CATALYST PAPER REPORT QUARTER

Transcription

1 CATALYST PAPER 1 REPORT QUARTER

2 CATALYST PAPER MANUFACTURES DIVERSE SPECIALTY MECHANICAL PRINTING PAPERS, NEWSPRINT AND PULP. Its customers include retailers, publishers and commercial printers in North America, Latin America, the Pacific Rim and Europe. With three mills, located in British Columbia, Catalyst has a combined annual production capacity of 1.5 million tonnes. The company is headquartered in Richmond, British Columbia, Canada and its shares trade on the Toronto Exchange under the symbol CYT. RALSTON (ROLLY) ATKINSON What a cardiovascular doctor is to a patient, Rolly is to our paper machines at Port Alberni. As an expert pipefitter, he s tuned in to the heartbeat of the mill, designing and implementing solutions that keep our machines running smoothly.

3 PRESIDENT S MESSAGE Third quarter earnings reflect a significant improvement in operations led by pulp, with better machine productivity, less maintenance-related downtime at all mills and higher sales revenues compared to the second quarter and to the same period of the prior year. Net earnings for the quarter were 5.2 million (0.36 per common share) and negative 3.5 million before specific items. This is a significant improvement from the prior quarter s net loss of 28.0 million (1.93 per common share) and negative 18.1 million before specific items. Adjusted earnings before interest, taxes and depreciation (EBITDA) in the third quarter were 16.4 million. Free cash flow was positive in the quarter. Cash from operations increased by 8.1 million from the same period last year and liquidity was 128 million at quarter-end, significantly better than a year earlier due to asset sales and improved vendor payment terms. Sales revenues of million for the quarter were up from the prior quarter, reflecting higher paper sales volumes for directory and uncoated specialty grades. Higher transaction prices for directory and uncoated specialty products and the weaker Canadian dollar also had a positive impact on revenues. Pulp sales volume was up nearly six thousand tonnes over the same quarter of and lower materials and maintenance expense drove a 62 per tonne improvement in average delivered cash costs. In addition, several factors drove balance sheet improvements in Q3, including the partial settlement of the defined benefit pension plan for salaried employees, the foreign exchange gain on translation of U.S. dollar-denominated debt, and the sale of a surplus wastewater treatment facility and associated land in Port Alberni. MARKET UPDATE The latter half of the year is typically stronger with seasonal retail campaigns driving print demand; however, the secular decline in paper markets continued to be evident in the third quarter. Newsprint and directory were most heavily impacted, down 11.2% and 10.9% respectively compared to the prior year, while demand for coated mechanical was down 4.5%. On a brighter note, demand for uncoated mechanical was up 12.1% compared to Q3. Benchmark paper prices products, but per tonne for newsprint and US50 per short ton for uncoated softhave been implemented. was up 1.4% over tonne price increase for China in September. Price increases of US15 and lower inventories led to a US20 per Our sales Ascent, our coated three paper launched in Q2 which further expands Catalyst s broad range of printing papers. OUTLOOK The global economy continued to grow in the third quarter, fueled by economic recovery in the Eurozone and a positive long-term economic outlook in North America. Government shutdowns during the quarter have tempered growth expectations for the United States and slower economic growth in Canada is expected to result in a weaker Canadian dollar in the fourth quarter. Printing paper demand continues to be impacted by structural industry change, including the migration to electronic media and paper conservation measures by publishers. Weaker U.S. markets for coated specialty papers could result in pricing pressure through the end of this year. However uncoated mechanical demand is expected to support improved operating rates and price increases and strong export markets for newsprint are expected to keep newsprint pricing firm for the balance of the year. The NBSK pulp market is expected to strengthen for the balance of the year with improved operating rates and lower producer inventories. Price increases in China of US20 per tonne in September and US30 per tonne in October have been implemented and a US20 per tonne increase for November is expected to be fully realized by year end. CATALYST PAPER THIRD QUARTER REPORT PRESIDENT S MESSAGE 1

4 Our maintenance spend will increase in the fourth quarter with the scheduled outage of the recovery boiler at our Crofton mill. The potential rise in energy rates in British Columbia in 2014 remains a concern for Catalyst and other energy-intensive industries and we are actively engaged in identifying economic impacts and solutions. Inside the company, we are getting back to basics and are taking advantage of our deep sea port at Crofton to serve markets in Latin America and Asia, and our multi-modal distribution facility in the Lower Mainland to serve our home market of North America with capacity available to also handle third-party shipments. Growth in Latin America and interest in North America is driving higher sales of Marathon Lite, our 40-gsm newsprint grade and it is expected to make up one-third of our newsprint business by year-end. Our recently launched coated three product, Ascent, and Sage, our environmentally focused offer, position Catalyst well to address the requirements of commercial printers, publishers and retail print advertisers. Let me end this third quarter update by extending appreciation on behalf of my management team and the board of directors to our Chairman Les Lederer who provided executive oversight of the business on an interim basis prior to my appointment October 1 st. Operational excellence is our focus with safety, productivity and costs being our top priorities now and for the year ahead. Joe Nemeth President and Chief Executive Officer CATALYST PAPER THIRD QUARTER REPORT PRESIDENT S MESSAGE 2

5 CATALYST PAPER CORPORATION MANAGEMENT S DISCUSSION AND ANALYSIS 3

6 MANAGEMENT S DISCUSSION AND ANALYSIS 5 1 Overview and highlights 2 Segmented results 13 3 Liquidity and capital resources 20 4 Contingent liabilities 22 5 Summary of quarterly results 23 6 Non-GAAP measures 23 7 Critical accounting policies and estimates 26 8 Changes in accounting policies 27 9 Impact of accounting pronouncements affecting future periods Risks and uncertainties Sensitivity analysis Outlook Disclosure controls and internal control over financial reporting 30 CONSOLIDATED FINANCIAL STATEMENTS

7 MANAGEMENT S DISCUSSION AND ANALYSIS The following management s discussion and analysis (MD&A) of Catalyst Paper Corporation (the company, we, us, and our) should be read in conjunction with our interim consolidated financial statements for the nine month periods ended September 30, and September 30, and our audited annual consolidated financial statements for the year ended December 31, and the notes thereto, which have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States (U.S.). Additional information about the company, including our most recent Annual Information Form is available on our website at or the Canadian Securities Administrator s electronic filing website at Throughout this discussion, references are made to certain measures that are not measures of performance under U.S. GAAP, including operating earnings, adjusted EBITDA, adjusted EBITDA before restructuring costs, average delivered cash costs per tonne before specific items, net earnings (loss) attributable to the company before specific items, net earnings (loss) per share attributable to the company s common shareholders before specific items, and free cash flow. We believe that these non-gaap measures are useful in evaluating our performance. These nongaap measures are defined and reconciled to their nearest GAAP measure in section 6, Non-GAAP measures. In this MD&A, unless otherwise indicated, all dollar amounts are expressed in Canadian dollars. The term dollars and the symbols and CDN refer to Canadian dollars and the term U.S. dollars and the symbol US refer to United States dollars. In this MD&A, the term tonne and the symbol MT refer to a metric tonne and the term ton or the symbol ST refer to a short ton, a measure of weight equal to metric tonne. Use of these symbols is in accordance with industry practice. The information in this report is as of November 5, which is the date of filing in conjunction with our press release announcing our results for the third quarter of. Disclosure contained in this document is current to November 5, unless otherwise stated. 5

8 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements and information in this MD&A are not based on historical facts and constitute forward-looking statements or forward-looking information within the meaning of Canadian securities laws and the U.S. Private Securities Litigation Reform Act of 1995 (forward-looking statements), including but not limited to, statements about our strategy, plans, future operating performance, contingent liabilities and outlook. Forward-looking statements: Are statements that address or discuss activities, events or developments that we expect or anticipate may occur in the future; Can be identified by the use of words such as believe, expect, anticipate, intend, plan, likely, predicts, estimates, forecasts, and similar words or phrases or the negative of such words or phrases; Reflect our current beliefs, intentions or expectations based on certain assumptions and estimates, including those identified below, which could prove to be significantly incorrect: Our ability to develop, manufacture and sell new products and services that meet the needs of our customers and gain commercial acceptance; Our ability to continue to sell our products and services in the expected quantities at the expected prices and expected times; Our ability to successfully obtain cost savings from our cost reduction initiatives; Our ability to implement business strategies and pursue opportunities; Expected cost of goods sold; Expected component supply costs and constraints; Expected foreign exchange and tax rates. While considered reasonable by management, are inherently subject to known and unknown risks and uncertainties and other factors that could cause actual results or events to differ from historical or anticipated results or events. These risk factors and others are discussed in the MD&A. Certain of these risks are: The impact of general economic conditions in the countries in which we do business; Conditions in the capital markets and our ability to obtain financing and refinance existing debt; Market conditions and demand for our products (including declines in advertising and circulation); The implementation of trade restrictions in jurisdictions where our products are marketed; Fluctuations in foreign exchange or interest rates; Raw material prices (including wood fibre, chemicals and energy); The effect of, or change in, environmental and other governmental regulations; Uncertainty relating to labour relations; The availability of qualified personnel; Legal proceedings; The effects of competition from domestic and foreign producers; The risk of natural disaster and other factors many of which are beyond our control. As a result, no assurance can be given that any of the events or results anticipated by such forward-looking statements will occur or, if they do occur, what benefit they will have on our operations or financial condition. Readers are cautioned not to place undue reliance on these forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. 6

9 1. OVERVIEW AND HIGHLIGHTS BUSINESS OVERVIEW We are the largest producer of mechanical printing papers in western North America. We also produce NBSK pulp which is marketed primarily in Asia. Our business is comprised of three business segments: specialty printing papers, newsprint, and pulp. Specialty printing papers include coated mechanical, uncoated mechanical and directory paper. We are the only producer of coated mechanical paper and soft calender (SC) paper in western North America. We operate three paper mills in British Columbia (B.C.) located in Crofton, Port Alberni, and Powell River. Our Crofton mill includes a two-line kraft pulp operation. More information about our business segments, product profile and our geographic sales distribution is provided on pages 6 to 8 of our Annual Report. Our production capacity by mill and product line is summarized in the following chart: Capacity by Mill Location and Product Line 1 Specialty printing papers 1 Newsprint 1 Pulp 2 Directory Newsprint NBSK pulp 270,000 Number of paper machines Uncoated mechanical Crofton, B.C ,000 Port Alberni, B.C , ,000 Powell River, B.C ,000 Total capacity (tonnes) 7 469, , ,000 15% 12% Mill location % of total capacity 32% Coated mechanical Total 350, , , , , ,000 1,486,000 23% 100% 18% 1 Capacities expressed in the above table can vary as we are able to switch production between products, particularly newsprint, directory and machine-finished uncoated grades. 2 Total pulp capacity at Crofton is 393,000 tonnes, of which 350,000 tonnes are designated as market pulp with the remainder 43,000 tonnes being consumed internally. 3 No. 1 paper machine at Crofton remains indefinitely curtailed. THIRD QUARTER OVERVIEW Business Overview Our results for the third quarter of showed an improvement to the previous quarter due to better production, lower operating costs, the positive impact of a weaker Canadian dollar and increased sales volumes for pulp. This was partly offset by lower sales volumes for paper and slightly weaker prices in the quarter for both pulp and paper. Costs were lower in the quarter partly due to fewer scheduled maintenance outages and included reductions in maintenance and labour spending. This was partly offset by an increase in the cost of furnish. Our net income for the quarter reflected the accounting impact of the special portability election option on our defined benefit pension plan for salaried employees (Salaried Plan). Financial Performance We recorded net earnings attributable to the company of 5.2 million and a net loss attributable to the company before specific items of 3.5 million in Q3. This compared to a net loss of 28.0 million and 18.1 million, respectively, in Q2. Significant specific items in Q3 included a gain on the partial settlement of our defined benefit pension plan for salaried employees (Salaried Plan) under the special portability election option, and a foreign exchange gain on the translation of U.S. dollar denominated debt. Significant specific items in the prior quarter included a gain on the sale of the Elk Falls site, a loss on the required purchase of our Exit Notes, and a foreign exchange loss on the translation of U.S. dollar denominated debt. Adjusted EBITDA and adjusted EBITDA before restructuring costs were 16.4 million in Q3 compared to adjusted EBITDA of negative 0.6 million and adjusted EBITDA before restructuring costs of negative 0.5 million in Q2. Refer to section 6, Non-GAAP measures, for additional information on specific items in the reported financial results. 7

10 SELECTED FINANCIAL INFORMATION (In millions of Canadian dollars, except where otherwise stated) Sales 2 YTD Q3 Q2 Q Total Q4 Q3 Q2 1, Q Operating earnings (loss) 2 (8.3) 4.9 (12.0) (1.2) 19.1 (5.7) Depreciation and amortization Adjusted EBITDA 1,2 before restructuring costs 1, (0.6) (0.5) Net earnings (loss) attributable to the company before specific items 1 (32.6) (33.2) 5.2 (3.5) (28.0) (18.1) (9.8) (11.6) (37.8) (35.2) (15.7) (7.5) (11.7) (5.0) (25.6) (9.6) Adjusted EBITDA margin 1,2 before restructuring costs 1,2 3.5% 3.5% (0.2%) (0.2%) 4.5% 4.5% 5.2% 5.7% 2.8% 2.8% 5.2% 5.3% 6.4% 6.4% 6.5% 8.5% Net earnings (loss) per share attributable to the company s common shareholders (in dollars) basic and diluted from continuing operations 3 (2.46) basic and diluted from discontinued operations before specific items 1,3 (2.29) (In thousands of tonnes) Sales 2 Production 2 1, , % 6.1% 0.36 (1.93) (0.89) (0.24) (1.55) 1.73 (1.25) 0.21 (0.80) (1.15) (2.62) (0.89) (1.09) , , (0.03) (0.07) (0.01) (0.02) (0.01) (0.03) Refer to section 6, Non-GAAP measures. 2 Numbers exclude the Snowflake mill s results from operations which have been reclassified as discontinued operations; earnings from discontinued operations, net of tax, are shown separately from continuing operations in the consolidated statements of earnings (loss) in our interim consolidated financial statements for the nine months ended September 30,. 3 Earnings per share data for periods ended on and subsequent to September 30, were based on 14.5 million weighted average common shares issued pursuant to our reorganization under CCAA. Earnings per share data for periods prior to September 30, were based on million weighted average common shares outstanding prior to emergence from the CCAA proceedings. These shares were cancelled on September 13,. 8

11 Market Overview * Uncoated mechanical is comprised of high-gloss and standard grades. Although market conditions remained challenging in the third quarter of, paper demand and operating rates improved in the seasonally stronger second half of the year. While paper demand declined compared to Q3 for newsprint, directory, and lightweight coated, these declines were partly offset by a significant increase in demand for uncoated mechanical. Inventory levels rose for all paper segments except for a slight decrease in lightweight coated. Average benchmark prices increased for all paper segments compared to the previous quarter except for directory paper which remained flat. NBSK pulp shipments increased 1.4% compared to the third quarter of. Benchmark prices for China slipped in the quarter to US675 per tonne. Sale of Port Alberni Wastewater Treatment Facility On September 30, we completed the sale of our wastewater treatment facility and related infrastructure to the City of Port Alberni for proceeds of 5.8 million. The sale included the 13.4 hectare wastewater treatment facility and 3.9 hectare parcel of lands combined with a road dedication to facilitate development of an industrial truck route along the waterfront. We received 5.0 million of the proceeds on September 30, and will receive 0.8 million in September Special Portability Election Members of our Salaried Plan who exercised the election under the special portability election option received their lump-sum payments in July. In addition, these members will receive quarterly top-up payments over the next four years. The lump-sum payments represented a partial settlement of the Salaried Plan in the third quarter. See section 7, Critical Accounting Policies and Estimates for a description of the accounting impact of the partial settlement of the Salaried Plan on our financial results for the three and nine months ended September 30,. 9

12 Appointment of President and Chief Executive Officer Joe Nemeth was appointed President, Chief Executive Officer, and director of the company effective October 1,. Leslie T. Lederer, who held this position on an interim basis, continues as a director and Chairman of the Board of directors. STRATEGY UPDATE Our objective is to return to profitability and maximize cash flows by focusing on reducing manufacturing costs and optimizing our brands and customer base. Additional information related to our corporate strategy, including key performance drivers and indicators, can be found on pages 16 to 24 of our Annual Report. Key Objectives The following is an update on our third quarter progress towards our key objectives: Social: Significantly improve safety results reducing medical incidents by 50% and lost time injuries by 41% to nd achieve 2 quartile or better industry ranking Lost-time injury frequency of 1.04 was in line with the Q2 level of 1.00 and outperformed the target of Medical incident rate of 3.11 improved from the Q2 level of 3.24 but was higher than the target of Establish Catalyst Paper as an employer-of-choice, and further strengthen linkages with training institutions and other recruitment-supporting initiatives Leadership development training continued through the quarter. Our relationship with the Vancouver Island University Power Engineering Program resulted in three practicum students joining the company as full time employees. Implemented a new pre-employment assessment process for hourly new hires Conducted focus groups to examine new employee survey results. Continue to seek competitive business conditions in B.C. including reductions in hydro and taxation rates and work with municipalities to achieve joint cost-saving service and infrastructure agreements Completed sale of wastewater treatment facility to City of Port Alberni for proceeds of 5.8 million. Agreement being finalized with City of Powell River to transfer our interest in PRSC Land Development Ltd. for approximately 3.0 million. Financial: Complete outstanding restructuring items and use proceeds of asset sales to pay down debt Non-core asset sales completed for the nine months ended September 30, include the Snowflake mill, our interest in Powell River Energy, the Elk Falls site, and the Port Alberni wastewater treatment facility. Purchased US15.6 million of our Exit Notes from the net proceeds from the sale of our interest in Powell River Energy. Reduce operating costs, and focus on generating positive free cash flow Free cash flow for the quarter was 0.8 million. Liquidity decreased by 6.9 million compared to Q2 mostly due to the payment of annual property taxes of 12.1 million, partially offset by proceeds received from the sale of the Port Alberni wastewater treatment facility of 5.0 million. Capital expenditures in the current quarter of 5.3 million included 3.3 million invested in maintenance of business and 1.2 million in profit adding investments. Complete special portability option program developed to deal with the salaried pension deficit Elections under the program were finalized by June 30, and lump-sum payments were distributed to members exiting the plan in July. The accounting impact of the partial plan settlement was recognized in the third quarter. 10

13 Commercial: Expand geographic reach of Catalyst Paper into emerging world markets of Latin America and Asia Increased sales of Marathon Lite worldwide. Nearly a third of our newsprint sales is Marathon Lite. Grew market share in Latin America for the third consecutive quarter. Gain market share and expand sales reach into new markets with new products Increased coated market share on the strength of our highest value coated grades, Pacficote and Ascent. Converted a growing number of customers to Electrabrite Ultra-Lite, our lighter basis weight, more economical alternative to traditional high bright papers. Increase breadth of product range and solidify position as the most flexible and diverse producer and marketer of paper in the West Grew sales of Ascent, the newest addition to our coated product line. Ascent is a coated three paper, the highest value grade we now produce. Retained customers as they moved from one grade to another. Our western location and broad product line allow customers to make the best choices for their business without the risk of changing paper suppliers. Environmental: Work with community stakeholders to identify and implement sustainable watershed management solutions Assessment underway of new BC Water Sustainability Act proposed for legislative introduction in Spring Adhere to high international standards for transparency and reporting of performance on social, governance and environmental factors Review completed of current sustainability disclosure against Global Reporting Initiative G4 guidelines. Support revision of the B.C. Forest Stewardship Council standard to achieve increased access to FSC fibre Industry working group continued to engage with other forest sector stakeholders to identify and prioritize key aspects for revision. CONSOLIDATED RESULTS OF OPERATIONS Sales Q3 vs. Q2 Sales revenues increased by 2.1% as a result of the positive impact of a weaker Canadian dollar, increased sales volumes achieved for directory, uncoated mechanical and pulp, and higher transaction prices for directory and uncoated, partially offset by reduced sales volumes for newsprint and lightweight coated, and lower transaction prices for newsprint, lightweight coated and pulp. Q3 vs. Q3 Sales revenues increased by 1.2% due to the positive impact of a weaker Canadian dollar, increased sales volumes for uncoated and pulp, and higher transaction prices for pulp, partially offset by reduced sales volumes for newsprint, lightweight coated and directory, and lower transaction prices for all paper grades. YTD vs. YTD Sales revenues decreased by 2.3% due to lower transaction prices for all paper segments excluding lightweight coated, and lower sales volumes for all specialty paper grades and pulp, partially offset by the positive impact of a weaker Canadian dollar, higher transaction prices for lightweight coated and pulp, and increased sales volumes for newsprint. 11

14 Adjusted EBITDA and adjusted EBITDA before Restructuring Costs The following table provides variances between periods for adjusted EBITDA and adjusted EBITDA before restructuring costs: (In millions of Canadian dollars) Adjusted EBITDA in comparative period Restructuring costs 1 Adjusted EBITDA before restructuring costs in comparative period Paper prices Pulp prices Impact of Canadian dollar Volume and mix Furnish mix and costs Power costs Fuel costs Labour costs Maintenance costs Selling, general and administrative Lower of cost or market impact on inventory, net of inventory change Other, net Adjusted EBITDA before restructuring costs in the current period Restructuring costs Adjusted EBITDA in the current period Q2 Q3 YTD (0.6) (0.5) (1.1) (0.8) (0.9) (0.1) 14.0 (5.8) (0.3) (3.3) 0.5 (0.8) (0.3) (0.2) 2.3 (2.7) 53.5 (13.6) (7.5) 6.3 (8.8) (2.4) 0.8 (10.4) 0.6 (2.7) (3.6) (0.1) Refer to section 6, Non-GAAP measures. Operating Earnings (Loss) Q3 vs. Q2 Operating earnings increased by 16.9 million due to higher adjusted EBITDA of 17.0 million, partly offset by higher depreciation and amortization expense of 0.1 million. Q3 vs. Q3 Operating earnings decreased by 1.0 million due to higher depreciation and amortization expense of 3.6 million, partially offset by higher adjusted EBITDA of 2.6 million. YTD vs. YTD Operating earnings decreased by 33.1 million due to lower adjusted EBITDA of 21.2 million and higher depreciation and amortization expense of 11.9 million. 12

15 Net Earnings (Loss) Attributable to the Company Q3 vs. Q2 Net earnings attributable to the company increased by 33.2 million compared to the previous quarter. Net earnings for Q3 included higher after-tax operating earnings of 16.9 million, an after-tax settlement gain of 2.6 million related to the special pension portability election, and an after-tax foreign exchange gain on the translation of U.S. dollar debt of 6.1 million. Net earnings for Q2 included an after-tax foreign exchange loss on the translation of U.S. dollar debt of 9.6 million, and an after-tax gain from the sale of the Elk Falls site of 2.1 million. Q3 vs. Q3 Net earnings attributable to the company decreased by million compared to Q3. Net earnings for Q3 included an after-tax settlement gain of 2.6 million related to the special pension portability election, a reduction in after-tax interest expense of 6.2 million, and a decrease in after-tax foreign exchange gain on the translation of U.S. dollar debt of 19.1 million. Net earnings for Q3 included a net after-tax reorganization credit of million, partially offset by an after-tax fair value adjustment to non-controlling interest of 41.2 million, recognized on our emergence from creditor protection proceedings. YTD vs. YTD Net earnings attributable to the company decreased by million compared to. Net earnings for the nine months ended September 30, included lower after-tax operating earnings of 33.1 million, an after-tax foreign exchange loss on the translation of U.S. dollar debt of 9.4 million, lower after-tax interest expense of 30.9 million, an after-tax settlement gain of 2.6 million related to the special pension portability election, and after-tax gains on the sale of non-core assets including the Snowflake mill, our interest in Powell River Energy, and the Elk Falls site of 11.5 million. Net earnings for the nine months ended September 30, included a net after-tax reorganization credit of million, partially offset by an after-tax fair value adjustment to non-controlling interest of 41.2 million, recognized on our emergence from creditor protection proceedings, and an after-tax foreign exchange gain on the translation of U.S. dollar debt of 24.0 million. 2. SEGMENTED RESULTS SPECIALTY PRINTING PAPERS (In millions of Canadian dollars, except where otherwise stated) Sales Operating earnings (loss) Depreciation and amortization 1 Adjusted EBITDA 1 before restructuring costs 1 Adjusted EBITDA margin 1 before restructuring costs (In thousands of tonnes) Sales Production Three months ended September 30, (3.4) % 3.9% % 8.8% Change (6.6) (11.9) 3.5 (8.4) (8.6) (4.8%) (4.9%) (10.2) (9.1) Nine months ended September 30, (17.0) % 2.8% 7.6% 8.2% Change (28.5) (36.3) 11.5 (24.8) (27.7) (4.8%) (5.4%) (32.0) (34.9) 1 Refer to section 6, Non-GAAP measures. 2 Numbers exclude the Snowflake mill s results from operations which have been reclassified as discontinuing operations in the consolidated statements of earnings (loss) in the interim consolidated financial statements for the nine months ended September 30,. 13

16 Segment Overview While North American demand for coated mechanical decreased by 4.5% from the third quarter of, demand for uncoated mechanical increased by 12.1% due to strong demand for high-gloss grades as customers sought lower cost alternatives to coated mechanical. Average benchmark prices increased for lightweight coated by 0.9% to US868 per short ton, and for soft-calendered A grade (SC-A) by 4.4% to US830 per short ton compared to the previous quarter. A US50 per short ton price increase on our soft-calendered paper was mostly implemented in the quarter. North American directory demand fell 10.9% in Q3 compared to the prior year due to the ongoing reduction or elimination of white pages, publication of smaller books, lower circulation, and the continued migration from printed books to the Internet. The average Q3 directory benchmark price remained flat at US750 per short ton compared to the previous quarter as the vast majority of tonnes are sold under one-year contracts with fixed pricing. Operating rates for directory paper remain strong despite declining demand due to continued capacity reduction in the directory marketplace. 14

17 Operational Performance The following chart summarizes the operating performance of our specialty printing papers segment: * Average delivered cash costs per tonne consist of cost of sales, excluding depreciation and amortization, and including the impact of SG&A and restructuring costs. Average delivered cash costs per tonne before specific items consist of cost of sales, excluding depreciation and amortization, and including the impact of SG&A, but excluding the impact of restructuring costs. Q3 vs. Q3 Sales volume decreased by 10,200 tonnes due to lower sales volumes for directory and lightweight coated, partially offset by higher sales volumes for uncoated mechanical. Average sales revenue increased 9 per tonne due to the positive impact of a weaker Canadian dollar, partially offset by lower average transaction prices for all specialty grades. Average delivered cash costs increased 48 per tonne due primarily to increased spending on maintenance, labour and indirect material and services, as well as cost increases in electric power, kraft and operating supplies. YTD vs. YTD Sales volume decreased by 32,000 tonnes due to lower sales volumes for all specialty grades. Average sales revenue decreased 4 per tonne due to lower average transaction prices for directory and uncoated mechanical, partially offset by higher average transaction prices for lightweight coated and the positive impact of a weaker Canadian dollar. Average delivered cash costs increased 38 per tonne due primarily to increased spending on maintenance and indirect material and services, as well as cost increases in coating, electric power and operating supplies, partially offset by the incurrence of restructuring costs in. 15

18 NEWSPRINT (In millions of Canadian dollars, except where otherwise stated) Sales Operating earnings (loss) Depreciation and amortization 1 Adjusted EBITDA 1 before restructuring costs 1 Adjusted EBITDA margin 1 before restructuring costs (In thousands of tonnes) Sales Production Three months ended September 30, Change (1.3) (1.7) 0.2 (1.5) (1.5) 5.6% 5.6% 8.8% 8.8% (3.2%) (3.2%) (1.7) 2.8 Nine months ended September 30, % 5.6% Change 6.2 (7.7) 1.0 (6.7) (7.4) 10.7% 11.3% (5.2%) (5.7%) Refer to section 6, Non-GAAP measures. 2 Numbers exclude the Snowflake mill s results from operations which have been reclassified as discontinuing operations in the consolidated statements of earnings (loss) in the interim consolidated financial statements for the nine months ended September 30,. 16

19 Segment Overview Total North American demand for newsprint decreased by 11.2% compared to Q3 partly due to lower newspaper print advertising and declining circulation. Strong exports, especially to Asia, partly compensated for weak domestic demand. The average Q3 North American newsprint benchmark price increased 0.5% to US595 per tonne compared to Q2. On September 1,, we implemented a US15 per tonne price increase on our US customer accounts. Operational Performance The following chart summarizes the operating performance of our newsprint segment: * Although C1 remains indefinitely curtailed, it is not included in our capacity table. ** Average delivered cash costs per tonne consist of cost of sales, excluding depreciation and amortization, and including the impact of SG&A and restructuring costs. Average delivered cash costs per tonne before specific items consist of cost of sales, excluding depreciation and amortization, and including the impact of SG&A, but excluding the impact of restructuring costs. Q3 vs. Q3 Sales volume decreased by 1,700 tonnes. Average sales revenue remained flat due to lower average transaction prices in the quarter that was offset by the positive impact of a weaker Canadian dollar. Average delivered cash costs increased 20 per tonne due primarily to increases in maintenance, indirect material and services, and electric power cost, partially offset by lower cost of chemicals. YTD vs. YTD Sales volume increased by 10,200 tonnes primarily due to increased newsprint production which partly offset lower directory production. Average sales revenue decreased 3 per tonne due to lower average transaction prices, partially offset by the positive impact of a weaker Canadian dollar. Average delivered cash costs increased 32 per tonne due primarily to increases in maintenance, indirect material & services, operating supplies and electric power cost. 17

20 PULP (In millions of Canadian dollars, except where otherwise stated) Sales Operating earnings (loss) Depreciation and amortization 1 Adjusted EBITDA 1 before restructuring costs 1 Adjusted EBITDA margin 1 before restructuring costs (In thousands of tonnes) Sales Production Three months ended September 30, (5.7) 0.6 (5.1) (5.1) 12.4% 12.4% (10.4%) (10.4%) Change (0.1) % 22.8% Nine months ended September 30, % 3.6% (6.2) 1.8 (4.4) (2.8) Change (0.6) (2.8%) (1.8%) 6.4% 5.4% (5.2) Refer to section 6, Non-GAAP measures. 2 Numbers exclude the Snowflake mill s results from operations which have been reclassified as discontinuing operations in the consolidated statements of earnings (loss) in the interim consolidated financial statements for the nine months ended September 30,. Segment Overview NBSK pulp markets continued to strengthen in the third quarter as demand improved in Asia and North America. Global NBSK demand increased by 1.4% from the third quarter of which supported a US20 per tonne price increase announced for China in September. The average NBSK benchmark pulp price for China decreased 2.1% to US685 per tonne compared to the previous quarter. 18

21 Operational Performance The following chart summarizes the operating performance of our pulp segment: * Average delivered cash costs per tonne consist of cost of sales, excluding depreciation and amortization, and including the impact of SG&A and restructuring costs. Average delivered cash costs per tonne before specific items consist of cost of sales, excluding depreciation and amortization, and including the impact of SG&A, but excluding the impact of restructuring costs. Q3 vs. Q3 Sales volume increased by 5,900 tonnes compared to the same quarter last year. Average sales revenue increased 85 per tonne due to higher average transaction prices and the positive impact of a weaker Canadian dollar. Average delivered cash costs decreased by 62 per tonne due to decreased maintenance spending and lower cost of chemicals and steam. YTD vs. YTD Sales volume decreased by 5,200 tonnes partly due to the inclusion of an 8,000 tonne delayed shipment in results. Average sales revenue increased by 29 due to higher average transaction prices and the positive impact of a weaker Canadian dollar. Average delivered cash costs decreased by 13 per tonne due to a reduction in the cost of fibre and chemicals, and the incurrence of restructuring costs in, partially offset by increased maintenance spending. 19

22 3. LIQUIDITY AND CAPITAL RESOURCES SELECTED FINANCIAL INFORMATION Three months ended September 30, (In millions of Canadian dollars, except where otherwise stated) Cash flows provided (used) by operations before changes in non-cash working capital Changes in non-cash working capital Cash flows provided (used) by: Operations Investing activities Financing activities Capital spending Depreciation and amortization Capital spending as % of depreciation and amortization 1 Net debt to net capitalization at September 30 Nine months ended September 30, Change 6.1 (15.8) 21.9 (19.1) (5.3) (13.8) (4.6) (6.6) (19.2) (24.8) (44.0) (3.4) (13.0) (0.7) (21.1) (0.6) (0.1) (5.0) (2.0) 3.6 (11.2) 35.4 (28.9) % 74% 92% 76% (46%) (1%) 56% 74% Change % 76% (63.8) % (1%) 1 Net debt ratio equals net debt (total debt less cash) divided by net capitalization (shareholder s equity attributable to the company and total debt less cash). Refer to page 43 of our Annual Report for a discussion of the nature and sources of funding for our principal cash requirements. OPERATING ACTIVITIES Cash flows from operating activities increased by 8.1 million in Q3 from the same quarter in the previous year, primarily due to an increase in adjusted EBITDA of 2.6 million, cash reorganization costs incurred in Q3 of 12.7 million, and a foreign exchange loss on the revaluation of working capital in Q3 of 7.9 million, partially offset by an increase in cash interest expense of 3.3 million, and an unfavourable change in non-cash working capital of 19.1 million compared to an unfavourable change of 5.3 million in Q3. INVESTING ACTIVITIES Cash used by investing activities increased by 0.1 million mostly due to an increase in other assets of 0.6 million compared to a decrease of 0.5 million in Q3, and a decrease in restricted cash in Q3 of 2.6 million, partially offset by a reduction in additions to property plant and equipment of 2.0 million, and an increase in proceeds from the sale of capital assets of 1.4 million. FINANCING ACTIVITIES Cash provided by financing activities was 11.5 million compared to 16.5 million in the same quarter last year. We increased the draw on our asset-based loan facility (ABL Facility) by 11.8 million in the current quarter. For Q3, we received 97.1 million from the issuance of exit financing on emerging from creditor protection proceedings, partially offset by the repayment of the outstanding draw on the debtor-in-possession (DIP) Credit Facility of 70.6 million, and the payment of issuance cost of 9.5 million related to the issuance of new debt and common shares. 20

23 CAPITAL RESOURCES Availability on the ABL Facility and total liquidity is summarized in the following table: Q3 (In millions of Canadian dollars) Borrowing base Letters of credit Amount drawn, net Minimum excess availability (19.8) (11.8) 2 ABL Facility Q (19.8) (22.1) (4.7) Q (22.3) (24.0) Q (17.8) (64.0) DIP Facility Q2 Q (19.6) (17.8) (70.5) (77.8) 3 (21.9) Availability Cash on hand Restricted cash Total liquidity ABL Facility Q Borrowing base included reserves of 1.3 million for pension, 1.8 million for creditor insurance deductibles, 2.3 million for landlord waivers, 1.3 million for employee source deductions, 0.3 million related to WCB, and 0.2 million purchasing card reserve. 2 Our ABL Facility is subject to certain financial covenants as disclosed in our interim consolidated financial statements for the three and nine months ended September 30, in note 12, Long-term debt. 3 The DIP Facility was subject to an excess availability condition. Our total liquidity increased by 31.2 million from the same quarter last year primarily due to non-core asset sales and improved vendor payment terms since emerging from creditor protection. Liquidity decreased by 6.9 million compared to the previous quarter mostly due to the payment of annual property taxes in July of 12.1 million, partially offset by proceeds received from the sale of the Port Alberni wastewater treatment facility of 5.0 million. At November 5, the company had 14,527,571 common shares issued and outstanding. Our common shares have no par value and an unlimited number of shares are authorized for future issuance. FINANCIAL INSTRUMENTS Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and long-term debt. Derivatives are used primarily to reduce exposure to currency risk on revenues, or occasionally debt, as well as price risk associated with revenue and energy costs. For a description of the nature and extent of risk to the company from our financial instruments, as well as our respective accounting treatment of financial instruments, refer to our annual consolidated financial statements for the year ended December 31, note 30, Financial instruments. For the methods and assumptions we use to determine the fair value of financial instruments, refer to note 29, Fair value measurement, of those statements. Our methods and assumptions for determining the fair value of financial instruments have not changed materially since those used in the preparation of our consolidated financial statements for the year ended December 31,. At September 30, the company did not have any foreign currency or commodity contracts outstanding. 21

24 The following table reconciles the average spot exchange rate to our effective exchange rate: US/CDN FOREIGN EXCHANGE Q3 Q2 Q1 Q4 Q3 Average Bank of Canada noon spot rate Average effective rate included in adjusted EBITDA (Favourable)/unfavourable impact of derivatives, other than those designated as effective hedges for accounting purposes, included in other 1 expenses Foreign exchange (gain)/loss, on working capital 2 balances, included in other expenses Average effective rate in net earnings/(loss) 3 before income taxes (0.011) (0.005) Q2 Q (0.002) (0.017) (In millions of dollars) 1 Favourable/(unfavourable) impact of derivatives other than those designated as effective hedges for accounting purposes included in other expenses 2 Foreign exchange gain/(loss) on working capital balances included in other expenses (7.8) (0.2) (1.0) 3.9 (4.0) 3 Excludes foreign exchange gain/(loss) on long term debt and US interest expense 4. CONTINGENT LIABILITIES The company s contingent liabilities at December 31, are described on page 47 of our Annual Report. We are not aware of any significant contingent liabilities outstanding as of November 5,. 22

25 5. SUMMARY OF QUARTERLY RESULTS The following table highlights selected financial information for the eight consecutive quarters ending September 30, : (In millions of Canadian dollars, except per share amounts) Sales 2 Adjusted EBITDA 1, 2 Net earnings (loss) attributable to the company Q3 Q2 Q1 Q4 Q3 Q2 Q Q (0.6) (28.0) (9.8) (35.2) (11.7) (25.6) (708.0) Net earnings (loss) per share attributable to the company s common shareholders basic and diluted from 0.36 continuing operations basic and diluted from discontinued operations (1.93) (0.89) (1.55) 1.73 (0.03) (0.07) (0.89) (0.01) (1.81) (0.04) 1 Refer to section 6, Non-GAAP measures. 2 Numbers exclude the Snowflake mill s results from operations which have been reclassified as discontinued operations in the consolidated statements of earnings (loss) in the interim consolidated financial statements for the nine months ended September 30,. Refer to section 1, Overview and highlights, and the discussion on Consolidated results of operations, for details of Q3 results compared to Q2. 6. NON-GAAP MEASURES Management uses certain measures that are not defined by U.S. GAAP to evaluate our performance and, as a result, the measures as employed by management may not be comparable to similarly titled measures reported by other entities. These non-gaap measures should not be considered by an investor as an alternative to their nearest respective GAAP measure. Our non-gaap measures include operating earnings (loss), adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, impairment and other closure costs, and before other nonoperating income and expenses), adjusted EBITDA before restructuring costs, adjusted EBITDA margin, adjusted EBITDA margin before restructuring costs, average delivered cash costs per tonne before specific items, net earnings (loss) attributable to the company before specific items, net earnings (loss) per share attributable to the company s common shareholders before specific items, and free cash flow. Specific items are items that do not arise from the company s day-to-day operating, investing and financing activities, or items that are subject to material volatility based on factors outside of management s control. Specific items include: foreign exchange gain or loss on long-term debt; gain or loss on cancellation of long-term debt; asset-impairment and other closure costs; restructuring costs; unusual non-recurring items; and certain income tax adjustments. ADJUSTED EBITDA AND ADJUSTED EBITDA BEFORE RESTRUCTURING COSTS Adjusted EBITDA as defined equates to operating earnings (loss) plus depreciation and amortization and impairment and other closure costs. Adjusted EBITDA margin and adjusted EBITDA margin before restructuring costs are defined as adjusted EBITDA and adjusted EBITDA before restructuring costs as a percentage of sales. These measures enable comparison of consolidated and segment operating results between periods without regard to debt service, income taxes, capital expenditure requirements, and specific items. These measures are provided to improve comparability between periods by eliminating the impact of financing (interest) and accounting (depreciation) items on our results. 23

26 Reconciliation to Net Earnings (Loss) Attributable to the Company: (In millions of Canadian dollars) Net earnings (loss) attributable to the company Net earnings (loss) attributable to non-controlling interest Net earnings (loss) Depreciation and amortization 1 Foreign exchange (gain) loss on long-term debt 1 Other (income) expense 1 Interest expense, net 1 Income tax expense (recovery) 1 Reorganization items, net 1 (Earnings) loss from discontinued operations net of tax Adjusted EBITDA Q3 YTD (32.6) 5.2 Q2 Q1 (28.0) (9.8) Total Q3 Q (35.2) Q2 Q1 (11.7) (25.6) (1.5) 32.7 (0.6) (0.2) (32.3) (28.0) 11.4 (9.5) (36.7) (12.3) 7.7 (25.8) (11.9) (6.1) (2.8) (2.3) (6.8) (20.8) (0.9) (663.7) 3.2 (0.1) (25.2) (1.6) (685.3) 12.8 (10.4) (4.0) (11.6) (3.1) (0.7) (0.8) (3.1) (0.6) Restructuring costs Specialty printing papers Newsprint Pulp (0.1) Total restructuring costs (0.1) 5.2 Adjusted EBITDA before restructuring costs (0.5) Numbers exclude the Snowflake mill s results from operations which have been reclassified as discontinued operations in the consolidated statements of earnings (loss) in the interim consolidated financial statements for the three and nine months ended September 30,. 24