UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549





FORM 20-F



| |  ̈ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------------

OR

| | R | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012
| | - | --------------------------------------------------------------------------------------------------------------------------------

OR

| |  ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------

OR

| |  ̈ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
| | - | -------------------------------------------------------------------------------------------

Date of
event requiring this shell company report

FOR THE
TRANSITION PERIOD FROM  TO



COMMISSION FILE NUMBER 000-49751












Catalyst Paper Corporation

(Exact name of Registrant as specified in
its charter)



N/A

(Translation of Registrant’s name
into English)



British Columbia, Canada

(Jurisdiction of incorporation or organization)



2nd Floor, 3600 Lysander Lane

Richmond

British Columbia, Canada V7B 1C3



(Address of principal executive offices)












Securities registered or to be registered
pursuant to Section 12(b) of the Act:

None.



Securities registered or to be registered
pursuant to Section 12(g) of the Act:

Common Shares.



Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act:

None.



The number of outstanding shares of each
of the issuer’s classes of capital or common stock as of

December 31, 2012 was:

14,527,571



Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £
No R



If this report is an annual or transition
report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. Yes £ No R



Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes R No £



Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes £
No £



Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

|Large accelerated filer   £ | Accelerated filer £ | Non-accelerated filer R
|--------------------------- | ------------------- | -----------------------



Indicate by check mark which basis of accounting
the registrant has used to prepare the financial statements included in this filing:

|U.S. GAAP   R | International Financial Reporting Standards as issued | Other £
|------------- | ----------------------------------------------------- | -------
|              | by the International Accounting Standards Board  £    |        



Indicate by check which financial statement
item the registrant has elected to follow. Item 17 R Item 18 £



If this is an annual report, indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £
No R











TABLE OF CONTENTS





|PART I  
|--------
|        
|ITEM 1. 
|ITEM 2. 
|ITEM 3. 
|        
|        
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|ITEM 4. 
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|        
|ITEM 4A.
|ITEM 5. 
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|        
|ITEM 6. 
|        
|        
|        
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|        
|        
|        
|ITEM 7. 
|        
|        











|PART I ... continued
|------------------
|                  
|ITEM 8.           
|                  
|                  
|ITEM 9.           
|                  
|                  
|                  
|ITEM 10.          
|                  
|                  
|                  
|                  
|                  
|ITEM 11.          
|ITEM 12.          
|                  
|PART II           
|                  
|ITEM 13.          
|                  
|                  
|ITEM 14.          
|ITEM 15.          
|                  
|                  
|                  
|                  
|ITEM 16A.         
|ITEM 16B.         
|ITEM 16C.         
|                  
|PART III          
|                  
|ITEM 17.          
|ITEM 18.          
|ITEM 19.          











PART
I



Unless otherwise specified, “Catalyst”,
the “company”, “we”, “us”, “our” and similar terms refer to Catalyst Paper Corporation
and its subsidiaries and affiliates. Unless otherwise indicated, all dollar amounts are expressed in Canadian dollars, references
to “$” and “dollars” are to Canadian dollars and references to “U.S.$” and “U.S. dollars”
are to United States dollars. As used in this annual report references to “tonnes” means metric tonnes, which is equivalent
to 1,000 kilograms or 2,204 pounds (1.1023 tons) and the term “ton”, or the symbol “ST”, refers to a short
ton, an imperial unit of measurement equal to 0.9072 metric tonnes.



| | ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, ADVISERS
AND AUDITORS
| | ------- | ---------------------------------------------------------------



| | A. | Directors and Senior Management
| | -- | -------------------------------



Information not required for an annual
report.



| | B. | Advisers
| | -- | --------



Information not required for an annual
report.



| | C. | Auditors
| | -- | --------



Information not required for an annual
report.



| | ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE
| | ------- | ---------------------------------------



Information not required for an annual
report.



| | ITEM 3. | KEY INFORMATION
| | ------- | ---------------



Cautionary Statement with Regard to
Forward-Looking Statements



Certain statements and information in this
annual report 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:
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | o | our ability to develop, manufacture and sell new products and services that meet the needs of our
customers and gain commercial acceptance;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| | o | our ability to continue to sell our products and services in the expected quantities at the expected
prices and expected times;
| | - | -------------------------------------------------------------------------------------------------------------------------------

| | o | our ability to successfully obtain cost savings from our cost reduction initiatives;
| | - | ------------------------------------------------------------------------------------

| | o | our ability to implement business strategies and pursue opportunities;
| | - | ----------------------------------------------------------------------

| | o | expected cost of goods sold;
| | - | ----------------------------

| | o | expected component supply costs and constraints; and
| | - | ----------------------------------------------------



| | o | 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
                                                                                                                              this
                                                                                                                              annual
                                                                                                                              report
                                                                                                                              and
                                                                                                                              in
                                                                                                                              Management’s
                                                                                                                              Discussion
                                                                                                                              and
                                                                                                                              Analysis
                                                                                                                              for
                                                                                                                              the
                                                                                                                              financial
                                                                                                                              year
                                                                                                                              ended
                                                                                                                              December
                                                                                                                              31,
                                                                                                                              2012,
                                                                                                                              which
                                                                                                                              may
                                                                                                                              be
                                                                                                                              found
                                                                                                                              on
                                                                                                                              SEDAR
                                                                                                                              at
                                                                                                                              www.sedar.comand
                                                                                                                              on
                                                                                                                              EDGAR
                                                                                                                              at
                                                                                                                              www.sec.gov.
                                                                                                                              Certain
                                                                                                                              of
                                                                                                                              these
                                                                                                                              risks
                                                                                                                              are:
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | o | the impact of general economic conditions in the countries in which we do business;
| | - | -----------------------------------------------------------------------------------





- 1 -







| | o | conditions in the capital markets and our ability to obtain financing and refinance existing debt;
| | - | --------------------------------------------------------------------------------------------------

| | o | market conditions and demand for our products (including declines in advertising and circulation);
| | - | --------------------------------------------------------------------------------------------------

| | o | the implementation of trade restrictions in jurisdictions where our products are marketed;
| | - | ------------------------------------------------------------------------------------------

| | o | fluctuations in foreign exchange or interest rates;
| | - | ---------------------------------------------------

| | o | raw material prices (including wood fibre, chemicals and energy);
| | - | -----------------------------------------------------------------

| | o | the effect of, or change in, environmental and other governmental regulations;
| | - | ------------------------------------------------------------------------------

| | o | uncertainty relating to labour relations;
| | - | -----------------------------------------

| | o | the availability of qualified personnel;
| | - | ----------------------------------------

| | o | the availability of wood fibre
| | - | ------------------------------

| | o | legal proceedings;
| | - | ------------------

| | o | the effects of competition from domestic and foreign producers;
| | - | ---------------------------------------------------------------

| | o | 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.



Market and Industry Data and Forecast



This annual report includes market share
and industry data and other statistical information and forecasts that we have obtained from independent industry publications,
government publications, market research reports and other published independent sources. Some data are also based on our good
faith estimates, which are derived from our internal surveys, as well as independent sources. RISI, Inc., an independent paper
and forest products industry research firm (“RISI”), is the source of a considerable amount of the third party industry
data and forecasts contained herein. Industry publications, surveys and forecasts generally state that the information contained
therein has been obtained from sources believed to be reliable. However, we cannot and do not provide any assurance as to the accuracy
or completeness of included information and do not guarantee the accuracy or completeness of such information.



Forecasts are particularly likely to be
inaccurate, especially over long periods of time. Although we believe these sources to be reliable, we have not independently verified
any of the data nor have we ascertained the underlying economic assumptions relied upon therein.



Presentation of Financial Information



Effective for the year ended December 31,
2009, we adopted U.S. generally accepted accounting principles (“U.S. GAAP”) for the presentation of our consolidated
financial statements for Canadian and United States reporting requirements.  Prior to 2009, we had presented our annual and
interim consolidated financial statements in accordance with Canadian generally accepted accounting principles (“Canadian
GAAP”) with reconciliation in our annual consolidated financial statements to U.S. GAAP for material recognition, measurement
and presentation differences.



In accordance with U.S. GAAP, an enterprise
value was established for the company as of September 30, 2012, the end of the quarter following our emergence from protection
under the Companies’ Creditors Arrangement Act, under fresh start accounting. This enterprise value was determined
with the assistance of an independent financial advisor. For a discussion of the valuation methods used to determine enterprise
value and additional information on fresh start accounting, see note 6, Creditor protection proceedings related disclosures in
our annual consolidated financial statements for the year ended December 31, 2012.



Companies’ Creditors Arrangement Act Proceedings



On January 31, 2012, Catalyst Paper Corporation and certain
of its subsidiaries obtained an order from the Supreme Court of British Columbia under the Companies’ Creditors Arrangement
Act (“CCAA”) and subsequently received a recognition order from the United States court under Chapter 15 of the
US Bankruptcy Code.



- 2 -







The company’s secured and unsecured
creditors approved the company’s proposed plan of arrangement under the CCAA (“Plan”) at meetings held on June
25, 2012. The Plan was approved by the Canadian Court on June 28, 2012 under the CCAA process and by the United States Court on
July 27, 2012 under the Chapter 15 process. The restructuring under the Plan completed on September 13, 2012. See Item 4.A Creditor
Protection and Restructuring Process.



| | A. | Selected Financial Data
| | -- | -----------------------



The following
table sets forth consolidated historical financial and operating data for Catalyst Paper Corporation for the periods indicated.
The financial statement data as of December 31 and September 30, 2012, and December 31, 2011, 2010 and 2009 and for the three months
ended December 31 and nine months ended September 30, 2012, and the years ended December 31, 2011, 2010 and 2009 is derived from
our audited consolidated financial statementsin our annual report.The financial data as of
December 31, 2008 and for the year ended December 31, 2008 has been derived from our audited financial statements and related notes
thereto and have been restated to be in accordance with U.S. GAAP. These financial statements are not included inthe annual
report.This information should be read in conjunction with Operating and Financial Review and Prospects,
which is included inthe annual report. The financial information
has been derived from consolidated financial statements that have been prepared in accordance with U.S. GAAP. All information provided
below is in millions of Canadian dollars, except information related to volume, information per share, and revenue per tonne.



|                                                             |  | Predecessor6            |         |   | Successor6                     |  
|------------------------------------------------------------ |  | ----------------------- | ------- | - | ------------------------------ | -
|                                                             |  | Years ended December 31 |         |   | Nine months ended September 30 |  
|(In millions, except per share amounts)                      |  | 2008 4 5                |         |   | 2009 4 5                       |  
|Consolidated Statements of Earnings (Loss) Data:             |  |                         |         |   |                                |  
|Sales                                                        |  | $                       | 1,696.9 |   |                                | $
|Operating expenses                                           |  |                         |         |   |                                |  
|Cost of sales, excluding depreciation and amortization       |  |                         | 1,456.5 |   |                                |  
|Depreciation and amortization                                |  |                         | 159.8   |   |                                |  
|Selling, general and administrative                          |  |                         | 46.9    |   |                                |  
|Restructuring and change-of-control                          |  |                         | 30.1    |   |                                |  
|Impairment                                                   |  |                         | 151.0   |   |                                |  
|                                                             |  |                         | 1,844.3 |   |                                |  
|Operating earnings (loss)                                    |  |                         | (147.4  | ) |                                |  
|Interest expense, net                                        |  |                         | (74.8   | ) |                                |  
|Gain on cancellation of long-term debt                       |  |                         | –       |   |                                |  
|Foreign exchange gain (loss) on long-term debt               |  |                         | (82.2   | ) |                                |  
|Other income (expense), net                                  |  |                         | (15.7   | ) |                                |  
|Earnings (loss) before reorganization items and income taxes |  |                         | (320.1  | ) |                                |  
|Reorganization items, net                                    |  |                         | –       |   |                                |  
|Income (loss) before income taxes                            |  |                         | (320.1  | ) |                                |  
|Income tax expense (recovery)                                |  |                         | (90.7   | ) |                                |  
|Earnings (loss) from continuing operations                   |  |                         | (229.4  | ) |                                |  
|Gain (loss) from discontinued operations net of tax          |  |                         | 10.4    |   |                                |  
|Net earnings (loss)                                          |  |                         | (219.0  | ) |                                |  
|Net (earnings) loss attributable to non-controlling interest |  |                         | (0.8    | ) |                                |  
|Net earnings (loss) attributable to the Company              |  | $                       | (219.8  | ) |                                | $
|Basic and diluted earnings (loss) per share                  |  |                         |         |   |                                |  
|- continuing operations                                      |  | $                       | (0.67   | ) |                                | $
|- discontinued operations                                    |  |                         | 0.03    |   |                                |  
|Weighted average common shares outstanding (in millions)     |  |                         | 336.1   |   |                                |  





- 3 -







|                                  |  | Predecessor 6     |         |  | Successor 6        |  
|--------------------------------- |  | ----------------- | ------- |  | ------------------ | -
|                                  |  | As at December 31 |         |  | As at September 30 |  
|(In millions)                     |  | 2008
    5        |         |  | 2009
    5         |  
|Consolidated Balance Sheet Data:  |  |                   |         |  |                    |  
|Working capital 1                 |  | $                 | 201.5   |  |                    | $
|Property, plant and equipment     |  |                   | 1,854.4 |  |                    |  
|Total assets                      |  |                   | 2,390.3 |  |                    |  
|Current portion of long-term debt |  |                   | 75.8    |  |                    |  
|Total debt 1                      |  |                   | 969.9   |  |                    |  
|Shareholders’ equity (deficiency) |  |                   | 822.5   |  |                    |  



|                                                   |  | Predecessor6            |        |   | Successor6                     |  
|-------------------------------------------------- |  | ----------------------- | ------ | - | ------------------------------ | -
|                                                   |  | Years ended December 31 |        |   | Nine months ended September 30 |  
|(In millions)                                      |  | 2008 4 5                |        |   | 2009 4 5                       |  
|Consolidated Statements of Cash Flows Data:        |  |                         |        |   |                                |  
|Cash flows provided (used) by operations           |  | $                       | 78.1   |   |                                | $
|Cash flows used by investing activities            |  |                         | (205.3 | ) |                                |  
|Cash flows provided (used) by financing activities |  |                         | 132.2  |   |                                |  
|                                                   |  |                         |        |   |                                |  
|(In millions , except per tonne)                   |  |                         |        |   |                                |  
|Other Financial Data:                              |  |                         |        |   |                                |  
|Adjusted EBITDA 2                                  |  | $                       | 163.4  |   |                                | $
|Adjusted EBITDA margin 2,3                         |  |                         | 9.6    | % |                                |  
|Additions to property, plant and equipment         |  |                         | 41.9   |   |                                |  
|                                                   |  |                         |        |   |                                |  
|Sales (000 tonnes)                                 |  |                         |        |   |                                |  
|Specialty printing papers                          |  |                         | 1,081  |   |                                |  
|Newsprint                                          |  |                         | 388    |   |                                |  
|Pulp                                               |  |                         | 507    |   |                                |  
|                                                   |  |                         |        |   |                                |  
|Average Sales Revenue ($ per tonne)                |  |                         |        |   |                                |  
|Specialty printing papers                          |  |                         | 936    |   |                                |  
|Newsprint                                          |  |                         | 762    |   |                                |  
|Pulp                                               |  |                         | 767    |   |                                |  
|                                                   |  |                         |        |   |                                |  
|Production (000 tonnes)                            |  |                         |        |   |                                |  
|Specialty printing papers                          |  |                         | 1,060  |   |                                |  
|Newsprint                                          |  |                         | 377    |   |                                |  
|Pulp                                               |  |                         | 503    |   |                                |  



- 4 -







Notes
to Selected Consolidated Financial Information

| | 1 | Current portion of long term debt is included in total debt and excluded from working capital.
| | - | ----------------------------------------------------------------------------------------------



| | 2 | Adjusted EBITDA is a non-GAAP measure. Adjusted EBITDA does not have a standardized meaning. Adjusted
EBITDA as set forth above represents net earnings (loss) before net interest expense, income taxes, depreciation and amortization
and impairment, foreign exchange gain (loss) on long-term debt, loss on repayment of long-term debt, other income (expense), and
non-controlling interests. We focus on adjusted EBITDA as we believe this measure enables comparison of our results between periods
without regard to debt service, income taxes and capital expenditure requirements. Adjusted EBITDA is also useful in analyzing
our ability to comply with our debt covenants. As such, we believe it would be useful for investors and other users to be aware
of this measure so they can better assess our operating performance. Adjusted EBITDA should not be considered by an investor as
an alternative to net income, an indicator of our financial performance or an alternative to cash flows as a measure of liquidity.
As there are no generally accepted methods for calculating adjusted EBITDA, this measure as calculated by us might not be comparable
to similarly titled measures reported by other companies.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3 | AdjustedEBITDA margin is defined as adjusted EBITDA as a percentage
of sales.
| | - | -----------------------------------------------------------------------------



| | 4 | Refer to “Changes in accounting policies” under Item 5. Operating and Financial
Review and Prospectsfor a discussion of the changes in the Corporation’s policy with respect to classification of gains
and losses on certain of the company’s derivative financial instruments and translation of foreign currency-denominated working
capital balances effective January 1, 2010. Prior period comparative information has been restated.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5 | The Snowflake mill was permanently closed on September 30, 2012 and the sale of the mill was completed
on January 30, 2013; comparative periods have been restated for the classification of the Snowflake mill’s results as discontinued
operations.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6 | The company’s reorganization pursuant to the CCAA proceedings and the application of fresh
start accounting materially changed the carrying amounts and classifications reported in the financial statements. Accordingly,
financial results for periods prior to September 30, 2012 are not comparable to results for periods subsequent to September 30,
2012. References to Successor or Successor company refer to the company on or after September 30, 2012 and references to Predecessor
or Predecessor company refer to the company prior to September 30, 2012.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 





- 5 -







Wehave provided below a reconciliation of adjusted EBITDA to net earnings (loss) attributable to the Company, which we believe
is the most directly comparable U.S. GAAP measure.



|(In millions of dollars)                                     |  | 2008 1 |        |   | 2009 1 |   |       | 2010 |  |   | 2011   |   |  | 2012 |       
|------------------------------------------------------------ |  | ------ | ------ | - | ------ | - | ----- | ---- |  | - | ------ | - |  | ---- | ------
|Net earnings (loss) attributable to the Company              |  | $      | (219.8 | ) |        | $ | (4.4  | )    |  | $ | (396.9 | ) |  | $    | (974.0
|Net earnings (loss) attributable to non-controlling interest |  |        | 0.8    |   |        |   | (1.2  | )    |  |   | (1.3   | ) |  |      | (2.6  
|Net earnings (loss)                                          |  |        | (219.0 | ) |        |   | (5.6  | )    |  |   | (398.2 | ) |  |      | (976.6
|Depreciation and amortization                                |  |        | 159.8  |   |        |   | 137.3 |      |  |   | 109.7  |   |  |      | 105.5 
|Impairment                                                   |  |        | 151.0  |   |        |   | 17.4  |      |  |   | 294.5  |   |  |      | 661.8 
|Gain on cancellation of long-term debt                       |  |        | –      |   |        |   | (30.7 | )    |  |   | (0.6   | ) |  |      | –     
|Foreign exchange (gain) loss on long-term debt               |  |        | 82.2   |   |        |   | (75.3 | )    |  |   | (27.6  | ) |  |      | 9.7   
|Loss on Powell River fire                                    |  |        | –      |   |        |   | –     |      |  |   | –      |   |  |      | 2.4   
|Other (income) expense, net                                  |  |        | 15.7   |   |        |   | 28.6  |      |  |   | 3.2    |   |  |      | (0.3  
|Interest expense, net                                        |  |        | 74.8   |   |        |   | 69.1  |      |  |   | 71.9   |   |  |      | 73.2  
|Income tax recovery                                          |  |        | (90.7  | ) |        |   | (23.1 | )    |  |   | (19.8  | ) |  |      | (8.4  
|Reorganization items, net                                    |  |        | –      |   |        |   | –     |      |  |   | –      |   |  |      | –     
|(Earnings) loss from discontinued operations net of tax      |  |        | (10.4  | ) |        |   | 7.3   |      |  |   | 19.5   |   |  |      | 195.5 
|                                                             |  |        |        |   |        |   |       |      |  |   |        |   |  |      |       
|Adjusted EBITDA 2                                            |  | $      | 163.4  |   |        | $ | 125.0 |      |  | $ | 52.6   |   |  | $    | 62.8  



| | 1 | Refer to “Changes in accounting policies” under Item 5. Operating and Financial
Review and Prospectsfor a discussion of the changes in the company’s policy with respect to classification of gains
and losses on certain of the company’s derivative financial instruments and translation of foreign currency-denominated working
capital balances effective January 1, 2010. Prior period comparative information has been restated.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2 | Adjusted EBITDA is a non-GAAP measure. Adjusted EBITDA does not have a standardized meaning. Adjusted
EBITDA as set forth above represents net earnings (loss) before net interest expense, income taxes, depreciation and amortization
and impairment, foreign exchange gain (loss) on long-term debt, loss on repayment of long-term debt, other income (expense), and
non-controlling interests. We focus on adjusted EBITDA as we believe this measure enables comparison of our results between periods
without regard to debt service, income taxes and capital expenditure requirements. Adjusted EBITDA is also useful in analyzing
our ability to comply with our debt covenants. As such, we believe it would be useful for investors and other users to be aware
of this measure so they can better assess our operating performance. Adjusted EBITDA should not be considered by an investor as
an alternative to net income, an indicator of our financial performance or an alternative to cash flows as a measure of liquidity.
As there are no generally accepted methods for calculating adjusted EBITDA, this measure as calculated by us might not be comparable
to similarly titled measures reported by other companies.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Exchange Rate Data



Bank of Canada



The following table sets forth certain
exchange rates based upon the noon rate as quoted by the Bank of Canada. Such rates are set forth as, for the period indicated,
U.S. dollars per Canadian $1.00. On March 14, 2013 the noon rate was 0.9746 U.S. dollars per Canadian $1.00.



|               |  | 2008 |        |  | 2009 |  |        | 2010 |  |  | 2011   |  |  | 2012 |       
|-------------- |  | ---- | ------ |  | ---- |  | ------ | ---- |  |  | ------ |  |  | ---- | ------
|               |  |      |        |  |      |  |        |      |  |  |        |  |  |      |       
|Low            |  |      | 0.7711 |  |      |  | 0.7692 |      |  |  | 0.9278 |  |  |      | 0.9430
|High           |  |      | 1.0289 |  |      |  | 0.9716 |      |  |  | 1.0054 |  |  |      | 1.0583
|Period-end     |  |      | 0.8166 |  |      |  | 0.9555 |      |  |  | 1.0054 |  |  |      | 0.9833
|Average rate 1 |  |      | 0.9381 |  |      |  | 0.8757 |      |  |  | 0.9710 |  |  |      | 1.0110





- 6 -







|               |  | 2012      |        |  | 2013    | 
|-------------- |  | --------- | ------ |  | ------- | 
|               |  | September |        |  | October | 
|Low            |  |           | 1.0099 |  |         | 
|High           |  |           | 1.0299 |  |         | 
|Period-end     |  |           | 1.0166 |  |         | 
|Average rate 1 |  |           | 1.0222 |  |         | 



| | 1 | The average rate is derived by taking the average of the noon rate for each business day during the relevant period.
| | - | --------------------------------------------------------------------------------------------------------------------



| | B. | Capitalizationand Indebtedness
| | -- | ------------------------------



Information not required for an annual
report.



| | C. | Reasons for the Offer and Use of Proceeds
| | -- | -----------------------------------------



Information not required for an annual report.



D.	Risk Factors



We face risks and uncertainties which fall
into the general business areas of markets, international commodity prices, currency exchange rates, environmental issues, fibre
supply, government regulation and policy and, for Canadian companies, trade barriers and potential impacts of Aboriginal rights,
including unresolved Aboriginal land claims in the Province of British Columbia.



Subsequent to our restructuring under
the CCAA proceedings, we may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take
other actions to satisfy our obligations under our indebtedness, which may not be successful



Our ability to service our debt obligations
or to refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing
economic and competitive conditions and certain financial, business, legislative, regulatory and other factors beyond our control.
We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to fund our day-to-day operations
or to pay the principal, premium, if any, and interest on our indebtedness.



If our cash flows and capital resources
are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce
or delay capital expenditures or to sell assets or operations, seek additional capital or restructure or refinance our indebtedness.
We may not be able to affect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even
if successful, such alternative actions may not allow us to meet our scheduled debt service obligations. The credit agreement that
governs the new ABL Facility and the note indentures that govern the 2017 Notes and the Exit Notes restrict our ability to dispose
of assets and use the proceeds from any such dispositions and may also restrict our ability to raise debt or equity capital to
be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or obtain proceeds
in an amount sufficient to meet any debt service obligations when due. Our inability to generate sufficient cash flows to satisfy
our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely
affect our financial position and results of operations and our ability to satisfy our obligations under the 2017 Notes, the Exit
Notes and the new ABL Facility.



If we cannot service our debt obligations,
we will be in default and as a result, holders of the 2017 Notes and Exit Notes could declare all outstanding principal and interest
to be due and payable, the lenders under the new ABL Facility could terminate their commitments to loan money, our secured lenders
could foreclose against the assets securing such borrowings and we could be forced into bankruptcy or liquidation.



Our degree of leverage upon completion
of our restructuring under the CCAA proceedings may limit our financial and operating activities



- 7 -







Our historical capital requirements have
been considerable and our future capital requirements could vary significantly and may be affected by general economic conditions,
wood fibre supply, currency exchange rates, industry trends, performance, interest rates and many other factors that are not within
our control. Subject to the limits contained in the credit agreement that governs the new ABL Facility and the note indentures
that govern the 2017 Notes and the Exit Notes, we may be able to incur additional debt from time to time to finance working capital,
capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt
could intensify. Our substantial level of indebtedness has had in the past, and could have in the future, important consequences,
including the following:



| | – | making it more difficult for us to satisfy our obligations
with respect to our debt,
| | - | ------------------------------------------------------------------------------------



| | – | limiting our ability to obtain additional financing to fund future working capital, capital expenditures,
product developments, acquisitions or other general corporate requirements,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | – | requiring a substantial portion of our cash flows to be dedicated to debt service payments instead
of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures and other general
corporate purposes,
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | – | increasing our vulnerability to general adverse economic and industry conditions,
| | - | ---------------------------------------------------------------------------------



| | – | exposing us to the risk of increased interest rates as certain of our borrowings, including the
Exit Notes and borrowings under the new ABL Facility are at variable rates of interest,
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | – | limiting our flexibility in planning for and reacting to changes in our industry,
| | - | ---------------------------------------------------------------------------------



| | – | placing us at a disadvantage compared to other, less leveraged competitors, and
| | - | -------------------------------------------------------------------------------



| | – | increasing our cost of borrowing.
| | - | ---------------------------------



We may not realize our anticipated
cost savings from our cost savings initiatives



As part of our restructuring under the
CCAA proceedings, we have taken steps to lower operating costs by implementing various cost savings initiatives. Certain of these
initiatives included, but were not limited to, new five-year competitive labour agreements in British Columbia to help reposition
the business, lower property tax rates for all three mills located in British Columbia, provincial approval of our application
for funding relief on our salaried pension plan solvency deficit, disposal of surplus assets, and closure of the Snowflake recycle
mill operations. Estimates of cost savings are inherently uncertain, and we may not be able to achieve all of the cost savings
or expense reductions that we have projected. Our ability to successfully realize savings and the timing of any realization may
be affected by factors such as the need to ensure continuity in our operations, labour and other contracts, regulations and/or
statutes governing employee/employer relationships, and other factors. In addition, our implementation of certain of these initiatives
has and is expected to require upfront costs. There can be no assurances provided that we will be able to successfully contain
our expenses or that even if our savings are achieved that implementation or other expenses will not offset any such savings. Our
estimates of the future expenditures necessary to achieve the savings we have identified may not prove accurate, and any increase
in such expenditures may affect our ability to achieve our anticipated savings. If these cost-control efforts do not reduce costs
in line with our expectations, our financial position, results of operations and cash flows will be negatively affected.



There is a limited trading market
for the company’s common shares



Although our new common shares are listed
on the TSX certain holders of common shares may also be creditors of the company and there is no certainty that a viable trading
market for the common shares will develop. The potential lack of liquidity for the common shares may make it more difficult for
us to raise additional capital, if necessary, and it may affect the price volatility of the common shares. There can also be no
assurance that a holder will be able to sell its common shares at a particular time or that the prices such holder receives when
it sells will be favorable. Future trading prices of the common shares will depend on many factors, including our operating performance
and financial condition.



As a result of the Plan, certain holders
of common shares may also be creditors of the company and may seek to dispose of such securities to obtain liquidity. Such sales
could cause the trading prices for these securities to be depressed. Further, the possibility that the holders of common shares
may determine to sell all or a large portion of their shares in a short period of time may adversely affect the market price of
the common shares.



- 8 -







Our business is of a cyclical nature
and demand for our products may fluctuate significantly



The markets for pulp
and paper products are highly cyclical and are characterized by periods of excess product supply due to many factors, including
additions to industry capacity, increased industry production, structural changes in the industry, periods of weak demand due to
weak general economic activity or other causes, and reduced inventory levels maintained by customers.



Demand for forest products
generally correlates to global economic conditions. Demand for pulp and paper products in particular is driven primarily by levels
of advertising. In periods of economic weakness, reduced spending by consumers and businesses results in decreased demand for forest
products, causing lower product prices and possible manufacturing downtime. The North American newsprint and directory paper market
is mature with demand for newsprint declining significantly in the last five years.



We believe these declines
in newsprint and directory paper demand will continue long term, although we have the ability to partially mitigate the impact
by switching production from newsprint and directory paper to other paper grades. Demand for our products is traditionally weaker
in the first half of the year.



As at December 31,
2012, one of the paper machines at our Crofton mill has been indefinitely curtailed. Should demand for our products weaken, additional
indefinite or periodic production curtailments may be required, which could have an adverse impact on our financial condition and
ability to generate sufficient cash flows to satisfy our operational needs and debt service requirements.



We operate in
a commodity market where prices may fluctuate significantly



The pulp and paper
industry is a commodity market in which producers compete primarily on the basis of price. Prices for our products have fluctuated
significantly in the past and may fluctuate significantly in the future, principally as a result of market conditions of supply
and demand, as well as changes in exchange rates. Our earnings are sensitive to price changes for our principal products, with
the effect of price changes on newsprint and mechanical specialty printing paper grades being the greatest. Market prices for our
products typically are not directly affected by input costs or other costs of sales and, consequently, we have limited ability
to pass through increases in operating costs to our customers without an increase in market prices. Even though our costs may increase,
our customers may not accept price increases for our products or the prices for our products may decline. As our financial performance
is principally dependent on the prices we receive for our products, prolonged periods of low prices, customer refusal to accept
announced price increases, or significant cost increases that cannot be passed on in product prices may be materially adverse to
us.



Media trends
may lead to long-term declines in demand for our products



Trends in advertising,
Internet use and electronic data transmission and storage can have adverse effects on traditional print media. As our newsprint,
telephone directory and retail customers increase their use of other forms of media and advertising, demand for our newsprint,
uncoated mechanical and coated mechanical papers may decline on a long-term basis.



We are subject
to exchange rate fluctuations



Nearly all of our sales
are based upon prices set in U.S. dollars, while a substantial portion of our costs and expenses are incurred in Canadian dollars
and our results of operations and financial condition are reported in Canadian dollars. The value of the Canadian dollar in relation
to the U.S. dollar has increased significantly in recent years. Increases in the value of the Canadian dollar relative to the U.S.
dollar reduce the amount of revenue in Canadian dollar terms from sales made in U.S. dollars, and would reduce cash flow available
to fund operations and debt service obligations.



Since we have debt
denominated in U.S. dollars, including our 2017 Notes and our Exit Notes, our reported earnings could fluctuate materially as a
result of exchange rates given that changes in the value of the Canadian dollar against the U.S. dollar during a given financial
reporting period result in a foreign currency gain or loss on the translation of U.S. dollar cash and debt into Canadian currency.



We have managed a part
of our currency exposure in the past through the use of currency options and forward contracts to hedge anticipated future sales
denominated in foreign currencies and U.S. dollar denominated debt. However, no assurance can be made that we will engage in any
hedging transactions or, if we decide to engage in any such transactions, that we will be successful in eliminating or mitigating
currency exchange risks. At March 5, 2013, we did not have any foreign currency options or forward contracts outstanding.



- 9 -







We face significant
global competition



We compete with American,
European and Asian producers in highly competitive global markets. Some of our competitors are larger and can accordingly achieve
greater economies of scale, some have greater financial resources and some operate mills in locations that have lower energy, furnish
or labour costs or have less stringent environmental and governmental regulations than the locations where we operate.



Our ability to compete
is affected by a number of these factors as well as the quality of our products and customer service and our ability to maintain
high plant efficiencies and operating rates and to control our manufacturing costs. If we were unable to compete effectively, there
may be a materially adverse impact on our business.



We face risks
related to our international sales



A significant portion
of our sales are outside of Canada and the United States 99% of our pulp sales and 24% of our paper sales in 2012. These international
sales result in additional risks including restrictive government actions (including trade quotas, tariffs and other trade barriers
and currency restrictions), local labour laws and regulations affecting our ability to hire, retain or dismiss employees, the need
to comply with multiple and potentially conflicting laws and regulations, unfavourable national or regional business conditions
or political or economic instability in some of these jurisdictions, higher transportation costs and difficulty in obtaining distribution
and sales support.



We are exposed
to fluctuations in the cost and supply of wood fibre



We have no significant
timber holdings and are dependent on third parties for the supply of wood fibre required for our paper manufacturing operations.



Approximately 70% of our fibre is provided
by five suppliers. Our fibre supply could be reduced as a result of events beyond our control, including industrial disputes, natural
disasters and material curtailments and shutdown of operations by suppliers for market or other reasons. Market-related curtailments
or shutdowns can be influenced by both seasonal and cyclical factors, such as raw material availability, finished goods inventory
levels, interest rates and demand for lumber. Continued weakness in the U.S. housing market could lead to production curtailment
for B.C. lumber producers and result in a reduction in residual fibre supply available to us.



We source a significant quantity of our
fibre from the interior of B.C. The current mountain pine beetle infestation in the B.C. interior is expected to reduce the long-term
fibre supply in the B.C. interior and could have a significant impact on the availability, quality and cost of fibre.



Approximately 69% of
our fibre is sourced under long-term fibre agreements with third parties with pricing based on market prices or on prices determined
under market-based formulas. Given that the market price for fibre varies due to external factors, there is a risk that we will
not continue to have access to wood fibre at previous levels or pricing.



Aboriginal groups have claimed aboriginal
title over substantial portions of B.C.’s timberlands, including areas where the forest tenures held by our suppliers are
located. Although the renewal of forest tenures held by our suppliers may be adversely affected by claims of aboriginal title,
the specific impact cannot be estimated at this time.



The permanent closure of our Snowflake
mill, which produced 100% recycled newsprint from ONP, has eliminated our exposure to cost and supply fluctuations in ONP.



We are dependent
on the supply of certain raw materials



In addition to wood
fibre, we are dependent on the supply of certain chemicals and raw materials used in our manufacturing processes. Any material
disruption in the supply of these chemicals or raw materials could affect our ability to meet customer demand in a timely manner
and harm our reputation, and any material increase in the cost of these chemicals or other raw materials could negatively affect
our business and the results of our operations.



We have incurred losses in recent
periods and may incur losses in the future that may affect liquidity and ongoing operations



- 10 -







As of December 31,
2012, we had recorded net losses in 9 of the last 12 quarters. These losses were driven by reduced prices, weak market demand,
production curtailments, general inflationary pressure and increased input costs and the strong Canadian dollar. Should we be unable
to return to sustained profitability, cash generated through operations may be insufficient to meet operating cash requirements,
requiring increased reliance on the ABL Facility to fund operating costs. If sufficient funding is not available under the ABL
Facility, then additional funding sources may be required and there is no assurance that we will be able to access additional funding
sources on favourable terms or at all to meet our cash requirements. The failure to obtain such funding could adversely affect
our operations and our ability to maintain compliance with covenants under the ABL Facility, the 2017 Notes, and the Exit Notes.



Labour disruptions could have a negative
impact on our business



Labour disruptions could occur and have
a negative impact on our business. The new labour agreements with the CEP and PPWC expire on April 30, 2017 and the new labour
agreement with CLAC expires on March 31, 2015. We do not anticipate labour disruptions in our operations in 2013.



Claims of aboriginal
title and rights in Canada may affect our operations



The ability to operate
our mills in Canada may be affected by claims of aboriginal rights and title by aboriginal groups. The governments of Canada and
B.C. have established a formal process to negotiate settlements with aboriginal groups throughout B.C. in order to resolve these
land claims. It is the policy of the governments that ownership of lands held in fee simple by third parties (such as us) will
not be affected by treaty negotiations. The Powell River mill site has been included in areas to which an aboriginal group has
asserted aboriginal title both through treaty negotiations with government and by commencing an action in 2005 in the Supreme Court
of B.C. While we and other industrial companies have been named as parties in the court proceeding along with the governments of
Canada and B.C., counsel for the aboriginal group has advised us that the plaintiffs are currently negotiating with these two governments
and have no intention of proceeding with the action at this time. Based on the history of similar proceedings, we expect that it
would be many years before a final court decision could be rendered if the proceeding were pursued.



Recent Supreme Court of Canada decisions
have confirmed that the governments of Canada and B.C. are obligated to consult with and, in certain circumstances, accommodate
aboriginal groups whenever there is a reasonable prospect decision, such as a decision to issue or amend a regulatory permit, which
may affect aboriginal groups’ rights or title. This duty of consultation and accommodation may affect our ability to obtain
or amend necessary regulatory permits on a timely basis and may influence the conditions set out in such permits.



Increases in
energy costs could have a negative impact on our business



Our operations consume a significant amount
of electricity, natural gas and fuel oil. Increases in prices for these commodities can increase manufacturing costs and have an
adverse impact on our business and results of our operations.



Although our electricity supply agreements
are provincially regulated and pricing has historically been stable, B.C. Hydro and Power Authority (“B.C. Hydro”)
in recent years has sought, and to some extent achieved, rate increases above historical levels. B.C. Hydro raised its rates by
9.3% on an interim basis in April 2010 and a subsequent Negotiated Settlement Process resulted in the approval of a final effective
rate increase of 7.3% on November 18, 2010. The difference between the interim and final approved rate increase was refunded through
a credit on energy purchases in Q1 2011. The introduction of the Harmonized Sales Tax (“HST”) on July 1, 2010 substantially
eliminated the 7% provincial sales tax on electricity, which reduced some of the impact of the rate increase. However, with the
re-implementation of the BC provincial sales tax on April 1, 2013 and BC Hydro’s expressed intention to seek approval from
the utilities commission to increase its rates in the range of 10% for the next three years in response to infrastructure maintenance
and B.C. energy policy that includes mandating self-sufficiency by 2016, feed in tariffs, and the implementation of Smart Metering,
our electricity prices could increase significantly and have an impact on our earnings. B.C. Hydro announced a 5.4% interim rate
increase, effective April 1, 2012, subject to final approval by the British Columbia Utilities Commission (BCUC) later in the year.
We have mitigated some of the impact of rate increases through reductions in usage at the highest incremental power rate and intend
to further mitigate rate increases by implementing energy conservation projects and increasing our capacity to self-generate electricity,
but there can be no assurance that we will be able to eliminate the effect of all such rate increases.



Since oil and natural
gas are purchased on spot markets, their prices fluctuate significantly due to various external factors. We manage our exposure
to the price volatility for these fuels through the use of financial instruments and physical supply agreements under a hedging
program and also by using lower priced alternatives where feasible. There is, however, no assurance that we will be successful
in eliminating or mitigating exposure to price volatility for these fuels.



- 11 -







We are subject
to significant environmental regulation



We are subject to extensive
environmental laws and regulations that impose stringent requirements on our operations, including, among other things, air emissions,
liquid effluent discharges, the storage, handling and disposal of hazardous materials and wastes, remediation of contaminated sites
and landfill operation and closure obligations. It may be necessary for us to incur substantial costs to comply with such environmental
laws and regulations.



Some of our operations are subject to stringent
permitting requirements and from time to time we face opposition to construction or expansion of proposed facilities, such as landfills.
We may discover currently unknown environmental liabilities in relation to our past or present operations or at our current or
former facilities, or we may be faced with difficulty in obtaining project approvals in the future. These occurrences may (i) require
site or other remediation costs to maintain compliance or correct violations of environmental laws and regulations, (ii) result
in denial of required permits, (iii) result in government or private claims for damage to person, property or the environment,
or (iv) result in civil or criminal fines and penalties or other sanctions.



We permanently closed our Elk Falls paper
mill in 2010. We may be required to conduct investigations and take remedial action for contaminated areas. We also permanently
closed our paper recycling division in 2010 but do not currently expect any significant expenditures in respect of remediation
of that site.



Our operations may be affected by the regulation
of greenhouse gases (GHG) in Canada:



| | · | The federal government has indicated its intent to regulate
priority air pollutants, including particulate matter and sulphur oxides (SOx), and GHGs under the Canada Clean Air Act
and the Canadian Environmental Protection Act. Under proposed targets, our Crofton mill may be required to reduce
SOx emissions. The cost of making any such reductions is estimated between $4 and $8 million. The new standards are still being
determined with compliance required within three to five years. In January 2010, the federal government, as part of its commitment
to the Copenhagen Accord, announced a GHG reduction target of 17% by 2020 based on 2005 emissions. It is unknown what the federal
government’s final position on these initiatives will be, as none have been enacted into law.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | B.C. is a signatory to the Western Climate Initiative,
a collaboration of four provinces and currently only one U.S. state (California), whose mandate is to achieve a 15% reduction
in GHGs below 2005 levels among member entities by 2020. In addition, the B.C. government has announced its goal of reducing the
provincial release of GHGs by 33% by 2020, based on 2007 levels, with interim reduction targets of 6% by 2012 and 18% by 2016.
Quebec and California have initiated their regulatory processes in connection with implementation of a cap and trade system. B.C.
has not issued regulations for its cap and trade program for GHGs and at this time is reviewing its climate change and clean energy
policies. It is too early to determine the impact on the company under any such cap and trade scheme.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Effective January 1, 2010, a GHG reporting regulation
was brought into effect by the B.C. government which affects our three paper mills in B.C. The regulation includes requirements
for calculating and reporting GHG emissions from facilities that release 10,000 tonnes or more of GHGs per year plus third-party
verification at facilities that release 25,000 tonnes or more per year. The first reports and verification audits were successfully
completed in 2011.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The finalization of Canadian federal and
provincial climate change regulation may depend on regulatory initiatives undertaken in the U.S. 	The United States has indicated
its intention to introduce more stringent environmental regulation and implement policies designed to reduce GHG emissions through
the Clean Air Act but the timing of the implementation of any national limits is uncertain. When limits are developed, it is expected
that they will focus on the electricity generating sector.



Effective July 1, 2012,
the carbon tax rates under the B.C. government’s carbon tax on fossil fuels increased by 25%. The impact of increases in
the carbon tax depends on our ability to decrease the use of fossil fuel. For the year ended December 31, 2012, we paid $6.5 million
in carbon taxes on our fossil fuel purchases.



- 12 -







Additional regulatory
initiatives may be implemented in other jurisdictions to address GHG emissions and other climate change-related concerns. If, to
the extent we operate or offer our products for sale in such jurisdictions, we may be required to incur additional capital expenditures,
operating costs or mitigating expenses, such as carbon taxes, to comply with any such initiatives.



Elimination of British Columbia Harmonized
Sales Tax will negatively impact our future financial results



On April 1, 2013, the Province will revert
back to provincial sales tax regime. We estimate that the additional annualized cost to our business from that date onward will
be approximately $12 million, based on actual 2012 expenditures.



Equipment failures and the need to
increase capital and maintenance expenditures could have a negative impact on our business



Our business is capital
intensive. Our annual capital expenditure requirements vary due to differing requirements for current maintenance, expansion, business
capital and environmental compliance and future projects. We regularly carry out maintenance on our manufacturing equipment but
key components may still require repair or replacement. The costs associated with such maintenance and capital expenditures or
our inability to source the necessary funds to enable us to maintain or upgrade our facilities as required could have an adverse
effect on our business and operations.



In addition, we may from time to time temporarily
suspend operations at one or more facilities to perform necessary maintenance or carry out capital projects. These temporary suspensions
could affect the ability to meet customer demand in a timely manner and adversely affect our business.



We may be subject
to litigation which could result in unexpected costs and expenditure of time and resources



We may from time to
time be subject to claims and litigation proceedings generally associated with commercial and employment law issues. Given that
these claims are subject to many uncertainties and the inability to predict with any certainty their outcomes and financial impacts,
there is no guarantee that actions that may be brought against us in the future will be resolved in our favour or covered by our
insurance. Any losses from settlements or adverse judgments arising out of these claims could be materially adverse to our operations
and business.



The Snowflake mill sources water from groundwater
wells in the vicinity of the Little Colorado River for its process requirements. The Little Colorado River Adjudication, filed
in 1978, is pending in the Superior Court of Arizona, Apache County. The purpose of this adjudication is to determine the nature,
extent and relative priority, if applicable, of the water rights of all claimants to the Little Colorado River system and sources.
There are more than 3,500 participants, including Snowflake. Native American tribes and the United States government contend that
Snowflake’s withdrawal and use of groundwater impermissibly interferes with water rights to the Little Colorado River. We
dispute this contention. However, an adverse determination could result in claims for damages that may be materially adverse to
us.



In addition, securities
class-action litigation often has been brought against public companies following periods of volatility in the market price of
their securities. It is possible that we could be the target of similar litigation in future. Securities litigation could result
in substantial costs and damages and divert management’s attention and resources.



We extend trade credit to our customers
and they may not pay us promptly or in full



We extend trade credit
to many purchasers of our products and rely on their creditworthiness. Some of these customers operate in highly competitive, mature,
cyclical or low-margin businesses and some are highly leveraged financially or are experiencing negative cash flows which may result
in them needing to refinance, restructure or file for bankruptcy protection or bankruptcy. We will typically have a greater number
of such customers during economic downturns. The failure of such customers to pay us promptly and in full under the credit terms
we extend to them could have a material adverse impact on our operating cash flows.



We are dependent upon certain of
our management personnel



The success of our operations is influenced
to a significant degree by our ability to attract and retain senior management with relevant industry experience. Successful implementation
of our business strategy is dependent on our ability to attract and retain our executive officers and management team. The unexpected
loss of services of any key management personnel or the inability to recruit and retain qualified personnel in the future could
have an adverse effect on our business and financial results.



- 13 -







Consumer boycotts or increases in
costs due to chain-of-custody programs may adversely affect demand for our products



Some of our customers are sensitive to
issues associated with harvesting of old growth forests and require us to supply products that are not produced from these forests.
A growing number of customers want to purchase products that originate from sustainable managed forests as validated by certification
programs. We have implemented The Forest Stewardship Council chain-of-custody system to verify that selected paper products at
our Crofton, Port Alberni and Powell River mills contain 100% certified wood fibre, but we may be required to implement additional
or more stringent chain-of-custody certification programs with increased costs to meet our customers’ demands. Demand for
our products may be adversely affected if we don’t implement such programs or if we become subject to organized boycotts
or similar actions by environmental or other groups.



Our insurance has limitations and
exclusions



We maintain insurance
coverage that we believe would ordinarily be maintained by an operator of facilities similar to our own. The insurance policies
are subject to limits and exclusions. Damage to or destruction of our facilities could accordingly exceed the limits of our policies
or be subject to policy exclusions.



Our mills are located in seismically
active areas



Our three operating
mills are situated adjacent to the ocean on the south coast of B.C. This is a seismically active area and these mills and the surrounding
transportation infrastructure are accordingly susceptible to risk of damage or destruction caused by earthquakes and tsunamis.
Our insurance may not cover the total losses associated with damage or destruction caused by an earthquake or tsunami, and this
insurance is subject to limits and deductibles in respect of such damage that may limit the amount recoverable.



Post-retirement
plan obligations may affect our financial condition



We maintain defined
benefit pension plans and other post-retirement benefit plans for certain retired employees. As at December 31, 2012, the underfunded
liability associated with the defined benefit pension plans was $53.5 million and the underfunded liability associated with the
other post-retirement benefit plans was $149.2 million. Funding requirements for these plans are dependent on various factors,
including interest rates, asset returns, regulatory requirements for funding purposes, and changes to plan benefits. In 2013, we
are required to contribute $4.5 million towards the underfunded liability of the defined benefit pension plan. Although we expect
to continue to make contributions to fund post-retirement plan obligations and to meet legal funding obligations for the defined
benefit pension plan, no assurance can be made that the underfunded liability under these plans will not be materially adverse
to us in the future.



A change in our legal control could
be materially adverse



We have outstanding US$250 million of 2017
Notes and US$35million of Exit Notes. If a Change of Control (as such term is defined in the indenture governing these notes) occurs,
we are required to make an offer to purchase all outstanding notes at a price equal to 101% of their principal amount, plus accrued
and unpaid interest to the date of payment, in accordance with the procedures set out in the indenture. We may not have sufficient
financial resources to fund any such repurchase.



- 14 -







| | ITEM 4. | INFORMATION ON THE CORPORATION
| | ------- | ------------------------------



| | A. | History and Development of the Corporation
| | -- | ------------------------------------------



Incorporation



We were formed on September 1, 2001 by
the amalgamation under the Canada Business Corporations Act of Norske Skog Canada Limited and Pacifica Papers Inc. On October
3, 2005 we changed our name to Catalyst Paper Corporation.



Catalyst’s principal predecessor
was British Columbia Forest Products Limited, which was a company formed by the amalgamation under the laws of the Province of
British Columbia on December 30, 1971 of its predecessor company, incorporated by certificate of incorporation, with memorandum
and articles, under the laws of the Province of British Columbia on January 31, 1946, and 24 of its wholly owned subsidiaries.
On September 2, 1988, British Columbia Forest Products Limited changed its name to Fletcher Challenge Canada Limited. Prior to
July 2000, 50.76% of Fletcher Challenge Canada Limited was owned by Fletcher Challenge Limited of New Zealand (“Fletcher
Challenge New Zealand”). In July 2000, Norske Skogindustrier ASA completed a transaction with Fletcher Challenge New Zealand
whereby all of the business and assets of Fletcher Challenge New Zealand’s paper division worldwide were acquired by Norske
Skogindustrier ASA. As part of this transaction, Norske Skogindustrier ASA acquired Fletcher Challenge New Zealand’s 50.76%
interest in Fletcher Challenge Canada Limited. On December 15, 2000, Fletcher Challenge Canada Limited changed its name to Norske
Skog Canada Limited.



As a result of the amalgamation with Pacifica
Papers Inc. and subsequent equity issues, Norske Skogindustrier ASA’s interest in Catalyst decreased to 29.4%. On February
16, 2006 Norske Skogindustrier ASA sold its remaining 29.4% interest in Catalyst by way of a secondary offering.



Pacifica Papers Inc.’s predecessor
was Pacifica Papers Limited Partnership. On June 8, 1998 Pacifica Papers Limited Partnership, through its indirect wholly owned
subsidiary, Pacifica Papers Acquisition Company Ltd., acquired all the shares of MB Paper Limited from MacMillan Bloedel Limited.
On March 12, 1999 the unitholders of Pacifica Papers Limited Partnership approved a reorganization pursuant to which Pacifica Papers
Limited Partnership changed its corporate form from a partnership to a corporation. As part of this reorganization, 28,750,000
common shares of Pacifica Papers Inc. were distributed to all the unitholders of Pacifica Paper Limited Partnership in exchange
for their partnership units on a one for one basis.



14,400,000 new common shares were issued
from the treasury of the company to the holders of the 2016 Notes (as hereinafter defined) on September 13, 2012, in accordance
with the company’s plan of arrangement under the Companies’ Creditors Arrangement Act (the “Plan”)
and a further 127,571 new common shares were issued from treasury on December 19, 2012 to certain unsecured creditors of the company
who elected to receive their pro rata share of up to 600,000 common shares pursuant to the terms of the Plan. Under the terms of
the Plan all former securities of the company issued and outstanding on September 13, 2012 were deemed automatically cancelled.
See “Creditor Protection and Restructuring Process - Implementation of Plan”.



Our head and registered office is located
at 2nd Floor, 3600 Lysander Lane, Richmond, British Columbia, V7B 1C3.



Creditor Protection and Restructuring
Process



Proceedings under the CCAA



Following extensive discussions and negotiations
in 2011 and early 2012 with certain holders of our 7.375% senior unsecured notes due 2014 (2014 Notes) and our 11.0% senior secured
notes due 2016 (2016 Notes) in an effort to implement a recapitalization transaction that would reduce our indebtedness and improve
the company’s capital structure, the Board of directors and management determined it was necessary to pursue a restructuring
under court supervision.



On January 31, 2012 the company obtained
an order from the Supreme Court of British Columbia under the CCAA and subsequently received a recognition order from the United
States court under Chapter 15 of the US Bankruptcy Code. The company arranged debtor-in-possession financing (“DIP Facility”)
of approximately $175 million to provide funding during the restructuring process under the CCAA for ongoing working capital, capital
expenditure requirements and general corporate purposes. The company’s operating revenue combined with the DIP Facility provided
sufficient liquidity to meet ongoing obligations to employees and suppliers and enabled normal operations to continue during the
restructuring process. The DIP Facility was paid out on September 13, 2012.



- 15 -







The company’s secured and unsecured
creditors approved the Plan at meetings held on June 25, 2012. The Plan was approved by the Canadian Court on June 28, 2012 under
the CCAA process and by the United States Court on July 27, 2012 under the Chapter 15 process. The Plan became effective on September
12, 2012 and restructuring under the Plan completed on September 13, 2012.



Implementation of Plan



As a result of the reorganization under the Plan:



| | · | Holders of 2016 Notes exchanged their US$390.4 million
aggregate principal amount of 2016 Notes plus accrued and unpaid interest for:
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| | - | US$250.0 million aggregate principal amount of senior
secured notes due in 2017 (“2017 Notes”) that bear interest, at the option of the company, at a rate of 11% per annum
in cash or 13% per annum payable 7.5% cash and 5.5% payment-in-kind (PIK); and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | 14.4 million new common shares which represented 100%
of the company’s issued and outstanding common shares subject to dilution for (i) the issuance of common shares to unsecured
creditors who made an equity election pursuant to the terms of the Plan, and (ii) common shares that may be issued under a new
management incentive plan should such a plan be adopted in the future.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Holders of 2014 Notes exchanged their US$250.0 million
aggregate principal amount of 2014 Notes plus accrued and unpaid interest for:
| | - | -------------------------------------------------------------------------------------------------------------------------------------



| | - | Their pro rata share (calculated by reference to the
aggregate amount of all claims of unsecured creditors allowed under the Plan) of 50% of the net proceeds (the “PREI Proceeds
Pool”) following the sale of Catalyst Paper’s interest in Powell River Energy Inc. and Powell River Energy Limited
Partnership (collectively “Powell River Energy”), or
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | If an equity election was made, their pro rata share
of 600,000 new common shares (the “Unsecured Creditor Share Pool”).
| | - | ------------------------------------------------------------------------------------------------------------------------



| | · | General creditors exchanged their general unsecured claims
for:
| | - | ---------------------------------------------------------------



| | - | Their pro rata share of the PREI Proceeds Pool; or
| | - | --------------------------------------------------



| | - | If an equity election was made, their pro rata share
of the Unsecured Creditor Share Pool; or
| | - | ---------------------------------------------------------------------------------------------



| | - | If the general unsecured claim was equal to or less than
$10,000 (unless an equity election was made), or if a valid cash election were made and such creditor elected to reduce their
claim to $10,000, cash in an amount equal to 50% of the creditor’s allowed claim (the “Cash Convenience Pool”).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On September 13, 2012 all previously outstanding common
shares of the company were cancelled for no consideration and holders of such common shares did not, and will not, receive any
distribution under the Plan.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We distributed $1.0 million to unsecured
creditors in November, 2012 as full and final settlement of claims under the Cash Convenience Pool. We issued 14,400,000 new common
shares to holders of 2016 Notes on September 13, 2012 and issued a further 127,571 common shares on December 19, 2012 to unsecured
creditors who elected to receive common shares in lieu of participating in the PREI Proceeds Pool,as
full and final settlement of their claims. We entered into an agreement on February 13, 2013 to sell our interest in Powell River
Energy for $33 million and following completion of such sale will pay out approximately $13 million from the PREI Proceeds Pool
to applicable unsecured creditors. We are required under the terms of the Exit Facility (defined below) to offer to purchase Exit
Notes (defined below) at par from our portion of the proceeds from the sale of Powell River Energy.







- 16 -







Exit financing arrangements



On September 13, 2012, we entered into
a new $175.0 million ABL Facility, which was a pre-condition for the Corporation to implement the Plan and exit from protection
under the CCAA. The ABL Facility provided financing for general corporate purposes, and for the repayment on exit of the debtor-possession
asset based lending facility (“DIP Facility”) that was in place throughout the CCAA proceedings. The Corporation also
completed a US$35 million secured exit financing facility (“Exit Facility”) on September 13, 2012 and issued US$35
million of notes (“Exit Notes”) under that facility on its exit from protection under the CCAA. The Exit Facility provided
the company with backstop financing to pay costs and expenses and manage other contingencies on exit from protection under CCAA.



Appointment of new board of directors



A new Board was appointed effective upon
completion of the restructuring under the Plan on September 13, 2012, comprised of John Brecker, Giorgio Caputo, John Charles,
Kevin J. Clarke, Todd Dillabough, Walter Jones, and Leslie Lederer. Mr. Clarke, the CEO of the Corporation, continued from the
previous board. Mr. Lederer is the Chair of the Board.



Asset Sales



Closure and Sale of Snowflake Mill



The company permanently closed the Snowflake
mill on September 30, 2012. The decision to close the Snowflake mill was driven by continued financial losses resulting from intense
supply input and market pressures. Snowflake had generated negative adjusted EBITDA since 2009. The Snowflake mill and associated
assets, including our shares in The Apache Railway Company, were sold to a third party on January 30, 2013. See - Impairment
of Snowflake Assets and Canadian Operations.



Sale of Powell River Energy



We entered into an agreement on February
13, 2013 to sell our interest in Powell River Energy for $33 million. The sale is expected to complete in the first quarter of
2013 and is subject to various closing conditions. Electricity generated by Powell River Energy Inc. will continue to be sold to
the company under the existing power purchase agreement which expires in 2016 with possible extension to 2021 in one year renewal
term increments at the option of the company.



Sale of Elk Falls Mill



On August 16, 2012, the company and its
subsidiaries, Catalyst Pulp Operations Limited and Elk Falls Pulp and Paper Limited entered into an agreement to sell the Elk Falls
millsite and remaining plant and equipment and adjacent properties to a third party. This sale did not complete and the company
is pursuing other sale opportunities for this site.



Other Asset Sales



We have reached an agreement-in-principle
to sell our 13.4 hectare wastewater treatment facility located at our Port Alberni mill along with 3.9 hectares of land combined
with a road dedication for proceeds of $5.8 million. The company has agreed to settle the mortgage receivable due from PRSC Limited
Partnership and sell its interest in PRSC Land Developments Ltd. for proceeds of approximately $3.0 million. We continue to actively
market our remaining poplar plantation land.



Executive Changes



Kevin J. Clarke was appointed President
and Chief Executive Officer on June 21, 2010. Richard Garneau tendered his resignation as President and Chief Executive Officer
in January 2010 and left the company on May 31, 2010. Denis Jean, a director of the company who held this position on an interim
basis until Mr. Clarke’s appointment, continued as a member of the Board of directors until his resignation from the board
on February 2, 2012. A new Board was appointed on September 13, 2012 in connection with the restructuring under the Plan.



Note Exchange
Transaction and Financing



In March, 2010, we issued US$280.4 million
of new 11.0% senior secured notes, due December 2016 in exchange for US$318.7 million of our 8.625% senior unsecured notes due
June 2011 (“2011 Notes”) and in May, 2010 issued US$110 million of Class B 2016 Notes. We purchased US$9.5 million
of our 2011 Notes for US$8.9 million in September, 2010 and redeemed all of the remaining outstanding 2011 Notes in February, 2011.
All of the 2016 Notes were cancelled on the effective date of the Plan. See “Creditor Protection and Restructuring Process.”



- 17 -







Permanent Closure of the Elk Falls
Paper Mill and the Coquitlam Paper Recycling Facility



We permanently closed our Elk Falls paper
mill in Campbell River, B.C., and our Coquitlam paper recycling facility during the third quarter of 2010 in light of weak markets
for commodity paper grades combined with uncompetitive manufacturing costs, including labour, municipal taxes, fibre, and other
input costs. Closure of our Elk Falls mill reduced our combined annual paper production capacity by 526,000 tonnes. We have incurred
total severance costs to date of $9.7 million as a result of the closure of the Elk Falls mill and paper recycling facility. Asset-impairment
and closure costs were $294.5 million. We disclaimed the operating lease for the paper recycling facility effective March 23, 2012
under the CCAA process.



Production Curtailment



The following table summarizes pulp and paper production curtailment
in 2012:



|2012 Production Curtailment (000 tonnes) |  | Specialty Printing Papers(1) |    |  | Newsprint(2) |  |     | Pulp |  |  | Total | 
|---------------------------------------- |  | ---------------------------- | -- |  | ------------ |  | --- | ---- |  |  | ----- | 
|Q1                                       |  |                              | 0  |  |              |  | 35  |      |  |  | 0     | 
|Q2                                       |  |                              | 0  |  |              |  | 35  |      |  |  | 0     | 
|Q3                                       |  |                              | 0  |  |              |  | 35  |      |  |  | 0     | 
|Q4                                       |  |                              | 12 |  |              |  | 35  |      |  |  | 0     | 
|Total                                    |  |                              | 12 |  |              |  | 140 |      |  |  | 0     | 



| | (1) | The specialty
                                                            printing papers curtailment relates to the three paper machines at
                                                            the Powell River mill which were curtailed for eight days during the
                                                            last half of December, 2012.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | The newsprint
                                                            production curtailment relates to the Crofton C1 paper machine which
                                                            was curtailed throughout 2012. This machine has been indefinitely
                                                            curtailed since January 21, 2010 as a result of reduced customer demand
                                                            and high operating costs.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cogen
Arbitration Settlement



In January, 2011 pursuant to settlement
of an arbitration proceeding in 2009, we transferred to Island Cogeneration No. 2. Inc. (“Cogen”) the land that had
been leased by Cogen upon which its energy facility is located. We have also granted certain easements and access rights to Cogen
to facilitate the independent operation of the energy facility. In addition, Cogen has agreed to take steps to eliminate its reliance
on us for certain services and we have agreed to cooperate with Cogen in that regard.



Green Transformation Program Credits



In February, 2011, we received funding
approval under the Canadian federal government’s “Green Transformation Program” for two capital projects to improve
energy efficiency, a $5 million project at our Port Alberni mill to improve combustion efficiency and environmental performance
of its biomass boiler and a $13 million project at our Powell River mill to increase the electrical generation of the existing
generator by approximately 18 megawatts. Funding was applied as capital expenditures were incurred towards approved projects with
program payments released quarterly based on costs incurred during each quarterly period and all the costs associated with these
projects have been paid.



Defined Benefit Pension Plans Funding



Funding Relief



In December, 2011, the B.C. Superintendent
of Pensions granted us an extension of time for payment of the solvency deficits under certain of our defined benefit pension plans.
This extension provided for payments necessary to amortize the solvency deficits over the seven year period ending December 2017,
including annual payments of $10.6 million for 2011, 2012 and 2013. As part of our CCAA proceedings we paid an additional $1.1
million in respect of the solvency deficiencies in 2012. During our CCAA proceedings, we obtained government approval (i) to offer
a special portability election option in respect of our defined benefit pension plan for salaried employees and (ii) for further
funding relief in respect of our obligation to make payment to the solvency deficit for that pension plan. The funding relief provides
for fixed annual contributions to the solvency deficit over a 15-year period ending in 2027 and a final payment of the remaining
deficit in 2028. This change results in estimated annual cash savings of approximately $7 million per year commencing in 2013.



- 18 -







Special Portability Option



Under the special portability election
option, we offered members of our defined benefit pension plan for salaried employees a one-time reduced lump-sum payment option
as full settlement of their entitlements under the plan. Members had to make their elections by no later than December 15, 2012,
and have until June 30, 2013 to revoke such elections in favour of continuing to receive monthly pension payments. As of March
5, 2013, 42% of the total membership of the pension plan, representing 48% of the total pension liability elected to take this
option.



Members who exercise the election will
receive a reduced lump-sum payment, calculated as the commuted value of future pension payments multiplied by the solvency ratio
of the plan on December 31, 2012, plus additional top-up payments over the next four years totaling 8% of commuted value. Commuted
value is defined as the amount a plan member needed to invest on December 31, 2012 to provide for future pension benefits, incorporating
an interest rate based on Government of Canada bonds.



Property Tax Dispute



We paid $22.4 million of property taxes
in 2011. This payment included $18.3 million in municipal and provincial property taxes levied by our B.C. municipalities for 2011
as well as $4.1 million to North Cowichan for 2010 property taxes and interest. Pursuant to statutory requirements, the payment
to North Cowichan was applied firstly to pay outstanding 2010 property taxes, penalties and interest in full and secondly to pay
2011 property taxes. As a result, as at December 31, 2011, there were unpaid property taxes owing to North Cowichan for 2011, together
with the 10% penalty for late payment, of $0.4 million.



Our appeal to the Supreme Court of Canada
regarding North Cowichan’s 2009 property taxes was dismissed on January 20, 2012. Shortly after that ruling we discontinued
our proceedings disputing the 2010 and 2011 property taxes assessed by North Cowichan and paid all of our unpaid property taxes
owing to North Cowichan. We also discontinued our appeal of the decision of the Supreme Court of British Columbia in respect of
the Strathcona Regional District portion of the property taxes levied by the City of Campbell River for 2010.



We continue to press for a fair and sustainable
level of municipal property taxes for major industry in the B.C. communities in which we operate. We paid the full amount of our
2012 property taxes of $12.2 million when due in July, 2012. North Cowichan reduced the property taxes payable by the Corporation
in respect of the Crofton facility substantially in 2012.



We have also pursued arrangements outside
of the courts and on April 9, 2010 entered into an agreement in principle with the City of Powell River to reduce the annual major
industry property taxes we pay to $2.25 million per year for the next five years and to jointly pursue arrangements that would
enable a 20-year service agreement valued at $3.5 million over five years, under which we would treat the City’s liquid waste
using the Powell River mill’s effluent system and burn the City’s bio-solids in the mill’s wood waste boiler.



We entered into an agreement in principle with the City of Port
Alberni in July 2012 to transfer certain infrastructure surplus to our needs in return for a cash payment and property tax certainty
over the next five year period.



Manning and Cost Reductions



During the first quarter of 2010, the Corporation
incurred $14.1 million in severance costs for approximately 300 employees including employees who were impacted by the extended
curtailment of our Elk Falls paper operations in 2008 and 2009 and indefinite closure of Crofton C1 paper machine and the paper
recycling facility in 2009.



During 2010, we implemented previously
announced changes to salaried employee and retiree pension and benefit plans, including the cessation of benefits related to future
service under the defined benefit pension plans and a reduction in the Corporation-provided contribution rate under the defined
contribution pension plans from 7% to 5%. We also changed the design of our extended health and other benefits plan to include
core coverage paid by the Corporation with optional enhanced coverage, deductibles and dispensing fees paid by employees and introduced
a 50/50 cost-sharing arrangement for provincial medical services plan premiums. In addition, annual vacation entitlements were
limited to 5 weeks per employee and supplemental vacation benefits were eliminated on a prospective basis.





- 19 -







Collective Agreements



Our collective agreements with the CEP
locals at our Crofton and Powell River and the PPWC local at our Crofton mills were to expire April 30, 2012 and our collective
agreements with the CEP locals at Port Alberni were to expire April 30, 2013. On March 19, 2012, new labour agreements were ratified
by the CEP and PPWC effective May 1, 2012 and will expire on April 30, 2017. The new labour agreements include a 10% reduction
in hourly rates along with various adjustments to vacation, health benefits and work rules necessary to provide Catalyst with a
more competitive labour cost structure. We also completed a new collective agreement at our Surrey Distribution Centre with the
Christian Labour Association of Canada (“CLAC”) in early March 2012 which expires in 2015.



Revolving Credit Facility



On May 30, 2011, we amended our $330 million
revolving asset based loan facility (the “ABL Facility”) by, reducing the amount of the facility to $175 million, extending
the maturity date from August, 2013 to May 31, 2016 and removing the fixed assets of the Snowflake mill from the borrowing base
under the ABL Facility. The ABL Facility provided for ongoing working capital, capital expenditure requirements as well as for
general corporate purposes. Collateral consisted of accounts receivable, inventories and cash and a second charge on the property,
plant and equipment of our mills. The ABL Facility was essentially replaced by the DIP Facility as part of our proceedings under
the CCAA. The DIP Facility was replaced by a new $175 million syndicated asset based loan facility (the “new ABL Facility”)
on September 13, 2012, when the restructuring under the Plan completed. The new ABL Facility matures on the earlier of September
13, 2017 and 90 days prior to maturity of any significant debt.



British Columbia Carbon Tax



Our operations in British Columbia are
subject to a broad-based carbon tax on fossil fuels of $20 per tonne in 2010, $25 per tonne in 2011 and $30 per tonne in 2012.
The tax applies to gasoline, diesel fuel, natural gas and other fossil fuels. We are a significant consumer of fossil fuels, both
directly in our operations and through our reliance on fossil fuel powered transportation for the delivery of products and supplies.
Although the intention is that the carbon tax will be, in the aggregate, revenue neutral, we are unable, in the short term, to
take advantage in a material way of other tax initiatives designed to offset the carbon tax. The tax increased our operating costs
by $2.6 million in 2010, $4.1 million in 2011 and $6.5 million in 2012



Maintenance Outages and Fires



Our results in 2011 were negatively impacted
by fires and extended maintenance outages in the second quarter. At the Snowflake mill, a recovered paper storage yard fire, a
market curtailment, and a five-day extension to a planned annual mill maintenance outage resulted in production downtime of 15
days or 8,400 tonnes of lost production. The fire at the Snowflake mill destroyed approximately 11,000 tonnes of recovered old
newsprint (“ONP”) and resulted in losses of $4.4 million. At the Powell River mill, a five-day planned mill maintenance
outage was extended to 10 days to address unexpected findings in the mill’s steam supply system, resulting in 14,000 tonnes
of lost production. Also in the quarter at Powell River, an electrical cable equipment fire idled the mill’s No. 9 paper
machine for five days and the No. 10 paper machine for 14 days and resulted in losses of $2.4 million to date and 8,700 tonnes
of lost production. The bulk of the losses incurred on the fires were below our deductibles and thus not covered by insurance.



Impairment of Snowflake Assets and
Canadian Operations



We impaired the assets of our Snowflake
mill by $161.8 million (US$155.9 million). In Q3 2011, the net book value of building, machinery and equipment of US$135.6 million
and maintenance supplies and spare parts inventory of US$9.7 million were written off. In the fourth quarter, land was impaired
by US$10.6 million. These impairment charges included the assets of The Apache Railway Company, a subsidiary of Catalyst Paper
(Snowflake) Inc. (“Snowflake”). The third quarter impairment was triggered by consistently poor operating results and
cash flow losses at our Snowflake mill that management projected would continue in the future. These losses were mostly attributable
to deteriorating newsprint pricing and demand as well as tight market conditions for ONP resulting in higher input costs. Up to
the date of closing the Snowflake mill we owned and used the impaired assets in our operations. The fourth quarter impairment of
land was based on an appraisal obtained from an independent third party real estate appraiser, dated January 3, 2012, that valued
the Snowflake land at US$6.6 million.



- 20 -







We recorded an impairment charge of $660.2
million in Q4 2011 on the buildings, plant and equipment of our Canadian operations after a comprehensive impairment analysis of
the Corporation’s Canadian operations triggered by (i) continuing declines in demand for newsprint and directory, economic
slowdown in the United States and globally, and the strengthening of the Canadian dollar for most of 2011; (ii) a reduction in
pulp prices in the fourth quarter of 2011; and (iii) the release in February 2012 by a leading information provider for the global
pulp and paper industry of their latest 5-year forecast for pulp and paper prices and future exchange rates reflecting significantly
lower future price estimates for pulp and paper than what had been previously forecasted. The impairment reduced the carrying value
of our pulp assets by $83.5 million and our paper assets by $576.7 million. We continue to own and use the impaired assets in our
Canadian operations. After giving effect to these impairment charges, the Corporation’s liabilities exceeded the book value
of its assets by $617.3 million as at December 31, 2011.



The Corporation permanently closed its
Snowflake mill on September 30, 2012. The decision to close the Snowflake mill was driven by continued financial losses resulting
from intense supply input and market pressures. Snowflake has generated negative adjusted EBITDA since 2009.



In August 2012, the Corporation obtained
both Canadian and U.S. Court approval of a sale process for the Snowflake mill and associated assets. The Snowflake mill and associated
assets, including the Corporation’s shares in The Apache Railway Company, were sold to a third party for US $13,460,000 in
a sale that completed on January 30, 2013.



The Snowflake mill closure resulted in
closure costs of approximately US$18.6 million, including a withdrawal liability of approximately US 11.7 million in connection
with the PACE Industry Union-Management Pension Fund, a multi-employer pension plan which we contributed to for hourly employees
at the Snowflake mill. The company is in the process of verifying this estimated liability. It is typical for withdrawal liabilities
of this nature to be paid over 20 years although confirmation of the payment schedule has not been received at this point. Closure
costs were mitigated from the sale of the Snowflake assets and realization of working capital. The sale is expected to result in
the elimination of future operating losses associated with the Snowflake mill and savings of annualized selling, general and administrative
expenses.



Capital Expenditures



Over the past five years our capital expenditures
on manufacturing operations have totalled approximately $108 million. In the year ended December 31, 2012, approximately $0.6 million
was spent on various environmental, maintenance of business and discretionary projects. As in 2011, capital expenditures were lower
in 2012 than the years preceding 2010 as a result of a concerted effort to preserve cash. We expect to increase our capital spending
to approximately $25 million in 2012. We also incurred capital spending of approximately $18 million in 2011 related to two projects
that are focused on energy efficiency, environmental improvement and cost reduction and funded those projects by utilizing $18
million of available Green Transformation Program credits.



The following table summarizes capital
expenditures on continuing operations over the past five years:



|$ Millions                                                                                              |  | 2012 |    |  | 2011 |  |    | 2010 |  |  | 2009 |  |  | 2008 |    |  | Total | 
|------------------------------------------------------------------------------------------------------- |  | ---- | -- |  | ---- |  | -- | ---- |  |  | ---- |  |  | ---- | -- |  | ----- | 
|Paper(1)                                                                                                |  |      | 18 |  |      |  | 15 |      |  |  | 11   |  |  |      | 11 |  |       | 
|Pulp                                                                                                    |  |      | 5  |  |      |  | 5  |      |  |  | 0    |  |  |      | 1  |  |       | 
|Continuing Operations                                                                                   |  |      | 23 |  |      |  | 20 |      |  |  | 11   |  |  |      | 12 |  |       | 
|(1)		
    The paper segment includes capital expenditures related to PREI. We consolidate 100% of PREI.





| | B. | Business Overview
| | -- | -----------------



We are the largest producer of mechanical
printing papers in western North America. We also produce northern bleached softwood kraft (“NBSK”) pulp. 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-calendared mechanical
paper in western North America.



Our three pulp and paper operations are
located at Crofton on the east coast of Vancouver Island, British Columbia, Port Alberni on central Vancouver Island and Powell
River on the west coast of the British Columbia mainland.



Our Snowflake recycle mill, located in
Snowflake, Arizona, which produced 100% recycled-content paper, ceased production and was permanently closed on September 30, 2012.
The Snowflake mill was sold to a third party on January 30, 2013.



The chart below represents our expectation
as to mill capacity in 2013, in thousands of tonnes, among the different product lines that can be produced at each mill. Capacity
per product can vary as some of our paper machines are capable of producing more than one product line.



- 21 -







|2013 CAPACITY BY MILL LOCATION AND PRODUCT LINE 1
|-------------------------------------------------
|                                                 
|Mill location                                    
|Crofton, B.C. 3                                  
|Port Alberni, B.C.                               
|Powell River, B.C.                               
|Total capacity4(tonnes)                          
|% of total capacity                              



| | 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.
                                                                                                                      Although
                                                                                                                      newsprint
                                                                                                                      can be produced
                                                                                                                      at Powell
                                                                                                                      River, we
                                                                                                                      are not
                                                                                                                      currently
                                                                                                                      producing
                                                                                                                      newsprint
                                                                                                                      at that
                                                                                                                      location.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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 | The No.
                                                          1 paper machine at Crofton (with a capacity of, approximately 140,000
                                                          tonnes of newsprint production on an annualized basis) remains indefinitely
                                                          curtailed and is not included in the table.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4 | The Snowflake
                                                          mill’s production has been removed from total capacity due to
                                                          the mill’s permanent closure on September 30, 2012.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Specialty Papers



Our specialty printing papers can be manufactured
on all of our paper machines. The specialty paper business segment has a total annual production capacity of 929,000 tonnes in
2013.



Specialty printing paper products represent
our largest business segment, generating 64% of our 2012 consolidated sales revenue. Our customer base consists primarily of retailers,
magazine and catalogue publishers, commercial printers and telephone directory publishers. Specialty printing paper products are
sold primarily through our sales and marketing personnel in North America, and through distributors and agents in other geographic
markets. In 2012, 86% of our specialty paper sales volumes were with customers in North America.



Newsprint



Newsprint can be manufactured on three
paper machines in British Columbia at Crofton and Powell River. The newsprint business segment has a current total annual production
capacity of 270,000 tonnes in 2013.



Newsprint sales generated 17% of our 2012
consolidated sales revenue. The newsprint customer base consists primarily of newspaper publishers located in western and central
North America, Asia and Latin America. In 2012, 43% of our newsprint sales volumes were with customers in North America.



Pulp



Our pulp segment consists of NBSK pulp
manufactured on two production lines at the Crofton mill, which has a total annual production capacity of 393,000 tonnes, of which
approximately 43,000 tonnes represent capacity being consumed internally. The pulp business segment has a total annual NBSK market
production capacity of 350,000 tonnes in 2013.



Pulp sales generated 19% of our 2012 consolidated
sales revenue. In 2012, 99% of our pulp sales volumes were with customers in Asia.



The pulp customer base includes producers
of tissue, magazine papers, woodfree printing and writing papers and certain specialty paper products. Pulp is sold primarily by
sales and marketing personnel based in Canada, and through a network of agents in locations throughout the world.



The following tables set out our total
revenues by product and geographic market for each of the last three financial years:



- 22 -







|Paper Sales 1           
|------------------------
|(In millions of dollars)
|                        
|United States           
|Canada                  
|Latin America           
|Asia and Australia      
|Europe and Other        
|                        



|Pulp Sales              
|------------------------
|(In millions of dollars)
|                        
|United States           
|Canada                  
|Latin America           
|Asia and Australia      
|Europe and Other        
|                        



| | 1 | Excludes
                                                                                                            Snowflake sales; the
                                                                                                            Snowflake operation
                                                                                                            was classified as
                                                                                                            a discontinued operation
                                                                                                            in 2012 and comparative
                                                                                                            numbers were restated
                                                                                                            accordingly.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Paper Marketing



The
principal customers for our specialty printing papers and newsprint are retailers, magazine, book and catalogue publishers, commercial
printers, telephone directory publishers and newspaper publishers. These customers are located primarily in western and central
North America, Asia and Latin America. Specialty printing paper and newsprint customers are served primarily by our sales and marketing
personnel in North America and distributors and agents in other geographic markets. Historically, approximately two-thirds of our
paper sales revenue has been generated from sales to customers in the United States. The United States is still the world's largest
consumer of coated and uncoated mechanical paper and newsprint, representing 27% of the world’s consumption for coated mechanical
paper, 32% for uncoated mechanical paper and 22% for newsprint. Specialty printing paper and newsprint markets are not subject
to significant seasonal fluctuations.



The
Crofton mill is located on tidewater and has deep-sea vessel loading facilities. Specialty printing paper and newsprint is shipped
overseas utilizing both by deep-sea vessels and containers, and by a combination of barge, rail and truck for destinations in North
America. We use the services of independent warehouses for distribution to our customers in other parts of the world.



Pulp Marketing



Our Crofton pulp mill is well situated
for export shipments to Asia and western Europe. Our strategy is to maintain a diversified range of freight-logical customers,
including producers of tissue, magazine papers, woodfree printing and writing papers and certain specialty paper products.



Pulp customers are served by sales and
marketing personnel in Canada and a network of agents in locations throughout the world. The Crofton pulp mill is located on tidewater
and has deep-sea vessel loading facilities. Pulp is shipped to offshore locations primarily by break bulk on deep-sea vessels.
Pulp markets are not subject to significant seasonal fluctuations.



Competition



The markets for our products are highly
competitive on a global basis. The pulp and paper industry is essentially a commodity market in which producers compete primarily
on the basis of price. In addition, since an important percentage of our production is directed to export markets, we compete on
a worldwide basis against many producers of approximately the same or larger capacity. In export markets, Canadian producers generally
compete with American, European and Asian producers.



- 23 -







Fibre Supply



Our pulp and paper operations consume wood
fibre which is purchased from more than 25 independent sawmills and more than 25 pulp log suppliers. Our fibre supply comes primarily
from residual wood chips and sawdust from sawmill operations located on the coast or in the southern interior of British Columbia
and secondarily from the chipping of pulp logs originating from locations throughout the region.



In 2012 our fibre supply for our B.C. pulp
and paper operations was comprised of sawmill wood chips and pulp logs. Approximately 70% of our fibre is provided by five suppliers.



Approximately 69% of our fibre is sourced
under indefinite (evergreen) term fibre agreements with third party suppliers (some of which were put in place when we sold our
timber and timber processing assets in the 1990s) with pricing based on market prices or at prices determined under market-based
formulas and including an evergreen contract with a coastal log producer under which additional wood chips can be obtained from
regional sawmills in exchange for sawlogs.



The remainder of the fibre requirements
for our B.C. pulp and paper operations is sourced from independent suppliers, many under long-term contracts. Fibre is purchased
from these suppliers at market prices or at prices determined under market based formulas. From time to time we sell fibre to outside
customers. We also engage in fibre trading activities to ensure optimum allocation of different fibre grades to the appropriate
product.



Our operations are subject to a wide range
of issues that can impact the availability and price of fibre supply, including suppliers’ lumber market demand, sawlog supply,
coastal solid wood industry restructuring, strikes, and regional market prices. The diversity of supply from over 50 independent
suppliers located in three geographical regions helps to mitigate the risk of interruptions to fibre deliveries to our operations.
Our production levels in 2010, 2011 and 2012 were not impacted by fibre shortages.



During the past five years, we have implemented
a chain of custody system to certify our wood fibre supply. Approximately 70% of our total fibre basket is certified to either
the Programme for the Endorsement of Forest Certification (“PEFC”) or Forest Stewardship Council (“FSC”)
standard. PEFC is an independent non-profit organization that assesses and mutually recognizes national forest certification programs
developed through multi-stakeholder processes. The PEFC standard is a third party audited system that identifies the source of
wood fibre and whether or not it is derived from a forest independently certified as being managed in accordance with a recognized
sustainable forest certification system. About 20% of our total fibre basket comes from recycled sources such as old newspapers
and magazines. In 2011 we also implemented the FSC chain of custody system at all three of our mills in British Columbia.



Competitive Strengths



We believe that we have the following competitive
strengths:



| | • | Cost-Competitive Manufacturing. Our financial results are driven by our manufacturing costs,
particularly with respect to furnish costs, energy prices and usage and labour costs. We are focused on reducing these costs and
improving margins, while maintaining or improving the quality of our products. There is a particular focus on finding ways to improve
controllable operating costs and on developing more flexible and efficient work practices at the mills that will reduce manufacturing
costs in the aggregate and create a shift in the proportion of fixed to variable costs. We have reduced our labour costs through
our new labour agreements in 2012 and have made significant capital expenditures over the past six years to shift production towards
higher-margin printing papers, reducing unit production costs, increasing machine productivity, improving product quality, and
meeting or exceeding environmental regulations.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Strong Market Position. We are the largest producer and marketer of printing papers (newsprint
and specialty printing papers) in western North America with production capacity of approximately 1.48 million tonnes of paper
and pulp. We are the only producer of coated mechanical and supercalendered papers in western North America and the largest producer
of glossy paper in the region. Our Crofton operation is a tidewater mill giving it reliable, low-cost access to international pulp
and paper markets via breakbulk vessels.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 24 -









| | • | Diversified Product Mix and Product Development. We are focused on optimizing our product
mix by developing higher value grades and introducing new product lines, which allow us to explore niche opportunities in the marketplace.
The most recent addition to our extensive lineup is Marathon Lite, an ultra-light newsprint grade that offers publishers and printers
environmental and economic benefits of a lighter sheet without sacrificing print quality or runnability. In 2010 we introduced
PacificoteTM , a high brightness and high gloss paper with superior printability ideal for magazine, catalogue, insert and direct
mail advertising applications. We also launched ElectrabriteTM Book, a range of caliper-controlled grades for book publishers,
Electrabrite 100% recycled hi-bright grade papers produced at Snowflake and E-Star Max, an 84-bright uncoated mechanical grade
for commercial printing. These are our most recent additions to our expansive range of Electra-paper grades that include ElectraprimeTM
(a soft-calendered, high-brightness paper designed to compete as an alternative to traditional supercalendered grades and used
primarily for advertising inserts and flyers), ElectrastarTM (a super high-brightness grade designed for applications in which
brightness is a desirable characteristic such as inserts and specialty newspapers), Electrabrite Lite (a lighter basis weight,
high-brightness product that is used by newspapers and retailers) and Electracote Brite (a brighter, heavier-coated paper ideal
for magazines, catalogue or retail insert applications as an attractive alternative to more expensive coated grades). We also introduced
our Sage line of specialty printing papers in 2010 which allows us to offer the Pacificote and Electra grades as being manufactured
carbon-neutral from certified wood fibre from sustainably managed forests with documented verification. These more specialized
products generally provide higher margins and improved demand prospects than standard commodity grades. We manage fluctuations
in demand for our products through our ability to switch production between products and machines, particularly newsprint, directory,
and machine-finished uncoated mechanical grades.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Efficient Supply Chain Management Practices. Distribution costs have a significant impact
on net sales realizations. Our strong and flexible distribution network optimizes all transportation modes available to us, such
as barge, truck, rail and break bulk and container shipping. Controlling key elements of our supply chain has allowed us to control
costs while achieving a high on time delivery performance and low damage levels especially to west coast print sites where our
strategic importance to customers is highest. Our Crofton mill site directly ships break bulk to offshore customers via regularly
scheduled vessels. We operate a central distribution centre in Surrey, B.C. which continuously receives volumes from our three
British Columbia manufacturing sites and then ships via rail, truck and container to our customers. This allows us to choose the
most cost effective transportation mode in conjunction with customer requirements. We also lease or otherwise have available 635
rail cars to ensure adequate supply and weight loads are maximized with the use of organization software. We lease five paper barges
which we use in conjunction with third party providers to transport our products to the Surrey distribution centre.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Business Strategy



Our objective is to return to profitability
and maximize cash flows by focusing on reducing manufacturing costs and optimizing our brands and customer base in a socially responsible
manner. In 2013, the focus will be on objectives and initiatives in four areas:



| | · | Financial. Complete outstanding restructuring
items and use proceeds of assets sales to pay down debt, focus on reducing operating costs and generating positive free cash flow
and completing implementation of special portability option in respect of our salaried defined benefit pension plan.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Corporate Social Responsibility. Significantly
improve our overall safety performance and , continue to seek competitive business conditions in British Columbia, including in
respect of electricity and taxation rates, and work with municipalities to achieve joint cost-saving service and infrastructure
agreements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Commercial. Continue to expand geographic reach
of the Corporation into emerging world markets of Latin America and Asia, gain market share and expand sales reach into new markets
with new products and increase breadth of product range and solidify position as the most flexible and diverse producer and marketer
of paper in the west.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Environmental. Work with community stakeholders to identify and implement sustainable watershed
management solutions, adhere to high international stands for transparency and reporting of performance on social, governance and
environmental factors and take steps to achieve increased access to Forest Stewardship Council certified fibre supply.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 25 -







| | C. | Organizational Structure
| | -- | ------------------------



We own all of the issued and outstanding
shares of the following principal subsidiaries as of December 31, 2012:



|Subsidiaries                        | Jurisdiction    
|----------------------------------- | ----------------
|Elk Falls Pulp and Paper Limited    | British Columbia
|Catalyst Pulp Operations Limited    | British Columbia
|Catalyst Pulp Sales Inc.            | British Columbia
|Catalyst Pulp and Paper Sales Inc.  | British Columbia
|Catalyst Paper Energy Holdings Ltd. | Canada          
|Catalyst Paper (USA) Inc.           | California      
|Catalyst Paper Holdings Inc.        | Delaware        
|Catalyst Paper (Snowflake) Inc.     | Delaware        
|Catalyst Paper Recycling Inc.       | Delaware        
|Pacifica Papers Sales Inc.          | Delaware        
|Pacifica Poplars Ltd.               | British Columbia
|Pacifica Poplars Inc.               | Delaware        
|Pacifica Papers U.S. Inc.           | Delaware        
|The Apache Railway Company (1)      | Arizona         



| | (1) | The
                                                              Apache Railway Company ceased to be a subsidiary of the company
                                                              on January 30, 2013 on completion of the sale of the Snowflake assets.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We are a partner of the British Columbia
general partnership Catalyst Paper. We hold a 71.3% interest in the partnership and our subsidiary, Catalyst Pulp Operations Limited,
holds the remainder. We also own 50.001% of Powell River Energy Inc., a Canadian corporation, which owns hydroelectric assets that
provide power to our Powell River mill. We have agreed to sell our interest in Powell River Energy Inc. See “Information
on the Corporation,.	History and Development of the Corporation – Asset Sales”.



| | D. | Property, Plant and Equipment
| | -- | -----------------------------



Paper



Paper Operations



Our specialty printing paper and newsprint
can be manufactured on 8 paper machines at four mill locations. Our paper machines consist of the following:



|Crofton                                                                               |  | Product            
|------------------------------------------------------------------------------------- |  | -------------------
|Paper Machine No. 1 (“C1”)                                                            |  | Specialty/Newsprint
|Paper Machine No. 2 (“C2”)                                                            |  | Specialty          
|Paper Machine No. 3 (“C3”)                                                            |  | Specialty/Newsprint
|                                                                                      |  |                    
|Port Alberni                                                                          |  | Product            
|Paper Machine No. 4 (“A4”)                                                            |  | Specialty          
|Paper Machine No. 5 (“A5”)                                                            |  | Specialty          
|                                                                                      |  |                    
|Powell River                                                                          |  | Product            
|Paper Machine No. 9 (“P9”)                                                            |  | Specialty          
|Paper Machine No. 10 (“P10”)                                                          |  | Specialty          
|Paper Machine No. 11 (“P11”)                                                          |  | Specialty/Newsprint
|                                                                                      |  |                    
|Two paper machines at Snowflake were shut
    down permanently on September 30, 2012.



- 26 -







Our 2013 capacity to produce specialty
printing papers and newsprint, in thousands of tonnes, as compared to our production for each of the last two years is as
follows:



|             |  |                               |           |  | Net Production         | 
|------------ |  | ----------------------------- | --------- |  | ---------------------- | 
|             |  |                               |           |  | Year ended December 31 | 
|Mill         |  | Annual Capacity 2013 (tonnes) |           |  | 2012                   | 
|Crofton(1)   |  |                               | 327,000   |  |                        | 
|Port Alberni |  |                               | 340,000   |  |                        | 
|Powell River |  |                               | 469,000   |  |                        | 
|Snowflake(2) |  |                               | 0         |  |                        | 
|             |  |                               | 1,136,000 |  |                        | 



| | (1) | We
                                                                                   have indefinitely curtailed our No.1 paper
                                                                                   machine at Crofton, displacing the equivalent
                                                                                   of 140,000 tonnes of annual newsprint production
                                                                                   from Crofton. The capacity noted above does
                                                                                   not include the capacity of that paper machine.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | The
                                                                                                        Snowflake mill permanently
                                                                                                        closed on September 30,
                                                                                                        2012.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Crofton
| |  | -------



Crofton's capacity is 327,000 tonnes of
newsprint and directory paper. C1 at Crofton was curtailed from February 1, 2009 to May 25, 2009 and indefinitely curtailed since
January 21, 2010.



The Crofton paper mill’s three paper
machines commenced operation in 1964, 1968 and 1982. C1 and C3 are capable of producing either newsprint or directory paper as
market conditions warrant and C2 is dedicated to producing lightweight directory paper. All machines were installed with, or have
been converted to, twin-wire sheet formation, which provides a more uniform quality of sheet for both printing surfaces. C2 produces
directory paper at the lowest industry basis weight. Crofton also makes directory paper on C3 and has the capability to make it
on C1. Pulp furnish for the paper mill is supplied by a three-line TMP mill.



| |  | Port Alberni
| |  | ------------



Port Alberni's annual capacity is 340,000
tonnes of directory paper and lightweight coated paper.



The Port Alberni paper mill has two paper
machines, one was put into operation in 1957 and the other in 1968. A5 was upgraded in 1995 to produce lightweight coated paper
and is the only lightweight coated paper machine in western North America. Its on-line technology allows for the coating of paper
on both sides simultaneously, reduces the amount of kraft pulp required to produce conventional lightweight coated paper and produces
the desired product quality in terms of runability, printability and bulk.



Pulp furnish for the paper mill is supplied
primarily from the mill's TMP plant. An $8,000,000 upgrade to the mill’s TMP plant was completed in May, 2009 which increased
the TMP facility’s capacity and displaced higher cost pulp. Equipment at the Port Alberni mill allows us to use crumb kraft
pulp from the Crofton mill in our lightweight coated paper.



| |  | Powell River
| |  | ------------



Powell River's annual capacity is 469,000
tonnes of uncoated specialty papers. The Powell River mill has three paper machines, which were put into operation in 1957, 1967
and 1981. These machines produce machine finished super-brights and hi-brights, soft calendered hi-bright papers and newsprint.
In 2004, we upgraded P10 and the peroxide bleach plant to support the production of higher value specialty printing papers, including
ElectracalTM and ElectraprimeTM grades. We have dedicated P9 to produce ElectrastarTM and ElectrabriteTM grades,
our super-bright and hi-bright grades, respectively. We continue our effort to push towards the development of high-brightness
products at our Powell River mill, and in 2005 we completed a further upgrade of the peroxide bleach plant to expand the mill’s
production capacity for higher brightness uncoated specialty printing grades.



Pulp furnish for the paper mill comes primarily
from a TMP plant. The Powell River mill also has the capability to use recycled de-inked pulp on a limited scale.



- 27 -







We own, through our
wholly owned subsidiary Catalyst Paper Energy Holdings Inc., 50.001% of Powell River Energy Inc. (“PREI”), which owns
two hydroelectric dams near the Powell River mill with a combined generating capacity of 83 megawatts. Pursuant to a power purchase
agreement between us and PREI, PREI provided the power generated by its facilities to us at a fixed rate approximating current
British Columbia Hydro and Power Authority (“BC Hydro”) rates until January 31, 2011. PREI’s hydroelectric facilities
supply approximately 40% of the annual power needs of the Powell River mill, although this amount varies depending on hydrological
conditions. We have entered into a replacement power purchase agreement with PREI commencing on February 1, 2011 on substantially
the same terms as the previous agreement for a five year term (with renewal options totaling an additional five years.) under which
PREI will provide the power generated by its facilities to us at a rate essentially equivalent to the BC Hydro rate from time to
time.



Pursuant to the terms of the Plan, the
company is required to use its commercially reasonable efforts to market and sell its interest in Powell River Energy and to distribute
up to 50% of the net proceeds received on account of the sale, depending on the number of equity elections received, to certain
of the Corporation’s unsecured creditors, all as more particularly described in the Plan. See “Proceedings Under
the Companies’ Creditors Arrangement Act”. We entered into an agreement on February 13, 2013 to sell our interest
in Powell River Energy. We have agreed to sell our interest in Powell River Energy Inc. See “Information on the Corporation,
..	History and Development of the Corporation – Asset Sales”.



| |  | Snowflake
| |  | ---------



The assets of the Snowflake mill consisted
of two paper machines and associated assets, including The Apache Railway Company (“Apache”). Apache is a short-line
railway operating freight service from Snowflake, Arizona to Holbrook, Arizona. Snowflake used Apache to transport coal for one
of its boilers and to transport a portion of its finished goods.



In 2011, we impaired the assets of the
Snowflake mill by $161.8 million (US$155.9 million). In the third quarter, the net book value of building, machinery and equipment
of US$135.6 million and maintenance supplies and spare parts inventory of US$9.7 million were written off. In the fourth quarter,
land was impaired by US$10.6 million. These impairment charges included the assets of Apache.



The company permanently closed the Snowflake
mill on September 30, 2012. The decision to close the Snowflake mill was driven by continued financial losses resulting from intense
supply input and market pressures. In August 2012, the Corporation obtained both Canadian and U.S. Court approval of a sale process
for the Snowflake mill and associated assets. The Snowflake mill and associated assets, including the company’s shares in
Apache, were sold to a third party for US$13,460,000 in a sale that completed on January 30, 2013.



The Snowflake mill closure resulted in
closure costs of approximately US$18.6 million, including a withdrawal liability of approximately US 11.7 million in connection
with the PACE Industry Union-Management Pension Fund, a multi-employer pension plan which we contributed to for hourly employees
at the Snowflake mill. The company is in the process of verifying this estimated liability. It is typical for withdrawal liabilities
of this nature to be paid over 20 years although confirmation of the payment schedule has not been received at this point. Closure
costs were mitigated from the sale of the Snowflake assets and realization of working capital. The sale is expected to result in
the elimination of future operating losses associated with the Snowflake mill and savings of annualized selling, general and administrative
expenses.



| |  | Elk Falls
| |  | ---------



All three paper machines at Elk Falls were
permanently closed in September, 2010 resulting in the removal of 526,000 tonnes of annual newsprint and uncoated mechanical paper
capacity.



Pulp



Pulp Operations



We manufacture market pulp on two lines
of pulp production at our Crofton mill. Our annual pulp production capacity for 2013 is 393,000 tonnes. Our annual market pulp
capacity is 350,000 tonnes (which excludes pulp consumed internally) as compared to market pulp production for the years ending
December 31, 2012 and December 31, 2011 of 317,900 tonnes and 316,000 tonnes, respectively.



- 28 -







The first pulp line at Crofton began operating
in 1957 and the second in 1965. This mill is equipped with one continuous digester and eight batch digesters, which provide the
flexibility to cook different species of chips independently. Crofton's batch digesters utilize a rapid displacement heating cooking
system. This system allows for quick turnaround in the batch cooking process, because it rapidly extracts and replaces the cooking
liquor in the cooking vessel for each batch without a significant loss in temperature. This technology improves the overall quality
of Crofton pulps and provides a stronger and more uniform pulp than conventional batch cooking.



The Crofton kraft pulp mill produces Northern
bleached softwood kraft, or NBSK pulp grades. One grade is a low coarseness fine fibre pulp is marketed as CKBC. This pulp is consumed
internally at our Port Alberni and Powell River operations and sold to market customers. CKBC is a high tensile strength grade
which is ideally suited for the manufacture of lightweight papers and tissue. The other pulp grade produced is made from spruce,
pine and fir (SPF), coastal hemlock and Douglas fir species and marketed as CKHFi. This grade has high intrinsic strength and bulk,
and is used in a variety of printing and writing papers and a range of specialty papers.



Paper Recycling Division



Our paper recycling operation was indefinitely
curtailed in February, 2010 and permanently closed in September, 2010. Prior to curtailment of its operations, this operation recycled
old newspapers, magazines and other waste paper into pulp suitable for the manufacture of newsprint, telephone directory paper
and similar grades of paper. Its production capacity was 175,000 air-dried metric tonnes (“ADMT”) of pulp per year.
Production in the 2010 fiscal year prior to curtailment of operations was 4,000 ADMT and average annual production in the preceding
last three fiscal years was approximately 132,000 ADMT per year.



Properties



Our head office is located in leased premises
in Richmond, British Columbia. The lease covers an aggregate of 39,275 square feet and expires March 31, 2018.



We leased the land and buildings where
our paper recycling facility was located. We disclaimed this lease effective March 23, 2012 as part of our proceedings under the
CCAA.



We also sub-lease the land and buildings
for our distribution warehouse and facility in Surrey, British Columbia, which expires in June 2014, subject to further options
to renew. We lease the premises for our Nanaimo office pursuant to a lease which expires February 28, 2013. We lease the premises
for our sales office in Seattle, Washington pursuant to a lease which expires in November, 2016.



Each of our Crofton, Powell River and Port
Alberni manufacturing facilities and the closed Elk Falls mill are situated on land we own. The Crofton mill is located on a 107
hectare site, , the Powell River mill is located on a 94 hectare site, the Port Alberni mill is located on a 44 hectare site and
the Elk Falls mill is located near the town of Campbell River, British Columbia on a 78 hectare site. The Snowflake mill site lands
were sold as part of the sale of the Snowflake assets and shares of The Apache Railway Company in January, 2013.



Our Crofton, Powell River and Port Alberni
properties are subject to a first lien in favour of the holders of Exit Notes, a second lien in favour of the holders of 2017 Notes
and a third lien in favour of the lenders under our ABL Facility.



Environment



Our operations are subject to a wide range
of general and industry specific environmental laws and regulations including those related to waste management, air emissions,
water discharges and remediation of environmental contamination. There has been significant upgrading of our facilities during
the decade to comply with solid and hazardous wastes, effluent and air regulations. Environmental performance is monitored regularly
by us, third party consultants and government regulatory bodies. We believe that our facilities are operating in substantial compliance
with applicable environmental laws and regulations.



In addition to regular monitoring of emission
points and reporting to regulatory authorities, we manage our environmental performance through an environmental management system.
This system is registered to the ISO 14001:2004 standard at all four of our operating facilities. The environmental management
system utilizes annual internal surveillance audits and bi-annual external compliance audits of our manufacturing facilities. Action
plans are developed to address any deficiencies and updates are regularly communicated to management and a committee of the board
of directors. Compliance audits at the active B.C. operations and the Snowflake operation were completed during 2010. No new material
issues were uncovered during those audits.



- 29 -







Numerous federal, state and provincial
environmental initiatives are underway which could translate into more vigorous regulatory standards and permits in the next decade,
especially with respect to air emissions. Substances that have been targeted include particulates, sulphur dioxide and greenhouse
gases. A number of those initiatives are described below.



Solid Waste



An ongoing environmental issue faced by
our operations is the disposal of solid waste. Most non-recyclable waste is disposed of at on-site landfills. Based on current
practice we have at least five years’ capacity in the landfills at Port Alberni and Crofton and approximately one year at
Powell River (which will increase to 20-30 years after completion of the planned expansion in 2013). We continue to work to reduce
volumes sent to landfill by increasing recycling efforts and investigating alternative uses for all waste.



Effluent



In 2003 we began an initiative to reduce
water use at all facilities. These reductions resulted in lower waste water volumes being discharged and greater opportunities
to improve the performance of the systems and reduce energy costs. We delivered total reductions in water use of 22% between 2003
and 2008 on an absolute basis (17% on an intensity basis). Since 2008 our absolute water use decreased by approximately 21% due
to closure of the Elk Falls and Paper Recycling Divisions. Water use intensity increased by 12% for the same period due to increased
production rates particularly kraft pulp production, which is a higher intensity process.



Air Emissions



Over the past twenty years, substantial
capital has been spent at all facilities upgrading air emissions controls and infrastructure. This includes odour collection and
treatment systems and new precipitators at Crofton, a fluidized bed boiler conversion at Port Alberni, a fluidized bed boiler at
Powell River and scrubber/precipitator upgrades at Snowflake. Our facilities are well positioned to be compliant with future air
emissions standards, which will likely focus on fine particulates, sulphur oxides and other criteria air contaminants.



The federal government of Canada has indicated
its intent to regulate priority air pollutants under the Clean Air Act. The priority air pollutants include particulate matter
and sulphur oxides (“SOx”). Under proposed targets Crofton will have to reduce SOx emission reductions at an estimated
cost of $4-8 million. The new air quality standards are still being determined with compliance required within three to five years.



Climate Change



We have long recognized the importance
of greenhouse gases (“GHG”) reductions, from the perspective of both stakeholder expectations and expanding regulatory
requirements. Our overall carbon footprint increased in 2008 with the acquisition of the Snowflake recycled newsprint mill (which
is located in a heavily fossil fuel dependent jurisdiction and whose primary energy source was coal) . At our Canadian operations,
however, direct GHG emissions were at 21% of 1990 levels on an absolute basis.



We were recognized through the Carbon Disclosure
Project for the quality and financial relevance of our climate change disclosure in 2008, 2009 and 2010, and we introduced our
carbon neutral Sage line of products in 2010 and continue to offer Catalyst CooledTM manufactured carbon neutral products.
By virtue of early response and rigorous carbon accounting, we believe we are well positioned relative to developments like the
implementation of a carbon tax and potential carbon related monetization opportunities. The B.C. government imposed a broad based
carbon tax on fossil fuels commencing July 1, 2008. On July 1, 2012, the tax rate increased from $25/tonne to $30/tonne.



The federal government of Canada has indicated
its intent to regulate GHG and sulphur oxides (SOx) on a sector by sector basis in order to achieve their targeted 17% reduction
by 2020 from 2005 levels. The pulp and paper sector is one of the sectors scheduled for development of regulations beginning in
2013.



British Columbia is a signatory to the
Western Climate Initiative (“WCI”), a collaboration of four provinces and currently one U.S. state, whose mandate is
to obtain a 15% reduction in GHG below 2005 levels among member entities by 2020. In addition, the B.C. government has announced
a goal of reducing the provincial release of GHG by 33% by 2020 based on 2007 levels with interim reduction targets of 6% by 2012
and 18% by 2016. In connection with the WCI, Quebec and California governments have initiated their regulatory processes in connection
with implementation of a cap and trade system



B.C. has not issued regulations for its
cap and trade program for GHGs and at this time is reviewing its climate change and energy policies. It is too early to determine
its impact on the Corporation without knowing the details of any such cap and trade scheme.



- 30 -







In 2012, we spent approximately $0.5 million
on environmental capital projects. We estimate that capital expenditures relating to known environmental matters, including compliance
issues and the assessment and remediation of the environmental condition of our properties, will total approximately $1.0 million
in 2013.



Contaminated Sites



British Columbia contaminated sites legislation
specifies the circumstances in which a “site profile” must be prepared in respect of any property that has been used
for certain industrial or commercial purposes. If a site is determined to be contaminated, remediation will normally be required
under government supervision. As current and past owners of mill sites, all forest products companies in British Columbia may face
remediation costs particularly as a result of historical operations and disposal practices. Compliance with this legislation has
not resulted in any material cost to us but there can be no guarantee that such costs will not be incurred in the future as a consequence,
for example, of the discovery of unknown conditions or changes in enforcement policies. We are not aware that any of our sites
or land parcels are considered by the Province to be contaminated under the Province’s contaminated sites legislation other
than the closed Elk Falls millsite.



Similarly, with respect to the closed Snowflake
millsite in Arizona, we are not aware of any soil or groundwater contamination at the site that is required to be remediated under
current State or Federal law. In Arizona, sites that have become contaminated due to a current or historical release of a regulated
substance are subject to evaluation for possible reporting and remediation under a variety of State and Federal regulatory programs.
As with all current and past owners of industrial facilities, future remediation costs may be incurred due to the discovery of
presently unknown environmental conditions or to changes in environmental laws or enforcement policies.



Social Responsibility



Fibre Certification
Chain of Custody



We have implemented the Programme for the
Endorsement of Forest Certification (PEFC) chain of custody system to verify that select paper products made at our Crofton, Port
Alberni and Powell River mills contain 100% certified wood fibre. A Forest Stewardship Council (FSC) chain of custody system was
implemented in Snowflake in April 2009 and implemented at all three of our British Columbia mills in 2011. In December 2009 FSC
awarded a five year group certificate to the Coast Forest Conservation Initiative (of which Catalyst is a member). This enables
an additional FSC certified fibre source in British Columbia for use in our fibre stream. We annually disclose our fibre pedigree
to the Forest Footprint Disclosure Project, enhancing transparency and public access to accurate data.



Aboriginal Relations
and Business Development



We continue to maintain cordial relationships
with numerous First Nations bands in proximity of our mills, and to develop aboriginal business initiatives at a pace and scope
suitable to the capacity of each band. The most extensive initiative is a limited partnership with the Tla’amin (“Sliammon”)
Nation and the City of Powell River which was formed in 2006. We have entered into an agreement in principle with the Sliammon
and the City of Powell River to transfer our interest in this limited partnership to them. In Port Alberni, we continue to discuss
opportunities with Hupacasath Nation, one of 14 nations that make up the Nuu chah nulth Tribal Council.



Carbon
Emission Reduction Reporting



We continue to participate in the Carbon
Disclosure Project, a study backed by institutional investors worldwide. We consider this an important global reporting initiative
that reinforces the need for risk-return analysis by companies and their investors of the potential impact of environmental factors
such as climate change on business and industry operations.



This complements our voluntary initiative
with World Wildlife Fund Inc. (WWF) and the Center for Energy and Climate Solutions, a division of Global Environment & Technology
Foundation (GETF) to reduce CO2 emissions at our British Columbia based facilities to 70% below our 1990 emissions by the year
2010 primarily through energy conservation measures. Our 2012 absolute greenhouse gas emissions were 21% of 1990 levels.



Clean Production
Initiative



As consumer and regulatory focus on toxic
substances of concern continues to grow, we have relied on our work with WWF Canada to transition to direct measurement of priority
emissions. Under this clean production initiative, testing of actual emissions has frequently been found to be less than previous
estimates based on data derived from emission factors. Preliminary work has also extended to procurement of chemicals and reductions
of substances of concern. The annual review of mill-specific top twenty substances of concern, using a methodology adapted by WWF,
continued to drive expanded testing and inform the prioritization of our reduction efforts.



- 31 -







| | ITEM 4A. | UNRESOLVED STAFF COMMENTS
| | -------- | -------------------------



None.



| | ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
| | ------- | --------------------------------------------



| | A. | Operating Results
| | -- | -----------------



The following operating and financial review
and prospects provides information that we believe is useful in understanding our operating results, cash flows and financial condition
for the three years ended December 31, 2012.



Business overview



Operating
earnings for the year were negatively impacted by a significant decline in pulp prices in China due to excess inventory and weak
market conditions, as well as a decrease in average transaction prices for paper. This was partially offset by lower maintenance,
labour, fibre, property taxes and selling, general and administrative (SG&A) cost.



Our net earnings reflect significant reorganization
credits resulting from the forgiveness of pre-petition debt and accounts payable on emergence from creditor protection and fair
value adjustments to our assets and liabilities in accordance with the requirements of fresh start accounting. This was partly
offset by reorganization costs consisting of legal and consulting fees incurred under the creditor protection proceedings and one-time
closure costs related to the Snowflake mill.



In accordance with U.S. GAAP, an enterprise
value was established for the company as of September 30, 2012 (the end of the quarter following our emergence from protection
under the CCAA) under fresh start accounting. This enterprise value was determined with the assistance of an independent financial
advisor. For a discussion of the valuation methods used to determine enterprise value and additional information on fresh start
accounting, see note 6, Creditor protection proceedings related disclosures in our annual consolidated financial statements for
the year ended December 31, 2012.



Financial
performance



We
recorded a net gain attributable to the company of $583.2 million and a net loss attributable to the company before specific items
of $37.8 million in 2012. This compared to losses of $974.0 million and $126.3 million, respectively, in 2011.



Significant specific items in 2012 included
reorganization credits related to the forgiveness of pre-petition debt and accounts payable and fair value adjustments from the
implementation of fresh start accounting, reorganization expenses related to legal and consulting fees, restructuring fees incurred
prior to entering creditor protection, closure costs related to the discontinued Snowflake mill, and a foreign exchange gain on
the translation of U.S. dollar denominated debt.



Significant specific items in the prior
year included an impairment charge on the pulp and paper assets of our Canadian operations, an impairment charge on certain assets
of the Snowflake mill, losses sustained due to fires at the Snowflake and Powell River mills, restructuring costs incurred on capital
structure negotiations and a foreign exchange loss on the translation of U.S. dollar denominated debt.



- 32 -







Selected
annual financial information

|(In
    millions of dollars, except where otherwise stated)                                      |  | 2012 3 |         |    | 2011 |   |         | 2010 | 
|------------------------------------------------------------------------------------------------ |  | ------ | ------- | -- | ---- | - | ------- | ---- | 
|Sales 2                                                                                          |  | $      | 1,058.2 |    |      | $ | 1,079.7 |      | 
|Operating earnings (loss) 2                                                                      |  |        | 19.1    |    |      |   | (704.5  | )    | 
|Depreciation and amortization 2                                                                  |  |        | 36.3    |    |      |   | 105.5   |      | 
|Adjusted EBITDA 1 2                                                                              |  |        | 55.4    |    |      |   | 62.8    |      | 
|– before
    restructuring costs 1 2                                                             |  |        | 60.7    |    |      |   | 68.7    |      | 
|Net earnings (loss) attributable to
    the company                                              |  |        | 583.2   |    |      |   | (974.0  | )    | 
|– before
    specific items 1                                                                    |  |        | (37.8   | )  |      |   | (126.3  | )    | 
|Total assets                                                                                     |  |        | 978.8   |    |      |   | 737.6   |      | 
|Total long-term
    liabilities                                                                  |  |        | 720.6   |    |      |   | 713.6   |      | 
|Adjusted EBITDA margin 1 2                                                                       |  |        | 5.2     | %  |      |   | 5.8     | %    | 
|– before
    restructuring costs 1 2                                                             |  |        | 5.7     | %  |      |   | 6.4     | %    | 
|Net
    earnings (loss) per share attributable to the company’s common shareholders (in dollars) |  |        |         |    |      |   |         |      | 
|– basic and
    diluted from continuing operations                                               |  | $      | 41.65   | 4  |      | $ | (2.04   | )    | 
|– basic and
    diluted from discontinued operations                                             |  |        | (1.15   | )4 |      |   | (0.51   | )    | 
|–
    before specific items                                                                      |  |        | (2.62   | )4 |      |   | (0.33   | )    | 
|                                                                                                 |  |        |         |    |      |   |         |      | 
|(In thousands of
    tonnes)                                                                     |  |        |         |    |      |   |         |      | 
|Sales 2                                                                                          |  |        | 1,401.4 |    |      |   | 1,351.2 |      | 
|Production  2                                                                                    |  |        | 1,388.6 |    |      |   | 1,365.1 |      | 
|Common shares (millions)                                                                         |  |        |         |    |      |   |         |      | 
|At period-end                                                                                    |  |        | 14.5    | 4  |      |   | 381.9   |      | 
|Weighted
    average                                                                             |  |        | 14.4    | 4  |      |   | 381.9   |      | 

| | 1 | Refer
                                                                                                              to Non-GAAP
                                                                                                              measures.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2 | Numbers
                                                          exclude the Snowflake mill’s results from operations which have
                                                          been reclassified as discontinued operations; losses from discontinued
                                                          operations, net of tax, are shown separately from continuing operations
                                                          in the consolidated statements of earnings (loss) in our annual consolidated
                                                          financial statements for the year ended December 31, 2012.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3 | We completed
                                                          our restructuring under the CCAA proceedings on September 13, 2012,
                                                          and adopted fresh start accounting in accordance with FASB ASC 852 on
                                                          September 30, 2012. Selected financial information for 2012 therefore
                                                          includes results for nine months preceding the adoption of fresh start
                                                          accounting and three months subsequent to adoption. Reported sales and
                                                          adjusted EBITDA were relatively unaffected, as the company’s physical
                                                          operations were not impacted by the financial recapitalization.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4 | All earnings
                                                          per share data and weighted average common shares for 2012 are based
                                                          on the new common shares issued to the company’s secured and unsecured
                                                          creditors under the Plan. Earnings per share data in this MD&A is
                                                          based on weighted average common shares calculated as if the 14.4 million
                                                          common shares issued to the company’s secured creditors on September
                                                          13, 2012 were issued on January 1, 2012, and the former 381.9 million
                                                          common shares cancelled on September 12, 2012 were cancelled on January
                                                          1, 2012. The 0.1 million common shares issued to the company’s
                                                          unsecured creditors in December were included in weighted average common
                                                          shares based on the number of days the shares were issued and outstanding
                                                          divided by the number of days in the year.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 33 -







Market Overview







North American demand for paper decreased
in 2012 compared to the prior year. Inventory levels for paper decreased due to recent mill curtailments and closures that more
than offset the lower demand. North American demand for uncoated mechanical and directory paper declined significantly in the year
while newsprint and lightweight coated (LWC) demand declined slightly. Benchmark prices increased for directory, remained flat
for uncoated mechanical, and decreased for LWC and newsprint.



The global market for NBSK pulp increased
due to increased demand in China. NBSK pulp benchmark prices declined significantly for most of the year due to excess inventory
and weak market conditions in China due to an oversupply of pulp. Pulp prices improved moderately in the fourth quarter.



Completion of CCAA
Process



On
September 13, 2012 we completed our restructuring under the CCAA and emerged from creditor protection with significantly reduced
debt and a more competitive cost structure. See“Creditor
Protection and Restructuring Process”.



Impairment of Snowflake Assets and Canadian
Operations



We impaired the assets of our Snowflake
mill by $161.8 million (US$155.9 million) in Q3 2011. At that time, the net book value of building, machinery and equipment of
US$135.6 million and maintenance supplies and spare parts inventory of US$9.7 million were written off. In Q4 2011, land was impaired
by US$10.6 million. These impairment charges included the assets of The Apache Railway Company, a subsidiary of Catalyst Paper
(Snowflake) Inc. (“Snowflake”). The Q3 2011 impairment was triggered by consistently poor operating results and cash
flow losses at our Snowflake mill that management projected would continue in the future. These losses were mostly attributable
to deteriorating newsprint pricing and demand as well as tight market conditions for ONP resulting in higher input costs. Up to
the date of closing the Snowflake mill we owned and used the impaired assets in our operations. The Q4 2011 impairment of land
was based on an appraisal obtained from an independent third party real estate appraiser, dated January 3, 2012, that valued the
Snowflake land at US$6.6 million.



- 34 -







The Corporation permanently closed its
Snowflake mill on September 30, 2012. The decision to close the Snowflake mill was driven by continued financial losses resulting
from intense supply input and market pressures. Snowflake has generated negative EBITDA since 2009. In August 2012, the Corporation
obtained both Canadian and U.S. Court approval of a sale process for the Snowflake mill and associated assets. The Snowflake mill
and associated assets, including the Corporation’s shares in The Apache Railway Company, were sold to a third party for US
$13,460,000 in a sale that completed on January 30, 2013.



The Snowflake mill closure resulted in
closure costs of approximately US $8.6 million including a withdrawal liability of approximately US$11.7 million in connection
with the PACE Industry Union-Management Pension Fund, a multi-employer pension plan which we contributed to for hourly employees
at the Snowflake mill. The company is in the process of verifying this estimated liability. It is typical for withdrawal liabilities
of this nature to be paid over 20 years although confirmation of the payment schedule has not been received at this point. Closing
costs were mitigated from the sale of the Snowflake assets and realization of working capital. The sale is expected to result in
the elimination of future operating losses associated with the Snowflake mill and savings of annualized selling, general and administrative
expenses.



The
Snowflake mill was treated as a discontinued operation in our annual consolidated financial statements for year ended December
31, 2012 and comparative periods were restated accordingly. Where so indicated,Snowflake’s results were removed from sales and production volumes, operating earnings, and non-GAAP measures, both for the
current period and for all comparative periods presented.



We recorded an impairment charge of $660.2
million in Q4 2011 on the buildings, plant and equipment of our Canadian operations after a comprehensive impairment analysis of
the Corporation’s Canadian operations triggered by (i) continuing declines in demand for newsprint and directory, economic
slowdown in the United States and globally, and the strengthening of the Canadian dollar for most of 2011; (ii) a reduction in
pulp prices in the fourth quarter of 2011; and (iii) the release in February 2012 by a leading information provider for the global
pulp and paper industry of their latest 5-year forecast for pulp and paper prices and future exchange rates reflecting significantly
lower future price estimates for pulp and paper than what had been previously forecasted. The impairment reduced the carrying value
of our pulp assets by $83.5 million and our paper assets by $576.7 million. We continue to own and use the impaired assets in our
Canadian operations. After giving effect to these impairment charges, the Corporation’s liabilities exceeded the book value
of its assets by $617.3 million as at December 31, 2011.



Fresh Start Accounting



In accordance with U.S. GAAP, an enterprise
value was established for the company as of September 30, 2012 (the end of the quarter following our emergence from protection
under the CCAA) under fresh start accounting. This enterprise value was determined with the assistance of an independent financial
advisor. For a discussion of the valuation methods used to determine enterprise value and additional information on fresh start
accounting, see note 6, Creditor protection proceedings related disclosures in our annual consolidated financial statements for
the year ended December 31, 2012.



New Labour Agreements



Our collective agreements with the CEP
locals at our Crofton and Powell River and the PPWC local at our Crofton mills were to expire April 30, 2012 and our collective
agreements with the CEP locals at Port Alberni were to expire April 30, 2013. On March 19, 2012, new labour agreements were ratified
by the CEP and PPWC effective May 1, 2012 and will expire on April 30, 2017. The new labour agreements include a 10% reduction
in hourly rates along with various adjustments to vacation, health benefits and work rules necessary to provide Catalyst with a
more competitive labour cost structure. We also completed a new collective agreement at our Surrey Distribution Centre with the
Christian Labour Association of Canada (“CLAC”) in early March 2012 which expires in 2015 and maintains existing rates
and benefits.



British Columbia Harmonized Sales Tax
Extinguished



On April 1, 2013, the Province will revert
back to provincial sales tax regime. We estimate that the additional annualized cost to our business from that date onward will
be approximately $12 million, based on actual 2012 expenditures.



- 35 -







Maintenance Outages and Fires



Our results in 2011 were negatively impacted
by fires and extended maintenance outages in the second quarter. At the Snowflake mill, a recovered paper storage yard fire, a
market curtailment, and a five-day extension to a planned annual mill maintenance outage resulted in production downtime of 15
days or 8,400 tonnes of lost production. The fire at Snowflake destroyed approximately 11,000 tonnes
of recovered ONP and resulted in losses of $4.4 million. At the Powell River mill, a five-day planned mill maintenance outage was
extended to 10 days to address unexpected findings in the mill’s steam supply system, resulting in 14,000 tonnes of lost
production. Also in the quarter at Powell River, an electrical cable equipment fire idled the mill’s No. 9 paper machine
forfive days and the No. 10 paper machine for 14 days and resulted in losses of $2.4 million and 8,700 tonnes of lost production.



The losses incurred on the fires were not
covered by insurance as the losses were below our policy deductible of $2 million per occurrence and our annual aggregate of $6
million with a per occurrence contribution not to exceed $3 million.



Property Tax Dispute



We paid $22.2 million of property taxes
in 2011. This payment included $18.1 million municipal and provincial property taxes levied by our B.C. municipalities for 2011
as well as $4.1 million to North Cowichan for 2010 property taxes and interest.  Pursuant to statutory requirements, the payment
to North Cowichan was applied firstly to pay outstanding 2010 property taxes, penalties and interest in full and secondly to 2011
property taxes.  As a result there are unpaid property taxes owing to North Cowichan for 2011, together with the 10% penalty
for late payment, of $0.4 million at December 31, 2011. Our property tax expense and liability has been recorded based on the full
amount of property taxes levied for 2011.



Our appeal to the Supreme Court of Canada
regarding North Cowichan’s 2009 property taxes was dismissed on January 20, 2012. Shortly after that ruling we discontinued
our proceedings disputing the 2010 and 2011 property taxes assessed by North Cowichan and as at February 29, 2012 have paid all
of our unpaid property taxes and penalties owing to North Cowichan for 2011. We also discontinued our appeal in respect of the
Strathcona Regional District portion of the property taxes levied by the City of Campbell River for 2010.We continue to press for a fair and sustainable level of municipal property taxes for major industry in the B.C. communities
in which we operate.



Financing arrangements



On September 13, 2012 we entered into a
new $175.0 million ABL Facility, which was a pre-condition for the company to implement the Plan and exit from protection under
the CCAA. The ABL Facility provided financing for general corporate purposes, and for the repayment on exit of the DIP Facility
that was in place throughout the CCAA proceedings.



The company also completed a US$35 million
secured exit financing facility (Exit Facility) on September 13, 2012 and issued US$35 million of notes (Exit Notes) under the
Exit Facility on its exit from protection under the CCAA. The Exit Facility provided the company with backstop financing to pay
costs and expenses and manage other contingencies on exit from protection under CCAA.



- 36 -











Canadian dollar



The chart below illustrates
the movement of the US$/CDN$ average spot rate over the past three years:







|US$/CDN$ Exchange     
|----------------------
|                      
|                      
|Average spot rate     
|Average effective rate
|Period-end spot rate  



The majority of our sales are denominated
in U.S. dollars. The Canadian dollar traded mostly below par for the first half of 2012 before strengthening to above par against
the U.S. dollar for the remainder of the year. There was no difference between our average effective exchange rate and the average
spot rate in 2012. The US$/CDN$ exchange rate movement in 2012 compared to 2011 resulted in a positive variance of $7.8 million
on revenue and a positive variance of $5.7 million on adjusted EBITDA. Year-end spot rate movement resulted in an after-tax foreign
exchange gain of $20.8 million on the translation of U.S. dollar denominated debt in 2012, compared to an after-tax foreign exchange
loss of $11.8 million in 2011. We have a program in place to hedge a portion of our anticipated U.S. dollar sales, although, effective
April 1, 2010, we no longer designate the positions as hedges for accounting purposes. At December 31, 2012 we did not have any
foreign currency options or forward contracts outstanding. Refer to our annual consolidated financial statements for the year
ended December 31, 2012 note 30, Financial instruments, for additional details.



- 37 -







CONSOLIDATED RESULTS - ANNUAL



Consolidated results
of operations



Year ended December
31, 2012 compared to year ended December 31, 2011



Sales



Sales
decreased by $21.5 million in 2012 as the unfavourable impact of lower transaction prices for pulp and paper and reduced sales
volumes for specialty paper were partially offset by increased sales volumes for pulp and newsprint and the favourable impact
of the weaker Canadian dollar



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 dollars)                                             |  | Adjusted EBITDA1 2 |       |   | Adjusted EBITDA before restructuring costs1 2 |  
|-------------------------------------------------------------------- |  | ------------------ | ----- | - | --------------------------------------------- | -
|2011                                                                 |  | $                  | 62.8  |   |                                               | $
|Paper prices                                                         |  |                    | (3.4  | ) |                                               |  
|Pulp prices                                                          |  |                    | (58.9 | ) |                                               |  
|Impact of Canadian dollar                                            |  |                    | 4.8   |   |                                               |  
|Volume and mix                                                       |  |                    | (1.2  | ) |                                               |  
|Furnish mix and costs                                                |  |                    | 22.7  |   |                                               |  
|Power and fuel costs                                                 |  |                    | (5.2  | ) |                                               |  
|Labour costs                                                         |  |                    | 14.3  |   |                                               |  
|Maintenance costs                                                    |  |                    | 8.9   |   |                                               |  
|Lower of cost or market impact on inventory, net of inventory change |  |                    | 10.1  |   |                                               |  
|Selling, general and administrative costs                            |  |                    | 6.4   |   |                                               |  
|Restructuring costs                                                  |  |                    | 0.6   |   |                                               |  
|Other, net                                                           |  |                    | (6.5  | ) |                                               |  
|2012                                                                 |  | $                  | 55.4  |   |                                               | $

| | 1 | Refer
                                                                            to section 13, Non-GAAP measures, for further
                                                                            details.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2 | Numbers
                                                                            exclude the Snowflake mill’s results which have
                                                                            been reclassified as discontinued operations in the
                                                                            consolidated statements of earnings (loss) in the
                                                                            annual consolidated financial statements for the year
                                                                            ended December 31, 2012.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Operating earnings (loss)

Operating earnings increased by $723.6
million due to impairment and other closure costs incurred in 2011 of $661.8 million and lower depreciation of $69.2 million,
partially offset by a reduction in adjusted EBITDA of $7.4 million. Impairment and other closure costs in the prior year consisted
mostly of an impairment charge on the pulp and paper assets of our Canadian operations in Q4 2011.



Net earnings (loss) attributable
to the company

Net loss attributable to the company increased
by 1,557.2 million. This was primarily due to higher after-tax operating earnings of $723.0 million, a net reorganization credit
after tax of $663.7 million, a decrease in after-tax loss from discontinued operations of $179.0 million and an after-tax foreign
exchange gain on the translation of our U.S. dollar denominated debt of $20.8 million compared to an after-tax loss of $11.8 million
in the previous year, partially offset by an after-tax increase in net earnings attributable to non-controlling interest of $33.0
million.



- 38 -







The following table reconciles 2012 net
earnings (loss) attributable to the company to 2011:



|(In millions of dollars)                                               |  | Pre-tax |        |   | After-tax |  
|---------------------------------------------------------------------- |  | ------- | ------ | - | --------- | -
|2011 net earnings (loss) attributable to the company                   |  | $       | (981.4 | ) |           | $
|Lower adjusted EBITDA before restructuring costs                       |  |         | (8.0   | ) |           |  
|Lower restructuring costs                                              |  |         | 0.6    |   |           |  
|Lower depreciation and amortization expense                            |  |         | 69.2   |   |           |  
|Lower impairment charge in 2012                                        |  |         | 661.8  |   |           |  
|Change in foreign exchange gain (loss) on long-term debt               |  |         | 30.5   |   |           |  
|Powell River fire                                                      |  |         | 2.4    |   |           |  
|Net gain related to reorganization in 2012                             |  |         | 663.7  |   |           |  
|Higher other expense, net                                              |  |         | (2.8   | ) |           |  
|Change in interest expense                                             |  |         | 1.3    |   |           |  
|Change in discontinued operations earnings (loss)                      |  |         | 178.0  |   |           |  
|Change in net earnings (loss) attributable to non-controlling interest |  |         | (33.0  | ) |           |  
|2012 net earnings (loss) attributable to the company                   |  | $       | 582.3  |   |           | $

SEGMENTED
RESULTS - ANNUAL



Specialty
printing papers



|(In millions of dollars, except where otherwise stated)
|-------------------------------------------------------
|                                                       
|Sales                                                  
|Operating earnings (loss)                              
|Depreciation and amortization                          
|Adjusted EBITDA 1                                      
|–    before restructuring costs 1                      
|Adjusted EBITDA margin 1                               
|–    before restructuring costs 1                      
|                                                       
|(In thousands of tonnes)                               
|Sales                                                  
|Production                                             



| | 1. | Refer
                                                                             to section 13, 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 annual consolidated financial statements for
                                                                             the year ended December 31, 2012.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | We
                                                                             completed our restructuring under the CCAA proceedings
                                                                             on September 13, 2012 and adopted fresh start accounting
                                                                             in accordance with FASB ASC 852 on September 30,
                                                                             2012. Segmented results for 2012 include results
                                                                             for nine months preceding the adoption of fresh start
                                                                             accounting and three months subsequent to adoption.
                                                                             Reported sales and adjusted EBITDA were relatively
                                                                             unaffected, as the company’s physical operations
                                                                             were not impacted by the financial recapitalization.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 39 -











Segment
Overview



North
American demand for coated mechanical decreased 2.3% for the year due to reduced advertising pages in magazines and a decrease
in catalogues being mailed out. LWC inventories decreased significantly in 2012 as capacity reductions due to closures and curtailments
more than offset the reduction in demand. The average benchmark price for LWC decreased to US$869 per short ton from US$900 per
short ton in 2011. The LWC benchmark price declined in the first half of 2012 before recovering to US$898 per short ton in Q4.



North American uncoated mechanical demand
(high-gloss and standard grades) decreased 15.3% due to declines in print advertising and lower circulation and page counts for
retail inserts. Average benchmark prices for super-calendered A grade (SC-A) remained flat compared to the prior year at US$835
per short ton for 2012. Continuing reduction in capacity kept the uncoated mechanical market tight despite declining demand. The
market weakened near the end of Q4 with the restart of a formerly idled mill which added significant capacity to the market, and
the end of the seasonally busy retail advertising period.



For LWC, we implemented a US$40 per short
ton price increase on August 1, 2012 and announced another US$60 per short ton increase effective October 1, 2012. For our uncoated
paper, we announced a US$40 per short ton price increase on our soft-calendered paper effective October 1, 2012. The increases
to LWC were partially implemented while the soft-calendered price increase was not implemented due to the restart of formerly
idle capacity in early Q4.



North American directory demand decreased
18.4% in 2012 from the prior year due to reduced publication of white pages, smaller book sizes, lower circulation, and the continued
migration from printed directory books to the Internet. At US$770 per short ton, the average directory benchmark price for the
current year increased by 4.8% compared to the prior year reflecting higher 2012 contract prices. The majority of our directory
pricing was largely fixed for the year based on 2012 contract pricing.



- 40 -







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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The 2012 specialty
printing papers product-grade distribution, based on sales volume, is depicted in the chart below:







- 41 -







The 2012 specialty printing papers geographic
sales distribution, based on sales volume, is depicted in the chart below.







| | · | Sales volume decreased by 24,900 tonnes due to lower directory
and uncoated sales volumes for the year, partially offset by higher coated sales volumes.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Average sales revenue increased $7 per tonne, reflecting
higher average transaction prices for directory and uncoated mechanical paper, and the positive impact of a weaker Canadian dollar,
partially offset by lower average transaction prices for LWC.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Average delivered cash costs decreased $27 per tonne due
to lower maintenance, labour and kraft costs, as well as reduced SG&A costs, partially offset by higher cost of chemicals
and electric power. The lower labour cost was mostly due to the positive impact of the new labour deal that went into effect on
May 1, 2012.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Newsprint



|(In millions of dollars, except where otherwise stated)
|-------------------------------------------------------
|                                                       
|Sales                                                  
|Operating earnings (loss)                              
|Depreciation and amortization                          
|Adjusted EBITDA 1                                      
|–    before restructuring costs 1                      
|Adjusted EBITDA margin 1                               
|–    before restructuring costs 1                      
|(In thousands of tonnes)                               
|Sales                                                  
|Production                                             



| | 1 | Refer
                                                                            to section 13, 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 annual consolidated financial statements for
                                                                            the year ended December 31, 2012.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3 | We
                                                                            completed our restructuring under the CCAA proceedings
                                                                            on September 13, 2012 and adopted fresh start accounting
                                                                            in accordance with FASB ASC 852 on September 30, 2012.
                                                                            Segmented results for 2012 include results for nine
                                                                            months preceding the adoption of fresh start accounting
                                                                            and three months subsequent to adoption. Reported
                                                                            sales and adjusted EBITDA were relatively unaffected,
                                                                            as the company’s physical operations were not
                                                                            impacted by the financial recapitalization.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





- 42 -











Segment Overview



North American newsprint
shipments were down by 1.2% in 2012. Operating rates remained similar to the prior year as North American newsprint capacity was
shut at a rate to compensate for declining demand. Newsprint inventories increased in the current year compared to 2011 levels.



The average North American Newsprint benchmark
price decreased to US$615 per metric tonne or 1.1% compared to the previous year. We announced a US$30 per tonne price increase
effective October 1, 2012. The increase was partially implemented in the US; however, these gains were offset by lower prices
in our international markets.



The Crofton No. 1 paper machine, originally
curtailed in January 2010, remained indefinitely curtailed throughout 2012, resulting in 140,000 tonnes of curtailment on an annualized
basis.



Operational performance



The following chart summarizes the operating
performance of our newsprint 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 43 -







The 2012 newsprint geographic sales distribution,
based on sales volume, is depicted in the chart below:







| | · | Sales
                                                                                                               volume increased
                                                                                                               by 58,800 tonnes
                                                                                                               due to increased
                                                                                                               newsprint production
                                                                                                               which offset lower
                                                                                                               directory production
                                                                                                               in 2012.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Average
                                                                                                               sales revenue declined
                                                                                                               $14 per tonne due
                                                                                                               to lower transaction
                                                                                                               prices, partially
                                                                                                               offset by the positive
                                                                                                               impact of the weaker
                                                                                                               Canadian dollar.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Average
                                                                                                               delivered cash
                                                                                                               costs decreased
                                                                                                               $29 per tonne due
                                                                                                               to reduced cost
                                                                                                               of maintenance,
                                                                                                               labour, fibre,
                                                                                                               SG&A and property
                                                                                                               taxes, partially
                                                                                                               offset by higher
                                                                                                               electric power
                                                                                                               costs.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pulp



|(In millions of dollars, except where otherwise stated)
|-------------------------------------------------------
|                                                       
|Sales                                                  
|Operating earnings (loss)                              
|Depreciation and amortization                          
|Adjusted EBITDA 1                                      
|–    before restructuring costs 1                      
|Adjusted EBITDA margin 1                               
|–    before restructuring costs 1                      
|                                                       
|(In thousands of tonnes)                               
|Sales                                                  
|Production                                             



| | 1 | Refer
                                                                              to section 13, 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 annual consolidated financial statements
                                                                              for the year ended December 31, 2012.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3 | We
                                                                              completed our restructuring under the CCAA proceedings
                                                                              on September 13, 2012 and adopted fresh start accounting
                                                                              in accordance with FASB ASC 852 on September 30,
                                                                              2012. Segmented results for 2012 include results
                                                                              for nine months preceding the adoption of fresh
                                                                              start accounting and three months subsequent to
                                                                              adoption. Reported sales and adjusted EBITDA were
                                                                              relatively unaffected, as the company’s physical
                                                                              operations were not impacted by the financial recapitalization
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 44 -











Global shipments of NBSK pulp increased
by 3.0% in 2012 compared to prior year shipments. There was a rapid decline in pulp prices in 2012 due to excess inventory and
weak market conditions in China. The average NBSK benchmark price for China declined to US$630 per tonne in the third quarter
before recovering moderately to US$662 per tonne in Q4. The average benchmark price for the year of US$667 per tonne was 20.0%
lower than 2011.



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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 45 -







The primary market for our market pulp is
Asia. The 2012 pulp geographic sales distribution, based on sales volume, is depicted in the chart below:







| | · | Sales
                                                                                                            volume increased by
                                                                                                            16,300 tonnes due
                                                                                                            to the inclusion of
                                                                                                            an 8,000 tonne shipment
                                                                                                            in current year sales
                                                                                                            that was delayed in
                                                                                                            December 2011 and
                                                                                                            slightly higher production
                                                                                                            in 2012.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Average
                                                                                                            sales revenue decreased
                                                                                                            by $174 per tonne
                                                                                                            due to lower average
                                                                                                            transaction prices,
                                                                                                            partially offset by
                                                                                                            the positive impact
                                                                                                            of a weaker Canadian
                                                                                                            dollar. Weak pulp
                                                                                                            prices in 2012 reflect
                                                                                                            soft demand and excess
                                                                                                            inventory in China.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Average
                                                                                                            delivered cash costs
                                                                                                            decreased by $42 per
                                                                                                            tonne due to lower
                                                                                                            fibre, SG&A and
                                                                                                            labour costs, partially
                                                                                                            offset by increased
                                                                                                            cost of chemicals.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



FINANCIAL CONDITION



The following table
highlights the significant changes between the consolidated balance sheets as at December 31, 2012, and December 31, 2011:



The following table highlights the significant
changes between the consolidated balance sheets as at December 31, 2012 and December 31, 2011:



|(In millions of dollars)      |  | 2012 |       |  | 2011 |   |       | Variance |  |   | Comments
|----------------------------- |  | ---- | ----- |  | ---- | - | ----- | -------- |  | - | --------
|Working capital               |  | $    | 151.4 |  |      | $ | 152.4 |          |  | $ | (1.0    
|Assets held for sale          |  |      | 34.3  |  |      |   | –     |          |  |   | 34.3    
|Property, plant and equipment |  |      | 611.6 |  |      |   | 386.3 |          |  |   | 225.3   



- 46 -







|(In millions of dollars)                         |  | 2012 |       |  | 2011 |  |       | Variance |  |  | Comments
|------------------------------------------------ |  | ---- | ----- |  | ---- |  | ----- | -------- |  |  | --------
|Goodwill                                         |  |      | 56.7  |  |      |  | –     |          |  |  | 56.7    
|Other assets                                     |  |      | 11.0  |  |      |  | 24.4  |          |  |  | (13.4   
|Liabilities associated with assets held for sale |  |      | 15.2  |  |      |  | –     |          |  |  | 15.2    
|Total debt                                       |  |      | 428.6 |  |      |  | 842.3 |          |  |  | (413.7  
|Employee future benefits                         |  |      | 289.7 |  |      |  | 305.7 |          |  |  | (16.0   
|Other long-term obligations                      |  |      | 8.9   |  |      |  | 19.2  |          |  |  | (10.3   
|Deferred income taxes and deferred credits       |  |      | –     |  |      |  | 13.2  |          |  |  | (13.2   



Outlook



Economy



The
global economies struggled in 2012 due to a host of factors including the sovereign debt issues affecting Europe and North America,
slow growth in the U.S. economy, and reduced economic growth in China. The U.S. economy is expected to improve in 2013 led by
an employment recovery as well as a recovering housing market. Volatility is expected to continue due to ongoing fiscal issues
in Europe and North America. The Canadian economy is expected to weaken due to a slowing housing market and generally slow economic
growth. A mix of a strengthening US economy and a weakening Canadian economy could result in some weakness in the Canadian dollar.
The continued volatility of the Canadian dollar may significantly impact our operating and net earnings, cash flow and liquidity.



Markets



Specialty
printing paper markets are expected to remain challenging in 2013 with the continued migration to electronic media. Demand for
coated mechanical is expected to drop in 2013 while demand for uncoated mechanical is expected to increase slightly due to the
restart of additional uncoated mechanical capacity in Q4, 2012. This additional capacity will lead to some grade switching from
coated to uncoated mechanical. Operating rates for coated and uncoated mechanical are expected to decline unless the drop in demand
is offset by additional mill closures and capacity reductions. Prices for coated and uncoated mechanical grades will be under
pressure in the seasonally slower first of the year as a result of these lower operating rates. Demand for directory paper will
continue to decline albeit at a slower rate than 2012 due to paper conservation moves by publishers and migration to electronic
media. Poor demand conditions and weaker operating rates for directory paper are expected to lead to slightly lower prices for
2013 compared to 2012.



- 47 -







Newsprint demand in 2013 is expected to
contract further due to declining circulation, page count reductions, conservation measures by publishers, and continued migration
of information and advertising to the Internet. After a significant drop in exports from North America in 2012, exports may increase
modestly as North American producers seek to find markets for their excess capacity. The restart of additional newsprint capacity
in the 2nd half of 2012 resulted in the first signs of price weakness in quite some time. This price weakness is expected to continue
through the first quarter of 2013. Newsprint prices for the remainder of the year will depend on the supply and demand balance.



The NBSK market improved slightly in the
fourth quarter and this trend is expected to continue for the first half of 2013 as the Chinese economy rebounds from slower economic
growth in 2012. Improved demand for pulp for woodfree paper and tissue are expected to increase demand and support higher prices
for NBSK in 2013. Hardwood pulp capacity increases in 2013 may lead to more switching between softwood and hardwood. Chinese buying
patterns and requirements are expected to continue to drive the market in 2013.



Operations and capital spending



Price pressure for key inputs is expected
to be marginal with the exception of power where we are expecting to see rate increases from BC Hydro as well as the return of
the PST. Labour, fibre, fossil fuel, and chemicals are expected to be similar to 2012. We expect maintenance costs for 2013 to
be higher than 2012 levels primarily due to the impact of total mill outages at Alberni in Q1 and Crofton in Q2. Crofton Pulp
outages in 2013 are expected in Q2 and Q4, while mandatory annual boiler annual outages will take place throughout the year at
all of our mills similar to 2012.



We anticipate that the Crofton No. 1 machine
will remain indefinitely curtailed due to weak markets and high costs, removing approximately 140,000 tonnes on an annualized
basis. We will continue to match production to our orders for all grades.



Capital spending is expected to be approximately
$25 million in 2013; however, capital will be managed to balance cash flow.



Q1, 2013 costs are expected to be higher
than Q1 2012 in part due to lower production and higher maintenance costs as a result of a number of reliability issues at the
mills in Q1, 2013.



Liquidity, debt
maturities and covenants



We do not currently
anticipate any significant uses of cash in 2013 other than for our operations, working capital fluctuations, interest payments,
pension funding of the Salaried DB Plan and the PACE Industry Union-Management multi-employer pension plan.



The company expects to close on the sale
of PREI at the end of the first quarter subject to various closing conditions. The company is required under the terms of the
Plan of Arrangement to distribute to unsecured creditors of the company who did not elect to receive shares in settlement of their
claims, their pro rata share of 50% of the net proceeds of the sale (which, given that many creditors elected to instead receive
shares, will result in a distribution of approximately 40% of the net proceeds of the sale). The company will offer to purchase
a portion of its Exit Notes with the balance of the net proceeds.



2013 key objectives:



In 2013, we will focus
on objectives and initiatives in four areas:



Social



| | · | Significantly
                                                                                                             improve safety results
                                                                                                             reducing medical
                                                                                                             incidents by 50%
                                                                                                             and lost time injuries
                                                                                                             by 41% to achieve
                                                                                                             2nd quartile or better
                                                                                                             industry ranking
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Continue
                                                                                                             to seek competitive
                                                                                                             business conditions
                                                                                                             in B.C. including
                                                                                                             in hydro and taxation
                                                                                                             rates and work with
                                                                                                             municipalities to
                                                                                                             achieve joint cost-saving
                                                                                                             service and infrastructure
                                                                                                             agreements
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Financial



| | · | Complete
                                                                                                             outstanding restructuring
                                                                                                             items and use proceeds
                                                                                                             of asset sales to
                                                                                                             pay down debt.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Reduce
                                                                                                             operating costs,
                                                                                                             and focus on generating
                                                                                                             positive free cash
                                                                                                             flow.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Complete
                                                                                                            special portability
                                                                                                            option program developed
                                                                                                            to deal with the salaried
                                                                                                            pension deficit.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 48 -







Commercial



| | · | Expand
geographic reach of Catalyst Paper into emerging world markets of Latin America and Asia.
| | - | ------------------------------------------------------------------------------------------------



| | · | Gain
                                                                                                         market share and expand
                                                                                                         sales reach into new
                                                                                                         markets with new products.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Increase
                                                                                                         breadth of product range
                                                                                                         and solidify position
                                                                                                         as the most flexible
                                                                                                         and diverse producer
                                                                                                         and marketer of paper
                                                                                                         in the west.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Environmental



| | · | Work
with community stakeholders to identify and implement sustainable watershed management solutions
| | - | -----------------------------------------------------------------------------------------------------



| | · | Adhere
to high international standards for transparency and reporting of performance on social, governance and environmental factors
| | - | ------------------------------------------------------------------------------------------------------------------------------------



| | · | Support
revision of the BC Forest Stewardship Council standard to achieve increased access to FSC fibre supply
| | - | --------------------------------------------------------------------------------------------------------------



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 non-operating 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.



- 49 -







Reconciliation of
net earnings (loss) attributable to the company by year



|(In millions of dollars)                                     |  | 2012 2 |        |   | 2011 |   |        | 2010 | 
|------------------------------------------------------------ |  | ------ | ------ | - | ---- | - | ------ | ---- | 
|Net earnings (loss) attributable to the company as reported  |  | $      | 583.2  |   |      | $ | (974.0 | )    | 
|Net earnings (loss) attributable to non-controlling interest |  |        | 30.4   |   |      |   | (2.6   | )    | 
|Net earnings (loss)                                          |  |        | 613.6  |   |      |   | (976.6 | )    | 
|Depreciation and amortization 1                              |  |        | 36.3   |   |      |   | 105.5  |      | 
|Impairment 1                                                 |  |        | –      |   |      |   | 661.8  |      | 
|(Gain) loss on cancellation of long-term debt 1              |  |        | –      |   |      |   | –      |      | 
|Foreign exchange (gain) loss on long-term debt 1             |  |        | (20.8  | ) |      |   | 9.7    |      | 
|Loss on Powell River fire                                    |  |        | –      |   |      |   | 2.4    |      | 
|Other (income) expense, net 1                                |  |        | 2.5    |   |      |   | (0.3   | )    | 
|Interest expense, net 1                                      |  |        | 71.9   |   |      |   | 73.2   |      | 
|Income tax recovery 1                                        |  |        | (0.9   | ) |      |   | (8.4   | )    | 
|Reorganization items, net 1                                  |  |        | (663.7 | ) |      |   | –      |      | 
|(Earnings) loss from discontinued operations net of tax      |  |        | 16.5   |   |      |   | 195.5  |      | 
|Adjusted EBITDA                                              |  | $      | 55.4   |   |      | $ | 62.8   |      | 
|Restructuring costs                                          |  |        | 5.3    |   |      |   | 5.9    |      | 
|Adjusted EBITDA before restructuring costs                   |  | $      | 60.7   |   |      | $ | 68.7   |      | 



| | 1 | 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 annual consolidated financial
                                                                                 statements for the year ended December 31, 2012.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2 | We
                                                                                 completed our restructuring under the CCAA proceedings
                                                                                 on September 13, 2012 and adopted fresh start
                                                                                 accounting in accordance with FASB ASC 852 on
                                                                                 September 30, 2012. Numbers for 2012 therefore
                                                                                 include results for nine months preceding the
                                                                                 adoption of fresh start accounting and three
                                                                                 months subsequent to adoption.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Net Earnings (Loss) Attributable to
the Company before Specific Items



Specific items are
defined previously, and the exclusion of such items from net earnings (loss) attributable to the company facilitates the comparison
of financial results between periods.



Reconciliation to Net Earnings (Loss)
Attributable to the Company by year:



|(In millions of dollars and after-taxes,  except where otherwise stated)                    |  | 2012 2 |        |   | 2011 |   |        | 2010 | 
|------------------------------------------------------------------------------------------- |  | ------ | ------ | - | ---- | - | ------ | ---- | 
|Net earnings (loss) attributable to the company as reported                                 |  | $      | 583.2  |   |      | $ | (974.0 | )    | 
|Specific items:                                                                             |  |        |        |   |      |   |        |      | 
|(Gain) loss on cancellation of long-term debt                                               |  |        | –      |   |      |   | –      |      | 
|Foreign exchange loss (gain) on long-term debt                                              |  |        | (20.8  | ) |      |   | 11.8   |      | 
|Loss on Snowflake fire 1                                                                    |  |        | –      |   |      |   | 4.4    |      | 
|Loss on Powell River fire                                                                   |  |        | –      |   |      |   | 2.0    |      | 
|Impairment and other closure costs 2                                                        |  |        | 19.7   |   |      |   | 823.6  |      | 
|Restructuring and change-of-control costs 1                                                 |  |        | 6.4    |   |      |   | 5.9    |      | 
|Reorganization items, net 1                                                                 |  |        | (667.5 | ) |      |   | –      |      | 
|Fair market adjustment to non-controlling interest                                          |  |        | 41.2   |   |      |   | –      |      | 
|Note exchange costs                                                                         |  |        | –      |   |      |   | –      |      | 
|Income tax adjustments                                                                      |  |        | –      |   |      |   | –      |      | 
|Net earnings (loss) attributable to the company  before specific items                      |  | $      | (37.8  | ) |      | $ | (126.3 | )    | 
|Net earnings (loss) per share attributable to the company’s common shareholders in dollars: |  |        |        |   |      |   |        |      | 
|As reported (continuing operations)                                                         |  | $      | 41.65  |   |      | $ | (2.04  | )    | 
|Before specific items                                                                       |  |        | (2.62  | ) |      |   | (0.33  | )    | 



| | 1 | Includes
                                                                                 amount related to Snowflake which was included
                                                                                 in discontinued operations, net of tax in the
                                                                                 consolidated statements of earnings (loss) in
                                                                                 the annual consolidated financial statements
                                                                                 for the year ended December 31, 2012.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2 | We
                                                                                 completed our restructuring under the CCAA proceedings
                                                                                 on September 13, 2012 and adopted fresh start
                                                                                 accounting in accordance with FASB ASC 852 on
                                                                                 September 30, 2012. Numbers for 2012 therefore
                                                                                 include results for nine months preceding the
                                                                                 adoption of fresh start accounting and three
                                                                                 months subsequent to adoption.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 50 -







Free Cash
Flow



Free cash flow excludes working capital
and certain other sources and uses of cash, which are disclosed in the consolidated statements of cash flows. This measure allows
us to assess our ability to generate funds to repay debt and assists in cash flow forecasting.



Reconciliation
to Cash Provided by Operating Activities less Cash Used by Investing Activities by year:



|(In millions of dollars)                                                 |  | 2012 1 |       |   | 2011 |   |       | 2010 | 
|------------------------------------------------------------------------ |  | ------ | ----- | - | ---- | - | ----- | ---- | 
|Cash provided (used) by operating activities                             |  | $      | 8.1   |   |      | $ | (71.5 | )    | 
|Cash used by investing activities                                        |  |        | (9.6  | ) |      |   | (17.7 | )    | 
|Proceeds from the sale of property, plant and equipment and other assets |  |        | (12.3 | ) |      |   | (1.2  | )    | 
|Other investing activities                                               |  |        | (3.7  | ) |      |   | (0.8  | )    | 
|Non-cash working capital changes except changes in taxes and interest    |  |        | (31.8 | ) |      |   | 42.0  |      | 
|Other                                                                    |  |        | 2.1   |   |      |   | (9.6  | )    | 
|Free cash flow                                                           |  | $      | (47.2 | ) |      | $ | (58.8 | )    | 



| | 1 | We
                                                                                 completed our restructuring under the CCAA proceedings
                                                                                 on September 13, 2012 and adopted fresh start
                                                                                 accounting in accordance with FASB ASC 852 on
                                                                                 September 30, 2012. Numbers for 2012 therefore
                                                                                 include results for nine months preceding the
                                                                                 adoption of fresh start accounting and three
                                                                                 months subsequent to adoption.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management’s Calculation of Free
Cash Flow by Year:



|(In millions of dollars)                                            |  | 2012 2 |       |   | 2011 |   |       | 2010 | 
|------------------------------------------------------------------- |  | ------ | ----- | - | ---- | - | ----- | ---- | 
|Adjusted EBITDA                                                     |  | $      | 55.4  |   |      | $ | 62.8  |      | 
|Interest expense, excluding amortization                            |  |        | (22.7 | ) |      |   | (72.6 | )    | 
|Capital expenditures                                                |  |        | (22.6 | ) |      |   | (19.7 | )    | 
|Reorganization costs                                                |  |        | (37.5 | ) |      |   | –     |      | 
|Income taxes paid                                                   |  |        | 0.2   |   |      |   | (0.1  | )    | 
|Employee future benefits, expense over (under) cash contributions 1 |  |        | (11.8 | ) |      |   | (8.0  | )    | 
|Net operating cash flow from discontinued operations                |  |        | (8.2  | ) |      |   | (21.2 | )    | 
|Free cash flow                                                      |  | $      | (47.2 | ) |      | $ | (58.8 | )    | 



| | 1 | Free
                                                                                 cash flow is adjusted to reflect the cash impact
                                                                                 of employee future benefits rather than the accounting
                                                                                 expense which is included in Adjusted EBITDA.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2 | We
                                                                                 completed our restructuring under the CCAA proceedings
                                                                                 on September 13, 2012 and adopted fresh start
                                                                                 accounting in accordance with FASB ASC 852 on
                                                                                 September 30, 2012. Numbers for 2012 therefore
                                                                                 include results for nine months preceding the
                                                                                 adoption of fresh start accounting and three
                                                                                 months subsequent to adoption.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



CRITICAL
ACCOUNTING POLICIES AND ESTIMATES



The preparation of
financial statements in conformity with U.S. GAAP requires companies to establish accounting policies and to make estimates that
affect both the amount and timing of recording of assets, liabilities, revenues and expenses. Some of these estimates require
judgments about matters that are inherently uncertain.



Note 3, Summary of significant
accounting policies, in the December 31, 2012 consolidated financial statements includes a summary of the significant accounting
policies used in their preparation. While all of the significant accounting policies are important to the annual consolidated
financial statements, some of these policies may be viewed as involving a high degree of judgment. On an ongoing basis using currently
available information, management reviews its estimates, including those related to environmental and legal liabilities, impairment
of long-lived assets, pension and post-retirement benefits, provision for bad and doubtful accounts, fair value measurement, and
income taxes. Actual results could differ from these estimates.



The following accounting
policies require management’s most difficult, subjective and complex judgments, and are subject to measurement uncertainty



Environmental
and legal liabilities



Environmental
and legal liabilities are recorded when it is considered probable that a liability has been incurred and the amount of the loss
can be reasonably estimated. Liabilities for environmental matters require evaluation of applicable environmental regulations
and estimates of remediation alternatives and the costs thereof. Provisions for liabilities relating to legal actions and claims
require judgments about projected outcomes and the range of loss, based on such factors as historical experience and recommendations
of legal counsel.



As
at December 31, 2012 we had a provision of $17.4 million for environmental, remedial and other obligations. This amount included
the US$11.7 million withdrawal liability from the PACE Industry Union-Management Pension Fund. We expect capital expenditures
relating to known environmental matters, including compliance issues and the assessment and remediation of the environmental condition
of the company’s properties, will total approximately $1.0 million in 2013.



- 51 -







Impairment of long-lived assets



We recognized goodwill on September 30,
2012 in accordance with fresh start accounting. Goodwill does not get amortised in subsequent periods, but will be tested annually
for impairment using a two-step impairment test at the reporting unit level. An assessment may first be performed based on certain
prescribed qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test.



We review other long-lived assets, primarily
plant and equipment, for impairment when events or changes in circumstances indicate that the carrying value of these assets may
not be recoverable. We test for impairment using a two-step methodology as follows:



| | (i) | Determine whether the projected undiscounted future cash
flows from operations exceed the net carrying amount of the assets as of the assessment date; and
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | If assets are determined to be impaired in step (i), then
such impaired assets are written down to their fair value, determined principally by using discounted future cash flows expected
from their use and eventual disposition.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Estimates of future cash flows and fair
value require judgments, assumptions and estimates and may change over time. Due to the variables associated with judgments and
assumptions used in these tests, the precision and accuracy of estimates of impairment charges are subject to significant uncertainties
and may change significantly as additional information becomes known. The carrying values of long-lived assets and goodwill represented
approximately 62.5% and 5.8% of total assets respectively as at December 31, 2012. If future developments were to differ adversely
from management’s best estimate of key assumptions and associated cash flows, we could potentially experience future material
impairment charges.



Assets held for Sale and Discontinued
Operations



Assets and liabilities that meet the held
for sale criteria are reported separately from continued operations in the consolidated balance sheet. Assets held for sale and
liabilities associated with assets held for sale are reported separately under current assets and current liabilities and are
not offset and reported as a single amount in the consolidated balance sheet. Assets and liabilities are classified prospectively
in the consolidated balance sheet as held for sale.



Assets classified as held for sale in
2012 included:



| | · | assets and liabilities of the Snowflake mill which were
closed on September 30, 2012 and subsequently sold to Hackman Capital and its affiliates,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



| | · | 13.4 hectare wastewater treatment facility located at Port
Alberni,
| | - | -------------------------------------------------------------------



| | · | land, buildings and equipment, and other assets of the
Elk Falls site,
| | - | ----------------------------------------------------------------------



| | · | mortgage receivable from PRSC Limited Partnership and interest
in PRSC Land Developments Ltd.
| | - | ---------------------------------------------------------------------------------------------



The results of discontinued operations,
net of tax, are presented separately from the results of continuing operations in the consolidated statements of earnings (loss).
Per share information and changes to other comprehensive income (loss) related to discontinued operations are presented separately
from continuing operations. Cash flows from discontinued operations are not presented separately from cash flows from continuing
operations in the consolidated statements of cash flows. All comparative periods are restated in the period that a component is
classified as a discontinued operation. The discontinued Snowflake mill met the definition of a discontinued operation in 2012
as a component of the company that was held for sale.



Enterprise Valuation



In accordance with the requirements of
fresh start accounting, we determined a preliminary enterprise value for the company with the assistance of an independent financial
advisor. The preliminary enterprise value established as of the valuation date of September 30, 2012 incorporated numerous major
assumptions including management’s best estimate of future operating performance, forecasts of future exchange rates and
product prices, and a discount rate based on the estimated blended rate of return required by our debt and equity investors.



- 52 -







Pension and post-retirement benefits



We maintain various
employee future benefit plans, which include defined benefit pension and post-retirement benefit plans. The company retains independent
actuarial firms to perform actuarial valuations of the fair value of our defined benefit pension and post-retirement benefit plan
assets and benefit obligations, and to advise on the amounts to be recorded in our financial statements. This information is determined
using certain assumptions, based on historical and market data that have a direct impact on the fair value of the assets and obligations
and on the charges disclosed in our financial statements. These assumptions include:



| | · | The
                                                                                                         discount rate, which
                                                                                                         is used to estimate the
                                                                                                         actuarial present value
                                                                                                         of the various plan obligations.
                                                                                                         The company, assisted
                                                                                                         by independent actuarial
                                                                                                         advisors, sets the discount
                                                                                                         rate assumption annually
                                                                                                         to reflect the rates
                                                                                                         available on high-quality
                                                                                                         debt instruments, with
                                                                                                         cash flows that are expected
                                                                                                         to match the timing and
                                                                                                         amount of expected benefit
                                                                                                         payments. As at December
                                                                                                         31, 2012 a discount rate
                                                                                                         of 4.0% per year was
                                                                                                         determined by us in consultation
                                                                                                         with our independent
                                                                                                         actuarial advisors.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                                                                                         long-term return on assets
                                                                                                         used to estimate the
                                                                                                         growth in the value of
                                                                                                         invested assets available
                                                                                                         to satisfy certain obligations.
                                                                                                         The company, with the
                                                                                                         assistance of independent
                                                                                                         actuarial firms, sets
                                                                                                         the expected rate of
                                                                                                         return on plan assets
                                                                                                         annually to reflect the
                                                                                                         current view of long-term
                                                                                                         investment returns. For
                                                                                                         2012, a rate of return
                                                                                                         of 6.5% per year was
                                                                                                         determined by management
                                                                                                         in consultation with
                                                                                                         our independent actuarial
                                                                                                         advisors.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Salary
                                                                                                         increases used to estimate
                                                                                                         the impact that future
                                                                                                         compensation increases
                                                                                                         would have on pension
                                                                                                         and other post-retirement
                                                                                                         obligations. As at December
                                                                                                         31, 2012 a rate of compensation
                                                                                                         increase of 2.0% per
                                                                                                         year was determined by
                                                                                                         management in consultation
                                                                                                         with our independent
                                                                                                         actuarial advisors.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Health
                                                                                                         care trend rates and
                                                                                                         mortality rates used
                                                                                                         to estimate the impact
                                                                                                         that future health care
                                                                                                         costs would have on pension
                                                                                                         and post-retirement obligations.
                                                                                                         As at December 31, 2012
                                                                                                         a health care trend rate
                                                                                                         of 6.0% per year was
                                                                                                         determined by management
                                                                                                         in consultation with
                                                                                                         our independent actuarial
                                                                                                         advisors. The health
                                                                                                         care trend rate is assumed
                                                                                                         to decline by 0.5% annually,
                                                                                                         and the ultimate health
                                                                                                         care trend rate is assumed
                                                                                                         to be 4.5%.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Actual experience can vary significantly
from estimates and could have a material impact on the estimated cost of employee benefit plans and future cash requirements.



The following table
provides a sensitivity analysis of the assumed overall health care cost trend rate used in measuring the net pension benefit obligation,
and the net obligation for other employee future benefits and related net periodic benefit cost for 2012. This sensitivity analysis
should be used with caution as it is hypothetical and changes in the health care cost trend rate may not be linear.



|                                       |  | Pension benefit plans  |  | Other benefit plans | 
|-------------------------------------- |  | ---------------------- |  | ------------------- | 
|(In millions of dollars)               |  | Net benefit obligation |  | Net 2012 expense    | 
|Assumed overall health care cost trend |  |                        |  |                     | 
|Impact of:                             |  |                        |  |                     | 
|1% increase                            |  | N/A                    |  | N/A                 | 
|1% decrease                            |  | N/A                    |  | N/A                 | 



Provision
for bad debts and allowance for doubtful accounts



We regularly review
the collectability of our accounts receivable. We record our allowance for doubtful accounts based on our best estimate of any
potentially uncollectible accounts by highlighting those that are specifically high risk and applying judgment to arrive at an
estimate. Consideration is given to current economic conditions and specific customer circumstances to determine the amount of
any bad debt expense to be recorded. Accounts receivable balances for individual customers could potentially be material at any
given time. We manage our credit risk principally through credit policies, which include the analysis of the financial position
of our customers and the regular review of their credit limits and payment terms. We also subscribe to credit insurance for a
majority of our receivables, periodically purchase accounts receivable puts on certain customers, and obtain bank letters of credit
for some export markets and customers. Our estimate of the required allowance is a matter of judgment and the actual loss eventually
sustained may be more or less than estimated.



- 53 -







As at December 31, 2012
Accounts receivable comprised 11.6% of total assets. Included in this balance was a provision of $2.2 million for doubtful
accounts, or 1.9% of accounts receivable (as at December 31, 2011 - $2.0 million for doubtful accounts, or 1.5% of accounts receivable).
We believe our allowance for doubtful accounts as at December 31, 2012 is adequate to provide for probable losses existing in accounts
receivable.



Fair value measurement



We measure our derivative
and non-derivative financial instruments at fair value, defined as the price that would be received from selling an asset or that
would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining
fair value measurements, we consider the principal or most advantageous market in which it would transact and consider assumptions
that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk
of non-performance.



An established fair
value hierarchy requires the company to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level
of input that is both available and significant to the fair value measurement. Three levels of inputs may be used to measure fair
value:



Level 1	 –	
Quoted prices in active markets for identical assets or liabilities.



Level 2	 –	
Observable inputs other than quoted prices in active markets for identical assets and liabilities, such as quoted prices for identical
or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities.



Level 3 	–	
Inputs that are generally unobservable and are supported by little or no market activity and that are significant to the fair
value determination of the assets or liabilities.



The determination of
fair value requires judgments, assumptions and estimates and may change over time.



The following table
presents information about the fair value of our derivative and non-derivative financial instruments not designated as hedging
instruments and measured on a recurring basis at December 31:



|                    |  | 2012 |   |  | 2011 |   |     | Fair value hierarchy |  |  | Balance sheet classification
|------------------- |  | ---- | - |  | ---- | - | --- | -------------------- |  |  | ----------------------------
|Assets              |  |      |   |  |      |   |     |                      |  |  |                             
|Currency contracts  |  | $    | – |  |      | $ | 2.0 |                      |  |  | 2                           
|Currency contracts  |  |      | – |  |      |   | 2.5 |                      |  |  | 2                           
|Commodity contracts |  |      | – |  |      |   | 0.5 |                      |  |  | 2                           
|                    |  | $    | – |  |      | $ | 5.0 |                      |  |  |                             
|Liabilities         |  |      |   |  |      |   |     |                      |  |  |                             
|Commodity contracts |  | $    | – |  |      | $ | 0.4 |                      |  |  | 2                           
|Commodity contracts |  |      | – |  |      | $ | 0.2 |                      |  |  | 2                           
|                    |  | $    | – |  |      | $ | 0.6 |                      |  |  |                             



Fair
values of our derivatives are classified under Level 2 as they are measured as follows:



| | 1 | The
                                                                                 fair value of forward currency contracts is measured
                                                                                 using the discounted difference between contractual
                                                                                 rates and market future rates. Interest rates,
                                                                                 forward market rates, and volatility are used
                                                                                 as inputs for such valuation techniques. We incorporate
                                                                                 credit valuation adjustments to appropriately
                                                                                 reflect both our own non-performance risk and
                                                                                 the counterparty’s non-performance risk
                                                                                 in the fair value measurements.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2 | The
                                                                                 fair value of commodity swap contracts is measured
                                                                                 using the discounted difference between contractual
                                                                                 rates and market rates. The fair value of natural
                                                                                 gas commodity options is measured using techniques
                                                                                 derived from the Black-Scholes pricing model.
                                                                                 We incorporate credit valuation adjustments to
                                                                                 appropriately reflect both our own non-performance
                                                                                 risk and the counterparty’s non-performance
                                                                                 risk in the fair value measurements.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We no longer designate U.S. dollar revenue
risk management instruments as cash flow hedges for accounting purposes effective April 1, 2010. For cash flow hedges that were
in place as at March 31, 2010, the effective portion of changes in the fair value accumulated as at March 31, 2010 were deferred
and recorded in Accumulated other comprehensive loss. When the hedge item was recorded in earnings, the corresponding gain or
loss on the hedge was reclassified from Accumulated other comprehensive loss to Sales. As of December 31, 2012 all deferred amounts
on these cash flow hedges had been recognized in Sales and circulated out of Accumulated other comprehensive loss.



- 54 -







Income taxes



The amounts recorded
for deferred income tax assets and liabilities are based on various judgments, assumptions and estimates. Deferred tax assets
and liabilities are measured using enacted tax rates for the years in which assets and liabilities are expected to be recovered
or settled. A projection of taxable income and estimates of the ultimate recovery or settlement of temporary differences are made
for these years. The projection of future taxable income is based on management’s best estimate and may vary from actual.



At December 31, 2012
the company provided a full valuation allowance against its deferred tax assets. As a result, no net deferred tax asset was recorded.
A one-percentage-point change in our reported effective income tax rate would have minimal effect on our income tax expense or
recovery.



In addition, we record
provisions for federal, provincial and foreign taxes based on the respective tax laws of the jurisdictions in which we operate
and on our judgment as to the appropriate allocation of income and deductions to these jurisdictions. Canadian, U.S. and international
tax laws are subject to interpretation, and our judgment may be challenged by taxation authorities. In such circumstances, the
final resolution can result in settlements that differ from our estimated amounts.



CHANGES
IN ACCOUNTING POLICIES



| |  | There were no recent amendments by the
                                                        FASB to the Accounting Standards Codification that materially impacted
                                                        the company’s consolidated financial statements or disclosures in
                                                        2012.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We adopted FASB ASC
852, Reorganizations for the duration of the CCAA proceedings. This standard requires that financial statements distinguish
transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Pre-petition
obligations potentially impaired by the CCAA proceedings were classified as Liabilities subject to compromise.



We applied fresh start accounting in accordance
with FASB ASC 852 as of the convenience date of September 30, 2012 whereby an enterprise value was established for the company,
identified assets and liabilities were adjusted to fair value, goodwill was recognized at the amount that the enterprise value
exceeded the fair value of identified assets and liabilities, and historical balances for the company’s equity accounts
were eliminated. Consolidated financial statements prepared prior to the application of fresh start accounting are not comparable
to our consolidated financial statements for the year ended December 31, 2012.



IMPACT OF ACCOUNTING PRONOUNCEMENTS
AFFECTING FUTURE PERIODS



There were no new
pronouncements issued by the FASB that may materially impact our consolidated financial statements for future periods.



B.		Liquidity
and Capital Resources



Selected annual financial information



|(In millions of dollars, except where otherwise stated)                                 |  | 2012 2 |       |   | 2011 |   |       | 2010 | 
|--------------------------------------------------------------------------------------- |  | ------ | ----- | - | ---- | - | ----- | ---- | 
|Cash flows provided (used) by
    operations before changes in non-cash working capital |  | $      | (32.0 | ) |      | $ | (51.5 | )    | 
|Changes in non-cash working capital                                                     |  |        | 40.1  |   |      |   | (20.0 | )    | 
|Cash flows provided (used) by                                                           |  |        |       |   |      |   |       |      | 
|Operations                                                                              |  |        | 8.1   |   |      |   | (71.5 | )    | 
|Investing activities                                                                    |  |        | (9.6  | ) |      |   | (17.7 | )    | 
|Financing activities                                                                    |  |        | (5.1  | ) |      |   | 18.9  |      | 
|Capital spending                                                                        |  |        | 22.6  |   |      |   | 19.7  |      | 
|Depreciation and amortization                                                           |  |        | 36.3  |   |      |   | 112.4 |      | 
|Impairment and other closure costs                                                      |  |        | 11.5  |   |      |   | 823.6 |      | 
|Capital spending as % of depreciation and amortization                                  |  |        | 62    | % |      |   | 18    | %    | 
|Net debt to net capitalization at period-end1                                           |  |        | 78    | % |      |   | 366   | %    | 



| | 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).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2 | We
                                                                                 completed our restructuring under the CCAA proceedings
                                                                                 on September 13, 2012 and adopted fresh start
                                                                                 accounting in accordance with FASB ASC 852 on
                                                                                 September 30, 2012. Cash flow information for
                                                                                 2012 therefore includes results for nine months
                                                                                 preceding the adoption of fresh start accounting
                                                                                 and three months subsequent to adoption.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 55 -







Our principal cash requirements are for
ongoing operating costs, working capital fluctuations, and capital expenditures as well as interest and principal payments on
debt. We anticipate that future operating cash requirements can be funded through internally generated cash flows from operations
and advances under our ABL Facility. Additional details are provided in “Capital resources” and in “Debt”
below and in section 3D, Risk Factors, in the discussion on “Subsequent to our restructuring under the CCAA proceedings,
we may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy
our obligations under our indebtedness, which may not be successful”.



Operating activities



Cash flows from
operating activities in 2012 increased $79.6 million compared to 2011 due to a decrease in working capital requirements, interest
paid, and net operating cash used by discontinued operations, partially offset by a decrease in adjusted EBITDA and reorganization
costs paid under the CCAA proceedings. The $40.1 million change in non-cash working capital in the current year consisted of a
decrease in accounts receivable of $18.2 million, a decrease in inventories of $20.3 million, and a decrease in prepaids of $4.0
million, partially offset by a reduction in accounts payable and accrued liabilities of $2.4 million.



Investing activities



Cash used by investing activities
decreased by $8.1 million compared to the previous year. The decrease was largely due to increased proceeds from the sale of property,
plant and equipment of $11.1 million, partially offset by increased fixed asset additions of $2.9 million. Asset sales in 2012
included Poplars land, assets of PRD, and scrap metal and equipment components of the Elk Falls site. Fixed asset additions in
the current year related primarily to maintenance of the business.



Capital spending in 2012 was significantly
higher than 2011 levels. especially as it related to maintenance of the business. The components are provided below:



|(In millions of dollars) |  | 2012 |      |  | 2011 |  
|------------------------ |  | ---- | ---- |  | ---- | -
|Safety                   |  | $    | 1.2  |  |      | $
|Environment              |  |      | 3.1  |  |      |  
|Maintenance of business  |  |      | 16.1 |  |      |  
|Profit adding            |  |      | 2.2  |  |      |  
|Total 1                  |  | $    | 22.6 |  |      | $



| | 1 | Included
                                                                                 $5.8 million related to PREI (2011 - $0.9 million)
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



Financing activities



Cash used by financing
activities in 2012 increased by $24.0 million compared to 2011. This was primarily due to a net repayment on the new ABL Facility
of $24 million compared to a net draw on the former ABL Facility of $48.0 million in 2011, and an increase in financing costs
paid of $10.7 million compared to the prior year, partially offset by the issuance of Exit Notes for net proceeds of $33.1 million,
and the redemption of US$26.0 million 8.625% notes in the prior year.



- 56 -







Capital resources



Our capital resources include cash
on hand and availability on our ABL Facility, with total liquidity at period-end summarized in the following table.



|                            |  | ABL Facility |       |   | DIP Facility |   |       | ABL Facility | 
|--------------------------- |  | ------------ | ----- | - | ------------ | - | ----- | ------------ | 
|                            |  | 2012         |       |   | 2012         |   |       | 2011         | 
|(In millions of dollars)    |  | Q4           |       |   | Q3           |   |       | Q2           | 
|Borrowing base1             |  | $            | 125.2 |   |              | $ | 164.0 |              | 
|Letters of credit           |  |              | (22.3 | ) |              |   | (17.8 | )            | 
|Amount drawn, net           |  |              | (24.0 | ) |              |   | (64.0 | )            | 
|Minimum excess availability |  |              | –     |   |              |   | –     |              | 
|Available to be drawn 2     |  |              | 78.9  |   |              |   | 82.2  |              | 
|Cash on hand 4              |  |              | 18.5  |   |              |   | 12.6  |              | 
|Restricted cash 5           |  |              | 0.5   |   |              |   | 2.0   |              | 
|Total liquidity             |  | $            | 97.9  |   |              | $ | 96.8  |              | 



| | 1 | The
                                                                                 borrowing base at December 31, 2012 includes
                                                                                 a reserve of $1.1 million for pension, $2.0 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 for purchasing card reserve.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2 | Our
                                                                                 ABL Facility is subject to certain financial
                                                                                 covenants as disclosed in our annual consolidated
                                                                                 financial statements for the year ended December
                                                                                 31, 2012 in note 18, Long-term debt.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3 | The
                                                                                 DIP Facility was subject to an excess availability
                                                                                 condition as disclosed in our annual consolidated
                                                                                 financial statements for the year ended December
                                                                                 31, 2012 in note 18, Long-term debt.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4 | Cash
                                                                                 on hand consists of $16.6 million per our consolidated
                                                                                 balance sheet and $1.9 million included in assets
                                                                                 held for sale.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5 | Restricted
                                                                                 cash consists of $0.5 million of cash held in
                                                                                 trust.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our total liquidity increased by $1.2 million
in 2012 from 2011 due to a reduction in the amount drawn on our ABL Facility and a reduction in letters of credit, partially offset
by a reduced borrowing base on the ABL Facility and reduced cash on hand. The borrowing base decreased primarily due to a reduction
in accounts receivable as of December 31, 2012. The reduction in cash on hand was due primarily to the payment of restructuring
costs of $5.3 million, reorganization costs of $37.5 million incurred during the CCAA proceedings, and the payment of debt issuance
cost of $9.3 million in the third quarter, partially offset by a net reduction in non-cash working capital of $40.1 million. The
reduction in working capital was due primary to a reduction in inventory resulting from the closure of the Snowflake mill and curtailment
at the Powell River mill in December, and a reduction in accounts receivable due to the Snowflake closure, improved collections
and reduced sales in the second half of December.



For information related to the computation
of our borrowing base and availability on the ABL Facility, refer to our annual consolidated financial statements for the year
ended December 31, 2012 note 18, Long-term debt.



At March 15, 2013 we had 14,527,571 common
shares issued and outstanding. All of the company’s former common shares and stock options were cancelled on September 13,
2012. The company’s new common shares have no par value and an unlimited number of shares are authorized for future issuance.



- 57 -







Debt



The
following table illustrates the changes in our long-term debt for the year ended December 31, 2012:



|(In
    millions of dollars)                                                                                           |  | January
    1, 2012 |       |  | Net
    increase (decrease) |   |        | Foreign
    exchange |  |   | December
    31, 2012 |  
|---------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ----- |  | --------------------------- | - | ------ | -------------------- |  | - | --------------------- | -
|Recourse                                                                                                               |  |                     |       |  |                             |   |        |                      |  |   |                       |  
|Floating
    rate senior secured notes, due September 2016 (US$35.0 million)                                           |  | $                   | ─     |  |                             | $ | 33.1   |                      |  | $ | 0.8                   |  
|Senior
    secured notes, 11.0% due October 2017 (US$250.0 million)                                                    |  |                     | ─     |  |                             |   | 243.8  |                      |  |   | 4.9                   |  
|Senior
    notes, 7.375% due March 2014 (US$250.0 million; December 31, 2010– US$250.0 million)                        |  |                     | 256.4 |  |                             |   | (246.1 | )                    |  |   | (10.3                 | )
|Senior
    secured notes, 11.0% due December 2016 (US$280.4 million)                                                   |  |                     | 285.2 |  |                             |   | (273.5 | )                    |  |   | (11.7                 | )
|Modification
    – difference in carrying value of 8.625% and 11.0% senior secured notes (US$38.3 million) on exchange |  |                     | 31.2  |  |                             |   | (31.2  | )                    |  |   | ─                     |  
|Class
    B senior secured notes, 11.0% due December 2016 (US$110.0 million)                                           |  |                     | 98.5  |  |                             |   | (94.0  | )                    |  |   | (4.5                  | )
|Revolving
    asset-based loan facility of up to $175.0 million due July 2017                                          |  |                     | ─     |  |                             |   | 24.0   |                      |  |   | ─                     |  
|Revolving
    asset-based loan facility of up to $175.0 million due May 2016                                           |  |                     | 48.0  |  |                             |   | (48.0  | )                    |  |   | ─                     |  
|Capital
    lease obligations                                                                                          |  |                     | 9.2   |  |                             |   | (1.0   | )                    |  |   | ─                     |  
|Non-recourse
    (PREI)                                                                                                |  |                     |       |  |                             |   |        |                      |  |   |                       |  
|First
    mortgage  bonds, 6.447% due July 2016                                                                        |  |                     | 95.0  |  |                             |   | ─      |                      |  |   | ─                     |  
|Subordinated
    promissory notes                                                                                      |  |                     | 18.8  |  |                             |   | ─      |                      |  |   | ─                     |  
|Total
    debt                                                                                                         |  | $                   | 842.3 |  |                             | $ | (392.9 | )                    |  | $ | (20.8                 | )
|Less:
    current portion                                                                                              |  |                     | 466.8 |  |                             |   | (460.2 | )                    |  |   | ─                     |  
|Total
    long-term debt                                                                                               |  | $                   | 375.5 |  |                             | $ | 67.3   |                      |  | $ | (20.8                 | )



On September 13, 2012 as part of the implementation
of the Plan and emergence from creditor protection, we issued US$250.0 million of new senior secured notes (2017 Notes). The 2017
Notes, issued in a debt exchange transaction with holders of our former 2016 Notes, have a maturity date of October 30, 2017, and
bear interest, payable quarterly, at a rate of 11% per annum in cash or, at the option of the company, 13% per annum payable 7.5%
cash and 5.5% payment-in-kind (PIK).



On September 13, 2012 we entered into a
new $175.0 million ABL Facility, which effectively replaced the DIP Credit Facility on exit from protection under the CCAA. The
collateral for the ABL Facility consists primarily of all present and future working capital assets of the company with a borrowing
base calculated on the balance of eligible accounts receivable and inventory, less certain reserves. The ABL Facility matures on
the earlier of July 31, 2017, and 90 days prior to maturity of any significant debt.



We also completed a US$35 million Exit
Facility on September 13, 2012 and issued US$35 million of Exit Notes under that facility. The Exit Facility was provided by certain
holders of the 2016 Notes and is secured by a charge on certain assets of the company and its subsidiaries ranking senior to the
lien securing the US$250 million of 2017 Notes to be issued under the Plan. The Exit Facility matures on September 13, 2016, and
can be prepaid in whole or in part at any time for a premium initially of 3% and declining annually thereafter.



We secured a DIP Credit Facility during
the creditor protection proceedings which replaced the former ABL Facility. The DIP Credit Facility had an 18-month maturity and
a maximum draw of approximately $175 million.



See note 18, Long-term debt in our annual
consolidated financial statements for the year ended December 31, 2012 for additional information on changes to our debt.

From time to time, we may purchase our
debt securities in the open market.



Financial
Instruments



Our financial instruments
consist primarily of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, long-term debt,
and derivatives. 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. In accordance with our financial risk management program, we manage our
exposure to risks through the use of financial instruments with counterparties that are of strong credit quality, normally being
major financial institutions. We do not enter into financial instruments for speculative purposes.



- 58 -







At December 31, 2012 we did not have any
foreign currency or commodity contracts outstanding.



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, 2012 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.



The following table reconciles the average
spot exchange rate to our effective exchange rate for sales and operating expenses including the impact from cash flow hedges that
were in place as at March 31, 2010 and were designated as hedging instruments at that time:



US$/CDN$ FOREIGN EXCHANGE



|                                                                                                                                                          |  | 2012 |       |   | 2011 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | -
|                                                                                                                                                          |  | YTD  |       |   | Q4   |  
|Average Bank of Canada noon spot rate                                                                                                                     |  |      | 1.001 |   |      |  
|(Favourable)/unfavourable impact of derivatives designated as effective hedges for accounting purposes1                                                   |  |      | –     |   |      |  
|Average effective rate included in adjusted EBITDA                                                                                                        |  |      | 1.001 |   |      |  
|(Favourable)/unfavourable impact of derivatives, other than those designated as effective hedges for accounting purposes, included in other expenses2     |  |      | 0.001 |   |      |  
|Foreign exchange (gain)/loss, on working capital balances, included in other expenses3                                                                    |  |      | 0.010 |   |      |  
|Average effective rate in net earnings/(loss) before income taxes4                                                                                        |  |      | 1.012 |   |      |  
|                                                                                                                                                          |  |      |       |   |      |  
|(In
    millions of dollars)                                                                                                                              |  |      |       |   |      |  
|1 	Favourable/(unfavourable)
    impact of derivatives designated as effective hedges for accounting purposes included in adjusted EBITDA                 |  | $    | –     |   |      | $
|2 	Favourable/(unfavourable)
    impact of derivatives other than those designated as effective hedges for accounting purposes included in other expenses |  |      | (1.2  | ) |      |  
|3	 Foreign
    exchange gain/(loss) on working capital balances included in other expenses                                                                |  |      | (7.5  | ) |      |  
|4	 Excludes
    foreign exchange gain/(loss) on long term debt and $US interest expense                                                                   |  |      |       |   |      |  



| | C. | Research and Development, Patents and Licences, etc.
| | -- | ----------------------------------------------------



Research required to meet our specific
needs is conducted at private laboratories under the direction of our technical experts and at the mill laboratories. Business
unit technical staff provide scientific and technological expertise in support of operations and product development efforts. Our
internal product development team carried out the bulk of our product development efforts in the last three years. We did not make
significant research and development expenditures to outside contractors in the last three years due to our cash conservation focus.



| | D. | Trend Information
| | -- | -----------------



See information provided in Item 5A.



| | E. | Off Balance Sheet Arrangements
| | -- | ------------------------------



Guarantees



Loans



We entered into a building lease agreement
in 2001 under which we would continue to make the prescribed lease payments directly to the financial institution holding the mortgage
on the building in the event the lessor was no longer able to meet its contractual obligations. At December 31, 2012 the principal
amount of the mortgage was $3.0 million. The agreement does not increase our liability beyond the obligations under the building
lease.



- 59 -







Paper recycling
plant acquisition



In connection with
our acquisition of the paper recycling plant in Coquitlam, B.C. in December 2003, we provided indemnities with respect to environmental
matters (other than pre-existing environmental conditions) under our lease of the land and buildings for all costs, claims and
damages if we release any hazardous substances on the property or breach any of the environmental covenants under the lease or
any environmental laws and an indemnity with respect to shares that were issued to the vendors as part of the purchase price. We
do not expect any claims under these indemnities given that we disclaimed our liabilities under the lease under the CCAA process
and that all of our outstanding shares as at September 13, 2012 were cancelled under the CCAA process.



| | F. | Tabular Disclosure of Contractual Obligations
| | -- | ---------------------------------------------



The following table presents the aggregate
amount of future cash outflows for contractual obligations as of December 31, 2012:



|(In
    millions of dollars)                        |  | 2013 |      |  | 2014 |   |      | 2015 |  |   | 2016 |  |  | 2017 |       |  | Thereafter |  
|--------------------------------------------------- |  | ---- | ---- |  | ---- | - | ---- | ---- |  | - | ---- |  |  | ---- | ----- |  | ---------- | -
|Total
    debt, excluding capital lease obligations |  | $    | ─    |  |      | $ | ─    |      |  | $ | ─    |  |  | $    | 129.8 |  |            | $
|Capital
    lease obligations                       |  |      | 6.6  |  |      |   | 1.6  |      |  |   | ─    |  |  |      | ─     |  |            |  
|Operating leases                                    |  |      | 6.0  |  |      |   | 4.3  |      |  |   | 1.7  |  |  |      | 1.7   |  |            |  
|Interest
    payments on long-term debt 1           |  |      | 38.3 |  |      |   | 38.2 |      |  |   | 38.2 |  |  |      | 37.6  |  |            |  
|Other
    commitments                               |  |      | ─    |  |      |   | ─    |      |  |   | ─    |  |  |      | ─     |  |            |  
|Total                                               |  | $    | 50.9 |  |      | $ | 44.1 |      |  | $ | 39.9 |  |  | $    | 169.1 |  |            | $



1	
Based on 11% cash interest on the 2017 Notes and no drawings on the ABL facility



| | ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
| | ------- | ------------------------------------------



| | A. | Directors and Senior Management
| | -- | -------------------------------



Directors



Our directors are as indicated in the following
table. Under the terms of an order of the Supreme Court of British Columbia made on August 28, 2012 in connection with the company’s
proceedings under the Companies’ Creditors Arrangement Act (“CCAA”), the term of the directors of the Corporation
appointed pursuant to the company’s plan of arrangement under the CCAA will continue until the annual meeting of Shareholders
that occurs after September, 12, 2013 (the first anniversary of the date the plan of arrangement became effective). Accordingly
each director indicated below will serve as a director of the Corporation until the annual meeting of the Shareholders of the Corporation
in 2014 or until his successor is elected or appointed, or unless his office is earlier vacated under any of the relevant provisions
of our by-laws or the Canada Business Corporation Act.



|Name and Municipality ofResidence                         |  | Age |  | Principal Occupation                                                                                       |  | Director Since    
|--------------------------------------------------------- |  | --- |  | ---------------------------------------------------------------------------------------------------------- |  | ------------------
|John Brecker
        Whiteplains,
        New York        |  | 49  |  | Director of Bowery Management; previously, Co-founder and Partner of Longacre Fund Management, LLC.        |  | September 13, 2012
|Giorgio
        Caputo
        New York,
        New York |  | 39  |  | Portfolio Manager at First Eagle; previously an Investment Analyst with Jana Partners                      |  | September 13, 2012
|John Charles
        Toronto,
        Ontario             |  | 64  |  | Managing Director of Leblanc and Royle, Vice- chair and Lead Director of Prism Medical Ltd.                |  | September 13, 2012
|Kevin J. ClarkeVancouver, BC                              |  | 61  |  | President and Chief Executive Officer, Catalyst Paper Corporation. Previously Group President, World Color |  | June 21, 2010     

- 60 -







|Name and Municipality ofResidence                   |  | Age |  | Principal Occupation                                                                                                                        |  | Director Since    
|--------------------------------------------------- |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------
|Todd Dillabough
        Calgary,
        Alberta    |  | 51  |  | Chief Executive Officer and Chief Operating Officer of Trident Resources Corporation. Previously with Pioneer Natural Resources Canada Inc. |  | September 13, 2012
|Walter Jones
        Summit,
        New Jersey     |  | 59  |  | Managing Director of CoMetrics Partners LLC; Previously a Partner at J.H. Cohn LLP.                                                         |  | September 13, 2012
|Leslie Lederer(1)
        Chicago,
        Illinois |  | 64  |  | Attorney in Private Practice; Previously a consultant                                                                                       |  | September 13, 2012



| | (1) | Chair of the Board.
| | --- | -------------------



Messrs. Jones, Brecker and Charles are members
of the Corporation’s Audit Committee.



Messrs. Clarke, Dillabough and Ledererare members of the Corporation’s Environmental, Health and Safety Committee.



Messrs. Caputo, Dillabough and Lederer
are members of the Corporation’s Governance and Human Resources and Compensation Committee.



Officers



Officers are appointed to serve at the
pleasure of the Board of directors.



|Name                                                            |  | Age |  | Title                                                                                                                                                                                                                                                  
|--------------------------------------------------------------- |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Brian Baarda
        Surrey, BC                                 |  | 46  |  | Vice President, Finance and Chief Financial Officer.  Previously Vice President, Operations –Newsprint, ONP Procurement, Recycling.                                                                                                                    
|David L. Adderley
        Vancouver, BC                         |  | 58  |  | Vice President and General Counsel.                                                                                                                                                                                                                    
|Lyn Brown
        Vancouver, BC                                 |  | 56  |  | Vice President, Marketing and Corporate Responsibility.  Previously, Vice President, Corporate Affairs and Social Responsibility; Vice President, Customer Relations and Vice President, Communications and Government Affairs, Aquila Networks Canada.
|Stephen Boniferro
        Delta, BC                             |  | 57  |  | Senior Vice President, Human Resources.  Previously, Vice President, Algoma Steel.                                                                                                                                                                     
|L. Thomas
        Crowley
        Bainbridge
        Island, WA |  | 52  |  | Senior Vice President, Sales and Marketing.  Previously Vice President and General Manager, Specialty Papers.                                                                                                                                          
|Kevin J.
        Clarke
        Vancouver,
        BC           |  | 61  |  | President and Chief Executive Officer.  Previously Group President, World Color.                                                                                                                                                                       
|Robert H. Lindstrom
        Burnaby, BC                         |  | 59  |  | Vice President, Supply Chain, Energy and IT.  Previously, Vice President Supply Chain and IT, Vice President, Strategy, Vice President, Supply and Utilities, Pulp Operations.                                                                         
|Alistair MacCallum
        West Vancouver, BC                   |  | 45  |  | Vice President, Treasurer and Controller.  Previously Corporate Controller.                                                                                                                                                                            
|Robert Stepusin
        Vancouver, BC                           |  | 59  |  | Senior Vice President, Business Improvement. Previously Executive Vice President, Finance and Administration, World Color.                                                                                                                             



Other than 2,894,937 of our common shares
that are held by First Eagle Investment Management, LLC, for which Mr. Caputo is a Portfolio Manager, our directors and officers
as a group beneficially own, directly or indirectly, or exercise control or direction over less than 1% of our issued and outstanding
common shares.



- 61 -







Mr. Clarke was the President, Chief Executive
Officer and a director of the company and each of the officers of the company named above were officers of the company when it
filed for protection under the Companies’ Creditors Arrangement Act and subsequently implemented a plan of arrangement under
the Companies’ Creditors Arrangement Act.



Mr. Dillabough was
the Chief Executive Officer of Trident Exploration Corp. when it filed a voluntary petition for relief under the CCAA and under
Chapter 11 of the United States Bankruptcy Code in September 2009. Mr. Dillabough was a director of Aveos Fleet Performance Inc.
when the company filed a voluntary petition for relief under the CCAA on March 19, 2012. Mr. Dillabough resigned from Aveos Fleet
Performance Inc. immediately following the CCAA filing.



| | B. | Compensation
| | -- | ------------



Compensation of Directors



The Governance, Human Resources and Compensation
Committee of the Board of directors is responsible for annually reviewing directors’ compensation and making recommendations
to the Board. Directors may receive their compensation in the form of cash or deferred share units, or a combination of both.



Under the directors’ compensation
policy, directors are paid an annual cash retainer, meeting fees and equity compensation through stock options. The company does
not currently have a stock option plan in effect and stock options were not issued in 2012. Any issuance of stock options going
forward would be subject to approval by the shareholders and the Toronto Stock Exchange (“TSX”).



The following table shows the director
compensation policy for the year ended December 31, 2012:



|   |  | Item                                                                                                                                                                                                                                                                         |  | Amount                                                          
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------
|1. |  | Chair of the Board                                                                                                                                                                                                                                                           |  |                                                                 
|   |  | ·       Cash retainer                                                                                                                                                                                                                                                        |  | $160,000/annum                                                  
|   |  | ·       Annual stock option grant (options are granted with an exercise price set 25% above the Common Share weighted average price over the five days prior to the date of grant and vest one third on the first, second and third anniversary of the date of grant)        |  | 36,000 options(1)                                               
|2. |  | Member of the Board                                                                                                                                                                                                                                                          |  |                                                                 
|   |  | ·       Cash retainer                                                                                                                                                                                                                                                        |  | $60,000/annum                                                   
|   |  | ·       Annual stock option grant (options are granted with an exercise price set 25% above the Common Share weighted average market price over the five days prior to the date of grant and vest one third on the first, second and third anniversary of the date of grant) |  | 24,000 options(2)                                               
|   |  | Member (attending)                                                                                                                                                                                                                                                           |  | $2,000/meeting                                                  
|   |  | Member (by telephone)                                                                                                                                                                                                                                                        |  | $1,000/meeting                                                  
|3. |  | Audit Committee of the Board                                                                                                                                                                                                                                                 |  |                                                                 
|   |  | Chair – Annual fee                                                                                                                                                                                                                                                           |  | $20,000/annum                                                   
|   |  | Member – Annual fee                                                                                                                                                                                                                                                          |  | $5,000/annum                                                    
|   |  | Member (attending)                                                                                                                                                                                                                                                           |  | $2,000/meeting                                                  
|   |  | Member (by telephone)                                                                                                                                                                                                                                                        |  | $1,000/meeting                                                  
|4. |  | Committees of the Board (other than Audit Committee)                                                                                                                                                                                                                         |  |                                                                 
|   |  | Chair – Annual fee                                                                                                                                                                                                                                                           |  | $10,000/annum                                                   
|   |  | Member – Annual fee                                                                                                                                                                                                                                                          |  | $5,000/annum                                                    
|   |  | Member (attending)                                                                                                                                                                                                                                                           |  | $1,500/meeting                                                  
|   |  | Member (by telephone)                                                                                                                                                                                                                                                        |  | $750/meeting                                                    
|5. |  | Special Committees of the Board                                                                                                                                                                                                                                              |  |                                                                 
|   |  | Chair – Annual fee                                                                                                                                                                                                                                                           |  | $10,000/annum                                                   
|   |  | Member – Annual fee                                                                                                                                                                                                                                                          |  | $5,000/annum                                                    
|   |  | Member (attending)                                                                                                                                                                                                                                                           |  | $1,500/meeting                                                  
|   |  | Member (by telephone)                                                                                                                                                                                                                                                        |  | $750/meeting                                                    
|6. |  | Travel                                                                                                                                                                                                                                                                       |  | $1,000 per round trip for non-business class travel over 3 hours



- 62 -







| | (1) | On March 9, 2012 the directors elected to reduce their cash retainer and meeting fees by 10% during
the Corporation’s proceedings under the CCAA.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Stock options were not issued in fiscal 2012. The Corporation’s
stock option plan ceased to be in effect after the Corporation filed under the CCAA and its shares were delisted by the TSX. Issuance
of any stock options going forward will be subject to approval of a new stock option plan by the Corporation’s shareholders
and the TSX.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Directors may choose to convert all or
part of their cash compensation into DSUs. The number of DSUs granted to a director is equal to the elected amount of the compensation
divided by the weighted average price of the Common Shares on the TSX over the ten days prior to the calculation date. The value
of the DSUs is payable by the company only after the director’s departure from the Board and is equal to the number of DSUs
held by the director multiplied by the weighted average price of the Common Shares on the TSX over the ten days prior to the
relevant redemption date. Directors may elect to redeem their DSUs at any time prior to December 15th of the year following
the year they ceased to be a director. All amounts are paid in cash, subject to statutory withholdings. A director may change his
or her DSU election prior to the commencement of each calendar year.



All DSUs that were outstanding on September
13, 2012 were cancelled for no consideration pursuant to the Corporation’s Plan of Arrangement under the CCAA. As at December
31, 2012 there were no DSUs outstanding.



The following table shows the value and
components of the cash compensation elements paid to the company’s directors in 2012:



|Director               |  | Annual Board Retainer ($) |        |  | Annual
Committee
Retainer ($) |  |       | Annual Committee Chair Retainer ($) |  |  | Special Committee Retainer ($) |  |  | Special
Committee Chair Retainer ($) |   |  | Meeting Fees ($) |  |        | Total Fees (Cash) ($) | 
|---------------------- |  | ------------------------- | ------ |  | ----------------------------- |  | ----- | ----------------------------------- |  |  | ------------------------------ |  |  | ------------------------------------ | - |  | ---------------- |  | ------ | --------------------- | 
|Thomas Chambers(4)     |  |                           | 39,095 |  |                               |  | 3,258 |                                     |  |  | 13,032                         |  |  |                                      | — |  |                  |  | —      |                       | 
|William Dickson(4)     |  |                           | 39,095 |  |                               |  | —     |                                     |  |  | 6,516                          |  |  |                                      | — |  |                  |  | —      |                       | 
|Benjamin Duster(2)     |  |                           | 26,227 |  |                               |  | —     |                                     |  |  | —                              |  |  |                                      | — |  |                  |  | —      |                       | 
|Doug Hayhurst(4)       |  |                           | 39,095 |  |                               |  | 6,516 |                                     |  |  | —                              |  |  |                                      | — |  |                  |  | —      |                       | 
|Denis Jean(1)          |  |                           | 5,345  |  |                               |  | —     |                                     |  |  | 891                            |  |  |                                      | — |  |                  |  | —      |                       | 
|Jeffrey Marshall(3)(4) |  |                           | 91,035 |  |                               |  | 1,667 |                                     |  |  | 1,667                          |  |  |                                      | — |  |                  |  | —      |                       | 
|Alan Miller(4)         |  |                           | 39,095 |  |                               |  | 6,516 |                                     |  |  | —                              |  |  |                                      | — |  |                  |  | —      |                       | 
|Geoff Plant(4)         |  |                           | 39,095 |  |                               |  | 1,667 |                                     |  |  | 4,849                          |  |  |                                      | — |  |                  |  | —      |                       | 
|Dallas Ross(4)         |  |                           | 39,095 |  |                               |  | 6,516 |                                     |  |  | —                              |  |  |                                      | — |  |                  |  | 77,667 | (7)                   | 
|John Brecker(5)        |  |                           | 20,000 |  |                               |  | 1,667 |                                     |  |  | —                              |  |  |                                      | — |  |                  |  | —      |                       | 
|Giorgio Caputo(5)(8)   |  |                           | —      |  |                               |  | —     |                                     |  |  | —                              |  |  |                                      | — |  |                  |  | —      |                       | 
|John Charles(5)        |  |                           | 20,000 |  |                               |  | 1,667 |                                     |  |  | —                              |  |  |                                      | — |  |                  |  | —      |                       | 
|Todd Dillabough(5)     |  |                           | 20,000 |  |                               |  | 1,667 |                                     |  |  | 2,500                          |  |  |                                      | — |  |                  |  | —      |                       | 
|Walter Jones(5)        |  |                           | 20,000 |  |                               |  | —     |                                     |  |  | 6,667                          |  |  |                                      | — |  |                  |  | —      |                       | 
|Les Lederer(5)(6)      |  |                           | 53,333 |  |                               |  | 417   |                                     |  |  | —                              |  |  |                                      | — |  |                  |  | —      |                       | 



| | (1) | Mr. Jean resigned as a director of the company as of February 2, 2012.
| | --- | ----------------------------------------------------------------------

| | (2) | Mr. Duster resigned as Board Chairman as of February 17, 2012 and as a director of the company
as of March 15, 2012.
| | --- | --------------------------------------------------------------------------------------------------------------------

| | (3) | Mr. Marshall became Board Chairman as of February 17, 2012.
| | --- | -----------------------------------------------------------



- 63 -







| | (4) | Messrs. Chambers, Dickson, Hayhurst, Marshall, Miller, Plant and Ross ceased to be directors of
the company as of September 13, 2012 pursuant to the company’s Plan of Arrangement under the CCAA.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Messrs. Brecker, Caputo, Charles, Dillabough, Jones and Lederer became directors of the Corporation
as of September 13, 2012 pursuant to the company’s’s Plan of Arrangement under the CCAA.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Mr. Lederer became Board Chairman as of September 13, 2012.
| | --- | -----------------------------------------------------------

| | (7) | Includes $10,000 per month additional retainer paid to Mr. Ross as Chairman of the Strategic Alternatives
Committee.
| | --- | --------------------------------------------------------------------------------------------------------------------



| | (8) | Mr. Caputo, an employee of First Eagle which exercise voting control over approximately 19.93%
of the Common Shares, has wavied all director compensation (other than reimbursement of expenses) for the time being.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In 2012 Towers Watson was retained to provide
advice to the Governance, Human Resources and Compensation Committee on the market competitiveness of the Corporation’s director
compensation. Towers Watson was paid an aggregate amount of $25,000 in respect of such services in early 2013.



The following table shows all compensation
provided to the directors for the company’s most recently completed financial year other than Mr. Clarke who, as Chief Executive
Officer of the company, does not receive compensation in his capacity as a director.



|Name             |  | Fees earned ($) |         |  | Share based awards ($) |  |   | Optionbasedawards($)(1) |  |  | Non-equity incentive plan compensation ($) |  |  | Pension value ($) |   |  | All other compensation ($) |  |   | Total ($) | 
|---------------- |  | --------------- | ------- |  | ---------------------- |  | - | ----------------------- |  |  | ------------------------------------------ |  |  | ----------------- | - |  | -------------------------- |  | - | --------- | 
|Thomas Chambers  |  |                 | 95,785  |  |                        |  | — |                         |  |  | —                                          |  |  |                   | — |  |                            |  | — |           | 
|William Dickson  |  |                 | 84,736  |  |                        |  | — |                         |  |  | —                                          |  |  |                   | — |  |                            |  | — |           | 
|Benjamin Duster  |  |                 | 45,977  |  |                        |  | — |                         |  |  | —                                          |  |  |                   | — |  |                            |  | — |           | 
|Doug Hayhurst    |  |                 | 85,761  |  |                        |  | — |                         |  |  | —                                          |  |  |                   | — |  |                            |  | — |           | 
|Denis Jean       |  |                 | 18,236  |  |                        |  | — |                         |  |  | —                                          |  |  |                   | — |  |                            |  | — |           | 
|Jeffrey Marshall |  |                 | 124,344 |  |                        |  | — |                         |  |  | —                                          |  |  |                   | — |  |                            |  | — |           | 
|Alan Miller      |  |                 | 83,686  |  |                        |  | — |                         |  |  | —                                          |  |  |                   | — |  |                            |  | — |           | 
|Geoff Plant      |  |                 | 80,411  |  |                        |  | — |                         |  |  | —                                          |  |  |                   | — |  |                            |  | — |           | 
|Dallas Ross      |  |                 | 174,053 |  |                        |  | — |                         |  |  | —                                          |  |  |                   | — |  |                            |  | — |           | 
|John Brecker     |  |                 | 35,667  |  |                        |  | — |                         |  |  | —                                          |  |  |                   | — |  |                            |  | — |           | 
|Giorgio Caputo   |  |                 | —       |  |                        |  | — |                         |  |  | —                                          |  |  |                   | — |  |                            |  | — |           | 
|John Charles     |  |                 | 32,667  |  |                        |  | — |                         |  |  | —                                          |  |  |                   | — |  |                            |  | — |           | 
|Todd Dillabough  |  |                 | 37,167  |  |                        |  | — |                         |  |  | —                                          |  |  |                   | — |  |                            |  | — |           | 
|Walter Jones     |  |                 | 39,667  |  |                        |  | — |                         |  |  | —                                          |  |  |                   | — |  |                            |  | — |           | 
|Les Lederer      |  |                 | 66,750  |  |                        |  | — |                         |  |  | —                                          |  |  |                   | — |  |                            |  | — |           | 



| | (1) | No options or other share based awards were granted to directors in 2012.
| | --- | -------------------------------------------------------------------------



Outstanding Share based and Option based
Awards

As at December 31, 2012, there were no
outstanding option-based or share-based awards held by directors. All option-based and share-based awards that were outstanding
at September 13, 2012 were cancelled on that date for no consideration pursuant to the Corporation’s Plan of Arrangement
under the CCAA. As at December 31, 2012 there were no securities authorized for issuance under any stock option plan or restricted
share unit plan.



There was no value vested in respect of
option-based or share-based awards during 2012 given the Corporation was in a restructuring process under the CCAA from January
30, 2012 to September 13, 2012. All option-based and share-based awards that were outstanding on September 13, 2012 were cancelled
for no consideration on that date pursuant to the Corporation’s Plan of Arrangement under the CCAA. None of the vested options
held by directors prior to their cancellation were in-the-money during 2012.



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Executive Compensation Strategy



The company’s executive compensation
strategy is based on a compensation philosophy which includes three principal components:

| | (i) | base salary and benefits aimed at compensating the executive for specific and general accountabilities
as well as the skills, knowledge and experience brought to the job;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | short term incentives payable in cash intended to focus initiative on annual objectives and reward
behaviour that achieves corporate performance targets; and
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | mid and long term incentives granted partly through the issuance of equity based compensation,
such as stock options, restricted share units and deferred share units, to encourage the enhancement of shareholder value and partly
payable in cash.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The total compensation strategy is intended
to accomplish the following objectives:

| | • | to attract executive officers who have demonstrated superior leadership and management skills;
| | - | ----------------------------------------------------------------------------------------------

| | • | to retain the services of valued members of the executive team throughout the normal business cycles
typical of resource based companies;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| | • | to link the interests of the executive officers with those of the shareholders; and
| | - | -----------------------------------------------------------------------------------

| | • | to motivate executive officers to achieve excellence within their respective areas of accountability.
| | - | -----------------------------------------------------------------------------------------------------



The company believes these objectives will
be reached with a total compensation package which corresponds to base salaries targeted at or below the median of primary and/or
secondary peer groups established by the Board with the assistance of independent consultants and where executive officers have
the potential to more than make up for such discount through awards under the short, mid and long term incentive plans aimed at
top decile comparator levels. Actual awards paid to executives will vary based upon both individual and corporate performance as
determined by the Governance, Human Resources and Compensation Under this philosophy average performance is expected to merit below
average pay and superior performance is rewarded with top decile pay. Variability may exist between the 50th and 90th percentile
based on the knowledge, experience and performance that the executive brings to his or her respective position.



Salaries, benefits and perquisites are
generally reviewed annually and adjustments are made when appropriate. Various sources of market data are used to ensure that executive
compensation levels are aligned with competitive market trends and that the executive compensation plan remains competitive relative
to total compensation packages for similar roles in the forest industry and general industry.



The Governance, Human Resources and Compensation
Committee regularly receives a report from an independent consultant which provides the committee with information on current compensation
practices. In 2010 management retained Towers Watson for certain compensation consulting services relating to executive MLTIP and
to provide advice on the market competitiveness of the Corporation’s executive compensation. The aggregate amount paid to
Towers Watson for 2010 in respect of all such services was $62,400. In 2012 management retained Towers Watson for compensation
consulting services relating to the development of a new executive MLTIP and to provide advice on the market competitiveness of
the Corporation’s executive compensation. The aggregate amount to be paid to Towers Watson for such executive compensation
related services was $25,000 for services during 2012 (which was paid in 2013) and for services in 2013 is $45,000. Towers Watson
also provides pension consulting and actuarial services to the Corporation and Mercer provides general employee compensation, pension,
and benefit consulting services and benefit administration services. The aggregate amount paid to Towers Watson for such other
services was $895,000 in 2011 and $769,000 in 2012. The aggregate amount paid to Mercer for such other services was $304,000 in
2011 and $229,500 in 2012.



Decisions made by the Corporation with
respect to the compensation of its executives are its own responsibility and reflect factors and considerations other than the
information provided by any compensation consulting firms.



Base Salary, Benefits and Perquisites



Base salaries are targeted at or below
the median of primary and/or secondary peer groups established by the Board with the assistance of independent consultants. Variability
may exist between the 50th and 90th percentile based on the knowledge, experience and performance
that the executive brings to his or her respective position.



- 65 -







Short Term Incentive Plan



The executive short-term incentive plan
(“STIP”) is intended to provide variable pay based on the achievement of measurable corporate and individual performance
objectives. Each executive’s progress on his or her individual objectives is monitored by the Governance, Human Resources
and Compensation Committee on a quarterly basis. Each executive position has a target STIP award value that is expressed as a percentage
of base salary. The percentage of base salary represented by the target STIP award for each Named Executive Officer (as defined
below) is as follows: Mr. Clarke: 60%; Mr. Stepusin: 40%; Mr. Baarda: 45%; Mr. Boniferro: 40%; Mr. Crowley: 45%. Target STIP potential
is established at the 75th percentile and the 90th percentile level of total cash compensation
reflected in market data for Forest and Paper Product and for General Industry peer groups established by the Board with the assistance
of independent consultants. STIP targets and awards are designed to be reflective of executive performance and are linked to specific
value creation within the organization, critical to the viability of a cyclical business. STIP awards are allocated in cash, although
at the executive’s discretion, all or a portion of the award may be redirected in the form of restricted share units.



There was no STIP program in place for
2012 and no amounts were or are to be paid in respect of 2012 STIP.



Mid and Long-Term Incentive Plan



The Board believes that executives should
have a stake in the company’s future and their interests should be aligned with those of the shareholders.



In 2010, the then Human Resources and Compensation
Committee with the assistance of independent consultants implemented a mid to long term incentive plan (“2010 MLTIP”)
for the period August 1, 2010 to July 31, 2012 to further this objective. There was no mid to long term incentive plan in place
from January 1, 2010 to July 31, 2010.



The 2010 MLTIP had targets established
as a percentage of base salary set at the 75th percentile and the 90th percentile level of total direct compensation reflected
in market data contained in both the Hay Forest Industry Survey Report and the Hay All Industrial Average Survey and Forest and
Paper Product and General Industry peer groups established by the Board with the assistance of independent consultants. The 2010
MLTIP had two components, time based awards payable either through allocations to the company’s Supplemental Retirement Plan
for Senior Executives or in cash and performance based awards through grants of RSUs under the company’s RSU Plan and stock
options under the company’s stock option plan. Vesting of RSUs and stock options was linked to the share price of the company’s
Common Shares while the payout of RSUs and the ability to exercise stock options also has a time based element.



Time based awards are based on 50% of the
target MLTIP for each executive. The number of RSUs and stock options granted to an executive under the 2010 MLTIP is based on
25% of his or her target MLTIP at the beginning of the performance period (August 1, 2010) allocated 50% to RSUs (based on two
times a price of $0.125 per Common Share at the time of grant representing a premium of approximately 25% over the Market Value
of the Common Shares under the RSU Plan at that time) and allocated 50% to stock options (based on a binomial options pricing model).
The remaining 25% of the target MLTIP for each executive does not apply for the period of the 2010 MLTIP. When the 2010 MLTIP was
implemented, the Board made a number of RSU and stock option grants to the company’s executives pursuant to the plan. The
stock options have a ten year life, and an exercise price equal to 25% over the weighted average price per share of the Common
Shares for all sales of Common Shares on the TSX during the five consecutive trading days preceding the date of the grant of the
options.



Time based awards were payable in three
instalments over the period of the plan on April 1, 2011, December 1, 2011 and August 1, 2012. In order to be eligible for time
based awards, the executive had to be employed by the company on the applicable payment date. Vesting of the RSUs and stock options
granted under the 2010 MLTIP occurred when the weighted average price per share of the company’s Common Shares for all sales
of such shares on the TSX over 20 consecutive trading days reaches or exceeds $0.25 per share. Vesting occurred in January, 2011.
The payment date for the RSUs and the date that the stock options become exercisable is August 1, 2012, but there was no payment
of RSUs due to the Corporation being subject to the CCAA on the payment date and the RSUs being subsequently cancelled pursuant
to the Corporation’s Plan of Arrangement under the CCAA.



The Board and the Governance, Human Resources
and Compensation Committee have considered the implications of the risks associated with the Corporation’s compensation policies
and practices. No risks have been identified arising from the Corporation’s compensation policies and practices that are
reasonably likely to have a material adverse effect on the Corporation.



- 66 -







As described under “Compensation
Discussion and Analysis”, the Corporation’s compensation strategy is intended to encourage the enhancement of Shareholder
value and link the interests of the executive officers with those of the Shareholders. As a result, the Board and the Governance,
Human Resources and Compensation Committee do not believe that the Corporation’s compensation policies and practices encourage
executive officers of the Corporation to expose the Corporation to inappropriate or excessive risks.



The Corporation does not currently have
a policy on whether or not an NEO or director is permitted to purchase financial instruments that are designed to hedge or offset
a decrease in market value of equity securities granted as compensation or held, directly or indirectly, by the NEO or director.



Key Employee Retention Plan



In 2011 Towers Watson was retained for
consulting services relating to the development of a key employee retention program and was paid an aggregate amount of $33,000
for such services. The Corporation implemented the key employee retention program in October, 2011. Each NEO is a participant in
the program. The program provides that each participant is entitled to a payment if his or her employment is terminated within
one year after a change in control of the Corporation or a sale of the Corporation’s business which, for the NEOs, is equal
to 2 times his annual salary in the case of Mr. Clarke and 1.5 times his annual salary in the case of the other NEOs together with
the value of his target bonus, perquisites and privileges for a two year period in the case of Mr. Clarke and for an 18 month period
in the case of the other NEOs. Where the severance amount for a participant based on common law is greater than the amount payable
under the key employee retention program, then the common law severance amount applies. In addition each of the NEOs is entitled
to a retention payment if he was employed by the Corporation on December 31, 2012 (equal to 67.5% of his annual salary in the case
of Mr. Clarke and 54% in the case of the other Named Executive Officers) and a retention payment if he is employed by the Corporation
on December 31, 2013 (equal to 82.5% of his annual salary in the case of Mr. Clarke and 66% of his salary in the case of the other
Named Executive Officers).



Executive Compensation



The following table reflects compensation
paid during 2012 to each of the Chief Executive Officer, the Chief Financial Officer and the company’s three most highly
compensated executive officers other than the Chief Executive Officer and Chief Financial Officer earning a combined salary and
bonus in excess of $150,000 (each a “Named Executive Officer” or “NEO”) except that annual incentive plan
compensation payments reflect 2010 STIP:



|                                    |  |              |      |  |                    |  |         |                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |                                                                                                                                                                                                                                                                                                                                                                                                               |  |  | Non-Equity
    Incentive Plan Compensation |   |  |                                                                                                                                               |  |   |                          |  |  |                                    | 
|----------------------------------- |  | ------------ | ---- |  | ------------------ |  | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------------------------------------------ | - |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------------------------ |  |  | ---------------------------------- | 
|Name
    and Principal Position (a) |  | Year
    (b) |      |  | Salary
    ($) (c) |  |         | Share
                                                                                                         based
                                                                                                         Awards
                                                                                ($)
                                                                                (d) |  |  | Option
                                                                                                         based
                                                                                                         Awards
                                                                                ($)
                                                                                (e) |  |  | Annual
    
    Incentive Plans ($) (f)    |   |  | Long
                                                                                                         term Incentive Plans ($)(1) (f) |  |   | Pension Value ($)(2) (g) |  |  | All
    Other Compensation ($) (h) | 
|K. J. Clarke                        |  |              |      |  |                    |  |         |                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |                                            |   |  |                                                                                                                                               |  |   |                          |  |  |                                    | 
|President and Chief                 |  |              | 2012 |  |                    |  | 622,729 |                                                                                                                                                                                                                                                                                                                                                                                                              |  |  | –                                                                                                                                                                                                                                                                                                                                                                                                             |  |  |                                            | – |  |                                                                                                                                               |  | – |                          |  |  | 824,342                            | 
|Executive Officer                   |  |              |      |  |                    |  |         |                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |                                            |   |  |                                                                                                                                               |  |   |                          |  |  |                                    | 
|B. Baarda                           |  |              |      |  |                    |  |         |                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |                                            |   |  |                                                                                                                                               |  |   |                          |  |  |                                    | 
|Vice President, Finance and         |  |              | 2012 |  |                    |  | 290,000 |                                                                                                                                                                                                                                                                                                                                                                                                              |  |  | –                                                                                                                                                                                                                                                                                                                                                                                                             |  |  |                                            | – |  |                                                                                                                                               |  | – |                          |  |  | 206,600                            | 
|Chief Financial Officer             |  |              |      |  |                    |  |         |                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |                                            |   |  |                                                                                                                                               |  |   |                          |  |  |                                    | 
|R. Stepusin                         |  |              |      |  |                    |  |         |                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |                                            |   |  |                                                                                                                                               |  |   |                          |  |  |                                    | 
|Senior Vice President,              |  |              | 2012 |  |                    |  | 398,656 |                                                                                                                                                                                                                                                                                                                                                                                                              |  |  | –                                                                                                                                                                                                                                                                                                                                                                                                             |  |  |                                            | – |  |                                                                                                                                               |  | – |                          |  |  | 299,012                            | 
|Business Improvement                |  |              |      |  |                    |  |         |                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |                                            |   |  |                                                                                                                                               |  |   |                          |  |  |                                    | 
|S. Boniferro                        |  |              |      |  |                    |  |         |                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |                                            |   |  |                                                                                                                                               |  |   |                          |  |  |                                    | 
|Senior Vice President,              |  |              | 2012 |  |                    |  | 250,000 |                                                                                                                                                                                                                                                                                                                                                                                                              |  |  | –                                                                                                                                                                                                                                                                                                                                                                                                             |  |  |                                            | – |  |                                                                                                                                               |  | – |                          |  |  | 185,000                            | 
|Human Resources                     |  |              |      |  |                    |  |         |                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |                                            |   |  |                                                                                                                                               |  |   |                          |  |  |                                    | 
|L. T. Crowley                       |  |              |      |  |                    |  |         |                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |                                            |   |  |                                                                                                                                               |  |   |                          |  |  |                                    | 
|Senior Vice President, Sales        |  |              | 2012 |  |                    |  | 276,948 |                                                                                                                                                                                                                                                                                                                                                                                                              |  |  | –                                                                                                                                                                                                                                                                                                                                                                                                             |  |  |                                            | – |  |                                                                                                                                               |  | – |                          |  |  | 204,178                            | 
|and Marketing                       |  |              |      |  |                    |  |         |                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |                                            |   |  |                                                                                                                                               |  |   |                          |  |  |                                    | 



Notes:



| | (1) | Consists
                                                           of payments made under 2010 MLTIP and the key employee retention program.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Amounts
                                                                               in this column for all NEOs reflect annual contributions
                                                                               and allocations (including investment returns on
                                                                               notional account balances) to the company’s
                                                                               defined contribution pension plan, including the
                                                                               SERP for the year ended December 31, 2012.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 67 -







SECURITIES AUTHORIZED FOR ISSUANCE UNDER
EQUITY COMPENSATION PLANS



As
at December 31, 2012 there were no securities authorized for issuance under any equity compensation plan of the Corporation.



Outstanding
Share Based and Option Based Awards



As
at December 31, 2012, there were no share-based or option-based awards held by named Executive Officers.



Incentive
Plan Awards – Value Vested or Earned

|Name          |  |  | Option based awards –value vested during the year($) |  |  |  | Share based awards – valuevested during the year($) |  |  |  | Non-equity incentive plancompensation – value earnedduring the year($) | 
|------------- |  |  | ---------------------------------------------------- |  |  |  | --------------------------------------------------- |  |  |  | ---------------------------------------------------------------------- | 
|K. J. Clarke  |  |  | —                                                    |  |  |  | —                                                   |  |  |  | —                                                                      | 
|B. Baarda     |  |  | —                                                    |  |  |  | —                                                   |  |  |  | —                                                                      | 
|R. Stepusin   |  |  | —                                                    |  |  |  | —                                                   |  |  |  | —                                                                      | 
|S. Boniferro  |  |  | —                                                    |  |  |  | —                                                   |  |  |  | —                                                                      | 
|L. T. Crowley |  |  | —                                                    |  |  |  | —                                                   |  |  |  | —                                                                      | 



There
was no value vested in respect of option based or share based awards during 2012 given the Corporation was in a restructuring
process under the CCAA from January 30, 2012 to September 13, 2012. All options, restricted share units and shares that were outstanding
on September 13, 2012 were cancelled for no consideration on that date pursuant to the Corporation’s Plan of Arrangement
under the CCAA. None of the vested options held by the Named Executive Officers prior to their cancellation were in-the-money
during 2012.



Pension Benefits



Retirement Plan Compensation



We do not provide pension, retirement or
similar benefits to directors.



NEOs who are Canadian
residents participate in a Canadian defined contribution plan pursuant to which the company contributes 5% of the executive’s
base salary and bonus to a maximum of $22,450. The executive directs the investment of his or her defined contribution account
based on a number of alternatives. Upon retirement the executive is entitled to all amounts contributed to and earned on his or
her defined contribution account, but no minimum amount of investment return or payout is guaranteed.



Executives who are United States residents
can participate in a US defined contribution plan (“ US DC Plan”). The US DC Plan provides for employer matching contributions
equal to 100% of the first 3% of eligible pay contributed to the plan, and 50% of the next 2% of eligible pay contributed to the
plan. In addition, the company will make regular discretionary non-elective contributions for eligible employees equal to 7% of
eligible pay. The employee can defer up to 75% of eligible pay as limited by law. Gross compensation was limited by law to USD
$245,000 for 2011. The employee directs the investment of his defined contribution account based on a number of alternatives. The
maximum employee contribution level for 2011 was USD$16,500 with the employer matching contribution level for 2011 being a maximum
of $9,800. If the employee is at least age 50, he or she may elect to defer a “catch-up” contribution of an additional
USD$5,500 for 2011. An employee may choose to contribute after tax contributions up to 10% of eligible pay as limited by law. Under
the US DC Plan, eligible pay includes salary, bonus, employer share purchase contributions, and vacation taken in pay. Upon retirement
the employee may elect to receive installments or lump sum as provided for by the plan.



- 68 -







In addition, the company
has established a defined contribution segment of the company’s Supplemental Retirement Plan for Senior Executives (the “SERP”).
The company makes regular contributions to the SERP on behalf of the executives, the amount of which varies among the executives.
Mr. Clarke’s SERP account is credited with an annual lump sum allocation of $300,000 on July 1 of each year. Mr. Stepusin’s
SERP account is credited with an annual lump sum allocation of $100,000, payable on July 1 of each year. Mr. Boniferro’s
SERP account is credited with a lump sum allocation of $200,000 on January 1 of each of 2008, 2009, 2010, 2011 and 2012, after
which the lump sum amount decreases to $100,000. Mr. Baarda’s SERP account is credited with an amount equal to 10% of his
salary and bonus less the amount credited to the defined contribution plan referred to above. Mr. Crowley is not a participant
in the SERP. Under the defined contribution segment of the SERP, the amount of bonus recognized in pensionable earnings is limited
to 50% of the bonus payment for the year subject to a further limit of 50% of the executive’s target bonus. The portion of
the bonus that is not recognized due to this latter limit may be carried forward to the following calendar years and applied in
years in which the target bonus limit is not reached.



Amounts allocated under
the SERP for Mr. Clarke and Mr. Stepusin vest in quarterly increments after they are allocated. Amounts for Mr. Boniferro vest
at the beginning of each year. Amounts for Mr. Baarda vest when allocated. On retirement, the executive can elect to receive benefits
as either a lump sum or in ten equal annual installments, calculated based on the 10 year Government of Canada bond rate. Amounts
allocated to the SERP are secured by a letter of credit except in the case of amounts allocated to Mr. Clarke and Mr. Stepusin.



Defined Contribution Plans



|Name          |  | Accumulated value at start of year ($) |         |  | Compensatory($)(1) |  |         | Non-compensatory($)(2) |  |  | Accumulated value at year end ($) | 
|------------- |  | -------------------------------------- | ------- |  | ------------------ |  | ------- | ---------------------- |  |  | --------------------------------- | 
|K. J. Clarke  |  |                                        | 93,094  |  |                    |  | 368,448 |                        |  |  | 5,843                             | 
|B. Baarda     |  |                                        | 476,923 |  |                    |  | 29,000  |                        |  |  | 27,590                            | 
|R. Stepusin   |  |                                        | 65,194  |  |                    |  | 151,743 |                        |  |  | 8,892                             | 
|S. Boniferro  |  |                                        | 971,808 |  |                    |  | 212,500 |                        |  |  | 20,559                            | 
|L. T. Crowley |  |                                        | 307,567 |  |                    |  | 49,980  |                        |  |  | 14,467                            | 

| | (1) | Represents
                                                            the employer contribution plus employee deductions from payroll not
                                                            reported as earnings.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Represents
                                                            non-compensatory amounts including employee contributions and regular
                                                            investment earnings on employer and employee contributions.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Board
Practices



Each director holds office until the next
annual annual general meeting (except in the case of the current directors who hold office until the annual general meeting in
2014 pursuant to a court order obtained in connection with the company’s plan of arrangement under the CCAA) or until his
or her successor is elected or appointed, or unless his or her office is earlier vacated under any of the relevant provisions of
our by-laws or the Canada Business Corporation Act.Directors do not have service contracts with the company.



Committees of the Board



The Board has established an Audit Committee,
Environmental, Health and Safety Committee, Governance, Human Resources and Compensation Committee.



Human Resources and Compensation
Committee



The compensation of our executive officers
is determined by the Governance, Human Resources and Compensation Committee (the “Compensation Committee”) since
the Human Resources and Compensation Committee was combined with the Governance Committee under the name Governance, Human Resources
and Compensation Committee effective February 29, 2012. Prior to that date compensation matters were dealt with by the Human Resources
and Compensation Committee. The current Committee consists of three independent directors, G. Caputo, T. Dillabough (chair) and
L. Lederer.



The Compensation Committee’s principal
function is to oversee organizational structure, executive appointment and succession, executive compensation, performance review
of the Chief Executive Officer, approval of changes to benefit provisions in our salaried pension plans and approval of collective
agreements.



The Compensation Committee
reviews and approves, at the beginning of each year, corporate objectives for the Chief Executive Officer. At the end of the year,
the Compensation Committee evaluates the Chief Executive Officer’s performance against those objectives. The results of the
assessment are reported to the Board. The Compensation Committee also reviews the performance of other senior executives with input
from the Chief Executive Officer.



- 69 -







The Compensation Committee determines the
compensation of our executive officers. The Compensation Committee annually reviews the compensation philosophy and guidelines
for executive management as well as the individual compensation of each member of the executive team, and reports its conclusions
to the Board for its consideration and approval. The Compensation Committee also administers our stock option plan, restricted
share unit plan and other share based compensation plans, if applicable, and makes recommendations regarding our granting of stock
options and restricted share units to executive management and other key employees.



Audit Committee



The Audit Committee consists of Messrs.
John Brecker, John Charles and Walter Jones (Chair). Each of these directors are independent for the purposes of sitting on the
Audit Committee, as defined under applicable legislation, and are financially literate. The Board has determined that Mr. Charles
qualifies as an “audit committee financial expert” for the purposes of applicable legislation. The relevant education
and experience of each Audit Committee member is as follows:



|Name         |  | Relevant Education and Experience                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Walter Jones |  | Mr. Jones holds a Bachelor of Science in industrial engineering from Pennsylvania State University.  He has more than 25 years of experience as a turnaround advisor, chief restructuring officer or operating trustee for troubled companies in a broad range of industries.  Mr. Jones was previously a principal in the restructuring practice of a large regional accounting firm, acted as vice-president of finance of a merchant banking firm specializing in financially troubled companies and as a general management consultant with a national accounting and consulting firm.  Mr. Jones is a member of one other audit committee.
|             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|John Brecker |  | Mr. Brecker holds a law degree from St. John’s University and a political science degree from American University.  He has extensive director and management experience in a family of hedge funds and in those capacities actively supervised financial officers.                                                                                                                                                                                                                                                                                                                                                                             
|             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|John Charles |  | Mr. Charles has been a chartered accountant since 1973. He has extensive director and corporate experience in financial management. He has a Bachelor of Science degree in Mathematics and Statistics from Queen’s University. Mr. Charles is a member of one other audit committee.                                                                                                                                                                                                                                                                                                                                                           



The roles and responsibilities of the Audit
Committee are contained in its terms of reference, which are reviewed annually. The principal functions of the Audit Committee
are:

| | (i) | to review all financial information and statutory disclosure documents prior to their approval
by the Board and their distribution to Shareholders and other interested persons;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | to evaluate systems of internal control and procedures for financial reporting;
| | ---- | -------------------------------------------------------------------------------

| | (iii) | to review and recommend for approval by the Board the terms of engagement and remuneration of the
external auditors;
| | ----- | --------------------------------------------------------------------------------------------------------------------

| | (iv) | to monitor the performance of the external and internal auditors and assess the independence thereof; and
| | ---- | ---------------------------------------------------------------------------------------------------------

| | (v) | to recommend to the Board the appointment of investment managers for our salaried pension plans
and to monitor the performance of these managers.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------



The Board, through the Audit Committee,
identifies and reviews with management the principal risks facing us and ensures that appropriate risk management systems and internal
control systems are implemented. The Audit Committee is also responsible for our financial reporting processes and the quality
of our financial reporting. The Audit Committee is free to communicate with our external and internal auditors at any time, and
the Committee meets with our internal and external auditors, without management present, on a regular basis.



Through the Audit Committee the Board has
approved policies relating to the treatment and disclosure of corporate information. Public disclosure about us is reviewed by
a group that includes the Chief Executive Officer, Chief Financial Officer, legal, investor relations and corporate controller’s
departments, and others as required, to ensure timely and accurate disclosure.



All quarterly and annual financial statements,
press releases, investor presentations and other corporate materials are posted immediately on our website (www.catalystpaper.com)
and on SEDAR at www.sedar.com. We provide live internet and conference call access to interested parties in connection with the
release of its quarterly financial information.



- 70 -







The Audit Committee is
responsible for pre-approving all non-audit services to be performed by the external auditors. The Chair of the Audit Committee
is authorized to pre-approve non-audit services that have a value equal to up to $100,000. All non-audit services pre-approved
by the Chair are presented to the Committee at its first scheduled meeting following the Chair’s pre-approval. In March,
2013, the Audit Committee approved the engagement of the external auditors for the period ending February 28, 2014 for the provision
of certain tax related services and miscellaneous accounting advice having an aggregate cost of $250,000.



During the last two years, the company
paid the following fees to its external auditors:



|                         |  | Period Ending December 31 |          
|------------------------ |  | ------------------------- | ---------
|                         |  | 2012                      |          
|(a)	  Audit Fees         |  |                           | 750,000  
|(b)	  Audit Related Fees |  |                           | 233,900  
|(c)	  Tax Fees           |  |                           | 89,815   
|(d)	  All Other Fees     |  |                           | —        
|Total                    |  |                           | 1,073,715



| | D. | Employees
| | -- | ---------



We have approximately 1,550 active hourly
and salaried employees.



Approximately 1,100 hourly employees at
our Canadian pulp and paper mills (with the exception of the Paper Recycling Division and the Surrey Distribution Centre) are members
of either the CEP or the PPWC. 70 hourly employees at the Surrey Distribution Centre are represented by the Christian Labour Association
of Canada (“CLAC”).



In March 2012, new five-year labour agreements
were entered into with unions representing more than 1,000 paper and pulp workers at the Corporation’s Crofton, Port Alberni
and Powell River mills. The new contracts entered into with CEP and PPWC went into effect on May 1, 2012 and expire on April 30,
2017.



On April 19, 2012 the Corporation signed
a new three year labour agreement with CLAC, expiring on March 31, 2015 covering the hourly workers located at the Surrey Distribution
Centre. The new agreement maintains existing rates and benefits throughout the term.



Employment of approximately 22 hourly employees
at the Snowflake mill and The Apache Railway Company terminated on the permanent closure of the Snowflake mill on September 30,
2012 with the employment of the approximately 9 remaining hourly employees occurring on the sale of the Snowflake assets in January,
2013.



| | E. | Share Ownership
| | -- | ---------------



Other than 2,894,937 of our common shares
that are held by accounts managed by First Eagle Investment Management, LLC, for which Mr. Caputo is a Portfolio Manager, our directors
and officers as a group beneficially own, directly or indirectly, or exercise control or direction over, less than one percent
of the issued and outstanding common shares.



Stock
Option and RSU Plans



As
a result of the company and certain of its subsidiaries filing for protection under the CCAA on January 31, 2012, the TSX suspended
the trading of the company’s common shares on the TSX on February 1, 2012 and delisted the company’s common shares
effective as of the close of markets on March 8, 2012. The Corporation’s stock option and restricted share unit (“RSU”)
plans ceased to be in effect upon the delisting.



All outstanding stock option and RSUs were
cancelled and of no further force and effect when the restructuring under the Plan of Arrangement completed on September 13, 2012.
Pursuant to the Plan of Arrangement 14,400,000 new Common Shares were issued to certain creditors of the company on September 13,
2012 and a further 127,571 new Common Shares were issued to certain creditors of the company on December 19, 2012. On January 7,
2013 the Corporation’s new Common Shares were listed on the TSX.



- 71 -







The company does not currently have a stock
option plan or RSU plan in effect. Any issuance of stock options or RSUs going forward would be subject to shareholder and TSX
approval of a new stock option plan and RSU plan. As at March 15, 2013, the company has not applied for, or received any approval
from, the TSX for a new RSU or stock option plan.



| | ITEM 7 | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
| | ------ | -------------------------------------------------



| | A. | Major Shareholders
| | -- | ------------------



To the knowledge of the directors and executive
officers of the Corporation, as at March 15, 2013 the only persons that beneficially own, directly or indirectly, or exercises
control or direction over, more than 5 per cent of the outstanding Common Shares are:



| | (i) | First Eagle Investment Management, LLC (“First Eagle”) who advised on February 7, 2013
that the aggregate number of Common Shares held by all of its managed accounts as at February 7, 2013 was 2,894,937 Common Shares,
which represents approximately 19.93% of all Common Shares; and
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Cyrus Capital Partners L.P. who filed a notice on February 4, 2013 that the aggregate number of
Common Shares held by all of its managed accounts as at February 4, 2013, 2013 was 3,621,362 Common Shares representing 24.93%
of all Common Shares;
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Mudrick Capital Management, L.P. who filed a notice on March 10, 2013, that the aggregate number
of Common Shares held by all of its managed accounts as at February 28, 2013 was 1,868,568 Common Shares, which represents approximately
12.9% of all Common Shares.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Third Avenue Management LLC, which had
control or direction over a significant number of our common shares since October 2006, disposed of its entire investment in the
company on February 16, 2012.



| | B. | Related Party Transactions
| | -- | --------------------------

Third Avenue Management LLC (“TAM”)
together with its subsidiaries and affiliates, was a significant shareholder in the company until it disposed of its entire investment
in the company on February 16, 2012. We did not undertake any transactions with TAM during the year ended December 31, 2012.



In
2012, we undertook certain transactions with companies affiliated with one of our directors. Payments for raw materials were made
to Aspen Group, Flavelle Sawmill, and Mill and Timber. These transactions were in the normal course of business and were on the
same terms as those accorded to third parties. For the nine months ended September 30, 2012, we paid aggregate fees of $2.7 million
(2011 - $4.3 million; 2010 - $3.6 million) to the companies affiliated with that director primarily for the purchasing of chips
and hog fuel. That director ceased to be a director on September 13, 2013 and these transactions will accordingly not be related
party transactions after that date.



| | C. | Interests of Experts and Counsel
| | -- | --------------------------------



Information not required for an annual
report.



| | ITEM 8 | FINANCIAL INFORMATION
| | ------ | ---------------------



| | A. | Consolidated Statements and Other Financial Information
| | -- | -------------------------------------------------------



See Item 17, “Financial Statements”



Legal Proceedings



We occasionally become party to legal proceedings,
generally related to contract disputes and employment law in the ordinary course of business. The final results of currently ongoing
legal proceedings, while not immediately determinable, are not expected to have a material effect on our financial results.



- 72 -







Contingent Liabilities



Claims
Regarding Certain Post-Retirement Benefits



The Communications, Energy and Paperworkers
Union of Canada Locals 1, 76, 592 and 686 (the Locals), representing hourly employees at our Powell River and Port Alberni mills,
applied to the Labour Relations Board of B.C. for a declaration that the company is responsible for certain post-retirement medical
and extended health benefits for some retired employees who were represented by the Locals and who retired from MacMillan Bloedel
Limited (now named Weyerhaeuser Canada Ltd.) prior to the company’s acquisition of Pacifica Papers Inc. which had acquired
the Powell River and Port Alberni mills in 1998. The Labour Relations Board declined to rule on the Locals’ application or
our defense to the claim on the basis that this matter was a dispute under the collective agreement and, accordingly, a matter
to be determined by arbitration. All four Locals subsequently filed grievances claiming that we are responsible for these post-retirement
benefits. We did not agree with the Locals’ positions and contested the grievances. Local 76’s claim was dismissed
by an arbitrator on December 23, 2010. The other three Locals withdrew their claims in 2011 and 2012. These claims are accordingly
no longer outstanding.



Export Sales



Export sales constitute a significant portion
of our sales. The following chart describes our total export sales and describes the percentage of total export sales for Canada,
United States and other countries for the last three fiscal years.

|(In millions of dollars, except where otherwise stated)
|-------------------------------------------------------
|                                                       
|                                                       
|Canada                                                 
|United States                                          
|Asia and Australasia                                   
|Latin America                                          
|Europe & Other                                         
|Total sales                                            



1Excludes Snowflake sales; the Snowflake operation was classified as a discontinued operation in 2012 and comparative numbers
were restated accordingly.



Dividend Policy



We are not permitted to pay dividends to
holders of our Common Shares under the terms of the indenture governing our 2017 Notes and Exit Notes while our Exit Notes and
2017 Notes are outstanding. No dividends have been paid in the last five years. No dividends have been paid in the last five years.



| | B. | Significant Changes
| | -- | -------------------



No significant changes have occurred since
the date of the annual financial statements provided herein.



| | ITEM 9 | THE OFFER AND LISTING
| | ------ | ---------------------



| | A. | Offer and Listing Details
| | -- | -------------------------



Common Shares

As at March 5, 2013, the Corporation has
14,527,571 common shares outstanding consisting of the 14,400,000 new common shares issued to holders of 2016 Notes on September
13, 2012 under the Plan and the 127,571 additional new common shares issued to certain unsecured creditors on December 19, 2012.On
January 7, 2013, our new common shares were listed on the TSX under the symbol “CYT”.



On February
1, 2012, the TSX suspended the trading of our former common shares (symbol “CTL) on the TSX due to the commencement of our
proceedings under the CCAA. The last day that our shares traded on the TSX was January 31, 2012. At the close of market on March
8, 2012, the TSX delisted the Corporation’s common shares on the basis that the Corporation no longer met the TSX continued
listing requirements as a result of our financial condition and the commencement of our CCAA proceedings in January, 2012.
During the month of January, 2012, the common shares traded at a high of $0.35, a low of $0.01 and an average daily volume of 2,111,500
shares. The Corporation’s former common shares did not trade on the TSX during the remainder of 2012 and were cancelled for
no consideration effective September 13, 2012.



- 73 -







Using information from published sources,
the following information shows the high and low trading values of our new common shares (“CYT”) for the periods indicated:



|For the month ended |  | High |      |  | Low | 
|------------------- |  | ---- | ---- |  | --- | 
|                    |  | ($)  |      |  | ($) | 
|February 28, 2013   |  |      | 2.76 |  |     | 
|January 31, 2013    |  |      | 2.00 |  |     | 



| | B. | Plan of Distribution
| | -- | --------------------



Information not required for an annual
report.



| | C. | Markets
| | -- | -------



See Item 9.A above.



| | D. | Selling Shareholders
| | -- | --------------------



Information not required for an annual
report.



| | E. | Dilution
| | -- | --------



Information not required for an annual
report.



| | F. | Expenses
| | -- | --------



Information not required for an annual
report.



| | ITEM 10 | ADDITIONAL INFORMATION
| | ------- | ----------------------



| | A. | Share Capital
| | -- | -------------



Information not required for an annual
report.



B.	Memorandum and Articles of Association



Description of Share Capital



We are authorized to issue an unlimited
number of common shares and 100,000,000 preferred shares. As of December 31, 2012, there were 14,527, 571 common shares issued
and outstanding and no preferred shares issued and outstanding. All of the issued and outstanding common shares are fully paid.
Holders of common shares are entitled to receive dividends as and when declared by our Board of Directors and, unless otherwise
provided by legislation, are entitled to one vote per share on all matters to be voted on at all meetings of shareholders. Upon
the voluntary or involuntary liquidation, dissolution or winding-up of the company, the holders of common shares are entitled to
share rateably in the remaining assets available for distribution after payment of liabilities. The common shares are not subject
to any future call or assessment and there are no pre-emptive, conversion or redemption rights attached to the common shares.



We do not nor do any of our subsidiaries
hold any common shares in the capital of the company.



As of March 15, 2013 there are no outstanding
stock options or RSUs nor are there any stock option or RSU plans in effect.



Description of Articles of Amalgamation
and By-Laws



Our articles of amalgamation issued pursuant
to the Canada Business Corporations Act contain no restrictions on the business we may carry on.



Our articles of amalgamation and by-laws
contain no restrictions on the power of directors:



| | 1. | to vote on a proposal arrangement or contract in which the director is materially interested;
| | -- | ---------------------------------------------------------------------------------------------



| | 2. | in the absence of an independent quorum, to vote compensation to themselves or any member of their
body; or
| | -- | -----------------------------------------------------------------------------------------------------------



| | 3. | with respect to borrowing powers exercisable by the directors or how such borrowing powers may
be varied.
| | -- | ---------------------------------------------------------------------------------------------------------



- 74 -







The restrictions on the ability of a director
to vote and the requirement to disclose his or her interest are governed by applicable corporate legislation. There are no restrictions
or provisions in our articles of amalgamation or by-laws regarding the retirement or non-retirement of directors under an age limit,
although the Board of directors’ Administrative Guidelines provide that a director must retire at the age of 70, unless otherwise
approved by the Board of directors. There are no restrictions or provisions in our articles of amalgamation or by-laws pertaining
to the number of shares required for director qualification.



Rights, Preferences and Restrictions
of Shares



Holders of common shares have a right to
receive dividends if, as and when declared by the directors. There is no time limit after which dividend entitlement lapses. Each
common share entitles the holder to one vote on a poll in respect of the election of directors and any other matter properly coming
before a meeting of such holders.



Our directors do not stand for re-election
at staggered intervals and cumulative voting for the election of our directors is not permitted. Neither the common shares nor
the preferred shares have any right to share in our profits, other than in respect of dividends.



The holders of common shares, subject to
the rights of any issued and outstanding preferred shares, have the right to share pro-rata in any surplus in the event of our
liquidation.



There are no redemption or sinking fund
provisions or liability to further capital calls on holders of common shares. Special rights and restrictions that may be attached
to any series of preferred shares issued in the future may include redemption or sinking fund provisions.



The rights, preferences and restrictions
applicable to preferred shares will be determined by the Board of directors at the time such preferred shares are created and issued.



Meetings



Meetings of shareholders may be called
by our directors and may be requisitioned by the holders of not less than five percent of our issued share capital carrying the
right to vote at a meeting. The court may also call a meeting of shareholders upon application by any director or shareholder.
For the purposes of determining shareholders entitled to receive notice of a meeting, the directors may fix an advance date as
the record date for such determination. Any record date shall not precede by more than 50 days or by less than 21 days the date
on which the meeting is to be held. Each registered shareholder and our auditor is entitled to attend at meetings of shareholders.



There are no limitations on the right to
own our securities, including the right of non-resident or foreign shareholders to hold or exercise voting rights on our securities,
imposed by the laws of Canada or by our articles of amalgamation or by-laws. There are no provisions in our articles of amalgamation
or by-laws that would have the effect of delaying, deferring or preventing a change of control of us and that would only operate
with respect to a merger, acquisition or corporate restructuring involving us or any of our subsidiaries.



There are no provisions in our articles
of amalgamation or by-laws governing the ownership threshold above which shareholder ownership must be disclosed.



| | C. | Material Contracts
| | -- | ------------------



| | 1. | Restructuring and Support Agreement, entered into on March 12, 2012 among Catalyst Paper Corporation,
certain of its subsidiaries and certain holders of its 2014 Notes and 2016 Notes in respect of the company’s restructuring
under the CCAA.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Plan of Arrangement.
| | -- | --------------------



| | 3. | Indenture, dated as of September 13, 2012, governing
the Corporation’s issuance of secured debentures, notes, bonds or other evidences of indebtedness in an unlimited aggregate
principal amount to be issued from time to time pursuant to the Indenture, among Catalyst, the subsidiary guarantors and Wilmington
Trust, National Association, as trustee. as collateral trustee.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | First Supplemental Indenture dated as of September 13, 2012, among the Corporation, the subsidiary
guarantors named therein and Wilmington Trust, National Association, as trustee governing the terms of the Corporation’s
PIK Toggle Senior Secured Notes due October 30, 2017.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 75 -







| | 5. | Second Supplemental Indenture dated as of September 13, 2012, among the Corporation, the subsidiary
guarantors named therein and Wilmington Trust, National Association, as trustee governing the terms of the Corporation’s
Floating Rate Senior Secured Notes due September 13, 2016.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. | Credit Agreement dated as of September 13, 2012 among Catalyst, certain lenders party thereto,
Canadian Imperial Bank of Commerce as Administrative Agent and Co-Collateral Agent with Wells Fargo Capital Finance Corporation
Canada.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | D. | Exchange Controls
| | -- | -----------------



The Investment Canada Act generally
prohibits implementation of a reviewable investment by an individual, government or agency thereof, corporation, partnership, trust
or joint venture that is not a “Canadian” as defined in the Investment Canada Act (“non-Canadian”),
unless after review, the minister responsible for the Investment Canada Act is satisfied that the investment is likely to
be of net benefit to Canada. An investment in common shares of the company by a non-Canadian (other than a “WTO Investor”
as defined in theInvestment Canada Act) would be reviewable under the Investment Canada Act if it was an investment
to acquire direct control of us and our value of our assets was $5,000,000 or more.



With regard to an investment in common
shares of the company by a WTO Investor, it would be reviewable under theInvestment Canada Act if it was an investment
to acquire direct control of us and the value of our assets of equals or exceeds a specified amount (the “Review Threshold”),
which is revised every year. The Review Threshold is $344 million for investments completed in 2013 and is indexed as of the first
of January every year.



A non-Canadian, whether a WTO Investor
or otherwise, would acquire control of the company for the purposes of the Investment Canada Act if he acquired a majority
of our common shares. The acquisition of less than a majority but one-third or more of our common shares would be presumed to be
an acquisition of control of the company unless it could be established we are not controlled in fact by the acquirer through the
ownership of common shares. An acquisition of less than one-third of our common shares would be deemed not to constitute an acquisition
of control.



Certain transactions in relation to our
common shares would be exempt from the Investment Canada Act, including:



| | · | an acquisition of our common shares by a person in the ordinary course of that person’s business
as a trader or dealer in securities;
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| | · | an acquisition of control of the company in connection with the realization of a security interest
granted for a loan or other financial assistance and not for any purpose related to the provision of the Investment Canada Act;
and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | an acquisition of control of the company by reason of an amalgamation, merger, consolidation or
corporate reorganization following which the ultimate direct or indirect control in fact of the company, though the ownership of
voting interests, remains unchanged.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



TheInvestment Canada Act was amended
on March 12, 2009, when the Budget Implementation Act (“Bill C-10”) received royal assent and came into force
of law. As a result of Bill C-10, the Review Threshold will increase to an enterprise value of assets of $600 million and eventually
will reach $1 billion. The provisions of Bill C-10 relating to the Review Threshold have not yet come into force and regulations
describing the manner in which the enterprise value is to be determined have not yet been prescribed. Until such time, the Review
Threshold described above continues to apply. Additionally, all investments in Canada - even those that do not amount to an acquisition
of control - may now be reviewed on grounds of whether they are likely to be injurious to national security. In particular, upon
referral by the minister responsible for the Investment Canada Act, the governor in Counsel may take measures in respect
of an investment that it considers advisable to protect national security, including, among other things, (a) directing the non-Canadian
not to implement the investment, (b) authorizing the investment on certain conditions, or (c) requiring the non-Canadian to divest
themselves of control of the Canadian business or of their investment.



Our ability to declare and pay dividends
is significantly restricted by the covenants in the indentures governing our senior notes and in the documentation relating to
our credit facilities.



- 76 -











| | E. | Taxation
| | -- | --------



Certain U.S. Federal
Income Tax Considerations



The following is a summary of certain United
States federal income tax considerations relevant to the ownership and disposition of our common shares, but does not purport to
be a complete analysis of all the potential tax considerations relating thereto. This summary is based on the tax laws of the United
States (including the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and
proposed regulations thereunder, published rulings and court decisions) as in effect on the date hereof, all of which are subject
to change, possibly with retroactive effect. We have not sought any ruling from the Internal Revenue Service (the “IRS”)
with respect to the statements made and the conclusions reached in the following summary, and no assurance can be made that the
IRS will agree with such statements and conclusions.



This
summary applies only if an investor holds our common shares as capital assets. Unless specifically stated otherwise, this summary
also does not address the tax considerations arising under the laws of any country other than the United States, any United States
state, or any local jurisdiction. In addition, this summary does not address tax considerations applicable to an investor’s
particular circumstances or to investors that may be subject to special tax rules, including, without limitation:



| | · | banks, insurance companies, or other financial institutions;
| | - | ------------------------------------------------------------

| | · | holders subject to the alternative minimum tax;
| | - | -----------------------------------------------

| | · | tax-exempt organizations;
| | - | -------------------------

| | · | brokers or dealers in securities or commodities;
| | - | ------------------------------------------------

| | · | traders in securities that elect to use a mark-to-market method of accounting for their securities
holdings;
| | - | ------------------------------------------------------------------------------------------------------------

| | · | foreign (non-United States) persons or entities;
| | - | ------------------------------------------------

| | · | persons that are S-corporations, partnerships or other pass-through entities;
| | - | -----------------------------------------------------------------------------

| | · | expatriates and certain former citizens or long-term residents of the United States;
| | - | ------------------------------------------------------------------------------------

| | · | holders whose functional currency is not the U.S. dollar;
| | - | ---------------------------------------------------------

| | · | persons holding our common shares as part of a hedging, straddle, conversion or constructive sale
transaction or other risk reduction transactions;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | · | grantor trusts;
| | - | ---------------

| | · | real estate investment trusts or regulated investment companies; or
| | - | -------------------------------------------------------------------

| | · | persons who are resident or ordinarily resident in Canada.
| | - | ----------------------------------------------------------



Investors should
consult their tax advisors about the United States federal, state, local and foreign tax consequences to them of the ownership
and disposition of our common shares.



The summary below
applies to an investor only if such investor is a beneficial owner of our common shares, is not resident in Canada for purposes
of the income tax treaty between the United States and Canada (the “U.S. Tax Treaty”), and is, for United States federal
income tax purposes:



| | · | an individual citizen or resident of the United States;
| | - | -------------------------------------------------------

| | · | a corporation (or other entity taxable as a corporation for United States federal income tax purposes)
created or organized in the United States or under the laws of the United States, any state thereof, or the District of Columbia;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | an estate, the income of which is subject to United States federal income taxation regardless of
its source; or
| | - | ---------------------------------------------------------------------------------------------------------------

| | · | a trust that (i) is subject to the primary supervision of a United States court and the control
of all substantial decisions by one or more United States persons or (ii) has a valid election in effect under applicable
Treasury Regulations to be treated as a United States person.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 77 -







Taxation of
Common Shares



Dividends



Subject to the
passive foreign investment company rules discussed below, the gross amount of any distribution by us of cash or property with respect
to common shares, including any Canadian tax withheld, will be includable in income by an investor as dividend income at the time
of receipt to the extent such distributions are made from our current or accumulated earnings and profits as determined under United
States federal income tax principles. Such a dividend will not be eligible for the dividends received deduction generally allowed
to corporate shareholders. To the extent, if any, that the amount of any distribution by us exceeds our current and accumulated
earnings and profits as determined under United States federal income tax principles, it will be treated first as a tax-free return
of an investor’s adjusted tax basis in the common shares and thereafter as capital gain. Notwithstanding the foregoing, we
do not intend to maintain calculations of earnings and profits as determined under United States federal income tax principles.
Therefore, an investor should expect that a distribution generally will be treated as a dividend even if that distribution would
otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.



For
taxable years beginning before January 1, 2011, dividends received by an individual may be eligible for preferential rates
of taxation, provided (i) certain holding period requirements are satisfied, (ii) the Company is eligible for the benefits
of the U.S. Tax Treaty, and (iii) we are not, and in the preceding year were not, a “passive foreign investment company”.
Dividends received after December 31, 2010 and dividends that are not eligible for preferential rates of taxation will be subject
toordinary income tax rates.



Dividends
paid in Canadian dollars will be included in an investor’s gross income in a U.S. dollar amount calculated by reference to
the exchange rate in effect on the date of receipt, regardless of whether the Canadian dollars are converted into U.S. dollars
at that time. If Canadian dollars are converted into U.S. dollars on the date of receipt, an investor generally should not be required
to recognize any foreign exchange gain or loss.An investor who
receives a distribution of Canadian dollars and converts the Canadian dollars into U.S. dollars subsequent to the date of
receipt of such Canadian dollars will have foreign exchange gain or loss based on any appreciation or depreciation in the value
of the Canadian dollar against the U.S. dollar. Such gain or loss will generally beU.S.
source ordinary income or loss. Investors should consult their
tax advisors regarding the treatment of a foreign currency gain or loss.



Sale or Exchange
of Common Shares



Subject to the
passive foreign investment company rules discussed below, generally an investor will recognize gain or loss on the sale or exchange
of common shares equal to the difference between the amount realized on such sale or exchange and an investor’s adjusted
tax basis in the common shares. Gain or loss recognized by an investor on the sale or exchange of a common share generally will
be capital gain or loss and generally will be long-term if held more than one year and otherwise short-term. Long-term capital
gains recognized by non-corporate investors, including individuals, generally will be subject to a maximum rate of tax of 15%.
The deductibility of capital losses is subject to limitations.



If the consideration
an investor receives for the common shares is not paid in U.S. dollars, the amount realized will be the U.S. dollar value of the
payment an investor receives determined by reference to the spot exchange rate in effect on the date of the sale or exchange or,
if the common shares sold or exchanged are traded on an “established securities market” and an investor is a cash basis
taxpayer or an electing accrual basis taxpayer, the spot exchange rate in effect on the settlement date. An investor will have
a tax basis in any foreign currency received equal to the U.S. dollar amount realized. Any gain or loss an investor realizes on
a subsequent conversion of foreign currency will be U.S. source ordinary income or loss, as the case may be.



Foreign Tax Credit Considerations



For purposes of
the U.S. foreign tax credit limitations, dividends on the common shares will be foreign source income and will generally constitute
“passive category income” but could, in the case of certain investors, constitute “general category income.”
In general, gain or loss realized upon sale or exchange of the common shares by an investor will be U.S. source income or loss,
as the case may be.



Subject to certain
complex limitations, including holding period requirements, generally an investor will be entitled to a credit against an investor’s
United States federal income tax liability or a deduction in computing an investor’s United States federal taxable income
in respect of any Canadian taxes withheld by us (to the extent not refundable). Investors should consult their tax advisors as
to the consequences of Canadian withholding taxes and the availability of a foreign tax credit or deduction.



- 78 -







Passive Foreign Investment Company Status



The foregoing
discussion assumes that we were not a Passive Foreign Investment Company (“PFIC”) for any taxable year during which
an investor held common shares. In general, a non-U.S. corporation is classified as a PFIC for each taxable year in which (i) 75%
or more of its gross income is passive income (as defined for U.S. federal income tax purposes) or (ii) on average for such
taxable year, 50% or more (by value) of its assets either produce or are held for the production of passive income. To the best
of the our knowledge and belief and based on information available, we are not and have not been a PFIC at least within the most
recent five years, and we expect that we will not become a PFIC in the foreseeable future. However, PFIC classification is factual
in nature, generally cannot be determined until the close of the taxable year in question, and is determined annually based on
application of complex rules which are uncertain in some respects. Consequently, we cannot provide any assurance that we have not
been or will not become a PFIC for any taxable year during which an investor holds or held common shares. If we were determined
to be a PFIC for any taxable year during which an investor holds or held common shares, an investor could be subject to special,
adverse U.S. federal income tax rules (including increased tax liability). Investors should consult their own tax advisors
concerning the U.S. federal income tax consequences of Catalyst being or having been a PFIC.



Information
Reporting and Backup Withholding



An investor (other
than an “exempt recipient,” including a corporation and certain other persons who, when required, demonstrate their
exempt status) may be subject to backup withholding at a rate of 31%, and to information reporting requirements with respect to
dividends on, and to proceeds from the sale or exchange of, the common shares. In general, if a non-corporate investor subject
to information reporting fails to furnish a correct taxpayer identification number or otherwise fails to comply with applicable
backup withholding requirements, backup withholding may apply. The backup withholding tax is not an additional tax and may be credited
against an investor’s regular United States federal income tax liability or refunded by the IRS where applicable.



Canadian Federal Income Tax Considerations



The following is a summary of the principal
Canadian federal income tax consequences generally applicable to a holder of common shares of Catalyst (a “U.S. holder”)
who (i) deals at arm’s length with Catalyst, (ii) holds such common shares as capital property, and who for the purposes
of the Income Tax Act (Canada) (the “Act”) and the Canada-United States Income Tax Convention (the “Treaty”),
(iii) is at all relevant times resident in the United States, (iv) is not and is not deemed to be resident in Canada, (v) is entitled
to full benefits under the Treaty, and (vi) does not use or hold and is not deemed to use or hold the common shares in carrying
on a business in Canada. Special rules, which are not discussed below, may apply to a U.S. holder which is an insurer that carries
on business in Canada and elsewhere or that is a limited liability company. Such U.S. holders are advised to consult their own
tax advisors.



This summary is of a general nature only
and is not, and should not be interpreted as, legal or tax advice to any particular U.S. holder and no representation is made with
respect to the Canadian income tax consequences to any particular person. Accordingly, U.S. holders are advised to consult their
own tax advisors with respect to their particular circumstances.



Under the Act and the Treaty, a U.S. holder
of common shares will generally be subject to a 15% withholding tax on dividends paid or credited or deemed by the Act to have
been paid or credited on such shares. The withholding tax rate is 5% where the U.S. holder is a corporation that beneficially owns
at least 10% of the voting shares of Catalyst and the dividends may be exempt from such withholding in the case of some U.S. holders
such as certain qualifying pension funds and charities.



In general, a U.S. holder will not be subject
to Canadian income tax on capital gains arising on the disposition of common shares of Catalyst at a time that the Catalyst’s
common shares are listed on the TSX unless (i) at any time in the 60-month period immediately preceding the disposition, 25% or
more of the shares of any class or series of the capital stock of Catalyst were owned by the U.S. holder, persons with whom the
U.S. holder did not deal at arm’s length for purposes of the Act or the U.S. holder and such persons and (ii) the value of
the common shares of Catalyst at the time of the disposition derives principally from real property (as defined in the Treaty)
situated in Canada. For this purpose, the Treaty defines real property situated in Canada to include rights to explore for or exploit
mineral deposits, sources and other natural resources situated in Canada, rights to amounts computed by reference to the amount
or value of production from such resources, certain other rights in respect of natural resources situated in Canada and shares
of a corporation the value of whose shares is derived principally from real property situated in Canada.



| | F. | Dividends and Paying Agents
| | -- | ---------------------------



Information not required for an annual
report.



- 79 -







| | G. | Statements by Experts
| | -- | ---------------------



Information not required for an annual
report.



| | H. | Documents on Display
| | -- | --------------------



Any documents referred to in this annual
report shall be available for review at the registered office of the Company located at 2nd floor, 3600 Lysander Lane, Richmond,
BC V7B 1C3.



| | I. | Subsidiary Information
| | -- | ----------------------



Information not required for an annual
report.



| | ITEM 11 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
| | ------- | ----------------------------------------------------------



| | A. | Quantitative Information about Market Risk
| | -- | ------------------------------------------



| | (a) | Financial Risk Management
| | --- | -------------------------



Financial instruments
of the company consist primarily of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and
long-term debt. Financial instruments of the company also include derivatives which the company uses to reduce its exposure to
currency and price risk associated with its revenues, energy costs and long-term debt.



The company has exposure
to risk from its financial instruments, specifically credit risk, market risk (including currency, price and interest rate risk)
and liquidity risk.



| | (i) | Credit Risk
| | --- | -----------



Credit
risk is the risk of financial loss to the company if a customer or counterparty to a financial instrument fails to meet its contractual
obligation. This risk derives principally from the company’s receivables from customers and derivative counterparties.



Accounts
Receivable



The company is exposed
to credit risk on accounts receivable from its customers who are mainly in the newspaper publishing, commercial printing and paper
manufacturing businesses. The company manages its credit risk principally through credit policies, which include the analysis of
the financial positions of its customers and the regular review of their credit limits. The company also subscribes to credit insurance
for substantially all of its receivables, periodically purchases accounts receivable puts on certain customers, and obtains bank
letters of credit for some export market customers.



- 80 -







Aging of receivables
at December 31 and September 30, 2012



|                                                    |  | Successor          |       |   | Predecessor         |  
|--------------------------------------------------- |  | ------------------ | ----- | - | ------------------- | -
|                                                    |  | As at  December 31 |       |   | As at  September 30 |  
|                                                    |  | 2012               |       |   | 2012                |  
|Trade receivables, gross                            |  |                    |       |   |                     |  
|Current                                             |  | $                  | 86.3  |   |                     | $
|Past due 1-30 days                                  |  |                    | 7.3   |   |                     |  
|Past due 31-90 days                                 |  |                    | 0.2   |   |                     |  
|Past due over 90 days                               |  |                    | 0.9   |   |                     |  
|                                                    |  |                    | 94.7  |   |                     |  
|Allowance for doubtful accounts                     |  |                    | (2.2  | ) |                     |  
|Trade receivables, net                              |  |                    | 92.5  |   |                     |  
|Other receivables, including sales tax recoverables |  |                    | 21.5  |   |                     |  
|Accounts receivable                                 |  | $                  | 114.0 |   |                     | $



The movement in the allowance
for doubtful accounts in respect of trade receivables were as follows:





|                                 |  | Successor          |     |  | Predecessor         |  
|-------------------------------- |  | ------------------ | --- |  | ------------------- | -
|                                 |  | As at  December 31 |     |  | As at  September 30 |  
|                                 |  | 2012               |     |  | 2012                |  
|Balance, beginning of period     |  | $                  | –   |  |                     | $
|Increase (decrease) in provision |  |                    | 2.2 |  |                     |  
|Balance, end of period (note 11) |  | $                  | 2.2 |  |                     | $









Derivatives



The company is also exposed
to credit risk with counterparties to the company’s derivative financial instruments. The credit risk arises from the potential
for a counterparty to default on its contractual obligations, and is limited to those contracts where the company would incur a
cost to replace a defaulted transaction. The company manages this risk by diversifying through counterparties that are of strong
credit quality, normally major financial institutions.



| | (ii) | Market risk
| | ---- | -----------



Market risk is the risk
that changes in market prices, such as foreign exchange rates, commodity prices and interest rates will affect the company’s
cash flows or the value of its financial instruments (e.g., fixed interest long-term debt).



Currency risk:
The company is exposed to the risk that future cash flows will fluctuate as substantially all of the company’s sales and
accounts receivable are denominated in U.S. dollars, while only a portion of its costs and payables are denominated in or referenced
to U.S. dollars. The company is also exposed to the fluctuations in the fair value of its debt denominated in U.S. dollars. Up
to September 31, 2011, a portion of the company’s U.S. dollar denominated long-term debt was designated as an effective hedge
of the company’s net investment in the Snowflake mill. The company uses foreign currency options and forward contracts to
partially hedge trade receivables and anticipated future sales denominated in foreign currencies as well as U.S. dollar denominated
debt.



The company’s
hedging policy for anticipated sales and accounts receivable includes 0% to 67% of 0- to 12-month and 0% to 25% of 13- to 24-month
U.S. dollar net exposure. Hedges are layered in over time, increasing the portion of sales or accounts receivable hedged as it
gets closer to the expected date of the sale or collection of the accounts receivable. The company’s hedging policy for its
U.S. dollar denominated debt includes 0% to 60% of U.S. dollar net exposure. Future U.S. dollar revenues also provide a partial
natural hedge for U.S. dollar denominated debt. As of December 31, 2012 and September 30, 2012, the company did not have any foreign
currency options or forward contracts outstanding.



- 81 -







Price
risk: The company’s policy allows for hedges of newsprint and pulp to be placed on anticipated sales, and hedges
of old newsprint to be placed on anticipated purchases and allows for anticipated purchases at 0% to 70% of 0- to 12-month, 0%
to 60% of 13- to 24-month and 0% to 30% of 25- to 36-month of the net exposure for oil and natural gas. As of December 31, 2012
and September 30, 2012, the company did not have any outstanding commodity contracts outstanding.



The following
table is a sensitivity analysis for product prices, foreign exchange and certain input costs:



|(In millions of dollars, except per share amounts)                  |  | AdjustedEBITDA1 |   |  | Net earnings2 |   |   | Earnings  per share | 
|------------------------------------------------------------------- |  | --------------- | - |  | ------------- | - | - | ------------------- | 
|Product prices 3                                                    |  |                 |   |  |               |   |   |                     | 
|A US$10 per tonne change in the sales price of:                     |  |                 |   |  |               |   |   |                     | 
|Specialty printing papers                                           |  | $               | 8 |  |               | $ | 6 |                     | 
|Newsprint                                                           |  |                 | 3 |  |               |   | 2 |                     | 
|Pulp                                                                |  |                 | 3 |  |               |   | 2 |                     | 
|Foreign exchange 4                                                  |  |                 |   |  |               |   |   |                     | 
|A US$0.01 change in the U.S. dollar relative to the Canadian dollar |  |                 | 6 |  |               |   | 5 |                     | 
|Energy cost sensitivity 5                                           |  |                 |   |  |               |   |   |                     | 
|A 5% change in the price of:                                        |  |                 |   |  |               |   |   |                     | 
|Natural gas and oil – direct purchases                              |  |                 | 2 |  |               |   | 1 |                     | 
|Electricity – direct purchases                                      |  |                 | 7 |  |               |   | 5 |                     | 
|Freight cost sensitivity                                            |  |                 |   |  |               |   |   |                     | 
|A US$5/bbl change in the price of West Texas Int. (WTI) Oil         |  |                 | 3 |  |               |   | 2 |                     | 
|Fibre sensitivity 5                                                 |  |                 |   |  |               |   |   |                     | 
|A US$5 per unit change in the price of:                             |  |                 |   |  |               |   |   |                     | 
|Wood chips (bone dry tonnes )                                       |  |                 | 8 |  |               |   | 6 |                     | 



| | 1. | Refer
                                                                                                        to Non-GAAP measures.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------

| | 2 | Based
                                                             on an expected long-term tax rate of 25%.
| | - | ------------------------------------------------------------------------------------------------------------

| | 3 | Based
                                                             on annualized sales of Q4 2012 and foreign exchange rate of US$1.01.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| | 4 | Based
                                                             on Q4 2012 annualized net cash flows and a movement to US$1.02 from
                                                             US$1.01 and excluding our hedging program and the impact of the translation
                                                             of U.S. dollar denominated debt.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5 | Based
                                                             on Q4 2012 annualized consumption levels and an exchange rate of
                                                             US$1.01.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interest
rate risk: The fair value of the company’s fixed-rate debt or the future cash flows of variable-rate debt or fixed-to-floating
interest swaps may fluctuate because of changes in market interest rates. The company’s policy is to keep the majority of
its term debt on a fixed-rate basis, but to allow for the placing of some fixed-to-floating swaps at rates considered acceptable.



| | (iii) | Liquidity risk
| | ----- | --------------



| |  | Liquidity risk is the risk that the company will not be able to meet its financial obligations
as they fall due. The company’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient
liquidity to meet its liabilities when due over the next 12 to 24 months, under both normal and stressed conditions, without incurring
unacceptable losses or risking damage to the company’s reputation.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The company’s principal cash requirements are for interest payments on its debt, capital
expenditures and working capital needs. The company uses its operating cash flows, ABL Facility and cash balances to maintain its
liquidity. Internal forecasts are regularly prepared that include earnings, capital expenditures, cash flows, cash or revolver
drawings, and sensitivities for major assumptions. The internal forecasts include borrowing base availability and covenant compliance.
The company also monitors the maturities of its long-term debt and assesses refinancing costs and risks in deciding when to refinance
debt in advance of its maturity.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Revenue risk management instruments
| | --- | -----------------------------------



| |  | The company did not have any foreign currency or forward contracts outstanding at December 31,
2012 or at September 30, 2012.
| |  | -----------------------------------------------------------------------------------------------------------------------------



Foreign currency options
and forward contracts are no longer designated as hedging instruments and are reported at their fair value, which was $nil million
at December 31, 2012 and September 30, 2012 (December 31, 2011 - $4.5 million), with related gains and losses recognized in Other
income (expense).



Commodity swap agreements
are not designated as hedging instruments and are reported at their fair value which was $nil at December 31, 2012 and September
30, 2012 (December 31, 2011 - $0.5 million) with related gains and losses recognized in Other income (expense).



- 82 -







| | (c) | Cost risk management instruments
| | --- | --------------------------------



The company did not
have any commodity contracts outstanding at December 31, 2012 or at September 30, 2012 (December 31, 2011 - negative $0.6 million).



| | (d) | Long-term debt risk management instruments
| | --- | ------------------------------------------



The company had no
forward foreign currency contracts or options to acquire U.S. dollars at December 31, 2012 (December 31, 2011 – $nil) held
for the purposes of managing exposure to foreign exchange rate fluctuations on the company’s long-term debt.



| | (e) | Interest rate swaps
| | --- | -------------------



The company had no fixed-to-floating
interest rate swaps outstanding at December 31, 2012.



| | B. | Qualitative Information about Market Risk
| | -- | -----------------------------------------



See Item 11A.



| | C. | Interim Periods
| | -- | ---------------



This disclosure item is not applicable.



| | ITEM 12 | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
| | ------- | ------------------------------------------------------



Information not required for an annual
report.



PART II



| | ITEM 13 | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
| | ------- | -----------------------------------------------



| | A. | Indebtedness
| | -- | ------------



Except for payments of principal and interest
on our 2016 Notes and 2014 Notes that were not made and were compromised as part of our proceedings under the CCAA and in accordance
with our Plan of Arrangement under the CCAA, there has been no default in the payment of principal or interest on our outstanding
indebtedness since the date of filing of our last annual report on Form 20-F.



| | B. | Dividends
| | -- | ---------



No dividends are in arrears.



| | ITEM 14 | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS
| | ------- | ----------------------------------------------------------------------------



| | A. | There have been no material modifications to the instruments defining the rights of holders of
any class of registered securities since the date of filing of our last annual report on Form 20-F except that the indentures governing
the 2014 Notes and 2016 Notes are no longer in effect given the exchange of the 2016 Notes and 2014 Notes under the company’s
plan of arrangement under the CCAA and the common shares of the company that were outstanding on September 13, 2013 were cancelled
for no consideration effective September 13, 2012 under the plan of arrangement. See “Creditor Protection and Restructuring
Process - Implementation of Plan”.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | B. | This disclosure item is not applicable.
| | -- | ---------------------------------------



| | C. | This disclosure item is not applicable.
| | -- | ---------------------------------------



| | D. | This disclosure item is not applicable.
| | -- | ---------------------------------------



| | E. | This disclosure item is not applicable.
| | -- | ---------------------------------------



- 83 -







| | ITEM 15 | CONTROLS AND PROCEDURES
| | ------- | -----------------------



| | A. | Disclosure Controls and Procedures
| | -- | ----------------------------------



We conducted an evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures. The evaluation was conducted under the supervision and with
the participation of management, including the chief executive officer and chief financial officer, as of December 31, 2012. Based
on the evaluation, our chief executive officer and chief financial officer concluded that such disclosure controls and procedures
– as defined in Canada under National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim
Filings, and in Rules 13a-15(e) and 15d-15(e) promulgated under the United States Securities Exchange Act of 1934, as amended (the
U.S. Exchange Act) – are effective as at December 31, 2012.



It should be noted that while our disclosure
controls and procedures are designed to provide a reasonable level of assurance of achieving their objectives, our chief executive
officer and chief financial officer do not expect that our disclosure controls and procedures or internal control over financial
reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.



| | B. | Internal Control over Financial Reporting
| | -- | -----------------------------------------



Section 404 of the United States Sarbanes-Oxley
Act, Management Assessment of Internal Controls (“Section 404”), continues to require that management (a) have
the responsibility for establishing and maintaining an adequate internal control structure and procedure for financial reporting,
and (b) assess and report on the effectiveness of internal control over financial reporting annually. As of December 31, 2012,
management has assessed the effectiveness of our internal control over financial reporting. Based on this assessment, management
has determined our internal control over financial reporting was effective as of December 31, 2012, and issued Management’s
Report on Financial Statements and Assessment of Internal Control over Financial Statements dated March 5, 2013, to that effect.
This document is included in Item 17.



| | C. | Report of the Independent Public Accounting Firm
| | -- | ------------------------------------------------



Included in Item 17.



| | D. | Changes in Internal Control over Financial Reporting
| | -- | ----------------------------------------------------



There were no changes in our internal control
over financial reporting during the period ended December 31, 2012 that materially affected or are reasonably likely to materially
affect our internal control over financial reporting. Management has limited the scope of the design and maintenance of adequate
disclosure controls and procedures and internal control over financial reporting to exclude controls, policies and procedures of
Powell River Energy Inc., a variable interest entity in which we are the primary beneficiary.



| | ITEM 16A | AUDIT COMMITTEE FINANCIAL EXPERT
| | -------- | --------------------------------



The Board of directors has determined that
Mr. John Charles, an individual serving on the audit committee of our Board of directors, is an audit committee financial expert
and is independent as defined in Item 16A of Form 20-F under the Securities Exchange Act of 1934, as amended.



| | ITEM 16B | CODE OF ETHICS
| | -------- | --------------



We have a Code of Corporate Ethics
and Behaviour that applies to directors, executives and employees, and is reviewed and committed to by salaried employees each
year. Breaches of this code can be reported through an anonymous phone line or other methods, but no reports were received in 2012.
No waivers from the Code of Corporate Ethics and Behavior were granted in the fiscal year ended December 31, 2012. A copy of the
current Code of Corporate Ethics and Behaviour can be found at our website www.catalystpaper.com.



Our governance practices
meet or exceed the effective governance guidelines of the Toronto Stock Exchange.



- 84 -







| | ITEM 16C | PRINCIPAL ACCOUNTANT FEES AND SERVICES
| | -------- | --------------------------------------



During the last two years, we paid the
following fees to our external auditors:



|                        |  | Period Ending December 31 |          
|----------------------- |  | ------------------------- | ---------
|                        |  | 2012                      |          
|(a)   Audit Fees        |  |                           | 750,000  
|(b)  Audit Related Fees |  |                           | 233,900  
|(c)  Tax Fees           |  |                           | 89,815   
|(d)  All Other Fees     |  |                           | —        
|Total                   |  |                           | 1,073,715



The services rendered
in connection with “Audit Related Fees” in 2012 consisted primarily of the auditor’s involvement with the audit
of our pension plan, quarterly reviews and audit related technical accounting matters. The services rendered in connection with
“Tax Fees” consisted primarily of tax compliance services.



The Audit Committee has adopted policies
and procedures for the pre-approval of audit, tax and other non-audit services provided by the independent registered public accounting
firm. These policies and procedures are summarized below.



The terms of engagement and scope of the
annual audit of the financial statements are agreed to by the Audit Committee in advance of the engagement of the independent registered
public accounting firm in respect of the annual audit. The Audit Committee approves the audit fees.



The independent registered public accounting
firm are not permitted to provide non-audit services that would compromise their independence or violate any laws or regulations
that would affect their appointment as independent registered chartered accountants. They are eligible for selection to provide
non-audit services only to the extent that their skills and experience make them a logical supplier of the services. The Audit
Committee must pre-approve the provision of all non-audit services by the independent registered public accounting firm and will
consider regulatory guidelines in determining the scope of permitted services. The Audit Committee has pre-approved non-audit services
in respect of individual assignments for permitted services that meet certain criteria. Assignments outside these parameters must
be specifically pre-approved by the Audit Committee in advance of commissioning the work.



In 2012, our Audit Committee approved all
audit, tax and other non-audit services performed by our independent registered public accounting firm.



| | ITEM 16D | Exemptions From Listing Standards for Audit Committees
| | -------- | ------------------------------------------------------



This disclosure item is not applicable.



| | ITEM 16E | Purchases of Equity Securities by the Issuer and its
Affiliates
| | -------- | ---------------------------------------------------------------



This disclosure item is not applicable.



| | ITEM 16F | Change in Registrant’s Certifying Accountant
| | -------- | --------------------------------------------



This disclosure item is not applicable.



| | ITEM 16G | Corporate Governance
| | -------- | --------------------



This disclosure item is not applicable.



- 85 -







PART III



| | ITEM 17 | FINANCIAL STATEMENTS
| | ------- | --------------------



The consolidated financial statements of
the Company as of December 31, 2012 and 2011 and for the three years ended December 31, 2012 as described below have been incorporated
by reference from Exhibit 99.2 to the company’s form 6-K, dated March 6, 2013 (No.000-49751).



Reports of Independent Registered Public
Accounting Firm and Consolidated Financial Statements of Catalyst Paper Corporation



Audited Consolidated Financial Statements

Report
of Independent Registered Public Accounting Firm

Consolidated
Balance Sheets as at December 31, 2012, September 30, 2012 and December 31, 2011

Consolidated
Statements of Earnings (Loss) for the three-months ended December 31, 2012, the nine-months ended September 30, 2012 and for the
years ended December 31, 2011 and 2010

Consolidated
Statements of Comprehensive Income (Loss) for the three-months ended December 31, 2012, the nine-months 		ended September
30, 2012 and for the years ended December 31, 2011 and 2010

Consolidated
Statements of Cash Flows for the three-months ended December 31, 2012, the nine-months 	ended September 30, 2012 and for the
years ended December 31, 2011 and 2010

Consolidated
Statements of Equity (Deficiency) for the three-months ended December 31, 2012, the nine-months 	ended September 30, 2012 and
for the years ended December 31, 2011 and 2010

Consolidated
Statements of Business Segments for the three-months ended December 31, 2012, the nine-months 		ended September 30, 2012
and for the years ended December 31, 2011 and 2010

Notes to
the Consolidated Statements















MANAGEMENT’S RESPONSIBILITY



Management’s
Report on Financial Statements and
Assessment of Internal Control Over Financial Reporting



Catalyst Paper Corporation’s management
is responsible for the preparation, integrity and fair presentation of the accompanying consolidated financial statements and other
information contained in this Annual Report. The consolidated financial statements and related notes were prepared in accordance
with U.S. generally accepted accounting principles and reflect management’s best judgments and estimates. Financial information
provided elsewhere in the Annual Report is consistent with that in the consolidated financial statements.



Management is responsible for designing and
maintaining adequate internal control over financial reporting. The company’s internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for reporting purposes. Internal control over financial reporting includes processes and procedures that:



| | · | pertain to the maintenance of records that,
in reasonable detail, accurately reflect the transactions of the company;
| | - | ---------------------------------------------------------------------------------------------------------------------

| | · | provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements and footnote disclosures;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| | · | provide reasonable assurance that receipts
and expenditures of the company are appropriately authorized by the company’s management and directors; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | provide reasonable assurance regarding the
prevention or timely detection of an unauthorized use, acquisition or disposition of assets that could have a material effect on
the consolidated financial statements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future
periods are subject to risk that controls may become inadequate because of changes in condition, or that the degree of compliance
with policies or procedures may deteriorate.



Management assessed the effectiveness of the
company’s internal control over financial reporting as of December 31, 2012. Management based this assessment on the criteria
for internal control over financial reporting described in the “Internal Control – Integrated Framework” issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of
the design of the company’s internal control over financial reporting and testing of the operational effectiveness of its
internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the company’s
Board of directors.



Based on this assessment, management determined
that as of December 31, 2012 the company’s internal control over financial reporting was effective.



The company’s independent auditor, which
audited and reported on the company’s consolidated financial statements, has also issued an auditors’ report on the
company’s internal control over financial reporting.



The Board of directors is responsible for
satisfying itself that management fulfills its responsibilities for financial reporting and internal control. The Audit Committee,
which is comprised of four non-management members of the Board of directors, provides oversight to the financial reporting process.
The Audit Committee meets periodically with management, the internal auditors and the external auditors to review the consolidated
financial statements, the adequacy of financial reporting, accounting systems and controls, and internal and external auditing
functions.



These consolidated financial statements have
been audited by KPMG LLP, the independent auditors, whose report follows.



|                        |                            
|----------------------- | ---------------------------
|                        |                            
|Kevin J. Clarke         | Brian Baarda               
|President and           | Vice-President, Finance    
|Chief Executive Officer | and Chief Financial Officer



Vancouver, Canada
March 5, 2013













Report of
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Shareholders of Catalyst Paper Corporation



We have audited the accompanying consolidated balance sheets
of Catalyst Paper Corporation as of December 31, 2012 (Successor), September 30, 2012 (Successor) and December 31, 2011 (Predecessor)
and the related consolidated statements of earnings (loss), comprehensive income (loss), equity (deficiency) and cash flows for
the three-month period ended December 31, 2012 (Successor), the nine-month period ended September 30, 2012 (Predecessor) and for
each of the years in the two-year period ended December 31, 2011 (Predecessor). These consolidated financial statements are the
responsibility of Catalyst Paper Corporation's management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.



We conducted our audits in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



As discussed in Note 2 to the consolidated financial statements,
the Supreme Court of British Columbia and the Bankruptcy Court in US confirmed the Plan of Arrangement on June 28, 2012 and July
27, 2012, respectively, which became effective on September 13, 2012. Accordingly, the accompanying consolidated financial statements
have been prepared in conformity with Accounting Standards Codification 852-10, Reorganizations, for the Successor Company as a
new entity with assets, liabilities and a capital structure having carrying amounts not comparable with prior periods, as described
in Note 1.



In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial position of Catalyst Paper Corporation as of December
31, 2012 (Successor), September 30, 2012 (Successor) and December 31, 2011 (Predecessor), and its consolidated results of operations
and its consolidated cash flows for the three-month period ended December 31, 2012 (Successor), the nine-month period ended September
30, 2012 (Predecessor) and for each of the years in the two-year period ended December 31, 2011 (Predecessor) in conformity with
US generally accepted accounting principles.



Chartered Accountants







Vancouver, Canada



March 5, 2013











CATALYST PAPER CORPORATION



CONSOLIDATED BALANCE SHEETS



(In millions of Canadian dollars)





|                                                                                                                                                                                       |  | Successor          |       |   | Predecessor         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | - | ------------------- | -
|                                                                                                                                                                                       |  | As at  December 31 |       |   | As at  September 30 |  
|                                                                                                                                                                                       |  | 2012               |       |   | 2012                |  
|Assets                                                                                                                                                                                 |  |                    |       |   |                     |  
|Current assets                                                                                                                                                                         |  |                    |       |   |                     |  
|Cash and cash equivalents                                                                                                                                                              |  | $                  | 16.6  |   |                     | $
|Restricted cash (note 10)                                                                                                                                                              |  |                    | 0.7   |   |                     |  
|Accounts receivable (note 11)                                                                                                                                                          |  |                    | 114.0 |   |                     |  
|Inventories (note 12)                                                                                                                                                                  |  |                    | 125.0 |   |                     |  
|Prepaids and other (note 13)                                                                                                                                                           |  |                    | 8.9   |   |                     |  
|Assets held for sale (note 9)                                                                                                                                                          |  |                    | 34.3  |   |                     |  
|                                                                                                                                                                                       |  |                    | 299.5 |   |                     |  
|Property, plant and equipment (note 14)                                                                                                                                                |  |                    | 611.6 |   |                     |  
|Goodwill (note 15)                                                                                                                                                                     |  |                    | 56.7  |   |                     |  
|Other assets (note 16)                                                                                                                                                                 |  |                    | 11.0  |   |                     |  
|                                                                                                                                                                                       |  | $                  | 978.8 |   |                     | $
|Liabilities                                                                                                                                                                            |  |                    |       |   |                     |  
|Current liabilities                                                                                                                                                                    |  |                    |       |   |                     |  
|Accounts payable and accrued liabilities (note 17)                                                                                                                                     |  | $                  | 113.8 |   |                     | $
|Current portion of long-term debt (note 18)                                                                                                                                            |  |                    | 6.6   |   |                     |  
|Liabilities associated with assets held for sale (note 9)                                                                                                                              |  |                    | 15.2  |   |                     |  
|                                                                                                                                                                                       |  |                    | 135.6 |   |                     |  
|Long-term debt (note 18)                                                                                                                                                               |  |                    | 422.0 |   |                     |  
|Employee future benefits (note 19)                                                                                                                                                     |  |                    | 289.7 |   |                     |  
|Other long-term obligations (note 20)                                                                                                                                                  |  |                    | 8.9   |   |                     |  
|Deferred income taxes (note 21)                                                                                                                                                        |  |                    | –     |   |                     |  
|Deferred credits (note 22)                                                                                                                                                             |  |                    | –     |   |                     |  
|                                                                                                                                                                                       |  |                    | 856.2 |   |                     |  
|Equity (Deficiency)                                                                                                                                                                    |  |                    |       |   |                     |  
|Shareholders’ equity (Deficiency)                                                                                                                                                      |  |                    |       |   |                     |  
|Common stock:	no par value; unlimited shares authorized; issued and outstanding: 14,527,571 shares (September 30, 2012 – 14,400,000 shares and December 31, 2011 – 381,900,450 shares) |  |                    | 144.9 |   |                     |  
|Preferred stock:	par value determined at time of issue; authorized 100,000,000 shares; issued and outstanding: nil shares                                                              |  |                    | –     |   |                     |  
|Additional paid-in capital                                                                                                                                                             |  |                    | –     |   |                     |  
|Deficit                                                                                                                                                                                |  |                    | (35.2 | ) |                     |  
|Accumulated other comprehensive income (loss) (note 23)                                                                                                                                |  |                    | 6.6   |   |                     |  
|                                                                                                                                                                                       |  |                    | 116.3 |   |                     |  
|Non-controlling interest (deficit) (note 8)                                                                                                                                            |  |                    | 6.3   |   |                     |  
|                                                                                                                                                                                       |  |                    | 122.6 |   |                     |  
|                                                                                                                                                                                       |  | $                  | 978.8 |   |                     | $

Going concern (note 1)

Commitments, guarantees and indemnities
and contingent liabilities (notes 32, 33, and 34)

Subsequent events (notes 8, 9, and 19)

The accompanying notes are an integral
part of the consolidated financial statements.



|On behalf of the Board: |             
|----------------------- | ------------
|                        |             
|Kevin J. Clarke         | Walter Jones
|Director                | Director    













CATALYST PAPER CORPORATION



CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)



(In millions of Canadian dollars, except where otherwise stated)



|                                                                                                                                                    |  | Successor          |       |   | Predecessor        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | - | ------------------ | -
|                                                                                                                                                    |  | Three months ended |       |   | Nine months  ended |  
|                                                                                                                                                    |  | December 31        |       |   | September 30       |  
|                                                                                                                                                    |  | 2012               |       |   | 2012               |  
|Sales                                                                                                                                               |  | $                  | 260.5 |   |                    | $
|Operating expenses                                                                                                                                  |  |                    |       |   |                    |  
|Cost of sales, excluding depreciation and amortization                                                                                              |  |                    | 245.6 |   |                    |  
|Depreciation and amortization                                                                                                                       |  |                    | 12.9  |   |                    |  
|Selling, general and administrative                                                                                                                 |  |                    | 7.7   |   |                    |  
|Restructuring (note 24)                                                                                                                             |  |                    | –     |   |                    |  
|Impairment and other closure costs (note 7)                                                                                                         |  |                    | –     |   |                    |  
|                                                                                                                                                    |  |                    | 266.2 |   |                    |  
|Operating earnings (loss)                                                                                                                           |  |                    | (5.7  | ) |                    |  
|Interest expense, net (note 25)                                                                                                                     |  |                    | (11.6 | ) |                    |  
|Foreign exchange gain (loss) on long-term debt                                                                                                      |  |                    | (3.2  | ) |                    |  
|Other income (expense), net (note 26)                                                                                                               |  |                    | 0.1   |   |                    |  
|Loss before reorganization items and  income taxes                                                                                                  |  |                    | (20.4 | ) |                    |  
|Reorganization items, net (note 6)                                                                                                                  |  |                    | (3.2  | ) |                    |  
|Income (loss) before income taxes                                                                                                                   |  |                    | (23.6 | ) |                    |  
|Income tax expense (recovery) (note 21)                                                                                                             |  |                    | 0.2   |   |                    |  
|Earnings (loss) from continuing operations                                                                                                          |  |                    | (23.8 | ) |                    |  
|Loss from discontinued operations net of tax (note 9)                                                                                               |  |                    | (12.9 | ) |                    |  
|Net earnings (loss)                                                                                                                                 |  |                    | (36.7 | ) |                    |  
|Net (earnings) loss attributable to non-controlling interest (note 8)                                                                               |  |                    | 1.5   |   |                    |  
|Net earnings (loss) attributable to the company                                                                                                     |  | $                  | (35.2 | ) |                    | $
|Basic and diluted net earnings (loss) per share from continuing operations attributable to the company’s common shareholders (note 27) (in dollars) |  | $                  | (1.55 | ) |                    | $
|Basic and diluted net loss per share from discontinued operations attributable to the company’s common shareholders (in dollars)                    |  | $                  | (0.89 | ) |                    | $
|Weighted average number of the company’s common shares outstanding (in millions)                                                                    |  |                    | 14.4  |   |                    |  



The accompanying notes are an integral
part of the consolidated financial statements.













CATALYST PAPER CORPORATION



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)



(In millions of Canadian dollars)



|                                                                                |  | Successor                      |       |   | Predecessor                    |  
|------------------------------------------------------------------------------- |  | ------------------------------ | ----- | - | ------------------------------ | -
|                                                                                |  | Three months ended December 31 |       |   | Nine months ended September 30 |  
|                                                                                |  | 2012                           |       |   | 2012                           |  
|Net earnings (loss)                                                             |  | $                              | (36.7 | ) |                                | $
|Other comprehensive income (loss), net of tax (expense) recovery:               |  |                                |       |   |                                |  
|Employee future benefits liability adjustment                                   |  |                                |       |   |                                |  
|Gross amount                                                                    |  |                                | 6.6   |   |                                |  
|Tax (expense) recovery                                                          |  |                                | –     |   |                                |  
|Net amount                                                                      |  |                                | 6.6   |   |                                |  
|Reclassification of amortization of employee  future benefits                   |  |                                |       |   |                                |  
|Gross amount                                                                    |  |                                | –     |   |                                |  
|Tax (expense) recovery                                                          |  |                                | –     |   |                                |  
|Net amount                                                                      |  |                                | –     |   |                                |  
|Unrealized net gain on cash flow revenue hedges                                 |  |                                |       |   |                                |  
|Gross amount                                                                    |  |                                | –     |   |                                |  
|Tax (expense) recovery                                                          |  |                                | –     |   |                                |  
|Net amount                                                                      |  |                                | –     |   |                                |  
|Reclassification of net (gain) loss on cash flow revenue hedges                 |  |                                |       |   |                                |  
|Gross amount                                                                    |  |                                | –     |   |                                |  
|Tax (expense) recovery                                                          |  |                                | –     |   |                                |  
|Net amount                                                                      |  |                                | –     |   |                                |  
|Unrealized gain (loss) on interest rate hedges                                  |  |                                |       |   |                                |  
|Gross amount                                                                    |  |                                | –     |   |                                |  
|Tax (expense) recovery                                                          |  |                                | –     |   |                                |  
|Net amount                                                                      |  |                                | –     |   |                                |  
|Other comprehensive income (loss) from continuing operations, net of taxes      |  |                                | 6.6   |   |                                |  
|Employee future benefits liability adjustment                                   |  |                                |       |   |                                |  
|Gross amount                                                                    |  |                                | –     |   |                                |  
|Tax (expense) recovery                                                          |  |                                | –     |   |                                |  
|Net amount                                                                      |  |                                | –     |   |                                |  
|Reclassification of amortization of employee  future benefits                   |  |                                |       |   |                                |  
|Gross amount                                                                    |  |                                | –     |   |                                |  
|Tax (expense) recovery                                                          |  |                                | –     |   |                                |  
|Net amount                                                                      |  |                                | –     |   |                                |  
|Foreign currency translation adjustments, net of related hedging activities     |  |                                |       |   |                                |  
|Gross amount                                                                    |  |                                | –     |   |                                |  
|Tax (expense) recovery                                                          |  |                                | –     |   |                                |  
|Net amount                                                                      |  |                                | –     |   |                                |  
|Other comprehensive income (loss) from discontinued operations, net of taxes    |  |                                | –     |   |                                |  
|Total comprehensive income (loss)                                               |  |                                | (30.1 | ) |                                |  
|Comprehensive (income) loss attributable to non-controlling (interest) deficit: |  |                                |       |   |                                |  
|Net (earnings) loss                                                             |  |                                | 1.5   |   |                                |  
|Other comprehensive (income) loss, net of taxes                                 |  |                                | –     |   |                                |  
|Comprehensive (income) loss attributable to non-controlling interest            |  |                                | 1.5   |   |                                |  
|Comprehensive income (loss) attributable to the company                         |  | $                              | (28.6 | ) |                                | $



The accompanying notes are an integral
part of the consolidated financial statements.











CATALYST PAPER CORPORATION



CONSOLIDATED STATEMENTS OF EQUITY (DEFICIENCY)



(In millions of Canadian dollars)





|                                                |  | Equity (deficiency) attributable to the company |              |   |            |   |          |                 | 
|----------------------------------------------- |  | ----------------------------------------------- | ------------ | - | ---------- | - | -------- | --------------- | 
|                                                |  | Common stock                                    |              |   | Additional |   |          |                 | 
|                                                |  | Number of shares                                |              |   | $          |   |          | paid-in capital | 
|Balance as at December 31, 2009 (predecessor)   |  |                                                 | 381,753,490  |   |            | $ | 1,035.0  |                 | 
|Stock option compensation expense               |  |                                                 | –            |   |            |   | –        |                 | 
|Net loss                                        |  |                                                 | –            |   |            |   | –        |                 | 
|Distributions to non-controlling interest       |  |                                                 | –            |   |            |   | –        |                 | 
|Other comprehensive income, net of tax          |  |                                                 | –            |   |            |   | –        |                 | 
|Balance as at December 31, 2010 (predecessor)   |  |                                                 | 381,753,490  |   |            | $ | 1,035.0  |                 | 
|Common shares issued                            |  |                                                 | 146,960      |   |            |   | 0.2      |                 | 
|Stock option compensation expense               |  |                                                 | –            |   |            |   | –        |                 | 
|Net loss                                        |  |                                                 | –            |   |            |   | –        |                 | 
|Distributions to non-controlling interest       |  |                                                 | –            |   |            |   | –        |                 | 
|Other comprehensive loss, net of tax            |  |                                                 | –            |   |            |   | –        |                 | 
|Balance as at December 31, 2011 (predecessor)   |  |                                                 | 381,900,450  |   |            | $ | 1,035.2  |                 | 
|Stock option compensation expense               |  |                                                 | –            |   |            |   | –        |                 | 
|Net earnings                                    |  |                                                 | –            |   |            |   | –        |                 | 
|Distributions to non-controlling interest       |  |                                                 | –            |   |            |   | –        |                 | 
|Other comprehensive loss, net of tax            |  |                                                 | –            |   |            |   | –        |                 | 
|Common shares issued                            |  |                                                 | 14,400,000   |   |            |   | 144.9    |                 | 
|Cancellation of Predecessor equity (deficiency) |  |                                                 | (381,900,450 | ) |            |   | (1,035.2 | )               | 
|Balance as at September 30, 2012 (successor)    |  |                                                 | 14,400,000   |   |            | $ | 144.9    |                 | 
|Common shares issued                            |  |                                                 | 127,571      |   |            |   | –        |                 | 
|Net loss                                        |  |                                                 | –            |   |            |   | –        |                 | 
|Distributions to non-controlling interest       |  |                                                 | –            |   |            |   | –        |                 | 
|Other comprehensive income, net of tax          |  |                                                 | –            |   |            |   | –        |                 | 
|Balance as at December 31, 2012 (successor)     |  |                                                 | 14,527,571   |   |            | $ | 144.9    |                 | 







The accompanying notes are an integral
part of the consolidated financial statements.











CATALYST PAPER CORPORATION



CONSOLIDATED STATEMENTS OF CASH FLOWS



(In millions of Canadian dollars)



|                                                                      |  | Successor                        |       |   | Predecessor                    |  
|--------------------------------------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------ | -
|                                                                      |  | Three months
 ended  December 31 |       |   | Nine months ended September 30 |  
|                                                                      |  | 2012                             |       |   | 2012                           |  
|Cash flows provided (used) by:                                        |  |                                  |       |   |                                |  
|Operations                                                            |  |                                  |       |   |                                |  
|Net earnings (loss)                                                   |  | $                                | (36.7 | ) |                                | $
|Items not requiring (providing) cash                                  |  |                                  |       |   |                                |  
|Depreciation and amortization                                         |  |                                  | 12.9  |   |                                |  
|Impairment and other closure costs (notes 7 and 9)                    |  |                                  | 8.2   |   |                                |  
|Deferred income taxes (note 21)                                       |  |                                  | 0.1   |   |                                |  
|Foreign exchange loss (gain) on long-term debt                        |  |                                  | 3.2   |   |                                |  
|Non-cash reorganization items                                         |  |                                  | 2.4   |   |                                |  
|Non-cash interest on compromised notes                                |  |                                  | –     |   |                                |  
|Employee future benefits, expense over (under) cash contributions     |  |                                  | (3.4  | ) |                                |  
|Decrease in other long-term obligations                               |  |                                  | (0.1  | ) |                                |  
|Loss (gain) on disposal of property, plant and equipment              |  |                                  | 0.4   |   |                                |  
|Other                                                                 |  |                                  | 0.2   |   |                                |  
|Changes in non-cash working capital                                   |  |                                  |       |   |                                |  
|Accounts receivable                                                   |  |                                  | 41.1  |   |                                |  
|Inventories                                                           |  |                                  | 11.6  |   |                                |  
|Prepaids and other                                                    |  |                                  | 4.5   |   |                                |  
|Accounts payable and accrued liabilities                              |  |                                  | 7.7   |   |                                |  
|Cash flows provided (used) by operations                              |  |                                  | 52.1  |   |                                |  
|Investing                                                             |  |                                  |       |   |                                |  
|Additions to property, plant and equipment                            |  |                                  | (10.4 | ) |                                |  
|Proceeds from sale of property, plant and equipment                   |  |                                  | 0.8   |   |                                |  
|Decrease (increase) in restricted cash                                |  |                                  | 3.4   |   |                                |  
|Decrease (increase) in other assets                                   |  |                                  | –     |   |                                |  
|Cash flows used by investing activities                               |  |                                  | (6.2  | ) |                                |  
|Financing                                                             |  |                                  |       |   |                                |  
|Increase (decrease) in revolving loan                                 |  |                                  | (40.0 | ) |                                |  
|Redemption of senior notes (note 18)                                  |  |                                  | –     |   |                                |  
|Proceeds on issuance of senior secured notes (note 18)                |  |                                  | –     |   |                                |  
|Note exchange costs (note 18)                                         |  |                                  | –     |   |                                |  
|Deferred financing costs (note 18)                                    |  |                                  | –     |   |                                |  
|DIP financing costs                                                   |  |                                  | –     |   |                                |  
|Settlement on purchase of senior notes (note 18)                      |  |                                  | –     |   |                                |  
|Decrease in other long-term debt                                      |  |                                  | –     |   |                                |  
|Share issuance costs                                                  |  |                                  | –     |   |                                |  
|Cash flows provided (used) by financing activities                    |  |                                  | (40.0 | ) |                                |  
|Cash and cash equivalents, increase (decrease) in the period          |  |                                  | 5.9   |   |                                |  
|Cash and cash equivalents, beginning of period                        |  |                                  | 12.6  |   |                                |  
|Cash and cash equivalents, end of period 1                            |  | $                                | 18.5  |   |                                | $
|Supplemental disclosures:                                             |  |                                  |       |   |                                |  
|Income taxes paid (recovered)                                         |  | $                                | –     |   |                                | $
|Net interest paid                                                     |  |                                  | 11.0  |   |                                |  
|Common stock issued under stock option compensation plan              |  |                                  | –     |   |                                |  
|Non-cash exchange of 8.625% senior notes                              |  |                                  | –     |   |                                |  
|Non-cash issuance of 11.0% senior notes                               |  |                                  | –     |   |                                |  
|Non-cash difference in carrying value of senior notes on modification |  |                                  | –     |   |                                |  
|1 Cash and cash equivalents
    included in assets held for sale      |  |                                  | 1.9   |   |                                |  



The accompanying notes are an integral part
of the consolidated financial statements.











CATALYST PAPER CORPORATION

CONSOLIDATED BUSINESS SEGMENTS



(In millions of Canadian dollars)





|                                           |  | Three months ended December 31, 2012 (successor) |      
|------------------------------------------ |  | ------------------------------------------------ | -----
|                                           |  | Specialty printing papers                        |      
|Sales to external customers                |  | $                                                | 171.8
|Inter-segment sales                        |  |                                                  | –    
|Depreciation and amortization              |  |                                                  | 11.2 
|Operating earnings (loss)                  |  |                                                  | 1.2  
|Total assets                               |  |                                                  | 710.5
|Additions to property, plant and equipment |  |                                                  | 6.5  









|                                           |  | Nine months ended September 30, 2012 (predecessor) |      
|------------------------------------------ |  | -------------------------------------------------- | -----
|                                           |  | Specialty printing papers                          |      
|Sales to external customers                |  | $                                                  | 503.8
|Inter-segment sales                        |  |                                                    | –    
|Depreciation and amortization              |  |                                                    | 18.9 
|Restructuring (note 24)                    |  |                                                    | 2.9  
|Operating earnings (loss)                  |  |                                                    | 19.3 
|Total assets                               |  |                                                    | 761.1
|Additions to property, plant and equipment |  |                                                    | 9.2  



|                                            |  | Year ended December 31, 2011 (predecessor) |       
|------------------------------------------- |  | ------------------------------------------ | ------
|                                            |  | Specialty printing papers                  |       
|Sales to external customers                 |  | $                                          | 690.4 
|Inter-segment sales                         |  |                                            | –     
|Depreciation and amortization               |  |                                            | 81.3  
|Restructuring (note 24)                     |  |                                            | 4.0   
|Impairment and other closure costs (note 7) |  |                                            | 507.2 
|Operating loss                              |  |                                            | (565.1
|Total assets                                |  |                                            | 432.0 
|Additions to property, plant and equipment  |  |                                            | 9.2   



|                                            |  | Year ended December 31, 2010 (predecessor) |        
|------------------------------------------- |  | ------------------------------------------ | -------
|                                            |  | Specialty printing papers                  |        
|Sales to external customers                 |  | $                                          | 674.0  
|Inter-segment sales                         |  |                                            | –      
|Depreciation and amortization               |  |                                            | 78.8   
|Restructuring (note 24)                     |  |                                            | 8.2    
|Impairment and other closure costs (note 7) |  |                                            | 104.4  
|Operating earnings (loss)                   |  |                                            | (149.7 
|Total assets                                |  |                                            | 1,046.0
|Additions to property, plant and equipment  |  |                                            | 9.1    







The accompanying notes are an integral part of the consolidated
financial statements.











CATALYST PAPER CORPORATION

CONSOLIDATED GEOGRAPHIC BUSINESS SEGMENTS



(In millions of Canadian dollars)



|                               | Three months ended December 31, 2012 (successor) |                          
|------------------------------ | ------------------------------------------------ | -------------------------
|Sales by shipment destination: |                                                  | Specialty printing papers
|Canada                         |                                                  | $                        
|United States                  |                                                  |                          
|Asia and Australasia           |                                                  |                          
|Latin America                  |                                                  |                          
|Europe and other               |                                                  |                          
|                               |                                                  | $                        





|                               | Nine months ended September 30, 2012 (predecessor) |                          
|------------------------------ | -------------------------------------------------- | -------------------------
|Sales by shipment destination: |                                                    | Specialty printing papers
|Canada                         |                                                    | $                        
|United States                  |                                                    |                          
|Asia and Australasia           |                                                    |                          
|Latin America                  |                                                    |                          
|Europe and other               |                                                    |                          
|                               |                                                    | $                        



|                               | Year ended December 31, 2011 (predecessor) |                          
|------------------------------ | ------------------------------------------ | -------------------------
|Sales by shipment destination: |                                            | Specialty printing papers
|Canada                         |                                            | $                        
|United States                  |                                            |                          
|Asia and Australasia           |                                            |                          
|Latin America                  |                                            |                          
|Europe and other               |                                            |                          
|                               |                                            | $                        





|                               | Year ended December 31, 2010 (predecessor) |                          
|------------------------------ | ------------------------------------------ | -------------------------
|Sales by shipment destination: |                                            | Specialty printing papers
|Canada                         |                                            | $                        
|United States                  |                                            |                          
|Asia and Australasia           |                                            |                          
|Latin America                  |                                            |                          
|Europe and other               |                                            |                          
|                               |                                            | $                        





|                                                      |  | Successor          |       |  | Predecessor         |  
|----------------------------------------------------- |  | ------------------ | ----- |  | ------------------- | -
|                                                      |  | As at  December 31 |       |  | As at  September 30 |  
|                                                      |  | 2012               |       |  | 2012                |  
|Property, plant and equipment by geographic location: |  |                    |       |  |                     |  
|Canada                                                |  | $                  | 611.6 |  |                     | $
|United States                                         |  |                    | –     |  |                     |  
|                                                      |  | $                  | 611.6 |  |                     | $



The accompanying notes are an integral
part of the consolidated financial statements.











NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|Note 1  | Nature of Operations and Going Concern                    | 11
|------- | --------------------------------------------------------- | --
|Note 2  | Creditor Protection Proceedings                           | 12
|Note 3  | Summary of Significant Accounting Policies                | 14
|Note 4  | Recently Implemented Accounting Standards                 | 20
|Note 5  | Changes in Future Accounting Standards                    | 21
|Note 6  | Creditor Protection Proceedings Related Disclosures       | 21
|Note 7  | Measurement Uncertainty – Impairment of Long-lived Assets | 28
|Note 8  | Variable Interest Entities                                | 31
|Note 9  | Assets Held for Sale and Discontinued Operations          | 32
|Note 10 | Restricted Cash                                           | 34
|Note 11 | Accounts Receivable                                       | 35
|Note 12 | Inventories                                               | 35
|Note 13 | Prepaids and Other                                        | 36
|Note 14 | Property, Plant and Equipment                             | 36
|Note 15 | Goodwill                                                  | 37
|Note 16 | Other Assets                                              | 37
|Note 17 | Accounts Payable and Accrued Liabilities                  | 38
|Note 18 | Long-term Debt                                            | 39
|Note 19 | Employee Future Benefits                                  | 42
|Note 20 | Other Long-term Obligations                               | 52
|Note 21 | Income Taxes                                              | 53
|Note 22 | Deferred Credits                                          | 56
|Note 23 | Accumulated Other Comprehensive Income (Loss)             | 57
|Note 24 | Restructuring                                             | 57
|Note 25 | Interest Expense, Net                                     | 58
|Note 26 | Other Income (Expense), Net                               | 58
|Note 27 | Earnings Per Share                                        | 59
|Note 28 | Stock-based Compensation Plans                            | 59
|Note 29 | Fair Value Measurement                                    | 61
|Note 30 | Financial Instruments                                     | 64
|Note 31 | Related Party Transactions                                | 66
|Note 32 | Commitments                                               | 67
|Note 33 | Guarantees and Indemnities                                | 67
|Note 34 | Contingent Liabilities                                    | 67
|Note 35 | Condensed Consolidating Financial Information             | 68













CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



| | 1. | NATURE OF OPERATIONS AND GOING CONCERN
| | -- | --------------------------------------



Catalyst Paper Corporation, together with its subsidiaries
and partnerships (collectively, the “company”) is a significant specialty mechanical printing papers and newsprint
producer in North America. The company operates in three business segments.



|Specialty printing papers | –	Manufacture and sale of mechanical specialty printing papers                      
|------------------------- | ------------------------------------------------------------------------------------
|Newsprint                 | –	Manufacture and sale of newsprint                                                 
|Pulp                      | –	Manufacture and sale of long-fibre Northern Bleached Softwood Kraft (“NBSK”) pulp.



The business segments of the company are strategic
business units that offer different products. They are managed separately because each business requires different technology,
capital expenditures, labour expertise and marketing strategies. Each segment is a significant component of the company’s
sales and operating earnings.



The company owns and operates three manufacturing
facilities located in the province of British Columbia (B.C.), Canada. On September 30, 2012 the company permanently shut down
its recycle mill operations located in Snowflake, Arizona (note 9). Two other facilities, including a paper recycling facility,
were permanently shut down during 2010. Inter-segment sales consist of pulp transfers at market prices. The primary market for
the company’s paper products is North America. The primary markets for the company’s pulp products are Asia and Australasia.



Creditor protection proceedings



On January 31, 2012, Catalyst Paper Corporation and
certain of its subsidiaries obtained an Initial Order from the Supreme Court of British Columbia (the Court) under the Companies’
Creditors Arrangement Act (CCAA). The company applied for recognition of the Initial Order under Chapter 15 of Title 11 of the
US Bankruptcy Code. The company entered into a Debtor-In-Possession (DIP) Credit Agreement, pursuant to which a DIP Credit Facility
of approximately $175 million was confirmed by the Court.



Emergence from Creditor Protection Proceedings



Catalyst Paper Corporation and all of its subsidiaries
and partnership successfully emerged from creditor protection proceedings under CCAA and Chapter 15 of Title 11 of the US Bankruptcy
Code on September 13, 2012 (emergence date). The company met all of the conditions to implement the second amended plan of arrangement
(Plan) on the emergence date by securing exit financing consisting of a new asset-based loan facility (ABL Facility) and new floating
rate senior secured notes (Floating Rate Notes). For additional information on the company’s emergence from creditor protection
proceedings, see note 2, Creditor protection proceedings.



In accordance with FASB ASC 852, fresh start accounting
was required upon the company’s emergence from the creditor protection proceedings because:



| | - | The reorganization value of the assets of the Predecessor company (defined below) immediately prior to the approval of the
Plan was less than the total of all post-petition liabilities and allowed claims, and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | The holders of the Predecessor company’s existing voting shares immediately prior to the approval of the Plan received
less than 50% of the voting shares of the common stock of the Successor company (defined below).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------













CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



FASB ASC 852 requires that fresh start accounting
be applied on the latter of the date of approval of the plan of arrangement, or the date that all material conditions to implement
the plan are met. The company’s application date for fresh start accounting was September 13, 2012, when exit financing was
secured. However, the company elected to apply fresh start accounting effective September 30, 2012, to coincide with the timing
of the third quarter close. The company evaluated events, transactions, and fluctuations in product prices, exchange rates and
inflation rates between September 13, 2012, and September 30, 2012, and concluded that the use of an accounting convenience date
of September 30, 2012 (convenience date) did not have a material impact on the company’s financial position, results of operations
and cash flows. The application of fresh start accounting was therefore reflected in the company’s consolidated balance sheet
as of September 30, 2012, and related fresh start accounting adjustments were included in the company’s consolidated statements
of earnings (loss) for the nine months ended September 30, 2012.



The implementation of the Plan and the application
of fresh start accounting materially changed the carrying amounts and classifications reported in the company’s financial
statements, and resulted in the company effectively becoming a new entity for financial reporting purposes. Accordingly, the company’s
consolidated financial statements for periods prior to September 30, 2012 are not comparable to consolidated financial statements
prepared for periods subsequent to September 30, 2012. References to Successor or Successor company refer to the company on or
after September 30, 2012, and references to Predecessor or Predecessor company refer to the company prior to September 30, 2012.
Additionally, references to periods on or after September 30, 2012, refer to the Successor, and references to periods prior to
September 30, 2012, refer to the Predecessor.



Going concern



The audited consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal
course of business. The creditor protection proceedings raised substantial doubt about the company’s ability to continue
as a going concern. During these proceedings, the company’s ability to continue as a going concern was dependent on obtaining
creditor and Court approval of a plan of arrangement, successful implementation of the plan of arrangement that would improve profitability,
reduce the company’s debt burden and improve liquidity, and securing exit financing to replace the debtor in possession financing
available to the company during the creditor protection proceedings. Management believes that the implementation of the Plan and
the company’s emergence from creditor protection proceedings have resolved the substantial doubt regarding the appropriateness
of the going concern basis of accounting.



| | 2. | CREDITOR PROTECTION PROCEEDINGS
| | -- | -------------------------------



Reorganization process



The Canadian Court and U.S. Court issued a variety
of orders throughout the restructuring process. These orders include, among other things, authorization to (a) make payments relating
to certain employees’ pre-petition wages, salaries and benefit programs in the ordinary course of business; (b) ensure the
continuation of existing cash management systems; (c) honour certain ongoing customer obligations; and (d) enter into a DIP Credit
Agreement that effectively replaced the former ABL Facility.



The terms of the Initial Order named PricewaterhouseCoopers
Inc. (PwC) as the court-appointed monitor (the Monitor), who assisted the company in formulating a restructuring plan.



Shortly after the commencement of the creditor protection
proceedings, the company began notifying all known creditors regarding these filings. Pursuant to the Initial Order, and subject
to certain exceptions, the continuation of any judicial or administrative proceedings or other actions against the company or its
property to recover, collect or secure a pre-petition claim were automatically stayed. Most creditor actions to obtain possession
of the company’s property, or to create or enforce any lien against the company’s property, or to collect pre-petition
amounts owed or otherwise exercise rights or remedies with respect to a pre-petition claim were enjoined.











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



The company reached new labour agreements, effective
from May 1, 2012 to April 30, 2017, with all six union locals at its Crofton, Port Alberni and Powell River mills. The new labour
agreements were entered into with the Communications, Energy and Paperworkers Union of Canada (CEP) locals 1, 76, 592, 686 and
1132 and the Pulp, Paper and Woodworkers Union of Canada (PPWC) local 2. Specific terms of the new labour agreements include a
10% reduction in hourly wage rates, various adjustments to vacation, health benefits and work rules, maintaining hourly retiree
health benefits, and providing for no wage inflation for the first three years and 2% increases in the fourth and fifth year that
these agreements are in effect.



On March 9, 2012, the company entered into a Restructuring
and Support Agreement (RSA) with certain holders of its 11% senior secured notes due 2016 (2016 Notes) and its 7.375% notes due
2014 (2014 Notes) that outlined a plan of arrangement under the CCAA. On May 15, 2012, the company announced that the original
terms of the plan of arrangement, as disclosed in the interim consolidated financial statements for the three months ended March
31, 2012, had been amended.



On May 23, 2012, the company announced that it did
not receive the necessary creditor approval for its amended plan of arrangement. Approval of not less than 66 2/3% of the principal
amount of each creditor class voting on the plan was required. While 99.5% of the principal amount of the secured creditor class
voted in favour of the plan, only 64% of the principal amount of the unsecured creditor class voted in favour. With the amended
plan of arrangement not being approved, the company was required to commence a sales process in accordance with certain agreed
sale and investor solicitation procedures (SISP).



On June 14, 2012, the company announced a second amended
plan of arrangement after receiving consent from a requisite number of holders of 2016 Notes to move forward to a vote. Proposed
changes under the Plan included the compromise of certain extended health benefits, modifications to the salaried pension plan
and application for additional solvency deficit funding relief. On June 25, 2012 the company announced that it had received the
necessary creditor approval for the Plan. Approval of more than 99% of secured and unsecured creditors was received. The company
also received confirmation of regulatory approval by provincial order in council of the proposed modifications to the salaried
pension plan and the application for additional funding relief. The Court sanctioned the Plan on June 28, 2012 and the US Court
in Delaware confirmed the Plan under the Chapter 15 process in a confirmation hearing on July 27, 2012.



Emergence from creditor protection proceedings



The Plan became effective on September 12, 2012 and
the restructuring under the Plan completed on September 13, 2012. Upon implementation of the Plan, the company was reorganized
through the consummation of several transactions pursuant to which, among other things:



| | § | The company’s operations were continued in substantially the
same form.
| | - | -----------------------------------------------------------------------



| | § | Holders of the Predecessor company’s 2016 Notes exchanged their
US$390.4 million aggregate principal amount plus accrued and unpaid interest for:
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



| | - | US$250.0 million aggregate principal amount of senior secured notes due in 2017 that bear interest, at the option of the company,
at a rate of 11% per annum in cash or 13% per annum payable 7.5% cash and 5.5% payment-in-kind (PIK); and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | 14.4 million new common shares, being approximately 100% of the company’s issued and outstanding common shares,subject
to dilution for (i) the issuance of common shares to unsecured creditors who made an equity election pursuant to the terms of the
Plan, and (ii) a new management incentive plan.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | § | Holders of the Predecessor company’s 2014 Notes exchanged their
US$250.0 million aggregate principal plus accrued and unpaid interest for:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| | - | their pro rata share (calculated by reference to the aggregate amount of all claims of unsecured creditors allowed under the
Plan) of 50% of the net proceeds following the sale of Catalyst Paper’s interest in Powell River Energy Inc. and Powell River
Energy Limited Partnership (PREI Proceeds Pool), or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | if an equity election was made, their pro rata share of 600,000 new common shares (the Unsecured Creditor Share Pool).
| | - | ----------------------------------------------------------------------------------------------------------------------











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



| | § | General creditors exchanged their general unsecured claims for:
| | - | ---------------------------------------------------------------



| | - | their pro rata share of the PREI Proceeds Pool; or
| | - | --------------------------------------------------



| | - | if an equity election was made, their pro rata share of the Unsecured Creditor Share Pool; or
| | - | ---------------------------------------------------------------------------------------------



| | - | if a general unsecured claim was equal to or less than $10,000, or if a valid cash election was made and such creditor elected
to reduce their claim to $10,000, cash in an amount equal to 50% of the creditor’s allowed claim (Cash Convenience Pool).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | § | All common shares and stock options of the Predecessor company outstanding
prior to the reorganization were cancelled for no consideration and holders of such common shares did not receive any distribution
under the Plan.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The company distributed $1.0 million to unsecured
creditors in November 2012 as full and final settlement of claims comprising the Cash Convenience Pool. The company issued 127,571
common shares to unsecured creditors in December as full and final settlement of claims comprising the Unsecured Creditor Share
Pool. The company agreed to the sale of its interest in PREI for proceeds of $33.0 million, expects to complete the sale in the
first quarter of 2013, and will subsequently pay out the PREI Proceeds Pool to applicable unsecured creditors. The company is required
under the Plan to offer its portion of the proceeds from the sale of PREI to the holders of Floating Rate Notes (see note 8, Variable
interest entities).



Exit Financing



On September 13, 2012, the company entered into a
new ABL Facility and issued new Floating Rate Notes. The $175.0 million ABL Facility, which was a pre-condition for the company
to implement the Plan and exit from creditor protection, matures on the earlier of July 31, 2017, and 90 days prior to maturity
of any significant debt. The Floating Rate Notes, which mature on September 13, 2016, were issued for US$35 million. The terms
and covenants of the ABL Facility and the Floating Rate Notes are disclosed in note 18, Long-term debt.



| | 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| | -- | ------------------------------------------



The consolidated financial statements of the company
are prepared in accordance with United States (U.S.) generally accepted accounting principles (U.S. GAAP).



| | (a) | Basis of consolidation
| | --- | ----------------------



The consolidated financial statements include the accounts
of the company and, from their respective dates of acquisition of control or formation, its wholly-owned subsidiaries and partnerships.
In addition, the consolidated financial statements include the accounts of the company’s joint venture, Powell River Energy
Inc. (PREI), a variable interest entity. All inter-company transactions and amounts have been eliminated on consolidation.



| | (b) | Variable interest entities
| | --- | --------------------------



Variable interest entities (VIE) are entities in which
equity investors do not have a controlling financial interest or the equity investment at risk is not sufficient to permit the
entity to finance its activities without additional subordinated financial support provided by other parties. The company consolidates
the accounts of VIEs where it has been determined that the company is the primary beneficiary, defined as the party that has the
power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and has an obligation
to absorb losses and receive benefits of that VIE.











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



| | (c) | Use of estimates
| | --- | ----------------



The consolidated financial
statements have been prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the year. On an ongoing basis, management reviews its estimates,
including those related to inventory obsolescence, estimated useful lives of assets, environmental and legal liabilities, impairment
of long-lived assets, derivative financial instruments, pension and post-retirement benefits, bad debt and doubtful accounts, income
taxes, restructuring costs, and commitment and contingencies, based on currently available information.



The enterprise value that was established as of the
valuation date of September 30, 2012 incorporated numerous major assumptions including, but not limited to, the following:



| | § | management’s best estimate of future operating performance as
of the valuation date,
| | - | ------------------------------------------------------------------------------------



| | § | internal forecasts and external forecasts based on published reports
of future exchange rates and product prices,
| | - | -----------------------------------------------------------------------------------------------------------------



| | § | a discount rate of 15% based on the estimated blended rate of return
required by debt and equity investors of the company,
| | - | --------------------------------------------------------------------------------------------------------------------------



| | § | the corporate income tax rate of approximately 25% represents an appropriate
rate to apply to future earnings of the company, based on current and projected federal and provincial tax rates,
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | § | a capital cost allowance (CCA) rate of 20% represents an appropriate
depreciation rate to apply to capital assets in future periods,
| | - | ------------------------------------------------------------------------------------------------------------------------------------



Actual amounts could differ from estimates.



| | (d) | Revenue recognition
| | --- | -------------------



The company recognizes revenues
upon shipment when persuasive evidence of an arrangement exists, prices are fixed or determinable, title of ownership has transferred
to the customer and collection is reasonably assured. Sales are reported net of discounts, allowances and rebates.



| | (e) | Shipping and handling costs
| | --- | ---------------------------



The company classifies shipping
and handling costs to Cost of sales, excluding depreciation and amortization as incurred.



| | (f) | Translation of foreign currencies
| | --- | ---------------------------------



The majority of the company’s
sales are denominated in foreign currencies, principally U.S. dollars (US$). Revenue and expense items denominated in foreign currencies
are translated at exchange rates prevailing during the period. Monetary assets and liabilities denominated in foreign currencies
are translated at the period-end exchange rates. Non-monetary assets and liabilities are translated at exchange rates in effect
when the assets are acquired or the obligations are incurred. Foreign exchange gains and losses are reflected in net earnings (loss)
for the period.



Up to September 30, 2012,
the company had a foreign subsidiary that was considered to be self-contained and integrated within its foreign jurisdiction, and
accordingly, used the U.S. dollar as its functional currency. Foreign exchange gains and losses arising from the translation of
the foreign subsidiary’s accounts into Canadian dollars (CDN$) were reported as a component of other comprehensive income
(loss), as discussed in note 23, Accumulated other comprehensive income (loss). Subsequent to the permanent closure of the
Snowflake recycle mill operations on September 30, 2012, the company ceased to have a self-contained foreign operation and therefore
no longer reports foreign exchange gains and losses as a component of other comprehensive income (loss).



| | (g) | Derivative financial instruments
| | --- | --------------------------------



The company uses derivative
financial instruments in the management of foreign currency and price risk associated with its revenues, energy costs and long-term
debt. It also uses interest rate swaps to manage its net exposure to interest rate changes.  The company’s policy is
to use derivatives for managing existing financial exposures and not for trading or speculative purposes. The company accounts
for its derivatives at fair value at each balance sheet date.













CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



In a cash flow hedge, the
changes in fair value of derivative financial instruments are recorded in Other comprehensive loss. These amounts are reclassified
in the consolidated statement of earnings (loss) in the periods in which results are affected by the cash flows of the hedged item.
Any hedge ineffectiveness is recorded in the consolidated statement of earnings (loss) when incurred.In a fair value hedge, hedging instruments are carried at fair value, with changes in fair value recognized in the consolidated
statement of earnings (loss).  The changes in fair value of the hedged item attributable to the hedged risk is also recorded
in the consolidated statement of earnings (loss) by way of a corresponding adjustment of the carrying amount of the hedged items
recognized on the balance sheet. In hedges of the foreign currency exposure of net investments in foreign subsidiaries that are
self-contained and integrated within a particular country, gains and losses on translation are deferred in a separate component
of shareholders’ equity to be recognized in net earnings (loss) upon sale or upon complete or substantially complete liquidation
of the net investment in the foreign subsidiary. Cash flows from derivative financial instruments are classified, in general, to
“Operations” on the consolidated statement of cash flows consistent with the hedged transaction.  Cash flows resulting
from termination of interest rate swaps are classified as “Investing activities.”



Effective April 1, 2010, the
company no longer designates its U.S. dollar revenue risk management instruments as cash flow hedges for accounting purposes. The
effective portion of gains or losses accumulated as at March 31, 2010 on its previously designated U.S. dollar revenue risk management
instruments were recorded in the same income statement line items as the hedged item in Sales. Prior
to April 1, 2010, the company designated the hedge relationship and formally documented, at its inception, the particular risk
management objective and strategy, the specific asset, liability or cash flow being hedged, as well as how effectiveness was assessed. 
Risk management strategies and relationships were assessed on an ongoing basis to ensure each derivative instrument was effective
in accomplishing the objective of offsetting either changes in the fair value or cash flow attributable to the exposure being hedged
both at inception and over the term of the hedging relationship.



Effective October 1, 2011,
the company no longer designates the foreign currency revaluation of a portion of its long-term debt as a hedge against the foreign
currency exposure arising on the net investment in its foreign subsidiary. As described in note 7, Measurement uncertainty –
impairment of long-lived assets, certain assets of the foreign subsidiary were impaired on September 30, 2011. Subsequent to
the recognition of this impairment, the revaluation of the company’s foreign currency denominated debt was no longer an effective
hedge against the foreign exchange gains and losses that arose on the net investment in the company’s foreign subsidiary.
Subsequent to the permanent closure of the Snowflake recycle mill operations on September 30, 2012 the company ceased to have a
self-contained foreign operation.



| | (h) | Cash and cash equivalents
| | --- | -------------------------



Cash and cash equivalents
include cash and short-term investments with original maturities of less than three months when acquired and are presented at fair
value.



| | (i) | Restricted cash
| | --- | ---------------



Restricted cash is segregated
and presented separately in the balance sheet, classified as current or non-current based on the facts pertaining to the restricted
cash, and is excluded from cash and cash equivalents in the statement of cash flows.











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



| | (j) | Inventories
| | --- | -----------



Specialty printing papers,
newsprint and pulp inventories are valued at the lower of three-month moving average cost or market. Wood chips, pulp logs and
other raw materials are valued at the lower of cost or market. For raw materials to be used in the production of finished goods,
market is determined on an as-converted-to-finished-goods basis. Work-in-progress and operating and maintenance supplies and spare
parts inventories are valued at cost. Cost is defined as all costs that relate to bringing the inventory to its present condition
and location under normal operating conditions and includes manufacturing costs, such as raw materials, labour and production overhead,
and depreciation and amortization costs. In addition, cost includes freight costs to move inventory offsite.



| | (k) | Repairs and maintenance costs
| | --- | -----------------------------



Repairs and maintenance, including
costs associated with planned major maintenance, are charged to Cost of sales, excluding depreciation and amortization as incurred.



| | (l) | Property, plant and equipment
| | --- | -----------------------------



Property, plant and equipment
are stated at cost, less accumulated depreciation and amortization, including asset impairment charges. Interest costs for capital
projects are capitalized. Buildings, machinery and equipment are generally amortized on a straight-line basis at rates that reflect
estimates of the economic lives of the assets. The rates for major classes of assets based on the estimated remaining economic
lives are:



|Buildings                     | 2.5% − 5.0% 
|----------------------------- | ------------
|Paper machinery and equipment | 5.0% – 10.0%
|Pulp machinery and equipment  | 5.0% – 10.0%



Effective December 31, 2011, the remaining useful lives
of the company’s pulp machinery were revised from approximately 7 years to 11 years. The company concluded that, based on
the physical condition of these assets, 11 years more fairly reflected the remaining useful lives of these assets and adopted these
change in estimate prospectively.



No depreciation is charged on capital projects during
the period of construction. Start-up costs incurred in achieving normal operating capacity on major capital projects are expensed
as incurred.



Leasehold improvements are normally amortized over
the lesser of their expected average service life and the term of the lease.



When property, plant and equipment are sold by the
company, the historical cost less accumulated depreciation and amortization is netted against the sale proceeds and the difference
is included in Other income (expense), net.



| | (m) | Assets Held For Sale and Discontinued Operations
| | --- | ------------------------------------------------



Assets and liabilities that meet the held-for-sale
criteria are reported separately from continuing operations in the consolidated balance sheet. Assets held for sale and liabilities
associated with assets held for sale are reported separately under current assets and current liabilities, and are not offset and
reported as a single amount in the consolidated balance sheet. Assets and liabilities are classified prospectively in the consolidated
balance sheet as held for sale.



The results of discontinued operations, net of tax,
are presented separately from the results of continuing operations in the consolidated statements of earnings (loss). Per share
information and changes to other comprehensive income (loss) related to discontinued operations are presented separately from continuing
operations. Cash flows from discontinued operations are not presented separately from cash flows from continuing operations in
the consolidated statements of cash flows. All comparative periods are restated in the period that a component is classified as
a discontinued operation.











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



| | (n) | Goodwill
| | --- | --------



Goodwill is measured at the amount that the company’s
enterprise value exceeded the fair value of its identified assets and liabilities on the convenience date of September 30, 2012,
that fresh start accounting was applied.



| | (o) | Government grants
| | --- | -----------------



Government grants are recognized at fair value when
there is reasonable assurance that the company will comply with the conditions attached to them and that the grants will be received.
Government grants related to additions or betterments to property, plant and equipment are recognized as credits against the carrying
values of the related assets, and subsequently recognized in net earnings (loss) over the useful lives of the related assets as
reductions to the resulting depreciation expense.



Government grants were awarded to the company by the
Canadian Forest Service (CFS) to invest in specified capital upgrades to property, plant and equipment. These government grants,
called Green Transformation Credits, were awarded in accordance with CFS’s Pulp and Paper Green Transformation Program.



| | (p) | Impairment of long-lived assets
| | --- | -------------------------------



Long-lived assets are tested for recoverability when
events or changes in circumstances indicate their carrying value may not be recoverable. A long-lived asset is potentially not
recoverable when its carrying value is greater than the sum of the undiscounted cash flows expected to result from its use and
eventual disposition. The impairment loss, if any, is measured as the amount by which the long-lived asset’s carrying amount
exceeds its fair value.



Goodwill will not be amortized in subsequent periods,
but will be tested for impairment using a two-step impairment test at the reporting unit level. The first step of the goodwill
impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including
goodwill. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied
fair value of reporting unit goodwill with the carrying amount of that goodwill. A company may first assess certain prescribed
qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test.



| | (q) | Environmental costs
| | --- | -------------------



Environmental expenditures are expensed or capitalized
depending upon their future economic benefit. Expenditures that prevent future environmental contamination are capitalized as part
of Property, plant and equipment, and depreciation and amortization is subsequently charged to earnings over the estimated future
benefit period of the assets. Expenditures that relate to an existing condition caused by past operations are expensed. Liabilities
are recorded on a discounted basis when rehabilitation efforts are likely to occur and the costs can be reasonably estimated.



| | (r) | Asset retirement obligations
| | --- | ----------------------------



Asset retirement obligations are recognized at fair
value in the period in which the company incurs a legal obligation associated with the retirement of an asset. The associated costs
are capitalized as part of the carrying value of the related asset and amortized over its remaining useful life. The liability
is accreted using a credit-adjusted risk-free interest rate.



The company’s obligations for the proper removal
and disposal of asbestos products in its mills meet the definition of a conditional asset retirement obligation. That is, the company
is subject to regulations that are in place to ensure that asbestos fibres do not become friable, or loose. The regulations require
that friable asbestos be repaired or removed in accordance with the regulations.



The company’s asbestos can generally be found
on steam and condensate piping systems throughout its facilities, as well as in transite cladding on buildings and in building
insulation. As a result of the longevity of the company’s mills, due in part to the company’s maintenance procedures,
and the fact that the company does not have plans for major changes that would require the removal of asbestos, the timing of the
removal of asbestos in the company’s mills is indeterminate. As a result, the company is currently unable to estimate the
fair value of its asbestos removal and disposal obligation.











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



The company’s obligations to cover (cap) the
surface areas of the landfills that are in operation at its mill sites meet the definition of an asset retirement obligation. Capping
will prevent future environmental contamination when the landfills are no longer in active use. The company presently has active
landfills at its Crofton, Powell River and Elk Falls mill sites.



| | (s) | Deferred financing costs
| | --- | ------------------------



Deferred costs related to the company’s long-term
debt are included in Other assets and amortized over the legal life of the related liability. Financing costs associated with modifications
of long-term debt are expensed as incurred. Financing costs associated with modifications to line-of-credit or revolving debt arrangements
are deferred and amortized if the borrowing capacity of the new arrangement is greater than or equal to the borrowing capacity
of the old arrangement and if the parties to the new arrangement are the same as the parties to the old arrangement. Borrowing
capacity is defined as the product of the remaining term of the arrangement and the maximum available credit.



| | (t) | Stock-based compensation and other stock-based payments
| | --- | -------------------------------------------------------



Stock options and restricted share units granted to
the company’s key officers, directors and employees are accounted for using the fair value-based method. Under this method,
compensation cost is measured at fair value at the date of grant, and is expensed over the award’s vesting period. Any consideration
paid by plan participants on the exercise of share options or the purchase of shares is credited to Common stock together with
any related stock-based compensation expense. Performance and time based share-based payments are amortized over their vesting
periods when it is probable that the performance conditions will be satisfied.



Deferred share units are accounted for using the quoted
market value at each reporting period until settlement, and are amortized over their vesting periods.



| | (u) | Income taxes
| | --- | ------------



Income taxes are accounted for using the asset and
liability method. Deferred income tax assets and liabilities are based on temporary differences (differences between the accounting
basis and the tax basis of the assets and liabilities) and non-capital loss carry-forwards and are measured using the enacted tax
rates and laws expected to apply when these differences reverse. Future tax benefits, including non-capital loss carry-forwards,
are recognized to the extent that realization of such benefits is considered more likely than not. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in earnings in the period that enactment occurs.



| | (v) | Deferred credits
| | --- | ----------------



Deferred credits represent the excess of amounts assigned
to deferred income tax assets for tax losses acquired in other than business combinations over the consideration paid. Deferred
credits are amortized to Income tax recovery in the consolidated statement of earnings (loss) during the period that the acquired
tax asset is utilized.



| | (w) | Employee future benefits
| | --- | ------------------------



The company maintains pension benefit plans for all
salaried employees, which include defined benefit and defined contribution segments. The company also sponsors other post-retirement
benefit plans, covering health and dental benefits. The company recognizes assets or liabilities for the respective overfunded
or underfunded statuses of its defined benefit pension plans and other post-retirement benefit plans on its consolidated balance
sheet. Changes in the funding statuses that have not been recognized in the company’s net periodic benefit costs are reflected
in Accumulated other comprehensive income (loss) in the company’s consolidated balance sheet. Net periodic benefit costs
are recognized as employees render the services necessary to earn the pension and other post-retirement benefits.











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



The estimated cost for pensions and other employee
future benefits provided to employees by the company is accrued using actuarial techniques and assumptions during the employees’
active years of service. The net periodic benefit cost includes:



| | - | the cost of benefits provided in exchange for employees’ services rendered during the year;
| | - | -------------------------------------------------------------------------------------------



| | - | the interest cost of benefit obligations;
| | - | -----------------------------------------



| | - | the expected long-term return on plan assets based on the fair value for all asset classes;
| | - | -------------------------------------------------------------------------------------------



| | - | gains or losses on settlements or curtailments;
| | - | -----------------------------------------------



| | - | the straight-line amortization of prior service costs and plan amendments included in accumulated other comprehensive income
(AOCI) over the expected average remaining service lifetime (EARSL) of employees who are active as of the date such costs are first
recognized, unless all, or almost all, of the employees are no longer active, in which case such costs are amortized over the average
remaining life expectancy of the former employees; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | the straight-line amortization of cumulative unrecognized net actuarial gains and losses in excess of 10% of the greater of
the accrued benefit obligation and the fair value of plan assets at the beginning of the year over the EARSL of the active employees
who are active as of the date such amounts are recognized, unless all, or almost all, of the employees are no longer active, in
which case such costs are amortized over the average life expectancy of the former employees.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The defined benefit plan obligations are determined
in accordance with the projected benefit method, prorated on services.



Amounts paid to the company’s defined contribution
plans for salaried employees and to multi-employer industry-wide pension plans are expensed as incurred.



| | (x) | Earnings (loss) per share
| | --- | -------------------------



Basic earnings (loss) per share is computed by dividing
net earnings (loss) attributable to the company for the period by the weighted average number of company common shares outstanding
during the reporting period. Diluted earnings (loss) per share is computed using the treasury stock method. When the effect of
options and other securities convertible into common shares is anti-dilutive, including when the company has incurred a loss for
the period, basic and diluted loss per share are the same.



| | (y) | Comparative figures
| | --- | -------------------



| |  | Comparative figures disclosed in the consolidated financial statements have been reclassified to conform to the presentation
adopted for the current year.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | RECENTLY IMPLEMENTED ACCOUNTING STANDARDS
| | -- | -----------------------------------------



FASB ASC 852, Reorganizations, was adopted
for the duration of the CCAA proceedings. In accordance with this standard, transactions and events directly associated with the
reorganization were distinguished and segregated from the ongoing operations of the business. Pre-petition obligations that were
impaired under the reorganization process pursuant to the CCAA proceedings were classified as Liabilities subject to compromise
in the balance sheet at the amounts expected to be allowed as claims by the Court. Professional fees, DIP-related financing costs,
charges related to indefinite idlings and permanent closures and other provisions for losses directly associated with or resulting
from the reorganization were recorded in Reorganization items, net in the consolidated statement of operations.



In accordance with FASB ASC 852, Reorganizations,
fresh start accounting was applied as of the convenience date of September 30, 2012. See note 6, Creditor protection proceedings
related disclosures, for a discussion of fresh start accounting.











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



| | 5. | CHANGES IN FUTURE ACCOUNTING STANDARDS
| | -- | --------------------------------------



There were no new pronouncements issued by the FASB
that may materially impact the company’s consolidated financial statements for future periods.



| | 6. | CredItOr Protection Proceedings RelateD Disclosures
| | -- | ---------------------------------------------------



Fresh start accounting



As discussed in note 3, Summary of significant
accounting policies, the company applied fresh start accounting as of September 30, 2012, pursuant to which the reorganization
value derived from the enterprise value established for the company was assigned to the company’s assets and liabilities,
which required recording assets and liabilities at fair value in conformity with the procedures specified in ASC 805, Business
Combinations.Deferred income taxes and pension and other post-employment benefits (OPEB) projected benefit obligations are
excluded from this requirement. In accordance with fresh start accounting, the Predecessor company’s common shares, additional
paid-in-capital, deficit and accumulated other comprehensive loss were eliminated. Accumulated depreciation on property, plant
and equipment was eliminated and estimated remaining useful lives were updated.



Enterprise valuation



We engaged an independent financial advisor to assist
us in the determination of the enterprise value of the Successor company. The enterprise value was estimated using three valuation
methods: (i) discounted cash flow analysis (DCF), (ii) comparable company analysis, and (iii) precedent transactions analysis.
The enterprise value was determined primarily based on the DCF analysis.



The DCF analysis is a forward-looking enterprise valuation
methodology that estimates the value of an asset or business by calculating the present value of expected future cash flows to
be generated by that asset or business. The company’s discount rate, defined as the blended rate of return required by debt
and equity investors of the Successor company, was estimated to be 15%. A one percent change in the discount rate has an impact
of approximately $40.0 million on the equity value of the company. Expected future cash flows were based on unlevered after-tax
free cash flows, a five-year projection period, and an estimated value beyond the projection period known as a terminal value.
Cash flow projections incorporated various assumptions, including future product sales prices and foreign exchange assumptions
based on independent, published market forecasts, future cost trends based on the company’s operating history and realization
of the cost reductions negotiated while in creditor protection. The enterprise value of the company calculated using the DCF analysis
was $392.9 million.



The comparable company analysis estimates the value
of the company based on a relative comparison with other publicly traded companies with similar operating and financial characteristics.
Under this valuation methodology, the enterprise values of these publicly traded companies, calculated as the aggregate market
value of their publicly traded equity securities plus the aggregate amount of net debt outstanding, are expressed as multiples
of various measures of the respective company’s operating earnings such as earnings before interest, taxes, depreciation
and amortization (EBITDA). These multiples are then applied to the company’s actual and projected operating results, after
adjusting for differences in, among other things, product offerings, markets, size, risk profile, profitability, leverage and operating
margins. The company’s implied multiple as of September 30, 2012 was estimated to be 4.9 X 2013 projected EBITDA.



The precedent transactions analysis estimates the
value of the company based on a relative comparison with companies that were recent targets of merger and acquisition transactions.
Under this valuation methodology, the purchase prices paid for these companies are expressed as multiples of various measures of
the respective company’s operating earnings such as EBITDA. These multiples are then applied to the company’s actual
and projected operating results, after adjusting for unique value considerations incorporated in purchase prices, as well as differences
in, among other things, product offerings, markets, size, risk profile, profitability, leverage and operating margins. No recent
precedent transactions were identified that were comparable on a relative basis to the company and, therefore, an implied multiple
could not be estimated for the company in accordance with this valuation method.











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)





In addition, certain of the company’s non-operating
assets were valued separately as follows: (i) tax attributes were valued based on a DCF analysis of the projected tax savings that
will arise from the use of the company’s available post-emergence attributes, and (ii) assets marketed to be sold prior to
emergence from creditor protection were valued based on the present value of estimated gross sales proceeds minus estimated sales
costs. Income taxes in the DCF analysis were estimated based on the projected statutory tax rates in Canada and the United States
during the forecasting period of 2012 to 2017.



Allocation of reorganization value to
assets and liabilities



The reorganization value derived from the company’s
enterprise value was assigned to assets and liabilities in accordance with the acquisition method of accounting for business combinations,
which requires recording assets and liabilities other than deferred income taxes and pension and OPEB projected benefit obligations
at fair value. The amount of deferred income taxes for the Successor company was determined in accordance with FASB ASC 740. See
note 21, Income taxes, for additional information. The amount of pension and OPEB projected benefit obligations was determined
in accordance with FASB ASC 715, which required that the actuarial present value of the company’s defined benefit pension
and post-retirement benefit plan assets and benefit obligations be determined based on certain assumptions (see note 19, Employee
future benefits).



Fair value estimates were based on the following approaches:



| | § | Inventories: Fair value of finished goods inventories was based
on estimated selling prices less selling costs, shipping costs and profit allowance. The fair values of raw materials and work
in process inventories were estimated to approximate their carrying values. The fair value of mill stores and other supplies inventories
was based on replacement cost for high-turnover items and on replacement cost less economic obsolescence for low-turnover items.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | § | Fixed assets:Fair value of construction in progress was estimated
to approximate carrying value. The fair value of land was based on the most recent property tax assessments. The fair value of
other fixed assets was based on the cost valuation method and the income valuation method. The cost valuation method estimates
fair value based on the estimated replacement cost of an asset, adjusted for various factors including physical deterioration,
technological obsolescence, economic life, and significant maintenance or betterment projects expected in the foreseeable future.
The income valuation method estimates fair value based on a DCF analysis, which incorporates various assumptions including future
product sales prices and foreign exchange assumptions based on independent, published market forecasts, future cost trends based
on the company’s operating history, and realization of the cost reductions negotiated while in creditor protection.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | § | Assets and liabilities held for sale: The fair value of assets
held for sale and liabilities associated with assets held for sale were estimated based on the present value of expected sales
price less cost to sell.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | § | All other assets and liabilities were recorded at the Predecessor
company’s carrying values, which approximate fair value, after adjustments resulting from the implementation of the Plan.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | § | Goodwill: Calculated as the amount by which the enterprise
value of the Successor company exceeded the fair value of identified assets and liabilities.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



Reorganized consolidated balance sheet



The effects of the implementation of the Plan and
the application of fresh start accounting on the company’s consolidated balance sheet as of September 30, 2012, are presented
in the reorganized consolidated balance sheet below.



The adjustments set forth in the column labeled Plan
of arrangement adjustmentsreflects the impact of implementing the Plan including, among other things, the discharge
and settlement of liabilities subject to compromise based on claims allowed by the Courts, the issuance of Successor company common
stock to holders of allowed claims in satisfaction of such claims, and the incurrence of new indebtedness related to secured notes
issued to holders of the Predecessor company’s secured pre-petition debt and related to the company’s exit financing.











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



The adjustments set forth in the column labeled Fresh
start accounting adjustments reflect, among other things, adjustments to the carrying values of the company’s assets
and liabilities to reflect their fair values, and the elimination of common stock, additional paid-in-capital, deficit and accumulated
other comprehensive loss as a result of the application of fresh start accounting.



|                                                 |  | As at September 30, 2012 |         
|------------------------------------------------ |  | ------------------------ | --------
|                                                 |  |                          |         
|                                                 |  |                          |         
|(In millions of Canadian dollars)                |  | Predecessor              |         
|Assets                                           |  |                          |         
|Current assets                                   |  |                          |         
|Cash and cash equivalents                        |  | $                        | 22.7    
|Restricted cash                                  |  |                          | 9.8     
|Accounts receivable                              |  |                          | 144.8   
|Inventories                                      |  |                          | 131.5   
|Prepaids and other                               |  |                          | 20.1    
|Assets held for sale                             |  |                          | 44.2    
|                                                 |  |                          | 373.1   
|Property, plant and equipment                    |  |                          | 356.7   
|Goodwill                                         |  |                          | –       
|Deferred income tax assets                       |  |                          | 2.5     
|Other assets                                     |  |                          | 2.6     
|                                                 |  | $                        | 734.9   
|Liabilities                                      |  |                          |         
|Liabilities not subject to compromise            |  |                          |         
|Current liabilities                              |  |                          |         
|Accounts payable and accrued liabilities         |  | $                        | 85.3    
|Current portion of long-term debt                |  |                          | 6.7     
|Liabilities associated with assets held for sale |  |                          | 16.6    
|                                                 |  |                          | 108.6   
|Long-term debt                                   |  |                          | 215.4   
|Employee future benefits                         |  |                          | 300.4   
|Other long-term obligations                      |  |                          | 9.0     
|Deferred credits                                 |  |                          | 9.6     
|Total liabilities not subject to compromise      |  |                          | 643.0   
|Liabilities subject to compromise                |  |                          | 875.5   
|Total liabilities                                |  |                          | 1,518.5 
|Deficiency                                       |  |                          |         
|Shareholders’ deficiency                         |  |                          |         
|Predecessor common stock                         |  |                          | 1,035.2 
|Successor common stock                           |  |                          | –       
|Additional paid-in capital                       |  |                          | 16.7    
|Deficit                                          |  |                          | (1,688.1
|Accumulated other comprehensive loss             |  |                          | (114.1  
|                                                 |  |                          | (750.3  
|Non-controlling interest (deficit)               |  |                          | (33.3   
|                                                 |  |                          | (783.6  
|                                                 |  | $                        | 734.9   











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



Plan of Arrangement Adjustments



| | 1 | Implementation of the Plan resulted in the following cash impact:
| | - | -----------------------------------------------------------------



|(In millions of Canadian dollars)                                    |  |   |       
|-------------------------------------------------------------------- |  | - | ------
|Proceeds from implementation of the Plan:                            |  |   |       
|Release of restricted cash                                           |  | $ | 6.1   
|Borrowing under the ABL Facility                                     |  |   | 64.0  
|Issuance of Floating Rate Notes                                      |  |   | 33.4  
|Payments related to implementation of the Plan                       |  |   |       
|Repayment of DIP Credit Facility, including exit fee of $6.9 million |  |   | (104.5
|Payment of issuance costs related to new debt                        |  |   | (9.3  
|Other                                                                |  |   | (0.2  
|                                                                     |  | $ | (10.5 



| | 2 | Reflects the estimated Cash Convenience Pool and PREI Proceeds Pool (see note 2, Creditor protection proceedings) that
was payable to the company’s general creditors and the holders of the Predecessor company’s 2014 Notes as of September
30, 2012 as full settlement of their allowed claims under the creditor protection proceedings. The company paid out the Cash Convenience
Pool of $1.0 million in November 2012. On February 13, 2013, the company agreed to the sale of its interest in PREI, subject to
Court approval, for proceeds of $33.0 million compared to estimated proceeds as of September 30, 2012 of $30.0 million (see note
8, Variable interest entities).
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3 | Reflects (i) the issuance of US$250.0 million senior secured notes due in 2017 to the holders of the Predecessor company’s
2016 Notes as partial settlement of their allowed claims under the creditor protection proceedings, (ii) the amount withdrawn on
the company’s ABL Facility, (iii) the issuance of US$35.0 million Floating Rate Notes, and (iv) repayment of the withdrawn
amount on the DIP Credit Facility that was cancelled on exit from the creditor protection proceedings (see note 2, Creditor
protection proceedings).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4 | The settlement or extinguishment of all remaining liabilities subject to compromise as of September 30, 2012 under the Plan
is summarized below:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



|(In millions of Canadian dollars)                                           |  |   |       
|--------------------------------------------------------------------------- |  | - | ------
|Unsecured pre-petition debt                                                 |  | $ | 243.9 
|Secured pre-petition debt                                                   |  |   | 380.9 
|Accrued interest on unsecured pre-petition debt                             |  |   | 18.9  
|Accrued interest on secured pre-petition debt                               |  |   | 59.5  
|Accounts payable and accrued liabilities, excluding accrued interest        |  |   | 33.8  
|Pension and other post-retirement projected benefit obligations             |  |   | 24.8  
|Labour union claim *                                                        |  |   | 91.8  
|Rejected leases and contracts                                               |  |   | 21.9  
|Total liabilities subject to compromise of the Predecessor company          |  |   | 875.5 
|Issuance of Successor company common stock **                               |  |   | (144.9
|Issuance of new senior secured notes                                        |  |   | (243.8
|Estimated Cash Convenience Pool payable                                     |  |   | (0.9  
|Estimated PREI Proceeds Pool payable ***                                    |  |   | (11.7 
|Elimination of sales tax receivable related to compromised accounts payable |  |   | (4.0  
|Gain on extinguishment of liabilities subject to compromise ****            |  | $ | 470.2 



| | * | The labour unions at the company’s Canadian mills submitted unsecured claims with respect to the June 25, 2012 creditor
vote on the Plan. These claims were based on the estimated present value of the five-year wage and benefit reductions agreed to
in the new labour agreements that went into effect on May 1, 2012. These claims, which were under dispute at the time of the approval
of the Plan, were subsequently allowed by the Court.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ** | On September 30, 2012, the company had 14.4 million common shares outstanding. These common shares were issued to its secured
bondholders. On September 30, 2012, the company held a total of 0.6 million common shares in reserve for the benefit of holders
of allowed unsecured creditor claims comprising the Unsecured Creditor Share Pool. In December 2012, 127,571 additional common
shares were issued as full and final settlement of the Unsecured Creditor Share Pool, increasing the total common shares outstanding
as of December 31, 2012 to 14,527,571.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | *** | The company entered into an agreement to sell PREI on February 13, 2013 for $33.0 million and therefore adjusted the estimated
PREI Proceeds Pool payable as of December 31, 2012 to $12.9 million.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | **** | Includes gain related to discontinued operations of $4.8 million. See note 9, Assets held for sale and discontinued operations.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------



| | 5 | Reflects the issuance of common stock of the Successor company, which had an equity value of $144.9 million as of September
30, 2012 which was determined as follows:
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(In millions of Canadian dollars)     |  |   |       
|------------------------------------- |  | - | ------
|Enterprise value                      |  | $ | 392.9 
|Plus:                                 |  |   |       
|Net redundant assets                  |  |   | 117.3 
|Less:                                 |  |   |       
|Interest bearing debt                 |  |   | (351.8
|Other adjustments                     |  |   | (13.5 
|Equity value of the Successor company |  | $ | 144.9 



| | 6 | Reflects the following items, all of which were included in Reorganization items, net in our consolidated statements
of earnings (loss) for the nine months ended September 30, 2012:
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(In millions of Canadian dollars)                           |  |   |      
|----------------------------------------------------------- |  | - | -----
|Gain on extinguishment of liabilities subject to compromise |  | $ | 470.2
|Professional fees *                                         |  |   | (6.9 
|Other                                                       |  |   | (0.2 
|Gain due to plan of arrangement adjustments **              |  | $ | 463.1





| | * | Represents professional fees that were contractually due to certain professionals as “success” fees upon the company’s
emergence from the creditor protection proceedings and were recorded as part of the effects of implementing the plan of arrangement.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ** | Includes gain related to discontinued operations of $7.1 million. See note 9, Assets held for sale and discontinued operations.
| | -- | -------------------------------------------------------------------------------------------------------------------------------











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



Fresh Start Accounting Adjustments



| | 7 | Reflects the following adjustments to the carrying value of asset and liabilities to reflect their estimated values as of September
30, 2012 based on the respective valuation methods discussed previously:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(In millions of Canadian dollars)                |  |   |      
|------------------------------------------------ |  | - | -----
|Prepaids and other                               |  | $ | (7.1 
|Property, plant and equipment                    |  |   | 257.4
|Assets held for sale                             |  |   | 12.0 
|Goodwill                                         |  |   | 56.7 
|Deferred income tax assets                       |  |   | (2.5 
|Liabilities associated with assets held for sale |  |   | 2.3  
|Deferred credits                                 |  |   | 9.6  
|Gain due to fresh start accounting adjustments   |  | $ | 328.4



The following table summarizes the reconciliation
of the enterprise equity value to the reorganization value, and the allocation of the reorganization value to the assets and liabilities
of the Successor company based on their estimated fair values as of September 30, 2012.



|(In millions of Canadian dollars)                                                               |  |   |        
|----------------------------------------------------------------------------------------------- |  | - | -------
|Enterprise value of the Successor company, including net redundant assets and other adjustments |  | $ | 496.7  
|Adjusted for:                                                                                   |  |   |        
|Non-controlling deficit                                                                         |  |   | 7.9    
|Non-interest bearing liabilities                                                                |  |   | 535.5  
|Reorganization value to be allocated to assets                                                  |  |   | 1,040.1
|Less amounts allocated to the value of:                                                         |  |   |        
|Total current assets                                                                            |  |   | (357.4 
|Property, plant and equipment                                                                   |  |   | (614.1 
|Other assets                                                                                    |  |   | (11.9  
|Reorganization value not allocated (goodwill)                                                   |  | $ | 56.7   



| | 8 | The net adjustments to common stock, additional paid-in-capital, deficit, and accumulated other comprehensive loss included
the adjustments required to state assets and liabilities of the Successor company at fair value, which resulted in a gain of $328.4
million included in Reorganization items, net ($328.3 million) and Loss from discontinued operations net of tax($0.1
million) in the company’s consolidated statements of earnings (loss) for the nine months ended September 30, 2012, and the
elimination of the Predecessor company’s equity accounts pursuant to fresh start accounting.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Reorganization Items, Net



Expenses (including professional fees), realized gains
and losses, and provisions for losses resulting from reorganization activities are reported separately from ongoing operations
of the business in the consolidated statement of earnings (loss) as Reorganization items, net. Interest expense isn’t
a reorganization item.











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



The components of reorganization items, net for the
three months ended December 31, 2012 and the nine months ended September 30, 2012, were as follows:



|Reorganization items, net                                    |  | Three months  ended December 31, 2012 |     |  | Nine months  ended  September 30, 2012 |  
|------------------------------------------------------------ |  | ------------------------------------- | --- |  | -------------------------------------- | -
|Professional fees 1                                          |  | $                                     | 1.8 |  |                                        | $
|Gain due to plan of arrangement adjustments 2                |  |                                       | 1.4 |  |                                        |  
|Gain due to fresh start accounting adjustments 3             |  |                                       | –   |  |                                        |  
|DIP financing costs 4                                        |  |                                       | –   |  |                                        |  
|Acceleration of ABL financing costs 5                        |  |                                       | –   |  |                                        |  
|Provision for repudiated lease contract 6                    |  |                                       | –   |  |                                        |  
|Write-off of debt discount, modification andissuance costs 7 |  |                                       | –   |  |                                        |  
|Adjustment to pre-petition accounts payable 8                |  |                                       | –   |  |                                        |  
|Adjustment to other post-employment benefits                 |  |                                       | –   |  |                                        |  
|Provision for labour union claims 9                          |  |                                       | –   |  |                                        |  
|Other                                                        |  |                                       | –   |  |                                        |  
|Reorganization items, net from continuing operations         |  |                                       | 3.2 |  |                                        |  
|Gain due to plan of arrangement adjustments 2                |  |                                       | 1.0 |  |                                        |  
|Gain due to fresh start accounting adjustments 3             |  |                                       | –   |  |                                        |  
|Adjustment to pre-petition accounts payable                  |  |                                       | –   |  |                                        |  
|Provision for repudiated coal contract 6                     |  |                                       | –   |  |                                        |  
|Reorganization items, net from discontinued operations       |  |                                       | 1.0 |  |                                        |  
|Total                                                        |  | $                                     | 4.2 |  |                                        | $



| | 1 | Professional fees directly related to the creditor protection proceedings, ongoing monitoring and establishment of a reorganization
plan, including legal, consulting and other professional fees.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2 | See discussion under Plan of arrangement adjustmentsabove.
| | - | ----------------------------------------------------------



| | 3 | See discussion under Fresh start accounting adjustmentsabove.
| | - | -------------------------------------------------------------



| | 4 | DIP financing costs incurred in connection with entering into the DIP Credit Agreement, including commitment fees.
| | - | ------------------------------------------------------------------------------------------------------------------



| | 5 | Pursuant to the creditor protection proceedings, the company’s former ABL Facility was replaced by the DIP Credit Facility
which resulted in the acceleration of the remaining deferred unamortized financing costs on the ABL Facility to the consolidated
statements of earnings (loss).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6 | The company repudiated on a lease contract at its paper recycling operation which was closed in 2010, resulting in a $7.0 million
adjustment to the allowed claims amount. The company repudiated on a coal contract at its Snowflake mill, discontinued on September
30, 2012, which resulted in adjustments for allowed claims of $4.3 million.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 7 | The company’s secured and unsecured pre-petition debt balances were adjusted to the allowed claims amounts, defined as
the outstanding principal plus accrued and unpaid interest, which resulted in the write-off of the unamortized discount, modification
and debt issue costs on the 2014 Notes and 2016 Notes.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 8 | The company’s pre-petition accounts payable were adjusted to the allowed claims amount.
| | - | ---------------------------------------------------------------------------------------



| | 9 | The labour unions at the company’s Canadian mills submitted unsecured claims with respect to the June 25, 2012 creditor
vote on the Plan. These claims were based on the estimated present value of the five-year wage and benefit reductions agreed to
in the new labour agreements that went into effect on May 1, 2012. These claims, which were under dispute at the time of the approval
of the Plan, were subsequently allowed by the Court, resulting in a provision for $91.8 million.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



Liabilities Subject to Compromise



As of December 31, 2012 and September 30, 2012, the
company had no liabilities subject to compromise due to its emergence from creditor protection proceedings on September 13, 2012.



| | 7. | MEASUREMENT UNCERTAINTY – IMPAIRMENT OF LONG-LIVED ASSETS
| | -- | ---------------------------------------------------------



The company reviews its long-lived assets, primarily
plant and equipment, for impairment when events or changes in circumstances indicate that the carrying value of these assets may
not be recoverable. The company tests for impairment using a two-step methodology as follows:



| | (i) | determine whether the projected undiscounted future cash flows from operations exceed the net carrying amount of the assets
as of the assessment date; and
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | if assets are determined to be impaired in step (i), then such impaired assets are written down to their fair value, determined
principally by using discounted future cash flows expected from their use and eventual disposition.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Estimates of future cash flows and fair value require
judgments, assumptions and estimates and may change over time. Due to the variables associated with judgments and assumptions used
in these tests, the precision and accuracy of estimates of impairment charges are subject to significant uncertainties and may
change significantly as additional information becomes known. The carrying value of long-lived assets represented approximately
68% of total assets as at December 31, 2012. If future developments were to differ adversely from management’s best estimate
of key assumptions and associated cash flows, the company could potentially experience future material impairment charges.



2012



The company did not identify any impairment indicators
related to its continuing operations subsequent to establishing an enterprise value and applying fresh start accounting as of September
30, 2012 and therefore did not conduct an impairment test as of December 31, 2012.



For its discontinued operations the company recognized
impairment, severance and other closure costs of $11.0 million for the three months ended December 31, 2012 and $8.7 million for
the nine months ended September 30, 2012, as disclosed in note 9, Assets held for sale and discontinued operations.



2011



The company recorded impairment and other closure
costs of $823.6 million in 2011, consisting of an impairment charge of $660.2 million on the assets of its Canadian operations,
$161.8 million on the assets of its Snowflake mill, net closure costs of $0.5 million related to the company’s discontinued
paper recycling operation and $1.1 million related to a revised estimate for future landfill rehabilitation cost in respect of
the landfill located at the company’s discontinued Elk Falls mill.



The following table provides the components of the
impairment and other closure costs:



|Buildings, plant and equipment                                     |  | $ | 801.1 | 
|------------------------------------------------------------------ |  | - | ----- | 
|Land                                                               |  |   | 10.8  | 
|Operating and maintenance supplies and spare parts inventory       |  |   | 10.1  | 
|                                                                   |  |   | 822.0 | 
|Other closure costs – operating lease at paper recycling operation |  |   | 0.5   | 
|Other closure costs – Elk Falls landfill rehabilitation estimate   |  |   | 1.1   | 
|Total                                                              |  | $ | 823.6 | 
|Classification in consolidated statement of earnings (loss):       |  |   |       | 
|Impairment and other closure costs                                 |  | $ | 661.8 | 
|Loss from discontinued operations net of tax                       |  |   | 161.8 | 
|                                                                   |  | $ | 823.6 | 











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



Continuing operations



In respect of the company’s Canadian operations,
impairment of $660.2 million was recorded on December 31, 2011 on buildings, plant and equipment. During the fourth quarter of
2011, continuing declines in current and forecast prices for newsprint, directory markets and pulp indicated a probable impairment
of the Canadian operations. Two asset groups were identified for the purpose of the impairment analysis; pulp assets and paper
assets. Paper assets in aggregate were treated as one asset group as the company’s paper machines are capable of running
various grades and can be reconfigured to switch from one paper production such as newsprint to directory or specialty.



The company conducted step (i) of the impairment test
to determine whether the carrying value of the assets of its Canadian operations were recoverable. Estimates of future cash flows
used to test the recoverability of long-lived assets included key assumptions related to foreign exchange rates, forecast product
prices, market supply and demand, estimated useful life of the long-lived assets, production levels, production costs, inflation,
weighted average cost of capital, and capital spending. The assumptions were derived from information generated internally and
external published reports and forecasts. The useful life of the company’s assets was estimated at 11 years for its pulp
and paper assets. Product sales prices and foreign exchange assumptions for 2012 of CDN$1.00 = US$0.99 were based on management’s
best estimates incorporating independent market information as well as analysis of historical data, trends and cycles. Product
sales prices and foreign exchange assumptions for years 2013 to 2015 were based on independent, published market forecasts.
The foreign exchange assumption was CDN$1.00 = US$0.97 in 2013 strengthening to CDN$1.00 = US$1.02 by 2015. Product sales prices
and foreign exchange rate assumptions for 2016 and subsequent years were estimated by management based on long-term trend pricing
for product sales prices and a long-term expected foreign exchange rate of CDN$1.00 = US$0.99. Step (i) of the impairment test
demonstrated that impairment charges on the company’s pulp and paper assets were required as the carrying values of the pulp
asset group and paper asset group exceeded the estimated undiscounted cash flows that will be generated by each respective group.



The company estimated the fair value of its pulp and
paper assets on December 31, 2011 by discounting estimated future cash flows from the use and eventual disposal of its long-lived
assets and net working capital to present value. A discount rate of 11% was used, reflecting current market assessments of the
time value of money and the risks particular to the company’s assets. Impairment of $660.2 million was recognized on the
assets of the company’s Canadian operations, based on the excess of the aggregate carrying values of the pulp and paper asset
groups compared to their estimated fair values. The impairment reduced the carrying value of the company’s pulp assets by
$83.5 million and the company’s paper assets by $576.7 million. The impairment charges were allocated to individual assets
on a pro rata basis.



The company recorded a $0.3 million impairment recovery
in the second quarter and a $0.4 million impairment recovery in the third quarter in respect of a lease obligation recognized in
2010 due to the discontinuation of the company’s paper recycling operation located in Coquitlam, British Columbia. These
recoveries represented changes in estimated utility charges, insurance and property tax on the water lot lease from what was originally
anticipated in 2010. On December 31, 2011, $1.2 million impairment expense was accrued in respect of this lease obligation. This
additional accrual was based on unfavourable changes to certain key assumptions that support the measurement of the obligation.
The lease obligation of $10.1 million of which $2.3 million is in Accounts payable and accrued liabilities and $7.8 million is
in Other long-term obligations.



The company recorded a $1.1 million impairment charge
related to the future rehabilitation of the landfill located at the discontinued Elk Falls mill. This charge was based on a revised
site remediation estimate obtained in the fourth quarter from an independent third party, and represents the incremental environmental
liability, on a discounted basis, that was accrued based on this estimate. It is the company’s accounting policy to capitalize
the cost associated with environmental liabilities as property, plant and equipment. The company concluded that, based on the closure
and impairment of Elk Falls’ assets in 2010, future economic benefits are unlikely, and therefore, this amount was charged
as impairment and other closure costs.











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



Discontinued operations



In respect of the company’s Snowflake, Arizona
mill, impairment of $151.0 million was recorded on September 30, 2011 on buildings, plant and equipment and operating maintenance
supplies and spare parts inventory. Current and historical operating and cash flow losses plus forecasted continuing losses indicated
probable impairment of these assets. A recoverability analysis was performed, and on the basis of this analysis, the carrying value
of these assets was fully impaired. On December 31, 2011, $10.8 million impairment was recorded on Snowflake’s land on the
basis of an appraisal, dated January 3, 2012, obtained from an independent third party real estate appraiser. On September 30,
2012, the Snowflake mill was permanently closed, and on January 30, 2013, the assets of the Snowflake mill and the shares of The
Apache Railway Company (Apache Railway) were sold (see note 9, Assets held for sale and discontinued operations).



2010



As a result of the decision to permanently close the
company’s Elk Falls paper mill and paper recycling operation in September 2010, the company recorded a $304.2 million charge
for related impairment, severances and other closure costs. The Elk Falls mill had been indefinitely curtailed since February 2009
and the paper recycling facility was indefinitely idled in February 2010.



The following table provides the components of the
impairment, severances and other closure costs:



|Property, plant and equipment                                                                      |  | $ | 272.5 |  
|-------------------------------------------------------------------------------------------------- |  | - | ----- | -
|Operating and maintenance supplies and spare parts inventory                                       |  |   | 20.3  |  
|                                                                                                   |  |   | 292.8 |  
|Less:	impairment previously recorded on paper assets (prior to announcement  of permanent closure) |  |   | (12.0 | )
|Severances                                                                                         |  |   | 9.7   |  
|Other closure costs – operating lease at paper recycling operation                                 |  |   | 13.7  |  
|Total                                                                                              |  | $ | 304.2 |  
|Classification in consolidated statement of earnings (loss):                                       |  |   |       |  
|Impairment and other closure costs                                                                 |  | $ | 294.5 |  
|Restructuring                                                                                      |  |   | 9.7   |  
|                                                                                                   |  | $ | 304.2 |  



During the fourth quarter of 2010, the company assessed
whether there were any impairment indicators present that would require the company to perform a detailed recovery test with respect
to its pulp and paper assets. The company determined that there were no new impairment indicators at the end of 2010 compared to
the impairment indicators that existed at the end of 2009. As a result, the company reviewed its detailed recovery test performed
at the end of 2009 and determined that the cash flow analysis performed at that time on the company’s assets still in operation
at the end of 2010 (excluding Elk Falls and the paper recycling operation shut down in 2010) indicated a significant excess of
undiscounted cash flows over the net book value of the assets. In addition, the company reviewed the major assumptions used in
the 2009 detailed recovery test and determined that, on an overall basis, the assumptions used were more conservative than the
assumptions that would be used in a new impairment test. On that basis, the company determined that a new detailed recovery test
was not required for 2010.











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



| | 8. | VARIABLE INTEREST ENTITIES
| | -- | --------------------------



The company has a 50.001% interest in PREI and consolidates
100% of it as PREI is a VIE in which the company is the primary beneficiary. PREI consists of an integrated hydroelectric power
generating, transmission and distribution system which includes two hydroelectric stations in B.C. with installed capacity of 83
megawatts. The company generally purchases 100% of the power generated by PREI.



The company has limited access to PREI’s financial
assets, which generally take the form of interest on loans, management fees and earnings distributions based on the company’s
interest in PREI. In addition, creditors of PREI have recourse limited to the assets in PREI.



As disclosed in note 2, Creditor
protection proceedings, the company must sell its interest in PREI, and in accordance with the Plan, distribute up to 50% of
the net proceeds to its creditors. On February 13, 2013, the company agreed to the sale of its interest in PREI, subject to Court
approval, to Powell River Energy Trust, a Brookfield Renewable affiliate, for proceeds of $33.0 million. Powell River Energy Trust
currently holds the other 50% stake in PREI. The company is required under the Plan to offer its portion of the proceeds from the
sale of PREI to the holders of Floating Rate Notes as partial settlement at par of this debt. In accordance with a power purchasing
agreement which expires in 2016, with possible extension to 2021 at the discretion of the company, the company will continue to
purchase all electricity generated by PREI subsequent to the sale, which is expected to be completed in the first quarter of 2013
subject to various closing conditions.



Condensed financial information
with respect to PREI is as follows:



|                                                       |  | Successor                        |      |   | Predecessor                     |  
|------------------------------------------------------ |  | -------------------------------- | ---- | - | ------------------------------- | -
|                                                       |  | Three months
 ended  December 31 |      |   | Nine months
 ended September 30 |  
|                                                       |  | 2012                             |      |   | 2012                            |  
|Condensed statements of earnings (loss)                |  |                                  |      |   |                                 |  
|Sales – affiliate 1                                    |  | $                                | 4.7  |   |                                 | $
|Cost of sales, excluding depreciation and amortization |  |                                  | 2.1  |   |                                 |  
|Depreciation and amortization                          |  |                                  | 1.9  |   |                                 |  
|                                                       |  |                                  | 4.0  |   |                                 |  
|Operating earnings                                     |  |                                  | 0.7  |   |                                 |  
|Interest expense                                       |  |                                  | (2.4 | ) |                                 |  
|Interest expense – affiliate 1                         |  |                                  | (0.9 | ) |                                 |  
|Other income (expense), net                            |  |                                  | (0.3 | ) |                                 |  
|Reorganization items, net                              |  |                                  | (1.3 | ) |                                 |  
|Income tax recovery (expense)                          |  |                                  | 1.1  |   |                                 |  
|Net earnings (loss)                                    |  |                                  | (3.1 | ) |                                 |  
|Other comprehensive income                             |  |                                  | –    |   |                                 |  
|Total comprehensive income (loss)2                     |  | $                                | (3.1 | ) |                                 | $











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



|                                         |  | Successor         |       |   | Predecessor         |  
|---------------------------------------- |  | ----------------- | ----- | - | ------------------- | -
|                                         |  | As at December 31 |       |   | As at 
September 30 |  
|                                         |  | 2012              |       |   | 2012                |  
|Condensed balance sheets                 |  |                   |       |   |                     |  
|Current assets                           |  |                   |       |   |                     |  
|Cash and cash equivalents                |  | $                 | 6.6   |   |                     | $
|Other                                    |  |                   | 2.7   |   |                     |  
|Property, plant and equipment            |  |                   | 147.0 |   |                     |  
|                                         |  | $                 | 156.3 |   |                     | $
|Current liabilities                      |  |                   |       |   |                     |  
|Accounts payable and accrued liabilities |  | $                 | 13.1  |   |                     | $
|Long-term debt (note 18)                 |  |                   | 113.8 |   |                     |  
|Long-term debt – affiliate 1             |  |                   | 20.8  |   |                     |  
|Deferred income taxes                    |  |                   | 23.6  |   |                     |  
|Deficit 2                                |  |                   | (15.0 | ) |                     |  
|                                         |  | $                 | 156.3 |   |                     | $



| | 1 | Balances with Catalyst Paper Energy Holdings Inc., a subsidiary of Catalyst Paper Corporation.
| | - | ----------------------------------------------------------------------------------------------

| | 2 | 50% is included in the company’s non-controlling interest (deficit) balances.
| | - | -----------------------------------------------------------------------------



The company has identified one other potential VIE,
but has not been able to obtain the financial information necessary to evaluate whether the entity is a VIE, or, if the entity
is a VIE, whether the company is the primary beneficiary. The company has entered into a building lease agreement with this potential
VIE whereby the company has agreed to continue making the prescribed lease payments directly to the financial institution holding
the mortgage on the building in the event the lessor is no longer able to meet its contractual obligations. The principal amount
of the mortgage was $3.0 million on December 31, 2012 and $3.4 million on September 30, 2012 (2011 – $4.8 million). This
agreement does not increase the company’s liability beyond the obligation under the building lease.



| | 9. | ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
| | -- | ------------------------------------------------



Closure and Sale of Snowflake Mill



On January 30, 2013 the company completed the U.S.
Court approved sale of the assets of the Snowflake facility and the shares of Apache Railway to an acquisition vehicle organized
by Hackman Capital and its affiliates for US$13.5 million and other non-monetary consideration. The assets of the Snowflake facility
that were sold included approximately 19,000 acres of land, equipment and other assets associated with the paper mill. The mill,
which is located in northeastern Arizona, was permanently shut on September 30, 2012. The decision to close the mill was driven
by continued financial losses resulting from intense supply input and market pressures. The closure resulted in impairment and
other closure costs of $19.7 million in 2012 for, among other things, severance, environmental obligations, and inventory write-offs.
Closure costs also included an estimated withdrawal liability of US$11.7 million due to the PACE Industry Union-Management Pension
Fund, a multi-employer pension plan the company contributed to on behalf of hourly employees at the Snowflake mill. The company
had accrued US$3.5 million in the third quarter for this withdrawal liability, which reflected the most recent estimate of this
liability based on the plan’s funding deficit as of December 31, 2008. The company received a new liability estimate of US$11.7
million in the fourth quarter from the United Steelworkers (USW). The company is in the process of verifying the actuarial information
used to calculate this estimated withdrawal liability. The Snowflake mill was a component of the company that was held for sale
on September 30, 2012 and, therefore, it was reported as a discontinued operation.











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



Other assets held for sale



The agreement that had been reached with Pacifica
Deep Sea Terminals Inc. to sell the Elk Falls site was terminated in December 2012. A non-refundable prepayment of a portion of
the purchase price was received and the transaction timeline was extended multiple times up to the ultimate deadline of December
18, 2012. The company continues to actively market the Elk Falls property.



The company has reached an agreement-in-principle
to sell its 13.4 hectare wastewater treatment facility located at its Port Alberni mill along with 3.9 hectares of land combined
with a road dedication for proceeds of $5.8 million. The company will settle the mortgage receivable from PRSC Limited Partnership
and sell its interest in PRSC Land Developments Ltd. for proceeds of approximately $3.0 million. The company continues to actively
market its remaining poplar plantation land. All of these assets and associated liabilities were reported as held for sale in the
consolidated balance sheets as of December 31, 2012 and September 30, 2012 and the company expects to complete sales transactions
in respect of these assets within 12 months of the balance sheet date of December 31, 2012.



A summary of major classes of assets and liabilities
classified as held for sale is as follows:



|                                                 |  | Successor         |     
|------------------------------------------------ |  | ----------------- | ----
|                                                 |  | December 31, 2012 |     
|Cash and cash equivalents                        |  | $                 | 1.9 
|Restricted cash                                  |  |                   | 2.3 
|Accounts receivable                              |  |                   | 0.5 
|Inventories                                      |  |                   | 0.6 
|Prepaids and other                               |  |                   | –   
|Property, plant and equipment                    |  |                   | 24.7
|Other assets                                     |  |                   | 4.3 
|Assets held for sale                             |  |                   | 34.3
|Accounts payable and accrued liabilities         |  |                   | 15.2
|Liabilities associated with assets held for sale |  | $                 | 15.2



As disclosed previously, the operations of the Snowflake
mill were classified as a discontinued operation. A breakdown of loss from discontinued operations, net of tax is as follows:



|                                                       |  | Successor          |       |   | Predecessor        |  
|------------------------------------------------------ |  | ------------------ | ----- | - | ------------------ | -
|                                                       |  | Three months ended |       |   | Nine months  ended |  
|                                                       |  | December 31        |       |   | September 30       |  
|                                                       |  | 2012               |       |   | 2012               |  
|Sales                                                  |  | $                  | 4.5   |   |                    | $
|Cost of sales, excluding depreciation and amortization |  |                    | (5.0  | ) |                    |  
|Depreciation and amortization                          |  |                    | –     |   |                    |  
|Impairment, severances and other closure costs         |  |                    | (11.0 | ) |                    |  
|Restructuring costs                                    |  |                    | (1.1  | ) |                    |  
|Interest expense, net                                  |  |                    | –     |   |                    |  
|Other income (expense), net                            |  |                    | 0.7   |   |                    |  
|Reorganization items, net (note 6)                     |  |                    | (1.0  | ) |                    |  
|Income tax expense                                     |  |                    | –     |   |                    |  
|Loss from discontinued operations, net of tax          |  | $                  | (12.9 | ) |                    | $











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)





The following tables provide the components of impairment,
severances and other closure costs for the three months ended December 31, 2012 and the nine months ended September 30, 2012:



|                                              |  | Three months  ended  December 31 2012  (successor) |     
|--------------------------------------------- |  | -------------------------------------------------- | ----
|                                              |  | Amount                                             |     
|Severances and other closure costs            |  |                                                    |     
|Severances                                    |  | $                                                  | 1.6 
|Withdrawal liability from multi-employer plan |  |                                                    | 8.2 
|Other closure costs                           |  |                                                    | 1.2 
|                                              |  | $                                                  | 11.0



|                                                   |  | Nine months  ended  September 30 2012
 (predecessor) |    
|-------------------------------------------------- |  | ---------------------------------------------------- | ---
|                                                   |  | Amount                                               |    
|Impairment                                         |  |                                                      |    
|Operating and maintenance supplies and spare parts |  | $                                                    | 0.5
|Raw materials                                      |  |                                                      | 0.6
|                                                   |  |                                                      | 1.1
|Severances and other closure costs                 |  |                                                      |    
|Severances                                         |  |                                                      | 3.2
|Withdrawal liability from multi-employer plan      |  |                                                      | 3.4
|Other closure costs                                |  |                                                      | 1.0
|                                                   |  | $                                                    | 8.7



Subsequent to the closure of the Snowflake mill, the
company recognized an impairment charge to reduce the book value of remaining inventory to the estimated salvage value. In addition
to severance, the company recognized obligations related to environmental remediation, dismantlement and other closure costs.



| | 10. | RESTRICTED CASH
| | --- | ---------------



Restricted cash includes $0.2 million collateral held
against letters of credit. Cash collateral is held at a rate of 105% of letters of credit. These letters of credit were recognized
under the former ABL Facility in effect prior to the CCAA proceedings, but are not presently recognized in the calculation of the
available balance under the new ABL Facility. Restricted cash also includes $0.5 million cash held in trust pending the outcome
of an arbitration case.











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



| | 11. | ACCOUNTS RECEIVABLE
| | --- | -------------------



The components of accounts receivable
are as follows:



|                                                       |  | Successor         |       |   | Predecessor         |  
|------------------------------------------------------ |  | ----------------- | ----- | - | ------------------- | -
|                                                       |  | As at December 31 |       |   | As at
 September 30 |  
|                                                       |  | 2012              |       |   | 2012                |  
|Trade receivables                                      |  | $                 | 94.7  |   |                     | $
|Less:  allowance for doubtful accounts                 |  |                   | (2.2  | ) |                     |  
|                                                       |  |                   | 92.5  |   |                     |  
|Sales taxes receivable                                 |  |                   | 12.6  |   |                     |  
|Pulp and Paper Green Transformation Program receivable |  |                   | –     |   |                     |  
|Other receivables                                      |  |                   | 8.9   |   |                     |  
|                                                       |  | $                 | 114.0 |   |                     | $



Accounts receivable are pledged as collateral against
the long-term debt of the company. See note 18, Long-term debt, for detailed disclosure of the collateral arrangements of
the company.



| | 12. | INVENTORIES
| | --- | -----------



The components of inventories
are as follows:



|                                                   |  | Successor         |       |  | Predecessor         |  
|-------------------------------------------------- |  | ----------------- | ----- |  | ------------------- | -
|                                                   |  | As at December 31 |       |  | As at
 September 30 |  
|                                                   |  | 2012              |       |  | 2012                |  
|Finished goods                                     |  |                   |       |  |                     |  
|Specialty printing papers                          |  | $                 | 22.3  |  |                     | $
|Newsprint                                          |  |                   | 7.7   |  |                     |  
|Pulp                                               |  |                   | 3.9   |  |                     |  
|Total finished goods                               |  |                   | 33.9  |  |                     |  
|Work-in-progress                                   |  |                   | 0.9   |  |                     |  
|Raw materials – wood chips, pulp logs and other    |  |                   | 23.1  |  |                     |  
|Operating and maintenance supplies and spare parts |  |                   | 67.1  |  |                     |  
|                                                   |  | $                 | 125.0 |  |                     | $



The company had applied write-downs
to finished goods inventory of $0.1 million on December 31, 2012 and $0.3 million on September 30, 2012 (December 31, 2011 –
$2.1 million) and to raw materials inventory of $0.8 million on December 31, 2012 and $2.0 million on September 30, 2012 (December
31, 2011 – $4.5 million).



Inventories are pledged as collateral
against the long-term debt of the company. See note 18, Long-term debt,for detailed disclosure of the collateral arrangements
of the company.











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



| | 13. | PREPAIDS AND OTHER
| | --- | ------------------



The components of prepaids and
other are as follows:



|                                       |  | Successor         |     |  | Predecessor         |  
|-------------------------------------- |  | ----------------- | --- |  | ------------------- | -
|                                       |  | As at December 31 |     |  | As at  September 30 |  
|                                       |  | 2012              |     |  | 2012                |  
|Property taxes, insurance and licences |  | $                 | 3.2 |  |                     | $
|Derivative financial instruments       |  |                   | –   |  |                     |  
|Deferred income tax assets (note 21)   |  |                   | –   |  |                     |  
|Other                                  |  |                   | 5.7 |  |                     |  
|                                       |  | $                 | 8.9 |  |                     | $



Prepaids and other assets are pledged as collateral
against the long-term debt of the company. See note 18, Long-term debt,for detailed disclosure of the collateral arrangements
of the company.



| | 14. | PROPERTY, PLANT AND EQUIPMENT
| | --- | -----------------------------



The components of property, plant and equipment are
as follows:



|                                        |  | As at December 31, 2012 (successor) |      
|--------------------------------------- |  | ----------------------------------- | -----
|                                        |  | Cost                                |      
|Buildings and land                      |  |                                     |      
|Specialty printing papers and newsprint |  | $                                   | 224.5
|Pulp                                    |  |                                     | 9.8  
|Machinery and equipment                 |  |                                     |      
|Specialty printing papers and newsprint |  |                                     | 384.9
|Pulp                                    |  |                                     | 5.3  
|                                        |  | $                                   | 624.5



|                                        |  | As at September 30, 2012 (successor) |      
|--------------------------------------- |  | ------------------------------------ | -----
|                                        |  | Cost                                 |      
|Buildings and land                      |  |                                      |      
|Specialty printing papers and newsprint |  | $                                    | 221.7
|Pulp                                    |  |                                      | 9.6  
|Machinery and equipment                 |  |                                      |      
|Specialty printing papers and newsprint |  |                                      | 379.5
|Pulp                                    |  |                                      | 3.3  
|                                        |  | $                                    | 614.1











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



|                                        |  | As at December 31, 2011 (predecessor) |        
|--------------------------------------- |  | ------------------------------------- | -------
|                                        |  | Cost                                  |        
|Buildings and land                      |  |                                       |        
|Specialty printing papers and newsprint |  | $                                     | 574.6  
|Pulp                                    |  |                                       | 98.8   
|Machinery and equipment                 |  |                                       |        
|Specialty printing papers and newsprint |  |                                       | 2,756.2
|Pulp                                    |  |                                       | 785.2  
|                                        |  | $                                     | 4,214.8



Machinery and equipment with a net carrying amount
of $7.3 million on December 31, 2012 and $7.5 million on September 30, 2012 (2011 – $9.6 million) were held under capital
leases. These assets had a cost of $7.5 million on December 31, 2012 and September 30, 2012 (2011 – $15.1 million) and accumulated
depreciation and amortization of $0.2 million on December 31, 2012 and $nil million on September 30, 2012 (2011 – $5.5 million).



Interest capitalized in connection with capital projects
was $nil for both 2012 and 2011.



Property, plant and equipment
are pledged as collateral against the long-term debt of the company. See note 18, Long-term debt,for detailed disclosure
of the collateral arrangements of the company.



| | 15. | GOODWILL
| | --- | --------



Goodwill recorded by the company represents the excess
of the enterprise value determined under fresh start accounting over the amount assigned to specific assets and liabilities of
the company.  The amount represents the present value of the future economic benefits available to the company from tax attributes
available in the company. The tax attributes consist primarily of the excess of tax basis over net book value of depreciable assets
that have no expiration date.



| | 16. | OTHER ASSETS
| | --- | ------------



The components of other assets
are as follows:



|                                               |  | Successor         |      |  | Predecessor         |  
|---------------------------------------------- |  | ----------------- | ---- |  | ------------------- | -
|                                               |  | As at December 31 |      |  | As at  September 30 |  
|                                               |  | 2012              |      |  | 2012                |  
|Deferred financing costs                       |  | $                 | 9.0  |  |                     | $
|Deferred charges and other                     |  |                   | 1.8  |  |                     |  
|Derivative financial instruments               |  |                   | –    |  |                     |  
|Accrued benefit asset – pension plan (note 19) |  |                   | 0.2  |  |                     |  
|                                               |  | $                 | 11.0 |  |                     | $



Other assets are pledged as collateral against the
long-term debt of the company. See note 18, Long-term debt,for detailed disclosure of the collateral arrangements of the
company.











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



| | 17. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| | --- | ----------------------------------------



The components of accounts payable and accrued liabilities
are as follows:



|                                                                           |  | Successor         |       |  | Predecessor         |  
|-------------------------------------------------------------------------- |  | ----------------- | ----- |  | ------------------- | -
|                                                                           |  | As at December 31 |       |  | As at  September 30 |  
|                                                                           |  | 2012              |       |  | 2012                |  
|Trade payables                                                             |  | $                 | 54.4  |  |                     | $
|Accrued payroll and related liabilities                                    |  |                   | 23.6  |  |                     |  
|Accrued interest                                                           |  |                   | 11.7  |  |                     |  
|Accrued benefit obligation – pension plan  (note 19)                       |  |                   | 7.4   |  |                     |  
|Accrued benefit obligation – other employee future benefit plans (note 19) |  |                   | 5.8   |  |                     |  
|Property taxes, including taxes in arrears, interest and related parties   |  |                   | –     |  |                     |  
|Restructuring (note 24)                                                    |  |                   | 0.3   |  |                     |  
|Lease obligation – paper recycling – current portion                       |  |                   | –     |  |                     |  
|Payables related to capital projects                                       |  |                   | 3.9   |  |                     |  
|Other                                                                      |  |                   | 6.7   |  |                     |  
|                                                                           |  | $                 | 113.8 |  |                     | $











CATALYST PAPER CORPORATION



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



| | 18. | LONG-TERM DEBT
| | --- | --------------



The company’s long-term debt at December 31
is listed below.



|                                                                                                                   |  | Successor         |       |   | Predecessor         |  
|------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ----- | - | ------------------- | -
|                                                                                                                   |  | As at December 31 |       |   | As at  September 30 |  
|Recourse                                                                                                           |  | 2012              |       |   | 2012                |  
|Floating rate senior secured notes, due September 2016 (US$35.0 million)                                           |  | $                 | 33.9  |   |                     | $
|Senior secured notes, 11.0% due October 2017 (US$250.0 million)                                                    |  |                   | 248.7 |   |                     |  
|Senior notes, 7.375% due March 2014 (US$250.0 million)                                                             |  |                   | –     |   |                     |  
|Senior secured notes, 11.0% due December 2016 (US$280.4 million)                                                   |  |                   | –     |   |                     |  
|Modification – difference in carrying value of 8.625% and 11.0% senior secured notes (US$38.3 million) on exchange |  |                   | –     |   |                     |  
|Class B senior secured notes, 11.0% due December 2016 (US$110.0 million)                                           |  |                   | –     |   |                     |  
|                                                                                                                   |  |                   | 282.6 |   |                     |  
|Revolving asset-based loan facility of up to $175.0 million due July 2017                                          |  |                   | 24.0  |   |                     |  
|Revolving asset-based loan facility of up to $175.0 million due May 2016                                           |  |                   | –     |   |                     |  
|Capital lease obligations                                                                                          |  |                   | 8.2   |   |                     |  
|                                                                                                                   |  |                   | 314.8 |   |                     |  
|Non-recourse(note
    8)                                                                                           |  |                   |       |   |                     |  
|First mortgage bonds, 6.447% due July 2016                                                                         |  |                   | 95.0  |   |                     |  
|Subordinated promissory notes                                                                                      |  |                   | 18.8  |   |                     |  
|                                                                                                                   |  |                   | 113.8 |   |                     |  
|Total debt                                                                                                         |  |                   | 428.6 |   |                     |  
|Less:  current portion                                                                                             |  |                   | (6.6  | ) |                     |  
|Total long-term debt                                                                                               |  | $                 | 422.0 |   |                     | $



Significant changes to long-term debt in 2012



On September 13, 2012 as part of the implementation
of the Plan and emergence from creditor protection, the Successor company issued US$250.0 million of new senior secured notes (2017
Notes). The 2017 Notes, issued to holders of the Predecessor company’s 2016 Notes, have a maturity date of October 30, 2017,
and bear interest, payable semi-annually, at a rate of 11% per annum in cash or, at the option of the company, 13% per annum payable
7.5% cash and 5.5% PIK. The PIK portion of the interest will consist of newly issued senior secured notes that will be governed
by the indentures of the 2017 Notes and will have identical maturity, covenants, interest, collateral and other characteristics
as the 2017 Notes. In 2012, the company elected to pay interest due on the 2017 Notes in cash.















CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



In addition to the above, the indentures governing
the 2017 Notes make provision for:



| | – | an annual cash flow sweep, subject to a minimum liquidity threshold; any amounts paid to holders of the 2017 Notes from the
cash flow sweep will be used to pay down the principal amount of the 2017 Notes at par value;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | – | the company issuing up to an additional US$75.0 million in principal amount of identical senior secured notes, subject to the
consent of holders of 75.0% in principal amount of 2017 Notes if the company’s secured debt to EBITDA ratio, pro forma for
the issuance of the additional senior secured notes, exceeds 3.0 times; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | – | the company repurchasing the 2017 Notes for 103% of their principal amount until December 15, 2013 and 100% thereafter.
| | - | -----------------------------------------------------------------------------------------------------------------------



On September 13, 2012 the company secured exit financing
consisting of a new ABL Facility and the issuance of Floating Rate Notes. The $175.0 million ABL Facility, which replaced the DIP
Credit Facility the company had access to while under creditor protection, matures on the earlier of July 31, 2017, and 90 days
prior to maturity of any significant debt. A financial covenant requires the company to maintain a minimum fixed charge coverage
ratio of 1.0:1.0 if excess availability under the Facility is below $22 million; at December 31, 2012, the fixed charge coverage
ratio was 0.4:1.0 for purposes of this covenant.



The US$35.0 Floating Rate Notes have a maturity date
of September 13, 2016, and can be prepaid in whole or in part at any time prior to September 13, 2013, at a redemption price of
103%, on or after September 13, 2013, and prior to September 13, 2014, at a redemption price of 102%, and on or after September
13, 2014, at a redemption price of 100% of the aggregate principal amount outstanding. The Floating Rate Notes bear interest, payable
quarterly, at 10.0% plus three-month LIBOR per annum, with a floor set for the floating LIBOR component of 3.0%.



The company secured a DIP Credit Facility, which replaced
its former ABL Facility, as part of the creditor protection proceedings. The DIP Credit Facility had an 18-month maturity and a
maximum draw of approximately $175 million. Maximum availability was subject to certain terms and conditions that the DIP lenders
agreed to provide to Catalyst during the CCAA proceedings. The security for the DIP Credit Facility consisted of a first charge
on the accounts receivable, inventory and cash of the company (collectively, the DIP First Charge Collateral) and a second charge
on the 2016 Notes First Charge Collateral.



Significant changes to long-term debt in 2011



On December 15, 2011 the company withheld an interest
payment of US$21.5 million due on that date on its 2016 Notes, electing to take advantage of a 30-day grace period stipulated in
the note indentures. The interest deferral represented a covenant violation on December 31, 2011 under the indentures governing
the 2016 Notes. However, the covenant violation didn’t result in a default on the 2016 Notes on December 31, 2011, due to
the 30-day grace period that was in force. Per the terms of the company’s former ABL Facility, the covenant violation on
the 2016 Notes would have resulted in a cross-default on the ABL Facility had it not been for a 30-day waiver obtained from the
ABL lenders. The covenant violation, which remained uncured on the date of the commencement of the creditor protection proceedings
on January 31, 2012, resulted in a reclassification of the $414.9 million outstanding on the 2016 Notes and the $48.0 million balance
drawn on the ABL Facility on December 31, 2011 as current debt.



On May 31, 2011 the company amended its former ABL
Facility, reducing the size of the Facility to $175 million, from $330 million, in part due to working capital levels which have
been lower since the closure of the Elk Falls mill. The maturity date was extended to May 31, 2016, from August 13, 2013. In addition,
the fixed assets of the Snowflake mill were no longer part of the borrowing base and became first lien security under the company’s
2016 Notes thereby increasing the first lien basket under those notes by $60 million.



On February 11, 2011, the company redeemed the outstanding
8.625% senior unsecured notes of US$26.0 million, due June 2011 (2011 Notes).











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



Significant terms, conditions and covenants



The indentures governing the company’s senior
notes contain customary restrictive covenants, including restrictions on incurring additional indebtedness, certain restricted
payments, including dividends and investments in other persons, the creation of liens, sale and leaseback transactions, certain
amalgamations, mergers, consolidations and the use of proceeds arising from certain sales of assets and certain transactions with
affiliates. Collateral provided on the 2017 Notes consists of a first charge on substantially all of the assets of the company,
other than (i) a senior collateral charge on the Floating Rate Notes, and (ii) the ABL First Charge Collateral, as described below
(2017 Notes First Charge Collateral), and a second charge on the senior collateral charge on the Floating Rate Notes and the ABL
First Charge Collateral. The Floating Rate Notes are secured by a charge on the assets of the company that ranks senior to the
lien securing the 2017 Notes (Floating Rate Notes First Charge Collateral). The indentures governing the Floating Rate Notes and
2017 Notes limit the ability of the company to incur debt, other than permitted debt, while the company cannot meet a fixed charge
coverage ratio of 2.0:1.0. The company’s fixed charge coverage ratio under these indentures, calculated on a 12-month trailing
average, was 0.9:1.0 at December 31, 2012 and 0.4:1.0 at September 30, 2012.



Under the indentures for the Floating Rate Notes and
the 2017 Notes, permitted debt includes, among other things, (a) debt arising under the ABL Facility, subject to certain limitations;
(b) debt under the Floating Rate Notes, additional senior secured notes issued under the PIK interest option, and the issuance
of up to US$75.0 million additional senior secured notes, subject to certain limitations; (c) purchase money debt and capitalized
lease obligations in an aggregate principal amount outstanding not to exceed $15.0 million; (d) a general basket of $25.0 million;
(e) debt incurred under interest rate agreements, currency agreements, and reimbursement obligations related to undrawn standby
letters of credit, subject to certain limitations; (f) debt in respect of completion guarantees, bid, performance, surety or appeal
bonds, subject to certain limitations; (g) a $5.0 million basket for accommodation guarantees, trade or standby letters of credit,
performance bonds, bankers’ acceptances and surety bonds; (h) debt equal to 200.0% of the net cash proceeds from the issue
or sale of capital stock or capital contributions, subject to certain limitations; and (i) debt incurred as full or partial payment
of any asset acquisition, or if debt constitutes acquired debt, subject to, among other things, the company’s consolidated
fixed charge coverage ratio being equal or higher after the asset acquisition than immediately before. The company cannot make
any restricted payments, including paying any dividends, except to the extent the balance in its restricted payments basket is
positive. The restricted payments basket under the 2017 Notes was negative $33.6 million as at December 31, 2012 and $nil million
as at September 30, 2012.



The security for the ABL Facility consists of a first
charge on accounts receivable, inventory and cash of the company (ABL First Charge Collateral) and a second charge on the 2017
Notes First Charge Collateral. Availability under the ABL Facility is determined by a borrowing base calculated primarily on eligible
accounts receivable and eligible inventory, less certain reserves. The borrowing base at December 31, 2012, included reserves for
a landlord waiver reserve in respect of rent of approximately $2.3 million, a pension reserve not exceeding the sum of normal cost
pension contributions, special and catch-up payments and any other payments in respect of a Canadian pension plan that are past
due of approximately $1.1 million, a reserve for credit insurance deductibles of $2.0 million, a reserve of $1.3 million for employee
source deductions, a reserve for workers compensation of $0.3 million, and a purchasing card reserve of $0.2 million. The borrowing
base at September 30, 2012, included reserves for a landlord waiver reserve in respect of rent of approximately $2.3 million, a
pension reserve not exceeding the sum of normal cost pension contributions, special and catch-up payments and any other payments
in respect of a Canadian pension plan that are past due of approximately $2.7 million, a reserve for credit insurance deductibles
of $2.0 million, a reserve of $1.3 million for employee source deductions, and a reserve for workers compensation of $0.3 million.











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



On December 31, 2012 the company had $78.9 million
available under the ABL Facility after deducting outstanding drawings of $24.0 million and outstanding letters of credit of $22.3
million, before potential application of the springing fixed charge coverage ratio. On September 30, 2012, the company had $82.2
million available under the ABL Facility after deducting outstanding drawings of $64.0 million and outstanding letters of credit
of $17.8 million, before potential application of the springing fixed charge coverage ratio. The company also had cash on hand
of $18.5 million on December 31, 2012 and $12.6 million on September 30, 2012, and restricted cash of $3.0 million on December
31, 2012 and $6.4 million on September 30, 2012.



The company was in compliance with its covenants under
the ABL Facility and under each of the indentures governing its outstanding senior notes on December 31, 2012 and September 30,
2012.



Non-recourse debt is debt owed by the company’s
subsidiary PREI. The company has a 50.001% interest in PREI, and consolidates 100% of it as PREI is a VIE in which the company
is the primary beneficiary.



Scheduled total debt repayments





|           |  | Recourse debt |       |  | Non-recourse debt (PREI) |  
|---------- |  | ------------- | ----- |  | ------------------------ | -
|2013       |  | $             | 6.6   |  |                          | $
|2014       |  |               | 1.6   |  |                          |  
|2015       |  |               | –     |  |                          |  
|2016       |  |               | 34.8  |  |                          |  
|2017       |  |               | 272.7 |  |                          |  
|Thereafter |  |               | –     |  |                          |  
|           |  | $             | 315.7 |  |                          | $





The company’s long-term debt is recorded at
amortized cost. The following table provides information about management’s best estimate of the fair value of the company’s
debt:



|             |  | Successor         |       |  | Predecessor        |  
|------------ |  | ----------------- | ----- |  | ------------------ | -
|             |  | December 31, 2012 |       |  | September 30, 2012 |  
|             |  | Carrying Value    |       |  | Fair Value         |  
|Recourse     |  | $                 | 314.8 |  |                    | $
|Non-recourse |  |                   | 113.8 |  |                    |  



The fair value of the company’s long-term recourse
debt related to its senior notes is determined based on quoted market prices of identical debt instruments. The fair value of the
company’s recourse debt related to the ABL Facility and non-recourse debt related to the first mortgage bonds is measured
by discounting the respective cash flows at quoted market rates for similar debt having the same maturity. In measuring fair value,
the company incorporates credit valuation adjustments to appropriately reflect its own non-performance risk, where appropriate.



| | 19. | EMPLOYEE FUTURE BENEFITS
| | --- | ------------------------



The company maintains pension benefit
plans for all salaried employees, which include defined benefit and defined contribution segments.  Employees hired subsequent
to January 1, 1994 enroll in the defined contribution segment. Effective January 1, 2010, employees in the defined benefit plan
ceased to accrue future benefits under the defined benefit segment of the plan and began to participate in the defined contribution
segment of the plan. The company also maintains pension benefits for former hourly employees that are not covered by union pension
plans. Unionized employees of the company are members of multi-employer industry-wide pension plans to which the company contributes
a predetermined amount per hour worked by an employee.











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



The company provides other benefit
plans consisting of provincial medical plan premiums, life insurance, extended health care and dental benefits to employees. 
In February 2010, the company announced changes to its benefit plans for current retirees which included the replacement of the
current extended health benefits program with provision of the lower cost program available to employees in active employment.
The reduction in the benefit obligation resulting from the plan changes of $21.3 million was recognized as a negative plan amendment
in 2010. The company also made the decision to permanently close Elk Falls mill in 2010 (note 7) and the related reduction in the
benefit obligation from the plan curtailment amounting to $9.7 million was recognized with a corresponding increase to other comprehensive
income.



Certain extended health benefits
with an actuarial value of $24.8 million as of September 30, 2012 were compromised under the Plan.



Defined contribution plans



For the defined contribution segment,
the company’s contributions are based on a percentage of an employee’s earnings with the company’s funding obligations
being satisfied upon crediting contributions to an employee’s account. The pension expense under the defined contribution
payment is equal to the company’s contribution.



Defined benefit plans



The defined benefit segment provides
a pension based on years of service and earnings. Benefits accrued under the defined benefit segment of the plan for service prior
to January 1, 2010 will remain in the defined benefit plan and will continue to be eligible for future salary growth and early
retirement subsidies.



The company offered members of its
defined benefit pension plan for salaried employees a one-time reduced lump-sum payment option as full settlement of their entitlements
under the plan. Members had to make their elections by no later than December 15, 2012, and have until June 30, 2013 to revoke
such elections in favour of continuing to receive retirement benefits in the form of a monthly pension. As of March 5, 2013, the
company had received elections for 42% of the total membership and 48% of the total solvency liability. As of March 5, 2013, the
future impact of the portability election on the projected benefit obligations and fair value of plan assets of the company are
impossible to estimate due to the revocation option, and therefore, were not reflected in the actuarial valuation of projected
benefit obligations and fair value of plan assets as of December 31, 2012.



The company measured the fair value
of plan assets and the projected benefit obligations of the Successor company for accounting purposes on December 31, 2012 and
September 30, 2012 with the assistance of its independent actuaries. Changes in the funding status of these plans not recognized
in net periodic benefit costs were reflected as an adjustment to Accumulated other comprehensive income (loss). Subsequent to the
closure of the Snowflake mill, the company no longer has a projected benefit obligation under the Snowflake Salaried Retiree Medical
and Life Insurance Plan.











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Components of net periodic
benefit cost recognized

|                                                                      |  | Successor                      |      |   | Predecessor                    |  
|--------------------------------------------------------------------- |  | ------------------------------ | ---- | - | ------------------------------ | -
|                                                                      |  | Three months ended December 31 |      |   | Nine months ended September 30 |  
|Pension benefit plans                                                 |  | 2012                           |      |   | 2012                           |  
|Defined benefit plan                                                  |  |                                |      |   |                                |  
|Service cost for the period                                           |  | $                              | 0.2  |   |                                | $
|Interest cost                                                         |  |                                | 3.7  |   |                                |  
|Expected return on assets                                             |  |                                | (3.6 | ) |                                |  
|Recognition (reversal) of downsizing program                          |  |                                | –    |   |                                |  
|Amortization of unrecognized items:                                   |  |                                |      |   |                                |  
|Actuarial (gains) losses                                              |  |                                | –    |   |                                |  
|Prior service costs                                                   |  |                                | –    |   |                                |  
|                                                                      |  |                                | 0.3  |   |                                |  
|Defined contribution plan                                             |  |                                |      |   |                                |  
|Service cost for the period                                           |  |                                | 0.7  |   |                                |  
|Multi-employer industry-wide pension plan service cost for the period |  |                                | 2.0  |   |                                |  
|Net periodic benefit cost for pension benefit plans                   |  | $                              | 3.0  |   |                                | $





|                                                  |  | Successor                      |     |  | Predecessor                    |  
|------------------------------------------------- |  | ------------------------------ | --- |  | ------------------------------ | -
|                                                  |  | Three months ended December 31 |     |  | Nine months ended September 30 |  
|                                                  |  | 2012                           |     |  | 2012                           |  
|Other benefit plans                               |  |                                |     |  |                                |  
|Service cost for the period                       |  | $                              | 0.4 |  |                                | $
|Interest cost                                     |  |                                | 1.5 |  |                                |  
|Amortization of unrecognized items:               |  |                                |     |  |                                |  
|Actuarial (gains) losses                          |  |                                | –   |  |                                |  
|Prior service credits                             |  |                                | –   |  |                                |  
|Net periodic benefit cost for other benefit plans |  | $                              | 1.9 |  |                                | $

















CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Change in projected defined benefit
plan obligation and fair value of plan assets



The following table represents the change
in the projected benefit obligation and fair value of plan assets as determined by independent actuaries:



|                                                                 |  | Pension benefit plans          |       |   | Other benefit plans            |  
|---------------------------------------------------------------- |  | ------------------------------ | ----- | - | ------------------------------ | -
|                                                                 |  | Successor                      |       |   | Predecessor                    |  
|                                                                 |  | Three months ended December 31 |       |   | Nine months ended September 30 |  
|                                                                 |  | 2012                           |       |   | 2012                           |  
|Change in benefit obligation                                     |  |                                |       |   |                                |  
|Projected benefit obligation at beginning of period              |  | $                              | 393.9 |   |                                | $
|Service cost for the period                                      |  |                                | 0.2   |   |                                |  
|Interest cost                                                    |  |                                | 3.7   |   |                                |  
|Benefit payments                                                 |  |                                | (7.8  | ) |                                |  
|Recognition (reversal) of downsizing program                     |  |                                | –     |   |                                |  
|Elimination of extended health benefits for retirees             |  |                                | –     |   |                                |  
|Actuarial losses (gains) and other adjustments                   |  |                                | (3.5  | ) |                                |  
|Projected benefit obligation at end  of period                   |  | $                              | 386.5 |   |                                | $
|                                                                 |  |                                |       |   |                                |  
|Change in plan assets                                            |  |                                |       |   |                                |  
|Fair value of defined benefit plan assets at beginning of period |  | $                              | 231.9 |   |                                | $
|Actual return on plan assets                                     |  |                                | 4.3   |   |                                |  
|Company contributions                                            |  |                                | 4.6   |   |                                |  
|Other                                                            |  |                                | –     |   |                                |  
|Benefit payments                                                 |  |                                | (7.8  | ) |                                |  
|Fair value of assets at end of period                            |  | $                              | 233.0 |   |                                | $











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Reconciliation of funded status to amounts recognized in
the consolidated balance sheets



|                                              |  | Pension benefit plans |        |   | Other benefit plans |  
|--------------------------------------------- |  | --------------------- | ------ | - | ------------------- | -
|                                              |  | Successor             |        |   | Predecessor         |  
|                                              |  | As at December 31     |        |   | As at  September 30 |  
|                                              |  | 2012                  |        |   | 2012                |  
|Projected benefit obligation at end of period |  | $                     | 386.5  |   |                     | $
|Fair value of plan assets at end of period    |  |                       | 233.0  |   |                     |  
|Funded status                                 |  | $                     | (153.5 | ) |                     | $



|                                                   |  | Pension benefit plans |        |   | Other benefit plans |  
|-------------------------------------------------- |  | --------------------- | ------ | - | ------------------- | -
|                                                   |  | Successor             |        |   | Predecessor         |  
|                                                   |  | As at December 31     |        |   | As at  September 30 |  
|                                                   |  | 2012                  |        |   | 2012                |  
|Other assets (note 16)                             |  | $                     | 0.2    |   |                     | $
|Accounts payable and accrued liabilities (note 17) |  |                       | (7.4   | ) |                     |  
|Employee future benefits                           |  |                       | (146.3 | ) |                     |  
|                                                   |  | $                     | (153.5 | ) |                     | $



Of the total funding deficit of $153.5 million
on December 31, 2012 and $162.0 million on September 30, 2012 (2011 – $156.9 million) in the company’s various defined
benefit pension plans, $83.3 million as of December 31, 2012 and $90.3 million as of September 30, 2012 (2011 – $86.9 million)
is related to funded defined benefit pension plans and $70.2 million as of December 31, 2012 and $71.7 million as of September
30, 2012 (2011 – $70.0 million) to “pay-as-you-go” unfunded defined benefit pension plans. In addition, all of
the other post-retirement benefit plans, consisting of group health care and life insurance, which had a deficit of $149.2 million
at December 31, 2012 and $150.8 million at September 30, 2012 (2011 – $162.3 million) is related to “pay-as-you-go”
plans.



Amounts not yet recognized in net periodic
benefit cost and included in accumulated other comprehensive income (loss)



|                                              |  | Pension benefit plans |     |  | Other benefit plans |  
|--------------------------------------------- |  | --------------------- | --- |  | ------------------- | -
|                                              |  | Successor             |     |  | Predecessor         |  
|                                              |  | As at December 31     |     |  | As at  September 30 |  
|                                              |  | 2012                  |     |  | 2012                |  
|Prior year service credits (costs)            |  | $                     | –   |  |                     | $
|Accumulated gain (loss)                       |  |                       | 4.6 |  |                     |  
|Accumulated other comprehensive income (loss) |  | $                     | 4.6 |  |                     | $















CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Amounts before taxes included
in other comprehensive income (loss)



|                                                           |  | Successor                      |     |  | Predecessor                    |  
|---------------------------------------------------------- |  | ------------------------------ | --- |  | ------------------------------ | -
|                                                           |  | Three months ended December 31 |     |  | Nine months ended September 30 |  
|Pension benefit plans                                      |  | 2012                           |     |  | 2012                           |  
|Amortization of employee future benefits                   |  | $                              | –   |  |                                | $
|Net gain (loss)                                            |  |                                | 4.6 |  |                                |  
|Net amount recognized in other comprehensive income (loss) |  | $                              | 4.6 |  |                                | $



|                                                           |  | Successor                      |     |  | Predecessor                    |  
|---------------------------------------------------------- |  | ------------------------------ | --- |  | ------------------------------ | -
|                                                           |  | Three months ended December 31 |     |  | Nine months ended September 30 |  
|Other benefit plans                                        |  | 2012                           |     |  | 2012                           |  
|Amortization of employee future benefits                   |  | $                              | –   |  |                                | $
|Net gain (loss)                                            |  |                                | 2.0 |  |                                |  
|Net amount recognized in other comprehensive income (loss) |  | $                              | 2.0 |  |                                | $



In accordance with the requirements
of fresh start accounting, the amounts not yet recognized in net periodic benefit cost and included in accumulated other comprehensive
income (loss) were reset to nil as at September 30 2012. Accordingly, no prior service (credit) costs or actuarial (gains) losses
were amortized in net benefit cost for the three months ended December 31, 2012. The accumulated actuarial (gains) losses as at
December 31, 2012 are less than 10% of the greater of the accrued benefit obligation and the fair value of plan assets on December
31, 2012, and therefore, no actuarial (gains) losses will be amortized in the net benefit cost for 2013.



Estimated future benefit payments



Total cash payments for employee
future benefits for the year ended December 31, 2012, consisting of cash contributed by the company to its funded pension plans,
cash payments directly to beneficiaries for its unfunded benefit plans, cash contributed to its defined contribution plans and
cash contributed to its multi-employer industry-wide plan, was $38.8 million (2011 – $42.3 million). During 2013, the company
expects to contribute approximately $22.7 million to all of the above pension plans and approximately $6.0 million to its other
benefit plans.



In July 2011, the final true up
contribution for the closure of the U.S. sales company’s benefit pension plan was made for US$5.1 million.



The following table presents estimated
future benefit payments from the plans as of December 31, 2012. Benefit payments for other post-retirement benefits are presented
net of retiree contributions.





|            |  | Pension benefit plans |       |  | Other benefit plans |  
|----------- |  | --------------------- | ----- |  | ------------------- | -
|2013        |  | $                     | 30.6  |  |                     | $
|2014        |  |                       | 30.5  |  |                     |  
|2015        |  |                       | 30.1  |  |                     |  
|2016        |  |                       | 29.6  |  |                     |  
|2017        |  |                       | 29.0  |  |                     |  
|2018 - 2022 |  |                       | 133.5 |  |                     |  















CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



Plan assets allocation



The asset allocation for the
company’s defined benefit pension plans, by asset category, was as follows:



|                        |  | Successor                 |       |   | Predecessor                | 
|----------------------- |  | ------------------------- | ----- | - | -------------------------- | 
|Plan assets             |  | As at  December 31,  2012 |       |   | As at  September 30,
 2012 | 
|Equity securities       |  |                           | 56.2  | % |                            | 
|Fixed income securities |  |                           | 38.6  | % |                            | 
|Real estate             |  |                           | 5.2   | % |                            | 
|Total                   |  |                           | 100.0 | % |                            | 



Fair value of plan assets



The following tables present information
about the fair value of pension and other benefit plan assets:



|                                    |  |       |       |   | Fair value hierarchy |  
|----------------------------------- |  | ----- | ----- | - | -------------------- | -
|As at December 31, 2012 (successor) |  | Total |       |   | Level 1              |  
|Asset category                      |  |       |       |   |                      |  
|Cash and cash equivalents           |  | $     | 2.8   |   |                      | $
|Equity securities:                  |  |       |       |   |                      |  
|Global equity pooled funds 1        |  |       | 85.5  |   |                      |  
|Canadian equity pooled funds 2      |  |       | 45.2  |   |                      |  
|Fixed income securities:            |  |       |       |   |                      |  
|Canadian long bond pooled funds 4   |  |       | 43.7  |   |                      |  
|Canadian bond pooled funds 4        |  |       | 43.9  |   |                      |  
|Forward currency contracts 5        |  |       | (0.1  | ) |                      |  
|Real estate 6                       |  |       | 12.0  |   |                      |  
|Total                               |  | $     | 233.0 |   |                      | $



|                                     |  |       |       |  | Fair value hierarchy |  
|------------------------------------ |  | ----- | ----- |  | -------------------- | -
|As at September 30, 2012 (successor) |  | Total |       |  | Level 1              |  
|Asset category                       |  |       |       |  |                      |  
|Cash and cash equivalents            |  | $     | 2.7   |  |                      | $
|Equity securities:                   |  |       |       |  |                      |  
|Global equity pooled funds 1         |  |       | 84.2  |  |                      |  
|Canadian equity pooled funds 2       |  |       | 46.3  |  |                      |  
|Fixed income securities:             |  |       |       |  |                      |  
|Canadian long bond pooled funds 4    |  |       | 43.4  |  |                      |  
|Canadian bond pooled funds 4         |  |       | 43.5  |  |                      |  
|Forward currency contracts 5         |  |       | –     |  |                      |  
|Real estate 6                        |  |       | 11.8  |  |                      |  
|Total                                |  | $     | 231.9 |  |                      | $













CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



|                                      |  |       |       |  | Fair value hierarchy |  
|------------------------------------- |  | ----- | ----- |  | -------------------- | -
|As at December 31, 2011 (predecessor) |  | Total |       |  | Level 1              |  
|Asset category                        |  |       |       |  |                      |  
|Cash and cash equivalents             |  | $     | 7.6   |  |                      | $
|Equity securities:                    |  |       |       |  |                      |  
|Global equity pooled funds 1          |  |       | 85.8  |  |                      |  
|Canadian equity pooled funds 2        |  |       | 41.9  |  |                      |  
|Balanced equity pooled funds 3        |  |       | 0.5   |  |                      |  
|Fixed income securities:              |  |       |       |  |                      |  
|Canadian long bond pooled funds 4     |  |       | 45.8  |  |                      |  
|Canadian bond pooled funds 4          |  |       | 44.9  |  |                      |  
|Forward currency contracts 5          |  |       | 0.4   |  |                      |  
|Total                                 |  | $     | 226.9 |  |                      | $





| | 1 | This category includes investments in pooled funds that aim to achieve long-term capital growth by
investing primarily in equity securities of companies that may be located anywhere in the world, excluding Canada. Fund performance
is benchmarked against the MSCI World excluding Canada (Cdn$) Index.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2 | This category includes investments in pooled funds that invest in well-diversified portfolios of equity
securities of Canadian companies. Fund performance is benchmarked against the S&P/TSX Capped Composite Index.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3 | This category includes investments in pooled funds that invest in a well-diversified, balanced portfolio
of Canadian common stocks, bonds, and money market securities. The fund also holds a portion of its assets in foreign common stock.
Fund performance is benchmarked against a customized index consisting of: 35% S&P/TSX Capped Composite Total Return Index,
25% Morgan Stanley Capital International World (Developed Markets) Index excluding Canada, 35% DEX Universe Bond Index and 5% DEX
30-Day T-Bill Index.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4 | This category includes investments in pooled funds that invest in a well-diversified portfolio of
fixed income securities issued primarily by Canadian governments and corporations. The duration range of the fund is +/- one year
of the benchmark’s duration. Fund performance for Canadian bond pooled funds and Canadian long bond pooled funds is benchmarked
against the DEX Universe Bond Index and DEX Long-Term Bond Index, respectively.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5 | This category includes foreign currency forward contracts to partially hedge investments in equity
and fixed income securities denominated in foreign currencies.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6 | This category includes direct investment in office, industrial, retail and residential real estate.
| | - | ---------------------------------------------------------------------------------------------------



Cash and cash equivalents are primarily
used to pay benefits and are recorded at carrying value which approximates fair value.



Equity and fixed income securities
are comprised of pooled fund trusts, the fair values of which are measured using the net asset values of the funds, as calculated
by the respective investment managers, and have daily or monthly 	liquidity. Net asset values are determined using quoted market
prices for the actively traded securities in which the fund has invested. The funds do not invest in securities that are not actively
traded.



Forward currency contracts are comprised
of over-the-counter instruments and their fair value is measured using the discounted difference between contractual rates and
market spot rates.











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Multi-employer benefit plans



The following table provides information
about the company’s two multi-employer pension plans:



|                                                  |  |                                   |  |                    |  |                 |  | Contributions by Catalyst Paper 4 |  |      |             |  |         
|------------------------------------------------- |  | --------------------------------- |  | ------------------ |  | --------------- |  | --------------------------------- |  | ---- | ----------- |  | --------
|                                                  |  |                                   |  |                    |  |                 |  | Successor                         |  |      | Predecessor |  |         
|                                                  |  |                                   |  |                    |  |                 |  | Three months                      |  |      | Nine months |  |         
|                                                  |  |                                   |  | Pension Protection |  | FIP / RP status |  | ended                             |  |      | ended       |  |         
|                                                  |  | EIN / Pension                     |  | Act Zone Status 2  |  | pending /       |  | September                         |  |      | September   |  |         
|Pension Fund                                      |  | plan number 1                     |  | 2012               |  | 2011            |  | Implemented 3                     |  | 2012 |             |  | 30, 2012
|Pulp
    and Paper Industry Pension Plans 6       |  | BCFIC - P085324
    CRA - 0394940 |  | Green              |  | Green           |  | No                                |  | $    | 1.9         |  |         
|PACE
    Industry Union-Management Pension Fund 7 |  | 11-6166763-001                    |  | Red                |  | Red             |  | Implemented                       |  |      | 0.1         |  |         



| | 1 | Employer identification number and three digit pension plan number, if applicable.
| | - | ----------------------------------------------------------------------------------

| | 2 | Funded status on each balance sheet date presented expressed as a zone status. Green status equals
at least 80% funded, yellow status equals less than 80% funded and red status equals less than 65% funded.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3 | Indicates whether a funding improvement plan (FIP) or a rehabilitation plan (RP) is pending or has
been implemented.
| | - | --------------------------------------------------------------------------------------------------------------------

| | 4 | The company’s annual contributions to the Pulp and Paper Industry Pension Plan in each respective
year were greater than 5% of total employer contributions. The company’s annual contributions to the PACE Industry Union
Management Pension Fund in each respective year were less than 5% of total employer contributions.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5 | Expiration date of collective bargaining agreement on December 31, 2012.
| | - | ------------------------------------------------------------------------

| | 6 | Plan participants are members and former members of the Pulp Paper and Woodworkers of Canada (PPWC)
and the Communication Energy and Paperworkers Union (CEP).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7 | Plan participants are members and former members of the United Steel, Paper and Forestry, Rubber,
Manufacturing, Energy, Allied Industrial and Service Workers International Union (United Steelworkers or USW).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Contributions to the Pulp and Paper
Industry Pension Plan are based on a percentage of earnings to a cap in hours worked and contributions to the PACE Industry Union-Management
Pension Fund are based on a contribution per hour worked to a maximum cap in hours worked. The risks of participating in multi-employer
plans differ from single-employer plans in the following ways:



| | 1. | The company’s contributions to multi-employer plans may be used to provide benefits to employees of other participating
employers.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------



| | 2. | If a participating employer were to stop contributing to a multi-employer plan, the unfunded obligations of the plan may be
borne by the remaining participating employers.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | If the company chose to stop participating in a multiemployer plan, it may be required to pay an amount to that plan based
on the underfunded status of the plan, referred to as a withdrawal liability.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As disclosed in note 9, Assets
held for sale and discontinued operations,the closure of the Snowflake mill on September 30, 2012 resulted in the incurrence
of a withdrawal liability of US$11.7 million related to the PACE Industry Union Management Pension Fund. This liability estimate,
provided by the USW, is based on the plan’s funding deficit as of December 31, 2010.



As disclosed in note 7, Measurement
uncertainty – impairment of long-lived assets, the company permanently closed the Elk Falls mill in 2010. This change
had a significant impact on the comparability of total employer contributions to multi-employer benefit plans for the periods presented.
The closure reduced the company’s employee base and resulted in a reduction in pension contributions to the Pulp and Paper
Industry Pension Plan of approximately $4.5million.











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Significant assumptions



Actuarial assumptions used in
accounting for the company-maintained benefit plans were:



|                                                       |  | Successor                          |                                                                                 |   | Predecessor                        | 
|------------------------------------------------------ |  | ---------------------------------- | ------------------------------------------------------------------------------- | - | ---------------------------------- | 
|                                                       |  | Three
    months ended December 31 |                                                                                 |   | Nine
    months ended September 30 | 
|Other
    benefit plans                                |  | 2012                               |                                                                                 |   | 2012                               | 
|                                                       |  |                                    |                                                                                 |   |                                    | 
|Benefit
    obligations at period end,                 |  |                                    |                                                                                 |   |                                    | 
|                                                       |  |                                    |                                                                                 |   |                                    | 
|Discount
    rate                                      |  |                                    | 4.00                                                                            | % |                                    | 
|Rate of compensation
    increase                      |  |                                    | 2.00                                                                            | % |                                    | 
|                                                       |  |                                    |                                                                                 |   |                                    | 
|Net
    benefit cost for the period ended,             |  |                                    |                                                                                 |   |                                    | 
|                                                       |  |                                    |                                                                                 |   |                                    | 
|Discount rate                                          |  |                                    | 3.90                                                                            | % |                                    | 
|Rate of compensation
    increase                      |  |                                    | 2.00                                                                            | % |                                    | 
|Expected rate of
    return on plan assets             |  |                                    | 6.50                                                                            | % |                                    | 
|                                                       |  |                                    |                                                                                 |   |                                    | 
|Assumed
    health care cost trend rate at period end, |  |                                    |                                                                                 |   |                                    | 
|                                                       |  |                                    |                                                                                 |   |                                    | 
|Extended health benefits:                              |  |                                    |                                                                                 |   |                                    | 
|Initial health
    care cost trend rate                |  |                                    | 6.00                                                                            | % |                                    | 
|Annual rate of
    decline in trend rate               |  |                                    | 0.50                                                                            | % |                                    | 
|Ultimate health
    care cost trend rate               |  |                                    | 4.50                                                                            | % |                                    | 
|                                                       |  |                                    |                                                                                 |   |                                    | 
|Dental benefits:                                       |  |                                    |                                                                                 |   |                                    | 
|Dental care cost
    trend rate                        |  |                                    | 3.00                                                                            | % |                                    | 
|                                                       |  |                                    |                                                                                 |   |                                    | 
|Medical services
    plan benefits:                    |  |                                    |                                                                                 |   |                                    | 
|Premium
    trend rate                                 |  |                                    | 6.00%
                                             in 2012 and 4.50% thereafter |   |                                    | 



The discount rate for the company’s
plans was based on the market interest rate on high-quality debt instruments currently available and expected to be available during
the period to maturity of the benefit plans. For December 31, 2012, September 30, 2012 and December 31, 2011, the discount rates
were based on AA corporate bond yields as of those dates respectively. In determining the rate of compensation increases, management
considered the general inflation rate, productivity and promotions. For the health care cost inflation rate, management considered
the trend in extended health care and dental costs in Canada and the impact of inflation on medical service plan premiums. The
expected rate of return on plan assets reflects management’s best estimate regarding the long-term expected return from all
sources of investment return based on the company’s target asset allocation. The 2012 expected rate of return on plan assets
was 6.5% per annum, which was based on a target allocation of approximately 20% Canadian Universe bonds, which were expected to
earn approximately 3.4% per annum in the long term, 20% Canadian Long bonds, which were expected to earn approximately 3.3% per
annum in the long term, 18% Canadian equity securities, which were expected to earn approximately 8.0% per annum in the long term,
and 37% global equity securities, which were expected to earn approximately 8.4% per annum in the long term, and 5% real estate,
which were expected to earn approximately 7.5% per annum in the long term. The 2012 expected rate of return on plan assets also
included a provision of 0.4% per annum in recognition of additional net returns assumed to be achieved due to active management
and periodic rebalancing to maintain the plan’s investment policy, net of investment manager fees, less a margin of 0.3%
per annum for non-investment expenses expected to be paid from the plans.











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



The company’s investment policy
recognizes the long-term pension liabilities, the benefits of diversification across asset classes and the effects of inflation.
The diversified portfolio is designed to maximize returns consistent with the company’s tolerance for risk. All assets are
managed by external investment firms. These firms are constrained by specific mandates and objectives and their performance is
measured against appropriate benchmarks. The asset allocation for each plan is reviewed periodically and is rebalanced toward target
asset mix when asset classes fall outside of a predetermined range. Portfolio risk is controlled by having fund managers comply
with guidelines, by establishing and monitoring the maximum size of any single holding in their portfolios and by using fund managers
with different investment styles. The portfolio includes holdings of Canadian and international equities, Canadian high-quality
and high-yield fixed income securities, and cash and cash equivalents. A series of permitted and prohibited investments are listed
in the company’s investment policy. The use of derivative instruments is restricted and must be in accordance with the company’s
policy. Prohibited investments include categories of assets or instruments not specifically provided for in the company’s
investment policy.



Sensitivity analysis



Assumed health care cost trend rates
have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost rates would
have the following effects for the three months ended December 31, 2012 and the nine months ended September 30, 2012:



|                                           |  | Other benefit plans |     
|------------------------------------------ |  | ------------------- | ----
|Three months ended December 31, 2012       |  | Increase            |     
|Total of service and interest cost         |  | $                   | 0.3 
|Accrued benefit obligation at December 31  |  |                     | 16.9
|                                           |  |                     |     
|                                           |  | Other benefit plans |     
|Nine months ended September 30, 2012       |  | Increase            |     
|Total of service and interest cost         |  | $                   | 0.8 
|Accrued benefit obligation at September 30 |  |                     | 16.9



| | 20. | OTHER LONG-TERM OBLIGATIONS
| | --- | ---------------------------



The components of other long-term
obligations are as follows:



|                                               |  | Successor         |     |  | Predecessor         |  
|---------------------------------------------- |  | ----------------- | --- |  | ------------------- | -
|                                               |  | As at December 31 |     |  | As at  September 30 |  
|                                               |  | 2012              |     |  | 2012                |  
|Restructuring (note 24)                        |  | $                 | –   |  |                     | $
|Environmental and remedial                     |  |                   | 5.8 |  |                     |  
|Lease obligation – paper recycling – long term |  |                   | –   |  |                     |  
|Other                                          |  |                   | 3.1 |  |                     |  
|                                               |  | $                 | 8.9 |  |                     | $











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Asset retirement obligations



The following table provides
a reconciliation of the company’s asset retirement obligations.



|                                       |  | Successor          |      |   | Predecessor        |  
|-------------------------------------- |  | ------------------ | ---- | - | ------------------ | -
|                                       |  | Three months ended |      |   | Nine months  ended |  
|                                       |  | December 31        |      |   | September 30       |  
|                                       |  | 2012               |      |   | 2012               |  
|Balance, beginning of period           |  | $                  | 6.2  |   |                    | $
|Liabilities settled                    |  |                    | (0.1 | ) |                    |  
|Liabilities derecognized               |  |                    | –    |   |                    |  
|Accretion expense                      |  |                    | –    |   |                    |  
|Revised estimates of future cash flows |  |                    | –    |   |                    |  
|Balance, end of period                 |  | $                  | 6.1  |   |                    | $



The balance sheet classification
for asset retirement obligations is as follows:



|                                         |  | Successor          |     |  | Predecessor         |  
|---------------------------------------- |  | ------------------ | --- |  | ------------------- | -
|                                         |  | As at  December 31 |     |  | As at  September 30 |  
|                                         |  | 2012               |     |  | 2012                |  
|Other long-term obligations              |  | $                  | 5.8 |  |                     | $
|Accounts payable and accrued liabilities |  |                    | 0.3 |  |                     |  
|                                         |  | $                  | 6.1 |  |                     | $



| | 21. | INCOME TAXES
| | --- | ------------



The components of earnings (loss)
before income taxes consist of the following:



|                                             |  | Successor          |       |   | Predecessor        |  
|-------------------------------------------- |  | ------------------ | ----- | - | ------------------ | -
|                                             |  | Three months ended |       |   | Nine months  ended |  
|                                             |  | December 31        |       |   | September 30       |  
|                                             |  | 2012               |       |   | 2012               |  
|Canada                                       |  | $                  | (31.6 | ) |                    | $
|United States                                |  |                    | 8.0   |   |                    |  
|Other                                        |  |                    | –     |   |                    |  
|Earnings (loss) from continuing operations   |  | $                  | (23.6 | ) |                    | $
|Earnings (loss) from discontinued operations |  | $                  | (12.9 | ) |                    | $
|Earnings (loss) before income taxes          |  | $                  | (36.5 | ) |                    | $











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



The income tax (recovery) expense
consists of:



|                                   |  | Successor          |      |   | Predecessor        |  
|---------------------------------- |  | ------------------ | ---- | - | ------------------ | -
|                                   |  | Three months ended |      |   | Nine months  ended |  
|                                   |  | December 31        |      |   | September 30       |  
|                                   |  | 2012               |      |   | 2012               |  
|Canada:                            |  |                    |      |   |                    |  
|Current                            |  | $                  | –    |   |                    | $
|Deferred                           |  |                    | (1.0 | ) |                    |  
|                                   |  |                    | (1.0 | ) |                    |  
|United States:                     |  |                    |      |   |                    |  
|Current                            |  |                    | 0.1  |   |                    |  
|Deferred                           |  |                    | 1.1  |   |                    |  
|                                   |  |                    | 1.2  |   |                    |  
|Other:                             |  |                    |      |   |                    |  
|Current                            |  |                    | –    |   |                    |  
|Deferred                           |  |                    | –    |   |                    |  
|                                   |  |                    | –    |   |                    |  
|Total from continuing operations   |  |                    |      |   |                    |  
|Current                            |  |                    | 0.1  |   |                    |  
|Deferred                           |  |                    | 0.1  |   |                    |  
|                                   |  | $                  | 0.2  |   |                    | $
|Total from discontinued operations |  |                    |      |   |                    |  
|Current                            |  |                    | –    |   |                    |  
|Deferred                           |  |                    | –    |   |                    |  
|                                   |  | $                  | –    |   |                    | $



The reconciliation of income taxes calculated at the
statutory rate to the actual income tax provision is as follows:



|                                                                                        |  | Successor          |      |   | Predecessor        | 
|--------------------------------------------------------------------------------------- |  | ------------------ | ---- | - | ------------------ | 
|                                                                                        |  | Three months ended |      |   | Nine months  ended | 
|                                                                                        |  | December
    31    |      |   | September
    30   | 
|                                                                                        |  | 2012               |      |   | 2012               | 
|Income tax recovery
    at Canadian statutory income tax rates                          |  | $                  | (9.1 | ) |                    | 
|Increase (decrease) in income
    taxes for:                                            |  |                    |      |   |                    | 
|Non-taxable income and
    expenses                                                     |  |                    | (1.8 | ) |                    | 
|Difference in foreign tax
    rate                                                      |  |                    | (0.5 | ) |                    | 
|Release of deferred income
    taxes related to reduction in corporate income tax rates |  |                    | –    |   |                    | 
|Change in the deferred
    income tax estimate                                          |  |                    | –    |   |                    | 
|Change in valuation allowance                                                           |  |                    | 11.9 |   |                    | 
|Adjustment to deferred
    credits                                                      |  |                    | –    |   |                    | 
|Other                                                                                   |  |                    | (0.3 | ) |                    | 
|Income
    tax expense (recovery)                                                       |  | $                  | 0.2  |   |                    | 



| | 1 | Included $8.4 million income tax recovery related to continuing operations and $1.0 million income tax expense related to discontinued
operations
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



| | 2 | Included $19.8 million income tax recovery related to continuing operations and $3.5 million income tax expense related to
discontinued operations
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Deferred tax assets
and liabilities



The tax effects of temporary differences
that give rise to significant current deferred tax assets are as follows:



|                                                                        |  | Successor          |       |   | Predecessor         |  
|----------------------------------------------------------------------- |  | ------------------ | ----- | - | ------------------- | -
|                                                                        |  | As at  December 31 |       |   | As at  September 30 |  
|Current                                                                 |  | 2012               |       |   | 2012                |  
|Deferred income tax assets                                              |  |                    |       |   |                     |  
|Non-capital losses and temporary differences related to working capital |  | $                  | 1.8   |   |                     | $
|Employee future benefits                                                |  |                    | 3.3   |   |                     |  
|Other                                                                   |  |                    | 5.6   |   |                     |  
|                                                                        |  |                    | 10.7  |   |                     |  
|Valuation allowance                                                     |  |                    | (10.7 | ) |                     |  
|                                                                        |  | $                  | –     |   |                     | $
|                                                                        |  |                    |       |   |                     |  
|Classification:                                                         |  |                    |       |   |                     |  
|Prepaids and other (note 13)                                            |  | $                  | –     |   |                     | $
|                                                                        |  | $                  | –     |   |                     | $



The tax effects of temporary differences
that give rise to significant non-current deferred tax assets (liabilities) are as follows:



|                                         |  | Successor          |        |   | Predecessor         |  
|---------------------------------------- |  | ------------------ | ------ | - | ------------------- | -
|                                         |  | As at  December 31 |        |   | As at  September 30 |  
|Non-current                              |  | 2012               |        |   | 2012                |  
|Deferred income tax assets (liabilities) |  |                    |        |   |                     |  
|Property, plant and equipment            |  | $                  | 126.3  |   |                     | $
|Non-capital loss carry-forwards          |  |                    | 14.9   |   |                     |  
|Employee future benefits                 |  |                    | 77.3   |   |                     |  
|Other                                    |  |                    | 4.5    |   |                     |  
|                                         |  |                    | 223.0  |   |                     |  
|Valuation allowance                      |  |                    | (223.0 | ) |                     |  
|                                         |  | $                  | –      |   |                     | $



At December 31, 2012, the company
has provided for a valuation allowance on its deferred tax assets of $233.7 million.



At December 31, 2012, the company
had Canadian federal non-capital loss carry-forwards of $35.0 million, which expire during the period 2028 to 2032, and U.S. federal
net operating loss carry-forwards of $16.4 million, which expire in 2032. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. As management believes that it is more likely than not that
the resulting future operations will not generate sufficient taxable income to realize all of the net deferred tax assets in Canada
and the U.S., during the year, and also due to the negative evidence from the company’s three year cumulative historical
performance, management recorded a valuation allowance of $6.1 million in respect of its U.S. federal net operating losses and
a valuation allowance of $8.8 million in respect of its Canadian operating losses.















CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Accounting for uncertainty in income taxes



At December 31, 2012 and September
30, 2012, the company had gross unrecognized tax benefits of $5.3 million (2011 – $5.3 million). If recognized, these tax
benefits would favourably impact the company’s effective tax rate.



Below is a reconciliation of the
total amounts of unrecognized tax benefits:



|                                                |  | Successor          |     |  | Predecessor        |  
|----------------------------------------------- |  | ------------------ | --- |  | ------------------ | -
|                                                |  | Three months ended |     |  | Nine months  ended |  
|                                                |  | December 31        |     |  | September 30       |  
|                                                |  | 2012               |     |  | 2012               |  
|Unrecognized tax benefits, beginning  of period |  | $                  | 5.3 |  |                    | $
|Current period tax positions                    |  |                    | –   |  |                    |  
|Settlements and lapse of statute of limitations |  |                    | –   |  |                    |  
|Unrecognized tax benefits, end of period        |  | $                  | 5.3 |  |                    | $



The company recognizes interest
expense and penalties related to unrecognized tax benefits within the provision for income tax expense on the consolidated statement
of earnings (loss). No interest expense or penalties related to unrecognized tax benefits were recorded during 2012. At December
31, 2012, there were no interest and penalties accrued in relation to uncertain tax positions in the consolidated balance sheet.



In the normal course of business,
the company and its subsidiaries are subject to audits by the Canadian federal and provincial taxing authorities, by the U.S. federal
and various state taxing authorities and by the taxing authorities in various foreign jurisdictions. All tax years up to and including
December 31, 2005 have been audited by the Canadian federal taxing authorities. The company’s income taxes are not currently
under audit by the Canadian federal taxing authorities, by the U.S. Internal Revenue Service, by any U.S. state taxing authority
or by any foreign taxing authority. The U.S. federal statute of limitations for pre-2009 tax years expired on September 15, 2012.



| | 22. | DEFERRED CREDITS
| | --- | ----------------



Reconciliation of deferred credits was as follows:



|                                             |  | Successor          |   |  | Predecessor        |  
|-------------------------------------------- |  | ------------------ | - |  | ------------------ | -
|                                             |  | Three months ended |   |  | Nine months  ended |  
|                                             |  | December 31        |   |  | September 30       |  
|                                             |  | 2012               |   |  | 2012               |  
|Balance, beginning of period                 |  | $                  | – |  |                    | $
|Adjustment related to fresh start accounting |  |                    | – |  |                    |  
|Balance, end of period                       |  | $                  | – |  |                    | $













CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



| | 23. | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
| | --- | ---------------------------------------------



The following table contains
information about the company’s AOCI, net of taxes:



|                                                                              |  | Successor          |     |  | Predecessor         |  
|----------------------------------------------------------------------------- |  | ------------------ | --- |  | ------------------- | -
|                                                                              |  | As at  December 31 |     |  | As at  September 30 |  
|                                                                              |  | 2012               |     |  | 2012                |  
|Unrecognized pension and other post-retirement benefit costs                  |  | $                  | 6.6 |  |                     | $
|Foreign currency translation adjustments, net of related hedging activities 1 |  |                    | –   |  |                     |  
|Unrecognized loss on interest rate hedges                                     |  |                    | –   |  |                     |  
|                                                                              |  | $                  | 6.6 |  |                     | $





| | 1 | The accumulated net adjustment is comprised of non-taxable translation gain of $nil million (2011
– $2.3 million gain) and a net revaluation of long-term debt designated as a net investment hedge of $nil million loss (2011
– $1.6 million loss), net of tax of $nil million (2011 – $nil million). Effective October 1, 2011, the company no longer
designates the net revaluation of long-term debt as a net investment hedge.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 24. | RESTRUCTURING
| | --- | -------------



The following table provides
the activity in the restructuring liability:



|                                                   |  | Successor          |      |   | Predecessor        |  
|-------------------------------------------------- |  | ------------------ | ---- | - | ------------------ | -
|                                                   |  | Three months ended |      |   | Nine months  ended |  
|                                                   |  | December 31        |      |   | September 30       |  
|                                                   |  | 2012               |      |   | 2012               |  
|Balance, beginning of period                       |  | $                  | 0.4  |   |                    | $
|Expensed in period                                 |  |                    | 1.1  |   |                    |  
|Disbursements                                      |  |                    | (0.6 | ) |                    |  
|Balance, end of period                             |  | $                  | 0.9  |   |                    | $
|Classification:                                    |  |                    |      |   |                    |  
|Accounts payable and accrued liabilities (note 17) |  | $                  | 0.3  |   |                    | $
|Liabilities associated with assets held for sale   |  |                    | 0.6  |   |                    |  
|Other long-term obligations (note 20)              |  |                    | –    |   |                    |  
|                                                   |  | $                  | 0.9  |   |                    | $



The following table provides
restructuring liability by year of initiatives:



|                           |  | Successor          |     |  | Predecessor         |  
|-------------------------- |  | ------------------ | --- |  | ------------------- | -
|                           |  | As at  December 31 |     |  | As at  September 30 |  
|                           |  | 2012               |     |  | 2012                |  
|2009 and prior initiatives |  | $                  | 0.2 |  |                     | $
|2010 initiatives           |  |                    | –   |  |                     |  
|2011 initiatives           |  |                    | –   |  |                     |  
|2012 initiatives           |  |                    | 0.7 |  |                     |  
|                           |  | $                  | 0.9 |  |                     | $











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



2012



During the three months ended December 31, 2012, the
company recorded restructuring costs of $1.1 million related to legal and consulting fees incurred in respect of the sale of the
Snowflake facility subsequent to its permanent closure on September 30, 2012. This amount was included in Loss from discontinued
operations net of tax in the consolidated statement of earnings (loss) for the three months ended December 31, 2012. The company
incurred $5.3 million in restructuring costs for the nine months ended September 30, 2012 consisting of legal and consulting fees
related to the restructuring negotiations prior to entering into the CCAA proceedings.



2011



During the year ended December 31, 2011 the company
recorded restructuring costs of $5.9 million related to debt restructuring negotiations with its bondholders. The costs consisted
of legal and consulting fees incurred in respect of these negotiations. The debt restructuring initiative did not result in a restructuring
transaction, and on January 31, 2012 the company entered into creditor protection.



2010



During the year ended December 31, 2010 the company
recorded restructuring costs of $25.3 million primarily related to severances payable to eligible employees at Elk Falls resulting
from extended curtailment and permanent closure.



| | 25. | INTEREST EXPENSE, NET
| | --- | ---------------------



The components of interest expense, net were as follows:



|                           |  | Successor          |      |  | Predecessor        |  
|-------------------------- |  | ------------------ | ---- |  | ------------------ | -
|                           |  | Three months ended |      |  | Nine months  ended |  
|                           |  | December 31        |      |  | September 30       |  
|                           |  | 2012               |      |  | 2012               |  
|Interest on long-term debt |  | $                  | 10.8 |  |                    | $
|Other                      |  |                    | 0.8  |  |                    |  
|                           |  |                    | 11.6 |  |                    |  
|Interest income            |  |                    | –    |  |                    |  
|                           |  | $                  | 11.6 |  |                    | $



| | 26. | OTHER INCOME (EXPENSE), NET
| | --- | ---------------------------



The components of other income
(expense), net, were as follows:



|                                                         |  | Successor          |      |   | Predecessor        |  
|-------------------------------------------------------- |  | ------------------ | ---- | - | ------------------ | -
|                                                         |  | Three months ended |      |   | Nine months  ended |  
|                                                         |  | December 31        |      |   | September 30       |  
|                                                         |  | 2012               |      |   | 2012               |  
|Fee related to bond exchange                             |  | $                  | –    |   |                    | $
|Loss on derivative financial instruments                 |  |                    | –    |   |                    |  
|Foreign exchange gain (loss) on working capital balances |  |                    | 0.4  |   |                    |  
|Gain (loss) on disposal of property, plant and equipment |  |                    | (0.5 | ) |                    |  
|Loss on fires                                            |  |                    | –    |   |                    |  
|Other                                                    |  |                    | 0.2  |   |                    |  
|                                                         |  | $                  | 0.1  |   |                    | $













CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



| | 27. | EARNINGS PER SHARE
| | --- | ------------------



The following table provides
the reconciliation between basic and diluted earnings (loss) per share:



|                                                                                                           |  | Successor          |       |   | Predecessor        |  
|---------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | - | ------------------ | -
|                                                                                                           |  | Three months ended |       |   | Nine months  ended |  
|                                                                                                           |  | December 31        |       |   | September 30       |  
|                                                                                                           |  | 2012               |       |   | 2012               |  
|Net earnings (loss) attributable to the company                                                            |  | $                  | (35.2 | ) |                    | $
|Weighted average shares used in computation of basic earnings per share (in millions)                      |  |                    | 14.4  |   |                    |  
|Weighted average shares from assumed conversion of dilutive options (in millions)                          |  |                    | –     |   |                    |  
|Weighted average shares used in computation of diluted earnings per share (in millions)                    |  |                    | 14.4  |   |                    |  
|Basic and diluted earnings (loss) per share from continuing operations                                     |  | $                  | (1.55 | ) |                    | $
|Basic and diluted earnings (loss) per share from discontinued operations                                   |  | $                  | (0.89 | ) |                    | $
|Basic and diluted earnings (loss) per share attributable to the company’s common shareholders (in dollars) |  | $                  | (2.44 | ) |                    | $



| | 28. | STOCK-BASED COMPENSATION PLANS
| | --- | ------------------------------



| | (a) | Details of stock-based compensation expense:
| | --- | --------------------------------------------
| |     |                                             

|                       |  | Successor          |   |  | Predecessor        |  
|---------------------- |  | ------------------ | - |  | ------------------ | -
|                       |  | Three months ended |   |  | Nine months  ended |  
|                       |  | December 31        |   |  | September 30       |  
|                       |  | 2012               |   |  | 2012               |  
|Stock option awards    |  | $                  | – |  |                    | $
|Restricted share units |  |                    | – |  |                    |  
|Deferred share units   |  |                    | – |  |                    |  
|                       |  | $                  | – |  |                    | $



| | (b) | Stock option plans
| | --- | ------------------



The company had an employee share option plan in place
for its key officers, former directors and employees that provided for the issuance of up to a maximum of 12.0 million common shares.
All stock options were cancelled on September 13, 2012 when the company exited from CCAA proceedings.



Prior to their cancellation, the long-term component
of the mid- to long-term incentive plan (MLTIP) for the company’s executives included stock options.  Vesting of the
stock options granted under the MLTIP was subject to the weighted average price per share of the common shares for all sales of
such shares on the Toronto Stock Exchange (TSX) over 20 consecutive trading days reaching or exceeding a price per share equal
to twice the exercise price.  These options had a 10-year life, and an exercise price that was established as 25% over the
weighted average price per share of the common shares for all sales of common shares on the TSX during the five consecutive trading
days preceding the date of the grant of the options. These options were exercisable on or after the earlier of August 1, 2012
or on the occurrence of a change-of-control event involving the company.











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Options granted, other than those granted pursuant
to the company’s MLTIP, had a maximum term of 10 years. These options were formerly exercisable as to one-third on and after
the first anniversary date, as to two-thirds on and after the second anniversary date and as to all on and after the third anniversary
date, unless, in the case of options granted on March 28, 2007, the market price of the common shares exceeded a specified acceleration
price, in which case all of the options were exercisable at that time.  In general, market price for options was determined
by the weighted average price per share for all sales of common shares on the TSX on the date on which a determination of market
price was required. However, market price for options granted annually to the company’s directors under the director compensation
program was set 25% above the market price as calculated above.



The company applied the fair value-based method for
recording share options granted to directors, officers and employees. Under the fair value method, compensation cost is measured
at fair value at the date of grant, and is expensed over the award’s vesting period. Compensation expense related to performance-based
options is recognized when it is probable that the performance conditions will be achieved.



As at December 31, 2012 and September 30, 2012, the
total remaining unrecognized compensation cost associated with the stock options totalled $nil (2011 – $0.1 million) due
to their cancellation on September 13, 2012.



The fair value of share options was estimated on the
date of grant using the Black-Scholes option pricing model with the following assumptions:



|                                                   |  | 2012 |     |  | 2011 |   |      | 2010 | 
|-------------------------------------------------- |  | ---- | --- |  | ---- | - | ---- | ---- | 
|Risk-free interest rate                            |  |      | N/A |  |      |   | 3.0  | %    | 
|Annual dividends per share                         |  |      | N/A |  |      |   | Nil  |      | 
|Expected stock price volatility                    |  |      | N/A |  |      |   | 74   | %    | 
|Expected option life (in years)                    |  |      | N/A |  |      |   | 10.0 |      | 
|Average fair value of options granted (in dollars) |  |      | N/A |  |      | $ | 0.25 |      | 



The risk-free interest rate
was based on a zero-coupon Government of Canada bond with a remaining term approximately equivalent to the expected life of the
stock option. The company estimated the annual dividends per share, expected stock price volatility and expected option life based
on historical experience.



Changes in the number of options outstanding during the years ended December 31 were as follows:



|                     |  | 2012                                                                                              |            |   | 2011                                          |   |      | 2010                                                                                              | 
|-------------------- |  | ------------------------------------------------------------------------------------------------- | ---------- | - | --------------------------------------------- | - | ---- | ------------------------------------------------------------------------------------------------- | 
|                     |  | Number of
                                                                                options |            |   | Weighted
 average exercise price (in dollars) |   |      | Number of
                                                                                options | 
|Beginning of year    |  |                                                                                                   | 7,522,337  |   |                                               | $ | 0.91 |                                                                                                   | 
|Granted              |  |                                                                                                   | –          |   |                                               |   | –    |                                                                                                   | 
|Exercised            |  |                                                                                                   | –          |   |                                               |   | –    |                                                                                                   | 
|Forfeited            |  |                                                                                                   | (54,000    | ) |                                               |   | 0.38 |                                                                                                   | 
|Expired or cancelled |  |                                                                                                   | (7,468,337 | ) |                                               |   | 0.91 |                                                                                                   | 
|End of year          |  |                                                                                                   | –          |   |                                               | $ | –    |                                                                                                   | 



| | (c) | Restricted share units
| | --- | ----------------------



The company had established a restricted share unit
(RSU) plan for its former directors and key executives.  The RSU plan was cancelled on September 13, 2012 when the company
exited from CCAA proceedings. Under the terms of this plan, senior executives were eligible for incentive remuneration paid to
them in the form of RSUs.  Each RSU, once vested, entitled the holder to receive one common share of the company.  The
fair value of RSUs was based on the market value of the company’s shares on the day of the grant.















CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



RSUs vested in accordance with terms determined by
the company, which reflected, among other things, one or more of the following factors: (i) the return to shareholders with or
without reference to other comparable businesses; (ii) the financial performance or results of the corporation; (iii) other performance
criteria relating to the corporation; and (iv) the length of time of service by the participant. The performance terms that the
company applied to RSUs were intended to strengthen the link between the corporation’s performance and the value of the RSUs
at the time that they were paid out.



Prior to their cancellation, the long-term component
of the MLTIP included performance-based RSUs. Vesting of these RSUs occurred when the weighted average price per share of the company’s
common shares for all sales of such shares on the TSX over 20 consecutive trading days reached or exceeded twice the price per
share equal to 25% over the weighted average price per share of the common shares for all sales of common shares on the TSX during
the five consecutive trading days preceding the date the RSUs were issued. These RSUs were to be paid out on the earlier of August
1, 2012 or on the occurrence of a change of control event involving the company. Compensation expense related to performance-based
RSUs was recognized when it was probable that the performance conditions would be achieved.



As at December 31, 2012 the total remaining unrecognized
compensation cost associated with the RSUs totalled $nil (2011 – $0.1 million) due to their cancellation on September 13,
2012.



Changes in the number of outstanding RSUs during
the year ended December 31, 2012 were as follows:



|                     |  | Number of shares |            |   | Weighted average fair
                                                                                value at grant date
                                                                                (in dollars) |  
|-------------------- |  | ---------------- | ---------- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -
|Beginning of year    |  |                  | 3,214,686  |   |                                                                                                                                                                                                                        | $
|Granted              |  |                  | –          |   |                                                                                                                                                                                                                        |  
|Vested/exercised     |  |                  | –          |   |                                                                                                                                                                                                                        |  
|Expired or cancelled |  |                  | (3,214,686 | ) |                                                                                                                                                                                                                        |  
|End of year          |  |                  | –          |   |                                                                                                                                                                                                                        |  



| | (d) | Deferred share unit plan
| | --- | ------------------------
| |     |                         

| |  | The company had established a deferred share unit (DSU) plan for its former directors. The DSU plan
was cancelled on September 13, 2012 when the company exited from CCAA proceedings. Under the terms of this plan, directors could
elect to receive their annual cash remuneration in DSUs, cash or a combination thereof. Each DSU initially had a value equivalent
to the company’s weighted average share price on the TSX during the 10 consecutive trading days prior to the issuance date
of the DSU. A director’s DSU account was credited with dividend equivalents in the form of additional DSUs when dividends
were paid on common shares. A director could elect the date of redemption by filing an irrevocable written election with the company
no later than December 15 of the calendar year commencing immediately after the director’s termination date. As at December
31, 2012, all DSUs had been cancelled (2011 – 474,416).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 29. | FAIR VALUE MEASUREMENT
| | --- | ----------------------



Fair value is
defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining fair value measurements for assets and liabilities required to be
recorded at fair value, the company considers the principal or most advantageous market in which it would transact and considers
assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions,
and risk of non-performance.











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



An established
fair value hierarchy requires the company to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest
level of input that is available and significant to the fair value measurement. The three levels of inputs that may be used to
measure fair value are:



| | Level 1  ─ | Quoted prices in active markets for identical
assets or liabilities.
| | ---------- | --------------------------------------------------------------------
| |            |                                                                     

| | Level 2  ─ | Observable inputs other than quoted prices in active
markets for identical assets and liabilities, such as quoted prices for identical or similar assets or liabilities in markets
that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilities.
| | ---------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |            |                                                                                                                                                                                                                                                                                                                                                           

| | Level 3  ─ | Inputs that are generally unobservable and
are supported by little or no market activity and that are significant to the fair value determination of the assets or liabilities.
| | ---------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On September 30, 2012 the company restated its assets
and liabilities at fair value in accordance with the requirements of fresh start accounting. The fair value estimates of cash and
cash equivalents, restricted cash, accounts receivable and accounts payable and accrued liabilities incorporated level 2 inputs.
The fair value estimates for substantially all other restated assets and liabilities were estimated incorporating level 3 inputs.
See note 6, Creditor protection proceedings related disclosuresfor detailed disclosure on the valuation techniques and
inputs incorporated in these fair value estimates.



The company did not have any currency or commodity
contracts outstanding on December 31, 2012 or September 30, 2012. At December 31, 2011, the company had currency contracts that
were not designated as hedging instruments with a total fair value of $4.5 million, of which the current portion of $2.0 million
was classified as Prepaids and the non-current portion of $2.5 million was classified as Other assets.



The following
table presents information about the fair value of the company’s derivative and non-derivative financial instruments measured
at fair value on a recurring basis:



|                    |  | Successor          |   |  | Predecessor         |   |   |                    |  |   |           
|------------------- |  | ------------------ | - |  | ------------------- | - | - | ------------------ |  | - | ----------
|                    |  | As at  December 31 |   |  | As at  September 30 |   |   | As at  December 31 |  |   | Fair value
|                    |  | 2012               |   |  | 2012                |   |   | 2011               |  |   | hierarchy 
|Assets              |  |                    |   |  |                     |   |   |                    |  |   |           
|Currency contracts  |  | $                  | – |  |                     | $ | – |                    |  | $ | 2.0       
|Currency contracts  |  |                    | – |  |                     |   | – |                    |  |   | 2.5       
|Commodity contracts |  |                    | – |  |                     |   | – |                    |  |   | 0.5       
|                    |  | $                  | – |  |                     | $ | – |                    |  | $ | 5.0       
|Liabilities         |  |                    |   |  |                     |   |   |                    |  |   |           
|Commodity contracts |  | $                  | – |  |                     | $ | – |                    |  | $ | 0.4       
|Commodity contracts |  | $                  | – |  |                     | $ | – |                    |  | $ | 0.2       
|                    |  | $                  | – |  |                     | $ | – |                    |  | $ | 0.6       



Fair values of
the company’s derivatives are classified under Level 2 as they are measured as follows:



| | 1 | The fair value of forward currency contracts is measured using the discounted difference between contractual rates and market
future rates. Interest rates, forward market rates, and volatility are used as inputs for such valuation techniques. The company
incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s
non-performance risk in the fair value measurements.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2 | The fair value of commodity swap contracts is measured using the discounted difference between contractual rates and market
rates. The fair value of natural gas commodity options is measured using techniques derived from the Black-Scholes pricing model.
The company incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s
non-performance risk in the fair value measurements.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The
following table presents information about the effects of the company’s derivative instruments previously designated as
cash flow hedges until April 1, 2010 when hedge accounting was discontinued (note 3) and the effect of long-term debt designated
as a hedge of the company’s net investment in the Snowflake mill on the company’s consolidated financial statements
at December 31:













CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



|                                                       |  | Gain (loss) recognized in AOCI 1 |   |  | (Gain) loss reclassified from AOCI 1 |   |      | Classification on statement of earnings (loss) reclassified from AOCI 1 |  | Gain (loss) recognized in income 2 |     
|------------------------------------------------------ |  | -------------------------------- | - |  | ------------------------------------ | - | ---- | ----------------------------------------------------------------------- |  | ---------------------------------- | ----
|                                                       |  | 2012                             |   |  | 2011                                 |   |      | 2012                                                                    |  |                                    | 2011
|Derivatives designated as cash flow hedges             |  |                                  |   |  |                                      |   |      |                                                                         |  |                                    |     
|Currency contracts                                     |  | $                                | – |  |                                      | $ | –    |                                                                         |  | $                                  | –   
|                                                       |  |                                  |   |  |                                      |   |      |                                                                         |  |                                    |     
|Long-term debt designated as	 hedges of net investment |  | $                                | – |  |                                      | $ | (2.0 | )                                                                       |  | $                                  | –   





| | 1 | The gain (loss) recognized, or (gain) loss reclassified
from AOCI relates to the effective portion of the hedge.
| | - | ----------------------------------------------------------------------------------------------------------------

| | 2 | The gain (loss) recognized in income relates to the ineffective
portion of the hedge and the amount excluded from effectiveness testing.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



The following table presents information about the effects of
the company’s derivative instruments designated as fair value hedges on the company’s consolidated financial statements
for the year ended December 31:



|                    |  | Gain (loss) recognized in income |   |  |                  
|------------------- |  | -------------------------------- | - |  | -----------------
|                    |  | Successor                        |   |  | Predecessor      
|                    |  | Three months ended               |   |  | Nine months ended
|                    |  | December 31                      |   |  | September 30     
|                    |  | 2012                             |   |  | 2012             
|Interest rate swaps |  | $                                | – |  |                  



| | (1) | The portion of the gain (loss) that relates to the foreign exchange portion of the contract is included in Foreign exchange
gain (loss) on long-term debt and is equal to $nil for December 31, 2012 (2011 – $nil).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The company has no fixed-to-floating interest rate swaps outstanding
at December 31, 2012 or September 30, 2012. The gain recognized in income for the years presented represents the effective portion
of interest rate swaps previously designated as fair value hedges that were unwound in prior years. The effective portion is being
amortized to income over the remaining term to maturity of the related debt.



The following table presents information about the effects of
the company’s derivative instruments not designated as hedging instruments on the company’s consolidated financial
statements:



|                                                                         |  | Gain (loss) recognized in income |   |  |                  
|------------------------------------------------------------------------ |  | -------------------------------- | - |  | -----------------
|                                                                         |  | Successor                        |   |  | Predecessor      
|                                                                         |  | Three months  ended              |   |  | Nine months ended
|                                                                         |  | December 31                      |   |  | September 30     
|                                                                         |  | 2012                             |   |  | 2012             
|Currency contracts related to revenue hedges                             |  | $                                | – |  |                  
|Commodity swap contracts related to pulp and newsprint hedges            |  |                                  | – |  |                  
|Commodity swap contracts related to natural gas and old newspaper hedges |  |                                  | – |  |                  
|                                                                         |  | $                                | – |  |                  











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Fair value of other financial
instruments



The carrying value of the company’s cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities approximate their fair values because of the short-term maturity
of these instruments.



| | 30. | FINANCIAL INSTRUMENTS
| | --- | ---------------------



| | (a) | Financial Risk Management
| | --- | -------------------------



Financial instruments
of the company consist primarily of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and
long-term debt. Financial instruments of the company also include derivatives which the company uses to reduce its exposure to
currency and price risk associated with its revenues, energy costs and long-term debt.



The company has
exposure to risk from its financial instruments, specifically credit risk, market risk (including currency, price and interest
rate risk) and liquidity risk.



| | (i) | Credit Risk
| | --- | -----------



Credit risk is
the risk of financial loss to the company if a customer or counterparty to a financial instrument fails to meet its contractual
obligation. This risk derives principally from the company’s receivables from customers and derivative counterparties.



Accounts Receivable



The company is
exposed to credit risk on accounts receivable from its customers who are mainly in the newspaper publishing, commercial printing
and paper manufacturing businesses. The company manages its credit risk principally through credit policies, which include the
analysis of the financial positions of its customers and the regular review of their credit limits. The company also subscribes
to credit insurance for substantially all of its receivables, periodically purchases accounts receivable puts on certain customers,
and obtains bank letters of credit for some export market customers.



Aging of receivables
were as follows:



|                                                    |  | Successor          |       |   | Predecessor         |  
|--------------------------------------------------- |  | ------------------ | ----- | - | ------------------- | -
|                                                    |  | As at  December 31 |       |   | As at  September 30 |  
|                                                    |  | 2012               |       |   | 2012                |  
|Trade receivables, gross                            |  |                    |       |   |                     |  
|Current                                             |  | $                  | 86.3  |   |                     | $
|Past due 1-30 days                                  |  |                    | 7.3   |   |                     |  
|Past due 31-90 days                                 |  |                    | 0.2   |   |                     |  
|Past due over 90 days                               |  |                    | 0.9   |   |                     |  
|                                                    |  |                    | 94.7  |   |                     |  
|Allowance for doubtful accounts                     |  |                    | (2.2  | ) |                     |  
|Trade receivables, net                              |  |                    | 92.5  |   |                     |  
|Other receivables, including sales tax recoverables |  |                    | 21.5  |   |                     |  
|Accounts receivable (note 11)                       |  | $                  | 114.0 |   |                     | $











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



The movement
in the allowance for doubtful accounts in respect of trade receivables were as follows:





|                                 |  | Successor          |     |  | Predecessor         |  
|-------------------------------- |  | ------------------ | --- |  | ------------------- | -
|                                 |  | As at  December 31 |     |  | As at  September 30 |  
|                                 |  | 2012               |     |  | 2012                |  
|Balance, beginning of period     |  | $                  | –   |  |                     | $
|Increase (decrease) in provision |  |                    | 2.2 |  |                     |  
|Balance, end of period (note 11) |  | $                  | 2.2 |  |                     | $



Derivatives



The company is
also exposed to credit risk with counterparties to the company’s derivative financial instruments. The credit risk arises
from the potential for a counterparty to default on its contractual obligations, and is limited to those contracts where the company
would incur a cost to replace a defaulted transaction. The company manages this risk by diversifying through counterparties that
are of strong credit quality, normally major financial institutions.



| | (ii) | Market risk
| | ---- | -----------



Market risk is
the risk that changes in market prices, such as foreign exchange rates, commodity prices and interest rates will affect the company’s
cash flows or the value of its financial instruments (e.g., fixed interest long-term debt).



Currency risk:
The company is exposed to the risk that future cash flows will fluctuate as substantially all of the company’s sales and
accounts receivable are denominated in U.S. dollars, while only a portion of its costs and payables are denominated in or referenced
to U.S. dollars. The company is also exposed to the fluctuations in the fair value of its debt denominated in U.S. dollars. Up
to September 30, 2011, a portion of the company’s U.S. dollar denominated long-term debt was designated as an effective hedge
of the company’s net investment in Snowflake mill. The company uses foreign currency options and forward contracts to partially
hedge trade receivables and anticipated future sales denominated in foreign currencies as well as U.S. dollar denominated debt.



The company’s
hedging policy for anticipated sales and accounts receivable includes 0% to 67% of 0- to 12-month and 0% to 25% of 13- to 24-month
U.S. dollar net exposure. Hedges are layered in over time, increasing the portion of sales or accounts receivable hedged as it
gets closer to the expected date of the sale or collection of the accounts receivable. The company’s hedging policy for its
U.S. dollar denominated debt includes 0% to 60% of U.S. dollar net exposure. Future U.S. dollar revenues also provide a partial
natural hedge for U.S. dollar denominated debt. As of December 31, 2012 and September 30, 2012, the company did not have any foreign
currency options or forward contracts outstanding.



Price risk:
The company’s policy allows for hedges of newsprint and pulp to be placed on anticipated sales, and hedges of old newsprint
to be placed on anticipated purchases and allows for anticipated purchases at 0% to 70% of 0- to 12-month, 0% to 60% of 13- to
24-month and 0% to 30% of 25- to 36-month of the net exposure for oil and natural gas. As of December 31, 2012 and September 30,
2012, the company did not have any outstanding commodity contracts outstanding.



Interest rate
risk: The fair value of the company’s fixed-rate debt or the future cash flows of variable-rate debt or fixed-to-floating
interest swaps may fluctuate because of changes in market interest rates. The company’s policy is to keep the majority of
its term debt on a fixed-rate basis, but to allow for the placing of some fixed-to-floating swaps at rates considered acceptable.











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



| | (iii) | Liquidity risk
| | ----- | --------------



Liquidity risk
is the risk that the company will not be able to meet its financial obligations as they fall due. The company’s approach
to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due
over the next 12 to 24 months, under both normal and stressed conditions, without incurring unacceptable losses or risking damage
to the company’s reputation.



The company’s
principal cash requirements are for interest payments on its debt, capital expenditures and working capital needs. The company
uses its operating cash flows, ABL Facility and cash balances to maintain its liquidity. Internal forecasts are regularly prepared
that include earnings, capital expenditures, cash flows, cash or revolver drawings, and sensitivities for major assumptions. The
internal forecasts include borrowing base availability and covenant compliance. The company also monitors the maturities of its
long-term debt and assesses refinancing costs and risks in deciding when to refinance debt in advance of its maturity.



| | (b) | Revenue risk management instruments
| | --- | -----------------------------------



The company did not have any foreign currency or forward
contracts outstanding at December 31, 2012 or at September 30, 2012.



Foreign currency options and forward contracts are no
longer designated as hedging instruments and are reported at their fair value, which was $nil million at December 31, 2012 and
September 30, 2012 (December 31, 2011 - $4.5 million), with related gains and losses recognized in Other income (expense)
net.



Commodity swap agreements are not designated as hedging
instruments and are reported at their fair value which was $nil at December 31, 2012 and September 30, 2012 (December 31, 2011
- $0.5 million) with related gains and losses recognized in Other income (expense) net.



| | (c) | Cost risk management instruments
| | --- | --------------------------------



The company did
not have any commodity contracts outstanding at December 31, 2012 or at September 30, 2012 (December 31, 2011 - negative $0.6 million).



| | 31. | RELATED PARTY TRANSACTIONS
| | --- | --------------------------



Third Avenue Management LLC (TAM), which had control
or direction over a significant number of the company’s common shares since October 2006, disposed of its entire investment
in the company on February 16, 2012, thereby ceasing to be a related party.



The company undertook certain transactions with companies
affiliated with a former director. Payments for raw materials were made to Aspen Group, Flavelle Sawmill, and Mill and Timber.
These transactions were in the normal course of business and were on the same terms to those accorded to third parties. Mr. Thomas
S. Chambers served as director of these three companies during his tenure as director of the company. Mr. Chambers ceased to be
a related party of the company when he ceased to be a director of the company on September 13, 2012. For the nine months ended
September 30, 2012, the company paid aggregate fees of $2.7 million (2011 - $4.3 million; 2010 - $3.6 million) primarily for obligations
under a building lease, purchasing chips and hog fuel, services related to trucking chips, and other consulting services.











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



| | 32. | COMMITMENTS
| | --- | -----------



The company has entered into operating leases for
property, plant and equipment. The minimum future payments under various operating leases in each of the years ended December 31
are listed below.



|2013             |  | $ | 6.0  | 
|---------------- |  | - | ---- | 
|2014             |  |   | 4.3  | 
|2015             |  |   | 1.7  | 
|2016             |  |   | 1.7  | 
|2017             |  |   | 1.6  | 
|Subsequent years |  |   | 0.7  | 
|                 |  | $ | 16.0 | 



Total lease expense amounted to $1.8 million for the
three months ended December 31, 2012 and $6.6 million for the nine months ended September 30, 2012 (2011 – $10.1 million;
2010 – $10.4 million).



| | 33. | GUARANTEES AND INDEMNITIES
| | --- | --------------------------



The company has, over time, provided various indemnities
with respect to tax, environment, and employment liabilities, as well as general representations and warranties on sales of portions
of its business, acquisitions, and commodity contracts. Significant existing indemnities are listed below.



| | (a) | In connection with the acquisition of the paper recycling plant in Coquitlam, B.C. in December 2003, the company provided indemnities
with respect to environmental matters (other than pre-existing environmental conditions) under the lease of the land and buildings
for all costs, claims and damages in the event of a release of any hazardous substances on the property by the company or a breach
by the company of any of the environmental covenants under the lease or any environmental laws and an indemnity with respect to
shares that were issued to the vendors as part of the purchase price. The company does not expect any claims under these indemnities
given that the company disclaimed its liabilities under the lease under the CCAA process and that all of the company’s outstanding
shares as at September 12, 2012 were cancelled under the CCAA process.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | The company has entered into a building lease agreement whereby it has agreed to continue making the prescribed lease payments
directly to the financial institution holding the mortgage on the building in the event the lessor is no longer able to meet its
contractual obligations (note 8). The value of the mortgage was $3.0 million on December 31, 2012 and $3.4 million on September
30, 2012 (2011 – $4.8 million). This agreement does not increase the company’s liability beyond the obligation under
the building lease.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



At December 31, 2012, the company is unable to estimate
the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome
of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no provisions have
been recorded. These indemnifications have not resulted in a significant expense in the past.



| | 34. | CONTINGENT LIABILITIES
| | --- | ----------------------



In the normal course of its business activities, the
company is subject to a number of claims and legal actions that may be made by customers, suppliers and others. While the final
outcome with respect to actions outstanding or pending as at December 31, 2012 cannot be predicted with certainty, the company
believes an adequate provision has been made, or the resolution will not have a material effect on the company’s consolidated
financial position, earnings or cash flows. Legal costs incurred in connection with contingent liabilities were expensed as incurred.











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



| | (a) | Claim for Certain Post-Retirement Benefits
| | --- | ------------------------------------------



The Communications, Energy and Paperworkers Union
of Canada Locals 1, 76, 592 and 686 (the Locals), representing hourly employees at the company’s Powell River and Port Alberni
mills, applied to the Labour Relations Board of B.C. for a declaration that the company is responsible for certain post-retirement
medical and extended health benefits for some retired employees who were represented by the Locals and who retired from MacMillan
Bloedel Limited (now named Weyerhaeuser Canada Ltd.) prior to the company’s acquisition of Pacifica Papers Inc. which had
acquired the Powell River and Port Alberni mills in 1998. The Labour Relations Board declined to rule on the Locals’ application
or the company’s defense to the claim on the basis that this matter was a dispute under the collective agreement and, accordingly,
a matter to be determined by arbitration. All four Locals subsequently filed grievances claiming that the company was responsible
for these post-retirement benefits. The company did not agree with the Locals’ positions and contested the grievances. Local
76’s claim was dismissed by an arbitrator on December 23, 2010. The other three Locals withdrew their claims in 2011 and
2012. These claims are accordingly no longer outstanding.



| | (b) | Short-term Incentive Plan Benefit Claim
| | --- | ---------------------------------------



In May 2010, a salaried employee of the company commenced
an action against the company in the Supreme Court of B.C. seeking a payment under the company's 2009 Short-term Incentive Plan
and damages in connection with the reduction of certain employee benefits announced in November 2009 and certification of the action
as a class proceeding on behalf of all salaried employees who were entitled to Short-term Incentive Plan payments and affected
by the reduction in benefits. The action was certified as a class proceeding on March 21, 2011, but only on behalf of those employees
and former employees who had not provided the company with releases of the claims. Except for nine active employees and twelve
employees who have left the company, all remaining salaried employees released the company from liability in respect of these claims
or withdrew from the class action. The remaining claims were compromised under the Plan under the CCAA and payment made as unsecured
claims in accordance with that process. This claim is accordingly no longer outstanding.



| | 35. | CONDENSED CONSOLIDATING FINANCIAL INFORMATION
| | --- | ---------------------------------------------



The following information is presented as required
under Rule 3-10 of Regulation S-X, in connection with the company’s 2017 Notes and Floating Rate Notes. The company has not
presented separate financial statements and other disclosures concerning the guarantor subsidiaries because management has determined
that such information will not be material to the holders of the Notes; however, the following condensed consolidating financial
information is being provided for each of the periods ended December 31, 2012, September 30, 2012, December 31, 2011 and December
31, 2010. Investments in subsidiaries are accounted for on an equity basis. The principal elimination entries eliminate investments
in subsidiaries and intercompany balances.











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where
otherwise stated)



Supplemental Consolidating Balance Sheet

As at December 31, 2012 (successor)



|                                                     |  | Catalyst Paper Corporation |       |   | Subsidiary guarantors |   |       | Subsidiary non-guarantors |  |   | Eliminating entries |   |  | Consolidated Catalyst Paper Corporation |       
|---------------------------------------------------- |  | -------------------------- | ----- | - | --------------------- | - | ----- | ------------------------- |  | - | ------------------- | - |  | --------------------------------------- | ------
|Assets                                               |  |                            |       |   |                       |   |       |                           |  |   |                     |   |  |                                         |       
|Current assets                                       |  |                            |       |   |                       |   |       |                           |  |   |                     |   |  |                                         |       
|Cash and cash equivalents                            |  | $                          | 0.8   |   |                       | $ | 8.9   |                           |  | $ | 6.9                 |   |  | $                                       | –     
|Restricted Cash                                      |  |                            | 0.7   |   |                       |   | –     |                           |  |   | –                   |   |  |                                         | –     
|Accounts receivable                                  |  |                            | 2.3   |   |                       |   | 111.0 |                           |  |   | 0.7                 |   |  |                                         | –     
|Inventories                                          |  |                            | –     |   |                       |   | 125.0 |                           |  |   | –                   |   |  |                                         | –     
|Prepaids and other                                   |  |                            | 0.7   |   |                       |   | 7.5   |                           |  |   | 0.7                 |   |  |                                         | –     
|Assets held for sale                                 |  |                            | –     |   |                       |   | 34.3  |                           |  |   | –                   |   |  |                                         | –     
|                                                     |  |                            | 4.5   |   |                       |   | 286.7 |                           |  |   | 8.3                 |   |  |                                         | –     
|Property, plant and equipment                        |  |                            | 387.1 |   |                       |   | 76.0  |                           |  |   | 148.5               |   |  |                                         | –     
|Goodwill                                             |  |                            | 56.7  |   |                       |   | –     |                           |  |   | –                   |   |  |                                         | –     
|Advances to related companies                        |  |                            | 234.2 |   |                       |   | 348.2 |                           |  |   | (0.8                | ) |  |                                         | (581.6
|Investments, net of equity loss in related companies |  |                            | 93.7  |   |                       |   | –     |                           |  |   | –                   |   |  |                                         | (93.7 
|Other assets                                         |  |                            | 24.3  |   |                       |   | 9.7   |                           |  |   | 0.6                 |   |  |                                         | (23.6 
|                                                     |  | $                          | 800.5 |   |                       | $ | 720.6 |                           |  | $ | 156.6               |   |  | $                                       | (698.9
|Liabilities                                          |  |                            |       |   |                       |   |       |                           |  |   |                     |   |  |                                         |       
|Current liabilities                                  |  |                            |       |   |                       |   |       |                           |  |   |                     |   |  |                                         |       
|Accounts payable and accrued liabilities             |  | $                          | 27.9  |   |                       | $ | 76.0  |                           |  | $ | 9.9                 |   |  | $                                       | –     
|Current portion of long-term debt                    |  |                            | 6.5   |   |                       |   | 0.1   |                           |  |   | –                   |   |  |                                         | –     
|Liabilities associated with assets held for sale     |  |                            | –     |   |                       |   | 15.2  |                           |  |   | –                   |   |  |                                         | –     
|                                                     |  |                            | 34.4  |   |                       |   | 91.3  |                           |  |   | 9.9                 |   |  |                                         | –     
|Long-term debt                                       |  |                            | 308.2 |   |                       |   | –     |                           |  |   | 113.8               |   |  |                                         | –     
|Advances from related companies                      |  |                            | 320.4 |   |                       |   | 236.6 |                           |  |   | 24.6                |   |  |                                         | (581.6
|Employee future benefits                             |  |                            | 9.7   |   |                       |   | 280.0 |                           |  |   | –                   |   |  |                                         | –     
|Other long-term obligations                          |  |                            | 5.2   |   |                       |   | 3.7   |                           |  |   | –                   |   |  |                                         | –     
|Deferred income taxes                                |  |                            | –     |   |                       |   | –     |                           |  |   | 23.6                |   |  |                                         | (23.6 
|                                                     |  |                            | 677.9 |   |                       |   | 611.6 |                           |  |   | 171.9               |   |  |                                         | (605.2
|Equity (Deficiency)                                  |  |                            |       |   |                       |   |       |                           |  |   |                     |   |  |                                         |       
|Shareholders’ equity (Deficiency)                    |  |                            |       |   |                       |   |       |                           |  |   |                     |   |  |                                         |       
|Common stock                                         |  |                            | 144.9 |   |                       |   | –     |                           |  |   | –                   |   |  |                                         | –     
|Additional paid-in capital                           |  |                            | –     |   |                       |   | –     |                           |  |   | –                   |   |  |                                         | –     
|Retained earnings (deficit)                          |  |                            | (35.2 | ) |                       |   | 3.5   |                           |  |   | (4.8                | ) |  |                                         | 1.3   
|Accumulated other comprehensive income (loss)        |  |                            | 6.6   |   |                       |   | 5.8   |                           |  |   | –                   |   |  |                                         | (5.8  
|Predecessor equity                                   |  |                            | –     |   |                       |   | 99.7  |                           |  |   | (10.5               | ) |  |                                         | (89.2 
|                                                     |  |                            | 116.3 |   |                       |   | 109.0 |                           |  |   | (15.3               | ) |  |                                         | (93.7 
|Non-controlling interest (deficit)                   |  |                            | 6.3   |   |                       |   | –     |                           |  |   | –                   |   |  |                                         | –     
|                                                     |  |                            | 122.6 |   |                       |   | 109.0 |                           |  |   | (15.3               | ) |  |                                         | (93.7 
|                                                     |  | $                          | 800.5 |   |                       | $ | 720.6 |                           |  | $ | 156.6               |   |  | $                                       | (698.9











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Supplemental Consolidating Statement
of Earnings (Loss)

For the three months ended December
31, 2012 (successor)





|                                                                     |  | Catalyst Paper Corporation |       |   | Subsidiary guarantors |   |       | Subsidiary non-guarantors |  |   | Eliminating entries |   |  | Consolidated Catalyst Paper Corporation |     
|-------------------------------------------------------------------- |  | -------------------------- | ----- | - | --------------------- | - | ----- | ------------------------- |  | - | ------------------- | - |  | --------------------------------------- | ----
|Sales                                                                |  | $                          | –     |   |                       | $ | 260.6 |                           |  | $ | 4.6                 |   |  | $                                       | (4.7
|Operating expenses                                                   |  |                            |       |   |                       |   |       |                           |  |   |                     |   |  |                                         |     
|Cost of sales, excluding depreciation and amortization               |  |                            | 4.4   |   |                       |   | 243.9 |                           |  |   | 2.0                 |   |  |                                         | (4.7
|Depreciation and amortization                                        |  |                            | 8.8   |   |                       |   | 2.2   |                           |  |   | 1.9                 |   |  |                                         | –   
|Selling, general and administrative                                  |  |                            | 4.6   |   |                       |   | 3.1   |                           |  |   | –                   |   |  |                                         | –   
|                                                                     |  |                            | 17.8  |   |                       |   | 249.2 |                           |  |   | 3.9                 |   |  |                                         | (4.7
|Operating earnings (loss)                                            |  |                            | (17.8 | ) |                       |   | 11.4  |                           |  |   | 0.7                 |   |  |                                         | –   
|Interest expense, net                                                |  |                            | (4.6  | ) |                       |   | (3.7  | )                         |  |   | (3.3                | ) |  |                                         | –   
|Foreign exchange loss on  long-term debt                             |  |                            | (3.2  | ) |                       |   | –     |                           |  |   | –                   |   |  |                                         | –   
|Equity earnings in Partnership                                       |  |                            | 8.8   |   |                       |   | –     |                           |  |   | –                   |   |  |                                         | (8.8
|Other income (expense), net                                          |  |                            | 1.4   |   |                       |   | (1.1  | )                         |  |   | (0.2                | ) |  |                                         | –   
|Earnings (loss) before reorganization items and income taxes         |  |                            | (15.4 | ) |                       |   | 6.6   |                           |  |   | (2.8                | ) |  |                                         | (8.8
|Reorganization items, net                                            |  |                            | (10.6 | ) |                       |   | 8.7   |                           |  |   | (1.3                | ) |  |                                         | –   
|Income (loss) before income taxes                                    |  |                            | (26.0 | ) |                       |   | 15.3  |                           |  |   | (4.1                | ) |  |                                         | (8.8
|Income tax expense (recovery)                                        |  |                            | 0.7   |   |                       |   | 0.6   |                           |  |   | (1.1                | ) |  |                                         | –   
|Earnings (loss) from continuing operations                           |  |                            | (26.7 | ) |                       |   | 14.7  |                           |  |   | (3.0                | ) |  |                                         | (8.8
|Earnings (loss) from discontinued operations net of tax              |  |                            | (12.9 | ) |                       |   | (11.5 | )                         |  |   | (1.4                | ) |  |                                         | 12.9
|Net earnings (loss)                                                  |  |                            | (39.6 | ) |                       |   | 3.2   |                           |  |   | (4.4                | ) |  |                                         | 4.1 
|Net (earnings) loss attributable to non-controlling interest         |  |                            | 1.5   |   |                       |   | –     |                           |  |   | –                   |   |  |                                         | –   
|Net earnings (loss) before equity in earnings (loss) of subsidiaries |  |                            | (38.1 | ) |                       |   | 3.2   |                           |  |   | (4.4                | ) |  |                                         | 4.1 
|Equity in earnings (loss) of subsidiaries                            |  |                            | 2.9   |   |                       |   | –     |                           |  |   | –                   |   |  |                                         | (2.9
|Net earnings (loss) attributable  to the company                     |  | $                          | (35.2 | ) |                       | $ | 3.2   |                           |  | $ | (4.4                | ) |  | $                                       | 1.2 















CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Supplemental Consolidating Statement
of Cash Flows

For the three months ended December
31, 2012 (successor)



|                                                             |  | Catalyst Paper Corporation |       |   | Subsidiary guarantors |   |        | Subsidiary non-guarantors |  |   | Eliminating entries |   |  | Consolidated Catalyst Paper Corporation |     
|------------------------------------------------------------ |  | -------------------------- | ----- | - | --------------------- | - | ------ | ------------------------- |  | - | ------------------- | - |  | --------------------------------------- | ----
|Cash flows provided (used) by:                               |  |                            |       |   |                       |   |        |                           |  |   |                     |   |  |                                         |     
|Operations                                                   |  |                            |       |   |                       |   |        |                           |  |   |                     |   |  |                                         |     
|Cash flows provided (used) by operations                     |  | $                          | (90.5 | ) |                       | $ | 160.9  |                           |  | $ | (22.2               | ) |  | $                                       | 3.9 
|Investing                                                    |  |                            |       |   |                       |   |        |                           |  |   |                     |   |  |                                         |     
|Additions to property, plant and equipment                   |  |                            | (4.2  | ) |                       |   | (3.2   | )                         |  |   | (3.0                | ) |  |                                         | –   
|Proceeds from sale of property, plant and equipment          |  |                            | –     |   |                       |   | 0.8    |                           |  |   | –                   |   |  |                                         | –   
|Decrease in restricted cash                                  |  |                            | 2.9   |   |                       |   | 0.5    |                           |  |   | –                   |   |  |                                         | –   
|Cash flows provided (used) by operations                     |  |                            | (1.3  | ) |                       |   | (1.9   | )                         |  |   | (3.0                | ) |  |                                         | –   
|Financing                                                    |  |                            |       |   |                       |   |        |                           |  |   |                     |   |  |                                         |     
|Increase (decrease) in advances to related companies         |  |                            | 132.3 |   |                       |   | (153.8 | )                         |  |   | 25.4                |   |  |                                         | (3.9
|Decrease in revolving loan                                   |  |                            | (40.0 | ) |                       |   | –      |                           |  |   | –                   |   |  |                                         | –   
|Distribution received (paid)                                 |  |                            | –     |   |                       |   | 0.4    |                           |  |   | (0.4                | ) |  |                                         | –   
|                                                             |  |                            | 92.3  |   |                       |   | (153.4 | )                         |  |   | 25.0                |   |  |                                         | (3.9
|Cash and cash equivalents, increase (decrease) in the period |  |                            | 0.5   |   |                       |   | 5.6    |                           |  |   | (0.2                | ) |  |                                         | –   
|Cash and cash equivalents, beginning of period               |  |                            | 0.3   |   |                       |   | 5.2    |                           |  |   | 7.1                 |   |  |                                         | –   
|Cash and cash equivalents, end of period                     |  | $                          | 0.8   |   |                       | $ | 10.8   |                           |  | $ | 6.9                 |   |  | $                                       | –   











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Supplemental Consolidating Balance Sheet

As at September 30, 2012 (successor)



|                                                     |  | Catalyst Paper Corporation |       |  | Subsidiary guarantors |   |       | Subsidiary non-guarantors |  |   | Eliminating entries |   |  | Consolidated Catalyst Paper Corporation |       
|---------------------------------------------------- |  | -------------------------- | ----- |  | --------------------- | - | ----- | ------------------------- |  | - | ------------------- | - |  | --------------------------------------- | ------
|Assets                                               |  |                            |       |  |                       |   |       |                           |  |   |                     |   |  |                                         |       
|Current assets                                       |  |                            |       |  |                       |   |       |                           |  |   |                     |   |  |                                         |       
|Cash and cash equivalents                            |  | $                          | 0.3   |  |                       | $ | 4.8   |                           |  | $ | 7.1                 |   |  | $                                       | –     
|Restricted cash                                      |  |                            | 3.6   |  |                       |   | 0.1   |                           |  |   | –                   |   |  |                                         | –     
|Accounts receivable                                  |  |                            | 1.9   |  |                       |   | 138.8 |                           |  |   | 0.1                 |   |  |                                         | –     
|Inventories                                          |  |                            | –     |  |                       |   | 131.5 |                           |  |   | –                   |   |  |                                         | –     
|Prepaids and other                                   |  |                            | 0.3   |  |                       |   | 12.3  |                           |  |   | 0.4                 |   |  |                                         | –     
|Assets held for sale                                 |  |                            | –     |  |                       |   | 56.2  |                           |  |   | –                   |   |  |                                         | –     
|                                                     |  |                            | 6.1   |  |                       |   | 343.7 |                           |  |   | 7.6                 |   |  |                                         | –     
|Property, plant and equipment                        |  |                            | 390.5 |  |                       |   | 76.2  |                           |  |   | 147.4               |   |  |                                         | –     
|Goodwill                                             |  |                            | 56.7  |  |                       |   | –     |                           |  |   | –                   |   |  |                                         | –     
|Advances to related companies                        |  |                            | 239.7 |  |                       |   | 295.9 |                           |  |   | 1.0                 |   |  |                                         | (536.6
|Investments, net of equity loss in related companies |  |                            | 89.2  |  |                       |   | –     |                           |  |   | –                   |   |  |                                         | (89.2 
|Other assets                                         |  |                            | 25.1  |  |                       |   | 10.8  |                           |  |   | 0.6                 |   |  |                                         | (24.6 
|                                                     |  | $                          | 807.3 |  |                       | $ | 726.6 |                           |  | $ | 156.6               |   |  | $                                       | (650.4
|Liabilities                                          |  |                            |       |  |                       |   |       |                           |  |   |                     |   |  |                                         |       
|Current liabilities                                  |  |                            |       |  |                       |   |       |                           |  |   |                     |   |  |                                         |       
|Accounts payable and accrued liabilities             |  | $                          | 15.7  |  |                       | $ | 75.6  |                           |  | $ | 6.2                 |   |  | $                                       | –     
|Current portion of long-term debt                    |  |                            | 6.6   |  |                       |   | 0.1   |                           |  |   | –                   |   |  |                                         | –     
|Liabilities associated with assets held for sale     |  |                            | –     |  |                       |   | 14.9  |                           |  |   | (0.1                | ) |  |                                         | –     
|                                                     |  |                            | 22.3  |  |                       |   | 90.6  |                           |  |   | 6.1                 |   |  |                                         | –     
|Long-term debt                                       |  |                            | 345.1 |  |                       |   | –     |                           |  |   | 113.8               |   |  |                                         | –     
|Advances from related companies                      |  |                            | 271.3 |  |                       |   | 242.7 |                           |  |   | 22.6                |   |  |                                         | (536.6
|Employee future benefits                             |  |                            | 10.4  |  |                       |   | 290.0 |                           |  |   | –                   |   |  |                                         | –     
|Other long-term obligations                          |  |                            | 5.4   |  |                       |   | 3.6   |                           |  |   | –                   |   |  |                                         | –     
|Deferred income taxes                                |  |                            | –     |  |                       |   | –     |                           |  |   | 24.6                |   |  |                                         | (24.6 
|                                                     |  |                            | 654.5 |  |                       |   | 626.9 |                           |  |   | 167.1               |   |  |                                         | (561.2
|Equity (Deficiency)                                  |  |                            |       |  |                       |   |       |                           |  |   |                     |   |  |                                         |       
|Shareholders’ equity (Deficiency)                    |  |                            |       |  |                       |   |       |                           |  |   |                     |   |  |                                         |       
|Common stock                                         |  |                            | 144.9 |  |                       |   | –     |                           |  |   | –                   |   |  |                                         | –     
|Additional paid-in capital                           |  |                            | –     |  |                       |   | –     |                           |  |   | –                   |   |  |                                         | –     
|Retained earnings (deficit)                          |  |                            | –     |  |                       |   | –     |                           |  |   | –                   |   |  |                                         | –     
|Accumulated other comprehensive income (loss)        |  |                            | –     |  |                       |   | –     |                           |  |   | –                   |   |  |                                         | –     
|Predecessor equity                                   |  |                            | –     |  |                       |   | 99.7  |                           |  |   | (10.5               | ) |  |                                         | (89.2 
|                                                     |  |                            | 144.9 |  |                       |   | 99.7  |                           |  |   | (10.5               | ) |  |                                         | (89.2 
|Non-controlling interest (deficit)                   |  |                            | 7.9   |  |                       |   | –     |                           |  |   | –                   |   |  |                                         | –     
|                                                     |  |                            | 152.8 |  |                       |   | 99.7  |                           |  |   | (10.5               | ) |  |                                         | (89.2 
|                                                     |  | $                          | 807.3 |  |                       | $ | 726.6 |                           |  | $ | 156.6               |   |  | $                                       | (650.4













CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Supplemental Consolidating Statement
of Earnings (Loss)

For the nine months ended September
30, 2012 (predecessor)







|                                                                     |  | Catalyst Paper Corporation |       |   | Subsidiary guarantors |   |       | Subsidiary non-guarantors |  |   | Eliminating entries |   |  | Consolidated Catalyst Paper Corporation |       
|-------------------------------------------------------------------- |  | -------------------------- | ----- | - | --------------------- | - | ----- | ------------------------- |  | - | ------------------- | - |  | --------------------------------------- | ------
|Sales                                                                |  | $                          | –     |   |                       | $ | 797.7 |                           |  | $ | 15.6                |   |  | $                                       | (15.6 
|Operating expenses                                                   |  |                            |       |   |                       |   |       |                           |  |   |                     |   |  |                                         |       
|Cost of sales, excluding depreciation and amortization               |  |                            | 13.2  |   |                       |   | 715.3 |                           |  |   | 5.1                 |   |  |                                         | (15.6 
|Depreciation and amortization                                        |  |                            | 15.4  |   |                       |   | 4.1   |                           |  |   | 3.9                 |   |  |                                         | –     
|Selling, general and administrative                                  |  |                            | 13.8  |   |                       |   | 12.4  |                           |  |   | –                   |   |  |                                         | –     
|Restructuring                                                        |  |                            | 5.3   |   |                       |   | –     |                           |  |   | –                   |   |  |                                         | –     
|                                                                     |  |                            | 47.7  |   |                       |   | 731.8 |                           |  |   | 9.0                 |   |  |                                         | (15.6 
|Operating earnings (loss)                                            |  |                            | (47.7 | ) |                       |   | 65.9  |                           |  |   | 6.6                 |   |  |                                         | –     
|Interest expense, net                                                |  |                            | (30.5 | ) |                       |   | (20.0 | )                         |  |   | (9.8                | ) |  |                                         | –     
|Foreign exchange gain on long-term debt                              |  |                            | 24.0  |   |                       |   | –     |                           |  |   | –                   |   |  |                                         | –     
|Equity earnings in Partnership                                       |  |                            | 79.8  |   |                       |   | –     |                           |  |   | –                   |   |  |                                         | (79.8 
|Other income (expense), net                                          |  |                            | (53.1 | ) |                       |   | 54.6  |                           |  |   | 51.6                |   |  |                                         | (55.7 
|Earnings (loss) before reorganization items and income taxes         |  |                            | (27.5 | ) |                       |   | 100.5 |                           |  |   | 48.4                |   |  |                                         | (135.5
|Reorganization items, net                                            |  |                            | 512.9 |   |                       |   | 98.4  |                           |  |   | 55.6                |   |  |                                         | –     
|Income (loss) before income taxes                                    |  |                            | 485.4 |   |                       |   | 198.9 |                           |  |   | 104.0               |   |  |                                         | (135.5
|Income tax expense (recovery)                                        |  |                            | 8.4   |   |                       |   | (21.4 | )                         |  |   | 11.9                |   |  |                                         | –     
|Earnings (loss) from continuing operations                           |  |                            | 477.0 |   |                       |   | 220.3 |                           |  |   | 92.1                |   |  |                                         | (135.5
|Earnings (loss) from discontinued operations, net of tax             |  |                            | (3.6  | ) |                       |   | (4.1  | )                         |  |   | 0.5                 |   |  |                                         | 3.6   
|Net earnings (loss)                                                  |  |                            | 473.4 |   |                       |   | 216.2 |                           |  |   | 92.6                |   |  |                                         | (131.9
|Net (earnings) loss attributable to non-controlling interest         |  |                            | (31.9 | ) |                       |   | –     |                           |  |   | –                   |   |  |                                         | –     
|Net earnings (loss) before equity in earnings (loss) of subsidiaries |  |                            | 441.5 |   |                       |   | 216.2 |                           |  |   | 92.6                |   |  |                                         | (131.9
|Equity in earnings (loss) of subsidiaries                            |  |                            | 176.9 |   |                       |   | –     |                           |  |   | –                   |   |  |                                         | (176.9
|Net earnings (loss) attributable  to the company                     |  | $                          | 618.4 |   |                       | $ | 216.2 |                           |  | $ | 92.6                |   |  | $                                       | (308.8











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Supplemental Consolidating Statement
of Cash Flows

For the nine months ended September
30, 2012 (successor)





|                                                             |  | Catalyst Paper Corporation |        |   | Subsidiary guarantors |   |       | Subsidiary non-guarantors |  |   | Eliminating entries |   |  | Consolidated  Catalyst Paper Corporation |       
|------------------------------------------------------------ |  | -------------------------- | ------ | - | --------------------- | - | ----- | ------------------------- |  | - | ------------------- | - |  | ---------------------------------------- | ------
|Cash flows provided (used) by:                               |  |                            |        |   |                       |   |       |                           |  |   |                     |   |  |                                          |       
|Operations                                                   |  |                            |        |   |                       |   |       |                           |  |   |                     |   |  |                                          |       
|Cash flows provided (used) by operations                     |  | $                          | 119.1  |   |                       | $ | 27.5  |                           |  | $ | 38.2                |   |  | $                                        | (228.8
|Investing                                                    |  |                            |        |   |                       |   |       |                           |  |   |                     |   |  |                                          |       
|Additions to property, plant and equipment                   |  |                            | (4.9   | ) |                       |   | (4.6  | )                         |  |   | (2.7                | ) |  |                                          | –     
|Proceeds from sale of property, plant and equipment          |  |                            | 5.5    |   |                       |   | 6.0   |                           |  |   | –                   |   |  |                                          | –     
|Increase in restricted cash                                  |  |                            | (3.6   | ) |                       |   | (2.8  | )                         |  |   | –                   |   |  |                                          | –     
|Decrease in other assets                                     |  |                            | 2.6    |   |                       |   | 1.0   |                           |  |   | 0.1                 |   |  |                                          | –     
|Cash flows used by investing activities                      |  |                            | (0.4   | ) |                       |   | (0.4  | )                         |  |   | (2.6                | ) |  |                                          | –     
|Financing                                                    |  |                            |        |   |                       |   |       |                           |  |   |                     |   |  |                                          |       
|Increase (decrease) in advances to related companies         |  |                            | (155.0 | ) |                       |   | (95.4 | )                         |  |   | 21.6                |   |  |                                          | 228.8 
|Increase in revolving loan                                   |  |                            | 16.0   |   |                       |   | –     |                           |  |   | –                   |   |  |                                          | –     
|Proceeds on issuance of senior secured notes                 |  |                            | 33.1   |   |                       |   | –     |                           |  |   | –                   |   |  |                                          | –     
|Deferred financing costs                                     |  |                            | (9.3   | ) |                       |   | –     |                           |  |   | –                   |   |  |                                          | –     
|DIP financing costs                                          |  |                            | (3.8   | ) |                       |   | –     |                           |  |   | –                   |   |  |                                          | –     
|Decrease in other long-term debt                             |  |                            | (0.7   | ) |                       |   | (0.2  | )                         |  |   | –                   |   |  |                                          | –     
|Share issuance costs                                         |  |                            | (0.2   | ) |                       |   | –     |                           |  |   | –                   |   |  |                                          | –     
|Distribution received (paid)                                 |  |                            | –      |   |                       |   | 56.3  |                           |  |   | (56.3               | ) |  |                                          | –     
|Cash flows provided (used) by financing activities           |  |                            | (119.9 | ) |                       |   | (39.3 | )                         |  |   | (34.7               | ) |  |                                          | 228.8 
|Cash and cash equivalents, increase (decrease) in the period |  |                            | (1.2   | ) |                       |   | (12.2 | )                         |  |   | 0.9                 |   |  |                                          | –     
|Cash and cash equivalents, beginning of the period           |  |                            | 1.5    |   |                       |   | 17.4  |                           |  |   | 6.2                 |   |  |                                          | –     
|Cash and cash equivalents, end of period                     |  | $                          | 0.3    |   |                       | $ | 5.2   |                           |  | $ | 7.1                 |   |  | $                                        | –     











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Supplemental Consolidating Balance Sheet

As at December 31, 2011 (predecessor)







|                                              |  | Catalyst Paper Corporation |          |   | Subsidiary guarantors |   |        | Subsidiary non-guarantors |  |   | Eliminating entries |   |  | Consolidated Catalyst Paper Corporation |       
|--------------------------------------------- |  | -------------------------- | -------- | - | --------------------- | - | ------ | ------------------------- |  | - | ------------------- | - |  | --------------------------------------- | ------
|Assets                                        |  |                            |          |   |                       |   |        |                           |  |   |                     |   |  |                                         |       
|Current assets                                |  |                            |          |   |                       |   |        |                           |  |   |                     |   |  |                                         |       
|Cash and cash equivalents                     |  | $                          | 1.5      |   |                       | $ | 17.4   |                           |  | $ | 6.2                 |   |  | $                                       | –     
|Accounts receivable                           |  |                            | 7.9      |   |                       |   | 126.7  |                           |  |   | 0.3                 |   |  |                                         | –     
|Inventories                                   |  |                            | –        |   |                       |   | 146.9  |                           |  |   | –                   |   |  |                                         | –     
|Prepaids and other                            |  |                            | 13.4     |   |                       |   | 6.1    |                           |  |   | 0.5                 |   |  |                                         | –     
|                                              |  |                            | 22.8     |   |                       |   | 297.1  |                           |  |   | 7.0                 |   |  |                                         | –     
|Property, plant and equipment                 |  |                            | 226.2    |   |                       |   | 63.1   |                           |  |   | 97.0                |   |  |                                         | –     
|Advances to related companies                 |  |                            | 255.1    |   |                       |   | 237.3  |                           |  |   | 2.1                 |   |  |                                         | (494.5
|Investments in related companies              |  |                            | (139.6   | ) |                       |   | –      |                           |  |   | –                   |   |  |                                         | 139.6 
|Other assets                                  |  |                            | 33.9     |   |                       |   | –      |                           |  |   | 0.7                 |   |  |                                         | (10.2 
|                                              |  | $                          | 398.4    |   |                       | $ | 597.5  |                           |  | $ | 106.8               |   |  | $                                       | (365.1
|Liabilities                                   |  |                            |          |   |                       |   |        |                           |  |   |                     |   |  |                                         |       
|Current liabilities                           |  |                            |          |   |                       |   |        |                           |  |   |                     |   |  |                                         |       
|Accounts payable and accrued liabilities      |  | $                          | 40.8     |   |                       | $ | 129.1  |                           |  | $ | 4.6                 |   |  | $                                       | –     
|Current portion of long-term debt             |  |                            | 466.6    |   |                       |   | 0.2    |                           |  |   | –                   |   |  |                                         | –     
|                                              |  |                            | 507.4    |   |                       |   | 129.3  |                           |  |   | 4.6                 |   |  |                                         | –     
|Long-term debt                                |  |                            | 261.7    |   |                       |   | –      |                           |  |   | 113.8               |   |  |                                         | –     
|Advances from related companies               |  |                            | 217.2    |   |                       |   | 253.9  |                           |  |   | 23.4                |   |  |                                         | (494.5
|Employee future benefits                      |  |                            | 14.3     |   |                       |   | 291.4  |                           |  |   | –                   |   |  |                                         | –     
|Other long-term obligations                   |  |                            | 5.5      |   |                       |   | 13.7   |                           |  |   | –                   |   |  |                                         | –     
|Deferred income taxes                         |  |                            | –        |   |                       |   | 1.0    |                           |  |   | 12.8                |   |  |                                         | (10.2 
|Deferred credits                              |  |                            | 9.6      |   |                       |   | –      |                           |  |   | –                   |   |  |                                         | –     
|                                              |  |                            | 1,015.7  |   |                       |   | 689.3  |                           |  |   | 154.6               |   |  |                                         | (504.7
|Equity                                        |  |                            |          |   |                       |   |        |                           |  |   |                     |   |  |                                         |       
|Shareholders’ equity                          |  |                            |          |   |                       |   |        |                           |  |   |                     |   |  |                                         |       
|Common stock                                  |  |                            | 1,035.2  |   |                       |   | 623.7  |                           |  |   | (33.3               | ) |  |                                         | (590.4
|Additional paid-in capital                    |  |                            | 16.6     |   |                       |   | 222.1  |                           |  |   | 4.7                 |   |  |                                         | (226.8
|Retained earnings (deficit)                   |  |                            | (1,556.0 | ) |                       |   | (894.2 | )                         |  |   | (18.4               | ) |  |                                         | 912.6 
|Accumulated other comprehensive income (loss) |  |                            | (89.4    | ) |                       |   | (43.4  | )                         |  |   | (0.8                | ) |  |                                         | 44.2  
|                                              |  |                            | (593.6   | ) |                       |   | (91.8  | )                         |  |   | (47.8               | ) |  |                                         | 139.6 
|Non-controlling interest (deficit)            |  |                            | (23.7    | ) |                       |   | –      |                           |  |   | –                   |   |  |                                         | –     
|                                              |  |                            | (617.3   | ) |                       |   | (91.8  | )                         |  |   | (47.8               | ) |  |                                         | 139.6 
|                                              |  | $                          | 398.4    |   |                       | $ | 597.5  |                           |  | $ | 106.8               |   |  | $                                       | (365.1











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Supplemental Consolidating Statement
of Earnings (Loss)

For the year ended December 31, 2011
(predecessor)





|                                                                     |  | Catalyst Paper Corporation |        |   | Subsidiary guarantors |   |         | Subsidiary non-guarantors |  |   | Eliminating entries |   |  | Consolidated Catalyst Paper Corporation |      
|-------------------------------------------------------------------- |  | -------------------------- | ------ | - | --------------------- | - | ------- | ------------------------- |  | - | ------------------- | - |  | --------------------------------------- | -----
|Sales                                                                |  | $                          | –      |   |                       | $ | 1,079.7 |                           |  | $ | 23.4                |   |  | $                                       | (23.4
|Operating expenses                                                   |  |                            |        |   |                       |   |         |                           |  |   |                     |   |  |                                         |      
|Cost of sales, excluding depreciation and amortization               |  |                            | 20.4   |   |                       |   | 966.7   |                           |  |   | 7.0                 |   |  |                                         | (23.4
|Depreciation and amortization                                        |  |                            | 66.8   |   |                       |   | 25.3    |                           |  |   | 13.4                |   |  |                                         | –    
|Selling, general and administrative                                  |  |                            | 20.1   |   |                       |   | 20.1    |                           |  |   | 0.1                 |   |  |                                         | –    
|Restructuring                                                        |  |                            | 5.9    |   |                       |   | –       |                           |  |   | –                   |   |  |                                         | –    
|Impairment and other closure costs                                   |  |                            | 496.2  |   |                       |   | 165.6   |                           |  |   | –                   |   |  |                                         | –    
|                                                                     |  |                            | 609.4  |   |                       |   | 1,177.7 |                           |  |   | 20.5                |   |  |                                         | (23.4
|Operating earnings (loss)                                            |  |                            | (609.4 | ) |                       |   | (98.0   | )                         |  |   | 2.9                 |   |  |                                         | –    
|Interest expense, net                                                |  |                            | (33.3  | ) |                       |   | (28.6   | )                         |  |   | (11.3               | ) |  |                                         | –    
|Foreign exchange loss on long-term debt                              |  |                            | (9.7   | ) |                       |   | –       |                           |  |   | –                   |   |  |                                         | –    
|Equity earnings in Partnership                                       |  |                            | 61.8   |   |                       |   | –       |                           |  |   | –                   |   |  |                                         | (61.8
|Other income (expense), net                                          |  |                            | 5.7    |   |                       |   | (8.1    | )                         |  |   | 0.3                 |   |  |                                         | –    
|Income (loss) before income taxes                                    |  |                            | (584.9 | ) |                       |   | (134.7  | )                         |  |   | (8.1                | ) |  |                                         | (61.8
|Income tax expense (recovery)                                        |  |                            | (57.8  | ) |                       |   | 52.3    |                           |  |   | (2.9                | ) |  |                                         | –    
|Earnings (loss) from continuing operations                           |  |                            | (527.1 | ) |                       |   | (187.0  | )                         |  |   | (5.2                | ) |  |                                         | (61.8
|Earnings (loss) from discontinued operations, net of tax             |  |                            | (195.5 | ) |                       |   | (195.5  | )                         |  |   | –                   |   |  |                                         | 195.5
|Net earnings (loss)                                                  |  |                            | (722.6 | ) |                       |   | (382.5  | )                         |  |   | (5.2                | ) |  |                                         | 133.7
|Net (earnings) loss attributable to non-controlling interest         |  |                            | 2.6    |   |                       |   | –       |                           |  |   | –                   |   |  |                                         | –    
|Net earnings (loss) before equity in earnings (loss) of subsidiaries |  | $                          | (720.0 | ) |                       | $ | (382.5  | )                         |  | $ | (5.2                | ) |  | $                                       | 133.7
|Equity in earnings (loss) of subsidiaries                            |  |                            | (254.0 | ) |                       |   | –       |                           |  |   | –                   |   |  |                                         | 254.0
|Net earnings (loss) attributable to the company                      |  | $                          | (974.0 | ) |                       | $ | (382.5  | )                         |  | $ | (5.2                | ) |  | $                                       | 387.7

















CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Supplemental Condensed Consolidating
Statement of Cash Flows

For the year ended December 31, 2011
(predecessor)





|                                                           |  | Catalyst Paper Corporation |        |   | Subsidiary guarantors |   |       | Subsidiary non-guarantors |  |   | Eliminating entries |   |  | Consolidated  Catalyst Paper Corporation |       
|---------------------------------------------------------- |  | -------------------------- | ------ | - | --------------------- | - | ----- | ------------------------- |  | - | ------------------- | - |  | ---------------------------------------- | ------
|Cash flows provided (used) by:                             |  |                            |        |   |                       |   |       |                           |  |   |                     |   |  |                                          |       
|Operations                                                 |  |                            |        |   |                       |   |       |                           |  |   |                     |   |  |                                          |       
|Cash flows provided (used) by operations                   |  | $                          | (427.3 | ) |                       | $ | (37.2 | )                         |  | $ | 5.3                 |   |  | $                                        | 387.7 
|Investing                                                  |  |                            |        |   |                       |   |       |                           |  |   |                     |   |  |                                          |       
|Additions to property, plant and equipment                 |  |                            | (7.8   | ) |                       |   | (11.0 | )                         |  |   | (0.9                | ) |  |                                          | –     
|Proceeds from sale of property, plant and equipment        |  |                            | –      |   |                       |   | 1.2   |                           |  |   | –                   |   |  |                                          | –     
|Decrease (increase) in other assets                        |  |                            | (1.2   | ) |                       |   | 2.0   |                           |  |   | –                   |   |  |                                          | –     
|Cash flows used by investing activities                    |  |                            | (9.0   | ) |                       |   | (7.8  | )                         |  |   | (0.9                | ) |  |                                          | –     
|Financing                                                  |  |                            |        |   |                       |   |       |                           |  |   |                     |   |  |                                          |       
|Increase in advances to related companies                  |  |                            | 352.3  |   |                       |   | 131.3 |                           |  |   | –                   |   |  |                                          | (483.6
|Increase (decrease) in long-term obligations               |  |                            | –      |   |                       |   | 0.2   |                           |  |   | (0.2                | ) |  |                                          | –     
|Increase in revolving loan                                 |  |                            | 48.0   |   |                       |   | –     |                           |  |   | –                   |   |  |                                          | –     
|Redemption of senior notes                                 |  |                            | (25.8  | ) |                       |   | –     |                           |  |   | –                   |   |  |                                          | –     
|Deferred financing costs                                   |  |                            | (2.4   | ) |                       |   | –     |                           |  |   | –                   |   |  |                                          | –     
|Decrease in other long-term debt                           |  |                            | (0.9   | ) |                       |   | –     |                           |  |   | –                   |   |  |                                          | –     
|Distribution paid                                          |  |                            | –      |   |                       |   | (94.1 | )                         |  |   | (1.8                | ) |  |                                          | 95.9  
|Cash flows provided (used) by financing activities         |  |                            | 207.2  |   |                       |   | 37.4  |                           |  |   | (2.0                | ) |  |                                          | (387.7
|Cash and cash equivalents, increase (decrease) during year |  |                            | (65.1  | ) |                       |   | (7.6  | )                         |  |   | 2.4                 |   |  |                                          | –     
|Cash and cash equivalents, beginning of year               |  |                            | 66.6   |   |                       |   | 25.0  |                           |  |   | 3.8                 |   |  |                                          | –     
|Cash and cash equivalents, end of year                     |  | $                          | 1.5    |   |                       | $ | 17.4  |                           |  | $ | 6.2                 |   |  | $                                        | –     











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Supplemental Consolidating Statement
of Earnings (Loss)

For the year ended December 31, 2010
(predecessor)





|                                                                     |  | Catalyst Paper Corporation |        |   | Subsidiary guarantors |   |         | Subsidiary non-guarantors |  |   | Eliminating entries |   |  | Consolidated Catalyst Paper Corporation |      
|-------------------------------------------------------------------- |  | -------------------------- | ------ | - | --------------------- | - | ------- | ------------------------- |  | - | ------------------- | - |  | --------------------------------------- | -----
|Sales                                                                |  | $                          | –      |   |                       | $ | 1,051.5 |                           |  | $ | 20.4                |   |  | $                                       | (20.5
|Operating expenses                                                   |  |                            |        |   |                       |   |         |                           |  |   |                     |   |  |                                         |      
|Cost of sales, excluding depreciation and amortization               |  |                            | 29.1   |   |                       |   | 915.0   |                           |  |   | 6.5                 |   |  |                                         | (20.5
|Depreciation and amortization                                        |  |                            | 69.5   |   |                       |   | 32.8    |                           |  |   | 7.4                 |   |  |                                         | –    
|Selling, general and administrative                                  |  |                            | 22.6   |   |                       |   | 20.8    |                           |  |   | –                   |   |  |                                         | –    
|Restructuring                                                        |  |                            | –      |   |                       |   | 25.3    |                           |  |   | –                   |   |  |                                         | –    
|Impairment and other closure costs                                   |  |                            | 232.8  |   |                       |   | 61.7    |                           |  |   | –                   |   |  |                                         | –    
|                                                                     |  |                            | 354.0  |   |                       |   | 1,055.6 |                           |  |   | 13.9                |   |  |                                         | (20.5
|Operating earnings (loss)                                            |  |                            | (354.0 | ) |                       |   | (4.1    | )                         |  |   | 6.5                 |   |  |                                         | –    
|Interest expense, net                                                |  |                            | (32.7  | ) |                       |   | (28.4   | )                         |  |   | (10.8               | ) |  |                                         | –    
|Foreign exchange gain on long-term debt                              |  |                            | 27.6   |   |                       |   | –       |                           |  |   | –                   |   |  |                                         | –    
|Equity earnings in Partnership                                       |  |                            | 37.0   |   |                       |   | –       |                           |  |   | –                   |   |  |                                         | (37.0
|Other income (expense), net                                          |  |                            | (11.4  | ) |                       |   | 8.9     |                           |  |   | (0.1                | ) |  |                                         | –    
|Earnings (loss) before income taxes                                  |  |                            | (333.5 | ) |                       |   | (23.6   | )                         |  |   | (4.4                | ) |  |                                         | (37.0
|Income tax recovery                                                  |  |                            | (13.3  | ) |                       |   | (4.9    | )                         |  |   | (1.6                | ) |  |                                         | –    
|Earnings (loss) from continuing operations                           |  |                            | (320.2 | ) |                       |   | (18.7   | )                         |  |   | (2.8                | ) |  |                                         | (37.0
|Loss from discontinued operations, net of tax                        |  |                            | (19.5  | ) |                       |   | (19.5   | )                         |  |   | –                   |   |  |                                         | 19.5 
|Net earnings (loss)                                                  |  |                            | (339.7 | ) |                       |   | (38.2   | )                         |  |   | (2.8                | ) |  |                                         | (17.5
|Net (earnings) loss attributable to non-controlling interest         |  |                            | 1.3    |   |                       |   | –       |                           |  |   | –                   |   |  |                                         | –    
|Net earnings (loss) before equity in earnings (loss) of subsidiaries |  |                            | (338.4 | ) |                       |   | (38.2   | )                         |  |   | (2.8                | ) |  |                                         | (17.5
|Equity in earnings (loss) of subsidiaries                            |  |                            | (58.5  | ) |                       |   | –       |                           |  |   | –                   |   |  |                                         | 58.5 
|Net earnings (loss) attributable to the company                      |  | $                          | (396.9 | ) |                       | $ | (38.2   | )                         |  | $ | (2.8                | ) |  | $                                       | 41.0 











CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except
where otherwise stated)



Supplemental Condensed Consolidating
Statement of Cash Flows

For the year ended December 31, 2010
(predecessor)





|                                                           |  | Catalyst Paper Corporation |        |   | Subsidiary guarantors |   |       | Subsidiary non-guarantors |  |   | Eliminating entries |   |  | Consolidated  Catalyst Paper Corporation |       
|---------------------------------------------------------- |  | -------------------------- | ------ | - | --------------------- | - | ----- | ------------------------- |  | - | ------------------- | - |  | ---------------------------------------- | ------
|Cash flows provided (used) by:                             |  |                            |        |   |                       |   |       |                           |  |   |                     |   |  |                                          |       
|Operations                                                 |  |                            |        |   |                       |   |       |                           |  |   |                     |   |  |                                          |       
|Cash flows provided (used) by operations                   |  | $                          | (153.9 | ) |                       | $ | 66.1  |                           |  | $ | 2.7                 |   |  | $                                        | 41.0  
|Investing                                                  |  |                            |        |   |                       |   |       |                           |  |   |                     |   |  |                                          |       
|Additions to property, plant and equipment                 |  |                            | (2.9   | ) |                       |   | (6.3  | )                         |  |   | (2.0                | ) |  |                                          | –     
|Proceeds from sale of property, plant and equipment        |  |                            | 0.4    |   |                       |   | 7.5   |                           |  |   | –                   |   |  |                                          | –     
|Decrease (increase) in other assets                        |  |                            | (1.7   | ) |                       |   | 0.5   |                           |  |   | –                   |   |  |                                          | –     
|Cash flows provided (used) by investing activities         |  |                            | (4.2   | ) |                       |   | 1.7   |                           |  |   | (2.0                | ) |  |                                          | –     
|Financing                                                  |  |                            |        |   |                       |   |       |                           |  |   |                     |   |  |                                          |       
|Increase (decrease) in advances to related companies       |  |                            | 99.5   |   |                       |   | 41.5  |                           |  |   | 0.5                 |   |  |                                          | (141.5
|Increase (decrease) in long-term obligations               |  |                            | –      |   |                       |   | 1.5   |                           |  |   | (1.5                | ) |  |                                          | –     
|Increase (decrease) in revolving loan                      |  |                            | –      |   |                       |   | (14.9 | )                         |  |   | –                   |   |  |                                          | 0.4   
|Proceeds on issuance of senior secured notes               |  |                            | 98.4   |   |                       |   | –     |                           |  |   | –                   |   |  |                                          | –     
|Proceeds on termination of debt hedges                     |  |                            | (8.3   | ) |                       |   | –     |                           |  |   | –                   |   |  |                                          | –     
|Deferred financing costs                                   |  |                            | (4.5   | ) |                       |   | –     |                           |  |   | –                   |   |  |                                          | –     
|Settlement on purchase of senior notes                     |  |                            | (9.2   | ) |                       |   | –     |                           |  |   | –                   |   |  |                                          | –     
|Decrease in other long-term debt                           |  |                            | –      |   |                       |   | (1.0  | )                         |  |   | –                   |   |  |                                          | –     
|Dividends paid                                             |  |                            | –      |   |                       |   | (12.6 | )                         |  |   | –                   |   |  |                                          | 12.6  
|Distribution paid                                          |  |                            | –      |   |                       |   | (85.7 | )                         |  |   | (1.8                | ) |  |                                          | 87.5  
|Repayment of revolving operating loan                      |  |                            | (14.5  | ) |                       |   | 14.5  |                           |  |   | –                   |   |  |                                          | –     
|Cash flows provided (used) by financing activities         |  |                            | 161.4  |   |                       |   | (56.7 | )                         |  |   | (2.8                | ) |  |                                          | (41.0 
|Cash and cash equivalents, increase (decrease) during year |  |                            | 3.3    |   |                       |   | 11.1  |                           |  |   | (2.1                | ) |  |                                          | –     
|Cash and cash equivalents, beginning of year               |  |                            | 63.3   |   |                       |   | 13.9  |                           |  |   | 5.9                 |   |  |                                          | –     
|Cash and cash equivalents, end of year                     |  | $                          | 66.6   |   |                       | $ | 25.0  |                           |  | $ | 3.8                 |   |  | $                                        | –     











CONSOLIDATED BALANCE SHEETS

(In millions of Canadian dollars)





|                                                 |  | Successor          |       |   | Predecessor         |  
|------------------------------------------------ |  | ------------------ | ----- | - | ------------------- | -
|                                                 |  | As at  December 31 |       |   | As at  September 30 |  
|                                                 |  | 2012               |       |   | 2012                |  
|Assets                                           |  |                    |       |   |                     |  
|Current assets                                   |  |                    |       |   |                     |  
|Cash and cash equivalents                        |  | $                  | 16.6  |   |                     | $
|Restricted cash                                  |  |                    | 0.7   |   |                     |  
|Accounts receivable                              |  |                    | 114.0 |   |                     |  
|Inventories                                      |  |                    | 125.0 |   |                     |  
|Prepaids and other                               |  |                    | 8.9   |   |                     |  
|Assets held for sale                             |  |                    | 34.3  |   |                     |  
|                                                 |  |                    | 299.5 |   |                     |  
|Property, plant and equipment                    |  |                    | 611.6 |   |                     |  
|Goodwill                                         |  |                    | 56.7  |   |                     |  
|Other assets                                     |  |                    | 11.0  |   |                     |  
|                                                 |  | $                  | 978.8 |   |                     | $
|Liabilities                                      |  |                    |       |   |                     |  
|Current liabilities                              |  |                    |       |   |                     |  
|Accounts payable and accrued liabilities         |  | $                  | 113.8 |   |                     | $
|Current portion of long-term debt                |  |                    | 6.6   |   |                     |  
|Liabilities associated with assets held for sale |  |                    | 15.2  |   |                     |  
|                                                 |  |                    | 135.6 |   |                     |  
|Long-term debt                                   |  |                    | 422.0 |   |                     |  
|Employee future benefits                         |  |                    | 289.7 |   |                     |  
|Other long-term obligations                      |  |                    | 8.9   |   |                     |  
|Deferred income taxes/deferred credits           |  |                    | –     |   |                     |  
|                                                 |  |                    | 856.2 |   |                     |  
|Equity                                           |  |                    |       |   |                     |  
|Shareholders’ equity (deficit)                   |  |                    |       |   |                     |  
|Common stock                                     |  |                    | 144.9 |   |                     |  
|Additional paid-in-capital                       |  |                    | –     |   |                     |  
|Retained earnings (deficit)                      |  |                    | (35.2 | ) |                     |  
|Accumulated other comprehensive  income (loss)   |  |                    | 6.6   |   |                     |  
|                                                 |  |                    | 116.3 |   |                     |  
|Non-controlling interest (deficit)               |  |                    | 6.3   |   |                     |  
|                                                 |  |                    | 122.6 |   |                     |  
|                                                 |  | $                  | 978.8 |   |                     | $













CONSOLIDATED STATEMENTS OF EARNINGS

(In millions of Canadian dollars)





|                                                             |  | Successor                        |       |   | Predecessor                    |  
|------------------------------------------------------------ |  | -------------------------------- | ----- | - | ------------------------------ | -
|                                                             |  | Three months

ended

December 31 |       |   | Nine months ended September 30 |  
|                                                             |  | 2012                             |       |   | 2012                           |  
|Sales                                                        |  | $                                | 260.5 |   |                                | $
|Operating expenses                                           |  |                                  |       |   |                                |  
|Cost of sales, excluding depreciation and amortization       |  |                                  | 245.6 |   |                                |  
|Depreciation and amortization                                |  |                                  | 12.9  |   |                                |  
|Selling, general and administrative                          |  |                                  | 7.7   |   |                                |  
|Restructuring and change-of-control                          |  |                                  | –     |   |                                |  
|Impairment                                                   |  |                                  | –     |   |                                |  
|                                                             |  |                                  | 266.2 |   |                                |  
|Operating earnings (loss)                                    |  |                                  | (5.7  | ) |                                |  
|Interest expense, net                                        |  |                                  | (11.6 | ) |                                |  
|Gain on cancellation of long-term debt                       |  |                                  | –     |   |                                |  
|Foreign exchange gain (loss) on long-term debt               |  |                                  | (3.2  | ) |                                |  
|Other income (expense), net                                  |  |                                  | 0.1   |   |                                |  
|Loss before reorganization items and income taxes            |  |                                  | (20.4 | ) |                                |  
|Reorganization items, net                                    |  |                                  | (3.2  | ) |                                |  
|Income (loss) before income taxes                            |  |                                  | (23.6 | ) |                                |  
|Income tax expense (recovery)                                |  |                                  | 0.2   |   |                                |  
|Earnings (loss) from continuing operations                   |  |                                  | (23.8 | ) |                                |  
|Gain (loss) from discontinued operations net of tax          |  |                                  | (12.9 | ) |                                |  
|Net earnings (loss)                                          |  |                                  | (36.7 | ) |                                |  
|Net (earnings) loss attributable to non-controlling interest |  |                                  | 1.5   |   |                                |  
|Net earnings (loss) attributable to the Company              |  | $                                | (35.2 | ) |                                | $













CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions of Canadian dollars)



|                                                                  |  | Successor                     |       |   | Predecessor                  |  
|----------------------------------------------------------------- |  | ----------------------------- | ----- | - | ---------------------------- | -
|                                                                  |  | Three monthsended December 31 |       |   | Nine monthsendedSeptember 30 |  
|                                                                  |  | 2012                          |       |   | 2012                         |  
|Cash flows provided (used) by:                                    |  |                               |       |   |                              |  
|Operations                                                        |  |                               |       |   |                              |  
|Net earnings (loss)                                               |  | $                             | (36.7 | ) |                              | $
|Items not requiring (providing) cash                              |  |                               |       |   |                              |  
|Depreciation and amortization                                     |  |                               | 12.9  |   |                              |  
|Impairment and other closure costs                                |  |                               | 8.2   |   |                              |  
|Deferred income taxes                                             |  |                               | 0.1   |   |                              |  
|Foreign exchange loss (gain) on long-term debt                    |  |                               | 3.2   |   |                              |  
|Non-cash reorganization items                                     |  |                               | 2.4   |   |                              |  
|Non-cash interest on compromised notes                            |  |                               | –     |   |                              |  
|Gain on cancellation of long-term debt                            |  |                               | –     |   |                              |  
|Employee future benefits, expense over (under) cash contributions |  |                               | (3.4  | ) |                              |  
|Increase (decrease) in other long-term obligations                |  |                               | (0.1  | ) |                              |  
|Loss (gain) on disposal of property, plant and equipment          |  |                               | 0.4   |   |                              |  
|Other                                                             |  |                               | 0.2   |   |                              |  
|Changes in non-cash working capital                               |  |                               | 64.9  |   |                              |  
|Cash flows provided (used) by operations                          |  |                               | 52.1  |   |                              |  
|Investing                                                         |  |                               |       |   |                              |  
|Acquisition of Snowflake newsprint mill                           |  |                               | –     |   |                              |  
|Additions to property, plant and equipment                        |  |                               | (10.4 | ) |                              |  
|Proceeds from sale of property, plant and equipment               |  |                               | 0.8   |   |                              |  
|Proceeds from termination of interest rate swaps                  |  |                               | –     |   |                              |  
|Decrease (increase) in restricted cash                            |  |                               | 3.4   |   |                              |  
|Decrease (increase) in other assets                               |  |                               | –     |   |                              |  
|Cash flows provided (used) by investing activities                |  |                               | (6.2  | ) |                              |  
|Financing                                                         |  |                               |       |   |                              |  
|Issue of shares, net of share issue costs                         |  |                               | –     |   |                              |  
|Share issue costs                                                 |  |                               | –     |   |                              |  
|Increase (decrease) in revolving loan and loan payable            |  |                               | (40.0 | ) |                              |  
|Repayment of revolving operating loan                             |  |                               | –     |   |                              |  
|Repayment of long-term debt                                       |  |                               | –     |   |                              |  
|Proceeds from long-term debt                                      |  |                               | –     |   |                              |  
|Proceeds on issuance of senior secured notes                      |  |                               | –     |   |                              |  
|Note exchange costs                                               |  |                               | –     |   |                              |  
|Proceeds on termination of debt foreign currency contracts        |  |                               | –     |   |                              |  
|Settlement on purchase of debt securities                         |  |                               | –     |   |                              |  
|Deferred financing costs                                          |  |                               | –     |   |                              |  
|DIP financing costs                                               |  |                               | –     |   |                              |  
|Increase (decrease) in other long-term debt                       |  |                               | –     |   |                              |  
|Cash flows provided (used) by financing activities                |  |                               | (40.0 | ) |                              |  
|Cash and cash equivalents, increase (decrease) in the year        |  |                               | 5.9   |   |                              |  
|Cash and cash equivalents, beginning of year                      |  |                               | 12.6  |   |                              |  
|Cash and cash equivalents, end of year                            |  | $                             | 18.5  |   |                              | $













OTHER FINANCIAL AND OPERATIONAL INFORMATION

(In millions of Canadian dollars,
except where otherwise stated)





|                                                                                    |  | Successor                       |       |   | Predecessor                     |  
|----------------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------- | -
|                                                                                    |  | Three months ended  December 31 |       |   | Nine months ended  September 30 |  
|                                                                                    |  | 2012                            |       |   | 2012                            |  
|Selected financial information                                                      |  |                                 |       |   |                                 |  
|Adjusted EBITDA1, 10                                                                |  | $                               | 7.2   |   |                                 | $
|Adjusted EBITDA margin2                                                             |  |                                 | 2.8   | % |                                 |  
|Weighted average common shares outstanding (in millions)                            |  |                                 | 14.4  |   |                                 |  
|Basic and diluted earnings (loss) per share (in dollars)  – continuing operations   |  | $                               | (1.55 | ) |                                 | $
|Basic and diluted earnings (loss) per share (in dollars)  – discontinued operations |  |                                 | (0.89 | ) |                                 |  
|Working capital3                                                                    |  | $                               | 151.4 |   |                                 | $
|Current assets to current liabilities3                                              |  |                                 | 2.33  |   |                                 |  
|Total debt to total capitalization4, 5                                              |  |                                 | 78.7  | % |                                 |  
|Net debt to net capitalization6, 7                                                  |  |                                 | 78.0  | % |                                 |  
|Common shares outstanding at end of period (in millions)                            |  |                                 | 14.5  |   |                                 |  
|Book value per share (in dollars)                                                   |  | $                               | 8.46  |   |                                 | $
|Average spot rate (US$/CDN$)8                                                       |  |                                 | 1.009 |   |                                 |  
|Share prices                                                                        |  |                                 |       |   |                                 |  
|High                                                                                |  | $                               | N/A   |   |                                 | $
|Low                                                                                 |  |                                 | N/A   |   |                                 |  
|Close                                                                               |  |                                 | N/A   |   |                                 |  
|Benchmark prices9                                                                   |  |                                 |       |   |                                 |  
|SC-A paper, 35 lb. (US$ per ton)                                                    |  | $                               | 835   |   |                                 | $
|LWC paper, No. 5, 40 lb. (US$ per ton)                                              |  |                                 | 898   |   |                                 |  
|Telephone directory paper, 22.1 lb. (US$ per ton)                                   |  |                                 | 770   |   |                                 |  
|Newsprint 48.8 gsm, average West Coast delivery (US$ per tonne)                     |  |                                 | 618   |   |                                 |  
|NBSK pulp, China delivery (US$ per tonne)                                           |  |                                 | 662   |   |                                 |  
|White-top linerboard, 42 lb., Eastern U.S. delivery (US$ per ton)                   |  |                                 | N/A   |   |                                 |  
|Sales (000 tonnes)                                                                  |  |                                 |       |   |                                 |  
|Specialty printing papers                                                           |  |                                 | 207   |   |                                 |  
|Newsprint                                                                           |  |                                 | 66    |   |                                 |  
|Pulp                                                                                |  |                                 | 74    |   |                                 |  





| | 1 | Adjusted EBITDA is a non-GAAP measure. Refer to the Non-GAAP Measures section in Management’s Discussion and Analysis.
| | - | ----------------------------------------------------------------------------------------------------------------------

| | 2 | Adjusted EBITDA margin is defined as adjusted EBITDA as a percentage of sales.
| | - | ------------------------------------------------------------------------------

| | 3 | Working capital and current assets to current liabilities, for these purposes, exclude current portion of long-term debt.
| | - | -------------------------------------------------------------------------------------------------------------------------

| | 4 | Total debt comprises long-term debt, including current portion.
| | - | ---------------------------------------------------------------

| | 5 | Total capitalization comprises total debt and shareholders’ equity.
| | - | -------------------------------------------------------------------

| | 6 | Net debt comprises total debt less cash on hand.
| | - | ------------------------------------------------

| | 7 | Net capitalization comprises net debt and shareholders’ equity.
| | - | ---------------------------------------------------------------

| | 8 | Average spot rate is the average Bank of Canada noon spot rate over the reporting period.
| | - | -----------------------------------------------------------------------------------------

| | 9 | Benchmark selling prices are sourced from RISI.
| | - | -----------------------------------------------

| | 10 | For adjusted EBITDA before specific items, refer to the Non-GAAP Measures section in Management’s Discussion and
Analysis.
| | -- | --------------------------------------------------------------------------------------------------------------------------













| | ITEM 18 | FINANCIAL STATEMENTS
| | ------- | --------------------



See Item 17.



| | ITEM 19 | EXHIBITS
| | ------- | --------



| | 3.1 | Articles of Catalyst Paper Corporation (3)
| | --- | ------------------------------------------



| | 3.2 | Bylaws of Norske Skog Canada Limited. (2)
| | --- | -----------------------------------------



| | 10.1 | Chip Supply Agreement dated November 19, 1992 between Crown Forest Industries Limited and Riverside
Forest Products Limited, as assigned July 6, 2000 and assigned January 1, 2001 (current parties Catalyst Paper and Tolko Industries
Ltd.). (1)
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.1.1 | Amending Letter dated August 23, 2005 between NorskeCanada and Riverside Forest Product Limited
relating to Chip Supply Agreement referred to in Exhibit 10.3 above (current parties Catalyst Paper and Tolko Industries Ltd.).
(4)
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.2 | Amended and Restated Chip and Pulplog Supply Agreement dated as of June 23, 1997 between 3264891
Canada Limited, 3264912 Canada Limited and TimberWest Forest Limited, as amended January 1, 1999 (Current parties Catalyst Paper
and TimberWest Forest Corp. and TimberWest Forest Company). (1)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.2.1 | Amendment dated October 3, 2002 to the Amended and Restated Chip and Pulplog Supply Agreement referred
to in Exhibit 10.4 above. (1)
| | ------ | ------------------------------------------------------------------------------------------------------------------------------------



| | 10.2.2 | Amendment dated January 1, 2008 to the Amended and Restated Chip and Pulplog Supply Agreement referred
to in Exhibit 10.4 above. (4)
| | ------ | ------------------------------------------------------------------------------------------------------------------------------------



| | 10.2.3 | Log Supply Option Agreement dated January 1, 2008 between Catalyst Paper, TimberWest Forest Corp.
and TimberWest Forest Company amending agreement referred to in Exhibit 10.4 above. (4)
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.3 | Amended and Restated Timber Harvesting Management Agreement dated as of January 1, 1999 between
Fletcher Challenge Canada Limited, TimberWest Forest Corp. and TimberWest Forest Company (current parties CPC, TimberWest Forest
Corp and TimberWest Forest Company Partnership). (1)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 86 -







| | 10.3.1 | Amendment dated January 1, 2008 to Amended and Restated Timber Harvesting Management Agreement
referred to in Exhibit 10.5 above. (4)
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------



| | 10.4 | Chip and Log Supply Agreement dated as of June 8, 1998 between MacMillan Bloedel Limited and MB
Paper Limited (current parties Western Forest Products Inc. and Catalyst Paper Corporation). (2)
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.4.1 | Amendment dated March 28, 2006 to Chip and Log Supply Agreement referred to in Exhibit 10.6 above.
(4)
| | ------ | ------------------------------------------------------------------------------------------------------



| | 10.4.2 | Amendment and Waiver dated October 10, 2006 to Chip and Log Supply Agreement referred to in Exhibit
10.6 above. (4)
| | ------ | -------------------------------------------------------------------------------------------------------------------



| | 10.4.3 | Amendment dated December 5, 2008 to Chip and Log Supply Agreement referred to in Exhibit 10.6 above.
(4)
| | ------ | --------------------------------------------------------------------------------------------------------



| | 10.5 | Chip and Sawlog Supply Agreement dated September 8, 1980 between British Columbia Forest Products
Limited and Doman Industries Limited. (4)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------



| | 10.5.1 | Amendment dated December 2, 2002 to Chip and Sawlog Supply Agreement referred to in Exhibit 10.7
above. (4)
| | ------ | -----------------------------------------------------------------------------------------------------------



| | 10.5.2 | Amendment dated November 2, 2004 to Chip and Sawlog Supply Agreement referred to in Exhibit 10.7
above. (4)
| | ------ | -----------------------------------------------------------------------------------------------------------



| | 10.5.3 | Amendment dated February 1, 2005 to Chip and Sawlog Supply Agreement referred to in Exhibit 10.7
above. (4)
| | ------ | -----------------------------------------------------------------------------------------------------------



| | 10.5.4 | Amendment dated June 27, 2005 to Chip and Sawlog Supply Agreement referred to in Exhibit 10.7 above.
(4)
| | ------ | --------------------------------------------------------------------------------------------------------



| | 10.5.5 | Amendment dated October 10. 2006 to Chip and Sawlog Supply Agreement referred to in Exhibit 10.7
above. (4)
| | ------ | -----------------------------------------------------------------------------------------------------------



| | 10.6 | Chip and Pulplog Supply Agreement dated July 1, 2004 between Teal Jones and Norske Canada (current
parties Teal Jones and Catalyst Paper). (4)
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------



| | 10.7 | Employment agreement dated November 23, 2007 between Catalyst Paper Corporation and Steve Boniferro.
(4)
| | ---- | --------------------------------------------------------------------------------------------------------



| | 21.1 | List of subsidiaries. (5)
| | ---- | -------------------------



| | 10.8 | Restructuring and Support Agreement, entered into on March 12, 2012 among Catalyst Paper Corporation,
certain of its subsidiaries and certain holders of its 2014 Notes and 2016 Notes. (6).
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.9 | Indenture, dated as of September 13, 2012, governing the Corporation’s issuance of secured
debentures, notes, bonds or other evidences of indebtedness in an unlimited aggregate principal amount to be issued from time to
time pursuant to the Indenture, among Catalyst, the subsidiary guarantors and Wilmington Trust, National Association, as trustee.
(7)
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.10 | First Supplemental Indenture dated as of September 13, 2012, among the Corporation, the subsidiary
guarantors named therein and Wilmington Trust, National Association, as trustee governing the terms of the Corporation’s
PIK Toggle Senior Secured Notes due October 30, 2017. (7)
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.11 | Second Supplemental Indenture dated as of September 13, 2012, among the Corporation, the subsidiary
guarantors named therein and Wilmington Trust, National Association, as trustee governing the terms of the Corporation’s
Floating Rate Senior Secured Notes due September 13, 2016. (7)
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.12. | Credit Agreement dated as of September 13, 2012 among Catalyst, certain lenders party thereto,
Canadian Imperial Bank of Commerce as Administrative Agent and Co-Collateral Agent with Wells Fargo Capital Finance Corporation
Canada.(8)
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 31.1 | Certification of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------



| | 32.1 | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------



- 87 -







| | 99.1 | Consolidated financial statements of the Company as of December 31, 2012 and 2011 and for the three
years ended December 31, 2012 have been incorporated by reference from Exhibit 99.2 to the Company’s Form 6-K, dated February
March 6, 2013 (No.000-49571). (9)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (9) | Previously filed (No. 000-49751) on Form 6-K of Catalyst Paper Corporation on March 6, 2013
| | --- | -------------------------------------------------------------------------------------------



| | (8) | Previously filed (No. 000-49751) on Form 6-K of Catalyst Paper Corporation on September 25, 2012.
| | --- | -------------------------------------------------------------------------------------------------



| | (7) | Previously filed (No. 000-49751) on Form 6-K of Catalyst Paper Corporation on September 21, 2012.
| | --- | -------------------------------------------------------------------------------------------------



| | (6) | Previously filed (No. 000-49751) on Form 6-K of Catalyst
Paper Corporation on March 13, 2012.
| | --- | ---------------------------------------------------------------------------------------------



| | (5) | Previously filed (No. 000-49751) on Form 20-F of Catalyst Paper Corporation on May 12, 2010.
| | --- | --------------------------------------------------------------------------------------------



| | (4) | Previously filed (No. 000-49751) on Form 20-F of Catalyst Paper Corporation on May 14, 2009.
| | --- | --------------------------------------------------------------------------------------------



| | (3) | Filed with this Form 20F.
| | --- | -------------------------



| | (2) | Previously filed with registration statement (No. 333-82406) on Form F-4 of Norske Skog Canada
Limited on March 1, 2002.
| | --- | ------------------------------------------------------------------------------------------------------------------------



| | (1) | Previously filed with the registration statement (No. 333-82406) on Form F-4 of Norske Skog Canada
Limited on March 1, 2002. Confidential information has been omitted and has been filed separately with the Securities and Exchange
Commission.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 88 -







SIGNATURES



Pursuant to the requirements of the Exchange
Act, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report
to be signed on its behalf by the undersigned, thereto duly authorized.



| | CATALYST PAPER CORPORATION |                                 
| | -------------------------- | --------------------------------
| |                            |                                 
| | By:                        | \\s\\ Kevin Clarke              
| |                            | Name: Kevin J. Clarke           
| |                            | Title:   Chief Executive Officer



Date: March 15, 2013



- 89 -