---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC
20549

FORM 20-F

[   ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
or 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year EndedDecember 31,
2014

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 AND EXCHANGE ACT OF 1934

Commission file number333-179957

MILLAR WESTERN FOREST PRODUCTS LTD.(Exact Name of the Registrant as Specified in its Charter)

Alberta, Canada(Jurisdiction of
Incorporation or Organization)

16640 - 111 Avenue, Edmonton, Alberta, T5M 2S5(Address of Principal Executive Offices)

David AndersonMillar Western Forest Products
Ltd.16640  111 AvenueEdmonton, Alberta T5M 2S5(780) 486-8200(Name, Telephone, E-mail and/or
Facsimile number and Address of Company Contact Person)

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:

NONE

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

NONE

---

Indicate the number of outstanding shares of each of the
issuers classes of capital or common stock as of the close of the period
covered by the annual report.

15,000,002 Common
Shares

Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act

YES [ 
 ]      NO [X]

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 [X]      NO [   ]

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 [  
]      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 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.

Large Accelerated Filer [   ]
    Accelerated Filer [   ]
    Non-Accelerated Filer [X]


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

U.S.
GAAP [   ]International Financial Reporting Standards as issued by
the International Accounting Standards Board [X] Other [   
]

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 [X]

Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.

NOT APPLICABLE

* Millar Western Forest Products Ltd. is a voluntary filer
and is submitting this Form 20-F to satisfy its reporting obligations under the
indenture relating to its 8.50% Senior Notes due 2021.

---

TABLE OF CONTENTS

|PRESENTATION
    OF FINANCIAL INFORMATION             | 1      
|----------------------------------------------------- | -------
|                                                      |        
|NON-GAAP
    FINANCIAL MEASURES                       | 1      
|                                                      |        
|SPECIAL NOTE
    REGARDING FORWARD-LOOKING STATEMENTS | 1      
|                                                      |        
|GLOSSARY OF
    CERTAIN TERMS AND DEFINITIONS         | 2      
|                                                      |        
|PART I                                                |        
|                                                      | ITEM 1:
|                                                      | ITEM 2:
|                                                      | ITEM 3:
|                                                      |        
|                                                      |        
|                                                      |        
|                                                      |        
|                                                      | ITEM 4:
|                                                      |        
|                                                      |        
|                                                      |        
|                                                      |        
|                                                      | ITEM 5:
|                                                      |        
|                                                      |        
|                                                      |        
|                                                      |        
|                                                      |        
|                                                      |        
|                                                      |        
|                                                      | ITEM 6:
|                                                      |        
|                                                      |        
|                                                      |        
|                                                      |        
|                                                      |        
|                                                      | ITEM 7:
|                                                      |        
|                                                      |        
|                                                      |        
|                                                      | ITEM 8:
|                                                      |        
|                                                      |        
|                                                      | ITEM 9:
|                                                      |        
|                                                      |        
|                                                      |        
|                                                      |        
|                                                      |        
|                                                      |        

i

---

|         | ITEM 10: | ADDITIONAL
    INFORMATION                                                         | 47                                                                          
|-------- | -------- | ---------------------------------------------------------------------------------- | ----------------------------------------------------------------------------
|         |          | A.                                                                                 | Share Capital                                                               
|         |          | B.                                                                                 | Memorandum
      and Articles of Association                                
|         |          | C.                                                                                 | Material Contracts                                                          
|         |          | D.                                                                                 | Exchange
      Controls                                                     
|         |          | E.                                                                                 | Taxation                                                                    
|         |          | F.                                                                                 | Dividends
      and Paying Agents                                           
|         |          | G.                                                                                 | Statements by Experts                                                       
|         |          | H.                                                                                 | Documents on
      Display                                                  
|         |          | I.                                                                                 | Subsidiary Information                                                      
|         | ITEM 11: | QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                     | 50                                                                          
|         |          | A.                                                                                 | Commodity Prices                                                            
|         |          | B.                                                                                 | Foreign
      Exchange                                                      
|         |          | C.                                                                                 | Interest Rates                                                              
|         | ITEM 12: | DESCRIPTION
    OF SECURITIES OTHER THAN EQUITY SECURITIES                         | 50                                                                          
|         |          |                                                                                    |                                                                             
|PART II  |          |                                                                                    |                                                                             
|         | ITEM 13: | DEFAULTS, DIVIDEND
    ARREARAGES AND DELINQUENCIES                                | 51                                                                          
|         | ITEM 14: | MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 51                                                                          
|         | ITEM 15: | CONTROLS AND PROCEDURES                                                            | 51                                                                          
|         | ITEM 16  |                                                                                    | 52                                                                          
|         |          | A.                                                                                 | AUDIT COMMITTEE FINANCIAL
      EXPERT                                      
|         |          | B.                                                                                 | CODE OF
      ETHICS                                                        
|         |          | C.                                                                                 | PRINCIPAL ACCOUNTANT FEES
      AND SERVICES                                
|         |          | D.                                                                                 | EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES            
|         |          | E.                                                                                 | PURCHASES OF EQUITY
      SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|         |          | F.                                                                                 | CHANGE IN
      REGISTRANTS CERTIFYING ACCOUNTANT                          
|         |          | G.                                                                                 | CORPORATE GOVERNANCE                                                        
|         |          | H.                                                                                 | MINE SAFETY
      DISCLOSURE                                                
|         |          |                                                                                    |                                                                             
|PART III |          |                                                                                    |                                                                             
|         | ITEM 17: | FINANCIAL STATEMENTS                                                               | 53                                                                          
|         | ITEM 18: | FINANCIAL
    STATEMENTS                                                           | 53                                                                          
|         | ITEM 19: | EXHIBITS                                                                           | 53                                                                          

ii

---

As used in this annual report on Form 20-F (this annual
report), unless the context otherwise indicates, the term we, our, Millar
Western or the Company means Millar Western Forest Products Ltd.

PRESENTATION OF FINANCIAL INFORMATION

We prepare our financial statements in accordance with
International Financial Reporting Standards as issued by the International
Accounting Standards Board, which we refer to as IFRS. Readers should be aware
that financial statements prepared in accordance with IFRS may differ in certain
respects from financial statements prepared in accordance with U.S. generally
accepted accounting principles, which we refer to as U.S. GAAP.

We present our financial statements in Canadian dollars. Except
where otherwise indicated, all dollar amounts are expressed in Canadian dollars,
references to $ or dollars are to Canadian dollars and references to US$
and U.S. dollars are to United States dollars. See Item 3 for exchange rate
information between the Canadian dollar and the United States dollar.

Refer to the audited financial statements and the accompanying
notes included elsewhere in this annual report for disclosure of matters in
response to changes in significant accounting policies inclusive of future
pronouncements and measurement assumptions, subsequent events, related party
transactions, financial instruments and material changes in in estimates and
accounting methods.

NON-GAAP FINANCIAL MEASURES

We define Adjusted EBITDA as operating earnings plus unrealized
other income or expense, depreciation and amortization. Operating earnings is
net income plus finance expenses, income tax expense or recovery and the foreign
exchange gain or loss on debt. Other income or expense includes both realized
and unrealized gains and losses on foreign exchange and/or commodity hedging and
the foreign-exchange impact on working capital balances. Only the realized
portion of such income or expense is included in Adjusted EBITDA, whereas both
the realized and unrealized portions are included in the determination of
operating earnings.

Adjusted EBITDA is not a measure of operating performance or
liquidity under IFRS or U.S. GAAP. Such terms, as used in this annual report,
are not necessarily comparable with similarly titled measures of other
companies. Management believes that Adjusted EBITDA may be useful in assessing
our operating performance and as an indicator of our ability to service or incur
indebtedness, make capital expenditures and finance working capital
requirements. The items excluded from Adjusted EBITDA are significant in
assessing our operating results and liquidity. Therefore, Adjusted EBITDA should
not be considered in isolation or as an alternative to operating earnings, cash
flow from operating activities or other combined income or cash flow data
prepared in accordance with IFRS or U.S. GAAP. See Item 5, Operating and
Financial Review and Prospects, for a reconciliation of Adjusted EBITDA to Net
Earnings (Loss).

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this annual report are forward-looking
statements within the meaning of the United States Private Securities
Litigation Reform Act of 1995. These forward-looking statements are not based on
historical facts but, rather, on our current expectations and our projections
about future events, including our current expectations regarding:

- the future demand for, and sales volumes of, our lumber and pulp products;
- future production volumes, efficiencies and operating costs;
- increases or decreases in the prices of our products;

- our future stability and growth prospects;
- our business strategies, the measures to implement those strategies and
  the benefits to be derived therefrom;
- our future profitability and capital needs, including capital
  expenditures;

1

---

- the outlook for and other future developments in our affairs or in the
  industries in which we participate; and
- the effect on us of new accounting releases.

These forward-looking statements generally can be identified by
the use of statements that include words such as believe, expect,
anticipate, intend, plan, likely, will, predicts, estimates,
forecasts or other similar words or phrases. Similarly, statements that
describe our objectives, plans or goals are or may be forward-looking
statements. These forward-looking statements are subject to various risks,
uncertainties and other factors that could cause our actual results to differ
materially from the future results expressed or implied by the forward-looking
statements. These risks and uncertainties are described under Risk Factors in
Item 3, Key Information.

Any written or oral forward-looking statements made by us or on
our behalf are subject to these factors. In light of these risks, uncertainties
and assumptions, the forward-looking events discussed in this annual report on
Form 20-F may not occur. Actual results could differ materially from those
expressed in any of our forward-looking statements. Other unknown or
unpredictable factors also could harm our future results. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. The forward-looking statements included in
this annual report are made only as at the date of this annual report. We do not
intend, and do not assume any obligation, to update these forward-looking
statements, except as required by law.

GLOSSARY OF CERTAIN TERMS AND DEFINITIONS

The following terms have the following meanings in this annual
report:

AAC means annual allowable cut, being the amount of
timber that may be harvested in any one year as stipulated in the pertinent
forest management plan for a Forest Management Unit as approved by the Minister
of Environment and Sustainable Resource Development of Alberta;

admt means air dried metric tonne, a unit of
measurement of pulp volume, and madmt means one thousand air dried
metric tonnes;

BCTMP means bleached chemi-thermo-mechanical pulp,
which is pulp produced in a process that uses mild chemicals, heat and
mechanical action to separate cellulose fibers;

BEK means bleached eucalyptus kraft pulp;

BEPmeans Bioenergy Effluent Project;

coniferous means a type of tree that is cone-bearing
and has needles or scale-like leaves, such as spruce, pine or fir;

Coniferous Timber Quota means the right to harvest a
percentage share of the AAC of coniferous timber within a Forest Management
Unit, as approved by the Alberta Minister of Environment and Sustainable
Resource Development, allocated on a 20-year basis and renewable thereafter for
additional 20-year periods;

deciduous means a type of tree with broad leaves that
usually shed annually, such as aspen;

Deciduous Timber Allocation means the right to harvest
a specified volume of deciduous timber within a designated area, as approved by
the Alberta Minister of Environment and Sustainable Resource Development,
allocated on a 20-year basis and renewable thereafter for additional 20-year
periods;

dimension lumber means standard commodity lumber,
ranging, in the case of Millar Western, from 1 x 3s to 2 x 10s in varying
lengths, usually 8 to 16;

2

---

dressed lumbermeans lumber that has been planed
smooth on four sides and trimmed for length in a planer mill, after being
produced as rough lumber in a sawmill; the majority of rough lumber
output from our three sawmill operations is processed as dressed lumber in each
operations planer mill, though we do sell volumes of rough lumber in addition
to dressed product.

EPCmeans Engineering, Procurement and Construction, a
form of contracting agreement; an EPC contractor will typically carry out the
detailed engineering design of a project, procure all necessary equipment and
materials, and construct to deliver a functioning facility to the client;

FMA means a Forest Management Agreement between the
Alberta Minister of Environment and Sustainable Resource Development and a
forest company, generally having a term of 20 years and renewable thereafter for
additional 20-year periods, and providing rights to manage, establish, grow,
harvest and remove timber in a specified area;

foot board measure or fbm or board
foot means a measure of lumber volume equivalent to a one-foot square
board, one inch thick; mfbm is one thousand board feet; and
mmfbm is one million board feet;

Forest Management Unit means an area of forest land
designated by the Minister of Environment and Sustainable Resource Development
of Alberta as a management unit;

FSC means the Forest Stewardship Council, a voluntary,
international certification and labeling system that promotes responsible forest
management and fiber procurement through its sustainable forest management and
chain of custody standards;

hardwood is wood obtained from deciduous species of
trees, such as aspen;

Industries means Millar Western Industries Ltd., the
parent company of Millar Western Forest Products Ltd.;

ISO means the International Organization for
Standardization, a worldwide federation of national standards bodies from
approximately 120 countries; ISO 14001 is an international set of
standards that provide a common approach for documenting and maintaining an
environmental management system;

kraft pulp means pulp produced in a process that uses
strong chemicals to separate cellulose fibers;

Millar Western FMA means the FMA between the Minister
of Environment and Sustainable Resource Development of Alberta and Millar
Western commencing May 14, 1997, in effect for 20 years and renewable thereafter
for additional 20-year periods, pursuant to which the Minister has granted
rights to us to manage, establish, grow, harvest and remove timber on a
perpetual sustained yield basis in the Millar Western forest management area;

Millar Western forest management area means the tract
of forested land over which we have been given rights to manage, establish,
grow, harvest and remove timber on a perpetual sustained yield basis for the
term of the Millar Western FMA;

MSR means machine stress rated, which is a rating
given to lumber in North America that describes its load bearing capability;

NBSK means northern bleached softwood kraft pulp;

Notes and Senior Notes, unless specified as
referring to notes appended to our financial statements or to previously issued
Senior Notes, mean the Companys 8.50% Senior Notes, issued in 2011 and due in
2021;

3

---

PEFC means the Programme for the Endorsement of Forest
Certification, a Europe-based umbrella organization that assesses and endorses
national forest certification systems for their consistency with international
standards, as well as maintaining its own chain-of-custody standard;

perpetual sustained yieldmeans the yield of
timber that a forest can produce continuously at a given intensity of management
without impairment of the productivity of the land;

rough lumber means timber sawn into boards and
constitutes the output of a sawmill; the majority of rough lumber output from
our three sawmill operations is further processed as dressed lumber in
each operations planer mill, though we do sell volumes of rough lumber in
addition to dressed product.

SFImeans the Sustainable Forestry Initiative,
a voluntary, third-party, North America-based forest certification program
established in 1994. SFI is based on principles and measures that promote
sustainable forest management and consider all forest values. It is managed by
SFI Inc., an independent, non-profit organization responsible for maintaining,
overseeing and improving the sustainable forestry certification program. SFI is
endorsed by PEFC;

softwood is wood obtained from coniferous species of
trees, such as spruce, pine or fir;

SPF means spruce, pine and fir, a major category of
softwood lumber; and

wood chips means pieces of wood approximately one inch
square by one-quarter inch thick resulting from the cutting of logs in chippers,
or as a by-product of the lumber manufacturing process, that are typically used
as a feedstock in the pulp making process.

4

---

PART I

ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS.

Not applicable.

ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3: KEY INFORMATION

A.          
Selected Financial Data

The selected historical financial data presented below as at
December 31, 2014, and 2013, and for each of the years in the three-year period
ended December 31, 2014, have been derived from, and should be read together
with, our audited financial statements and the accompanying notes included
elsewhere in this annual report. Our audited financial statements are presented
in Canadian dollars and have been prepared in accordance with IFRS. The selected
historical financial data presented below as at December 31, 2012, 2011, and
2010, and for the years ended December 31, 2011 and 2010, are also presented in
accordance with IFRS and have been derived from, and should be read together
with, our audited financial statements corresponding to such periods, which are
not included in this annual report.

The selected historical financial data presented below are
qualified in their entirety by the more detailed information appearing in our
financial statements and the related notes, as well as Item 5, Operating and
Financial Review and Prospects, and other financial information included
elsewhere in this annual report. Historical results are not necessarily
indicative of results expected for any future period.

5

---

Year ended December 31,2014
    
    
    2013
    
    
    2012
    
    
    2011
    
    
    2010Statements of earnings data:
    
    
    
    
    
    
    
    (in thousands)IFRSRevenue
    $
    405,123
    
    $
    382,938
    
    $
    332,401
    
    $
    284,682
    
    $
    295,383Cost of products sold
    
    273,852
    
    
    259,155
    
    
    241,039
    
    
    207,019
    
    
    183,863Freight and other distribution costs
    
    59,767
    
    
    53,438
    
    
    53,222
    
    
    48,563
    
    
    49,565Depreciation and amortization
    
    14,272
    
    
    13,996
    
    
    13,641
    
    
    11,349
    
    
    11,029General and administration
    
    18,748
    
    
    19,061
    
    
    13,781
    
    
    15,929
    
    
    13,766Other (income) expenses (1)
    
    (2,679
    )
    
    (11,869
    )
    
    7,650
    
    
    (25,751
    )
    
    9,843Operating earnings
    
    41,163
    
    
    49,157
    
    
    3,068
    
    
    27,573
    
    
    27,317Foreign exchange gain (loss)
      on borrowings
    
    (20,265
    )
    
    (14,425
    )
    
    4,641
    
    
    (5,518
    )
    
    10,716Finance expenses (2)
    
    (22,086
    )
    
    (20,892
    )
    
    (20,425
    )
    
    (20,847
    )
    
    (17,460
    )(Loss) earnings before income
      taxes
    
    (1,188
    )
    
    13,840
    
    
    (12,716
    )
    
    1,208
    
    
    20,573Income taxes expense (recovery)
    
    3,993
    
    
    7,220
    
    
    (4,457
    )
    
    1,437
    
    
    2,914Net (loss) income
    $
    (5,181
    )
    $
    6,620
    
    $
    (8,259
    )
    $
    (229
    )
    $
    17,659Actuarial losses (gains) - net of tax
    
    1,455
    
    
    (577
    )
    
    317
    
    
    220
    
    
    986Comprehensive (loss) income
    $
    (6,636
    )
    $
    7,197
    
    $
    (8,576
    )
    $
    (449
    )
    $
    16,673


Year ended December 31,2014
    
    
    2013
    
    
    2012
    
    
    2011
    
    
    2010Balance sheets data:
    
    
    
    
    
    
    
    (in thousands)IFRSCash
    $
    47,425
    
    $
    47,219
    
    $
    24,674
    
    $
    31,630
    
    $
    45,064Restricted cash
    $
    -
    
    $
    7,977
    
    $
    18,824
    
    $
    -
    
    $
    -Total assets
    $
    420,112
    
    $
    396,274
    
    $
    382,175
    
    $
    369,748
    
    $
    344,482Financial liabilities - borrowings
    $
    263,761
    
    $
    240,181
    
    $
    222,745
    
    $
    223,554
    
    $
    202,458Shareholder's equity
    $
    69,431
    
    $
    78,317
    
    $
    72,620
    
    $
    81,526
    
    $
    84,225


|(1) | Other (income) expenses includes the gain or loss on
      disposal of property, plant and equipment, insurance proceeds, foreign
      exchange gains or losses on U.S. dollar cash and working capital, and
      realized and unrealized gains or losses on derivative contracts. See note
      17 to our audited financial statements included elsewhere in this annual
      report, referring to the three-year period ended December 31,
  2014.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(2) | Finance expenses consists of interest expense, net of
      interest income. See note 18 to our audited financial statements included
      elsewhere in this annual report, referring to the three-year period ended
      December 31, 2014.                                                                                                                                                                                                          

6

---

EXCHANGE RATE DATA

The following table sets forth, for each period indicated, the
low and high exchange rates for Canadian dollars expressed in U.S. dollars, the
exchange rate at the end of such period and the average of such exchange rates
on the last day of each month during such period, based on the Bank of Canadas
closing rate on such dates:

2014
    2013
    2012
    2011
    2010Low
    0.8568
    0.9314
    0.9576
    0.9383
    0.9218High
    0.9444
    1.0188
    1.0377
    1.0630
    1.0069Period End
    0.8620
    0.9402
    1.0051
    0.9833
    1.0054Average
    0.9053
    0.9710
    1.0004
    1.0110
    0.9709


The following table sets forth, for each of the last six
months, for Canadian dollars expressed in U.S. dollars, the low and high
exchange rates based on the closing rate as described above:

Last
      six monthsFebruary
    January
    December
    November
    October
    SeptemberLow
    0.7813
    0.7867
    0.8579
    0.8741
    0.8845
    0.8929High
    0.8095
    0.8511
    0.8828
    0.8900
    0.9006
    0.9196


On March 4th, 2015, the Bank of Canadas noon
rate was US$0.8039= $1.00.

B.          
Capitalization and Indebtedness

Not applicable.

C.          
Reasons for the Offer and Use of Proceeds

Not applicable.

D.          
Risk Factors

You should carefully consider the following factors in
addition to the other information set forth in this annual report. The following
risks, including both those common within our industry and those specific to our
company, could materially and adversely affect our business, our financial
condition or results of operations, or our ability to make payments under our
outstanding indebtedness.

Industry-related Risks

Our business is of a cyclical nature, and prices of and
demand for our products, and our results of operations, may fluctuate
significantly based on market factors.

Our financial performance is principally dependent on the
selling prices of, and the demand for, the pulp and lumber products we sell.
Prices and demand for such products have fluctuated significantly in the past
and may fluctuate significantly in the future. The markets for pulp and lumber
are highly cyclical and affected by such factors as global economic conditions,
demand for pulp and paper, residential and commercial construction in North
America and Asia, changes in industry production capacity and inventory levels
and other factors beyond our control. Market conditions, demand and selling
prices for our products may decline from current levels. Any prolonged or severe
weakness in the market for any of our principal products would adversely affect
our business, financial condition, results of operations and cash flows.

7

---

Intense global competition could limit our ability to
effectively market our products, which could have a negative impact on our
revenue and profitability.

We compete in North American and overseas export markets with
numerous forest products companies, including very large integrated firms that
have greater financial resources than we do. Our lumber segment also competes
indirectly with firms that manufacture substitutes for wood building materials.
While the principal basis for competition is price, we also compete on the basis
of customer service, quality and product type. Our competitive position is
influenced by the availability, quality and cost of fiber, energy and labor,
plant efficiencies and productivity and foreign currency fluctuations. Some of
our competitors may have lower costs, or less stringent environmental and other
governmental regulations to comply with, than we do. Some competitors may be
less leveraged than we are and, therefore, have greater financial flexibility
than we do. In addition, variations in the exchange rates between the Canadian
dollar and the U.S. dollar, and between the U.S. dollar and local currencies in
each of our export markets, also affect the relative competitive position of our
products when compared to our competitors outside of Canada. Our ability to
compete in the markets to which we export our products is also dependent upon
free access and transportation costs to such markets. If we are unable to
compete effectively, our revenue could decline, which would have a material
adverse effect on our business, financial condition, results of operations and
cash flows.

We are exposed to currency exchange risk that could
reduce cash flow available to fund our operations and cause our reported
earnings to fluctuate materially.

Our operating results are sensitive to fluctuations in the
exchange rate of the Canadian dollar to the U.S. dollar, as prices for our
products are largely denominated in U.S. dollars or linked to prices quoted in
U.S. dollars, while most of our operating costs are incurred in Canadian
dollars. Therefore, an increase in the value of the Canadian dollar relative to
the U.S. dollar reduces the amount of revenue we realize, in Canadian dollar
terms, from sales made in U.S. dollars, which reduces our operating margin and
the cash flow available to fund our operations.

In addition, we are exposed to currency exchange risk on our
debt, including the Senior Notes and interest thereon, and current assets
denominated in U.S. dollars. Since we present our financial statements in
Canadian dollars, any change in the value of the Canadian dollar relative to the
U.S. dollar during a given financial reporting period would result in a foreign
currency loss or gain on the translation of our U.S.-dollar-denominated debt and
assets into Canadian dollars. Consequently, our reported earnings could
fluctuate materially as a result of foreign-exchange translation gains or
losses.

To mitigate the impact of foreign-exchange volatility on our
earnings, we may enter into currency contracts to partially hedge our exposure
to fluctuations in exchange rates. However, hedging transactions may not be
successful in materially reducing our exposure to exchange rate fluctuations.

The Softwood Lumber Agreement on Canadian softwood lumber
shipments to the United States could have a negative effect on our
profitability.

The Softwood Lumber Agreement (SLA) was signed on September 12,
2006, to address a longstanding trade dispute between Canada and the United
States and, specifically, to resolve litigation arising from, and trade measures
imposed following, the March 2001 expiry of a prior softwood lumber trade
agreement between the two countries. Effective for a term of seven years
commencing October 12, 2006, with an option to renew for two additional years,
the SLA brought about the revocation of American countervailing and anti-dumping
duties on Canadian lumber shipments to the U.S. In January 2012, Canada and the
U.S. announced that the SLA would be extended for two years, to October 2015.

Under the SLA, export charges are imposed on Canadian lumber
shipments to the U.S. when the market price of lumber is at or below US$355 per
thousand board feet, and additional surge penalties are imposed on shipments
from certain regions, including Alberta, when shipments from that region exceed
a prescribed level in a given month. The export charges vary according to the
market price of lumber, and range from 0 to 15%; the additional surge penalties,
when applied, are set at 50% of the current export charge and so range from 0 to
7.5%.

8

---

Given prevailing monthly average benchmark lumber prices,
U.S.-bound Alberta lumber shipments, including our shipments, were subject to
export charges of up to 15% in all but eight months from the time of the SLAs
commencement in October 2006 through to the end of 2012. As a result of
increased lumber pricing, our shipments were subject to export charges in only
three months of 2013 and at no time in 2014. Alberta lumber exports have
frequently exceeded the surge-trigger level during months when export charges
were in effect, thereby also becoming subject to the additional surge penalty.

Sales of lumber to the United States represent a significant
source of our revenue, accounting for approximately 36% of our revenue in 2014.
The charges and penalties imposed under the SLA can therefore have a negative
effect on our results of operations. Furthermore, if the U.S. deems Canada or
Canadian regions to be out of compliance with the terms of the SLA, it may refer
the matter to a binding dispute-settlement process, and if Canada or such
Canadian regions are determined to be out of compliance with the agreement,
penalties, including additional export charges, may be imposed. If such a
judgment is made affecting Alberta, the imposition of any such penalties could
have a negative effect on our profitability.

The SLA is currently scheduled to expire in October 2015. Under
the terms of the agreement, no trade measures may be imposed during the 12-month
period following the agreements expiry. Canadas position with respect to the
approaching expiry date is that the current SLA should be extended in its
current form. The United States has not to date stated an official position with
respect to the agreements expiry.

An increase in our fiber costs could have a negative
impact on our earnings.

The availability of an economic fiber supply is one of the most
important factors affecting the performance of forest products companies. The
costs of our fiber, including fees charged by government, logging and
transportation costs, and market prices for purchased fiber, have historically
fluctuated and could increase in the future. Any significant increase in the
cost of fiber could have a material adverse effect on our business, financial
condition, results of operations and cash flows.

The government imposes fees, referred to as stumpage, on all
timber harvested on government-owned land and also holds companies responsible
for reforestation and reclamation costs. Amendments to government legislation or
regulatory regimes may change stumpage-fee structures payable in relation to the
harvesting of timber and could increase costs through the imposition of
additional or more stringent reforestation and silvicultural standards. A
material increase to the stumpage rates applicable to the Millar Western FMA,
our Coniferous Timber Quotas or our Deciduous Timber Allocations could have a
material adverse effect on our business, financial condition, results of
operations and cash flows.

While approximately 90% of our fiber requirements are met
through our government timber allocations and fiber exchange and supply
agreements with other companies, we purchase the balance of our fiber
requirements on the open market. Accordingly, our operations could be affected
by changes in the supply and demand for, and the prices of, purchased fiber.

We rely on independent contractors to harvest timber and haul
logs from the forest to our operations. Contractor shortages arising from
workforce competition in Alberta may require us to increase compensation levels,
which could negatively affect costs, and also could impede our ability to
maintain sufficient log supplies in our yards to sustain current mill operating
rates. Delivered timber costs are also affected by variable fuel prices and
log-haul distances. Higher fiber costs could have a material adverse effect on
our business, financial condition, results of operations and cash flows.

Our ability to harvest timber is subject to natural
events that are beyond our control and that could have a negative impact on our
operations.

Our ability to harvest timber is subject to natural events such
as forest fires, adverse weather conditions, insect infestation, disease and
prolonged drought. The occurrence of any of these events could adversely affect
our ability to harvest timber, which could have a material adverse effect
on our business, financial condition, results of operations and cash flows.

9

---

In response to a mountain pine beetle infestation, the Alberta
government and forest industry have implemented an action plan that has been
effective to date in curbing beetle spread and mitigating associated damage.
However, the infestation remains an ongoing risk to the health of mature pine
stands in our operating area. Any significant impacts on merchantable pine
stands in our area could affect our fiber supply and may have a material adverse
effect on our business, financial condition, results of operations and cash
flows.

If environmental or other regulatory approvals, licenses
or permits are delayed, restricted or not renewed, a variety of operations on
our timberlands or at our facilities could be delayed or restricted.

In connection with a variety of operations on our properties,
we are required to make regulatory filings with governmental agencies. Any of
these agencies could delay review of or reject any of our filings, which could
delay or restrict our manufacturing or logging operations, potentially resulting
in an adverse effect on our operating results. For example, our pulp mill
operates under an environmental permit that is due to expire on November 1,
2015, if not renewed on or before that date. We have initiated the renewal
procedure for our pulp mill operating permit and expect to obtain the renewal on
a timely basis, but if we are unable to renew or extend this or any other
material approval, license, permit or certificate, or if we are delayed in doing
so, our business, financial condition, results of operations and cash flows
could be materially adversely affected.

Our ability to sell our products could be compromised if
environmental certifications are not achieved or renewed, which could have a
negative impact on our business, financial condition, results of operations and
cash flows.

Sales of our products, especially pulp, are increasingly
dependent upon our ability to achieve and maintain certification under
internationally recognized standards for sustainable forest management and
wood-fiber chain of custody. Certifications that we currently hold may be
terminated for failure to meet the requirements of the certification standard,
which could result in lost product sales. As well, existing standards could
become more onerous or new certifications may be deemed necessary in order to
meet customer requirements, resulting in additional costs. Any of these
developments could cause our business, financial condition, results of
operations and cash flows to be materially adversely affected. For more details
regarding our certifications, see Item 4, Business Overview  Government
regulation  Forest certification.

Company-specific Risks

We may not have the capital required to maintain our
facilities and grow our operations.

Facilities for producing lumber and pulp are capital intensive.
Our annual capital expenditures may increase due to changes in requirements for
maintenance, unforeseen events and changes to environmental or other regulations
that require capital for compliance. Although we maintain our production
equipment with regular periodic and scheduled maintenance, key pieces of
equipment in our various production processes may need to be repaired or
replaced before such repair or replacement is scheduled. If we do not have
sufficient funds or such repairs or replacements are delayed, the costs of
repairing or replacing such equipment and the associated downtime of the
affected production line could have a material adverse effect on our business,
financial condition, results of operations and cash flows.

We may require additional capital to complete our
bioenergy project, and we may not realize all savings and revenues expected to
result from the project.

Our Whitecourt pulp mill is currently constructing a project
(the Bioenergy Effluent Project, or BEP) to install new technology that will
produce a biogas used to generate renewable energy, which will displace
purchased electricity and natural gas in our mill operations. The project is
expected to enhance pulp mill environmental performance by reducing greenhouse
gas emissions and to strengthen mill economic performance by cutting operating
costs and increasing revenues. Project costs, net of $27.5 million in
government grants and a $7.9 million letter of credit recovered from the
original EPC contractor, are expected to amount to approximately $70 million,
which we expect to fund through cash from operations and an interim financing
arrangement in the amount of $20.2 million. Of the net project costs, $31
million had been spent at December 31, 2014, leaving a balance of approximately
$39 million to be funded through cash from operations and interim financing.

10

---

If we do not generate sufficient cash flow from operations, and
if additional borrowing or refinancing is not available to us, we may not have
sufficient cash to enable us to complete the project. Furthermore, the project
involves the adaptation of proven technology to a new application and may not
function as intended, which could reduce the operating cost savings and/or
revenue enhancements expected to result from the project. Higher capital and
financing costs and delays or reductions in expected contributions from the
completed project could have a material adverse effect on our business,
financial condition, results of operations and cash flows.

A reduction in our fiber supply could affect our ability
to operate.

Fiber is the primary raw material in our products, and
maintaining long-term fiber security is therefore important to our business. We
obtain approximately 61% of our fiber requirements, based on current production
capacity, from a Forest Management Agreement (FMA), Coniferous Timber Quotas and
Deciduous Timber Allocations issued by the Alberta Minister of Environment and
Sustainable Resource Development, each of which is issued for a period of 20
years and is renewable, provided agreement obligations are met. Our FMA,
representing approximately 25% of our fiber requirements, was renewed in 2014
and is now in effect until 2034. Our quotas and allocations have expiry dates
ranging between 2021 and 2031. The FMA, quotas and allocations may not be
renewed or extended on acceptable terms. In addition, the Millar Western FMA,
quotas and allocations contain terms or conditions that could, under certain
circumstances, result in a reduction in the amount of fiber available to us. Any
significant reductions to fiber allocations under our FMA, quotas and
allocations could affect our ability to maintain current mill operating rates.

The Millar Western FMA provides that the Minister may withdraw
from the forest management area (i) any land which cannot be harvested without
causing substantial harm to the environment, (ii) any land determined to be
required for human or physical resource development of the Province of Alberta,
(iii) any land required for commercial and industrial facilities and (iv) any
land that is not capable of producing timber. In the event of such withdrawal,
the government may compensate the holder for certain costs and losses associated
with such withdrawal. There have been no material withdrawals of land from the
Millar Western FMA since its inception.

In 2005, the Alberta government introduced the Healthy Pine
Strategy in response to the then-worsening mountain pine beetle infestation in
British Columbia. It called for increased harvesting levels in mature and
over-mature pine stands to reduce their vulnerability to infestation and improve
overall forest health. Subject to approval by Alberta Environment and
Sustainable Resource Development, companies have been permitted to harvest
volumes in excess of historical annual allowable cut volumes to address the
infestation concern; however, to ensure long-term sustainability of the forest
resources, companies employing these surge cuts will experience a reduction in
their annual allowable cuts in future years. Our 2007-2016 annual allowable cuts
for our Whitecourt and Fox Creek tenure areas have been adjusted to reflect the
Healthy Pine Strategy and show increases of an average of 40% in our FMA and
four of our Coniferous Timber Quotas. If these surge volumes are fully
harvested, annual allowable cuts could fall by an average of 15% below the
volumes stated in the detailed forest management plan for our FMA and in the
quota agreements, for a seven-year period beginning in 2017. The reduction is
expected to begin taking effect in our FMA area in 2017 and in the affected
Coniferous Timber Quotas during the period 2024 to 2028. To mitigate these
potential reductions, we have implemented a series of intensive forest
management practices to improve forest growth and yield; however, we expect to
have to supplement our existing timber supply with additional open-market timber
purchases after 2016, the availability and cost of which are unknown at this
time.

The Government of Alberta has initiated the Land-Use Framework
process to manage competing land-use pressures. The government has divided the
province into seven regions and intends to develop land-use plans for each, with
the aim of balancing economic, environmental and social demands. While we view
this process as potentially beneficial in providing greater long-term certainty
regarding resource development, it presents a risk in that the government could
reduce the amount of land allocated to the forest products industry for timber
production. One regional plan, the Lower Athabasca Regional Plan, is now complete, and called
for timber volume losses in areas supplying our Boyle operations. To compensate
for these volume losses, the Alberta government allocated to us equivalent
timber volumes in other locations, with the result that there was no net impact
on Boyles tenured fiber supply; however, the plan did affect overall fiber
supply in the region, which could limit our ability to secure additional volumes
of fiber in the future. Two additional plans, one for the Upper Athabasca region
and the other for the Upper Peace region, could have volume implications for our
Whitecourt and Fox Creek operations; however, the planning processes associated
with these plans are yet to begin. The Alberta government may not compensate us
for any volume reductions that may result. A significant loss of fiber supply
resulting from this process could have a material adverse effect on our
business, financial condition, results of operation and cash flows.

11

---

The Government of Canada has enacted legislation aimed at
protecting species at risk, including woodland caribou. Woodland caribou ranges
overlap forest management areas in which some of our Coniferous Timber Quotas
are embedded. Caribou range planning processes currently being undertaken by the
Alberta government, in consultation with industry and other stakeholders and in
consideration of both federal and provincial legislative requirements, have the
potential to reduce the supply of timber available from these areas. Any
significant resulting loss of fiber supply could have a material adverse effect
on our business, financial condition, results of operation and cash flows.

In addition to fiber from government tenures, we also rely on
fiber acquired through multi-year exchange and supply contracts to satisfy
approximately 29% of our requirements. These multi-year fiber agreements expire
between 2019 and 2021. While all are renewable, we may not be able to extend
these contracts beyond their expiry. If these contracts are not renewed, we may
be without sufficient fiber to maintain current production levels, which could
have a material adverse effect on our business, financial condition, results of
operation and cash flows. Under the terms of the multi-year fiber exchange and
supply contracts, we provide other companies with wood residuals. If these
contracts are not renewed upon expiry, we could incur revenue reductions and/or
additional disposal costs. Fiber availability or manufacturing disruptions could
also impair our ability to provide these residuals in specified quantities and
put us in breach of contractual obligations. These outcomes could have a
material adverse effect on our business, financial condition, results of
operations and cash flows.

Changes to costs and benefits arising from our power
purchase rights could adversely affect our profitability.

Effective January 1, 2001, we entered into two Power Syndicate
Agreements (Battle River and Sundance C, respectively) with an affiliate of
Capital Power Corporation (formerly EPCOR Utilities Inc.) and three other
industrial participants in Alberta for the purpose of sharing the rights and
responsibilities defined in two corresponding Power Purchase Arrangements, which
we refer to as our power purchase rights. In May 2006, we consolidated our power
purchase rights by swapping our interest in the Battle River agreement for an
increased interest in the Sundance C agreement and the corresponding Power
Purchase Arrangement, which we refer to as the PPA. The PPA, which is set to
expire on December 31, 2020, gives us, along with all other parties to the
Sundance C Power Syndicate Agreement, the right to the generation capacity and
substantially all of the associated electricity output from certain existing
generating units in the province of Alberta. We and such other parties are
obligated to pay the owner of the generating units the costs of maintaining and
operating the units, according to cost schedules set out in the PPA.

The power purchase rights effectively reduce our exposure to
fluctuations in market electricity rates. In 2014, we estimate that the power
purchase rights provided us savings of $6.1 million (2013  $22.5 million; 2012
 $14.2 million), compared to what we would have paid for power at market rates
and, therefore, comprised a meaningful component of our operating performance.
The agreements governing our power purchase rights contain termination
provisions that are effective upon the occurrence of a force majeure event. If
our power purchase rights were terminated, we would be exposed to fluctuations
in market electricity rates, which could have a material adverse effect on our
business, financial condition, results of operations and cash flows.

Although we, along with all other parties to the PPA, have
provided financial commitments in relation to the agreement, the other parties
to the agreement may fail to perform their obligations over the term of the
agreement, which could diminish the benefits we receive from the arrangement. A
failure by Capital Power Corporation, in particular, could adversely affect the
savings we realize from our power purchase rights.

12

---

Under the PPA, our financial commitment requires us to provide
a letter of credit covering the shortfall that would occur if the net present
value of the cash flows associated with the power purchase rights were to fall
below a specified level. There has been no requirement to provide such a letter
of credit to date, but we may be required to provide one in the future. If we
are required to provide such a letter of credit in a large amount, it would
limit the amount of credit available to us under our revolving credit facility,
which could have a material adverse effect on our liquidity.

Environmental and other government legislation and
regulations could increase our cost of doing business or restrict our ability to
conduct our business.

We are subject to a wide range of general and industry-specific
environmental and other laws and regulations imposed by federal, provincial and
local authorities in Canada, including those governing the use, storage,
handling, generation, treatment, emission, release, discharge and disposal of
certain hazardous materials and wastes, the remediation of contaminated soil and
groundwater, and the health and safety of employees. We are also subject to
reforestation requirements and had an accrued liability of $14.6 million at
December 31, 2014 (2013  $13.1 million, 2012  $15.2 million), for future
reforestation obligations.

Our failure to comply with applicable environmental and safety
laws and regulations, and associated permit requirements, could result in civil
or criminal fines or penalties or enforcement actions, including regulatory or
judicial orders enjoining or curtailing operations or requiring corrective
measures, installation of equipment or remedial actions, any of which could
result in significant capital expenditures or reduced results of operations. In
addition, future events, such as any changes in environmental or other laws and
regulations, including any new legislation that might arise or any change in
interpretation or enforcement of laws and regulations, may result in additional
expenditures or liabilities. These could have a material adverse effect on our
business, financial condition, results of operations and cash flows.

In the province of Alberta, power consumers are responsible for
electricity distribution and transmission costs. Given that we are a major
electricity consumer, recent and projected investments in transmission
infrastructure could result in significant escalation of our transmission
costs.

Under the Climate Change and Emissions Management Act, the
Government of Alberta has set out intensity-based carbon emission reduction
targets. Facilities that release more than 50,000 tonnes of CO2equivalent (CO2e) per year are required to report their
emissions but are not currently subject to reduction requirements. Large
emitters, defined as those producing more than 100,000 tonnes of CO2e
per year, are required to reduce their emission intensity by 12%. In lieu of
reductions, organizations can remit to a technology fund the amount of $15 for
every tonne of CO2e generated over a specified limit or buy an equivalent amount
of provincially-approved offset credits, which normally trade below $15 per
tonne. In recent years, our Whitecourt pulp mill has released approximately
75,800 tonnes of CO2e per year, making us responsible for reporting
our emissions, though not currently subject to a requirement to reduce the
emissions or to pay penalties or purchase offsets in association with them.

Our PPA is linked to a coal-fired electricity plant that
qualifies as a large emitter, making us responsible for a portion of penalties
associated with its CO2e emissions. In 2014, we were responsible for
approximately 54,600 tonnes of CO2e emissions associated with the
PPA. To address this obligation, we intend to apply offset credits of 54,600
tonnes of CO2e emitted, earned through an energy reduction project
conducted in our mill operations and independently verified and registered with
provincial authorities.

The Alberta government may introduce a regulatory change that
lowers the emissions threshold defining large emitters, which could result in
a change of status for our pulp mill that would require us not only to report
but either to reduce, to pay for or to offset our emissions over a specified
threshold. The government may also increase the penalties that apply to these
emissions. Either or both such regulatory changes could increase our costs and
have a material adverse effect on our business, financial condition, results of
operations and cash flows.

Our business is subject to many operational risks for
which we may not be adequately insured.

13

---

Our business is subject to the risks associated with operating
pulp mills and sawmills and with logging, such as unforeseen equipment
breakdowns, power failures, fires, floods, environmental issues, severe weather
and other events that could result in a temporary or prolonged shutdown of any
of our operations. A shutdown at any of our operations could materially
adversely affect our business, financial condition, results of operations and
cash flows. Although we maintain insurance, including business interruption
insurance, we may incur losses beyond the limits of, or outside the coverage of,
such insurance. From time to time, various types of insurance for companies in
the pulp and lumber industries have not been available on commercially
acceptable terms or, in some cases, have been unavailable. For example, we
cannot insure against losses of standing timber from any cause, including fire,
and insurance against certain environmental risks may not be available on
commercially acceptable terms. In addition, premiums for our existing coverage
may increase substantially, and we may be unable to maintain our current
insurance coverage.

We have significant indebtedness, which could weaken our
financial condition and limit our ability to fulfill our obligations under our
outstanding indebtedness.

We have a significant amount of indebtedness and significant
debt service obligations. This high degree of leverage could have important
consequences. For example, it could:

- make it more difficult for us to satisfy our obligations with respect to
  our outstanding indebtedness;
- increase our vulnerability to adverse economic and industry conditions;
- require us to dedicate a substantial portion of cash from operations to
  the payment of debt service, thereby reducing the availability of cash to fund
  working capital, capital expenditures and other general corporate purposes;
- limit our ability to obtain financing for working capital, capital
  expenditures, general corporate purposes or acquisitions;
- place us at a disadvantage compared to our competitors that have a lower
  degree of leverage; and
- limit our flexibility in planning for, or reacting to, changes in our
  business and in the forest products industry.

We may not generate cash flow sufficient to service all
of our obligations.

Our ability to make payments on and to refinance our
indebtedness, and to fund our operations, working capital and capital
expenditures, depends on our ability to generate cash in the future. Our cash
flow is subject to general economic, industry, financial, competitive,
operating, regulatory and other factors that are beyond our control. Our
business may not generate cash flow in an amount sufficient to enable us to
repay our indebtedness or to fund our other liquidity needs. We may need to
refinance all or a portion of our indebtedness on or before maturity. Our
ability to refinance our indebtedness or obtain additional financing will depend
on, among other things:

- our financial condition at the time;
- restrictions in the indenture governing our Senior Notes and the terms
  governing our revolving credit facility; and
- other factors, including the condition of the financial markets or the
  forest products industry.

If we do not generate sufficient cash flow from operations, and
if additional borrowing, refinancing, or proceeds of asset sales are not
available to us, then we may not have sufficient cash to enable us to meet all
of our obligations.

We may be able to incur additional indebtedness, which
could further exacerbate the risks associated with our substantial indebtedness.

Although the terms governing our revolving credit facility and
the indenture governing the Senior Notes (the indenture) contain restrictions
on the incurrence of additional indebtedness, additional indebtedness incurred
in compliance with these restrictions could be substantial. As at December 31,
2014, we would have been permitted to borrow up to $46.2 million under our
revolving credit facility. In addition, the indenture does not prevent us from
incurring obligations, such as trade payables and operating
leases, that do not constitute indebtedness. If we incur additional indebtedness
or other obligations, the related risks could be magnified.

14

---

The agreements governing our indebtedness contain
significant restrictions that limit our operating and financial flexibility.

The agreements governing our indebtedness contain covenants
that, among other things, limit our ability to:

- incur additional indebtedness;
- pay dividends and make distributions;
- repurchase stock;
- make certain investments;
- transfer or sell assets;
- create liens;
- enter into transactions with affiliates;
- issue or sell stock of subsidiaries;
- create dividend or other payment restrictions affecting restricted
  subsidiaries; and
- merge, consolidate, amalgamate or sell all or substantially all of our
  assets to another person.

In addition, our revolving credit facility requires us to
maintain specified financial ratios, and we may be unable to meet such ratios.
All of these covenants may limit our ability to execute our business strategy.
Moreover, we may be unable to comply with these covenants. If that occurs, our
lenders could accelerate our indebtedness, in which case, we may not be able to
repay all of our indebtedness.

Our sole shareholder has the ability to direct our
operations, and its interests may conflict with the interests of the Senior
Noteholders.

Our parent, Industries, holds, directly and of record, all of
our outstanding common shares. Millar Western Industries Ltd. is wholly owned by
Hualkeith Investments Ltd., a corporation owned by our co-chairmen of the board
of directors, brothers James B. Millar and H. MacKenzie Millar, and other
members of the Millar family. James B. Millar and H. MacKenzie Millar together
control 55.6% of the outstanding equity of Hualkeith. The Millar family may have
interests that differ from those of the Senior Noteholders and, therefore, may
make decisions that are adverse to their interests.

The ability to enforce civil liabilities in Canada under
U.S. securities laws may be limited.

We are incorporated under the laws of the Province of Alberta
and substantially all of our assets are located in Canada. All of our directors
and officers reside in Canada, and most of their assets are located in Canada.
It may not be possible, therefore, to effect service of process within the
United States upon us or our directors and officers. There is uncertainty as to
the enforceability (1) in an original action in Canadian courts, of liabilities
predicated solely upon United States federal securities laws and (2) of
judgments of United States courts obtained in actions predicated upon the civil
liability provisions of United States federal securities laws in Canadian
courts. Therefore, persons in the United States may not be able to secure
judgment against us or our directors and officers in a Canadian court or, if
successful in securing a judgment against us or them in a U.S. court, may not be
able to enforce such judgment in Canada.

15

---

ITEM 4: INFORMATION ON THE COMPANY

A.          
History and Development of the Company

We were incorporated as Millar Western Forest Products Ltd.
under the Business Corporations Act (Alberta) on September 8, 1997. We
have no subsidiaries. On May 13, 1998, we acquired all of the forest products
operations of our parent company, Millar Western Industries Ltd. (Industries)
and its subsidiaries. The predecessor of Industries was first incorporated in
1919 and began lumber operations in the Whitecourt area in 1922. Industries
completed construction of the Whitecourt pulp mill in 1988 and acquired the
Boyle sawmill in 1993. We completed construction of the current Whitecourt
sawmill in 2001. We acquired the Fox Creek sawmill in 2007, and rebuilt it in
2010-11 at a cost of approximately $60 million, $38 million of which was
provided through an insurance settlement. We are currently constructing a
bioenergy facility at our Whitecourt pulp mill at an expected cost, net of
government grants, of approximately $70 million, to be funded through cash from
operations and $20.2 million in interim financing.

Our head office is located at 16640 - 111 Avenue, Edmonton,
Alberta, T5M 2S5, and our registered office is located at 2900 Manulife Place,
10180 - 101 Street, Edmonton, Alberta, T5J 3V5. Our telephone and facsimile
numbers are (780) 486-8200 and (780) 486-8282, respectively. Our authorized
capital consists of an unlimited number of common shares, of which 15,000,002
were issued and outstanding as at December 31, 2014.

Our agent for service of process in the United States is CT
Corporation System, 111 8th Avenue, New York, New York 10011, (212)
894-8700.

B.          
Business Overview

We are an integrated forest products company active in Alberta,
Canada, that produces and markets softwood lumber and hardwood and softwood
bleached chemi-thermo-mechanical pulp, or BCTMP. We own and operate four
production facilities in Alberta, including a sawmill and a BCTMP mill at an
integrated complex in Whitecourt, a sawmill in Boyle, and a sawmill in Fox
Creek. We are constructing a bioenergy project (the BEP) at the Whitecourt BCTMP
mill that will convert organic matter in pulp-mill waste into renewable energy,
for consumption by our pulp operations; substantial completion of the BEP is
scheduled for late 2015.

Our sawmills produce kiln-dried dimension lumber from spruce,
pine and fir, or SPF, timber for the residential and commercial construction
industries. We also produce higher-margin grades, such as machine-stress-rated,
or MSR, lumber for load-bearing applications, as well as specialty products,
such as decking. Under our current operating strategy, our sawmills have a
combined annual capacity of 530 million foot board measure (mmfbm), with the
Whitecourt, Boyle and Fox Creek facilities having individual annual capacities
of 330 mmfbm, 80 mmfbm and 120 mmfbm, respectively. Our lumber is sold
principally in Canada and the United States; China is also a regular destination
for our products, and a small percentage of certain higher-margin grades is
shipped to Japan.

Our Whitecourt pulp mill produces hardwood, softwood and
blended grades of pulp and has an annual production capacity of 320,000 air
dried metric tonnes (admt). Our BCTMP is sold internationally for use in the
production of a diverse range of paper products, including coated and uncoated
printing and writing papers, paperboard, specialty papers, tissue and
toweling.

Principal markets

Our production of both pulp and lumber provides a diversified
revenue base. From 2010 to 2014, 55% of our total revenue came from pulp sales
and 45% came from lumber sales. This balance of pulp and lumber production has
enabled us to weather cyclical swings in each of the two distinct markets. In
addition, the geographic and product-line diversity of our customers mitigates
the impact of a downturn in demand in any one region or product category.

The geographic distribution of our revenue for the periods
indicated is shown in the following table.

16

---

Distribution of Sales Revenue, by Geographic Region

|              | 2014 | 2013 | 2012
|------------- | ---- | ---- | ----
|              |      |      |     
|Canada        | 30%  | 34%  | 33% 
|China         | 25%  | 17%  | 19% 
|United States | 22%  | 18%  | 17% 
|Other Asia    | 14%  | 21%  | 17% 
|Europe        | 7%   | 9%   | 11% 
|Other         | 2%   | 1%   | 3%  

Lumber

Our sawmills produce kiln-dried SPF dimension lumber for use in
residential and commercial construction, as well as higher-margin grades, such
as MSR, J-grade and appearance grade, and specialty products, such as rough
decking and fencing. Since 2005, we have focused on developing specialty
products that are less subject to commodity price fluctuations. These products
currently represent approximately 11% of our total production and are sold
directly to end users. The remainder of our production is sold through a supply
chain that includes retail stores, stocking distributors and wholesale
companies.

The following table shows the approximate distribution of our
lumber sales by grade.

Distribution of Lumber Sales, by Grade

|                     | 2014 | 2013 | 2012
|-------------------- | ---- | ---- | ----
|                     |      |      |     
|Commodity            | 74%  | 64%  | 62% 
|J-grade & appearance | 10%  | 16%  | 15% 
|MSR                  | 3%   | 8%   | 9%  
|Specialties          | 13%  | 12%  | 14% 

The principal markets for our lumber products are Canada, the
United States, China and Japan. Lumber sales within North America are handled by
sales staff located in our Edmonton corporate office. All offshore sales are
conducted through an international marketing consortium, Interex Forest Products
Ltd. of Vancouver, of which we are a 25% owner.

The following table shows the approximate distribution of our
lumber sales by geographic region.

Distribution of Lumber Sales, by Geographic Region

|       | 2014 | 2013 | 2012
|------ | ---- | ---- | ----
|       |      |      |     
|Canada | 56%  | 65%  | 72% 
|U.S.   | 36%  | 23%  | 18% 
|China  | 6%   | 9%   | 7%  
|Japan  | 2%   | 3%   | 3%  

In 2014, our five largest lumber customers represented
approximately 41% of all the lumber we sold.

Pulp

Our pulp, BCTMP, is sold for use in a wide variety of
applications, including paperboard, coated and uncoated papers, tissue and
towels, and specialty and other papers. Our corporate marketing staff, supported
by an international network of independent sales agents, market pulp
to all major pulp consuming regions, including Europe, Asia, and North America.

17

---

BCTMP is used by papermakers in combination with kraft pulps,
primarily to add bulk and opacity to the paper sheet. It is our defined
marketing strategy to keep a diversified portfolio of customers, both
geographically and by end use, to mitigate pulp market volatility.

The following table shows the approximate distribution of our
pulp sales by end product.

Distribution of Pulp Sales, by End Product

|                         | 2014 | 2013 | 2012
|------------------------ | ---- | ---- | ----
|                         |      |      |     
|Paperboard               | 61%  | 52%  | 47% 
|Coated & uncoated papers | 26%  | 33%  | 31% 
|Tissue & towel           | 6%   | 6%   | 13% 
|Specialty & other        | 7%   | 9%   | 9%  

In recent years, there has been significant growth in the sale
of our pulp for use in multi-ply paperboard. This increased use of BCTMP in the
manufacture of paperboard is also evident in the changing geographic
distribution of our pulp sales and, specifically, rising sales to Asia, a region
that has seen strong growth in paper-making capacity and, particularly, in
paperboard capacity.

The following table shows the approximate distribution of our
pulp sales by geographic region.

Distribution of Pulp Sales, by Geographic Region

|              | 2014 | 2013 | 2012
|------------- | ---- | ---- | ----
|              |      |      |     
|China         | 49%  | 37%  | 37% 
|Other Asia    | 22%  | 36%  | 26% 
|Europe        | 13%  | 17%  | 19% 
|North America | 7%   | 7%   | 12% 
|Other         | 9%   | 3%   | 5%  

In 2014, our five largest pulp customers represented
approximately 55% of all the pulp we sold.

Seasonality

We conduct a significant amount of our log harvesting and
hauling in the winter months, creating a seasonal buildup of working capital.
Harvesting usually begins in the fourth quarter, with the balance of harvesting
and most hauling activities occurring in the first quarter of the following
year. The build-up of log inventory over this period is typically valued at
$40-$45 million, with $5-$10 million worth of logs accumulated in the fourth
quarter, depending on weather conditions, and the rest realized in the following
years first quarter. These log inventories are consumed through the year and
reach minimum levels in the third quarter. This seasonal working capital
build-up and reduction has a significant impact on our liquidity through the
year.

Sources and availability of raw materials

Fiber

The availability of a secure and economic fiber supply is one
of the most important factors affecting the performance of forest products
companies. Fiber supply self-sufficiency is a key competitive element, because
direct control and management of timber resources largely insulates an
operator from fluctuations in the market price of fiber. Approximately 90% of
the fiber requirement for our pulp mill and sawmill facilities is supplied under
long-term agreements with the Government of Alberta and multiple-year agreements
with other forest products companies. Our agreements with the Alberta government
include a Forest Management Agreement (FMA), Coniferous Timber Quotas and
Deciduous Timber Allocations; our agreements with other forest companies include
a variety of fiber exchange and supply contracts. We purchase the balance of our
fiber requirements on the open market. Our fiber costs are subject to variation
depending on factors including the periods harvesting locations and delivery
distances from forest to mill, weather conditions, and normal competitive market
pressures related to our harvesting and hauling contractors. We pay fees,
referred to as stumpage, to the Alberta government for all fiber harvested from
government-owned lands.

18

---

In May 1997, we entered into an FMA with the Alberta Minister
of Environment and Sustainable Resource Development, which we refer to as the
Millar Western FMA, pursuant to which the Minister has granted us rights to
manage, establish, grow, harvest and remove timber on a perpetual sustained
yield basis in a designated area, which we refer to as the Millar Western forest
management area. The Millar Western FMA is in effect for 20 years and is
renewable every 10 years thereafter for additional 20-year terms; the FMA was
renewed in 2014 and is currently in effect until April 30, 2034. The following
table sets out our annual allowable cut (AAC) under our current long-term
provincial tenure and fiber available annually under our other fiber agreements:

|                                            |  | Coniferous     |  |  | Deciduous | 
|------------------------------------------- |  | -------------- |  |  | --------- | 
|                                            |  |                |  |  |           | 
|                                            |  | (cubic meters) | 
|                                            |  |                |  |  |           | 
|Forest Management Agreement (1)             |  | 396,000        |  |  | 273,000   | 
|Coniferous Timber Quotas (2)                |  | 840,000        |  |  |          | 
|Deciduous Timber Allocations (3)            |  |               |  |  | 154,000   | 
|Exchange agreement and supply contracts (4) |  | 665,000        |  |  | 140,000   | 
|Total annual fiber supply:                  |  | 1,901,000      |  |  | 567,000   | 

| | (1) | Net of third-party allocations. Expires 2034 and is
      renewable every 10 years for additional terms of 20 years.
| | --- | --------------------------------------------------------------------------------------------------------------------
| | (2) | Expire 2017 to 2031 and are renewable for additional
      terms of 20 years.                                       
| | (3) | Expire 2027 and are renewable for additional terms of 20
      years.                                               
| | (4) | Exchange and purchase agreements expire 2019 to
    2021.                                                           

In addition to deciduous logs, the Whitecourt pulp mill
requires approximately 90,000 bone dry units of coniferous chips per year. This
requirement is supplied entirely by chip residuals from our Whitecourt sawmill,
and the sawmills surplus chips are sent to other manufacturers under multi-year
fiber-exchange agreements.

In previous years, we did not harvest our full AAC under the
Millar Western FMA, Coniferous Timber Quotas and Deciduous Timber Allocations.
Upon approval from Alberta Environment and Sustainable Resource Development,
these non-sustainable volumes, representing the unused portion of AAC, can be
carried over for harvest in future years. Our coniferous carry-over volume from
the Millar Western FMA and Coniferous Timber Quotas is approximately 1.6 million
cubic meters. The deciduous carry-over volume from the Millar Western FMA and
Deciduous Timber Allocations is approximately 1.3 million cubic meters.

Electricity

Volatility in the deregulated Alberta electricity market can
result in significant fluctuations in market power pricing. Because electricity
represents a significant portion of our input costs, we took steps at the time
of deregulation to acquire long-term power purchase rights in order to insulate
our pulp and lumber operations from the anticipated market volatility. We
currently hold an 11.27% share in a Power Purchase Arrangement (PPA), which is a
20-year agreement that gives the holders the right to the generation capacity
of, and substantially all the associated electricity output from, certain
existing generating units in the Province of Alberta. Our PPA expires in 2020.
The PPA holder is obligated to pay the owner of the generating units the costs
of maintaining and operating the units, according to cost schedules set out in
the PPAs. There are no net settlement provisions in the PPAs.

19

---

Through our share of the PPA, in 2014 we had indirect control
over electrical generating capacity of approximately 601,000 megawatt hours. The
electrical energy required for our operations and that provided through the PPA
are approximately equal. To this extent, our electricity costs are the costs
specified in the schedules to the PPAs plus transmission costs, which mitigates
our exposure to the fluctuations in market electricity rates. The benefit of
these rights is allocated to each operating segment based on its electricity
consumption.

Other Commodities

Natural gas.The natural gas used at our facilities is
supplied under annual supply contracts that are subject to market prices. From
time to time, we manage our gas price exposure by entering into commodity price
forward contracts. We also have rights to a natural gas storage facility located
in Saskatchewan that enable us to manage seasonal market price variations.

Water. Water is supplied under contract to our
Whitecourt and Boyle facilities by the Town of Whitecourt and the Village of
Boyle, respectively. The Fox Creek mill supplies its own water from onsite
wells.

Chemicals.Our Whitecourt pulp mills requirements for
hydrogen peroxide, which is the main chemical used in our pulp bleaching
process, are supplied from a plant located in Alberta under an agreement that
provides us with relatively stable pricing over its term, and that will expire
December 31, 2020. Caustic soda, also used in the bleaching process, is provided
by a major producer under a contract that provides for market-based pricing and
that will expire December 31, 2015, but will be automatically renewed on an
annual basis unless cancelled by one of the parties. Other bleaching chemicals
used in our Whitecourt pulp mill are supplied by third parties under varying
contract terms. Magnesium sulphate used in our Whitecourt pulp mill is produced
and supplied by Industries, pursuant to a contract. See Item 7, Section B,
Related party transactions.

Government regulation

Environmental matters

Our operations are regulated primarily by the Environmental
Protection and Enhancement Act (Alberta), which we refer to as the AEPEA, and
the Pulp and Paper Effluent Regulations included within the Fisheries Act
(Canada). We have instituted environmental controls to monitor our operations to
confirm they are in compliance with regulated parameters of both provincial and
federal authorities. Under the AEPEA, the sawmills operate in accordance with
the terms of a code of practice that governs environmental aspects of their
activities, and the pulp mill operates in accordance with an environmental
permit that is due for renewal on or before November 1, 2015. We have initiated
the renewal procedure for the pulp mill operating permit and expect to obtain
the renewal on a timely basis.

The pulp mill has an extended aeration activated biomass
wastewater treatment system. The biomass produced as a waste product from the
system is used as a soil conditioner on agricultural lands, and as feedstock at
a local biomass-fueled electrical generating station. Wood waste from the
Whitecourt pulp mill and sawmill is sent to the same power station, to generate
renewable electricity, and wood waste from the Boyle sawmill is sent to a
neighboring pulp mill for energy generation. The Fox Creek mill is the only
company facility that continues to dispose of its wood waste by incineration;
however, we are in the process of implementing a plan for alternative uses of
these byproducts and expect to decommission the incinerator in 2016.

The Whitecourt pulp mill is currently developing a bioenergy
project that will install anaerobic hybrid digesters in advance of the existing
aerobic effluent treatment system, to produce a biogas that will be used to
generate renewable energy. In addition to reducing purchased energy costs and
allowing for pulp production increases, the project is expected to reduce
greenhouse gas emissions, freshwater intake and chemical usage, and improve the
quality of treated wastewater discharged to a local river, among other benefits.

All forest areas we harvest are reforested to the standards
required under the Timber Management Regulations (Alberta). In the five-year
period 2010-2014, we spent $32.6 million on reforestation and as at December 31,
2014, had an accrued liability of $14.6 million for future reforestation.

20

---

Climate Change and Emissions Management Act

In 2007, the Province of Alberta passed a revision to the
Climate Change and Emissions Management Act that sets out intensity-based
carbon emission reduction targets. Facilities that release over 50,000 tonnes of
CO2equivalent (CO2e) per year are required to report
their emissions but are not currently subject to reduction requirements. Large
emitters, defined as those producing more than 100,000 tonnes of CO2e
per year, are required to reduce their emission intensity by 12%. In lieu of
reductions, organizations can remit to a technology fund the amount of $15 for
every tonne of CO2e generated over a specified limit or buy an
equivalent amount of provincially-approved offset credits, which normally trade
below $15 per tonne.

Our Whitecourt pulp mill releases approximately 75,800 tonnes
of CO2e per year, making us responsible for reporting our emissions,
though not currently subject to a requirement to reduce the emissions or to pay
penalties or purchase offsets in association with them. Our PPA is linked to a
coal-fired electricity plant that qualifies as a large emitter, making us
responsible for a portion of penalties associated with its CO2e
emissions. In 2014, we were responsible for approximately 54,600 tonnes of
CO2e emissions associated with the PPA. To address this obligation,
we intend to apply offset credits of 54,600 tonnes of CO2e emitted, earned
through an energy reduction project conducted in our mill operations and independently verified and
registered with provincial authorities.

Forest certification

To provide independent verification of the sustainability of
our forest management activities and legality of our timber procurement systems,
we have sought certification under several third-party audited,
internationally-recognized environmental standards.

In 1995 and 1996, respectively, our Whitecourt and Boyle
woodlands operations were certified to FORESTCARE, a comprehensive code
of practice developed by the Alberta forest industry and one of North Americas
earliest independently-audited forest management standards. In 2005,
Whitecourts and Boyles environmental management systems were certified to the
ISO 14001 standard. Our Whitecourt FMA area was certified to the Canadian
Standards Associations CSA-Z809 standard for sustainable forest management in
2006. In 2009, rather than renewing its CSA certification, Whitecourt elected to
seek certification to the Sustainable Forest Initiative (SFI) standard, due to
its greater compatibility with our tenure system. Our Boyle woodlands operations
achieved SFI certification in 2011. All our volume and land-based tenures are
now certified to the SFI standard. To satisfy different customer preferences,
our Whitecourt and Boyle operations are certified under two international
chain-of-custody standards: the Programme for the Endorsement of Forest
Certification (PEFC) and the Forest Stewardship Council (FSC). Chain-of-custody
certification assesses wood tracking systems to ensure responsible timber
sourcing.

Standard
    
    Type
    ExpiryWhitecourtWoodlands(includes Fox Creek)
    
    Boyle WoodlandsFORESTCARE
    
    Comprehensive
      Code of Practices
    December 2016
    
    December 2017ISO 14001
    
    Environmental Management System
    January 8, 2018
    
    January 8, 2018Sustainable Forestry Initiative (SFI)
    
    Sustainable
      Forest Management
    January 8, 2018
    
    January 8, 2018Programme for the Endorsement of Forest Certification
      (PEFC)
    
    Chain of Custody
    December 2, 2015
    
    December 2, 2015Forest Stewardship Council (FSC)
    
    Chain of Custody
    March 27, 2019
    
    June 7, 2016


21

---

Provincial stumpage fees

The Government of Alberta imposes stumpage fees on all timber
harvested on government-owned land. The timber on such land is owned by the
Province of Alberta, and stumpage fees are a form of harvest tax that is
assessed on a market-based fee structure. Under the stumpage system for
coniferous timber, the amount of the stumpage fee increases or decreases with
the benchmark lumber price of kiln-dried, 2x4, Two-and-Better grade Western SPF.
The stumpage system applies to all logs harvested from the Millar Western FMA
and Coniferous Timber Quotas. Reduced stumpage rates apply to marginal timber,
pulpwood and timber affected by fire or insects. The governments stumpage
system for deciduous timber is also market-based. Stumpage rates do not apply to
wood harvested from private lands.

C.          
Organizational Structure

Not applicable.

D.          
Property, Plants and Equipment

We own and operate four production facilities in Alberta: a
sawmill and a BCTMP mill at an integrated complex in Whitecourt, and sawmills in
Boyle and Fox Creek.

Lumber

We own and operate three sawmills, located at Whitecourt, Boyle
and Fox Creek, Alberta. The sawmills have a combined annual capacity of 530
mmfbm of SPF lumber, produced for North American and offshore markets in
dimensions from 1 x 3 to 2 x 10 and lengths from 8 to 16. The mills
products include construction lumber for residential and commercial uses, MSR
lumber for engineered roofing and load-bearing applications and other
higher-value grades, including J-grade for the Japanese housing market, all sold
in dressed form. We also sell specialty products, including decking, fencing and
timbers, in rough form.

Sawmill Operating History



The Whitecourt mill site has been home to a series of sawmills
since 1926. In June 2001, we completed construction of our current mill, at a
total cost of $42.6 million, which was funded from operating cash flow. This
project significantly improved the efficiency of the Whitecourt lumber
operation, increased the quality of its products and reduced its manufacturing
costs. In 2005-2006, we invested $16.6 million in the addition of a new drying
kiln and installation of a small-log line to further increase the efficiency of
processing the smaller-diameter logs that are a significant portion of the
mills total log supply. In addition to the sawmill, our Whitecourt lumber
operations comprise four natural-gas-fired drying kilns and a high-speed planer
mill.

22

---

We acquired the Boyle sawmill assets and related Coniferous
Timber Quotas in September 1993. Our post-acquisition capital expenditure
program significantly improved the sawmills competitiveness and profitability,
including doubling its production capacity. Further capital improvements were
made in 2004-2005, with the installation of a new drying kiln and a small-log
line at a cost of $10.3 million. The Boyle sawmill is a two-line operation that
has a 140 mmfbm/year-capacity when operating on two shifts, but is currently
running on a single-shift basis. Other major equipment includes two drying kilns
and a planer mill.

In August 2007, we purchased lumber manufacturing and timber
assets at Fox Creek, including a three-line, 45 mmfbm/year-capacity sawmill, a
planer mill, a kiln, log inventory, mobile equipment and 140,000 cubic
meters/year of timber in quotas and 65,000 cubic meters/year of timber available
through third-party agreements. The total purchase price, funded from operating
cash flow, was $22 million, which included log inventory valued at $3 million
and mobile equipment and a maintenance shop valued at $1 million, for a net
price of $18 million. On August 29, 2008, a fire destroyed most of the sawmill
building and its contents, leaving unaffected the mills log-handling equipment
and other facilities on the mill site, including the planer mill, drying kiln,
mobile shop and log inventory. All assets were covered by a fire insurance
policy, which included a replacement cost provision.

In July 2010, we commenced construction of a replacement
sawmill at Fox Creek. The new sawmill, comprising two production lines capable
of producing 120 mmfbm of lumber annually on a one-shift basis, started
operation in late 2011, and was optimized over the course of 2012. We also
invested in other site upgrades, including new technology in the planer mill to
increase yields and lower costs. The total cost of the Fox Creek reconstruction
project was approximately $60 million, of which approximately $38 million was
provided through an insurance settlement.

Pulp

Our BCTMP mill, located at Whitecourt, Alberta, commenced
commercial production in July 1988. The pulp mill was constructed at a cost of
approximately $205 million and was designed to produce 210,000 admt per year.
Since start up, we have increased the production capacity of the plant by 52%,
to 320,000 admt per year, without significant capital investment but through a
focus on mill optimization and continuous improvement.

BCTMP Mill Operating History



The mill is a two-line facility that uses heat, mild chemicals
and mechanical action to produce totally chlorine-free hardwood (aspen),
softwood (SPF), and blended pulps for use in the production of coated and
uncoated printing and writing papers, paperboard, specialty paper, tissue and
toweling. All hardwood chips used in the pulping process are produced on site,
and all the softwood chips are supplied by the Whitecourt sawmill, located on
the same site.

We are currently constructing a bioenergy project at the pulp
mill. This project will install anaerobic hybrid digesters in advance of the
mills existing aerobic effluent treatment system, to produce a biogas that will
be used to generate renewable energy. In addition to reducing purchased
energy costs and allowing for pulp production increases, the project is expected
to cut greenhouse gas emissions, reduce freshwater intake and chemical
consumption and improve the quality of treated wastewater discharged to a local
river, among other benefits. The cost of the project, net of $27.5 million in
government grants and a $7.9 million letter of credit recovered from the initial
EPC contractor, is expected to be approximately $70.0 million, which we expect
to fund through cash from operations and an interim financing arrangement in the
amount of $20.2 million. Of the net project costs, $31 million had been spent at
December 31, 2014, leaving a balance of approximately $39 million to be funded
through cash from operations and interim financing.

23

---

ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS

This Managements Discussion and Analysis of our financial
condition and results of operations (MD&A), prepared as of March 4, 2015,
is based upon and should be read in conjunction with our audited financial
statements and the accompanying notes included elsewhere in this annual report.

The MD&A contains historical information, descriptions of
circumstances and statements about future developments or anticipated financial
results. These forward-looking statements are based on certain assumptions or
expectations that, in turn, are subject to various risks or uncertainties. Such
statements are intended to help readers better understand our financial
performance, but readers should exercise caution in relying upon them in
anticipating our future financial performance. See Special Note Regarding
Forward-Looking Statements.

A.          
Results of Operations

Year ended December 31, 2014, compared to year ended
December 31, 2013

The following table sets out our operating and financial
results for the periods indicated.

24

---

|                                                    |   | Year ended December 31, |  
|--------------------------------------------------- | - | ----------------------- | -
|                                                    |   | 2014                    |  
|                                                    |   | (in millions)           |  
|                                                    |   |                         |  
|Statements of earnings data:                        |   |                         |  
|Revenue                                             | $ | 405.1                   |  
|Cost of products sold                               |   | 273.9                   |  
|Freight and other distribution costs                |   | 59.7                    |  
|Depreciation and amortization                       |   | 14.3                    |  
|General and administration                          |   | 18.8                    |  
|Other income                                        |   | (2.7                    | )
|Operating earnings                                  | $ | 41.1                    |  
|Foreign exchange loss on borrowings                 |   | (20.2                   | )
|Finance expenses                                    |   | (22.1                   | )
|Net (loss) income before income taxes               | $ | (1.2                    | )
|Income taxes expense                                |   | 4.0                     |  
|Net (loss) income                                   | $ | (5.2                    | )
|Actuarial (losses) gains, net of tax
      recovery |   | (1.4                    | )
|Comprehensive (loss) income                         | $ | (6.6                    | )
|                                                    |   |                         |  
|Reconciliation of adjusted EBITDA data:             |   |                         |  
|Net (loss) income for the year                      | $ | (5.2                    | )
|Add/(subtract)                                      |   |                         |  
|Income taxes expense                                |   | 4.0                     |  
|Foreign exchange loss on borrowings                 |   | 20.2                    |  
|Finance expenses                                    |   | 22.1                    |  
|Operating earnings                                  | $ | 41.1                    |  
|Depreciation &
      amortization                   |   | 14.3                    |  
|Other unrealized expense (income)                   |   | 2.0                     |  
|Adjusted EBITDA                                     | $ | 57.4                    |  
|                                                    |   |                         |  
|Other data:                                         |   |                         |  
|Average exchange rate (US$/C$1.00)1                 |   | 0.906                   |  
|Period end exchange rate (US$/C$1.00)               |   | 0.862                   |  

|(1) | Average exchange rates are the daily noon Bank of Canada
      foreign-exchange rates, averaged over the period. Period end exchange
      rates are the closing Bank of Canada rate on the last business day of the
      period. The rates are set forth as U.S. dollars per C$1.00 and are the
      inverse of rates quoted by the Bank of Canada for Canadian dollars per
      US$1.00.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Improved economic and market conditions, strong operational
performance and the impacts of a weaker Canadian dollar were reflected in our
results for 2014. At $405.1 million, revenue was up $22.2 million, or 5.8%, from
the previous year, driven by a 6.7% decline in average value of the Canadian
dollar relative to the U.S. currency in which the majority of our lumber and
pulp sales are denominated.

Cost of products sold rose in 2014, primarily due to higher
fiber costs in our lumber segment and higher net power costs in our pulp
segment. Freight and other distribution costs were also higher, reflecting
increased rail and ocean transport charges, as well as a change to the
transaction terms on a portion of our lumber sales. In 2014, we initiated a
program to sell more lumber on a delivered basis, as opposed to a mill basis,
resulting in a sharp increase in freight costs that was offset by a
corresponding increase in revenue.

The contribution made by other income declined in 2014,
reflecting smaller gains on commodity derivative contracts in the period. The
depreciation of the Canadian dollar contributed to a foreign-exchange gain on
working capital balances, which was partially offset by losses on
foreign-exchange hedge contracts.

25

---

The net effect of these variances, and particularly the
difference in contribution from commodity derivative contracts, was a decrease
in operating earnings to $41.1 million from $49.1 million in 2013.

Our US$210 million in long-term debt was translated at the
exchange rate of US$0.862/C$ 1.00 on December 31, 2014, compared to US$0.940/C$
1.00 at December 31, 2013, resulting in a foreign-exchange loss of $20.2 million
in the period. A $1.2 million increase in financing expenses for 2014 was also
attributable to the Canadian dollars decline.

We realized a net loss before taxes of $1.2 million, compared
to net income of $13.8 million in the previous year. The years results were
subject to income tax at a statutory rate of 32%, consistent with the rate
applied in 2013. The effective tax rate for 2014 varied from the statutory rate
because of the manufacturing and processing profits deduction, the non-taxable
portion of the unrealized exchange loss on debt, the non-taxable portion of
capital gains and the effect of future income-tax rate reductions.

After a provision for income tax expense of $4.0 million, we
recorded a net loss of $5.2 million in 2014, compared to net income of $6.6
million recorded in 2013.

Adjustments through comprehensive income are actuarial
valuation changes that are presented net of income tax provision in accordance
with IAS 19R. These adjustments resulted in a comprehensive loss of $6.6 million
for the current year, compared to comprehensive earnings of $7.2 million in
2013.

Lumber

|                                                   |   | Year ended December 31, |  
|-------------------------------------------------- | - | ----------------------- | -
|                                                   |   | 2014                    |  
|                                                   |   |                         |  
|Production (total sawmill)-SPF-mmfbm               |   | 533.9                   |  
|Production (dressed lumber)-SPF-mmfbm              |   | 463.3                   |  
|Shipments -SPF-mmfbm                               |   | 529.1                   |  
|Benchmark price -SPF#2&Better-US$ per mfbm         | $ | 350                     |  
|                                                   |   |                         |  
|Revenue - millions                                 | $ | 207.2                   |  
|Cost of products sold - millions                   |   | 152.1                   |  
|Freight and other distribution costs - millions    |   | 15.8                    |  
|Other realized income - millions                   |   | (2.4                    | )
|Adjusted EBITDA - millions                         | $ | 41.7                    |  
|Adjusted EBITDA margin - %                         |   | 20%                     |  
|                                                   |   |                         |  
|Other unrealized (expense) income -
      millions |   | (0.8                    | )
|Depreciation & amortization - millions             |   | (6.8                    | )
|Operating earnings - millions                      | $ | 34.1                    |  
|                                                   |   |                         |  
|Capital expenditures - millions                    | $ | 5.0                     |  

The U.S. housing market continued its slow recovery in 2014,
with housing starts averaging just over 1 million units per year. Despite a
modest 1.7% drop in the U.S.-dollar-denominated average benchmark price, lumber
segment revenue rose 8.1% year-over-year, reflecting the impacts of the decrease
in the relative value of the Canadian dollar and a change in sales terms on a
portion of sales. Lumber pricing peaked in the first quarter, in line with
normal, seasonal demand, before falling in the second quarter, as transportation
issues related to rail service and a disruption at the Port of Vancouver were
resolved and higher volumes were shipped to the market. Supply and demand came
back into balance early in the third quarter, and prices recovered steadily
through the remainder of the year. Lumber pricing was much less volatile in 2014
than in the previous year, ranging from a high of US$376/mfbm to a low of
US$310/mfbm, compared to a range of US$408-US$295/mfbm in 2013.

26

---

We continued to see strong operating performance at all three
sawmills through 2014, with lumber production up 3.7 mmfbm compared to 2013 and
shipments rising to 529.1 mmfbm, a new company record. At $152.1 million,
segment cost of products sold rose $10.2 million, or 7.2%, from 2013. This
increase was the result of both higher shipment volumes and pressure on fiber
costs, which in turn reflected longer hauling distances associated with both our
normal harvest-area rotation and Albertas mountain pine beetle management
strategy.

Freight and other distribution costs were up sharply in 2014.
While also reflecting higher rail and trucking fees, the rise was primarily due
to our shift from mill-basis to delivered-basis terms of sale on a portion of
our output, and was therefore largely offset by higher revenues.

Strong lumber prices in the first quarter provided us an
opportunity to enter into commodity derivative contracts as a hedge against
price exposure through the balance of the year. These lumber hedges provided a
benefit of just over $1.5 million in realized gains in 2014, recorded in other
realized income, which was lower than the $3.0 million realized in 2013. We
continue to recognize the strategic value of defensive hedging on major inputs
and, when appropriate, on product sales; however, our hedging activities are
limited to our capacity for physical consumption or production of goods and are
not entered into for speculative purposes.

The lumber segment posted Adjusted EBITDA of $41.7 million in
2014, compared to $42.0 million in 2013. Operating earnings of $34.1 million
were $8.3 million lower than the prior years, with the difference due to an
unrealized gain associated with commodity derivative contracts in 2013.

Segment capital expenditures of $5.0 million in 2014 included
$1.5 million spent to acquire timber quotas. The balance of $3.5 million was limited to
maintenance-of-business spending, which was higher than 2013
maintenance-of-business expenditures of $2.1 million.

Pulp

|                                                |   | Year ended December 31, |  
|----------------------------------------------- | - | ----------------------- | -
|                                                |   | 2014                    |  
|                                                |   |                         |  
|Production-madmt                                |   | 329.7                   |  
|Shipments -madmt                                |   | 319.4                   |  
|Benchmark price - NBSK, US$ per admt            | $ | 1,024                   |  
|Benchmark price - BEK, US$ per admt             | $ | 744                     |  
|                                                |   |                         |  
|Revenue - millions                              | $ | 197.5                   |  
|Cost of products sold - millions                |   | 121.8                   |  
|Freight and other distribution costs - millions |   | 43.9                    |  
|Other realized income - millions                |   | (2.3                    | )
|Adjusted EBITDA - millions                      | $ | 34.1                    |  
|Adjusted EBITDA margin - %                      |   | 17%                     |  
|                                                |   |                         |  
|Other unrealized expense - millions             |   | (1.2                    | )
|Depreciation & amortization - millions          |   | (7.3                    | )
|Operating earnings - millions                   | $ | 25.6                    |  
|                                                |   |                         |  
|Capital expenditures - millions                 | $ | 23.6                    |  

The general pulp market got off to a cautious start in 2014, as
new hardwood kraft mills in South America started producing and shipping pulp in
the first quarter. As expected, hardwood kraft prices were under pressure in the
first half of the year before starting to recover in the second half. Softwood
kraft pricing was better than expected in 2014, rising on strong demand and no
significant increases in supply. BCTMP prices were strong in the first half, as
Chinese board producers built inventory, but weakened in the second half, as
board producers curtailed production in response to reduced demand and falling domestic prices for
their product. Prices continue to be under pressure in the first quarter of 2015
as demand remains weak and customers draw down inventories.

27

---

Our pulp segment had an exceptional year operationally, with
the Whitecourt pulp mill producing 329.7 madmt, easily surpassing its previous
record of 321.2 madmt, recorded in 2011. At 319.4 madmt, shipments lagged
production, with the resulting inventory increase reflecting weakening demand
and delayed vessel departures in the fourth quarter. While shipments were down,
per-unit sales realizations rose 7.1% on exchange impacts, and revenue of $197.5
million was 3.5% higher than the previous year.

Segment cost of products sold increased by $4.5 million, or
3.8%, from 2013 on higher net power costs, which reflect a combination of power
pool pricing, transmission costs, and contributions from our power management
program. Although average power pool pricing in Alberta was lower in 2014,
decreased volatility in the market price limited the contribution made by our
pulp mills energy management program, which was down 58% compared to 2013. The
pulp segment continued to focus on operating efficiency and, as a result of
increased production volumes, reduced per-unit operating costs by 3.8%.

Freight and other distribution costs were 5.0% higher in the
period, due to higher rail and ocean freight rates, as well as costs associated
with the first-quarter service disruption at the Port of Vancouver.

Other realized income of $2.3 million for the period reflected
foreign-exchange gains on working capital balances, and was higher than the
income of $0.9 million in 2013.

In 2014, pulp segment power costs were reduced by $5.8 million
below market rates, due to the contribution of our power purchase rights. Based
on per-segment consumption, 94% of the benefit of the power purchase rights was
allocated to the pulp segment, and the balance used to offset power costs in the
lumber segment. By comparison, power purchase rights reduced costs by $20.5
million to the pulp segment in 2013, with the greater contribution in 2013
reflecting higher power-pool pricing and volatility.

The result of all contributing factors was segment Adjusted
EBITDA of $34.1 million, 4.3% higher than the $32.7 million achieved in 2013.
After recording an unrealized expense of $1.2 million related to losses on
forward-exchange contracts, and depreciation and amortization of $7.3 million,
the segment recorded operating earnings of $25.6 million in 2014, consistent
with earnings of $25.4 million in 2013.

Capital expenditures of $23.6 million were higher than the $6.7
million recorded in 2013; these figures included $21.6 million and $4.6 million,
respectively, for the mills bioenergy effluent project (BEP), with the balance
in both years representing maintenance-of-business activities. We expect BEP
expenditures in 2015 to be $39.2 million, funded through $31.0 million in cash
from operations and $8.2 million in interim financing.

Corporate and other

|                            |   | Year ended December 31, |  
|--------------------------- | - | ----------------------- | -
|                            |   | 2014                    |  
|                            |   | (in millions)           |  
|                            |   |                         |  
|Revenue                     | $ | 0.4                     |  
|General & administration    |   | 18.8                    |  
|Other realized income       |   | -                       |  
|Adjusted EBITDA             | $ | (18.4                   | )
|Depreciation & amortization |   | (0.2                    | )
|Operating loss              | $ | (18.6                   | )
|                            |   |                         |  
|Capital expenditures        | $ | 0.4                     |  

28

---

Revenue for the corporate and other segment was generated
primarily from fees billed to our parent company for administrative services.
Corporate revenue was unchanged, year to year, at $0.4 million.

The corporate and other segment recorded negative Adjusted
EBITDA of $18.4 million in 2014, compared to the $18.5 million loss posted in
2013.

Year ended December 31, 2013, compared to year ended
December 31, 2012

The following table sets out our operating and financial
results for the periods indicated.

|                                                 |   | Year ended December 31, |  
|------------------------------------------------ | - | ----------------------- | -
|                                                 |   | 2013                    |  
|                                                 |   | (in millions)           |  
|                                                 |   |                         |  
|Statements of earnings data:                     |   |                         |  
|Revenue                                          | $ | 382.9                   |  
|Cost of products sold                            |   | 259.2                   |  
|Freight and other distribution costs             |   | 53.4                    |  
|Depreciation and amortization                    |   | 14.0                    |  
|General and administration                       |   | 19.1                    |  
|Other (income) expenses                          |   | (11.9                   | )
|Operating earnings                               | $ | 49.1                    |  
|Foreign exchange (loss) gain on borrowings       |   | (14.4                   | )
|Finance expenses                                 |   | (20.9                   | )
|Net (loss) income before income taxes            | $ | 13.8                    |  
|Income taxes expense (recovery)                  |   | 7.2                     |  
|Net income (loss)                                | $ | 6.6                     |  
|Actuarial gains (losses), net of tax             |   | 0.6                     |  
|Comprehensive income (loss)                      | $ | 7.2                     |  
|                                                 |   |                         |  
|Adjusted EBITDA data:                            |   |                         |  
|Net income (loss)                                | $ | 6.6                     |  
|Add (subtract)                                   |   |                         |  
|Income taxes expense
      (recovery)            |   | 7.2                     |  
|Foreign exchange loss (gain) on
      borrowings |   | 14.4                    |  
|Finance expenses                                 |   | 20.9                    |  
|Operating earnings                               | $ | 49.1                    |  
|Depreciation and
      amortization              |   | 14.0                    |  
|Other unrealized (income) expense                |   | (6.8                    | )
|Adjusted EBITDA                                  | $ | 56.3                    |  
|                                                 |   |                         |  
|Other data:                                      |   |                         |  
|Average exchange rate (US$ per C$1.00) (1)       |   | 0.971                   |  
|Period end exchange rate (US$ per C$1.00)        |   | 0.940                   |  

|(1) | Average exchange rates are the daily noon Bank of Canada
      foreign-exchange rates, averaged over the period. Period end exchange
      rates are the closing Bank of Canada rate on the last business day of the
      period. The rates are set forth as U.S. dollars per C$1.00 and are the
      inverse of rates quoted by the Bank of Canada for Canadian dollars per
      US$1.00.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Improved economic and market conditions and a weaker Canadian
dollar were reflected in our results for 2013, our strongest in years. At $382.9
million, revenue was up $50.5 million, or 15.2%, from the previous year, driven
primarily by strong gains in lumber prices and shipment volumes, but also
reflecting improved pricing and higher shipments in the pulp segment. With the majority of our sales
conducted in U.S. dollars, revenue was also positively affected by the Canadian
dollars 3% year-to-year decline in relative value, though this benefit was
partially offset by an exchange loss on long-term debt, reflecting a sharp dip
in the dollars value at the period end.

29

---

Cost of products sold rose in 2013, primarily due to increased
lumber production, but also reflecting higher fiber costs. Freight and other
distribution costs were consistent, year over year.

At $19.1 million, general and administration costs were
considerably higher than the $13.8 million recorded in 2012, due mainly to a
provision for the distribution of $3.2 million under our profit-sharing program
and to an increase in wages and benefits, year over year. In addition, we had
higher-than-normal professional and consulting fees, associated with items such
as management services, management development programs and software reviews.

Other income provided a significant contribution to our
financial results in 2013, primarily reflecting unrealized gains of $6.9 million
on commodity derivative contracts, which contrasted with the unrealized loss on
derivative contracts in 2012. We also had realized gains of $3.0 million on the
commodity derivative contracts in 2013. The depreciation of the Canadian dollar
contributed a $2.0 million foreign-exchange gain on working capital balances
during the period.

We posted operating earnings of $49.1 million for 2013, a
considerable improvement over earnings of $3.1 million in 2012.

Our US$210 million in long-term debt was translated at the
exchange rate of US$0.940/C$ 1.00 on December 31, 2013, compared to US$1.005/C$
1.00 at December 31, 2012, resulting in a foreign exchange loss of $14.4 million
in the period. A modest increase in financing expenses for 2013 was also
attributable to the Canadian dollars decline.

We realized net income before taxes of $13.8 million, comparing
very favorably with a net loss of $12.7 million in the previous year. The years
results were subject to income tax at a statutory rate of 32%, consistent with
the rate applied in 2012. The effective tax rate for 2013 varied from the
statutory rate because of the manufacturing and processing deduction, the
non-taxable portion of the unrealized exchange loss on debt, the non-taxable
portion of capital gains and the effect of future income-tax rate reductions.
Tax credits related to Scientific Research and Experimental Development
(SR&ED) claims reduced tax expenses by $0.3 million in 2013, consistent with
the SR&ED contribution in 2012.

After a provision for income tax expense of $7.2 million, we
recorded net income of $6.6 million in 2013, a significant improvement over the
net loss of $8.3 million recorded in 2012.

Adjustments through comprehensive income are actuarial
valuation changes that are presented net of income tax provision in accordance
with IAS 19R. These adjustments resulted in comprehensive income of $7.2 million
for the year.

Lumber

|                                                   |   | Year ended December 31, |  
|-------------------------------------------------- | - | ----------------------- | -
|                                                   |   | 2013                    |  
|                                                   |   |                         |  
|Production (total sawmill) - SPF  mmfbm           |   | 530.2                   |  
|Production (dressed lumber) - SPF - mmfbm          |   | 468.0                   |  
|Shipments - SPF - mmfbm                            |   | 524.2                   |  
|Benchmark price - SPF#2&Better - US$ per mfbm      | $ | 356                     |  
|                                                   |   |                         |  
|Revenue - millions                                 | $ | 191.6                   |  
|Cost of products sold - millions                   |   | 153.4                   |  
|Inventory valuation adjustments - millions         |   | -                       |  
|Other realized (income) expense - millions         |   | (3.8                    | )
|Adjusted EBITDA - millions                         | $ | 42.0                    |  
|Adjusted EBITDA margin - %                         |   | 22%                     |  
|                                                   |   |                         |  
|Other unrealized income (expense) -
      millions |   | 7.1                     |  
|Depreciation & amortization - millions             |   | (6.7                    | )
|Operating earnings (loss) - millions               | $ | 42.4                    |  
|                                                   |   |                         |  
|Capital expenditures - millions                    | $ | 2.1                     |  

30

---

General economic improvement was reflected in stronger markets
for lumber in 2013, with the continued recovery in U.S. housing starts, stable
Canadian demand and strong exports to China and Japan helping to boost the
average benchmark price, which rose by 19% over 2012 levels. Lumber pricing
showed significant volatility through the year, climbing to a high of $408/mfbm
late in the first quarter before falling sharply to a low of $295/mfbm in the
second, then improving gradually through the third and fourth quarters to end
the year at $372/mfbm. While the peaks and valleys were particularly steep in
2013, pricing generally moved in line with normal, seasonal building cycles and
market expectations.

We continued to see strong operating performance at all three
of our sawmills through 2013. In its second full year of operation, the Fox
Creek mill made further gains in productivity, contributing to total sawmill
production (including rough and dressed lumber) of 530.3 mmfbm, up from 515.1
mmfbm in 2012. Shipments increased to 524.2 mmfbm for the year, a new Company
record.

On the stronger average pricing and higher shipment volumes,
the lumber segment recorded revenue of $191.6 million for the period, an
increase of 24% over 2012. Our per-unit sales net realizations tracked the
direction of benchmark pricing but were less volatile, demonstrating the benefit
of our sales into specialty-product and direct-to-end-use markets, which help to
insulate a portion of our sales from market fluctuations. As a result of the
stronger market pricing, softwood lumber export taxes were applied in only the
months of August, September and October, in contrast to 2012, in which export
taxes affected our net sales realizations in all months.

At $153.4 million, segment cost of products sold rose $11.0
million, or 7%, from 2012. This increase was the result of both higher
production levels and higher fiber costs, which in turn reflected rising fuel
prices and longer hauling distances associated with both our normal harvest-area
rotation and Albertas mountain pine beetle management strategy.

As lumber prices began their sharp rise in late 2012, we took
the opportunity to enter into commodity derivative contracts as a hedge against
expected price declines in early 2013. These lumber hedges provided a benefit of
just over $3 million in realized gains in 2013, recorded in other realized
income. The large year-to-year shift in other unrealized income primarily
reflected the gains in 2013 on commodity derivative contracts, compared against
the losses incurred in 2012. We recognize the strategic value of defensive
hedging on major inputs and, when appropriate, on product sales; however, our
hedging activities are limited to our capacity for physical consumption or
production of goods and are not entered into for speculative purposes.

The lumber segment posted Adjusted EBITDA of $42.0 million and
operating earnings of $42.4 million in the period, comparing very favorably with
the Adjusted EBITDA of $12.8 million and operating loss of $0.6 million recorded
in 2012.

The $2.1 million in capital expenditures recorded by the lumber
segment in 2013 were restricted to maintenance-of-business spending, contrasting
with 2012 expenditures of $4.9 million, which included $2.3 million for
completion of the planer-mill component of the Fox Creek reconstruction project.
Excluding this amount, maintenance-of-business expenditures were similar, year
to year.

31

---

Pulp

|                                             |   | Year ended December 31, |  
|-------------------------------------------- | - | ----------------------- | -
|                                             |   | 2013                    |  
|                                             |   |                         |  
|Production - madmt                           |   | 321.0                   |  
|Shipments - madmt                            |   | 330.7                   |  
|Benchmark price - NBSK, US$ per admt         | $ | 941                     |  
|Benchmark price - BEK, US$ per admt          | $ | 793                     |  
|                                             |   |                         |  
|Revenue - millions                           | $ | 190.9                   |  
|Cost of products sold - millions             |   | 159.1                   |  
|Other realized (income) expense - millions   |   | (0.9                    | )
|Adjusted EBITDA - millions                   | $ | 32.7                    |  
|Adjusted EBITDA margin - %                   |   | 17%                     |  
|                                             |   |                         |  
|Other unrealized (expense) income - millions |   | (0.2                    | )
|Depreciation & amortization - millions       |   | (7.1                    | )
|Operating earnings - millions                | $ | 25.4                    |  
|                                             |   |                         |  
|Capital expenditures - millions              | $ | 6.7                     |  

The general pulp market got off to a weak start in 2013 as it
adjusted to previous capacity additions, but pricing strengthened through the
year. BCTMP prices generally tracked the benchmark BEK, though that relationship
varied from region to region, with the strongest markets for our sector seen in
China, where higher paperboard production brought increased demand for BCTMP.

Our pulp segment had a strong year operationally, with the
Whitecourt pulp mill producing 321.0 thousand admt, nearly reaching the record
output recorded in 2011. At 330.7 thousand admt, shipments exceeded production,
with the resulting inventory reduction reflecting, in part, our focus on
increasing sales to the Asian market, where differing logistical requirements
than those for Europe reduce our need for local market inventory. With shipments
up and per-unit sales net realizations rising consistently with average BEK
pricing, pulp segment revenue increased 7.2% year over year, to $190.9 million.

Segment cost of products sold rose by $5.4 million from 2012,
largely due to the higher sales volumes, and per-unit operating costs rose 3% in
the period, reflecting increased fiber costs.

Other realized income of $0.9 million for the period reflected
foreign-exchange gains on working capital balances, and contrasted with an
expense of $1.0 million in 2012.

In 2013, our PPA contributed $20.5 million in
power-cost-savings benefit to the pulp segment, a significant increase over the
PPA contribution of $11.1 million in 2012, reflecting the higher Alberta power
demand levels and power-pool pricing in 2013.

The result of all factors was segment Adjusted EBITDA of $32.7
million, which compared favorably to the $23.4 million achieved in 2012. After
recording an unrealized expense of $0.2 million related to losses on forward
exchange contracts, and depreciation and amortization of $7.1 million, the
segment recorded operating earnings of $25.4 million in 2013, up from $17.2
million in the previous year.

Capital expenditures of $6.7 million were consistent with the
$6.5 million recorded in 2012; these figures included $2.1 million and $1.9
million, respectively, for maintenance-of-business activities, with the balance
in both years attributed to the mills bioenergy project.

32

---

Corporate and other

|                            |   | Year ended December 31, |  
|--------------------------- | - | ----------------------- | -
|                            |   | 2013                    |  
|                            |   | (in
      millions)     |  
|                            |   |                         |  
|Revenue                     | $ | 0.4                     |  
|General & administration    |   | 19.1                    |  
|Other realized income       |   | (0.2                    | )
|Adjusted EBITDA             | $ | (18.5                   | )
|Depreciation & amortization |   | (0.2                    | )
|Operating loss              | $ | (18.7                   | )
|                            |   |                         |  
|Capital expenditures        | $ | 1.0                     |  

Revenue for the corporate and other segment was generated
primarily from fees billed to our parent company for administrative services.
Corporate revenue was unchanged, year to year, at $0.4 million.

The corporate and other segment recorded negative Adjusted
EBITDA of $18.5 million in 2013, compared to the $13.5 million loss posted in
2012. This change was due mainly to a provision for the distribution of $3.2
million under our profit-sharing program for 2013; no such provision was made
the previous year. In addition, the increase reflected a year-to-year rise in
wages and benefits, as well as higher-than-normal professional and consulting
fees associated with items such as management services, management development
programs and software reviews.

Segment capital expenditures of $1.0 million included the
purchase of property in Whitecourt required for temporary accommodation of new
employees.

Results of Operations  Fourth Quarter of 2014

The following table sets out our operating and financial
results for the periods indicated.

33

---

|                                                    |   | Three months ended |  
|--------------------------------------------------- | - | ------------------ | -
|                                                    |   | Dec.
      31/14   |  
|                                                    |   | (in millions)      |  
|                                                    |   |                    |  
|Statements of earnings data:                        |   |                    |  
|Revenue                                             | $ | 93.5               |  
|Cost of products sold                               |   | 63.3               |  
|Freight and other distribution costs                |   | 14.2               |  
|Depreciation and amortization                       |   | 3.6                |  
|General and administration                          |   | 5.1                |  
|Other expense (income)                              |   | 0.8                |  
|Operating earnings                                  | $ | 6.5                |  
|Foreign exchange loss on borrowings                 |   | (8.4               | )
|Finance expenses                                    |   | (5.4               | )
|Net loss before income taxes                        | $ | (7.3               | )
|Income taxes (recovery) expense                     |   | (0.3               | )
|Net loss                                            | $ | (7.0               | )
|Actuarial (losses) gains, net of tax
      recovery |   | (1.4               | )
|Comprehensive loss                                  | $ | (8.4               | )
|                                                    |   |                    |  
|Reconciliation of adjusted EBITDA data:             |   |                    |  
|Net loss                                            | $ | (7.0               | )
|Add (subtract)                                      |   |                    |  
|Income taxes expense
      (recovery)               |   | (0.3               | )
|Foreign exchange loss on borrowings                 |   | 8.4                |  
|Finance expenses                                    |   | 5.4                |  
|Operating earnings                                  | $ | 6.5                |  
|Depreciation and
      amortization                 |   | 3.6                |  
|Unrealized other expense (income)                   |   | 3.4                |  
|Adjusted EBITDA                                     | $ | 13.5               |  
|                                                    |   |                    |  
|Other data:                                         |   |                    |  
|Average exchange rate (US$ per C$1.00)1             |   | 0.881              |  
|Period end exchange rate (US$ per C$1.00)           |   | 0.862              |  

|(1) | Average exchange rates are the daily noon Bank of Canada
      foreign-exchange rates, averaged over the period. Period end exchange
      rates are the closing Bank of Canada rate on the last business day of the
      period. The rates are set forth as U.S. dollars per C$1.00 and are the
      inverse of rates quoted by the Bank of Canada for Canadian dollars per
      US$1.00.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We recorded revenue of $93.5 million for the fourth quarter of
2014, down from the $104.0 million reported in the third quarter, as lower
lumber and pulp shipments more than offset higher per-unit sales realizations in
both segments. The quarters revenue was slightly improved over the $91.3
million posted in the fourth quarter of 2013, however, primarily due to
exchange-rate effects and higher lumber shipment volumes.

Cost of products sold was down from the previous quarter,
reflecting lower shipments, but up from the same period of 2013, due primarily
to increased fiber costs. General and administration cost of $5.1 million for
the quarter was higher than the previous quarter, but down from the fourth
quarter of 2013, largely reflecting differences in the profit-sharing provision.

We recorded $0.8 million in other expense in the quarter, due
mainly to losses on currency hedges; this compared to other income of $2.6
million in the third quarter of 2014 and $0.9 million in the fourth quarter of
2013, which had included foreign-exchange gains on working-capital balances and
commodity-derivative contracts.

34

---

The result for the quarter was operating earnings of $6.5
million, which was lower than both comparable periods. We recorded a
foreign-exchange loss of $8.4 million on the value of our
U.S.-dollar-denominated debt, reflecting the continued weakening of the Canadian
dollar.

After a provision for income-tax expense of $0.3 million, we
recorded a net loss of $7.0 million for the quarter, as compared to net losses
of $8.2 million and $5.3 million in the third quarter of 2014 and the fourth
quarter of 2013, respectively.

Adjustments through comprehensive income are actuarial
valuation changes that are presented net of income tax provision in accordance
with IAS 19R. These adjustments resulted in a comprehensive loss of $8.4 million
for the current quarter, compared to comprehensive losses of $8.2 million and
$4.7 million for the third quarter of 2014 and the fourth quarter of 2013,
respectively.

Lumber

|                                              |   | Three months ended |  
|--------------------------------------------- | - | ------------------ | -
|                                              |   | Dec.
      31/14   |  
|                                              |   | (in millions)      |  
|                                              |   |                    |  
|Production (total sawmill) - SPF - mmfbm      |   | 130.6              |  
|Production (dressed lumber) - SPF - mmfbm     |   | 114.5              |  
|Shipments - SPF - mmfbm                       |   | 129.0              |  
|Benchmark price - SPF#2&Better - US$ per mfbm | $ | 340                |  
|                                              |   |                    |  
|Revenue                                       | $ | 50.6               |  
|Cost of products sold                         |   | 35.3               |  
|Freight and other distribution costs          |   | 4.2                |  
|Other realized (income) expense               |   | (1.0               | )
|Adjusted EBITDA                               | $ | 12.1               |  
|Adjusted EBITDA margin - %                    |   | 24%                |  
|                                              |   |                    |  
|Other unrealized (expense) income             |   | (1.4               | )
|Depreciation and amortization                 |   | (1.7               | )
|Operating earnings                            | $ | 9.0                |  
|                                              |   |                    |  
|Capital expenditures                          | $ | 1.1                |  

Although the average benchmark price fell from both comparable
periods, per-unit sales realizations rose as a result of the depreciation of the
Canadian dollar. Shipments fell compared to the third quarter, mostly related to
the normal, seasonal reduction in sales activity toward year-end, but were
higher than in the same period in 2013.

Production of 130.6 mmfbm was lower than third-quarter output
of 136.5 mmfbm, reflecting a reduced number of operating days due to the holiday
season, but was essentially unchanged from the same quarter of 2013.

Revenue was lower in the period compared to the third quarter,
as lower shipments more than offset higher per-unit sales realizations, but was
higher than the fourth quarter of last year, on higher shipment volumes and
sales realizations. Cost of products sold varied from both comparable periods,
due to changes in shipment volumes. On a per-unit basis, cost of products sold
was similar to the fourth quarter of last year but down from the third quarter
of 2014, which had included an adjustment to the costs of logs received from a
third party through a long-term exchange agreement.

Other realized income of $1.0 million in the quarter
represented an exchange gain on working capital associated with the weakening
Canadian dollar. This compared to other realized expense of $0.1 million in the
third quarter, which reflected a small loss on commodity derivative
contracts.

35

---

Our lumber segment generated $12.1 million in Adjusted EBITDA
during the fourth quarter, which was higher than both the previous quarter and
the fourth quarter of 2013. Depreciation and amortization were virtually
unchanged from comparable periods, and we recorded operating earnings of $9.0
million in the quarter.

Capital expenditures of $1.1 million in the quarter were
limited to maintenance-of-business activities.

Pulp

|                                     |   | Three months ended |  
|------------------------------------ | - | ------------------ | -
|                                     |   | Dec.
      31/14   |  
|                                     |   | (in millions)      |  
|                                     |   |                    |  
|Production - madmt                   |   | 78.7               |  
|Shipments - madmt                    |   | 69.8               |  
|Benchmark price - NBSK, US$ per admt | $ | 1,025              |  
|Benchmark price - BEK, US$ per admt  | $ | 738                |  
|                                     |   |                    |  
|Revenue                              | $ | 42.8               |  
|Cost of products sold                |   | 28.0               |  
|Freight and other distribution costs |   | 10.0               |  
|Other realized (income) expense      |   | (1.6               | )
|Adjusted EBITDA                      | $ | 6.4                |  
|Adjusted EBITDA margin - %           |   | 15%                |  
|                                     |   |                    |  
|Other unrealized (expense) income    |   | (2.0               | )
|Depreciation and amortization        |   | (1.9               | )
|Operating earnings                   | $ | 2.5                |  
|                                     |   |                    |  
|Capital expenditures                 | $ | 16.4               |  

Our pulp mill continued to operate well, but production volumes
fell quarter-to-quarter, as the mill conducted its annual maintenance shutdown
during the period. Shipments declined compared to both prior periods, due to a
general slowdown in the Chinese market and a delay in vessel departures
resulting from congestion at the Vancouver port. Operating difficulties
experienced with the aerobic effluent treatment system in early 2015 will reduce
production by approximately 5,000 admt, and shipments will continue to come
under pressure from issues at the port.

Though per-unit sales realizations rose in the quarter,
reflecting currency impacts, segment revenue decreased compared to both prior
quarters, due to lower shipments. At $28.0 million, cost of products sold was
lower than the third quarter on the decreased shipments, but virtually unchanged
from the fourth quarter of 2013. Freight and other distribution costs were also
down from the previous quarter, due to the lower volumes. Freight costs are paid
almost exclusively in U.S. dollars, and the increase in per-unit costs compared
to other quarters reflected exchange-rate effects.

After a $1.6 million realized gain on U.S.-dollar-denominated
working-capital changes, the segment recorded $6.4 million in Adjusted EBITDA in
the fourth quarter of 2014, which was down from both comparable quarters
earnings. Having accounted for unrealized losses associated with currency hedges
and for depreciation and amortization, the segment posted operating earnings of
$2.5 million in the quarter.

The segments fourth quarter capital expenditures of $16.4
million comprised $15.9 million related to the BEP and $0.5 million for maintenance-of-business
activities.

36

---

Corporate and other

|                              |   | Three months ended |  
|----------------------------- | - | ------------------ | -
|                              |   | Dec.
      31/14   |  
|                              |   | (in millions)      |  
|                              |   |                    |  
|Revenue                       | $ | 0.1                |  
|General and administration    |   | 5.1                |  
|Other realized (income)       |   | -                  |  
|Adjusted EBITDA               | $ | (5.0               | )
|Depreciation and amortization |   | -                  |  
|Operating loss                | $ | (5.0               | )
|                              |   |                    |  
|Capital expenditures          | $ | 0.1                |  

Our corporate and other segment recorded negative Adjusted
EBITDA of $5.0 million for the quarter, with the change from comparable quarters
primarily reflecting changes in the profit sharing provision.

B.          
Liquidity and Capital Resources

Liquidity and Capital Resources for 2014 compared to 2013

Summary of Financial Position

|                                                     |   | As at December 31, | 
|---------------------------------------------------- | - | ------------------ | 
|                                                     |   | 2014               | 
|                                                     |   | (in millions)      | 
|                                                     |   |                    | 
|Cash                                                 | $ | 47.4               | 
|Restricted cash                                      |   | -                  | 
|Current assets                                       |   | 190.0              | 
|Current liabilities                                  |   | 60.1               | 
|Ratio of current assets to current
      liabilities |   | 3.2                | 
|Financial liabilities - borrowings                   | $ | 262.4              | 
|Shareholder's equity                                 |   | 69.4               | 

We ended 2014 with $47.4 million in cash and no restricted
cash, as the letter of credit that had been in place at the end of 2013 was
converted to cash and used to fund ongoing capital expenditures associated with
the BEP.

Cash from operations was more than sufficient to meet required
investments in working capital, the interest payments on our long-term debt and
capital expenditures during the year, which included $21.6 million for the
BEP.

In 2014, we renewed our $50 million revolving credit facility,
extending the expiration to July 15, 2018. The facility is subject to a
borrowing formula based on our levels of inventory and accounts receivable. On
December 31, 2014, the amount available under the facility was $50.0 million,
with $3.8 million committed to letters of credit.

Based on our current level of operations, we believe that our
existing cash balance and availability under our revolving credit facility will
provide sufficient liquidity to meet operational cash draws, scheduled interest
payments, long-term debt repayment, normal capital expenditures and working
capital needs over the next 12 months. We are obligated to make two scheduled
interest payments of $US8.9 million on April 1, 2015, and October 1, 2015, and
the Canadian-dollar value of the payments will be dependent upon the exchange
rate at the time of payment.

In addition to normal capital expenditures, we also expect to
spend $39.2 million to complete the BEP project, which will be funded through
cash from operations and interim financing in the amounts of $31.0 million and
$8.2 million, respectively. We expect that cash from operations, our
current cash balance and availability under our revolving credit facility will
also be sufficient to meet these obligations. However, our future operating
performance may be adversely affected by prevailing economic conditions and by
currency, market and other factors beyond our control, including the factors
discussed in Item 3, Risk Factors.

37

---

Selected Cash Flow Items

|                                             |   | Year ended December 31, |  
|-------------------------------------------- | - | ----------------------- | -
|                                             |   | 2014                    |  
|                                             |   | (in millions)           |  
|Selected cash flow items                     |   |                         |  
|Operating activities:                        |   |                         |  
|Cash provided by operating activities        | $ | 57.7                    |  
|Net reforestation                            |   | 0.7                     |  
|Net change in non-cash working capital items |   | (14.0                   | )
|                                             |   | 44.4                    |  
|Investing activities:                        |   |                         |  
|Additions to property plant and equipment    |   | (24.4                   | )
|Receipt of government grants                 |   | 1.5                     |  
|Proceeds on Fox Creek insurance claim        |   | -                       |  
|Increase in restricted cash                  |   | -                       |  
|Other                                        |   | 0.1                     |  
|                                             |   | (22.8                   | )
|Financing activities:                        |   |                         |  
|Increase in borrowings                       |   | 4.0                     |  
|Repayment of borrowings                      |   | (1.2                    | )
|Finance expenses paid                        |   | (22.0                   | )
|Dividends                                    |   | (2.2                    | )
|                                             |   | (21.4                   | )
|                                             |   |                         |  
|Increase (decrease) increase in cash         | $ | 0.2                     |  
|                                             |   |                         |  
|Opening Cash                                 | $ | 47.2                    |  
|Closing Cash                                 | $ | 47.4                    |  
|                                             |   |                         |  
|Cash and cash equivalents                    | $ | 47.4                    |  
|Restricted cash                              |   | -                       |  
|Total cash                                   | $ | 47.4                    |  

We generated $44.4 million in cash from operations in 2014, an
increase from the $41.2 million provided in 2013, reflecting higher revenues
associated with a weakening Canadian dollar and increased lumber shipments.

Working capital used $14 million in 2014, up from $12.1 million
in 2013, with the difference attributed to higher pulp inventories.

Financing activities in 2014 were related to the receipt of
$4.0 million in interim BEP financing and dividend payments of $2.2 million.
Repayment of borrowings represented payments on our power purchase loans.
Borrowings in 2013 consisted of a first-quarter draw of $8.0 million against our
revolving credit facility and the receipt of $3.6 million in interim BEP
financing; repayment of borrowings in that period reflected full repayment of
the revolving credit facility and principal payments on the power purchase
loans.

Finance expenses paid were $1.5 million higher in 2014 due to
the decline in the Canadian dollar.

38

---

Liquidity and Capital Resources for 2013 compared to
2012

Summary of Financial Position

|                                                     |   | As at December 31, |  
|---------------------------------------------------- | - | ------------------ | -
|                                                     |   | 2013               |  
|                                                     |   | (in millions)      |  
|                                                     |   |                    |  
|Cash                                                 | $ | 47.2               |  
|Restricted cash                                      |   | 8.0                |  
|Current assets                                       |   | 178.6              |  
|Current liabilities                                  |   | 59.3               |  
|Ratio of current assets to
      current liabilities |   | 3.0                | x
|Financial liabilities - borrowings                   | $ | 237.4              |  
|Shareholder's equity                                 |   | 78.3               |  

We ended 2013 with $47.2 million in cash, up significantly from
$24.7 million in cash held at the end of 2012. Restricted cash dropped to $8
million in 2013, as the bioenergy project (BEP) progressed and capital
expenditures were made with grant funds received in 2012. The change in
restricted cash also reflected the fact that, in 2013, we did not have any
unrealized losses on futures contracts that required deposits to offset. The
restriction on the $8 million at December 31, 2013, was removed in February
2014.

Cash from operations was more than sufficient to meet required
investments in working capital, the interest payments on our long-term debt and
normal capital expenditures during the year, which included $4.5 million for the
BEP. We increased our borrowings for the year by $3.6 million, for financing
related to the BEP.

In 2012, we renewed our $50 million revolving credit facility,
extending the expiration to July 15, 2015. The facility is subject to a
borrowing formula based on our levels of inventory and accounts receivable. On
December 31, 2013, this borrowing base was calculated to be $64.9 million, and
the facility was undrawn; the amount available at that date was therefore $50.0
million (2012  $50.0 million), of which $3.7 million (2012  $3.6 million) was
committed to letters of credit.

Selected Cash Flow Items

|                                                   |   | Year ended December 31, |  
|-------------------------------------------------- | - | ----------------------- | -
|                                                   |   | 2013                    |  
|                                                   |   | (in millions)           |  
|Selected cash flow items                           |   |                         |  
|Operating activities:                              |   |                         |  
|Cash provided by operating activities              | $ | 55.1                    |  
|Net reforestation                                  |   | (1.8                    | )
|Net change in non-cash working capital
      items |   | (12.1                   | )
|                                                   |   | 41.2                    |  
|Investing activities:                              |   |                         |  
|Additions to property plant and equipment          |   | (21.5                   | )
|Receipt of government grants                       |   | 15.3                    |  
|Increase in restricted cash                        |   | 7.0                     |  
|                                                   |   | 0.8                     |  
|Financing activities:                              |   |                         |  
|Increase in borrowings                             |   | 11.6                    |  
|Repayment of borrowings                            |   | (9.1                    | )
|Finance expenses paid                              |   | (20.5                   | )
|Dividends                                          |   | (1.5                    | )
|                                                   |   | (19.5                   | )
|                                                   |   |                         |  
|Increase (decrease) increase in cash               | $ | 22.5                    |  
|                                                   |   |                         |  
|Opening Cash                                       | $ | 24.7                    |  
|Closing Cash                                       | $ | 47.2                    |  
|                                                   |   |                         |  
|Cash and cash equivalents                          | $ | 47.2                    |  
|Restricted cash                                    |   | 8.0                     |  
|Total cash                                         | $ | 55.2                    |  

39

---

We generated $41.2 million in cash from operations in 2013, an
increase from the $25.3 million provided in 2012, reflecting the stronger
markets and increased shipments seen in the fourth quarter. As a result, total
cash increased to $55.2 million, despite a year-to-year reduction in restricted
cash related to the previously mentioned BEP expenditures.

Working capital used $12.1 million in 2013, contrasting with a
positive contribution of $4.0 million in 2012, with the difference attributed to
our discontinuation of the sale of letter-of-credit-backed trade receivables at
the end of the third quarter and to lower accounts payable reflecting the
reduction in restricted cash.

Capital expenditures for 2013 totaled $24.8 million, which
included $21.5 million in cash expenditures and $3.3 million in non-cash items
recorded as accounts payable, and which was offset by $15.3 million in grant
funds used for the BEP. Excluding that amount, we had net capital expenditures
of $9.5 million, of which BEP expenditures accounted for $4.5 million, and the
$5.0 million balance represented maintenance-of-business activities. In 2012, we
recorded capital expenditures of $16.5 million, which was offset by $0.2 million
in disposals, plus $3.7 million in non-cash adjustments; excluding an offset for
$8.7 in grant funds used for BEP expenditures, we had net capital expenditures
of $11.6 million, of which $4.9 million was spent on the BEP and the Fox Creek
sawmill project, and $6.1 million was spent on maintenance of business.

Financing activities in 2013 reflected the first-quarter draw
of $8.0 million against our revolving credit facility and the receipt of interim
BEP financing of $3.6 million. Repayment of borrowings reflects full repayment
of the revolving credit facility and payments on the power purchase loans.
Borrowings in 2012 were solely related to the interim financing on the BEP, and
repayments were limited to the power purchase right loans.

Based on our current level of operations, we believe that our
existing cash balance and availability under our revolving credit facility will
provide sufficient liquidity to meet operational cash draws, scheduled interest
payments, long-term debt repayment, normal capital expenditures and working
capital needs over the next 12 months. However, our future operating performance
may be adversely affected by prevailing economic conditions and by currency,
market and other factors beyond our control, including the factors discussed in
Item 3, Risk Factors.

C.          
Research and Development

We did not conduct significant research and development
activities in 2014.

D.          
Trend Information

The North American lumber market remained relatively strong
through 2014, as the U.S. housing market continued to slowly strengthen and
Asian demand remained consistent with 2013 levels. The market was characterized
by reduced volatility compared to recent years, with benchmark prices ranging
only from a high of US$376/mfbm to a low of US$310/mfbm. Consistently strong
pricing meant that no export charges were imposed under the Softwood Lumber
Agreement in 2014. Given pricing trends, SLA export charges are not expected to
have a significant impact on revenues in 2015.

40

---

The beginning of 2013 marked the first phase of what some
analysts believe will be a sustained period of price improvement for lumber.
This outlook is based, in part, on expectations of increased demand from the
U.S., as the American housing market recovers and the renovation and remodeling
market maintains a steady pace, and of continued demand from China. It is also
supported on the supply side, given that lumber capacity increases are expected
to be constrained by the effects of the mountain pine beetle infestation on
available merchantable timber in British Columbia. Though we generally agree
with this outlook and expect these demand and supply trends to continue through
2015 and into 2016, our forecast is tempered by regional variations in the U.S.
housing recovery, the potential for increased supply from the southern U.S., the
lack of predictability in Chinese buying patterns and the unsteady nature of
current global economic conditions. We expect pricing to be more volatile in
2015, as transportation infrastructure may struggle to deal with increasing
demand, and the market may face uncertainty surrounding the SLA, which is
scheduled to expire in the fourth quarter.

In 2014, the pulp market was affected by the start-up of two
new hardwood kraft mills in South America, which upset the supply/demand balance
in the short term and put pressure on pricing. Softwood kraft producers enjoyed
good market conditions, as demand was firm and no significant new capacity was
added. The hardwood BCTMP market was strong in the first half of 2014, as two
large paperboard producers in China built inventory in anticipation of their
start-up of new capacity. This resulted in a divergence between the hardwood
kraft and BCTMP markets, with BCTMP selling at a premium for several months.
Softwood BCTMP markets were under pressure for most of 2014, reflecting
increased supply from new production capacity in New Zealand and Europe.

The pricing outlook for the overall pulp market in the year
ahead is expected to be challenging for producers, as the growth in Chinese
demand slows and the printing and writing segment of the market continues to
decline. Hardwood kraft pricing has been relatively strong in the fourth quarter
of 2014 and first quarter of 2015, as buyers have taken advantage of significant
discounts versus softwood pricing to substitute grades to the extent possible.
This strength is expected to be short-lived, with Chinese demand continuing to
slacken and hardwood prices are generally forecast to weaken into the second
quarter before starting to recover later in the year. Softwood kraft pricing is
also under pressure, as supply has risen on fewer-than-normal maintenance
shutdowns and demand has fallen on slower purchasing by Chinese traders.

BCTMP prices are also expected to come under pressure, with
Chinese demand slowing and customers working through inventories. Current prices
are at levels that have historically signified the bottom of the market, where
domestic Chinese pulp producers will curtail capacity as prices fall below their
marginal cost of production. The currencies of BCTMP-producing countries have
all declined sharply early in 2015, and the market is expected to be volatile as
U.S.-dollar pricing adjusts to the relative currency values and declining
demand. We expect both hardwood and softwood BCTMP grades to weaken through the
first and second quarters, before a supply response from high-cost producers can
help prices recover in the second half of 2015.

Operationally, we expect our lumber facilities to continue to
run at operating rates similar to those achieved in 2014, with production of
approximately 530 million board feet. The pulp mill is expected to produce
approximately 316,000 tonnes, down from the record level of 329,700 tonnes in
2014, as the BEP commissioning scheduled to be conducted during the third
quarter is expected to affect mill output.

E.          
Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements, apart from
$3.8 million committed for standby letters of credit under our revolving credit
facility.

F.          
Tabular Disclosure of Contractual Obligations

The table below summarizes the Companys contractual
obligations (1)(4) as at December 31, 2014.

41

---

Payments due by period(in
      millions)MoreLess
    1-2
    3-5
    thanTotal
    than
      1 year
    years
    years
    5
      yearsLong-term debt
    $266.9
    $1.4
    $3.5
    $11.7
    $250.3Fixed-rate interest (2)
    $136.3
    $22.5
    $22.3
    $65.2
    $26.3Power purchase rights (3)
    $128.8
    $20.3
    $20.4
    $65.4
    $22.7Total
    $532.0
    $44.2
    $46.2
    $142.3
    $299.3


| | (1) | Contractual obligations are stated as undiscounted
      amounts and are agreements related to debt, leases and enforceable
      agreements to purchase goods or services on specified terms but do not
      include reforestation obligations, accounts payable in the ordinary course
      of business or contingent amounts payable.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Based on annual interest of US$17.9 million converted at
      a rate of US$0.8620/C$1.00.                                                                                                                                                                                                                                                
| | (3) | Does not include anticipated revenues from the sale of
      power supplied under the power purchase rights.                                                                                                                                                                                                                              
| | (4) | Our net pension liability of $2.9 million is not included
      as we are uncertain about the timing and amount of
  liability.                                                                                                                                                                                                           

G.          
Safe Harbor

See Special Note Regarding Forward-Looking Statements.

ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.          
Directors and Officers

The following table sets forth certain information with respect
to our directors and executive officers.

|                           |     |  | **Years
      of** |  |                                                      
|-------------------------- | --- |  | ------------------ |  | -----------------------------------------------------
|                           |     |  | **Industry**       |  |                                                      
|Name                       | Age |  | Experience         |  | Position                                             
|James B. Millar            | 74  |  | 52                 |  | Co-Chairman and
      Director                       
|H. MacKenzie Millar        | 68  |  | 45                 |  | Co-Chairman and Director                             
|J. Craig Armstrong         | 63  |  | 41                 |  | President, Chief
      Executive Officer and Director
|Carol Cotton, CA           | 57  |  | 27                 |  | Senior Vice- President                               
|Ronald J. Reis, PEng       | 61  |  | 40                 |  | Senior Vice-
      President, Pulp                   
|David Anderson, MBA        | 41  |  | 18                 |  | Vice-President, Finance &
      Business Development 
|Stefan Demharter           | 53  |  | 32                 |  | Vice-President,
      Wood Products                  
|Brian McConkey             | 50  |  | 26                 |  | Vice-President, Human Resources                      
|Robert J. Turner, QC (2)   | 68  |  |                    |  | Secretary,
      General Counsel and Director        
|Gordon J. Clanachan (1)(3) | 60  |  |                    |  | Director, Audit Committee Chair                      
|Donald R. Ching (1)(2)(3)  | 73  |  |                    |  | Director                                             
|W. Kenneth Davidson (3)    | 64  |  |                    |  | Director                                             
|Douglas G. Hall (1)(2)(3)  | 65  |  |                    |  | Director                                             

| | (1) | Member of Audit Committee                  
| | --- | -------------------------------------------
| | (2) | Member of Executive Compensation Committee 
| | (3) | Member of Independent Directors
  Committee

42

---

James B. Millar has served as our Co-Chairman of
the Board and Director since July 2010, and had previously served as Chairman of
the Board and a Director since September 1997. Mr. Millar joined the family
business on a full-time basis in 1963, working in the construction and forest
products divisions of our parent, Industries. Mr. Millar is a past president of
the Alberta Roadbuilders Association and served on the board of trustees of the
University of Alberta Hospitals Foundation. Mr. Millar has a B.Sc. in Civil
Engineering from the University of Alberta. Mr. Millar is the brother of H.
MacKenzie Millar.

H. MacKenzie Millar has served as our Co-Chairman
of the Board and Director since July 2010, and had previously served as
President and Chief Executive Officer and a Director since September 1997. Mr.
Millar joined the family business on a full-time basis in 1970. Mr. Millar is a
past president of the Alberta Forest Products Association and has served on the
boards of Forintek Canada, Canadian Wood Council, Alberta Research Council and
the Forest Sector Advisory Council to the Government of Canada. In 2010, Mr.
Millar was awarded a lifetime honorary membership in the Alberta Forest Products
Association. Mr. Millar has Bachelor of Arts and Bachelor of Commerce degrees
from the University of Alberta and has served on the Business Advisory Council
to the Faculty of Business of the University of Alberta. Mr. Millar is the
brother of James B. Millar.

J. Craig Armstrong has served as President, Chief
Executive Officer and Director since July 2010. Mr. Armstrong had previously
served as Executive Vice-President since July 1998. Prior to this, Mr. Armstrong
had served as our Senior Vice-President, Marketing, since September 1997. Mr.
Armstrong joined Industries in 1987 as Director of Sales and Marketing and was
appointed that companys Senior Vice-President, Marketing, in 1994. Prior to
1987, Mr. Armstrong spent 13years with other forest products companies. Mr.
Armstrong has a Bachelor of Commerce degree from the University of
Saskatchewan.

Carol Cotton, CA, was appointed Senior
Vice-President in April 2002. Prior to this, Ms. Cotton had served as our Senior
Vice-President and Chief Financial Officer since September 1997. Ms. Cotton
joined Industries in 1988 as Vice-President, Finance, and was appointed Senior
Vice-President and Chief Financial Officer in 1996. Ms. Cotton has been a member
of the Institute of Chartered Accountants of Alberta since 1982 and, prior to
1988, she was a manager with Coopers & Lybrand, chartered accountants. Ms.
Cotton has a Bachelor of Commerce degree from the University of Alberta.

Ronald J. Reis, PEng, has served as Senior
Vice-President, Pulp, since 2006. Prior to this, Mr. Reis had served as our
Vice-President, Engineering and Technology, since September 1997. Mr. Reis
joined Industries in 1987 as Corporate Technical Director and was appointed Vice
President, Engineering and Technology in 1992. Prior to 1987, Mr. Reis spent 12
years with another forest products company. Mr. Reis has a Chemical Engineering
degree from Lakehead University.

David Anderson, MBA,has served as
Vice-President, Finance and Business Development, since April 2014. Prior to
this, Mr. Anderson had served as Manager, Lumber Sales, and Manager, Pulp Sales,
since joining Millar Western in 2005, and had previously held positions in
another forest products company. Mr. Anderson holds a Bachelor of Science in
Forestry degree and a Masters in Business Administration degree.

Stefan Demharterhas served as Vice-President,
Wood Products since July 2012. Prior to this, Mr. Demharter had served as
General Manager, Wood Products, since September 2004. Mr. Demharter joined
Millar Western in 2001 as Sawmill Manager and previously held positions with
another forest products company.

Brian McConkeyhas served as Vice-President,
Human Resources, since July 2012. Prior to this, Mr. McConkey had served as
Director Human Resources since June 2001. Mr. McConkey joined Millar Western in
1999 as Manager, Human Resources, and was previously employed by another forest
products company. He has a Bachelor of Arts degree and a diploma in Human
Resource Management.

Robert J. Turner, QC, has served as our
Secretary, General Counsel and a Director since September 1997. Mr. Turner is
a Consultant of Dentons Canada LLP, a law firm. Mr. Turner has a
Bachelor of Commerce degree from the University of Calgary and a Bachelor of
Laws degree from the University of Alberta.

43

---

Gordon J. Clanachan, FCA, ICD.D,was
appointed a director in August 2014, and serves as the chair of our audit
committee. Previously President and CEO of RaiLink Ltd. and a Senior Manager of
Price Waterhouse, Mr. Clanachan has served on boards including Melcor
Developments Ltd., Chandos GP Corp., the Edmonton Pip Industry Pension Plan, the
University of Alberta and the Edmonton Regional Airports Authority. A graduate
of Glasgow University, Mr. Clanachan is a member of the Institute of Chartered
Accountants of Scotland, the Institute of Corporate Directors and the Canadian
Institute of Chartered Accountants, and has been designated a Fellow of
Chartered Accountants by the Institute of Chartered Accountants of Alberta.

Donald R. Ching was appointed a Director in
September 1997. Mr. Ching is an independent consultant and previously was
President and Chief Executive Officer of AREVA Resources Canada Inc., a uranium
mining company, from 2005 to 2007. From 1996 to 2004, Mr. Ching was President
and Chief Executive Officer of SaskTel, a communications company, and, before
that, was President of Crown Investments Corporation of Saskatchewan, and a
managing partner in a law firm.

W. Kenneth Davidson, MBA, was appointed a
Director in September 1997. Mr. Davidson is an independent consultant, and was
previously Co-Chief Executive Officer of Gordon Capital Corporation, from 1996
to 2001. Before that, he spent 20 years with the Canadian Imperial Bank of
Commerce, serving as Executive Vice-President, Risk Management, for the last
five years of his term. Mr. Davidson holds Bachelor of Science degrees in
Mathematics and Business, both from Concordia University, and a Masters in
Business Administration degree from McMaster University. Mr. Davidson also
serves as a director of Vermillion Energy Inc.

Douglas G. Hall was appointed a Director in March
1999. Mr. Hall, a corporate director, was a Managing Director of RBC Dominion
Securities for 25 years. Mr. Hall has a Masters in Business Administration
degree from the University of Western Ontario and a Bachelor of Arts degree from
Queens University and is a Chartered Financial Analyst. Mr. Hall also serves as
a director of Pattern Energy Group, NexC Partners, Purpose Investments,
Stanfield's and
Southwest Properties.

Certain of our directors and officers are also directors and
officers of Industries and are therefore in positions involving possible
conflicts of interest. Specifically, James B. Millar, Co-Chairman and a
Director, is also Chairman, Chief Executive Officer and a Director of
Industries; H. MacKenzie Millar, Co-Chairman and a Director, is also the
President and a Director of Industries; J. Craig Armstrong, President and Chief
Executive Officer and a Director, is also Executive Vice-President of
Industries; Carol Cotton, Senior Vice-President, is also Senior Vice-President
and Chief Financial Officer of Industries, and Robert J. Turner, Secretary,
General Counsel and a Director, is also Secretary and General Counsel of
Industries. Our directors and officers are subject to fiduciary obligations to
act in our best interests. Individuals who are directors and officers of both
Millar Western and Industries have agreed with us that they will dedicate a
substantial majority of their time to us in order to perform their duties as our
directors and officers.

B.          
Compensation

Executive officers are appointed annually and serve at the
discretion of the Board of Directors. The aggregate amount of compensation we
paid to all directors and officers as a group, for services in all capacities in
2014, was $6.0 million.

Our policy provides that each non-employee director is entitled
to receive an annual fee of $22,000 and a fee of $1,500 for each board or
committee meeting attended. The chair of the Audit Committee of the Board of
Directors is entitled to an additional $10,000 per annum, and the chair of each
other committee is entitled to an additional fee of $5,000 per annum. The total
compensation paid to non-employee directors for the year ended December 31,
2014, was $0.1 million.

We do not have a stock incentive plan and have never granted
stock appreciation rights to any of our directors, officers or employees. We
maintain a defined contribution pension plan for all of our employees. The
aggregate amount that we contributed to the pension plan on behalf of the
employees in 2014 was $2.7 million, of which $0.1 million represented
contributions on behalf of our officers. All of our employees are entitled to
participate on a voluntary basis in a retirement savings plan, or RSP, under
which we match each employees RSP contribution up to a fixed amount. The
aggregate amount of matching RSP contributions paid by us in 2014 was $1.0
million, of which less than $12,000 represented matching contributions on behalf
of our officers.

44

---

On January 1, 2000, we established a supplementary defined
benefit pension plan for our executives and certain key employees. Under this
plan, participants will be entitled to a target level of retirement benefits in
combination with the Canada Pension Plan and our other Registered Pension Plans.
The aggregate amount that we contributed to the supplementary pension plan on
behalf of the participants was $1.0 million in 2014.

Employee Profit Sharing Plan

All full-time employees participate in a profit sharing plan
that distributes to employees on an annual basis a percentage of earnings before
income taxes and unusual items, such as unrealized exchange gains or losses on
debt. The percentage of such earnings set aside for distribution under the
employee profit sharing plan is reviewed annually. For the years ended December
31, 2014, 2013, 2012, 2011and 2010, the amount of such earnings set aside for
distribution was $2.5 million, $3.2 million, nil, $0.4 million, and $1.1
million, respectively.

C.          
Board Practices

In accordance with our articles of incorporation and by-laws,
our Board of Directors may consist of up to ten directors, and our current Board
of Directors consists of eight directors. Each director holds office until the
next annual general shareholders meeting or until the election of his or her
successor, unless the director resigns or the office becomes vacant by reason of
the Directors death, removal or other cause. The start of each directors and
executive officers term of service is set forth in Item 6(A) above. No
directors have service contracts providing for benefits upon termination of
employment.

The Audit Committee of the Board of Directors currently
consists of three independent directors: Gordon J. Clanachan, Donald R. Ching
and Douglas G. Hall. The Audit Committee is responsible for reviewing our
financial statements and our internal controls, reviewing the work of our
independent auditors, monitoring other financial matters and making
recommendations for approval in respect thereof to the Board of Directors.

The Executive Compensation Committee currently consists of
three members: Douglas G. Hall, Donald R. Ching and Robert J. Turner. The
Executive Compensation Committee is responsible for reviewing compensation
levels of senior management and other executive compensation matters.

D.          
Employees

As of December 31, 2014, we had 653 full-time employees, all of
whom were non-unionized.

|Location                                 | Employees(1)
|---------------------------------------- | ------------
|Corporate office (Edmonton)              | 54          
|Whitecourt pulp mill                     | 129         
|Whitecourt sawmill                       | 279         
|Boyle sawmill                            | 87          
|Fox Creek sawmill                        | 72          
|Woodlands (Whitecourt, Fox Creek, Boyle) | 32          
|Total                                    | 653         

(1) Does not include part-time or seasonal
employees.

In addition, we employed independent contractors to provide
logging, trucking, road building and forest regeneration services.

45

---

E.          
Share Ownership

As the Company is 100% owned by Industries, none of the
individuals described above owns shares in the Company or has options to
purchase any shares.

ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS

A.          
Principal Shareholder

Industries holds, directly and of record, 15,000,002 common
shares, representing 100% of our outstanding common shares. Industries is a
company with operations in chemicals and other businesses. Industries is owned
100% by Hualkeith Investments Ltd., or Hualkeith, a corporation indirectly owned
100% by James B. Millar, H. MacKenzie Millar and other members of the Millar
family. James B. Millar and H. MacKenzie Millar together control 55.6% of the
outstanding equity of Hualkeith. The registered office of Industries is located
at 2900 Manulife Place, 10180 -101 Street, Edmonton, Alberta, T5J 3V5, and its
executive offices are located at 16640 -111 Avenue, Edmonton, Alberta, T5M 2S5.

There are no arrangements known to us that may at a subsequent
date result in a change in control of us.

By virtue of its ownership of all of our issued and outstanding
common shares, Industries acting alone can elect our entire board of directors
and can approve any transaction requiring shareholder approval.

B.          
Related Party Transactions

On May 13, 1998, we, Industries, and certain of our executive
officers entered into certain agreements, covering non-competition, trademark
licensing, corporate services, and magnesium sulphate supply. Management
believes that such agreements are equivalent to those that could have been
negotiated with unaffiliated, third parties.

Services Provided by Directors

Robert J. Turner, Secretary, General Counsel and a Director of
Millar Western, is a consultant at the law firm of Dentons LLP (formerly Fraser
Milner Casgrain LLP), which received fees of $165,000, $226,000 and $210,000 for
general corporate legal advice provided to us in 2014, 2013 and 2012,
respectively. Such compensation did not exceed 5% of the revenues of Dentons
during 2014, 2013 or 2012.

Indebtedness of Directors and Officers

There is no indebtedness outstanding to us by our directors or
executive officers.

C.          
Interests of experts and counsel

Not applicable.

ITEM 8: FINANCIAL INFORMATION

A.          
Consolidated Statements and Other Financial Information

See Item 17: Financial Statements.

B.          
Significant Changes

Not applicable.

46

---

ITEM 9: THE OFFER AND LISTING

A.          
Offer and Listing Details

There is no organized trading market, inside or outside the
United States, for the Notes covered by this annual report.

B.          
Plan of Distribution

Not applicable.

C.          
Markets

The Notes covered by this annual report are not listed on any
stock exchange or other regulated market.

D.          
Selling Shareholders

Not applicable.

E.          
Dilution

Not applicable.

F.          
Expenses of the Issue

Not applicable.

ITEM 10: ADDITIONAL INFORMATION

A.          
Share Capital

Not applicable.

B.          
Memorandum and Articles of Association

There are no provisions of the Companys articles or other
constituent documents that describe the Companys objects and purposes.

Under the Business Corporations Act (Alberta), a director may
vote on a proposal, arrangement or contract in which he or she is interested, if
the contract or transaction is:

| | a. | an arrangement by way of security for money lent to or
      obligations undertaken by that director, or by a body corporate in which
      he has an interest, for the benefit of the Company or an
  affiliate,
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                  
| | b. | a contract or transaction relating primarily to that
      directors remuneration as a director, officer, employee or agent of the
      Company or an affiliate,                                               
| |    |                                                                                                                                                                                                                  
| | c. | a contract or transaction for indemnity or liability
      insurance, or                                                                                                                                         
| |    |                                                                                                                                                                                                                  
| | d. | a contract or transaction with an
  affiliate.                                                                                                                                                                   

47

---

In the absence of an independent quorum, a director may not
vote compensation to himself or herself. The directors may, without
authorization of the shareholders,

| | a. | borrow money on the credit of the Company,                                                                                                                                                         
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                    
| | b. | issue, reissue, sell or pledge debt obligations of the
      Company,                                                                                                                              
| |    |                                                                                                                                                                                                    
| | c. | subject to certain conditions, give a guarantee on behalf
      of the Company to secure performance of an obligation of any person,
      and                                                     
| |    |                                                                                                                                                                                                    
| | d. | mortgage, hypothecate, pledge or otherwise create a
      security interest in all or any property of the Company, owned or
      subsequently acquired, to secure any obligation of the
  Company.

Such borrowing powers can only be varied by a special
resolution of the shareholders (not less than two-thirds of the votes).

The Companys directors are not subject to any age limit
requirement, and no shares are required for directors qualification.

The following are the rights, preferences and restrictions
attaching to the Companys common shares:

Dividend Rights. The Board of Directors may from time to
time declare dividends payable to shareholders according to their respective
rights and interests in the Company. Dividends may be paid, in money or property
or by issuing fully paid shares of the Company.

Subject to the rights of the holders of any shares of the
Company having rights or privileges superior to the common shares with respect
to any priority in the payment of dividends:

| | a. | each holder of a common share shall be entitled to
      receive dividends as and when declared and payable, and                            
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                             
| | b. | dividends may be declared and paid on the common shares
      to the complete exclusion of the other classes of shares of the
      Company.

Rights to Share in Profits or Surplus on Liquidation.
Subject to the rights of the holders of any shares of the Company having rights
or privileges superior to the common shares with respect to priority of
distribution on a liquidation, dissolution or winding-up, each holder of a
common share shall be entitled to receive, on a proportionate basis, the
remaining property of the Company in the event of a liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary. Any remaining
property shall be paid or distributed in equivalent amount per share on each
outstanding common share and any shares of the Company whose entitlement on a
liquidation, dissolution or winding-up ranks equally with the common shares.

Rights of Retraction. Subject to holders of shares of a
class or series right to vote separately as a class or series, a special
resolution is required to change the rights of holders of shares of any class or
series of shares of the Company. These are no more significant than required by
law.

Shareholders Meeting. Subject to the Business
Corporations Act (Alberta), the annual meeting of shareholders is held at such
time, and on such day in each year, and at such place or places as the board of
directors, the chairman of the board, the managing director, or the president
may from time to time determine.

The board of directors has the power to call a special meeting
of shareholders at any time.

48

---

The only persons entitled to be present at a meeting of
shareholders shall be those entitled to vote thereat, the directors and auditors
of the Company, and others who, although not entitled to vote, are entitled or
required under any provision of the Business Corporations Act (Alberta) or
articles or by-laws to be present at the meeting. Any other person may be
admitted only by invitation of the chairman of the meeting, or with the consent
of the meeting.

There are currently no limitations on the right of foreign or
non-resident owners of Notes to hold or vote such securities imposed by Canadian
law or the Companys articles or other constituent documents.

There are no provisions of the Companys articles or other
constituent documents that would delay, defer or prevent a change of control and
that would operate only with respect to a merger, acquisition or corporate
restructuring involving the Company.

There are no bylaw provisions governing the ownership threshold
above which shareholder ownership must be disclosed.

The Companys articles and other constituent documents do not
contain provisions governing changes in capital that are more stringent than
required by law.

C.          
Material Contracts

Not applicable.

D.          
Exchange Controls

There are currently no limitations imposed by Canadian laws,
decrees or regulations that restrict the import or export of capital, including
foreign exchange controls, or that affect the remittance of dividends, and
interest or other payments to nonresident holders of the Companys securities.

E.          
Taxation

Not applicable.

F.          
Dividends and Paying Agents

Not applicable.

G.          
Statements by Experts

Not applicable.

H.          
Documents on Display

The Companys registration statement on Form F-4, its annual
and periodic reports and all other filings made with the U.S. Securities and
Exchange Commission may be inspected and copied at the Commissions public
reference facilities in Room 5080, 100F Street, N.E., Washington, D.C., 20549,
and at the regional offices of the Commission. The Commission may be reached at
1-800-SEC-0330 for further information on the public reference rooms. These
Commission filings are also available to the public from commercial document
retrieval services. Reports furnished by the Company with the Commission since
November 26, 2002, are also maintained electronically on the Commissions
website, www.sec.gov.

I.          
Subsidiary Information

49

---

Not applicable.

ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

A.          
Commodity Prices

The markets for pulp and lumber are highly cyclical and
affected by such factors as global economic conditions, world-wide demand for
pulp and paper, residential and commercial construction in North America and
Asia, and changes in industry production capacity and inventory levels. All
these factors have a significant impact on selling prices for our products and
profitability. The following outlines the sensitivity of operating earnings over
the course of a year to changes in commodity prices.

Changes in realized
    
    
    Estimated impact onprice(1)
    
    
    operating earnings(2)(millions)Pulp (3)
    
    US$50/admt
    
    $
    16.0Lumber (4)
    
    US$50/mfbm
    
    $
    26.0


| | (1) | Assumed exchange rate of US$1.00 = C$1.00.
| | --- | ------------------------------------------
| | (2) | Before impact of profit sharing plan.     
| | (3) | Based on annual shipments of 320 madmt.   
| | (4) | Based on annual shipments of 520
mmfbm.   

B.          
Foreign Exchange

We sell the majority of our products (67% of 2014 revenue, 66%
of 2013 revenue and 67% of 2012 revenue) in U.S. dollars. Consequently, the
value of the Canadian dollar versus the U.S. dollar has a major impact on our
revenue and profitability. The value of the Canadian dollar was US$0.8620 at
December 31, 2014, compared to US$0.9402 at December 31, 2013, and US$1.0051 at
December 31, 2012.

The impact on earnings of fluctuations in currency rates is
partially offset by the corresponding fluctuations in our debt-service payments,
substantially all of which are denominated in U.S. dollars. To further reduce
the impact on earnings of fluctuations in currency rates, we periodically enter
into foreign-exchange forward contracts. We do not use any instruments to manage
our exposure to changes in foreign-currency rates with respect to the principal
value of our U.S.-dollar-denominated debt. We do not hold or issue
foreign-currency financial instruments for trading purposes. Based on sales
revenue for the year ended December 31, 2014, the effect of a US$0.01 change in
the value of the Canadian dollar over the course of the year would affect
operating earnings by approximately $2.5 million.

C.          
Interest Rates

The interest rate on the majority of our existing long-term
debt, specifically the US$210.0 million aggregate principal amount of 8.50%
Senior Notes, due 2021, as well as our two power purchase rights loans are all
fixed. The interest rate on our existing revolving credit facility varies with
the prevailing prime rate of the facilitys provider. We do not currently use
any derivative instruments to manage our exposure to changes in market interest
rates.

ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES

Not applicable.

50

---

PART II

ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

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

Not applicable.

ITEM 15: CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Our principal
executive officer and principal financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this report, have concluded that, as at such date, our disclosure
controls and procedures were effective in timely alerting them to material
information relating to us required to be disclosed in our reports filed or
submitted under the Exchange Act. Notwithstanding the foregoing, there can be no
assurance that our disclosure controls and procedures will detect or uncover all
failures within our company to disclose all material information otherwise
required to be set forth in our periodic reports.

Managements Annual Report on Internal Control Over
Financial Reporting.Our management is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with International
Financial Reporting Standards as issued by the International Accounting
Standards Board. Management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2014, based on the criteria set
forth in Internal Control - Integrated Framework (1992)issued by
the Committee of Sponsoring Organizations of the Treadway Commission. This
evaluation included review of the documentation of controls, evaluation of the
design effectiveness of controls, testing of the operating effectiveness of
controls and a conclusion on this evaluation. Based on this evaluation,
management has concluded that our internal control over financial reporting was
effective as of December 31, 2014.

Attestation Report of the Registered Public Accounting Firm.This annual report does not include a report of our independent auditor
regarding our internal control over financial reporting due to our not being an
accelerated filer or a large accelerated filer, as such terms are defined in
Rule 12b-2 under the Exchange Act.

Changes in Internal Control Over Financial Reporting.
There was no change in our internal control over financial reporting that
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.

Our management, including our principal executive officer and
principal financial officer, does not expect that our disclosure controls and
procedures or internal controls and procedures will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate.

51

---

Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.

ITEM 16

A.          
AUDIT COMMITTEE FINANCIAL EXPERT

Gordon J. Clanachan is an audit committee financial expert and
is independent (as defined under the rules and regulations of the New York Stock
Exchange).

The Securities and Exchange Commission has indicated that the
designation of a person as an audit committee financial expert does not make
such person an expert for any purpose, impose on such person any duties,
obligations or liability that are greater than those imposed on such person as a
member of the Companys Audit Committee and Board of Directors in the absence of
such designation and does not affect the duties, obligations or liability of any
other member of the Audit Committee or the Board of Directors.

B.          
CODE OF ETHICS

We have adopted a code of ethics that applies to our principal executive
officer,  principal financial officer,  principal accounting officer,
and persons fulfilling similar functions. The code of ethics is filed as an
exhibit to this annual report for the year ended December 31, 2014. A copy of
the code of ethics will be provided to any person without charge upon such
persons request in writing at the address set forth on the cover of this annual
report.

C.          
PRINCIPAL ACCOUNTANT FEES AND SERVICES

We paid the following fees to PricewaterhouseCoopers LLP in
each of the years ended December 31, 2014, 2013 and 2012, for professional
services:

2014
    
    
    2013
    
    
    2012(in thousands)Audit Fees (1)
    $
    259.3
    
    $
    253.0
    
    $
    279.2Audit-Related Fees
    $
    -
    
    $
    -
    
    $
    -Tax Fees (2)
    $
    24.6
    
    $
    18.7
    
    $
    25.1All Other Fees (3)
    $
    97.8
    
    $
    123.0
    
    $
    28.0$
    381.7
    
    $
    394.7
    
    $
    332.3


| | (1) | Audit fees comprise professional services for the audit
      of our annual financial statements, review of our interim financial
      statements, and services normally provided in connection with our
      statutory and regulatory filings.         
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Tax fees comprise amounts paid for tax compliance and
      advisory services.                                                                                                                                                                            
| | (3) | All other fees comprise amounts paid for the audit of
      expenditures under the Alberta governments Forest Resource Improvement
      Program, consultations on accounting developments and the accounting for
      potential corporate transactions.

Our Audit Committee approved 100% of the fees paid to
PricewaterhouseCoopers LLP in 2014, 2013 and 2012 and has a pre-approval policy
with respect to permitted non-audit services. Under this policy, subject to
certain conditions, specified audit-related services, tax compliance, audit
services and tax services may be presented to the Audit Committee for
pre-approval as a category of services on an annual or project basis. On an
annual basis, management is required to update the Audit Committee in respect of
the actual amount of fees in comparison to the pre-approved estimate. All
non-audit services not otherwise pre-approved by the Audit Committee must be
pre-approved by the Audit Committee on an individual basis.

52

---

No audit-related fees, tax fees or other non-audit fees were
approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01
of Regulation S-X.

D.          
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not Applicable.

E.          
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Not Applicable.

F.          
CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT

Not Applicable.

G.          
CORPORATE GOVERNANCE

Not Applicable.

H.          
MINE SAFETY DISCLOSURE

Not Applicable.

PART III

ITEM 17: FINANCIAL STATEMENTS

The Auditors Report and Financial Statements for the Company
are attached hereto as itemized under Item 19(a) and are incorporated herein by
reference. Such Financial Statements have been prepared on the basis of
International Financial Reporting Standards as issued by the International
Accounting Standards Board.

ITEM 18: FINANCIAL STATEMENTS

Not applicable. See Item 17.

ITEM 19: EXHIBITS

(a)      Financial Statements

(i) Independent Auditors Report.

(ii) Statements of Financial Position
as at December 31, 2013 and 2014.

(iii) Statements of Operations and
Comprehensive Income (Loss) for the years ended December 31, 2012, 2013 and
2014.

(iv) Statements of Changes in Equity
for the years ended December 31, 2012, 2013 and 2014. (v) Statements of Cash
Flows for the years ended December 31, 2012, 2013 and 2014.

(vi) Notes to the Financial Statements.

(vii) Financial Statement Schedules are
omitted because they are not applicable, not required or because the required
information is included in the Financial Statements filed herein.

(b)      Exhibits

53

---

|Exhibit   | Description of Exhibit                                                                                                                                                                                                                                  
|--------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number    |                                                                                                                                                                                                                                                         
|1.1*      | Certificate, Articles of Incorporation and Articles of
      Amendment.                                                                                                                                                                                 
|1.2*      | By-laws.                                                                                                                                                                                                                                                
|2.1***    | Indenture dated as of April 7, 2011, among the Company,
      The Bank of New York Mellon, as trustee, and BNY Trust Company of Canada
      as co-trustee.                                                                                             
|2.2***    | Registration Rights Agreement, dated as of April 7, 2011,
      among the Company and Goldman, Sachs & Co., HSBC Securities & Co.,
      HSBC Securities (USA) Inc. and KKR Capital Markets LLC.                                                        
|2.3***    | Form of Exchange Note (included in Exhibit 2.1).                                                                                                                                                                                                        
|2.4***    | Credit Facility Letter dated as of December 29, 2006,
      from HSBC Bank Canada to the Registrant.                                                                                                                                                    
|2.5***    | First Supplemental Credit Facility Letter dated as of
      September 12, 2007, from HSBC Bank Canada to the Registrant.                                                                                                                                
|2.6***    | Second Supplemental Credit Facility Letter dated as of
      March 26, 2008, from HSBC Bank Canada to the Registrant.                                                                                                                                   
|2.7***    | Third Supplemental Credit Facility Letter dated as of
      April 22, 2008, from HSBC Bank Canada to the Registrant.                                                                                                                                    
|2.8***    | Fourth Supplemental Credit Facility Letter dated as of
      August 13, 2009, from HSBC Bank Canada to the Registrant.                                                                                                                                  
|2.9***    | Fifth Supplemental Credit Facility Letter dated as of May
      25, 2010, from HSBC Bank Canada to the Registrant.                                                                                                                                      
|2.10***   | Sixth Supplemental Credit Facility Letter dated as of
      September 17, 2010, from HSBC Bank Canada to the Registrant.                                                                                                                                
|2.11***   | Seventh Supplemental Credit Facility Letter dated as of
      April 6, 2011, from HSBC Bank Canada to the Registrant.                                                                                                                                   
|2.12****  | Credit Facility Letter dated as of April 16, 2012, from
      HSBC Bank Canada to the Registrant.                                                                                                                                                       
|2.13****  | First Supplemental Credit Facility Letter dated as of
      August 27, 2012, from HSBC Bank Canada to the Registrant.                                                                                                                                   
|2.14     | Second Supplemental Credit Facility Letter dated as of
    June 19, 2014, from HSBC Bank Canada to the Registrant                                                                                                                                       
|2.15***   | SD Extension Loan Agreement dated as of June 5, 2006,
      between the Registrant and CP Energy Marketing LP (formerly known as EPCOR
      Merchant and Capital LP).                                                                                  
|2.16***   | Tax Loan Agreement dated as of February 22, 2007, between
      the Registrant and CP Energy Marketing LP (formerly known as EPCOR
      Merchant and Capital LP).                                                                                      
|2.17***   | Letter of Understanding dated June 5, 2006, among the
      Registrant, CP Energy Marketing LP (formerly known as EPCOR Merchant and
      Capital LP) and Capital Power PPA Management Inc. (formerly known as EPCOR
      PPA Management Inc.).       
|4.1*      | Forest Management Agreement dated May 14, 1997, between
      the Minister of Environmental Protection of Alberta and the Registrant.                                                                                                                   
|4.2*      | Corporate Services Agreement dated May 13, 1998, between
      the Registrant and Millar Western Industries Ltd.                                                                                                                                        
|4.3*      | Non-Competition Agreement dated as of May 13, 1998, among
      the Registrant, Millar Western Industries Ltd., James B. Millar and H.
      MacKenzie Millar.                                                                                          
|4.4***    | Trademark Licensing Agreement dated May 13, 1998, between
      the Registrant and Millar Western Industries Ltd.                                                                                                                                       
|4.5***    | Fox Creek Site Land Lease dated as of December 10, 2010,
      between the Registrant and the Province of Alberta.                                                                                                                                      
|4.6**     | Power Syndicate Agreement (Sundance C) dated January 1,
      2001, among the Registrant, Capital Power Corporation (formerly known as
      EPCOR Utilities Inc.) and certain industry participants.                                                   
|4.7***    | Power Purchase Arrangement (Sundance C).                                                                                                                                                                                                                
|4.8***    | Millar Western PPI Swap and Purchase Agreement dated as
      of May 19, 2006, among the Registrant, CP Energy Marketing LP (formerly
      EPCOR Merchant and Capital LP) and Capital Power Corporation (formerly
      known as EPCOR Utilities Inc.).
|11.1***** | Code of Ethics.                                                                                                                                                                                                                                         
|12.1     | Certification of the Chief Executive Officer, J. Craig
      Armstrong, required by 17 CFR 240.15d-14(a).                                                                                                                                               
|12.2     | Certification of the Vice-President, Finance and Business
  Development, David Anderson, required by 17 CFR 240.15d-14(a).                                                                                                                              

54

---

|13.1 | Certification of the Chief Executive Officer, J. Craig
      Armstrong, required by 17 CFR 240.15d-14(b) and 18 U.S.C. Section 1350.                          
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|13.2 | Certification of the Vice-President Finance and Business
      Development, David Anderson, required by 17 CFR 240.15d-14(b) and 18
      U.S.C. Section 1350.

|*     | Incorporated by reference from the Registrants Form F-4
      filed with the Securities and Exchange Commission (Commission File No.
      333-8960).                    
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**    | Incorporated by reference from the Registrants Form 20-F
      filed with the Securities and Exchange Commission on June 4, 2002
      (Commission File No. 333-08960).  
|***   | Incorporated by reference from the Registrants Form F-4
      filed with the Securities and Exchange Commission (Commission File No.
      333-179957).                  
|****  | Incorporated by reference from the Registrants Form 20-F
      filed with the Securities and Exchange Commission on March 5, 2014
      (Commission File No. 333-112898).
|***** | Incorporated by reference from the Registrants Form 20-F
      filed with the Securities and Exchange Commission on March 5, 2013
      (Commission File No. 333-112898).
|     | Filed herewith.                                                                                                                                                           

SIGNATURE

The registrant hereby certifies that it meets all
of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.

MILLAR WESTERN FOREST PRODUCTS LTD.

|Dated: March 4, 2015 | By: | /s/
      David Anderson                              
|-------------------- | --- | ------------------------------------------------------
|                     |     | David Anderson                                        
|                     |     | Vice-President, Finance and Business
      Development

55

---







Millar Western ForestProducts Ltd.

Financial StatementsDecember 31, 2014 and 2013













---

March 4, 2015





Independent Auditors Report

To the Shareholder ofMillar Western Forest
Products Ltd.

We have audited the accompanying financial statements of Millar
Western Forest Products Ltd., which comprise the statements of financial
position as at December 31, 2014 and 2013 and the statements of operations and
comprehensive (loss) income, changes in equity and cash flows for each of the
three years in the period ended December 31, 2014 and the related
notes, which comprise a summary of significant accounting policies and other
explanatory information.

Managements responsibility for the financial statementsManagement is responsible for the preparation and fair presentation of
these financial statements in accordance with International Financial Reporting
Standards as issued by the International Accounting Standards Board, and for
such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement,
whether due to fraud or error.

Auditors responsibilityOur responsibility is to
express an opinion on these 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 comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free from material misstatement. Canadian
generally accepted auditing standards also require that we comply with ethical
requirements.

An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditors judgment, including the assessment
of the risks of material misstatement of the financial statements, whether due
to fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the entitys preparation and fair presentation of
the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entitys internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating
the overall presentation of the financial statements.

We believe that the audit evidence we have obtained in our
audits is sufficient and appropriate to provide a basis for our audit opinion.

---

OpinionIn our opinion, the financial statements
present fairly, in all material respects, the financial position of Millar
Western Forest Products Ltd. as at December 31, 2014 and 2013 and its financial
performance and its cash flows for each of the three years in the period ended
December 31, 2014, in accordance with International Financial Reporting
Standards as issued by the International Accounting Standards Board.

(signed) PricewaterhouseCoopers LLP

Chartered Accountants

Edmonton, Alberta

---

|Millar Western Forest Products Ltd.         
|--------------------------------------------
|Statement of Financial Position             
|As at December
      31                     
|                                            
|(expressed in thousands of Canadian dollars)

|                                                   |  | 2014    |  |  | 2013    | 
|-------------------------------------------------- |  | ------- |  |  | ------- | 
|                                                   |  | $       |  |  | $       | 
|Assets                                             |  |         |  |  |         | 
|Current assets                                     |  |         |  |  |         | 
|Cash and cash equivalents (note 5)                 |  | 47,425  |  |  | 47,219  | 
|Restricted cash (note 5)                           |  | -       |  |  | 7,977   | 
|Accounts and other receivables (note 6)            |  | 40,617  |  |  | 37,981  | 
|Inventories (note 7)                               |  | 89,216  |  |  | 75,562  | 
|Prepaid expenses                                   |  | 12,768  |  |  | 9,868   | 
|                                                   |  | 190,026 |  |  | 178,607 | 
|Property, plant and equipment(note
      8)        |  | 192,606 |  |  | 175,033 | 
|Intangible assets(note 9)                          |  | 37,157  |  |  | 40,100  | 
|Other assets(note 10)                              |  | 323     |  |  | 2,534   | 
|                                                   |  | 420,112 |  |  | 396,274 | 
|                                                   |  |         |  |  |         | 
|Liabilities                                        |  |         |  |  |         | 
|Current liabilities                                |  |         |  |  |         | 
|Accounts payable and accrued liabilities (note 12) |  | 54,204  |  |  | 52,227  | 
|Financial liabilities  borrowings (note
      13) |  | 1,362   |  |  | 2,810   | 
|Reforestation obligations (note 14)                |  | 4,529   |  |  | 4,257   | 
|                                                   |  | 60,095  |  |  | 59,294  | 
|Financial liabilities borrowings (note 13)        |  | 262,399 |  |  | 237,371 | 
|Asset retirement obligations(note
      14)        |  | 2,004   |  |  | 1,217   | 
|Other obligations                                  |  | 23      |  |  | 103     | 
|Reforestation obligations(note 14)                 |  | 10,045  |  |  | 8,863   | 
|Deferred income taxes(note 19)                     |  | 13,189  |  |  | 9,429   | 
|Post-employment benefit obligation(note 20)        |  | 2,926   |  |  | 1,680   | 
|                                                   |  | 350,681 |  |  | 317,957 | 
|Shareholders Equity                               |  |         |  |  |         | 
|Share capital(note 15)                             |  | 65,500  |  |  | 65,500  | 
|Retained earnings                                  |  | 3,931   |  |  | 12,817  | 
|                                                   |  | 69,431  |  |  | 78,317  | 
|                                                   |  | 420,112 |  |  | 396,274 | 

Approved by the Board of Directors

|(signed) Gordon J. ClanachanDirector | (signed) J. Craig Armstrong Director
|-------------------------------------- | --------------------------------------

The accompanying notes are an integral part of these financial
statements.

---

Millar Western Forest Products Ltd.Statement of Changes in EquityFor the years ended December
31

(expressed in thousands of Canadian dollars)

|                                                                            |  | Share   |  |  | Retained |   |  | Total  |  
|--------------------------------------------------------------------------- |  | ------- |  |  | -------- | - |  | ------ | -
|                                                                            |  | capital |  |  | earnings |   |  | equity |  
|                                                                            |  | $       |  |  | $        |   |  | $      |  
|                                                                            |  |         |  |  |          |   |  |        |  
|Balance  January 1, 2012                                                   |  | 61,500  |  |  | 20,026   |   |  | 81,526 |  
|                                                                            |  |         |  |  |          |   |  |        |  
|Net loss for the year                                                       |  | -       |  |  | (8,259   | ) |  | (8,259 | )
|Acquisition of Chickadee Creek Energy Inc.                                  |  | -       |  |  | (330     | ) |  | (330   | )
|Remeasurement loss that will not be
      reclassified to net (loss) income |  | -       |  |  | (317     | ) |  | (317   | )
|Adjustment to stated capital                                                |  | 4,000   |  |  | (4,000   | ) |  | -      |  
|                                                                            |  |         |  |  |          |   |  |        |  
|Balance  December 31, 2012                                                 |  | 65,500  |  |  | 7,120    |   |  | 72,620 |  
|                                                                            |  |         |  |  |          |   |  |        |  
|Net income for the year                                                     |  | -       |  |  | 6,620    |   |  | 6,620  |  
|Remeasurement loss that will not be
      reclassified to net (loss) income |  | -       |  |  | 577      |   |  | 577    |  
|Dividends (note 15)                                                         |  | -       |  |  | (1,500   | ) |  | (1,500 | )
|                                                                            |  |         |  |  |          |   |  |        |  
|Balance  December 31, 2013                                                 |  | 65,500  |  |  | 12,817   |   |  | 78,317 |  
|                                                                            |  |         |  |  |          |   |  |        |  
|Net loss for the year                                                       |  | -       |  |  | (5,181   | ) |  | (5,181 | )
|Remeasurement gain that will not be
      reclassified to net (loss) income |  | -       |  |  | (1,455   | ) |  | (1,455 | )
|Dividends (note 15)                                                         |  | -       |  |  | (2,250   | ) |  | (2,250 | )
|                                                                            |  |         |  |  |          |   |  |        |  
|Balance  December 31, 2014                                                 |  | 65,500  |  |  | 3,931    |   |  | 69,431 |  

The accompanying notes are an integral part of these financial
statements.

---

Millar Western Forest Products Ltd.Statements of Operations and Comprehensive (Loss)
IncomeFor the years ended December 31

(expressed in thousands of Canadian dollars)

|                                                                                                                                                                  |  | 2014    |   |  | 2013    |   |  | 2012    |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|                                                                                                                                                                  |  | $       |   |  | $       |   |  | $       |  
|                                                                                                                                                                  |  |         |   |  |         |   |  |         |  
|Revenue                                                                                                                                                           |  | 405,123 |   |  | 382,938 |   |  | 332,401 |  
|                                                                                                                                                                  |  |         |   |  |         |   |  |         |  
|Cost of products sold (excluding
      depreciation andamortization)                                                                                              |  | 273,852 |   |  | 259,155 |   |  | 241,039 |  
|                                                                                                                                                                  |  |         |   |  |         |   |  |         |  
|Freight and other distribution costs                                                                                                                              |  | 59,767  |   |  | 53,438  |   |  | 53,222  |  
|                                                                                                                                                                  |  |         |   |  |         |   |  |         |  
|Depreciation and amortization                                                                                                                                     |  | 14,272  |   |  | 13,996  |   |  | 13,641  |  
|                                                                                                                                                                  |  |         |   |  |         |   |  |         |  
|General and administration                                                                                                                                        |  | 18,748  |   |  | 19,061  |   |  | 13,781  |  
|                                                                                                                                                                  |  |         |   |  |         |   |  |         |  
|Other (income) expenses(note 17)                                                                                                                                  |  | (2,679  | ) |  | (11,869 | ) |  | 7,650   |  
|                                                                                                                                                                  |  |         |   |  |         |   |  |         |  
|                                                                                                                                                                  |  | 363,960 |   |  | 333,781 |   |  | 329,333 |  
|                                                                                                                                                                  |  |         |   |  |         |   |  |         |  
|Operating earnings                                                                                                                                                |  | 41,163  |   |  | 49,157  |   |  | 3,068   |  
|                                                                                                                                                                  |  |         |   |  |         |   |  |         |  
|Foreign exchange (loss) gain on
      borrowings                                                                                                                  |  | (20,265 | ) |  | (14,425 | ) |  | 4,641   |  
|                                                                                                                                                                  |  |         |   |  |         |   |  |         |  
|Finance expenses(note 18)                                                                                                                                         |  | (22,086 | ) |  | (20,892 | ) |  | (20,425 | )
|                                                                                                                                                                  |  |         |   |  |         |   |  |         |  
|Net (loss) income before income taxes                                                                                                                             |  | (1,188  | ) |  | 13,840  |   |  | (12,716 | )
|                                                                                                                                                                  |  |         |   |  |         |   |  |         |  
|Income taxes expense (recovery)(note 19)                                                                                                                          |  | 3,993   |   |  | 7,220   |   |  | (4,457  | )
|                                                                                                                                                                  |  |         |   |  |         |   |  |         |  
|Net (loss) income for the year                                                                                                                                    |  | (5,181  | ) |  | 6,620   |   |  | (8,259  | )
|                                                                                                                                                                  |  |         |   |  |         |   |  |         |  
|Remeasurement (loss) gain that will not
      bereclassified
                to net (loss)
      income net of tax
      of **** $485 (2013 $192; 2012  $106) |  | (1,455  | ) |  | 577     |   |  | (317    | )
|                                                                                                                                                                  |  |         |   |  |         |   |  |         |  
|Comprehensive (loss) income for the year                                                                                                                          |  | (6,636  | ) |  | 7,197   |   |  | (8,576  | )

The accompanying notes are an integral part of these financial
statements.

---

Millar Western Forest Products Ltd.Statements of Cash Flows For the years ended December
31

(expressed in thousands of Canadian dollars)

|                                                                     |  | 2014    |   |  | 2013    |   |  | 2012    |  
|-------------------------------------------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|                                                                     |  | $       |   |  | $       |   |  | $       |  
|                                                                     |  |         |   |  |         |   |  |         |  
|Cash provided by (used in)                                           |  |         |   |  |         |   |  |         |  
|                                                                     |  |         |   |  |         |   |  |         |  
|Operating activities                                                 |  |         |   |  |         |   |  |         |  
|Net (loss) income for the year                                       |  | (5,181  | ) |  | 6,620   |   |  | (8,259  | )
|Adjustments for                                                      |  |         |   |  |         |   |  |         |  
|Finance expenses                                                     |  | 22,086  |   |  | 20,892  |   |  | 20,425  |  
|Depreciation and
      amortization                                  |  | 14,272  |   |  | 13,996  |   |  | 13,641  |  
|Deferred income tax expense (recovery)                               |  | 4,245   |   |  | 7,344   |   |  | (4,325  | )
|Unrealized
      exchange loss (gain) on borrowings                  |  | 20,265  |   |  | 14,425  |   |  | (4,641  | )
|Unrealized loss (gain) on derivative contracts                       |  | 2,074   |   |  | (6,970  | ) |  | 6,612   |  
|Reforestation
      expense                                          |  | 7,151   |   |  | 5,018   |   |  | 7,077   |  
|Loss
      (gain) on disposal of property, plant and equipment       |  | 49      |   |  | 832     |   |  | (45     | )
|Inventory
      valuation                                            |  | -       |   |  | -       |   |  | (1,963  | )
|Other                                                                |  | (117    | ) |  | (1,954  | ) |  | 120     |  
|Reforestation
      expenditures                                     |  | (6,466  | ) |  | (6,817  | ) |  | (7,256  | )
|                                                                     |  |         |   |  |         |   |  |         |  
|                                                                     |  | 58,378  |   |  | 53,386  |   |  | 21,386  |  
|Net change in non-cash working capital
      items (note 25)         |  | (14,012 | ) |  | (12,170 | ) |  | 3,895   |  
|                                                                     |  |         |   |  |         |   |  |         |  
|                                                                     |  | 44,366  |   |  | 41,216  |   |  | 25,281  |  
|                                                                     |  |         |   |  |         |   |  |         |  
|Investing activities                                                 |  |         |   |  |         |   |  |         |  
|Additions to property, plant and equipment and intangibles (note 25) |  | (24,326 | ) |  | (21,655 | ) |  | (16,598 | )
|Receipt of government grants                                         |  | 1,500   |   |  | 15,377  |   |  | 8,655   |  
|Proceeds on disposal of property, plant and equipment                |  | 28      |   |  | 136     |   |  | 205     |  
|Cash collateral on derivative contracts
      (note 5)               |  | -       |   |  | 6,952   |   |  | (6,952  | )
|Acquisition of Chickadee Creek Energy Inc.                           |  | -       |   |  | -       |   |  | 36      |  
|Decrease (increase) in other assets                                  |  | 42      |   |  | (4      | ) |  | (46     | )
|                                                                     |  |         |   |  |         |   |  |         |  
|                                                                     |  | (22,756 | ) |  | 806     |   |  | (14,700 | )
|                                                                     |  |         |   |  |         |   |  |         |  
|Financing activities                                                 |  |         |   |  |         |   |  |         |  
|Increase in borrowings                                               |  | 4,037   |   |  | 11,603  |   |  | 4,312   |  
|Repayment of borrowings                                              |  | (1,220  | ) |  | (9,092  | ) |  | (978    | )
|Finance expenses paid                                                |  | (21,971 | ) |  | (20,488 | ) |  | (20,121 | )
|Dividends                                                            |  | (2,250  | ) |  | (1,500  | ) |  | (750    | )
|                                                                     |  |         |   |  |         |   |  |         |  
|                                                                     |  | (21,404 | ) |  | (19,477 | ) |  | (17,537 | )
|                                                                     |  |         |   |  |         |   |  |         |  
|Increase (decrease) in cash and cashequivalents during the year      |  | 206     |   |  | 22,545  |   |  | (6,956  | )
|                                                                     |  |         |   |  |         |   |  |         |  
|Cash and cash equivalents  Beginning of
      year                  |  | 47,219  |   |  | 24,674  |   |  | 31,630  |  
|                                                                     |  |         |   |  |         |   |  |         |  
|Cash and cash equivalents  End of year                              |  | 47,425  |   |  | 47,219  |   |  | 24,674  |  

The accompanying notes are an integral part of these financial
statements.

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

|1 | General information                                                                                                                                                                                                                                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                     
|  | Millar Western Forest Products Ltd. (the Company) is
      incorporated and located in Canada. The address of the Companys corporate
      office is 16640  111 Avenue, Edmonton, Alberta, Canada T5M 2S5.                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                     
|  | The Company is a subsidiary of Millar Western Industries
      Ltd. with the ultimate parent being Hualkeith Investments Ltd.                                                                                                                                                                                                                                                                       
|  |                                                                                                                                                                                                                                                                                                                                                                                                     
|  | The Company is an integrated forest products company with
      facilities in Canada producing lumber and pulp. The lumber segment
      consists of three sawmill operations that produce and market dimension
      lumber. The pulp segment consists of a pulp operation that manufactures
      and markets a number of different grades of bleached
      chemi-thermo-mechanical pulp (BCTMP).
|  |                                                                                                                                                                                                                                                                                                                                                                                                     
|2 | Summary of significant accounting
  policies                                                                                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                     
|  | Statement of compliance                                                                                                                                                                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                     
|  | These audited financial statements and the notes thereto
      have been prepared in accordance with International Financial Reporting
      Standards (IFRS), as issued by the International Accounting Standards
      Board (IASB).                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                     
|  | These financial statements were approved by the Companys
      board of directors on March 4, 2015.                                                                                                                                                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                     
|  | The significant accounting policies used in the
      preparation of these financial statements are as follows:                                                                                                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                                                                                                                     
|  | Basis of measurement                                                                                                                                                                                                                                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                     
|  | These financial statements have been prepared on the
      historical cost basis, except for derivative financial instruments, which
      are measured at fair value.                                                                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                     
|  | Foreign currency                                                                                                                                                                                                                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                     
|  | i)                                                                                                                                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                                                                                                                     

(1)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

| | ii) | Transactions and balances                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     | Foreign currency transactions are translated into
      Canadian dollars by applying exchange rates in effect at the transaction
      date. At each reporting year end, monetary assets and liabilities
      denominated in foreign currencies are converted into Canadian dollars at
      rates of exchange prevailing on that date. Gains and losses on exchange
      differences are recognized in the statements of operations and
      comprehensive (loss) income.

Cash and cash equivalents

Cash and cash equivalents are defined
as cash on hand, deposits held with banks and money market instruments with
maturity dates of less than three months from the date they are acquired.

Restricted cash

Restricted cash is cash and cash
equivalents received for which external restrictions over the use and/or purpose
of the amounts have been imposed.

Financial instruments

| | i) | Financial assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The Company classifies its financial assets either at
      fair value through earnings or as loans and receivables. The
      classification depends on the purpose for which the financial assets were
      acquired. Management determines the classification of its financial assets
      at initial recognition.                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Financial assets at fair value through earnings are
      financial assets held for trading and include derivative instruments for
      which cash flow hedging has not been applied. Financial assets at fair
      value through earnings are carried at fair value, with changes in fair
      value generally recorded in other income (expense).                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Loans and receivables are non-derivative financial assets
      with fixed or determinable payments that are not quoted in an active
      market, and include cash and cash equivalents and accounts and other
      receivables. Loans and receivables are recognized initially at their face
      amount, except when fair value is materially different, and are
      subsequently measured at amortized cost using the effective interest
      method, less a provision for impairment. A provision for impairment is
      established when there is objective evidence the Company will not be able
      to collect all amounts due, according to the original terms of the
      instrument.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The Company may enter into transactions to sell trade
      receivables to third parties. If the risks and rewards of ownership of the
      receivables are transferred to the purchaser, the transaction is accounted
      for as a sale, and the receivables are derecognized. If the risks and
      rewards of ownership of the receivables are neither transferred nor
      retained and if control is not retained over the receivables, the
      transaction is accounted for as a sale.                                                                                                                                                                                                     

(2)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

| | ii)  | Financial liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |      | Accounts payable and accrued liabilities are non-interest
      bearing and are recognized initially at their face amount, except when
      fair value is materially different, and are subsequently measured at
      amortized cost using the effective interest method. Borrowings are
      recognized initially at fair value, net of any directly attributable
      transaction costs, and are subsequently measured at amortized cost using
      the effective- interest method.                                                                                               
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | iii) | Derivative financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |      | From time to time, the Company enters into forward
      exchange contracts to hedge a portion of its expected foreign currency
      denominated revenue over periods of up to 12 months into the future. The
      Company also enters into forward sales contracts for pulp or lumber, in
      order to reduce the impact of market volatility on its product sales, and
      enters into forward purchase contracts for natural gas, in order to reduce
      the impact of market volatility on its gas purchases. These contracts are
      classified as derivative instruments.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |      | Derivatives are recognized at fair value on the date the
      Company becomes a party to the contract and are subsequently re-measured
      at fair value. The Company does not enter into speculative contracts and
      does not apply hedge accounting; therefore, unrealized gains and losses on
      derivatives are recorded in earnings at each year end.                                                                                                                                                                                                                     
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |      | The Company has reviewed all significant contractual
      agreements and determined there are no material embedded derivatives that
      must be separated from the host contract and recorded at fair
  value.                                                                                                                                                                                                                                                                                                                                                                        
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |      | Details of the Companys classification of financial
      instruments are provided in note 22.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

Impairment of financial assets

At each reporting date, the Company
assesses whether there is objective evidence that a financial asset carried at
amortized cost is impaired. If such evidence exists, the Company recognizes an
impairment loss, with the loss being the difference between the amortized cost
of the asset and the value of the estimated future cash flows, discounted using
the instruments original effective interest rate. The carrying amount of the
asset is reduced by this amount, either directly or indirectly, through the use
of an allowance account.

Impairment losses on financial assets
carried at amortized cost are reversed in subsequent periods if the amount of
the loss decreases and the decrease can be related objectively to an event
occurring after the impairment was recognized.

(3)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

Inventories

The Companys inventories include pulp,
lumber, logs, processing materials and supplies.

Pulp, lumber, and log inventories are
recorded at the lower of cost and net realizable value (NRV). Cost is determined
using average cost and comprises raw materials, direct labour and other direct
costs, and related production overheads consistent with the normal level of
production. NRV represents the estimated selling price for inventories in the
ordinary course of business, less the estimated costs of completion and selling
expenses.

Processing materials and supplies are
recorded at weighted average cost, recalculated at each transaction date.

Cost of products sold, as presented in
the statement of comprehensive (loss) income, includes all inventories expensed
in the year, as well as changes in inventory valuation provisions. When reasons
for a write-down of inventory have ceased to exist, the write-down is
reversed.

Property, plant and equipment

Property, plant and equipment are
stated at cost less accumulated depreciation and accumulated impairment losses.
Cost includes expenditures that are directly attributable to the acquisition or
construction of the asset, including commissioning costs and borrowing costs.
Subsequent costs are included in the assets carrying value or are recognized as
a separate asset, as appropriate, only when it is probable that future economic
benefits associated with the item will flow to the Company and the cost can be
measured reliably. The carrying amount of a replaced asset is removed when the
item is replaced. Repair and maintenance costs are charged to the statement of
operations and comprehensive (loss) income during the year in which they are
incurred. Depreciation is recognized on a straight-line basis.

The estimated useful lives of the
various components of the Companys major assets classes are as follows:

Buildings  sawmill
    20  60 yearsBuildings  pulp mill
    15  60 yearsBuildings  other
    8  15 yearsProcess equipment  sawmill
    5  50 yearsProcess equipment  pulp mill
    5  50 yearsMobile equipment
    3  10 yearsAncillary equipment
    5  15 yearsFurniture, office and computer equipment
    5  50 yearsBridges
    10  50 yearsRoads and yards
    10  50 years


The Company allocates the amount
initially recognized in respect of an item of property, plant and equipment to
its significant components and depreciates each component separately. Assets
under construction are recognized at cost and not depreciated until the assets
are available-for-use. Residual values and useful lives of the assets are
reviewed annually and adjusted if appropriate.

(4)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

Gains and losses on disposal of
property, plant and equipment are determined by comparing the proceeds with the
carrying amount of the assets and are included as part of other (income)
expenses in the statement of operations and comprehensive (loss) income.

Intangible assets

The Companys intangible assets include
timber rights, computer software and power purchase rights. These assets are
capitalized and amortized in the statements of operations and comprehensive
(loss) income, on a straight-line basis over the period of their expected useful
lives, as follows:

Timber rights
    10  60 yearsComputer software
    5  15 yearsPower purchase rights
    20 years


Assets under construction are
recognized at cost and not depreciated until the assets are available for use.

Impairment of non-financial assets

Property, plant and equipment and
intangible assets are tested for impairment at minimum on an annual basis or
sooner if there is an event or change in circumstances that indicates the
carrying amount may not be recoverable. For the purposes of measuring
recoverable amounts, assets are grouped at the lowest levels for which there are
separately identifiable cash flows (cash-generating units or CGUs). The
recoverable amount is the higher of an assets fair value, less costs to sell,
and its value in use, which is defined as the present value of the expected
future cash flows of the relevant assets or CGU. An impairment loss is
recognized for the amount by which the assets carrying amount exceeds its
recoverable amount.

The Company evaluates impairment losses
for potential reversals when events or circumstances warrant such consideration.

Borrowing costs

Borrowing costs attributable to the
acquisition, construction or production of qualifying assets are added to the
cost of those assets, until such time as the assets are substantially ready for
their intended use. All other borrowing costs are recognized as finance expenses
in the statements of operations and comprehensive (loss) income in the period in
which they are incurred.

Employee benefits

| | i) | Pension obligations                                                                                                                                                                                      
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                          
| |    | The Company has defined contribution plans providing
      pension benefits to most of its employees, and for certain key employees
      the Company has a supplementary defined benefit pension
  plan.

(5)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

| |      | The cost of defined contribution pension plans is charged
      to expense as the contributions become payable.                                                                                                                                                                                                                                                                                                                                                                           
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |      | The cost of defined benefit plans is determined using the
      projected benefit method, pro-rated on service and managements best
      estimates of expected plan investment performance, salary increases and
      retirement ages of employees in the plan. The related pension liability
      recognized in the statements of financial position is the present value of
      the defined benefit obligation at the year-end date, less the fair value
      of the plan assets.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |      | Actuarial valuations for defined benefit plans are
      carried out annually, or when any significant changes to the plan or
      membership may require a revaluation to be completed.                                                                                                                                                                                                                                                                                                 
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |      | Actuarial gains and losses are recognized in the period
      in which they occur in other comprehensive income (OCI), without recycling
      through earnings in subsequent periods. The costs of past-service benefits
      are recognized as an expense in the statements of operations and
      comprehensive (loss) income.                                                                                                                                                       
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ii)  | Profit sharing                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |      | The Company recognizes a liability and an expense for
      profit sharing, based on a formula that takes into consideration the net
      income before taxes of the Company after certain adjustments.                                                                                                                                                                                                                                                                                  
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | iii) | Other obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |      | The Company offers a supplemental vacation program for
      select employees. The employees can use the vacation at their discretion,
      and the vacation can be carried forward until the end of employment. The
      Company accrues for unused vacation at each year
end.                                                                                                                                                                                                         

Provisions

Provisions for environmental
reclamation, restructuring costs and legal claims, where applicable, are
recognized when the Company has a present legal or constructive obligation as a
result of past events, when it is more likely than not that an outflow of
resources will be required to settle the obligation, and when the amount can be
reliably estimated. Provisions are measured at managements best estimate of the
expenditure required to settle the obligation at the end of the reporting
period, and are discounted to present value where the effect is material using a
risk free rate. The Company performs evaluations to identify onerous contracts
and, where applicable, records provision for such contracts.

Forestry legislation in Alberta
requires the Company to incur the cost of reforestation of areas of land on
which timber is harvested under the terms of its quotas and forest management
agreement. Accordingly, the Company records a liability for the costs of
reforestation in the period in which the timber is harvested. In periods
subsequent to the initial measurement, changes in the liability resulting from
the passage of time and work performed and revisions to reforestation estimates
are recognized in the statements of operations and comprehensive (loss) income
as they occur.

(6)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

Income taxes

Income tax comprises current and
deferred tax. Income tax is recognized in the statements of operations and
comprehensive (loss) income.

Current tax is the expected tax payable
on the taxable income for the year, using tax rates enacted or substantively
enacted, at the end of the reporting period, and any adjustment to tax payable
in respect of previous years.

Deferred income taxes are recognized
for the future tax consequences attributable to the differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred income tax liabilities or assets are
measured using substantively enacted rates anticipated to apply in the periods
in which the differences are expected to reverse. Deferred income tax assets are
recorded in the financial statements if realization is considered more likely
than not.

Deferred income tax assets and
liabilities are presented as non-current.

Investment tax credits are recognized
through income tax expense/recovery when it is considered probable the tax
credit will be utilized against taxable earnings.

Revenue

Revenue is derived from the sale of
pulp and lumber and from administrative services provided to related parties. It
is measured at the fair value of the consideration received or receivable, net
of claims, rebates, returns and discounts, for the sale of goods and services in
the ordinary course of the Companys business. Historical experience is used to
estimate and provide for discounts and returns. Volume discounts are assessed
based on anticipated annual purchases.

Revenue is recognized when the
significant risks and rewards of ownership have been transferred to the
customer, the sales price and costs can be measured reliably, and it is probable
that the economic benefits will flow to the Company. These criteria are
generally met at the time the product is shipped to the customer title and risk
have passed to the customer and acceptance of the product, when contractually
required, has been obtained.

Government grants

Grants received under government
incentive programs are recognized initially as deferred revenue at fair value
when there is reasonable assurance they will be received and the Company will
comply with the conditions associated with the grant. Grants that compensate the
Company for the cost of an asset are deducted against the carrying amount of the
asset.

(7)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

|  | Segment reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  | Operating segments are reported in a manner consistent
      with the internal reporting provided to the chief operating
      decision-maker. The chief operating decision maker has been identified as
      the Companys senior executive team, which collectively makes strategic
      decisions for the segments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|3 | Critical accounting estimates and
  judgments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  | The preparation of financial statements requires
      management to use judgment in applying its accounting policies and
      estimates and assumptions about the future. Estimates and other judgments
      are continually evaluated and are based on managements experience and
      other factors, including expectations about future events that are
      believed to be reasonable under the circumstances. The following discusses
      the most significant accounting judgments and estimates that the Company
      has made in the preparation of the financial statements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  | Power purchase rights                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  | The Companys power purchase rights arise from a
      long-term contract for the purchase of power. The underlying contract that
      determines the amount the Company pays for power contains many variables
      and meets the definition of a derivative contract. However, since the
      Company expects to use substantially all of the power supplied under the
      contract in its normal operations, the derivative contract is not carried
      at fair value in the financial statements. The most difficult and
      subjective judgment in the application of this policy is in the
      determination of normal usage. Since the contract is for a period of
      twenty years, management considers all appropriate facts and circumstances
      in making this assessment, including historical experience and long-term
      expected power usage in its facilities based on normal production levels.
      If management determines in the future that the contract does not meet the
      exception for normal purchases, the contract would be carried on the
      statements of financial position at fair value, and since an active market
      does not exist for these types of contracts, valuation techniques would be
      required to determine fair value.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  | Useful lives of timber rights                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  | The Companys timber rights comprise various agreements
      and contracts that have fixed terms but contain renewal provisions that
      could extend the lives of the rights indefinitely. In estimating the
      useful lives of timber rights, management has generally assumed that
      renewals will occur in the normal course of business, with useful lives
      not to exceed 60 years. If the Company was unable to obtain a renewal in
      the future for a material agreement, this would have an impact on
      amortization, as well as in the determination of discounted cash flows
      used in impairment tests for other long-lived
assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

(8)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

|  | Reforestation obligation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | The Company is required to reforest the areas of land on
      which timber is harvested under the terms of its quotas and forest
      management agreements. Accordingly, the Company records a liability for
      the estimated costs of reforestation in the period in which the timber is
      harvested (note 14) with any changes in initial measurement recognized in
      the statements of operations and comprehensive (loss) income as they
      occur. The timing of the reforestation payments is based on the estimated
      period required to attain free-to-grow status in a given area, which is
      generally between 12 to 15 years. Due to the general, long-term nature of
      the liability, the most significant areas of uncertainty in estimating the
      provision are the amount and timing of future costs that will be incurred
      as, depending on the location and environment of land, the reforestation
      costs can vary significantly.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4 | Changes in accounting policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | The IASB periodically issues new standards and amendments
      or interpretations to existing standards. The new pronouncements listed
      below are those the Company considers relevant to its financial
      reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | The Company has adopted the new International Financial
      Reporting Interpretations Committee (IFRIC) 21 - Levies effective
      January 1, 2014. This interpretation provides guidance on when a liability
      should be recognized for a government legislated levy. This interpretation
      had no significant effect on our consolidated financial
  statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | The following standards have been issued but not yet
      applied.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| |  | IFRS 9, Financial Instruments  In November 2009, IFRS 9
      was issued and in October 2010 was further amended. IFRS 9 addresses
      classification and measurement of financial assets and replaces the
      multiple category and measurement models in International Accounting
      Standards (IAS) 39 - Financial Instruments: Recognition and Measurement
      for debt instruments with a new mixed measurement model having only two
      categories: amortized cost and fair value through profit or loss. IFRS 9
      also replaces the models for measuring equity instruments and such
      instruments are either recognized at fair value through profit or loss or
      at fair value through other comprehensive earnings. In December 2009, IFRS
      9 was deferred. We do not expect this standard to have a significant
      effect on our financial statements.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | IFRS 15, Revenue from Contracts with Customers  In May
      2014, IFRS 15 was issued. This standard addresses revenue recognition and
      establishes principles for reporting information about the nature, amount,
      timing and uncertainty of revenue and cash flows arising from an entitys
      contracts with customers. Revenue is recognized when a customer obtains
      control of a good or service and thus has the ability to control its use
      and obtain the benefits from the good or service. The standard replaces
      IAS 18 - Revenue, IAS 11 - Construction Contracts and the related
      interpretations. The standard is effective for annual periods beginning on
      or after January 1, 2017 with earlier application permitted. We have not
      assessed the impact of the new standard.                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   | There are no other standards or amendments or
      interpretations to existing standards issued but not yet effective that
      are expected to have a material impact on our financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

(9)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

|5 | Cash and cash equivalents and restricted
    cash                                                                                                                    
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                      
|  | Cash on deposit at Canadian banks earns interest at the
      banks prime rate minus 1.95%. The banks prime rate as at December 31,
      2014, was 3% (2013  3%).
|  |                                                                                                                                                                      
|6 | Accounts and other
receivables                                                                                                                                       

| |                                       |  | 2014   |  |  | 2013   | 
| | ------------------------------------- |  | ------ |  |  | ------ | 
| |                                       |  | $      |  |  | $      | 
| |                                       |  |        |  |  |        | 
| | Trade receivables                     |  | 32,250 |  |  | 31,958 | 
| | Intercompany receivables (note 21(a)) |  | 194    |  |  | 43     | 
| | Other receivables                     |  | 8,173  |  |  | 5,980  | 
| |                                       |  |        |  |  |        | 
| |                                       |  | 40,617 |  |  | 37,981 | 

|  | Current trade and other receivables are unsecured and
      non-interest bearing. Normal payment terms for the Company are 30 days
      (see also note 22).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                             
|7 | Inventories                                                                                                                                                 

| |                                    |  | 2014   |  |  | 2013   | 
| | ---------------------------------- |  | ------ |  |  | ------ | 
| |                                    |  | $      |  |  | $      | 
| |                                    |  |        |  |  |        | 
| | Logs                               |  | 29,475 |  |  | 24,146 | 
| | Pulp                               |  | 23,046 |  |  | 16,917 | 
| | Lumber                             |  | 22,052 |  |  | 20,378 | 
| | Operating and maintenance supplies |  | 14,643 |  |  | 14,121 | 
| |                                    |  |        |  |  |        | 
| |                                    |  | 89,216 |  |  | 75,562 | 

There were no write-downs relating to
inventories in the years ended December 31, 2014 and 2013.

(10)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

|8 | Property, plant and
equipment
|- | -----------------------------

ProcessLand
    
    
    Buildings
    
    
    equipment
    
    
    Other
    
    
    Total$
    
    
    $
    
    
    $
    
    
    $
    
    
    $Year ended December 31, 2013As
      at January 1, 2013
    
    2,263
    
    
    44,083
    
    
    122,482
    
    
    6,467
    
    
    175,295Additions
    
    200
    
    
    1,417
    
    
    6,075
    
    
    2,152
    
    
    9,844Disposals
    
    -
    
    
    -
    
    
    (636
    )
    
    (330
    )
    
    (966
    )Depreciation for the year
    
    -
    
    
    (1,591
    )
    
    (6,278
    )
    
    (1,271
    )
    
    (9,140
    )As at December 31, 2013
    
    2,463
    
    
    43,909
    
    
    121,643
    
    
    7,018
    
    
    175,033As at December 31, 2013Cost
    
    2,463
    
    
    83,803
    
    
    333,999
    
    
    18,360
    
    
    438,625Accumulated depreciation
    
    -
    
    
    (39,894
    )
    
    (212,356
    )
    
    (11,342
    )
    
    (263,592
    )Net book value
    
    2,463
    
    
    43,909
    
    
    121,643
    
    
    7,018
    
    
    175,033Year ended December 31, 2014As
      at January 1, 2014
    
    2,463
    
    
    43,909
    
    
    121,643
    
    
    7,018
    
    
    175,033Additions
    
    -
    
    
    791
    
    
    24,102
    
    
    2,154
    
    
    27,047Disposals
    
    -
    
    
    -
    
    
    (73
    )
    
    (4
    )
    
    (77
    )Depreciation for the year
    
    -
    
    
    (1,630
    )
    
    (6,450
    )
    
    (1,317
    )
    
    (9,397
    )As at December 31, 2014
    
    2,463
    
    
    43,070
    
    
    139,222
    
    
    7,851
    
    
    192,606As at December 31, 2014Cost
    
    2,463
    
    
    84,594
    
    
    357,899
    
    
    20,333
    
    
    465,289Accumulated depreciation
    
    -
    
    
    (41,524
    )
    
    (218,677
    )
    
    (12,482
    )
    
    (272,683
    )Net book value
    
    2,463
    
    
    43,070
    
    
    139,222
    
    
    7,851
    
    
    192,606


Included in the above net book value
are assets under construction, and therefore are not being depreciated, in the
amount of $32.8 million as at December 31, 2014 (2013  $10.7 million).

The Company is constructing a bioenergy
effluent project (BEP) at its BCTMP mill at Whitecourt, Alberta. The project
involves the construction and integration of three anaerobic hybrid digesters
into the BCTMP mills existing aerobic effluent treatment system. The project
qualified for a total of $27.5 million in government grants, of which $25.5
million (2013 - $24.0 million) has been received by the Company and expended on
the project.

Total expenditures on the project to
December 31, 2014 were $64.2 million, resulting in a net expenditure of $30.8
million, after receipt of the above grants and $7.9 million retained from the
EPC contractor. The Company has also received $12.0 million (2013  $7.9
million) in interim financing (note 13) to partially fund project costs.

In 2014, borrowing costs of $ 0.8
million (2013  $0.4) were capitalized for the construction of the BEP based on
an average annual interest rate of 8.5%.

(11)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

|9 | Intangible assets
|- | -----------------

| |                                    |  |        |   |  |          |   |  | Power    |   |  |         |  
| | ---------------------------------- |  | ------ | - |  | -------- | - |  | -------- | - |  | ------- | -
| |                                    |  | Timber |   |  | Computer |   |  | purchase |   |  |         |  
| |                                    |  | rights |   |  | software |   |  | rights   |   |  | Total   |  
| |                                    |  | $      |   |  | $        |   |  | $        |   |  | $       |  
| |                                    |  |        |   |  |          |   |  |          |   |  |         |  
| | Year ended December 31, 2013       |  |        |   |  |          |   |  |          |   |  |         |  
| | As at January 1,
      2013        |  | 9,706  |   |  | 427      |   |  | 34,727   |   |  | 44,860  |  
| | Additions                          |  | 78     |   |  | 19       |   |  | -        |   |  | 97      |  
| | Disposals                          |  | -      |   |  | (2       | ) |  | -        |   |  | (2      | )
| | Amortization
      for the periodr |  | (425   | ) |  | (89      | ) |  | (4,341   | ) |  | (4,855  | )
| |                                    |  |        |   |  |          |   |  |          |   |  |         |  
| | As at December 31, 2013            |  | 9,359  |   |  | 355      |   |  | 30,386   |   |  | 40,100  |  
| |                                    |  |        |   |  |          |   |  |          |   |  |         |  
| | As at December 31, 2013            |  |        |   |  |          |   |  |          |   |  |         |  
| | Cost                               |  | 15,810 |   |  | 9,634    |   |  | 67,783   |   |  | 93,227  |  
| | Accumulated amortization           |  | (6,451 | ) |  | (9,279   | ) |  | (37,397  | ) |  | (53,127 | )
| |                                    |  |        |   |  |          |   |  |          |   |  |         |  
| | Net book value                     |  | 9,359  |   |  | 355      |   |  | 30,386   |   |  | 40,100  |  
| |                                    |  |        |   |  |          |   |  |          |   |  |         |  
| | Year ended December 31, 2014       |  |        |   |  |          |   |  |          |   |  |         |  
| | As at January 1,
      2014        |  | 9,359  |   |  | 355      |   |  | 30,386   |   |  | 40,100  |  
| | Additions                          |  | 1,549  |   |  | 383      |   |  | -        |   |  | 1,932   |  
| | Disposals                          |  | -      |   |  | -        |   |  | -        |   |  | -       |  
| | Amortization for the period        |  | (440   | ) |  | (94      | ) |  | (4,341   | ) |  | (4,875  | )
| |                                    |  |        |   |  |          |   |  |          |   |  |         |  
| | Closing net book value             |  | 10,468 |   |  | 644      |   |  | 26,045   |   |  | 37,157  |  
| |                                    |  |        |   |  |          |   |  |          |   |  |         |  
| | As at December 31, 2014            |  |        |   |  |          |   |  |          |   |  |         |  
| | Cost                               |  | 17,359 |   |  | 10,017   |   |  | 67,783   |   |  | 95,159  |  
| | Accumulated amortization           |  | (6,891 | ) |  | (9,373   | ) |  | (41,738  | ) |  | (58,002 | )
| |                                    |  |        |   |  |          |   |  |          |   |  |         |  
| | Net book value                     |  | 10,468 |   |  | 644      |   |  | 26,045   |   |  | 37,157  |  

Included in the above net book value
are assets under construction, and therefore they are not being amortized, in
the amount of $0.4 million as at December 31, 2014 (2013  $0.1 million).

Power purchase rights

In 2001 and 2006, the Company entered
into agreements to acquire the rights to a portion of the electricity generated
from certain power plants in Alberta. These 20-year agreements give the Company
the entitlement and obligation to purchase, at largely predetermined prices,
approximately 80 megawatts of electricity.

(12)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

|10 | Other assets
|-- | ------------

| |                                          |  | 2014 |  |  | 2013  | 
| | ---------------------------------------- |  | ---- |  |  | ----- | 
| |                                          |  | $    |  |  | $     | 
| |                                          |  |      |  |  |       | 
| | Recovery from Power Purchase Arrangement |  | -    |  |  | 2,169 | 
| | Other                                    |  | 323  |  |  | 365   | 
| |                                          |  |      |  |  |       | 
| |                                          |  | 323  |  |  | 2,534 | 

|   | Recovery of amounts relating to the Power Purchase
      Arrangement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | In February 2014, there was a final resolution on the
      force majeure claim against the participants in the PPA. It was determined
      the Company would recover a total $2.4 million, compared to the
      $2.2 million which the Company had anticipated and accrued to be
      recoverable. This refund was to be split into two equal payments of $1.2
      million in the first quarters of 2014 and 2015. As at December 31, 2014,
      $1.2 million plus accumulated interest remained within accounts
      receivable, which is to be paid in the first quarter of 2015.                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|11 | Revolving credit facility                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | The Company has a $50 million revolving credit facility
      maturing July 15, 2018. The credit facility was undrawn at December 31,
      2014 and December 31, 2013. The facility is subject to a borrowing formula
      based on the Companys levels of inventory and accounts receivable. The
      amount available as at December 31, 2014, under the facility was $50.0
      million (2013  $50.0 million), of which $3.8 million (2013  $3.7
      million) was committed to letters of credit. The interest rate on this
      facility is floating and may, at the Companys option, be based on the
      Canada bank prime rate or US base rate, plus a spread of 2.00%. The
      Company has the option of basing the rate on LIBOR plus a spread of 3.25%.
      Collateral pledged for the facility is a first charge on all accounts
      receivable and domestic inventory of the Company.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|12 | Accounts payable and accrued
  liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| |                                         |  | 2014   |  |  | 2013   | 
| | --------------------------------------- |  | ------ |  |  | ------ | 
| |                                         |  | $      |  |  | $      | 
| |                                         |  |        |  |  |        | 
| | Trade payables                          |  | 20,668 |  |  | 20,086 | 
| | Payable to related parties (note 21(b)) |  | 245    |  |  | 246    | 
| | Accrued expenses                        |  | 31,460 |  |  | 23,918 | 
| | Deposits US$7.5 million (note 8)        |  | -      |  |  | 7,977  | 
| | Derivative contracts                    |  | 1,831  |  |  | -      | 
| |                                         |  |        |  |  |        | 
| |                                         |  | 54,204 |  |  | 52,227 | 

(13)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

|13 | Financial liabilities 
  borrowings
|-- | ------------------------------------

| |                                         |  | 2014    |   |  | 2013    |  
| | --------------------------------------- |  | ------- | - |  | ------- | -
| |                                         |  | $       |   |  | $       |  
| |                                         |  |         |   |  |         |  
| | Unsecured senior notes  US$210 million |  | 243,621 |   |  | 223,356 |  
| | Less: Financing expenses                |  | (3,111  | ) |  | (3,609  | )
| | Power purchase rights loan #1           |  | 9,518   |   |  | 10,565  |  
| | Power purchase rights loan #2           |  | 1,781   |   |  | 1,954   |  
| | BEP loan (note 8)                       |  | 11,952  |   |  | 7,915   |  
| |                                         |  |         |   |  |         |  
| |                                         |  | 263,761 |   |  | 240,181 |  
| | Less: Current portion                   |  | 1,362   |   |  | 2,810   |  
| |                                         |  |         |   |  |         |  
| |                                         |  | 262,399 |   |  | 237,371 |  

Principal repayments required are as
follows:

$2015
    
    1,3622016
    
    3,5132017
    
    3,6912018
    
    3,8902019
    
    4,112Thereafter
    
    250,304


On April 1, 2011, the Company redeemed
its US$190 million in Senior Notes due November 2013 and issued US$210 million
in Senior Notes due April 1, 2021, bearing interest at 8.5%, payable
semi-annually, on April 1 and October 1 of each year. The new notes are
unsecured obligations of the Company and rank equally and rateably with all
existing and future unsecured indebtedness of the Company.

The Company incurred $5.0 million of
financing costs relating to the issuance of US$210 million of unsecured Senior
Notes. The financing costs are offset against the borrowings and are amortized
over the expected ten-year term of the notes.

The indenture governing the unsecured
Senior Notes contains certain restrictions on the ability of the Company to
incur additional indebtedness, pay dividends or distributions, make investments,
issue or repurchase share capital, create liens, or engage in sale and leaseback
transactions, mergers, consolidations and sales of assets and transactions with
affiliates. As at December 31, 2014, the Company is not in violation of any of
these restrictions.

In 2006, the Company was provided with
a $15.6 million loan to acquire additional power purchase rights as described in
note 9. The loan is repayable in equal monthly payments of $0.2 million,
including principal and interest, from May 31, 2006 to December 31, 2020.
Interest is accrued on the loan at an effective annual rate of 12%.

(14)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

|   | In 2007, the Company was provided with a further $5.1
      million loan in connection with the power purchase rights. The loan is
      non-interest bearing and is repayable in equal annual payments of $0.4
      million from February 23, 2008 to December 31, 2020. The loan is being
      amortized using an effective annual interest rate of 9.75%.                                                                                                                                                                               
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Collateral for both of the power purchase rights loans
      consists of a first charge on the additional interest acquired in 2006 and
      an obligation to provide a letter of credit to the lender if the net
      present value of the Companys power purchase rights falls below a
      predetermined level. As at December 31, 2014, a letter of credit was not
      required.                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Company has obtained interim financing in the amount
      of $20.2 million, bearing interest at the Canada bank prime rate plus 2%,
      to procure the biogas scrubber and power island, key project components of
      the BEP (note 8). Of this amount, $12.0 million was advanced as at
      December 31, 2014 (2013  $7.9 million). On completion of the project, the
      interim financing converts to a lease bearing interest at 5.25% over a
      76-month period. After 60 months, the interest rate is
  renegotiated.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|14 | Reforestation and asset retirement
    obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| |                              |  |               |   |  | Asset       |   |  |        |  
| | ---------------------------- |  | ------------- | - |  | ----------- | - |  | ------ | -
| |                              |  | Reforestation |   |  | retirement  |   |  |        |  
| |                              |  | obligation    |   |  | obligations |   |  | Total  |  
| |                              |  | $             |   |  | $           |   |  | $      |  
| |                              |  |               |   |  |             |   |  |        |  
| | As at December 31, 2012      |  | 15,233        |   |  | 2,206       |   |  | 17,439 |  
| | Change in accrual            |  | 4,702         |   |  | 91          |   |  | 4,793  |  
| | Change in provision          |  | 2             |   |  | (1,080      | ) |  | (1,078 | )
| | Expenditures during the year |  | (6,817        | ) |  | -           |   |  | (6,817 | )
| |                              |  |               |   |  |             |   |  |        |  
| | As at December 31, 2013      |  | 13,120        |   |  | 1,217       |   |  | 14,337 |  
| | Less: Current portion        |  | 4,257         |   |  | -           |   |  | 4,257  |  
| |                              |  |               |   |  |             |   |  |        |  
| | As at December 31, 2013      |  | 8,863         |   |  | 1,217       |   |  | 10,080 |  
| |                              |  |               |   |  |             |   |  |        |  
| | As at December 31, 2013      |  | 13,120        |   |  | 1,217       |   |  | 14,337 |  
| | Change in accrual            |  | 7,562         |   |  | (263        | ) |  | 7,299  |  
| | Change in provision          |  | 21            |   |  | 1,050       |   |  | 1,071  |  
| | Expenditures during the year |  | (6,129        | ) |  | -           |   |  | (6,129 | )
| |                              |  |               |   |  |             |   |  |        |  
| | As at December 31, 2014      |  | 14,574        |   |  | 2,004       |   |  | 16,578 |  
| | Less: Current portion        |  | 4,529         |   |  | -           |   |  | 4,529  |  
| |                              |  |               |   |  |             |   |  |        |  
| | As at December 31, 2014      |  | 10,045        |   |  | 2,004       |   |  | 12,049 |  

The estimated undiscounted cash flows
required to settle the reforestation obligations as at December 31, 2014, were
$15.0 million (2013  $13.5 million), with payments spread over 14 years. The
most significant area of uncertainty is the estimate of future costs to be
incurred. The estimated cash flows have been adjusted for inflation and
discounted using the risk-free rates, ranging from 1.0% to 2.2% as at December
31, 2014.

(15)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

|   | The asset retirement obligations are to reclaim land
      leased from the Province of Alberta. These obligations represent estimated
      undiscounted future payments of $8.0 million to reclaim the land. The
      payments are expected to occur at least 60 years into the future and have
      been discounted at a risk free rate of 2.3%.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                     
|15 | Share capital                                                                                                                                                                                                                                                                                                                                       

Authorized
            Unlimited
number of common shares, no par value

Issued and fully paid

| |                          |  | 2014   |  |  | 2013   | 
| | ------------------------ |  | ------ |  |  | ------ | 
| |                          |  | $      |  |  | $      | 
| |                          |  |        |  |  |        | 
| | 15,000,002 common shares |  | 65,500 |  |  | 65,500 | 

|   | The shareholder declared and paid dividends of $2.3
      million in 2014 (2013  $1.5 million).
|-- | ------------------------------------------------------------------------------------------------
|   |                                                                                                 
|16 | Expenses by nature                                                                              

| |                                                                     |  | 2014    |   |  | 2013    |  |  | 2012    |  
| | ------------------------------------------------------------------- |  | ------- | - |  | ------- |  |  | ------- | -
| |                                                                     |  | $       |   |  | $       |  |  | $       |  
| |                                                                     |  |         |   |  |         |  |  |         |  
| | Changes in inventories of finished goods
      and work-in-progress |  | (6,805  | ) |  | 1,575   |  |  | (2,959  | )
| | Raw materials and consumables used                                  |  | 184,801 |   |  | 165,514 |  |  | 155,817 |  
| | Depreciation and amortization                                       |  | 14,272  |   |  | 13,995  |  |  | 13,641  |  
| | Wages and employee benefits expense                                 |  | 67,140  |   |  | 64,645  |  |  | 60,211  |  
| | Transportation                                                      |  | 59,767  |   |  | 53,438  |  |  | 53,221  |  
| | Other expenses                                                      |  | 44,785  |   |  | 34,614  |  |  | 49,402  |  
| |                                                                     |  |         |   |  |         |  |  |         |  
| |                                                                     |  | 363,960 |   |  | 333,781 |  |  | 329,333 |  

|17 | Other income
(expenses)
|-- | -----------------------

| |                                                                |  | 2014   |   |  | 2013   |   |  | 2012   |  
| | -------------------------------------------------------------- |  | ------ | - |  | ------ | - |  | ------ | -
| |                                                                |  | $      |   |  | $      |   |  | $      |  
| |                                                                |  |        |   |  |        |   |  |        |  
| | (Loss) gain on disposal of property, plant
      and equipment |  | (49    | ) |  | (832   | ) |  | 45     |  
| | Foreign exchange gain (loss)                                   |  | 4,697  |   |  | 1,987  |   |  | (839   | )
| | Insurance proceeds                                             |  | -      |   |  | 482    |   |  | -      |  
| | Change in unrealized (loss) gain on derivative contracts       |  | (2,074 | ) |  | 7,194  |   |  | (6,612 | )
| | Realized gain (loss) on derivative
      contracts             |  | 105    |   |  | 3,038  |   |  | (244   | )
| |                                                                |  |        |   |  |        |   |  |        |  
| |                                                                |  | 2,679  |   |  | 11,869 |   |  | (7,650 | )

(16)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

|18 | Finance expenses
|-- | ----------------

| |                                                 |  | 2014   |   |  | 2013   |   |  | 2012   |  
| | ----------------------------------------------- |  | ------ | - |  | ------ | - |  | ------ | -
| |                                                 |  | $      |   |  | $      |   |  | $      |  
| |                                                 |  |        |   |  |        |   |  |        |  
| | Interest expense on borrowings                  |  | 22,527 |   |  | 20,930 |   |  | 19,694 |  
| | Less: Interest capitalized on qualifying assets |  | 798    |   |  | 395    |   |  | 106    |  
| |                                                 |  |        |   |  |        |   |  |        |  
| | Net interest expense on borrowings              |  | 21,729 |   |  | 20,535 |   |  | 19,588 |  
| | Other interest and bank charges                 |  | 683    |   |  | 673    |   |  | 1,027  |  
| | Interest income                                 |  | (326   | ) |  | (316   | ) |  | (190   | )
| |                                                 |  |        |   |  |        |   |  |        |  
| |                                                 |  | 22,086 |   |  | 20,892 |   |  | 20,425 |  

|19 | Income tax expense (recovery)                                                                                                                                                            
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                          
|   | The following analysis describes the difference between
      the effective tax rate reflected in the provision for income taxes and the
      statutory rates applicable to the Company.

| |                                                                                                                                           |  | 2014   |   |  | 2013   |   |  | 2012    |  
| | ----------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | - |  | ------ | - |  | ------- | -
| |                                                                                                                                           |  | $      |   |  | $      |   |  | $       |  
| |                                                                                                                                           |  |        |   |  |        |   |  |         |  
| | (Loss) income before income taxes                                                                                                         |  | (1,188 | ) |  | 13,840 |   |  | (12,716 | )
| |                                                                                                                                           |  |        |   |  |        |   |  |         |  
| | Income taxes based on combined federal and
      provincial
      income            tax
      rates of 32.0% (2013  32.0%; 2012  32.0%) |  | (380   | ) |  | 4,429  |   |  | (4,069  | )
| |                                                                                                                                           |  |        |   |  |        |   |  |         |  
| | Increase (decrease) resulting from                                                                                                        |  |        |   |  |        |   |  |         |  
| | Manufacturing
      and processing deduction of 7%                                                                                        |  | 83     |   |  | (969   | ) |  | 890     |  
| | Non-taxable
      portion of unrealized loss (gain) on debt                                                                               |  | 2,533  |   |  | 1,803  |   |  | (580    | )
| | Non-taxable
      portion of capital gains                                                                                                |  | -      |   |  | 11     |   |  | (25     | )
| | Non-deductible
      (taxable) income and other items                                                                                     |  | (141   | ) |  | 490    |   |  | 173     |  
| | SRED investment
      tax credits - net                                                                                                   |  | (635   | ) |  | (347   | ) |  | (266    | )
| | Impact of enacted rates                                                                                                                   |  | -      |   |  | -      |   |  | -       |  
| | Change
      in unrealized tax capital losses for which
      no                       deferred
      tax asset was recognized            |  | 2,533  |   |  | 1,803  |   |  | (580    | )
| |                                                                                                                                           |  |        |   |  |        |   |  |         |  
| | Income tax expense (recovery)                                                                                                             |  | 3,993  |   |  | 7,220  |   |  | (4,457  | )
| |                                                                                                                                           |  |        |   |  |        |   |  |         |  
| | Current income tax recovery                                                                                                               |  | (252   | ) |  | (124   | ) |  | (132    | )
| | Deferred income tax expense (recovery)                                                                                                    |  | 4,245  |   |  | 7,344  |   |  | (4,325  | )
| |                                                                                                                                           |  |        |   |  |        |   |  |         |  
| | Income tax expense (recovery)                                                                                                             |  | 3,993  |   |  | 7,220  |   |  | (4,457  | )

The weighted average applicable tax
rate was 32.0% (2013  32.0%; 2012  32.0%).

(17)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

Current income tax recovery includes a
$0.3 million (2013  $0.1 million; 2012  $0.1 million) recovery in respect to
prior year adjustments.

The Company did not recognize a
deferred income tax asset of $5.3 million (2013  $2.8 million; 2012  $1.0
million) in respect of unrealized foreign exchange losses on long-term debt.

As at December 31, 2014, the Company
had approximately $16.3 million of federal and $21.4 million of provincial
non-capital losses available to reduce future years income for tax purposes,
subject to confirmation by taxation authorities. The losses for both
jurisdictions commence expiry in the December 31, 2032 taxation year.

The movement of the deferred income tax
account is as follows:

| |                                                                                       |  | 2014   |   |  | 2013  | 
| | ------------------------------------------------------------------------------------- |  | ------ | - |  | ----- | 
| |                                                                                       |  | $      |   |  | $     | 
| |                                                                                       |  |        |   |  |       | 
| | As at January 1                                                                       |  | 9,429  |   |  | 1,893 | 
| | Charge (credit) to the statements of operations and
      comprehensive (loss) income |  | 4,245  |   |  | 7,344 | 
| | Tax credit relating to components of other comprehensive
      (loss) income          |  | (485   | ) |  | 192   | 
| |                                                                                       |  |        |   |  |       | 
| | As at December 31                                                                     |  | 13,189 |   |  | 9,429 | 

Significant components of the Companys
deferred income tax assets and liabilities are as follows:

| |                                                    |  | 2014    |   |  | 2013    |  
| | -------------------------------------------------- |  | ------- | - |  | ------- | -
| |                                                    |  | $       |   |  | $       |  
| |                                                    |  |         |   |  |         |  
| | Deferred income tax assets                         |  |         |   |  |         |  
| | Reforestation
      costs                          |  | 3,062   |   |  | 2,807   |  
| | Research and development expenditures              |  | 1,478   |   |  | 882     |  
| | Non-capital loss
      available for carry-forward |  | 4,587   |   |  | 10,648  |  
| | Investment tax credits                             |  | 2,481   |   |  | 2,098   |  
| | Other accrued
      liabilities                    |  | 1,730   |   |  | 838     |  
| |                                                    |  |         |   |  |         |  
| |                                                    |  | 13,338  |   |  | 17,273  |  
| |                                                    |  |         |   |  |         |  
| | Deferred income tax liabilities                    |  |         |   |  |         |  
| | Property, plant and equipment                      |  | (26,049 | ) |  | (25,759 | )
| | Long-term debt                                     |  | (184    | ) |  | (401    | )
| | Force majeure (note 10)                            |  | (294    | ) |  | (542    | )
| |                                                    |  |         |   |  |         |  
| |                                                    |  | (26,527 | ) |  | (26,702 | )
| |                                                    |  |         |   |  |         |  
| | Net deferred income tax liability                  |  | (13,189 | ) |  | (9,429  | )

(18)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

| |                                                 |  | 2014    |   |  | 2013    |  
| | ----------------------------------------------- |  | ------- | - |  | ------- | -
| |                                                 |  | $       |   |  | $       |  
| |                                                 |  |         |   |  |         |  
| | Deferred income tax assets                      |  |         |   |  |         |  
| | To be recovered
      after more than 12 months |  | 12,787  |   |  | 16,682  |  
| | To
      be recovered within 12 months          |  | 551     |   |  | 591     |  
| | Deferred income tax liabilities                 |  |         |   |  |         |  
| | To
      be recovered after more than 12 months |  | (26,527 | ) |  | (26,702 | )
| |                                                 |  |         |   |  |         |  
| | Net deferred income tax liability               |  | (13,189 | ) |  | (9,429  | )

|20 | Employee benefit plans
|-- | ----------------------

| |                                                          |  | 2014  |   |  | 2013  |  
| | -------------------------------------------------------- |  | ----- | - |  | ----- | -
| |                                                          |  | $     |   |  | $     |  
| |                                                          |  |       |   |  |       |  
| | Statements of financial position obligations for         |  |       |   |  |       |  
| | Defined benefit pension plan                             |  | 2,926 |   |  | 1,680 |  
| | Post-employment
      benefits                           |  | 104   |   |  | 199   |  
| | Supplemental vacations                                   |  | 1,589 |   |  | 1,508 |  
| | Statements of operations and comprehensive (loss) income |  |       |   |  |       |  
| | Defined benefit pension plan                             |  | 306   |   |  | 262   |  
| | Post-employment
      medical benefits                   |  | (95   | ) |  | (104  | )
| | Supplemental vacations                                   |  | 80    |   |  | 175   |  

Defined contribution plans

The total expense for the Companys
pension benefits is as follows:

| |                                                             |  | 2014  |  |  | 2013  | 
| | ----------------------------------------------------------- |  | ----- |  |  | ----- | 
| |                                                             |  | $     |  |  | $     | 
| |                                                             |  |       |  |  |       | 
| | Plans providing defined contribution
      pension benefits |  | 3,702 |  |  | 3,460 | 

Defined benefit pension plan

On January 1, 2000, the Company
established a supplementary defined benefit pension plan for certain key
employees. Contributions by the Company are made in accordance with independent
actuarial valuations. The effective date for the last actuarial valuation was
December 31, 2014.

(19)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

Information regarding this plan is as
follows:

| |                                       |  | 2014  |   |  | 2013  |  
| | ------------------------------------- |  | ----- | - |  | ----- | -
| |                                       |  | $     |   |  | $     |  
| |                                       |  |       |   |  |       |  
| | Change in benefit obligation          |  |       |   |  |       |  
| | Obligation 
      beginning of year  |  | 6,903 |   |  | 7,396 |  
| | Actuarial (gain) loss                 |  | 1,887 |   |  | (592  | )
| | Current service
      cost            |  | 148   |   |  | 129   |  
| | Past service cost                     |  | 100   |   |  | -     |  
| | Benefits paid                         |  | (305  | ) |  | (305  | )
| | Interest cost                         |  | 317   |   |  | 275   |  
| |                                       |  |       |   |  |       |  
| | Obligation  end of year              |  | 9,050 |   |  | 6,903 |  
| |                                       |  |       |   |  |       |  
| | Change in plan assets at fair value   |  |       |   |  |       |  
| | Plan assets 
      beginning of year |  | 5,223 |   |  | 4,209 |  
| | Employer contributions                |  | 1,000 |   |  | 1,000 |  
| | Actual return on
      plan assets    |  | 206   |   |  | 319   |  
| | Benefits paid                         |  | (305  | ) |  | (305  | )
| |                                       |  |       |   |  |       |  
| | Plan assets  end of year             |  | 6,124 |   |  | 5,223 |  
| |                                       |  |       |   |  |       |  
| | Net plan liability                    |  | 2,926 |   |  | 1,680 |  

| |                               |  | 2014 |  |  | 2013 |  |  | 2012 | 
| | ----------------------------- |  | ---- |  |  | ---- |  |  | ---- | 
| |                               |  | $    |  |  | $    |  |  | $    | 
| | Components of pension expense |  |      |  |  |      |  |  |      | 
| | Interest costs                |  | 58   |  |  | 133  |  |  | 194  | 
| | Current service costs         |  | 148  |  |  | 129  |  |  | 176  | 
| | Past service costs            |  | 100  |  |  | -    |  |  | -    | 
| |                               |  |      |  |  |      |  |  |      | 
| | Net expense                   |  | 306  |  |  | 262  |  |  | 370  | 

| |                                                                                                                        |  | 2014   |   |  | 2013 |   |  | 2012 |  
| | ---------------------------------------------------------------------------------------------------------------------- |  | ------ | - |  | ---- | - |  | ---- | -
| |                                                                                                                        |  | $      |   |  | $    |   |  | $    |  
| |                                                                                                                        |  |        |   |  |      |   |  |      |  
| | Components of remeasurement (loss) gain                                                                                |  |        |   |  |      |   |  |      |  
| | Demographic assumptions                                                                                                |  | (834   | ) |  | -    |   |  | -    |  
| | Financial
      assumptions                                                                                            |  | (1,021 | ) |  | 932  |   |  | (432 | )
| | Experience assumptions                                                                                                 |  | (32    | ) |  | (340 | ) |  | (2   | )
| | Return
      on plan assets, excluding
      amounts                       included
      in interest (income) expense |  | (53    | ) |  | 177  |   |  | 11   |  
| | Net tax impact                                                                                                         |  | 485    |   |  | (192 | ) |  | 106  |  
| |                                                                                                                        |  |        |   |  |      |   |  |      |  
| | Net impact on comprehensive (loss) income                                                                              |  | (1,455 | ) |  | 577  |   |  | (317 | )

(20)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

| |                               |  | 2014 |  |  | 2013 |  |  | 2012 | 
| | ----------------------------- |  | ---- |  |  | ---- |  |  | ---- | 
| |                               |  | %    |  |  | %    |  |  | %    | 
| |                               |  |      |  |  |      |  |  |      | 
| | Plan assets by asset category |  |      |  |  |      |  |  |      | 
| | Equity securities             |  | 31   |  |  | 31   |  |  | 27   | 
| | Debt securities               |  | 13   |  |  | 13   |  |  | 13   | 
| | Other                         |  | 56   |  |  | 56   |  |  | 60   | 
| |                               |  |      |  |  |      |  |  |      | 
| |                               |  | 100  |  |  | 100  |  |  | 100  | 

The overall expected rate of return is
based on the actuarys median annualized future return, which is in turn based
on the target asset mix and equity risk premium, less allowances for investment
expenses and active equity management.

The actuarial assumptions to determine
the benefit obligation at the end of the year are as follows:

| |                                                | 2014 | 2013
| | ---------------------------------------------- | ---- | ----
| |                                                |      |     
| | To determine benefit obligation at end of year |      |     
| | Discount rate                                  | 3.90 | 4.70
| | Rate of
      compensation increase            | 3.50 | 3.50
| | Rate of price inflation                        | 2.00 | 2.00

The assumed discount rate has a
significant effect on the benefit obligation. A change in this assumption would
have the following effect on the 2014 obligation:

| |               |  | 0.5%     |   |  | 0.5%     | 
| | ------------- |  | -------- | - |  | -------- | 
| |               |  | increase |   |  | decrease | 
| |               |  |          |   |  |          | 
| | Discount rate |  | (535     | ) |  | 589      | 

|21 | Related party transactions                                                                                      
|-- | ----------------------------------------------------------------------------------------------------------------
|   |                                                                                                                 
|   | The Company enters into transactions with Millar Western
      Industries Ltd. (Industries), its parent
company.

| | a) | The Company earned revenue from Industries as
    follows:
| | -- | ----------------------------------------------------------

| |                                          |  | 2014 |  |  | 2013 |  |  | 2012 | 
| | ---------------------------------------- |  | ---- |  |  | ---- |  |  | ---- | 
| |                                          |  | $    |  |  | $    |  |  | $    | 
| |                                          |  |      |  |  |      |  |  |      | 
| | Administration fees                      |  | 378  |  |  | 373  |  |  | 367  | 
| |                                          |  |      |  |  |      |  |  |      | 
| | Other fees                               |  | 156  |  |  | -    |  |  | -    | 
| |                                          |  |      |  |  |      |  |  |      | 
| | Included in accounts receivable relating |  |      |  |  |      |  |  |      | 
| | Included to
      these transactions     |  | 194  |  |  | 43   |  |  | 39   | 

Administration fees are established at
the cost to the Company plus a 5% markup.

(21)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

| | b) | The Company incurred costs charged by Industries as
      follows:
| | -- | ------------------------------------------------------------------

| |                                |  | 2014  |  |  | 2013  |  |  | 2012  | 
| | ------------------------------ |  | ----- |  |  | ----- |  |  | ----- | 
| |                                |  | $     |  |  | $     |  |  | $     | 
| | Chemical purchases             |  | 1,100 |  |  | 1,109 |  |  | 922   | 
| | Other services                 |  | 2,584 |  |  | 2,036 |  |  | 1,862 | 
| | Accounts payable to Industries |  | 245   |  |  | 246   |  |  | 650   | 

| |    | Chemical purchases are charged to the Company at the same
      prices used for arms-length parties; facility and equipment transactions
      are charged at the cost to Industries.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                      
| | c) | Key management compensation                                                                                                                                                          
| |    |                                                                                                                                                                                      
| |    | Key management includes members of the executive and
      officers of the Company. The compensation for key management for services
      is as follows:                            

| |                          |  | 2014  |  |  | 2013  |  |  | 2012  | 
| | ------------------------ |  | ----- |  |  | ----- |  |  | ----- | 
| |                          |  | $     |  |  | $     |  |  | $     | 
| |                          |  |       |  |  |       |  |  |       | 
| | Short-term benefits      |  | 4,824 |  |  | 4,175 |  |  | 3,294 | 
| | Post-employment benefits |  | 1,206 |  |  | 1,165 |  |  | 703   | 
| |                          |  |       |  |  |       |  |  |       | 
| |                          |  | 6,030 |  |  | 5,340 |  |  | 3,997 | 

Short-term benefits include salaries,
current benefits and profit shares paid or payable.

|22 | Financial instruments and financial risk
      factors            
|-- | ------------------------------------------------------------------
|   |                                                                   
|   | Carrying and fair value of financial instruments by
      category

2014Loans
    
    
    OtherHeld-for-
    
    
    and
    
    
    financial
    
    
    Carryingtrading
    
    
    receivables
    
    
    liabilities
    
    
    value
    
    
    Fair value$
    
    
    $
    
    
    $
    
    
    $
    
    
    $Financial assetsCash
      and short-terminvestments
    
    -
    
    
    47,425
    
    
    -
    
    
    47,425
    
    
    47,425Accounts receivableTrade and other
    
    -
    
    
    40,617
    
    
    -
    
    
    40,617
    
    
    40,617Other assets
    
    -
    
    
    323
    
    
    -
    
    
    323
    
    
    323-
    
    
    88,365
    
    
    -
    
    
    88,365
    
    
    88,365


(22)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

2014Loans
    
    
    OtherHeld-for-
    
    
    and
    
    
    financial
    
    
    Carryingtrading
    
    
    receivables
    
    
    liabilities
    
    
    value
    
    
    Fair value$
    
    
    $
    
    
    $
    
    
    $
    
    
    $Financial liabilitiesAccounts payableTrade and other
    
    1,831
    
    
    -
    
    
    52,373
    
    
    54,204
    
    
    54,204Borrowings
    
    -
    
    
    -
    
    
    263,761
    
    
    263,761
    
    
    274,7861,831
    
    
    -
    
    
    316,134
    
    
    317,965
    
    
    328,990


2013Loans
    
    
    OtherHeld-for-
    
    
    and
    
    
    financial
    
    
    Carryingtrading
    
    
    receivables
    
    
    liabilities
    
    
    value
    
    
    Fair value$
    
    
    $
    
    
    $
    
    
    $
    
    
    $Financial assetsCash
      and short-terminvestments
    
    212
    
    
    54,984
    
    
    -
    
    
    55,196
    
    
    55,196Accounts receivableTrade and other
    
    18
    
    
    40,132
    
    
    -
    
    
    40,150
    
    
    40,150Other assets
    
    -
    
    
    365
    
    
    -
    
    
    365
    
    
    365230
    
    
    95,481
    
    
    -
    
    
    95,711
    
    
    95,711Financial liabilitiesAccounts payableTrade and other
    
    -
    
    
    -
    
    
    52,096
    
    
    52,096
    
    
    52,096Borrowings
    
    -
    
    
    -
    
    
    240,181
    
    
    240,181
    
    
    242,220-
    
    
    -
    
    
    292,277
    
    
    292,277
    
    
    294,316


The estimated fair value of financial
instruments is based on relevant market prices and information available at the
year end.

The fair value of short-term financial
assets and liabilities, which include cash and cash equivalents, restricted
cash, accounts and other receivables, accounts payable and accrued liabilities,
approximates their carrying value, due to the short-term nature of these
financial assets and liabilities.

The fair value of the Senior Notes
included in borrowings as at December 31, 2014, was estimated to be US$216.6
million (2013  US$215.3 million) based on the most recent bid price. The fair
value of the power purchase rights loans, included in borrowings, as at December
31, 2014, was estimated to be $11.6 million (2013  $13.3 million), based on a
market interest rate assumption of 9.56% (2013  8.82%).

(23)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

Financial assets and liabilities that
are recognized on the statements of financial position at fair value are
classified in a hierarchy that is based on the significance of the inputs used
in making the measurements. The three levels of the hierarchy are:

| |  | Level 1  unadjusted quoted
      prices in active markets for identical assets or liabilities;                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Level 2  inputs other than quoted prices that are
      observable for the asset or liability, either directly (that is, as
      prices) or indirectly (that is, as derived from prices); and
| |  | Level 3  inputs that are not
      based on observable market data.                                                                                                                           

Derivative instruments are included in
Level 2 of the fair value hierarchy as they are valued using pricing models or
discounted cash flow models. These models require a variety of inputs,
including, but not limited to, contractual terms, market prices, forward price
curves, yield curves, and credit spreads. These inputs are obtained from or
corroborated with the market where possible.

The fair value of fixed commodity
forward sale and purchase contracts is calculated using a discounted cash flow
method based on forward commodity prices. The fair value of forward exchange
contracts is calculated using a forward pricing model.

Financial risk management

The Companys activities expose it to a
variety of financial risks: market risk, foreign currency risk, interest rate
risk, liquidity risk and credit risk. The Companys risk management strategy
focuses on the unpredictability of financial and commodity markets and seeks to
reduce related potential adverse effects on the Companys financial performance.

The Companys risk management policies
require that significant risks are reviewed with the Companys board of
directors. The Companys methods for managing financial risks, outlined below,
remain unchanged in the year ended December 31, 2014.

| | i) | Market risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | From time to time, the Company enters into forward
      contracts for both lumber and pulp to reduce commodity-price risk. The
      Company does not enter into such agreements for speculative or trading
      purposes. These contracts are generally settled financially but may, at
      the Companys discretion, be settled by physical delivery of the finished
      product. Contracts outstanding at the end of the year are recorded at
      their fair value, and any unrealized gains or losses are included in other
      (income) expense. As at December 31, 2014, the Company had $nil US dollar
      denominated forward lumber commodity contracts outstanding (2013  US$8.5
      million; 2012 US$59.4 million), resulting in no unrealized gain or loss
      (2013  gain of $0.2 million; 2012  loss of $7.0 million) in other
      (income) expense. In 2014, the Company had a realized gain on commodity
      contracts of $1.5 million (2013  gain of $3.1 million; 2012  loss of
      $0.7 million) in other (income) expense.

(24)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

| | ii)  | Foreign currency risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |      | A foreign currency risk arises when future commercial
      transactions or recognized assets or liabilities are denominated in a
      currency that is not the Companys functional currency. The Company is
      exposed to foreign currency risk on sales, purchases and the maturity of
      its $210 million in long-term debt that are denominated in US
    dollars.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |      | A significant portion of the Companys sales,
      approximately 67% of its 2014 revenue (2013  64%; 2012  64%), were
      denominated in U.S. currency, and as at December 31, 2014, the Company had
      $30.1 million (2013  $29.9 million; 2012  $16.0 million) in US dollar
      denominated accounts receivable. Consequently, the Company is exposed to
      foreign currency exchange risk, as changes in foreign currency rates
      affect the future cash flows of accounts receivable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |      | The impact on earnings of fluctuations in currency rates
      is partially offset by the corresponding fluctuation in interest payments,
      substantially all of which are denominated in US dollars. To further
      reduce the impact on earnings of fluctuations in currency rates, the
      Company may enter into currency contracts to hedge US dollar positions,
      but does not hold or issue foreign currency financial instruments for
      speculative or trading purposes. As at December 31, 2014, the Company had
      US$49.0 million (2013  US$5.0 million) in outstanding forward-exchange
      contracts, with a weighted average contract rate of C$1.1282/US$1.00 (2013
       C$1.0710/US$1.00). The Company also had US$1.0 million (2013  $45.0
      million) in outstanding collar options contracts, with a call option price
      of CA$1.0850/US$1.00 and put option price of CA$1.0950/US$1.00. The
      Company recorded the amount of unrealized loss on these currency contracts
      for the year ended December 31, 2014 of $1.8 million (2013  $0.02 million
      gain) in other (income) expense.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |      | A significant portion of the Companys products are sold
      at prices denominated in US dollars or based on prevailing US dollar
      prices, and a significant portion of operational costs and expenses
      incurred in Canadian dollars. Therefore, an increase in the value of the
      Canadian dollar relative to the US dollar reduces the revenue in Canadian
      dollar terms realized by the Company from sales made in US dollars, which
      reduces operating margin and the cash flow available to fund operations.
      The Companys US dollar denominated long-term debt provides a partial
      offset to exchange exposure. The Company has not entered into any
      financial instruments to mitigate the foreign currency risk associated
      with the long-term debt.                                                                                                                                                                                                                                                                                                                                              
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |      | The US dollar financial position exposure as at December
      31, 2014 was US$33.0 million (2013  US$32.5 million) in net working
      capital and US$210.0 million (2013  US$210.0 million) in long-term debt.
      Based on these balances, with other variables unchanged, a $0.01 change in
      the exchange rate for one US dollar into Canadian currency would have
      resulted in a $2.5 million (2013  $1.8 million) change in
  earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | iii) | Interest rate risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |      | The interest rates on the majority of the Companys
      long-term debt are fixed; consequently, the Company is not significantly
      exposed to fair-value changes on long-term debt when the market rate of
      interest changes. The interest rate on the Companys revolving credit
      facility does fluctuate with the market; however, there was no balance
      drawn on the facility as at December 31, 2014. Interest rate
    exposure mainly relates to interest receipts on the Companys cash
      balance of $47.4 million (2013  $47.2 million) at the end of the year.
      The Company does not currently use any derivative instruments to manage
its exposure to changes in market interest rates.                                                                                                                                                                                                                                                                                                                                                                                                                        

(25)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

| | iv) | Credit risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | Credit risk is the risk customers or counterparties to
      certain financial contracts will fail to pay amounts due or perform their
      obligations under a contract. The Company is exposed to credit risk
      primarily through its accounts receivable. The Company manages this risk
      through the establishment of credit policies and limits that are applied
      in the selection of counterparties and through ongoing management review
      of all receivable balances past due, with the objective of identifying at
      an early stage matters that could potentially delay the collection of
      funds.                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | To mitigate the risk associated with customer or
      counterparty failure to meet obligations, the Company insures most trade
      receivables to 90% of the value of the invoice. The proportion of accounts
      thus insured amounted, as at December 31, 2014, to 90% of the Companys
      total trade receivables; the remaining balance was predominantly
      represented by receivables with other forest products companies relating
      to fibre agreements, for which the Company held outstanding payables in
      similar amounts. The maximum exposure to credit risk for receivables at
      the reporting date was $41 million. The Company and the insurer work in
      concert to regularly review the creditworthiness of existing and future
      customers and establish that credit limits are commensurate with credit
      risk. All new trade customers must be insurable under the terms of the
      policy.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | The concentration of credit risk of accounts receivable
      is limited, as accounts receivable are widely distributed among customers
      and geographic locations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| |                                 |  | 2014   |  |  | 2013   | 
| | ------------------------------- |  | ------ |  |  | ------ | 
| |                                 |  | $      |  |  | $      | 
| |                                 |  |        |  |  |        | 
| | Current                         |  | 30,690 |  |  | 29,180 | 
| | 30  60 days                    |  | 1,400  |  |  | 2,774  | 
| | 61  90 days                    |  | 157    |  |  | -      | 
| | 91  120 days                   |  | 3      |  |  | 4      | 
| | Greater than 120 days           |  | -      |  |  | -      | 
| |                                 |  |        |  |  |        | 
| | Total trade receivables         |  | 32,250 |  |  | 31,958 | 
| | Other receivables               |  | 8,367  |  |  | 6,023  | 
| | Allowance for doubtful accounts |  | -      |  |  | -      | 
| |                                 |  |        |  |  |        | 
| | Total accounts receivable       |  | 40,617 |  |  | 37,981 | 

During 2014, the Company recorded $0.1
million in bad debt expense (2013  $nil).

Periodically, the Company enters into
agreements with third parties for the sale of certain trade receivables arising
from pulp export sales to China. Total receivables sold during the year ended
December 31, 2014, were US$6.2 million (2013  US$33.0 million). As the risks
and rewards of ownership over the receivables were transferred, the receivables
were derecognized at the date of the transaction and no gain or loss was recognized. Related fees in the
      amount of $8 thousand (2013  $0.1 million) were shown as a reduction in
revenue.

(26)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

| | v) | Liquidity risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Liquidity risk arises from the possibility the Company
      will not be able to meet its financial obligations as they fall due. The
      Company manages liquidity risk by forecasting cash flows to identify
      potential financing requirements, and by maintaining access to additional
      financing in the form of a working capital supported revolving credit
      facility in the amount of $50 million, which is due July 15, 2018. This
      credit facility requires the Company to meet certain covenants. The
      Company was in compliance with these covenants as at December 31,
    2014.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The following are contractual cash flow maturities
      (including interest) of financial liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

<1 year
    
    
    1-2 years
    
    
    3-5 years
    
    
    >5 years
    
    
    Total$
    
    
    $
    
    
    $
    
    
    $
    
    
    $Borrowings
    
    23,895
    
    
    25,843
    
    
    76,902
    
    
    276,638
    
    
    403,278Accounts payable and accrued liabilities
    
    54,204
    
    
    -
    
    
    -
    
    
    -
    
    
    54,20478,099
    
    
    25,843
    
    
    76,902
    
    
    276,638
    
    
    457,482


|23 | Capital management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Company is privately owned and, accordingly,
      management defines capital as cash and shareholders equity, with the
      source of its capital being operations. It is the Companys objective to
      manage its capital to ensure adequate resources exist to support
      operations while maintaining business growth. The Companys financial
      results are primarily influenced by the prevailing market prices for pulp
      and lumber and the relative value of the Canadian and US dollars;
      therefore, it manages and adjusts its capital structure as needed, in
      light of the economic conditions and the risk characteristics of the
      underlying assets. To maintain or adjust the capital structure, the
      Company may issue new debt to replace existing debt with different
      characteristics.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Company does not have any externally imposed capital
      requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|24 | Segmented information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Companys operations are located in Canada. The
      Companys reportable segments are strategic business units that
      manufacture and sell different products. The business units are managed
      separately, as each business requires different manufacturing technology
      and marketing strategies. The Company has three reportable segments:
      lumber, pulp and corporate and other. The lumber segment manufactures
      dimension lumber for sale primarily in Canada, the United States and Asia.
      The pulp segment manufactures bleached chemi-thermo-mechanical pulp for
      sale to papermakers worldwide. Included in corporate and other are the
      combined results from the Companys management fees and unallocated
      corporate and other expenses.                                                

(27)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

The accounting policies applied to the
reporting segments are as described in note 2. The Company evaluates the
performance of each segment based on operating earnings. The Company does not
allocate financing expenses or income taxes to its business segments. The
Company accounts for inter-segment revenue and transfers as if the transfers
were to third parties at current market prices.

Product segments

| | Lumber                                                    |  | 2014     |   |  | 2013     |   |  | 2012     |  
| | --------------------------------------------------------- |  | -------- | - |  | -------- | - |  | -------- | -
| |                                                           |  | $        |   |  | $        |   |  | $        |  
| |                                                           |  |          |   |  |          |   |  |          |  
| | Revenue from external customers                           |  | 207,272  |   |  | 191,639  |   |  | 153,839  |  
| | Cost of products sold                                     |  | (152,139 | ) |  | (141,853 | ) |  | (129,374 | )
| | Freight and other distribution costs                      |  | (15,764  | ) |  | (11,552  | ) |  | (11,071  | )
| | Depreciation and amortization                             |  | (6,838   | ) |  | (6,756   | ) |  | (6,565   | )
| | Other income (expense)                                    |  | 1,599    |   |  | 10,931   |   |  | (7,446   | )
| |                                                           |  |          |   |  |          |   |  |          |  
| | Operating earnings (loss)                                 |  | 34,130   |   |  | 42,409   |   |  | (617     | )
| |                                                           |  |          |   |  |          |   |  |          |  
| | Pulp                                                      |  |          |   |  |          |   |  |          |  
| |                                                           |  |          |   |  |          |   |  |          |  
| | Revenue from external customers                           |  | 197,473  |   |  | 190,926  |   |  | 178,195  |  
| | Cost of products sold                                     |  | (121,671 | ) |  | (117,255 | ) |  | (111,626 | )
| | Freight and other distribution costs                      |  | (44,003  | ) |  | (41,886  | ) |  | (42,151  | )
| | Depreciation and amortization                             |  | (7,263   | ) |  | (7,083   | ) |  | (6,950   | )
| | Other income (expense)                                    |  | 1,080    |   |  | 693      |   |  | (200     | )
| |                                                           |  |          |   |  |          |   |  |          |  
| | Operating earnings                                        |  | 25,616   |   |  | 25,395   |   |  | 17,268   |  
| |                                                           |  |          |   |  |          |   |  |          |  
| | Corporate and other                                       |  |          |   |  |          |   |  |          |  
| |                                                           |  |          |   |  |          |   |  |          |  
| | Revenue from related parties                              |  | 378      |   |  | 373      |   |  | 367      |  
| | Cost of products sold                                     |  | (42      | ) |  | (47      | ) |  | (39      | )
| | General and administration                                |  | (18,748  | ) |  | (19,061  | ) |  | (13,781  | )
| | Depreciation and amortization                             |  | (171     | ) |  | (157     | ) |  | (126     | )
| | Other income (expense)                                    |  | -        |   |  | 245      |   |  | (4       | )
| |                                                           |  |          |   |  |          |   |  |          |  
| | Operating loss                                            |  | (18,583  | ) |  | (18,647  | ) |  | (13,583  | )
| |                                                           |  |          |   |  |          |   |  |          |  
| | Revenue from external customers and related
      parties |  | 405,123  |   |  | 382,938  |   |  | 332,401  |  
| | Cost of products sold and general and administration      |  | (292,600 | ) |  | (278,216 | ) |  | (254,820 | )
| | Freight and other distribution costs                      |  | (59,767  | ) |  | (53,438  | ) |  | (53,222  | )
| | Depreciation and amortization                             |  | (14,272  | ) |  | (13,996  | ) |  | (13,641  | )
| | Other income (expense)                                    |  | 2,679    |   |  | 11,869   |   |  | (7,650   | )
| |                                                           |  |          |   |  |          |   |  |          |  
| | Operating earnings                                        |  | 41,163   |   |  | 49,157   |   |  | 3,068    |  

Cost of products sold for the lumber
segment is net of chip transfers to the pulp segment of $6.5 million (2013 
$6.2 million; 2012  $6.6 million).

(28)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

Expenditures on property, plant and
equipment and intangible assets

| |                     |  | 2014   |  |  | 2013  | 
| | ------------------- |  | ------ |  |  | ----- | 
| |                     |  | $      |  |  | $     | 
| |                     |  |        |  |  |       | 
| | Lumber              |  | 5,046  |  |  | 2,105 | 
| | Pulp                |  | 23,563 |  |  | 6,713 | 
| | Corporate and other |  | 370    |  |  | 1,026 | 
| |                     |  |        |  |  |       | 
| |                     |  | 28,979 |  |  | 9,844 | 

Expenditures on property, plant and
equipment and intangible assets are net of government grant funding.

Identifiable assets

| |                     |  | 2014    |  |  | 2013    | 
| | ------------------- |  | ------- |  |  | ------- | 
| |                     |  | $       |  |  | $       | 
| |                     |  |         |  |  |         | 
| | Lumber              |  | 208,461 |  |  | 198,331 | 
| | Pulp                |  | 159,618 |  |  | 137,878 | 
| | Corporate and other |  | 52,033  |  |  | 60,065  | 
| |                     |  |         |  |  |         | 
| |                     |  | 420,112 |  |  | 396,274 | 

The Companys assets are all located in
Canada. Revenue is attributed to geographic locations based on shipping
destination as follows:

Geographic sales revenue

| |               |  | 2014    |  |  | 2013    |  |  | 2012    | 
| | ------------- |  | ------- |  |  | ------- |  |  | ------- | 
| |               |  | $       |  |  | $       |  |  | $       | 
| |               |  |         |  |  |         |  |  |         | 
| | Canada        |  | 122,859 |  |  | 130,333 |  |  | 110,166 | 
| | United States |  | 90,085  |  |  | 67,628  |  |  | 56,342  | 
| | Europe        |  | 25,773  |  |  | 34,728  |  |  | 36,441  | 
| | China         |  | 100,450 |  |  | 67,572  |  |  | 67,286  | 
| | Asia          |  | 58,603  |  |  | 77,268  |  |  | 52,404  | 
| | Other         |  | 7,353   |  |  | 5,409   |  |  | 9,762   | 
| |               |  |         |  |  |         |  |  |         | 
| |               |  | 405,123 |  |  | 382,938 |  |  | 332,401 | 

(29)

---

|Millar Western Forest Products Ltd.                                                                                  
|---------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                        
|For the years
      ended December 31                                                                                
|                                                                                                                     
|(all amounts in text and tabular format are expressed in
      thousands of Canadian dollars, unless otherwise noted)

|25 | Supplementary cash flow information Net change in
      non-cash working capital items
|-- | --------------------------------------------------------------------------------------

| |                                                                        |  | 2014    |   |  | 2013    |   |  | 2012    |  
| | ---------------------------------------------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
| |                                                                        |  | $       |   |  | $       |   |  | $       |  
| |                                                                        |  |         |   |  |         |   |  |         |  
| | Accounts receivable and other                                          |  | (2,540  | ) |  | (11,578 | ) |  | 9,227   |  
| | Inventories                                                            |  | (13,654 | ) |  | 2,027   |   |  | (7,657  | )
| | Prepaid expenses                                                       |  | (2,468  | ) |  | 1,835   |   |  | (2,052  | )
| | Accounts payable and accrued liabilities                               |  | 4,650   |   |  | (4,454  | ) |  | 4,377   |  
| |                                                                        |  |         |   |  |         |   |  |         |  
| |                                                                        |  | (14,012 | ) |  | (12,170 | ) |  | 3,895   |  
| |                                                                        |  |         |   |  |         |   |  |         |  
| | Additions to property, plant and equipment and intangible
      assets |  | (30,479 | ) |  | (25,319 | ) |  | (20,389 | )
| | Changes in working capital for investing
      activities              |  | 5,355   |   |  | 3,269   |   |  | 3,685   |  
| | Interest capitalized on qualifying assets                              |  | 798     |   |  | 395     |   |  | 106     |  
| |                                                                        |  |         |   |  |         |   |  |         |  
| |                                                                        |  |         |   |  |         |   |  |         |  
| |                                                                        |  | (24,326 | ) |  | (21,655 | ) |  | (16,598 | )
| |                                                                        |  |         |   |  |         |   |  |         |  
| | Interest paid                                                          |  | 21,614  |   |  | 20,131  |   |  | 19,284  |  
| |                                                                        |  |         |   |  |         |   |  |         |  
| | Income taxes refunded                                                  |  | (252    | ) |  | (124    | ) |  | (330    | )

(30)

---