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UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, 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,
2013

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)

Carol CottonMillar 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

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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.

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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:
|                                                  |              
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|                                                  |              
|                                                  | ITEM
      7:
|                                                  |              
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|                                                  |              
|                                                  | ITEM
      8:
|                                                  |              
|                                                  |              
|                                                  | ITEM
      9:
|                                                  |              
|                                                  |              
|                                                  |              
|                                                  |              
|                                                  |              
|                                                  |              

i

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|         | ITEM 10: | ADDITIONAL
    INFORMATION                                                         | 55                                                                          
|-------- | -------- | ---------------------------------------------------------------------------------- | ----------------------------------------------------------------------------
|         |          | 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                     | 58                                                                          
|         |          | A.                                                                                 | Commodity Prices                                                            
|         |          | B.                                                                                 | Foreign
      Exchange                                                      
|         |          | C.                                                                                 | Interest Rates                                                              
|         | ITEM 12: | DESCRIPTION
    OF SECURITIES OTHER THAN EQUITY SECURITIES                         | 59                                                                          
|         |          |                                                                                    |                                                                             
|PART II  |          |                                                                                    |                                                                             
|         | ITEM 13: | DEFAULTS, DIVIDEND
    ARREARAGES AND DELINQUENCIES                                | 59                                                                          
|         | ITEM 14: | MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 59                                                                          
|         | ITEM 15: | CONTROLS AND PROCEDURES                                                            | 59                                                                          
|         | ITEM 16  |                                                                                    | 60                                                                          
|         |          | 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                                                               | 61                                                                          
|         | ITEM 18: | FINANCIAL
    STATEMENTS                                                           | 61                                                                          
|         | ITEM 19: | EXHIBITS                                                                           | 61                                                                          

ii

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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. Our first full year of
reporting under IFRS was 2011, with a transition date of January 1, 2010, and
comparable periods in 2010 being restated. Prior to January 1, 2011, we prepared
our financial statements in accordance with Canadian generally accepted
accounting principles, which we refer to as Previous GAAP. As a result of the
transition to IFRS, certain of our revenue and cost items have been
reclassified, which affected the calculation of Adjusted EBITDA (defined below)
in prior periods. 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 expenses, depreciation and amortization. Other income or expense
includes both realized and unrealized gains and losses on foreign exchange or
commodity hedging, and foreign-exchange impacts on working capital balances,
with only the realized portion of such income or expense being included in
Adjusted EBITDA and both the realized and unrealized portion being 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 3: Selected Financial
Data 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;
- 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

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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

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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
and for each of the years in the three-year period ended December 31, 2013, 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 reported in Canadian dollars and have been
prepared in accordance with IFRS. The selected historical financial data
presented below as at and for the year ended December 31, 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 period,
which are not included in this annual report.

Our earlier audited financial statements were prepared in
accordance with Previous GAAP, which differs from IFRS in certain respects. The
selected historical financial data presented below as at and for the year ended
December 31, 2009, have been derived from, and should be read together with, our
audited financial statements prepared in accordance with Previous GAAP, 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

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|                                           |   | Year ended December 31, |  
|------------------------------------------ | - | ----------------------- | -
|                                           |   | 2013                    |  
|Statements of earnings data:               |   |                         |  
|IFRS                                       |   |                         |  
|Revenue                                    | $ | 382,938                 |  
|Cost of products sold                      |   | 259,155                 |  
|Freight and other distribution costs       |   | 53,438                  |  
|Depreciation and amortization              |   | 13,996                  |  
|General and administration                 |   | 19,061                  |  
|Other (income) expenses
    (1)            |   | (11,869                 | )
|Operating earnings                         |   | 49,157                  |  
|Foreign exchange (loss) gain on borrowings |   | (14,425                 | )
|Finance expenses(2)                        |   | (20,892                 | )
|Earnings (loss) before income taxes        |   | 13,840                  |  
|Income taxes expense (recovery)            |   | 7,220                   |  
|Net earnings (loss) for the year           | $ | 6,620                   |  
|Actuarial (gains) losses- net of tax       |   | (577                    | )
|Comprehensive income (loss) for the year   | $ | 7,197                   |  
|                                           |   |                         |  
|Other data:                                |   |                         |  
|Shipments:                                 |   |                         |  
|Lumber (mmfbm)                             |   | 524                     |  
|Pulp (madmt)                               |   | 331                     |  
|Average revenue:                           |   |                         |  
|Lumber ($ per mfbm)                        |   | 366                     |  
|Pulp ($ per admt)                          |   | 577                     |  

|                                   |   | Year ended December 31, | 
|---------------------------------- | - | ----------------------- | 
|                                   |   | 2013                    | 
|Balance sheets data:               |   | (in thousands)          | 
|IFRS                               |   |                         | 
|Cash                               | $ | 47,219                  | 
|Restricted cash                    | $ | 7,977                   | 
|Total assets                       | $ | 396,274                 | 
|Financial liabilities - borrowings | $ | 240,181                 | 
|Shareholder's equity               | $ | 78,317                  | 

|(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
      19 to our audited financial statements included elsewhere in this annual
      report, referring to the three-year period ended December 31,
  2013.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(2) | Finance expenses consists of interest expense, net of
      interest income. See note 20 to our audited financial statements included
      elsewhere in this annual report, referring to the three-year period ended
      December 31, 2013.                                                                                                                                                                                                          

6

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Year ended December 31,2009Statement of earnings data:
    
    (in thousands)Previous GAAPRevenue
    $
    255,010Cost of products sold
    
    186,636Freight and other distribution costs
    
    53,391Depreciation and amortization
    
    21,011General and administration
    
    12,329Operating (loss)
    
    (18,357
    )Foreign exchange gain on borrowings
    
    31,730Other expenses (1)
    
    10,156Finance expenses (2)
    
    (18,097
    )(Loss) before income taxes
    
    (14,880
    )Income taxes (recovery)
    
    (7,397
    )Net (loss) for the year
    $
    (7,483
    )Other data:Shipments:Lumber (mmfbm)
    
    353Pulp (madmt)
    
    296Average revenue:Lumber ($ per mfbm)
    
    246Pulp ($ per admt)
    
    567




2009Balance sheets data:
    
    (in thousands)Previous GAAPCash
    $
    61,186Total assets
    $
    336,138Financial liabilities - borrowings
    $
    215,939Shareholder's equity
    $
    69,764


|(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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                     
|(2) | Finance expenses consists of interest expense, net of
      interest income.                                                                                                                                                                                                        

7

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Adjusted EBITDA:

|                                           |   | Year ended December 31, |  
|------------------------------------------ | - | ----------------------- | -
|                                           |   | 2013                    |  
|IFRS                                       |   |                         |  
|Net earnings (loss) for the year           | $ | 6,620                   |  
|Income taxes expense (recovery)            |   | 7,220                   |  
|Foreign exchange loss (gain) on borrowings |   | 14,425                  |  
|Finance expenses                           |   | 20,892                  |  
|Operating earnings                         |   | 49,157                  |  
|Other unrealized (income) expense          |   | (6,853                  | )
|Depreciation and amortization              |   | 13,996                  |  
|Adjusted EBITDA(1)                         | $ | 56,300                  |  

Year ended December 31,2009Previous GAAP
    
    (in thousands)Net loss for the year
    $
    (7,483
    )Income taxes recovery
    
    (7,397
    )Other expenses (income)
    
    2,592Foreign exchange (gain) loss on borrowings
    
    (31,730
    )Finance expenses
    
    18,097Depreciation and amortization
    
    21,011Adjusted EBITDA (1)
    $
    (4,910
    )


|(1) | We define Adjusted EBITDA as operating earnings plus
      other unrealized income or expenses, depreciation and amortization. Other
      income or expense includes both realized and unrealized gains and losses
      on foreign exchange or commodity hedging, and foreign-exchange impacts on
      working capital balances, with only the realized portion of such income or
      expense being included in Adjusted EBITDA and both the realized and
      unrealized portion being included in the determination of operating
      earnings.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

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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:

2013
    2012
    2011
    2010
    2009Low
    0.9314
    0.9576
    0.9383
    0.9218
    0.7633High
    1.0188
    1.0377
    1.0630
    1.0069
    0.9755Period End
    0.9402
    1.0051
    0.9833
    1.0054
    0.9515Average
    0.9710
    1.0004
    1.0110
    0.9709
    0.8757


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
    0.8932
    0.8909
    0.9314
    0.9391
    0.9527
    0.9471High
    0.9141
    0.9444
    0.9471
    0.9617
    0.9736
    0.9803


On March 4th, 2014, the Bank of Canadas closing
rate was US$0.9009 = $1.00.

B.         
Capitalization and Indebtedness

Not applicable.

C.         
Reasons for the Offer and Use of Proceeds

Not applicable.

9

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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 could materially and adversely affect our business, our financial
condition or results of operations, or our ability to make payments under our
outstanding indebtedness.

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.

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 fiber, energy, labor or other costs than we do,
or less stringent environmental and other governmental regulations to comply
with than we do. Other 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.

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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.

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

Our facilities for producing lumber and pulp are capital
intensive. 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. The BEP has not progressed according to plan,
experiencing delays and cost overruns while under the management of an
Engineering, Procurement and Construction (EPC) contractor hired to design and
build the facility. We therefore terminated the EPC contract, effective November
6, 2013, and at year-end were in the process of assessing project status and
preparing new plans for project completion. See note 28 to our audited financial
statements included elsewhere in this annual report.

While final costs for the BEP are not currently known, they
will be higher than originally budgeted. Furthermore, while the completion date
is not currently known, it will be later than originally scheduled. Government
departments providing grant funding have been advised of project delays and we
have no reason to expect the delays to affect our receipt of the full amount of
grant funding committed; bank financing is likewise expected to be unaffected.
Additional capital required to complete the project will be provided from our
operations, cash on hand, additional loans and/or additional government grants.
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.

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,
without modification to any other agreement terms.

Under the SLA, export charges are imposed on Canadian lumber
shipments to the U.S. when the 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% .

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Given the monthly average benchmark lumber prices recorded
during the period, 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 in 2013, our shipments were subject to export
charges in only three months of the year. 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 14% of our revenue in 2013.
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.

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

Fiber is the primary raw material in our products; therefore,
maintaining long-term fiber security is important to our business. We obtain
approximately 61% of our fiber requirements, based on current production
capacity, from the Millar Western Forest Management Agreement, or Millar Western
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 we have met
our obligations under the agreement. Our FMA, representing approximately 25% of
our fiber requirements, and one of our Coniferous Timber Quotas, representing
less than one percent of our fiber requirements, expire in 2017, and the balance
of our quotas and allocations have expiry dates ranging between 2021 and 2031.
The FMA, quotas or allocations may not be renewed or extended on acceptable
terms. In addition, the Millar Western FMA and such 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 land- and volume-based tenures could affect our
ability to maintain current mill operating rates.

In 2005, the Alberta government introduced the Healthy Pine
Strategy in response to the then-worsening mountain pine beetle situation 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 the forest management planning process and
approval by Alberta Environment and Sustainable Resource Development, companies
can 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 that employ these surge cuts may 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 41% in
our FMA and four of our Coniferous Timber Quotas over annual allowable cut
levels stated in our most recent detailed forest management plan. If these surge
volumes are fully harvested, annual allowable cuts could fall by an average of
15% below the volumes stated in our detailed forest management plan, for a
ten-year period beginning in 2017. The drop-down 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. We have implemented a series of intensive forest
management practices to improve forest growth and yield, to mitigate these
potential annual allowable cut reductions; however, we may 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 in response to significant land-use pressures arising during a period of
rapid economic expansion and population growth in the province. The Alberta
government has divided the province into seven regions and intends to develop
land-use plans for each of the regions that effectively balance competing
economic, environmental and social demands. While we view this process as beneficial in providing long-term certainty
regarding resource development, it presents a risk in that the government could
increase the amount of land set aside for conservation purposes at the expense
of lands currently 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 meet conservation objectives. 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 affect our ability to secure sufficient volumes of fiber to allow
the future addition of a second operating shift at our Boyle sawmill. 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 to this process could have a
material adverse effect on our business, financial condition, results of
operation and cash flows.

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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
provincial government, in consultation with industry and other stakeholders,
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 30% 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.

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 for fiber, logging and
transportation, 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 stumpage fees 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 may increase the costs through the imposition of additional and 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 91% 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.

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We rely on independent contractors to harvest timber and haul
logs from the forest to our operations. Contractor shortages arising from strong
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 vulnerable to rising fuel prices and to
log-haul distances. Depending on the harvesting rotation, we may be travelling
greater distances to access our fiber, which could also contribute to higher
costs. These outcomes 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.

In 2006 and 2009, Alberta experienced major in-flights of
mountain pine beetle from British Columbia, firmly establishing the insect in
our province and threatening mature pine stands. The Alberta government and
forest industry responded with a mountain pine beetle action plan that has been
effective to date in curbing beetle spread and mitigating associated damage.
However, the mountain pine beetle remains present in the forests of Albertas
central region and an ongoing risk to mature pine stands in our operating area.
Any significant increase in mountain pine beetle populations could negatively
affect merchantable pine stands and 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 2013, we estimate that the power
purchase rights provided us savings of $22.5 million (2012, $14.2 million; 2011,
$22.9 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.

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.

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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 $13.1 million at
December 31, 2013 (2012  $15.2 million, 2011  $15.2 million), for future
reforestation obligations.

Our failure to comply with applicable environmental and safety
laws and regulations, and the permit requirements related thereto, 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
Province of Alberta has set 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 percent. 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 70,200 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 2013, we were responsible for approximately 64,200 tonnes
of CO2e emissions associated with the PPA. To address this obligation, we intend
to apply offset credits of 64,200 tonnes of CO2e emitted, earned through energy
reduction projects conducted in our mill operations and independently verified
and registered with provincial authorities.

The Government of Alberta 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.

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, 2014, if not renewed on or before that date, and our Fox
Creek sawmill operates a wood-waste incinerator under a permit that will expire
January 1, 2015, if not renewed on or before that date. We have initiated the
normal renewal procedure for our pulp mill operating permit, and we have applied
for a certificate of variance for the Fox Creek burner permit to allow us time
to complete and implement a plan to have all wood residuals now incinerated put
instead to commercial uses, consistent with current practice at our Whitecourt
and Boyle operations. We currently expect to obtain the pulp mill operating
permit renewal and the burner certificate of variance on a timely basis. If we
are unable to renew or extend these or any other material approvals, licenses,
permits or certificates, however, or if there is a delay in renewing such
approvals, licenses, permits or certificates, our business, financial condition,
results of operations and cash flows could be materially adversely affected.

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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 by customers,
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.

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

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 do
not insure and cannot get insurance 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

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- 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,
2013, we would have been permitted to borrow up to $46.3 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.

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.

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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 controlled 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.

18

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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, and
had no operations or cash flows from September 8, 1997, to May 12, 1998. 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 logging and sawmilling 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, approximately $38
million of which was provided through an insurance settlement. In 2012, we
acquired a 100% interest in a related company, Chickadee Creek Energy Inc.
(CCEI), which was immediately wound up and dissolved; prior to such acquisition,
CCEI was a wholly owned subsidiary of Industries. In 2012, we commenced
construction at our Whitecourt pulp mill of a bioenergy project initially
expected to cost $42 million and be financed in part through $27.5 million in
government grants and $13 million in interim financing. We were advised in the
third quarter of 2013 by the projects EPC contractor that the project would
exceed the agreed budget and schedule, and, as a result, we have terminated the
EPC contract and are in the process of developing a new budget, schedule and
plan to complete the project.

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, 2013.

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 hardwood and softwood bleached
chemi-thermo-mechanical pulp, or BCTMP, and softwood lumber. In the twelve
months ended December 31, 2013, we recorded total revenue of $382.9 million,
Adjusted EBITDA of $56.3 million and net income of $6.6 million.

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 that was completed in 2011 to
replace a mill extensively damaged in a 2008 fire. In 2012, we began
construction of a bioenergy project (the BEP) adjacent to the Whitecourt BCTMP
mill that will convert organic matter in pulp-mill waste into renewable energy,
for consumption by our pulp operations; completion and startup of the BEP are
currently scheduled for late 2014, subject to finalization of a new budget and
plan to complete the project.

Our sawmills produce kiln-dried dimension lumber from spruce,
pine and fir, or SPF, 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. Historically, our lumber has
sold principally in Canada and the United States; however, China is now 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 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.

19

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Principal markets

Our production of both pulp and lumber provides a diversified
revenue base. From 2009 to 2013, 58% of our total revenue came from pulp sales
and 42% 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.

Distribution of Sales Revenue, by Geographic Region

|              | 2013 | 2012 | 2011
|------------- | ---- | ---- | ----
|              |      |      |     
|Canada        | 34%  | 33%  | 29% 
|United States | 18%  | 17%  | 15% 
|Europe        | 9%   | 11%  | 15% 
|Asia          | 38%  | 36%  | 38% 
|Other         | 1%   | 3%   | 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
represent approximately 12% 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. As the
commodity market has improved, we have limited our supply into these specialty
markets, maintaining a position large enough to manage market risk, but not so
significant that it would impair our ability to benefit from the improving
commodity market.

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

Distribution of Lumber Sales, by Grade

|                     | 2013 | 2012 | 2011
|-------------------- | ---- | ---- | ----
|                     |      |      |     
|Commodity            | 64%  | 62%  | 60% 
|J-grade & appearance | 16%  | 15%  | 17% 
|MSR                  | 8%   | 9%   | 9%  
|Specialties          | 12%  | 14%  | 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 17% owner.

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

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Distribution of Lumber Sales, by Geographic Region

|       | 2013 | 2012 | 2011
|------ | ---- | ---- | ----
|       |      |      |     
|Canada | 65%  | 72%  | 66% 
|U.S.   | 23%  | 18%  | 13% 
|China  | 9%   | 7%   | 18% 
|Japan  | 3%   | 3%   | 3%  

In 2013, our top five lumber customers represented
approximately 47% 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, markets pulp to all
major pulp consuming regions, including Europe, Asia, and North America.

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

|                         | 2013 | 2012 | 2011
|------------------------ | ---- | ---- | ----
|                         |      |      |     
|Paperboard               | 52%  | 47%  | 41% 
|Coated & uncoated papers | 33%  | 31%  | 36% 
|Tissue & towel           | 6%   | 13%  | 12% 
|Specialty & other        | 9%   | 9%   | 11% 

As shown in the table above, there has been significant growth
in the sale of our pulp for use in multi-ply paperboard, where BCTMP provides a
significant functional advantage and is used as the primary source of fiber in
the middle plies of the sheet. 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

|               | 2013 | 2012 | 2011
|-------------- | ---- | ---- | ----
|               |      |      |     
|Asia           | 73%  | 64%  | 60% 
|Western Europe | 17%  | 19%  | 23% 
|North America  | 7%   | 12%  | 12% 
|Other          | 3%   | 5%   | 5%  

In 2013, our top five pulp customers represented approximately
49% of all the pulp we sold.

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Seasonality

We conduct a significant amount of our log harvesting and
hauling in the winter months, creating a seasonal build-up 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 million to $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 91% of the fiber
requirement for our pulp mill and sawmill facilities is supplied from timber
resources held under long-term agreements with the Government of Alberta or
supplied through multiple-year agreements with other forest products companies,
providing a high level of fiber supply security and cost stability. 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. Stumpage
is applied at a base rate of $1.90 per cubic meter of coniferous timber and
$0.20 per cubic meter of deciduous timber, and is subject to escalation related
to the market price of end products. In 2013, we paid a 12-month average
stumpage fee of $2.50 per coniferous cubic meter, an increase of 32% over the
base rate applied in 2012; there was no change from the base rate of $0.20 per
deciduous cubic meter.

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 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 will
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.

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)           |  | 830,000        |  |  |          | 
|Deciduous Timber Allocations(3)            |  |               |  |  | 154,000   | 
|Exchange agreement and supply contracts(4) |  | 665,000        |  |  | 140,000   | 
|Total annual fiber supply:                 |  | 1,891,000      |  |  | 567,000   | 

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| | (1) | Net of third party allocations. Expires 2017 and is
      renewable for additional terms of 20 years.
| | --- | -----------------------------------------------------------------------------------------------------
| | (2) | Expire 2017 to 2026 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,
with surplus chips 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 or 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
results 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. Effective
January 1, 2001, we entered into two Power Syndicate Agreements with an
affiliate of EPCOR Utilities Inc. and three other industrial participants in
Alberta for the purpose of sharing the rights and responsibilities defined in
two Power Purchase Arrangements, which we refer to as the PPAs. We invested
$20.8 million to acquire a 5.83% share in the PPAs, which were previously
acquired by EPCOR in accordance with a Power Auction Agreement in 2000 during
the deregulation of the electricity market in Alberta. Effective May 1, 2006, we
sold our interest in one of the agreements and concurrently acquired a greater
interest in the remaining agreement. These transactions were accounted for as a
sale and purchase, respectively, to reflect their commercial substance,
resulting in a gain of $32.7 million, an increase in long-term debt of $15.6
million and an increase in other assets of $46.9 million. In 2009, EPCOR
divested its power generation assets, which included its PPA arrangements, to a
new company, Capital Power Corporation.

The PPAs are 20-year agreements that give the holder 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.

Through our participation in the syndicate, in 2013 we had
indirect control over electrical generating capacity of approximately 602,000
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 enables us to dampen seasonal market price variations by
storing gas during periods of low gas pricing and withdrawing gas during periods
of higher pricing.

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.

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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, 2014; this agreement will be renegotiated during the year, in
accordance with past practice. 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 expires December 31, 2014, 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, 2014. We have initiated
the normal renewal procedure for the pulp mill operating permit and expect to
obtain the renewal on a timely basis.

Our Whitecourt pulp mill does not use chlorine compounds and
therefore does not generate any chlorinated byproducts such as dioxins or
furans. 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 actively
seeking alternatives.

As described above, 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 cut greenhouse gas emissions, reduce freshwater intake and
improve the quality of treated wastewater discharged to a local river.

All forest areas we harvest are reforested to the standards
required under the Timber Management Regulations (Alberta). Since 2007, we have
spent $41.7 million on reforestation and as at December 31, 2013, had an accrued
liability of $13.1 million for future reforestation.

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 percent. 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 70,200 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 2013, we were responsible for approximately 64,200 tonnes of CO2e
emissions associated with the PPA. To address this obligation, we intend to
apply offset credits of 64,200 tonnes of CO2e emitted, earned through
energy reduction projects independently verified and registered with provincial
authorities.

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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 achieved certification 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 instead 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 wood sourcing.

|Standard                                                           |  | Type                            | Expiry              
|------------------------------------------------------------------ |  | ------------------------------- | --------------------
|                                                                   |  |                                 | Whitecourt          
|                                                                   |  |                                 | Woodlands           
|                                                                   |  |                                 | (includes Fox Creek)
|FORESTCARE                                                         |  | Comprehensive Code of Practices | December 2016       
|ISO 14001                                                          |  | Environmental Management System | January 10, 2015    
|Sustainable Forestry Initiative (SFI)                              |  | Sustainable Forest Management   | January 10, 2015    
|Programme for the Endorsement of Forest Certification
      (PEFC) |  | Chain of Custody                | December 2, 2015    
|Forest Stewardship Council (FSC)                                   |  | Chain of Custody                | April 25, 2014      

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 Western SPF. This
relationship effectively lowers our softwood fiber costs when lumber prices are
low. 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.

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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 2005-6, 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.

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 increasing its capacity by approximately 100%. Further capital
improvements were made in 2004-5, 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 June 2007, we entered into an agreement to purchase a
sawmill located at Fox Creek, along with related lumber manufacturing and timber
assets. The sale closed August 1, 2007, and we took possession of assets
including a three-line, 45 mmfbm/year-capacity sawmill, a planer mill, a kiln,
log inventory and mobile equipment. The purchase also included 140,000 cubic
meters of timber in quotas and 65,000 cubic meters 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 broke out while the sawmill was in
operation, destroying most of the sawmill building and its contents. Unaffected by the
fire were 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.

26

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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. As part of
the reconstruction project, we also invested in other site upgrades, including
the installation of new technology in the planer mill to increase grade yields,
reduce trim loss and lower labor costs, which was completed in January 2012. The
total cost of the Fox Creek reconstruction project was approximately $60
million, approximately $38 million of which 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, rather,
through a focus on mill optimization and continuous improvement.

BCTMP Mill Operating History



Our BCTMP 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 our
Whitecourt 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
improve the quality of treated wastewater discharged to a local river. At the
time of commencement in 2012, the project was expected to cost $42 million,
financed in part through $27.5 million in government grants and $13 million in
interim financing, and project completion was scheduled for early 2014. We were
advised in the third quarter of 2013 by the projects EPC contractor that the
project would exceed the agreed budget and schedule, and, as a result, we
terminated the EPC contract and are in the process of developing a new budget,
schedule and plan to complete the project. See note 28 to our audited financial
statements included elsewhere in this annual report.

27

---

Capital expenditures

Our capital expenditures can be categorized as being of two
types: maintenance and discretionary. We consider capital expenditures that are
required to maintain the production capacity of our facilities at current
levels, or expenditures that address safety or environmental matters, to be
maintenance capital expenditures. Capital expenditures that enhance the
productivity or profitability of our operations are considered to be
discretionary capital expenditures. From 2009-2013, maintenance capital
expenditures averaged $3.5 million per year.



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, 2014,
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, 2013, compared to year ended
December 31, 2012

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

28

---

|                                                 |   | 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.

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.

29

---

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.

30

---

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                     |  

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.

31

---

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.

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.

32

---

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.

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.

33

---

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

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

|                                                 |   | Year ended December 31, |  
|------------------------------------------------ | - | ----------------------- | -
|                                                 |   | 2012                    |  
|                                                 |   | (in millions)           |  
|                                                 |   |                         |  
|Statements of earnings data:                     |   |                         |  
|Revenue                                          | $ | 332.4                   |  
|Cost of products sold                            |   | 241.0                   |  
|Freight and other distribution costs             |   | 53.2                    |  
|Depreciation and amortization                    |   | 13.6                    |  
|General and administration                       |   | 13.8                    |  
|Other expense (income)                           |   | 7.7                     |  
|Operating earnings                               | $ | 3.1                     |  
|Foreign exchange gain (loss) on borrowings       |   | 4.6                     |  
|Finance expenses                                 |   | (20.4                   | )
|Net (loss) income before income taxes            | $ | (12.7                   | )
|Income taxes (recovery) expense                  |   | (4.4                    | )
|Net (loss) income for the year                   | $ | (8.3                    | )
|Actuarial (losses) gains, net of tax             |   | (0.3                    | )
|Comprehensive (loss) income for the year         | $ | (8.6                    | )
|                                                 |   |                         |  
|Adjusted EBITDA data:                            |   |                         |  
|Net (loss) income for the year                   | $ | (8.3                    | )
|Add/(subtract)                                   |   |                         |  
|Income taxes (recovery) expense                  |   | (4.4                    | )
|Foreign exchange (gain)
      loss on borrowings |   | (4.6                    | )
|Finance expenses                                 |   | 20.4                    |  
|Operating earnings                               | $ | 3.1                     |  
|Depreciation &
      amortization                |   | 13.6                    |  
|Other unrealized expense                         |   | 6.0                     |  
|Adjusted EBITDA, as reported                     | $ | 22.7                    |  
|                                                 |   |                         |  
|Other data:                                      |   |                         |  
|Average exchange rate (US$ per C$1.00)
    (1)   |   | 1.000                   |  
|Period end exchange rate (US$ per C$1.00)        |   | 1.005                   |  

|(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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our results reflected the small benefit of a weakening Canadian
dollar, which declined 1.1% in value relative to the U.S. dollar year-over-year,
helping to boost revenue by a little less than 1%, given that 64% of revenues
were denominated in U.S. dollars. The revenue improvement would
normally have been mitigated by the offsetting exchange-rate impact of
U.S.-dollar-denominated working capital and long-term debt; however, the
period-end exchange rate moved in favor of the Canadian dollar, resulting in an
exchange gain.

34

---

At $332.4 million, our 2012 revenue was up nearly $48 million,
or 17%, compared to 2011. Stronger lumber shipments and pricing accounted for
the entire increase, as higher pulp shipments were undermined by weaker sales
realizations.

Our cost of products sold rose $34.0 million, or just over 16%,
year over year, primarily due to additional lumber production at the new Fox
Creek facility and, also, to rising fiber costs associated with longer log-haul
distances and higher fuel costs. Freight and other distribution costs were $4.6
million, just over 9% higher in comparison to the comparable period, on
increased shipments for both segments. Depreciation and amortization rose $2.2
million, or about 20%, over 2011 as a result of the completion and start-up of
the Fox Creek facility. General and administration decreased to $1.7 million, or
11%, returning costs to more normalized levels after the 2011 spike attributed
to expenditures associated with professional and consulting fees, as well as
benefit-plan adjustments.

We did not make any provision for profit sharing in the
period.

Other expenses were $7.7 million in 2012 and included $6.9
million in unrealized losses on commodity derivative contracts at year-end, a
significant change from the $25.9 million in other income recorded in 2011,
which had reflected gains on commodity derivative contracts and the final
settlement of the Fox Creek insurance claim.

Operating earnings for 2012 were $3.1 million, down
significantly from the $27.6 million recorded for the previous year, which,
again, had reflected significant contributions from commodity hedging and the
insurance settlement.

We realized a $4.6 million foreign-exchange gain on our
U.S.-dollar-denominated debt due the strengthening of the Canadian dollar at the
end of the period.

Finance expenses in 2012 were $4.1 million higher than the
previous year, with the difference due in large part to the capitalization of
$3.6 million in interest expense associated with the Fox Creek reconstruction in
2011. The difference also reflected our refinancing in the second quarter of
2011 and the higher coupon rate on the newly issued Senior Notes compared to our
previous Notes, and to minor impacts, related to changing exchange rates, on
U.S.-dollar-denominated interest.

During the period, we acquired a 100% interest in a related
company, Chickadee Creek Energy Inc. (CCEI), which was immediately wound up and
dissolved. Prior to the acquisition, CCEI was a wholly owned subsidiary of our
parent Industries. Immediately prior to the acquisition, CCEI had no active
operations but retained rights to a $3.4 million government grant that had been
obtained to facilitate the development of a previously considered biomass energy
project. Prior to the dissolution of CCEI, the $3.4 million government grant and
other assets worth $0.1 million were assigned to us. We assumed CCEIs
liabilities in the amount of $0.5 million. We and Industries received approval
from the appropriate government authority to apply the former CCEI grant toward
our current bioenergy project at the Whitecourt pulp mill.

We realized a loss before taxes of $12.7 million, which
compared unfavorably to income before taxes of $1.2 million in 2011. The years
results were subject to income tax at a statutory rate of 32%, compared to a
rate of 33.5% in 2011. The effective tax rate for the year 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 contributed $0.2 million to the income tax recovery,
compared to $0.4 million in 2011.

After a provision for income tax recovery of $4.4 million, we
recorded a net loss of $8.3 million for the year, which compares to a net loss
of $0.2 million in 2011.

35

---

Adjustments through comprehensive income are actuarial
valuation changes that are presented net of income tax provision in accordance
with IFRS and result in a comprehensive loss of $8.6 million for the period.

Lumber

|                                                 |   | Year ended December 31, |  
|------------------------------------------------ | - | ----------------------- | -
|                                                 |   | 2012                    |  
|                                                 |   |                         |  
|Production-SPF-mmfbm                             |   | 459.8                   |  
|Shipments -SPF-mmfbm                             |   | 519.9                   |  
|Benchmark price -SPF#2&Better-US$ per
      mfbm | $ | 298                     |  
|                                                 |   |                         |  
|Revenue - millions                               | $ | 153.9                   |  
|Cost of products sold - millions                 |   | 142.4                   |  
|Inventory valuation adjustments - millions       |   | (1.9                    | )
|Other realized expense (income) - millions       |   | 0.6                     |  
|Adjusted EBITDA - millions                       | $ | 12.8                    |  
|Adjusted EBITDA margin - %                       |   | 8%                      |  
|                                                 |   |                         |  
|Other unrealized (expense) income - millions     |   | (6.8                    | )
|Depreciation & amortization - millions           |   | (6.6                    | )
|Operating (loss) earnings - millions             | $ | (0.6                    | )
|                                                 |   |                         |  
|Capital expenditures - millions                  | $ | 4.9                     |  

Improving U.S. housing starts data and continued demand from
China resulted in strong improvement in pricing for the lumber segment during
the year. The spring seasonal rally saw benchmark pricing peak at roughly
US$300/mfbm before declining slightly, then holding fairly steady through the
summer months. The fall period, normally characterized by a late-season rise
followed by a pricing retreat, instead saw steady improvement in the third
quarter followed by a surge through to the end of the year, with prices reaching
a 2012 peak of US$385/mfbm.

Our lumber segment continued to see excellent operating
performance through 2012 at our Whitecourt and Boyle operations and at the newly
constructed Fox Creek sawmill. Combined production for the three facilities was
459.8 million foot board measure (mmfbm), up 95.5 mmfbm, or 26%, from the 364.3
mmfbm achieved in 2011. This increase was largely the result of the 120 mmfbm in
additional capacity from the Fox Creek sawmill, but was offset in part by
unscheduled downtime in the third quarter due to log delivery challenges and
scheduled downtime in the fourth quarter related to the Christmas vacation
period. Shipments for the segment surged by 109.3 mmfbm, or 26.6%, to 519.9
mmfbm, as inventories were reduced by roughly 10%; the value of inventories,
however, increased with the reversal of previous valuation write-downs.

At US$298/mfbm, average benchmark pricing for the year was up
US$42/mfbm, or 16%, compared to 2011. With a modest 1% contribution from a
weakening Canadian dollar, per-unit sales realizations likewise increased
$41/mfbm versus the previous year. The rise in shipments and per-unit pricing
combined to increase segment revenue by $49.0 million, or 47%, to $153.9 million
for the year.

Lumber segment cost of products sold increased by $35.2 million
to $142.4 million in 2012, a 33% rise from 2011. This increase exceeded that
attributed to the higher production levels, with per-unit costs climbing nearly
5% due to higher costs associated with log harvesting and hauling, including
rising fuel prices and longer haul distances.

As the markets outlook improved, the previously referenced
inventory valuation reductions were reversed through the year and contributed
$1.9 million in 2012, compared to the write-down of $1.8 million in 2011.

Other realized expense or income represents the cash impact of
foreign-exchange and commodity hedging, as well as realized foreign-exchange
impacts on working capital changes. In 2012, the lumber segment realized a loss
of $0.6 million, primarily on commodity hedging activities, in
contrast to the previous year, which had benefitted by $15.9 million from the
same activities. The relative stability of foreign-exchange rates meant that
neither foreign-exchange hedging nor working capital changes had a significant
impact.

36

---

The segment reported $12.8 million in Adjusted EBITDA. While
these results were comparable to the $11.8 million realized in 2011, the 2011
results were almost entirely attributable to contributions from commodity
hedging. Excluding the hedging activities, the segment would have realized a
significant improvement year over year. We advise caution in anticipating future
hedging program contributions, as the conditions that gave rise to the
significant benefits realized in 2011 may not recur in the future.

Capital expenditures for the lumber segment were $4.9 million,
$2.0 million of which was for completion of the Fox Creek reconstruction
project, with a further $2.9 million allocated to maintenance-of-business and
smaller, high-return projects. This compared to capital expenditures of $45.1
million in 2011, $43.3 million of which was dedicated to the Fox Creek
project.

Pulp

|                                                   |   | Year ended December 31, |  
|-------------------------------------------------- | - | ----------------------- | -
|                                                   |   | 2012                    |  
|                                                   |   |                         |  
|Production-madmt                                   |   | 321.1                   |  
|Shipments -madmt                                   |   | 322.3                   |  
|Benchmark price -NBSK, US$ per admt                | $ | 872                     |  
|Benchmark price -BEK, US$ per admt                 | $ | 757                     |  
|                                                   |   |                         |  
|Revenue - millions                                 | $ | 178.1                   |  
|Cost of products sold - millions                   |   | 153.7                   |  
|Inventory valuation adjustments - millions         |   | -                       |  
|Other realized expense (income) - millions         |   | 1.0                     |  
|Adjusted EBITDA - millions                         | $ | 23.4                    |  
|Adjusted EBITDA margin - %                         |   | 13%                     |  
|                                                   |   |                         |  
|Other unrealized income (expense) -
      millions |   | 0.8                     |  
|Depreciation & amortization - millions             |   | (6.9                    | )
|Operating earnings - millions                      | $ | 17.3                    |  
|                                                   |   |                         |  
|Capital expenditures - millions                    | $ | 6.5                     |  

Global pulp markets had an uneven year, as modest improvements
in the global economy  usually a reliable indicator for paper and, thus, wood
pulp demand  were undermined by continued uncertainty about future economic
conditions. On the supply side, the addition of new capacity presented further
challenges, especially for hardwood kraft producers. Benchmark pricing for
hardwood pulp grades improved at the start the year, while the softwood market
showed signs of weakness. After strengthening at midyear, both markets fell off
in the third quarter before rebounding modestly to finish the year. Pricing for
the benchmark softwood and, especially, hardwood grades was volatile through the
year, with the average Northern Bleached Softwood Kraft (NBSK) price falling by
more than $100, or over 10%, from 2011, and Bleached Eucalyptus Kraft (BEK) pulp
experiencing swings of nearly US$100, or over 10%, during the year and recording
an average price US$31, or 7%, lower than 2011.

Pricing for our BCTMP was much more stable, with sales
realizations varying by only $25 through the year, contributing to eight
straight quarters of largely unchanged pricing. We believe this represents a
disengagement from the historic price relationship between BCTMP and the
benchmark grades, particularly for the multi-ply paperboard business that
dominates the Asian BCTMP market. Our ongoing position in fine paper and
tissue/towel applications provides more direct linkage to benchmark grades, but
these segments represent less than 40% of sales.

37

---

The price stability of the multi-ply paperboard market, which
constituted 47% of our pulp business in 2012, has a much greater impact on our
sales realizations.

Our pulp mill had another high-production year, producing 321.1
thousand admt (madmt), essentially matching the record-setting 321.2 madmt
produced in 2011. At 322.3 madmt, shipments were significantly improved,
slightly exceeding production and up from 311.0 madmt shipped the previous year.
Inventories were largely stable through the year, following a market rebalancing
in 2011 that had resulted in increased inventories. We remain committed to
well-balanced market distribution, both geographically and in terms of end-use
products, while taking into account continued development of the Asian market
and declining paper production in the more mature markets of Europe and North
America.

At $178.1 million, segment revenue was down slightly on
improved shipments, as per-unit sales realizations were approximately 4% lower
in 2012 compared to 2011, even after a 1% contribution from the modestly weaker
Canadian dollar.

Segment cost of products sold rose by approximately 4.6%, to
$153.7 million, due to increases in fiber and energy costs. Included in the pulp
segment costs was $1.6 million of a $1.85 million provision related to our share
of a force majeure claim by the owner of the Sundance power plant in which we
have power purchase rights under our PPA; the balance of the provision was
accounted as a product inventory cost.

In 2012, pulp-segment power costs were reduced by $11.1 million
from market rates due to the contribution of our power purchase rights. Based on
per-segment consumption, 91% of the benefit of the power purchase rights was
allocated to the pulp segment, with the balance used to offset power costs in
the lumber segment. The 2012 cost benefit compared unfavorably to the $21.3
million recorded in 2011, which reflected that years higher average electricity
pool pricing.

With $1 million in other realized expense, primarily associated
with foreign-exchange changes to working capital, the segment posted $23.4
million in Adjusted EBITDA. This compared unfavorably to the $35.3 million
realized in 2011.

After accounting for other unrealized income of $0.8 million
relating to foreign-exchange balances at the year-end and $6.9 million in
depreciation and amortization, the segment realized operating earnings of $17.3
million in 2012, a reduction from the $26.1 million recorded in 2011.

Capital expenditures of $6.5 million in 2012 included $4.6
million related to our bioenergy project, construction of which began in the
third quarter, and $1.9 million for maintenance-of-business and smaller,
high-return projects, which was consistent with the $1.8 million spent in
2011.

Corporate and other

|                            |   | Year ended December 31, |  
|--------------------------- | - | ----------------------- | -
|                            |   | 2012                    |  
|                            |   | (in millions)           |  
|                            |   |                         |  
|Revenue                     | $ | 0.4                     |  
|General & administration    |   | 13.9                    |  
|Other realized (income)     |   | -                       |  
|Adjusted EBITDA             | $ | (13.5                   | )
|Depreciation & amortization |   | (0.1                    | )
|Operating loss              | $ | (13.6                   | )
|                            |   |                         |  
|Capital expenditures        | $ | 0.3                     |  

38

---

Revenue for the corporate and other segment was generated
primarily from fees billed to our parent company for administrative services.
Corporate revenue was essentially un-changed from year to year, with $0.4
million recorded in both 2012 and 2011.

The corporate and other segment recorded negative Adjusted
EBITDA of $13.5 million as compared to negative $8.0 million posted in 2011. The
$5.5 million year over year difference is largely related to our receipt of $7.6
million in final settlement of the Fox creek insurance claim. Without this
settlement, the segments Adjusted EBITDA in 2011 would have compared
unfavorably to 2012, due to the previous periods provision for profit sharing,
higher-than-normal professional and consulting fees and an amendment to the
supplementary defined-benefit pension plan.

39

---

Results of Operations  Fourth Quarter of 2013

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

Three months endedDec.
      31/13
    
    
    Sep.
      30/13
    
    
    Dec.
      31/12(in millions)Statements of earnings data:Revenue
    $
    91.3
    
    $
    94.3
    
    $
    82.9Cost of products sold
    
    62.3
    
    
    65.0
    
    
    60.2Freight and other
      distribution costs
    
    13.0
    
    
    13.1
    
    
    13.0Depreciation and amortization
    
    3.5
    
    
    3.5
    
    
    3.4General and administration
    
    5.7
    
    
    3.6
    
    
    3.2Other (income) expenses
    
    (0.9
    )
    
    1.5
    
    
    9.0Operating earnings (loss)
    $
    7.7
    
    $
    7.6
    
    $
    (5.9
    )Foreign exchange (loss) gain on borrowings
    
    (7.0
    )
    
    4.5
    
    
    (2.5
    )Finance expenses
    
    (5.2
    )
    
    (5.0
    )
    
    (5.1
    )Net (loss) income before income taxes
    $
    (4.5
    )
    $
    7.1
    
    $
    (13.5
    )Income taxes expense
      (recovery)
    
    0.8
    
    
    0.6
    
    
    (2.8
    )Net (loss) income
    $
    (5.3
    )
    $
    6.5
    
    $
    (10.7
    )Actuarial gains (losses), net
      of tax
    
    0.6
    
    
    -
    
    
    (0.3
    )Comprehensive (loss) income
    $
    (4.7
    )
    $
    6.5
    
    $
    (11.0
    )Adjusted EBITDA data:Net (loss) income
    $
    (5.3
    )
    $
    6.5
    
    $
    (10.7
    )Add (subtract)Income
      taxes (recovery) expense
    
    0.8
    
    
    0.6
    
    
    (2.8
    )Foreign exchange loss on
      borrowings
    
    7.0
    
    
    (4.5
    )
    
    2.5Finance
      expenses
    
    5.2
    
    
    5.0
    
    
    5.1Operating earnings (loss)
    $
    7.7
    
    $
    7.6
    
    $
    (5.9
    )Depreciation and amortization
    
    3.5
    
    
    3.5
    
    
    3.4Other unrealized (income)
      expense
    
    (0.2
    )
    
    3.9
    
    
    8.5Adjusted EBITDA
    $
    11.0
    
    $
    15.0
    
    $
    6.0Other data:Average exchange rate
      (US$ per C$1.00)(1)
    
    0.953
    
    
    0.963
    
    
    1.009Period end exchange rate
      (US$ per C$1.00)
    
    0.940
    
    
    0.971
    
    
    1.005


40

---

|(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 $91.3 million for the fourth quarter of
2013, down slightly from the $94.3 million reported in the third quarter of
2013, as lower lumber and pulp shipments more than offset higher net sales
realizations for lumber. The quarters revenue represented a significant
improvement over the $82.9 million posted in the fourth quarter of 2012,
however, primarily due to higher pricing and shipments in both segments.

Cost of products sold was down from the previous quarter,
reflecting lower shipments, but up from the same period of 2012, due primarily
to increased fiber costs. General and administration cost of $5.7 million for
the quarter was considerably higher than comparable quarters, largely reflecting
a profit-sharing provision, increased wages and benefits and higher-than-normal
professional and consulting fees.

We recorded $0.9 million in other income in the quarter, due
mainly to gains in foreign-exchange impacts on working capital, compared to
other expense of $1.5 million in the third quarter of 2013 and other expense of
$9.0 million in the fourth quarter of 2012.

The result for the quarter was operating earnings of $7.7
million, which was consistent with operating earnings of $7.6 million in the
third quarter of 2013 and significantly better than the operating loss of $5.9
million in the fourth quarter of 2012. We recorded a foreign-exchange loss of
$7.0 million on the value our U.S.-dollar-denominated debt, as the period-end
exchange rate was weaker than that recorded at the end of the third quarter of
2013. The slight increase in finance expenses in the fourth quarter over the
comparable quarters also reflected the impact of the weaker Canadian dollar.

After a provision for income tax expense of $0.8 million, we
recorded a $5.3 million net loss for the quarter, due primarily to the $7.0
million foreign-exchange loss, as compared to net income of $6.5 million in the
third quarter of 2013 and a net loss of $10.7 million in the fourth quarter of
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 a comprehensive loss of $4.7 million
for the quarter.

41

---

Lumber

Three months endedDec.
      31/13
    
    
    Sep.
      30/13
    
    
    Dec.
      31/12Production (total sawmill) -
      SPF - mmfbm
    
    129.8
    
    
    135.5
    
    
    122.8Production (dressed lumber) - SPF - mmfbm
    
    116.9
    
    
    113.7
    
    
    109.4Shipments - SPF - mmfbm
    
    121.3
    
    
    134.5
    
    
    120.8Benchmark price - SPF#2&Better - US$ per
      mfbm
    $
    370
    
    $
    328
    
    $
    333Revenue - millions
    $
    46.1
    
    $
    45.2
    
    $
    39.3Cost of products sold -
      millions
    
    37.5
    
    
    38.7
    
    
    34.2Other realized (income) expense - millions
    
    (0.2
    )
    
    (2.9
    )
    
    1.1Adjusted EBITDA - millions
    $
    8.8
    
    $
    9.4
    
    $
    4.0Adjusted EBITDA margin - %
    
    19%
    
    
    21%
    
    
    10%Other unrealized expense - millions
    
    -
    
    
    (4.0
    )
    
    (8.0
    )Depreciation and amortization
      - millions
    
    (1.6
    )
    
    (1.7
    )
    
    (1.7
    )Operating earnings (loss) - millions
    $
    7.2
    
    $
    3.7
    
    $
    (5.7
    )Capital expenditures - millions
    $
    0.3
    
    $
    0.7
    
    $
    1.0


Our lumber segment continued to benefit from stronger market
conditions in the U.S., as well as increased lumber exports to China, with the
benchmark price rising 13% quarter-to-quarter, to an average of US$370/mfbm, and
per-unit net sales realizations improving similarly. Shipments fell compared to
the third quarter, due largely to railcar and truck shortages and to the normal,
seasonal reduction in sales activity toward year-end, but were consistent with
the same period in 2012. Reflecting the higher pricing year-over-year, softwood
lumber export tax was applied only in the month of October, whereas export taxes
were applied in all three months of the 2012 fourth quarter.

Production of 129.8 mmfbm was lower than third-quarter output
of 135.5 mmfbm, reflecting a reduced number of operating days due to the holiday
season, but was higher than in the same quarter last year, due to increased
production from the Fox Creek mill.

Revenue was slightly higher in the period compared to the third
quarter, as stronger per-unit sales realizations more than offset the drop in
shipments resulting from transportation issues. Cost of products sold, though
lower overall on reduced production, increased on a per-unit basis, due to the
impact of higher energy and fiber costs at all facilities. Increased fiber costs
reflected longer log-hauling distances associated with both our normal
harvest-area rotation and Albertas mountain pine beetle management
strategy.

Other realized income of $0.2 million in the quarter
represented an exchange gain on working capital associated with the weakening
Canadian dollar. This compared to other realized income of $2.9 million in the
third quarter of 2013, which largely reflected gains on commodity derivative
contracts.

Our lumber segment generated $8.8 million in Adjusted EBITDA
during the fourth quarter, down slightly from the previous period, but a
significant improvement from the $4.0 million recorded in the same period last
year. The segment had no unrealized expenses in the quarter, in contrast to the
unrealized losses of $4.0 million and $8.0 million recorded in the comparable quarters, with the
difference primarily reflecting mark-to-market re-valuations of our hedging
positions made in those prior periods.

42

---

After accounting for the segments depreciation and
amortization, we recorded operating earnings of $7.2 million, significantly
higher than both comparable periods.

Capital expenditures of $0.3 million in the quarter were
limited to maintenance-of-business activities.

Pulp

Three months endedDec.
      31/13
    
    
    Sep.
      30/13
    
    
    Dec.
      31/12Production-madmt
    
    81.1
    
    
    75.4
    
    
    83.4Shipments -madmt
    
    77.0
    
    
    83.4
    
    
    81.2Benchmark price - NBSK, US$
      per admt
    $
    983
    
    $
    947
    
    $
    863Benchmark price - BEK, US$ per admt
    $
    772
    
    $
    785
    
    $
    772Revenue - millions
    $
    45.1
    
    $
    49.0
    
    $
    43.5Cost of products sold -
      millions
    
    37.8
    
    
    39.3
    
    
    38.9Other realized (income) expense - millions
    
    (0.4
    )
    
    0.7
    
    
    (0.6
    )Adjusted EBITDA - millions
    $
    7.7
    
    $
    9.0
    
    $
    5.2Adjusted EBITDA margin - %
    
    17%
    
    
    18%
    
    
    12%Other unrealized income (expense) - millions
    
    0.2
    
    
    0.1
    
    
    (0.5
    )Depreciation and amortization
      - millions
    
    (1.8
    )
    
    (1.8
    )
    
    (1.7
    )Operating earnings - millions
    $
    6.1
    
    $
    7.3
    
    $
    3.0Capital expenditures - millions
    $
    0.1
    
    $
    1.1
    
    $
    0.4


Our pulp segment had a strong quarter, with production up from
the third quarter, when the mill conducted its annual maintenance shutdown, and
consistent with the high levels achieved in the same period of 2012. Shipments
declined in the quarter compared to both prior periods, due primarily to delayed
vessel departures resulting from congestion at the Vancouver port.

Benchmark BEK pricing declined slightly from the third quarter
but was consistent with the fourth quarter of 2012. Our net sales realizations
fared better than benchmark pricing, up 4.5% year-to-year on a weaker Canadian
dollar and a higher proportion of sales into China. Demand for both hardwood and
softwood BCTMP rose in China, resulting in stronger pricing that contributed to
an increase in revenue, year-over-year, despite a drop in shipments. Compared to
the third quarter, revenue declined due to the lower shipments caused by
transportation issues.

At $37.8 million, cost of products sold was fairly consistent
with the comparable quarters, with changes largely reflecting the third
quarters annual maintenance shutdown costs, as well as provisions of $0.4
million in the fourth quarter of 2013 and $1.8 million in the fourth quarter of
2012, related to the previously noted force majeure claim.

43

---

After a modest $0.4 million realized gain on
U.S.-dollar-denominated working-capital changes, the segment recorded $7.7
million in Adjusted EBITDA in the fourth quarter of 2013. This was down from the
previous quarters earnings, due to lower shipments, but up from the fourth
quarter of 2012, due to higher sales realizations. Having accounted for
unrealized losses, depreciation and amortization, the segment posted operating
earnings of $6.1 million in the quarter.

The segments capital expenditures of $0.1 million were limited
to maintenance-of-business activities, as there was little activity on the
bioenergy project during the quarter.

Corporate and other

Three months endedDec.
      31/13
    
    
    Sep.
      30/13
    
    
    Dec.
      31/12(in millions)Revenue
    $
    0.1
    
    $
    0.1
    
    $
    0.1General and administration
    
    5.7
    
    
    3.6
    
    
    3.3Other realized (income)
      expense
    
    (0.1
    )
    
    (0.1
    )
    
    -Adjusted EBITDA
    $
    (5.5
    )
    $
    (3.4
    )
    $
    (3.2
    )Depreciation and amortization
    
    (0.1
    )
    
    -
    
    
    -Operating loss
    $
    (5.6
    )
    $
    (3.4
    )
    $
    (3.2
    )Capital expenditures
    $
    -
    
    $
    0.8
    
    $
    -


Our corporate and other segment recorded negative Adjusted
EBITDA of $5.5 million for the quarter, with the change from comparable quarters
primarily reflecting a year-over-year wage and benefit increase, profit sharing
and higher-than-normal professional and consulting fees.

B.         
Liquidity and Capital Resources

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               |  |  

44

---

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                    |  

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.

45

---

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, 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 3D,
Risk Factors.

Liquidity and Capital Resources for 2012 compared to
2011

Summary of Financial Position

|                                                     |   | As at December 31, |  |  
|---------------------------------------------------- | - | ------------------ |  | -
|                                                     |   | 2012               |  |  
|                                                     |   | (in millions)      |  |  
|                                                     |   |                    |  |  
|Cash                                                 | $ | 24.7               |  |  
|Restricted cash                                      |   | 18.8               |  |  
|Current assets                                       |   | 159.1              |  |  
|Current liabilities                                  |   | 70.1               |  |  
|Ratio of current assets to current
      liabilities |   | 2.3                |  | X
|Financial liabilities - borrowings                   | $ | 221.7              |  |  
|Shareholder's equity                                 |   | 72.6               |  |  

We ended 2012 with $43.5 million in cash, $18.8 million of
which was restricted cash, for government grants received for the BEP but not
yet expended, as well as for deposits to secure unrealized losses on futures
contracts. Cash from operations, including changes in working capital, was
sufficient to meet our capital investments and financing activities.

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 accounts receivable and inventories. On December 31,
2012, this borrowing base was calculated to be $53.0 million; therefore, all
$50.0 million was available under the facility, with $3.6 million committed to
standby letters of credit.

46

---

|                                                   |   | Year ended December 31, |  
|-------------------------------------------------- | - | ----------------------- | -
|                                                   |   | 2012                    |  
|                                                   |   | (in millions)           |  
|Selected cash flow items                           |   |                         |  
|Operating activities:                              |   |                         |  
|Cash provided by operating activities              | $ | 21.5                    |  
|Net reforestation                                  |   | (0.2                    | )
|Net change in non-cash working capital
      items |   | 4.0                     |  
|                                                   |   | 25.3                    |  
|Investing activities:                              |   |                         |  
|Additions to property plant and equipment          |   | (16.5                   | )
|Receipt of government grants                       |   | 8.7                     |  
|Proceeds on Fox Creek insurance claim              |   | -                       |  
|Increase in restricted cash                        |   | (6.9                    | )
|Other                                              |   | -                       |  
|                                                   |   | (14.7                   | )
|Financing activities:                              |   |                         |  
|Increase in borrowings                             |   | 4.3                     |  
|Repayment of borrowings                            |   | (1.0                    | )
|Finance expenses paid                              |   | (20.1                   | )
|Dividends                                          |   | (0.7                    | )
|                                                   |   | (17.5                   | )
|                                                   |   |                         |  
|Increase (decrease) increase in cash               | $ | (6.9                    | )
|                                                   |   |                         |  
|Opening Cash                                       | $ | 31.6                    |  
|Closing Cash                                       | $ | 24.7                    |  
|                                                   |   |                         |  
|Cash and cash equivalents                          | $ | 24.7                    |  
|Restricted cash                                    |   | 18.8                    |  
|Total cash                                         | $ | 43.5                    |  

We generated $21.5 million in cash from operations in the
current year, a significant decline from the $38.3 million provided in 2011,
reflecting the impact of rising energy and transportation costs on both our
lumber and pulp segments. The impact of improved pricing in the lumber segment
in 2012 was more than offset by significant contributions from the segments
hedging program in 2011, while in 2011 the corporate and other segment
benefitted from the receipt of previously referenced insurance proceeds.

Working capital generated $4.0 million in 2012, compared to the
$4.5 million used in 2011, as increased inventories (related mainly to our
seasonal log inventory build) were more than offset by an increase in cash from
lower accounts receivable (in part due to active factoring of long-term,
letter-of-credit-backed receivables) and higher accounts payable (due mainly to
unrealized losses on derivative contracts and deferred revenue from grant
funding).

Investing activities were $14.7 million in 2012, which included
$2.3 million for the completion of the Fox Creek planer upgrade and $4.6 million
for the BEP. The remaining balance of $4.8 million addressed our requirements
for maintenance-of-business expenditures for the year. Comparatively, the $43.3
million in capital investments made in 2011, net of $4.3 million in non-cash
working capital, was primarily attributable to a $43.2 million expenditure
related to the rebuilding of the Fox Creek sawmill and associated site
enhancements, and included $3.6 million in capitalized interest and $1.4 million
in capitalized commissioning costs. The remaining $4.4 million in capital
expenditures for 2011 was for maintenance-of-business capital and certain small,
but high-return, projects.

47

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Financing activities for the year consisted of $20.1 million
related to the servicing of our long-term debt, $0.9 million in principal
payments for our power-purchase loans and a first-quarter dividend payment of
$0.8 million. This was lower than the previous years expenses paid, which
included financing activities connected to the redemption of our US$190 million
in 7.75% Senior Notes due 2013 and the issuance of US$210 million in 8.50%
Senior Notes due 2021.

C.         
Research and Development

We did not conduct significant research and development
activities in 2013.

D.         
Trend Information

The North American lumber market, while volatile, experienced
significant improvement through most of 2013, as continued recovery in the U.S.
housing market, solid Asian demand and a moderate supply response combined to
strengthen pricing. Rising prices resulted in a reduction in export charges
imposed under the Softwood Lumber Agreement in 2013, with only one month seeing
charges at 10% and two months at 5%. Given pricing trends, SLA export charges
are not expected to have a significant impact on revenues in 2014.

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, as well as on 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 2014 and into 2015, our forecast is tempered by regional
variations in the U.S. housing recovery, the lack of predictability in Chinese
buying patterns, and the unsteady nature of current global economic conditions.

In recent years, the strength of general pulp markets has been
undermined by the weakness of the global economy, which reduced paper
consumption, and by the start-up of new pulp capacity, which further upset the
supply/demand balance. Market pulp production volumes have increased over the
past five years, including during the period of economic upheaval starting in
2008, in which demand for paper, and therefore pulp, declined significantly.
This capacity growth reflected investment decisions made prior to the onset of
the credit crisis and ensuing recession. Demand improved in 2010, and through
2011 and 2012; however, new hardwood kraft mill production in South America
entered the market in mid-2012, reaching full mill-design capacity volumes by
early 2013. Though this new production challenged pricing, its impact was
partially offset by rising demand, reflecting a strengthening global economy.
Softwood kraft supply also increased in 2013, with the startup of new capacity
in Russia. Hardwood BCTMP market pulp supply was relatively static during 2013,
although the shutdown of a Canadian mill contributed to a tightened
supply/demand balance by mid-year. Softwood BCTMP markets remained weak through
most of 2013, reflecting the impact of new capacity in New Zealand.

The pricing outlook for all pulps in the year ahead is expected
to be relatively stable in the first half of 2014, but it is likely that weaker
pricing will be seen later in the year, as new hardwood kraft capacity,
primarily from South America, comes into the market, eventually affecting prices
for all grades. To the extent our BCTMP output is used in the printing and
writing or tissue and towel sectors, we would expect to see our associated
pricing follow the general downward trend. The current strength of the
containerboard market in China, and to a lesser extent in India, is creating a
distinct pricing trend for market BCTMP, in both hardwood and softwood grades;
however, even with strong demand and limited new capacity, it is expected that
pricing for BCTMP grades used in board products will be negatively affected by
the oversupply of hardwood kraft in the last half of the year.

Operationally, we expect our facilities to continue to run at operating rates similar to those achieved in 2013. In 2014,  the lumber segment is expected to produce
  approximately 530 million board feet of sawmill production, and the pulp segment
should again produce and sell approximately 320,000 tonnes.

48

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We expect to continue seeing upward pressure on our costs, with
the major factors in the foreseeable future being increased stumpage fees
associated with higher lumber pricing, and rising consumer costs for power
transmission related to infrastructure expansion. The labor market is also
expected to be a significant challenge in the future, as our sector faces strong
workforce competition in Alberta from the oil and gas sector, especially for
trades positions.

E.         
Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements, apart from
$3.7 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) as at December 31, 2013.

Payments due by period(in
      millions)More1-2
    
    
    3-5
    
    
    thanTotal
    
    
    1
      year
    
    
    years
    
    
    years
    
    
    5
      yearsLong-term debt
    $
    243.8
    
    $
    2.8
    
    $
    3.0
    
    $
    9.8
    
    $
    228.2Fixed-rate interest (2)
    $
    136.2
    
    $
    19.6
    
    $
    19.3
    
    $
    56.5
    
    $
    40.8Power purchase rights(3)
    $
    165.5
    
    $
    19.4
    
    $
    21.9
    
    $
    71.7
    
    $
    52.5Total
    $
    545.5
    
    $
    41.8
    
    $
    44.2
    
    $
    138.0
    
    $
    321.5


| | (1) | Contractual obligations 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$1.00/C$1.00.                                                                                                                                                                                                           
| | (3) | Does not include anticipated revenues from the sale of
      power supplied under the power purchase rights.                                                                                                                                                                                       

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                | 73  |  | 51         |  | Co-Chairman and Director                       
|H. MacKenzie Millar            | 67  |  | 44         |  | Co-Chairman and
      Director                 
|J. Craig Armstrong             | 62  |  | 40         |  | President, Chief Executive Officer and
Director
|Carol Cotton, CA               | 56  |  | 26         |  | Senior Vice-
      President                   
|Ronald J. Reis, PEng           | 60  |  | 39         |  | Senior Vice- President, Pulp                   
|Stefan Demharter               | 52  |  | 31         |  | Vice-President,
      Wood Products            
|Brian McConkey                 | 49  |  | 25         |  | Vice-President, Human Resources                
|Robert J. Turner, QC (2)       | 67  |  |            |  | Secretary,
      General Counsel and Director  
|W. Kenneth Davidson (3)        | 63  |  |            |  | Director                                       
|William D. Grace, FCA(1)(2)(3) | 78  |  |            |  | Director                                       
|Donald R. Ching (1)(3)         | 72  |  |            |  | Director                                       
|Douglas G. Hall (1)(2)(3)      | 64  |  |            |  | Director                                       

49

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

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.

50

---

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.

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
Vice-Chair and Consultant of Dentons Canada LLP, a law firm. Mr. Turner has a
Bachelor of Commerce from the University of Calgary and a Bachelor of Laws from
the University of Alberta.

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 Masters in
Business Administration from McMaster University. Mr. Davidson also serves as a
director of Vermillion Energy Inc.

William D. Grace, FCA, was appointed a Director
in September 1997. During his business career, Mr. Grace served as managing
partner of the PricewaterhouseCoopers consulting group and as Chief Financial
Officer with several Alberta corporations. Mr. Grace also serves as a director
of Melcor Developments Ltd. Mr. Grace has previously served on numerous other
boards of both private and public companies, including Stantec Inc. and The
Forzani Group Ltd.

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.

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 an M.B.A. from the University of Western
Ontario and a B.A. from Queens University and is also a Chartered Financial
Analyst. Mr. Hall also serves as a director of Pattern Energy Group, NexC
Partners, Purpose Investments 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; 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.

51

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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, officers and key employees as a group, for services in
all capacities in 2013, was $5.3 million.

Our policy provides that each non-employee director is entitled
to receive an annual fee of $18,000 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 $7,000 per annum, and the chair of each
other committee is entitled to an additional fee of $3,500 per annum. The total
compensation paid to non-employee directors for the year ended December 31,
2013, 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 2013 was $3.5 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 2013 was $0.9
million, of which less than $10,000 represented matching contributions on behalf
of our officers.

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 2013.

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, 2013, 2012, 2011, 2010 and 2009, the amount of such earnings set aside for
distribution was $3.2 million, nil, $0.4 million, $1.1 million and nil,
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 independent directors: William D. Grace, 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 four
members: Douglas G. Hall, William D. Grace, H. MacKenzie Millar and Robert J.
Turner. The Executive Compensation Committee is responsible for reviewing
compensation levels of senior management and other executive compensation
matters.

52

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D.         
Employees

As of December 31, 2013, we had 628 full-time employees, all of
whom were non-unionized.

|Location                                 | Employees
    (1)
|---------------------------------------- | -----------------
|Corporate office (Edmonton)              | 51               
|Whitecourt pulp mill                     | 112              
|Whitecourt sawmill                       | 260              
|Boyle sawmill                            | 88               
|Fox Creek sawmill                        | 77               
|Woodlands (Whitecourt, Fox Creek, Boyle) | 40               
|Total                                    | 628              

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

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

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, which are described in greater detail
below. Management believes that such agreements are equivalent to those that
could have been negotiated with unaffiliated, third parties.

Non-Competition Agreement

Industries, James B. Millar and H. MacKenzie Millar entered
into a non-competition agreement, whereby each agreed not to engage, without our
consent, in the operation of or have any financial interest in any business
operation in the forest products industry in Canada or the United States for so
long as Industries, James B. Millar and H. MacKenzie Millar hold, in the
aggregate, at least 10% of our outstanding common shares. The non-competition
agreement does not apply to the purchase of less than a controlling interest of
a publicly traded company engaged in the forest products industry, selling goods
or products to businesses in the forest products industry (provided that the
relationship is strictly supplier-purchaser), or performance under the Corporate
Services Agreement described below. In addition, Industries, James B. Millar and
H. MacKenzie Millar have agreed not to disclose any confidential information or
trade secrets concerning our present and contemplated business.

53

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Trademark Licensing Agreement

Industries is the registered owner in Canada of the trademark
MILLAR WESTERN, the Millar Western logo and the trademark a resourceful
company. We and Industries entered into a trademark licensing agreement, which
we refer to as the Trademark Licensing Agreement, which grants to us a
non-exclusive, non-transferable license to use the trademarks in Canada and,
where applicable, in the United States, and wherever else in the world the
trademarks are registered, in association with the sale of salt, lumber, wood
chips, pulp, and paper and paper products. Under the license, we will be
required to maintain certain quality standards for wares and services set by
Industries. In addition, we may only use the trademarks in our business or
tradename and not as or in any other corporate, business or tradename. The
Trademark Licensing Agreement may be terminated by either party upon six months
notice to the other party or by Industries in the event of a material breach of
the Trademark Licensing Agreement by us.

Corporate Services Agreement

We entered into a corporate services agreement, which we refer
to as the Corporate Services Agreement, with Industries in 1998, regarding
office, managerial and aircraft services. Pursuant to the Corporate Services
Agreement, Industries has granted us a non-exclusive license to use and occupy
an office building owned by Industries for market rent. We have agreed to supply
to Industries, on a non-exclusive basis, management, finance and accounting,
information systems, purchasing and human resource services as the needs of
Industries dictate. Industries pays us 5% in excess of the costs we incur in
providing such services. All of the persons employed by Industries in forest
products operations remained employees of Industries until December 31, 1998, at
which time they became our employees. Industries agreed to make such employees
available to us, continued to pay such employees and did not terminate or alter
any terms of employment. We reimbursed Industries for all costs incurred by
Industries related to those employees. Industries makes its aircraft available
to us on a standby basis, and we pay a standby fee equal to 100% of the fixed
costs of the aircraft and a proportionate amount of the variable costs equal to
the portion of our use of the aircraft in relation to the total use of the
aircraft. The Corporate Services Agreement may be terminated by either party
upon six months notice.

The agreements described below were assigned to us by
Industries on May 13, 1998. Management believes that such agreements involve the
payment of market rates or are on terms that we would have negotiated with
unaffiliated third parties.

Magnesium Sulphate Supply Agreement

Pursuant to a magnesium sulphate supply agreement, Industries
produces and supplies, and we purchase, all of the magnesium sulphate
requirements of the Whitecourt pulp mill at a price based upon the market rate.
This agreement may be terminated by either party on two months notice.

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 $226,000, $210,000 and $276,000 for
general corporate legal advice provided to us in 2013, 2012 and 2011,
respectively. Such compensation did not exceed 5% of the revenues of Dentons
during 2013, 2012 or 2011.

Indebtedness of Directors and Officers

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

54

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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.

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.

55

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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.                                                                                                                                                                   

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.

56

---

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.

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.

57

---

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

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 on              
|--------- | ------------------- |  | ---------------------------------
|          | price(1)            |  | operating earnings(2)            
|          |                     |  | (millions)                       
|          |                     |  |                                  
|Pulp (3)  | US$50/admt          |  | $                    
       16.0
|Lumber(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 (66% of 2013 revenue, 67%
of 2012 revenue and 71% of 2011 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$0.9402 at
December 31, 2013, compared to US$1.0051 at December 31, 2012, and US$0.9833 at
December 31, 2011.

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, 2013, 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 $2.4 million.

58

---

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.

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, 2013, 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, 2013.

Attestation Report of the Registered Public Accounting Firm.This annual report does not include a report of our registered public
accounting firm 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. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.

59

---

ITEM 16

A.         
AUDIT COMMITTEE FINANCIAL EXPERT

William D. Grace 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, 2013. 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, 2013, 2012 and 2011, for professional
services:

2013
    
    
    2012
    
    
    2011(in thousands)Audit Fees(1)
    
    253.0
    
    
    279.2
    
    
    224.1Audit-Related Fees
    
    -
    
    
    -
    
    
    -Tax Fees(2)
    
    18.7
    
    
    25.1
    
    
    24.0All Other Fees (3)
    
    123.0
    
    
    28.0
    
    
    189.1394.7
    
    
    332.3
    
    
    437.2


| | (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.

60

---

Our Audit Committee approved 100% of the fees paid to
PricewaterhouseCoopers LLP in 2010, 2011 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.

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) Auditors Report. (ii)
Statements of Financial Position as at December 31, 2012 and 2013.

61

---

(iii) Statements of Operations and
Comprehensive Income (Loss) for the years ended December 31, 2011, 2012 and
2013.(iv) Statements of Changes in Equity for the years ended December 31,
2011, 2012 and 2013. (v) Statements of Cash Flows for the years ended
December 31, 2011, 2012 and 2013.(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 --------

|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*** | 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).                                                                           
|2.15*** | 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).                                                                               
|2.16*** | 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.                                                                                                                                     

62

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|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 Senior Vice President, Carol Cotton,
      required by 17 CFR 240.15d-14(a).                                                                                                                                                       
|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 Senior Vice President, Carol Cotton,
      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, 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 5, 2014 | By: | /s/ Carol Cotton     
|-------------------- | --- | ---------------------
|                     |     | Carol Cotton         
|                     |     | Senior Vice-President

63

---









Millar Western ForestProducts Ltd.

Financial StatementsDecember 31, 2013 and 2012

---

March 4, 2014



Independent Auditors Report

To the Shareholder of Millar 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, 2013 and 2012 and the statements of operations and
  comprehensive income (loss), changes in equity and cash flows for each of the
  three years in the period ended December 31, 2013, and the related notes, which
  comprise a summary of significant accounting policies and other explanatory
  information.

Managements responsibility for thefinancial
  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.

PricewaterhouseCoopers LLPTD Tower, 10088 102 Avenue NW, Suite 1501,
              Edmonton, Alberta, Canada T5J 3N5T: +1 780
                441 6700, F: +1 780 441 6776PwC refers to PricewaterhouseCoopers LLP, an Ontario
        limited liability partnership.


---

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, 2013 and 2012 and its financial
  performance and its cash flows for each of the three years in the period ended
  December 31, 2013 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.Statements of Financial PositionAs at December
        31


|                                                   |  | 2013    |  |  | 2012    | 
|-------------------------------------------------- |  | ------- |  |  | ------- | 
|                                                   |  | **$**   |  |  | **$**   | 
|                                                   |  |         |  |  |         | 
|Assets                                             |  |         |  |  |         | 
|                                                   |  |         |  |  |         | 
|Current assets                                     |  |         |  |  |         | 
|Cash and cash equivalents (note 5)                 |  | 47,219  |  |  | 24,674  | 
|Restricted cash (note 5)                           |  | 7,977   |  |  | 18,824  | 
|Accounts and other receivables (note 6)            |  | 37,981  |  |  | 26,006  | 
|Inventories (note 7)                               |  | 75,562  |  |  | 77,588  | 
|Prepaid expenses                                   |  | 9,868   |  |  | 12,018  | 
|                                                   |  |         |  |  |         | 
|                                                   |  | 178,607 |  |  | 159,110 | 
|Property, plant and equipment(note
      8)        |  | 175,033 |  |  | 175,295 | 
|Intangible assets(note 10)                         |  | 40,100  |  |  | 44,860  | 
|Other assets(note 11)                              |  | 2,534   |  |  | 2,910   | 
|                                                   |  |         |  |  |         | 
|                                                   |  | 396,274 |  |  | 382,175 | 
|                                                   |  |         |  |  |         | 
|Liabilities                                        |  |         |  |  |         | 
|                                                   |  |         |  |  |         | 
|Current liabilities                                |  |         |  |  |         | 
|Accounts payable and accrued liabilities (note 13) |  | 52,227  |  |  | 63,960  | 
|Financial liabilities  borrowings (note
      14) |  | 2,810   |  |  | 1,092   | 
|Reforestation obligations (note 15)                |  | 4,257   |  |  | 5,070   | 
|                                                   |  |         |  |  |         | 
|                                                   |  | 59,294  |  |  | 70,122  | 
|Financial liabilities  borrowings(note 14)        |  | 237,371 |  |  | 221,653 | 
|Asset retirement obligations(note 15)              |  | 1,217   |  |  | 2,206   | 
|Other obligations                                  |  | 103     |  |  | 331     | 
|Reforestation obligations(note 15)                 |  | 8,863   |  |  | 10,163  | 
|Deferred income taxes(note 21)                     |  | 9,429   |  |  | 1,893   | 
|Post-employment benefit obligation(note 22)        |  | 1,680   |  |  | 3,187   | 
|                                                   |  |         |  |  |         | 
|                                                   |  | 317,957 |  |  | 309,555 | 
|                                                   |  |         |  |  |         | 
|Shareholders equity                               |  |         |  |  |         | 
|                                                   |  |         |  |  |         | 
|Share capital(note 16)                             |  | 65,500  |  |  | 65,500  | 
|Retained earnings                                  |  | 12,817  |  |  | 7,120   | 
|                                                   |  |         |  |  |         | 
|                                                   |  | 78,317  |  |  | 72,620  | 
|                                                   |  |         |  |  |         | 
|                                                   |  | 396,274 |  |  | 382,175 | 

Approved by the Board of Directors

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

---

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


|                                                           |  | Share   |  |  | Retained |   |  | Total  |  
|---------------------------------------------------------- |  | ------- |  |  | -------- | - |  | ------ | -
|                                                           |  | capital |  |  | earnings |   |  | equity |  
|                                                           |  | **$**   |  |  | **$**    |   |  | **$**  |  
|                                                           |  |         |  |  |          |   |  |        |  
|Balance  January 1, 2011                                  |  | -       |  |  | 84,225   |   |  | 84,225 |  
|                                                           |  |         |  |  |          |   |  |        |  
|Net loss for the year                                      |  | -       |  |  | (229     | ) |  | (229   | )
|                                                           |  |         |  |  |          |   |  |        |  
|Actuarial losses                                           |  | -       |  |  | (220     | ) |  | (220   | )
|                                                           |  |         |  |  |          |   |  |        |  
|Adjustment to stated capital (note 16)                     |  | 61,500  |  |  | (61,500  | ) |  | -      |  
|                                                           |  |         |  |  |          |   |  |        |  
|Dividends (note 16)                                        |  | -       |  |  | (2,250   | ) |  | (2,250 | )
|                                                           |  |         |  |  |          |   |  |        |  
|Balance  December 31, 2011                                |  | 61,500  |  |  | 20,026   |   |  | 81,526 |  
|                                                           |  |         |  |  |          |   |  |        |  
|Net loss for the year                                      |  | -       |  |  | (8,259   | ) |  | (8,259 | )
|                                                           |  |         |  |  |          |   |  |        |  
|Acquisition of Chickadee Creek Energy Inc.
      (note 17) |  | -       |  |  | (330     | ) |  | (330   | )
|                                                           |  |         |  |  |          |   |  |        |  
|Actuarial losses                                           |  | -       |  |  | (317     | ) |  | (317   | )
|                                                           |  |         |  |  |          |   |  |        |  
|Adjustment to stated capital (note 16)                     |  | 4,000   |  |  | (4,000   | ) |  | -      |  
|                                                           |  |         |  |  |          |   |  |        |  
|Balance  December 31, 2012                                |  | 65,500  |  |  | 7,120    |   |  | 72,620 |  
|                                                           |  |         |  |  |          |   |  |        |  
|Net income for the year                                    |  | -       |  |  | 6,620    |   |  | 6,620  |  
|                                                           |  |         |  |  |          |   |  |        |  
|Actuarial gains                                            |  | -       |  |  | 577      |   |  | 577    |  
|                                                           |  |         |  |  |          |   |  |        |  
|Dividends (note 16)                                        |  | -       |  |  | (1,500   | ) |  | (1,500 | )
|                                                           |  |         |  |  |          |   |  |        |  
|Balance  December 31, 2013                                |  | 65,500  |  |  | 12,817   |   |  | 78,317 |  

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

---

Millar Western Forests Product Ltd.Statements of Operations and Comprehensive Income
      (Loss)For the years ended December 31

|                                                                                   |  |         |   |  |         |   |  |         |  
|---------------------------------------------------------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|                                                                                   |  |         |   |  |         |   |  |         |  
|                                                                                   |  | 2013    |   |  | 2012    |   |  | 2011    |  
|                                                                                   |  | $       |   |  | $       |   |  | **$**   |  
|                                                                                   |  |         |   |  |         |   |  |         |  
|Revenue                                                                            |  | 382,938 |   |  | 332,401 |   |  | 284,682 |  
|                                                                                   |  |         |   |  |         |   |  |         |  
|Cost of products sold (excluding
      depreciation and amortization)              |  | 259,155 |   |  | 241,039 |   |  | 207,019 |  
|Freight and other distribution costs                                               |  | 53,438  |   |  | 53,222  |   |  | 48,563  |  
|Depreciation and amortization                                                      |  | 13,996  |   |  | 13,641  |   |  | 11,349  |  
|General and administration                                                         |  | 19,061  |   |  | 13,781  |   |  | 15,929  |  
|Other (income) expenses (note 19)                                                  |  | (11,869 | ) |  | 7,650   |   |  | (25,751 | )
|                                                                                   |  |         |   |  |         |   |  |         |  
|                                                                                   |  | 333,781 |   |  | 329,333 |   |  | 257,109 |  
|                                                                                   |  |         |   |  |         |   |  |         |  
|Operating earnings                                                                 |  | 49,157  |   |  | 3,068   |   |  | 27,573  |  
|                                                                                   |  |         |   |  |         |   |  |         |  
|Foreign exchange (loss) gain on
      borrowings                                   |  | (14,425 | ) |  | 4,641   |   |  | (5,518  | )
|                                                                                   |  |         |   |  |         |   |  |         |  
|Finance expenses(note 20)                                                          |  | (20,892 | ) |  | (20,425 | ) |  | (20,847 | )
|                                                                                   |  |         |   |  |         |   |  |         |  
|Net income (loss) before income taxes                                              |  | 13,840  |   |  | (12,716 | ) |  | 1,208   |  
|                                                                                   |  |         |   |  |         |   |  |         |  
|Income taxes expense (recovery)(note 21)                                           |  | 7,220   |   |  | (4,457  | ) |  | 1,437   |  
|                                                                                   |  |         |   |  |         |   |  |         |  
|Net income (loss) for the year                                                     |  | 6,620   |   |  | (8,259  | ) |  | ( 229   | )
|                                                                                   |  |         |   |  |         |   |  |         |  
|Actuarial gains (losses)  (net of tax 2013
       $192; 2012  $106; 2011  $74) |  | 577     |   |  | (317    | ) |  | (220    | )
|                                                                                   |  |         |   |  |         |   |  |         |  
|Comprehensive income (loss) for the year                                           |  | 7,197   |   |  | (8,576  | ) |  | ( 449   | )

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

---

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


|                                                               |  | 2013    |   |  | 2012    |   |  | 2011     |  
|-------------------------------------------------------------- |  | ------- | - |  | ------- | - |  | -------- | -
|                                                               |  | **$**   |   |  | **$**   |   |  | **$**    |  
|                                                               |  |         |   |  |         |   |  |          |  
|Cash provided by (used in)                                     |  |         |   |  |         |   |  |          |  
|                                                               |  |         |   |  |         |   |  |          |  
|Operating activities                                           |  |         |   |  |         |   |  |          |  
|Net income (loss) for the year                                 |  | 6,620   |   |  | (8,259  | ) |  | (229     | )
|Adjustments for                                                |  |         |   |  |         |   |  |          |  
|Finance expenses                                               |  | 20,892  |   |  | 20,425  |   |  | 20,847   |  
|Depreciation and amortization                                  |  | 13,996  |   |  | 13,641  |   |  | 11,349   |  
|Deferred income
      tax expense (recovery)                   |  | 7,344   |   |  | (4,325  | ) |  | 1,685    |  
|Unrealized exchange loss (gain) on borrowings                  |  | 14,425  |   |  | (4,641  | ) |  | 12,222   |  
|Unrealized (gain)
      loss on derivative contracts           |  | (6,970  | ) |  | 6,612   |   |  | (2,594   | )
|Reforestation expense                                          |  | 5,018   |   |  | 7,077   |   |  | 6,549    |  
|Loss
      (gain) on disposal of property, plant and equipment |  | 832     |   |  | (45     | ) |  | (436     | )
|Fox Creek insurance claim                                      |  | -       |   |  | -       |   |  | (7,600   | )
|Inventory
      valuation                                      |  | -       |   |  | (1,963  | ) |  | 1,242    |  
|Other                                                          |  | (1,954  | ) |  | 120     |   |  | 1,872    |  
|Reforestation
      expenditures                               |  | (6,817  | ) |  | (7,256  | ) |  | (7,325   | )
|                                                               |  |         |   |  |         |   |  |          |  
|                                                               |  | 53,386  |   |  | 21,386  |   |  | 37,582   |  
|Net change in non-cash working capital
      items (note 27)   |  | (12,170 | ) |  | 3,895   |   |  | (4,499   | )
|                                                               |  |         |   |  |         |   |  |          |  
|                                                               |  | 41,216  |   |  | 25,281  |   |  | 33,083   |  
|                                                               |  |         |   |  |         |   |  |          |  
|Investing activities                                           |  |         |   |  |         |   |  |          |  
|Additions to property, plant and equipment (note 27)           |  | (21,655 | ) |  | (16,598 | ) |  | (43,324  | )
|Receipt of government grants (note 9)                          |  | 15,377  |   |  | 8,655   |   |  | -        |  
|Proceeds on disposal of property, plant and equipment          |  | 136     |   |  | 205     |   |  | 1,358    |  
|Proceeds on Fox Creek insurance claim                          |  | -       |   |  | -       |   |  | 7,600    |  
|Cash collateral on derivative contracts (note 5)               |  | 6,952   |   |  | (6,952  | ) |  | -        |  
|Acquisition of Chickadee Creek Energy Inc.
      (note 17)     |  | -       |   |  | 36      |   |  | -        |  
|(Increase) decrease in other assets                            |  | (4      | ) |  | (46     | ) |  | 2,186    |  
|                                                               |  |         |   |  |         |   |  |          |  
|                                                               |  | 806     |   |  | (14,700 | ) |  | (32,180  | )
|                                                               |  |         |   |  |         |   |  |          |  
|Financing activities                                           |  |         |   |  |         |   |  |          |  
|Increase in borrowings                                         |  | 11,603  |   |  | 4,312   |   |  | 201,348  |  
|Repayment of borrowings                                        |  | (9,092  | ) |  | (978    | ) |  | (189,850 | )
|Finance expenses paid                                          |  | (20,488 | ) |  | (20,121 | ) |  | (24,335  | )
|Dividends                                                      |  | (1,500  | ) |  | (750    | ) |  | (1,500   | )
|                                                               |  |         |   |  |         |   |  |          |  
|                                                               |  | (19,477 | ) |  | (17,537 | ) |  | (14,337  | )
|                                                               |  |         |   |  |         |   |  |          |  
|Increase (decrease) in cash and cash equivalents               |  | 22,545  |   |  | (6,956  | ) |  | (13,434  | )
|                                                               |  |         |   |  |         |   |  |          |  
|Cash and cash equivalents  beginning of year                  |  | 24,674  |   |  | 31,630  |   |  | 45,064   |  
|                                                               |  |         |   |  |         |   |  |          |  
|Cash and cash equivalents  end of year                        |  | 47,219  |   |  | 24,674  |   |  | 31,630   |  

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

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


|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. and the ultimate parent is 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 Accounts Standards Board
      (IASB).                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                     
|  | These financial statements were approved by the Companys
      board of directors on March 4, 2014.                                                                                                                                                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                     
|  | 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
        Statement


| | 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 period end, monetary assets and liabilities
      denominated in foreign currencies are converted to Canadian dollars at
      rates of exchange prevailing on that date. Gains and losses on exchange
      differences are recognized in the statement of operations and
      comprehensive income (loss).

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 has 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 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 that 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
        Statement


| | ii)  | Financial liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |      | Accounts payable and accrued liabilities are
      non-interest-bearing and are recognized initially at 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 period end.                                                                                                                                                                                                                   
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |      | The Company has reviewed all significant contractual
      agreements and determined that 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 24.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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
        Statement


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 income, includes all inventories expensed in the
  period, 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 income (loss) during the period 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
      40  60 yearsBuildings  pulp mill
      40  60 yearsBuildings  other
      15  30 yearsProcess equipment - sawmill
      25  40 yearsProcess equipment  pulp mill
      20  50 yearsMobile equipment
      5  10 yearsAncillary equipment
      10  25 yearsFurniture, office and computer equipment
      5  20 yearsBridges
      20  30 yearsRoads and yards
      30  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
        Statement


Gains and losses on disposals 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 income (loss).

Intangible assets

The Companys intangible assets include
  timber rights, computer software and power purchase rights. These assets are
  capitalized and amortized in the statement of operations and comprehensive
  income (loss), 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 whenever events or changes in
  circumstances indicate 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 statement of operations and comprehensive income (loss) 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.
| |    |                                                                                                                                                                                                        
| |    | The cost of defined-contribution pension plans is charged
      to expense as the contributions become payable.                                                                                        

(5)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


| |      | The cost of defined-benefit plans is determined using the
      projected-benefit method, prorated 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 statement of financial position is the present value of
      the defined-benefit obligation at the period-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 statement of
      operations and comprehensive income (loss).                                                                                                                                                       
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ii)  | Profit sharing                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |      | The Company recognises 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 period
      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 statement of operations and comprehensive income (loss) as
  they occur.

(6)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


Income taxes

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

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 that 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 that 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
        Statement


|  | 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 judgement 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
      balance sheet 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
        Statement


|  | 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 15) with any changes in initial measurement being
      recognized in the statement of operations and comprehensive income (loss)
      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 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 that the Company considers relevant to its financial
      reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  | We have adopted the following new and revised standards,
      along with any consequential amendments, effective January 1, 2013. These
      changes were made in accordance with the applicable transitional
      provisions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| |  | IFRS 13, Fair Value Measurement  In May 2011, IFRS 13
      was issued which defines fair value, establishes a framework for measuring
      fair value and sets out disclosure requirements for fair value
      measurements. Prior to the introduction of the standard there was no
      single source of guidance on fair value measurement. The adoption of IFRS
      13 did not require any adjustments to the valuation techniques used to
      measure fair value and did not result in any measurement adjustments.                                               
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | IAS 1, Presentation of Financial Statements  IAS 1 was
      amended and requires companies to group items presented within OCI based
      on whether they may be subsequently reclassified to profit or loss. This
      amendment to IAS 1 was effective for annual periods beginning on or after
      July 1, 2012, with full retrospective application. The adoption of IAS 1
      did not have any effect on the financial statements.                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | IAS 19, Amendment, Employee Benefits  In June 2011, IAS
      19 was amended. The amendment required changes to the recognition and
      measurement of defined benefit pension expense and termination benefits,
      the most significant impact being the replacement of interest cost and
      expected return on plan assets with a net interest amount that is
      calculated by applying a single discount rate to the net defined liability
      (asset). The impact of the adoption of the amended standard was not
      material to the financial statements.

(9)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


The following standards have been
  issued but not yet applied.

| |  | IFRIC 21, Levies  Released in May 2013, this standard
      provides guidance on when to recognise a liability for a levy imposed by a
      government, both for levies that are accounted for in accordance with IAS
      37, Provisions, Contingent Liabilities and Contingent Assets and those
      where the timing and amount of the levy is certain. IFRIC 21 is effective
      for annual periods beginning on or after January 1, 2014. The Company is
      currently assessing the impact of IFRIC 21.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | IFRS 9, Financial Instruments  In November 2009, IFRS 9
      was issued and, in October 2010 and November, 2013 further amended. IFRS 9
      addresses classification and measurement of financial assets and replaces
      the multiple category and measurement models in IAS 39 for debt
      instruments with a new mixed measurement model having only two categories:
      amortized cost and fair value through profit and 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. IFRS 9 was further amended to
      include guidance on hedge accounting and to allow entities to early adopt
      the requirement to recognize changes in fair value attributable to a
      change in an entitys own credit risk, from financial liabilities
      designated under the fair value option, in OCI (without having to adopt
      the remainder of IFRS 9). IFRS 9 was originally deemed to be effective for
      annual periods beginning on or after January 1, 2015, with earlier
      application permitted, but in July, 2013 the effective date was determined
      to be left open pending the finalization of the impairment and
      classification and measurement requirements. The Company has not assessed
      the impact of IFRS 9.

|5 | Cash and cash equivalents and restricted
      cash                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                      
|  | Cash on deposit at Canadian banks earn interest at the
      banks prime rate minus 1.95%. The banks prime rate at December 31, 2013,
      was 3%.

| |                                                     |  | 2013  |  |  | 2012   | 
| | --------------------------------------------------- |  | ----- |  |  | ------ | 
| |                                                     |  | **$** |  |  | **$**  | 
| | Restricted Cash                                     |  |       |  |  |        | 
| | Government grant funds                              |  | -     |  |  | 11,872 | 
| | Deposits  US$7.5
      million (note 28)           |  | 7,977 |  |  | -      | 
| | Cash collateral for unrealized derivative contracts |  | -     |  |  | 6,952  | 
| |                                                     |  |       |  |  |        | 
| |                                                     |  | 7,977 |  |  | 18,824 | 

In 2012, the Company received grant
  funding for the bioenergy effluent project (note 9) that has specific
  restrictions under the terms of the grant agreements, thereby limiting the
  Companys ability to use the funds other than for the project. As various
  conditions were met, or project payments were made, funds were released or used
  by the Company to satisfy project costs incurred. As of December 31, 2013, all
  government grant funds were used towards the project.

(10)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


|  | In 2012, the Company had funds on deposit to cover
      unrealized losses on derivative contracts. Deposits were returned to the
      Company when the derivative contracts expired or the unrealized loss was
      reduced. These funds were non-interest bearing.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                       
|6 | Accounts and other
      receivables                                                                                                                                                                                                                                  

| |                                    |  | 2013   |  |  | **2012** |  
| | ---------------------------------- |  | ------ |  |  | -------- | -
| |                                    |  | **$**  |  |  | **$**    |  
| |                                    |  |        |  |  |          |  
| | Trade receivables                  |  | 31,958 |  |  | 17,364   |  
| | Allowance for doubtful accounts    |  | -      |  |  | (43      | )
| | Intercompany receivables (note 23) |  | 43     |  |  | 39       |  
| | Other receivables                  |  | 5,980  |  |  | 8,646    |  
| |                                    |  |        |  |  |          |  
| |                                    |  | 37,981 |  |  | 26,006   |  

|  | Current trade and other receivables are unsecured and
      non-interest bearing. Normal payment terms for the Company are 30 days
      (see also note 24).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                             
|7 | Inventories                                                                                                                                                 

| |                                    |  | 2013   |  |  | 2012   | 
| | ---------------------------------- |  | ------ |  |  | ------ | 
| |                                    |  | **$**  |  |  | **$**  | 
| |                                    |  |        |  |  |        | 
| | Logs                               |  | 24,146 |  |  | 23,757 | 
| | Pulp                               |  | 16,917 |  |  | 21,182 | 
| | Lumber                             |  | 20,378 |  |  | 18,632 | 
| | Operating and maintenance supplies |  | 14,121 |  |  | 14,017 | 
| |                                    |  |        |  |  |        | 
| |                                    |  | 75,562 |  |  | 77,588 | 

|  | There were no write-downs relating to inventories in the
      years ended December 31, 2013, and 2012.
|- | -------------------------------------------------------------------------------------------------------
|  |                                                                                                        
|8 | Property, plant and
      equipment                                                                    

ProcessLand
      
      
      Buildings
      
      
      equipment
      
      
      Other
      
      
      Total**$**
      
      
      **$**
      
      
      **$**
      
      
      **$**
      
      
      **$**Year ended December 31, 2012At
        January 1, 2012
      
      2,263
      
      
      44,438
      
      
      119,903
      
      
      6,214
      
      
      172,818Additions
      
      -
      
      
      1,177
      
      
      8,746
      
      
      1,577
      
      
      11,500Disposals
      
      -
      
      
      (7
      )
      
      (94
      )
      
      (113
      )
      
      (214
      )Depreciation for the year
      
      -
      
      
      (1,525
      )
      
      (6,073
      )
      
      (1,211
      )
      
      (8,809
      )At December 31, 2012
      
      2,263
      
      
      44,083
      
      
      122,482
      
      
      6,467
      
      
      175,295


(11)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


ProcessLand
      
      
      Buildings
      
      
      equipment
      
      
      Other
      
      
      Total**$**
      
      
      **$**
      
      
      **$**
      
      
      **$**
      
      
      **$**At December 31, 2012Cost
      
      2,263
      
      
      82,386
      
      
      329,690
      
      
      17,609
      
      
      431,948Accumulated depreciation
      
      -
      
      
      (38,303
      )
      
      (207,208
      )
      
      (11,142
      )
      
      (256,653
      )Net book value
      
      2,263
      
      
      44,083
      
      
      122,482
      
      
      6,467
      
      
      175,295Year ended December 31, 2013At
        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
      
      
      175,033At 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
      
      
      175,033


|  | Included in the above net book value are assets under
      construction, and therefore are not being depreciated, in the amount of
      $10.7 million at December 31, 2013 (2012  $7.0 million).                                                                                                                                                                                                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | In 2013, depreciation of $9.1 million (2012  $8.8
      million) was presented in depreciation and amortization expense on the
      statement of operations and comprehensive income (loss).                                                                                                                                                                                                                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | In 2013, borrowing costs of $0.4 million (2012  nil)
      were capitalized for the interim financing received exclusively to help
      fund the construction of the BEP project (note 14).                                                                                                                                                                                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | In 2012, borrowing costs of $0.1 million were capitalized
      for the Fox Creek sawmill rebuild based on an average annual
      capitalization rate of 8.2%.                                                                                                                                                                                                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|9 | Bioenergy effluent project                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | In 2012, the Company commenced a bioenergy effluent
      project (BEP) at its BCTMP mill at Whitecourt, Alberta. The project
      involves construction and integration of three anaerobic hybrid digesters
      into the BCTMP mills existing aerobic effluent treatment system.
      Construction commenced in the third quarter of 2012, with substantial
      completion expected by the end of 2014 (note 28).                                                                                                                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | The project qualified for a total of $27.5 million in
      government grants, of which $24.0 million had been received by the Company
      at December 31, 2013. At the end of 2013, all grant funds received had
      been expended on the project. Additional costs incurred by the Company in
      the amount of $10.1 million (2012  $4.6 million) are included in assets
      under construction within property, plant and equipment (note 8). Of the
      $10.1 million, the Company had received $7.9 million in interim financing
      from HSBC (note 14).

(12)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


|10 | Intangible assets
|-- | -----------------

| |                                   |  | Timber |   |  | Computer |   |  | purchase |   |  |         |  
| | --------------------------------- |  | ------ | - |  | -------- | - |  | -------- | - |  | ------- | -
| |                                   |  | rights |   |  | software |   |  | rights   |   |  | Total   |  
| |                                   |  | **$**  |   |  | **$**    |   |  | **$**    |   |  | **$**   |  
| |                                   |  |        |   |  |          |   |  |          |   |  |         |  
| | Year ended December 31, 2012      |  |        |   |  |          |   |  |          |   |  |         |  
| | At January 1, 2012                |  | 10,132 |   |  | 288      |   |  | 39,068   |   |  | 49,488  |  
| | Additions                         |  | -      |   |  | 204      |   |  | -        |   |  | 204     |  
| | Amortization for
      the period |  | (426   | ) |  | (65      | ) |  | (4,341   | ) |  | (4,832  | )
| |                                   |  |        |   |  |          |   |  |          |   |  |         |  
| | At December 31, 2012              |  | 9,706  |   |  | 427      |   |  | 34,727   |   |  | 44,860  |  
| |                                   |  |        |   |  |          |   |  |          |   |  |         |  
| | At December 31, 2012              |  |        |   |  |          |   |  |          |   |  |         |  
| | Cost                              |  | 15,732 |   |  | 9,639    |   |  | 67,783   |   |  | 93,154  |  
| | Accumulated
      amortization    |  | (6,026 | ) |  | (9,212   | ) |  | (33,056  | ) |  | (48,294 | )
| |                                   |  |        |   |  |          |   |  |          |   |  |         |  
| | Net book value                    |  | 9,706  |   |  | 427      |   |  | 34,727   |   |  | 44,860  |  
| |                                   |  |        |   |  |          |   |  |          |   |  |         |  
| | Year ended December 31, 2013      |  |        |   |  |          |   |  |          |   |  |         |  
| | At
      January 1, 2013          |  | 9,706  |   |  | 427      |   |  | 34,727   |   |  | 44,860  |  
| | Additions                         |  | 78     |   |  | 19       |   |  | -        |   |  | 97      |  
| | Disposals                         |  | -      |   |  | (2       | ) |  | -        |   |  | (2      | )
| | Amortization for
      the period |  | (425   | ) |  | (89      | ) |  | (4,341   | ) |  | (4,855  | )
| |                                   |  |        |   |  |          |   |  |          |   |  |         |  
| | Closing net book value            |  | 9,359  |   |  | 355      |   |  | 30,386   |   |  | 40,100  |  
| |                                   |  |        |   |  |          |   |  |          |   |  |         |  
| | 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  |  

Included in the above net book value
  are assets under construction, and therefore are not being amortized, in the
  amount of $0.1 million at December 31, 2013 (2012  $nil).

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.

In 2013, amortization of $4.3 million
  (2012  $4.3 million) was presented in depreciation and amortization expense on
  the statement of operations and comprehensive income (loss).

(13)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


|11 | Other assets
|-- | ------------

| |                   |  | 2013  |  |  | 2012  | 
| | ----------------- |  | ----- |  |  | ----- | 
| |                   |  | **$** |  |  | **$** | 
| |                   |  |       |  |  |       | 
| | Recovery from PPA |  | 2,169 |  |  | 2,549 | 
| | Other             |  | 365   |  |  | 361   | 
| |                   |  |       |  |  |       | 
| |                   |  | 2,534 |  |  | 2,910 | 

|   | Recovery of amounts relating to the Power Purchase
      Arrangement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The Company was notified on July 26, 2012, that TransAlta
      Generation Partnership, owner of the Sundance power plant, would be making
      a force majeure claim against participants in the Sundance Power Purchase
      Arrangement (PPA) with respect to a 2011 third quarter outage of the
      plants Unit 6, which had occurred due to a transformer failure. The
      Company has an 11.27% interest in the Sundance PPA for Units 5 and 6 and
      thus was contractually responsible for paying its share of the claimed
      amount in advance of a final determination as to whether or not a force
      majeure situation, as specified in the PPA, occurred. Based on legal and
      technical arguments, the Company does not believe the event meets the
      PPA-specified tests for such a force majeure determination. However, to
      meet its contractual obligation, the Company paid $4.4 million, its share
      of the claim, in the third quarter of 2012 and set up a receivable for the
      full amount. The Company has reviewed all possible outcomes for settlement
      of the claim and has set up a provision of $2.2 million (2012  $1.9
      million) before tax. This leaves a balance of $2.2 million recoverable,
      pending final resolution of the claim (note 28). This amount is included
      in other assets on the balance sheet.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|12 | Revolving credit facility                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The Company has a $50 million revolving credit facility
      maturing July 15, 2015. The credit facility was undrawn at December 31,
      2013, and December 31, 2012. The facility is subject to a borrowing
      formula based upon the Companys levels of inventory and accounts
      receivable. The amount available at December 31, 2013, under the facility
      was $50.0 million (2012  $50.0 million), of which $3.7 million (2012 
      $3.6 million) was committed to letters of credit. The interest rate on
      this facility is floating and may, at the Companys option, be based upon
      the Canada Bank Prime Rate or U.S. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

(14)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


|13 | Accounts payable and accrued
      liabilities
|-- | ----------------------------------------------

| |                                         |  | 2013   |  |  | 2012   | 
| | --------------------------------------- |  | ------ |  |  | ------ | 
| |                                         |  | **$**  |  |  | **$**  | 
| |                                         |  |        |  |  |        | 
| | Trade payables                          |  | 20,086 |  |  | 20,961 | 
| | Payable to related parties (note 23(b)) |  | 246    |  |  | 650    | 
| | Accrued expenses                        |  | 23,918 |  |  | 23,525 | 
| | Deposits US$7.5 million (note 28)       |  | 7,977  |  |  | -      | 
| | Deferred grants (note 9)                |  | -      |  |  | 11,872 | 
| | Derivative contracts                    |  | -      |  |  | 6,952  | 
| |                                         |  |        |  |  |        | 
| |                                         |  | 52,227 |  |  | 63,960 | 

|14 | Financial liabilities 
      borrowings
|-- | ----------------------------------------

| |                                         |  | 2013    |   |  | 2012    |  
| | --------------------------------------- |  | ------- | - |  | ------- | -
| |                                         |  | **$**   |   |  | **$**   |  
| |                                         |  |         |   |  |         |  
| | Unsecured Senior Notes  US$210 million |  | 223,356 |   |  | 208,929 |  
| | Less: Financing expenses                |  | (3,609  | ) |  | (4,107  | )
| | Power purchase rights loan #1           |  | 10,565  |   |  | 11,500  |  
| | Power purchase rights loan #2           |  | 1,954   |   |  | 2,111   |  
| | BEP loan                                |  | 7,915   |   |  | 4,312   |  
| |                                         |  |         |   |  |         |  
| |                                         |  | 240,181 |   |  | 222,745 |  
| | Less: Current portion                   |  | 2,810   |   |  | 1,092   |  
| |                                         |  |         |   |  |         |  
| |                                         |  | 237,371 |   |  | 221,653 |  

Principal repayments required are as
  follows:

**$**2014
      
      2,8102015
      
      2,9522016
      
      3,1112017
      
      3,2892018
      
      3,455Thereafter
      
      228,173


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 ten-year life of the notes.

(15)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


|   | 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. At December 31, 2013, 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 10.
      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%.                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | 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, 2013, a letter of credit was not
      required.                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Company has obtained interim financing in the amount
      of $13.2 million, bearing interest at the Canada Bank Prime Rate plus 2%,
      to procure the biogas scrubber and power island, key project components
      for the BEP (note 9). Of this amount, $7.9 million was advanced at
      December 31, 2013. In 2014, the interim financing converts to a lease
      bearing interest at 5.25% over a 42-month period, with a residual of 25%
      of the purchase price. The lease period can be extended to 61 months with
      no residual.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|15 | Reforestation and asset retirement
      obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| |                              |  |               |   |  | Asset       |  |  |        |  
| | ---------------------------- |  | ------------- | - |  | ----------- |  |  | ------ | -
| |                              |  | Reforestation |   |  | retirement  |  |  |        |  
| |                              |  | obligation    |   |  | obligations |  |  | Total  |  
| |                              |  | **$**         |   |  | **$**       |  |  | **$**  |  
| |                              |  |               |   |  |             |  |  |        |  
| | At December 31, 2011         |  | 15,191        |   |  | 2,002       |  |  | 17,193 |  
| | Change in provision          |  | 7,298         |   |  | 204         |  |  | 7,502  |  
| | Expenditures during the year |  | (7,256        | ) |  | -           |  |  | (7,256 | )
| |                              |  |               |   |  |             |  |  |        |  
| | At December 31, 2012         |  | 15,233        |   |  | 2,206       |  |  | 17,439 |  
| | Less: Current portion        |  | 5,070         |   |  | -           |  |  | 5,070  |  
| |                              |  |               |   |  |             |  |  |        |  
| | At December 31, 2012         |  | 10,163        |   |  | 2,206       |  |  | 12,369 |  

(16)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


| |                              |  |               |   |  | Asset       |   |  |        |  
| | ---------------------------- |  | ------------- | - |  | ----------- | - |  | ------ | -
| |                              |  | Reforestation |   |  | retirement  |   |  |        |  
| |                              |  | obligation    |   |  | obligations |   |  | Total  |  
| |                              |  | **$**         |   |  | **$**       |   |  | **$**  |  
| |                              |  |               |   |  |             |   |  |        |  
| | At December 31, 2012         |  | 15,233        |   |  | 2,206       |   |  | 17,439 |  
| | Change in provision          |  | 4,704         |   |  | (989        | ) |  | 3,715  |  
| | Expenditures during the year |  | (6,817        | ) |  | -           |   |  | (6,817 | )
| |                              |  |               |   |  |             |   |  |        |  
| | At December 31, 2013         |  | 13,120        |   |  | 1,217       |   |  | 14,337 |  
| | Less: Current portion        |  | 4,257         |   |  | -           |   |  | 4,257  |  
| |                              |  |               |   |  |             |   |  |        |  
| | At December 31, 2013         |  | 8,863         |   |  | 1,217       |   |  | 10,080 |  

|   | The estimated undiscounted cash flows required to settle
      the reforestation obligations at December 31, 2013, were $13.5 million
      (2012  $15.6 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 1.1% to 3.1% at
      December 31, 2013.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The asset retirement obligations are to reclaim land
      leased from the Province of Alberta. These obligations represent estimated
      undiscounted future payments of $8.2 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 3.2%.                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|16 | Share capital                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Authorized                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Unlimited number of
      no-par value common shares                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Issued and fully paid                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| |                          |  | 2013   |  |  | 2012   | 
| | ------------------------ |  | ------ |  |  | ------ | 
| |                          |  | **$**  |  |  | **$**  | 
| |                          |  |        |  |  |        | 
| | 15,000,002 common shares |  | 65,500 |  |  | 65,500 | 

On March 31, 2011, the shareholder
  passed a resolution to adjust the stated capital of the Company to $27.5
  million, on May 31, 2011, the shareholder passed a resolution to adjust the
  stated capital by an additional $34.0 million, and on December 17, 2012, the
  shareholder passed a resolution to increase the stated capital by $4.0 million.

The shareholder declared and paid
  dividends of $1.50 million in 2013. The shareholder declared dividends of $2.25
  million in 2011, of which $1.5 million was paid in 2011 and the balance of $0.75
  million in 2012.

(17)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


|17 | Acquisition of Chickadee Creek Energy
      Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Effective September 12, 2012, the Company acquired a 100%
      interest in a related company, Chickadee Creek Energy Inc. (CCEI), and
      simultaneously wound CCEI up into the Company. Prior to the acquisition,
      CCEI was a wholly owned subsidiary of the Companys parent, Millar Western
      Industries Ltd. At the time of the transaction, CCEI had no active
      operations; however, it had previously secured a government grant and had
      recently obtained approval from the appropriate government authority to
      direct the grant proceeds to the BEP, as described in note 9. Since the
      transaction was between companies under common control, and since CCEI had
      no active operations, it has been accounted for as an asset acquisition at
      predecessor carrying amounts. The following table summarizes the assets
      acquired and liabilities assumed in the
      transaction.

**$**Assets acquiredCash
      
      36Restricted cash
      
      3,445Deferred income taxes
      
      1163,597Liabilities assumedAccounts
        payable
      
      51Deferred grant revenue
      
      3,445Payable
        to parent (unsecured, non-interest bearing)
      
      4313,927Net deficiency in assets acquired
      
      ( 330
      )


|   | The net deficiency in assets acquired has been presented
      as a reduction of the Companys retained earnings in the statement of
      shareholders equity, reflecting the net transfer of resources to the
      parent.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                               
|18 | Expenses by nature                                                                                                                                                                                                            

| |                                                                     |  | 2013    |  |  | 2012    |   |  | 2011    |  
| | ------------------------------------------------------------------- |  | ------- |  |  | ------- | - |  | ------- | -
| |                                                                     |  | **$**   |  |  | **$**   |   |  | **$**   |  
| |                                                                     |  |         |  |  |         |   |  |         |  
| | Changes in inventories of finished goods
      and work in progress |  | 1,575   |  |  | (2,959  | ) |  | (5,423  | )
| | Raw materials and consumables used                                  |  | 165,514 |  |  | 155,817 |   |  | 136,605 |  
| | Depreciation and amortization                                       |  | 13,995  |  |  | 13,641  |   |  | 11,349  |  
| | Wages and employee benefits expense                                 |  | 64,645  |  |  | 60,211  |   |  | 56,424  |  
| | Transportation                                                      |  | 53,438  |  |  | 53,221  |   |  | 48,563  |  
| | Other expenses                                                      |  | 34,614  |  |  | 49,402  |   |  | 9,591   |  
| |                                                                     |  |         |  |  |         |   |  |         |  
| |                                                                     |  | 333,781 |  |  | 329,333 |   |  | 257,109 |  

(18)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


|19 | Other income
      (expenses)
|-- | -----------------------------

| |                                                                |  | 2013   |   |  | 2012   |   |  | 2011   | 
| | -------------------------------------------------------------- |  | ------ | - |  | ------ | - |  | ------ | 
| |                                                                |  | **$**  |   |  | **$**  |   |  | **$**  | 
| |                                                                |  |        |   |  |        |   |  |        | 
| | (Loss) gain on disposal of property, plant
      and equipment |  | (832   | ) |  | 45     |   |  | 436    | 
| | Foreign exchange gain (loss)                                   |  | 1,987  |   |  | (839   | ) |  | 963    | 
| | Insurance proceeds                                             |  | 482    |   |  | -      |   |  | 7,600  | 
| | Change in unrealized gain (loss) on derivative contracts       |  | 7,194  |   |  | (6,612 | ) |  | 2,594  | 
| | Realized gain (loss) on derivative
      contracts             |  | 3,038  |   |  | (244   | ) |  | 14,158 | 
| |                                                                |  |        |   |  |        |   |  |        | 
| |                                                                |  | 11,869 |   |  | (7,650 | ) |  | 25,751 | 

|20 | Finance expenses
|-- | ----------------

| |                                                 |  | 2013   |   |  | 2012   |   |  | 2011   |  
| | ----------------------------------------------- |  | ------ | - |  | ------ | - |  | ------ | -
| |                                                 |  | **$**  |   |  | **$**  |   |  | **$**  |  
| |                                                 |  |        |   |  |        |   |  |        |  
| | Interest expense on borrowings                  |  | 20,930 |   |  | 19,694 |   |  | 19,400 |  
| | Less: Interest capitalized on qualifying assets |  | 395    |   |  | 106    |   |  | 3,555  |  
| |                                                 |  |        |   |  |        |   |  |        |  
| | Net interest expense on borrowings              |  | 20,535 |   |  | 19,588 |   |  | 15,845 |  
| | Refinancing charges                             |  | -      |   |  | -      |   |  | 4,590  |  
| | Other interest and bank charges                 |  | 673    |   |  | 1,027  |   |  | 775    |  
| | Interest income                                 |  | (316   | ) |  | (190   | ) |  | (363   | )
| |                                                 |  |        |   |  |        |   |  |        |  
| |                                                 |  | 20,892 |   |  | 20,425 |   |  | 20,847 |  

In April 2011, the Company incurred
  refinancing charges relating to the redemption of US$190 million of unsecured
  Senior Notes that included a premium on redemption of borrowings of $2.78
  million and amortization of deferred financing costs of $1.81 million.

(19)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


|21 | Income tax expense                                                                                                                                                                       
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                          
|   | 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.

| |                                                                                                                                             |  | 2013   |   |  | 2012    |   |  | 2011   |  
| | ------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | - |  | ------- | - |  | ------ | -
| |                                                                                                                                             |  | **$**  |   |  | **$**   |   |  | **$**  |  
| |                                                                                                                                             |  |        |   |  |         |   |  |        |  
| | Income (loss) before income taxes                                                                                                           |  | 13,840 |   |  | (12,716 | ) |  | 1,208  |  
| |                                                                                                                                             |  |        |   |  |         |   |  |        |  
| | Income taxes based on combined federal and
      provincial 
                 
      income tax rates of 32.0% (2012  32.0%; 2011  33.5%) |  | 4,429  |   |  | (4,069  | ) |  | 405    |  
| |                                                                                                                                             |  |        |   |  |         |   |  |        |  
| | (Decrease) increase resulting from                                                                                                          |  |        |   |  |         |   |  |        |  
| | Manufacturing
      and processing deduction of 7%                                                                                          |  | (969   | ) |  | 890     |   |  | (85    | )
| | Non-taxable portion of unrealized loss (gain) on debt                                                                                       |  | 1,803  |   |  | (580    | ) |  | 1,619  |  
| | Non-taxable
      portion of capital gains                                                                                                  |  | 11     |   |  | (25     | ) |  | (1,620 | )
| | Non-deductible (taxable) income and other items                                                                                             |  | 490    |   |  | 173     |   |  | 181    |  
| | SRED investment
      tax credits - net                                                                                                     |  | (347   | ) |  | (266    | ) |  | (638   | )
| | Impact of enacted rates                                                                                                                     |  | -      |   |  | -       |   |  | 47     |  
| | Change
      in unrealized tax capital losses for which no 
                             
      deferred tax asset was recognized           |  | 1,803  |   |  | (580    | ) |  | 1,528  |  
| |                                                                                                                                             |  |        |   |  |         |   |  |        |  
| | Income tax expense (recovery)                                                                                                               |  | 7,220  |   |  | (4,457  | ) |  | 1,437  |  
| |                                                                                                                                             |  |        |   |  |         |   |  |        |  
| | Current income tax recovery                                                                                                                 |  | (124   | ) |  | (132    | ) |  | (248   | )
| | Deferred income tax expense (recovery)                                                                                                      |  | 7,344  |   |  | (4,325  | ) |  | 1,685  |  
| |                                                                                                                                             |  |        |   |  |         |   |  |        |  
| | Income tax expense (recovery)                                                                                                               |  | 7,220  |   |  | (4,457  | ) |  | 1,437  |  

The weighted average applicable tax
  rate was 32.0% (2012  32.0%; 2011  33.5%) .

Current income tax recovery includes a
  $0.124 million recovery in respect to prior-year adjustments.

The Company did not recognize a
  deferred income tax asset of $2.8 million (2012  $0.95 million; 2011  $1.5
  million) in respect of unrealized foreign exchange losses on long-term debt.

At December 31, 2013, the Company had
  approximately $40.6 million of federal and $45.6 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, 2029, taxation year.

(20)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


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

| |                                                                       |  | 2013  |  |  | 2012   |  
| | --------------------------------------------------------------------- |  | ----- |  |  | ------ | -
| |                                                                       |  | **$** |  |  | **$**  |  
| |                                                                       |  |       |  |  |        |  
| | At January 1                                                          |  | 1,893 |  |  | 6,440  |  
| | Charge (credit) to the statement of income                            |  | 7,344 |  |  | (4,325 | )
| | Tax credit related to acquisition of CCEI 
      note 17             |  | -     |  |  | (116   | )
| | Tax credit relating to components of other comprehensive
      income |  | 192   |  |  | (106   | )
| |                                                                       |  |       |  |  |        |  
| | At December 31                                                        |  | 9,429 |  |  | 1,893  |  

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

| |                                                    |  | 2013    |   |  | 2012    |  
| | -------------------------------------------------- |  | ------- | - |  | ------- | -
| |                                                    |  | **$**   |   |  | **$**   |  
| |                                                    |  |         |   |  |         |  
| | Deferred income tax assets                         |  |         |   |  |         |  
| | Reforestation
      costs                          |  | 2,807   |   |  | 3,256   |  
| | Research and development expenditures              |  | 882     |   |  | 962     |  
| | Non-capital loss
      available for carry forward |  | 10,648  |   |  | 10,905  |  
| | Investment tax credits                             |  | 2,098   |   |  | 1,874   |  
| | Other accrued
      liabilities                    |  | 838     |   |  | 2,876   |  
| |                                                    |  |         |   |  |         |  
| |                                                    |  | 17,273  |   |  | 19,873  |  
| |                                                    |  |         |   |  |         |  
| | Deferred income tax liabilities                    |  |         |   |  |         |  
| | Property, plant and equipment                      |  | (25,759 | ) |  | (21,132 | )
| | Long-term debt                                     |  | (401    | ) |  | (634    | )
| | Force majeure (note 11)                            |  | (542    | ) |  | -       |  
| |                                                    |  |         |   |  |         |  
| |                                                    |  | (26,702 | ) |  | (21,766 | )
| |                                                    |  |         |   |  |         |  
| | Net deferred income tax liability                  |  | (9,429  | ) |  | (1,893  | )

| |                                                 |  | 2013    |   |  | 2012    |  
| | ----------------------------------------------- |  | ------- | - |  | ------- | -
| |                                                 |  | **$**   |   |  | **$**   |  
| |                                                 |  |         |   |  |         |  
| | Deferred income tax assets                      |  |         |   |  |         |  
| | To be recovered
      after more than 12 months |  | 16,682  |   |  | 19,157  |  
| | To
      be recovered within 12 months          |  | 591     |   |  | 716     |  
| |                                                 |  |         |   |  |         |  
| | Deferred income tax liabilities                 |  |         |   |  |         |  
| | To be recovered
      after more than 12 months |  | (26,702 | ) |  | (21,766 | )
| |                                                 |  |         |   |  |         |  
| | Net deferred income tax liability               |  | (9,429  | ) |  | (1,893  | )

(21)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


|22 | Employee benefit plans
|-- | ----------------------

| |                                     |  | 2013  |   |  | 2012  |  
| | ----------------------------------- |  | ----- | - |  | ----- | -
| |                                     |  | **$** |   |  | **$** |  
| |                                     |  |       |   |  |       |  
| | Balance sheet obligations for       |  |       |   |  |       |  
| | Defined-benefit
      pension plan  |  | 1,680 |   |  | 3,187 |  
| | Post-employment benefits            |  | 199   |   |  | 303   |  
| | Supplemental
      vacations        |  | 1,508 |   |  | 1,333 |  
| | Income statement charges (recovery) |  |       |   |  |       |  
| | Defined-benefit
      pension plan  |  | 262   |   |  | 370   |  
| | Post-employment medical benefits    |  | (104  | ) |  | (120  | )
| | Supplemental
      vacations        |  | 175   |   |  | 17    |  

Defined-contribution plans

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

| |                                                             |  | 2013  |  |  | 2012  | 
| | ----------------------------------------------------------- |  | ----- |  |  | ----- | 
| |                                                             |  | **$** |  |  | **$** | 
| |                                                             |  |       |  |  |       | 
| | Plans providing defined contribution
      pension benefits |  | 3,460 |  |  | 3,278 | 

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, 2013.

Information regarding this plan is as
  follows:

| |                                       |  | 2013  |   |  | 2012  |  
| | ------------------------------------- |  | ----- | - |  | ----- | -
| |                                       |  | **$** |   |  | **$** |  
| |                                       |  |       |   |  |       |  
| | Change in benefit obligation          |  |       |   |  |       |  
| | Obligation 
      beginning of year  |  | 7,396 |   |  | 6,669 |  
| | Actuarial (gain) loss                 |  | (592  | ) |  | 493   |  
| | Current service
      cost            |  | 129   |   |  | 176   |  
| | Benefits paid                         |  | (305  | ) |  | (225  | )
| | Interest cost                         |  | 275   |   |  | 283   |  
| | Amendments                            |  | -     |   |  | -     |  
| |                                       |  |       |   |  |       |  
| | Obligation  end of year              |  | 6,903 |   |  | 7,396 |  
| |                                       |  |       |   |  |       |  
| | Change in plan assets at fair value   |  |       |   |  |       |  
| | Plan assets 
      beginning of year |  | 4,209 |   |  | 3,749 |  
| | Employer contributions                |  | 1,000 |   |  | 526   |  
| | Actual return on
      plan assets    |  | 319   |   |  | 159   |  
| | Benefits paid                         |  | (305  | ) |  | (225  | )
| |                                       |  |       |   |  |       |  
| | Plan assets  end of year             |  | 5,223 |   |  | 4,209 |  
| |                                       |  |       |   |  |       |  
| | Net plan liability                    |  | 1,680 |   |  | 3,187 |  

(22)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


| |                                |  | 2013  |   |  | 2012  |   |  | 2011  |  
| | ------------------------------ |  | ----- | - |  | ----- | - |  | ----- | -
| |                                |  | **$** |   |  | **$** |   |  | **$** |  
| | Components of pension expense  |  |       |   |  |       |   |  |       |  
| | Interest costs                 |  | 275   |   |  | 283   |   |  | 245   |  
| | Expected return on plan assets |  | (142  | ) |  | (89   | ) |  | (90   | )
| | Current service
      costs    |  | 129   |   |  | 176   |   |  | 138   |  
| | Plan amendments                |  | -     |   |  | -     |   |  | 1,580 |  
| |                                |  |       |   |  |       |   |  |       |  
| | Net expense                    |  | 262   |   |  | 370   |   |  | 1,873 |  
| |                                |  |       |   |  |       |   |  |       |  
| |                                |  | 2013  |   |  | 2012  |   |  | 2011  |  
| |                                |  | %     |   |  | %     |   |  | %     |  
| |                                |  |       |   |  |       |   |  |       |  
| | Plan assets by asset category  |  |       |   |  |       |   |  |       |  
| | Equity securities              |  | 31    |   |  | 27    |   |  | 28    |  
| | Debt securities                |  | 13    |   |  | 13    |   |  | 20    |  
| | Other                          |  | 56    |   |  | 60    |   |  | 52    |  
| |                                |  |       |   |  |       |   |  |       |  
| | Total                          |  | 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 significant actuarial assumptions
  used are as follows:

| |                                                |  | 2013  |  |  | 2012  | 
| | ---------------------------------------------- |  | ----- |  |  | ----- | 
| |                                                |  | **$** |  |  | **$** | 
| |                                                |  |       |  |  |       | 
| | To determine benefit obligation at end of year |  |       |  |  |       | 
| | Discount rate                                  |  | 4.70  |  |  | 3.80  | 
| | Rate of
      compensation increase            |  | 3.50  |  |  | 3.70  | 
| | Rate of price inflation                        |  | 2.00  |  |  | 2.25  | 

|23 | 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:
| | -- | ------------------------------------------------------------

| |                                                                            |  | 2013  |  |  | 2012  |  |  | 2011  | 
| | -------------------------------------------------------------------------- |  | ----- |  |  | ----- |  |  | ----- | 
| |                                                                            |  | **$** |  |  | **$** |  |  | **$** | 
| |                                                                            |  |       |  |  |       |  |  |       | 
| | Administration fees                                                        |  | 373   |  |  | 367   |  |  | 373   | 
| |                                                                            |  |       |  |  |       |  |  |       | 
| | Included in accounts receivable relating 
           to these transactions |  | 43    |  |  | 39    |  |  | 40    | 

Fees are established at the cost to
  the Company plus a 5% mark-up.

(23)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


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

| |                                |  | 2013  |  |  | 2012  |  |  | 2011  | 
| | ------------------------------ |  | ----- |  |  | ----- |  |  | ----- | 
| |                                |  | **$** |  |  | **$** |  |  | **$** | 
| |                                |  |       |  |  |       |  |  |       | 
| | Chemical purchases             |  | 1,109 |  |  | 922   |  |  | 891   | 
| |                                |  |       |  |  |       |  |  |       | 
| | Other services                 |  | 2,036 |  |  | 1,862 |  |  | 1,751 | 
| |                                |  |       |  |  |       |  |  |       | 
| | Accounts payable to Industries |  | 246   |  |  | 650   |  |  | 898   | 

| |    | 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. Included in the December 31, 2012
      accounts payable is $431 thousand assumed in the CCEI purchase (note
      17).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                              
| | 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:                                                                                                                                                    

| |                          |  | 2013  |  |  | 2012  |  |  | 2011  | 
| | ------------------------ |  | ----- |  |  | ----- |  |  | ----- | 
| |                          |  | **$** |  |  | **$** |  |  | **$** | 
| |                          |  |       |  |  |       |  |  |       | 
| | Short-term benefits      |  | 4,175 |  |  | 3,294 |  |  | 3,359 | 
| | Post-employment benefits |  | 1,165 |  |  | 703   |  |  | 713   | 
| |                          |  |       |  |  |       |  |  |       | 
| |                          |  | 5,340 |  |  | 3,997 |  |  | 4,072 | 

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

|24 | Financial instruments and financial risk
      factors             
|-- | -------------------------------------------------------------------
|   |                                                                    
|   | Carrying and fair value of financial instruments by
      category:

December 31, 2013Loans
      
      
      OtherHeld for
      
      
      and
      
      
      financial
      
      
      Carryingtrading
      
      
      receivables
      
      
      liabilities
      
      
      value
      
      
      Fair value$
      
      
      $
      
      
      $
      
      
      **$**
      
      
      **$**Financial assetsCash and short-term investments
      
      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
      
      
      95,711


(24)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


December 31, 2013Loans
      
      
      OtherHeld for
      
      
      and
      
      
      financial
      
      
      Carryingtrading
      
      
      receivables
      
      
      liabilities
      
      
      value
      
      
      Fair value**$**
      
      
      **$**
      
      
      **$**
      
      
      **$**
      
      
      **$**Financial liabilitiesAccounts payableTrade and other
      
      -
      
      
      -
      
      
      52,096
      
      
      52,096
      
      
      52,096Borrowings
      
      -
      
      
      -
      
      
      240,181
      
      
      240,181
      
      
      242,220-
      
      
      -
      
      
      292,277
      
      
      292,277
      
      
      294,316


December 31, 2012Loans
      
      
      OtherHeld for
      
      
      and
      
      
      financial
      
      
      Carryingtrading
      
      
      receivables
      
      
      liabilities
      
      
      value
      
      
      Fair value**$**
      
      
      **$**
      
      
      **$**
      
      
      **$**
      
      
      **$**Financial assetsCash and short-term investments
      
      -
      
      
      43,498
      
      
      -
      
      
      43,498
      
      
      43,498Accounts receivableTrade and other
      
      -
      
      
      28,556
      
      
      -
      
      
      28,556
      
      
      28,556Other assets
      
      -
      
      
      361
      
      
      -
      
      
      361
      
      
      361-
      
      
      72,415
      
      
      -
      
      
      72,415
      
      
      72,415Financial liabilitiesAccounts payableTrade and other
      
      -
      
      
      -
      
      
      45,006
      
      
      45,006
      
      
      45,006Derivatives
      
      6,952
      
      
      -
      
      
      -
      
      
      6,952
      
      
      6,952Borrowings
      
      -
      
      
      -
      
      
      222,745
      
      
      222,745
      
      
      210,6316,952
      
      
      -
      
      
      267,751
      
      
      274,703
      
      
      262,589


The estimated fair value of financial
  instruments is based on relevant market prices and information available at the
  period 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 at December 31, 2013, was estimated to be US$228.9
  million (2012  US$197.4 million) based upon the most recent bid price. The fair
  value of the power purchase rights loans, included in borrowings, at December
  31, 2013, was estimated to be $13.3 million, based on a market interest rate
  assumption of 8.82% .

(25)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


Financial assets and liabilities that
  are recognized on the balance sheet 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, 2013.

| | 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 period are recorded at
      their fair value, and any unrealized gains or losses are included in other
      income (expense). At December 31, 2013, the Company had $8.5 million in
      U.S.-dollar denominated forward lumber commodity contracts outstanding
      (2012  US$59.4 million; 2011 $nil), resulting in an unrealized gain of
      $0.2 million (2012  loss of $7.0 million; 2011  $nil) in other income
      (expense). At December 31, 2013, the average 2012 price was $379 per one
      thousand board feet and all contracts mature in 2014. In 2013, the Company
      had a realized gain on commodity contracts of $3.1 million (2012  loss of
      $0.7 million; 2011  gain of $14.3 million) in other income (expense). A
      US$10 change in the contract pricing on the outstanding commodity
      contracts would result in a financial impact of $0.2
      million.

(26)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


| | 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 U.S.
      dollars.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | A significant portion of the Companys sales,
      approximately 64% of its 2013 revenue (2012  64%; 2011  69%), were
      denominated in U.S. currency, and at December 31, 2013, the Company had
      $29.9 million (2012  $16.0 million; 2011  $29.0 million) in U.S.
      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
      related to sales is partially offset by fluctuations in interest payments,
      substantially all of which are denominated in U.S. dollars. To further
      reduce the impact on earnings of fluctuations in currency rates, the
      Company may enter into currency contracts to hedge U.S. dollar positions
      but does not hold or issue foreign currency financial instruments for
      speculative or trading purposes. At December 31, 2013, the Company had
      US$45.0 million (2012  $nil; 2011  $nil) in outstanding collar options
      contracts, with a call option range of C$0.9602  C$0.9524 per US$1.00 and
      put option range of C$0.9200  C$0.9091 per US$1.00 with expiration dates
      ranging from January 15, 2014 to June 20, 2014. The Company also had
      US$5.0 million (2012  $nil; 2011  $19.0 million) in outstanding
      forward-exchange contracts, with a contract rate of US$0.9337/C$1.00 (2012
       $nil; 2011  US$1.0009/C$1.00) and recorded the amount of unrealized
      gain on these forward-exchange contracts in 2013 of $0.02 million (2012 
      $nil; 2011  loss of $0.3 million) in other income.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | A significant portion of the Companys products are sold
      at prices denominated in U.S. dollars or based on prevailing U.S. 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 U.S. dollar reduces the revenue in
      Canadian dollar terms realized by the Company from sales made in U.S.
      dollars, which reduces operating margin and the cash flow available to
      fund operations. U.S. dollar denominated 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 U.S. dollar financial position exposure at December
      31 was US$32.5 million (2012  US$24.2 million) in net working capital and
      US$210.0 million (2012  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 U.S. dollar into Canadian currency would have
      resulted in a $1.8 million (2012  $1.9 million) change in
      earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

(27)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


| | 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 at December 31, 2013. Interest rate exposure mainly
      relates to interest receipts on the Companys cash balance of $47.2 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.                                                                                                                                                                                                                                           
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | iv)  | Credit risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |      | Credit risk is the risk that 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, at December 31, 2013, 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 $38 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| |                                 |  | 2013   |  |  | 2012   |  
| | ------------------------------- |  | ------ |  |  | ------ | -
| | As at                           |  | **$**  |  |  | **$**  |  
| |                                 |  |        |  |  |        |  
| | Current                         |  | 31,954 |  |  | 16,718 |  
| | 30-60 days                      |  | -      |  |  | 595    |  
| | 61-90 days                      |  | -      |  |  | 2      |  
| | 91-120 days                     |  | 4      |  |  | 6      |  
| | Greater than 120 days           |  | -      |  |  | 43     |  
| |                                 |  |        |  |  |        |  
| | Total trade receivables         |  | 31,958 |  |  | 17,364 |  
| | Other receivables               |  | 6,023  |  |  | 8,685  |  
| | Allowance for doubtful accounts |  | -      |  |  | (43    | )
| |                                 |  |        |  |  |        |  
| | Total accounts receivable       |  | 37,981 |  |  | 26,006 |  

(28)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


| |    | During 2013, the Company recorded no bad debt expense
      (2012  $0.1 million).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | 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, 2013, were US$33.0 million (2012  US$48.4). 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 $0.1 million (2012 
      $0.2 million) were shown as a reduction in revenue. No receivables were
      sold subsequent to August 2013.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | v) | Liquidity risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Liquidity risk arises from the possibility that 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, 2015.
      This credit facility requires the Company to meet certain covenants. The
      Company was in compliance with these covenants at December 31,
      2013.                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The following are contractual cash-flow maturities
      (including interest) of financial liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

<1 year
      
      
      1-2 years
      
      
      3-5 years
      
      
      >5 years
      
      
      Total**$**
      
      
      **$**
      
      
      **$**
      
      
      **$**
      
      
      **$**Borrowings
      
      23,515
      
      
      23,432
      
      
      69,762
      
      
      271,555
      
      
      388,264Accounts payable and 
             accrued
        liabilities
      
      52,096
      
      
      -
      
      
      -
      
      
      -
      
      
      52,09675,611
      
      
      23,432
      
      
      69,762
      
      
      271,555
      
      
      440,360


(29)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


|25 | 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 U.S. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|26 | 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.                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The accounting policies applied to the reporting segments
      are as described in note 2. The Company evaluates the performance of each
      segment based upon 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                               |  | 2013     |   |  | 2012     |   |  | **2011** |  
| | ------------------------------------ |  | -------- | - |  | -------- | - |  | -------- | -
| |                                      |  | **$**    |   |  | **$**    |   |  | **$**    |  
| |                                      |  |          |   |  |          |   |  |          |  
| | Revenue from external customers      |  | 191,639  |   |  | 153,839  |   |  | 104,902  |  
| | Cost of products sold                |  | (141,853 | ) |  | (129,374 | ) |  | (101,913 | )
| | Freight and other distribution costs |  | (11,552  | ) |  | (11,071  | ) |  | (7,145   | )
| | Depreciation and amortization        |  | (6,756   | ) |  | (6,565   | ) |  | (4,219   | )
| | Other income (expense)               |  | 10,931   |   |  | (7,446   | ) |  | 17,935   |  
| |                                      |  |          |   |  |          |   |  |          |  
| | Operating earnings (loss)            |  | 42,409   |   |  | ( 617    | ) |  | 9,560    |  

(30)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


| | Pulp                                 |  | 2013     |   |  | 2012     |   |  | 2011     |  
| | ------------------------------------ |  | -------- | - |  | -------- | - |  | -------- | -
| |                                      |  | **$**    |   |  | **$**    |   |  | **$**    |  
| |                                      |  |          |   |  |          |   |  |          |  
| | Revenue from external customers      |  | 190,926  |   |  | 178,195  |   |  | 179,407  |  
| | Cost of products sold                |  | (117,255 | ) |  | (111,626 | ) |  | (105,084 | )
| | Freight and other distribution costs |  | (41,886  | ) |  | (42,151  | ) |  | (41,418  | )
| | Depreciation and amortization        |  | (7,083   | ) |  | (6,950   | ) |  | (7,031   | )
| | Other income (expense)               |  | 693      |   |  | (200     | ) |  | 268      |  
| |                                      |  |          |   |  |          |   |  |          |  
| | Operating earnings                   |  | 25,395   |   |  | 17,268   |   |  | 26,142   |  

| | Corporate and other           |  | 2013    |   |  | 2012    |   |  | 2011    |  
| | ----------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
| |                               |  | **$**   |   |  | **$**   |   |  | **$**   |  
| |                               |  |         |   |  |         |   |  |         |  
| | Revenue from related parties  |  | 373     |   |  | 367     |   |  | 373     |  
| | Cost of products sold         |  | (47     | ) |  | (39     | ) |  | (22     | )
| | General and administration    |  | (19,061 | ) |  | (13,781 | ) |  | (15,929 | )
| | Depreciation and amortization |  | (157    | ) |  | (126    | ) |  | (99     | )
| | Other income (expense)        |  | 245     |   |  | (4      | ) |  | 7,548   |  
| |                               |  |         |   |  |         |   |  |         |  
| | Operating loss                |  | (18,647 | ) |  | (13,583 | ) |  | (8,129  | )

| |                                                           |  | 2013     |   |  | 2012     |   |  | 2011     |  
| | --------------------------------------------------------- |  | -------- | - |  | -------- | - |  | -------- | -
| |                                                           |  | **$**    |   |  | **$**    |   |  | **$**    |  
| |                                                           |  |          |   |  |          |   |  |          |  
| | Revenue from external customers and related
      parties |  | 382,938  |   |  | 332,401  |   |  | 284,682  |  
| | Cost of products sold and general and administration      |  | (278,216 | ) |  | (254,820 | ) |  | (222,948 | )
| | Freight and other distribution costs                      |  | (53,438  | ) |  | (53,222  | ) |  | (48,563  | )
| | Depreciation and amortization                             |  | (13,996  | ) |  | (13,641  | ) |  | (11,349  | )
| | Other income (expense)                                    |  | 11,869   |   |  | (7,650   | ) |  | 25,751   |  
| |                                                           |  |          |   |  |          |   |  |          |  
| | Operating earnings                                        |  | 49,157   |   |  | 3,068    |   |  | 27,573   |  

Cost of products sold for the lumber
  segment is net of chip transfers to the pulp segment of $6.2 million (2012 
  $6.6 million; 2011  $5.8 million).

Expenditures on property, plant and
  equipment and intangibles

| |                     |  | 2013  |  |  | 2012   | 
| | ------------------- |  | ----- |  |  | ------ | 
| |                     |  | **$** |  |  | **$**  | 
| |                     |  |       |  |  |        | 
| | Lumber              |  | 2,105 |  |  | 4,902  | 
| | Pulp                |  | 6,713 |  |  | 6,455  | 
| | Corporate and other |  | 1,026 |  |  | 347    | 
| |                     |  |       |  |  |        | 
| |                     |  | 9,844 |  |  | 11,704 | 

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

(31)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


| | Identifiable assets |  |         |  |  |         | 
| | ------------------- |  | ------- |  |  | ------- | 
| |                     |  |         |  |  |         | 
| |                     |  | 2013    |  |  | 2012    | 
| |                     |  | **$**   |  |  | **$**   | 
| |                     |  |         |  |  |         | 
| | Lumber              |  | 198,331 |  |  | 207,136 | 
| | Pulp                |  | 137,878 |  |  | 123,705 | 
| | Corporate and other |  | 60,065  |  |  | 51,334  | 
| |                     |  |         |  |  |         | 
| |                     |  | 396,274 |  |  | 382,175 | 

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

Geographic sales revenue

| |               |  | 2013    |  |  | 2012    |  |  | 2011    | 
| | ------------- |  | ------- |  |  | ------- |  |  | ------- | 
| |               |  | $       |  |  | $       |  |  | $       | 
| |               |  |         |  |  |         |  |  |         | 
| | Canada        |  | 130,333 |  |  | 110,166 |  |  | 82,966  | 
| | United States |  | 67,628  |  |  | 56,342  |  |  | 41,084  | 
| | Europe        |  | 34,728  |  |  | 36,441  |  |  | 43,263  | 
| | Asia          |  | 144,840 |  |  | 119,690 |  |  | 107,924 | 
| | Other         |  | 5,409   |  |  | 9,762   |  |  | 9,445   | 
| |               |  |         |  |  |         |  |  |         | 
| |               |  | 382,938 |  |  | 332,401 |  |  | 284,682 | 

|27 | Supplementary cash-flow information Net change in
      non-cash working capital items
|-- | --------------------------------------------------------------------------------------

| |                                          |  | 2013    |   |  | 2012   |   |  | 2011   |  
| | ---------------------------------------- |  | ------- | - |  | ------ | - |  | ------ | -
| |                                          |  | $       |   |  | $      |   |  | $      |  
| |                                          |  |         |   |  |        |   |  |        |  
| | Accounts receivable and other            |  | (11,578 | ) |  | 9,227  |   |  | 4,013  |  
| | Inventories                              |  | 2,027   |   |  | (7,657 | ) |  | (7,099 | )
| | Prepaid expenses                         |  | 1,835   |   |  | (2,052 | ) |  | (973   | )
| | Accounts payable and accrued liabilities |  | (4,454  | ) |  | 4,377  |   |  | (440   | )
| |                                          |  |         |   |  |        |   |  |        |  
| |                                          |  | (12,170 | ) |  | 3,895  |   |  | (4,499 | )

(32)

---

Millar Western Forest Products Ltd.Notes to Financial
        Statement


| |                                                                        |  | 2013    |   |  | 2012    |   |  | 2011    |  
| | ---------------------------------------------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
| |                                                                        |  | **$**   |   |  | **$**   |   |  | **$**   |  
| |                                                                        |  |         |   |  |         |   |  |         |  
| | Additions to property, plant and equipment
      and intangible assets |  | (25,319 | ) |  | (20,389 | ) |  | (47,589 | )
| | Changes in working capital for investing activities                    |  | 3,269   |   |  | 3,685   |   |  | 710     |  
| | Interest capitalized on qualifying assets                              |  | 395     |   |  | 106     |   |  | 3,555   |  
| |                                                                        |  |         |   |  |         |   |  |         |  
| |                                                                        |  | (21,655 | ) |  | (16,598 | ) |  | (43,324 | )

| |                       |  | 2013   |   |  | 2012   |   |  | 2011   |  
| | --------------------- |  | ------ | - |  | ------ | - |  | ------ | -
| |                       |  | **$**  |   |  | **$**  |   |  | **$**  |  
| | Interest paid         |  | 20,131 |   |  | 19,284 |   |  | 15,390 |  
| |                       |  |        |   |  |        |   |  |        |  
| | Income taxes refunded |  | (124   | ) |  | (330   | ) |  | (50    | )

|28 | Subsequent events
|-- | -----------------
|   |                  
|   | i)               
|   |                  
|   |                  
|   |                  
|   |                  
|   |                  
|   |                  
|   |                  
|   | ii)              
|   |                  
|   |                  

(33)

---