##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 FOR THE TRANSITION PERIOD FROM  TO
 COMMISSION FILE NUMBER 000-49751
 
 Catalyst Paper Corporation
  N/A
 British Columbia, Canada
 2 nd Floor, 3600 Lysander Lane
Richmond
British Columbia, Canada V7B 1C3
  
 
 
 
 
 Yes o No þ
 o þ
 þ o
 Yes
o No o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
  U.S. GAAP o
    
    International Financial Reporting Standards as issued
by the International Accounting Standards Board o
    
    Other þ
 þ o
 o þ




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##### Table of Contents



TABLE OF CONTENTS
 PART IITEM 1. Identity of Directors, Senior Managements, Advisers and Auditors
    
    
    1ITEM 2. Offer Statistics and Expected Timetable
    
    
    1ITEM 3. Key Information
    
    
    1Cautionary Statement with Regard to Forward-Looking Statements
    
    
    1A. Selected Financial Data
    
    
    2Exchange Rate Data
    
    
    5D. Risk Factors
    
    
    6ITEM 4. Information on the Corporation
    
    
    14A. History and Development of the Corporation
    
    
    14B. Business Overview
    
    
    16Competition
    
    
    19Fibre Supply
    
    
    19Competitive Strengths
    
    
    20Business Strategy
    
    
    21C. Organizational Structure
    
    
    22D. Property, Plants and Equipment
    
    
    22Paper
    
    
    22Pulp
    
    
    25Properties
    
    
    26Environment
    
    
    26Social Responsibility
    
    
    29ITEM 4A. Unresolved Staff Comments
    
    
    30ITEM 5. Operating and Financial Review and Prospects
    
    
    30A. Operating Results
    
    
    30 Segmented Results  Annual
    
    
    38 Segmented Results  Quarterly
    
    
    47 Outlook
    
    
    49 Financial Condition
    
    
    53B. Liquidity and Capital Resources
    
    
    54C. Research and Development, Patents and Licences
    
    
    56D. Trend Information
    
    
    56E. Off Balance Sheet Arrangements
    
    
    56F. Tabular Disclosure of Contractual Obligations
    
    
    57Critical Accounting Policies and Estimates
    
    
    61Changes in Accounting Policies
    
    
    64Impact of Accounting Pronouncements Affecting Future Periods
    
    
    65ITEM 6. Directors, Senior Management and Employees
    
    
    67A. Directors and Senior Management
    
    
    67B. Compensation
    
    
    69Compensation of Directors
    
    
    69Executive Compensation Strategy
    
    
    72C. Board Practices
    
    
    79D. Employees
    
    
    82E. Share Ownership
    
    
    82ITEM 7. Major Shareholders and Related Party Transactions
    
    
    88A. Major Shareholders
    
    
    88B. Related Party Transactions
    
    
    88




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##### Table of Contents



PART I ... continuedITEM 8. Consolidated Statements and Other Financial Information
    
    
    88A. Consolidated Statements and other Financial Information
    
    
    88B. Significant Changes
    
    
    89ITEM 9. The Offer and Listing
    
    
    90A. Offer and Listing Details
    
    
    90C. Markets
    
    
    90ITEM 10. Additional Information
    
    
    91B. Memorandum and Articles of Association
    
    
    91C. Material Contracts
    
    
    92D. Exchange Controls
    
    
    93E. Taxation
    
    
    94H. Documents on Display
    
    
    97ITEM 11. Quantitative and Qualitative Disclosures about Market Risk
    
    
    97ITEM 12. Description of Securities Other than Equities Securities
    
    
    100PART IIITEM 13 Defaults, Dividend Arrearages and Delinquencies
    
    
    101A. Indebtedness
    
    
    101B. Dividends
    
    
    101ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    101ITEM 15. Controls and Procedures
    
    
    101A. Disclosure Controls and Procedures
    
    
    101B. Internal Control over Financial Reporting
    
    
    101C. Report of Independent Public Accounting Firm
    
    
    102D.
Changes in Internal Control Over Financial Reporting
    
    
    102ITEMS 16A. Audit Committee Financial Expert
    
    
    102ITEM 16B. Code of Ethics
    
    
    102ITEM 16C. Principal Accountant Fees and Services
    
    
    102PART IIIITEM 17. Financial Statements
    
    
    103ITEM 18. Financial Statements
    
    
    103ITEM 19. Exhibits
    
    
    104Exhibit 10.1.2Exhibit 10.2.1Exhibit 10.3.1Exhibit 10.4.2Exhibit 10.4.3Exhibit 10.5.1Exhibit 10.6.1Exhibit 10.6.2Exhibit 10.6.3Exhibit 10.7Exhibit 10.7.1Exhibit 10.7.2Exhibit 10.7.3Exhibit 10.7.4Exhibit 10.7.5Exhibit 10.8Exhibit 10.9Exhibit 10.10Exhibit 10.16Exhibit 10.17Exhibit 15.1Exhibit 21.1Exhibit 31.1Exhibit 32.1




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##### Table of Contents



PART I
  
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, ADVISERS AND AUDITORS
 A. Directors and Senior Management
  B. Advisers
  C. Auditors
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 
 Cautionary Statement with Regard to Forward-Looking Statements
  
    
    the impact of general economic conditions in the United States and Canada and in other
countries in which we do business;
 
    
    market conditions and demand for our products and the outlook for inventories, production
and pricing;
 
    
    declines in advertising and circulation and migration to electronic media;
 
    
    expected cash flows, capital expenditures and completion of capital projects;
 
    
    our ability and that of our agents to sell our products in offshore markets;
 
    
    business strategies and measures to implement strategies;
 
    
    our history of losses;
 
    
    the cyclical nature of our business;
 
    
    the effects of intense competition;
 
    
    competitive strengths, goals, expansion and growth of our business and operations;
 
    
    shifts in industry capacity;
 
    
    fluctuations in foreign exchange or interest rates;
 
    
    our ability to successfully obtain cost savings from our cost reduction initiatives;
 
    
    labour unrest;
  - 1 -




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##### Table of Contents




    
    fluctuations in the availability and cost of raw materials, including fibre and energy;
 
    
    implementation of environmental legislation requiring capital for operational changes;
 
    
    the availability of qualified personnel or management;
 
    
    the outcome of certain litigation or disputes; and
 
    
    conditions in the capital markets and our ability to obtain financing.
   Market and Industry Data and Forecast
   Presentation of Financial Information
  
 A. Selected Financial Data
   - 2 -




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Amounts under Canadian GAAP
    
    Years ended December 31,(In millions, except per share amounts)
    

    

    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    2008Consolidated Statements of Earnings (loss) Data:Sales
    
    $
    1,878.2
    
    
    $
    1,823.9
    
    
    $
    1,882.5
    
    
    $
    1,714.6
    
    
    $
    1,849.4Operating expensesCost of sales
    
    
    1,674.9
    
    
    
    1,604.3
    
    
    
    1,609.3
    
    
    
    1,574.6
    
    
    
    1,613.0Selling, general and administrative
    
    
    50.5
    
    
    
    57.7
    
    
    
    62.2
    
    
    
    48.3
    
    
    
    46.9Restructuring and change-of-control
    
    
    
    
    
    
    6.7
    
    
    
    
    
    
    
    64.7
    
    
    
    30.1Amortization
    
    
    184.1
    
    
    
    180.3
    
    
    
    183.7
    
    
    
    176.4
    
    
    
    165.8Impairment
    
    
    
    
    
    
    
    
    
    
    23.4
    
    
    
    
    
    
    
    151.01,909.5
    
    
    
    1,849.0
    
    
    
    1,878.6
    
    
    
    1,864.0
    
    
    
    2,006.8Operating earnings (loss)
    
    
    (31.3
    )
    
    
    (25.1
    )
    
    
    3.9
    
    
    
    (149.4
    )
    
    
    (157.4
    )Interest expense, net
    
    
    (74.9
    )
    
    
    (75.7
    )
    
    
    (73.8
    )
    
    
    (70.7
    )
    
    
    (75.0
    )Foreign exchange gain (loss) on long-term debt
    
    
    53.5
    
    
    
    24.7
    
    
    
    (0.3
    )
    
    
    103.9
    
    
    
    (82.2
    )Loss on repayment of long-term debt
    
    
    (5.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income (expense), net
    
    
    1.2
    
    
    
    4.5
    
    
    
    1.8
    
    
    
    (15.3
    )
    
    
    2.5Earnings (loss) before income taxes and
non-controlling interest
    
    
    (56.7
    )
    
    
    (71.6
    )
    
    
    (68.4
    )
    
    
    (131.5
    )
    
    
    (312.1
    )Income tax recovery
    
    
    (28.1
    )
    
    
    (46.6
    )
    
    
    (54.0
    )
    
    
    (100.0
    )
    
    
    (91.8
    )Net earnings (loss) before non-controlling interest
    
    
    (28.6
    )
    
    
    (25.0
    )
    
    
    (14.4
    )
    
    
    (31.5
    )
    
    
    (220.3
    )Non-controlling interest
    
    
    
    
    
    
    (0.6
    )
    
    
    (1.5
    )
    
    
    (0.1
    )
    
    
    (0.8
    )Net earnings (loss)
    
    $
    (28.6
    )
    
    $
    (25.6
    )
    
    $
    (15.9
    )
    
    $
    (31.6
    )
    
    $
    (221.1
    )Other comprehensive income (loss) 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14.3
    
    
    
    (18.5
    )Comprehensive income (loss) 1
    
    $
    (28.6
    )
    
    $
    (25.6
    )
    
    $
    (15.9
    )
    
    $
    (17.3
    )
    
    $
    (239.6
    )Basic and diluted earnings (loss) per share
    
    $
    (0.13
    )
    
    $
    (0.12
    )
    
    $
    (0.07
    )
    
    $
    (0.15
    )
    
    $
    (0.66
    )Weighted average common shares outstanding (in
millions)
    
    
    214.6
    
    
    
    214.6
    
    
    
    214.6
    
    
    
    214.7
    
    
    
    336.1Consolidated Balance Sheet Data:Working capital 2
    
    $
    260.7
    
    
    $
    237.9
    
    
    $
    282.3
    
    
    $
    221.3
    
    
    $
    201.5Property, plant and equipment
    
    
    2,172.9
    
    
    
    2,139.3
    
    
    
    2,023.1
    
    
    
    1,912.8
    
    
    
    1,852.0Total assets
    
    
    2,751.2
    
    
    
    2,700.7
    
    
    
    2,641.3
    
    
    
    2,457.1
    
    
    
    2,423.4Current portion of long-term debt
    
    
    0.7
    
    
    
    0.8
    
    
    
    1.8
    
    
    
    1.2
    
    
    
    75.8Total debt 2
    
    
    828.4
    
    
    
    866.5
    
    
    
    858.7
    
    
    
    784.6
    
    
    
    882.9Shareholders equity
    
    
    1,042.8
    
    
    
    1,019.7
    
    
    
    1,005.8
    
    
    
    988.6
    
    
    
    870.0Consolidated Statements of Cash Flows Data:Cash flows provided (used) by operations
    
    $
    34.8
    
    
    $
    60.7
    
    
    $
    127.2
    
    
    $
    (2.7
    )
    
    $
    75.7Cash flows used by investing activities
    
    
    (41.8
    )
    
    
    (93.0
    )
    
    
    (85.8
    )
    
    
    (83.7
    )
    
    
    (202.9
    )Cash flows provided (used) by financing activities
    
    
    33.0
    
    
    
    6.3
    
    
    
    (5.9
    )
    
    
    50.9
    
    
    
    132.2
  - 3 -




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##### Table of Contents



Amounts under U.S. GAAP:
    
    Years ended December 31,(In millions, except per share amounts)
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008Sales
    
    $
    1,855.4
    
    
    $
    1,791.5
    
    
    $
    1,873.2
    
    
    $
    1,714.6
    
    
    $
    1,849.4Net earnings
    
    
    (52.0
    )
    
    
    (50.4
    )
    
    
    (25.7
    )
    
    
    (36.5
    )
    
    
    (219.8
    )Basic and diluted earnings (loss) per share
    
    
    (0.24
    )
    
    
    (0.23
    )
    
    
    (0.12
    )
    
    
    (0.17
    )
    
    
    (0.65
    )Total assets
    
    
    2,789.0
    
    
    
    2,711.6
    
    
    
    2,634.9
    
    
    
    2,454.4
    
    
    
    2,406.2Current portion of long-term debt
    
    
    0.7
    
    
    
    0.8
    
    
    
    1.8
    
    
    
    1.2
    
    
    
    75.8Long-term debt
    
    
    829.2
    
    
    
    866.6
    
    
    
    859.3
    
    
    
    799.0
    
    
    
    894.1Shareholders equity
    
    $
    1,044.0
    
    
    $
    986.6
    
    
    $
    916.6
    
    
    $
    906.7
    
    
    $
    822.5
 Other Financial Data:
    
    Years ended December 31,(In millions, except per tonne)
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008EBITDA 3
    
    $
    152.8
    
    
    $
    155.2
    
    
    $
    211.0
    
    
    $
    27.0
    
    
    $
    159.4EBITDA margin 3, 4
    
    
    8.1
    %
    
    
    8.5
    %
    
    
    11.2
    %
    
    
    1.6
    %
    
    
    8.6
    %Additions to property, plant and equipment
    
    
    68.0
    
    
    
    95.2
    
    
    
    93.2
    
    
    
    85.8
    
    
    
    41.9Sales (000 tonnes)Specialty printing papers
    
    
    993.7
    
    
    
    942.9
    
    
    
    990.2
    
    
    
    1,054.8
    
    
    
    1,080.8Newsprint
    
    
    754.7
    
    
    
    707.1
    
    
    
    699.1
    
    
    
    496.3
    
    
    
    601.8Pulp
    
    
    527.3
    
    
    
    603.0
    
    
    
    626.2
    
    
    
    603.2
    
    
    
    506.9Average Sales Revenue ($  per tonne)Specialty printing papers
    
    
    941
    
    
    
    955
    
    
    
    928
    
    
    
    872
    
    
    
    926Newsprint
    
    
    733
    
    
    
    748
    
    
    
    758
    
    
    
    681
    
    
    
    771Pulp
    
    
    739
    
    
    
    654
    
    
    
    693
    
    
    
    757
    
    
    
    759Production (000 tonnes)Specialty printing papers
    
    
    1,000.0
    
    
    
    949.3
    
    
    
    983.7
    
    
    
    1,055.4
    
    
    
    1,060.1Newsprint
    
    
    757.8
    
    
    
    699.5
    
    
    
    703.7
    
    
    
    472.8
    
    
    
    596.8Pulp
    
    
    544.0
    
    
    
    590.9
    
    
    
    624.3
    
    
    
    601.8
    
    
    
    503.4
 Notes to Selected Consolidated Financial Information
 1
    
    Effective January 1, 2007, the Corporation adopted the new CICA Section 3855,
Financial Instruments  Recognition and Measurement, Section 1530, Comprehensive
Income, Section 3865, Hedges, Section 3861, Financial Instruments  Disclosure and
Presentations and Section 3251, Equity. These standards introduce new requirements for
recognition, measurement and disclosure of financial instruments, when and how hedge
accounting may be applied, establishes the concept of comprehensive income and rules for
operating it, and establishes rules for the presentation of equity and changes in equity.
Prior period financial statements are not revised for the adoption of these new standards.2
    
    Current portion of long term debt is included in total debt and excluded from
working capital.3
    
    EBITDA is a non-GAAP measure. EBITDA does not have a standardized meaning. EBITDA
as set forth above represents net earnings (loss) before net interest expense, income
taxes, amortization and impairment, foreign exchange gain (loss) on long-term debt, loss on
repayment of long-term debt, other income (expense), and non-controlling interests. We
focus on EBITDA as we believe this measure enables comparison of our results between
periods without regard to debt service, income taxes and capital expenditure requirements.
EBITDA is also useful in analyzing our ability to comply with our debt covenants. As such,
we believe it would be useful for investors and other users to be aware of this measure so
they can better assess our operating performance. EBITDA should not be considered by an
investor as an alternative to net income, an indicator of our financial performance or an
alternative to cash flows as a measure of liquidity. As there are no generally accepted
methods for calculating EBITDA, this measure as calculated by us might not be comparable to
similarly titled measures reported by other companies.4
    
    EBITDA margin is defined as EBITDA as a percentage of sales.  - 4 -




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Years ended December 31,(In millions of dollars)
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008Net earnings (loss)
    
    $
    (28.6
    )
    
    $
    (25.6
    )
    
    $
    (15.9
    )
    
    $
    (31.6
    )
    
    $
    (221.1
    )Amortization
    
    
    184.1
    
    
    
    180.3
    
    
    
    183.7
    
    
    
    176.4
    
    
    
    165.8Impairment
    
    
    
    
    
    
    
    
    
    
    23.4
    
    
    
    
    
    
    
    151.0Foreign exchange (gain) loss on long-term debt
    
    
    (53.5
    )
    
    
    (24.7
    )
    
    
    0.3
    
    
    
    (103.9
    )
    
    
    82.2Loss on repayment of long-term debt
    
    
    5.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other (income) expense, net
    
    
    (1.2
    )
    
    
    (4.5
    )
    
    
    (1.8
    )
    
    
    15.3
    
    
    
    (2.5
    )Interest expense, net
    
    
    74.9
    
    
    
    75.7
    
    
    
    73.8
    
    
    
    70.7
    
    
    
    75.0Income tax recovery
    
    
    (28.1
    )
    
    
    (46.6
    )
    
    
    (54.0
    )
    
    
    (100.0
    )
    
    
    (91.8
    )Non-controlling interest
    
    
    
    
    
    
    0.6
    
    
    
    1.5
    
    
    
    0.1
    
    
    
    0.8EBITDA 2
    
    $
    152.8
    
    
    $
    155.2
    
    
    $
    211.0
    
    
    $
    27.0
    
    
    $
    159.4
 
 Exchange Rate Data
 Bank of Canada
  Years ended December 31,2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008Low
    
    
    0.7159
    
    
    
    0.7872
    
    
    
    0.8528
    
    
    
    0.8437
    
    
    
    0.7711High
    
    
    0.8493
    
    
    
    0.8690
    
    
    
    0.9099
    
    
    
    1.0905
    
    
    
    1.0289Period-end
    
    
    0.8308
    
    
    
    0.8577
    
    
    
    0.8581
    
    
    
    1.0120
    
    
    
    0.8166Average rate 1
    
    
    0.7683
    
    
    
    0.8253
    
    
    
    0.8818
    
    
    
    0.9304
    
    
    
    0.9381
 2008
    
    
    2009May 1December
    
    
    January
    
    
    February
    
    
    March
    
    
    April
    
    

(through
May 13)Low
    
    
    0.7711
    
    
    
    0.7849
    
    
    
    0.7870
    
    
    
    0.7692
    
    
    
    0.7910
    
    
    
    0.8423High
    
    
    0.8358
    
    
    
    0.8458
    
    
    
    0.8202
    
    
    
    0.8167
    
    
    
    0.8375
    
    
    
    0.8635Period-end
    
    
    0.8166
    
    
    
    0.8088
    
    
    
    0.7870
    
    
    
    0.7935
    
    
    
    0.8375
    
    
    
    0.8559Average rate 1
    
    
    0.8100
    
    
    
    0.8155
    
    
    
    0.8031
    
    
    
    0.7908
    
    
    
    0.8170
    
    
    
    0.8540
 1
    
    The average rate is derived by taking the average of the noon rate for each business
day during the relevant period. B. Capitalization and Indebtedness
  C. Reasons for the Offer and Use of Proceeds
   - 5 -




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##### Table of Contents



D. Risk Factors
 Risks Related to Our Liquidity
 We have substantial debt which may impair our financial and operating flexibility
     
    
    limit our ability to obtain additional financing to fund growth, working capital, capital
expenditures, debt-service requirements or other purposes;
 
    
    limit our ability to use operating cash flow in other areas of our business, because we
must use a portion of these funds to make principal and interest payments on our debt;
 
    
    increase our vulnerability to interest rate fluctuations because the debt under our ABL
Facility is at variable interest rates;
 
    
    limit our ability to compete with competitors who have more flexibility as to the use of
their cash flow;
 
    
    limit our ability to make investments or take other actions; and
 
    
    limit our ability to react to changing market conditions, changes in our industry and
economic downturns.
    - 6 -




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##### Table of Contents



Risks Related to Our Business
 Our business is of a cyclical nature and our product prices may fluctuate significantly
  
    
    additions to industry capacity;
 
    
    increased industry production;
 
    
    periods of insufficient demand due to weak general economic activity or other causes; and
 
    
    reduced inventory levels held by customers.
    We are subject to the risks of exchange rate fluctuations
     - 7 -




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##### Table of Contents



We face significant global competition
   
    
    the quality of our products and customer service;
 
    
    our ability to maintain high plant efficiencies and operating rates and thus lower
manufacturing costs;
 
    
    the cost of energy; and
 
    
    the availability, quality and cost of fibre, labour and chemicals.
  We face risks related to our international sales
  
    
    the effective marketing of our products in these global regions;
 
    
    restrictive governmental actions such as the imposition of trade quotas, tariffs and other
trade barriers and restrictions on transfers of funds;
 
    
    changes in non-Canadian labour laws and regulations affecting our ability to hire, retain
or dismiss employees;
 
    
    the need to comply with multiple and potentially conflicting laws and regulations;
 
    
    unfavourable business conditions or political or economic instability in any particular
country or region;
 
    
    higher transportation costs reflecting increases in the cost of oil; and
 
    
    difficulty in obtaining distribution and logistics support.
   - 8 -




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##### Table of Contents



We are exposed to fluctuations in the cost and supply of wood fibre
        We have incurred losses in recent periods and may incur losses in the future which may affect
ongoing operations
   - 9 -




---



##### Table of Contents



Labour disruptions could have a negative impact on our business
   Claims of Aboriginal title and rights in Canada may affect our operations
   Increases in energy costs could have a negative impact on our business
     - 10 -




---



##### Table of Contents



We are subject to significant environmental regulation
  
    
    air emissions;
 
    
    water discharges;
 
    
    use and handling of hazardous materials;
 
    
    use, handling and disposal of waste; and
 
    
    remediation of environmental contamination.
   Clean Air Act Canadian Environmental Protection Act
     - 11 -




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##### Table of Contents



We are dependent on the supply of certain raw materials
  Increases in capital and maintenance expenditures and equipment failures could have a negative
impact on our business
  We may be subject to periodic litigation which could result in unexpected expenditures of time and
resources
     - 12 -




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##### Table of Contents



We extend trade credit to our customers and they may not pay us promptly or in full
  Consumer boycotts or increases in costs due to chain-of-custody programs may adversely affect
demand for our products
  Our insurance is limited and subject to exclusions
  Our mills are located in seismically active areas
  Post-retirement plan obligations may affect our financial condition
  A change of legal control of the Corporation could be materially adverse to us
   - 13 -




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##### Table of Contents



ITEM 4. INFORMATION ON THE CORPORATION
 
 A. History and Development of the Corporation
 Canada Business Corporations Act
        - 14 -




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##### Table of Contents



- 15 -




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##### Table of Contents



White top
    
    
    
    
    
    
    SpecialtyProduction Curtailment
    
    
    
    
    
    linerboard
    
    
    
    
    
    
    printing(000 tonnes)
    
    Pulp1
    
    
    (000 tonnes)
    
    
    Newsprint2
    
    
    papers
    
    
    TotalQ1 20093
    
    
    34.2
    
    
    
    
    
    
    
    109.4
    
    
    
    36.7
    
    
    
    180.3Q4 20084
    
    
    46.7
    
    
    
    23.8
    
    
    
    72.7
    
    
    
    27.5
    
    
    
    170.7Q3 2008
    
    
    16.8
    
    
    
    8.0
    
    
    
    42.7
    
    
    
    2.7
    
    
    
    70.2Q2 2008
    
    
    12.8
    
    
    
    4.4
    
    
    
    38.3
    
    
    
    
    
    
    
    55.5Q1 2008
    
    
    14.0
    
    
    
    8.2
    
    
    
    41.6
    
    
    
    0.9
    
    
    
    64.7Total
    
    
    124.5
    
    
    
    44.4
    
    
    
    304.7
    
    
    
    67.8
    
    
    
    541.4
 1
    
    Includes curtailment related to market demand and fibre shortages.2
    
    Includes impact of the indefinite curtailment of paper machine No. 1 at Elk Falls
throughout 2008 and Q1, 2009, a portion of which related to fibre shortages.3
    
    Includes impact on production due to indefinite curtailment of Crofton pulp, paper
machine No. 1 at Crofton and all three paper machines at Elk Falls.4
    
    Includes impact on production due to the closure of the Elk Falls sawdust pulp and
white top linerboard operation in November 2008 (39,200 tonnes in Q4, 2008 from date of
permanent closure to year end).  (In millions of dollars)
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    TotalPaper1
    
    
    38
    
    
    
    73
    
    
    
    83
    
    
    
    75
    
    
    
    39
    
    
    
    308Pulp
    
    
    30
    
    
    
    22
    
    
    
    10
    
    
    
    11
    
    
    
    3
    
    
    
    76Continuing Operations
    
    
    68
    
    
    
    95
    
    
    
    93
    
    
    
    86
    
    
    
    42
    
    
    
    384
 1
    
    The paper segment includes capital expenditures related to Powell
River Energy Inc. (PREI). We consolidate 100% of PREI effective January 1,
2005. Our 50% interest in PREI, prior to January 1, 2005 was accounted for
using the proportionate consolidation method. 
 B. Business Overview
    - 16 -




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##### Table of Contents



OtherUncoatedDirectory
    
    
    Groundwood
    
    
    LWC
    
    
    Paper
    
    
    TotalMill
    
    Newsprint1
    
    
    Paper
    
    
    Specialties
    
    
    Paper
    
    
    Sub-total
    
    
    Pulp2
    
    
    TotalCrofton
    
    
    200,000
    
    
    
    210,000
    
    
    
    
    
    
    
    
    
    
    
    410,000
    
    
    
    403,000
    
    
    
    813,000Elk Falls
    
    
    373,000
    
    
    
    
    
    
    
    153,000
    
    
    
    
    
    
    
    526,000
    
    
    
    
    
    
    
    526,000Port Alberni
    
    
    
    
    
    
    106,000
    
    
    
    
    
    
    
    231,000
    
    
    
    337,000
    
    
    
    
    
    
    
    337,000Powell River
    
    
    33,000
    
    
    
    
    
    
    
    435,000
    
    
    
    
    
    
    
    468,000
    
    
    
    
    
    
    
    468,000Snowflake
    
    
    347,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    347,000
    
    
    
    
    
    
    
    347,000Total
    
    
    953,000
    
    
    
    316,000
    
    
    
    588,000
    
    
    
    231,000
    
    
    
    2,088,000
    
    
    
    403,000
    
    
    
    2,491,000
 1
    
    We have indefinitely curtailed our three paper machines at Elk Falls and our No.
1 paper machine at Crofton, displacing the equivalent of 526,000 tonnes of newsprint
and uncoated mechanical paper capacity from Elk Falls on an annualized basis and
140,000 tonnes of annual newsprint production from Crofton. The capacity noted above
has not been adjusted to reflect these indefinite curtailments.2
    
    Our total pulp capacity is 403,000 tonnes, of which 60,000 tonnes is used
internally, leaving 343,000 tonnes available to sell to third parties. We have
indefinitely curtailed our pulp operations at Crofton. The capacity noted above has
not been adjusted to reflect this curtailment.  Specialty Papers
   Newsprint
   Pulp
    - 17 -




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##### Table of Contents



Paper Sales
 Year Ended December 31(In millions of dollars)
    
    2006
    
    
    2007
    
    
    2008United States
    
    $
    1,016.0
    
    
    $
    857.9
    
    
    $
    1,026.4Canada
    
    
    192.7
    
    
    
    181.7
    
    
    
    196.8Latin America
    
    
    116.5
    
    
    
    121.5
    
    
    
    140.5Asia and Australia
    
    
    121.6
    
    
    
    90.5
    
    
    
    99.9Europe and Other
    
    
    1.4
    
    
    
    6.0
    
    
    
    1.2$
    1,448.2
    
    
    $
    1,257.6
    
    
    $
    1,464.8
 Pulp Sales
 Year Ended December 31(In millions of dollars)
    
    2006
    
    
    2007
    
    
    2008United States
    
    $
    37.8
    
    
    $
    47.0
    
    
    $
    50.6Canada
    
    
    13.9
    
    
    
    14.5
    
    
    
    12.6Latin America
    
    
    55.4
    
    
    
    36.7
    
    
    
    29.5Asia and Australia
    
    
    201.0
    
    
    
    242.2
    
    
    
    191.6Europe and Other
    
    
    126.2
    
    
    
    116.6
    
    
    
    100.3$
    434.3
    
    
    $
    457.0
    
    
    $
    384.6
 Paper Marketing
    Pulp Marketing
    - 18 -




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##### Table of Contents



Competition
  
 Fibre Supply
         - 19 -




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##### Table of Contents



Competitive Strengths
  
    
    Strong Market Position. We are the largest producer and marketer of printing
papers (newsprint and specialty printing papers) in western North America with production
capacity of approximately 2.5 million tonnes of paper and pulp. We are the only producer of
lightweight coated and supercalendered papers in western North America and the largest
producer of glossy paper in the region. We are one of the leading producers of directory
paper in the world. In addition, we operate the largest paper recycling operation in western
Canada.
 
    
    Diversified Product Mix and Product Development. We are focused on optimizing our
product mix by developing higher value grades, which allow us to exploit niche opportunities
in the marketplace. In recent years, we have introduced new product lines which include
Electraprime, Electrastar and Electrabrite Lite, and most recently Electracote Brite. Our
Electraprime grade is a soft-calendered, high-brightness paper designed to compete as an
alternative to traditional supercalendered grades. It is used primarily for advertising
inserts and flyers. Our Electrastar product is a super high-brightness grade designed for
applications in which brightness is a desirable characteristic such as inserts and specialty
newspapers. Electrabrite Lite is a lighter basis weight, high-brightness product that is used
by newspapers and retailers. Electracote Brite is a brighter, heavier paper ideal for
magazines, catalogue or retail insert applications as an attractive alternative to more
expensive coated grades. All four product lines have been well received in the market. These
newer and more specialized products generally provide higher margins and improved demand
prospects than standard commodity grades. We manage fluctuations in demand for our products
through our ability to switch production between products, particularly newsprint, directory,
and machine-finished uncoated mechanical grades.
 
    
    Upgraded, Cost-Competitive Manufacturing Facilities. Our financial results are
driven by our manufacturing costs, particularly with respect to fibre prices and mix, energy
prices and usage and labour costs. We are focused on reducing these costs, while maintaining
or improving the quality of our products. In each of 2007 and 2008 we announced restructuring
programs that resulted in workplace reductions at a number of our mills, resulting in a
reduction in our workforce by 954 employees. Over the past five years, capital expenditures
of approximately $384 million have been directed primarily towards shifting production
towards higher-margin printing papers, reducing unit production costs, increasing machine
productivity, improving product quality, and meeting or exceeding environmental regulations.
In addition, over the last several years, we have developed expertise in the production of
lightweight papers, which improve our margins by decreasing fibre, shipping, and storage and
handling expenses. The Snowflake mill, which we acquired in April 2008, is one of the lowest
cost newsprint facilities in North America.
 
    
    Diversification. The acquisition of the Snowflake mill enhanced our geographic,
fibre and currency diversification while increasing our market share. The Snowflake mill is
the only newsprint mill within a 1,600 kilometre (1,000 mile) radius. This provides delivery
and customer service advantages in key western American states with large and growing
metropolitan populations such as Phoenix, Arizona, Los Angeles and San Diego, California and
Denver, Colorado. The mills primary raw material is ONP and
OMG. ONP and OMG are exposed
to different market forces than the woodfibre used by our virgin fibre newsprint mills in
Canada. Current challenges in the U.S. housing market have reduced sawmilling activity, which
in turn has reduced the availability of residual virgin fibre in
North America. While ONP and OMG are also subject to market forces, these generally differ significantly from the primary drivers
of virgin fibre cost and availability.
  
    
    Strong Supply Chain Management Practices. Distribution costs have a significant
impact on net sales realizations. Our strong and flexible distribution network optimizes all
transportation modes available to us, such as truck, rail and break bulk and container
shipping. Controlling key elements of our supply chain has allowed us to control costs while
achieving a high on time performance and low damage levels especially to west coast print
sites where our strategic importance to customers is highest. Our Crofton mill site directly
ships breakbulk paper and pulp to offshore customers via regularly scheduled vessels. We
operate a central distribution centre in Surrey, B.C. which continuously receives volumes from
our four British Columbia manufacturing sites and then ships via rail, truck and container to
our customers. This allows us to choose the most cost effective transportation mode in
conjunction with customer requirements. We also lease 780 rail cars to ensure adequate supply
and weight loads are maximized with the use of organization software. We lease five paper
barges which we use in conjunction with third party providers to transport our products to the
Surrey distribution centre. At Snowflake we balance inbound ONP paper with outbound finished
product deliveries to minimize transportation costs.
 
    
    Production Expertise. Over the last several years, we have developed expertise in
the production of lightweight papers. As part of this process we converted all our B.C. paper
mills to alkaline papermaking, which uses lower-cost (compared to fibre furnish) precipitated
calcium carbonate, or PCC, fillers in the production process. In addition to being a
lower-cost input, the PCC filler leads to improved brightness and opacity, which facilitates
the production of papers with a lower basis weight. The use of lower basis weight paper by
our customers reduces their postage costs. Lower basis weight papers also provide a positive
environmental impact as they use less fibre.
  - 20 -




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##### Table of Contents



Business Strategy
  
    
    Cost Competitive Manufacturing. Our manufacturing costs are key to being
competitive over the long term and we are focused on reducing those costs and improving our
margins. We continually examine all areas of our business for cost reduction opportunities.
Over the past several years we have sought to reduce our per unit cash costs by improving
machine productivity through initiatives such as our asset reliability program, improvements
in our grade development and improved operator technical training. We have directed capital
expenditures towards higher margin products and projects that reduce unit production costs.
We have developed expertise in the production of lightweight papers, reducing our fibre costs
and shipping, storage and handling expenses. We have also made significant workforce
reductions over the last two years.
 
    
    Re-aligning Labour Cost Structure. We have established a target labour cost
structure of $80 per tonne at each of our mills. Our 2008 agreements with the CEP at our Port
Alberni mill provides a structure for achieving this target at the mill. In addition, our
agreements with the CEP at Crofton, Elk Falls and Powell River and PPWC at Crofton include a
commitment to complete plans which will assist us in reaching the target at those mills as
well. In February 2009, we reached agreement with the two CEP locals in Powell River which
will facilitate achieving this goal. Discussions continue with locals at the other mills.
Our Snowflake mill has the labour structure needed to achieve the $80 per tonne goal and is
expected to be on target in 2009, subject to the impact of production curtailment.
 
    
    Grow Market Share in Uncoated Mechanical Grades. We continue to develop new grades
as a way of protecting and increasing market share in our core region, the west coast of North
America. Our broad product range allows us to effectively respond to evolving customer
demands, increasing our ability to retain our most desirable customers. With more grade
options for our paper machines and customers, we believe we are able to achieve higher
margins.
  
    
    Be the Preferred Supplier for our Customers. In 2008, we focused further on
advancing our preferred supplier status with key customers by continuing to improve the
consistency, runnability and reliability of our products, and our on-time delivery service.
As a result, we recorded the lowest number of quality claims in our history. We have
continued using a chain-of-custody system to certify our wood fibre supply. The
PricewaterhouseCoopers standard that we use is a third-party audited system that verifies
fibre is derived from a forest managed in accordance with the requirements of a major
sustainability certification program. The chain-of-custody system tracks the fibre from
source to finished product and provides a valuable tool to assure customers that paper
contains fibre originated from well-managed forests. It is expected to continue to result in
additional sales opportunities. In 2007, we launched Catalyst Cooled, a product line whose
manufacture, together with the purchase of offsetting credits, results in no net carbon
emissions. This product is designed for customers who do not want their paper to contribute
to carbon emissions.
  - 21 -




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##### Table of Contents



C. Organizational Structure
  Subsidiaries
    
    JurisdictionElk Falls Pulp and Paper Limited
    
    British ColumbiaCatalyst Paper Finance Limited
    
    British ColumbiaCatalyst Pulp Operations Limited
    
    British ColumbiaCatalyst Pulp Sales Inc.
    
    British ColumbiaCatalyst Pulp and Paper Sales Inc.
    
    British ColumbiaCatalyst Paper (USA) Inc.
    
    CaliforniaCatalyst Paper Holdings Inc.
    
    DelawareCatalyst Paper (Snowflake) Inc.
    
    DelawareCatalyst Paper Recycling Inc.
    
    DelawarePacifica Papers Sales Inc.
    
    DelawarePacifica Poplars Ltd.
    
    British ColumbiaPacifica Poplars Inc.
    
    DelawarePacifica Papers U.S. Inc.
    
    DelawareThe Apache Railway Company
    
    Arizona
  
 D. Property, Plants and Equipment
 
 Paper
 Paper Operations
  Crofton
    
    ProductPaper Machine No. 1 (No. 1 PM)
    
    Specialty/NewsprintPaper Machine No. 2 (No. 2 PM)
    
    SpecialtyPaper Machine No. 3 (No. 3 PM)
    
    Specialty/Newsprint
 Elk Falls
    
    ProductPaper Machine No. 1 (No. 1 PM)
    
    Specialty/NewsprintPaper Machine No. 2 (No. 2 PM)
    
    SpecialtyPaper Machine No. 5 (No. 5 PM)
    
    Newsprint
 Port Alberni
    
    ProductPaper Machine No. 4 (No. 4 PM)
    
    SpecialtyPaper Machine No. 5 (No. 5 PM)
    
    Specialty (Coated)
 Powell River
    
    ProductPaper Machine No. 9 (No. 9 PM)
    
    SpecialtyPaper Machine No. 10 (No. 10 PM)
    
    SpecialtyPaper Machine No. 11 (No. 11 PM)
    
    Specialty/Newsprint
 Snowflake
    
    ProductPaper Machine No. 1 (No. 1 PM)
    
    Recycled NewsprintPaper Machine No. 3 (No. 3 PM)
    
    Recycled Newsprint
  - 22 -




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##### Table of Contents



Net ProductionYear ended December 31Mill
    
    Annual Capacity
    
    
    2008
    
    
    2007Crofton
    
    
    410
    
    
    
    365
    
    
    
    379Elk Falls 1
    
    
    526
    
    
    
    363
    
    
    
    410Port Alberni 2
    
    
    337
    
    
    
    268
    
    
    
    284Powell River
    
    
    468
    
    
    
    446
    
    
    
    455Snowflake 3
    
    
    347
    
    
    
    215
    
    
    
    2,088
    
    
    
    1,657
    
    
    
    1,528
 1
    
    We have indefinitely curtailed our three paper machines at Elk
Falls and our No. 1 paper machine at Crofton, displacing the equivalent
526,000 tonnes of newsprint and uncoated mechanical paper capacity from
Elk Falls on an annualized basis and 140,000 tonnes of annual newsprint
production from Crofton. The capacity noted above has not been adjusted
to reflect these indefinite curtailments.2
    
    Paper machine No. 4 at Port Alberni was curtailed for parts of
2007 and 2008. The machine was restarted in May 2008. The capacity
noted above has not been adjusted to reflect this curtailment.3
    
    The Snowflake mill was acquired on April 10, 2008. Net
production for 2008 reflects production for the period April 10, 2008 to
December 31, 2008. Crofton
        Elk Falls
     - 23 -




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##### Table of Contents



Port Alberni
     Powell River
        - 24 -




---



##### Table of Contents



Snowflake
  2
    
 Pulp
 Pulp Operations
   Year ended December 31Mill
    
    Annual Capacity
    
    
    2008 Production
    
    
    2007 ProductionPulp 1
    
    Crofton
    
    
    403
    
    
    
    304
    
    
    
    326Elk Falls
    
    
    200
    
    
    
    113
    
    
    
    164603
    
    
    
    417
    
    
    
    490White top linerboard
    
    Elk Falls
    
    
    131
    
    
    
    87
    
    
    
    113Total
    
    
    
    
    734
    
    
    
    504
    
    
    
    603
 1
    
    In 2009, as a result of the permanent closure of our Elk Falls pulp facility,
our total pulp capacity is 403,000 tonnes, of which 343,000 tonnes is designated as
market pulp, with the remainder being consumed internally. The capacity noted
above does not reflect the indefinite curtailment of the Crofton pulp mill.   - 25 -




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##### Table of Contents



Paper Recycling Division
    
 Properties
    
 Environment
    - 26 -




---



##### Table of Contents



Recycled Content in Mechanical Paper
   Solid Waste
  Effluent
   Air Emissions
  Clean Air Act
   - 27 -




---



##### Table of Contents



Climate Change
        - 28 -




---



##### Table of Contents



Contaminated Sites
   
 Social Responsibility
 Fibre Certification Chain of Custody
   Aboriginal Relations and Business Development
  Carbon Emission Reduction Reporting
  2
 Clean Production Initiative
   - 29 -




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##### Table of Contents



ITEM 4A. UNRESOLVED STAFF COMMENTS
  
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
 A. Operating Results
    2008 annual overview
 General overview
  Financial performance
   - 30 -




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##### Table of Contents



Snowflake mill acquisition
   Production curtailment
   Specialty2008 Production Curtailment
    
    
    
    
    
    White top
    
    
    
    
    
    
    printing(000 tonnes)
    
    Pulp 2
    
    
    Linerboard 2
    
    
    Newsprint 1
    
    
    papers
    
    
    TotalQ1
    
    
    14.0
    
    
    
    8.2
    
    
    
    41.6
    
    
    
    0.9
    
    
    
    64.7Q2
    
    
    12.8
    
    
    
    4.4
    
    
    
    38.3
    
    
    
    
    
    
    
    55.5Q3
    
    
    16.8
    
    
    
    8.0
    
    
    
    42.7
    
    
    
    2.7
    
    
    
    70.2Q4
    
    
    46.7
    
    
    
    23.8
    
    
    
    72.7
    
    
    
    27.5
    
    
    
    170.7Total
    
    
    90.3
    
    
    
    44.4
    
    
    
    195.3
    
    
    
    31.1
    
    
    
    361.1
 1
    
    Curtailment includes 153,000 tonnes related to E1 which is indefinitely curtailed
due to the decline in market demand for newsprint.2
    
    Includes impact on production due to the closure of the Elk Falls sawdust pulp and
white top linerboard operation in November 2008 (39,200 tonnes in Q4 from date of
permanent closure to year end). Permanent closure of the Elk Falls pulp mill
   Restructuring
   - 31 -




---



##### Table of Contents



Renewal of collective agreements
  Canadian dollar
   
 Product demand and pricing
    - 32 -




---



##### Table of Contents



Liquidity and capital assets
    - 33 -




---



##### Table of Contents



2008 key events
 
    
    Completed the acquisition of the 347,000 tonne Snowflake recycled newsprint mill in April 2008 for a total cost of
$169.8 million.
    
    Realized additional labour cost savings of approximately $48 million over 2007 due to the full year impact of
efficiency initiatives implemented in 2007 and a further reduction in the workforce of 14% in 2008.
    
    Reached agreement with the CEP and PPWC on the renewal of the collective agreements for Crofton, Elk Falls, and Powell
River that included a commitment to complete plans to achieve an $80 per tonne labour cost target at each mill.
    
    Signed new labour agreements at the Port Alberni mill incorporating an $80 per tonne labour structure resulting in a
commitment of a $12 million capital upgrade on the TMP facility, a $14 million early retirement and severance program,
and the restart of A4 in early May 2008.
    
    Announced indefinite curtailment of E1 at Elk Falls in April 2008.
    
    Permanently closed the Elk Falls sawdust pulp and white top linerboard operation in November 2008 due to
unavailability of sawdust fibre.
    
    Refinanced our $350 million revolving operating facility, maturing July 2009, with a new $330 million ABL Facility
maturing August 2013.
    
    Received recognition for environmental performance and corporate social responsibility including:
 
    
    Named a Climate Disclosure Leader in the Carbon Disclosure Project, acknowledging
superior and financially relevant climate risk transparency.
    
    Recognized for energy management and conservation efforts through BC Hydros Power Smart
Excellence Awards.
    
    Continued inclusion in Jantzi Social Index, consisting of 60 Canadian companies that
pass a set of broad-based environmental, social and governance screens.
    
    Included in Corporate Knightsmagazines list of Best 50 Canadian Corporate Citizens.
  
    
    Received third consecutive award of excellence for financial reporting and corporate
reporting in the forest products industry category from the Canadian Institute of Chartered
Accountants.
  - 34 -




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##### Table of Contents



Selected annual financial information
 (In millions of dollars, except where otherwise stated)
    
    2006
    
    
    2007
    
    
    2008Sales
    
    $
    1,882.5
    
    
    $
    1,714.6
    
    
    $
    1,849.4Operating earnings (loss)
    
    
    3.9
    
    
    
    (149.4
    )
    
    
    (157.4
    )EBITDA1
    
    
    211.0
    
    
    
    27.0
    
    
    
    159.4- before specific items 1
    
    
    211.0
    
    
    
    116.7
    
    
    
    189.5Net earnings (loss)
    
    
    (15.9
    )
    
    
    (31.6
    )
    
    
    (221.1
    )- before specific items 1
    
    
    (25.0
    )
    
    
    (89.3
    )
    
    
    (28.0
    )Total assets
    
    
    2,641.3
    
    
    
    2,457.1
    
    
    
    2,423.4Total long-term liabilities
    
    
    1,342.2
    
    
    
    1,199.1
    
    
    
    1,208.2EBITDA margin 1
    
    
    11.2
    %
    
    
    1.6
    %
    
    
    8.6
    %- before specific items 1
    
    
    11.2
    %
    
    
    6.5
    %
    
    
    10.2
    %Net earnings (loss) per share (in dollars)- basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.15
    )
    
    $
    (0.66
    )- before specific items
    
    
    (0.12
    )
    
    
    (0.42
    )
    
    
    (0.08
    )Sales (000 tonnes)Specialty printing papers
    
    
    990.2
    
    
    
    1,054.8
    
    
    
    1,080.8Newsprint
    
    
    699.1
    
    
    
    496.3
    
    
    
    601.8Total paper
    
    
    1,689.3
    
    
    
    1,551.1
    
    
    
    1,682.6Pulp
    
    
    626.2
    
    
    
    603.2
    
    
    
    506.9Total sales
    
    
    2,315.5
    
    
    
    2,154.3
    
    
    
    2,189.5Production (000 tonnes)Specialty printing papers
    
    
    983.7
    
    
    
    1,055.4
    
    
    
    1,060.1Newsprint
    
    
    703.7
    
    
    
    472.8
    
    
    
    596.8Total paper
    
    
    1,687.4
    
    
    
    1,528.2
    
    
    
    1,656.9Pulp
    
    
    624.3
    
    
    
    601.8
    
    
    
    503.4Total production
    
    
    2,311.7
    
    
    
    2,130.0
    
    
    
    2,160.3US$/CDN$ foreign exchange rates 2Average spot rate (a)
    
    
    0.882
    
    
    
    0.930
    
    
    
    0.938Period-end spot rate (b)
    
    
    0.858
    
    
    
    1.012
    
    
    
    0.817Average effective rate (c)
    
    
    0.872
    
    
    
    0.917
    
    
    
    0.947Common shares (millions)At period end
    
    
    214.6
    
    
    
    214.7
    
    
    
    381.8Weighted average
    
    
    214.6
    
    
    
    214.7
    
    
    
    336.1
 1
    
    EBITDA, EBITDA before specific items, EBITDA margin, EBITDA margin before specific items, net
earnings (loss) before specific items, and net earnings (loss) per share before specific items
are non-GAAP measures. EBITDA margin and EBITDA margin before specific items are defined as
EBITDA and EBITDA before specific items, as a percentage of sales and adjusted sales,
respectively. Refer to section on Non-GAAP measures for further details.2
    
    Foreign exchange rates: a)
    
    Average spot rate is the average Bank of Canada noon spot rate over the reporting
period.b)
    
    Period-end spot rate is the Bank of Canada noon spot rate on December 31.c)
    
    Average effective rate represents a blended rate which takes account of the
applicable spot rates, our revenue hedging program in the period, and translation of U.S.
dollar denominated working capital at period opening and closing rates. See section on
Summary of quarterly results for further details.
  - 35 -




---



##### Table of Contents



2008 strategic initiatives
 Snowflake mill acquisition
  Development of new grades
  Market share growth in uncoated mechanical grades
  Labour cost target
  TMP investment at Port Alberni
  Opportunities in Asian market
   Consolidated results of operations
 Year ended December 31, 2008 compared to year ended December 31, 2007
 Sales
   - 36 -




---



##### Table of Contents



Sales
    
    Year ended December 31,
    
    
    
    
    
    
    Increase (decrease) from 2007 as a result of(In millions of dollars)
    
    2008
    
    
    2007
    
    
    Total Change
    
    
    Volume 1
    
    
    Price
    
    
    Mix
    
    
    F/XSpecialty printing papers
    
    $
    1,000.9
    
    
    $
    919.6
    
    
    $
    81.3
    
    
    $
    22.7
    
    
    $
    86.6
    
    
    $
    (2.0
    )
    
    $
    (26.0
    )Newsprint
    
    
    463.9
    
    
    
    338.0
    
    
    
    125.9
    
    
    
    95.2
    
    
    
    39.2
    
    
    
    2.9
    
    
    
    (11.4
    )Total paper
    
    
    1,464.8
    
    
    
    1,257.6
    
    
    
    207.2
    
    
    
    117.9
    
    
    
    125.8
    
    
    
    0.9
    
    
    
    (37.4
    )Pulp
    
    
    384.6
    
    
    
    457.0
    
    
    
    (72.4
    )
    
    
    (73.0
    )
    
    
    16.8
    
    
    
    1.8
    
    
    
    (18.0
    )Total
    
    $
    1,849.4
    
    
    $
    1,714.6
    
    
    $
    134.8
    
    
    $
    44.9
    
    
    $
    142.6
    
    
    $
    2.7
    
    
    $
    (55.4
    )
 1
    
    Includes impact of Snowflake sales. EBITDA and EBITDA before specific items
 EBITDA before(In millions of dollars)
    
    EBITDA1
    
    
    Specific Items1,32007 EBITDA
    
    $
    27.0
    
    
    $
    116.7Paper prices
    
    
    126.7
    
    
    
    126.7Pulp prices
    
    
    18.6
    
    
    
    18.6Impact of Canadian dollar on sales, inclusive of hedging2
    
    
    (55.4
    )
    
    
    (55.4
    )Production volume and mix (including Snowflake)
    
    
    10.2
    
    
    
    (21.1
    )Distribution costs
    
    
    (14.2
    )
    
    
    (14.2
    )Fibre mix and costs
    
    
    (7.6
    )
    
    
    (9.9
    )Chemical costs
    
    
    (6.2
    )
    
    
    (6.2
    )Fuel mix and costs
    
    
    (13.4
    )
    
    
    (16.4
    )Labour costs
    
    
    49.2
    
    
    
    56.1Maintenance
    
    
    20.0
    
    
    
    22.4Other fixed costs (including Snowflake)
    
    
    (32.2
    )
    
    
    (29.7
    )Lower of cost or market write-down in inventories
    
    
    (5.9
    )
    
    
    (5.9
    )Restructuring costs
    
    
    34.6
    
    
    
    Other, net
    
    
    8.0
    
    
    
    7.82008 EBITDA
    
    $
    159.4
    
    
    $
    189.5
 1
    
    EBITDA and EBITDA before specific items are non-GAAP measures. Refer to section on
Non-GAAP measures for further details.2
    
    Estimated total impact on EBITDA of average foreign exchange effective rate movement
period-to-period is negative $39 million.3
    
    Specific items in 2007 included the impact of the USW strike of $25.0 million and
restructuring and change-of-control costs of $64.7 million. Specific items in 2008
included impact of restructuring costs of $30.1 million. This impact has been attributed
to the relevant line items in the reconciliation above. Operating earnings (loss)
  Net earnings (loss)
   - 37 -




---



##### Table of Contents



(In millions of dollars)
    
    Pre-tax
    
    
    After-tax2007 net earnings (loss)
    
    $
    (131.6
    )
    
    $
    (31.6
    )Higher EBITDA before specific items
    
    
    72.8
    
    
    
    53.8Lower restructuring costs
    
    
    34.6
    
    
    
    21.9Impact of the USW strike in 2007
    
    
    25.0
    
    
    
    16.5Lower amortization expense
    
    
    10.6
    
    
    
    2.0Impairment charge in 2008
    
    
    (151.0
    )
    
    
    (111.0
    )Change in foreign exchange loss on long-term debt
    
    
    (186.1
    )
    
    
    (155.7
    )Higher other income, net
    
    
    17.8
    
    
    
    11.8Higher interest expense
    
    
    (4.3
    )
    
    
    (5.1
    )Income tax adjustments, net
    
    
    
    
    
    
    (23.0
    )Non-controlling interest
    
    
    (0.7
    )
    
    
    (0.7
    )2008 net earnings (loss)
    
    $
    (312.9
    )
    
    $
    (221.1
    )
 
 SEGMENTED RESULTS  ANNUAL
 Specialty printing papers
 (In millions of dollars, except per tonne and per ton)
    
    2006
    
    
    2007
    
    
    2008Sales
    
    $
    918.4
    
    
    $
    919.6
    
    
    $
    1,000.9Operating earnings (loss)
    
    
    9.7
    
    
    
    (75.1
    )
    
    
    27.0EBITDA 1
    
    
    104.8
    
    
    
    26.2
    
    
    
    139.5- before specific items 1
    
    
    104.8
    
    
    
    73.4
    
    
    
    150.1EBITDA margin 1
    
    
    11.4
    %
    
    
    2.8
    %
    
    
    13.9
    %- before specific items 1
    
    
    11.4
    %
    
    
    8.0
    %
    
    
    15.0
    %Sales (000 tonnes)
    
    
    990.2
    
    
    
    1,054.8
    
    
    
    1,080.8Production (000 tonnes)
    
    
    983.7
    
    
    
    1,055.4
    
    
    
    1,060.1Curtailment (000 tonnes)2
    
    
    
    
    
    
    7.2
    
    
    
    31.1Average sales revenue per tonne
    
    $
    928
    
    
    $
    872
    
    
    $
    926Average delivered cash costs per tonne 3
    
    
    822
    
    
    
    847
    
    
    
    797- before specific items 1,3
    
    
    822
    
    
    
    802
    
    
    
    787Benchmark pricesSC-A paper, 35 lb. (US$/ton) 4
    
    
    788
    
    
    
    753
    
    
    
    866LWC paper, No. 5, 40 lb. (US$/ton) 4
    
    
    836
    
    
    
    786
    
    
    
    960Telephone directory paper, 22.1 lb. (US$/ton) 4
    
    
    721
    
    
    
    740
    
    
    
    750
 1
    
    EBITDA, EBITDA before specific items, EBITDA margin, EBITDA margin before specific items,
and average delivered cash costs per tonne before specific items are non-GAAP measures.
EBITDA margin and EBITDA margin before specific items are defined as EBITDA and EBITDA before
specific items as a percentage of sales and adjusted sales, respectively. Refer to section
on Non-GAAP measures for further details.2
    
    Curtailment consists of downtime related to the USW strike in 2007 and downtime related to
unavailability of fibre and market demand in 2008.3
    
    Average delivered cash costs per tonne consist of cost of sales including the impact of the
USW strike, selling, general and administration (SG&A) costs, and restructuring and
change-of-control costs.4
    
    Benchmark selling prices are sourced from Resource Information Systems, Inc. (RISI).  - 38 -




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##### Table of Contents



Markets
     
  - 39 -




---



##### Table of Contents



Segment overview
  .
    - 40 -




---



##### Table of Contents



Operational performance
    Outlook
     Newsprint
 (In millions of dollars, except per tonne)
    
    2006
    
    
    2007
    
    
    2008Sales
    
    $
    529.8
    
    
    $
    338.0
    
    
    $
    463.9Operating earnings (loss)
    
    
    6.9
    
    
    
    (56.9
    )
    
    
    3.6EBITDA 1
    
    
    71.8
    
    
    
    (23.7
    )
    
    
    43.3- before specific items 1
    
    
    71.8
    
    
    
    (4.4
    )
    
    
    47.4EBITDA margin 1
    
    
    13.6
    %
    
    
    (7.0
    %)
    
    
    9.3
    %- before specific items 1
    
    
    13.6
    %
    
    
    (1.2
    %)
    
    
    10.2
    %Sales (000 tonnes)
    
    
    699.1
    
    
    
    496.3
    
    
    
    601.8Production (000 tonnes)
    
    
    703.7
    
    
    
    472.8
    
    
    
    596.8Curtailment (000 tonnes)2
    
    
    
    
    
    
    98.9
    
    
    
    195.3Average sales revenue per tonne
    
    $
    758
    
    
    $
    681
    
    
    $
    771Average delivered cash costs per tonne 3
    
    
    655
    
    
    
    729
    
    
    
    699- before specific items 1,3
    
    
    655
    
    
    
    674
    
    
    
    692Benchmark prices (US$/tonne) 4Newsprint 48.8 gsm, West Coast delivery
    
    
    649
    
    
    
    579
    
    
    
    687
 1
    
    EBITDA, EBITDA before specific items, EBITDA margin, EBITDA margin before specific items,
and average delivered cash costs per tonne before specific items are non-GAAP measures.
EBITDA margin and EBITDA margin before specific items are defined as EBITDA and EBITDA before
specific items as a percentage of sales and adjusted sales, respectively. Refer to section
on Non-GAAP measures for further details.2
    
    Curtailment consists of downtime related to the USW strike in 2007 and downtime related to
unavailability of fibre and market demand in 2008 (including the indefinite curtailment of
E1).3
    
    Average delivered cash costs per tonne consist of cost of sales, including the impact of
the USW strike, SG&A costs, and restructuring and change-of-control costs.4
    
    Benchmark selling prices are sourced from RISI.  - 41 -




---



##### Table of Contents



Markets
  
  
  - 42 -




---



##### Table of Contents



Segment overview
  
    
    The acquisition of Snowflake in April 2008 increased production in the year by 215,200
tonnes of lower-cost, recycled newsprint focused on freight logical markets in the U.S. South
and West.
 
    
    Following agreement on a new labour contract designed to reduce labour costs at Port
Alberni to $80 per tonne, we restarted the A4 paper machine in early 2008 with the impact of
increasing newsprint production in B.C. by 64,800 tonnes in the year.
 
    
    Our E1 paper machine at Elk Falls was curtailed throughout 2008, reflecting a lack of fibre
in the early part of the year, weaker market demand, and a drive to optimize newsprint
production on lower-cost machines. This curtailment removed the equivalent of 153,000 tonnes
of newsprint production in 2008.
 
    
    In addition to E1, production was periodically curtailed during the year, particularly in
Q4, on other newsprint machines. This reduced production by 42,300 tonnes in 2008, reflecting
weaker demand and our drive to manage inventories by matching production to customer orders.
Including E1, total production curtailment in 2008 was 195,300 tonnes, an increase of 96,400
tonnes compared to curtailment in 2007.
 
    
    We utilized our ability to allocate machine capacity in B.C. between different grades to
reduce newsprint production and increase market share in uncoated mechanical grades.
 Operational performance
    Outlook
   - 43 -




---



##### Table of Contents



Pulp
 (In millions of dollars, except per tonne and per ton)
    
    2006
    
    
    2007
    
    
    2008Sales
    
    $
    434.3
    
    
    $
    457.0
    
    
    $
    384.6Operating earnings (loss)
    
    
    (12.7
    )
    
    
    (17.4
    )
    
    
    (188.0
    )EBITDA 1
    
    
    34.4
    
    
    
    24.5
    
    
    
    (23.4
    )- before specific items 1
    
    
    34.4
    
    
    
    47.7
    
    
    
    (8.0
    )EBITDA margin 1
    
    
    7.9
    %
    
    
    5.4
    %
    
    
    (6.1
    %)- before specific items 1
    
    
    7.9
    %
    
    
    9.8
    %
    
    
    (2.1
    %)Sales (000 tonnes)
    
    
    626.2
    
    
    
    603.2
    
    
    
    506.9Production (000 tonnes)
    
    
    624.3
    
    
    
    601.8
    
    
    
    503.4Curtailment (000 tonnes)2
    
    
    
    
    
    
    54.7
    
    
    
    134.7Average sales revenue per tonne
    
    $
    693
    
    
    $
    757
    
    
    $
    759Average delivered cash costs per tonne 3
    
    
    638
    
    
    
    717
    
    
    
    805- before specific items 1,3
    
    
    638
    
    
    
    679
    
    
    
    774Benchmark pricesNBSK pulp, Northern Europe delivery (US$/tonne) 4
    
    
    681
    
    
    
    800
    
    
    
    840White top linerboard, 42 lb., Eastern U.S. delivery (US$/ton) 4
    
    
    673
    
    
    
    697
    
    
    
    750
 1
    
    EBITDA, EBITDA before specific items, EBITDA margin, EBITDA margin before specific items, and
average delivered cash costs per tonne before specific items are non-GAAP measures. EBITDA
margin and EBITDA margin before specific items are defined as EBITDA and EBITDA before
specific items as a percentage of sales and adjusted sales, respectively. Refer to section on
Non-GAAP measures for further details.2
    
    Curtailment consists of downtime related to the USW strike in 2007 and downtime related to
unavailability of fibre and market demand in 2008.3
    
    Average delivered cash costs per tonne consist of cost of sales, including the impact of the
USW strike, SG&A costs, and restructuring and change-of-control costs.4
    
    Benchmark selling prices are sourced from RISI.  - 44 -




---



##### Table of Contents



Markets
   
  
 Segment Overview
     - 45 -




---



##### Table of Contents



Operational performance
    Outlook
   - 46 -




---



##### Table of Contents



SEGMENTED RESULTS  QUARTERLY
 Selected quarterly financial information
 (In millions of dollars,
    
    2007
    
    

    2008except where otherwise stated)
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    TOTAL
    
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    TOTALSales
    
    $
    478.1
    
    
    $
    441.8
    
    
    $
    413.7
    
    
    $
    381.0
    
    
    $
    1,714.6
    
    
    $
    399.5
    
    
    $
    452.9
    
    
    $
    504.8
    
    
    $
    492.2
    
    
    $
    1,849.4Operating earnings (loss)
    
    
    (30.7
    )
    
    
    (46.7
    )
    
    
    (44.3
    )
    
    
    (27.7
    )
    
    
    (149.4
    )
    
    
    (29.6
    )
    
    
    (153.3
    )
    
    
    14.0
    
    
    
    11.5
    
    
    
    (157.4
    )EBITDA 1
    
    
    14.1
    
    
    
    (1.9
    )
    
    
    (0.3
    )
    
    
    15.1
    
    
    
    27.0
    
    
    
    12.1
    
    
    
    29.5
    
    
    
    53.1
    
    
    
    64.7
    
    
    
    159.4- before specific items 1
    
    
    33.1
    
    
    
    17.4
    
    
    
    37.4
    
    
    
    28.8
    
    
    
    116.7
    
    
    
    26.7
    
    
    
    30.7
    
    
    
    66.2
    
    
    
    65.9
    
    
    
    189.5Net earnings (loss)
    
    
    (25.6
    )
    
    
    0.2
    
    
    
    (18.6
    )
    
    
    12.4
    
    
    
    (31.6
    )
    
    
    (37.4
    )
    
    
    (124.3
    )
    
    
    (10.9
    )
    
    
    (48.5
    )
    
    
    (221.1
    )- before specific items 1
    
    
    (19.7
    )
    
    
    (31.8
    )
    
    
    (16.9
    )
    
    
    (20.9
    )
    
    
    (89.3
    )
    
    
    (21.8
    )
    
    
    (22.7
    )
    
    
    7.2
    
    
    
    9.3
    
    
    
    (28.0
    )EBITDA margin 1
    
    
    2.9
    %
    
    
    (0.4
    %)
    
    
    (0.1
    %)
    
    
    4.0
    %
    
    
    1.6
    %
    
    
    3.0
    %
    
    
    6.5
    %
    
    
    10.5
    %
    
    
    13.1
    %
    
    
    8.6
    %- before specific items 1
    
    
    6.9
    %
    
    
    3.9
    %
    
    
    8.5
    %
    
    
    6.6
    %
    
    
    6.5
    %
    
    
    6.7
    %
    
    
    6.8
    %
    
    
    13.1
    %
    
    
    13.4
    %
    
    
    10.2
    %Net earnings (loss) per share (in dollars)- basic and diluted
    
    $
    (0.12
    )
    
    $
    
    
    
    $
    (0.09
    )
    
    $
    (0.06
    )
    
    $
    (0.15
    )
    
    $
    (0.17
    )
    
    $
    (0.34
    )
    
    $
    (0.03
    )
    
    $
    (0.13
    )
    
    $
    (0.66
    )- before specific items 1
    
    
    (0.09
    
    
    
    (0.15
    )
    
    
    (0.08
    )
    
    
    (0.10
    )
    
    
    (0.42
    )
    
    
    (0.10
    )
    
    
    (0.06
    )
    
    
    0.02
    
    
    
    0.02
    
    
    
    (0.08
    )Sales (000 tonnes)Specialty printing papers
    
    
    255.2
    
    
    
    259.2
    
    
    
    261.1
    
    
    
    279.3
    
    
    
    1,054.8
    
    
    
    268.5
    
    
    
    267.4
    
    
    
    268.7
    
    
    
    276.2
    
    
    
    1,080.8Newsprint
    
    
    148.7
    
    
    
    157.1
    
    
    
    119.8
    
    
    
    70.7
    
    
    
    496.3
    
    
    
    81.8
    
    
    
    170.8
    
    
    
    189.0
    
    
    
    160.2
    
    
    
    601.8Total paper
    
    
    403.9
    
    
    
    416.3
    
    
    
    380.9
    
    
    
    350.0
    
    
    
    1,551.1
    
    
    
    350.3
    
    
    
    438.2
    
    
    
    457.7
    
    
    
    436.4
    
    
    
    1,682.6Pulp
    
    
    167.9
    
    
    
    147.4
    
    
    
    151.8
    
    
    
    136.1
    
    
    
    603.2
    
    
    
    145.4
    
    
    
    130.0
    
    
    
    138.0
    
    
    
    93.5
    
    
    
    506.9Total sales
    
    
    571.8
    
    
    
    563.7
    
    
    
    532.7
    
    
    
    486.1
    
    
    
    2,154.3
    
    
    
    495.7
    
    
    
    568.2
    
    
    
    595.7
    
    
    
    529.9
    
    
    
    2,189.5Production (000 tonnes)Specialty printing papers
    
    
    256.6
    
    
    
    270.4
    
    
    
    262.6
    
    
    
    265.8
    
    
    
    1,055.4
    
    
    
    268.4
    
    
    
    265.7
    
    
    
    276.0
    
    
    
    250.0
    
    
    
    1,060.1Newsprint
    
    
    152.1
    
    
    
    148.9
    
    
    
    110.9
    
    
    
    60.9
    
    
    
    472.8
    
    
    
    83.0
    
    
    
    172.2
    
    
    
    188.9
    
    
    
    152.7
    
    
    
    596.8Total paper
    
    
    408.7
    
    
    
    419.3
    
    
    
    373.5
    
    
    
    326.7
    
    
    
    1,528.2
    
    
    
    351.4
    
    
    
    437.9
    
    
    
    464.9
    
    
    
    402.7
    
    
    
    1,656.9Pulp
    
    
    156.8
    
    
    
    157.1
    
    
    
    143.2
    
    
    
    144.7
    
    
    
    601.8
    
    
    
    140.0
    
    
    
    142.9
    
    
    
    131.3
    
    
    
    89.2
    
    
    
    503.4Total production
    
    
    565.5
    
    
    
    576.4
    
    
    
    516.7
    
    
    
    471.4
    
    
    
    2,130.0
    
    
    
    491.4
    
    
    
    580.8
    
    
    
    596.2
    
    
    
    491.9
    
    
    
    2,160.3US$/CDN$ foreign exchange rates 2Average spot rate
    
    
    0.854
    
    
    
    0.911
    
    
    
    0.957
    
    
    
    1.019
    
    
    
    0.930
    
    
    
    0.996
    
    
    
    0.990
    
    
    
    0.961
    
    
    
    0.825
    
    
    
    0.938Period-end spot rate
    
    
    0.867
    
    
    
    0.940
    
    
    
    1.004
    
    
    
    1.012
    
    
    
    1.012
    
    
    
    0.973
    
    
    
    0.982
    
    
    
    0.944
    
    
    
    0.817
    
    
    
    0.817Average effective rate
    
    
    0.860
    
    
    
    0.916
    
    
    
    0.935
    
    
    
    0.970
    
    
    
    0.917
    
    
    
    0.967
    
    
    
    0.989
    
    
    
    0.971
    
    
    
    0.868
    
    
    
    0.947Common shares (millions)At period-end
    
    
    214.6
    
    
    
    214.7
    
    
    
    214.7
    
    
    
    214.7
    
    
    
    214.7
    
    
    
    214.7
    
    
    
    381.8
    
    
    
    381.8
    
    
    
    381.8
    
    
    
    381.8Weighted average
    
    
    214.6
    
    
    
    214.7
    
    
    
    214.7
    
    
    
    214.7
    
    
    
    214.7
    
    
    
    214.7
    
    
    
    365.2
    
    
    
    381.8
    
    
    
    381.8
    
    
    
    336.1
 1
    
    EBITDA, EBITDA before specific items, EBITDA margin, EBITDA margin before specific items, net
earnings (loss) before specific items, and net earnings (loss) per share before specific items
are non-GAAP measures. EBITDA margin and EBITDA margin before specific items are defined as
EBITDA and EBITDA before specific items, as a percentage of sales and adjusted sales,
respectively. Refer to section on Non-GAAP measures for further details.2
    
    Foreign exchange rates: a)
    
    Average spot rate is the average Bank of Canada noon spot rate over the reporting period.b)
    
    Period-end spot rate is the Bank of Canada noon spot rate.c)
    
    Average effective rate represents a blended rate which takes account of the applicable spot
rates, our revenue hedging program in the period, and translation of U.S. dollar denominated
working capital at period opening and closing rates. See section on Summary of quarterly
results for further details.
  - 47 -




---



##### Table of Contents



Summary of selected financial information
 (In millions of dollars,
    
    2007
    
    
    2008except per tonne and per ton)
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    TOTAL
    
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    TOTALSpecialty printing papersSales
    
    $
    238.1
    
    
    $

    225.1
    
    
    $

    222.1
    
    
    $
    234.3
    
    
    $
    919.6
    
    
    $

    235.0
    
    
    $
    235.3
    
    
    $

    248.7
    
    
    $

    281.9
    
    
    $
    1,000.9Operating earnings (loss)
    
    
    (14.2
    )
    
    
    (21.1
    )
    
    
    (26.3
    )
    
    
    (13.5
    )
    
    
    (75.1
    )
    
    
    (10.0
    )
    
    
    (0.2
    )
    
    
    14.6
    
    
    
    22.6
    
    
    
    27.0EBITDA 1
    
    
    9.6
    
    
    
    4.1
    
    
    
    
    
    
    
    12.5
    
    
    
    26.2
    
    
    
    14.5
    
    
    
    25.6
    
    
    
    40.5
    
    
    
    58.9
    
    
    
    139.5- before specific items 1
    
    
    22.7
    
    
    
    17.0
    
    
    
    17.6
    
    
    
    16.1
    
    
    
    73.4
    
    
    
    25.5
    
    
    
    26.1
    
    
    
    40.6
    
    
    
    57.9
    
    
    
    150.1EBITDA margin 1
    
    
    4.0
    %
    
    
    1.8
    %
    
    
    
    
    
    
    5.3
    %
    
    
    2.8
    %
    
    
    6.2
    %
    
    
    10.9
    %
    
    
    16.3
    %
    
    
    20.9
    %
    
    
    13.9
    %- before specific items 1
    
    
    9.5
    %
    
    
    7.6
    %
    
    
    8.0
    %
    
    
    6.9
    %
    
    
    8.0
    %
    
    
    10.9
    %
    
    
    11.1
    %
    
    
    16.3
    %
    
    
    20.5
    %
    
    
    15.0
    %Sales (000 tonnes)
    
    
    255.2
    
    
    
    259.2
    
    
    
    261.1
    
    
    
    279.3
    
    
    
    1,054.8
    
    
    
    268.5
    
    
    
    267.4
    
    
    
    268.7
    
    
    
    276.2
    
    
    
    1,080.8Production (000 tonnes)
    
    
    256.6
    
    
    
    270.4
    
    
    
    262.6
    
    
    
    265.8
    
    
    
    1,055.4
    
    
    
    268.4
    
    
    
    265.7
    
    
    
    276.0
    
    
    
    250.0
    
    
    
    1,060.1Curtailment (000 tonnes) 2
    
    
    
    
    
    
    
    
    
    
    3.2
    
    
    
    4.0
    
    
    
    7.2
    
    
    
    0.9
    
    
    
    
    
    
    
    2.7
    
    
    
    27.5
    
    
    
    31.1Average sales revenue per tonne
    
    $
    933
    
    
    $
    868
    
    
    $
    850
    
    
    $
    839
    
    
    $
    872
    
    
    $
    875
    
    
    $
    880
    
    
    $
    925
    
    
    $
    1,020
    
    
    $
    926Average delivered cash costs per tonne 3
    
    
    896
    
    
    
    852
    
    
    
    849
    
    
    
    794
    
    
    
    847
    
    
    
    821
    
    
    
    785
    
    
    
    775
    
    
    
    807
    
    
    
    797- before specific items 3
    
    
    845
    
    
    
    802
    
    
    
    781
    
    
    
    783
    
    
    
    802
    
    
    
    780
    
    
    
    783
    
    
    
    774
    
    
    
    810
    
    
    
    787SC-A paper, 35 lb. (US$/ton) 4
    
    
    752
    
    
    
    745
    
    
    
    745
    
    
    
    770
    
    
    
    753
    
    
    
    815
    
    
    
    850
    
    
    
    895
    
    
    
    902
    
    
    
    866LWC paper, No. 5, 40 lb. (US$/ton) 4
    
    
    767
    
    
    
    748
    
    
    
    782
    
    
    
    848
    
    
    
    786
    
    
    
    910
    
    
    
    965
    
    
    
    988
    
    
    
    975
    
    
    
    960Telephone directory paper, 22.1 lb. (US$/ton) 4
    
    
    740
    
    
    
    740
    
    
    
    740
    
    
    
    740
    
    
    
    740
    
    
    
    745
    
    
    
    745
    
    
    
    755
    
    
    
    755
    
    
    
    750NewsprintSales
    
    $
    109.3
    
    
    $
    106.7
    
    
    $
    77.8
    
    
    $
    44.2
    
    
    $
    338.0
    
    
    $
    53.7
    
    
    $
    118.3
    
    
    $
    148.9
    
    
    $
    143.0
    
    
    $
    463.9Operating earnings (loss)
    
    
    (13.3
    )
    
    
    (13.5
    )
    
    
    (15.6
    )
    
    
    (14.5
    )
    
    
    (56.9
    )
    
    
    (12.0
    )
    
    
    (6.9
    )
    
    
    11.9
    
    
    
    10.6
    
    
    
    3.6EBITDA 1
    
    
    (3.1
    )
    
    
    (4.2
    )
    
    
    (8.1
    )
    
    
    (8.3
    )
    
    
    (23.7
    )
    
    
    (4.8
    )
    
    
    3.0
    
    
    
    21.5
    
    
    
    23.6
    
    
    
    43.3- before specific items 1
    
    
    0.6
    
    
    
    (0.2
    )
    
    
    (0.4
    )
    
    
    (4.4
    )
    
    
    (4.4
    )
    
    
    (1.2
    )
    
    
    3.5
    
    
    
    21.6
    
    
    
    23.5
    
    
    
    47.4EBITDA margin 1
    
    
    (2.8
    %)
    
    
    (3.9
    %)
    
    
    (10.4
    %)
    
    
    (18.8
    %)
    
    
    (7.0
    %)
    
    
    (8.9
    %)
    
    
    2.5
    %
    
    
    14.4
    %
    
    
    16.5
    %
    
    
    9.3
    %- before specific items 1
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    (0.8
    %)
    
    
    (5.5
    %)
    
    
    (1.2
    %)
    
    
    (2.2
    %)
    
    
    3.0
    %
    
    
    14.5
    %
    
    
    16.4
    %
    
    
    10.2
    %Sales (000 tonnes)
    
    
    148.7
    
    
    
    157.1
    
    
    
    119.8
    
    
    
    70.7
    
    
    
    496.3
    
    
    
    81.8
    
    
    
    170.8
    
    
    
    189.0
    
    
    
    160.2
    
    
    
    601.8Production (000 tonnes)
    
    
    152.1
    
    
    
    148.9
    
    
    
    110.9
    
    
    
    60.9
    
    
    
    472.8
    
    
    
    83.0
    
    
    
    172.2
    
    
    
    188.9
    
    
    
    152.7
    
    
    
    596.8Curtailment (000 tonnes) 2
    
    
    
    
    
    
    
    
    
    
    33.1
    
    
    
    65.8
    
    
    
    98.9
    
    
    
    41.6
    
    
    
    38.3
    
    
    
    42.7
    
    
    
    72.7
    
    
    
    195.3Average sales revenue per tonne
    
    $
    735
    
    
    $
    679
    
    
    $
    650
    
    
    $
    625
    
    
    $
    681
    
    
    $
    657
    
    
    $
    692
    
    
    $
    788
    
    
    $
    893
    
    
    $
    771Average delivered cash costs per tonne 3
    
    
    756
    
    
    
    706
    
    
    
    720
    
    
    
    742
    
    
    
    729
    
    
    
    716
    
    
    
    675
    
    
    
    674
    
    
    
    746
    
    
    
    699- before specific items 3
    
    
    731
    
    
    
    681
    
    
    
    646
    
    
    
    636
    
    
    
    674
    
    
    
    671
    
    
    
    672
    
    
    
    674
    
    
    
    746
    
    
    
    692Newsprint 48.8 gsm, West Coast delivery (US$/tonne) 4
    
    
    606
    
    
    
    584
    
    
    
    561
    
    
    
    565
    
    
    
    579
    
    
    
    613
    
    
    
    670
    
    
    
    726
    
    
    
    741
    
    
    
    687PulpSales
    
    $
    130.7
    
    
    $
    110.0
    
    
    $
    113.8
    
    
    $
    102.5
    
    
    $
    457.0
    
    
    $
    110.8
    
    
    $
    99.3
    
    
    $
    107.2
    
    
    $
    67.3
    
    
    $
    384.6Operating earnings (loss)
    
    
    (3.2
    )
    
    
    (12.1
    )
    
    
    (2.4
    )
    
    
    0.3
    
    
    
    (17.4
    )
    
    
    (7.6
    )
    
    
    (146.2
    )
    
    
    (12.5
    )
    
    
    (21.7
    )
    
    
    (188.0
    )EBITDA1
    
    
    7.6
    
    
    
    (1.8
    )
    
    
    7.8
    
    
    
    10.9
    
    
    
    24.5
    
    
    
    2.4
    
    
    
    0.9
    
    
    
    (8.9
    )
    
    
    (17.8
    )
    
    
    (23.4
    )- before specific items 1
    
    
    9.8
    
    
    
    0.6
    
    
    
    20.2
    
    
    
    17.1
    
    
    
    47.7
    
    
    
    2.4
    
    
    
    1.1
    
    
    
    4.0
    
    
    
    (15.5
    )
    
    
    (8.0
    )EBITDA margin1
    
    
    5.8
    %
    
    
    (1.6
    %)
    
    
    6.9
    %
    
    
    10.6
    %
    
    
    5.4
    %
    
    
    2.2
    %
    
    
    0.9
    %
    
    
    (8.3
    %)
    
    
    (26.4
    %)
    
    
    (6.1
    %)- before specific items 1
    
    
    7.5
    %
    
    
    0.5
    %
    
    
    16.2
    %
    
    
    14.2
    %
    
    
    9.8
    %
    
    
    2.2
    %
    
    
    1.1
    %
    
    
    3.7
    %
    
    
    (23.0
    %)
    
    
    (2.1
    %)Sales (000 tonnes)
    
    
    167.9
    
    
    
    147.4
    
    
    
    151.8
    
    
    
    136.1
    
    
    
    603.2
    
    
    
    145.4
    
    
    
    130.0
    
    
    
    138.0
    
    
    
    93.5
    
    
    
    506.9Production (000 tonnes)
    
    
    156.8
    
    
    
    157.1
    
    
    
    143.2
    
    
    
    144.7
    
    
    
    601.8
    
    
    
    140.0
    
    
    
    142.9
    
    
    
    131.3
    
    
    
    89.2
    
    
    
    503.4Curtailment (000 tonnes) 2
    
    
    
    
    
    
    
    
    
    
    27.9
    
    
    
    26.8
    
    
    
    54.7
    
    
    
    22.2
    
    
    
    17.2
    
    
    
    24.8
    
    
    
    70.5
    
    
    
    134.7Average sales revenue per tonne
    
    $
    778
    
    
    $
    746
    
    
    $
    750
    
    
    $
    753
    
    
    $
    757
    
    
    $
    762
    
    
    $
    764
    
    
    $
    777
    
    
    $
    719
    
    
    $
    759Average delivered cash costs per tonne 3
    
    
    732
    
    
    
    759
    
    
    
    699
    
    
    
    672
    
    
    
    717
    
    
    
    746
    
    
    
    758
    
    
    
    841
    
    
    
    910
    
    
    
    805- before specific items 3
    
    
    719
    
    
    
    743
    
    
    
    622
    
    
    
    637
    
    
    
    679
    
    
    
    746
    
    
    
    756
    
    
    
    748
    
    
    
    886
    
    
    
    774NBSK pulp, Northern Europe delivery (US$/tonne) 4
    
    
    757
    
    
    
    783
    
    
    
    810
    
    
    
    850
    
    
    
    800
    
    
    
    880
    
    
    
    900
    
    
    
    878
    
    
    
    703
    
    
    
    840White top linerboard, 42 lb., Eastern U.S. delivery (US$/ton) 4
    
    
    680
    
    
    
    680
    
    
    
    707
    
    
    
    720
    
    
    
    697
    
    
    
    720
    
    
    
    720
    
    
    
    780
    
    
    
    780
    
    
    
    750
 1
    
    EBITDA, EBITDA before specific items, EBITDA margin, EBITDA margin before specific items, and
average delivered cash costs per tonne before specific items are non-GAAP measures. EBITDA
margin and EBITDA margin before specific items are defined as EBITDA and EBITDA before
specific items as a percentage of sales and adjusted sales, respectively. Refer to section on
Non-GAAP measures for further details.2
    
    Curtailment consists of downtime related to the USW strike in 2007 and downtime related to
unavailability of fibre and market demand in 2008. Includes impact on production in Q4, 2008
post closure of the pulp mill and white top linerboard operation in November 2008 (39,200
tonnes in Q4 from date of permanent closure to year-end).3
    
    Average delivered cash costs per tonne consist of cost of sales including the impact of the
USW strike, SG&A costs, and restructuring and change of-control costs.4
    
    Benchmark selling prices are sourced from RISI.  - 48 -




---



##### Table of Contents



Fourth quarter overview
     Paper
    
    
    Pulp2008  Q4 Production Curtailment
    
    
    
    
    
    Specialty
    
    
    Pulp and white(000 tonnes)
    
    Newsprint

    
    
    printing papers
    
    
    top linerboard
    
    

    TotalSnowflake
    
    
    15.4
    
    
    
    
    
    
    
    
    
    
    
    15.4Port Alberni
    
    
    
    
    
    
    9.3
    
    
    
    
    
    
    
    9.3Crofton
    
    
    9.3
    
    
    
    3.6
    
    
    
    8.0
    
    
    
    20.9Powell River
    
    
    5.9
    
    
    
    12.5
    
    
    
    
    
    
    
    18.4Elk Falls
    
    
    42.1
    1
    
    
    2.1
    
    
    
    62.5
    2
    
    
    106.7Total
    
    
    72.7
    
    
    
    27.5
    
    
    
    70.5
    
    
    
    170.7
 1
    
    Curtailment includes 38,250 tonnes related to E1 which is indefinitely
curtailed due to the decline in market demand for newsprint.2
    
    Includes impact on production of the closure of the Elk Falls sawdust pulp mill
and white top linerboard operation in November 2008 (39,200 tonnes in Q4 from date
of permanent closure to year end).  
 OUTLOOK
   - 49 -




---



##### Table of Contents



Production curtailment
  Specialty2009  Q2 Forecast Production Curtailment (000 tonnes)
    
    Printing Papers
    
    
    Newsprint
    
    
    Pulp
    
    
    TotalSnowflake (Apr/May/Jun)
    
    
    
    
    
    
    29.4
    
    
    
    
    
    
    
    29.4Crofton (Apr/May/Jun) 1
    
    
    
    
    
    
    23.4
    
    
    
    85.9
    
    
    
    109.3Elk Falls (Apr/May/Jun) 1
    
    
    38.0
    
    
    
    93.0
    
    
    
    
    
    
    
    131.0Total
    
    
    38.0
    
    
    
    145.8
    
    
    
    85.9
    
    
    
    269.7
 1
    
    Curtailment includes market curtailment related to E1, E2, E5, C1 and Crofton
Pulp which are indefinitely curtailed.  Capital spending
  Liquidity, debt maturities, and covenants
      - 50 -




---



##### Table of Contents



2009 key priorities
  
    
    focus on cash flows and liquidity through the prudent use of capital, including limiting capital expenditures to basic
maintenance of business levels and refinancing the 2009 non-recourse debt maturity of PREI;
    
    maintain our focus on matching production to customer orders and keep inventories at appropriate levels;
    
    identify further opportunities to reduce fixed costs during periods of production curtailment to minimize the
financial impact of operating at reduced volumes;
    
    finalize and implement plans to reduce labour costs to $80 per tonne at Crofton, Elk Falls and Powell River mills; and
    
    reduce municipal property taxes in the four municipalities in B.C. that we operate in from the current combined level
of $23 million.
 Consolidated results of operations
 Year ended December 31, 2007 compared to year ended December 31, 2006
 Sales
   Sales
    
    Year ended December 31,
    
    
    Total
    
    
    Increase (decrease) from 2006 as a result of(In millions of dollars)
    
    2007
    
    
    2006
    
    
    change
    
    
    Volume1
    
    
    Price
    
    
    Mix
    
    
    F/XSpecialty paper
    
    $
    919.6
    
    
    $
    918.4
    
    
    $
    1.2
    
    
    $
    61.8
    
    
    $
    (21.4
    )
    
    $
    4.8
    
    
    $
    (44.0
    )Newsprint
    
    
    338.0
    
    
    
    529.8
    
    
    
    (191.8
    )
    
    
    (154.6
    )
    
    
    (29.0
    )
    
    
    3.1
    
    
    
    (11.3
    )Total paper
    
    
    1,257.6
    
    
    
    1,448.2
    
    
    
    (190.6
    )
    
    
    (92.8
    )
    
    
    (50.4
    )
    
    
    7.9
    
    
    
    (55.3
    )Pulp
    
    
    457.0
    
    
    
    434.3
    
    
    
    22.7
    
    
    
    (16.0
    )
    
    
    58.7
    
    
    
    1.8
    
    
    
    (21.8
    )Total
    
    $
    1,714.6
    
    
    $
    1,882.5
    
    
    $
    (167.9
    )
    
    $
    (108.8
    )
    
    $
    8.3
    
    
    $
    9.7
    
    
    $
    (77.1
    )
 1
    
    Decrease in volume is due to curtailment of certain assets in the third and
fourth quarters related to the USW strike and curtailment of the A4 paper machine
effective September 1, 2007.  - 51 -




---



##### Table of Contents



EBITDA
  1 1
 
 1
    
    EBITDA and EBITDA before specific items are non-GAAP measures. Refer to
section on Non-GAAP measures for further details.2
    
    Includes foreign exchange impact on costs. Operating earnings (loss)
  Net earnings (loss)
   (In millions of dollars)
    
    Pre-tax
    
    
    After-tax2006 net earnings (loss)
    
    $
    (69.9
    )
    
    $
    (15.9
    )Lower EBITDA before specific items
    
    
    (94.3
    )
    
    
    (62.2
    )Restructuring and change-of-control costs
    
    
    (64.7
    )
    
    
    (42.7
    )Impact of the USW strike
    
    
    (25.0
    )
    
    
    (16.5
    )Lower amortization expense
    
    
    7.3
    
    
    
    4.8Lower impairment loss
    
    
    23.4
    
    
    
    15.4Loss on disposal of A3 paper machine
    
    
    (7.5
    )
    
    
    (4.9
    )Increase in foreign exchange gain on long-term debt
    
    
    104.2
    
    
    
    86.5Lower other income, net
    
    
    (9.6
    )
    
    
    (6.3
    )Lower interest expense
    
    
    3.1
    
    
    
    2.0Income tax adjustments, net
    
    
    
    
    
    
    6.8Non-controlling interest
    
    
    1.4
    
    
    
    1.42007 net earnings (loss)
    
    $
    (131.6
    )
    
    $
    (31.6
    )
  - 52 -




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##### Table of Contents



FINANCIAL CONDITION
  (In millions of dollars)
    
    2007
    
    
    2008
    
    
    Variance
    
    
    CommentWorking
capital1
    
    $
    221.3
    
    
    $
    201.5
    
    
    $
    (19.8
    )
    
    Decrease reflects negative mark to market positions on revenue currency hedges at December 31, 2008, lower finished goods inventories due to production curtailment in late Q4, 2008 and lower supplies and spare parts inventory. This was partly offset by a modest increase in receivables and cash and cash equivalents, and increase in current future income tax asset.Property,
plant and equipment
    
    
    1,912.8
    
    
    
    1,852.0
    
    
    
    (60.8
    )
    
    Decrease reflects amortization expense in excess of property, plant and equipment asset additions by $123.9 million and asset impairment of $151.0 million offset by capital assets related to the Snowflake acquisition.Other
assets
    
    
    54.8
    
    
    
    100.5
    
    
    
    45.7
    
    
    Increase reflects higher mark to market value of long-term debt currency hedges at December 31, 2008, higher long-term pension asset and additional deferred financing costs related to our ABL Facility in 2008.Total
debt1
    
    
    785.8
    
    
    
    958.7
    
    
    
    172.9
    
    
    Increase reflects the weaker Canadian dollar and the impact on translation of our U.S. dollar denominated debt, and increased utilization of our credit facility.Employee
future benefits
    
    
    211.7
    
    
    
    226.6
    
    
    
    14.9
    
    
    Increase reflects a number of early retirements as part of our restructuring initiatives, poor pension fund investment returns in 2008 and changes in underlying actuarial assumptions.Other
long-term obligations
    
    
    26.9
    
    
    
    13.3
    
    
    
    (13.6
    )
    
    Decrease reflects lower liabilities related to our restructuring initiative at the end of 2008, and reversal in the negative mark to market position on long-term debt currency hedges at December 31, 2007.Future
income taxes and deferred credits
    
    
    175.9
    
    
    
    85.4
    
    
    
    (90.5
    )
    
    Decrease consists of the following significant items: (i) a release of future income taxes of $6.9 million related to the reduction in future provincial corporate income tax rates; (ii) a reduction of $35.5 million related to the write-down of Elk Falls sawdust pulp and white top linerboard assets; and (iii) a reduction of $10.7 million related to the foreign exchange loss on debt. The balance of the reduction primarily relates to future income taxes on losses generated in 2008.Contributed
surplus
    
    
    12.1
    
    
    
    14.6
    
    
    
    2.5
    
    
    Increase relates to the recording of stock-based compensation.
 1
    
    Current portion of long-term debt is included in total debt and excluded from working
capital.  - 53 -




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##### Table of Contents



B. Liquidity and Capital Resources
  (In millions of dollars, except where otherwise stated and ratios)
    
    2006
    
    
    2007
    
    
    2008Cash flows provided (used) by operations before
changes in non-cash working capital
    
    $
    110.8
    
    
    $
    (51.0
    )
    
    $
    134.8Changes in non-cash working capital
    
    
    (35.1
    )
    
    
    48.3
    
    
    
    (7.6
    )Cash flows provided (used) byOperations
    
    
    75.7
    
    
    
    (2.7
    )
    
    
    127.2Investing activities
    
    
    (202.9
    )
    
    
    (83.7
    )
    
    
    (85.8
    )Financing activities
    
    
    132.2
    
    
    
    50.9
    
    
    
    (5.9
    )Capital spending
    
    
    41.9
    
    
    
    85.8
    
    
    
    93.2Amortization
    
    
    165.8
    
    
    
    176.4
    
    
    
    183.7Impairment
    
    
    151.0
    
    
    
    
    
    
    
    23.4Capital spending as % of amortization
    
    
    25
    %
    
    
    49
    %
    
    
    51
    %Total debt to total capitalization 1,2
    
    
    52
    %
    
    
    44
    %
    
    
    46
    %Net debt to net capitalization 3,4
    
    
    52
    %
    
    
    44
    %
    
    
    45
    %Net debt to LTM EBITDA before specific items 3,5,6
    
    
    5.0
    
    
    
    6.7
    
    
    
    3.9EBITDA before specific items to interest 5
    
    
    2.5
    
    
    
    1.6
    
    
    
    2.9
 1
    
    Total debt comprises long-term debt, including current portion.2
    
    Total capitalization comprises total debt and shareholders equity.3
    
    Net debt comprises total debt, less cash on hand.4
    
    Net capitalization comprises net debt and shareholders equity.5
    
    EBITDA before specific items is a non-GAAP measure. Refer to section on Non-GAAP measures for further details.6
    
    LTM = last twelve months.  (In
millions of dollars,
    
    2007
    
    
    2008except where otherwise stated and ratios)
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    TOTAL
    
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    TOTALCash flows provided (used) by
operations before changes in
non-cash working capital
    
    $
    (7.2
    )
    
    $
    (27.4
    )
    
    $
    (17.8
    )
    
    $
    1.4
    
    
    $
    (51.0
    )
    
    $
    4.5
    
    
    $
    2.2
    
    
    $
    50.8
    
    
    $
    53.3
    
    
    $
    110.8Changes in non-cash working capital
    
    
    8.2
    
    
    
    24.1
    
    
    
    (16.1
    )
    
    
    32.1
    
    
    
    48.3
    
    
    
    (19.3
    )
    
    
    26.3
    
    
    
    (46.4
    )
    
    
    4.3
    
    
    
    (35.1
    )Cash flows provided (used) byOperations
    
    
    1.0
    
    
    
    (3.3
    )
    
    
    (33.9
    )
    
    
    33.5
    
    
    
    (2.7
    )
    
    
    (14.8
    )
    
    
    28.5
    
    
    
    4.4
    
    
    
    57.6
    
    
    
    75.7Investing activities
    
    
    (20.0
    )
    
    
    (22.2
    )
    
    
    (23.7
    )
    
    
    (17.8
    )
    
    
    (83.7
    )
    
    
    (10.4
    )
    
    
    (174.0
    )
    
    
    (12.6
    )
    
    
    (5.9
    )
    
    
    (202.9
    )Financing activities
    
    
    
    
    
    
    9.0
    
    
    
    57.6
    
    
    
    (15.7
    )
    
    
    50.9
    
    
    
    25.2
    
    
    
    145.5
    
    
    
    14.4
    
    
    
    (52.9
    )
    
    
    132.2Capital spending
    
    
    20.3
    
    
    
    23.0
    
    
    
    25.0
    
    
    
    17.5
    
    
    
    85.8
    
    
    
    5.5
    
    
    
    10.8
    
    
    
    12.1
    
    
    
    13.5
    
    
    
    41.9Amortization
    
    
    44.8
    
    
    
    44.8
    
    
    
    44.0
    
    
    
    42.8
    
    
    
    176.4
    
    
    
    41.7
    
    
    
    46.3
    
    
    
    39.1
    
    
    
    38.7
    
    
    
    165.8Impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136.5
    
    
    
    
    
    
    
    14.5
    
    
    
    151.0Capital spending as % of amortization
    
    
    45
    %
    
    
    51
    %
    
    
    57
    %
    
    
    41
    %
    
    
    49
    %
    
    
    13
    %
    
    
    23
    %
    
    
    31
    %
    
    
    35
    %
    
    
    25
    %Total debt to total capitalization 1,2
    
    
    46
    %
    
    
    44
    %
    
    
    45
    %
    
    
    44
    %
    
    
    44
    %
    
    
    47
    %
    
    
    48
    %
    
    
    50
    %
    
    
    52
    %
    
    
    52
    %Net debt to net capitalization 3,4
    
    
    46
    %
    
    
    44
    %
    
    
    45
    %
    
    
    44
    %
    
    
    44
    %
    
    
    47
    %
    
    
    48
    %
    
    
    49
    %
    
    
    52
    %
    
    
    52
    %Net debt to LTM EBITDA before
specific items 3,5,6
    
    
    4.2
    
    
    
    4.9
    
    
    
    5.9
    
    
    
    6.7
    
    
    
    6.7
    
    
    
    7.6
    
    
    
    6.9
    
    
    
    5.9
    
    
    
    5.0
    
    
    
    5.0EBITDA before specific items to
interest 5
    
    
    1.8
    
    
    
    0.9
    
    
    
    2.0
    
    
    
    1.9
    
    
    
    1.6
    
    
    
    1.6
    
    
    
    1.6
    
    
    
    3.4
    
    
    
    3.4
    
    
    
    2.5
 1
    
    Total debt comprises long-term debt, including current portion.2
    
    Total capitalization comprises total debt and shareholders equity.3
    
    Net debt comprises total debt, less cash on hand.4
    
    Net capitalization comprises net debt and shareholders equity.5
    
    EBITDA before specific items is a non-GAAP measure. Refer to section on Non-GAAP measures for further details.6
    
    LTM = last twelve months.  - 54 -




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##### Table of Contents



Operating activities
  Investing activities
   Financing activities
   2007
    
    
    2008(In millions of dollars)
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4Borrowing base
    
    $
    350.0
    
    
    $
    350.0
    
    
    $
    326.9
    
    
    $
    309.0
    
    
    $
    311.3
    
    
    $
    319.0
    
    
    $
    304.1
    
    
    $
    263.3Letters of credit
    
    
    (22.8
    )
    
    
    (20.7
    )
    
    
    (20.7
    )
    
    
    (20.7
    )
    
    
    (20.6
    )
    
    
    (24.1
    )
    
    
    (24.5
    )
    
    
    (27.9
    )Amount drawn, net
    
    
    
    
    
    
    (9.4
    )
    
    
    (67.1
    )
    
    
    (47.5
    )
    
    
    (69.4
    )
    
    
    (93.5
    )
    
    
    (113.5
    )
    
    
    (60.1
    )Available to be drawn1
    
    
    327.2
    
    
    
    319.9
    
    
    
    239.1
    
    
    
    240.8
    
    
    
    221.3
    
    
    
    201.4
    
    
    
    166.1
    
    
    
    175.3Cash on hand
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.2
    
    
    
    5.0Total liquidity
    
    $
    327.2
    
    
    $
    319.9
    
    
    $
    239.1
    
    
    $
    240.8
    
    
    $
    221.3
    
    
    $
    201.4
    
    
    $
    172.3
    
    
    $
    180.3
 1
    
    Availability effective Q3, 2008 relates to the ABL Facility and availability for prior
quarters relates to our previous $350 million revolving operating facility.  Debt
   - 55 -




---



##### Table of Contents



Issue
    
    January 1,
    
    
    Net increase
    
    
    Foreign
    
    
    December 31,(In millions of dollars)
    
    2008
    
    
    (decrease)
    
    
    exchange
    
    
    2008RecourseSenior notes, 8.625% due June 2011 (US$400.0 million)
    
    $
    388.9
    
    
    $
    1.6
    
    
    $
    94.6
    
    
    $
    485.1Senior notes, 7.375% due March 2014 (US$250.0 million)
    
    
    246.6
    
    
    
    1.2
    
    
    
    59.1
    
    
    
    306.9Revolving asset based loan facility of up to $330.0 million due
August 2013 with interest based on Canadian Prime/BA rates
or U.S. Base/LIBOR rates
    
    
    
    
    
    
    60.1
    
    
    
    
    
    
    
    60.1Revolving loan facility of up to $350.0 million due
July 2009 with interest based on Canadian Prime/BA rates or
U.S. Base/LIBOR rates
    
    
    47.1
    
    
    
    (47.1
    )
    
    
    
    
    
    
    Capital lease obligation
    
    
    8.6
    
    
    
    3.6
    
    
    
    
    
    
    
    12.2Non-recourse (PREI)First mortgage bonds, 6.387% due July 2009
    
    
    74.6
    
    
    
    0.3
    
    
    
    
    
    
    
    74.9Subordinated promissory notes
    
    
    19.5
    
    
    
    
    
    
    
    
    
    
    
    19.5Loan payable
    
    
    0.5
    
    
    
    (0.5
    )
    
    
    
    
    
    
    Total long-term debt
    
    $
    785.8
    
    
    $
    19.2
    
    
    $
    153.7
    
    
    $
    958.7Less current portion
    
    
    (1.2
    )
    
    
    (74.6
    )
    
    
    
    
    
    
    (75.8
    )$
    784.6
    
    
    $
    (55.4
    )
    
    $
    153.7
    
    
    $
    882.9
  
 C. Research and Development, Patents and Licences, etc.
  
 D. Trend Information
  
 E.
Off-Balance Sheet Arrangements
 Guarantees
 Business Dispositions
  Loans
   - 56 -




---



##### Table of Contents



Recycling plant acquisition
  
 F. Tabular Disclosure of Contractual Obligations
  Payments due by period(In millions of dollars)
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    ThereafterTotal debt
    
    $
    76.0
    1
    
    $
    1.0
    
    
    $
    490.9
    
    
    $
    4.0
    
    
    $
    64.0
    
    
    $
    327.0Operating leases
    
    
    10.3
    
    
    
    9.0
    
    
    
    8.4
    
    
    
    6.1
    
    
    
    5.7
    
    
    
    28.0Other commitments
    
    
    1.9
    
    
    
    1.9
    
    
    
    1.9
    
    
    
    0.6
    
    
    
    
    
    
    
    Total
    
    $
    88.2
    
    
    $
    11.9
    
    
    $
    501.2
    
    
    $
    10.7
    
    
    $
    69.7
    
    
    $
    355.0
 1
    
    Includes $74.9 million of debt owned by Powell River Energy Inc. (PREI).
We have a 50% interest in PREI, and consolidated 100% as PREI is a variable
interest entity in which we are the primary beneficiaries. We will be likely to
contribute our 50% share of the debt repayment, $37.5 million, to the extent that
PREI was not able to refinance this debt prior to maturity. Non-GAAP Measures
     - 57 -




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##### Table of Contents



Reconciliation of net earnings (loss) to EBITDA and EBITDA before specific items
 (In millions of dollars)
    
    2006
    
    
    2007
    
    
    2008Net earnings (loss)
    
    $
    (15.9
    )
    
    $
    (31.6
    )
    
    $
    (221.1
    )Amortization
    
    
    183.7
    
    
    
    176.4
    
    
    
    165.8Impairment
    
    
    23.4
    
    
    
    
    
    
    
    151.0Foreign exchange (gain) loss on long-term debt
    
    
    0.3
    
    
    
    (103.9
    )
    
    
    82.2Other (income) expense, net
    
    
    (1.8
    )
    
    
    15.3
    
    
    
    (2.5
    )Interest expense, net
    
    
    73.8
    
    
    
    70.7
    
    
    
    75.0Income tax recovery
    
    
    (54.0
    )
    
    
    (100.0
    )
    
    
    (91.8
    )Non-controlling interest
    
    
    1.5
    
    
    
    0.1
    
    
    
    0.8EBITDA
    
    $
    211.0
    
    
    $
    27.0
    
    
    $
    159.4Specific items:Restructuring costs
    
    
    
    
    
    
    55.3
    
    
    
    30.1Change-of-control costs
    
    
    
    
    
    
    9.4
    
    
    
    Impact of USW strike
    
    
    
    
    
    
    25.0
    
    
    
    Total specific items
    
    
    
    
    
    
    89.7
    
    
    
    30.1EBITDA before specific items
    
    $
    211.0
    
    
    $
    116.7
    
    
    $
    189.5
 Reconciliation of net earnings (loss) to EBITDA and EBITDA before specific items by
quarter
 2007
    
    
    2008(In millions of dollars)
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    Total
    
    
    Q1
    
    
    Q2
    
    

Q3
    
    
    Q4
    
    
    TotalNet earnings (loss)
    
    $
    (25.6
    )
    
    $
    0.2
    
    
    $
    (18.6
    )
    
    $
    12.4
    
    
    $
    (31.6
    )
    
    $
    (37.4
    )
    
    $
    (124.3
    )
    
    $
    (10.9
    )
    
    $
    (48.5
    )
    
    $
    (221.1
    )Amortization
    
    
    44.8
    
    
    
    44.8
    
    
    
    44.0
    
    
    
    42.8
    
    
    
    176.4
    
    
    
    41.7
    
    
    
    46.3
    
    
    
    39.1
    
    
    
    38.7
    
    
    
    165.8Impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136.5
    
    
    
    
    
    
    
    14.5
    
    
    
    151.0Foreign exchange (gain) loss on
long-term debt
    
    
    (7.9
    )
    
    
    (53.2
    )
    
    
    (33.9
    )
    
    
    (8.9
    )
    
    
    (103.9
    )
    
    
    16.7
    
    
    
    1.2
    
    
    
    10.8
    
    
    
    53.5
    
    
    
    82.2Other (income) expense, net
    
    
    (0.3
    )
    
    
    1.8
    
    
    
    7.2
    
    
    
    6.6
    
    
    
    15.3
    
    
    
    (0.2
    )
    
    
    (2.1
    )
    
    
    (0.2
    )
    
    
    
    
    
    
    (2.5
    )Interest expense, net
    
    
    18.5
    
    
    
    18.4
    
    
    
    18.4
    
    
    
    15.4
    
    
    
    70.7
    
    
    
    16.8
    
    
    
    19.4
    
    
    
    19.2
    
    
    
    19.6
    
    
    
    75.0Income tax recovery
    
    
    (15.2
    )
    
    
    (14.2
    )
    
    
    (17.4
    )
    
    
    (53.2
    )
    
    
    (100.0
    )
    
    
    (26.0
    )
    
    
    (47.3
    )
    
    
    (4.8
    )
    
    
    (13.7
    )
    
    
    (91.8
    )Non-controlling interest
    
    
    (0.2
    )
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    0.5
    
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    0.6
    
    
    
    0.8EBITDA
    
    
    14.1
    
    
    
    (1.9
    )
    
    
    (0.3
    )
    
    
    15.1
    
    
    
    27.0
    
    
    
    12.1
    
    
    
    29.5
    
    
    
    53.1
    
    
    
    64.7
    
    
    
    159.4Specific items:Restructuring costs
    
    
    10.8
    
    
    
    19.0
    
    
    
    24.1
    
    
    
    1.4
    
    
    
    55.3
    
    
    
    14.6
    
    
    
    1.2
    
    
    
    13.1
    
    
    
    1.2
    
    
    
    30.1Change-of-control costs
    
    
    8.2
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.6
    
    
    
    9.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impact of USW strike
    
    
    
    
    
    
    
    
    
    
    13.3
    
    
    
    11.7
    
    
    
    25.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total specific items
    
    
    19.0
    
    
    
    19.3
    
    
    
    37.7
    
    
    
    13.7
    
    
    
    89.7
    
    
    
    14.6
    
    
    
    1.2
    
    
    
    13.1
    
    
    
    1.2
    
    
    
    30.1EBITDA before specific items
    
    $
    33.1
    
    
    $
    17.4
    
    
    $
    37.4
    
    
    $
    28.8
    
    
    $
    116.7
    
    
    $
    26.7
    
    
    $
    30.7
    
    
    $
    66.2
    
    
    $
    65.9
    
    
    $
    189.5
  - 58 -




---



##### Table of Contents



Impact of specific items by segment in 2007 and 2008 by quarter
 (In millions of dollars,
    
    2007
    
    
    2008except where otherwise stated)
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    Total
    
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    TotalSpecific items:Sales
    
    $
    
    
    
    $
    
    
    
    $
    (25.7
    )
    
    $
    (55.0
    )
    
    $
    (80.7
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Cost of sales
    
    
    
    
    
    
    
    
    
    
    12.4
    
    
    
    43.3
    
    
    
    55.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impact of the USW strike 1
    
    
    
    
    
    
    
    
    
    
    (13.3
    )
    
    
    (11.7
    )
    
    
    (25.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restructuring costs
    
    
    (10.8
    )
    
    
    (19.0
    )
    
    
    (24.1
    )
    
    
    (1.4
    )
    
    
    (55.3
    )
    
    
    (14.6
    )
    
    
    (1.2
    )
    
    
    (13.1
    )
    
    
    (1.2
    )
    
    
    (30.1
    )Change-of-control costs
    
    
    (8.2
    )
    
    
    (0.3
    )
    
    
    (0.3
    )
    
    
    (0.6
    )
    
    
    (9.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EBITDA impact of specific items
    
    $
    (19.0
    )
    
    $
    (19.3
    )
    
    $
    (37.7
    )
    
    $
    (13.7
    )
    
    $
    (89.7
    )
    
    $
    (14.6
    )
    
    $
    (1.2
    )
    
    $
    (13.1
    )
    
    $
    (1.2
    )
    
    $
    (30.1
    )Segment EBITDA favourable
(unfavourable) impact of specific
itemsSpecialty printing papers
    
    $
    (13.1
    )
    
    $
    (12.9
    )
    
    $
    (17.6
    )
    
    $
    (3.6
    )
    
    $
    (47.2
    )
    
    $
    (11.0
    )
    
    $
    (0.5
    )
    
    $
    (0.1
    )
    
    $
    1.0
    
    
    $
    (10.6
    )Newsprint
    
    
    (3.7
    )
    
    
    (4.0
    )
    
    
    (7.7
    )
    
    
    (3.9
    )
    
    
    (19.3
    )
    
    
    (3.6
    )
    
    
    (0.5
    )
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    (4.1
    )Pulp
    
    
    (2.2
    )
    
    
    (2.4
    )
    
    
    (12.4
    )
    
    
    (6.2
    )
    
    
    (23.2
    )
    
    
    
    
    
    
    (0.2
    )
    
    
    (12.9
    )
    
    
    (2.3
    )
    
    
    (15.4
    )Total
    
    $
    (19.0
    )
    
    $
    (19.3
    )
    
    $
    (37.7
    )
    
    $
    (13.7
    )
    
    $
    (89.7
    )
    
    $
    (14.6
    )
    
    $
    (1.2
    )
    
    $
    (13.1
    )
    
    $
    (1.2
    )
    
    $
    (30.1
    )Segment EBITDA favourable
(unfavourable) impact of
restructuring and change-of-control
costs onlySpecialty printing papers
    
    $
    (13.1
    )
    
    $
    (12.9
    )
    
    $
    (14.4
    )
    
    $
    (1.8
    )
    
    $
    (42.2
    )
    
    $
    (11.0
    )
    
    $
    (0.5
    )
    
    $
    (0.1
    )
    
    $
    1.0
    
    
    $
    (10.6
    )Newsprint
    
    
    (3.7
    )
    
    
    (4.0
    )
    
    
    (4.8
    )
    
    
    (0.4
    )
    
    
    (12.9
    )
    
    
    (3.6
    )
    
    
    (0.5
    )
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    (4.1
    )Pulp
    
    
    (2.2
    )
    
    
    (2.4
    )
    
    
    (5.2
    )
    
    
    0.2
    
    
    
    (9.6
    )
    
    
    
    
    
    
    (0.2
    )
    
    
    (12.9
    )
    
    
    (2.3
    )
    
    
    (15.4
    )Total
    
    $
    (19.0
    )
    
    $
    (19.3
    )
    
    $
    (24.4
    )
    
    $
    (2.0
    )
    
    $
    (64.7
    )
    
    $
    (14.6
    )
    
    $
    (1.2
    )
    
    $
    (13.1
    )
    
    $
    (1.2
    )
    
    $
    (30.1
    )Curtailed production due to USW strike
(000 tonnes)Specialty printing papers
    
    
    
    
    
    
    
    
    
    
    3.2
    
    
    
    4.0
    
    
    
    7.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Newsprint
    
    
    
    
    
    
    
    
    
    
    33.1
    
    
    
    65.8
    
    
    
    98.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pulp
    
    
    
    
    
    
    
    
    
    
    27.9
    
    
    
    26.8
    
    
    
    54.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    64.2
    
    
    
    96.6
    
    
    
    160.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 1
    
    The impact of the USW strike is based on management estimates. Reconciliation of net earnings (loss) as reported to net earnings (loss) before specific
items
 (In millions of dollars and after-tax, except where otherwise stated)
    
    2006
    
    
    2007
    
    
    2008Net earnings (loss) as reported
    
    $
    (15.9
    )
    
    $
    (31.6
    )
    
    $
    (221.1
    )Specific items (after taxes):Foreign exchange loss (gain) on long-term debt
    
    
    0.2
    
    
    
    (86.2
    )
    
    
    69.4Impairment and loss on disposal
    
    
    15.4
    
    
    
    4.9
    
    
    
    111.0Restructuring and change-of-control costs
    
    
    
    
    
    
    42.7
    
    
    
    20.8USW strike impact
    
    
    
    
    
    
    16.5
    
    
    
    Third Avenue Management tender offer
    
    
    2.2
    
    
    
    
    
    
    
    Financing related fees
    
    
    
    
    
    
    0.8
    
    
    
    Termination fee on closure of corrugating machine
    
    
    
    
    
    
    
    
    
    
    (1.2
    )Income tax adjustments
    
    
    (26.9
    )
    
    
    (36.4
    )
    
    
    (6.9
    )Net earnings (loss) before specific items
    
    $
    (25.0
    )
    
    $
    (89.3
    )
    
    $
    (28.0
    )Net earnings (loss) per share in dollars:As reported
    
    $
    (0.07
    )
    
    $
    (0.15
    )
    
    $
    (0.66
    )Before specific items
    
    $
    (0.12
    )
    
    $
    (0.42
    )
    
    $
    (0.08
    )
  - 59 -




---



##### Table of Contents



Reconciliation of net earnings (loss) as reported to net earnings (loss) before specific items
by quarter
 (In millions of dollars and after-tax,
    
    2007
    
    
    2008except where otherwise stated)
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    TOTAL
    
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    

TOTALNet earnings (loss) as reported
    
    $
    (25.6
    )
    
    $
    0.2
    
    
    $
    (18.6
    )
    
    $
    12.4
    
    
    $
    (31.6
    )
    
    $
    (37.4
    )
    
    $
    (124.3
    )
    
    $
    (10.9
    )
    
    $
    (48.5
    )
    
    $
    (221.1
    )Specific items (after taxes):Foreign exchange loss (gain) on
long-term debt
    
    
    (6.6
    )
    
    
    (44.1
    )
    
    
    (28.1
    )
    
    
    (7.4
    )
    
    
    (86.2
    )
    
    
    14.1
    
    
    
    1.0
    
    
    
    9.1
    
    
    
    45.2
    
    
    
    69.4Impairment and loss on disposal
    
    
    
    
    
    
    
    
    
    
    4.9
    
    
    
    
    
    
    
    4.9
    
    
    
    
    
    
    
    101.0
    
    
    
    
    
    
    
    10.0
    
    
    
    111.0Restructuring and change-of-control costs
    
    
    12.5
    
    
    
    12.7
    
    
    
    16.1
    
    
    
    1.4
    
    
    
    42.7
    
    
    
    10.1
    
    
    
    0.8
    
    
    
    9.0
    
    
    
    0.9
    
    
    
    20.8USW strike impact
    
    
    
    
    
    
    
    
    
    
    8.8
    
    
    
    7.7
    
    
    
    16.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Financing related fees
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Termination fee on closure of
corrugating machine
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.2
    )
    
    
    
    
    
    
    
    
    
    
    (1.2
    )Income tax adjustments
    
    
    
    
    
    
    (14.
    )
    
    
    
    
    
    
    (35.0
    )
    
    
    (36.4
    )
    
    
    (8.6
    )
    
    
    
    
    
    
    
    
    
    
    1.7
    
    
    
    (6.9
    )Net earnings (loss) before specific items
    
    $
    (19.7
    )
    
    $
    (31.8
    )
    
    $
    (16.9
    )
    
    $
    (20.9
    )
    
    $
    (89.3
    )
    
    $
    (21.8
    )
    
    $
    (22.7
    )
    
    $
    7.2
    
    
    $
    9.3
    
    
    $
    (28.0
    )Net earnings (loss) per share in dollars:As reported
    
    $
    (0.12
    )
    
    $
    
    
    
    $
    (0.09
    )
    
    $
    0.06
    
    
    $
    (0.15
    )
    
    $
    (0.17
    )
    
    $
    (0.34
    )
    
    $
    (0.03
    )
    
    $
    (0.13
    )
    
    $
    (0.66
    )Before specific items
    
    $
    (0.09
    )
    
    $
    (0.15
    )
    
    $
    (0.08
    )
    
    $
    (0.10
    )
    
    $
    (0.42
    )
    
    $
    (0.10
    )
    
    $
    (0.06
    )
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    (0.08
    )
  Years
ended December 31(In millions of dollars)
    
    2006
    
    
    2007
    
    
    2008Cash provided (used) by operating activities
    
    $
    127.2
    
    
    $
    (2.7
    )
    
    $
    75.7Cash used by investing activities
    
    
    (85.8
    )
    
    
    (83.7
    )
    
    
    (202.9
    )Proceeds from the sale of property, plant and equipment and other assets
    
    
    (3.5
    )
    
    
    (6.5
    )
    
    
    (2.2
    )Snowflake acquisition
    
    
    
    
    
    
    
    
    
    
    169.8Other investing activities
    
    
    (3.9
    )
    
    
    4.4
    
    
    
    (6.6
    )Non-cash working capital changes except changes in taxes and interest
    
    
    9.0
    
    
    
    (49.7
    )
    
    
    37.8Other
    
    
    7.0
    
    
    
    17.8
    
    
    
    (26.4
    )Free cash flow
    
    $
    50.0
    
    
    $
    (120.4
    )
    
    $
    45.2
 2007
    
    
    2008(In millions of dollars)
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    TOTAL
    
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    TOTALCash provided (used) by operating
activities
    
    $
    1.0
    
    
    $
    (3.3
    )
    
    $
    (33.9
    )
    
    $
    33.5
    
    
    $
    (2.7
    )
    
    $
    (14.8
    )
    
    $
    28.5
    
    
    $
    4.4
    
    
    $
    57.6
    
    
    $
    75.7Cash used by investing activities
    
    
    (20.0
    )
    
    
    (22.2
    )
    
    
    (23.7
    )
    
    
    (17.8
    )
    
    
    (83.7
    )
    
    
    (10.4
    )
    
    
    (174.0
    )
    
    
    (12.6
    )
    
    
    (5.9
    )
    
    
    (202.9
    )Proceeds from the sale of
property, plant and equipment
and other assets
    
    
    (0.5
    )
    
    
    (0.4
    )
    
    
    (3.6
    )
    
    
    (2.0
    )
    
    
    (6.5
    )
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    (2.3
    )
    
    
    0.1
    
    
    
    (2.2
    )Snowflake acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169.5
    
    
    
    0.3
    
    
    
    
    
    
    
    169.8Other investing activities
    
    
    0.2
    
    
    
    (0.4
    )
    
    
    2.3
    
    
    
    2.3
    
    
    
    4.4
    
    
    
    5.0
    
    
    
    (6.4
    )
    
    
    2.5
    
    
    
    (7.7
    )
    
    
    (6.6
    )Non-cash working capital changes
except change in taxes and
interest
    
    
    (4.5
    )
    
    
    (29.6
    )
    
    
    20.2
    
    
    
    (35.8
    )
    
    
    (49.7
    )
    
    
    22.8
    
    
    
    (29.7
    )
    
    
    51.3
    
    
    
    (6.6
    )
    
    
    37.8Other
    
    
    0.6
    
    
    
    15.5
    
    
    
    (0.1
    )
    
    
    1.8
    
    
    
    17.8
    
    
    
    (7.3
    )
    
    
    13.2
    
    
    
    (21.0
    )
    
    
    (11.3
    )
    
    
    (26.4
    )Free cash flow
    
    $
    (23.2
    )
    
    $
    (40.4
    )
    
    $
    (38.8
    )
    
    $
    (18.0
    )
    
    $
    (120.4
    )
    
    $
    (4.8
    )
    
    $
    1.2
    
    
    $
    22.6
    
    
    $
    26.2
    
    
    $
    45.2
  - 60 -




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##### Table of Contents



Years
ended December 31(In millions of dollars)
    
    2006
    
    
    2007
    
    
    2008EBITDA
    
    $
    211.0
    
    
    $
    27.0
    
    
    $
    159.4Interest paid, net
    
    
    (71.5
    )
    
    
    (67.8
    )
    
    
    (74.4
    )Capital expenditures
    
    
    (93.2
    )
    
    
    (85.8
    )
    
    
    (41.9
    )Income taxes paid
    
    
    (2.7
    )
    
    
    (0.5
    )
    
    
    (0.8
    )Employee future benefits, net of funding
    
    
    6.4
    
    
    
    6.7
    
    
    
    2.9Free cash flow
    
    $
    50.0
    
    
    $
    (120.4
    )
    
    $
    45.2
 2007
    
    
    2008(In millions of dollars)
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    TOTAL
    
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    TOTALEBITDA
    
    $
    14.1
    
    
    $
    (1.9
    )
    
    $
    (0.3
    )
    
    $
    15.1
    
    
    $
    27.0
    
    
    $
    12.1
    
    
    $
    29.5
    
    
    $
    53.1
    
    
    $
    64.7
    
    
    $
    159.4Interest paid, net
    
    
    (17.5
    )
    
    
    (17.3
    )
    
    
    (17.9
    )
    
    
    (15.1
    )
    
    
    (67.8
    )
    
    
    (17.4
    )
    
    
    (17.1
    )
    
    
    (18.8
    )
    
    
    (21.1
    )
    
    
    (74.4
    )Capital expenditures
    
    
    (20.3
    )
    
    
    (23.0
    )
    
    
    (25.0
    )
    
    
    (17.5
    )
    
    
    (85.8
    )
    
    
    (5.5
    )
    
    
    (10.8
    )
    
    
    (12.1
    )
    
    
    (13.5
    )
    
    
    (41.9
    )Income taxes received (paid)
    
    
    (0.6
    )
    
    
    (0.2
    )
    
    
    0.2
    
    
    
    0.1
    
    
    
    (0.5
    )
    
    
    (0.8
    )
    
    
    0.3
    
    
    
    0.4
    
    
    
    (0.7
    )
    
    
    (0.8
    )Employee future benefits,
net of funding
    
    
    1.1
    
    
    
    2.0
    
    
    
    4.2
    
    
    
    (0.6
    )
    
    
    6.7
    
    
    
    6.8
    
    
    
    (0.7
    )
    
    
    
    
    
    
    (3.2
    )
    
    
    2.9Free cash flow
    
    $
    (23.2
    )
    
    $
    (40.4
    )
    
    $
    (38.8
    )
    
    $
    (18.0
    )
    
    $
    (120.4
    )
    
    $
    (4.8
    )
    
    $
    1.2
    
    
    $
    22.6
    
    
    $
    26.2
    
    
    $
    45.2
 
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES
    Environmental and legal liabilities
     - 61 -




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##### Table of Contents



Impairment of long-lived assets
  (i)
    
    Determine whether the projected undiscounted future cash flows from operations exceed the net
carrying amount of the assets as of the assessment date; and
 (ii)
    
    If such excess does not exist in step (i), then such impaired assets are written down to
their fair value, determined principally by using discounted future cash flows expected from
their use and eventual disposition.
    
    
    In the second quarter, we recorded an impairment charge of $136.4 million on assets related
to our Elk Falls sawdust pulp mill and white top linerboard operation, of which $129.0 million
related to property, plant and equipment and $7.4 million related to supplies and spare-parts
inventory. This was a result of the severe impact on this operation of the unavailability of
sawdust fibre. The Elk Falls sawdust pulp and white top linerboard operation was permanently
closed in November 2008.
 
    
    As a result of a review undertaken by us of specific assets that are no longer in use or
where the net realizable value has decreased due to the weak economy, we recorded an
asset-impairment charge of $14.6 million in the fourth quarter.
 Pension and post-retirement benefits
  
    
    The discount rate which is used to estimate the actuarial present value of the various plan
obligations. Assisted by independent actuarial advisors, we set the discount rate assumption
annually to reflect the rates available on high-quality debt instruments, with cash flows that
are expected to match the timing and amount of expected
benefit payments. As at December 31, 2008, a discount rate of 7.0% per year was determined by
management in consultation with its independent actuarial advisors.
  - 62 -




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##### Table of Contents




    
    The long-term return on assets used to estimate the growth in the value of invested assets
available to satisfy certain obligations. With the assistance of independent actuarial firms,
we annually set the expected rate of return on plan assets to reflect the current view of
long-term investment returns. As at December 31, 2008, a rate of return of 7.0% per year was
determined by management in consultation with its independent actuarial advisors.
 
    
    Salary increases used to estimate the impact that future compensation increases will have
on pension and other post-retirement obligations. As at December 31, 2008, a rate of
compensation increase of 2.5% per year was determined by management in consultation with its
independent actuarial advisors.
 
    
    Health care trend rates and mortality rates used to estimate the impact that future health
care costs will have on pension and post-retirement obligations. As at December 31, 2008, a
health care trend rate of 7.5% per year was determined by management in consultation with its
independent actuarial advisors. The health care trend rate is assumed to decline by 0.5%
annually, and the ultimate health care trend rate is assumed to be 4.5%.
   Pension benefit plans
    
    
    Other benefit plansAccrued benefit
    
    
    Net 2008
    
    
    Accrued benefit
    
    
    Net 2008(In millions of dollars)
    
    obligation
    
    
    expense
    
    
    obligation
    
    
    expenseExpected rate of return on assets
Impact of:1% increase
    
    
    n/a
    
    
    
    (2.7
    )
    
    
    n/a
    
    
    
    n/a1% decrease
    
    
    n/a
    
    
    
    2.7
    
    
    
    n/a
    
    
    
    n/aDiscount rate
Impact of:1% increase
    
    
    (27.1
    )
    
    
    (3.9
    )
    
    
    (20.9
    )
    
    
    (2.4
    )1% decrease
    
    
    29.4
    
    
    
    4.5
    
    
    
    24.4
    
    
    
    3.1Assumed overall health care cost trend
Impact of:1% increase
    
    
    n/a
    
    
    
    n/a
    
    
    
    26.5
    
    
    
    6.11% decrease
    
    
    n/a
    
    
    
    n/a
    
    
    
    (22.3
    )
    
    
    (4.4
    )
 Provision for bad debts and allowance for doubtful accounts
   - 63 -




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##### Table of Contents



Income taxes
    
 CHANGES IN ACCOUNTING POLICIES
  Section 1535, Capital Disclosures
 Capital Disclosures
 Section 3031, Inventories
 Inventories,
 Section 3862, Financial Instruments  Disclosuresand Section 3863, Financial Instruments 
Presentation
 Financial Instruments  Disclosures Financial Instruments 
Presentation Financial Instruments  Disclosure and Presentation
  - 64 -




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##### Table of Contents



Section 1400, General Standards of Financial Statement Presentation
 General Standards of Financial Statement
Presentation
 
 IMPACT OF ACCOUNTING PRONOUNCEMENTS AFFECTING FUTURE PERIODS
 Goodwill and Intangible Assets Goodwill and Other Intangible Assets Research and
Development
 International Financial Reporting Standards
    
    
    Property, plant and equipmentConsistent with Canadian GAAP, under IFRS, separable components of property, plant and equipment
(PP&E) are recognized initially at cost. Under International Accounting Standards (IAS) 16,
Property, Plant and Equipment,an entity is required to choose, for each class of PP&E, to use
either the cost model (consistent with Canadian GAAP) or the revaluation model. Under the
revaluation model, an item of PP&E is carried at its revalued amount, being its fair value at
the date of the revaluation less any accumulated amortization and accumulated impairment losses.
Increases in fair value are recorded in a revaluation surplus account in equity while decreases
in fair value serve to reduce the revaluation surplus account, related to the asset, with any
excess recognized in income.For major maintenance, IFRS allows for major inspections and overhauls to be accounted as a
separate component of PP&E if the component is used for over one period. This treatment is only
intended for use for major expenditures that occur at regular intervals over the life of the
asset as costs of routine repairs and maintenance will continue to be expensed as incurred. The
major maintenance required on our plant and equipment would likely qualify for treatment under
this standard and would allow for additional amounts to be capitalized and amortized.
 
    
    ImpairmentsUnder Canadian GAAP for assets other than financial assets, a write-down to estimated fair value
is recognized if the estimated undiscounted future cash flows from an asset or group of assets
is less than their carrying value.
  - 65 -




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##### Table of Contents



Under IAS 36, Impairment of Assets,a write-down is recognized if the recoverable amount,
determined as the higher of the estimated fair value less costs to sell or value in use is less
than carried value. Consistent with Canadian GAAP, impairments are measured at the amount by
which carried value exceeds fair value less costs to sell.Currently Canadian GAAP requires a two-step impairment test in which we must first compare
undiscounted cash flows to the carrying value of the assets, and only if the cash flows are
below the carrying value does management need to discount the cash flows to calculate
impairment. Under IFRS the impairment calculation is a one-step process in which discounted
cash flows are compared to the carrying value of assets. This may lead to additional
write-downs where carrying values of assets were previously supported under Canadian GAAP on an
undiscounted cash flow basis, but could not be supported on a discounted cash flow basis.
  
    
    Share-based payments
  
    
    Employee benefits
 Employee Benefits
 
    
    Asset retirement obligations
  
    
    Provisions
 Provisions, Contingent Liabilities and Contingent Assets
 First-time adoption of IFRS
 First-time Adoption of International Financial
Reporting Standards
 
    
    Business combinations
   - 66 -




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##### Table of Contents




    
    Fair-value or revaluation as deemed cost
  
    
    Employee benefits
  
    
    Cumulative translation adjustment
 The Effects of Changes in Foreign Exchange Rates
  
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
 A. Directors and Senior Management
 Directors
 Canada
Business Corporation Act
 Name
    
    Age
    
    Principal Occupation
    
    Director SinceThomas S. Chambers
    
    
    65
    
    
    President, Senior Partner
Services Ltd. Previously,
Partner, PricewaterhouseCoopers.
Director, Coopers Park
Corporation, Macdonald Dettwiler
& Associates Ltd., Viterra Inc.
    
    October 30, 2003Gary Collins
    
    
    45
    
    
    Senior Vice President, Belkorp
Industries Inc. Previously,
President and Chief Executive
Officer, HMY Airways Inc.,
member of the British Columbia
Legislative Assembly and
Minister of Finance, British
Columbia. Director, Liquor
Stores Income Fund, Lantic Inc.,
Jazz Air Income Fund.
    
    April 27, 2005William F. Dickson
    
    
    68
    
    
    Corporate director. Chairman of
Fraserwood Industries Ltd.
Previously, a partner of and
counsel to Lawson Lundell LLP,
where he practiced corporate and
commercial law.
    
    June 9, 2008
  - 67 -




---



##### Table of Contents



Name
    
    Age
    
    Principal Occupation
    
    Director SinceMichel Desbiens
    
    
    69
    
    
    Corporate director and retired
forest products company
executive. Previously,
consultant to the forestry
industry. Director, Cascades
Inc., Rogers Sugar Income Fund
(trustee), Lantic Inc.
    
    May 24, 2006Benjamin C. Duster, IV
    
    
    48
    
    
    Senior Advisor, Watermark
Advisors (financial advisory
services). Previously, Partner,
Masson & Company LLC (financial
restructuring firm).
    
    December 1, 2006Richard Garneau
    
    
    61
    
    
    President and Chief Executive
Officer. Previously, Executive
Vice President, Operations and
Senior Vice President, Forest
Products, Domtar Inc.
    
    March 28, 2007Denis Jean
    
    
    60
    
    
    Corporate director and consultant
    
    March 28, 2007Jeffrey G. Marshall
    
    
    64
    
    
    Chairman, Smith Marshall
(business consulting services).
Previously, President and Chief
Executive Officer, Aluma
Enterprises Inc. Director,
Neenah Foundry Company, Ormet
Corporation
    
    December 1, 2006Amit B. Wadhwaney
    
    
    55
    
    
    Portfolio Manager and Senior
Research Analyst, Third Avenue
Management LLC.
    
    December 1, 2006
     Officers
  Name
    
    Age
    
    TitleBrian Baarda
    
    
    42
    
    
    Vice President, Operations  Newsprint, ONP Procurement,
Recycling. Previously Vice President, Powell River
Division.Lyn Brown
    
    
    52
    
    
    Vice President, Corporate Relations and Social
Responsibility. Previously, Director, Corporate Affairs
and Social Responsibility; Vice President, Customer
Relations and Vice President, Communications and
Government Affairs, Aquila Networks Canada.Stephen Boniferro
    
    
    53
    
    
    Senior Vice President, Human Resources. Previously,
Vice President, Algoma Steel.L. Thomas Crowley
    
    
    48
    
    
    Senior Vice President, Sales and Marketing. Previously
Vice President and General Manager, Specialty Papers.Richard Garneau
    
    
    61
    
    
    President and Chief Executive Officer. Previously,
Executive Vice President, Operations and Senior Vice
President, Forest Products, Domtar Inc.Brian Johnston
    
    
    52
    
    
    Vice President, Operations  Specialty Paper and Pulp.
Previously Vice President, Elk Falls Division and Vice
President, Technical Services.Robert H. Lindstrom
    
    
    55
    
    
    Vice President, Supply Chain. Previously, Vice
President, Strategy, Vice President, Supply and
Utilities, Pulp Operations.Valerie B. Seager
    
    
    52
    
    
    Vice President and General Counsel. Previously,
Corporate Secretary and Legal Counsel.David Smales
    
    
    39
    
    
    Vice President, Finance and Chief Financial Officer.
Previously Vice President, Strategy & Analysis.Peter M. Staiger
    
    
    51
    
    
    Corporate Controller & Treasurer. Previously, Treasurer.
  - 68 -




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##### Table of Contents



B. Compensation
 
 Compensation of Directors
  th
  - 69 -




---



##### Table of Contents



Item
    
    AmountChairs Annual Fee Annual cash retainer
    
    
    $125,000 Annual stock option grant (options are granted with an
exercise price set 25% above the common share market price
on the date of grant and vest one third on the first,
second and third anniversary of the date of grant)
    
    36,000 options Restricted share units (RSUs) (One time initial grant
made to current and future Chairs when they are appointed.
RSUs vest three years after their grant date.)
    
    125,000 RSUsDirectors Annual Fee Annual cash retainer
    
    
    $60,000 Annual stock option grant (options are granted with an
exercise price set 25% above the common share market price
on the date of grant and vest one third on the first,
second and third anniversary of the date of grant)
    
    24,000 options Restricted share units (One time initial grant made to
current and subsequent directors when they join the Board.
RSUs vest three years after their grant date.)
    
    60,000 RSUsCommittee Chairs Annual Fee (other than Audit Committee Chair)
    
    
    $10,000Committee Members Annual Fee
    
    
    $5,000Audit Committee Chairs Annual Fee
    
    
    $15,000Special Committees Special Committees requiring five or less meetings
    
    Chair $2,500Member $1,500 Special Committees requiring six or more meetings
    
    Chair $5,000Member $3,000
  th
  Number of DSUs
    
    
    Percentage ofHeld as
    
    
    Cash CompensationDirector
    
    at December 31, 2008
    
    
    as DSUsThomas Chambers1
    
    
    263,065
    
    
    
    100
    %Gary Collins
    
    
    190,558
    
    
    
    100
    %Michel Desbiens
    
    
    10,547
    
    
    
    0
    %William Dickson
    
    
    
    
    
    
    0
    %Benjamin Duster
    
    
    10,547
    
    
    
    0
    %Neal Goldman 2
    
    
    10,547
    
    
    
    0
    %Jeffrey Marshall
    
    
    84,406
    
    
    
    50
    %Denis Jean
    
    
    
    
    
    
    0
    %Amit Wadhwaney
    
    
    
    
    
    
    0
    %
 1
    
    Mr. Chambers has elected to receive cash compensation during 2009.2
    
    Mr. Goldman did not stand for re-election as a director in 2009.  - 70 -




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##### Table of Contents



AnnualAnnual
    
    
    Annual
    
    
    CommitteeBoard
    
    
    Committee
    
    
    Chair
    
    
    Total FeesRetainer
    
    
    Retainer
    
    
    Retainer
    
    
    (Cash)Director1
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)Thomas Chambers2
    
    
    60,000
    
    
    
    5,000
    
    
    
    15,000
    
    
    
    80,000Gary Collins2
    
    
    60,000
    
    
    
    10,000
    
    
    
    
    
    
    
    70,000Michel Desbiens
    
    
    125,000
    
    
    
    5,000
    
    
    
    
    
    
    
    130,000William Dickson 3
    
    
    33,627
    
    
    
    5,604
    
    
    
    
    
    
    
    39,231Benjamin Duster
    
    
    60,000
    
    
    
    3,750
    
    
    
    10,000
    
    
    
    73,750Neal Goldman4
    
    
    60,000
    
    
    
    13,750
    
    
    
    
    
    
    
    73,750Denis Jean5
    
    
    60,000
    
    
    
    5,000
    
    
    
    7,500
    
    
    
    72,500Jeffrey Marshall 2
    
    
    60,000
    
    
    
    5,000
    
    
    
    10,000
    
    
    
    75,000Amit Wadhwaney 6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 1
    
    Mr. Garneau, as Chief Executive Officer of the
Corporation, does not receive compensation in his capacity as
a director.2
    
    Messrs. Chambers, Collins and Marshall received all or a portion of their cash compensation as DSUs.3
    
    Mr. Dickson became a director on June 8, 2008.4
    
    Mr. Goldman did not stand for re-election as a director in 2009.5
    
    Mr. Jean was chair of the Strategy Committee, which was disbanded in February, 2008.6
    
    Mr. Wadhwaney, a director and employee of Third
Avenue Management, LLC which exercises voting control over
approximately 31.6% of the common shares, has waived all
director compensation (other than reimbursement of expenses)
for the time being.  Option
    
    
    Non-equityShare based
    
    
    based
    
    
    incentive plan
    
    
    Pension
    
    
    All otherFees earned
    
    
    awards
    
    
    awards
    
    
    compensation
    
    
    value
    
    
    compensation
    
    
    TotalName
    
    ($)
    
    
    ($) 1, 3
    
    
    ($)2, 3
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)Thomas Chambers
    
    
    80,000
    
    
    
    71,007
    
    
    
    29,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180,141Gary Collins
    
    
    70,000
    
    
    
    50,906
    
    
    
    29,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,040Michel Desbiens
    
    
    130,000
    
    
    
    47,366
    
    
    
    43,702
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    221,068William Dickson
    
    
    39,231
    
    
    
    88,978
    
    
    
    12,698
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140,907Benjamin Duster
    
    
    73,750
    
    
    
    24,652
    
    
    
    29,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127,536Neal Goldman4
    
    
    73,750
    
    
    
    24,652
    
    
    
    29,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127,536Denis Jean5
    
    
    72,500
    
    
    
    20,966
    
    
    
    29,134
    
    
    
    
    
    
    
    
    
    
    
    47,500
    
    
    
    170,100Jeffrey Marshall
    
    
    75,000
    
    
    
    30,828
    
    
    
    29,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134,962Amit Wadhwaney
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 1
    
    Represents the fair value of RSUs granted in 2008 on the date of grant. The fair value is
based on the closing price of the commons shares on the TSX on the grant date.2
    
    Represents the fair value of options granted in 2008 on the date of grant. The fair value of
share options was estimated using the Black-Scholes option-pricing model with the following
assumptions: 2008Risk-free interest rate
    
    
    3.8
    %Annual dividends per share
    
    NILExpected stock price volatility
    
    
    40.0
    %Expected option life (in years)
    
    
    8.5Average fair value of options granted (in dollars)
    
    $
    0.51
  3
    
    In April, 2008 we completed a rights offering, pursuant to which each holder of record of
common shares on March 11, 2008 received one right for each common share held (the Rights
Offering). Each 1.285 rights entitled the holder to purchase a subscription receipt of the
Corporation for an exercise price of $0.75 per
subscription receipt. Each subscription receipt was converted into one common share concurrent
with the closing of our acquisition of the recycled newsprint mill in Snowflake, Arizona. The
Rights Offering resulted in the issuance of 167,069,361 common shares for gross proceeds of
$125,302,021. The Rights Offering had a substantial dilutive effect on the value of previously
issued equity based compensation, none of which had provisions which entitled the holders thereof
to participate in the rights offering. Accordingly, in addition to the annual stock option grant
made to directors pursuant to the directors compensation program, options and RSUs were granted to
directors in 2008 in order to compensate directors for the diminution in value of previously
granted equity based compensation resulting from the Rights Offering.  - 71 -




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##### Table of Contents



4
    
    Mr. Goldman did not stand for re-election as a director in 2009.5
    
    In addition to fees earned under the directors compensation program Mr. Jean received fees of
$47,500 in 2008 for consulting services he provided to us. 
 Executive Compensation Strategy
  i)
    
    base salary and benefits aimed at compensating the executive for specific and general
accountabilities as well as the skills, knowledge and experience brought to the job;ii)
    
    short term incentives payable in cash intended to focus initiative on annual objectives and reward
behaviour that achieves corporate performance targets; andiii)
    
    mid and long term incentives granted through the issuance of stock options and restricted share
units to encourage the enhancement of shareholder value.
  
    
    to attract executive officers who have demonstrated superior leadership and management skills;
    
    to retain the services of valued members of the executive team throughout the normal business cycles
typical of resource-based companies;
    
    to link the interests of the executive officers with those of the shareholders; and
    
    to motivate executive officers to achieve excellence within their respective areas of accountability.
    Base Salary, Benefits and Perquisites
 th th th th
   - 72 -




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##### Table of Contents



Short Term Incentive Plan
 th th
  STIP Metrics
  Corporate Component (50%)
  Department Component (30%)
  Board Discretion (20%)
  2008 STIP Targets  Scorecard
  Measure and Weighting
    
    Results vs. TargetSafety (15%)
    
    2008 targets were not met and no
STIP award was made in respect of
this metric.EBITDA (55%)
    
    EBITDA of $175 million (against an
EBITDA target of $127 million) was
achieved and 100% of the STIP
award relating to this metric was
awarded.Reducing
Cash Manufacturing Costs (10%)
    
    Cash manufacturing costs exceeded
budget and no STIP award was made
in respect of this metric.Implementing
Pricing Strategies (5%)
    
    The majority of announced price
increases were implemented in 2008
and 99% of the STIP award relating
to this metric was awarded.Capital Expenditures (5%)
    
    Capital expenditures remained
within the targeted amount of $37
million and 100% of the STIP award
was made in respect of this
metric.Acquisition
Synergies (10%)
    
    $9.2 million of the $10.5 million
targeted synergies were obtained
from the acquisition of the
Snowflake recycled mill and 88% of
the STIP award relating to this
metric was awarded.
  - 73 -




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##### Table of Contents



Department
    
    Targets
    
    Results vs. TargetChief Executive Officer
    
    Targeted achievements
in EBITDA, pricing
strategies, capital
expenditures,
synergies, cost
reductions,
succession planning
and investor
relations
    
    77% of the department
component of the STIP
for the Chief
Executive Officer was
earned based on
targeted achievements
in EBITDA, pricing
strategies, capital
expenditures,
synergies and
investor relations.
However,
notwithstanding the
Boards determination
that the Chief
Executive Officer was
entitled to a STIP
award in connection
with his departmental
achievements, he
declined his 2008
STIP entitlement.Chief Financial Officer
    
    Targeted achievements
in hedging, accounts
receivable,
refinancing and
growth activities,
Sarbanes Oxley
compliance and
investor relations
    
    69% of the department
component of the STIP
for the Chief
Financial Officer was
awarded based on
targeted achievements
in accounts
receivable,
refinancing and
growth activities,
Sarbanes Oxley
compliance and
investor relations.Senior Vice President,
Sales and Marketing
    
    Targeted achievements
in managing
inventory,
maintaining pricing
strategies, reducing
sales expenses and
improving margins
    
    96% of the department
component of the STIP
for the Senior Vice
President, Sales and
Marketing was earned
based on targeted
achievements in all
areas.Senior Vice President,
Human Resources
    
    Targeted achievements
in labour
negotiations,
compensation
competitiveness and
structure, succession
planning and
alignment of
corporate strategy
with human resource
policies and
employees
    
    35% of the department
component of the STIP
for the Senior Vice
President, Human
Resources was earned
based on targeted
achievements in
labour negotiations,
compensation
structure and
alignment of human
resources policies
with corporate
strategy.Vice President,
Supply Chain
    
    Targeted achievements
in reducing fibre
costs, securing new
fibre sources,
reducing
transportation costs,
inventory, finished
goods and spare
parts, achieving on
time delivery and
damage reduction and
savings in chemicals
and parts
    
    84% of the department
component of the STIP
for the Vice
President, Supply
Chain was earned
based on targeted
achievements in all
areas.
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##### Table of Contents



Mid and Long-Term Incentive Plan
 th th
       - 75 -




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##### Table of Contents



MLTIP Target Metrics
 Vesting AmountsTargets
    
    50%
    
    
    75%
    
    
    100%3 Year ROCE Performance Targets
    

    5%
    
    

    7.5%
    
    

    10%ROCE
    
    
    ROCE
    
    
    ROCE
    Executive Compensation
   - 76 -




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##### Table of Contents



Non-Equity IncentiveAnnual Compensation
    
    
    Plan CompensationShare
    
    
    Option
    
    
    Annual
    
    
    Long termbased
    
    
    based
    
    
    Incentive
    
    
    Incentive
    
    
    Pension
    
    
    All Other
    
    
    TotalSalary
    
    
    Awards
    
    
    Awards
    
    
    Plans
    
    
    Plans
    
    
    Value
    
    
    Compensation
    
    
    CompensationName and Principal Position
    
    Year
    
    
    ($)
    
    
    ($)1
    
    
    ($)2
    
    
    ($)3
    
    
    ($)
    
    
    ($)4
    
    
    ($)5
    
    
    ($)(a)
    
    (b)
    
    
    (c)
    
    
    (d)
    
    
    (e)
    
    
    (f)
    
    
    (f)
    
    
    (g)
    
    
    (h)
    
    
    (i)R. Garneau
President and Chief
Executive Officer
    
    
    2008
    
    
    
    612,000
    
    
    
    17,472
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    346,000
    
    
    
    
    
    
    
    975,472D. Smales
Vice-President, Finance and
Chief Financial Officer
    
    
    2008
    
    
    
    275,000
    
    
    
    25,540
    
    
    
    33,988
    
    
    
    90,000
    
    
    
    
    
    
    
    38,224
    
    
    
    
    
    
    
    462,752S.
Boniferro(6)
Senior Vice President,
Human Resources
    
    
    2008
    
    
    
    250,000
    
    
    
    74,148
    
    
    
    
    
    
    
    76,000
    
    
    
    
    
    
    
    217,500
    
    
    
    
    
    
    
    617,648L. T.
Crowley
Senior Vice-President,
Sales and Marketing
    
    
    2008
    
    
    
    266,525
    
    
    
    23,202
    
    
    
    47,589
    
    
    
    98,817
    
    
    
    
    
    
    
    45,912
    
    
    
    
    
    
    
    477,044R.
Lindstrom
Vice President, Supply Chain
    
    
    2008
    
    
    
    225,000
    
    
    
    18,454
    
    
    
    51,464
    
    
    
    70,000
    
    
    
    
    
    
    
    31,050
    
    
    
    
    
    
    
    395,968
 Notes
 1
    
    Represents the fair value of RSUs on the grant date based on the closing price of the common
shares on the TSX on the grant date subject to, in the case of RSUs which were granted to
Messrs. Smales, Crowley and Lindstrom pursuant to the MLTIP, a discount of 37% reflecting
managements estimate of the likelihood that certain performance targets established under the
MLTIP will be achieved. Of the RSU amounts listed in the table, during 2008 Mr. Garneau was
granted 183,153 RSUs having a value of $120,002 on the grant date to compensate for the
diminution in value of previously granted RSUs caused by the dilutive impact of the
Corporations April 2008 rights offering (the Rights Offering). These RSUs were granted
pursuant to and were to vest in accordance with the provisions of the MLTIP. Mr. Garneau has
voluntarily surrendered all RSUs granted to him pursuant to the MLTIP for no consideration or
expectation of future grants and these RSUs are therefore not reflected in the table.2
    
    Represents the fair value of stock options on the grant date. The fair value was estimated
using the Black-Scholes option-pricing model with the following assumptions: 2008Risk-free interest rate
    
    
    3.8
    %Annual dividends per share
    
    NILExpected stock price volatility
    
    
    40.0
    %Expected option life (in years)
    
    
    8.5Average fair value of options granted (in dollars)
    
    $
    0.51
 The risk-free interest rate was based on a zero-coupon Government of Canada bond with a
remaining term approximately equivalent to the expected life of the stock option. We estimated
the annual dividends per share, expected stock price volatility and expected option life based
upon historical experience. A discount of 37% was applied to stock options granted pursuant to
the MLTIP, reflecting managements estimate of the likelihood that certain performance targets
established under the MLTIP will be achieved.3
    
    Mr. Garneau was entitled to a STIP award of $476,000 pursuant to achievements under the
corporate and departmental component of the 2008 STIP, but he declined to accept such award.4
    
    Amounts in this column, for all executives other than Mr. Crowley, reflect annual
contributions and allocations (including investment returns on notional account balances) to
our defined contribution pension plan, including the SERP, for the year ended December 31,
2008. Of Mr. Boniferros SERP amount, $200,000 represents a payment made pursuant to Mr.
Boniferros employment agreement with the Corporation which is intended to compensate Mr.
Boniferro for a retention award and loss of pension benefits he would have been entitled to
from his former employer. In the case of Mr. Crowley, the amount shown reflects contributions
relating to our defined benefit plans and a contribution of $6,900 to Mr. Crowleys 401(k)
account.5
    
    Perquisites, including property and personal benefits do not exceed in the aggregate $50,000
or more than 10% of the respective named executives total salary for the financial year.6
    
    Mr. Boniferro joined us as Senior Vice President, Human Resources on January 8, 2008.7
    
    Mr. Crowley is compensated in United States dollars. Amounts in the above table have been
converted into Canadian dollars at an exchange rate of CDN$1.0661 to US$1.00.   - 77 -




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##### Table of Contents



Pension Benefits
       Defined Contribution Plans
 Accumulated value
    
    
    
    
    
    
    
    
    
    
    Accumulated valueat start of year
    
    
    Compensatory
    
    
    Non-compensatory
    
    
    at year endName
    
    ($)
    
    
    ($)1
    
    
    ($)2
    
    
    ($)R. Garneau
    
    
    19,720
    
    
    
    346,000
    
    
    
    (56,485
    )
    
    
    309,235D. Smales
    
    
    59,549
    
    
    
    38,224
    
    
    
    (17,908
    )
    
    
    79,865S. Boniferro
    
    
    
    
    
    
    217,500
    
    
    
    (32,329
    )
    
    
    185,171R. Lindstrom
    
    
    965,054
    
    
    
    31,050
    
    
    
    (133,195
    )
    
    
    882,910
 1
    
    Represents the employer contribution.2
    
    Represents non-compensatory amounts including employee contributions and regular
investment earnings on employer and employee contributions.   - 78 -




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##### Table of Contents



Pension Benefits Table for United States Resident Named Executive Officer
 Number
    
    
    Annual benefits
    
    
    Accruedof years
    
    
    payable
    
    
    obligation
    
    
    
    
    
    
    Non-
    
    
    Accruedcredited
    
    
    ($)
    
    
    at start of
    
    
    Compensatory
    
    
    compensatory
    
    
    obligationservice
    
    
    At year
    
    
    
    
    
    
    year
    
    
    change
    
    
    change
    
    
    at year endName
    
    (#)
    
    
    end
    
    
    At age 65
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)L. T. Crowley
    
    
    8
    
    
    
    7,174
    
    
    
    27,197
    
    
    
    288,265
    
    
    
    36,165
    
    
    
    12,229
    
    
    
    336,659
  
 C. Board Practices
 Committees of the Board
  Human Resources and Compensation Committee
       - 79 -




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##### Table of Contents



Audit Committee
  Name
    
    Relevant Education and ExperienceT. S. Chambers
    
    Mr. Chambers has been a chartered accountant since 1969. He
was an audit partner at PricewaterhouseCoopers LLP from
1976 to 2002 and was the managing partner of
PricewaterhouseCoopers LLPs and its predecessors Canadian
audit practice from 1996 to 2001. Mr. Chambers is a member
of the Institute of Corporate Directors and was the chair
of the British Columbia chapter of that organization from
2002 to 2004. Mr. Chambers is the chair of three other
audit committees.G. Collins
    
    Mr. Collins is the Senior Vice President of Belkorp
Industries Inc. He was President and Chief Executive
Officer of HMY Airways Inc. from December 2004 to December
2006. He was a member of the British Columbia Legislative
Assembly from 1991 to 2004 and was Minister of Finance of
British Columbia from June 2001 to December 2004. He is a
member of two other audit committees.J. G. Marshall
    
    Mr. Marshall is chairman of Smith Marshall, a strategic
partnership which provides business consulting services to
industry. From 1997 to 2003 he was the President and Chief
Executive Officer of Aluma Enterprises Inc., a construction
technology company. Prior to that he was the President and
Chief Executive Officer of Ontario Clean Water Agency, and
Marshall Drummond McCall Inc., and Marshall Steel Limited.
In all of those capacities he actively supervised financial
officers. He is a member of one other audit committee. He
holds an MBA (Finance) from McGill University.
  (i)
    
    to review all financial information and statutory disclosure documents prior to their
approval by the Board and their distribution to Shareholders and other interested persons;(ii)
    
    to evaluate systems of internal control and procedures for financial reporting;(iii)
    
    to review and recommend for approval by the Board the terms of engagement and remuneration
of the external auditors;(iv)
    
    to monitor the performance of the external and internal auditors and assess the independence
thereof; and(v)
    
    to recommend to the Board the appointment of investment managers for our salaried pension
plans and to monitor the performance of these managers.
    - 80 -




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##### Table of Contents



Environmental, Health and Safety Committee
   (i)
    
    establish principles of us of environment, health and safety stewardship;(ii)
    
    monitor our compliance with those principles;(iii)
    
    review our methods of communicating environmental, health and safety policies and
procedures; and(iv)
    
    review the risks related to environmental issues, including an evaluation of the cost benefit
associated with those risks.
   Governance Committee
   (i)
    
    to develop and monitor our overall approach to corporate governance issues;(ii)
    
    to recommend to the Board the nominees for election and re-election as members of the
Board; and(iii)
    
    to review the performance of the Board as a whole and of its Committees.
    - 81 -




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##### Table of Contents



D. Employees
    
 E. Share Ownership
  Stock Option Plan
  Vesting
  Limitations on Grants
   - 82 -




---



##### Table of Contents



Cessation of Entitlement
  (a)
    
    if an option holder dies, vested options must be exercised by his or her personal
representatives no later than the later of:
 (i)
    
    90 days after the earlier of the date of the grant of probate of the estate and the
first anniversary of the date of death; and
 (ii)
    
    90 days after the end of our fiscal year in which the death occurred;
 (b)
    
    if an option holder retires or becomes permanently disabled, vested options must be exercised
no later than the earlier of:
 (i)
    
    90 days after the end of our fiscal year in which the option holder retired or
became disabled; and
 (ii)
    
    the end of the options term;
 (c)
    
    if an option holders employment is terminated either voluntarily or without cause, vested
options must be exercised within 30 days after the date of termination of employment; and(d)
    
    if an option holders employment is terminated for cause, all options terminate immediately.
   (a)
    
    formal minor or technical modifications to any of the provisions of the Plan;(b)
    
    corrections of any ambiguity, defective provision, error or omission in the provisions of
the Plan;(c)
    
    changes to the vesting provisions of options or the Plan;(d)
    
    changes to the termination provisions of options which do not entail an extension beyond the
original expiry date of the options, unless as a result of a blackout period extension
(as discussed below);(e)
    
    additions of cashless exercise features to the Plan which provide for the payment in cash or
securities on exercise of options and which provide for a full deduction of the number of
underlying securities from the Plan reserve in such case; and(f)
    
    the addition of, or changes to, provisions relating to any form of financial assistance
provided by us to participants that would facilitate the purchase of securities under
the Plan,
  Restricted Share Unit Plan
   - 83 -




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##### Table of Contents



Dividends
  Maximum Number of Common Shares Issued
  Cessation of Entitlement
    - 84 -




---



##### Table of Contents



Transferability
  Amendments to the RSU Plan
  (a)
    
    for the purposes of making formal minor or technical modifications to any of the provisions
of the RSU Plan,
 (b)
    
    to correct any ambiguity, defective provision, error or omission in the provisions of the RSU
Plan,(c)
    
    to change the vesting provisions of RSUs or the RSU Plan; and
 (d)
    
    to change the termination provisions of RSUs or the RSU Plan which does not entail an
extension beyond the original expiry date of the RSU;
  (e)
    
    no such amendment of the Plan may be made without the consent of each affected participant if
such amendment would adversely affect the rights of such affected participant(s) under the
Plan; and
 (f)
    
    Shareholder approval shall be obtained in accordance with the requirements of the Toronto
Stock Exchange for any amendment that:
 (i)
    
    increases the maximum number of common shares issuable pursuant to the Plan;(ii)
    
    extends the expiry date for RSUs granted to insiders under the Plan;(iii)
    
    provides for other types of compensation through common share issuance;(iv)
    
    expands the rights of a participant to assign RSUs beyond what is currently
permitted in the RSU Plan; or(v)
    
    adds additional categories of participants.
  - 85 -




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##### Table of Contents



Outstanding Share based and Option based Awards
  Option Based Awards1
    
    
    Share Based Awards2Number of
    
    
    
    
    
    
    
    
    
    
    Value of
    
    
    Number of
    
    
    Market orsecurities
    
    
    
    
    
    
    
    
    
    
    unexercised
    
    
    shares or units
    
    
    payout value ofunderlying
    
    
    Option
    
    
    Option
    
    
    in-the-
    
    
    of shares that
    
    
    share basedunexercised
    
    
    exercise
    
    
    expiration
    
    
    money
    
    
    have not
    
    
    awards thatoptions
    
    
    price
    
    
    date
    
    
    options
    
    
    vested
    
    
    have not vestedName
    
    (#)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    (#)
    
    
    ($)R. Garneau3
    
    
    854,586
    
    
    
    3.06
    
    
    
    7/31/2014
    
    
    
    
    
    
    
    795,051
    
    
    
    238,515400,698
    
    
    
    1.15
    
    
    
    7/29/2015D. Smales4
    
    
    43,000
    
    
    
    3.39
    
    
    
    1/14/2016
    
    
    
    
    
    
    
    154,993
    
    
    
    46,4987,000
    
    
    
    3.29
    
    
    
    4/26/2016181,753
    
    
    
    3.06
    
    
    
    7/31/201485,220
    
    
    
    1.15
    
    
    
    7/29/201519,561
    
    
    
    1.15
    
    
    
    7/29/2018L. T. Crowley5
    
    
    50,000
    
    
    
    4.39
    
    
    
    1/29/2014
    
    
    
    
    
    
    
    140,804
    
    
    
    42,24150,000
    
    
    
    3.77
    
    
    
    1/3/201543,000
    
    
    
    3.39
    
    
    
    1/24/20167,000
    
    
    
    3.30
    
    
    
    4/26/2016165,232
    
    
    
    3.06
    
    
    
    9/6/201477,769
    
    
    
    1.15
    
    
    
    7/29/201545,592
    
    
    
    1.15
    
    
    
    7/29/2018S. Boniferro6
    
    
    372,549
    
    
    
    1.15
    
    
    
    7/29/2015
    
    
    
    
    
    
    
    66,800
    
    
    
    20,040R. Lindstrom7
    
    
    62,500
    
    
    
    4.39
    
    
    
    1/29/2014
    
    
    
    
    
    
    
    111,989
    
    
    
    33,59762,500
    
    
    
    3.62
    
    
    
    1/3/201558,000
    
    
    
    3.39
    
    
    
    1/24/201610,000
    
    
    
    3.29
    
    
    
    4/26/2016131,416
    
    
    
    3.06
    
    
    
    7/31/201461,618
    
    
    
    1.15
    
    
    
    7/29/201559,153
    
    
    
    1.15
    
    
    
    7/29/2018
 Notes
 1
    
    Underlying securities are common shares.2
    
    Represents RSUs. Underlying securities are common shares.3
    
    These Options were granted and were to vest pursuant to our MLTIP. Options that expire on
7/29/2015 were granted to compensate the holder for the diminution in value of previously
granted options caused by the dilutive impact of the Rights Offering. 728,151 of the RSUs
were granted pursuant to and vest in accordance with the MLTIP and 66,800 were granted
pursuant to Mr. Garneaus employment contract and vest on April 23, 2010. Mr. Garneau has
voluntarily surrendered all stock options and RSUs granted to him pursuant to the MLTIP for no
consideration or expectation of future grant.4
    
    Options that expire in 2016 vest as to one-third on the first, second and third anniversary
of the date of grant. The 181,753 options that expire in 2014 were issued pursuant to and
vest in accordance with the MLTIP. The 85,220 options that expire in 2015 were granted to
compensate the holder for the diminution in value of the 181,753 MLTIP options caused by the
dilutive impact of the Rights Offering and these options vest in accordance with the
provisions of the MLTIP. The 19,561 options that expire in 2018 were granted to compensate
the holder for the diminution in value of previously issued non-MLTIP options caused by the
Rights Offering and these options vest as to one third on the first, second and third
anniversary of the date of grant. All RSUs were granted pursuant to and vest in accordance
with the MLTIP.5
    
    The 50,000 options that expire in 2014 and 2015 and the options that expire in 2016 vest as
to one-third on the first, second and third anniversary of the date of grant. The 165,232
options that expire in 2014 were issued pursuant to and vest in accordance with the MLTIP.
The 77,769 options that expire in 2015 were granted to compensate the holder for the
diminution in value of the 165,232 MLTIP options caused by the dilutive impact of the Rights
Offering and these options vest in accordance with the provisions of the MLTIP. The 45,592
options that expire in 2018 were granted to compensate the holder for the diminution in value
of previously issued non-MLTIP options caused by the Rights Offering and these options vest as
to one third on the first, second and third anniversary of the date of grant. All RSUs were
granted pursuant to and vest in accordance with the MLTIP.6
    
    The options were granted to Mr. Boniferro pursuant to and vest in accordance with the MLTIP.
Mr. Boniferro has voluntarily surrendered all stock options granted to him pursuant to the
MLTIP for no consideration or expectation of future grant. The 66,800 RSUs were granted
pursuant to Mr. Boniferros employment contract and vest on December 31, 2010.  - 86 -




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##### Table of Contents



7
    
    The 62,500 options that expire in 2014 and 2015 and the options that expire in 2016 vest as
to one-third on the first, second and third anniversary of the date of grant. The 131,416
options that expire in 2014 were issued pursuant to and vest in accordance with the MLTIP.
The 61,618 options that expire in 2015 were granted to compensate the holder for the
diminution in value of the 131,416 MLTIP options caused by the dilutive impact of the Rights
Offering and these options vest in accordance with the provisions of the MLTIP. The 59,153
options that expire in 2018 were granted to compensate the holder for the diminution in value
of previously issued non-MLTIP options caused by the Rights Offering and these options vest as
to one third on the first, second and third anniversary of the date of grant. All RSUs were
granted pursuant to and vest in accordance with the MLTIP.   Option Based Awards1
    
    
    Share Based Awards2Number ofNumber of
    
    
    
    
    
    
    
    
    
    
    Value of
    
    
    shares or
    
    
    Market orsecurities
    
    
    
    
    
    
    
    
    
    
    unexercised
    
    
    units of
    
    
    payout value ofunderlying
    
    
    Option
    
    
    Option
    
    
    in-the-
    
    
    shares that
    
    
    share basedunexercised
    
    
    exercise
    
    
    expiration
    
    
    money
    
    
    have not
    
    
    awards thatoptions
    
    
    price
    
    
    date
    
    
    options
    
    
    vested
    
    
    have not vestedName
    
    (#)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    (#)
    
    
    ($)Thomas Chambers
    
    
    24,000
    
    
    
    4.57
    
    
    
    3/28/2017
    
    
    
    
    
    
    
    128,276
    
    
    
    38,48324,000
    
    
    
    1.95
    
    
    
    1/16/201825,765
    
    
    
    1.44
    
    
    
    7/29/2018Gary Collins
    
    
    24,000
    
    
    
    4.57
    
    
    
    3/28/2017
    
    
    
    
    
    
    
    108,948
    
    
    
    32,68424,000
    
    
    
    1.95
    
    
    
    1/16/201825,765
    
    
    
    1.44
    
    
    
    7/29/2018Michel Desbiens
    
    
    36,000
    
    
    
    4.57
    
    
    
    3/28/2017
    
    
    
    
    
    
    
    170,544
    
    
    
    51,16336,000
    
    
    
    1.95
    
    
    
    1/16/201838,650
    
    
    
    1.44
    
    
    
    7/29/2018William Dickson
    
    
    24,000
    
    
    
    1.44
    
    
    
    7/29/2018
    
    
    
    
    
    
    
    80,160
    
    
    
    24,048Benjamin Duster
    
    
    24,000
    
    
    
    4.57
    
    
    
    3/28/2017
    
    
    
    
    
    
    
    83,704
    
    
    
    25,11124,000
    
    
    
    1.95
    
    
    
    1/16/201825,765
    
    
    
    1.44
    
    
    
    7/29/2018Neal Goldman
    
    
    24,000
    
    
    
    4.57
    
    
    
    3/28/2017
    
    
    
    
    
    
    
    83,704
    
    
    
    25,11124,000
    
    
    
    1.95
    
    
    
    1/16/201825,765
    
    
    
    1.44
    
    
    
    7/29/2018Denis Jean
    
    
    24,000
    
    
    
    4.57
    
    
    
    3/28/2017
    
    
    
    
    
    
    
    80,160
    
    
    
    24,04824,000
    
    
    
    1.95
    
    
    
    1/16/201825,765
    
    
    
    1.44
    
    
    
    7/29/2018Jeffrey Marshall
    
    
    24,000
    
    
    
    4.57
    
    
    
    3/28/2017
    
    
    
    
    
    
    
    89,642
    
    
    
    26,89324,000
    
    
    
    1.95
    
    
    
    1/16/201825,765
    
    
    
    1.44
    
    
    
    7/29/2018Amit Wadhwaney3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Notes
 1
    
    Underlying securities are common shares. Option grants made on February 13, 2009 pursuant to
the directors compensation program are not reflected in this table. All options vest as to
one-third on the first, second and third anniversary of the date of grant. Options which
expire on 3/28/2017 and 1/16/2018 were granted pursuant to the director compensation program.
Options which expire on 7/29/2018 were granted to compensate the holder for the diminution in
value of previously granted options caused by the dilutive impact of the Rights Offering.2
    
    Reflects outstanding RSUs. Underlying securities are common shares. The RSUs vest three
years from their grant date and represent RSUs granted pursuant to the directors compensation
program and RSUs granted to compensate the holder for the diminution in value of previously
granted equity based compensation caused by the dilutive impact of the Rights Offering.3
    
    Mr. Wadhwaney has elected to waive his entitlement to director compensation for the time
being, other than reimbursement of expenses.  - 87 -




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##### Table of Contents



ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
 A. Major Shareholders
   (i)
    
    Third Avenue Management LLC (TAM) who has advised us that as at March 12, 2009, client
accounts managed by TAM own in the aggregate 131,424,721 common shares representing
approximately 34.42% of the issued and outstanding common shares and TAM has voting control
over 120,700,693 common shares, representing 31.6% of all outstanding common shares;
 (ii)
    
    Letko, Brosseau & Associates, who reported on February 10, 2009 that the aggregate number of
common shares held by all of its managed accounts as at December 31, 2008 was 45,971,978
common shares representing 12.04% of all outstanding common shares; and
 (iii)
    
    Natcan Investment Management Inc., who reported on May 31, 2008 that funds and accounts
managed by it hold 25,316,904 common shares, representing 6.637% of all outstanding common
 shares.
 
 B. Related Party Transactions
   C. Interests of Experts and Counsel
  
 ITEM 8. FINANCIAL INFORMATION
 
 A. Consolidated Statements and Other Financial Information
  Legal Proceedings
   - 88 -




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##### Table of Contents



Contingent Liability
  Export Sales
  (In millions of dollars,
    
    2006
    
    
    2007
    
    
    2008except where otherwise stated)
    
    $
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Canada
    
    
    206.6
    
    
    
    11
    %
    
    
    196.2
    
    
    
    11
    %
    
    
    209.4
    
    
    
    11
    %United States
    
    
    1,053.8
    
    
    
    56
    %
    
    
    904.9
    
    
    
    53
    %
    
    
    1,077.0
    
    
    
    58
    %Asia and Australasia
    
    
    322.6
    
    
    
    17
    %
    
    
    332.7
    
    
    
    20
    %
    
    
    291.5
    
    
    
    16
    %Latin America
    
    
    171.9
    
    
    
    9
    %
    
    
    158.2
    
    
    
    9
    %
    
    
    170.0
    
    
    
    9
    %Europe & Other
    
    
    127.6
    
    
    
    7
    %
    
    
    122.6
    
    
    
    7
    %
    
    
    101.5
    
    
    
    6
    %Total sales
    
    
    1,882.5
    
    
    
    100
    %
    
    
    1,714.6
    
    
    
    100
    %
    
    
    1,849.4
    
    
    
    100
    %
 Dividend Policy
  
 B. Significant Changes
   - 89 -




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##### Table of Contents



ITEM 9. THE OFFER AND LISTING
 
 A. Offer and Listing Details
 Common Shares
  For the year ended
    
    High
    
    
    Low($)
    
    
    ($)December 31, 2008
    
    
    1.78
    
    
    
    0.24December 31, 2007
    
    
    4.31
    
    
    
    1.19December 31, 2006
    
    
    3.60
    
    
    
    2.40December 31, 2005
    
    
    4.26
    
    
    
    2.40December 31, 2004
    
    
    4.95
    
    
    
    3.30
 For the quarter ended
    
    High
    
    
    Low($)
    
    
    ($)March 31, 2009
    
    
    0.44
    
    
    
    0.08December 31, 2008
    
    
    0.80
    
    
    
    0.24September 30, 2008
    
    
    1.37
    
    
    
    0.65June 30, 2008
    
    
    1.42
    
    
    
    0.83March 31, 2008
    
    
    1.78
    
    
    
    0.80December 31, 2007
    
    
    1.97
    
    
    
    1.19September 30, 2007
    
    
    3.44
    
    
    
    1.38June 30, 2007
    
    
    3.80
    
    
    
    3.21March 31, 2007
    
    
    4.31
    
    
    
    3.26
 For the month ended
    
    High
    
    
    Low($)
    
    
    ($)May 13, 2009
    
    
    0.30
    
    
    
    0.20April 30, 2009
    
    
    0.32
    
    
    
    0.14March 31, 2009
    
    
    0.19
    
    
    
    0.08February 28, 2009
    
    
    0.35
    
    
    
    0.16January 31, 2009
    
    
    0.44
    
    
    
    0.32December 31, 2008
    
    
    0.43
    
    
    
    0.28November 30, 2008
    
    
    0.60
    
    
    
    0.24October 31, 2008
    
    
    0.80
    
    
    
    0.33
 Note
 B. Plan of Distribution
  
 C. Markets
  D. Selling Shareholders
  E. Dilution
   - 90 -




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##### Table of Contents



F. Expenses
  
 ITEM
10. ADDITIONAL INFORMATION
 A. Share Capital
  
 B. Memorandum and Articles of Association
 Description of Share Capital
     Description of Articles of Amalgamation and By-Laws
   1.
    
    to vote on a proposal arrangement or contract in which the director is materially interested;
 2.
    
    in the absence of an independent quorum, to vote compensation to themselves or any member of
their body; or
 3.
    
    with respect to borrowing powers exercisable by the directors or how such borrowing powers
may be varied.
  Rights, Preferences and Restrictions of Shares
     - 91 -




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##### Table of Contents



Meetings
    
 C. Material Contracts
  1.
    
    Standby Purchase Agreement dated February 10, 2008 between the Corporation, BMO Nesbitt Burns
Inc. (BMO) and Genuity Capital Markets (Genuity) pursuant to which BMO and Genuity agreed
severally to purchase up to an aggregate of not more than 50% of the subscription receipts
offered and not otherwise purchased pursuant to the Rights Offering. The Rights Offering was
oversubscribed and neither BMO nor Genuity were required to purchase any subscription
receipts. We paid each of BMO and Genuity $937,500 for their standby commitment.
 2.
    
    Oversubscription Agreement dated February 10, 2008 between the Corporation and Third Avenue
International Value Fund (TAVIX) pursuant to which TAVIX agreed to exercise its basic and
additional subscription privilege under the Rights Offering such that it would subscribe for
that number of subscription receipts having an aggregate purchase price not exceeding
$62,500,000. TAVIX was reimbursed for its out-of-pocket expenses under the Oversubscription
Agreement (not including the exercise price payable in connection with the subscription for
subscription receipts). No fee was payable to TAVIX pursuant to the Oversubscription
Agreement.
 3.
    
    Dealer Management Agreement dated February 29, 2008 between the Corporation, BMO and Genuity
pursuant to which BMO and Genuity agreed to act as dealer managers in connection with the
Rights Offering. Each of BMO and Genuity received a fee of $1,000,000 for such services,
which fee was offset by the fees payable under the Standby Commitment Agreement.
  - 92 -




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##### Table of Contents



4.
    
    Subscription Receipt Agreement dated February 29, 2008 between the Corporation, BMO on its
own behalf and on behalf of Genuity, Third Avenue Trust on behalf of TAVIX and CIBC Mellon
Trust Company (the Rights Agent) pursuant to which the Rights Agent held the proceeds obtained from the
exercise of rights pending satisfaction of the release conditions
specified therein.
  5.
    
    Asset and Stock Purchase Agreement dated February 10, 2008 between the Corporation and
Abitibi Consolidated Sales Corporation relating to the acquisition of the Snowflake mill for a
total cost of $169.8 million, including working capital adjustments and transactions costs.
 6.
    
    Third Supplemental Indenture dated as of April 10, 2008 amending the Indenture dated as of
May 15, 2003 governing the Corporations 8-5/8% Senior Notes due 2011 (the 8-5/8% Notes),
among the Corporation, the subsidiary guarantors named therein and Wells Fargo Bank Minnesota,
National Association, as trustee, pursuant to which Catalyst Paper (Snowflake) Inc., Catalyst
Paper Recycling Inc., and The Apache Railway Company were added as subsidiary guarantors of
the 8-5/8% Notes.
 7.
    
    Second Supplemental Indenture dated as of April 10, 2008 amending the indenture dated as of
March 23, 2004 governing the Corporation 7-3/8% Senior Notes due 2014, among the Corporation,
the subsidiary guarantors named therein and Wells Fargo Bank Minnesota, National Association,
as trustee pursuant to which Catalyst Paper (Snowflake) Inc., Catalyst Paper Recycling Inc.,
and The Apache Railway Company were added as subsidiary guarantors of the 7-3/8% Notes.
  
 D. Exchange Controls
 Investment Canada Act Investment Canada Act Investment Canada Act Investment Canada Act Investment Canada Act
 Investment Canada Act
 Investment Canada Act
 Investment Canada
Act
 
    
    an acquisition of our common shares by a person in the ordinary course of that persons
business as a trader or dealer in securities;
 
    
    an acquisition of control of the Corporation in connection with the realization of a
security interest granted for a loan or other financial assistance and not for any purpose
related to the provision of the Investment Canada Act; and
 
    
    an acquisition of control of the Corporation by reason of an amalgamation, merger,
consolidation or corporate reorganization following which the ultimate direct or indirect
control in fact of the Corporation, though the ownership of voting interests, remains
unchanged.
  - 93 -




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##### Table of Contents



Investment Canada Act Budget Implementation Act Investment
Canada Act
  
 E. Taxation
 Certain U.S. Federal Income Tax Considerations
   
    
    banks, insurance companies, or other financial institutions;
    
    holders subject to the alternative minimum tax;
    
    tax-exempt organizations;
    
    brokers or dealers in securities or commodities;
    
    traders in securities that elect to use a mark-to-market method of accounting for their
securities holdings;
    
    foreign (non-United States) persons or entities;
    
    persons that are S-corporations, partnerships or other pass-through entities;
    
    expatriates and certain former citizens or long-term residents of the United States;
    
    holders whose functional currency is not the U.S. dollar;
    
    persons holding our common shares as part of a hedging, straddle, conversion or
constructive sale transaction or other risk reduction transactions;
    
    grantor trusts;
    
    real estate investment trusts or regulated investment companies; or
    
    persons who are resident or ordinarily resident in Canada.
   - 94 -




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##### Table of Contents




    
    an individual citizen or resident of the United States;
 
    
    a corporation (or other entity taxable as a corporation for United States federal income
tax purposes) created or organized in the United States or under the laws of the United
States, any state thereof, or the District of Columbia;
 
    
    an estate, the income of which is subject to United States federal income taxation
regardless of its source; or
 
    
    a trust that (i) is subject to the primary supervision of a United States court and the
control of all substantial decisions by one or more United States persons or (ii) has a valid
election in effect under applicable Treasury Regulations to be treated as a United States
person.
 Taxation of Common Shares
 Dividends
    Sale or Exchange of Common Shares
    - 95 -




---



##### Table of Contents



Foreign Tax Credit Considerations
   Passive Foreign Investment Company Status
  Information Reporting and Backup Withholding
  Canadian Federal Income Tax Considerations
 U.S. holder Income Tax Act Act Treaty
  - 96 -




---



##### Table of Contents



F. Dividends and Paying Agents
  G. Statements by Exports
  
 H. Documents on Display
  I. Subsidiary Information
  
 ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   Credit Risk
   - 97 -




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##### Table of Contents



Accounts Receivable
   2007
    
    
    2008Trade receivables, grossCurrent
    
    $
    164.8
    
    
    $
    177.8Past due 1-30 days
    
    
    29.7
    
    
    
    24.5Past due 31-90 days
    
    
    2.0
    
    
    
    4.0Past due over 90 days
    
    
    0.5
    
    
    
    0.3197.0
    
    
    
    206.6Allowance for doubtful accounts
    
    
    (2.8
    )
    
    
    (3.2
    )Trade receivables, net
    
    
    194.2
    
    
    
    203.4Other receivables, including GST recoverables
    
    
    18.9
    
    
    
    18.3Accounts receivable
    
    $
    213.1
    
    
    $
    221.7
  2007
    
    
    2008Balance, beginning of year
    
    $
    3.1
    
    
    $
    2.8Increase in provision
    
    
    
    
    
    
    3.1Utilized in the year
    
    
    (0.3
    )
    
    
    (2.7
    )Balance, end of year
    
    $
    2.8
    
    
    $
    3.2
  Derivatives
  Market risk:
 Currency risk:
    - 98 -




---



##### Table of Contents



Price risk
 Interest rate risk
  Effect from increase
    
    
    Effect from decreasein rate or price
    
    
    in rate or price(In millions of dollars,
    
    
    
    
    
    
    
    
    
    Change
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    Otherexcept where otherwise stated)
    
    Currency and
    
    
    in rate
    
    
    Net
    
    
    comprehensive
    
    
    Net
    
    
    comprehensiveAs at December 31, 2008
    
    notional amount
    
    
    or price
    
    
    earnings
    
    
    income
    
    
    earnings
    
    
    incomeRevenue hedges
- currency risk (US$/C$)
    
    US$
    
    
    

    570
    
    
    
    5
    %
    
    
    5.9
    
    
    
    6.8
    
    
    
    (6.4
    )
    
    
    (7.4
    )Revenue hedges
- price risk (commodities)
    

    US$
    
    
    

    11
    
    
    
    5
    %
    
    
    (0.4
    )
    
    
    
    
    
    
    0.4
    
    
    
    Oil and natural gas hedges
- price risk (commodities)
    

    C$
    
    
    
    4
    
    
    
    5
    %
    
    
    0.1
    
    
    
    
    
    
    
    (0.1
    )
    
    
    Old newspaper (ONP) hedges
- price risk (commodities)
    

    US$
    
    
    

    3
    
    
    
    5
    %
    
    
    0.1
    
    
    
    
    
    
    
    (0.1
    )
    
    
    U.S. debt hedges
- currency risk (US$/C$)
    

    US$
    
    
    

    190
    
    
    
    10
    %
    
    
    (6.1
    )
    
    
    
    
    
    
    7.1
    
    
    
    ABL Facility
- interest risk (annualized)
    

    C$
    
    
    
    60
    
    
    100
    bps
    
    
    (0.4
    )
    
    
    
    
    
    
    0.4
    
    
    
    
 Liquidity risk
   Financial instruments
    - 99 -




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##### Table of Contents



Revenue risk management instruments
   Cost risk management instruments
  (i)
    
    Agreement to fix the purchase price of 40,000 tonnes of ONP within the next ten months
  fair value as at December 31, 2008 was negative $0.9 million.(ii)
    
    Agreements in place for approximately 23% of natural gas usage for the next 12-month
period  fair value as at December 31, 2008 was negative $0.8 million.
  Long-term debt risk management instruments
  Interest rate swaps
  
 ITEM
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
   - 100 -




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##### Table of Contents



PART II
 
 ITEM
13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
 
 A. Indebtedness
  
 B. Dividends
  
 ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
 A.
    
    There have been no material modifications to the instruments defining the rights of holders
of any class of registered securities since the date of filing of our last annual report on
Form 20-F.B.
    
    This disclosure item is not applicable.C.
    
    This disclosure item is not applicable.D.
    
    This disclosure item is not applicable.E.
    
    This disclosure item is not applicable.
 
 ITEM
15. CONTROLS AND PROCEDURES
 
 A. Disclosure Controls and Procedures
 Certification of Disclosure in Issuers Annual and Interim Filings United States Securities Exchange Act of 1934
 (a)
    
    recorded, processed, summarized and reported within the time periods specified in the rules
and forms of the Canadian and U.S. securities regulatory authorities, and
 (b)
    
    accumulated and communicated to the Companys management, including the Companys chief
executive officer and chief financial officer, or persons performing similar functions, as
appropriate, to allow timely decisions regarding required disclosure.
  
 B. Internal Control over Financial Reporting
 Sarbanes-Oxley Act, Management Assessment of Internal Controls
  - 101 -




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##### Table of Contents



C. Report of Independent Public Accounting Firm
 
  
 D.
Changes in Internal Control over Financial Reporting
 ITEM
16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM
16B. CODE OF ETHICS
  
 ITEM
16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 Period ending December 312007
    
    
    2008Audit Fees
    
    $
    834,667
    
    
    $
    897,000Audit Related Fees
    
    
    354,775
    
    
    
    376,950Tax Fees
    
    
    95,195
    
    
    
    81,515Total
    
    $
    1,284,637
    
    
    $
    1,355,465
      C. Exemptions From Listing Standards for Audit Committees
  D. Purchases of Equity Securities by the Issuer and its Affiliates
   - 102 -




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##### Table of Contents



PART III
 
 ITEM
17. FINANCIAL STATEMENTS
  Reports of Independent Registered Public Accounting Firm and Consolidated Financial Statements of
Catalyst Paper Corporation
 Audited Consolidated Financial StatementsReport of Independent Registered Public Accounting FirmConsolidated Balance Sheets as at December 31, 2008 and 2007Consolidated Statements of Earnings and Comprehensive Income (Loss) for the years ended December
31, 2008, 2007 and 2006Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006Consolidated
Statements of Shareholders Equity for the years ended
December 31, 2008, 2007 and 2006Consolidated
Statements of Business Segments for the years ended December 31, 2008, 2007 and 2006Consolidated Geographic Business SegmentsNotes to the
Consolidated Financial Statements
 
 ITEM
18. FINANCIAL STATEMENTS
   - 103 -




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##### Table of Contents



ITEM
19. EXHIBITS
 2.1
    
    
    Asset and Stock Purchase Agreement dated February 10, 2008 between the Corporation and
Abitibi Consolidated Sales Corporation relating to the acquisition of the Snowflake mill and
associated schedules. (6)3.1
    
    
    Articles of Amalgamation of Norske Skog Canada Limited. (2)3.2
    
    
    By laws of Norske Skog Canada Limited. (2)10.1
    
    
    Indenture, dated as of May 15, 2003, governing the Corporations 8 5/8% Senior Notes due
2011, among the Corporation, the subsidiary guarantors and Wells Fargo Bank Minnesota,
National Association, as trustee (the 2003 Notes Indenture). (4)10.1.1
    
    
    First Supplemental Indenture amending the 2003 Notes Indenture, dated as of December 1,
2003, among the Corporation, the subsidiary guarantors named therein and Wells Fargo Bank
Minnesota, National Association, as trustee. (3)10.1.2
    
    
    Second Supplemental Indenture amending the 2003 Notes Indenture, dated as of July 14, 2006,
among the Corporation, the subsidiary guarantors named therein and Wells Fargo Bank Minnesota,
National Association, as trustee. (10)10.1.3
    
    
    Third Supplemental Indenture amending the 2003 Notes Indenture, dated as of April 10, 2008,
among the Corporation, the subsidiary guarantors named therein and Wells Fargo Bank Minnesota,
National Association, as trustee. (8)10.2
    
    
    Indenture, dated as of March 23, 2004, governing Catalysts 7 3/8% Senior Notes due 2014,
among Catalyst, the subsidiary guarantors and Wells Fargo Bank, National Association, as
trustee (the 2004 Notes Indenture). (3)10.2.1
    
    
    First Supplemental Indenture amending the 2004 Notes Indenture, dated as of July 14, 2006,
among the Corporation, the subsidiary guarantors named therein and Wells Fargo Bank Minnesota,
National Association, as trustee. (10)10.2.2
    
    
    Second Supplemental Indenture amending the 2004 Notes Indenture, dated as of April 10, 2008,
among the Corporation, the subsidiary guarantors named therein and Wells Fargo Bank Minnesota,
National Association, as trustee. (8)10.3
    
    
    Chip Supply Agreement dated November 19, 1992 between Crown Forest Industries Limited and
Riverside Forest Products Limited, as assigned July 6, 2000 and assigned January 1, 2001
(current parties Catalyst Paper and Tolko Industries Ltd.). (1)10.3.1
    
    
    Amending Letter dated August 23, 2005 between NorskeCanada and Riverside Forest Product
Limited relating to Chip Supply Agreement referred to in Exhibit 10.3 above (current parties
Catalyst Paper and Tolko Industries Ltd.). (10)10.4
    
    
    Amended and Restated Chip and Pulplog Supply Agreement dated as of June 23, 1997 between
3264891 Canada Limited, 3264912 Canada Limited and TimberWest Forest Limited, as amended
January 1, 1999 (Current parties Catalyst Paper and TimberWest Forest Corp. and TimberWest
Forest Company). (1)
  - 104 -




---



##### Table of Contents



10.4.1
    
    
    Amendment dated October 3, 2002 to the Amended and Restated Chip and Pulplog Supply
Agreement referred to in Exhibit 10.4 above. (1)10.4.2
    
    
    Amendment dated January 1, 2008 to the Amended and Restated Chip and Pulplog Supply
Agreement referred to in Exhibit 10.4 above. (10)10.4.3
    
    
    Log Supply Option Agreement dated January 1, 2008 between Catalyst Paper, TimberWest Forest
Corp. and TimberWest Forest Company which is referred to in agreement referred to in Exhibit 10.4 above.
(10)10.5
    
    
    Amended and Restated Timber Harvesting Management Agreement dated as of January 1, 1999
between Fletcher Challenge Canada Limited, TimberWest Forest Corp. and TimberWest Forest
Company (current parties CPC, TimberWest Forest Corp and TimberWest Forest Company
Partnership). (1)10.5.1
    
    
    Amendment dated January 1, 2008 to Amended and Restated Timber Harvesting Management
Agreement referred to in Exhibit 10.5 above. (10)10.6
    
    
    Chip and Log Supply Agreement dated as of June 8, 1998 between MacMillan Bloedel Limited and
MB Paper Limited (current parties Western Forest Products Inc. and Catalyst Paper
Corporation). (2)10.6.1
    
    
    Amendment dated March 28, 2006 to Chip and Log Supply Agreement referred to in Exhibit 10.6
above. (10)10.6.2
    
    
    Amendment and Waiver dated October 10, 2006 to Chip and Log Supply Agreement referred to in
Exhibit 10.6 above. (10)10.6.3
    
    
    Amendment dated December 5, 2008 to Chip and Log Supply Agreement referred to in Exhibit
10.6 above. (10)10.7
    
    
    Chip and Sawlog Supply Agreement dated September 8, 1980 between British Columbia Forest
Products Limited and Doman Industries Limited. (10)10.7.1
    
    
    Amendment dated December 2, 2002 to Chip and Sawlog Supply Agreement referred to in Exhibit
10.7 above. (10)10.7.2
    
    
    Amendment dated November 2, 2004 to Chip and Sawlog Supply Agreement referred to in Exhibit
10.7 above. (10)10.7.3
    
    
    Amendment dated February 1, 2005 to Chip and Sawlog Supply Agreement referred to in Exhibit
10.7 above. (10)10.7.4
    
    
    Amendment dated June 27, 2005 to Chip and Sawlog Supply Agreement referred to in Exhibit
10.7 above. (10)10.7.5
    
    
    Amendment dated October 10. 2006 to Chip and Sawlog Supply Agreement referred to in Exhibit
10.7 above. (10)10.8
    
    
    Chip and Pulplog Supply Agreement dated July 1, 2004 between Teal Jones and Norske Canada
(current parties Teal Jones and Catalyst Paper). (10)
  - 105 -




---



##### Table of Contents



10.9
    
    

Catalyst
Paper Amended and Restated Stock Option
Plan. (10)10.10
    
    

Catalyst
Paper 2007 Restricted Share Unit
Plan. (10)10.11
    
    
    Standby Purchase Agreement dated February 10, 2008 between the Corporation, BMO Nesbitt
Burns Inc. and Genuity Capital Markets. (5)10.12
    
    
    Oversubscription Agreement dated February 10, 2008 between the Corporation and Third Avenue
International Value Fund. (5)10.13
    
    
    Dealer Manager Agreement dated February 29, 2008 between the Corporation, BMO Nesbitt Burns
Inc. and Genuity Capital Market. (7)10.14
    
    
    Subscription Receipt Agreement dated February 29, 2008 between the Corporation, BMO Nesbitt
Burns Inc. on its own behalf and on behalf of Genuity Capital Markets, Third Avenue Trust on
behalf of Third Avenue International Value Fund and CIBC Mellon Trust Company. (7)10.15
    
    
    Credit Agreement for the ABL Facility dated as of August 13, 2008 among the Corporation,
Catalyst Paper, Catalyst Paper Holdings Inc. and Catalyst Paper (Snowflake) Inc. as Borrower,
the subsidiary guarantors named therein, CIT Business Credit Canada Inc., J.P. Morgan
Securities Inc., and the vendor parties named therein (the ABL Facility). (9)10.16
    
    
    Employment agreement dated March 12, 2007 between Catalyst Paper Corporation and Richard
Garneau. (10)10.17
    
    
    Employment agreement dated November 23, 2007 between Catalyst Paper Corporation and Steve
Boniferro. (10)15.1
    
    

Consent
of Independent Registered Public Accounting Firm (10)21.1
    
    
    List of subsidiaries. (10)31.1
    
    
    Certification of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (10)32.1
    
    
    Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (10)
 (10)
    
    Filed herewith.(9)
    
    Previously filed
(No. 000-49751) on Form 6-K of Catalyst Paper Corporation on August 18, 2008.(8)
    
    Previously filed
(No. 000-49751) on Form 6-K of Catalyst Paper Corporation on April 17, 2008.(7)
    
    Previously filed
(No. 000-49751) on Form 6-K of Catalyst Paper Corporation on March 3, 2008.(6)
    
    Previously filed
(No. 000-49751) on Form 6-K of Catalyst Paper Corporation on February 29, 2008.(5)
    
    Previously filed
(No. 000-49751) on Form 6-K of Catalyst Paper Corporation on February 20, 2008.(4)
    
    Previously filed with registration statement (No. 333-105719) on Form F-4 of Norske Skog
Canada Limited on May 30, 2003.(3)
    
    Previously filed with registration statement (No. 333-114538) on Form F-4 of Norske Skog
Canada Limited on April 16, 2004.(2)
    
    Previously filed with registration statement (No. 333-82406) on Form F-4 of Norske Skog
Canada Limited on March 1, 2002.(1)
    
    Previously filed with the registration statement (No. 333-82406) on Form F-4 of Norske Skog
Canada Limited on March 1, 2002. Confidential information has been omitted and has been filed
separately with the Securities and Exchange Commission.  - 106 -




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly
authorized. CATALYST PAPER CORPORATION By: /s/
Name: Richard Garneau
Title: Chief Executive Officer Date:  May 14,
2009  - 107 -




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##### Table of Contents



MANAGEMENTS RESPONSIBILITY
 Managements Report on Financial Statements and Assessment of Internal Control Over Financial
Reporting
   
    
    pertain to the maintenance of records that, in reasonable detail, accurately reflect the
transactions of the Company;
 
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements and footnote disclosures;
 
    
    provide reasonable assurance that receipts and expenditures of the Company are
appropriately authorized by the Companys management and directors; and
 
    
    provide reasonable assurance regarding the prevention or timely detection of an
unauthorized use, acquisition or disposition of assets that could have a material effect on
the consolidated financial statements.
       Richard Garneau
    
    David SmalesPresident and
    
    Vice-President, FinanceChief Executive Officer
    
    and Chief Financial Officer




---



##### Table of Contents



AUDITORS REPORT ON FINANCIAL STATEMENTS
     
   1




---



##### Table of Contents



KPMG LLP
    
    Telephone
    
    (604) 691-3000Chartered Accountants
    
    Fax
    
    (604) 691-3031PO Box 10426 777 Dunsmuir Street
    
    Internet
    
    www.kpmg.caVancouver BC V7Y 1K3Canada
  Comments by Auditors for US Readers on Canada  US Reporting Differences
 
   
 
 KPMG LLP, a Canadian limited liability partnership is the Canadianmember firm of KPMG International, a Swiss cooperative.
  2




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING UNDER STANDARDS OF THE PUBLIC COMPANY
ACCOUNTING OVERSIGHT BOARD (UNITED STATES)
        
   3




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##### Table of Contents



CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (LOSS)  (In millions of dollars, except where otherwise stated)
 Years ended December 31,2008
    
    
    2007
    
    
    2006Sales
    
    $
    1,849.4
    
    
    $
    1,714.6
    
    
    $
    1,882.5Operating expensesCost of sales
    
    
    1,613.0
    
    
    
    1,574.6
    
    
    
    1,609.3Selling, general and administrative
    
    
    46.9
    
    
    
    48.3
    
    
    
    62.2Restructuring and change-of-control (note 7)
    
    
    30.1
    
    
    
    64.7
    
    
    
    Amortization
    
    
    165.8
    
    
    
    176.4
    
    
    
    183.7Impairment (note 4)
    
    
    151.0
    
    
    
    
    
    
    
    23.42,006.8
    
    
    
    1,864.0
    
    
    
    1,878.6Operating earnings (loss)
    
    
    (157.4
    )
    
    
    (149.4
    )
    
    
    3.9Interest expense, net (note 8)
    
    
    (75.0
    )
    
    
    (70.7
    )
    
    
    (73.8
    )Foreign exchange gain (loss) on long-term debt
    
    
    (82.2
    )
    
    
    103.9
    
    
    
    (0.3
    )Other income (expense), net (note 9)
    
    
    2.5
    
    
    
    (15.3
    )
    
    
    1.8Earnings (loss) before income taxes and
non-controlling interest
    
    
    (312.1
    )
    
    
    (131.5
    )
    
    
    (68.4
    )Income tax recovery (note 10)
    
    
    (91.8
    )
    
    
    (100.0
    )
    
    
    (54.0
    )Net earnings (loss) before non-controlling interest
    
    
    (220.3
    )
    
    
    (31.5
    )
    
    
    (14.4
    )Non-controlling interest (note 5)
    
    
    (0.8
    )
    
    
    (0.1
    )
    
    
    (1.5
    )Net earnings (loss)
    
    $
    (221.1
    )
    
    $
    (31.6
    )
    
    $
    (15.9
    )Other comprehensive income (loss)
    
    
    (18.5
    )
    
    
    14.3
    
    
    
    Comprehensive income (loss)
    
    $
    (239.6
    )
    
    $
    (17.3
    )
    
    $
    (15.9
    )Basic and diluted earnings (loss) per share
(note 11) (in dollars)
    
    $
    (0.66
    )
    
    $
    (0.15
    )
    
    $
    (0.07
    )Weighted average common shares outstanding (in millions)
    
    
    336.1
    
    
    
    214.7
    
    
    
    214.6
   4




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##### Table of Contents



CONSOLIDATED BALANCE SHEETS  (In millions of dollars)
 As at December 31,2008
    
    
    2007AssetsCurrent assetsCash and cash equivalents
    
    $
    5.0
    
    
    $
    Accounts receivable (note 12)
    
    
    221.7
    
    
    
    213.1Inventories (note 13)
    
    
    211.4
    
    
    
    235.7Prepaids and other (note 14)
    
    
    32.8
    
    
    
    40.7470.9
    
    
    
    489.5Property, plant and equipment (note 15)
    
    
    1,852.0
    
    
    
    1,912.8Other assets (note 16)
    
    
    100.5
    
    
    
    54.8$
    2,423.4
    
    
    $
    2,457.1LiabilitiesCurrent liabilitiesAccounts payable and accrued liabilities (note 17)
    
    $
    269.4
    
    
    $
    268.2Current portion of long-term debt
    
    
    75.8
    
    
    
    1.2345.2
    
    
    
    269.4Long-term debt (note 18)
    
    
    882.9
    
    
    
    784.6Employee future benefits (note 19)
    
    
    226.6
    
    
    
    211.7Other long-term obligations (note 20)
    
    
    13.3
    
    
    
    26.9Future income taxes (note 10)
    
    
    66.8
    
    
    
    154.2Deferred credits (note 21)
    
    
    18.6
    
    
    
    21.71,553.4
    
    
    
    1,468.5Shareholders equityShare capital (note 22)
    
    
    1,035.0
    
    
    
    913.9Contributed surplus
    
    
    14.6
    
    
    
    12.1Retained earnings (deficit)
    
    
    (174.7
    )
    
    
    49.0Accumulated other comprehensive income (loss)
    
    
    (4.9
    )
    
    
    13.6870.0
    
    
    
    988.6$
    2,423.4
    
    
    $
    2,457.1
    On behalf of the Board:Richard Garneau
    
    Thomas S. ChambersDirector
    
    Director
  5




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##### Table of Contents



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY  (In millions of dollars, except where otherwise stated)
 Years ended December 31,2008
    
    
    2007
    
    
    2006Share capital (note 22)Number of shares outstanding, beginning of year
    
    
    214,684,129
    
    
    
    214,604,120
    
    
    
    214,604,120Number of shares issued under rights offering (note 6)
    
    
    167,069,361
    
    
    
    
    
    
    
    Number of shares issued under stock option plan
    
    
    
    
    
    
    80,009
    
    
    
    Number of shares outstanding, end of year
    
    
    381,753,490
    
    
    
    214,684,129
    
    
    
    214,604,120Balance, beginning of year
    
    $
    913.9
    
    
    $
    913.6
    
    
    $
    913.6Issue of common shares on rights offering, net of
share issue costs (note 6)
    
    
    121.1
    
    
    
    
    
    
    
    Stock options exercised
    
    
    
    
    
    
    0.3
    
    
    
    Balance, end of year
    
    
    1,035.0
    
    
    
    913.9
    
    
    
    913.6Contributed surplusBalance, beginning of year
    
    
    12.1
    
    
    
    9.3
    
    
    
    7.3Stock option compensation expense
    
    
    2.5
    
    
    
    3.2
    
    
    
    2.0Stock options exercised
    
    
    
    
    
    
    (0.4
    )
    
    
    Balance, end of year
    
    
    14.6
    
    
    
    12.1
    
    
    
    9.3Retained earnings (deficit)Balance, beginning of year
    
    
    49.0
    
    
    
    82.9
    
    
    
    98.8Adoption of new accounting standards (note 2(c))
    
    
    (2.6
    )
    
    
    (2.3
    )
    
    
    Net earnings (loss)
    
    
    (221.1
    )
    
    
    (31.6
    )
    
    
    (15.9
    )Balance, end of year
    
    
    (174.7
    )
    
    
    49.0
    
    
    
    82.9Accumulated other comprehensive income (loss)Balance, beginning of year
    
    
    13.6
    
    
    
    
    
    
    
    Adoption of new accounting standards for financial
instruments
    
    
    
    
    
    
    (0.7
    )
    
    
    Change in foreign currency translation of self-sustaining
foreign subsidiaries, net of related hedging activities
    
    
    6.7
    
    
    
    
    
    
    
    Unrealized net gain (loss) on cash flow revenue hedges,
net of tax of $11.1 million (2007  $13.8 million)
    
    
    (25.0
    )
    
    
    28.4
    
    
    
    Reclassification of net gain (loss) on cash flow
revenue hedges to net earnings (loss), net of tax of
$0.1 million (2007  $7.3 million)
    
    
    (0.2
    )
    
    
    (14.1
    )
    
    
    Balance, end of year
    
    
    (4.9
    )
    
    
    13.6
    
    
    
    Total shareholders equity
    
    $
    870.0
    
    
    $
    988.6
    
    
    $
    1,005.8
   6




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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS  (In millions of dollars)
 Years ended December 31,2008
    
    
    2007
    
    
    2006Cash flows provided (used) by:OperationsNet earnings (loss)
    
    $
    (221.1
    )
    
    $
    (31.6
    )
    
    $
    (15.9
    )Items not requiring (providing) cashAmortization
    
    
    165.8
    
    
    
    176.4
    
    
    
    183.7Impairment (note 4)
    
    
    151.0
    
    
    
    
    
    
    
    23.4Future income taxes (note 10)
    
    
    (93.5
    )
    
    
    (100.7
    )
    
    
    (56.1
    )Foreign exchange loss (gain) on long-term debt
    
    
    82.2
    
    
    
    (103.9
    )
    
    
    0.3Employee future benefits, excess of expense over funding
    
    
    2.9
    
    
    
    6.7
    
    
    
    6.4Increase (decrease) in other long-term obligations
    
    
    (5.1
    )
    
    
    7.5
    
    
    
    0.9Loss (gain) on disposal of property, plant and equipment (note 9)
    
    
    (0.4
    )
    
    
    13.6
    
    
    
    (1.1
    )Non-controlling interest
    
    
    0.8
    
    
    
    0.1
    
    
    
    1.5Lower of cost or market write-down of inventories (note 13)
    
    
    5.9
    
    
    
    1.8
    
    
    
    (2.0
    )Other
    
    
    22.3
    
    
    
    (20.9
    )
    
    
    (6.3
    )110.8
    
    
    
    (51.0
    )
    
    
    134.8Changes in non-cash working capitalAccounts receivable
    
    
    (7.4
    )
    
    
    64.2
    
    
    
    (35.5
    )Inventories
    
    
    21.5
    
    
    
    7.4
    
    
    
    2.7Prepaids and other
    
    
    3.6
    
    
    
    (5.0
    )
    
    
    (0.9
    )Accounts payable and accrued liabilities
    
    
    (52.8
    )
    
    
    (18.3
    )
    
    
    26.1(35.1
    )
    
    
    48.3
    
    
    
    (7.6
    )Cash flows provided (used) by operations
    
    
    75.7
    
    
    
    (2.7
    )
    
    
    127.2InvestingAcquisition of Snowflake newsprint mill (note 6)
    
    
    (169.8
    )
    
    
    
    
    
    
    Additions to property, plant and equipment
    
    
    (41.9
    )
    
    
    (85.8
    )
    
    
    (93.2
    )Proceeds from sale of property, plant and equipment
    
    
    2.2
    
    
    
    6.5
    
    
    
    3.5Proceeds from termination of interest rate swaps (note 24 (e))
    
    
    7.6
    
    
    
    
    
    
    
    Purchase price adjustment (note 25)
    
    
    
    
    
    
    
    
    
    
    4.3Increase in other assets
    
    
    (1.0
    )
    
    
    (4.4
    )
    
    
    (0.4
    )Cash flows used by investing activities
    
    
    (202.9
    )
    
    
    (83.7
    )
    
    
    (85.8
    )FinancingIssue of shares, net of share issue costs (note 6)
    
    
    121.1
    
    
    
    
    
    
    
    Increase (decrease) in revolving loan and loan payable
    
    
    60.1
    
    
    
    47.0
    
    
    
    (5.5
    )Repayment of revolving operating loan
    
    
    (47.1
    )
    
    
    
    
    
    
    Deferred financing costs
    
    
    (5.5
    )
    
    
    
    
    
    
    Increase (decrease) in other long-term debt
    
    
    3.6
    
    
    
    3.6
    
    
    
    (0.4
    )Issue of shares from exercise of stock options
    
    
    
    
    
    
    0.3
    
    
    
    Cash flows provided (used) by financing activities
    
    
    132.2
    
    
    
    50.9
    
    
    
    (5.9
    )Cash and cash equivalents, increase (decrease) in the year
    
    
    5.0
    
    
    
    (35.5
    )
    
    
    35.5Cash and cash equivalents, beginning of year
    
    
    
    
    
    
    35.5
    
    
    
    Cash and cash equivalents, end of year
    
    $
    5.0
    
    
    $
    
    
    
    $
    35.5Supplemental disclosures:Income taxes paid
    
    $
    0.8
    
    
    $
    0.5
    
    
    $
    2.7Net interest paid
    
    
    74.4
    
    
    
    67.8
    
    
    
    71.5
   7




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##### Table of Contents



CONSOLIDATED BUSINESS SEGMENTS  (In millions of dollars)
 Year ended December 31, 2008Specialty
    
    
    
    
    
    
    
    
    
    
    Corporateprinting papers
    
    
    Newsprint
    
    
    Pulp
    
    
    adjustments
    
    
    ConsolidatedSales to external customers
    
    $
    1,000.9
    
    
    $
    463.9
    
    
    $
    384.6
    
    
    $
    
    
    
    $
    1,849.4Inter-segment sales
    
    
    
    
    
    
    
    
    
    
    36.8
    
    
    
    (36.8
    )
    
    
    Restructuring (note 7)
    
    
    10.6
    
    
    
    4.1
    
    
    
    15.4
    
    
    
    
    
    
    
    30.1Amortization
    
    
    100.6
    
    
    
    37.3
    
    
    
    27.9
    
    
    
    
    
    
    
    165.8Impairment (note 4)
    
    
    11.9
    
    
    
    2.4
    
    
    
    136.7
    
    
    
    
    
    
    
    151.0Operating earnings (loss)
    
    
    27.0
    
    
    
    3.6
    
    
    
    (188.0
    )
    
    
    
    
    
    
    (157.4
    )Total assets
    
    
    1,387.7
    
    
    
    697.8
    
    
    
    280.7
    
    
    
    57.2
    
    
    
    2,423.4Additions to property,
plant and equipment
    
    
    24.2
    
    
    
    15.1
    
    
    
    2.6
    
    
    
    
    
    
    
    41.9
 Year ended December 31, 2007Specialty
    
    
    
    
    
    
    
    
    
    
    Corporateprinting papers
    
    
    Newsprint
    
    
    Pulp
    
    
    adjustments
    
    
    ConsolidatedSales to external customers
    
    $
    919.6
    
    
    $
    338.0
    
    
    $
    457.0
    
    
    $
    
    
    
    $
    1,714.6Inter-segment sales
    
    
    
    
    
    
    
    
    
    
    45.3
    
    
    
    (45.3
    )
    
    
    Restructuring and
change-of-control (note 7)
    
    
    42.2
    
    
    
    12.9
    
    
    
    9.6
    
    
    
    
    
    
    
    64.7Amortization
    
    
    101.3
    
    
    
    33.2
    
    
    
    41.9
    
    
    
    
    
    
    
    176.4Operating earnings (loss)
    
    
    (75.1
    )
    
    
    (56.9
    )
    
    
    (17.4
    )
    
    
    
    
    
    
    (149.4
    )Total assets
    
    
    1,435.0
    
    
    
    518.6
    
    
    
    483.2
    
    
    
    20.3
    
    
    
    2,457.1Additions to property, plant
and equipment
    
    
    42.8
    
    
    
    32.4
    
    
    
    10.6
    
    
    
    
    
    
    
    85.8
 Year ended December 31, 2006Specialty
    
    
    
    
    
    
    
    
    
    
    Corporateprinting papers
    
    
    Newsprint
    
    
    Pulp
    
    
    adjustments
    
    
    ConsolidatedSales to external customers
    
    $
    918.4
    
    
    $
    529.8
    
    
    $
    434.3
    
    
    $
    
    
    
    $
    1,882.5Inter-segment sales
    
    
    
    
    
    
    
    
    
    
    47.2
    
    
    
    (47.2
    )
    
    
    Amortization
    
    
    94.6
    
    
    
    45.8
    
    
    
    43.3
    
    
    
    
    
    
    
    183.7Impairment (note 4)
    
    
    0.5
    
    
    
    19.1
    
    
    
    3.8
    
    
    
    
    
    
    
    23.4Operating earnings (loss)
    
    
    9.7
    
    
    
    6.9
    
    
    
    (12.7
    )
    
    
    
    
    
    
    3.9Total assets
    
    
    1,355.3
    
    
    
    737.8
    
    
    
    529.5
    
    
    
    18.7
    
    
    
    2,641.3Additions to property,
plant and equipment
    
    
    48.4
    
    
    
    34.4
    
    
    
    10.4
    
    
    
    
    
    
    
    93.2
   8




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##### Table of Contents



CONSOLIDATED GEOGRAPHIC BUSINESS SEGMENTS  (In millions of dollars)
 2008Specialtyprinting papers
    
    
    Newsprint
    
    
    Pulp
    
    
    TotalSales by shipment destination:Canada
    
    $
    138.0
    
    
    $
    58.8
    
    
    $
    12.6
    
    
    $
    209.4United States
    
    
    764.6
    
    
    
    261.8
    
    
    
    50.6
    
    
    
    1,077.0Asia and Australasia
    
    
    28.2
    
    
    
    71.7
    
    
    
    191.6
    
    
    
    291.5Latin America
    
    
    69.9
    
    
    
    70.6
    
    
    
    29.5
    
    
    
    170.0Europe and other
    
    
    0.2
    
    
    
    1.0
    
    
    
    100.3
    
    
    
    101.5$
    1,000.9
    
    
    $
    463.9
    
    
    $
    384.6
    
    
    $
    1,849.4
 2007Specialtyprinting papers
    
    
    Newsprint
    
    
    Pulp
    
    
    TotalSales by shipment destination:Canada
    
    $
    121.0
    
    
    $
    60.7
    
    
    $
    14.5
    
    
    $
    196.2United States
    
    
    712.2
    
    
    
    145.7
    
    
    
    47.0
    
    
    
    904.9Asia and Australasia
    
    
    22.7
    
    
    
    67.8
    
    
    
    242.2
    
    
    
    332.7Latin America
    
    
    59.9
    
    
    
    61.6
    
    
    
    36.7
    
    
    
    158.2Europe and other
    
    
    3.8
    
    
    
    2.2
    
    
    
    116.6
    
    
    
    122.6$
    919.6
    
    
    $
    338.0
    
    
    $
    457.0
    
    
    $
    1,714.6
 2006Specialtyprinting papers
    
    
    Newsprint
    
    
    Pulp
    
    
    TotalSales by shipment destination:Canada
    
    $
    104.0
    
    
    $
    88.7
    
    
    $
    13.9
    
    
    $
    206.6United States
    
    
    759.3
    
    
    
    256.7
    
    
    
    37.8
    
    
    
    1,053.8Asia and Australasia
    
    
    15.6
    
    
    
    106.0
    
    
    
    201.0
    
    
    
    322.6Latin America
    
    
    38.5
    
    
    
    78.0
    
    
    
    55.4
    
    
    
    171.9Europe and other
    
    
    1.0
    
    
    
    0.4
    
    
    
    126.2
    
    
    
    127.6$
    918.4
    
    
    $
    529.8
    
    
    $
    434.3
    
    
    $
    1,882.5
   9




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TABLE OF CONTENTS
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 PageNote 1 Nature of Operations
    
    
    11Note 2 Summary of Significant Accounting Policies
    
    
    11Note 3 Capital Structure Management
    
    
    17Note 4 Measurement Uncertainty  Impairment of Long-lived assets
    
    
    17Note 5 Variable Interest Entities
    
    
    19Note 6 Acquisition of Snowflake Recycle Newsprint Mill
    
    
    20Note 7 Restructuring and Change-of-Control Costs
    
    
    21Note 8 Interest Expense, Net
    
    
    22Note 9 Other Income (Expense), Net
    
    
    22Note 10 Income Taxes
    
    
    22Note 11 Earnings per Share
    
    
    24Note 12 Accounts Receivable
    
    
    24Note 13 Inventories
    
    
    24Note 14 Prepaids and Other
    
    
    25Note 15 Property, Plant and Equipment
    
    
    25Note 16 Other Assets
    
    
    26Note 17 Accounts Payable and Accrued Liabilities
    
    
    26Note 18 Long-term Debt
    
    
    26Note 19 Employee Future Benefits
    
    
    28Note 20 Other Long-term Obligations
    
    
    32Note 21 Deferred Credits
    
    
    32Note 22 Share Capital
    
    
    32Note 23 Stock-based Compensation Plans
    
    
    32Note 24 Financial Instruments
    
    
    35Note 25 Related Party Transactions
    
    
    39Note 26 Commitments
    
    
    40Note 27 Guarantees and Indemnities
    
    
    40Note 28 Contingent Liabilities
    
    
    41Note 29 Accounting Policy Developments
    
    
    41Note 30 Reconciliation of Canadian and United States Generally
 Accepted Accounting Principles
    
    
    42
 
  10




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 1.
    
    NATURE OF OPERATIONSCatalyst Paper Corporation, together with its subsidiaries and partnerships (collectively,
the Company) is a significant specialty mechanical printing papers and newsprint producer
in North America. The Company operates in three business segments.
 Specialty printing papers
    
    
    
    Manufacture and sale of mechanical specialty printing
papers.Newsprint
    
    
    
    Manufacture and sale of newsprint.Pulp
    
    
    
    Manufacture and sale of long-fibre Northern Bleached Softwood Kraft (NBSK)
pulp (prior to November 18, 2008, pulp segment included manufacture of short-fibre
NBSK pulp and white top linerboard).
    2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (a)
    
    Basis of consolidationThe consolidated financial statements include the accounts of the Company and, from
their respective dates of acquisition of control or formation, its wholly owned
subsidiaries and partnerships. In addition, the consolidated financial statements
include the accounts of the Companys joint venture, Powell River Energy Inc. (PREI),
a variable interest entity. All inter-company transactions and amounts have been
eliminated on consolidation.(b)
    
    Variable interest entitiesVariable interest entities (VIE) are entities in which equity investors do not have a
controlling financial interest or the equity investment at risk is not sufficient to
permit the entity to finance its activities without additional subordinated financial
support provided by other parties. The Company consolidates the accounts of VIEs where
it has been determined that the Company is the primary beneficiary, defined as the
party that receives the majority of the expected residual returns and/or absorbs the
majority of the entitys expected losses.(c)
    
    Changes in accounting policiesOn January 1, 2008, the Company adopted the following new recommendations of the
Canadian Institute of Chartered Accountants (CICA):Handbook Section 3031, Inventories, provides more guidance on the measurement and
disclosure requirements for inventories. Significantly to the Company, the new
recommendations require raw materials to be recorded at the lower of cost or net
realizable value (NRV) with NRV determined on an as converted to finished goods basis
for all raw materials to be used in the production of finished goods, allow the
reversals of previous write-downs to NRV when there is a subsequent increase in the
value of inventories and include more detailed guidance on the classification of spare
parts between inventories and capitalized equipment. The Company adopted this standard
with a prospective application.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 Upon adoption of this standard, the Company recorded a write-down of $3.8 million to
opening raw materials inventory and adjusted its opening balances of retained earnings
by $2.6 million, net of taxes. In addition, the Company reclassified $5.7 million of
its maintenance spare parts inventory from Inventories to Property, plant and
equipment on the balance sheet.Handbook Section 1535, Capital Disclosures establishes guidelines for the disclosure
of information related to an entitys objectives, policies and processes for managing
capital, quantitative data on what the entity regards as capital and whether the entity
has complied with any capital requirement and, if it has not complied, the consequences
of such non-compliance (note 3).Handbook Section 3862, Financial Instruments  Disclosures and Section 3863,
Financial Instruments  Presentation enhance existing disclosures in previously
issued Section 3861, Financial Instruments  Disclosures and Presentation. The new
recommendations under Section 3862, Financial Instruments  Disclosures require
additional disclosures, relative to those previously required, with an emphasis on
risks associated with both recognized and unrecognized financial instruments to which
an entity is exposed during the period and at the balance sheet date, and how the
entity manages those risks (note 24(a)).During 2008, the CICA amended Handbook Section 1400, General Standards of Financial
Statement Presentation. The revision to this section provides additional guidance
related to managements assessment of the Companys ability to continue as a going
concern. This revision is effective for fiscal years beginning on or after January 1,
2008. The standard did not have a material impact on the Companys consolidated
financial statements.On January 1, 2007, the Company adopted the new recommendations of CICA Handbook
Section 3855, Financial Instruments  Recognition and Measurement, Section 1530,
Comprehensive Income, Section 3865, Hedges, Section 3861, Financial Instruments 
 Disclosure and Presentation, and Section 3251, Equity. These new standards, which
applied to fiscal years beginning on or after October 1, 2006, introduced new
requirements for recognition, measurement and disclosure of financial instruments, when
and how hedge accounting may be applied, established the concept of comprehensive
income and rules for reporting it, and established rules for the presentation of equity
and changes in equity. Prior period financial statements were not revised for the
adoption of these new standards. The adoption of these standards resulted in the
Company recording on its balance sheet, at fair value, certain revenue and interest
rate derivative financial instruments that were previously off balance sheet and the
reclassification of its deferred financing costs against long-term debt. This resulted
in the adjustment of $2.3 million, net of taxes, to the opening balances of retained
earnings on January 1, 2007.For the year ended December 31, 2008, the Company early adopted the new recommendations
of the CICA Emerging Issues Committee as described in Abstract 173 Credit Risk and the
Fair Value of Financial Assets and Financial Liabilities. This Abstract clarifies
that the Company must consider its own credit risk and the credit risk of a
counterparty in the determination of the fair value of derivative instruments. The
Company adopted this standard effective January 1, 2008 and it had no material effect
on opening balances.(d)
    
    Use of estimatesThe consolidated financial statements have been prepared in conformity with Canadian
GAAP, which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the year. On an ongoing basis, management reviews its
estimates, including those related to inventory obsolescence, estimated useful lives of
assets, environmental and legal liabilities, impairment of long-lived assets, pension
and post-retirement benefits, bad debt and doubtful accounts and income taxes, based on
currently available information. Actual amounts could differ from estimates.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 (e)
    
    Revenue recognitionThe Company recognizes revenues upon shipment when the significant risks and rewards of
ownership are transferred to the customer and collection is reasonably assured. Title
to products is typically
transferred to the customers at the time of shipment, and payment is based on agreed
prices and credit terms contained in sales invoices. Customers have no contractual
right of return.(f)
    
    Translation of foreign currenciesThe majority of the Companys sales are denominated in foreign currencies, principally
U.S. dollars. Revenue and expense items denominated in foreign currencies are
translated at exchange rates prevailing during the period. Monetary assets and
liabilities denominated in foreign currencies are translated at the period-end exchange
rates. Non-monetary assets and liabilities are translated at exchange rates in effect
when the assets are acquired or the obligations are incurred. Foreign exchange gains
and losses are reflected in net earnings (loss) for the period.The Company has a foreign subsidiary that is considered to be self-sustaining.
Accordingly, the foreign exchange gains and losses arising from the translation of the
foreign subsidiarys accounts into Canadian dollars are reported as a component of
other comprehensive income, as discussed in note 6.(g)
    
    Derivative financial instrumentsThe Company uses derivative financial instruments in the management of foreign currency
and price risk associated with its revenues, energy costs and long-term debt. It also
uses interest rate swaps to manage its net exposure to interest rate changes. The
Companys policy is to use derivatives for managing existing financial exposures and
not for trading or speculative purposes. The Company accounts for its derivatives at
fair value at each balance sheet date. Prior to January 1, 2007, the Company used
hedge accounting to account for the derivative financial instruments designated as
hedging instruments, and the fair value method to account for derivative financial
instruments not designated as hedging instruments.The Company designates the hedge relationship and formally documents at its inception,
the particular risk management objective and strategy, the specific asset, liability or
cash flow being hedged, as well as how effectiveness is assessed. Risk management
strategies and relationships are assessed on an on-going basis to ensure each
derivative instrument is effective in accomplishing the objective of offsetting either
changes in the fair value or cash flow attributable to the exposure being hedged both
at inception and over the term of the hedging relationship.Realized and unrealized gains or losses associated with hedging instruments are
recognized in earnings in the same period the hedge item is recognized. Realized and
unrealized gains or losses when hedging instruments have ended or ceased to be
effective prior to their maturity are deferred and recognized in earnings concurrently
with the recognition of the item being hedged.Foreign exchange exposure to foreign currency revenue and related receivables,
primarily in U.S. currency, is managed through the use of foreign exchange forward
contracts and options to sell foreign currencies. Realized foreign exchange
translation gains and losses from transactions formally designated as hedges are
recognized concurrently with the hedged revenue in Sales. The effective portion of
changes in the fair value of derivatives that qualify and are designated as cash flow
hedges are deferred and recorded as a component of accumulated other comprehensive
income (AOCI) until the underlying transaction is recorded in earnings. When the
hedged item affects earnings, the gain or loss is reclassified from AOCI to Sales.
Any ineffective portion of a hedging derivatives change in fair value and the portion
that is excluded from the assessment of hedge effectiveness is recognized immediately
in Sales.Price risk associated with the sale of products, primarily NBSK pulp, is managed from
time to time through the use of commodity swap agreements. These contracts are not
designated as hedging instruments for accounting purposes, and are reported at fair
value in Prepaids and other or Accounts payable and accrued liabilities on the
consolidated balance sheet. Changes in fair value are recognized in Sales.Price risk associated with the purchase of certain inputs, primarily oil and gas, is
managed from time to time through the use of commodity swaps. These instruments are
not designated as hedges for accounting purposes and are reported at their fair value
in Prepaids and other or Accounts payable and accrued liabilities on the
consolidated balance sheet. Changes in fair value are recognized in Cost of sales.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 Foreign currency exposure on long-term debt denominated in U.S. currency is managed
through the use of forward contracts and options to purchase U.S. dollars. The Company
has designated a portion of its foreign currency denominated long-term debt as an
effective hedge of its self-sustaining subsidiary. Gains and losses on translation of
such debt into Canadian dollars are deferred in a separate component of shareholders
equity to be recognized in net earnings when there is a reduction in the net investment
in the subsidiary. The fair values of these instruments are reported under Other
assets or Other long-term obligations on the consolidated balance sheet at their
fair value. Changes in fair value on instruments that are not designated as hedges are
recognized in Foreign exchange gain (loss) on long-term debt, offsetting the
respective translation gains and losses on the underlying foreign currency long-term
debt.Exposure to interest rates on long-term debt is managed through the use of interest
swaps. These swap agreements require the periodic exchange of payments without the
exchange of the notional principal amount on which the payments are based. These
instruments are designated as fair value hedging instruments. The effective portion of
changes in the fair value of the derivatives are netted in long-term debt and the
ineffective portion is recognized in Interest expense, net.Cash flows from derivative financial instruments that are designated as hedges and for
which hedge accounting does not apply are classified, in general, to Operations on
the consolidated statement of cash flows consistent with the hedged transaction. Cash
flows resulting from termination of interest rate swaps are classified as investing
activities.(h)
    
    Cash and cash equivalentsCash and cash equivalents include cash and short-term investments with original
maturities of less than three months and are presented at fair value.(i)
    
    InventoriesSpecialty printing papers, newsprint and pulp inventories are valued at the lower of
average cost or net realizable value. Wood chips, pulp logs and other raw materials
are valued at the lower of cost or net realizable value. For all raw materials to be
used in the production of finished goods, net realizable value is determined on an as
converted to finished goods basis (note 2(c)). Work-in-progress and operating and
maintenance supplies and spare parts inventories are valued at cost.(j)
    
    Property, plant and equipmentProperty, plant and equipment are stated at cost, less accumulated amortization,
including asset impairment charges. Interest costs are capitalized for capital
projects in excess of $10 million and having a minimum duration of six months.
Buildings, machinery and equipment are generally amortized on a straight-line basis at
rates that reflect estimates of the economic lives of the assets. The rates for major
classes of assets based on the estimated remaining economic lives are:
 Buildings
    
    
    2.5%  5.0
    %Paper machinery and equipment
    
    
    5.0%  10.0
    %Pulp machinery and equipment
    
    
    10.0%  20.0
    %
 During periods of major production interruption on assets with economic lives greater
than five years, an obsolescence amount of 50% of normal amortization is charged on
manufacturing machinery and equipment.No amortization is charged on capital projects during the period of construction.
Start-up costs incurred in achieving normal operating capacity on major capital
projects are deferred and amortized over a five-year period.Leasehold improvements are normally amortized over the lesser of their expected average
service life and the term of the lease.When property, plant and equipment are sold by the Company, the historical cost less
accumulated amortization is netted against the sale proceeds and the difference is
included in Other income (expense), net.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 (k)
    
    Impairment of long-lived assetsLong-lived assets are tested for recoverability when events or changes in circumstances
indicate their carrying value may not be recoverable. A long-lived asset is potentially
not recoverable when its carrying value is greater than the sum of the undiscounted
cash flows expected to result from its use and eventual disposition. The impairment
loss, if any, is measured as the amount by which the long-lived assets carrying amount
exceeds its fair value.(l)
    
    Environmental costsEnvironmental expenditures are expensed or capitalized depending upon their future
economic benefit. Expenditures that prevent future environmental contamination are
capitalized as part of Property, plant and equipment, and amortization is
subsequently charged to earnings over the estimated future benefit period of the
assets. Expenditures that relate to an existing condition caused by past operations
are expensed. Liabilities are recorded on an undiscounted basis when rehabilitation
efforts are likely to occur and the costs can be reasonably estimated.(m)
    
    Asset retirement obligationsAsset retirement obligations are recognized at fair value in the period in which the
Company incurs a legal obligation associated with the retirement of an asset. The
associated costs are capitalized as part of the carrying value of the related asset and
amortized over its remaining useful life. The liability is accreted using a
credit-adjusted risk-free interest rate.The Companys obligations for the proper removal and disposal of asbestos products in
its mills meet the definition of a conditional asset retirement obligation. That is,
the Company is subject to regulations that are in place to ensure that asbestos fibres
do not become friable, or loose. The regulations require that friable asbestos be
repaired or removed in accordance with the regulations.The Companys asbestos can generally be found on steam and condensate piping systems
throughout its facilities, as well as in transite cladding on buildings and in building
insulation. As a result of the longevity of the Companys mills, due in part to the
Companys maintenance procedures, and the fact that the Company does not have plans for
major changes that would require the removal of asbestos, the timing of the removal of
asbestos in the Companys mills is indeterminate. As a result, the Company is
currently unable to estimate the fair value of its asbestos removal and disposal
obligation.(n)
    
    Research and developmentResearch and development costs are expensed except in cases where development costs
meet certain identifiable criteria for deferral. Deferred development costs are
amortized over the life of the commercial production.(o)
    
    Deferred financing costsDeferred financing costs represent the issuance costs of the Companys long-term debt.
Deferred costs related to the Companys senior notes are netted against the carrying
value of long-term debt on the consolidated balance sheet and amortized using the
effective interest rate method over the expected life of the related liability.
Deferred costs related to the Companys revolving asset based facility are included in
Other assets.(p)
    
    Share issue costsDirect costs of issuing shares, net of income tax recoveries thereon, are applied to
reduce the value of consideration assigned to such shares.(q)
    
    Stock-based compensation and other stock-based paymentsStock options and restricted share units granted to the Companys key officers,
directors and employees are accounted for using the fair value-based method. Under
this method, compensation cost is measured at fair value at the date of grant, and is
expensed over the awards vesting period. Any consideration paid by plan participants
on the exercise of share options or the purchase of shares is credited to Share
capital together with any related stock-based compensation expense. Performance and
time based share-based payments are amortized over their vesting periods based on
managements best estimate.Deferred share units are accounted for using the quoted market value at each reporting
period until settlement, and are amortized over their vesting periods.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 (r)
    
    Income taxesIncome taxes are accounted for using the asset and liability method. Future income tax
assets and liabilities are based on temporary differences (differences between the
accounting basis and the tax basis of the assets and liabilities) and non-capital loss
carry-forwards and are measured using the enacted or substantively enacted tax rates
and laws expected to apply when these differences reverse. Future tax benefits,
including non-capital loss carry-forwards, are recognized to the extent that
realization of such benefits is considered more likely than not. The effect on future
tax assets and liabilities of a change in tax rates is recognized in earnings in the
period that substantive enactment occurs.(s)
    
    Deferred creditsDeferred credits represent the excess of amounts assigned to future income tax assets
for tax losses acquired in other than business combinations over the consideration
paid. Deferred credits are amortized to Income tax recovery in the consolidated
statement of earnings during the period that the acquired tax asset is utilized.(t)
    
    Employee future benefitsPensions and other employee future benefitsThe estimated cost for pensions and other employee future benefits provided to
employees by the Company is accrued using actuarial techniques and assumptions during
the employees active years of service. These plans include funded and unfunded
defined benefit plans and defined contribution plans. The net periodic benefit cost
includes:
 
    
    the cost of benefits provided in exchange for employees services rendered during the year;
    
    the interest cost of benefit obligations;
    
    the expected long-term return on plan assets based on the fair value for all asset classes;
    
    gains or losses on settlements or curtailments;
    
    the straight-line amortization of past service costs and plan
amendments over the average remaining service period of the active employee group
covered by the plans as of the date such costs are first recognized, unless all,
or almost all, of the employees are no longer active, in which case such costs are
amortized over the average life expectancy of the former employees (amortized over
5 years for periods prior to December 31, 2008); and
    
    the amortization of cumulative unrecognized net actuarial gains and
losses in excess of 10% of the greater of the accrued benefit obligation and the
fair value of plan assets at the beginning of the year over the average remaining
service period of the active employee group covered by the plans, unless all, or
almost all, of the employees are no longer active, in which case such costs are
amortized over the average life expectancy of the former employees (amortized over
5 years for periods prior to December 31, 2008).
  (u)
    
    Earnings per shareBasic earnings (loss) per share is computed by dividing net earnings
(loss) for the period by the weighted average shares outstanding
during the reporting period. Diluted earnings (loss) per share is
computed using the treasury stock method. When the effect of options
and other securities convertible into common shares is anti-dilutive,
including when the Company has incurred a loss for the period, basic
and diluted loss per share are the same.(v)
    
    Comparative figuresCertain comparative figures disclosed in the consolidated financial
statements have been reclassified to conform with the presentation
adopted for the current year.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 3.
    
    CAPITAL STRUCTURE MANAGEMENT
     4.
    
    MEASUREMENT UNCERTAINTY  IMPAIRMENT OF LONG-LIVED ASSETS
  (i)
    
    Determine whether the projected undiscounted future cash flows from operations
exceed the net carrying amount of the assets as of the assessment date, and(ii)
    
    If assets are determined to be impaired in step (i), then such impaired assets
are written down to their fair value, determined principally by using discounted future
cash flows expected from their use and eventual disposition.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
       18




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 5.
    
    VARIABLE INTEREST ENTITIES
   Years ended December 31
    
    2008
    
    
    2007
    
    
    2006Condensed statement of earningsSales  affiliate 1
    
    $
    18.6
    
    
    $
    19.2
    
    
    $
    19.6Cost of sales
    
    
    4.9
    
    
    
    5.1
    
    
    
    5.3Amortization
    
    
    3.2
    
    
    
    3.3
    
    
    
    2.98.1
    
    
    
    8.4
    
    
    
    8.2Operating earnings
    
    
    10.5
    
    
    
    10.8
    
    
    
    11.4Interest expense
    
    
    (7.7
    )
    
    
    (8.2
    )
    
    
    (8.1
    )Interest expense  affiliate 1
    
    
    (2.7
    )
    
    
    (3.1
    )
    
    
    (3.1
    )Other expense, net
    
    
    0.5
    
    
    
    (4.2
    )
    
    
    (0.3
    )Income tax recovery
    
    
    1.0
    
    
    
    4.9
    
    
    
    3.0Net earnings2
    
    $
    1.6
    
    
    $
    0.2
    
    
    $
    2.9
 As at December 31
    
    2008
    
    
    2007Condensed balance sheetsCurrent assets
    
    $
    3.5
    
    
    $
    3.8Property, plant and equipment
    
    
    115.6
    
    
    
    118.2$
    119.1
    
    
    $
    122.0Current liabilitiesAccounts payable and accrued liabilities
    
    $
    15.3
    
    
    $
    17.4Current portion of long-term debt (note 18)
    
    
    74.9
    
    
    
    0.5Long-term debt (note 18)
    
    
    19.5
    
    
    
    94.1Long-term debt  affiliate 1
    
    
    21.5
    
    
    
    21.5Future income taxes
    
    
    19.7
    
    
    
    20.7Shareholders deficit 2
    
    
    (31.8
    )
    
    
    (32.2
    )$
    119.1
    
    
    $
    122.0
 1
    
    Balances with Catalyst Paper Corporation.2
    
    50% is included in the Companys non-controlling interest balances.   19




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 6.
    
    ACQUISITION OF SNOWFLAKE RECYCLE NEWSPRINT MILL
   Assets acquiredCurrent assets
    
    $
    18.1Property, plant and equipment
    
    
    169.7Other assets
    
    
    0.5188.3Liabilities assumedCurrent liabilities
    
    
    (18.1
    )Employee future benefits
    
    
    (0.4
    )Fair value of net assets acquired
    
    $
    169.8Consideration paidCash, including transaction costs
    
    $
    169.8
     20




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 7.
    
    RESTRUCTURING AND CHANGE-OF-CONTROL COSTS
  Years ended December 312008
    
    
    2007Balance, beginning of year
    
    $
    28.1
    
    
    $
    Expensed in year
    
    
    30.1
    
    
    
    64.7Disbursements
    
    
    (23.6
    )
    
    
    (23.6
    )Other non-cash items
    
    
    
    
    
    
    (0.4
    )34.6
    
    
    
    40.7Less: portion related to employee future benefits
    
    
    (18.3
    )
    
    
    (12.6
    )Balance, end of year
    
    $
    16.3
    
    
    $
    28.1Classification:Accounts payable and accrued liabilities (note 17)
    
    $
    14.0
    
    
    $
    20.0Other long-term obligations (note 20)
    
    
    2.3
    
    
    
    8.1$
    16.3
    
    
    $
    28.1
 2008
    2007
    21




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 8.
    
    INTEREST EXPENSE, NET
  2008
    
    
    2007
    
    
    2006Interest on long-term debt
    
    $
    78.0
    
    
    $
    71.7
    
    
    $
    75.4Fixed-to-floating interest rate swaps
    
    
    (2.9
    )
    
    
    
    
    
    
    (1.2
    )Other
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.975.4
    
    
    
    71.8
    
    
    
    75.1Capitalized interest
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    Interest income
    
    
    (0.3
    )
    
    
    (0.9
    )
    
    
    (1.3
    )$
    75.0
    
    
    $
    70.7
    
    
    $
    73.8
 9.
    
    OTHER INCOME (EXPENSE), NET
  2008
    
    
    2007
    
    
    2006Termination fee on closure of corrugating
machine at Snowflake
    
    $
    2.0
    
    
    
    
    
    
    
    Gain (loss) on disposal of property, plant
and equipment
    
    
    0.4
    
    
    $
    (13.6
    )
    
    $
    1.1Financing expenses
    
    
    
    
    
    
    (1.2
    )
    
    
    Other
    
    
    0.1
    
    
    
    (0.5
    )
    
    
    0.7$
    2.5
    
    
    $
    (15.3
    )
    
    $
    1.8
 10.
    
    INCOME TAXES
  2008
    
    
    2007
    
    
    2006Current
    
    $
    1.7
    
    
    $
    0.7
    
    
    $
    2.1Future
    
    
    (86.6
    )
    
    
    (78.3
    )
    
    
    (33.2
    )Release of future taxes related to reduction
in corporate income tax rates
    
    
    (6.9
    )
    
    
    (22.4
    )
    
    
    (22.9
    )$
    (91.8
    )
    
    $
    (100.0
    )
    
    $
    (54.0
    )
  22




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
  2008
    
    
    2007
    
    
    2006Income tax recovery at Canadian
statutory income tax rates
    
    $
    (96.8
    )
    
    
    31.0
    %
    
    $
    (44.7
    )
    
    
    34.0
    %
    
    $
    (23.3
    )
    
    
    34.1
    %Increase (decrease) in income taxes for:Non-taxable income and expenses
    
    
    13.8
    
    
    
    (4.4
    )
    
    
    (14.9
    )
    
    
    11.3
    
    
    
    0.8
    
    
    
    (1.2
    )Difference in foreign tax rate
    
    
    (4.3
    )
    
    
    1.4
    
    
    
    (1.7
    )
    
    
    1.3
    
    
    
    (1.8
    )
    
    
    2.6Release of future income taxes related
to reduction in corporate income tax
rates
    
    
    (6.9
    )
    
    
    2.2
    
    
    
    (22.4
    )
    
    
    17.0
    
    
    
    (22.9
    )
    
    
    33.5Change in the future income tax estimate
    
    
    
    
    
    
    
    
    
    
    (14.4
    )
    
    
    11.0
    
    
    
    (4.5
    )
    
    
    6.6Adjustment to deferred credits
    
    
    (2.7
    )
    
    
    0.8
    
    
    
    (2.3
    )
    
    
    1.7
    
    
    
    1.0
    
    
    
    (1.4
    )Large corporations tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.3
    )
    
    
    0.4Other
    
    
    5.1
    
    
    
    (1.6
    )
    
    
    0.4
    
    
    
    (0.3
    )
    
    
    (3.0
    )
    
    
    4.4Income tax recovery
    
    $
    (91.8
    )
    
    
    29.4
    %
    
    $
    (100.0
    )
    
    
    76.0
    %
    
    $
    (54.0
    )
    
    
    79.0
    %
  2008
    
    
    2007Future income tax assetsNon-capital losses and temporary differences related
to working capital
    
    $
    21.7
    
    
    $
    5.0Employee future benefits
    
    
    4.5
    
    
    
    0.626.2
    
    
    
    5.6Valuation allowance
    
    
    
    
    
    
    (1.9
    )$
    26.2
    
    
    $
    3.7Classification:Prepaids and other (note 14)
    
    $
    26.2
    
    
    $
    Other assets (note 16)
    
    
    
    
    
    
    3.7$
    26.2
    
    
    $
    3.7
  Future income tax liabilitiesProperty, plant and equipment
    
    $
    184.2
    
    
    $
    229.2Non-capital loss carry-forwards
    
    
    (79.7
    )
    
    
    (77.0
    )Employee future benefits
    
    
    (50.7
    )
    
    
    (54.2
    )Other
    
    
    8.3
    
    
    
    54.062.1
    
    
    
    152.0Valuation allowance
    
    
    4.7
    
    
    
    2.2$
    66.8
    
    
    $
    154.2
  23




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 11.
    
    EARNINGS PER SHARE
  2008
    
    
    2007
    
    
    2006Net earnings (loss) reported
    
    $
    (221.1
    )
    
    $
    (31.6
    )
    
    $
    (15.9
    )Weighted average shares used in computation of basic
earnings per share (in millions)
    
    
    336.1
    
    
    
    214.7
    
    
    
    214.6Weighted average shares from assumed conversion of
dilutive options (in millions)
    
    
    
    
    
    
    
    
    
    
    Weighted average shares used in computation of diluted
earnings per share (in millions)
    
    
    336.1
    
    
    
    214.7
    
    
    
    214.6Basic and diluted earnings (loss) per share (in dollars)
    
    $
    (0.66
    )
    
    $
    (0.15
    )
    
    $
    (0.07
    )
 12.
    
    ACCOUNTS RECEIVABLE
  2008
    
    
    2007Trade receivables
    
    $
    206.6
    
    
    $
    197.0Less: Allowance for doubtful accounts
    
    
    (3.2
    )
    
    
    (2.8
    )203.4
    
    
    
    194.2Sales taxes receivable
    
    
    3.0
    
    
    
    8.3Other receivables
    
    
    15.3
    
    
    
    10.6$
    221.7
    
    
    $
    213.1
 13.
    
    INVENTORIES
  2008
    
    
    2007Finished goodsSpecialty printing papers
    
    $
    25.6
    
    
    $
    40.6Newsprint
    
    
    8.7
    
    
    
    10.3Pulp
    
    
    18.8
    
    
    
    24.3Total finished goods
    
    
    53.1
    
    
    
    75.2Work-in-progress
    
    
    1.7
    
    
    
    1.5Raw materials  wood chips, pulp logs and other
    
    
    46.1
    
    
    
    41.0Operating and maintenance supplies and spare parts
    
    
    110.5
    
    
    
    118.0$
    211.4
    
    
    $
    235.7
    24




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 14.
    
    PREPAIDS AND OTHER
  2008
    
    
    2007Future income tax assets (note 10)
    
    $
    26.2
    
    
    $
    Derivative financial instruments
    
    
    1.3
    
    
    
    32.0Property taxes, insurance and licences
    
    
    2.1
    
    
    
    3.7Other
    
    
    3.2
    
    
    
    5.0$
    32.8
    
    
    $
    40.7
 15.
    
    PROPERTY, PLANT AND EQUIPMENT
  2008Accumulated
    
    
    Net bookCost
    
    
    amortization
    
    
    valueBuildings and landSpecialty printing papers and newsprint
    
    $
    556.4
    
    
    $
    229.3
    
    
    $
    327.1Pulp
    
    
    141.2
    
    
    
    111.8
    
    
    
    29.4Machinery and equipmentSpecialty printing papers and newsprint
    
    
    2,708.0
    
    
    
    1,369.1
    
    
    
    1,338.9Pulp
    
    
    862.3
    
    
    
    705.7
    
    
    
    156.6$
    4,267.9
    
    
    $
    2,415.9
    
    
    $
    1,852.0
 2007Accumulated
    
    
    Net bookCost
    
    
    amortization
    
    
    valueBuildings and landSpecialty printing papers and newsprint
    
    $
    464.9
    
    
    $
    163.8
    
    
    $
    301.1Pulp
    
    
    124.4
    
    
    
    68.1
    
    
    
    56.3Machinery and equipmentSpecialty printing papers and newsprint
    
    
    2,561.0
    
    
    
    1,295.0
    
    
    
    1,266.0Pulp
    
    
    885.4
    
    
    
    596.0
    
    
    
    289.4$
    4,035.7
    
    
    $
    2,122.9
    
    
    $
    1,912.8
     25




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 16.
    
    OTHER ASSETS
  2008
    
    
    2007Accrued benefit asset  pension plan (note 19)
    
    $
    31.0
    
    
    $
    16.6Derivative financial instruments
    
    
    34.7
    
    
    
    5.0Non-controlling interest (note 5)
    
    
    15.9
    
    
    
    16.1Deferred charges and other
    
    
    13.8
    
    
    
    13.4Deferred financing costs
    
    
    5.1
    
    
    
    Future income tax assets (note 10)
    
    
    
    
    
    
    3.7$
    100.5
    
    
    $
    54.8
 17.
    
    ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
  2008
    
    
    2007Trade payables
    
    $
    115.3
    
    
    $
    135.7Accrued payroll and related liabilities
    
    
    66.9
    
    
    
    74.9Restructuring and change-of-control (note 7)
    
    
    14.0
    
    
    
    20.0Accrued benefit obligation  pension plan (note 19)
    
    
    7.3
    
    
    
    5.5Accrued benefit obligation  other employee future
benefit plans (note 19)
    
    
    6.7
    
    
    
    6.7Derivative financial instruments
    
    
    30.2
    
    
    
    0.2Accrued interest
    
    
    10.9
    
    
    
    9.2Other
    
    
    18.1
    
    
    
    16.0$
    269.4
    
    
    $
    268.2
 18.
    
    LONG-TERM DEBT
  2008
    
    
    2007RecourseSenior notes, 8.625% due June 2011 (US$400.0 million)
    
    $
    485.1
    
    
    $
    388.9Senior notes, 7.375% due March 2014 (US$250.0 million)
    
    
    306.9
    
    
    
    246.6792.0
    
    
    
    635.5Revolving asset based loan facility of up to $330.0
million due August 2013
    
    
    60.1
    
    
    
    Revolving operating facility of up to $350.0 million
due July 2009
    
    
    
    
    
    
    47.1Capital lease obligations
    
    
    12.2
    
    
    
    8.6864.3
    
    
    
    691.2Non-recourseFirst mortgage bonds, 6.387% due July 2009
    
    
    74.9
    
    
    
    74.6Subordinated promissory notes
    
    
    19.5
    
    
    
    19.5Short-term loan payable
    
    
    
    
    
    
    0.594.4
    
    
    
    94.6Total debt
    
    
    958.7
    
    
    
    785.8Less: Current portion
    
    
    (75.8
    )
    
    
    (1.2
    )$
    882.9
    
    
    $
    784.6
  26




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
       27




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 Scheduled total debt repayments
 Recourse
    
    
    Non-recoursedebt
    
    
    debt (PREI)2009
    
    $
    1.0
    
    
    $
    75.02010
    
    
    1.0
    
    
    
    2011
    
    
    490.9
    
    
    
    2012
    
    
    4.0
    
    
    
    2013
    
    
    64.0
    
    
    
    Thereafter
    
    
    307.5
    
    
    
    19.5$
    868.4
    
    
    $
    94.5
 Fair value of total debt
  2008
    
    
    2007Recourse
    
    $
    414.3
    
    
    $
    573.9Non-recourse (PREI)
    
    
    95.8
    
    
    
    96.5$
    510.1
    
    
    $
    670.4
 19.
    
    EMPLOYEE FUTURE BENEFITS
 Description of benefit plans
     Total cash payments
   Defined benefit plan
   28




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 Change in accrued defined benefit plan obligation
  Pension benefit plans
    
    
    Other benefit plans2008
    
    
    2007
    
    
    2008
    
    
    2007Accrued benefit obligations at beginning of year
    
    $
    375.8
    
    
    $
    376.5
    
    
    $
    219.4
    
    
    $
    227.6Service cost for the year
    
    
    5.2
    
    
    
    5.3
    
    
    
    4.6
    
    
    
    5.1Interest cost
    
    
    19.3
    
    
    
    18.2
    
    
    
    11.5
    
    
    
    11.4Employee contributions
    
    
    0.5
    
    
    
    0.4
    
    
    
    
    
    
    
    Benefit payments
    
    
    (29.8
    )
    
    
    (29.8
    )
    
    
    (6.7
    )
    
    
    (6.4
    )Recognition of restructuring program (note 7)
    
    
    7.5
    
    
    
    12.6
    
    
    
    
    
    
    
    Prior service (credits) costs
    
    
    5.1
    
    
    
    
    
    
    
    
    
    
    
    Actuarial loss (gain) and other adjustments
    
    
    (49.3
    )
    
    
    (7.4
    )
    
    
    (65.1
    )
    
    
    (18.3
    )Accrued benefit obligations balance at end of year
    
    $
    334.3
    
    
    $
    375.8
    
    
    $
    163.7
    
    
    $
    219.4
 Change in fair value of defined benefit plan assets
  Pension benefit plans
    
    
    Other benefit plans2008
    
    
    2007
    
    
    2008
    
    
    2007Fair value of defined benefit plan assets at beginning
of year
    
    $
    276.4
    
    
    $
    283.5
    
    
    $
    
    
    
    $
    Actual return on plan assets
    
    
    (54.6
    )
    
    
    (1.1
    )
    
    
    
    
    
    
    Employee contributions
    
    
    0.5
    
    
    
    0.4
    
    
    
    
    
    
    
    Company contributions
    
    
    26.7
    
    
    
    24.4
    
    
    
    6.7
    
    
    
    6.4Other
    
    
    1.4
    
    
    
    (1.0
    )
    
    
    
    
    
    
    Benefit payments
    
    
    (29.8
    )
    
    
    (29.8
    )
    
    
    (6.7
    )
    
    
    (6.4
    )Fair value of defined benefit plan assets at end of year
    
    $
    220.6
    
    
    $
    276.4
    
    
    $
    
    
    
    $
    
  Plan assets at December 31,
    
    2008
    
    
    2007Equity securities
    
    
    52.6
    %
    
    
    60.5
    %Fixed income securities
    
    
    47.4
    %
    
    
    39.5
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 Reconciliation of the funded status of the benefit plans to the amounts in the consolidated
balance sheets
    29




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
  Pension benefit plans
    
    
    Other benefit plans2008
    
    
    2007
    
    
    2008
    
    
    2007Accrued benefit obligation at end of year
    
    $
    334.3
    
    
    $
    375.8
    
    
    $
    163.7
    
    
    $
    219.4Fair value of plan assets at end of year
    
    
    220.6
    
    
    
    276.4
    
    
    
    
    
    
    
    Funded status-deficit
    
    
    (113.7
    )
    
    
    (99.4
    )
    
    
    (163.7
    )
    
    
    (219.4
    )Unrecognized prior service (credits) costs
    
    
    5.2
    
    
    
    
    
    
    
    (1.5
    )
    
    
    (1.7
    )Unrecognized actuarial (gains) losses
    
    
    86.7
    
    
    
    68.2
    
    
    
    (22.6
    )
    
    
    45.0Accrued benefit obligation recognized in
the consolidated balance sheets
    
    $
    (21.8
    )
    
    $
    (31.2
    )
    
    $
    (187.8
    )
    
    $
    (176.1
    )
 Classification of accrued obligations
  Pension benefit plans
    
    
    Other benefit plans2008
    
    
    2007
    
    
    2008
    
    
    2007Other assets (note 16)
    
    $
    31.0
    
    
    $
    16.6
    
    
    $
    
    
    
    $
    Accounts payable and accrued liabilities (note 17)
    
    
    (7.3
    )
    
    
    (5.5
    )
    
    
    (6.7
    )
    
    
    (6.7
    )Employee future benefits
    
    
    (45.5
    )
    
    
    (42.3
    )
    
    
    (181.1
    )
    
    
    (169.4
    )$
    (21.8
    )
    
    $
    (31.2
    )
    
    $
    (187.8
    )
    
    $
    (176.1
    )
 Components of net periodic benefit cost recognized in the year
 Pension benefit plans
    
    2008
    
    
    2007
    
    
    2006Defined benefit costsService cost for the year
    
    $
    5.2
    
    
    $
    5.3
    
    
    $
    6.9Interest cost
    
    
    19.3
    
    
    
    18.2
    
    
    
    17.8Actual return on assets
    
    
    54.6
    
    
    
    1.1
    
    
    
    (37.7
    )Actuarial (gain)/loss
    
    
    (51.5
    )
    
    
    (9.0
    )
    
    
    14.2Prior service costs
    
    
    5.1
    
    
    
    
    
    
    
    Settlement loss
    
    
    
    
    
    
    0.5
    
    
    
    Recognition of restructuring program (note 7)
    
    
    7.5
    
    
    
    12.6
    
    
    
    Difference between actual and expected return
    
    
    (73.9
    )
    
    
    (20.7
    )
    
    
    20.3Difference between actual and recognized actuarial
(gain)/loss and other
    
    
    56.4
    
    
    
    11.6
    
    
    
    (7.7
    )Difference between actual and recognized prior service costs
    
    
    (5.1
    )
    
    
    
    
    
    
    17.6
    
    
    
    19.6
    
    
    
    13.8Defined contribution costService cost for the year
    
    
    5.5
    
    
    
    5.3
    
    
    
    5.5Net periodic benefit cost for pension benefit plans
    
    $
    23.1
    
    
    $
    24.9
    
    
    $
    19.3
  30




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 Other benefit plans
    
    2008
    
    
    2007
    
    
    2006Defined benefit costsService cost for the year
    
    $
    4.6
    
    
    $
    5.1
    
    
    $
    5.6Interest cost
    
    
    11.5
    
    
    
    11.4
    
    
    
    10.9Actuarial (gain)/loss
    
    
    (66.2
    )
    
    
    (18.3
    )
    
    
    0.4Difference between actual and recognized actuarial
(gain)/loss and other
    
    
    68.0
    
    
    
    21.5
    
    
    
    3.0Difference between actual and recognized prior service
(credits) costs
    
    
    (0.2
    )
    
    
    (0.2
    )
    
    
    (0.2
    )Net periodic benefit cost for other benefit plans
    
    $
    17.7
    
    
    $
    19.5
    
    
    $
    19.7
 Significant assumptions
  2008
    
    
    2007Benefit obligations at December 31,Discount rate
    
    
    7.00
    %
    
    
    5.25
    %Rate of compensation increase
    
    
    2.50
    %
    
    
    2.50
    %Net benefit cost for year ended December 31,Discount rate
    
    
    5.25
    %
    
    
    5.00
    %Rate of compensation increase
    
    
    2.50
    %
    
    
    3.00
    %Expected rate of return on plan assets
    
    
    7.00
    %
    
    
    7.00
    %Assumed health care cost trend rate at December 31,Extended health benefitsInitial health care cost trend rate
    
    
    7.50
    %
    
    
    8.00
    %Annual rate of decline in trend rate
    
    
    0.50
    %
    
    
    0.50
    %Ultimate health care cost trend rate
    
    
    4.50
    %
    
    
    4.50
    %Dental benefitsDental care cost trend rate
    
    
    4.0
    %
    
    
    4.00
    %Medical services plan benefitsPremium trend rate
    
    
    2.0
    %
    
    
    2.00
    %
 Sensitivity analysis
  Other benefit plansIncrease
    
    
    DecreaseTotal of service and interest cost
    
    $
    3.3
    
    
    $
    (2.7
    )Accrued benefit obligation at December 31
    
    $
    26.5
    
    
    $
    (22.3
    )
  31




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 20.
    
    OTHER LONG-TERM OBLIGATIONS
  2008
    
    
    2007Restructuring and change-of-control liabilities (note 7)
    
    $
    2.3
    
    
    $
    8.1Forward foreign currency contracts hedging long-term debt
    
    
    
    
    
    
    5.4Environmental and remedial
    
    
    6.8
    
    
    
    9.2Other
    
    
    4.2
    
    
    
    4.2$
    13.3
    
    
    $
    26.9
 21.
    
    DEFERRED CREDITS
  2008
    
    
    2007Beginning of year
    
    $
    21.7
    
    
    $
    25.5Adjustment related to utilization of acquired tax losses
    
    
    (2.7
    )
    
    
    (2.3
    )Adjustment resulting from reduction in corporate income
tax rates
    
    
    (0.4
    )
    
    
    (1.5
    )End of year
    
    $
    18.6
    
    
    $
    21.7
 22.
    
    SHARE CAPITAL
 (a)
    
    Authorized
  (b)
    
    Issued and outstanding
 2008
    
    
    2007Shares
    
    
    $
    
    
    Shares
    
    
    $Issued and outstanding:Common shares
    
    
    381,753,490
    
    
    
    1,035.0
    
    
    
    214,684,129
    
    
    
    913.9
 23.
    
    STOCK-BASED COMPENSATION PLANS
 (a)
    
    Details of stock-based compensation expense:
 2008
    
    
    2007
    
    
    2006Stock option awards
    
    $
    1.0
    
    
    $
    2.4
    
    
    $
    2.0Restricted share units
    
    
    1.5
    
    
    
    0.8
    
    
    
    Deferred share units
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.9$
    2.7
    
    
    $
    3.4
    
    
    $
    2.9
  32




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 (b)
    
    Stock option plansThe Company has an employee share option plan (the Plan) for its key officers,
directors and employees. The Plan provides for the issuance of up to a maximum of 12.0
million common shares.Options granted, other than those granted pursuant to the Companys mid and long-term
incentive plan, have a maximum term of ten years. These options are exercisable as to
one-third on and after the first
anniversary date, as to two-thirds on and after the second anniversary date and as to
all on and after the third anniversary date, unless, for all options other than those
granted on March 28, 2007, the market price of the common shares exceeds a specified
acceleration price, in which case all of the options are exercisable at that time. In
general, market price for options is determined by the weighted average price per
share for all sales of common shares on Toronto Stock Exchange (TSX) during the five
consecutive trading days preceding the date on which a determination of market price
is required under the Plan. However, market price for options granted annually to the
Companys directors under the director compensation program is set 25% above the
market price as calculated above.The Company has granted stock options to its key executives that are time and
performance based. These options vest on December 31, 2009 subject to certain
conditions being met. 50% of the total number of stock options will vest if the
executive remains employed with the Company on December 31, 2009, subject to a minimum
return on capital employed benchmark. The remaining 50% of the options will vest
subject to the achievement of a relative return on capital employed compared to that
of an industry peer group. These options have a term of seven years.The Company applies the fair value-based method for recording share options granted to
directors, officers and employees. Under the fair value method, compensation cost is
measured at fair value at the date of grant, and is expensed over the awards vesting
period. Compensation expense related to performance-based options has been based on
managements best estimate of the outcome of the performance conditions in accordance
with CICA Handbook Section 3870, Stock-based Compensation and Other Stock-based
Payments.The fair value of share options was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
 2008
    
    
    2007
    
    
    2006Risk-free interest rate
    
    
    3.8
    %
    
    
    4.5
    %
    
    
    4.0
    %Annual dividends per share
    
    
    Nil
    
    
    
    Nil
    
    
    
    NilExpected stock price volatility
    
    
    40.0
    %
    
    
    30.5
    %
    
    
    30.6
    %Expected option life (in years)
    
    
    8.5
    
    
    
    7.0
    
    
    
    4.0Average fair value of options granted (in dollars)
    
    $
    0.51
    
    
    $
    1.25
    
    
    $
    1.02
   2008
    
    
    2007
    
    
    2006Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageexercise
    
    
    
    
    
    
    exercise
    
    
    
    
    
    
    exerciseNumber of
    
    
    price
    
    
    Number of
    
    
    price
    
    
    Number of
    
    
    priceoptions
    
    
    (in dollars)
    
    
    options
    
    
    (in dollars)
    
    
    options
    
    
    (in dollars)Beginning of year
    
    
    3,964,024
    
    
    $
    3.43
    
    
    
    8,171,000
    
    
    $
    4.35
    
    
    
    8,409,500
    
    
    $
    5.00Granted
    
    
    2,691,891
    
    
    
    1.23
    
    
    
    1,984,624
    
    
    
    3.20
    
    
    
    1,836,000
    
    
    
    3.37Exercised
    
    
    
    
    
    
    
    
    
    
    (80,009
    )
    
    
    3.31
    
    
    
    
    
    
    
    Expired or cancelled
    
    
    (811,931
    )
    
    
    3.42
    
    
    
    (6,111,591
    )
    
    
    4.58
    
    
    
    (2,074,500
    )
    
    
    6.08End of year
    
    
    5,843,984
    
    
    
    2.42
    
    
    
    3,964,024
    
    
    
    3.43
    
    
    
    8,171,000
    
    
    
    4.35
  33




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
  Options outstanding
    
    
    Options exercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    average
    
    
    
    
    
    
    averageremaining
    
    
    range of
    
    
    
    
    
    
    range of
    
    
    AcceleratedRange of
    
    Number of
    
    
    option life
    
    
    exercise price
    
    
    Number of
    
    
    exercise price
    
    
    priceexercise prices
    
    options
    
    
    (years)
    
    
    (in dollars)
    
    
    Options
    
    
    (in dollars)
    
    
    (in dollars)$1.15  $1.95
    
    
    2,691,891
    
    
    
    7.5
    
    
    $
    1.23
    
    
    
    
    
    
    $
    
    
    
    $
    $3.06  $3.30
    
    
    1,734,093
    
    
    
    5.8
    
    
    
    3.08
    
    
    
    143,334
    
    
    
    3.24
    
    
    
    4.66$3.31  $3.77
    
    
    875,500
    
    
    
    6.6
    
    
    
    3.50
    
    
    
    724,500
    
    
    
    3.52
    
    
    
    5.03$4.39  $4.57
    
    
    542,500
    
    
    
    6.1
    
    
    
    4.45
    
    
    
    422,500
    
    
    
    4.42
    
    
    
    5.415,843,984
    
    
    
    6.7
    
    
    $
    2.42
    
    
    
    1,290,334
    
    
    $
    3.78
    
    
    $
    5.11
 (c)
    
    Restricted share units
     Weighted averagefair valueNumber
    
    
    at grant dateof shares
    
    
    (in dollars)Beginning of year
    
    
    1,686,307
    
    
    $
    3.20Granted
    
    
    755,785
    
    
    
    1.05Expired or cancelled
    
    
    (163,072
    )
    
    
    (3.11
    )End of year
    
    
    2,279,020
    
    
    $
    2.94
  34




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 (d)
    
    Deferred share unit plan
  24.
    
    FINANCIAL INSTRUMENTS
 (a)
    
    Financial Risk Management
    Credit Risk
  Accounts Receivable
   35




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
  2008
    
    
    2007Trade receivables, grossCurrent
    
    $
    177.8
    
    
    $
    164.8Past due 1-30 days
    
    
    24.5
    
    
    
    29.7Past due 31-90 days
    
    
    4.0
    
    
    
    2.0Past due over 90 days
    
    
    0.3
    
    
    
    0.5206.6
    
    
    
    197.0Allowance for doubtful accounts
    
    
    (3.2
    )
    
    
    (2.8
    )Trade receivables, net
    
    
    203.4
    
    
    
    194.2Other receivables, including GST recoverables
    
    
    18.3
    
    
    
    18.9Accounts receivable (note 12)
    
    $
    221.7
    
    
    $
    213.1
  2008
    
    
    2007Balance, beginning of year
    
    $
    2.8
    
    
    $
    3.1Increase in provision
    
    
    3.1
    
    
    
    Utilized in the year
    
    
    (2.7
    )
    
    
    (0.3
    )Balance, end of year (note 12)
    
    $
    3.2
    
    
    $
    2.8
  Derivatives
  Market risk
  Currency risk
    36




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 Price risk
 Interest rate risk
 Sensitivity analysis for derivative positions and variable rate debt
 Effect from increase
    
    
    Effect from decreasein rate or price
    
    
    in rate or priceChange
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    OtherCurrency and
    
    
    in rate
    
    
    Net
    
    
    comprehensive
    
    
    Net
    
    
    comprehensiveAs at December 31, 2008
    
    notional amount
    
    
    or price
    
    
    earnings
    
    
    income
    
    
    earnings
    
    
    income($millions)
    
    
    
    
    
    ($millions)
    
    
    ($millions)
    
    
    ($millions)
    
    
    ($millions)Revenue hedges
 currency risk (US$/C$)
    
    US$570
    
    
    
    5
    %
    
    
    5.9
    
    
    
    6.8
    
    
    
    (6.4
    )
    
    
    (7.4
    )Revenue hedges
 price risk (commodities)
    
    US$11
    
    
    
    5
    %
    
    
    (0.4
    )
    
    
    
    
    
    
    0.4
    
    
    
    Oil and natural gas hedges
 price risk (commodities)
    
    C$4
    
    
    
    5
    %
    
    
    0.1
    
    
    
    
    
    
    
    (0.1
    )
    
    
    Old newspaper (ONP) hedges
 price risk (commodities)
    
    US$3
    
    
    
    5
    %
    
    
    0.1
    
    
    
    
    
    
    
    (0.1
    )
    
    
    U.S. debt hedges
 currency risk (US$/C$)
    
    US$190
    
    
    
    10
    %
    
    
    (6.1
    )
    
    
    
    
    
    
    7.1
    
    
    
    ABL Facility
 interest risk (annualized)
    
    C$60
    
    
    
    100
    bps
    
    
    (0.4
    )
    
    
    
    
    
    
    0.4
    
    
    
    
 Liquidity risk
    37




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 (b)
    
    Revenue risk management instruments
  OptionsPurchased US$ put
    
    
    Sold US$ call
    
    
    Forward contractsAverage rate
    
    
    
    
    
    
    Average rate
    
    
    
    
    
    
    Average rateTerm
    
    US$millions
    
    
    US$/C$
    
    
    US$millions
    
    
    US$/C$
    
    
    US$millions
    
    
    US$/C$As at December 31, 20080 to 12 months
    
    $
    501
    
    
    
    0.9553
    
    
    $
    302
    
    
    
    0.8810
    
    
    $
    14
    
    
    
    0.780513 to 24 months
    
    
    55
    
    
    
    0.9674
    
    
    
    10
    
    
    
    0.8877
    
    
    
    
    
    
    
    $
    556
    
    
    
    0.9565
    
    
    $
    312
    
    
    
    0.8812
    
    
    
    14
    
    
    
    0.7805As at December 31, 20070 to 12 months
    
    $
    496
    
    
    
    0.9688
    
    
    $
    106
    
    
    
    0.9190
    
    
    $
    47
    
    
    
    1.000113 to 24 months
    
    
    38
    
    
    
    1.0355
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    534
    
    
    
    0.9733
    
    
    $
    106
    
    
    
    0.9190
    
    
    $
    47
    
    
    
    1.0001
   (c)
    
    Cost risk management instruments
 OptionsSold
    
    
    PurchasedGJ
    
    
    Average rate
    
    
    GJ
    
    
    Average rateTerm
    
    (millions)
    
    
    C$/GJ
    
    
    (millions)
    
    
    C$/GJAs at December 31, 20080.5
    
    
    $
    7.63
    
    
    
    0.5
    
    
    $
    8.00As at December 31, 20070.6
    
    
    $
    6.07
    
    
    
    1.0
    
    
    $
    7.98
     38




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 (d)
    
    Long-term debt risk management instruments
  (e)
    
    Interest rate swaps
   (f)
    
    Fair value of financial instruments
  25.
    
    RELATED PARTY TRANSACTIONS
    2008
    
    
    2007
    
    
    2006Norske SkogSelling, general and administrative
    
    $
    
    
    
    $
    
    
    
    $
    0.2
    39




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 26.
    
    COMMITMENTS
 (a)
    
    The Company has entered into operating leases for property, plant and
equipment. The minimum future payments under various operating leases in each of the
years ended December 31 are as follows:
 2009
    
    $
    10.32010
    
    
    9.02011
    
    
    8.42012
    
    
    6.12013
    
    
    5.7Subsequent years
    
    
    28.0$
    67.5
  (b)
    
    The Company has entered into a six-year take-or-pay contract for the purchase
of recycled paper used in the production of its paper products. The agreement,
effective May 1, 2006, provides for minimum purchase quantities of recycled paper and
prices are based on market rates at the beginning of each month. Total purchases in
2008 amounted to $2.4 million (2007  $2.1 million). At current market rates, the
Company is expected to pay approximately $1.9 million per year for the duration of the
contract.
 27.
    
    GUARANTEES AND INDEMNITIES
  (a)
    
    The Company sold a portion of its operations in June 2001. In this regard, the
Company provided a 10-year environmental indemnity with a maximum liability to the
Company of $12.5 million. This liability has subsequently been reduced by expenditures
related to certain decommissioning projects. The Company provided a tax indemnity,
which continues while the relevant tax years of the indemnified parties remain open to
audit.(b)
    
    In connection with the acquisition of the Companys paper recycling operation
in December 2003, the Company has provided indemnities with respect to representations
and warranties related to general corporate matters and to the shares that have been
issued to the vendors. Liability under these indemnities expired in November 2008,
except that the indemnity related to title to the shares does not expire. The Company
does not expect any significant claims with respect to this indemnity. The Company has
also provided indemnities with respect to general environmental matters under its lease
of the land and buildings. The Company has agreed to indemnify the landlord for all
costs, claims and damages related to any release by the Company of any hazardous
substances on the property or the breach by the Company of its environmental covenants
under the lease or any environmental laws. This indemnity is indefinite and survives
after the lease is terminated. The Company is not liable for pre-existing
environmental conditions.(c)
    
    The Company has entered a building lease agreement whereby it has agreed to
continue making the prescribed lease payments directly to the financial institution
holding the mortgage on the building in the event the lessor is no longer able to meet
its contractual obligations (note 5). As at December 31, 2008, the value of the
mortgage was $9.6 million (2007  $10.6 million). This agreement does not increase the
Companys liability beyond the obligation under the building lease.
  40




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 28.
    
    CONTINGENT LIABILITIES
   29.
    
    ACCOUNTING POLICY DEVELOPMENTS
    41




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 30.
    
    RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
  Net earnings adjustments
  2008
    
    
    2007
    
    
    2006Net earnings (loss) as reported under Canadian GAAP
    
    $
    (221.1
    )
    
    $
    (31.6
    )
    
    $
    (15.9
    )U.S. dollar revenue hedges (a)
    
    
    
    
    
    
    
    
    
    
    (9.4
    )U.S. dollar long-term debt hedges (b)
    
    
    
    
    
    
    
    
    
    
    (0.7
    )Fixed-to-floating interest swaps (c)
    
    
    
    
    
    
    
    
    
    
    (0.8
    )Foreign exchange gain (loss) on hedge of net investment (d)
    
    
    2.4
    
    
    
    
    
    
    
    Income tax impact effect of rate change
    
    
    (1.1
    )
    
    
    (4.9
    )
    
    
    1.1Net earnings (loss) in accordance with U.S. GAAP
    
    
    (219.8
    )
    
    
    (36.5
    )
    
    
    (25.7
    )Other comprehensive income:Other comprehensive income in accordance with Canadian GAAP (e)
    
    
    (18.5
    )
    
    
    14.3
    
    
    
    Reclass of amortization of employee future benefits included in
pension cost, net of future income taxes of $3.6 million (2007  $5.1 million)
    
    
    10.3
    
    
    
    13.9
    
    
    
    Employee future benefits liability adjustment, net of future
income taxes of $8.1 million (2007  $2.2 million)
    
    
    22.8
    
    
    
    (5.8
    )
    
    
    Minimum pension liability adjustment, net of future income taxes
of $nil (2006  $3.6 million) (e)
    
    
    
    
    
    
    
    
    
    
    7.9Reclassification of effective portion of U.S. dollar hedges on
de-designation, net of future income taxes of $nil
(2006  $5.2 million) (a)
    
    
    
    
    
    
    
    
    
    
    (11.3
    )Effective portion of U.S. dollar revenue hedges, net of
future income taxes of $nil (2006  $2.8 million) (a)
    
    
    
    
    
    
    
    
    
    
    6.1Comprehensive income (loss) in accordance with U.S. GAAP
    
    $
    (205.2
    )
    
    $
    (14.1
    )
    
    $
    (23.0
    )Basic and diluted net earnings (loss) per share in accordance
with U.S. GAAP (in dollars)
    
    
    (0.65
    )
    
    
    (0.17
    )
    
    
    (0.12
    )Basic and diluted weighted average number of shares in
accordance with U.S. GAAP (in millions)
    
    
    336.1
    
    

    
    214.7
    
    
    
    214.6
  42




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
  Years ended December 31,2008
    
    
    2007
    
    
    2006Canadian
    
    
    U.S.
    
    
    Canadian
    
    
    U.S.
    
    
    Canadian
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    GAAP
    
    
    GAAP
    
    
    GAAP
    
    
    GAAPSales
    
    $
    1,849.4
    
    
    $
    1,849.4
    
    
    $
    1,714.6
    
    
    $
    1,714.6
    
    
    $
    1,882.5
    
    
    $
    1,873.2Operating expensesCost of sales
    
    
    1,613.0
    
    
    
    1,613.0
    
    
    
    1,574.6
    
    
    
    1,574.6
    
    
    
    1,609.3
    
    
    
    1,609.3Selling, general and administrative
    
    
    46.9
    
    
    
    46.9
    
    
    
    48.3
    
    
    
    48.3
    
    
    
    62.2
    
    
    
    62.2Restructuring and change-of-control
    
    
    30.1
    
    
    
    30.1
    
    
    
    64.7
    
    
    
    64.7
    
    
    
    
    
    
    
    Amortization
    
    
    165.8
    
    
    
    165.8
    
    
    
    176.4
    
    
    
    176.4
    
    
    
    183.7
    
    
    
    183.7Impairment
    
    
    151.0
    
    
    
    151.0
    
    
    
    
    
    
    
    
    
    
    
    23.4
    
    
    
    23.42,006.8
    
    
    
    2,006.8
    
    
    
    1,864.0
    
    
    
    1,864.0
    
    
    
    1,878.6
    
    
    
    1,878.6Operating earnings (loss)
    
    
    (157.4
    )
    
    
    (157.4
    )
    
    
    (149.4
    )
    
    
    (149.4
    )
    
    
    3.9
    
    
    
    (5.4
    )Interest expense, net
    
    
    (75.0
    )
    
    
    (75.0
    )
    
    
    (70.7
    )
    
    
    (70.7
    )
    
    
    (73.8
    )
    
    
    (74.6
    )Foreign exchange gain (loss) on long-term debt
    
    
    (82.2
    )
    
    
    (82.2
    )
    
    
    103.9
    
    
    
    103.9
    
    
    
    (0.3
    )
    
    
    (1.0
    )Other income (expense), net
    
    
    2.5
    
    
    
    4.9
    
    
    
    (15.3
    )
    
    
    (15.3
    )
    
    
    1.8
    
    
    
    1.8Earnings (loss) before income taxes
and non-controlling interest
    
    
    (312.1
    )
    
    
    (309.7
    )
    
    
    (131.5
    )
    
    
    (131.5
    )
    
    
    (68.4
    )
    
    
    (79.2
    )Income tax recovery
    
    
    (91.8
    )
    
    
    (90.7
    )
    
    
    (100.0
    )
    
    
    (95.1
    )
    
    
    (54.0
    )
    
    
    (55.0
    )Net earnings (loss) before non-controlling interest
    
    
    (220.3
    )
    
    
    (219.0
    )
    
    
    (31.5
    )
    
    
    (36.4
    )
    
    
    (14.4
    )
    
    
    (24.2
    )Non-controlling interest
    
    
    (0.8
    )
    
    
    (0.8
    )
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (1.5
    )
    
    
    (1.5
    )Net earnings (loss)
    
    $
    (221.1
    )
    
    $
    (219.8
    )
    
    $
    (31.6
    )
    
    $
    (36.5
    )
    
    $
    (15.9
    )
    
    $
    (25.7
    )Other comprehensive income
    
    
    (18.5
    )
    
    
    14.6
    
    
    
    14.3
    
    
    
    22.4
    
    
    
    
    
    
    
    2.7Comprehensive income (loss)
    
    $
    (239.6
    )
    
    $
    (205.2
    )
    
    $
    (17.3
    )
    
    $
    (14.1
    )
    
    $
    (15.9
    )
    
    $
    (23.0
    )Basic and diluted earnings (loss) per share
(in dollars)
    
    $
    (0.66
    )
    
    $
    (0.65
    )
    
    $
    (0.15
    )
    
    $
    (0.17
    )
    
    $
    (0.07
    )
    
    $
    (0.12
    )Weighted average common shares
outstanding (in millions)
    
    
    336.1
    
    
    
    336.1
    
    
    $
    214.7
    
    
    $
    214.7
    
    
    
    214.6
    
    
    
    214.6
  43




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 Balance sheet adjustments
  2008
    
    
    2007Property, plant and equipment  Canadian GAAP
    
    $
    1,852.0
    
    
    $
    1,912.8Foreign exchange gain (loss) on hedge of net investment (d)
    
    
    2.4
    
    
    
    Property, plant and equipment  U.S. GAAP
    
    $
    1,854.4
    
    
    $
    1,912.8Other assets  Canadian GAAP
    
    $
    100.5
    
    
    $
    54.8Employee future benefits (e)
    
    
    (30.8
    )
    
    
    (17.1
    )Deferred financing costs (g)
    
    
    11.2
    
    
    
    14.4Other assets  U.S. GAAP
    
    $
    80.9
    
    
    $
    52.1Long-term debt  Canadian GAAP
    
    $
    882.9
    
    
    $
    784.6Deferred financing costs (g)
    
    
    11.2
    
    
    
    14.4Long-term debt  U.S. GAAP
    
    $
    894.1
    
    
    $
    799.0Employee future benefits  Canadian GAAP
    
    $
    226.6
    
    
    $
    211.7Employee future benefits (e)
    
    
    36.6
    
    
    
    95.1Employee future benefits  U.S. GAAP
    
    $
    263.2
    
    
    $
    306.8Future income taxes  Canadian GAAP
    
    $
    66.8
    
    
    $
    154.2Tax effect of employee future benefits adjustment (e)
    
    
    (25.9
    )
    
    
    (37.6
    )Tax effect of other adjustments
    
    
    8.4
    
    
    
    7.3Future income taxes  U.S. GAAP
    
    $
    49.3
    
    
    $
    123.9Shareholders equity  Canadian GAAP
    
    $
    870.0
    
    
    $
    988.6Foreign exchange gain (loss) on hedge of net investment (d)
    
    
    2.4
    
    
    
    Employee future benefits (e)
    
    
    (67.4
    )
    
    
    (112.2
    )Tax effect of employee future benefits adjustment (e)
    
    
    25.9
    
    
    
    37.6Tax effect of other adjustments
    
    
    (8.4
    )
    
    
    (7.3
    )Shareholders equity  U.S. GAAP
    
    $
    822.5
    
    
    $
    906.7
  2008
    
    
    2007Accumulated other comprehensive income  Canadian GAAP
    
    $
    (4.9
    )
    
    $
    13.6Employee future benefits  adoption of FAS 158
    
    
    (41.5
    )
    
    
    (74.6
    )Accumulated other comprehensive income (loss)  U.S. GAAP
    
    $
    (46.4
    )
    
    $
    (61.0
    )
  44




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
  As at December 31,2008
    
    
    2007Canadian
    
    
    U.S.
    
    
    Canadian
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    GAAP
    
    
    GAAPAssetsCurrent assetsCash and cash equivalents
    
    $
    5.0
    
    
    $
    5.0
    
    
    $
    
    
    
    $
    Accounts receivable
    
    
    221.7
    
    
    
    221.7
    
    
    
    213.1
    
    
    
    213.1Inventories
    
    
    211.4
    
    
    
    211.4
    
    
    
    235.7
    
    
    
    235.7Prepaids and other
    
    
    32.8
    
    
    
    32.8
    
    
    
    40.7
    
    
    
    40.7470.9
    
    
    
    470.9
    
    
    
    489.5
    
    
    
    489.5Property, plant and equipment
    
    
    1,852.0
    
    
    
    1,854.4
    
    
    
    1,912.8
    
    
    
    1,912.8Other assets
    
    
    100.5
    
    
    
    80.9
    
    
    
    54.8
    
    
    
    52.1$
    2,423.4
    
    
    $
    2,406.2
    
    
    $
    2,457.1
    
    
    $
    2,454.4LiabilitiesCurrent liabilitiesAccounts payable and accrued liabilities
    
    $
    269.4
    
    
    $
    269.4
    
    
    $
    268.2
    
    
    $
    268.2Current portion of long-term debt
    
    
    75.8
    
    
    
    75.8
    
    
    
    1.2
    
    
    
    1.2345.2
    
    
    
    345.2
    
    
    
    269.4
    
    
    
    269.4Long-term debt
    
    
    882.9
    
    
    
    894.1
    
    
    
    784.6
    
    
    
    799.0Employee future benefits
    
    
    226.6
    
    
    
    263.2
    
    
    
    211.7
    
    
    
    306.8Other long-term obligations
    
    
    13.3
    
    
    
    13.3
    
    
    
    26.9
    
    
    
    26.9Future income taxes
    
    
    66.8
    
    
    
    49.3
    
    
    
    154.2
    
    
    
    123.9Deferred credits
    
    
    18.6
    
    
    
    18.6
    
    
    
    21.7
    
    
    
    21.71,553.4
    
    
    
    1,583.7
    
    
    
    1,468.5
    
    
    
    1,547.7Shareholders equityShare capital
    
    
    1,035.0
    
    
    
    1,035.0
    
    
    
    913.9
    
    
    
    913.9Contributed surplus
    
    
    14.6
    
    
    
    14.6
    
    
    
    12.1
    
    
    
    12.1Retained earnings
    
    
    (174.7
    )
    
    
    (180.7
    )
    
    
    49.0
    
    
    
    41.7Accumulated other comprehensive income (loss)
    
    
    (4.9
    )
    
    
    (46.4
    )
    
    
    13.6
    
    
    
    (61.0
    )870.0
    
    
    
    822.5
    
    
    
    988.6
    
    
    
    906.7$
    2,423.4
    
    
    $
    2,406.2
    
    
    $
    2,457.1
    
    
    $
    2,454.4
 (a)
    
    U.S. dollar revenue hedges
   45




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 (b)
    
    U.S. dollar long-term debt hedges
  (c)
    
    Fixed-to-floating interest swaps
  (d)
    
    Foreign exchange on hedge of net investmentUnder Canadian GAAP, the Company designated a forward contract as a hedge of the
purchase price on the acquisition of the Snowflake mill. The foreign exchange gain
was accounted for as a reduction of the net investment. Under U.S. GAAP, the Company
has eliminated the GAAP difference by recognizing the foreign exchange gain in
earnings.(e)
    
    Employee future benefitsEffective December 31, 2006, the Company adopted Financial Accounting Standards
(FAS) No. 158, Employers Accounting for Defined Benefit Pension and Other
Post-retirement Plans. This statement requires the recognition of the overfunded or
underfunded status of a defined benefit post-retirement plan as an asset or liability
in the balance sheet and changes in that funded status in the year in which the
changes occur through comprehensive income. This new standard replaced the U.S. GAAP
requirement to recognize an additional minimum pension liability in cases where the
accumulated benefit obligation exceeded the market value of plan assets. The portion
of this additional liability that related to unrecognized prior service cost was
recognized as an intangible asset while the remainder was charged to comprehensive
income (loss). There is no change in the calculation of the pension and other
employee future benefits expense. Canadian GAAP has no such requirement.(f)
    
    Comprehensive incomeStatement of FAS No. 130, Reporting Comprehensive Income, requires that a company
classify items of other comprehensive income in a financial statement and display the
accumulated balance of other comprehensive income separately from retained earnings
and additional paid-in capital in the equity section of the balance sheet. The
concept of comprehensive income exists under Canadian GAAP, but applies to fiscal
years beginning on or after October 1, 2006 and applies to the Company commencing in
its 2007 fiscal year.(g)
    
    Debt issue costsEffective January 1, 2007, on adoption of the new Canadian accounting standards, the
Company netted its debt issue costs associated with its senior notes against the
carrying value of debt. Under U.S. GAAP, debt issue costs are reported in the balance
sheet as deferred charges.
  46




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 (h)
    
    Future income taxesOn January 1, 2007, the Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN
48 clarifies the accounting for uncertainty in income taxes and uses a
more-likely-than-not threshold to determine recognition in the financial statements of
an uncertain tax position. The more-likely-than-not threshold means that a benefit
related to an uncertain tax position is recognized only when it is
more-likely-than-not that the position will be sustained based on its technical merits
and where there is a greater than 50 per cent likelihood that the position would be
sustained if challenged by a tax authority. The tax position is measured as the
largest amount of benefit that is greater than 50 per cent likely of being realized
upon settlement. The unresolved uncertain tax positions must be reassessed at each
balance sheet date based on these thresholds. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim periods
and disclosure. FIN 48 is effective for fiscal years beginning after December 31,
2006.The Company did not record any unrecognized tax benefits as a result of applying this
interpretation.A tabular reconciliation of the total amounts of unrecognized tax benefits at the
beginning and end of 2008 is as follows:
 Unrecognized tax benefits, beginning of year
    
    $
    16.9Increases  tax positions taken in prior periods
    
    
    Decreases  tax positions taken in prior periods
    
    
    (2.5
    )Current period tax positions
    
    
    Settlements
    
    
    (2.6
    )Lapse of statute of limitations
    
    
    Decrease resulting from tax rate reduction
    
    
    (0.1
    )Unrecognized tax benefits, end of year
    
    $
    11.7
   (i)
    
    Shareholders equityAccumulated other comprehensive income is recorded as a separate component of
shareholders equity under U.S. GAAP. The concept of accumulated other comprehensive
income exists under Canadian GAAP, but applies to fiscal years beginning on or after
October 1, 2006 and applies to the Company commencing in its 2007 fiscal year.(j)
    
    Consolidated cash flowsUnder U.S. GAAP, the consolidated cash flows would not be significantly different from
the presentation under Canadian GAAP, except that U.S. GAAP does not allow sub-totals
within cash flows provided by operations.
  47




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in millions, except where otherwise stated)
 (k)
    
    Changes in accounting policiesFair value measurementFASB issued FAS 157, Fair Value Measurement, which clarifies the definition of fair
value applicable under all United States accounting standards, with some limited
exceptions. The standard establishes a single definition of fair value, sets out a
framework for measuring fair value and requires additional disclosures about fair
value measurements. The objective of the standard is to increase consistency,
reliability and comparability in fair value measurements, and to enhance disclosures
to help users of financial statements assess the effects of the fair value
measurements used in financial reporting. The framework provides a hierarchy for
reliably determining fair value based on the definition in the standard. This
standard is effective November 1, 2008. For the year ended December 31, 2008, the
Company has adopted this standard under Canadian GAAP and as a result there is no
difference.FASB issued FAS 159, Fair Value Option for Financial Assets and Liabilities, which
allows entities to elect fair value accounting to certain financial assets and
liabilities. The adoption of this standard had no impact on the Companys
consolidated financial statements.FASB issued FAS 140-e, Disclosure About Transfers of Financial Assets and Interests
in Variable Interest Entities, that requires additional disclosures relating to
retained interest in financial assets and
provides guidance on how a primary beneficiary is determined as a VIE. The adoption
of this standard had no impact on the Companys consolidated financial statements.(l)
    
    Changes in future accounting policiesFASB has issued the following pronouncements:
 (i)
    
    FAS 141R  Business Combinations, provides new guidance on
accounting for business combinations, on how entities should approach financial
planning and reporting around business combinations. This will require entities
to be more transparent in demonstrating the values of assets and liabilities.
This standard is effective for fiscal years beginning after December 15, 2008.(ii)
    
    FAS 160  Non-controlling Interests in Consolidated Financial
Statements, has been issued to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides in its
consolidated financial statements by establishing specific accounting and
reporting standards. This standard is effective for fiscal years beginning on or
after December 15, 2008.(iii)
    
    FAS 161  Disclosures About Derivative Instruments and Hedging
Activities. This standard requires enhanced disclosures to enable investors to
better understand their effects on an entitys financial position, financial
performance, and cash flows. The standard is effective for fiscal years
beginning after November 15, 2008.
  48




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##### Table of Contents



EXHIBIT
INDEX
 2.1
    
    
    Asset and Stock Purchase Agreement dated February 10, 2008 between the Corporation and
Abitibi Consolidated Sales Corporation relating to the acquisition of the Snowflake mill and
associated schedules. (6)3.1
    
    
    Articles of Amalgamation of Norske Skog Canada Limited. (2)3.2
    
    
    By laws of Norske Skog Canada Limited. (2)10.1
    
    
    Indenture, dated as of May 15, 2003, governing the Corporations 8 5/8% Senior Notes due
2011, among the Corporation, the subsidiary guarantors and Wells Fargo Bank Minnesota,
National Association, as trustee (the 2003 Notes Indenture). (4)10.1.1
    
    
    First Supplemental Indenture amending the 2003 Notes Indenture, dated as of December 1,
2003, among the Corporation, the subsidiary guarantors named therein and Wells Fargo Bank
Minnesota, National Association, as trustee. (3)10.1.2
    
    
    Second Supplemental Indenture amending the 2003 Notes Indenture, dated as of July 14, 2006,
among the Corporation, the subsidiary guarantors named therein and Wells Fargo Bank Minnesota,
National Association, as trustee. (10)10.1.3
    
    
    Third Supplemental Indenture amending the 2003 Notes Indenture, dated as of April 10, 2008,
among the Corporation, the subsidiary guarantors named therein and Wells Fargo Bank Minnesota,
National Association, as trustee. (8)10.2
    
    
    Indenture, dated as of March 23, 2004, governing Catalysts 7 3/8% Senior Notes due 2014,
among Catalyst, the subsidiary guarantors and Wells Fargo Bank, National Association, as
trustee (the 2004 Notes Indenture). (3)10.2.1
    
    
    First Supplemental Indenture amending the 2004 Notes Indenture, dated as of July 14, 2006,
among the Corporation, the subsidiary guarantors named therein and Wells Fargo Bank Minnesota,
National Association, as trustee. (10)10.2.2
    
    
    Second Supplemental Indenture amending the 2004 Notes Indenture, dated as of April 10, 2008,
among the Corporation, the subsidiary guarantors named therein and Wells Fargo Bank Minnesota,
National Association, as trustee. (8)10.3
    
    
    Chip Supply Agreement dated November 19, 1992 between Crown Forest Industries Limited and
Riverside Forest Products Limited, as assigned July 6, 2000 and assigned January 1, 2001
(current parties Catalyst Paper and Tolko Industries Ltd.). (1)10.3.1
    
    
    Amending Letter dated August 23, 2005 between NorskeCanada and Riverside Forest Product
Limited relating to Chip Supply Agreement referred to in Exhibit 10.3 above (current parties
Catalyst Paper and Tolko Industries Ltd.). (10)10.4
    
    
    Amended and Restated Chip and Pulplog Supply Agreement dated as of June 23, 1997 between
3264891 Canada Limited, 3264912 Canada Limited and TimberWest Forest Limited, as amended
January 1, 1999 (Current parties Catalyst Paper and TimberWest Forest Corp. and TimberWest
Forest Company). (1)




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##### Table of Contents



10.4.1
    
    
    Amendment dated October 3, 2002 to the Amended and Restated Chip and Pulplog Supply
Agreement referred to in Exhibit 10.4 above. (1)10.4.2
    
    
    Amendment dated January 1, 2008 to the Amended and Restated Chip and Pulplog Supply
Agreement referred to in Exhibit 10.4 above. (10)10.4.3
    
    
    Log Supply Option Agreement dated January 1, 2008 between Catalyst Paper, TimberWest Forest
Corp. and TimberWest Forest Company which is referred to in agreement referred to in Exhibit 10.4 above.
(10)10.5
    
    
    Amended and Restated Timber Harvesting Management Agreement dated as of January 1, 1999
between Fletcher Challenge Canada Limited, TimberWest Forest Corp. and TimberWest Forest
Company (current parties CPC, TimberWest Forest Corp and TimberWest Forest Company
Partnership). (1)10.5.1
    
    
    Amendment dated January 1, 2008 to Amended and Restated Timber Harvesting Management
Agreement referred to in Exhibit 10.5 above. (10)10.6
    
    
    Chip and Log Supply Agreement dated as of June 8, 1998 between MacMillan Bloedel Limited and
MB Paper Limited (current parties Western Forest Products Inc. and Catalyst Paper
Corporation). (2)10.6.1
    
    
    Amendment dated March 28, 2006 to Chip and Log Supply Agreement referred to in Exhibit 10.6
above. (10)10.6.2
    
    
    Amendment and Waiver dated October 10, 2006 to Chip and Log Supply Agreement referred to in
Exhibit 10.6 above. (10)10.6.3
    
    
    Amendment dated December 5, 2008 to Chip and Log Supply Agreement referred to in Exhibit
10.6 above. (10)10.7
    
    
    Chip and Sawlog Supply Agreement dated September 8, 1980 between British Columbia Forest
Products Limited and Doman Industries Limited. (10)10.7.1
    
    
    Amendment dated December 2, 2002 to Chip and Sawlog Supply Agreement referred to in Exhibit
10.7 above. (10)10.7.2
    
    
    Amendment dated November 2, 2004 to Chip and Sawlog Supply Agreement referred to in Exhibit
10.7 above. (10)10.7.3
    
    
    Amendment dated February 1, 2005 to Chip and Sawlog Supply Agreement referred to in Exhibit
10.7 above. (10)10.7.4
    
    
    Amendment dated June 27, 2005 to Chip and Sawlog Supply Agreement referred to in Exhibit
10.7 above. (10)10.7.5
    
    
    Amendment dated October 10. 2006 to Chip and Sawlog Supply Agreement referred to in Exhibit
10.7 above. (10)10.8
    
    
    Chip and Pulplog Supply Agreement dated July 1, 2004 between Teal Jones and Norske Canada
(current parties Teal Jones and Catalyst Paper). (10)




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##### Table of Contents



10.9
    
    

Catalyst
Paper Amended and Restated Stock Option
Plan. (10)10.10
    
    

Catalyst
Paper 2007 Restricted Share Unit
Plan. (10)10.11
    
    
    Standby Purchase Agreement dated February 10, 2008 between the Corporation, BMO Nesbitt
Burns Inc. and Genuity Capital Markets. (5)10.12
    
    
    Oversubscription Agreement dated February 10, 2008 between the Corporation and Third Avenue
International Value Fund. (5)10.13
    
    
    Dealer Manager Agreement dated February 29, 2008 between the Corporation, BMO Nesbitt Burns
Inc. and Genuity Capital Market. (7)10.14
    
    
    Subscription Receipt Agreement dated February 29, 2008 between the Corporation, BMO Nesbitt
Burns Inc. on its own behalf and on behalf of Genuity Capital Markets, Third Avenue Trust on
behalf of Third Avenue International Value Fund and CIBC Mellon Trust Company. (7)10.15
    
    
    Credit Agreement for the ABL Facility dated as of August 13, 2008 among the Corporation,
Catalyst Paper, Catalyst Paper Holdings Inc. and Catalyst Paper (Snowflake) Inc. as Borrower,
the subsidiary guarantors named therein, CIT Business Credit Canada Inc., J.P. Morgan
Securities Inc., and the vendor parties named therein (the ABL Facility). (9)10.16
    
    
    Employment agreement dated March 12, 2007 between Catalyst Paper Corporation and Richard
Garneau. (10)10.17
    
    
    Employment agreement dated November 23, 2007 between Catalyst Paper Corporation and Steve
Boniferro. (10)15.1
    
    

Consent
of Independent Registered Public Accounting Firm (10)21.1
    
    
    List of subsidiaries. (10)31.1
    
    
    Certification of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (10)32.1
    
    
    Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (10)
 (10)
    
    Filed herewith.(9)
    
    Previously filed
(No. 000-49751) on Form 6-K of Catalyst Paper Corporation on August 18, 2008.(8)
    
    Previously filed
(No. 000-49751) on Form 6-K of Catalyst Paper Corporation on April 17, 2008.(7)
    
    Previously filed
(No. 000-49751) on Form 6-K of Catalyst Paper Corporation on March 3, 2008.(6)
    
    Previously filed
(No. 000-49751) on Form 6-K of Catalyst Paper Corporation on February 29, 2008.(5)
    
    Previously filed
(No. 000-49751) on Form 6-K of Catalyst Paper Corporation on February 20, 2008.(4)
    
    Previously filed with registration statement (No. 333-105719) on Form F-4 of Norske Skog
Canada Limited on May 30, 2003.(3)
    
    Previously filed with registration statement (No. 333-114538) on Form F-4 of Norske Skog
Canada Limited on April 16, 2004.(2)
    
    Previously filed with registration statement (No. 333-82406) on Form F-4 of Norske Skog
Canada Limited on March 1, 2002.(1)
    
    Previously filed with the registration statement (No. 333-82406) on Form F-4 of Norske Skog
Canada Limited on March 1, 2002. Confidential information has been omitted and has been filed
separately with the Securities and Exchange Commission.