Catalyst Paper (CTLFQ) 6-K Current report (foreign)

MANAGEMENT’S RESPONSIBILITY

Management’s Report on Financial Statements and
Assessment of Internal Control Over Financial Reporting

Catalyst Paper Corporation’s management is responsible for the preparation, integrity and fair presentation of the accompanying consolidated financial statements and other information contained in this Annual Report. The consolidated financial statements and related notes were prepared in accordance with U.S. generally accepted accounting principles and reflect management’s best judgments and estimates. Financial information provided elsewhere in the Annual Report is consistent with that in the consolidated financial statements.

Management is responsible for designing and maintaining adequate internal control over financial reporting. The company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for reporting purposes. Internal control over financial reporting includes processes and procedures that:

· pertain to the maintenance of records that, in reasonable detail, accurately reflect the transactions of the company;

· provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements and footnote disclosures;

· provide reasonable assurance that receipts and expenditures of the company are appropriately authorized by the company’s management and directors; and

· provide reasonable assurance regarding the prevention or timely detection of an unauthorized use, acquisition or disposition of assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in condition, or that the degree of compliance with policies or procedures may deteriorate.

Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2013. Management based this assessment on the criteria for internal control over financial reporting described in the “Internal Control – Integrated Framework 1992” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of the company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the company’s Board of directors.

Based on this assessment, management determined that as of December 31, 2013 the company’s internal control over financial reporting was effective.

The Board of directors is responsible for satisfying itself that management fulfills its responsibilities for financial reporting and internal control. The Audit Committee, which is comprised of four non-management members of the Board of directors, provides oversight to the financial reporting process. The Audit Committee meets periodically with management, the internal auditors and the external auditors to review the consolidated financial statements, the adequacy of financial reporting, accounting systems and controls, and internal and external auditing functions.

These consolidated financial statements have been audited by KPMG LLP, the independent auditors, whose report follows.

Joe Nemeth	Brian Baarda
President and	Vice-President, FinanceChief Executive Officer

Vancouver, Canada
March 4, 2014

1

Report of INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of Catalyst Paper Corporation

We have audited the accompanying consolidated balance sheets of Catalyst Paper Corporation as of December 31, 2013 (Successor), December 31, 2012 (Successor) and September 30, 2012 (Successor), and the related consolidated statements of earnings (loss), comprehensive income (loss), equity (deficiency) and cash flows for the year ended December 31, 2013 (Successor), the three-month period ended December 31, 2012 (Successor), the nine-month period ended September 30, 2012 (Predecessor) and for the year ended December 31, 2011 (Predecessor). These consolidated financial statements are the responsibility of Catalyst Paper Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Notes 1 and 5 to the consolidated financial statements, Catalyst Paper Corporation and all of its subsidiaries and partnership emerged from creditor protection proceedings on September 13, 2012. Accordingly, the accompanying consolidated financial statements have been prepared in conformity with Accounting Standards Codification 852-10, Reorganizations, for the Successor Company as a new entity with assets, liabilities and a capital structure having carrying amounts not comparable with Predecessor prior periods, as described in Note 1.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Catalyst Paper Corporation as of December 31, 2013 (Successor), December 31, 2012 (Successor), and September 30, 2012 (Successor), and its consolidated results of operations and its consolidated cash flows for the year ended December 31, 2013 (Successor), the three-month period ended December 31, 2012 (Successor), the nine-month period ended September 30, 2012 (Predecessor) and for the year ended December 31, 2011 (Predecessor) in conformity with US generally accepted accounting principles.

Chartered Accountants

Vancouver, Canada

March 4, 2014

2

CATALYST PAPER CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions of Canadian dollars)

	Successor
	As at December 31,						As at September 30,
	2013			2012			2012
Assets
Current assets
Cash and cash equivalents	$	12.1		$	16.6		$	12.2
Restricted cash		–			0.7			3.7
Accounts receivable (note 9)		116.5			114.0			140.8
Inventories (note 10)		140.2			125.0			131.5
Prepaids and other (note 11)		4.5			8.9			13.0
Assets held for sale (note 8)		5.7			34.3			56.2
		279.0			299.5			357.4
Property, plant and equipment (note 12)		412.2			611.6			614.1
Goodwill (note 13)		–			56.7			56.7
Other assets (note 14)		8.9			11.0			11.9
	$	700.1		$	978.8		$	1,040.1
Liabilities
Current liabilities
Accounts payable and accrued liabilities (note 15)	$	119.7		$	113.8		$	97.5
Current portion of long-term debt (note 16)		2.0			6.6			6.7
Liabilities associated with assets held for sale (note 8)		–			15.2			14.8
		121.7			135.6			119.0
Long-term debt (note 16)		301.8			422.0			458.9
Employee future benefits (note 17)		254.9			289.7			300.4
Other long-term obligations (note 18)		8.8			8.9			9.0
		687.2			856.2			887.3
Equity
Shareholders’ equity
Common stock: no par value; unlimited shares authorized; issued and outstanding: 14,527,571 shares (December 31, 2012 – 14,527,571 and September 30, 2012 – 14,400,000 shares)		144.9			144.9			144.9
Preferred stock: par value determined at time of issue; authorized 100,000,000 shares; issued and outstanding: nil shares		–			–			–
Deficit		(162.8	)		(35.2	)		–
Accumulated other comprehensive income (note 20)		30.8			6.6			–
		12.9			116.3			144.9
Non-controlling interest (note 7)		–			6.3			7.9
		12.9			122.6			152.8
	$	700.1		$	978.8		$	1,040.1

Commitments, guarantees and indemnities, and gain contingencies (notes 28, 29 and 30)

The accompanying notes are an integral part of the consolidated financial statements.

On behalf of the Board:
Joe Nemeth	Walter Jones
Director	Director

CATALYST PAPER 2013 ANNUAL REPORT 3

CATALYST PAPER CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(In millions of Canadian dollars, except where otherwise stated)

	Successor						Predecessor
	Year ended			Three months ended			Nine months ended			Year ended
	December 31,			December 31,			September 30,			December 31,
	2013			2012			2012			2011
Sales	$	1,051.4		$	260.5		$	797.7		$	1,079.7
Operating expenses
Cost of sales, excluding depreciation and amortization		970.9			245.6			718.0			970.7
Depreciation and amortization		47.0			12.9			23.4			105.5
Selling, general and administrative		33.2			7.7			26.2			40.3
Restructuring (note 21)		1.2			–			5.3			5.9
Impairment and other closure costs (note 6)		86.9			–			–			661.8
		1,139.2			266.2			772.9			1,784.2
Operating earnings (loss)		(87.8	)		(5.7	)		24.8			(704.5	)
Interest expense, net (note 22)		(37.4	)		(11.6	)		(60.3	)		(73.2	)
Foreign exchange gain (loss) on long-term debt		(18.8	)		(3.2	)		24.0			(9.7	)
Other income (expense), net (note 23)		14.9			0.1			(2.6	)		(2.1	)
Loss before reorganization items and income taxes		(129.1	)		(20.4	)		(14.1	)		(789.5	)
Reorganization items, net (note 5)		(1.2	)		(3.2	)		666.9			–
Income (loss) before income taxes		(130.3	)		(23.6	)		652.8			(789.5	)
Income tax expense (recovery) (note 19)		0.1			0.2			(1.1	)		(8.4	)
Earnings (loss) from continuing operations		(130.4	)		(23.8	)		653.9			(781.1	)
Earnings (loss) from discontinued operations, net of tax (note 8)		3.1			(12.9	)		(3.6	)		(195.5	)
Net earnings (loss)		(127.3	)		(36.7	)		650.3			(976.6	)
Net (earnings) loss attributable to non-controlling interest (note 7)		(0.3	)		1.5			(31.9	)		2.6
Net earnings (loss) attributable to the company	$	(127.6	)	$	(35.2	)	$	618.4		$	(974.0	)
Basic and diluted net earnings (loss) per share from continuing operations attributable to the company’s common shareholders (note 24) (in dollars)	$	(9.01	)	$	(1.55	)	$	1.63		$	(2.04	)
Basic and diluted net earnings (loss) per share from discontinued operations attributable to the company’s common shareholders (note 24) (in dollars)	$	0.21		$	(0.89	)	$	(0.01	)	$	(0.51	)
Weighted average number of the company’s common shares outstanding (note 24) (in millions)		14.5			14.4			381.9			381.9

The accompanying notes are an integral part of the consolidated financial statements.

4

CATALYST PAPER CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions of Canadian dollars)

	Successor						Predecessor
	Year ended December 31,			Three months ended December 31,			Nine months ended September 30,			Year ended December 31,
	2013			2012			2012			2011
Net earnings (loss)	$	(127.3	)	$	(36.7	)	$	650.3		$	(976.6	)
Other comprehensive income (loss), net of tax (expense) recovery:
Employee future benefits liability adjustment
Gross amount (note 17)		24.2			6.6			(32.0	)		(47.0	)
Tax (expense) recovery		–			–			–			0.3
Net amount		24.2			6.6			(32.0	)		(46.7	)
Reclassification of amortization of employee future benefits
Gross amount		–			–			3.9			5.0
Tax (expense) recovery		–			–			(0.9	)		(1.6	)
Net amount		–			–			3.0			3.4
Reclassification of net (gain) loss on cash flow revenue hedges
Gross amount		–			–			–			(1.4	)
Tax (expense) recovery		–			–			–			0.4
Net amount		–			–			–			(1.0	)
Other comprehensive income (loss) from continuing operations, net of taxes		24.2			6.6			(29.0	)		(44.3	)
Employee future benefits liability adjustment
Gross amount		–			–			0.3			0.1
Tax (expense) recovery		–			–			–			(0.1	)
Net amount		–			–			0.3			–
Reclassification of amortization of employee future benefits
Gross amount		–			–			–			0.2
Tax (expense) recovery		–			–			–			(0.1	)
Net amount		–			–			–			0.1
Foreign currency translation adjustments, net of related hedging activities
Gross amount		–			–			4.0			0.4
Tax (expense) recovery		–			–			–			0.5
Net amount		–			–			4.0			0.9
Other comprehensive income (loss) from discontinued operations, net of taxes		–			–			4.3			1.0
Total comprehensive income (loss)		(103.1	)		(30.1	)		625.6			(1,019.9	)
Comprehensive (income) loss attributable to non-controlling interest:
Net (earnings) loss		(0.3	)		1.5			(31.9	)		2.6
Comprehensive (income) loss attributable to non-controlling interest		(0.3	)		1.5			(31.9	)		2.6
Comprehensive income (loss) attributable to the company	$	(103.4	)	$	(28.6	)	$	593.7		$	(1,017.3	)

The accompanying notes are an integral part of the consolidated financial statements.

5

CATALYST PAPER CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY (DEFICIENCY)

(In millions of Canadian dollars)

	Equity (deficiency) attributable to the company
	Common stock
	Number of shares			$			Additional paid-in capital			Deficit			Accumulated other comprehensive income (loss)			Non- controlling interest (deficit)			Total
Balance as at December 31, 2010 (predecessor)		381,753,490		$	1,035.0		$	16.6		$	(582.0	)	$	(46.1	)	$	(20.1	)	$	403.4
Common shares issued		146,960			0.2			(0.2	)		–			–			–			–
Stock option compensation expense		–			–			0.2			–			–			–			0.2
Net loss		–			–			–			(974.0	)		–			(2.6	)		(976.6	)
Distributions to non-controlling interest		–			–			–			–			–			(1.0	)		(1.0	)
Other comprehensive loss, net of tax		–			–			–			–			(43.3	)		–			(43.3	)
Balance as at December 31, 2011 (predecessor)		381,900,450		$	1,035.2		$	16.6		$	(1,556.0	)	$	(89.4	)	$	(23.7	)	$	(617.3	)
Stock option compensation expense		–			–			0.1			–			–			–			0.1
Net earnings		–			–			–			618.4			–			31.9			650.3
Distributions to non-controlling interest		–			–			–			–			–			(0.3	)		(0.3	)
Other comprehensive loss, net of tax		–			–			–			–			(24.7	)		–			(24.7	)
Common shares issued		14,400,000			144.9			–			–			–			–			144.9
Cancellation of Predecessor equity (deficiency)		(381,900,450	)		(1,035.2	)		(16.7	)		937.6			114.1			–			(0.2	)
Balance as at September 30, 2012 (successor)		14,400,000		$	144.9		$	–		$	–		$	–		$	7.9		$	152.8
Common shares issued		127,571			–			–			–			–			–			–
Net loss		–			–			–			(35.2	)		–			(1.5	)		(36.7	)
Distributions to non-controlling interest		–			–			–			–			–			(0.1	)		(0.1	)
Other comprehensive income, net of tax		–			–			–			–			6.6			–			6.6
Balance as at December 31, 2012 (successor)		14,527,571		$	144.9		$	–		$	(35.2	)	$	6.6		$	6.3		$	122.6
Net loss		–			–			–			(127.6	)		–			0.3			(127.3	)
De-recognition of non-controlling interest		–			–			–			–			–			(6.6	)		(6.6	)
Other comprehensive income, net of tax		–			–			–			–			24.2			–			24.2
Balance as at December 31, 2013 (successor)		14,527,571		$	144.9		$	–		$	(162.8	)	$	30.8		$	–		$	12.9

The accompanying notes are an integral part of the consolidated financial statements.

6

CATALYST PAPER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions of Canadian dollars)

	Successor						Predecessor
	Year ended December 31,			Three months ended December 31,			Nine months ended September 30,			Year ended December 31,
	2013			2012			2012			2011
Cash flows provided (used) by:
Operations
Net earnings (loss)	$	(127.3	)	$	(36.7	)	$	650.3		$	(976.6	)
Items not requiring (providing) cash:
Depreciation and amortization		47.0			12.9			23.4			112.4
Impairment and other closure costs (note 6)		86.9			8.2			3.3			823.6
Deferred income taxes (note 19)		–			0.1			(0.7	)		(7.6	)
Settlement gain on special pension portability election		(2.6	)		–			–			–
Foreign exchange loss (gain) on long-term debt		18.8			3.2			(24.0	)		9.7
Non-cash reorganization items		0.5			2.4			(707.4	)		–
Non-cash interest on compromised notes		–			–			48.4			–
Employee future benefits, expense under cash contributions		(7.0	)		(3.4	)		(8.4	)		(8.0	)
Loss (gain) on disposal of property, plant and equipment		(0.6	)		0.4			(6.7	)		(0.1	)
Gain on disposal of non-core assets2		(12.3	)		–			–			–
Loss on purchase of Floating Rate Notes		2.2			–			–			–
Decrease in other long-term obligations		(0.2	)		(0.1	)		–			(3.1	)
Other		1.9			0.2			2.6			(1.8	)
Changes in non-cash working capital
Accounts receivable		(2.7	)		41.1			(22.9	)		(14.3	)
Inventories		(14.7	)		11.6			8.7			(17.1	)
Prepaids and other		3.6			4.5			(0.5	)		7.6
Accounts payable and accrued liabilities		(1.0	)		7.7			(10.1	)		3.8
Cash flows provided (used) by operating activities		(7.5	)		52.1			(44.0	)		(71.5	)
Investing
Additions to property, plant and equipment		(23.4	)		(10.4	)		(12.2	)		(19.7	)
Proceeds from sale of property, plant and equipment		0.8			0.8			11.5			1.2
Proceeds from sale of non-core assets2		51.4			–			–			–
Decrease (increase) in restricted cash		3.1			3.4			(6.4	)		–
Decrease (increase) in other assets		(0.5	)		–			3.7			0.8
Cash flows provided (used) by investing activities		31.4			(6.2	)		(3.4	)		(17.7	)
Financing
Increase (decrease) in revolving loan		(13.4	)		(40.0	)		16.0			48.0
Redemption of senior notes		–			–			–			(25.8	)
Purchase of Floating Rate Notes (note 16)		(15.8	)		–			–			–
Proceeds on issuance of senior secured notes (note 16)		–			–			33.1			–
Deferred financing costs (note 16)		–			–			(9.3	)		(2.4	)
DIP financing costs		–			–			(3.8	)		–
Decrease in other long-term debt		(1.1	)		–			(0.9	)		(0.9	)
Share issuance costs		–			–			(0.2	)		–
Cash flows provided (used) by financing activities		(30.3	)		(40.0	)		34.9			18.9
Cash and cash equivalents, increase (decrease) in the period		(6.4	)		5.9			(12.5	)		(70.3	)
Cash and cash equivalents, beginning of period		18.5			12.6			25.1			95.4
Cash and cash equivalents, end of period1	$	12.1		$	18.5		$	12.6		$	25.1
Supplemental disclosures:
Income taxes paid (recovered)		–			–			(0.2	)		0.1
Net interest paid		36.8			11.0			11.7			72.6
Common stock issued under stock option compensation plan		–			–			–			0.2
1  Cash and cash equivalents included in assets held for sale		–			1.9			0.4			–
2  Non-core assets disposed of for the year ended December 31, 2013 included the Elk Falls site, the Snowflake mill, the company’s interest in Powell River Energy Inc, the Port Alberni wastewater treatment facility, and two parcels of Poplars land

The accompanying notes are an integral part of the consolidated financial statements.

7

CATALYST PAPER CORPORATION

CONSOLIDATED BUSINESS SEGMENTS

(In millions of Canadian dollars)

Year ended December 31, 2013 (successor)	Specialty printing papers			Newsprint		Pulp		Corporate adjustments			Consolidated
Sales to external customers	$	635.1		$	192.3	$	224.0	$	–		$	1,051.4
Inter-segment sales		–			–		24.8		(24.8	)		–
Depreciation and amortization		40.4			5.1		1.5		–			47.0
Restructuring (note 21)		0.6			0.4		0.2		–			1.2
Impairment and other closure costs (note 6)		86.9			–		–		–			86.9
Operating earnings (loss)		(102.3	)		8.4		6.1		–			(87.8	)
Total assets		464.0			149.9		86.2		–			700.1
Additions to property, plant and equipment		15.4			2.0		6.0		–			23.4

Three months ended December 31, 2012 (successor)	Specialty printing papers		Newsprint		Pulp			Corporate adjustments			Consolidated
Sales to external customers	$	171.8	$	44.0	$	44.7		$	–		$	260.5
Inter-segment sales		–		–		7.1			(7.1	)		–
Depreciation and amortization		11.2		1.4		0.3			–			12.9
Operating earnings (loss)		1.2		2.4		(9.3	)		–			(5.7	)
Total assets		710.5		182.6		85.5			0.2			978.8
Additions to property, plant and equipment		6.5		1.8		2.1			–			10.4

Nine months ended September 30, 2012 (predecessor)	Specialty printing papers		Newsprint		Pulp			Corporate adjustments			Consolidated
Sales to external customers	$	503.8	$	134.1	$	159.8		$	–		$	797.7
Inter-segment sales		–		–		22.5			(22.5	)		–
Depreciation and amortization		18.9		2.7		1.8			–			23.4
Restructuring (note 21)		2.9		0.8		1.6			–			5.3
Operating earnings (loss)		19.3		11.7		(6.2	)		–			24.8
Total assets		761.1		193.4		85.4			0.2			1,040.1
Additions to property, plant and equipment		9.2		1.2		1.8			–			12.2

Year ended December 31, 2011 (predecessor)	Specialty printing papers			Newsprint			Pulp			Corporate adjustments			Consolidated
Sales to external customers	$	690.4		$	141.3		$	248.0		$	–		$	1,079.7
Inter-segment sales		–			–			39.3			(39.3	)		–
Depreciation and amortization		81.3			9.1			15.1			–			105.5
Restructuring (note 21)		4.0			0.8			1.1			–			5.9
Impairment and other closure costs (note 6)		507.2			71.1			83.5			–			661.8
Operating loss		(565.1	)		(69.2	)		(70.2	)		–			(704.5	)
Total assets		432.0			216.5			75.8			13.3			737.6
Additions to property, plant and equipment		9.2			6.1			4.4			–			19.7

The accompanying notes are an integral part of the consolidated financial statements.

8

CATALYST PAPER CORPORATION

CONSOLIDATED GEOGRAPHIC BUSINESS SEGMENTS

(In millions of Canadian dollars)

Year ended December 31, 2013 (successor)	Specialty printing papers		Newsprint		Pulp		Total
Sales by shipment destination:
Canada	$	79.9	$	41.7	$	–	$	121.6
United States		483.8		40.1		–		523.9
Asia and Australasia		36.9		42.3		223.8		303.0
Latin America		34.5		68.2		–		102.7
Europe and other		–		–		0.2		0.2
	$	635.1	$	192.3	$	224.0	$	1,051.4

Three months ended December 31, 2012 (successor)	Specialty printing papers		Newsprint		Pulp		Total
Sales by shipment destination:
Canada	$	25.4	$	12.9	$	–	$	38.3
United States		122.6		9.1		–		131.7
Asia and Australasia		14.3		11.4		43.7		69.4
Latin America		9.5		10.6		–		20.1
Europe and other		–		–		1.0		1.0
	$	171.8	$	44.0	$	44.7	$	260.5

Nine months ended September 30, 2012 (predecessor)	Specialty printing papers		Newsprint		Pulp		Total
Sales by shipment destination:
Canada	$	78.4	$	31.1	$	–	$	109.5
United States		356.6		27.5		–		384.1
Asia and Australasia		38.2		38.1		158.2		234.5
Latin America		30.2		37.4		–		67.6
Europe and other		0.4		–		1.6		2.0
	$	503.8	$	134.1	$	159.8	$	797.7

Year ended December 31, 2011 (predecessor)	Specialty printing papers		Newsprint		Pulp		Total
Sales by shipment destination:
Canada	$	120.2	$	36.4	$	4.6	$	161.2
United States		484.7		26.9		–		511.6
Asia and Australasia		38.7		34.8		243.3		316.8
Latin America		45.1		43.2		–		88.3
Europe and other		1.7		–		0.1		1.8
	$	690.4	$	141.3	$	248.0	$	1,079.7

	Successor
	As at December 31,				As at September 30,
	2013		2012		2012
Property, plant and equipment by geographic location:
Canada	$	412.2	$	611.6	$	614.1
	$	412.2	$	611.6	$	614.1

The accompanying notes are an integral part of the consolidated financial statements.

9

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1	Nature of Operations and Basis of Preparation	11
Note 2	Summary of Significant Accounting Policies	11
Note 3	Recently Implemented Accounting Standards	16
Note 4	Changes in Future Accounting Standards	17
Note 5	Creditor Protection Proceedings Related Disclosures	17
Note 6	Measurement Uncertainty – Impairment of Long-lived Assets	20
Note 7	Variable Interest Entities	22
Note 8	Assets Held for Sale and Discontinued Operations	24
Note 9	Accounts Receivable	26
Note 10	Inventories	26
Note 11	Prepaids and Other	27
Note 12	Property, Plant and Equipment	27
Note 13	Goodwill	28
Note 14	Other Assets	28
Note 15	Accounts Payable and Accrued Liabilities	29
Note 16	Long-term Debt	29
Note 17	Employee Future Benefits	31
Note 18	Other Long-term Obligations	40
Note 19	Income Taxes	41
Note 20	Accumulated Other Comprehensive Income	44
Note 21	Restructuring	44
Note 22	Interest Expense, Net	45
Note 23	Other Income (Expense), Net	46
Note 24	Earnings Per Share	46
Note 25	Stock-based Compensation Plans	46
Note 26	Fair Value Measurement	46
Note 27	Financial Instruments	46
Note 28	Commitments	46
Note 29	Guarantees and Indemnities	46
Note 30	Gain Contingencies	46
Note 31	Condensed Consolidating Financial Information	46

10

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

1. NATURE OF OPERATIONS AND BASIS OF PREPARATION

Catalyst Paper Corporation, together with its subsidiaries and partnership (collectively, the “company”) is a specialty mechanical printing papers and newsprint producer in North America. The company operates in three business segments.

Specialty printing papers	–   Manufacture and sale of mechanical specialty printing papers
Newsprint	–   Manufacture and sale of newsprint
Pulp	–   Manufacture and sale of long-fibre Northern Bleached Softwood Kraft (“NBSK”) pulp

The business segments of the company are strategic business units that offer different products. They are managed separately because each business requires different technology, capital expenditures, labour expertise and marketing strategies. Each segment is a significant component of the company’s sales and operating earnings. The company owns and operates three manufacturing facilities located in the province of British Columbia (B.C.), Canada. Inter-segment sales consist of pulp transfers at market prices. The primary market for the company’s paper products is North America. The primary markets for the company’s pulp products are Asia and Australasia.

Creditor protection proceedings

Catalyst Paper Corporation and all of its subsidiaries and partnership successfully emerged from creditor protection proceedings under the Companies’ Creditors Arrangement Act (CCAA) and Chapter 15 of Title 11 of the US Bankruptcy Code on September 13, 2012. The implementation of a plan of arrangement (Plan) and the application of fresh start accounting materially changed the carrying amounts and classifications reported in the company’s financial statements, and resulted in the company effectively becoming a new entity for financial reporting purposes. Accordingly, the company’s consolidated financial statements for periods prior to September 30, 2012 are not comparable to consolidated financial statements prepared for periods subsequent to September 30, 2012. References to Successor or Successor company refer to the company on or after September 30, 2012, and references to Predecessor or Predecessor company refer to the company prior to September 30, 2012. For additional information on the company’s emergence from creditor protection proceedings, see note 5,Creditor protection proceedings related disclosures.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of the company are prepared in accordance with United States generally accepted accounting principles (U.S. GAAP).

(a) Basis of consolidation

The consolidated financial statements include the accounts of the company and, from their respective dates of acquisition of control or formation, its wholly-owned subsidiaries and partnerships. All inter-company transactions and amounts have been eliminated on consolidation.

(b) Variable interest entities

Variable interest entities (VIE) are entities in which equity investors do not have a controlling financial interest or the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties. The company consolidated the accounts of VIEs where it has been determined that the company is the primary beneficiary, defined as the party that has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and has an obligation to absorb losses and receive benefits of that VIE.

On March 20, 2013 the company sold its 50.001% interest in Powell River Energy Inc. and Powell River Energy Limited Partnership (PREI) for proceeds of $33.0 million. Up to the date of sale, the company consolidated 100% of PREI’s balances in its consolidated results as PREI was a variable interest entity in which the company was the primary beneficiary. The sale did not affect existing operating arrangements between the company and PREI, including the power purchase agreement, and the company will continue to purchase 100% of the power generated by PREI.

11

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

The company is no longer the primary beneficiary of PREI subsequent to the sale of its equity interest and the settlement of its affiliate loans. Although the power purchase agreement continues, the company does not own any of PREI’s equity, does not control its Board of directors, and does not direct PREI’s activities and operations to ensure that the terms of the power purchase agreement are met.

Subsequent to the sale of the company’s interest in PREI, the power purchase agreement meets the definition of a lease under U.S. GAAP. The arrangement meets the criteria of a lease as fulfillment of the power purchase agreement is dependent on identified land and depreciable assets, consisting of PREI’s integrated hydroelectric power generation, transmission and distribution system, and the power purchase agreement stipulates that the company buy 100% of the power output generated by these assets.

The lease was determined to be an operating lease, as opposed to a capital lease, and future operating lease payments will be recognized as a component of energy cost. The balances and accounts of PREI and the 50% included in non-controlling interest were derecognized on the date of sale, and a gain on sale was recognized for the difference between the net proceeds on sale after settlement of the affiliate loans and the book value of assets and liabilities derecognized.

(c) Use of estimates

The consolidated financial statements have been prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the year. On an ongoing basis, management reviews its estimates, including those related to inventory obsolescence, estimated useful lives of assets, environmental and legal liabilities, impairment of long-lived assets, derivative financial instruments, pension and post-retirement benefits, bad debt and doubtful accounts, income taxes, restructuring costs, and commitment and contingencies, based on currently available information.

The enterprise value that was established as of the valuation date of September 30, 2012 incorporated numerous major assumptions including, but not limited to, the following:

· management’s best estimate of future operating performance as of the valuation date,

· internal forecasts and external forecasts based on published reports of future exchange rates and product prices,

· a discount rate of 15% based on the estimated blended rate of return required by debt and equity investors of the company,

· the corporate income tax rate of approximately 25% represents an appropriate rate to apply to future earnings of the company, based on current and projected federal and provincial tax rates,

· a capital cost allowance (CCA) rate of 20% represents an appropriate depreciation rate to apply to capital assets in future periods.

Actual amounts could differ from estimates.

(d) Going concern

The company is required to assess its ability to continue as a going concern or whether substantial doubt exists as to the company’s ability to continue as a going concern into the foreseeable future. The company has forecasted its cash flows for the next 12 months and believes that it has adequate liquidity in cash and available borrowings under its credit facilities to finance its operations without support from other parties over the next year. The company has concluded that substantial doubt does not exist as to the company’s ability to continue as a going concern over the next fiscal year.

12

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

(e) Revenue recognition

The company recognizes revenues upon shipment when persuasive evidence of an arrangement exists, prices are fixed or determinable, title of ownership has transferred to the customer and collection is reasonably assured. Sales are reported net of discounts, allowances and rebates.

(f) Shipping and handling costs

The company classifies shipping and handling costs to Cost of sales, excluding depreciation and amortization as incurred.

(g) Translation of foreign currencies

The majority of the company’s sales are denominated in foreign currencies, principally U.S. dollars (US$). Revenue and expense items denominated in foreign currencies are translated at exchange rates prevailing during the period. Monetary assets and liabilities denominated in foreign currencies are translated at the period-end exchange rates. Non-monetary assets and liabilities are translated at exchange rates in effect when the assets are acquired or the obligations are incurred. Foreign exchange gains and losses are reflected in net earnings (loss) for the period.

Up to September 30, 2012, the company had a foreign subsidiary that was considered to be self-contained and integrated within its foreign jurisdiction, and accordingly, used the U.S. dollar as its functional currency. Foreign exchange gains and losses arising from the translation of the foreign subsidiary’s accounts into Canadian dollars (CDN$) were reported as a component of other comprehensive income (loss). Subsequent to the permanent closure of the Snowflake recycle mill operations on September 30, 2012, the company ceased to have a self-contained foreign operation and therefore no longer reports foreign exchange gains and losses as a component of other comprehensive income (loss).

(h) Derivative financial instruments

The company uses derivative financial instruments in the management of foreign currency and price risk associated with its revenues, energy costs and long-term debt. It also uses interest rate swaps to manage its net exposure to interest rate changes.  The company’s policy is to use derivatives for managing existing financial exposures and not for trading or speculative purposes. The company accounts for its derivatives at fair value at each balance sheet date.

In a cash flow hedge, the changes in fair value of derivative financial instruments are recorded in Other comprehensive income (loss). These amounts are reclassified in the consolidated statement of earnings (loss) in the periods in which results are affected by the cash flows of the hedged item. Any hedge ineffectiveness is recorded in the consolidated statement of earnings (loss) when incurred. In a fair value hedge, hedging instruments are carried at fair value, with changes in fair value recognized in the consolidated statement of earnings (loss).  The changes in fair value of the hedged item attributable to the hedged risk is also recorded in the consolidated statement of earnings (loss) by way of a corresponding adjustment of the carrying amount of the hedged items recognized on the balance sheet.

Effective October 1, 2011, the company no longer designates the foreign currency revaluation of a portion of its long-term debt as a hedge against the foreign currency exposure arising on the net investment in its foreign subsidiary, the Snowflake recycle mill operations. Subsequent to the permanent closure of the Snowflake mill on September 30, 2012 the company ceased to have a self-contained foreign operation.

(i) Cash and cash equivalents

Cash and cash equivalents include cash and short-term investments with original maturities of less than three months when acquired and are presented at fair value.

13

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

(j) Inventories

Specialty printing papers, newsprint and pulp inventories are valued at the lower of three-month moving average cost or market. Wood chips, pulp logs and other raw materials are valued at the lower of cost or market. For raw materials to be used in the production of finished goods, market is determined on an as-converted-to-finished-goods basis. Work-in-progress and operating and maintenance supplies and spare parts inventories are valued at cost. Cost is defined as all costs that relate to bringing the inventory to its present condition and location under normal operating conditions and includes manufacturing costs, such as raw materials, labour and production overhead, and depreciation and amortization costs. In addition, cost includes freight costs to move inventory offsite.

(k) Repairs and maintenance costs

Repairs and maintenance, including costs associated with planned major maintenance, are charged to Cost of sales, excluding depreciation and amortization as incurred.

(l) Property, plant and equipment

Property, plant and equipment are stated at cost, less accumulated depreciation and amortization, including asset impairment charges. Interest costs for capital projects are capitalized. Buildings, machinery and equipment are generally amortized on a straight-line basis at rates that reflect estimates of the economic lives of the assets. The rates for major classes of assets based on the estimated remaining economic lives are:

Buildings	2.5% – 5.0%
Paper machinery and equipment	5.0% – 10.0%
Pulp machinery and equipment	5.0% – 10.0%

No depreciation is charged on capital projects during the period of construction. Start-up costs incurred in achieving normal operating capacity on major capital projects are expensed as incurred.

Leasehold improvements are normally amortized over the lesser of their expected average service life and the term of the lease.

When property, plant and equipment are sold by the company, the historical cost less accumulated depreciation and amortization is netted against the sale proceeds and the difference is included in Other income (expense), net.

(m) Assets held for sale and discontinued operations

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

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

(n) Goodwill

The carrying value of goodwill on December 31, 2013 was written off in accordance with an impairment test on long-lived assets (see Note 6,Measurement uncertainty – impairment of long-lived assets). Goodwill was measured at the amount that the company’s enterprise value exceeded the fair value of its identified assets and liabilities with the application of fresh start accounting as of September 30, 2012.

14

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

(o) Impairment of long-lived assets

Long-lived assets are tested for recoverability when events or changes in circumstances indicate their carrying value may not be recoverable. A long-lived asset is potentially not recoverable when its carrying value is greater than the sum of the undiscounted cash flows expected to result from its use and eventual disposition. The impairment loss, if any, is measured as the amount by which the long-lived asset’s carrying amount exceeds its fair value.

Goodwill is tested for impairment on an annual basis. A company may first assess certain prescribed qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test.

(p) Environmental costs

Environmental expenditures are expensed or capitalized depending upon their future economic benefit. Expenditures that prevent future environmental contamination are capitalized as part of Property, plant and equipment, and depreciation and amortization is subsequently charged to earnings over the estimated future benefit period of the assets. Expenditures that relate to an existing condition caused by past operations are expensed. Liabilities are recorded on a discounted basis when rehabilitation efforts are likely to occur and the costs can be reasonably estimated.

(q) Asset retirement obligations

Asset retirement obligations are recognized at fair value in the period in which the company incurs a legal obligation associated with the retirement of an asset. The associated costs are capitalized as part of the carrying value of the related asset and amortized over its remaining useful life. The liability is accreted using a credit-adjusted risk-free interest rate.

The company’s obligations for the proper removal and disposal of asbestos products in its mills meet the definition of a conditional asset retirement obligation. That is, the company is subject to regulations that are in place to ensure that asbestos fibres do not become friable, or loose. The regulations require that friable asbestos be repaired or removed in accordance with the regulations. The company’s asbestos can generally be found on steam and condensate piping systems throughout its facilities, as well as in transite cladding on buildings and in building insulation. As a result of the longevity of the company’s mills, due in part to the company’s maintenance procedures, and the fact that the company does not have plans for major changes that would require the removal of asbestos, the timing of the removal of asbestos in the company’s mills is indeterminate. As a result, the company is currently unable to estimate the fair value of its asbestos removal and disposal obligation.

The company’s obligations to cover (cap) the surface areas of the landfills that are in operation at its mill sites meet the definition of an asset retirement obligation. Capping will prevent future environmental contamination when the landfills are no longer in active use. The company presently has active landfills at its Crofton and Powell River mill sites.

(r) Deferred financing costs

Deferred costs related to the company’s long-term debt are included in Other assets and amortized over the legal life of the related liability. Financing costs associated with modifications of long-term debt are expensed as incurred.

(s) Stock-based compensation and other stock-based payments

Phantom share units granted to the company’s key 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. Accrued compensation cost is a liability as potential entitlements are payable in cash, and therefore, compensation cost must be re-measured at fair value as of each reporting date with prospective adjustment to the amount of the expense.

15

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

(t) Income taxes

Income taxes are accounted for using the asset and liability method. Deferred income tax assets and liabilities are based on temporary differences (differences between the accounting basis and the tax basis of the assets and liabilities) and non-capital loss carry-forwards and are measured using the enacted tax rates and laws expected to apply when these differences reverse. Future tax benefits, including non-capital loss carry-forwards, are recognized to the extent that realization of such benefits is considered more likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that enactment occurs.

(u) Employee future benefits

The company maintains pension benefit plans for all salaried employees, which include defined benefit and defined contribution segments. The company also sponsors other post-retirement benefit plans, covering health and dental benefits. The company recognizes assets or liabilities for the respective overfunded or underfunded statuses of its defined benefit pension plans and other post-retirement benefit plans on its consolidated balance sheet. Changes in the funding statuses that have not been recognized in the company’s net periodic benefit costs are reflected in Accumulated other comprehensive income (loss) in the company’s consolidated balance sheet. Net periodic benefit costs are recognized as employees render the services necessary to earn the pension and other post-retirement benefits.

The estimated cost for pensions and other employee future benefits provided to employees by the company is accrued using actuarial techniques and assumptions during the employees’ active years of service. The net periodic benefit cost includes:

· the cost of benefits provided in exchange for employees’ services rendered during the year;

· the interest cost of benefit obligations;

· the expected long-term return on plan assets based on the fair value for all asset classes;

· gains or losses on settlements or curtailments;

· the straight-line amortization of prior service costs and plan amendments included in accumulated other comprehensive income (AOCI) over the expected average remaining service lifetime (EARSL) of employees who are active as of the date such costs are first recognized, unless all, or almost all, of the employees are no longer active, in which case such costs are amortized over the average remaining life expectancy of the former employees; and

· the straight-line amortization of cumulative unrecognized net actuarial gains and losses in excess of 10% of the greater of the accrued benefit obligation and the fair value of plan assets at the beginning of the year over the EARSL of the active employees who are active as of the date such amounts are recognized, unless all, or almost all, of the employees are no longer active, in which case such costs are amortized over the average life expectancy of the former employees.

The defined benefit plan obligations are determined in accordance with the projected benefit method, prorated on services.

Amounts paid to the company’s defined contribution plans for salaried employees and to multi-employer industry-wide pension plans are expensed as incurred.

(v) Earnings (loss) per share

Basic earnings (loss) per share is computed by dividing net earnings (loss) attributable to the company for the period by the weighted average number of company common shares outstanding during the reporting period. Diluted earnings (loss) per share is computed using the treasury stock method. When the effect of options and other securities convertible into common shares is anti-dilutive, including when the company has incurred a loss for the period, basic and diluted loss per share are the same.

16

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

(w) Comparative figures

Comparative figures disclosed in the consolidated financial statements have been reclassified to conform to the presentation adopted for the current year.

3. RECENTLY IMPLEMENTED ACCOUNTING STANDARDS

There were no new pronouncements issued by the Financial Accounting Standards Board (FASB) that impacted the company’s consolidated financial results for the year.

4. CHANGES IN FUTURE ACCOUNTING STANDARDS

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

5. CredItOr Protection Proceedings RelateD Disclosures

Emergence from Creditor Protection Proceedings

On January 31, 2012, Catalyst Paper Corporation and certain of its subsidiaries obtained an Initial Order from the Supreme Court of British Columbia under the CCAA proceedings. The company applied for recognition of the Initial Order under Chapter 15 of Title 11 of the US Bankruptcy Code. The company entered into a Debtor-In-Possession (DIP) Credit Agreement, pursuant to which a DIP Credit Facility of approximately $175 million was confirmed by the Court.

The company successfully emerged from the creditor protection proceedings on September 13, 2012. The company met all of the conditions to implement the Plan by securing exit financing consisting of a new asset-based loan facility (ABL Facility) and new floating rate senior secured notes (Floating Rate Notes). Upon implementation of the Plan, the company was reorganized through the consummation of several transactions pursuant to which, among other things:

· The company’s operations were continued in substantially the same form.

· Holders of the Predecessor company’s 2016 Notes exchanged their US$390.4 million aggregate principal amount plus accrued and unpaid interest for:

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

− 14.4 million new common shares, being approximately 100% of the company’s issued and outstanding common shares, subject to dilution for (i) the issuance of common shares to unsecured creditors who made an equity election pursuant to the terms of the Plan, and (ii) a new management incentive plan.

· Holders of the Predecessor company’s 2014 Notes exchanged their US$250.0 million aggregate principal plus accrued and unpaid interest for:

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

− if an equity election was made, their pro rata share of 600,000 new common shares (the Unsecured Creditor Share Pool).

· General creditors exchanged their general unsecured claims for:

− their pro rata share of the PREI Proceeds Pool; or

− if an equity election was made, their pro rata share of the Unsecured Creditor Share Pool; or

17

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

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

· All common shares and stock options of the Predecessor company outstanding prior to the reorganization were cancelled for no consideration and holders of such common shares did not receive any distribution under the Plan.

The company distributed $1.0 million to unsecured creditors in November 2012 as full and final settlement of claims comprising the Cash Convenience Pool. The company issued 127,571 common shares to unsecured creditors in December as full and final settlement of claims comprising the Unsecured Creditor Share Pool.The company distributed $12.7 million to unsecured creditors who did not make an equity election as full and final settlement of their claims under the PREI Proceeds Pool (see note 7,Variable interest entities).

Fresh start accounting

The company applied fresh start accounting as of September 30, 2012. An enterprise value was established for the company and its assets and liabilities were restated at fair value.In accordance with fresh start accounting, the Predecessor company’s common shares, additional paid-in-capital, deficit and accumulated other comprehensive loss were eliminated. The effects of the implementation of the Plan and the application of fresh start accounting were reflected in the company’s consolidated balance sheet as of September 30, 2012.

Reorganization Items, Net

Expenses (including professional fees), realized gains and losses, and provisions for losses resulting from reorganization activities are reported separately from ongoing operations of the business in the consolidated statement of earnings (loss) as reorganization items.

The components of reorganization items, net are as follows:

	Successor					Predecessor
Reorganization items, net	Year ended December 31, 2013			Three months ended December 31, 2012		Nine months ended September 30, 2012
Professional fees ¹	$	0.6		$	1.8	$	24.7
Gain due to plan of arrangement adjustments ²		0.6			1.4		(456.0	)
Gain due to fresh start accounting adjustments ³		–			–		(328.3	)
DIP financing costs4		–			–		3.8
Acceleration of ABL financing costs5		–			–		3.3
Provision for repudiated lease contract6		–			–		7.0
Write-off of debt discount, modification and issuance costs7		–			–		(11.0	)
Adjustment to pre-petition accounts payable8		–			–		(4.8	)
Adjustment to other post-employment benefits		–			–		2.4
Provision for labour union claims9		–			–		91.8
Other		–			–		0.2
Reorganization items, net from continuing operations		1.2			3.2		(666.9	)
Gain due to plan of arrangement adjustments ²		(0.1	)		1.0		(7.1	)
Gain due to fresh start accounting adjustments ³		–			–		(0.1	)
Adjustment to pre-petition accounts payable8		–			–		(1.9	)
Provision for repudiated coal contract6		–			–		4.3
Reorganization items, net from discontinued operations		(0.1	)		1.0		(4.8	)
Total	$	1.1		$	4.2	$	(671.7	)

1 Professional fees directly related to the creditor protection proceedings, ongoing monitoring and establishment of a reorganization plan, including legal, consulting and other professional fees.

18

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

2 Net gain recognized from application of the Plan as of September 30, 2012.

3 Net gain recognized from application of fresh start accounting in accordance with FASB ASC 852,Reorganizations, as of September 30, 2012.

4 Financing costs incurred in connection with entering into DIP Credit Agreement, including commitment fees, for the duration of the creditor protection proceedings.

5 Pursuant to the creditor protection proceedings, the company’s former ABL Facility was replaced by the DIP Credit Facility which resulted in the acceleration of the remaining deferred unamortized financing costs on the former ABL Facility in earnings.

6 The company repudiated on a lease contract at its paper recycling operation which was closed in 2010, resulting in a $7.0 million adjustment to the allowed claims amount. The company repudiated on a coal contract at its Snowflake mill, discontinued on September 30, 2012, which resulted in adjustments for allowed claims of $4.3 million.

7 The company’s secured and unsecured pre-petition debt balances were adjusted to the allowed claims amounts, defined as the outstanding principal plus accrued and unpaid interest, which resulted in the write-off of the unamortized discount, modification and debt issue costs on the 2014 Notes and 2016 Notes.

8 The company’s pre-petition accounts payable were adjusted to the allowed claims amount.

9 The labour unions at the company’s Canadian mills submitted unsecured claims as part of the creditor protection proceedings.

6. MEASUREMENT UNCERTAINTY – IMPAIRMENT OF LONG-LIVED ASSETS

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

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

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

The company tests its goodwill for impairment on an annual basis using a two-step impairment test at the reporting unit level. Reporting units of the company, defined as operating segments or one reporting level lower, are its one pulp and three paper mill operations. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill

Estimates of future cash flows and fair value require judgments, assumptions and estimates and may change over time. Due to the variables associated with judgments and assumptions used in these tests, the precision and accuracy of estimates of impairment charges are subject to significant uncertainties and may change significantly as additional information becomes known. The carrying value of long-lived assets represented approximately 58.9% of total assets as at December 31, 2013. If future developments were to differ adversely from management’s best estimate of key assumptions and associated cash flows, the company could potentially experience future material impairment charges.

2013

On December 31, 2013, the company recognized an impairment charge of $56.7 million on goodwill and $30.2 million on property, plant and equipment.

The following table provides the components of the impairment and other closure costs:

Buildings, plant and equipment
Port Alberni	$	17.3
Powell River		12.9
		30.2
Goodwill		56.7
Impairment and other closure costs	$	86.9

19

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

There were indicators of potential impairment of long-lived assets at December 31, 2013, including declines in current and forecasted paper prices and announced rate increases in future electric power purchases that may negatively impact future operating costs and profitability. Four asset groups were identified for the purpose of the impairment analysis: Crofton paper, Crofton pulp, Powell River and Port Alberni. Assets and related liabilities were grouped by mill in accordance with the enterprise valuation established for fresh start accounting on September 30, 2012 for which independent cash flows were identified for each mill.

The full carrying value of goodwill was included in the Powell River and Port Alberni asset groups for the purpose of the long-lived asset impairment test in accordance with the assignment of goodwill on application of fresh start accounting. The company conducted step (i) of the impairment test to determine whether the carrying value of its long-lived assets were recoverable. The Port Alberni and Powell River asset groups failed the recoverability test due in part to current and projected weakness in specialty paper prices. The carrying value of assigned assets and liabilities exceeded the estimated fair value of the asset groups, resulting in full impairment of assigned goodwill and impairment of the carrying value of property, plant and equipment down to estimated fair value as of December 31, 2013.

Estimates of future cash flows used to test the recoverability of long-lived assets included key assumptions related to foreign exchange rates, forecast product prices, market supply and demand, estimated useful life of the long-lived assets, production levels, production costs, inflation, weighted average cost of capital, and capital spending. The assumptions were derived from information generated internally and external published reports and forecasts. Product sales prices and foreign exchange assumptions for 2014 of CDN$1.00 = US$0.93 were based on management’s best estimates incorporating independent market information as well as analysis of historical data, trends and cycles. Product sales prices and foreign exchange assumptions for years 2015 to 2018 were based on independent, published market forecasts. The foreign exchange assumption for CDN$1.00 ranged between US$0.92 and US$0.93 for the forecast period. The company estimated the fair value of its pulp and paper assets by discounting estimated future cash flows from the use of its long-lived assets and net working capital to present value. A discount rate of 15% was used, reflecting current market assessments of the time value of money and the risks particular to the company’s assets. 

2012

The company did not identify any impairment indicators related to its continuing operations subsequent to establishing an enterprise value and applying fresh start accounting as of September 30, 2012 and therefore did not conduct an impairment test as of December 31, 2012.

For its discontinued operations the company recognized impairment, severance and other closure costs of $11.0 million for the three months ended December 31, 2012 and $8.7 million for the nine months ended September 30, 2012, as disclosed in note 8,Assets held for sale and discontinued operations.

2011

The company recorded impairment and other closure costs of $823.6 million in 2011, consisting of an impairment charge of $660.2 million on the assets of its Canadian operations, $161.8 million on the assets of the Snowflake mill, net closure costs of $0.5 million related to the discontinued paper recycling operation and $1.1 million related to a revised estimate for future landfill rehabilitation cost in respect of the landfill located at the discontinued Elk Falls mill. Subsequent to this impairment, the company repudiated on the lease contract on the paper recycling operation (see note 5.Creditor protection proceedings related disclosures), closed and sold the Snowflake mill, and sold the discontinued Elk Falls mill including the landfill and other related assets (see note 8.Assets held for sale and discontinued operations). 

20

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

The following table provides the components of the impairment and other closure costs:

Buildings, plant and equipment	$	801.1
Land		10.8
Operating and maintenance supplies and spare parts inventory		10.1
		822.0
Other closure costs – operating lease at paper recycling operation		0.5
Other closure costs – Elk Falls landfill rehabilitation estimate		1.1
Total	$	823.6
Classification in consolidated statement of earnings (loss):
Impairment and other closure costs	$	661.8
Loss from discontinued operations, net of tax		161.8
	$	823.6

Continuing operations

In respect of the company’s Canadian operations, impairment of $660.2 million was recorded on December 31, 2011 on buildings, plant and equipment. During the fourth quarter of 2011, continuing declines in current and forecast prices for newsprint, directory markets and pulp indicated a probable impairment of the Canadian operations. Two asset groups were identified for the purpose of the impairment analysis; pulp assets and paper assets. Paper assets in aggregate were treated as one asset group as the company’s paper machines are capable of running various grades and can be reconfigured to switch from one paper production such as newsprint to directory or specialty.

The company conducted step (i) of the impairment test to determine whether the carrying value of the assets of its Canadian operations were recoverable. Estimates of future cash flows used to test the recoverability of long-lived assets included key assumptions related to foreign exchange rates, forecast product prices, market supply and demand, estimated useful life of the long-lived assets, production levels, production costs, inflation, weighted average cost of capital, and capital spending. The assumptions were derived from information generated internally and external published reports and forecasts. The useful life of the company’s assets was estimated at 11 years for its pulp and paper assets. Product sales prices and foreign exchange assumptions for 2012 of CDN$1.00 = US$0.99 were based on management’s best estimates incorporating independent market information as well as analysis of historical data, trends and cycles. Product sales prices and foreign exchange assumptions for years 2013 to 2015 were based on independent, published market forecasts. The foreign exchange assumption was CDN$1.00 = US$0.97 in 2013 strengthening to CDN$1.00 = US$1.02 by 2015. Product sales prices and foreign exchange rate assumptions for 2016 and subsequent years were estimated by management based on long-term trend pricing for product sales prices and a long-term expected foreign exchange rate of CDN$1.00 = US$0.99. The company estimated the fair value of its pulp and paper assets by discounting estimated future cash flows from the use and eventual disposal of its long-lived assets and net working capital to present value. A discount rate of 11% was used, reflecting current market assessments of the time value of money and the risks particular to the company’s assets.

Discontinued operations

In respect of the company’s Snowflake, Arizona mill, impairment of $151.0 million was recorded on September 30, 2011 on buildings, plant and equipment and operating maintenance supplies and spare parts inventory. Current and historical operating and cash flow losses plus forecasted continuing losses indicated probable impairment of these assets. A recoverability analysis was performed, and on the basis of this analysis, the carrying value of these assets was fully impaired. On December 31, 2011, $10.8 million impairment was recorded on Snowflake’s land on the basis of an appraisal, dated January 3, 2012, obtained from an independent third party real estate appraiser.

21

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

7. VARIABLE INTEREST ENTITIES

On March 20, 2013 the company sold its 50.001% interest in PREI and settled its $20.8 million affiliate loans to PREI for proceeds of $33.0 million. A $12.7 million distribution of the net proceeds was made to unsecured creditors pursuant to the Plan under the creditor protection proceedings (see note 5,Creditor protection proceedings related disclosures). PREI consists of an integrated hydroelectric power generating, transmission and distribution system which includes two hydroelectric stations in B.C. with installed capacity of 83 Megawatts.  The company generally purchases 100% of the power generated by PREI and will continue to do so subsequent to the sale of its interest.

The company derecognized the accounts of PREI on the date of sale and recognized a gain on sale in the consolidated statement of earnings (loss). Prior to the sale, the company consolidated 100% of PREI as the company was the primary beneficiary.

The results of PREI were included in the company’s consolidated results up to the date of sale of March 20, 2013. Condensed financial information with respect to PREI is as follows:

	Successor
	Year ended December 31,			Three months ended December 31,			Year ended December 31,
	2013			2012			2011
Condensed statements of earnings (loss)
Sales – affiliate1	$	5.6		$	4.7		$	23.4
Cost of sales, excluding depreciation and amortization		1.3			2.1			7.0
Depreciation and amortization		1.6			1.9			13.4
		2.9			4.0			20.4
Operating earnings		2.7			0.7			3.0
Interest expense		(1.8	)		(2.4	)		(8.9	)
Interest expense – affiliate1		(0.4	)		(0.9	)		(2.4	)
Other income (expense), net		(0.1	)		(0.3	)		–
Reorganization items, net		–			(1.3	)		–
Income tax recovery (expense)		0.2			1.1			3.0
Net earnings (loss)		0.6			(3.1	)		(5.3	)
Other comprehensive income		–			–			0.1
Total comprehensive income (loss) 2	$	0.6		$	(3.1	)	$	(5.2	)

22

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

	Successor
	As at December 31,		As at December 31,			As at September 30,
	2013		2012			2012
Condensed balance sheets
Current assets
Cash and cash equivalents	$	–	$	6.6		$	6.9
Other		–		2.7			3.4
Property, plant and equipment		–		147.0			145.9
	$	–	$	156.3		$	156.2
Current liabilities
Accounts payable and accrued liabilities	$	–	$	13.1		$	8.5
Long-term debt (note 16)		–		113.8			113.8
Long-term debt – affiliate1		–		20.8			20.8
Deferred income taxes		–		23.6			24.6
Deficit2		–		(15.0	)		(11.5	)
	$	–	$	156.3		$	156.2

1 Balances with Catalyst Paper Energy Holdings Inc., a subsidiary of Catalyst Paper Corporation.

2 50% is included in the company’s non-controlling interest (deficit) balances.

The company recognized a gain on the sale of its interest in PREI of $5.3 million consisting of:

	Gain on Sale
Proceeds from sale
Gross proceeds from sale	$	33.0
Closing costs incurred		(0.2	)
Settlement of affiliate loans		(20.8	)
Other adjustments		(0.1	)
Net proceeds		11.9
De-recognition of assets
Cash and cash equivalents		(6.0	)
Other		(3.0	)
Property, plant and equipment		(145.6	)
De-recognition of liabilities
Accounts payable and accrued liabilities		6.8
Long-term debt		113.8
Long-term debt – affiliate loans		20.8
De-recognition of non-controlling interest		6.6
	$	5.3

The company has identified one other potential VIE, but has not been able to obtain the financial information necessary to evaluate whether the entity is a VIE, or, if the entity is a VIE, whether the company is the primary beneficiary. The company has entered into a building lease agreement with this potential VIE whereby the company has agreed to continue making the prescribed lease payments directly to the financial institution holding the mortgage on the building in the event the lessor is no longer able to meet its contractual obligations. The principal amount of the mortgage was $1.0 million on December 31, 2013 (December 31, 2012 – $3.0 million; September 30, 2012 – $3.4 million). This agreement does not increase the company’s liability beyond the obligation under the building lease.

23

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

8. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

Closure and Sale of Snowflake Mill

On January 30, 2013 the company completed the U.S. Court approved sale of the assets of the Snowflake facility and the shares of Apache Railway to an acquisition vehicle organized by Hackman Capital and its affiliates for US$13.5 million and other non-monetary consideration. The assets of the Snowflake facility that were sold included approximately 19,000 acres of land, equipment and other assets associated with the paper mill. The mill, which is located in northeastern Arizona, was permanently shut on September 30, 2012 due to continued financial losses resulting from intense supply input and market pressures. The closure resulted in impairment and other closure costs of $19.9 million for, among other things, severance, environmental obligations, and inventory write-offs. Closure costs also included an estimated withdrawal liability of US$11.7 million due to the PACE Industry Union-Management Pension Fund, a multi-employer pension plan the company contributed to on behalf of hourly employees at the Snowflake mill. The results of the Snowflake mill up to the date of sale, including impairment and closure costs and the net gain on sale, were reported as a discontinued operation.

Other asset sales

The company completed the sale of its Elk Falls industrial site on May 24, 2013 for proceeds of $8.6 million to Quicksilver Resources Canada Inc. The pulp and paper mill formerly operated at Elk Falls was indefinitely curtailed in 2009 and permanently closed in 2010.

The company completed the sale of its wastewater treatment facility and related infrastructure to the City of Port Alberni on September 30, 2013 for proceeds of $5.8 million. Assets sold had a net book value of $5.8 million and included the 13.4 hectare wastewater treatment facility and 3.9 hectare parcel of lands combined with a road dedication to facilitate development of an industrial truck route along the waterfront.

The company sold two parcels of poplar plantation land with a book value of $0.5 million on December 16, 2013 for proceeds of $0.3 million.

Assets held for sale

The company will settle the mortgage receivable from PRSC Limited Partnership and sell its interest in PRSC Land Developments Ltd. for proceeds of approximately $3.0 million. The company continues to actively market the remaining poplar plantation land. These assets were reported as held for sale in the consolidated balance sheets as of December 31, 2013.

A summary of major classes of assets and liabilities classified as held for sale is as follows:

	Successor
	December 31,				September 30,
	2013		2012		2012
Cash and cash equivalents	$	–	$	1.9	$	0.4
Restricted cash		–		2.3		2.7
Accounts receivable		–		0.5		17.1
Inventories		–		0.6		5.4
Prepaids and other		–		–		0.5
Property, plant and equipment		2.9		24.7		25.8
Other assets		2.8		4.3		4.3
Assets held for sale		5.7		34.3		56.2
Accounts payable and accrued liabilities		–		15.2		14.8
Liabilities associated with assets held for sale	$	–	$	15.2	$	14.8

24

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

The operations of the Snowflake mill were classified as a discontinued operation. A breakdown of earnings (loss) from discontinued operations, net of tax is as follows:

	Successor						Predecessor
	Year ended December 31,			Three months ended December 31,			Nine months ended September 30,			Year ended December 31,
	2013			2012			2012			2011
Sales	$	0.7		$	4.5		$	142.8		$	181.8
Cost of sales, excluding depreciation and amortization		(1.1	)		(5.0	)		(142.4	)		(202.9	)
Depreciation and amortization		–			–			–			(7.0	)
Impairment, severances and other closure costs		(0.2	)		(11.0	)		(8.7	)		(161.8	)
Restructuring costs		(0.4	)		(1.1	)		–			–
Interest expense, net		–			–			(0.1	)		(0.2	)
Other income (expense), net		(0.1	)		0.7			–			(4.4	)
Gain on sale of assets of Snowflake and shares of Apache Railway		4.1			–			–			–
Reorganization items, net (note 5)		0.1			(1.0	)		4.8			–
Income tax expense		–			–			–			(1.0	)
Earnings (loss) from discontinued operations, net of tax	$	3.1		$	(12.9	)	$	(3.6	)	$	(195.5	)

The company recognized a gain on the sale of the assets of Snowflake and the shares of Apache Railway of $4.1 million that consisted of:

	Gain on Sale
Contract price	$	13.5
Adjusted for:
Transaction fees related to sale		(0.4	)
Cancellation of letter of credit related to Arizona Department of Environmental Quality		(2.3	)
Net proceeds		10.8
De-recognition of assets
Property, plant and equipment		(6.6	)
Other current assets (Apache Railway)		(0.2	)
De-recognition of liabilities
Accounts payable and accrued liabilities (Apache Railway)		0.1
	$	4.1

25

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

9. ACCOUNTS RECEIVABLE

The components of accounts receivable are as follows:

	Successor
	As at December 31,						As at September 30,
	2013			2012			2012
Trade receivables	$	106.4		$	94.7		$	121.9
Less:  allowance for doubtful accounts		(1.8	)		(2.2	)		–
		104.6			92.5			121.9
Sales taxes receivable		5.0			12.6			12.7
Other receivables		6.9			8.9			6.2
	$	116.5		$	114.0		$	140.8

Accounts receivable are pledged as collateral against the long-term debt of the company. See note 16,Long-term debt,for detailed disclosure of the collateral arrangements of the company.

10. INVENTORIES

The components of inventories are as follows:

	Successor
	As at December 31,				As at September 30,
	2013		2012		2012
Finished goods
Specialty printing papers	$	29.7	$	22.3	$	31.1
Newsprint		10.6		7.7		7.8
Pulp		1.3		3.9		3.0
Total finished goods		41.6		33.9		41.9
Work-in-progress		1.0		0.9		0.9
Raw materials – wood chips, pulp logs and other		23.3		23.1		21.1
Operating and maintenance supplies and spare parts		74.3		67.1		67.6
	$	140.2	$	125.0	$	131.5

At December 31, 2013, the company had applied write-downs to finished goods inventory of $nil (December 31, 2012 – $0.1 million; September 30, 2012 – $0.3 million) and to raw materials inventory of $nil (December 31, 2012 – $0.8 million; September 30, 2012 – $2.0 million).

Inventories are pledged as collateral against the long-term debt of the company. See note 16,Long-term debt,for detailed disclosure of the collateral arrangements of the company.

11. PREPAIDS AND OTHER

The components of prepaids and other are as follows:

	Successor
	As at December 31,				As at September 30,
	2013		2012		2012
Property taxes, insurance and licences	$	3.5	$	3.2	$	6.7
Other		1.0		5.7		6.3
	$	4.5	$	8.9	$	13.0

Prepaids and other assets are pledged as collateral against the long-term debt of the company. See note 16,Long-term debt,for detailed disclosure of the collateral arrangements of the company.

26

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

12. PROPERTY, PLANT AND EQUIPMENT

The components of property, plant and equipment are as follows:

	As at December 31, 2013 (successor)
	Cost		Accumulated depreciation, amortization and impairment		Net book  value
Buildings and land
Specialty printing papers and newsprint	$	67.7	$	8.1	$	59.6
Pulp		10.9		0.2		10.7
Machinery and equipment
Specialty printing papers and newsprint		410.1		77.1		333.0
Pulp		10.0		1.1		8.9
	$	498.7	$	86.5	$	412.2

	As at December 31, 2012 (successor)
	Cost		Accumulated depreciation, amortization and impairment		Net book  value
Buildings and land
Specialty printing papers and newsprint	$	224.5	$	2.7	$	221.8
Pulp		9.8		0.1		9.7
Machinery and equipment
Specialty printing papers and newsprint		384.9		9.9		375.0
Pulp		5.3		0.2		5.1
	$	624.5	$	12.9	$	611.6

	As at September 30, 2012 (successor)
	Cost		Accumulated depreciation, amortization and impairment		Net book  value
Buildings and land
Specialty printing papers and newsprint	$	221.7	$	-	$	221.7
Pulp		9.6		-		9.6
Machinery and equipment
Specialty printing papers and newsprint		379.5		-		379.5
Pulp		3.3		-		3.3
	$	614.1	$	-	$	614.1

The carrying value of property, plant and equipment was impaired by $30.2 million as of December 31, 2013 (see note 6,Measurement uncertainty – impairment of long-lived assets).

At December 31, 2013, machinery and equipment was held under capital leases with a net carrying amount of $6.0 million (December 31, 2012 – $7.3 million; September 30, 2012 – $7.5 million), cost of $7.5 million (December 31, 2012 – $7.5 million; September 30, 2012 – $7.5 million) and accumulated depreciation and amortization of $1.5 million (December 31, 2012 – $0.2 million; September 30, 2012 – $nil).

Interest capitalized in connection with capital projects was $nil for both 2013 and 2012.

Property, plant and equipment are pledged as collateral against the long-term debt of the company. See note 16,Long-term debt,for detailed disclosure of the collateral arrangements of the company.

27

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

13. GOODWILL

The carrying value of goodwill was impaired as of December 31, 2013 (see note 6,Measurement uncertainty – impairment of long-lived assets).

14. OTHER ASSETS

The components of other assets are as follows:

	Successor
	As at December 31,				As at September 30,
	2013		2012		2012
Deferred financing costs	$	4.9	$	9.0	$	9.8
Deferred charges and other		3.9		1.8		1.9
Accrued benefit asset – pension plan (note 17)		0.1		0.2		0.2
	$	8.9	$	11.0	$	11.9

Other assets are pledged as collateral against the long-term debt of the company. See note 16,Long-term debt,for detailed disclosure of the collateral arrangements of the company.

15. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

The components of accounts payable and accrued liabilities are as follows:

	Successor
	As at December 31,				As at September 30,
	2013		2012		2012
Trade payables	$	59.5	$	54.4	$	50.9
Accrued payroll and related liabilities		34.5		23.6		21.8
Accrued interest		5.4		11.7		5.6
Accrued benefit obligation – pension plan (note 17)		8.2		7.4		7.3
Accrued benefit obligation – other employee future benefit plans (note 17)		6.1		5.8		5.3
Restructuring (note 21)		0.7		0.3		0.4
Payables related to capital projects		1.8		3.9		0.9
Other		3.5		6.7		5.3
	$	119.7	$	113.8	$	97.5

28

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

16. LONG-TERM DEBT

The company’s long-term debt at December 31 is listed below.

	Successor
	As at December 31,						As at September 30,
	2013			2012			2012
Recourse
Floating rate senior secured notes, due September 2016 (US$19.4 million; December 31, 2012 – US$35.0 million)	$	20.2		$	33.9		$	33.4
Senior secured notes, 11.0% due October 2017 (US$250.0 million)		265.9			248.7			245.9
		286.1			282.6			279.3
Revolving asset-based loan facility of up to $175.0 million due July 2017		10.6			24.0			64.0
Capital lease obligations		7.1			8.2			8.5
		303.8			314.8			351.8
Non-recourse (note 8)
First mortgage bonds, 6.447% due July 2016	��	–			95.0			95.0
Subordinated  promissory notes		–			18.8			18.8
		–			113.8			113.8
Total debt		303.8			428.6			465.6
Less:  current portion		(2.0	)		(6.6	)		(6.7	)
Total long-term debt	$	301.8		$	422.0		$	458.9

Significant changes to long-term debt in 2013

The company made an offer to purchase US$20.0 million of the Floating Rate Notes outstanding from the net proceeds that arose from the sale of its interest in PREI. The offer, which expired on April 24, 2013, was accepted by noteholders representing US$15.6 million of the Floating Rate Notes.

The company derecognized its non-recourse debt, consisting of the first mortgage bonds and subordinated promissory notes owed by PREI, on the sale of its interest in PREI on March 20, 2013 as disclosed in note 7,Variable interest entities. The company is no longer the primary beneficiary of this VIE subsequent to the date of sale, and therefore, will no longer consolidate PREI’s debt.

The company renewed certain master equipment leases for an additional ten years. This resulted in a reclassification in the quarter of the principal amount outstanding on its capital leases from current to long-term.

Significant changes to long-term debt in 2012

On September 13, 2012 as part of the implementation of the Plan and emergence from creditor protection, the Successor company issued US$250.0 million of new senior secured notes (2017 Notes). The 2017 Notes, issued to holders of the Predecessor company’s 2016 Notes, have a maturity date of October 30, 2017, and bear interest, payable semi-annually, at a rate of 11% per annum in cash or, at the option of the company, 13% per annum payable 7.5% cash and 5.5% payment-in-kind (PIK). The PIK portion of the interest will consist of newly issued senior secured notes that will be governed by the indentures of the 2017 Notes and will have identical maturity, covenants, interest, collateral and other characteristics as the 2017 Notes. To date, the company has elected to pay interest due on the 2017 Notes in cash.

On September 13, 2012 the company secured exit financing consisting of a new ABL Facility and the issuance of Floating Rate Notes. The $175.0 million ABL Facility, which replaced the DIP Credit Facility the company had access to while under creditor protection, matures on the earlier of July 31, 2017, and 90 days prior to maturity of any significant debt. A financial covenant requires the company to maintain a minimum fixed charge coverage ratio of 1.0:1.0 if excess availability under the Facility is below $22 million.

29

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

The US$35.0 million Floating Rate Notes have a maturity date of September 13, 2016, and can be prepaid in whole or in part at any time prior to September 13, 2013, at a redemption price of 103%, on or after September 13, 2013, and prior to September 13, 2014, at a redemption price of 102%, and on or after September 13, 2014, at a redemption price of 100% of the aggregate principal amount outstanding. The Floating Rate Notes bear interest, payable quarterly, at 10.0% plus three-month LIBOR per annum, with a floor set for the floating LIBOR component of 3.0%.

The company secured a DIP Credit Facility, which replaced its former ABL Facility, as part of the creditor protection proceedings. The DIP Credit Facility had an 18-month maturity and a maximum draw of approximately $175 million. Maximum availability was subject to certain terms and conditions that the DIP lenders agreed to provide to Catalyst during the CCAA proceedings. The security for the DIP Credit Facility consisted of a first charge on the accounts receivable, inventory and cash of the company (collectively, the DIP First Charge Collateral) and a second charge on the 2016 Notes First Charge Collateral.

Significant terms, conditions and covenants

The indentures governing the company’s senior notes contain customary restrictive covenants, including restrictions on incurring additional indebtedness, certain restricted payments, including dividends and investments in other persons, the creation of liens, sale and leaseback transactions, certain amalgamations, mergers, consolidations and the use of proceeds arising from certain sales of assets and certain transactions with affiliates. Collateral provided on the 2017 Notes consists of a first charge on substantially all of the assets of the company, other than (i) a senior collateral charge on the Floating Rate Notes, and (ii) the ABL First Charge Collateral, as described below (2017 Notes First Charge Collateral), and a second charge on the senior collateral charge on the Floating Rate Notes and the ABL First Charge Collateral. The Floating Rate Notes are secured by a charge on the assets of the company that ranks senior to the lien securing the 2017 Notes (Floating Rate Notes First Charge Collateral). The indentures governing the Floating Rate Notes and 2017 Notes limit the ability of the company to incur debt, other than permitted debt, while the company cannot meet a fixed charge coverage ratio of 2.0:1.0. The company’s fixed charge coverage ratio under these indentures, calculated on a 12-month trailing average, was 1.0:1.0 at December 31, 2013 (December 31, 2012 – 0.9:1.0; September 30, 2012 – 0.4:1.0).

The company cannot make any restricted payments, including paying any dividends, except to the extent the balance in its restricted payments basket is positive. The restricted payments basket under the 2017 Notes was negative $45.8 million as at December 31, 2013 (December 31, 2012 – negative $33.6 million; September 30, 2012 – $nil).

The security for the ABL Facility consists of a first charge on accounts receivable, inventory and cash of the company (ABL First Charge Collateral) and a second charge on the 2017 Notes First Charge Collateral. Availability under the ABL Facility is determined by a borrowing base calculated primarily on eligible accounts receivable and eligible inventory, less certain reserves. The borrowing base at December 31, 2013, included reserves for a landlord waiver reserve in respect of rent of approximately $2.0 million, a pension reserve not exceeding the sum of normal cost pension contributions, special and catch-up payments and any other payments in respect of a Canadian pension plan that are past due of approximately $1.3 million, a reserve for credit insurance deductibles of $1.9 million, a reserve of $1.6 million for employee source deductions, and a reserve for workers compensation of $0.3 million. On December 31, 2013 the company had $110.5 million available under the ABL Facility after deducting outstanding drawings of $10.6 million and outstanding letters of credit of $19.3 million, before potential application of the springing fixed charge coverage ratio. The company also had cash on hand of $12.1 million on December 31, 2013.

The company was in compliance with its covenants under the ABL Facility and under each of the indentures governing its outstanding senior notes on December 31, 2013.

30

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Scheduled total debt repayments

	Recourse debt
2014	$	2.0
2015		0.4
2016		21.1
2017		278.8
2018		1.9
Thereafter		–
	$	304.2

The company’s long-term debt is recorded at amortized cost. The following table provides information about management’s best estimate of the fair value of the company’s debt:

	Successor
	December 31,								September 30,
	2013				2012				2012
	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
Recourse	$	303.8	$	212.5	$	314.8	$	262.5	$	351.8	$	351.8
Non-recourse		–		–		113.8		113.8		113.8		113.8

The fair value of the company’s long-term recourse debt related to its senior notes is determined based on quoted market prices of identical debt instruments (level 1 fair value measurement). The fair value of the company’s recourse debt related to the ABL Facility is measured by discounting the respective cash flows at quoted market rates for similar debt having the same maturity (level 2 fair value measurement). In measuring fair value, the company incorporates credit valuation adjustments to appropriately reflect its own non-performance risk, where appropriate.

17. EMPLOYEE FUTURE BENEFITS

The company maintains pension benefit plans for all salaried employees, which include defined benefit and defined contribution segments.  Employees hired subsequent to January 1, 1994 enroll in the defined contribution segment. Effective January 1, 2010, employees in the defined benefit plan ceased to accrue future benefits under the defined benefit segment of the plan and began to participate in the defined contribution segment of the plan. The company also maintains pension benefits for former hourly employees that are not covered by union pension plans. Unionized employees of the company are members of multi-employer industry-wide pension plans to which the company contributes a predetermined amount per hour worked by an employee.

The company provides other benefit plans consisting of provincial medical plan premiums, life insurance, extended health care and dental benefits to employees.  Certain extended health benefits with an actuarial value of $24.8 million were compromised under the creditor protection proceedings in 2012.

Defined contribution plans

For the defined contribution segment, the company’s contributions are based on a percentage of an employee’s earnings with the company’s funding obligations being satisfied upon crediting contributions to an employee’s account. The pension expense under the defined contribution payment is equal to the company’s contribution.

31

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Defined benefit plans

The defined benefit segment provides a pension based on years of service and earnings. Benefits accrued under the defined benefit segment of the plan for service prior to January 1, 2010 will remain in the defined benefit plan and will continue to be eligible for future salary growth and early retirement subsidies.

The company measured the fair value of plan assets and the projected benefit obligations for accounting purposes on December 31, 2013 with the assistance of its independent actuaries. Changes in the funding status of these plans not recognized in net periodic benefit costs were reflected as an adjustment to Accumulated other comprehensive income (loss). Subsequent to the closure of the Snowflake mill, the company no longer has a projected benefit obligation under the Snowflake Salaried Retiree Medical and Life Insurance Plan.

Special portability option

The company offered members of its defined benefit pension plan for salaried employees (Salaried Plan) a one-time reduced lump-sum payment option as full settlement of their entitlements under the plan. Members had to make their elections by no later than December 15, 2012, and had until June 30, 2013 to revoke such elections in favour of continuing to receive retirement benefits in the form of a monthly pension.

Members who exercised the election received reduced lump-sum payments calculated as the commuted value of future pension payments multiplied by the solvency ratio of the Salaried Plan on December 31, 2012. In addition, these members will receive quarterly top-up payments over the next four years totaling 8% of their commuted value. Commuted value is the amount a plan member needed to invest on December 31, 2012 to provide for future pension benefits, incorporating an interest rate based on Government of Canada bonds.

Members of the Salaried Plan who exercised the election under the special portability election option received lump-sum payments of $38.3 million in July 2013. These lump-sum payments represented a partial settlement of the Salaried Plan in the third quarter. On the effective settlement date, deemed for accounting purposes to be July 1, 2013, the company measured the fair value of plan assets and the projected benefit obligation of the Salaried Plan with the assistance of its independent actuaries. The company recognized a net actuarial gain of $15.1 million in other comprehensive income, consisting of an actuarial gain of $6.2 million with respect to members remaining in the plan, and an actuarial gain of $8.9 million with respect to members electing to settle their benefits under the special portability election option. The net actuarial gain included a settlement credit of $16.6 million; members who exercised the election exchanged pension benefits with total commuted value of $59.6 million for reduced lump-sum payments of $38.3 million and quarterly top-up payments over the next four years totaling 8% of commuted value with a present value of $4.7 million on July 1, 2013. A portion of net actuarial gain of $2.6 million, pro-rated based on the percentage of benefit obligations settled under the special portability election option, was reclassified from accumulated other comprehensive income to earnings.

32

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Components of net periodic benefit cost recognized

	Successor						Predecessor
	Year ended December 31,			Three months ended December 31			Nine months ended September 30			Year ended December 31
Pension benefit plans	2013			2012			2012			2011
Defined benefit plan
Service cost for the period	$	1.1		$	0.2		$	1.0		$	1.4
Interest cost		14.0			3.7			12.3			17.7
Expected return on assets		(13.3	)		(3.6	)		(11.2	)		(16.5	)
Recognition (reversal) of downsizing program		–			–			(0.2	)		1.7
Amortization of unrecognized items:
Actuarial (gains) losses		–			–			6.4			7.9
Prior service costs		–			–			0.3			0.4
		1.8			0.3			8.6			12.6
Defined contribution plan
Service cost for the period		2.5			0.7			2.4			3.4
Multi-employer industry-wide pension plan service cost for the period		8.5			2.0			7.5			10.1
Net periodic benefit cost for pension benefit plans	$	12.8		$	3.0		$	18.5		$	26.1

	Successor				Predecessor
	Year ended December 31,		Three months ended December 31		Nine months ended September 30			Year ended December 31
Other benefit plans	2013		2012		2012			2011
Service cost for the period	$	2.0	$	0.4	$	1.0		$	1.3
Interest cost		5.9		1.5		5.3			7.6
Amortization of unrecognized items:
Actuarial (gains) losses		–		–		0.1			0.4
Prior service credits		–		–		(2.8	)		(3.7	)
Net periodic benefit cost for other benefit plans	$	7.9	$	1.9	$	3.6		$	5.6

33

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Change in projected defined benefit plan obligation and fair value of plan assets

The following table represents the change in the projected benefit obligation and fair value of plan assets as determined by independent actuaries:

	Pension benefit plans									Other benefit plans
	Successor						Predecessor			Successor						Predecessor
	Year ended December 31,			Three months ended December 31,			Nine months ended September 30,			Year ended December 31,			Three months ended December 31,			Nine months ended September 30,
	2013			2012			2012			2013			2012			2012
Change in benefit obligation
Projected benefit obligation at beginning of period	$	386.5		$	393.9		$	383.8		$	149.2		$	150.8		$	162.3
Service cost for the period		1.1			0.2			1.0			2.0			0.4			1.0
Interest cost		14.0			3.7			12.3			5.9			1.5			5.3
Benefit payments		(29.0	)		(7.8	)		(22.9	)		(5.2	)		(1.5	)		(5.6	)
Recognition (reversal) of downsizing program		–			–			(0.2	)		–			–			(1.4	)
Elimination of extended health benefits for retirees		–			–			–			–			–			(24.8	)
Settlement		(38.4	)
Actuarial losses (gains) and other adjustments		(17.0	)		(3.5	)		19.9			(0.1	)		(2.0	)		14.0
Projected benefit obligation at end of period	$	317.2		$	386.5		$	393.9		$	151.8		$	149.2		$	150.8
Change in plan assets
Fair value of defined benefit plan assets at beginning of period	$	233.0		$	231.9		$	226.9		$	–		$	–		$	–
Actual return on plan assets		23.0			4.3			13.4			–			–			–
Company contributions		11.3			4.6			14.5			5.2			1.5			5.6
Other		–			–			–			–			–			–
Settlement		(38.4	)
Benefit payments		(29.0	)		(7.8	)		(22.9	)		(5.2	)		(1.5	)		(5.6	)
Fair value of assets at end of period	$	199.9		$	233.0		$	231.9		$	–		$	–		$	–

34

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Reconciliation of funded status to amounts recognized in the consolidated balance sheets

	Pension benefit plans									Other benefit plans
	Successor									Successor
	As at December 31,						As at September 30,			As at December 31,						As at September 30,
	2013			2012			2012			2013			2012			2012
Projected benefit obligation at end of period	$	317.2		$	386.5		$	393.9		$	151.8		$	149.2		$	150.8
Fair value of plan assets at end of period		199.9			233.0			231.9			–			–			–
Funded status	$	(117.3	)	$	(153.5	)	$	(162.0	)	$	(151.8	)	$	(149.2	)	$	(150.8	)

	Pension benefit plans									Other benefit plans
	Successor									Successor
	As at December 31,						As at September 30,			As at December 31,						As at September 30,
	2013			2012			2012			2013			2012			2012
Other assets (note 14)	$	0.1		$	0.2		$	0.2		$	–		$	–		$	–
Accounts payable and accrued liabilities (note 15)		(8.2	)		(7.4	)		(7.3	)		(6.1	)		(5.8	)		(5.3	)
Employee future benefits		(109.2	)		(146.3	)		(154.9	)		(145.7	)		(143.4	)		(145.5	)
	$	(117.3	)	$	(153.5	)	$	(162.0	)	$	(151.8	)	$	(149.2	)	$	(150.8	)

Of the total funding deficit of $117.3 million (December 31, 2012 - $153.5 million; September 30, 2012 - $162.0 million) in the company’s various defined benefit pension plans, $45.9 million (December 31, 2012 - $83.3 million; September 30, 2012 - $90.3 million) is related to funded defined benefit pension plans and $71.4 million (December 31, 2012 - $70.2 million; September 30, 2012 - $71.7 million) to “pay-as-you-go” unfunded defined benefit pension plans. In addition, all of the other post-retirement benefit plans, consisting of group health care and life insurance, which had a deficit of $151.8 million (December 31, 2012 - $149.2 million; September 30, 2012 - $150.8 million) is related to “pay-as-you-go” plans.

Amounts not yet recognized in net periodic benefit cost and included in accumulated other comprehensive income (loss)

	Pension benefit plans						Other benefit plans
	Successor						Successor
	As at December 31,				As at September 30,		As at December 31,				As at September 30,
	2013		2012		2012		2013		2012		2012
Accumulated gain (loss)	$	28.7		4.6	$	–	$	2.1		2.0	$	–
Accumulated other comprehensive income (loss)	$	28.7	$	4.6	$	–	$	2.1	$	2.0	$	–

35

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Amounts before taxes included in other comprehensive income (loss)

	Successor					Predecessor
	Year ended December 31,			Three months ended December 31,		Nine months ended September 30,
Pension benefit plans	2013			2012		2012
Amortization of employee future benefits	$	–		$	–	$	6.6
Net gain (loss)		26.7			4.6		(17.4	)
Settlement gain on special pension portability election		(2.6	)		–		–
Net amount recognized in other comprehensive income (loss)	$	24.1		$	4.6	$	(10.8	)

	Successor				Predecessor
	Year ended December 31,		Three months ended December 31		Nine months ended September 30
Other benefit plans	2013		2012		2012
Amortization of employee future benefits	$	–	$	–	$	(2.7	)
Net gain (loss)		0.1		2.0		(14.3	)
Net amount recognized in other comprehensive income (loss)	$	0.1	$	2.0	$	(17.0	)

An estimated amount of $0.3 million of gains for pension plans will be amortized from accumulated other comprehensive income (loss) to net periodic benefit cost in 2014.

Estimated future benefit payments

Total cash payments for employee future benefits for the year ended December 31, 2013, consisting of cash contributed by the company to its funded pension plans, cash payments directly to beneficiaries for its unfunded benefit plans, cash contributed to its defined contribution plans and cash contributed to its multi-employer industry-wide plan, was $27.7 million (2012 – $38.8 million). During 2014, the company expects to contribute approximately $23.6 million to all of the above pension plans and approximately $6.3 million to its other benefit plans.

The following table presents estimated future benefit payments from the plans as of December 31, 2013. Benefit payments for other post-retirement benefits are presented net of retiree contributions.

	Pension benefit plans		Other benefit plans
2014		27.6		6.3
2015		27.2		6.7
2016		26.8		7.1
2017		25.6		7.6
2018		24.2		8.0
2019 - 2022		110.0		48.2

Plan assets allocation

The asset allocation for the company’s defined benefit pension plans, by asset category, was as follows:

	Successor
	As at December 31,						As at September 30,
Plan assets	2013			2012			2012
Equity securities		55.8	%		56.2	%		57.3	%
Fixed income securities		37.8	%		38.6	%		37.6	%
Real estate		6.4	%		5.2	%		5.1	%
Total		100.0	%		100.0	%		100.0	%

36

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Fair value of plan assets

The following tables present information about the fair value of pension and other benefit plan assets:

			Fair value hierarchy
As at December 31, 2013 (successor)	Total		Level 1		Level 2		Level 3
Asset category
Cash and cash equivalents	$	2.3	$	2.3	$	–	$	–
Equity securities:
Global equity pooled funds1		72.8		–		72.8		–
Canadian equity pooled funds2		38.8		–		38.8		–
Fixed income securities:
Canadian long bond pooled funds3		35.7		–		35.7		–
Canadian bond pooled funds3		37.4		–		37.4		–
Forward currency contracts4		–		–		–		–
Real estate5		12.9		–		12.9		–
Total	$	199.9	$	2.3	$	197.6	$	–

				Fair value hierarchy
As at December 31, 2012 (successor)	Total			Level 1		Level 2			Level 3
Asset category
Cash and cash equivalents	$	2.8		$	2.8	$	–		$	–
Equity securities:
Global equity pooled funds1		85.5			–		85.5			–
Canadian equity pooled funds2		45.2			–		45.2			–
Fixed income securities:
Canadian long bond pooled funds3		43.7			–		43.7			–
Canadian bond pooled funds3		43.9			–		43.9			–
Forward currency contracts4		(0.1	)		–		(0.1	)		–
Real estate5		12.0			–		12.0			–
Total	$	233.0		$	2.8	$	230.2		$	–

			Fair value hierarchy
As at September 30, 2012 (successor)	Total		Level 1		Level 2		Level 3
Asset category
Cash and cash equivalents	$	2.7	$	2.7	$	–	$	–
Equity securities:
Global equity pooled funds1		84.2		–		84.2		–
Canadian equity pooled funds2		46.3		–		46.3		–
Fixed income securities:
Canadian long bond pooled funds3		43.4		–		43.4		–
Canadian bond pooled funds3		43.5		–		43.5		–
Forward currency contracts4		–		–		–		–
Real estate5		11.8		–		11.8		–
Total	$	231.9	$	133.2	$	98.7	$	–

1 This category includes investments in pooled funds that aim to achieve long-term capital growth by investing primarily in equity securities of companies that may be located anywhere in the world, excluding Canada. Fund performance is benchmarked against the MSCI World excluding Canada (CDN$) Index.

2 This category includes investments in pooled funds that invest in well-diversified portfolios of equity securities of Canadian companies. Fund performance is benchmarked against the S&P/TSX Capped Composite Index.

3 This category includes investments in pooled funds that invest in a well-diversified portfolio of fixed income securities issued primarily by Canadian governments and corporations. The duration range of the fund is +/- one year of the benchmark’s duration. Fund performance for Canadian bond pooled funds and Canadian long bond pooled funds is benchmarked against the DEX Universe Bond Index and DEX Long-Term Bond Index, respectively.

4 This category includes foreign currency forward contracts to partially hedge investments in equity and fixed income securities denominated in foreign currencies.

5 This category includes direct investment in office, industrial, retail and residential real estate.

37

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Cash and cash equivalents are primarily used to pay benefits and are recorded at carrying value which approximates fair value.

Equity and fixed income securities are comprised of pooled fund trusts, the fair values of which are measured using the net asset values of the funds, as calculated by the respective investment managers, and have daily or monthly liquidity. Net asset values are determined using quoted market prices for the actively traded securities in which the fund has invested. The funds do not invest in securities that are not actively traded.

Forward currency contracts are comprised of over-the-counter instruments and their fair value is measured using the discounted difference between contractual rates and market spot rates.

Real estate is comprised of income producing office, distribution & warehouse, retail and multi-family properties, held through an open pooled fund.  The fair value is based on market assessments performed on a periodic basis by independent experts on each of the properties held by the fund.

Multi-employer benefit plans

The following table provides information about the company’s two multi-employer pension plans: 

Pension  Protection Act  Zone Status 2

Contributions by Catalyst Paper 4

Successor

Predecessor

Pension Fund

EIN / Pension  plan number 1

2013

2012

FIP / RP status  pending /  implemented 3

Year ended  December 31,  2013

Three months  ended  December 31,  2012

Nine months  ended  September 30,  2012

Year ended  December 31,  2011

Surcharge  imposed

Expiration  date 5

Pulp and Paper Industry Pension Plan6

BCFIC-P085324 CRA-0394940

Green

Green

No

$

8.5

$

1.9

$

6.8

$

9.2

No

4/30/2017

PACE Industry Union-Management Pension Fund7

11-6166763-001

Red

Red

Implemented

1.0

0.1

0.7

0.9

No

1/3/2014

1 Employer identification number and three digit pension plan number.

2 Funded status on each balance sheet date presented expressed as a zone status. Green status equals at least 80% funded, yellow status equals less than 80% funded and red status equals less than 65% funded.

3 Indicates whether a funding improvement plan (FIP) or a rehabilitation plan (RP) is pending or has been implemented.

4 The company’s annual contributions to the Pulp and Paper Industry Pension Plan in each respective year were greater than 5% of total employer contributions. The company’s annual contributions to the PACE Industry Union Management Pension Fund in each respective year were less than 5% of total employer contributions.

5 Expiration date of collective bargaining agreement on December 31, 2013.

6 Plan participants are members and former members of the Pulp Paper and Woodworkers of Canada (PPWC) and the Communication Energy and Paperworkers’ Union (CEP).

7 Plan participants are members and former members of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (United Steelworkers or USW).

38

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Contributions to the Pulp and Paper Industry Pension Plan are based on a percentage of earnings to a cap in hours worked and contributions to the PACE Industry Union-Management Pension Fund are based on a contribution per hour worked to a maximum cap in hours worked. The risks of participating in multi-employer plans differ from single-employer plans in the following ways:

1. The company’s contributions to multi-employer plans may be used to provide benefits to employees of other participating employers.

2. If a participating employer were to stop contributing to a multi-employer plan, the unfunded obligations of the plan may be borne by the remaining participating employers.

3. If the company chose to stop participating in a multiemployer plan, it may be required to pay an amount to that plan based on the underfunded status of the plan, referred to as a withdrawal liability.

As disclosed in note 8,Assets held for sale and discontinued operations,the closure of the Snowflake mill on September 30, 2012 resulted in the incurrence of a withdrawal liability of US$11.7 million related to the PACE Industry Union Management Pension Fund.

Significant assumptions

Actuarial assumptions used in accounting for the company-maintained benefit plans were:

	Successor						Predecessor
	Year ended December 31,			Three months ended December 31,			Nine months ended September 30,
Other benefit plans	2013			2012			2012
Benefit obligations at period end,
Discount rate		4.50	%		4.00	%		3.90	%
Rate of compensation increase		1.00	%		2.00	%		2.00	%
Net benefit cost for the period ended,
Discount rate		4.00	%		3.90	%		4.40	%
Rate of compensation increase		2.00	%		2.00	%		2.00	%
Expected rate of return on plan assets		6.50	%		6.50	%		6.75	%
Assumed health care cost trend rate at period end,
Extended health benefits:
Initial health care cost trend rate		6.00	%		6.00	%		6.00	%
Annual rate of decline in trend rate		0.50	%		0.50	%		0.50	%
Ultimate health care cost trend rate		4.50	%		4.50	%		4.50	%
Dental benefits:
Dental care cost trend rate		3.00	%		3.00	%		3.00	%
Medical services plan benefits:
Premium trend rate		4.50	%		6.00% in 2012 and 4.50% thereafter			6.00% in 2011 and 2012, and 4.50% thereafter

39

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

The discount rate for the company’s plans was based on the market interest rate on high-quality debt instruments currently available and expected to be available during the period to maturity of the benefit plans. For December 31, 2013, December 31, 2012 and September 30, 2012, the discount rates were based on AA corporate bond yields as of those dates respectively. In determining the rate of compensation increases, management considered the general inflation rate, productivity and promotions. For the health care cost inflation rate, management considered the trend in extended health care and dental costs in Canada and the impact of inflation on medical service plan premiums. The expected rate of return on plan assets reflects management’s best estimate regarding the long-term expected return from all sources of investment return based on the company’s target asset allocation. The 2013 expected rate of return on plan assets was 6.5% per annum, which was based on a target allocation of approximately 40% Canadian bonds, which were expected to earn approximately 3.3% per annum in the long term, 18% Canadian equity securities, which were expected to earn approximately 8.0% per annum in the long term, and 37% global equity securities, which were expected to earn approximately 8.4% per annum in the long term, and 5% real estate, which were expected to earn approximately 7.5% per annum in the long term. The 2013 expected rate of return on plan assets also included a provision of 0.6% per annum in recognition of additional net returns assumed to be achieved due to active management and periodic rebalancing to maintain the plan’s investment policy, net of investment manager fees, less a margin of 0.3% per annum for non-investment expenses expected to be paid from the plans. The mortality assumption as at December 31, 2013 for the Hourly Bridge, Plan A, Plan C and hourly post-retirement benefits other than pension was the 1994 Uninsured Pensioner Mortality Table and for all other programs was 90% of the 1994 Uninsured Pensioner Mortality Table.

The company’s investment policy recognizes the long-term pension liabilities, the benefits of diversification across asset classes and the effects of inflation. The diversified portfolio is designed to maximize returns consistent with the company’s tolerance for risk. All assets are managed by external investment firms. These firms are constrained by specific mandates and objectives and their performance is measured against appropriate benchmarks. The asset allocation for each plan is reviewed periodically and is rebalanced toward target asset mix when asset classes fall outside of a predetermined range. Portfolio risk is controlled by having fund managers comply with guidelines, by establishing and monitoring the maximum size of any single holding in their portfolios and by using fund managers with different investment styles. The portfolio includes holdings of Canadian and international equities, Canadian high-quality and high-yield fixed income securities, and cash and cash equivalents. A series of permitted and prohibited investments are listed in the company’s investment policy. The use of derivative instruments is restricted and must be in accordance with the company’s policy. Prohibited investments include categories of assets or instruments not specifically provided for in the company’s investment policy.

Sensitivity analysis

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost rates would have the following effects for 2014:

Other benefit plans	Increase		Decrease
Total of service and interest cost	$	1.0	$	(0.9	)
Accrued benefit obligation at December 31		18.0		(15.5	)

18. OTHER LONG-TERM OBLIGATIONS

The components of other long-term obligations are as follows:

	Successor
	As at December 31,				As at September 30,
	2013		2012		2012
Environmental and remedial	$	5.7	$	5.8	$	5.9
Other		3.1		3.1		3.1
	$	8.8	$	8.9	$	9.0

40

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Asset retirement obligations

The following table provides a reconciliation of the company’s asset retirement obligations.

	Successor						Predecessor
	Year ended			Three months ended			Nine months ended
	December 31,			December 31,			September 30,
	2013			2012			2012
Balance, beginning of period	$	6.1		$	6.2		$	8.5
Liabilities settled		(0.3	)		(0.1	)		–
Liabilities derecognized		–			–			(2.3	)
Accretion expense		0.2			–			–
Balance, end of period	$	6.0		$	6.1		$	6.2

The balance sheet classification for asset retirement obligations is as follows:

	Successor
	As at December 31,				As at September 30,
	2013		2012		2012
Other long-term obligations	$	5.7	$	5.8	$	5.9
Accounts payable and accrued liabilities		0.3		0.3		0.3
	$	6.0	$	6.1	$	6.2

19. INCOME TAXES

The components of earnings (loss) before income taxes consist of the following:

	Successor						Predecessor
	Year ended			Three months ended			Nine months ended			Year ended
	December 31,			December 31,			September 30,			December 31,
	2013			2012			2012			2011
Canada	$	(108.9	)	$	(31.6	)	$	651.2		$	(773.0	)
United States		(21.4	)		8.0			1.6			(16.7	)
Other		–			–			–			0.2
Earnings (loss) from continuing operations	$	(130.3	)	$	(23.6	)	$	652.8		$	(789.5	)
Earnings (loss) from discontinued operations	$	3.1		$	(12.9	)	$	(3.6	)	$	(194.5	)
Earnings (loss) before income taxes	$	(127.2	)	$	(36.5	)	$	649.2		$	(984.0	)

41

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

The income tax (recovery) expense consists of:

	Successor					Predecessor
	Year ended		Three months ended			Nine months ended			Year ended
	December 31,		December 31,			September 30,			December 31,
	2013		2012			2012			2011
Canada:
Current	$	–	$	–		$	–		$	(0.1	)
Deferred		–		(1.0	)		(1.1	)		(6.6	)
		–		(1.0	)		(1.1	)		(6.7	)
United States:
Current		0.1		0.1			(0.4	)		0.2
Deferred		–		1.1			0.4			(2.0	)
		0.1		1.2			–			(1.8	)
Other:
Current		–		–			–			0.1
Deferred		–		–			–			–
		–		–			–			0.1
Total from continuing operations
Current		0.1		0.1			(0.4	)		0.2
Deferred		–		0.1			(0.7	)		(8.6	)
	$	0.1	$	0.2		$	(1.1	)	$	(8.4	)
Total from discontinued operations
Current		–		–			–			–
Deferred		–		–			–			1.0
	$	–	$	–		$	–		$	1.0

The reconciliation of income taxes calculated at the statutory rate to the actual income tax provision is as follows:

	Successor										Predecessor
	Year ended					Three months ended					Nine months ended					Year ended
	December 31,					December 31,					September 30,					December 31,
	2013					2012					2012					2011
Income tax recovery at Canadian statutory income tax rates	$	(32.7	)	25.8	%	$	(9.1	)	25.0	%	$	162.3		25.0	%	$	(260.8	)	26.5	%
Increase (decrease) in income taxes for:
Non-taxable income and expenses		21.1		(16.6	)		(1.8	)	5.0			7.4		1.1			2.0		(0.2	)
Difference in foreign tax rate		0.6		(0.5	)		(0.5	)	1.3			(1.0	)	(0.1	)		(25.4	)	2.5
Change in deferred income taxes related to increase in corporate income tax rates		(8.5	)	6.6			–		–			–		–			11.3		(1.1	)
Change in the deferred income tax estimate		–		–			–		–			–		–			(0.6	)	0.1
Change in valuation allowance		18.2		(14.3	)		11.9		(32.7	)		(164.9	)	(25.4	)		265.7		(27.0	)
Adjustment to deferred credits		–		–			–		–			(9.6	)	(1.5	)		–		–
Other		1.4		(1.1	)		(0.3	)	0.9			4.7		0.7			0.4		–
Income tax expense (recovery)	$	0.1		(0.1	)%	$	0.2		(0.5	)%	$	(1.1	)	(0.2	)%	$	(7.4	)1	0.8	%

1 Included $8.4 million income tax recovery related to continuing operations and $1.0 million income tax expense related to discontinued operations

42

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Deferred tax assets and liabilities

The tax effects of temporary differences that give rise to significant current deferred tax assets are as follows:

	Successor
	As at December 31,						As at September 30,
	2013			2012			2012
Current
Deferred income tax assets
Non-capital losses and temporary differences related to working capital	$	4.0		$	1.8		$	3.1
Employee future benefits		3.7			3.3			3.4
Other		0.8			5.6			4.3
		8.5			10.7			10.8
Valuation allowance		(8.5	)		(10.7	)		(10.8	)
	$	–		$	–		$	–

The tax effects of temporary differences that give rise to significant non-current deferred tax assets (liabilities) are as follows:

	Successor
	As at December 31,						As at September 30,
	2013			2012			2012
Non-current
Deferred income tax assets (liabilities)
Property, plant and equipment	$	142.4		$	126.3		$	119.7
Non-capital loss carry-forwards		19.1			14.9			12.9
Employee future benefits		70.9			77.3			76.9
Other		5.0			4.5			3.0
		237.4			223.0			212.5
Valuation allowance		(237.4	)		(223.0	)		(212.5	)
	$	–		$	–		$	–

At December 31, 2013, the company has provided for a valuation allowance on its deferred tax assets of $245.9 million.

At December 31, 2013, the company had Canadian federal non-capital loss carry-forwards of $43.8 million, which expire during the period 2028 to 2033, and U.S. federal net operating loss carry-forwards of $20.8 million, which expire in 2032 and 2033. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. As management believes that it is more likely than not that the resulting future operations will not generate sufficient taxable income to realize all of the net deferred tax assets in Canada and the U.S., during the year, and also due to the negative evidence from the company’s three year cumulative historical performance, management recorded an additional valuation allowance during the year of $1.6 million in respect of its U.S. federal net operating losses and an additional valuation allowance during the year of $2.6 million in respect of its Canadian operating losses.

43

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Accounting for uncertainty in income taxes

At December 31, 2013, the company had gross unrecognized tax benefits of $4.3 million (December 31, 2012 - $5.3 million; September 30, 2012 - $5.3 million). If recognized, these tax benefits would favourably impact the company’s effective tax rate.

Below is a reconciliation of the total amounts of unrecognized tax benefits:

	Successor					Predecessor
	Year ended			Three months ended		Nine months ended
	December 31,			December 31,		September 30,
	2013			2012		2012
Unrecognized tax benefits, beginning of period	$	5.3		$	5.3	$	5.3
Current period tax positions		–			–		–
Change in tax rate		0.2			–		–
Settlements and lapse of statute of limitations		(1.2	)		–		–
Unrecognized tax benefits, end of period	$	4.3		$	5.3	$	5.3

The company recognizes interest expense and penalties related to unrecognized tax benefits within the provision for income tax expense on the consolidated statement of earnings (loss). No interest expense or penalties related to unrecognized tax benefits were recorded during 2013. At December 31, 2013, there were no interest and penalties accrued in relation to uncertain tax positions in the consolidated balance sheet.

In the normal course of business, the company and its subsidiaries are subject to audits by the Canadian federal and provincial taxing authorities, by the U.S. federal and various state taxing authorities and by the taxing authorities in various foreign jurisdictions. All tax years up to and including December 31, 2005 have been audited by the Canadian federal taxing authorities. The company’s income taxes are not currently under audit by the Canadian federal taxing authorities, by the U.S. Internal Revenue Service, by any U.S. state taxing authority or by any foreign taxing authority. The U.S. federal statute of limitations for pre-2010 tax years expired on September 15, 2013.

20. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table contains information about the company’s AOCI, net of taxes:

	Successor
	As at December 31,				As at September 30,
	2013		2012		2012
Unrecognized pension and other post-retirement benefit costs		30.8		6.6		–
	$	30.8	$	6.6	$	–

44

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

21. RESTRUCTURING

The following table provides the activity in the restructuring liability:

	Successor						Predecessor
	Year ended			Three months ended			Nine months ended
	December 31,			December 31,			September 30,
	2013			2012			2012
Balance, beginning of period	$	0.9		$	0.4		$	1.3
Expensed in period		1.6			1.1			5.3
Disbursements		(1.8	)		(0.6	)		(6.2	)
Balance, end of period		0.7			0.9			0.4
Classification:
Accounts payable and accrued liabilities  (note 15)		0.7			0.3			0.4
Liabilities associated with assets held for sale		–			0.6			–
	$	0.7		$	0.9		$	0.4

The following table provides restructuring liability by year of initiatives:

	Successor
	As at December 31,				As at September 30,
	2013		2012		2012
2011 and prior initiatives	$	0.1	$	0.2	$	0.2
2012 initiatives		–		0.7		0.2
2013 initiatives		0.6		–		–
	$	0.7	$	0.9	$	0.4

2013

During the year ended December 31, 2013 the company incurred $1.2 million severance mostly related to a reduction to the size of the executive team. The company also incurred $0.4 million restructuring costs related to the discontinued Snowflake facility which was included in Earnings (loss) from discontinued operations net of tax.

2012

During the three months ended December 31, 2012 the company recorded restructuring costs of $1.1 million related to legal and consulting fees incurred in respect of the sale of the Snowflake facility subsequent to its permanent closure on September 30, 2012. This amount was included in Loss from discontinued operations net of tax in the consolidated statement of earnings (loss) for the three months ended December 31, 2012. The company incurred $5.3 million in restructuring costs for the nine months ended September 30, 2012 consisting of legal and consulting fees related to the restructuring negotiations prior to entering into the CCAA proceedings.

2011

During the year ended December 31, 2011 the company recorded restructuring costs of $5.9 million related to debt restructuring negotiations with its bondholders. The costs consisted of legal and consulting fees incurred in respect of these negotiations. The debt restructuring initiative did not result in a restructuring transaction, and on January 31, 2012 the company entered into creditor protection.

45

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

22. INTEREST EXPENSE, NET

The components of interest expense, net were as follows:

	Successor				Predecessor
	Year ended		Three months ended		Nine months ended			Year ended
	December 31,		December 31,		September 30,			December 31,
	2013		2012		2012			2011
Interest on long-term debt	$	34.5	$	10.8	$	59.6		$	72.0
Other		2.9		0.8		0.8			1.5
		37.4		11.6		60.4			73.5
Interest income		–		–		(0.1	)		(0.3	)
	$	37.4	$	11.6	$	60.3		$	73.2

23. OTHER INCOME (EXPENSE), NET

The components of other income (expense), net, were as follows:

	Successor						Predecessor
	Year ended			Three months ended			Nine months ended			Year ended
	December 31,			December 31,			September 30,			December 31,
	2013			2012			2012			2011
Gain (loss) on derivative financial instruments	$	0.1		$	–		$	(1.2	)	$	(3.4	)
Foreign exchange gain (loss) on working capital balances		5.5			0.4			(7.9	)		3.2
Gain (loss) on disposal of property, plant and equipment		0.6			(0.5	)		6.7			0.1
Gain on sale of non-core assets1		8.1			–			–			–
Settlement gain on special pension portability election		2.6			–			–			–
Loss on purchase of Floating Rate Notes		(2.3	)
Loss on fires		–			–			–			(2.4	)
Other		0.3			0.2			(0.2	)		0.4
	$	14.9		$	0.1		$	(2.6	)	$	(2.1	)

1 Includes gains on the sale of the Elk Falls site ($3.1 million) and our interest in Powell River Energy ($5.3 million), partially offset by a loss on the sale of poplar land ($0.3 million).

46

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

24. EARNINGS PER SHARE

The following table provides the reconciliation between basic and diluted earnings (loss) per share:

	Successor						Predecessor
	Year ended			Three months ended			Nine months ended			Year ended
	December 31,			December 31,			September 30,			December 31,
	2013			2012			2012			2011
Net earnings (loss) attributable to the company	$	(127.6	)	$	(35.2	)	$	618.4		$	(974.0	)
Weighted average shares used in computation of basic earnings per share (in millions)		14.5			14.4			381.9			381.9
Weighted average shares used in computation of diluted earnings per share (in millions)		14.5			14.4			381.9			381.9
Basic and diluted earnings (loss) per share from continuing operations		(9.01	)		(1.55	)		1.63			(2.04	)
Basic and diluted earnings (loss) per share from discontinued operations		0.21			(0.89	)		(0.01	)		(0.51	)
Basic and diluted earnings (loss) per share attributable to the company’s common shareholders (in dollars)	$	(8.80	)	$	(2.44	)	$	1.62		$	(2.55	)

25. STOCK-BASED COMPENSATION PLANS

Details of stock-based compensation expense:

	Successor				Predecessor
	Year ended		Three months ended		Nine months ended		Year ended
	December 31,		December 31,		September 30,		December 31,
	2013		2012		2012		2011
Phantom share units	$	0.1	$	–	$	–	$	–
Stock option awards		–		–		–		0.2
Restricted share units		–		–		–		0.1
	$	0.1	$	–	$	–	$	0.3

Phantom share units

The company established a phantom share unit (PSU) plan for its key executives in 2013.  Under the terms of this plan, senior executives are eligible for incentive remuneration paid to them in the form of PSUs.  Each PSU, once vested, entitles the holder to a cash payment equal to the incremental market value of the PSU.  Incremental market value is defined as the amount, if any, by which the market value of one common share of the company determined on the vesting date exceeds the market value determined on the grant date. The company applies a fair value-based method to record the PSUs granted to executives. Under the fair value method, compensation cost was initially measured at fair value at the date of grant and expensed over the plan’s vesting period. Compensation cost accrued over the vesting period will be recognized as a liability due to the fact that potential entitlements at the time of vesting will be paid in cash. Compensation cost must therefore be re-measured at fair value as of each reporting date with prospective adjustment to the amount of the expense.

47

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

As at December 31, 2013, the fair value of PSUs was estimated using the Black-Scholes option pricing model based the following assumptions:

	2013
	Vesting Date December 31, 2015			Vesting Date December 31,  2016
Risk-free interest rate		1.1	%		1.4	%
Annual dividends per share		Nil			Nil
Expected stock price volatility		77	%		77	%
Expected unit life (in years)		2.0			3.0
Average fair value of units granted (in dollars)	$	0.61		$	0.73

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 PSU. The company estimated the annual dividends per share, expected stock price volatility and expected option life based on historical experience.

As at December 31, 2013, the total remaining unrecognized compensation cost associated with the PSUs totalled $0.6 million.

Changes in the number of PSUs outstanding during the years ended December 31 was as follows:

	2013
	Number of options			Weighted average exercise price (in dollars)
Beginning of year		–		$	–
Granted		1,447,904			1.19
Exercised		(332,822	)		1.20
Expired or cancelled		(166,411	)		1.20
End of year		948,671		$	1.19

26. FAIR VALUE MEASUREMENT

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and liabilities required to be recorded at fair value, the company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance.

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

Level 1 ─	Quoted prices in active markets for identical assets or liabilities.
Level 2 ─	Observable inputs other than quoted prices in active markets for identical assets and liabilities, such as quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 ─	Inputs that are generally unobservable and are supported by little or no market activity and that are significant to the fair value determination of the assets or liabilities.

The company did not have any currency or commodity contracts outstanding on December 31, 2013, December 31, 2012, and September 30, 2012.

48

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Fair value of other financial instruments

The carrying value of the company’s cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values because of the short-term maturity of these instruments.

27. FINANCIAL INSTRUMENTS

Financial Risk Management

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

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

(i) Credit Risk

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

Accounts Receivable

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

Aging of receivables were as follows:

	Successor
	As at December 31,						As at September 30,
	2013			2012			2012
Trade receivables, gross
Current	$	96.3		$	86.3		$	110.7
Past due 1-30 days		7.5			7.3			6.7
Past due 31-90 days		1.2			0.2			3.6
Past due over 90 days		1.4			0.9			0.9
		106.4			94.7			121.9
Allowance for doubtful accounts		(1.8	)		(2.2	)		–
Trade receivables, net		104.6			92.5			121.9
Other receivables, including sales tax recoverables		11.9			21.5			18.9
Accounts receivable (note 9)	$	116.5		$	114.0		$	140.8

49

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

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

	Successor
	As at December 31,					As at September 30,
	2013			2012		2012
Balance, beginning of period	$	2.2		$	–	$	2.0
Increase (decrease) in provision		(0.4	)		2.2		(2.0	)
Balance, end of period (note 9)	$	1.8		$	2.2	$	–

Derivatives

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

(ii) Market risk

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

Currency risk

The company is exposed to the risk that future cash flows will fluctuate as substantially all of the company’s sales and accounts receivable are denominated in U.S. dollars, while only a portion of its costs and payables are denominated in or referenced to U.S. dollars. The company is also exposed to the fluctuations in the fair value of its debt denominated in U.S. dollars. The company uses foreign currency options and forward contracts to partially hedge trade receivables and anticipated future sales denominated in foreign currencies as well as U.S. dollar denominated debt.

The company’s hedging policy for anticipated sales and accounts receivable includes 0% to 67% of 0- to 12-month and 0% to 25% of 13- to 24-month U.S. dollar net exposure. Hedges are layered in over time, increasing the portion of sales or accounts receivable hedged as it gets closer to the expected date of the sale or collection of the accounts receivable. The company’s hedging policy for its U.S. dollar denominated debt includes 0% to 60% of U.S. dollar net exposure. Future U.S. dollar revenues also provide a partial natural hedge for U.S. dollar denominated debt. As of December 31, 2013, December 31, 2012 and September 30, 2012, the company did not have any foreign currency options or forward contracts outstanding.

Price risk

The company’s policy allows for hedges of newsprint and pulp to be placed on anticipated sales, and hedges of old newsprint to be placed on anticipated purchases and allows for anticipated purchases at 0% to 70% of 0- to 12-month, 0% to 60% of 13- to 24-month and 0% to 30% of 25- to 36-month of the net exposure for oil and natural gas. As of December 31, 2013, December 31, 2012 and September 30, 2012, the company did not have any outstanding commodity contracts outstanding.

Interest rate risk

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

50

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

(iii) Liquidity risk

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

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

28. COMMITMENTS

The company has entered into operating leases for property, plant and equipment. The minimum future payments under various operating leases in each of the years ended December 31 are listed below:

2014	$	30.2
2015		33.4
2016		5.8
2017		2.9
2018		1.9
Subsequent years		0.4
	$	74.6

Subsequent to the sale of the company’s interest in PREI on March 20, 2013, the power purchase agreement between the company and PREI meets the definition of an operating lease under U.S. GAAP (see note 2,Summary of significant accounting policies). The lease expenses relating to the power purchase agreement totaled $17.9 million for the year ended December 31, 2013 and minimum future lease payments total $54.0 million over the next three years. The power purchase agreement expires on January 31, 2016.

Total lease expense amounted to $25.7 million for the year ended December 31, 2013 (2012 – $8.4 million;2011 – $10.1 million).

29. GUARANTEES AND INDEMNITIES

The company has entered into a building lease agreement whereby it has agreed to continue making the prescribed lease payments directly to the financial institution holding the mortgage on the building in the event the lessor is no longer able to meet its contractual obligations (note 7). The value of the mortgage was $1.0 million on December 31, 2013 (December 31, 2012 – $3.0 million; September 30, 2012 – $3.4 million). This agreement does not increase the company’s liability beyond the obligation under the building lease.

30. GAIN CONTINGENCIES

The company is subject to a gain contingency for successfully appealing a sales tax reassessment. This contingency is not reflected in the financial results of the company as of December 31, 2013. On January 28, 2014, the Supreme Court of British Columbia ruled in favour of Catalyst Paper in the company’s action against the Province of British Columbia involving a reassessment of the amount of sales tax payable under the Social Services Tax Act on electricity purchased from PREI in 2001 through 2010. The company estimates that it will receive a sales tax refund of $5.8 million including interest. The Province of British Columbia has applied to the British Columbia Court of Appeal for leave to appeal this decision.

31. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The following information is presented as required under Rule 3-10 of Regulation S-X, in connection with the company’s 2017 Notes and Floating Rate Notes. The company has not presented separate financial statements and other disclosures concerning the guarantor subsidiaries because management has determined that such information will not be material to the holders of the Notes; however, the following condensed consolidating financial information is being provided for each of the periods ended December 31, 2013, December 31, 2012, September 30, 2012 and December 31, 2011. Investments in subsidiaries are accounted for on an equity basis. The principal elimination entries eliminate investments in subsidiaries and intercompany balances.

51

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Supplemental Consolidating Balance Sheet

As at December 31, 2013 (successor)

	Catalyst Paper Corporation			Subsidiary guarantors		Subsidiary non-guarantors			Eliminating entries			Consolidated Catalyst Paper Corporation
Assets
Current assets
Cash and cash equivalents	$	1.3		$	10.6	$	0.2		$	–		$	12.1
Accounts receivable		0.9			115.6		–			–			116.5
Inventories		–			140.2		–			–			140.2
Prepaids and other		0.6			3.9		–			–			4.5
Assets held for sale		–			5.7		–			–			5.7
		2.8			276.0		0.2			–			279.0
Property, plant and equipment		326.9			83.7		1.6			–			412.2
Advances to related companies		226.9			359.1		(1.4	)		(584.6	)		–
Investments, net of equity in related companies		152.9			–		–			(152.9	)		–
Other assets		–			8.9		–			–			8.9
	$	709.5		$	727.7	$	0.4		$	(737.5	)	$	700.1
Liabilities
Current liabilities
Accounts payable and accrued liabilities	$	15.7		$	103.8	$	0.2		$	–		$	119.7
Current portion of long-term debt		2.0			–		–			–			2.0
		17.7			103.8		0.2			–			121.7
Long-term debt		301.8			–		–			–			301.8
Advances from related companies		359.6			224.5		0.5			(584.6	)		-
Employee future benefits		12.6			242.3		–			–			254.9
Other long-term obligations		4.9			3.9		–			–			8.8
		696.6			574.5		0.7			(584.6	)		687.2
Equity
Shareholders’ equity
Common stock		144.9			–		–			–			144.9
Retained earnings (deficit)		(162.8	)		40.3		10.2			(50.5	)		(162.8	)
Accumulated other comprehensive income (loss)		30.8			13.2		–			(13.2	)		30.8
Predecessor equity		–			99.7		(10.5	)		(89.2	)		–
		12.9			153.2		(0.3	)		(152.9	)		12.9
	$	709.5		$	727.7	$	0.4		$	(737.5	)	$	700.1

52

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Supplemental Consolidating Statement of Earnings (Loss)

For the year ended December 31, 2013 (successor)

	Catalyst Paper Corporation			Subsidiary guarantors			Subsidiary non-guarantors			Eliminating entries			Consolidated Catalyst Paper Corporation
Sales	$	–		$	1,051.4		$	5.6		$	(5.6	)	$	1,051.4
Operating expenses
Cost of sales, excluding depreciation and amortization		17.5			957.7			1.3			(5.6	)		970.9
Depreciation and amortization		36.7			8.7			1.6			–			47.0
Selling, general and administrative		18.2			15.0			–			–			33.2
Restructuring		0.9			0.3			–			–			1.2
Impairment and other closure costs		86.9			–			–			–			86.9
		160.2			981.7			2.9			(5.6	)		1,139.2
Operating earnings (loss)		(160.2	)		69.7			2.7			–			(87.8	)
Interest expense, net		(17.7	)		(17.6	)		(2.1	)		–			(37.4	)
Foreign exchange loss on long-term debt		(18.8	)		–			–			–			(18.8	)
Equity earnings in Partnership		60.7			–			–			(60.7	)		-
Other income (expense), net		6.8			(18.3	)		14.2			12.2			14.9
Earnings (loss) before reorganization items and income taxes		(129.2	)		33.8			14.8			(48.5	)		(129.1	)
Reorganization items, net		(1.2	)		–			–			–			(1.2	)
Income (loss) before income taxes		(130.4	)		33.8			14.8			(48.5	)		(130.3	)
Income tax expense (recovery)		-			0.1			(0.2	)		0.2			0.1
Earnings (loss) from continuing operations		(130.4	)		33.7			15.0			(48.7	)		(130.4	)
Earnings from discontinued operations, net of tax		3.1			3.1			–			(3.1	)		3.1
Net earnings (loss)		(127.3	)		36.8			15.0			(51.8	)		(127.3	)
Net earnings attributable to non-controlling interest		(0.3	)		–			–			–			(0.3	)
Net earnings (loss) attributable to the company	$	(127.6	)	$	36.8		$	15.0		$	(51.8	)	$	(127.6	)

53

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Supplemental Consolidating Statement of Cash Flows

For the year ended December 31, 2013 (successor)

	Catalyst Paper Corporation			Subsidiary guarantors			Subsidiary non-guarantors			Eliminating entries			Consolidated Catalyst Paper Corporation
Cash flows provided (used) by:
Operations
Cash flows provided (used) by operating activities	$	52.5		$	34.3		$	(22.9	)	$	(71.4	)	$	(7.5	)
Investing
Additions to property, plant and equipment		(16.5	)		(6.7	)		(0.2	)		–			(23.4	)
Proceeds from sale of property, plant and equipment		–			0.8			–			–			0.8
Proceeds from sale of non-core assets		6.6			(7.3	)		39.9			12.2			51.4
Decrease in restricted cash		0.7			2.4			–			–			3.1
Decrease in other assets		0.2			(0.7	)		–			–			(0.5	)
Cash flows provided (used) by investing activities		(9.0	)		(11.5	)		39.7			12.2			31.4
Financing
Increase (decrease) in advances to related companies		(12.7	)		(23.0	)		(23.5	)		59.2			–
Decrease in revolving loan		(13.4	)		–			–			–			(13.4	)
Purchase of Floating Rate Notes		(15.8	)		–			–			–			(15.8	)
Decrease in long-term debt		(1.1	)		–			–			–			(1.1	)
Cash flows provided (used) by financing activities		(43.0	)		(23.0	)		(23.5	)		59.2			(30.3	)
Cash and cash equivalents, increase (decrease) in the period		0.5			(0.2	)		(6.7	)		–			(6.4	)
Cash and cash equivalents, beginning of period		0.8			10.8			6.9			–			18.5
Cash and cash equivalents, end of period	$	1.3		$	10.6		$	0.2		$	–		$	12.1

54

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Supplemental Consolidating Balance Sheet

As at December 31, 2012 (successor)

	Catalyst Paper Corporation			Subsidiary guarantors		Subsidiary non-guarantors			Eliminating entries			Consolidated Catalyst Paper Corporation
Assets
Current assets
Cash and cash equivalents	$	0.8		$	8.9	$	6.9		$	–		$	16.6
Restricted cash		0.7			–		–			–			0.7
Accounts receivable		2.3			111.0		0.7			–			114.0
Inventories		–			125.0		–			–			125.0
Prepaids and other		0.7			7.5		0.7			–			8.9
Assets held for sale		–			34.3		–			–			34.3
		4.5			286.7		8.3			–			299.5
Property, plant and equipment		387.1			76.0		148.5			–			611.6
Goodwill		56.7			–		–			–			56.7
Advances to related companies		234.2			348.2		(0.8	)		(581.6	)		–
Investments, net of equity loss in related companies		93.7			–		–			(93.7	)		–
Other assets		24.3			9.7		0.6			(23.6	)		11.0
	$	800.5		$	720.6	$	156.6		$	(698.9	)	$	978.8
Liabilities
Current liabilities
Accounts payable and accrued liabilities	$	27.9		$	76.0	$	9.9		$	–		$	113.8
Current portion of long-term debt		6.5			0.1		–			–			6.6
Liabilities associated with assets held for sale		–			15.2		–			–			15.2
		34.4			91.3		9.9			–			135.6
Long-term debt		308.2			–		113.8			–			422.0
Advances from related companies		320.4			236.6		24.6			(581.6	)		–
Employee future benefits		9.7			280.0		–			–			289.7
Other long-term obligations		5.2			3.7		–			–			8.9
Deferred credits		–			–		23.6			(23.6	)		–
		677.9			611.6		171.9			(605.2	)		856.2
Equity
Shareholders’ equity
Common stock		144.9			–		–			–			144.9
Additional paid-in capital		–			–		–			–			–
Retained earnings (deficit)		(35.2	)		3.5		(4.8	)		1.3			(35.2	)
Accumulated other comprehensive income (loss)		6.6			5.8		–			(5.8	)		6.6
Predecessor equity		–			99.7		(10.5	)		(89.2	)		–
		116.3			109.0		(15.3	)		(93.7	)		116.3
Non-controlling interest (deficit)		6.3			–		–			–			6.3
		122.6			109.0		(15.3	)		(93.7	)		122.6
	$	800.5		$	720.6	$	156.6		$	(698.9	)	$	978.8

55

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Supplemental Consolidating Statement of Earnings (Loss)

For the three months ended December 31, 2012 (successor)

	Catalyst Paper Corporation			Subsidiary guarantors			Subsidiary non-guarantors			Eliminating entries			Consolidated Catalyst Paper Corporation
Sales	$	–		$	260.6		$	4.6		$	(4.7	)	$	260.5
Operating expenses
Cost of sales, excluding depreciation and amortization		4.4			243.9			2.0			(4.7	)		245.6
Depreciation and amortization		8.8			2.2			1.9			–			12.9
Selling, general and administrative		4.6			3.1			–			–			7.7
		17.8			249.2			3.9			(4.7	)		266.2
Operating earnings (loss)		(17.8	)		11.4			0.7			–			(5.7	)
Interest expense, net		(4.6	)		(3.7	)		(3.3	)		–			(11.6	)
Foreign exchange loss on long-term debt		(3.2	)		–			–			–			(3.2	)
Equity earnings in Partnership		8.8			–			–			(8.8	)		–
Other income (expense), net		1.4			(1.1	)		(0.2	)		–			0.1
Earnings (loss) before reorganization items and income taxes		(15.4	)		6.6			(2.8	)		(8.8	)		(20.4	)
Reorganization items, net		(10.6	)		8.7			(1.3	)		–			(3.2	)
Income (loss) before income taxes		(26.0	)		15.3			(4.1	)		(8.8	)		(23.6	)
Income tax expense (recovery)		0.7			0.6			(1.1	)		–			0.2
Earnings (loss) from continuing operations		(26.7	)		14.7			(3.0	)		(8.8	)		(23.8	)
Earnings (loss) from discontinued operations, net of tax		(12.9	)		(11.5	)		(1.4	)		12.9			(12.9	)
Net earnings (loss)		(39.6	)		3.2			(4.4	)		4.1			(36.7	)
Net (earnings) loss attributable to non-controlling interest		1.5			–			–			–			1.5
Net earnings (loss) before equity in earnings (loss) of subsidiaries		(38.1	)		3.2			(4.4	)		4.1			(35.2	)
Equity in earnings (loss) of subsidiaries		2.9			–			–			(2.9	)		–
Net earnings (loss) attributable to the company	$	(35.2	)	$	3.2		$	(4.4	)	$	1.2		$	(35.2	)

56

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Supplemental Consolidating Statement of Cash Flows

For the three months ended December 31, 2012 (successor)

	Catalyst Paper Corporation			Subsidiary guarantors			Subsidiary non-guarantors			Eliminating entries			Consolidated Catalyst Paper Corporation
Cash flows provided (used) by:
Operations
Cash flows provided (used) by operating activities	$	(90.5	)	$	160.9		$	(22.2	)	$	3.9		$	52.1
Investing
Additions to property, plant and equipment		(4.2	)		(3.2	)		(3.0	)		–			(10.4	)
Proceeds from sale of property, plant and equipment		–			0.8			–			–			0.8
Decrease in restricted cash		2.9			0.5			–			–			3.4
Cash flows provided (used) by investing activities		(1.3	)		(1.9	)		(3.0	)		–			(6.2	)
Financing
Increase (decrease) in advances to related companies		132.3			(153.8	)		25.4			(3.9	)		–
Decrease in revolving loan		(40.0	)		–			–			–			(40.0	)
Distribution received (paid)		–			0.4			(0.4	)		–			–
Cash flows provided (used) by financing activities		92.3			(153.4	)		25.0			(3.9	)		(40.0	)
Cash and cash equivalents, increase (decrease) in the period		0.5			5.6			(0.2	)		–			5.9
Cash and cash equivalents, beginning of the period		0.3			5.2			7.1			–			12.6
Cash and cash equivalents, end of period	$	0.8		$	10.8		$	6.9		$	–		$	18.5

57

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Supplemental Consolidating Balance Sheet

As at September 30, 2012 (successor)

	Catalyst Paper Corporation		Subsidiary  guarantors		Subsidiary non-guarantors			Eliminating entries			Consolidated Catalyst Paper Corporation
Assets
Current assets						��
Cash and cash equivalents	$	0.3	$	4.8	$	7.1		$	–		$	12.2
Restricted cash		3.6		0.1		–			–			3.7
Accounts receivable		1.9		138.8		0.1			–			140.8
Inventories		–		131.5		–			–			131.5
Prepaids and other		0.3		12.3		0.4			–			13.0
Assets held for sale		–		56.2		–			–			56.2
		6.1		343.7		7.6			–			357.4
Property, plant and equipment		390.5		76.2		147.4			–			614.1
Goodwill		56.7		–		–			–			56.7
Advances to related companies		239.7		295.9		1.0			(536.6	)		–
Investments, net of equity loss in related companies		89.2		–		–			(89.2	)		–
Other assets		25.1		10.8		0.6			(24.6	)		11.9
	$	807.3	$	726.6	$	156.6		$	(650.4	)	$	1,040.1
Liabilities
Current liabilities
Accounts payable and accrued liabilities	$	15.7	$	75.6	$	6.2		$	–		$	97.5
Current portion of long-term debt		6.6		0.1		–			–			6.7
Liabilities associated with assets held for sale		–		14.9		(0.1	)		–			14.8
		22.3		90.6		6.1			–			119.0
Long-term debt		345.1		–		113.8			–			458.9
Advances from related companies		271.3		242.7		22.6			(536.6	)		–
Employee future benefits		10.4		290.0		–			–			300.4
Other long-term obligations		5.4		3.6		–			–			9.0
Deferred income taxes		–		–		24.6			(24.6	)		–
		654.5		626.9		167.1			(561.2	)		887.3
Equity
Shareholders’ equity
Common stock		144.9		–		–			–			144.9
Additional paid-in capital		–		–		–			–			–
Retained earnings (deficit)		–		–		–			–			–
Accumulated other comprehensive income (loss)		–		–		–			–			–
Predecessor equity		–		99.7		(10.5	)		(89.2	)		–
		144.9		99.7		(10.5	)		(89.2	)		144.9
Non-controlling interest (deficit)		7.9		–		–			–			7.9
		152.8		99.7		(10.5	)		(89.2	)		152.8
	$	807.3	$	726.6	$	156.6		$	(650.4	)	$	1,040.1

58

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Supplemental Consolidating Statement of Earnings (Loss)

For the nine months ended September 30, 2012 (predecessor)

	Catalyst Paper Corporation			Subsidiary guarantors			Subsidiary non-guarantors			Eliminating entries			Consolidated Catalyst Paper Corporation
Sales	$	–		$	797.7		$	15.6		$	(15.6	)	$	797.7
Operating expenses
Cost of sales, excluding depreciation and amortization		13.2			715.3			5.1			(15.6	)		718.0
Depreciation and amortization		15.4			4.1			3.9			–			23.4
Selling, general and administrative		13.8			12.4			–			–			26.2
Restructuring		5.3			–			–			–			5.3
		47.7			731.8			9.0			(15.6	)		772.9
Operating earnings (loss)		(47.7	)		65.9			6.6			–			24.8
Interest expense, net		(30.5	)		(20.0	)		(9.8	)		–			(60.3	)
Foreign exchange loss on long-term debt		24.0			–			–			–			24.0
Equity earnings in Partnership		79.8			–			–			(79.8	)		–
Other income (expense), net		(53.1	)		54.6			51.6			(55.7	)		(2.6	)
Earnings (loss) before reorganization items and income taxes		(27.5	)		100.5			48.4			(135.5	)		(14.1	)
Reorganization items, net		512.9			98.4			55.6			–			666.9
Income (loss) before income taxes		485.4			198.9			104.0			(135.5	)		652.8
Income tax expense (recovery)		8.4			(21.4	)		11.9			–			(1.1	)
Earnings (loss) from continuing operations		477.0			220.3			92.1			(135.5	)		653.9
Earnings (loss) from discontinued operations, net of tax		(3.6	)		(4.1	)		0.5			3.6			(3.6	)
Net earnings (loss)		473.4			216.2			92.6			(131.9	)		650.3
Net (earnings) loss attributable to non-controlling interest		(31.9	)		–			–			–			(31.9	)
Net earnings (loss) before equity in earnings (loss) of subsidiaries	$	441.5		$	216.2		$	92.6		$	(131.9	)	$	618.4
Equity in earnings (loss) of subsidiaries		176.9			–			–			(176.9	)		–
Net earnings (loss) attributable to the company	$	618.4		$	216.2		$	92.6		$	(308.8	)	$	618.4

59

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Supplemental Consolidating Statement of Cash Flows

For the nine months ended September 30, 2012 (successor)

	Catalyst Paper Corporation			Subsidiary guarantors			Subsidiary non-guarantors			Eliminating entries			Consolidated Catalyst Paper Corporation
Cash flows provided (used) by:
Operations
Cash flows provided (used) by operating activities	$	119.1		$	27.5		$	38.2		$	(228.8	)	$	(44.0	)
Investing
Additions to property, plant and equipment		(4.9	)		(4.6	)		(2.7	)		–			(12.2	)
Proceeds from sale of property, plant and equipment		5.5			6.0			–			–			11.5
Increase in restricted cash		(3.6	)		(2.8	)		–			–			(6.4	)
Decrease in other assets		2.6			1.0			0.1			–			3.7
Cash flows (used) by investing activities		(0.4	)		(0.4	)		(2.6	)		–			(3.4	)
Financing
Increase (decrease) in advances to related companies		(155.0	)		(95.4	)		21.6			228.8			–
Increase in revolving loan		16.0			–			–			–			16.0
Proceeds on issuance of senior secured notes		33.1			–			–			–			33.1
Deferred financing costs		(9.3	)		–			–			–			(9.3	)
DIP financing costs		(3.8	)		–			–			–			(3.8	)
Decrease in other long-term debt		(0.7	)		(0.2	)		–			–			(0.9	)
Share issuance costs		(0.2	)		–			–			–			(0.2	)
Distribution received (paid)		–			56.3			(56.3	)		–			–
Cash flows provided (used) by financing activities		(119.9	)		(39.3	)		(34.7	)		228.8			34.9
Cash and cash equivalents, increase (decrease) in the period		(1.2	)		(12.2	)		0.9			–			(12.5	)
Cash and cash equivalents, beginning of the period		1.5			17.4			6.2			–			25.1
Cash and cash equivalents, end of period	$	0.3		$	5.2		$	7.1		$	–		$	12.6

60

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Supplemental Consolidating Statement of Earnings (Loss)

For the year ended December 31, 2011 (predecessor)

	Catalyst Paper Corporation			Subsidiary guarantors			Subsidiary non-guarantors			Eliminating entries			Consolidated Catalyst Paper Corporation
Sales	$	–		$	1,079.7		$	23.4		$	(23.4	)	$	1,079.7
Operating expenses
Cost of sales, excluding depreciation and amortization		20.4			966.7			7.0			(23.4	)		970.7
Depreciation and amortization		66.8			25.3			13.4			–			105.5
Selling, general and administrative		20.1			20.1			0.1			–			40.3
Restructuring		5.9			–			–			–			5.9
Impairment and other closure costs		496.2			165.6			–			–			661.8
		609.4			1,177.7			20.5			(23.4	)		1,784.2
Operating earnings (loss)		(609.4	)		(98.0	)		2.9			–			(704.5	)
Interest expense, net		(33.3	)		(28.6	)		(11.3	)		–			(73.2	)
Foreign exchange gain on long-term debt		(9.7	)		–			–			–			(9.7	)
Equity earnings in Partnership		61.8			–			–			(61.8	)		–
Other income (expense), net		5.7			(8.1	)		0.3			–			(2.1	)
Earnings (loss) before income taxes		(584.9	)		(134.7	)		(8.1	)		(61.8	)		(789.5	)
Income tax expense (recovery)		(57.8	)		52.3			(2.9	)		–			(8.4	)
Earnings (loss) from continuing operations		(527.1	)		(187.0	)		(5.2	)		(61.8	)		(781.1	)
Earnings (loss) from discontinued operations, net of tax		(195.5	)		(195.5	)		–			195.5			(195.5	)
Net earnings (loss)		(722.6	)		(382.5	)		(5.2	)		133.7			(976.6	)
Net (earnings) loss attributable to non-controlling interest		2.6			–			–			–			2.6
Net earnings (loss) before equity in earnings (loss) of subsidiaries	$	(720.0	)	$	(382.5	)	$	(5.2	)	$	133.7		$	(974.0	)
Equity in earnings (loss) of subsidiaries		(254.0	)		–			–			254.0			–
Net earnings (loss) attributable to the company	$	(974.0	)	$	(382.5	)	$	(5.2	)	$	387.7		$	(974.0	)

61

Catalyst Paper Corporation

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts expressed in millions of Canadian dollars, except where otherwise stated

Supplemental Condensed Consolidating Statement of Cash Flows

For the year ended December 31, 2011 (predecessor)

	Catalyst Paper Corporation			Subsidiary guarantors			Subsidiary non-guarantors			Eliminating entries			Consolidated Catalyst Paper Corporation
Cash flows provided (used) by:
Operations
Cash flows provided (used) by operating activities	$	(427.3	)	$	(37.2	)	$	5.3		$	387.7		$	(71.5	)
Investing
Additions to property, plant and equipment		(7.8	)		(11.0	)		(0.9	)		–			(19.7	)
Proceeds from sale of property, plant and equipment		–			1.2			–			–			1.2
Decrease (increase) in other assets		(1.2	)		2.0			–			–			0.8
Cash flows used by investing activities		(9.0	)		(7.8	)		(0.9	)		–			(17.7	)
Financing
Increase in advances to related companies		352.3			131.3			–			(483.6	)		–
Increase (decrease) in long-term obligations		–			0.2			(0.2	)		–			–
Increase in revolving loan		48.0			–			–			–			48.0
Redemption of senior notes		(25.8	)		–			–			–			(25.8	)
Deferred financing costs		(2.4	)		–			–			–			(2.4	)
Decrease in other long-term debt		(0.9	)		–			–			–			(0.9	)
Distribution paid		–			(94.1	)		(1.8	)		95.9			–
Cash flows provided (used) by financing activities		371.2			37.4			(2.0	)		(387.7	)		18.9
Cash and cash equivalents, increase (decrease) during year		(65.1	)		(7.6	)		2.4			–			(70.3	)
Cash and cash equivalents, beginning of year		66.6			25.0			3.8			–			95.4
Cash and cash equivalents, end of year	$	1.5		$	17.4		$	6.2		$	–		$	25.1

62

COMPARATIVE REVIEW

CATALYST PAPER CORPORTION

CONSOLIDATED BALANCE SHEETS

(In millions of Canadian dollars)

	Successor								Predecessor
	As at December 31,						As at September 30,		As at December 31,
	2013			2012			2012		2011			2010			2009
Assets
Current assets
Cash and cash equivalents	$	12.1		$	16.6		$	12.2	$	25.1		$	95.4		$	83.1
Restricted cash		–			0.7			3.7		–			–			–
Accounts receivable		116.5			114.0			140.8		134.9			120.6			101.5
Inventories		140.2			125.0			131.5		146.9			139.9			178.3
Prepaids and other		4.5			8.9			13.0		20.0			27.7			25.2
Assets held for sale		5.7			34.3			56.2		–			–			–
		279.0			299.5			357.4		326.9			383.6			388.1
Property, plant and equipment		412.2			611.6			614.1		386.3			1,285.6			1,664.7
Goodwill		–			56.7			56.7		–			–			–
Other assets		8.9			11.0			11.9		24.4			27.0			38.0
	$	700.1		$	978.8		$	1,040.1	$	737.6		$	1,696.2		$	2,090.8
Liabilities
Current liabilities
Accounts payable and accrued liabilities	$	119.7		$	113.8		$	97.5	$	174.5		$	171.6		$	173.3
Current portion of long-term debt		2.0			6.6			6.7		466.8			27.0			1.0
Liabilities associated with assets held for sale		–			15.2			14.8		–			–			–
		121.7			135.6			119.0		641.3			198.6			174.3
Long-term debt		301.8			422.0			458.9		375.5			783.9			774.6
Employee future benefits		254.9			289.7			300.4		305.7			269.1			294.6
Other long-term obligations		8.8			8.9			9.0		19.2			20.2			13.4
Deferred income taxes/deferred credits		–			–			–		13.2			21.0			38.3
		687.2			856.2			887.3		1,354.9			1,292.8			1,295.2
Equity
Shareholders’ equity
Common stock		144.9			144.9			144.9		1,035.2			1,035.0			1,035.0
Additional paid-in-capital		–			–			–		16.6			16.6			16.4
Retained earnings (deficit)		(162.8	)		(35.2	)		–		(1,556.0	)		(582.0	)		(185.1	)
Accumulated other comprehensive income (loss)		30.8			6.6			–		(89.4	)		(46.1	)		(52.7	)
		12.9			116.3			144.9		(593.6	)		423.5			813.6
Non-controlling interest (deficit)		–			6.3			7.9		(23.7	)		(20.1	)		(18.0	)
		12.9			122.6			152.8		(617.3	)		403.4			795.6
	$	700.1		$	978.8		$	1,040.1	$	737.6		$	1,696.2		$	2,090.8

63

COMPARATIVE REVIEW

CATALYST PAPER CORPORTION

CONSOLIDATED STATEMENTS OF EARNINGS

(In millions of Canadian dollars)

	Successor						Predecessor
	Year  ended December 31,			Three months  ended  December 31,			Nine months ended  September 30,			Years ended December 31,
	2013			2012			2012			2011			2010			2009
Sales	$	1,051.4		$	260.5		$	797.7		$	1,079.7		$	1,051.4		$	1,077.7
Operating expenses
Cost of sales, excluding depreciation and amortization		970.9			245.6			718.0			970.7			930.1			890.0
Depreciation and amortization		47.0			12.9			23.4			105.5			109.7			137.3
Selling, general and administrative		33.2			7.7			26.2			40.3			43.4			44.8
Restructuring and change-of-control		1.2			–			5.3			5.9			25.3			17.9
Impairment and other closure costs		86.9			–			–			661.8			294.5			17.4
		1,139.2			266.2			772.9			1,784.2			1,403.0			1,107.4
Operating earnings (loss)		(87.8	)		(5.7	)		24.8			(704.5	)		(351.6	)		(29.7	)
Interest expense, net		(37.4	)		(11.6	)		(60.3	)		(73.2	)		(71.9	)		(69.1	)
Gain on cancellation of long-term debt		–			–			–			–			–			30.7
Foreign exchange gain (loss) on long-term debt		(18.8	)		(3.2	)		24.0			(9.7	)		27.6			75.3
Other income (expense), net		14.9			0.1			(2.6	)		(2.1	)		(2.6	)		(28.6	)
Loss before reorganization items and income taxes		(129.1	)		(20.4	)		(14.1	)		(789.5	)		(398.5	)		(21.4	)
Reorganization items, net		(1.2	)		(3.2	)		666.9			–			–			–
Income (loss) before income taxes		(130.3	)		(23.6	)		652.8			(789.5	)		(398.5	)		(21.4	)
Income tax expense (recovery)		0.1			0.2			(1.1	)		(8.4	)		(19.8	)		(23.1	)
Earnings (loss) from continuing operations		(130.4	)		(23.8	)		653.9			(781.1	)		(378.7	)		1.7
Gain (loss) from discontinued operations, net of tax		3.1			(12.9	)		(3.6	)		(195.5	)		(19.5	)		(7.3	)
Net earnings (loss)		(127.3	)		(36.7	)		650.3			(976.6	)		(398.2	)		(5.6	)
Net (earnings) loss attributable to non-controlling interest		(0.3	)		1.5			(31.9	)		2.6			1.3			1.2
Net earnings (loss) attributable to the Company	$	(127.6	)	$	(35.2	)	$	618.4		$	(974.0	)	$	(396.9	)	$	(4.4	)

64

COMPARATIVE REVIEW

CATALYST PAPER CORPORTION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions of Canadian dollars)

	Successor						Predecessor
	Year  ended December 31,			Three months  ended  December 31,			Nine months ended  September 30,			Years ended December 31,
	2013			2012			2012			2011			2010			2009
Cash flows provided (used) by:
Operations
Net earnings (loss)	$	(127.3	)	$	(36.7	)	$	650.3		$	(976.6	)	$	(398.2	)	$	(5.6	)
Items not requiring (providing) cash:
Depreciation and amortization		47.0			12.9			23.4			112.4			119.3			146.6
Impairment and other closure costs		86.9			8.2			3.3			823.6			294.5			17.4
Deferred income taxes		–			0.1			(0.7	)		(7.6	)		(16.1	)		(26.6	)
Settlement gain on special pension portability election		(2.6	)		–			–			–			–			–
Foreign exchange loss (gain) on long-term debt		18.8			3.2			(24.0	)		9.7			(27.6	)		(75.3	)
Non-cash reorganization items		0.5			2.4			(707.4	)		–			–			–
Non-cash interest on compromised notes		–			–			48.4			–			–			–
Gain on cancellation of long-term debt		–			–			–			–			(0.6	)		(30.7	)
Employee future benefits, expense over (under) cash contributions		(7.0	)		(3.4	)		(8.4	)		(8.0	)		(2.4	)		4.3
Increase (decrease) in other long-term obligations		(0.2	)		(0.1	)		–			(3.1	)		(4.2	)		(0.5	)
Loss (gain) on disposal of property, plant and equipment		(0.6	)		0.4			(6.7	)		(0.1	)		(7.2	)		3.9
Gain on disposal of non-core assets		(12.3	)		–			–			–			–			–
Loss on purchase of Floating Rate Notes		2.2			–			–			–			–			–
Other		1.9			0.2			2.6			(1.8	)		10.9			4.6
Changes in non-cash working capital		(14.8	)		64.9			(24.8	)		(20.0	)		(12.5	)		65.5
Cash flows provided (used) by operating activities		(7.5	)		52.1			(44.0	)		(71.5	)		(44.1	)		103.6
Investing
Additions to property, plant and equipment		(23.4	)		(10.4	)		(12.2	)		(19.7	)		(11.2	)		(11.5	)
Proceeds from sale of property, plant and equipment		0.8			0.8			11.5			1.2			7.9			4.5
Proceeds from sale of non-core assets		51.4			–			–			–			–			–
Decrease (increase) in restricted cash		3.1			3.4			(6.4	)		–			–			–
Decrease (increase) in other assets		(0.5	)		–			3.7			0.8			(1.2	)		4.1
Cash flows provided (used) by investing activities		31.4			(6.2	)		(3.4	)		(17.7	)		(4.5	)		(2.9	)
Financing
Share issue costs		–			–			(0.2	)		–			–			–
Increase (decrease) in revolving loan and loan payable		(13.4	)		(40.0	)		16.0			48.0			(14.5	)		(45.6	)
Repayment of long-term debt		–			–			–			(25.8	)		–			(75.7	)
Purchase of Floating Rate Notes		(15.8	)		–			–			–			–			–
Proceeds from long-term debt		–			–			–			–			–			95.0
Proceeds on issuance of senior secured notes		–			–			33.1			–			98.4			–
Note exchange costs		–			–			–			–			(8.3	)		(2.2	)
Proceeds on termination of debt foreign currency contracts		–			–			–			–			–			34.7
Settlement on purchase of debt securities		–			–			–			–			(9.2	)		(26.9	)
Deferred financing costs		–			–			(9.3	)		(2.4	)		(4.5	)		(0.9	)
DIP financing costs		–			–			(3.8	)		–			–			–
Increase (decrease) in other long-term debt		(1.1	)		–			(0.9	)		(0.9	)		(1.0	)		(1.0	)
Cash flows provided (used) by financing activities		(30.3	)		(40.0	)		34.9			18.9			60.9			(22.6	)
Cash and cash equivalents, increase (decrease) in the year		(6.4	)		5.9			(12.5	)		(70.3	)		12.3			78.1
Cash and cash equivalents, beginning of year		18.5			12.6			25.1			95.4			83.1			5.0
Cash and cash equivalents, end of year	$	12.1		$	18.5		$	12.6		$	25.1		$	95.4		$	83.1

CATALYST PAPER 2013 ANNUAL REPORT 65

COMPARATIVE REVIEW

CATALYST PAPER CORPORTION

OTHER FINANCIAL AND OPERATIONAL INFORMATION

(In millions of Canadian dollars, except where otherwise stated)

	Successor						Predecessor
	Year  ended December 31,			Three months  ended  December 31,			Nine months ended  September 30,			Years ended December 31,
	2013			2012			2012			2011			2010			2009
Selected financial information
Adjusted EBITDA1,10	$	46.1		$	7.2		$	48.2		$	62.8		$	52.6			125.0
Adjusted EBITDA margin2		4.4	%		2.8	%		6.0	%		5.8	%		5.0	%		11.6	%
Weighted average common shares outstanding (in millions)		14.5			14.4			381.9			381.9			381.8			381.8
Basic and diluted earnings (loss) per share (in dollars)
- Continuing operations	$	(9.01	)	$	(1.55	)	$	1.63		$	(2.04	)	$	(0.99	)	$	0.01
Basic and diluted earnings (loss) per share (in dollars)
- Discontinued operations		0.21			(0.89	)		(0.01	)		(0.51	)		(0.05	)		(0.02	)
Working capital3	$	153.6		$	151.4		$	203.7		$	152.4		$	212.0		$	214.8
Current assets to current liabilities3		2.28			2.33			3.09			1.87			2.24			2.24
Total debt to total capitalization4,5		95.9	%		78.7	%		76.3	%		338.7	%		66	%		49	%
Net debt to net capitalization6,7		95.8	%		78.0	%		75.8	%		365.5	%		63	%		46	%
Common shares outstanding at end of period (in millions)		14.5			14.5			14.4			381.9			381.8			381.8
Book value per share (in dollars)	$	0.89		$	8.46		$	10.61		$	(1.62	)	$	1.06		$	2.08
Average spot rate (US$/CDN$)8		0.971			1.009			0.998			1.011			0.971			0.876
Share prices
High	$	2.76			$ N/A			$ N/A		$	0.55		$	0.44		$	0.44
Low		1.00			N/A			N/A			0.02			0.09			0.08
Close		1.35			N/A			N/A			0.03			0.24			0.20
Benchmark prices9
SC-A paper, 35 lb. (US$ per ton)	$	811		$	835		$	835		$	836		$	765		$	798
LWC paper, No. 5, 40 lb. (US$ per ton)		864			898			859			900			790			808
Telephone directory paper, 22.1 lb. (US$ per ton)		750			770			770			735			670			758
Newsprint 48.8 gsm, average West Coast delivery (US$ per tonne)		598			618			614			622			578			546
NBSK pulp, China delivery (US$ per tonne)		700			662			669			834			821			578
Sales (000 tonnes)
Specialty printing papers		762			207			605			838			830			892
Newsprint		283			66			198			205			236			261
Pulp		328			74			251			308			277			110

1 Adjusted EBITDA is aNon-GAAPMeasure. Refer to theNon-GAAP Measures section in Management’s Discussion and Analysis.

2 Adjusted EBITDA margin is defined as adjusted EBITDA as a percentage of sales.

3 Working capital and current assets to current liabilities, for these purposes, exclude current portion of long-term debt.

4 Total debt comprises long-term debt, including current portion.

5 Total capitalization comprises total debt and shareholders’ equity.

6 Net debt comprises total debt less cash on hand.

7 Net capitalization comprises net debt and shareholders’ equity.

8 Average spot rate is the average Bank of Canada noon spot rate over the reporting period.

9 Benchmark selling prices are sourced from RISI.

10 For adjusted EBITDA before specific items, refer to theNon-GAAP Measures section in Management’s Discussion and Analysis.

66 CATALYST PAPER 2013 ANNUAL REPORT