Tembec Inc.: Exhibit 99.2 - Filed by newsfilecorp.com

The following interim Management Discussion and Analysis (MD&A) provides a review of the significant developments and issues that impacted Tembec’s financial performance during its fourth fiscal quarter ended September 28, 2013. The MD&A should be read in conjunction with the interim consolidated financial statements for the period ended September 28, 2013, and the audited consolidated financial statements and annual MD&A for the fiscal year ended September 29, 2012, included in the Company’s Financial Report. Financial data has been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). All financial references are stated in Canadian dollars, unless otherwise noted. All references to quarterly information relate to Tembec’s fiscal quarters. Adjusted EBITDA, net debt to total capitalization, free cash flow and certain other financial measures utilized in the MD&A are non-IFRS financial measures. As they have no standardized meaning prescribed by IFRS, they may not be comparable to similar measures presented by other companies. Non-IFRS financial measures are described in the Definitions section on the last page of the MD&A.

The interim MD&A includes “forward-looking statements” within the meaning of securities laws. Such statements relate, without limitation, to the Company’s or management’s objectives, projections, estimates, expectations or predictions of the future and can be identified by words such as “may”, “will”, “could”, “anticipate”, “estimate”, “expect” and “project”, the negative or variations thereof, and expressions of similar nature. Forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience, information available to it and its perception of future developments. Such statements are subject to a number of risks and uncertainties, including, but not limited to, changes in foreign exchange rates, product selling prices, raw material and operating costs and other factors identified in the Company’s periodic filings with securities regulatory authorities. Many of these risks are beyond the control of the Company and, therefore, may cause actual actions or results to materially differ from those expressed or implied herein. The forward-looking statements contained herein reflect the Company’s expectations as of the date hereof and are subject to change after such date. The Company disclaims any intention to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable securities legislation. The information in the MD&A is as at November 21, 2013, the date of filing in conjunction with the Company’s press release announcing its results for the fourth fiscal quarter. Disclosure contained in this document is current to that date, unless otherwise stated.

	Quarterly Results ($ millions)
	Fiscal 2012								Fiscal 2013
	Dec 11		Mar 12		Jun 12		Sep 12		Dec 12		Mar 13		Jun 13		Sep 13

Sales	401		407		415		443		376		407		399		352
Freight and other deductions	53		57		59		63		50		54		54		43
Lumber export taxes	2		3		1		1		1		-		1		1
Cost of sales	316		326		311		337		286		310		296		267
SG&A	18		18		18		20		19		19		18		16
Share-based compensation	-		1		(1	)	(1	)	1		-		-		-
Adjusted EBITDA	12		2		27		23		19		24		30		25

Depreciation & amortization	12		10		11		13		11		9		9		11
Other items	2		(5	)	2		51		1		23		4		1
Operating earnings (loss)	(2	)	(3	)	14		(41	)	7		(8	)	17		13
Interest, foreign exchange & other	10		10		7		14		7		6		6		9
Exchange loss (gain) on long-term debt	(2	)	(6	)	8		(13	)	4		6		11		(7	)
Pre-tax earnings (loss)	(10	)	(7	)	(1	)	(42	)	(4	)	(20	)	-		11
Income tax expense	6		7		4		5		6		6		4		5
Net earnings (loss)	(16	)	(14	)	(5	)	(47	)	(10	)	(26	)	(4	)	6

During the December 2012 quarter, the Company reorganized its internal reporting structure, which impacted segment disclosure included in the current period financial statements and MD&A. Prior to the change, the Company had reported the results of the Skookumchuck, BC, Northern Bleached Softwood Kraft (NBSK) pulp mill as part of the Specialty Cellulose and Chemical Pulp segment. Subsequent to the organizational change, the mill has been regrouped with the high-yield pulp mills in a new segment called Paper Pulp. The Specialty Cellulose and Chemical Pulp segment has been renamed Specialty Cellulose Pulp. Comparative prior period segment information has been restated in the interim financial statements to conform to the new presentation. The following summarizes fiscal 2012 quarterly and total year financial results of the two new segments that were utilized as comparables in fiscal 2013.

	($ millions)
								TOTAL
	Dec 11		Mar 12		Jun 12	Sep 12		2012
Specialty Cellulose Pulp
Sales	123		133		124	127		507
Freight and other deductions	10		9		11	10		40
Cost of sales	84		91		91	86		352
SG&A	4		5		5	6		20
Adjusted EBITDA	25		28		17	25		95

Depreciation and amortization	2		2		3	4		11
Operating earnings	23		26		14	21		84

Paper Pulp
Sales	103		120		144	140		507
Freight and other deductions	20		25		29	31		105
Cost of sales	88		107		106	126		427
SG&A	2		1		3	1		7
Adjusted EBITDA	(7	)	(13	)	6	(18	)	(32	)
Depreciation and amortization	6		5		6	6		23
Other item - impairment of Chetwynd pulp mill	-		-		-	50		50
Operating loss	(13	)	(18	)	-	(74	)	(105	)

CONSOLIDATED SUMMARY

SALES
$ millions	June		September		Total		Price		Volume & Mix
	2013		2013		Variance		Variance		Variance
Forest Products	110		105		(5	)	(8	)	3
Specialty Cellulose Pulp	120		117		(3	)	-		(3	)
Paper Pulp	106		73		(33	)	1		(34	)
Paper	86		81		(5	)	1		(6	)
Corporate	2		4		2		-		2
	424		380		(44	)	(6	)	(38	)
Less: Intersegment Sales	(25	)	(28	)	(3	)
Sales	399		352		(47	)

Sales decreased by $47 million as compared to the prior quarter. Currency had a small positive effect on pricing as the Canadian dollar averaged US $0.963, a 1.4% decline from US $0.977 in the prior quarter. Forest Products segment sales decreased by $5 million due to lower lumber prices. Specialty Cellulose Pulp segment sales declined by $3 million due to lower shipments. Paper Pulp segment sales decreased by $33 million due to lower shipments. Paper segment sales decreased by $5 million due to lower shipments.

ADJUSTED EBITDA
$ millions	June		September		Total		Price		Cost & Volume
	2013		2013		Variance		Variance		Variance
Forest Products	7		1		(6	)	(8	)	2
Specialty Cellulose Pulp	19		22		3		-		3
Paper Pulp	3		(2	)	(5	)	1		(6	)
Paper	6		8		2		1		1
Corporate	(5	)	(4	)	1		-		1
	30		25		(5	)	(6	)	1

Adjusted EBITDA decreased by $5 million as compared to the prior quarter. The Forest Products segment adjusted EBITDA declined by $6 million as a result of lower prices. Specialty Cellulose Pulp segment adjusted EBITDA increased by $3 million due to lower costs. Paper Pulp segment adjusted EBITDA declined by $5 million due to higher costs. Paper segment adjusted EBITDA increased by $2 million as a result of lower costs and higher prices.

OPERATING EARNINGS (LOSS)
							Adjusted
$ millions	June		September		Total		EBITDA		Depreciation		Other Items
	2013		2013		Variance		Variance		Variance		Variance
Forest Products	5		(2	)	(7	)	(6	)	(1	)	-
Specialty Cellulose Pulp	15		18		3		3		-		-
Paper Pulp	(2	)	(5	)	(3	)	(5	)	-		2
Paper	6		7		1		2		(1	)	-
Corporate	(7	)	(5	)	2		1		-		1
	17		13		(4	)	(5	)	(2	)	3

The Company generated operating earnings of $13 million compared to operating earnings of $17 million in the prior quarter. The previously noted decrease in adjusted EBITDA generated the decline in operating earnings. A more detailed explanation of segment variances is included in the analysis that follows.

	June	September
	2013	2013		Variance
Financial ($ millions)
Sales ⁽¹⁾	110	105		(5	)

Freight and other deductions	10	10		-
Lumber export taxes	1	1		-
Cost of sales ⁽¹⁾	89	91		(2	)
SG&A	3	2		1
Adjusted EBITDA	7	1		(6	)

Depreciation and amortization	2	3		(1	)
Operating earnings (loss)	5	(2	)	(7	)

Shipments
SPF lumber (mmbf)	188	194		6

Reference Prices
KD #2 & better delivered G.L. (US $ per mbf)	436	417		(19	)
KD stud delivered G.L. (US $ per mbf)	438	374		(64	)
(1) Includes intersegment sales eliminated on consolidation

The Forest Products segment generated adjusted EBITDA of $1 million on sales of $105 million for the quarter ended September 2013, compared to adjusted EBITDA of $7 million on sales of $110 million in the prior quarter. Sales decreased by $5 million due to lower lumber prices.

The weaker market conditions that began in the month of June continued into the month of July. However, prices for random lumber rallied in August and September. Stud lumber prices did not rally and continue to sell at a relatively high discount compared to random lumber prices. Overall, US $ reference prices for random lumber decreased by US $19 per mbf while stud lumber decreased by US $64 per mbf. Currency was favourable as the Canadian dollar averaged US $0.963, a 1.4% decline from US $0.977 in the prior quarter. The net effect decreased sales and adjusted EBITDA by $8 million or $41 per mbf. Lumber shipments were equal to 86% of capacity versus 83% in the prior quarter. Sawmill manufacturing costs were unchanged from the prior quarter.

During the September 2013 quarter, the Company incurred $1 million of lumber export taxes, on shipments of lumber to the United States, unchanged from the prior quarter. Lumber export taxes are payable based on the 2006 Softwood Lumber Agreement (SLA) between Canada and the United States. Applicable export tax rates may vary based on selling prices. During the September 2013 quarter, the Company incurred a tax of 2.7% on its lumber shipments, up from 0.9% in the prior quarter.

The Forest Products segment generated an operating loss of $2 million as compared to operating earnings of $5 million in the prior quarter. The previously noted declined in adjusted EBITDA negatively impacted operating results.

The Specialty Cellulose Pulp segment generated adjusted EBITDA of $22 million on sales of $117 million for the quarter ended September 2013, compared to adjusted EBITDA of $19 million on sales of $120 million in the prior quarter. The sales decline of $3 million was due to lower shipments of pulp.

Demand for specialty grades was flat while US and euro prices were relatively unchanged quarter-over-quarter. However, with the Canadian dollar weakening versus the US dollar and the euro, Canadian dollar equivalent pricing increased by $23 per tonne. Viscose grade price realizations declined by $88 per tonne. This market remains oversupplied and prices remain relatively low. Overall, pricing did not impact adjusted EBITDA. Shipments were equal to 74% of capacity as compared to 79% in the prior quarter. Mill level manufacturing costs declined by $2 million. Finished goods inventories of specialty cellulose pulp were at approximately 46 days of supply at the end of September 2013, up from 41 days at the end of the prior quarter.

The Specialty Cellulose Pulp segment generated operating earnings of $18 million compared to operating earnings of $15 million in the prior quarter. The previously noted increase in adjusted EBITDA accounted for the higher operating earnings.

The Paper Pulp segment generated negative adjusted EBITDA of $2 million on sales of $73 million for the quarter ended September 2013, compared to adjusted EBITDA of $3 million on sales of $106 million in the prior quarter. The $33 million decrease in sales was due to lower shipments of pulp. In May 2013, the Company completed the sale of its remaining NBSK mill located in Skookumchuck, BC. During the prior quarter, the mill generated sales of $23 million and adjusted EBITDA of $3 million.

Market conditions for paper pulp remained relatively weak although demand was stable. The benchmark price (delivered China) for bleached eucalyptus kraft (BEK) decreased by US $45 per tonne. However, this decline did not affect high-yield pulp prices in the quarter. This grade, unlike BEK, had not experienced a price increase in the June 2013 quarter. Currency was a positive as the Canadian dollar averaged US $0.963, a 1.4% decline from US $0.977 in the prior quarter. Overall, average prices increased by $8 per tonne, improving adjusted EBITDA by $1 million. Pulp shipments were equal to 88% of capacity as compared to 98% in the prior quarter. Manufacturing costs increased by $2 million, due primarily to under-absorption of fixed costs as the two pulp mills produced 7.8% fewer tonnes. Paper Pulp inventories were at 22 days of supply at the end of September 2013, as compared to 23 days at the end of June 2013.

The Paper Pulp segment generated an operating loss of $5 million compared to an operating loss of $2 million in the prior quarter. The decline in adjusted EBITDA impacted operating results. The prior quarter results included a loss of $2 million related to the sale of the Skookumchuck pulp mill.

The Paper segment generated adjusted EBITDA of $8 million on sales of $81 million for the quarter ended September 2013, compared to adjusted EBITDA of $6 million on sales of $86 million in the prior quarter. Lower shipments led to the $5 million decrease in sales.

In terms of markets, coated bleached board improved slightly. The newsprint market weakened due to continued lower North American demand combined with the restart of previously idled capacity. The US $ reference prices for coated bleached board increased by US $24 per short ton while the US $ reference price for newsprint declined by US $2 per tonne. Currency was positive as the Canadian dollar averaged US $0.963, a 1.4% decrease from US $0.977 in the prior quarter. The net effect was a small increase in average prices, increasing adjusted EBITDA by $1 million. Coated bleached board shipments were equal to 94% of capacity as compared to 102% in the prior quarter. The shipment to capacity percentage for newsprint was 81%, compared to 91% in the prior quarter. Manufacturing costs were relatively unchanged quarter-over-quarter.

The Paper segment generated operating earnings of $7 million, compared to operating earnings of $6 million in the prior quarter. The previously noted increase in adjusted EBITDA contributed to the higher operating earnings.

The Company recorded a negligible expense for share-based compensation in the current quarter and in the prior quarter. Senior executives currently participate in a long-term incentive plan which entitles participants to potentially receive units that are equal in value to one common share. The units have a defined vesting period and are subject to performance conditions that ultimately determine the amount of units that vest and are earned by plan participants. Non-executive members of the board of directors receive a portion of their fees in the form of “Deferred Share Units” (DSU). The DSUs vest at specified dates. The period credit/expense for the share-based compensation plans consists of normal periodic variation in the number of units based on anticipated or normal vesting and the change in the value of the Company’s share price.

The following table summarizes interest, foreign exchange and other expenses by component:

There were no significant interest expense variances quarter-over-quarter. The expense relates primarily to interest on the US $305 million 11.25% senior secured notes maturing in December 2018. Capitalized interest relates primarily to the large capital project currently under construction at the Temiscaming, QC, specialty cellulose mill. Foreign exchange items are primarily caused by gains or losses on the translation of US $ net monetary assets. When the Canadian dollar strengthens versus the US dollar, as was the case in the September 2013 quarter, losses are generated. The opposite occurs when the Canadian dollar weakens versus the US dollar, as was the case in the June 2013 quarter. The credit for employee future benefits results from the anticipated return on plan assets exceeding the amount of obligation accretion.

During the September 2013 quarter, the Company recorded a gain of $7 million on the translation of its US $ denominated debt as the relative value of the Canadian dollar increased from US $0.951 to US $0.971.

During the June 2013 quarter, the Company recorded a loss of $11 million on the translation of its US $ denominated debt as the relative value of the Canadian dollar decreased from US $0.984 to US $0.951.

The following table reconciles the anticipated income tax expense/recovery based on the statutory rate to the actual income tax expense/recovery:

During the September 2013 quarter, the Company recorded an income tax expense of $5 million on earnings before income taxes of $11 million. The income tax expense reflected a $2 million unfavourable variance versus an anticipated income tax expense of $3 million based on the Company’s effective tax rate of 26.3% . The difference in statutory income tax rate reduced the income tax expense by $4 million. This included a decrease of $5 million due to the reduced operations in the Province of BC, partially offset by an increase of $1 million due to the higher corporate tax rate applicable to the Company’s French operations. This item was offset by a $9 million increase related to the non-recognition of tax assets. The September 2013 quarter absorbed an $11 million increase related to period losses of the Canadian operations for which no deferred tax asset was recognized. Based on past financial performances, it has not been determined that the future realization of these assets is probable. This was partially offset by a $2 million decrease relating to a deferred tax asset generated by previously unrecognized losses of the U.S. operations. Based on past financial performances, it has been determined that the future realization of this amount of tax assets is probable. Permanent differences generated a decrease of $3 million.

During the June 2013 quarter, the Company recorded an income tax expense of $4 million on “nil” earnings before income taxes. The income tax expense reflected a $4 million unfavourable variance versus an anticipated “nil” income tax expense based on the Company’s effective tax rate of 26.3% . The higher corporate tax rate applicable to the Company’s French operations generated an increase of $1 million. The utilization of previously unrecognized tax assets of the Company’s U.S. operations decreased the expense by $1 million. Permanent differences generated an increase of $4 million.

The Company generated net earnings of $6 million or $0.06 per share for the quarter ended September 28, 2013. This compares to a net loss of $4 million or $0.04 per share for the quarter ended June 29, 2013. As noted previously, the Company’s financial results were impacted by certain specific items. The following table summarizes the impact of these items on the reported financial results. The Company believes it is useful supplemental information as it provides an indication of results excluding the specific items. This supplemental information is not intended as an alternative measure for net earnings as determined by IFRS. The table below contains the gain or loss on translation of foreign debt, which is a recurring item. Because the Company has a substantial amount of US $ denominated debt, relatively minor changes in the value of the Canadian dollar versus the US dollar can lead to large unrealized periodic gains or losses. As well, this item receives capital gain/loss tax treatment and is not tax-affected at regular business income rates.

The following table summarizes the impact of items affecting the reported total comprehensive earnings during the last two quarters:

Comprehensive items include gains or losses related to the currency translation of the assets and liabilities of the Company’s French and U.S. operations. The gains or losses are generated by changes in the end of period exchange rates. During the September 2013 quarter, the currency translation of the French operations generated a gain of $3 million. During the June 2013 quarter, the currency translation of the French operations generated a gain of $8 million.

During the September 2013 quarter, the Company recognized a gain of $39 million relating to the reduction of the estimated net obligation for employee future benefits. The average discount rate applied to estimate the present value of future obligations increased from 4.5% to 4.6%, thereby reducing estimated future obligations by $19 million. As well, the actual return on plan assets exceeded the expected return by $21 million. The Company also recognized a loss of $1 million based on plan experience of the most recent fiscal year. Comprehensive earnings were increased by $2 million due to the recognition of a deferred tax asset generated by previously unrecognized losses of the U.S. operations. Based on past financial performance, it has been determined that the future realization of this amount of tax assets is probable. During the June 2013 quarter, the Company recognized a gain of $30 million relating to the reduction of the estimated net obligation for employee future benefits. The average discount rate applied to estimate the present value of future obligations increased from 4.1% to 4.5%, thereby reducing estimated future obligations by $41 million. This was partially offset by the actual return on plan assets being $11 million below the expected return.

CONSOLIDATED SUMMARY

SALES
$ millions	September		September		Total		Price	Volume & Mix
	2012		2013		Variance		Variance	Variance
Forest Products	108		105		(3	)	1	(4	)
Specialty Cellulose Pulp	127		117		(10	)	6	(16	)
Paper Pulp	140		73		(67	)	6	(73	)
Paper	96		81		(15	)	1	(16	)
Corporate	5		4		(1	)	-	(1	)
	476		380		(96	)	14	(110	)
Less: Intersegment Sales	(33	)	(28	)	5
Sales	443		352		(91	)

Sales decreased by $91 million from the same quarter a year ago. Currency was a positive factor as the Canadian dollar averaged US $0.963, a 4.0% decrease from US $1.003 in the year ago quarter. Forest Products segment sales decreased by $3 million as a result of lower shipments. Specialty Cellulose Pulp segment sales decreased by $10 million due to lower shipments, partially offset by higher prices. Paper Pulp segment sales declined by $67 million due to lower shipments. Paper segment sales declined by $15 million due to lower shipments.

ADJUSTED EBITDA
$ millions	September		September		Total		Price	Cost & Volume
	2012		2013		Variance		Variance	Variance
Forest Products	8		1		(7	)	1	(8	)
Specialty Cellulose Pulp	25		22		(3	)	6	(9	)
Paper Pulp	(18	)	(2	)	16		6	10
Paper	14		8		(6	)	1	(7	)
Corporate	(6	)	(4	)	2		-	2
	23		25		2		14	(12	)

Adjusted EBITDA increased by $2 million from the prior year quarter. Forest Products segment adjusted EBITDA declined by $7 million from the prior year quarter due to higher costs. Specialty Cellulose Pulp segment adjusted EBITDA decreased by $3 million due to higher costs, partially offset by higher prices. Paper Pulp segment adjusted EBITDA increased by $16 million due to lower costs and higher prices. Paper segment adjusted EBITDA decreased by $6 million due to higher costs.

OPERATING EARNINGS (LOSS)
							Adjusted
$ millions	September		September		Total		EBITDA		Depreciation		Other Items
	2012		2013		Variance		Variance		Variance		Variance
Forest Products	6		(2	)	(8	)	(7	)	(1	)	-
Specialty Cellulose Pulp	21		18		(3	)	(3	)	-		-
Paper Pulp	(74	)	(5	)	69		16		3		50
Paper	13		7		(6	)	(6	)	-		-
Corporate	(7	)	(5	)	2		2		-		-
	(41	)	13		54		2		2		50

The Company generated operating earnings of $13 million compared to an operating loss of $41 million in the same quarter a year ago. The improvement in operating results is due primarily to a favourable variance in other items. In the prior year quarter, the Company had absorbed a charge of $50 million relating to the impairment of the Chetwynd, BC, high-yield pulp mill. A more detailed explanation of segment variances is included in the analysis that follows.

The Forest Products segment generated adjusted EBITDA of $1 million on sales of $105 million. This compares to adjusted EBITDA of $8 million on sales of $108 million in the comparable quarter of the prior year. Lower shipments of wood chips and by-products accounted for the majority of the decrease in sales.

Demand for SPF lumber was stable with shipments equal to 86% of capacity, unchanged from the year ago quarter. US $ reference prices for random lumber increased by US $14 per mbf while the reference price for stud lumber was down US $20 per mbf. Currency was favourable as the Canadian dollar averaged US $0.963, a 4.0% decline from US $1.003 in the prior year quarter. As a result, the average selling price of SPF lumber increased by $5 per mbf, increasing adjusted EBITDA by $1 million. Sawmill costs increased by $8 million, primarily for fibre.

During the September 2013 quarter, the Company incurred $1 million of lumber export taxes on shipments of lumber from its Eastern sawmills to the United States, unchanged from the prior year quarter. The effective tax rate was 2.7% versus 3.6% in the year ago quarter.

The Forest Products segment generated an operating loss of $2 million, as compared to operating earnings of $6 million in the prior year quarter. The previously noted decrease in adjusted EBITDA led to the decline in operating results.

The Specialty Cellulose Pulp segment generated adjusted EBITDA of $22 million on sales of $117 million. This compares to adjusted EBITDA of $25 million on sales of $127 million in the year ago quarter. The $10 million decline in sales was due to lower shipments of specialty grade pulp, partially offset by increased prices for specialty grades.

Demand for specialty grades was weaker than in the prior year quarter. Despite weaker market conditions, US dollar and euro prices were relatively unchanged. The $126 per tonne improvement in Canadian dollar prices was largely due to currency as the Canadian dollar weakened by 4.0% versus the US dollar and 9.5% versus the euro. However, this increase was partially offset by a $149 per tonne decrease in viscose grade prices. The viscose market remains oversupplied and prices have weakened considerably since 2011. Overall, pulp pricing improved, increasing adjusted EBITDA by $5 million. Shipments were equal to 74% of capacity as compared to 85% in the prior year quarter. Manufacturing costs increased by $3 million, primarily as a result of lower pulp production and under-absorption of fixed costs. Adjusted EBITDA was also negatively impacted by $4 million due to a mix variance associated with shipping lower volumes of specialty grade pulp and higher volumes of viscose grade pulp.

The Specialty Cellulose Pulp segment generated operating earnings of $18 million compared to operating earnings of $21 million in the comparable quarter of the prior year. The previously noted decrease in adjusted EBITDA led to the lower operating earnings.

The Paper Pulp segment generated negative adjusted EBITDA of $2 million on sales of $73 million. This compares to negative adjusted EBITDA of $18 million on sales of $140 million in the year ago quarter. The $67 million decrease in sales was caused by lower shipments of pulp. The Chetwynd, BC, high-yield pulp mill did not operate during the September 2013 quarter. In the prior year quarter, the mill had shipped 46,100 tonnes and had recorded sales of $27 million. In May 2013, the Company completed the sale of its remaining NBSK mill located in Skookumchuck, BC. During the prior year quarter, the mill had shipped 60,300 tonnes and had recorded sales of $39 million.

The reference price for BEK increased by US $25 per tonne. Currency was also a positive factor as the Canadian dollar averaged US $0.963, a 4.0% decline from the year ago quarter. Overall, Canadian dollar prices for high-yield pulp improved by $48 per tonne increasing adjusted EBITDA by $6 million. Pulp shipments were equal to 88% of capacity as compared to 90% in the prior year quarter. The prior year percentage includes the capacity of the Chetwynd high-yield pulp mill. Mill level manufacturing costs increased by $6 million. The mills saw higher costs for chemicals, maintenance material and under-absorption of fixed costs. The two high-yield pulp mills produced 13.5% fewer tonnes in the most recent quarter. The improvement in adjusted EBITDA was driven primarily by the sale of the Skookumchuck NBSK mill and the idling of the Chetwynd high-yield pulp mill. In the prior year quarter, these facilities had generated negative EBITDA of $10 million and $5 million respectively.

The Paper Pulp segment generated an operating loss of $5 million compared to an operating loss of $74 million in the comparable quarter of the prior year. The prior year quarter includes a $50 million charge related to the impairment of the Chetwynd high-yield pulp mill, which remains idled.

The Paper segment generated adjusted EBITDA of $8 million on sales of $81 million. This compares to adjusted EBITDA of $14 million on sales of $96 million in the same quarter a year ago. Lower shipments led to the $15 million decrease in sales.

In terms of markets, coated bleached board was relatively stable. Newsprint was weaker due to a combination of lower North American demand and the restart of previously idled capacity. The US $ reference price for coated bleached board increased by US $30 per short ton while the reference price for newsprint declined by US $35 per tonne. Currency was favourable as the Canadian dollar declined by 4.0% from US $1.003 to US $0.963. The net effect was that pricing for newsprint declined, reducing adjusted EBITDA by $1 million and pricing for coated bleached board improved, increasing adjusted EBITDA by $2 million. Coated bleached board shipments were equal to 94% of capacity as compared to 111% in the year ago quarter. Newsprint shipment to capacity was 81% compared to 103% in the prior year quarter. Manufacturing costs increased by $4 million, primarily due to higher fibre costs and the under-absorption of fixed costs. The two paper mills produced 16.5% fewer tonnes as compared to the prior year quarter. The lower shipments reduced adjusted EBITDA by $2 million.

The Paper segment generated operating earnings of $7 million, compared to $13 million in the prior year quarter. The previously noted drop in adjusted EBITDA led to the lower operating earnings.

The Company recorded a negligible expense for share-based compensation in the current quarter, compared to a $1 million credit in the year ago quarter. Senior executives currently participate in a long-term incentive plan which entitles participants to potentially receive units that are equal in value to one common share. The units have a defined vesting period and are subject to performance conditions that ultimately determine the amount of units that vest and are earned by plan participants. Non-executive members of the board of directors receive a portion of their fees in the form of “Deferred Share Units” (DSU). The DSUs vest at specified dates. The period credit/expense for the share-based compensation plan consists of normal periodic variation in the number of units based on anticipated or normal vesting and the changes in the value of the Company’s share price.

The following table summarizes interest, foreign exchange and other expenses by component:

There were no significant interest expense variances quarter-over-quarter. The interest expense relates primarily to interest on the US $305 million 11.25% senior secured notes maturing in December 2018. The increase in capitalized interest is related to the Temiscaming, QC, specialty cellulose project. Foreign exchange items relate primarily to gains or losses on the translation of US $ net monetary assets. When the Canadian dollar strengthens versus the US dollar, as was the case in both September quarters, losses are generated. The credit for employee future benefits results from the anticipated return on plan assets exceeding the amount of obligation accretion.

During the September 2012 quarter, the Company recorded a gain of $13 million on the translation of its US $ denominated debt as the relative value of the Canadian dollar increased from US $0.976 to US $1.017.

The following table reconciles the anticipated income tax expense/recovery based on the statutory rate to the actual income tax expense/recovery:

During the September 2013 quarter, the Company recorded an income tax expense of $5 million on earnings before income taxes of $11 million. The income tax expense reflected a $2 million unfavourable variance versus an anticipated income tax expense of $3 million based on the Company’s effective tax rate of 26.3% . The difference in statutory income tax rates reduced the income tax expense by $4 million. This included a decrease of $5 million due to the reduced operations in the province of BC, partially offset by an increase of $1 million due to the higher corporate tax rate applicable to the Company’s French operations. This item was offset by a $9 million increase related to the non-recognition of tax assets. The September 2013 quarter absorbed an $11 million increase related to period losses of the Canadian operations for which no deferred tax asset was recognized. Based on past financial performances, it has not been determined that the future realization of these assets is probable. This was partially offset by a $2 million decrease relating to a deferred tax asset generated by previously unrecognized losses of the U.S. operations. Based on past financial performances, it has been determined that the future realization of this amount of tax assets is probable. Permanent differences decreased the expense by $3 million.

During the September 2012 quarter, the Company recorded an income tax expense of $5 million on a loss before income taxes of $42 million. The income tax expense reflected a $16 million unfavourable variance versus an anticipated income tax recovery of $11 million based on the Company’s effective tax rate of 26.3% . The higher corporate tax rate applicable to the Company’s French operations increased the expense by $2 million. The prior year quarter absorbed a $16 million increase related to period losses of the Canadian operations for which no deferred tax asset was recognized. Permanent differences decreased the expense by $2 million.

The Company generated net earnings of $6 million or $0.06 per share for the quarter ended September 28, 2013, compared to a net loss of $47 million or $0.47 per share for the quarter ended September 29, 2012. As noted previously, the Company’s financial results were impacted by certain specific items. The following table summarizes the impact of these items on the reported financial results. The Company believes it is useful supplemental information as it provides an indication of results excluding the specific items. This supplemental information is not intended as an alternative measure for net earnings as determined by IFRS. The table below contains the gain or loss on translation of foreign debt, which is a recurring item. Because the Company has a substantial amount of US $ denominated debt, relatively minor changes in the value of the Canadian dollar versus the US dollar can lead to large unrealized periodic gains or losses. As well, this item receives capital gain/loss tax treatment and is not tax-affected at regular business income rates.

The following table summarizes the impact of items affecting the reported total comprehensive earnings (loss) during the September 2013 quarter and the comparable period a year ago:

Comprehensive items include gains or losses related to the currency translation of the assets and liabilities of the Company’s French and U.S. operations. The gains or losses are generated by the changes in the end of period exchange rates. During the September 2013 quarter, the currency translation of the French operations generated a gain of $3 million. In the September 2012 quarter, the currency translation of the French operations generated a loss of $2 million. The currency translation of the U.S. operations generated a gain of $1 million.

During the September 2013 quarter, the Company recognized a gain of $39 million relating to the reduction of the estimated net obligation for employee future benefits. The average discount rate applied to estimate the present value of future obligations increased from 4.5% to 4.6%, thereby reducing estimated future obligation by $19 million. As well, the actual return on plan assets exceeded the expected return by $21 million. The Company also recognized a loss of $1 million based on plan experience of the most recent fiscal year. Comprehensive earnings were increased by $2 million due to the recognition of a deferred tax asset generated by previously unrecognized losses of the U.S. operations. Based on past financial performance, it has been determined that the future realization of this amount of tax assets is probable. During the September 2012 quarter, the Company recognized a loss of $38 million relating to the increase of the estimated net obligation for employee future benefits. The average discount rate applied to estimate the present value of future obligations decreased from 4.5% to 3.7%, thereby increasing estimated future obligations by $79 million. This was partially offset by the actual return on plan assets being $31 million higher than the expected return. The Company also recognized a gain of $10 million based on plan experience of fiscal 2012.

CONSOLIDATED SUMMARY

SALES
$ millions	September		September		Total		Price		Volume & Mix
	2012		2013		Variance		Variance		Variance
Forest Products	432		420		(12	)	43		(55	)
Specialty Cellulose Pulp	507		460		(47	)	3		(50	)
Paper Pulp	507		418		(89	)	9		(98	)
Paper	346		332		(14	)	(9	)	(5	)
Corporate	13		12		(1	)	-		(1	)
	1,805		1,642		(163	)	46		(209	)
Less: Intersegment Sales	(139	)	(108	)	31
Sales	1,666		1,534		(132	)

Sales decreased by $132 million as compared to the prior year. Currency was not a significant factor as the Canadian dollar averaged US $0.985, a 0.7% decrease from US $0.992 in the prior year. Forest Products segment sales decreased by $12 million as a result of lower shipments, partially offset by higher prices. Specialty Cellulose Pulp segment sales decreased by $47 million due to lower shipments. Paper Pulp segment sales decreased by $89 million due to lower shipments. Paper segment sales decreased by $14 million due to lower prices and shipments.

ADJUSTED EBITDA
$ millions	September		September		Total		Price		Cost & Volume
	2012		2013		Variance		Variance		Variance
Forest Products	(16	)	17		33		43		(10	)
Specialty Cellulose Pulp	95		73		(22	)	3		(25	)
Paper Pulp	(32	)	5		37		9		28
Paper	37		25		(12	)	(9	)	(3	)
Corporate	(20	)	(22	)	(2	)	-		(2	)
	64		98		34		46		(12	)

Adjusted EBITDA increased by $34 million from the prior year. Forest Products segment adjusted EBITDA improved by $33 million from the prior year due to higher prices, partially offset by higher costs. Specialty Cellulose Pulp segment adjusted EBITDA decreased by $22 million due to higher costs and lower volumes. Paper Pulp segment adjusted EBITDA improved by $37 million due to lower costs and higher prices. Paper segment adjusted EBITDA decreased by $12 million because of lower prices and higher costs.

OPERATING EARNINGS (LOSS)
							Adjusted
$ millions	September		September		Total		EBITDA		Depreciation		Other Items
	2012		2013		Variance		Variance		Variance		Variance
Forest Products	(4	)	8		12		33		1		(22	)
Specialty Cellulose Pulp	84		59		(25	)	(22	)	(3	)	-
Paper Pulp	(105	)	(33	)	72		37		9		26
Paper	35		22		(13	)	(12	)	(1	)	-
Corporate	(42	)	(27	)	15		(2	)	-		17
	(32	)	29		61		34		6		21

The Company generated operating earnings of $29 million compared to an operating loss of $32 million a year ago. The previously noted increase in adjusted EBITDA was an important contributor to the improvement in operating results. Lower depreciation expense and a favourable variance in other items also had a positive impact. A more detailed explanation of segment variances is included in the analysis that follows.

The Forest Products segment generated adjusted EBITDA of $17 million on sales of $420 million. This compares to negative adjusted EBITDA of $16 million on sales of $432 million in the prior year. The sale of the Company’s two BC sawmills at the end of the March 2012 quarter had a significant impact on sales. The sawmills had shipped 172 million board feet of lumber in the prior year and had generated lumber, chip and by-product revenues of $79 million. Sales also decreased by $9 million due to the divestiture of the hardwood flooring operations in November 2011. Higher SPF lumber prices and shipments from the Company’s Eastern sawmills increased sales by $70 million, partially offsetting the previously noted decreases.

Demand for SPF lumber improved with Eastern lumber shipments equal to 82% of capacity, as compared to 73% in the prior year. US $ reference prices for random lumber increased by US $71 per mbf while the reference price for stud lumber was up US $51 per mbf. Currency was relatively unchanged as the Canadian dollar averaged US $0.985, a 0.7% decrease from US $0.992 in the prior year. The average selling price of SPF lumber increased by $58 per mbf, increasing adjusted EBITDA by $43 million. Cost of manufacturing for the Eastern sawmills increased by $12 million, primarily for fibre.

During the year ended September 2013, the Company incurred $3 million of lumber export taxes on shipments of lumber from its Eastern sawmills to the United States, down from $4 million in the prior year. The effective tax rate was 1.9% versus 4.8% a year ago. Higher volumes and prices partially offset the impact of the lower export tax rate. The prior year also included $3 million of export taxes for Western sawmill lumber shipments to the United States.

The Forest Products segment generated operating earnings of $8 million, as compared to an operating loss of $4 million in the prior year. The previously noted improvement in adjusted EBITDA accounted for the improvement in operating results. In the prior year, the Company sold its two BC sawmills and recorded a gain of $24 million. The Company also sold its Toronto, Ontario, hardwood flooring plant and announced the closure of its Huntsville, Ontario, hardwood flooring plant. The combined effect was a charge of $2 million.

The Specialty Cellulose Pulp segment generated adjusted EBITDA of $73 million on sales of $460 million. This compares to adjusted EBITDA of $95 million on sales of $507 million in the prior year. The $47 million decline in pulp sales was due to lower shipments of specialty grades.

Demand for specialty grades was weaker than in the prior year even though realized Canadian dollar prices increased by $64 per tonne. However, this increase was more than offset by a $313 per tonne decrease in viscose grade prices. The latter market has weakened considerably since 2011. Overall, pricing was lower and reduced adjusted EBITDA by $2 million. Shipments were equal to 75% of capacity as compared to 83% in the prior year. Mill manufacturing costs increased by $10 million, primarily for chemicals and under-absorption of fixed costs as the two mills produced 6% fewer tonnes in the current year. Adjusted EBITDA was also negatively impacted by $12 million due to a volume variance associated with lower shipments of specialty grade pulp.

The Specialty Cellulose Pulp segment generated operating earnings of $59 million compared to operating earnings of $84 million in the prior year. The previously noted decline in adjusted EBITDA led to the lower operating earnings.

The Paper Pulp segment generated adjusted EBITDA of $5 million on sales of $418 million. This compares to negative adjusted EBITDA of $32 million on sales of $507 million in the prior year. The $89 million decrease in sales was caused by lower shipments of pulp. The Chetwynd, BC, high-yield pulp mill did not operate in fiscal 2013, reducing sales by 175,800 tonnes and $100 million. The Company sold the Skookumchuck, BC, NBSK mill in mid-May 2013. As a result, NBSK pulp shipments declined by 58,400 tonnes and sales decreased by $45 million. These declines were partially offset by higher shipments and prices for the Company’s two other high-yield pulp mills.

The reference price for NBSK increased by US $1 per tonne. However, discounts to reference prices increased year-over-year and NBSK pulp realizations declined by US $30 per tonne. While the reference price for BEK increased by US $53 per tonne, the increase in high-yield pulp prices was a more modest US $14 per tonne. Currency was relatively unchanged as the Canadian dollar averaged US $0.985, a 0.7% decrease from US $0.992 in the prior year. Overall, Canadian dollar prices increased by $13 per tonne increasing adjusted EBITDA by $9 million. Paper pulp shipments were equal to 96% of capacity as compared to 80% in the prior year. The latter percentage includes the capacity of the Chetwynd, high-yield pulp mill. Mill level manufacturing costs declined by $11 million, primarily at the Skookumchuck NBSK pulp mill. In the prior year, the mill had absorbed costs related to 17 days of unplanned downtime due to problems associated with its recovery boiler. Profitability also improved due to the closure of the Chetwynd high-yield pulp mill, which generated negative adjusted EBITDA of $12 million in fiscal 2012. The segment also benefited from a favourable variance of $7 million on the net realizable value (NRV) of finished goods inventories. In the prior year, relatively low pulp selling prices had generated a charge of $3 million on the estimated NRV of finished goods inventories. During fiscal 2013, pulp prices improved and the Company recorded a gain of $4 million on the estimated NRV of finished goods inventories.

The Paper Pulp segment generated an operating loss of $33 million compared to an operating loss of $105 million in the prior year. In addition to the previously noted improvement in adjusted EBITDA, depreciation expense declined by $9 million due primarily to the sale of the Skookumchuck NBSK pulp mill. The prior year operating results included a $50 million charge relating to the Chetwynd high-yield pulp mill. The current year included a $22 million impairment charge and a $2 million loss on sale related to the Skookumchuck pulp mill.

The Paper segment generated adjusted EBITDA of $25 million on sales of $332 million. This compares to adjusted EBITDA of $37 million on sales of $346 million in fiscal 2012. The $14 million decrease in sales was due to lower shipments and lower prices.

In terms of markets, coated bleached board was relatively stable. Newsprint was weaker due to a combination of lower North American demand and the restart of previously idled capacity. The US $ reference price for coated bleached board declined by US $14 per short ton while the reference price for newsprint dropped by US $23 per tonne. Currency was relatively unchanged as the Canadian dollar averaged US $0.985, a 0.7% decrease from US $0.992 in the prior year. The net effect was that overall pricing for both products declined, reducing adjusted EBITDA by $9 million. Coated bleached board shipments were equal to 94% of capacity as compared to 95% in the prior year. Newsprint shipment to capacity was 90% compared to 92% in the prior year. Mill manufacturing costs increased by $3 million. Lower electricity costs at the Kapuskasing newsprint mill were offset by higher fibre and chemical costs. The mills also under-absorbed fixed costs as production declined by 3.9% .

The Paper segment generated operating earnings of $22 million compared to operating earnings of $35 million in the prior year. The previously noted decrease in adjusted EBITDA led to the lower operating earnings.

The Company recorded a $1 million charge for share-based compensation in the current year, compared to a $1 million credit in the prior year. Senior executives currently participate in a long-term incentive plan which entitles participants to potentially receive units that are equal in value to one common share. The units have a defined vesting period and are subject to performance conditions that ultimately determine the amount of units that vest and are earned by plan participants. Non-executive members of the board of directors receive a portion of their fees in the form of “Deferred Share Units” (DSU). The DSUs vest at specified dates. The period credit/expense for the share-based compensation plans consists of normal periodic variation in the number of units based on anticipated or normal vesting and the changes in the value of the Company’s share price.

The Corporate segment’s “other items” include expenses relating to several permanently idled facilities. The costs relate to custodial, site security, legal and remediation activities. These “legacy” costs totalled $7 million in the current year, compared to $10 million in the prior year. The current year also includes a gain of $2 million relating to the sale of the Cranbrook, BC, office. The prior year results included a $16 million charge relating to the impairment of a loan receivable. Fiscal 2012 also included a gain of $4 million generated by the sale of a minority equity interest in two dissolving pulp mills.

The following table summarizes interest, foreign exchange and other expenses by component:

The interest expense relates primarily to interest on the US $305 million 11.25% senior secured notes maturing in December 2018. In the prior year, the amount of outstanding notes was US $255 million for the first five months of the year. The increase in capitalized interest was caused by the Temiscaming specialty cellulose project. Foreign exchange items relate primarily to gains or losses on the translation of US $ net monetary assets. When the Canadian dollar weakens versus the US dollar, as was the case in the most recent fiscal year, gains are generated. In the prior year, the Canadian dollar strengthened versus the US dollar and a loss was generated. The credit for employee future benefits results from the anticipated return on plan assets exceeding the amount of obligation accretion.

During fiscal 2013, the Company recorded a loss of $14 million on the translation of its US $ denominated debt as the relative value of the Canadian dollar decreased from US $1.017 to US $0.971.

During fiscal 2012, the Company recorded a gain of $13 million on the translation of its US $ denominated debt as the relative value of the Canadian dollar increased from US $0.971 to US $1.017.

The following table reconciles the anticipated income tax expense/recovery based on the statutory rate to the actual income tax expense/recovery:

During fiscal 2013, the Company recorded an income tax expense of $21 million on a loss before income taxes of $13 million. The income tax expense reflected a $24 million unfavourable variance versus an anticipated income tax recovery of $3 million based on the Company’s effective tax rate of 26.3% . The difference in statutory income tax rate increased the expense by $1 million. This included an increase of $6 million due to the higher corporate tax rate applicable to the Company’s French operations, partially offset by a decrease of $5 million due to reduced operations in the Province of BC. The most significant item was a $21 million increase related to non-recognition of tax assets. This included a $24 million increase related to the losses of the Canadian operations for which no deferred tax asset was recognized. Based on past financial performance, it has not been determined that future realization of these assets is probable. This was partially offset by the recognition of $3 million of tax assets related to the Company’s U.S. operations. Based on past financial performance, it has been determined that the future realization of this amount is probable. Permanent differences increased the expense by $2 million.

During fiscal 2012, the Company recorded an income tax expense of $22 million on a loss before income taxes of $60 million. The income tax expense reflected a $38 million unfavourable variance versus an anticipated income tax recovery of $16 million based on the Company’s effective tax rate of 26.3% . The difference in statutory income tax rates increased the expense by $6 million. This was due primarily to the higher corporate tax rate applicable to the Company’s French operations. The most significant item was a $32 million increase related to non-recognition of tax assets of the Canadian operations.

The Company generated a net loss of $34 million or $0.34 per share for the year ended September 28, 2013, compared to a net loss of $82 million or $0.82 per share for the year ended September 29, 2012. As noted previously, the Company’s financial results were impacted by certain specific items. The following table summarizes the impact of these items on the reported financial results. The Company believes it is useful supplemental information as it provides an indication of results excluding the specific items. This supplemental information is not intended as an alternative measure for net earnings as determined by IFRS. The table below contains the gain or loss on translation of foreign debt, which is a recurring item. Because the Company has a substantial amount of US $ denominated debt, relatively minor changes in the value of the Canadian dollar versus the US dollar can lead to large unrealized periodic gains or losses. As well, this item receives capital gain/loss tax treatment and is not tax-affected at regular business income rates.

The following table summarizes the impact of items affecting the reported total comprehensive earnings (loss) during the last two fiscal years:

Comprehensive items include gains or losses related to the currency translation of the assets and liabilities of the Company’s French and U.S. operations. The gains or losses are generated by the changes in the end of period exchange rates. During fiscal 2013, the currency translation of the French operations generated a gain of $16 million, partially offset by a loss of $1 million relating to U.S. operations. In the prior year, the currency translation of the French operations generated a loss of $12 million, partially offset by a gain of $1 million relating to U.S. operations.

During fiscal 2013, the Company recognized a gain of $132 million relating to the reduction of the estimated net obligation for employee future benefits. The average discount rate applied to estimate the present value of future obligations increased from 3.7% to 4.6%, thereby reducing estimated future obligations by $102 million. As well, the actual return on plan assets exceeded the expected return by $31 million. The Company also recognized a loss of $1 million based on plan experience in fiscal 2013. Comprehensive earnings were increased by $2 million due to the recognition of a deferred tax asset generated by previously unrecognized losses of the U.S. operations. Based on past financial performance, it has been determined that the future realization of this amount of tax assets is probable. In the prior year, the Company recognized a loss of $38 million relating to the increase of the estimated net obligation for employee future benefits. The average discount rate applied to estimate the present value of future obligations decreased from 4.5% to 3.7%, thereby increasing estimated future obligations by $79 million. This was partially offset by the actual return on plan assets being $31 million higher than the expected return. The Company also recognized a gain of $10 million based on plan experience of fiscal 2012.

Selected quarterly information for the eight most recently completed fiscal quarters is disclosed below.

	$ millions (except as otherwise noted)
	Dec 11		Mar 12		Jun 12		Sept 12		Dec 12		Mar 13		June 13		Sept 13
Sales	401		407		415		443		376		407		399		352
Adjusted EBITDA	12		2		27		23		19		24		30		25
Depreciation and amortization	12		10		11		13		11		9		9		11
Other items	2		(5	)	2		51		1		23		4		1
Operating earnings (loss)	(2	)	(3	)	14		(41	)	7		(8	)	17		13
Net earnings (loss)	(16	)	(14	)	(5	)	(47	)	(10	)	(26	)	(4	)	6
Basic and fully diluted net earnings (loss) per share ($)	(0.16	)	(0.14	)	(0.05	)	(0.47	)	(0.10	)	(0.26	)	(0.04	)	0.06
Comprehensive earnings (loss)	(21	)	(14	)	(10	)	(86	)	(4	)	35		34		50

	($ millions)
	Fiscal 2012								Fiscal 2013
	Dec 11		Mar 12		Jun 12		Sept 12		Dec 12		Mar 13		Jun 13		Sept 13
Cash flow from operations before working capital changes	2		(16	)	16		11		(1	)	11		16		10
Less:
Additions to property, plant and equipment	23		28		24		45		34		26		30		47
Interest on debt	8		9		10		11		11		10		11		10
Free cash flow (negative)	(29	)	(53	)	(18	)	(45	)	(46	)	(25	)	(25	)	(47	)

Cash flow from operations before working capital changes in fiscal 2013 was $36 million, compared to $13 million in the prior year. After allowing for capital expenditures of $137 million and interest on debt of $42 million, free cash flow in fiscal 2013 was negative $143 million compared to negative $145 million in the prior year. In fiscal 2013, non-cash working capital items used $13 million.

During fiscal 2013, capital expenditures totalled $137 million compared to $120 million in the prior year. The Company estimates that annual capital expenditures of $35 million to $40 million are required to adequately maintain its facilities. The higher level of capital expenditures relates to one relatively large capital project. In March 2012, the Company announced a major capital investment to upgrade its specialty cellulose mill in Temiscaming, Quebec. The project involves the replacement of three low-pressure boilers with a single new high-pressure boiler designed to burn waste sulphite liquor generated by the specialty cellulose manufacturing process. The project also includes the installation of a new 50-megawatt electrical turbine. The total estimated cost of the project is currently $235 million. During fiscal 2013, $78 million was spent on the project, bringing total cumulative project expenditures to $137 million.

The completion of the boiler portion of the project is scheduled for May 2014 and the start-up of the turbine should occur in October 2014. The Company anticipates that the Temiscaming specialty cellulose project will improve annual adjusted EBITDA by approximately $48 million. The improvement will include approximately $28 million of incremental electricity revenues, $7 million of operating and maintenance cost reduction and $13 million of productivity and margin enhancements associated with the production increase of 15,000 tonnes of specialty pulp per year.

The Company has set an objective of maintaining a minimum liquidity of $135 million to $150 million. At the end of September 2013, the Company had total cash of $74 million plus unused operating lines of $35 million, for total liquidity of $109 million. At September 2012, the date of the last audited financial statements, the Company had net cash of $92 million and unused operating lines of $48 million, for total liquidity of $140 million.

The Company had previously entered into two secured term loan facilities totalling $105 million to fund a portion of the $235 million Temiscaming Cogen project. During the September 2013 quarter, the Company increased the Cogen project loan facilities from $105 million to $133 million, of which $73 million remained undrawn at the end of the September 2013. There remains an amount of $98 million to be spent over the next five quarters to complete the Temiscaming Cogen project. During this period, the Company’s liquidity will likely remain below its stated objective.

Operating Lines
$ millions	September		December		March		June		September
	2012		2012		2013		2013		2013
Borrowing base	187		170		196		173		168
Less: availability reserve	(23	)	(19	)	(22	)	(21	)	(20	)
Net availability	164		151		174		152		148

Outstanding letters of credit	(48	)	(48	)	(47	)	(52	)	(56	)
Amount drawn	(68	)	(69	)	(86	)	(57	)	(57	)
Unused amount	48		34		41		43		35

In March 2011, the Company entered into a five-year $200 million ABL (asset-based loan) facility expiring in March 2016. In March 2013, the Company disclosed that it had reached an agreement with existing ABL lenders to amend and extend the facility. The maturity date was extended by one year and is now set to expire in March 2017. The Company also negotiated a reduction of the aggregate revolving loan commitment from $200 million to $175 million and related adjustments to certain thresholds due to a reduction in the number of mills it operates. The ABL has a first priority charge over the receivables and inventories of the Company’s Canadian operations. The facility is subject to a permanent availability reserve of $15 million. This amount is increased to $25 million if the Company’s trailing 12-month adjusted EBITDA falls below $60 million. There is also a variable reserve, which totalled $5 million at the end of the September 2013 quarter.

The outstanding letters of credit constitute security for various operating items, principally the unfunded portion of supplementary retirement plans, future landfill closure liabilities and performance guarantees related to electricity generation agreements.

	Fiscal 2012				Fiscal 2013
	Dec 11	Mar 12	Jun 12	Sept 12	Dec 12	Mar 13	Jun 13	Sept 13
Net debt / total capitalization	34%	37%	40%	45%	50%	55%	52%	52%
Adjusted EBITDA / interest on indebtedness (times)	1.5	0.4	2.9	2.2	1.9	2.4	3.0	2.4

The Company’s long-term objective is to maintain the net debt to total capitalization ratio at 40% or less. A strong balance sheet provides the Company with the ability to access capital markets at favourable rates. The net debt to total capitalization ratio of the Company was 52% as at September 2013, as compared to 45% at the end of the prior fiscal year. The increase is due primarily to increased debt levels to finance the previously noted Temiscaming specialty cellulose project. The Company anticipates that the net debt to total capitalization ratio will remain in excess of its target until the Temiscaming project is completed and begins to generate the projected incremental adjusted EBITDA.

In March 2012, the Company entered into a $75 million term loan facility to assist with the financing of the previously mentioned Temiscaming, Quebec, specialty cellulose project. The interest rate on the facility is 5.5% . The loan has a 15½ -year term consisting of a 42-month construction or drawdown period followed by a 12-year amortization period. The term of the loan will be shortened by three years if the Company does not complete certain future capital expenditures at the Temiscaming specialty cellulose mill. The loan is secured by a second ranking charge on the project assets. The Company has also granted the lender a five-year option starting on the first loan disbursement date to acquire 3 million common shares of Tembec at a price of $7 per share. This option expires on August 30, 2017. As at the end of September 2013, the Company had drawn $40 million of the $75 million available. During the current quarter, the Company negotiated an additional tranche of project financing, effectively increasing the total funding from the lender to $93 million. This new $18 million tranche is also secured by a second ranking charge on project assets and the interest rate remains at 5.5% . This second tranche is repayable in 48 equal monthly instalments beginning in April 2016. In connection with the additional funding, the Company granted the lender a five-year option to acquire 712,000 common shares of Tembec at a premium of 30% over the average trading price of the shares over the five business days prior to the issuance of the option. This option will vest on the first loan disbursement date of the second $18 million tranche, which cannot occur until the Company has drawn the entire $75 million of the first tranche.

In June 2012, the Company entered into a $30 million term loan facility to assist with the financing of the previously noted specialty cellulose project in Temiscaming, Quebec. The interest rate on this loan is the greater of 6.35% and the yield on equivalent terms Government of Canada bonds plus 4.25% at the date the funds are advanced. The loan is secured by a first ranking charge on the project assets. In July 2012, the Company received $20 million representing the first advance under the facility. The interest rate on this advance was set at 6.35% . During the current quarter, the Company increased the size of the facility to $40 million. As part of the loan amendment, the terms of the remaining $10 million to be drawn on the original facility were amended to correspond to those of the new $10 million in funding. The initial $20 million drawn in July 2012 is repayable in blended monthly instalments over an eight-year period beginning in July 2014, with a “balloon” payment of $12 million to be repaid in July 2022. In mid-October 2013, the Company received the remaining $20 million on the facility. This second tranche bears interest at a rate of 6.86% and is repayable in blended monthly instalments over a period of eight years beginning in November 2014, with a “balloon” payment of $12 million to be repaid in October 2022.

Moody’s Investors Service (Moody’s) has assigned a B3 rating to the senior secured notes and the same level for the Company’s corporate credit rating. Standard and Poor’s (S&P) has assigned a CCC+ rating to the senior secured notes as well as the Company’s corporate credit rating. Moody’s has a “negative” outlook with respect to its rating. S&P has a “developing” outlook with respect to its rating.

As at November 21, 2013, issued and outstanding capital shares consisted of 100,000,000 common shares (100,000,000 as at September 29, 2012). During the December 2012 quarter, the Company granted a lender a five-year option to acquire 3 million common shares at a price of $7 per share. The option expires August 30, 2017. During the September 2013 quarter, the Company agreed to grant the same lender a five-year option to acquire 712,000 common shares at a premium of 30% over the average trading price of the share over five business days prior to the issuance of the option. The option will be granted on the date of the first advance made under the loan facility, which has not yet occurred.

During the quarter ended September 28, 2013, the Company did not make any changes to its internal controls over financial reporting that would have materially affected, or would likely materially affect, such controls.

On September 30, 2013, the Company announced the BC Lands Sale Initiative with the objective of realizing up to $75 million in gross proceeds by December 2014. At the date of this report, the Company has reached agreements to sell various parcels of land for total gross proceeds of $23 million.

On November 6, 2013, China issued its preliminary determination to antidumping duties to be applied to viscose grade pulp imported from Canada, the United States and Brazil. The Company was assigned a duty rate of 13% on viscose shipments to China. The antidumping duties do not apply to the specialty cellulose pulp mill located in Tartas, France. The specialty cellulose mill located in Temiscaming, Quebec, currently produces and sells approximately 40,000 tonnes per year of viscose grade pulp into the Chinese market. The balance of the mill’s production is specialty grades, which are not subject to the antidumping duties. Based on the aforementioned volume and current prices for viscose grade pulp in China, the impact of the duties on the Company’s financial results would be approximately $4 million per year. In anticipation of the potential antidumping duties, the Company has been developing a plan to reduce their impact.

Overall, the September 2013 quarterly results were in line with expectations. Weaker than anticipated profitability in lumber was offset by specialty cellulose and paper. While the relatively small decline in random length lumber prices was not unexpected, the 15% decrease in stud lumber prices was unforeseen. The latter grade is more closely tied to United States housing starts and there has been some softness in the data over the last several months. Pricing for random lumber has recently improved, but the significant gap with stud lumber remains. Pricing over the medium and longer term should increase, in step with the anticipated growth in United States new home construction. Specialty Cellulose Pulp segment results continue to be negatively impacted by relatively low viscose grade prices. While pricing for specialty grades remained stable, demand has been softer than anticipated. We continue to assess the market with our customers and are adjusting our production plans accordingly. We anticipate that it will be one or two quarters before we see an increase in demand for specialty grades. Market conditions for viscose grade pulp remain weak. The latter market is currently under pressure as new capacity is exceeding demand growth. The recently announced Chinese antidumping duties on viscose grade pulp will exacerbate the situation. The Company currently has a position of 40,000 tonnes of viscose per year in the Chinese market. In anticipation of this announcement, the Company had been developing a plan to reduce the impact of the duties. The focus will now shift to implementing the plan. The negative adjusted EBITDA generated by the Paper Pulp segment was expected given that the Company disposed of its profitable NBSK pulp mill in the prior quarter. The hardwood paper pulp market remains relatively soft and the impact of new capacity will cause it to remain challenging. Paper segment results improved due to lower energy costs at the Kapuskasing newsprint mill. The Company continues with its capital expenditure program, with a strong emphasis on its two specialty cellulose mills. The cornerstone of the program is the high-pressure boiler and turbine currently under construction at the Temiscaming, Quebec, site. The project will materially improve the mill’s cost structure and margins. A total of $137 million has been spent on the Temiscaming specialty cellulose project to the end of the September 2013 quarter. The Company has also made significant progress in dealing with its defined benefit pension plan obligations. As a result of relatively high contributions, good pension asset performance and an increase in discount rates, the Company’s net pension deficit has decreased from $243 million to $71 million in the last 12 months. This will lead to a material decline in pension contributions in future periods. The Company has recently launched its BC Lands Sale Initiative with the objective of realizing up to $75 million in gross proceeds by December 2014. This will be an area of focus in the next few quarters.

	Fiscal 2012				Fiscal 2013
	Dec 11	Mar 12	Jun 12	Sep 12	Dec 12	Mar 13	Jun 13	Sep 13
Shares outstanding - end of quarter (millions)	100	100	100	100	100	100	100	100
Book value per share ($)	2.12	1.98	1.88	1.02	1.01	1.36	1.70	2.20
Foreign exchange:
1 C $ = US $ - average	0.977	0.998	0.991	1.003	1.009	0.991	0.977	0.963
- period end	0.980	1.001	0.976	1.017	1.004	0.984	0.951	0.971

1 euro = US $ - average	1.350	1.309	1.286	1.250	1.297	1.319	1.307	1.326
- period end	1.304	1.326	1.256	1.284	1.322	1.282	1.302	1.353

1 euro = C $ - average	1.382	1.312	1.298	1.246	1.286	1.332	1.337	1.377
- period end	1.331	1.325	1.287	1.263	1.317	1.302	1.369	1.393

The following summarizes non-IFRS financial measures utilized in the MD&A. As there is no generally accepted method of calculating these financial measures, they may not be comparable to similar measures reported by other companies.

Adjusted EBITDA refers to earnings before interest, income taxes, depreciation, amortization and other items. Since the Company excludes “other items” such as gains and losses on significant asset disposals, restructuring charges and custodial costs for permanently idled facilities, it differs from EBITDA. Adjusted EBITDA does not have any standardized meaning according to IFRS. The Company defines adjusted EBITDA as sales less cost of sales and selling, general and administrative expenses, meaning it represents operating earnings before depreciation, amortization and other items. The Company considers adjusted EBITDA to be a useful indicator of the financial performance of the Company, the business segments and the individual business units. The most comparable financial measure is operating earnings or loss. The following table is a reconciliation of quarterly operating earnings to the Company’s definition of adjusted EBITDA:

	$ millions
	Fiscal 2012							Fiscal 2013
	Dec 11		Mar 12		Jun 12	Sep 12		Dec 12	Mar 13		Jun 13	Sep 13
Operating earnings (loss)	(2	)	(3	)	14	(41	)	7	(8	)	17	13
Depreciation and amortization	12		10		11	13		11	9		9	11
Other items	2		(5	)	2	51		1	23		4	1
Adjusted EBITDA	12		2		27	23		19	24		30	25

Free cash flow refers to cash provided by operating activities before changes in non-cash working capital balances less interest expense and capital expenditures. Working capital changes are excluded as they are often seasonal and temporary in nature. The Company considers free cash flow to be a useful indicator of its ability to generate discretionary cash flow, thereby improving its overall liquidity position.

Total capitalization refers to net debt plus deferred tax liabilities, employee future benefit liabilities, provisions, other long-term liabilities, and shareholders’ equity.

Net debt to total capitalization is used by the Company to measure its financial leverage.

	$ millions
	Fiscal 2012								Fiscal 2013
	Dec 11		Mar 12		Jun 12		Sep 12		Dec 12⁽¹⁾		Mar 13⁽¹⁾		Jun 13		Sep 13
Long-term debt	269		314		318		323		348		353		365		369
Net unamortized financing costs	13		11		12		13		16		16		17		17
Current portion of long-term debt	18		19		16		16		16		16		16		16
Operating bank loans / Bank indebtedness	48		69		68		68		69		86		57		57
Less: total cash	(86	)	(127	)	(101	)	(92	)	(57	)	(35	)	(94	)	(74	)
Net debt	262		286		313		328		392		436		361		385
Long-term liabilities	292		282		277		304		292		222		166		140
Shareholders' equity	212		198		188		102		101		136		170		220
Total capitalization	766		766		778		734		785		794		697		745

Net debt to total capitalization ratio	34%		37%		40%		45%		50%		55%		52%		52%
⁽¹⁾Ratio is calculated excluding "held for sale" reclassifications

	Quarter ended				Quarter ended
	June 29, 2013				September 28, 2013
	$ millions		$ per share		$ millions		$ per share
Net earnings (loss) as reported - in accordance with IFRS	(4	)	(0.04	)	6		0.06
Specific items (after-tax):
Loss (gain) on translation of foreign debt	9		0.09		(6	)	(0.06	)
Loss on sale of Skookumchuck pulp mill	1		0.01		-		-
Costs for permanently idled facilities	1		0.01		1		0.01
Unrecognized deferred tax assets on above items	2		0.02		-		-
Net earnings excluding specific items - not in accordance with IFRS	9		0.09		1		0.01

	Quarter ended				Quarter ended
	September 29, 2012				September 28, 2013
	$ millions		$ per share		$ millions		$ per share
Net earnings (loss) as reported - in accordance with IFRS	(47	)	(0.47	)	6		0.06
Specific items (after-tax):
Gain on translation of foreign debt	(11	)	(0.11	)	(6	)	(0.06	)
Asset impairment - Chetwynd pulp mill	37		0.37		-		-
Costs for permanently idled facilities	1		0.01		1		0.01
Unrecognized deferred tax asset on above items	11		0.11		-		-
Net earnings (loss) excluding specific items - not in accordance with IFRS	(9	)	(0.09	)	1		0.01

	Year ended				Year ended
	September 29, 2012				September 28, 2013
	$ millions		$ per share		$ millions		$ per share
Net loss as reported - in accordance with IFRS	(82	)	(0.82	)	(34	)	(0.34	)
Specific items (after-tax):
Loss (gain) on translation of foreign debt	(11	)	(0.11	)	12		0.12
Impairment of Temlam loan receivable	14		0.14		-		-
Gain on sale of minority equity investment	(4	)	(0.04	)	-		-
Loss on sale/closure of hardwood flooring plants	2		0.02		-		-
Gain on sale of BC sawmills	(18	)	(0.18	)	-		-
Asset impairment of Chetwynd pulp mill	37		0.37		-		-
Asset impairment and loss on sale of Skookumchuck pulp mill	-		-		17		0.17
Gain on sale of BC office	-		-		(1	)	(0.01	)
Costs for permanently idled facilities	8		0.08		6		0.06
Unrecognized deferred tax asset on above items	10		0.10		10		0.10
Net earnings (loss) excluding specific items - not in accordance with IFRS	(44	)	(0.44	)	10		0.10

	$ millions
	September		September
	2012		2013
Net loss	(82	)	(34	)
Foreign currency translation gain (loss) on foreign operation	(11	)	15
Employee future benefit gain (loss)	(38	)	132
Recognition of tax asset	-		2
Total comprehensive earnings (loss)	(131	)	115