40-F

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 40-F

[_] Registration statement pursuant to Section 12 of the Securities Exchange Act of 1934 or

[X] Annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended: September 28, 2013      Commission File Number 033-172078-02

TEMBEC INC.
(Exact name of registrant as specified in its charter)

Canada	2611	N.A.
(Province or Other Jurisdiction of Incorporation	(Primary Standard Industrial Classification	(I.R.S. Employer
or Organization)	Code)	Identification No.)

800, René-Lévesque Boulevard West

Suite 1050

Montréal, Québec, Canada

H3B 1X9

(Address and telephone number of registrant’s principal executive offices)

_______________________ 

CT Corporation System

111 Eight Avenue

New York, New York 10011

(212) 894-8940

(Name, address (including zip code) and telephone number (including area code) of agent for service in the United States)

 _______________________

Securities to be registered pursuant to Section 12(b) of the Act:

Title of Each Class:	Name of Each Exchange On Which Registered:
N/A	N/A

Securities registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: 11.25% Senior Secured Notes due 2018

For annual reports, indicate by check mark the information filed with this form:

[X] Annual Information Form       [X] Audited Annual Financial Statements

Indicate the number of outstanding shares of each of the registrant’s classes of capital or common stock as of the close of the period covered by the annual report: 100,000,000 Common Shares

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. [X] Yes       [_] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [_] Yes       [_] No

FORWARD LOOKING STATEMENTS

The Exhibits incorporated by reference into this Annual Report contain certain “forward-looking statements” within the meaning of securities laws. Such statements relate, without limitation, to Tembec Inc. (the “Company” or the “Registrant”) 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 variation thereof, and expressions of similar nature. Forward looking statements are based on certain assumptions and analyses made by the Registrant in light of its experience, information available to it and its perception of future developments. The forward-looking statements contained in this Annual Report reflect the Registrant’s expectations as of the date hereof and are subject to change after such date. The Registrant 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. Forward-looking statements are statements about the future and are inherently uncertain, and actual achievements of the Registrant or other future events or conditions may differ materially from those reflected in the forward-looking statements due to a variety of risks, uncertainties and other factors, including, without limitation, those described in the Annual Information Form of the Registrant filed as Exhibit 99.1 to this Annual Report on Form 40-F.

Many of these risks are beyond the control of the Registrant and, therefore, may cause actual actions or results to materially differ from those expressed or implied herein. In addition, other risks could adversely affect the Registrant and it is not possible to predict or assess all risks. The Registrant’s actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will occur, or if any of them do so, what benefits, including the amount of proceeds, the Registrant will derive from them. Except as otherwise indicated, forward-looking statements do not take into account the effect that transactions or non-recurring or other special items announced or occurring after the statements are made may have on the Registrant’s business. Such statements do not, unless otherwise specified by the Registrant, reflect the impact of dispositions, sales of assets, monetizations, mergers, acquisitions, combinations or transactions, asset write-downs or other charges announced or occurring after forward-looking statements are made. The financial impact of these transactions and non-recurring and other special items can be complex and depends on the facts particular to each of them, and cannot be expressed in a meaningful way or in the same way the Registrant presents known risks affecting its business.

DIFFERENCES IN UNITED STATES AND CANADIAN REPORTING PRACTICES

The Registrant is permitted, under a multijurisdictional disclosure system adopted by the United States (“MJDS”), to prepare this report in accordance with Canadian disclosure requirements, which are different from those of the United States. The Registrant’s historical financial statements, which are filed with this Annual Report, have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), and are subject to Canadian auditing and auditor independence standards. They may not be comparable to financial statements of the United States companies.

Under MJDS the Registrant is permitted to incorporate by reference into this Annual Report financial statements prepared in accordance with the IFRS.

DOCUMENTS FILED PURSUANT TO GENERAL INSTRUCTIONS

The Registrant hereby incorporates by reference Exhibit 99.1 through Exhibit 99.5, as set forth in the Exhibit Index attached hereto.

The Registrant hereby incorporates by reference Exhibit 99.2, the Annual Audited Financial Statements of the Registrant for the years ended September 28, 2013 and September 29, 2012, as well as Exhibit 99.3, the Registrant’s Management’s Discussion and Analysis for the year ended September 28, 2013, as set forth in the Exhibit Index attached hereto.

The Registrant has filed a written consent of the auditor named in Exhibit 99.6, as set forth in the Exhibit Index attached hereto.

DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the Registrant’s fiscal year ended September 28, 2013, an evaluation of the effectiveness of the Registrant’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) was carried out by the Registrant’s principal executive officer and principal financial officer. Based upon the evaluation, the Registrant’s principal executive officer and principal financial officer have concluded that as of the end of the fiscal year, the Registrant’s disclosure controls and procedures were effective. Disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure, at a reasonable assurance level, that information required to be disclosed by the Registrant in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the registrant’s management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. It should be noted that while the registrant’s principal executive officer and principal financial officer believe that the registrant’s disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the registrant’s disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) under the Exchange Act. A 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 external purposes in accordance with IFRS as issued by the IASB.

A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. It should be noted that a control system, no matter how well conceived or operated, can only provide reasonable assurance, not absolute assurance, that the objectives of the control system are met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.

The Company’s President and Chief Executive Officer and the Company’s Executive Vice-President, Finance and Chief Financial Officer have evaluated, or caused to be evaluated, under their supervision the effectiveness of the Company’s internal control over financial reporting as of September 28, 2013. In making this assessment, management used the criteria set forth in the Internal Control Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on their evaluation, they have concluded that, as of September 28, 2013, the Company’s internal control over financial reporting was effective.

AUDITORS’ ATTESTATION REPORT

The Company is neither an accelerated filer nor large accelerated filer and is not required to provide an auditor’s attestation report on its internal control over financial reporting for the fiscal year ended September 28, 2013 in accordance with Section 989G(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in the Company’s internal control over financial reporting during its fiscal year ended September 28, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

NOTICE PURSUANT TO REGULATION BTR

None.

IDENTIFICATION OF THE AUDIT COMMITTEE

The required disclosure is included under “Item 8.1.1 – Independence” and “Item 8.2 – Audit Committee” in the Registrant’s Annual Information Form for the fiscal year ended September 28, 2013, filed as Exhibit 99.1 to this Annual Report on Form 40-F.

The Registrant is not a "listed issuer'' as defined in Exchange Act Rule 10A-3, and is therefore not subject to the audit committee requirements set forth in the rules of any national securities exchange registered pursuant to Section 6 of the Exchange Act or any national securities association registered pursuant to Section 15A of the Exchange Act. However, as a reporting issuer in Canada, the Registrant's Board of Directors has established a separately designated Audit Committee of the Board in accordance with Canadian Multilateral Instrument 52-110, Audit Committees (“MI 52-110”), as adopted by the Canadian Securities Administrators. The Audit Committee provides oversight of the Registrant's accounting and financial reporting processes and the audits of the Registrant's annual financial statements. The Audit Committee has adopted an Audit Committee Charter that is annexed as Schedule “A” to the Registrant's Annual Information Form filed as Exhibit 99.1 to this Annual Report on Form 40F.

AUDIT COMMITTEE FINANCIAL EXPERT

The Registrant’s Board of Directors has determined that all members of the Audit Committee are considered “independent” and “financially literate” within the meaning of MI 52-110 and Mr. Norman M. Betts is an audit committee financial expert as that term is defined in Item 407 of Regulation S-K under the Exchange Act.

CODE OF ETHICS

The Registrant has adopted a Code of Ethics (the “Code”) (as that term is defined in paragraph 9(b) of General Instruction B in Form 40-F), that applies to all directors, officers and employees of the Registrant, including the principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. A copy of the Code is posted on the Registrant’s website at http://tembec.com/en/investors/corporate-governance. Any amendments to the Code, and all waivers of the Code with respect to any of the officers covered by it, will be posted to the Issuer’s website within five business days of any amendment or waiver to the Code and shall be provided in print to any shareholder who requests them.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required is included under “Item 8.2.4 – External Auditor Service Fees” in the Registrant’s Annual Information Form for the fiscal year ended September 28, 2013, incorporated by reference as Exhibit 99.1 to this Annual Report on Form 40-F.

POLICIES AND PROCEDURES FOR THE ENGAGEMENT OF AUDIT AND NON-AUDIT SERVICES AND PRE-APPROVAL POLICIES

The information required is included under “Item 8.2.2 – Charter of the Audit Committee” and “Item 8.2.5 – Policies and Procedures for the Engagement of Non-Audit Services” in the Registrant’s Annual Information Form for the fiscal year ended September 28, 2013, incorporated by reference as Exhibit 99.1 to this Annual Report on Form 40-F.

OFF BALANCE SHEET ARRANGEMENTS

The outstanding letters of credit, in the amount of $56 million, 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. The Registrant does not have any other significant off-balance sheet arrangements as of September 28, 2013.

DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following table lists as of September 28, 2013 information with respect to the Registrant’s known contractual obligations.

Contractual Obligations	Total	Less	2 to 3 Years	4 to 5 Years	More
		than 1 Year			than 5 Years
Long-Term Debt	402	16	13	11	362
Interest on Long-Term Debt	214	40	78	77	19
Operating Leases	9	4	4	1	-
Purchase Obligations	170	106	54	10	-
Pension Obligations:	-	-	-	-	-
Normal Cost	119	8	15	15	81
Contractual	172	37	65	33	37
Total (1)	1,086	211	229	147	499

(1) Excludes $56 million drawn under an asset-based revolving five-year working credit facility expiring March 2017 which has been classified as a current liability.

The table above shows the Company’s contractual obligations as at September 28, 2013. The Company has long-term debt with contractual maturities and applicable interest. The operating lease obligations relate primarily to property and equipment rentals entered into in the normal course of business. Purchase obligations relate to ongoing normal commercial commitments to purchase timber, wood chips, energy, chemicals and other operating inputs. They also include outstanding obligations relating to capital expenditures. Pension obligations have two components. The current service costs are limited to a 15-year period and are based on estimated future employee service for existing registered defined benefit plans. Past service costs include estimated solvency and going concern amortization payments, based on actuarial evaluations that were filed on or before September 28, 2013.

MINE SAFETY DISCLOSURE

Not applicable.

UNDERTAKINGS

The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.

CONSENT TO SERVICE OF PROCESS

The Registrant has previously filed a Form F-X in connection with the class of securities in relation to which the obligation to file this report arises.

Any change to the name or address of the Registrant’s agent for service shall be communicated promptly to the Commission by amendment to the Form F-X referencing the file number of the Registrant.

SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

TEMBEC INC.
By: (s) James M. Lopez	By: (s) Michel J. Dumas
James M. Lopez	Michel J. Dumas
President and Chief Executive Officer	Executive Vice President, Finance and Chief
	Financial Officer

Date: December 16, 2013

EXHIBIT INDEX

The following documents are being filed with the Commission as exhibits to this registration statement on Form 40-F.

Exhibit	Description
99.1	Annual Information Form for the year ended September 28, 2013
99.2	Audited Annual Financial Statements as at September 28, 2013 and September 29, 2012 and for the years then ended
99.3	Management Discussion and Analysis for the year ended September 28, 2013
99.4	Annual Financial Report for the year ended September 28, 2013
99.5	Unaudited Supplemental Condensed Consolidating Financial Information for the years ended September 28, 2013 and September 29, 2012
99.6	Consent of KPMG LLP
99.7	Certification of Chief Executive Officer pursuant to Section Rule 13a-14(a) or 15d-14 of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
99.8	Certification of Chief Financial Officer pursuant to Section Rule 13a-14(a) or 15d-14 of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
99.9	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.10	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EX-99.1

Exhibit 99.1

Tembec Inc.

Annual Information Form

December 16, 2013
For the fiscal year ended September 28, 2013

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TABLE OF CONTENTS

ITEM 1 -	DATE OF ANNUAL INFORMATION FORM			5
ITEM 2 -	CORPORATE STRUCTURE			5
ITEM 3 -	GENERAL DEVELOPMENT OF THE BUSINESS			7
	3.1	BUSINESS OVERVIEW		7
	3.2	THREE-YEAR HISTORY		7
	3.3	TRENDS		10
ITEM 4 -	NARRATIVE DESCRIPTION OF THE BUSINESS			11
	4.1	PRINCIPAL OPERATIONS		11
		4.1.1	FOREST PRODUCTS SEGMENT	11
		4.1.2	SPECIALTY CELLULOSE PULP SEGMENT	15
		4.1.3	PAPER PULP SEGMENT	16
		4.1.4	PAPER SEGMENT	17
	4.2	ENVIRONMENTAL AND SOCIAL POLICIES		18
	4.3	ENERGY		20
	4.4	RESEARCH AND DEVELOPMENT		21
	4.5	COMPETITION		21
	4.6	RISK FACTORS		21
ITEM 5 -	DIVIDENDS			29
ITEM 6 -	GENERAL DESCRIPTION OF CAPITAL STRUCTURE			30
	6.1	GENERAL DESCRIPTION OF CAPITAL STRUCTURE		30
	6.2	RATINGS		30
ITEM 7 -	MARKET FOR SECURITIES OF THE CORPORATION			31
ITEM 8 -	DIRECTORS AND OFFICERS			31
	8.1	INFORMATION CONCERNING DIRECTORS		31
		8.1.1	INDEPENDENCE	35
	8.2	AUDIT COMMITTEE		35
		8.2.1	GENERAL	35
		8.2.2	CHARTER OF THE AUDIT COMMITTEE	35
		8.2.3	RELEVANT EDUCATION AND EXPERIENCE OF THE AUDIT COMMITTEE MEMBERS	36
		8.2.4	EXTERNAL AUDITOR SERVICE FEES	37
		8.2.5	POLICIES AND PROCEDURES FOR THE ENGAGEMENT OF NON-AUDIT SERVICES	37
	8.3	INFORMATION CONCERNING NON-DIRECTOR OFFICERS		38
	8.4	CEASE TRADE ORDERS, BANKRUPTCIES, PENALTIES AND SANCTIONS		38
ITEM 9 -	LEGAL PROCEEDINGS			40
ITEM 10 -	TRANSFER AGENT AND REGISTRAR			40
ITEM 11 -	MATERIAL CONTRACTS			40
ITEM 12 -	INTERESTS OF EXPERTS			42
ITEM 13 -	ADDITIONAL INFORMATION			43
DEFINITIONS				43
SCHEDULE “A” AUDIT COMMITTEE CHARTER				45

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DOCUMENTS INCORPORATED BY REFERENCE

CERTAIN SPECIFICALLY IDENTIFIED PAGES OF THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 2013 (THE “2013 FINANCIAL STATEMENTS”) AND THE MANAGEMENT’S DISCUSSION AND ANALYSIS DATED NOVEMBER 29, 2013 (THE “2013 MD&A”), FILED WITH THE SECURITIES COMMISSION OR SIMILAR AUTHORITY IN EACH OF THE PROVINCES OF CANADA, ARE INCORPORATED BY REFERENCE INTO AND FORM AN INTEGRAL PART OF THIS ANNUAL INFORMATION FORM (THE “AIF”).

GLOSSARY

Unless otherwise noted or the context otherwise indicates, references to the “Corporation” in this AIF are to Tembec Inc. References to “Tembec” are to, as the context may require, either the Corporation or Former Tembec, as defined below, or the Corporation or Former Tembec together with one or more of their respective subsidiaries (the “Subsidiaries”), affiliates and its interests in joint ventures and other entities. Reference to “Tembec Industries” is to Tembec Industries Inc., a wholly-owned subsidiary of the Corporation. In addition, unless otherwise defined herein, certain terms are defined in the Definitions section of this AIF. All dollar figures are in Canadian dollars unless stated otherwise.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this AIF include “forward-looking statements” within the meaning of securities laws. Such statements relate, without limitation, to the Corporation’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 variation thereof, and expressions of similar nature. Forward-looking statements are based on certain assumptions and analyses made by the Corporation in light of its experience, information available to it and its perception of future developments. The forward-looking statements contained in this AIF reflect the Corporation’s expectations as of the date hereof and are subject to change after such date. The Corporation 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.

Such statements are subject to a number of risks and uncertainties, including, but not limited to:

The demand and prices for the products that Tembec sells;

Fluctuations in the exchange rate of the Canadian dollar to the U.S. dollar and to the euro;

Raw material availability and prices;

Energy availability and costs;

Labour availability and labour disruptions;

The effect and enforcement of environmental and other governmental regulations;

Levels of capital expenditures required to maintain and upgrade processes;

Fluctuations in export taxes and/or volume restrictions imposed on lumber exported to the United States;

Debt service requirements;

Performance of pension fund assets;

Scope of insurance coverage; and

First Nations' land claims.

Many of these risks are beyond the control of the Corporation and, therefore, may cause actual actions or results to materially differ from those expressed or implied herein. In addition, other risks could adversely affect Tembec and it is not possible to predict or assess all risks. Tembec’s actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will occur, or if any of them do so, what benefits, including the amount of proceeds, Tembec will derive from them. Except as otherwise indicated, forward-looking statements do not take into account the effect that transactions or non-recurring or other special items announced or occurring after the statements are made may have on Tembec’s business. Such statements do not, unless otherwise specified by Tembec, reflect the impact of dispositions, sales of assets, monetizations, mergers, acquisitions, combinations or transactions, asset write-downs or other charges announced or occurring after forward-looking statements are made. The financial impact of these transactions and non-recurring and other special items can be complex and depends on the facts particular to each of them, and cannot be expressed in a meaningful way or in the same way Tembec presents known risks affecting its business.

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IFRS REPORTING

Effective September 26, 2010, the Corporation fully adopted International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) as the basis for preparation of financial information and accounting.

NON-IFRS FINANCIAL MEASURES

The following summarizes non-IFRS financial measures utilized in the 2013 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 Corporation 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 Corporation 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 Corporation considers adjusted EBITDA to be a useful indicator of the financial performance of the Corporation, the business segments and the individual business units. The most comparable financial measure is operating earnings or loss. A reconciliation of operating earnings to the Corporation's definition of adjusted EBITDA is provided in the 2013 MD&A.

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TEMBEC INC.
ANNUAL INFORMATION FORM

ITEM 1 - DATE OF ANNUAL INFORMATION FORM

This AIF is dated as of December 16, 2013. Except as otherwise indicated, the information contained in this AIF is stated as at September 28, 2013.

ITEM 2 - CORPORATE STRUCTURE

On February 29, 2008, the former Tembec Inc. (“Former Tembec”), completed a recapitalization transaction (the “Recapitalization”).

On January 16, 2008, a new entity, Tembec Arrangement Inc., was incorporated under the Canada Business Corporations Act to carry on business as of February 29, 2008 under the name of Tembec Inc. As part of the Recapitalization, Former Tembec Inc. became Tembec Holdings Inc. and Tembec Arrangement Inc. changed its name to Tembec Inc. Former Tembec was dissolved effective December 8, 2010. Additional information relating to the Recapitalization may be found on SEDAR at www.sedar.com. In this AIF, all references made to Tembec Inc. or to the Corporation refer to this new Tembec Inc. incorporated on January 16, 2008, unless specified otherwise. References to “Tembec” refer to the Corporation or Former Tembec together with one or more of their respective subsidiaries.

The Corporation’s head office is located at Suite 1050, 800 René-Lévesque Blvd. West, Montreal, Québec, H3B 1X9, telephone: 514-871-0137. Its website address is www.tembec.com.

The chart below depicts Tembec’s principal facilities by industry segment as at the date of this AIF and, where appropriate, the Subsidiaries or affiliates that own substantially all of the assets of such operating facilities.

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CORPORATE ORGANIZATION CHART

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ITEM 3 - GENERAL DEVELOPMENT OF THE BUSINESS

3.1 BUSINESS OVERVIEW

Tembec is a forest products Company with operations principally located in Canada and France. Its business segments are forest products, specialty cellulose pulp, paper pulp and paper.

Tembec can currently produce approximately 880 million board feet of lumber, 310,000 tonnes of specialty cellulose, 805,000 tonnes of paper pulp and 420,000 tonnes of paper. A breakdown of production capacities by operating facility is included in the Segment Review section of the 2013 MD&A. For the fiscal year ended September 28, 2013, Tembec had sales of $1.5 billion, adjusted EBITDA of $98 million, operating earnings of $29 million and a net loss of $34 million. Tembec’s total assets at that date were $1 billion and it employed approximately 3,500 people. The segmented results and the breakdown of sales of the Corporation’s products by geographic areas are included in the Corporation’s 2013 Financial Statements.

3.2 THREE-YEAR HISTORY

The following summarizes major events that have occurred over the past three years:

Forest Products Segment

In Fiscal 2011, 2012 and 2013, Tembec incurred a series of production curtailments and shutdowns, ranging from a few weeks to indefinite periods of time, at various sawmill and engineered wood facilities. These production curtailments and shutdowns were due to several factors, including low product pricing resulting from low demand, the high relative value of the Canadian dollar versus the U.S. dollar, the internal requirement for by-product chips and the related need to manage inventory levels and working capital.

In Fiscal 2011, Tembec permanently closed its sawmill in Taschereau, Québec. The facility had been idle since October 2009. The majority of the log supply was reallocated to Tembec’s La Sarre and Bearn sawmills. In Fiscal 2013, Tembec sold the sawmill located in Taschereau, Québec, for nominal net proceeds.

In Fiscal 2012, Tembec sold its Toronto (Ontario) hardwood flooring plant assets, as well as its Muskoka and Vintage brands, for proceeds of $13 million and closed its hardwood flooring plant located in Huntsville, Ontario.

In Fiscal 2012, Tembec sold its Elko and Canal Flats sawmills located in British Columbia and the associated Crown tenures, which consisted of approximately 1.1 million cubic meters of combined Crown, private land and contract annual allowable cut, for proceeds of $66 million.

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Specialty Cellulose Pulp Segment

In Fiscal 2011, demand for specialty cellulose pulp improved and remained favorable throughout fiscal 2012 and the mills had no market related downtime. In Fiscal 2013, both mills operated as planned and no production curtailments were taken for market conditions. However, demand for specialty grades was lower and as a result the mills operated at a reduced rate, producing 16,700 fewer tones than in Fiscal 2012.

In Fiscal 2012, Tembec inaugurated a new steam turbine at its Tartas mill in France. The green energy investment cost $21 million and generated significant benefits in terms of energy production, environmental performance and reduced costs for the Tartas mill.

At the Temiscaming specialty cellulose mill, the Corporation is making an energy investment of $235 million for the installation of a high pressure liquor recovery boiler and an electrical turbine, which will result in the production of an additional 35 megawatts of electricity on average. The Corporation entered into a Power Purchase Agreement with Hydro Québec as part of the investment. Part of the Project will be financed with $132.8 million of the new debt, which consists of loans for an aggregate amount of $92.8 million from Investissement Québec and a $40 million loan from IPD. 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. Tembec 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. As of Fiscal 2013 year end, Tembec has spent $137 million on the Project as defined hereinafter, which has a total estimated cost of $235 million. Tembec has utilized a total of $60 million of the previously noted $132.8 million of project financing. Of the remaining $98 million to be spent, $73 million will be funded by the remaining Project financing and $25 million from the Tembec’s internally generated cash flow.

Paper Pulp Segment

In Fiscal 2011, the unionized employees at Tembec’s High Yield pulp mill in Matane, Québec, went on strike following a breakdown in labour discussions. Consequently, production activities at the pulp mill were interrupted and resulted in 127 days of downtime before the mill resumed operations in mid-September 2011. Total lost annual production was approximately 81,400 tonnes.

In Fiscal 2012, Tembec completed construction of a new anaerobic treatment facility to produce methane biogas and reduce the use of fossil fuels at its high-yield pulp mill in Matane, Québec. Funding for the investment was provided mainly by the Government of Canada with $19.7 million and the Government of Québec with $6.3 million. The overall project represents a total gross investment of $29 million - $26 million for the anaerobic facility and $3 million for the installation of the new electric boiler.

In Fiscal 2012, due to continuing low product prices and the operation’s relative cost, the Chetwynd high yield pulp mill was indefinitely idled. This mill has a rated annual capacity of 240,000 tonnes. Additionally, during the first half of Fiscal 2012, market-related production curtailments totaling 27,000 tonnes were taken at the Matane and Temiscaming mills. There was no market related downtime taken at either mill in Fiscal 2013.

The NBSK pulp mill located in Skookumchuck, BC had no market related downtime in Fiscal 2011. In Fiscal 2012, the mill absorbed 17 days of unplanned downtime to repair its recovery boiler. In Fiscal 2013, the pulp mill had no market related downtime until it was sold in mid-May 2013. The selling price was $97 million, including $29 million of working capital.

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Paper Segment

At the end of Fiscal 2011, the previously idled paper machine #3 at Kapuskasing, Ontario newsprint mill was deemed to be permanently shut down and consequently the production capacity of this segment was reduced by 90,000 tonnes. The mill has been operating two machines since that time.

In Fiscal 2012, Tembec sold its newsprint mill and related assets located in Pine Falls, Manitoba, for nominal net proceeds. The mill had been idle since September 2009.

The coated bleached board mill no market related downtime in 2011, 2012 and 2013.

Corporate

In Fiscal 2012, Tembec Industries issued an additional US $50 million in aggregate principal amount of 11.25% senior secured notes due in December 2018 (“Additional Notes”), bringing the aggregate principal amount of 2018 Senior Secured Notes issued by Tembec Industries to US$ 305 million. The Additional Notes were sold in a private offering to “qualified institutional buyers” as defined in Rule 144A under the Securities Act, and outside the United States in reliance on Regulation S under the U.S. Securities Act of 1933 (the “Securities Act”). In September 2012, Tembec Industries completed its exchange offer to exchange up to US $50 million in aggregate principal amount of 11.25% Senior Secured Notes due 2018 registered under the Securities Act, for any and all of its outstanding US $50 million Additional Notes, which were issued in transactions exempt from registration under the Securities Act. This exchange offer followed an undertaking by Tembec Industries to file an exchange offer registration statement with the U.S. Securities and Exchange Commission with respect to the Additional Notes issued in February 2012 to allow for the notes to be sold without restrictions on transfer. The proceeds from the offering, together with cash on hand, were used for general corporate purposes, as additional liquidity to support Tembec’s capital expenditure initiatives and to pay fees and expenses related to the offering.

The 2018 Senior Secured Notes are senior secured obligations of Tembec Industries, secured by a first priority lien on certain of the property and assets of Tembec Industries and certain subsidiaries of the Corporation, other than receivables, inventory and certain intangibles upon which the note holders have a second priority lien. The 2018 Senior Secured Notes are guaranteed by the Corporation and certain of the other Corporation’s subsidiaries.

In Fiscal 2011, the Corporation (as “Guarantor”), and Tembec Industries, Tembec Enterprises Inc., A.R.C. Resins Corporation and Tembec General Partnership (as “Borrowers”), entered into a financing agreement with GE Canada Finance Holding Company and a syndicate of lenders (“ABL Lenders”) for a revolving credit facility of $200 million (“ABL Facility”) maturing on March 4, 2016 secured by a first priority charge over receivables and inventory of the Borrowers. Interest is based on the prime rate or the banker’s acceptance rate, as the case may be. As at September 28, 2013, the amount available under this facility was $120 million, amount of which $53 million was drawn and $56 million was reserved for letters of credit. In April 2011, the Ontario Court of Appeal rendered a decision in the restructuring proceedings involving Indalex Limited under the Companies’ Creditors Arrangement Act (“CCAA”). The Court of Appeal held that defined benefit pension plan deficiency claims had priority over security held by debtor-in-possession (DIP) lenders in the context of a sale made under a CCAA proceeding. In the first quarter of Fiscal 2013, the agent for the ABL lenders’ syndicate had expressed concern regarding their security position on collateral related to Ontario operations. In light of the uncertainty surrounding the decision of the Ontario Court of Appeal, the ABL agent had requested that the Corporation refrain from making any further draws or utilization of the ABL Facility until such priority issue is dealt with by the Supreme Court of Canada. In February 2013, the Supreme Court of Canada overturned the Ontario Court of Appeal’s decision. The Supreme Court of Canada’s decision has led to a satisfactory resolution of potential security issues regarding the Corporation’s Ontario collateral. As a result, full access to the ABL Facility was effectively restored. In Fiscal 2013, the Borrowers and the Guarantor on one hand and the ABL Lenders on the other hand agreed to amend and extend the ABL Facility by one year. The maturity date of the Facility is set to expire on March 4, 2017. Tembec also negotiated a reduction of the aggregate resolving loan commitments from $200 million to $175 million and related adjustments to certain thresholds due to a reduction in the number of mills it operates.

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The Corporation’s French operations are supported by “receivable factoring” agreements. As such, the borrowing base fluctuates periodically, depending on shipments and cash receipts. As at September 28, 2013, the amount available under such agreements was $28 million, of which $4 million was drawn.

In Fiscal 2012, Tembec, Tembec Industries Inc. and Tembec Energy L.P. entered into a $75-million loan (the “IQ Loan”) with Investissement Québec (“IQ”), a governmental agency, which will be used to finance a portion of the total cost of the project to upgrade Tembec’s specialty cellulose manufacturing facility in Temiscaming, Québec which was initially estimated at $190 million (the “Project”) but revised to $235 million in Fiscal 2013. The loan is secured by a second ranking charge over the Project’s assets. Tembec has also granted to Investissement Québec 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.

In Fiscal 2013, Tembec, Tembec Industries Inc. and Tembec Energy L.P. entered into an additional loan in the amount of $17.8 million with IQ (“Additional IQ Loan”). The Additional IQ Loan will bear interest at the same rate as that applicable under the initial $75 million loan entered into in Fiscal 2012. The loan is secured by a second ranking charge over the Project’s assets. Tembec has also agreed to grant a five year option to IQ to subscribe for 712,000 common shares of the Corporation 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. The option will be granted on the date of the first advance under the Additional IQ Loan.

In Fiscal 2012, Tembec Energy L.P. entered into a $30 million loan (“IPD Loan”) with Integrated Private Debt Fund III LP (“IPD”), which will be used to finance the acquisition of the boiler and the turbine required in connection with the Project. Tembec intervened to the IPD Loan to guarantee all obligations of Tembec Energy L.P. thereunder. The IPD Loan is secured by a first ranking charge over the Project’s assets.

In Fiscal 2013, Tembec Energy L.P. has entered into an amended and restated credit agreement (the “Restated Credit Agreement”) with IPD, as Agent for the Project’s senior lenders, increasing its credit facility by $10 million (“Increased IPD Facility”). The Increased IPD Facility will be subject to the current general terms and conditions of the credit facility with IPD. The Increased IPD Facility will be reimbursed in blended monthly instalments over a period of eight years beginning in November 2014 with a balloon payment to be repaid in October 2022.

Other Developments

In Fiscal 2011, Tembec completed the sale of its hydro-electric generating assets which have a capacity of approximately 7.4 megawatts, located in Smooth Rock Falls, Ontario to Gemini-SRF Power Corporation for a total consideration of $16.5 million.

In Fiscal 2012, Tembec Energy L.P. entered into a long term power purchase contract with Hydro Québec, acting through its Hydro Québec Distribution Division. The agreement will allow Tembec to sell to Hydro Québec, for a 25 year term, up to 50 megawatts of the electricity generated by a new turbine to be installed at the Temiscaming site as part of the Project.

3.3 TRENDS

Reference is made to the Segment Review section of the 2013 MD&A.

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ITEM 4 - NARRATIVE DESCRIPTION OF THE BUSINESS

4.1 PRINCIPAL OPERATIONS

Tembec’s business is centered on the production and sale of forest, pulp and paper products. The manufacturing assets of Tembec are located primarily in Canada, with a fairly large presence in the eastern part of the country, namely, Northeastern Ontario and Northwestern Québec. The lumber and paper businesses are North American in nature and Tembec’s assets in these segments are located in this market. The pulp businesses are more global in nature, with Europe and China being the largest consumers. One specialty cellulose pulp mill is located in France. The other four pulp mills are located in Canada.

Tembec has approximately 3,500 employees of which 2,700 are covered by collective bargaining agreements. At the end of Fiscal 2013, there were 7 agreements covering 26 employees that had expired. During Fiscal 2014, six (6) collective agreements covering approximately 875 employees will expire. The remaining contracts expire at various dates up to January 2019.

The following sections provide specifics in relation to each of Tembec’s principal business segments.

4.1.1 Forest Products Segment

The Forest Products Segment’s principal activity is focused on the production of SPF lumber. It also produces small amounts of Engineered and Specialty Wood products. For the fiscal year ended September 28, 2013, the Forest Products Segment generated consolidated sales of $354 million as compared to $348 million in Fiscal 2012, adjusted EBITDA of $17 million as compared to a negative adjusted EBITDA of $16 million in Fiscal 2012 and operating earnings of $8 million as compared to operating loss of $4 million in Fiscal 2012. The Forest Products Segment’s annual sales accounted for approximately 23% of Tembec’s total consolidated sales in Fiscal 2013 as compared to 21% in Fiscal 2012.

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The following table summarizes the annual operating levels of each operating facility by product group:

SPRUCE, PINE, FIR LUMBER
Location and Product	MBF
Stud Lumber
La Sarre, QC	135,000
Senneterre, QC	100,000
Cochrane, ON	110,000
Kapuskasing, ON	105,000
Random Lumber
Hearst, ON	160,000
Chapleau, ON	135,000
Bearn, QC	110,000
Finger Joint Lumber
Cranbrook, BC	25,000
	880,000
SPECIALTY WOOD
Location and Product	MBF
Hardwood Lumber - Huntsville, ON	30,000
ENGINEERED WOOD
Location and Product
Engineered Finger Joint Lumber
	MBF
La Sarre, QC	60,000
Kirkland Lake, ON	30,000
	90,000

Products and Markets

The Softwood (SPF) lumber sawmills produce various types, species and grades of lumber which are used primarily for residential and commercial construction. Higher value SPF lumber products include J-Grade, TemPlusTM and TemSelectTM and machine stress rated (MSR) grades. Hardwood lumber is used in a wide variety of applications, including furniture, flooring and specialty residential and commercial applications. In addition, the Forest Products Segment produced and shipped approximately 870,000 tonnes of wood chips in Fiscal 2013, approximately 67% of which were directed to Tembec’s pulp and paper facilities.

The SPF lumber industry is subject to both cyclical and seasonal fluctuations in demand, which can lead to volatility in prices. North American solid wood products demand is influenced by the general level of economic activity, consumer confidence and interest rates. All of the above impact on housing construction starts, which is generally regarded as the best indicator of lumber demand. Total North American lumber demand in 2013 was estimated at 49 billion board feet, with U.S. demand of approximately 40 billion board feet and the balance being consumed in Canada. U.S. producers currently supply 29 billion board feet, leaving a U.S. domestic shortfall of approximately 11 billion board feet. Canadian producers sold a total of 26 billion board feet, shipping 11 billion board feet to the U.S. and exporting 6 billion board feet outside North America. The remaining 9 billion board feet was consumed domestically in Canada. Tembec’s production capacity represents approximately 1% of North American SPF lumber capacity of 72 billion board feet.

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The Forest Products Segment business fosters a highly diversified customer base. Products are sold by Tembec’s own internal sales force directly to large retailers, industrial end-users and distributors. Tembec markets most of its solid wood products in North America. In Fiscal 2013, 53% of Tembec’s consolidated sales occurred in Canada and 47% in the United States.

As a result of the significant dependence on the U.S. market, Tembec’s forest products’ competitiveness is heavily influenced by the relative strength of the Canadian dollar versus the U.S. dollar. Tembec competes directly with other Canadian and U.S. producers of SPF lumber. While selling prices, product quality and customer service are important factors affecting competition, other factors such as fibre costs, foreign exchange rates and the 2006 Softwood Lumber Agreement (“SLA”) also have an impact on Tembec’s competitive position. The SLA, which came into force on October 12, 2006, requires Canadian exporters to the U.S to pay an export tax which varied inversely with the price of lumber. Effective October 12, 2006, Tembec’s Québec and Ontario sawmills became subject to a combination of export taxes and volume restraints or quotas that vary depending on the option selected by individual Canadian provinces. Tembec’s Eastern Canadian sawmills located in Ontario were subject to an average export tax of 1.3% in fiscal 2013. Tembec’s Québec sawmills were subject to an average export tax of 3.8% . The difference in tax rate is on account for an adverse arbitration award that came into effect in March 2011. The SLA, which was set to expire on October 12, 2013 was extended for an additional two years, to October 2015.

Timber Supply

Tembec’s Canadian forestry operations are managed by the Forest Products Group. This includes the harvesting of timber, either directly or through contractors, and all silviculture and regeneration work required to ensure a sustainable supply of wood fibre to the manufacturing units. The Forest Products Group is also responsible for third-party timber purchases and wood chip production from whole log chippers which are required to supplement total requirements. Its main objective is the optimization of the flow of timber to the various manufacturing units.

Tembec seeks to maximize the utilization of timberlands for which it is responsible through efficient management and by following sustainable forest management practices so that the timberlands provide a continuous supply of wood for future needs. Site preparation, planting and harvesting techniques are continually improved through a variety of methods, such as research to improve the timber yield of the forests.

As Tembec’s forestry activity in Canada is conducted primarily on Crown lands, the Forest Products Group works closely with provincial governments to ensure harvesting plans and operations comply with established laws & regulations.

Québec

The Province of Québec announced reforms to its forest tenure regime. The reforms became effective in April 2013. As a result of such reforms, contractual harvest volumes have been reduced by approximately 25%, and were reallocated to a timber marketing board for sale on the open market, leaving the remaining 75% committed to current license holders. In furtherance to these reforms, Tembec has worked with the Ministry of Natural Resources (Québec) to ensure the best transition to the new Québec Forest Act in 2013. During the Summer 2013, the Chief Forester of the Province of Québec rendered public for consultation an update of the forestry allowable harvest volumes for the various forest management units in the Province of Québec. This data update, following the consultation process and approval by the Minister, will determine the 2014-18 annual allowable cut. The Chief Forester is currently completing the timber supply study and results should be made public in the December 2013 quarter. The Minister of Natural Resources will allocate the allowable harvest volumes in the March 2014 quarter.

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Ontario

Tembec’s cutting rights in Ontario are provided principally through several Sustainable Forest Licenses on Crown land issued by the Ministry of Natural Resources (Ontario). These licenses expire at different dates and have 20-year terms and are renewable every five years. Their renewal is based on satisfactory performance determined by independent audits and approval of the Ministry of Natural Resources (Ontario). The Province of Ontario has approved legislation for reforms of its forest tenure regime and where the Ministry of Natural Resources (Ontario) will facilitate the trial of new tenure systems over the next 5 years. Tembec will continue to monitor developments and work with the Ministry of Natural Resources (Ontario) in connection therewith.

Manitoba

In Fiscal 2012, Tembec sold its newsprint mill and related assets for nominal net proceeds. Tembec has completed all outstanding obligations related to the Forest Management License currently held by Tembec.

British Columbia

Tembec currently owns approximately 57,000 hectares of lands in British Columbia. These lands are located in the East Kootenay region. Tembec is currently pursuing the sale of several parcels of land and has set an objective of realizing up to $75 million in land sales by December 2014 (“B.C. Land Sale Initiative”). Since the launch of this B.C. Land Sale Initiative, Tembec sold 1,875 hectares of lands to Jemi Holdings Ltd. for a price of $4.2 million and approximately 7,150 hectares of land to Teck Resources Limited for a price of $19 million. There can be no assurance that the Corporation will attain the stated objective or that it will do so within the specified time period.

Timber Resources Availability

Tembec harvests timber under forest tenures held by it in British Columbia, Ontario and Québec and has a total allowable annual cut (“AAC “) of approximately 4.8 million cubic meters. Tembec’s Canadian wood fibre requirements are also met with deliveries from our Freeholds, open market purchases and exchanges on either a spot or contract basis (Business to Business).

The following table sets out Tembec’s timber resources available as at September 28, 2013:

	CUBIC METERS
Chetwynd (High Yield Pulp)
Forest Licenses (non-replaceable)	335,500
Pulpwood Agreement 13	200,000
Sub-total – Crown (HYP)	535,500
Managed Forests (Free Hold)	73,000
Total British Columbia	608,500
Ontario
Sawmills
Sustainable Forest Licenses	2,471,800
Sub-total – Crown	2,471,800
Free Hold	50,000
Business to Business	130,000

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Total Ontario	2,651,800
Québec
Sawmills
Wood supply guaranty	897,450
Sub-total – Crown (sawmills)	897,450
Matane & Témiscaming (HYP)
Wood supply guarantee	282,500
Sub-total – Crown (HYP)	282,500
Total Québec	1,179,950

Stumpage and Other Charges

Provincial authorities impose fees on volumes of wood cut on Crown lands. These fees are determined under specific mechanisms in each province. Part of the mandate of the Corporation’s Forest Resources Management Group is to ensure that fees charged by the provincial governments reflect the fair value of the timber being harvested.

4.1.2 Specialty Cellulose Pulp Segment

The Specialty Cellulose Pulp segment consists of two manufacturing facilities, which produce specialty cellulose pulps. The mills generate lignin as a by-product of the sulphite process, which is sold to third parties. The Temiscaming mill also includes a facility that produces ethanol as a by-product that is also sold to third parties. The segment also includes a stand-alone resin business, which produces powder and liquid phenolic resins at two operating sites in Québec: Temiscaming and Longueuil. The Corporation also operates a third facility located in Toledo, Ohio, United States which manufactures powder and liquid amino-resins. The chemical business also periodically purchases and re-sells pulp mill by-product chemicals from third parties.

In Fiscal 2013, the Specialty Cellulose Pulp Segment generated consolidated sales of $460 million as compared to $507 million in Fiscal 2012, adjusted EBITDA of $73 million as compared to $95 million in Fiscal 2012 and operating earnings of $59 million as compared to operating earnings of $84 million in Fiscal 2012.

The following table summarizes the products and current capacity levels of each facility:

Location and Product
	Tonnes
Specialty Cellulose Pulp
Temiscaming, QC – Specialty Cellulose Pulp	160,000
Tartas, France – Specialty Cellulose Pulp	150,000
	310,000

Products and Markets

The specialty cellulose pulp produced at the two pulp mills is high purity cellulose utilized in a wide variety of specialized products such as pharmaceuticals, food additives, and industrial chemicals. The Temiscaming specialty cellulose pulp mill also produces ″viscose” grade pulp, which is utilized in the production of viscose staple fibre, which in turn is used to produce rayon for the textile industry.

Tembec markets its specialty pulp on a world-wide basis, primarily through its own sales force, with a network of offices in Toronto, Canada, and Dax, France. This is consistent with Tembec’s strategy of selling directly to customers and establishing long-term strategic relationships. Sales from the Specialty Cellulose Pulp Segment represented approximately 30% of Tembec’s total consolidated sales in Fiscal 2013.

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Fibre Supply

The Temiscaming mill purchased approximately 305,700 bone dry tonnes of wood chips in fiscal 2013, down from 370,200 in the prior year. Of this amount, approximately 73% was supplied by the Forest Products segment, compared to 66% in the prior year. The remaining requirements were purchased from third parties under contracts and agreements of various durations. The pulp mill located in Southern France purchased approximately 284,000 bone dry tonnes of wood in Fiscal 2013 as compared to 287,000 bone dry tonnes in the prior year. The fibre is sourced from many private landowners.

4.1.3 Paper Pulp Segment

The Paper Pulp segment consisted of four market pulp manufacturing facilities. Prior to May 2013, Tembec owned and operated a chemical softwood kraft (NBSK) paper pulp mill located in Skookumchuck, BC. The mill had a capacity to produce 270,000 tonnes per year. Its financial results are included in the segment’s results for all of fiscal 2012 and for approximately eight months in fiscal 2013. The remaining three facilities are hardwood high-yield pulp mills. They produce pulp with a combination of mechanical and chemical processes. The Company produces hardwood grades made from maple, aspen and birch. High-yield pulps have a lower tensile and tear strength than kraft pulps but they offer advantages on bulk and opacity. They compete against other hardwood or “short fibre” grades, with Bleached Eucalyptus Kraft (BEK) being the most prominent. The Chetwynd, BC, mill has been idle since September 2012 due to relatively low prices resulting from significant new capacity start-ups of BEK pulp mills in the Southern hemisphere.

In Fiscal 2013, the Paper Pulp Segment generated consolidated sales of $388 million as compared to $465 million in Fiscal 2012, adjusted EBITDA of $5 million as compared to negative adjusted EBITDA of $32 million in Fiscal 2012 and an operating loss of $33 million as compared to an operating loss of $105 million in Fiscal 2012.

The following table summarizes the products and current capacity levels of each facility:

Location and Product
Hardwood High Yield	Tonnes
Temiscaming, QC	315,000
Matane, QC	250,000
Chetwynd, BC1	240,000
Total	805,000

Products and Markets

High-yield market pulps have been produced in North America since the mid-1980’s. Initially, most high-yield pulps were manufactured with softwood and utilized in tissue and towel applications, where their superior bulk and absorbency are desired characteristics. However, Tembec has always maintained a strategy of targeting the use of high-yield pulps in paper and board production. The strategy led to the development of hardwood high-yield grades made from birch, aspen and maple. Although high-yield pulps are lower than kraft pulps in tensile and tear strength, they offer advantages in bulk and opacity.

The global high-yield pulp market totals approximately 5 million tonnes. Canada is the principal producer at 2 million tonnes per year of capacity, followed by Western Europe at 1 million tonnes. The principal market is China which consumes 2 million tonnes, followed by other Asian countries and Western Europe which consume 1 million tonnes each.

^{_______________________________
1} On September 16, 2012, Tembec indefinitely idled its high-yield pulp mill in Chetwynd, British Columbia due to market related conditions.

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Tembec markets its high-yield pulp mainly to Asian and European destinations, primarily through its own sales force, with a network of offices in Toronto, Canada, and Dax, France. This is consistent with Tembec’s strategy of selling directly to customers and establishing long-term strategic relationships. Sales from the Paper Pulp Segment represented approximately 25% of Tembec’s total consolidated sales in Fiscal 2013.

Fibre Supply

Tembec’s Pulp mills, including the Skookumchuck NBSK pulp mill, procured 834,500 bone dry tonnes of wood chips in Fiscal 2013. Of this amount, approximately 20% was supplied by the Forest Products Segment. The remainder was purchased from third parties under contracts and agreements of various durations.

4.1.4 Paper Segment

The Paper Segment currently consists of two facilities with a total of three paper machines. The mill located in Kapuskasing, Ontario, produces newsprint on two machines. The facility located in Temiscaming, Québec, produces multi-ply coated bleached board on one machine. In Fiscal 2012, Tembec sold its Pine Falls Manitoba Newsprint Mill and related assets. For Fiscal 2013, the Paper Segment generated consolidated sales of $332 million as compared to $346 million in Fiscal 2012, adjusted EBITDA of $25 million in Fiscal 2013 as compared to adjusted EBITDA of $37 million in Fiscal 2012 and operating earnings of $22 million as compared to operating earnings of $35 million in Fiscal 2012.

The following table summarizes the products and current capacity levels of each facility:

Location and Product
	Tonnes
Coated Bleached Board
Temiscaming, QC	180,000
Newsprint
Kapuskasing, ON	240,000

Products and Markets

Tembec’s coated bleached board sales’ focus is on lightweight, fully bleached coated board used in commercial printing. Target markets include book cover, directory cover, lightweight premium packaging and coated linerboard. The board is sold primarily in North America through its own sales force located in the U.S. and Canada. Board is also sold to merchants and large commercial printers.

Newsprint is used primarily for the publication of daily newspapers. It is generally considered to be a commodity product, having a uniform definition and few distinct differences. Newsprint demand is driven primarily by the requirements of daily newspapers. Canadian manufacturers of newsprint are very dependent on export markets, particularly the U.S. market. In calendar year 2013, total North American newsprint demand is expected to be approximately 4.5 million tonnes with the U.S. market consuming approximately 3.7 million tonnes. Another 2.0 million tonnes will be shipped to export markets outside North America. U.S. capacity is 2.6 million tonnes while Canadian newsprint capacity is 4.3 million tonnes of the approximate total 6.9 million tonnes of capacity in North America. Tembec’s newsprint capacity represents approximately 3.5% of total North American production capacity.

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The focus of the Paper Segment is the North American market which accounted for 94% of consolidated sales in Fiscal 2013, with the U.S. representing 74% of consolidated sales. For Fiscal 2013, the Paper Segment represented 22% of the Corporation’s consolidated sales.

Fibre Supply

The Paper Segment’s newsprint mill purchased 234,400 bone dry tonnes of virgin fibre in the last fiscal year, of which approximately 81% was internally sourced.

The coated bleached board mill utilizes a combination of chemical kraft high yield pulps to produce a three-ply sheet. During Fiscal 2013, the mill utilized 61,600 tonnes of high-yield pulp supplied by the Temiscaming mill.

4.2 ENVIRONMENTAL AND SOCIAL POLICIES

Tembec is committed to demonstrating responsible stewardship of resources and continuous improvement of its environmental performance. Tembec’s objectives are to:

Maintain compliance with its corporate principles and environmental policy;

Comply with all applicable environmental legislation and continually improve its environmental performance;

Integrate sustainable development into its business and operating plans;

Respond effectively to environmental issues; and

Maintain recognized environmental certifications as required.

Tembec’s environmental policy is available on the Corporation’s website at www.tembec.com.

Environmental Management System:

These objectives have been incorporated into the Tembec Environmental Management System (EMS), which minimizes the impact of manufacturing activities and forest operations on the environment. The EMS is administered in accordance with ISO 14001 standard and Tembec’s specific environmental requirements.

In 2013, a certifiable EMS is in place in our manufacturing and forest operations. Each year, Tembec fully reviews all progress accomplished through its EMS to ensure continuous improvement in its environmental performance.

Every business unit must implement the EMS. Internal audits are conducted on all EMS procedures to ensure compliance with ISO 14001 and Tembec’s environmental requirements. Tembec’s operating pulp manufacturing and Québec forest operations are certified to the ISO 14001 standard. Also, audits are conducted at each site to ensure compliance with all applicable laws and regulations.

Integration of the OHSAS-18001 Health and Safety through the EMS (ISO 14001) Environmental System

The implementation of the OHSAS 18001 Health and Safety Management System continues across Tembec. The majority of our mills continue to maintain the system in place and perform internal audits regularly. Tembec will continue to monitor the implementation for those who are not at 100%.

Environmental Performance

Tembec has developed environmental performance indicators to continually monitor the progress of each of its business units towards the achievement of EMS as well as regulatory standards.

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On the whole, Tembec’s environmental performance is in compliance with statutory and regulatory requirements governing atmospheric emissions, effluent and solid waste. In fact, through its EMS, Tembec exceeds in many cases statutory and regulatory requirements.

Over the years, Tembec has implemented voluntary measures to protect the environment. Since 1990, Tembec has been taking action to significantly reduce its greenhouse gas emissions, and has actively supported and promoted the Kyoto Protocol. Tembec has established specific objectives and targets to reduce energy consumption and greenhouse gas emissions at its mills, and has set goals to improve biomass recovery as a source of energy.

Tembec’s initiatives, including those described above, have already led to significant improvements in its overall environmental performance. Moreover, the implementation of Tembec’s EMS at all sites will ensure continuous improvement of Tembec’s environmental performance in accordance with its strong commitment to environmental protection and sustainable development.

In Fiscal 2013, Tembec spent approximately $5,335,000 on capital projects as part of its commitment to continuously improve its environmental performance as per its policy and to comply with applicable environmental requirements.

Forest Certification

The portfolio of Forest Stewardship Council (“FSC”) forest management certificates held by Tembec in Canada consists of seven certified forests across more than 9.3 million hectares forming a substantial base of certified wood supply for company facilities. Further, Tembec is a partner with other forest industry companies on lands managed by third parties. FSC certification on these lands contributes an additional 1 million hectares of FSC certified forest to Tembec’s wood supply portfolio. As a leader in the achievement of FSC forest certification in Canada, Tembec is active in renewing forest certificates consistent with the five year anniversary date. In 2013, Tembec and the Ministry of Natural Resources in Québec worked collaboratively to maintain FSC certification consistent with the implementation of the new forest regime.

Assessment of external fibre supply sources is guided by Tembec’s Fibre Procurement Policy (2006). Tembec provides evidence of Chain of Custody certification to customers to enable them to produce and label their own products as certified. All of Tembec facilities are linked to a corporate multi-site FSC chain of custody and FSC Controlled Wood system. Several company facilities additionally have Program for Endorsement of Forest Certification (“PEFC”) Chain of Custody (“COC”) certification. These independent third party audited systems ensure Tembec fibre procurement personnel source fibre from known sources with certainty and assurance.

Forest conservation, as an integral component of well managed forests, is a key theme for the Tembec Forest Resources Management (“FRM”) Group. The identification and conservation of habitat of rare, threatened and endangered species is a strong priority across Tembec’s Canadian Boreal operations. Detailed engagement with government, First Nations and environmental organizations regarding the conservation of woodland caribou in Ontario continued in 2013. Tembec, municipal representatives, First Nations and environmental organizations presented a woodland caribou conservation plan to the Ontario government in June 2012. Work to implement this plan will continue through 2014.

Tembec is a signatory to the Canadian Boreal Initiative and the Canadian Boreal Forest Agreement. Both initiatives bring non-government interests together to identify strategies to advance forest conservation initiatives and support world leading forest management practices in the Canadian Boreal forest region. Tembec’s boreal forest tenures are included in the scope of these agreements and Tembec FRM personnel lead Tembec’s participation.

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Advocating for a strengthened integration of Ecosystem-Based Management (“EBM”) principles in forest management is a strong focus for Tembec’s forest management group in Québec. Tembec continued its ongoing involvement in EBM projects in the Abitibi Region of the Boreal Forest and in the Mixed Forest of the Temiscaming Region.

First Nations Policy

As part of sustainable forest management and corporate social responsibility, Tembec recognizes its operations in Canada take place on territories on which Aboriginal People assert rights and interests. Tembec has adopted a First Nations Policy, the purpose of which is to build and maintain relationships with Aboriginal communities located in the vicinity of Tembec’s operations. Tembec’s policy addresses such priorities as capacity building, employment, information-sharing, business relations and measures to harmonize traditional land use and forestry operations.

To accommodate the traditional activities of the communities during forestry planning and operations, Tembec has concluded agreements with many First Nations including, in Ontario, the Missanabie Cree First Nation, the Taykwa Tagamou Nation, the Northeast Superior Regional Chiefs’ Forum (comprised of six First Nations which are the Brunswick House First Nation, the Chapleau Cree First Nation, the Hornepayne First Nation, the Michipicoten First Nation, the Missanabie Cree First Nation and Pic Mobert First Nation), and in Québec, the Timiscaming First Nation, the Wolf Lake First Nation, the Eagle Village First Nation, the Lac Simon First Nation, the Pikogan First Nation and the Long Point First Nation. In addition Tembec and Grand Council of the Cree (Québec) have signed a communication protocol pertaining to the undertaking of Forest Stewardship Council (FSC) certification on the Paix des Braves territory and Tembec and Moose Cree First Nation (Ontario) have a Memorandum of Understanding (MOU) in place. While each agreement is unique, the agreements generally provide for identification of areas of concern, development of measures to harmonize Tembec’s interests with those of aboriginal groups, outline communications protocols and provide dispute resolution processes. Tembec also may provide financial support to assist the community in engaging resource management expertise.

4.3 ENERGY

Tembec is committed to operating energy efficient plants and to making full use of its forest resources. To this end, Tembec converts waste pulping liquors, mill effluent and biomass wastes into renewable energy through various processes. Tembec also plans to further improve its capacity to convert these wastes. In Fiscal 2013, Tembec generated approximately 17,000,000 Gigajoules of renewable energy, which represents approximately 59% of Tembec’s total energy consumption. This includes generating 470,000 MWhrs of electricity, or 23% of our total consumption.

Temiscaming and Kapuskasing

Both the Temiscaming and Kapuskasing mill complexes utilize biomass boilers fired on bark, sawdust and shavings to generate approximately 5.5% of their total electricity consumption.

Chapleau

The Chapleau cogeneration facility sells the bulk of its power to Hydro One. Steam is then fed to the sawmill kilns to dry lumber. The Chapleau cogeneration facility consumes residual biomass from the sawmill and the surrounding region.

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Tartas

The Tartas mill burns both waste sulphite liquor and biomass at its cogeneration facility. Since the commissioning of its new turbine, the Tartas mill has become a net exporter of electricity, generating approximately 83% of its needs.

Other Green Energy

Tembec also converts effluent to energy through two operating anaerobic effluent treatment plants. Current methane consumption is approximately 132,000 GJ/year (Temcell I & II). Commissioning of a third anaerobic effluent installation at the Matane mill is underway and will result in incremental methane generation. Methane is used to offset fossil fuel purchases in pulp dryers. Recovered biomass is also sold to third parties for cogeneration purposes.

4.4 RESEARCH AND DEVELOPMENT

Tembec considers research and development (“R&D”) essential to its growth and to its long-term ability to compete successfully on world markets. Tembec’s mission of minimizing costs and encouraging innovation while protecting the environment is backed by its history of continued research investment. R&D activities are carried out with specialized research centers, Canadian and foreign universities, strategic equipment and technology developers, in conjunction with in-house development and trials. The R&D thrust is a crucial aspect of Tembec’s activities, enabling Tembec to continue meeting its customers and other key stakeholders’ ever-growing expectations. Recent research efforts have been focused on further enhancing Tembec’s already sound environmental practices, improving delivered fiber costs, developing value-added products and exploiting waste to energy opportunities.

4.5 COMPETITION

The lumber, pulp and paper industries are essentially commodity markets in which producers compete primarily on the basis of price. In addition, since the majority of Tembec’s lumber, pulp and paper production is directed to export markets, it competes on a worldwide basis against many producers with approximately the same or larger capacity. In export markets, Tembec generally competes with U.S., Latin American, Asian and Scandinavian producers. Some of Tembec’s competitors have lower energy and labor costs and fewer environmental and governmental regulations to comply with than Tembec does. Others are larger in size, allowing them to achieve greater economies of scale. Also, some of Tembec’s foreign competitors may benefit from incentives given by foreign governments, which may ultimately adversely affect Tembec’s competitive position.

4.6 RISK FACTORS

The following information is a summary of certain risk factors relating to the business of Tembec and is qualified in its entirety by reference to, and must be read in conjunction with, information appearing elsewhere in this AIF and in the 2013 MD&A.

Demand and prices for Tembec’s products are cyclical, which could have a material adverse effect on its business, financial condition and results of operations.

Demand and prices for most lumber, pulp and paper products are cyclical and are influenced by a variety of factors. These factors include periods of excess product supply due to industry capacity increases, periods of decreased demand due to generally reduced economic activity or product-specific activity, inventory de-stocking by customers and fluctuations in currency exchange rates. Tembec has in the past, and may in the future, decide to schedule production curtailments and shutdowns as a result of weak economic conditions, reduced demand for its products, lack of economically viable fibre, declining demand for newsprint, reduced market prices and other factors. If global economic conditions were to deteriorate in the future, prolonged curtailments of production or extended shutdowns could have a material adverse effect on its business, financial condition and results of operations. In addition, the relatively high fixed cost component of certain manufacturing processes, specifically in pulp and paper, requires producers to operate facilities with target efficiency in the 80-85% range even when demand is not sufficient to absorb all of the output. This excess production may saturate the market and have a negative impact on product prices, further increasing the inherent cyclicality of the industry.

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Tembec does not currently engage in hedging transactions to mitigate the impact of price volatility. However, even if Tembec were to engage in hedging transactions, there can be no assurance that such transactions would eliminate the risks of demand and price cyclicality and their impact on Tembec’s business, financial condition and results of operations.

Tembec is exposed to the risk of exchange rate fluctuations.

Revenues for most of Tembec’s products are affected by fluctuations in the relative exchange rates of the U.S. dollar and the euro as compared to the Canadian dollar. The prices for many of Tembec’s products, including those that Tembec sells in Canada and Europe, are generally driven by prices referenced in U.S. dollars. Tembec generates approximately 900 million of U.S. dollar denominated sales annually from its Canadian operations. As a result, any decrease in the value of the U.S. dollar and the euro relative to the Canadian dollar reduces the amount of revenues Tembec realizes on its sales in local currency. In addition, because Tembec’s business units purchase the majority of their production materials in local currency, fluctuations in foreign exchange rates can significantly affect a unit’s relative profitability when compared to competing manufacturing sites in other currency jurisdictions.

Direct U.S. dollar purchases of raw materials, supplies and services provide a partial offset to the impact of exchange rate fluctuations on sales. To further reduce the risks associated with exchange rate fluctuations, Tembec has a policy which permits hedging up to 50% of its anticipated U.S. dollar receipts for up to 36 months in duration. Notwithstanding such policy, Tembec does not currently engage in hedging transactions to mitigate the impact of exchange rate fluctuations. However, if Tembec were to engage in such transactions, there can be no assurance that it will be able to do so on commercially reasonable terms or at all, or that such transactions will reduce the risks associated with such fluctuations.

The availability of, and prices for, wood fibre significantly impact Tembec’s business.

Fibre is the most important raw material for the production of wood products, pulp and paper. Regulatory developments and environmental litigation have caused, and may cause in the future, significant reductions in the amount of timber available for commercial harvest in Canada, thereby increasing prices for alternative sources of wood fibre. The availability of harvested timber may further be limited by natural and man-made events. In addition, future domestic or foreign legislation, litigation advanced by Aboriginal groups and litigation concerning the use of timberlands, the protection of endangered species, the promotion of forest diversity and the response to and prevention of wildfires could also affect timber supplies.

In Canada, virgin fibre or timber is sourced primarily from Crown lands. In fiscal 2013, approximately 95% of Tembec’s virgin fibre and timber requirements were sourced from Crown lands. Tembec’s current agreements with provincial authorities grant timber tenure for terms varying from 5 to 25 years and may be subject to renewals every five years. These agreements contain commitments with respect to sustainable forest management, silvicultural work, forest and soil renewal, as well as cooperation with other forest users. The price and availability of Tembec’s fibre depends, in large part, on Tembec’s ability to replace or renew these agreements on acceptable terms or enter into acceptable alternative fibre supply arrangements with provincial authorities. The terms of any replacement, renewal or alternative arrangement are based on legislative and regulatory provisions as well as governmental policy. Therefore, changes in legislation, regulatory regimes or policy in the provinces in which Tembec operates, may reduce the availability of fibre and increase costs through the imposition of additional and more stringent harvesting, rehabilitation and silvicultural standards or the alteration of fee structures. There can be no assurance that Tembec’s agreements with provincial authorities for the supply of fibre will be renewed, extended or replaced in the future on acceptable terms, or at all, or that the amount of timber that Tembec is allowed to harvest will not decrease.

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Additionally, evolving tenure legislation and regulation may have an impact on Tembec’s access to fibre. The province of British Columbia reformed its forest tenure regime in 2006 and, in July 2010 implemented a timber pricing mechanism by which stumpage fees increasingly resemble a market pricing system. This system may exert upward pressure on timber pricing in the mid-term, thereby reducing profitability. Similarly, the Province of Québec recently reformed its tenure regime. In Québec, pursuant to this new tenure regime, contracted harvest volumes have been reduced by approximately 25% with such volume, being reallocated to a timber marketing board for sale on the open market and socio-economic development projects. Also, Québec’s new regime removes from commercial parties, such as Tembec, authority over forest planning and harvesting. Accordingly, Tembec may be unable to ensure that the fibre processed at its Québec mills benefits from its current certifications, such as those provided by the Canadian Forest Stewardship Council, or FSC.

The Province of Ontario also recently reformed its tenure system with amendments that came into force in June 2011, but that will only be implemented over the next five to seven years. Similar to the Québec regime, in Ontario, new local Crown corporations (Local Forest Management Corporations) will manage forest planning and market harvesting rights and enhanced sustainability. Forest Licenses to manage Crown forests may be issued to corporations formed by groups of mills and/or harvester companies. Ontario is also moving towards a timber pricing system driven by competitive markets. Availability of fibre and prices could be materially affected by forest tenure reform in the provinces of British Columbia, Québec and Ontario. It is too early to assess these and other possible effects of the reforms in British Columbia, Québec and Ontario. To the extent the availability of fibre from Crown lands is insufficient, Tembec will be required to increase its purchases of fibre on the open market. Further, even if sufficient fibre is available from these Crown lands, there can be no assurance that fibre will be available at prices that will allow Tembec to operate its mills at desired and/or profitable levels of production.

In addition to sourcing its fibre requirements from Crown lands, Tembec also sources a significant amount of fibre by purchasing from third parties pursuant to contracts and agreements of various durations and on the open market. Tembec’s dependence on external sources of fibre could increase materially in the future as a result of, among other things, the factors discussed above, which may limit the availability of timber Tembec harvests from Crown lands. Fibre is a commodity and prices historically have been cyclical. Fibre pricing is also subject to regional market influences, and Tembec’s cost of fibre may increase in particular regions in which it operates due to market shifts in those regions. Tembec’s more geographically diversified competitors may not be affected to the same degree by such regional price volatility. Any sustained increase in fibre prices, whether sourced from Crown lands or from third parties, could materially increase Tembec’s operating costs and thereby materially reduce Tembec’s operating margins to the extent that Tembec cannot pass through equivalent increases in the prices for its products to its customers. Additionally, if one or more of Tembec’s major suppliers of fibre stops selling to Tembec, Tembec’s financial condition and operating results may suffer.

Tembec is dependent on the supply of certain raw materials.

As noted above, Tembec depends on the supply of fibre. Tembec also depends on the supply of other raw materials used in its production facilities, including certain chemicals. Any disruption in the supply of any of these raw materials could affect Tembec’s ability to manufacture its products and meet customer demand in a timely manner, which could thereby harm Tembec’s reputation and its results of operations. In addition, any material increase in the cost of these raw materials could have a negative impact on Tembec’s profitability.

In addition, natural and man-made events, including forest fires, adverse weather conditions, insect infestation, tree disease, ice storms, prolonged drought, flooding, periodically affect the industry in which Tembec operates.

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The occurrence of any of these events could have a material adverse effect on the availability of, and could significantly increase prices for, raw materials.

Tembec relies heavily on third parties, typically railroads or trucks, to transport its manufactured products and to deliver the necessary raw materials for its production processes. If any of Tembec’s transportation providers were to fail to deliver these raw materials or manufactured products in a timely manner and Tembec were unable to find a comparable transportation provider in a timely manner, its reputation and customer relationships could be adversely affected, and it may be unable to sell such products at full value, or at all. In addition, if any of Tembec’s transportation providers were to cease operations or cease doing business with Tembec, it may be unable to replace them at a reasonable cost.

Reductions in the availability of energy supplies or an increase in energy costs may increase Tembec’s operating costs.

Tembec is affected by the cost of natural gas and electricity. Natural gas and electricity are important components of mill costs, especially for high-yield pulp mills, newsprint and paper mills. For fiscal 2013, purchased energy costs totalled approximately $94 million, 50% of which was electricity, which accounted for 8% of the total cost of sales. The price and availability of natural gas and electricity are influenced by a number of factors that are often beyond Tembec’s control, including mechanical failures, weather, political factors and unanticipated or sudden increases in demand. While Tembec purchases electricity primarily from large public utilities at rates set by regulatory bodies, in certain other jurisdictions, electricity is deregulated, which can lead to greater price volatility.

Tembec purchases its electricity, natural gas and other fossil fuel requirements at market rates. To mitigate the effect of price fluctuations on its financial performance, Tembec employs several tactics, including securing longer term supply agreements and operational curtailments in periods of high prices. Tembec does not currently hold any electricity or natural gas derivative commodity contracts. If Tembec is unable to continue to purchase its natural gas and electricity requirements for its operations on commercially reasonable terms, Tembec’s operations could be disrupted and its business, financial condition and results of operations could be materially adversely affected.

Tembec may not be able to successfully renegotiate its collective agreements with its unionized employees, which could affect its labor costs and operations.

As of September 28, 2013, Tembec had approximately 2,700 hourly paid employees covered by collective agreements. Collective agreements governing approximately 875 unionized employees will be under negotiation in the next fiscal year. There is a risk, however, that Tembec may not be able to negotiate collective agreements on acceptable terms. If Tembec is not able to renegotiate its collective agreements, it could face a strike or work stoppage or be obligated to pay higher wages and more benefits to union members. Any disruption in the operations of Tembec or higher ongoing labor costs could have a material adverse effect on its business, financial condition and results of operations.

Furthermore, at many of Tembec’s facilities, as well as those of the North American industry as a whole, reductions in employment levels due to technological and process improvements have resulted in a workforce with longer average years of service. This increases the cost of pensions and benefits.

Tembec is subject to the risk of substantial environmental liability and limitations on its operations brought about by the requirements of environmental laws and regulations.

Tembec is subject to various federal, state, provincial and local environmental, health and safety laws and regulations concerning such issues as air emissions, wastewater discharges, solid and hazardous materials and waste handling and disposal, forestry operations, endangered species, landfill operation and closure, and the investigation and remediation of contamination. These laws and regulations are increasingly stringent. While Tembec believes that its facilities are and will continue to be in material compliance with all applicable environmental laws and regulations, the risks of substantial additional costs and liabilities related to compliance with such laws and regulations are an inherent part of its business.

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(i) Marathon Pulp Inc.

Tembec Industries was subject to a number of orders issued by the Ministry of the Environment (Ontario) (“MOE”) in connection with the operation of a mill located in Marathon, Ontario, owned by Marathon Pulp Inc. (“MPI”). MPI, formerly a joint venture between Tembec Industries and Kruger Inc., filed a notice of intention to make a proposal under the Canada Bankruptcy and Insolvency Act in February 2009. MPI was deemed bankrupt in March of that year. The MOE issued the orders primarily on the alleged ground that Tembec Industries had management and control of the site or business of MPI at the site (“MPI Site”). The orders compelled Tembec Industries to, among other matters, safeguard the MPI Site from immediate environmental harm; to monitor, record and report on contamination at the MPI Site; to develop and execute plans to close waste disposal sites and an industrial lagoon; to remediate existing contamination at the MPI Site; to address mercury and polychlorinated biphenyls contaminated sediments in the harbour ("Harbour") adjacent to the MPI Site; and to provide financial assurance of approximately $4.8 million for the performance of the work.

Tembec Industries appealed the MOE orders to the Environmental Review Tribunal ("ERT") and vigorously contested the MOE orders. Tembec Industries sought stays of the MOE orders pending the hearing of the appeals, but the ERT was only able to grant partial stays. Tembec Industries was compelled to comply with the unstayed portions of the MOE orders. As of September 2013, Tembec Industries has spent a total of $17 million to effect this compliance, including legal costs and a provision for future site remediation obligations.

On September 7, 2011, Tembec Industries, without admission of liability, reached a settlement with the MOE regarding the MPI Site and the Harbour, which remained subject to a certain number of conditions, all of which were met by December 23, 2011. Other parties to the settlement included Ball Packaging Products Canada Corp. (“Ball”) and Georgia Pacific LLC (“GP”), two corporations with previous involvement at the MPI Site. The settlement contemplated (i) financial contribution by Ball and GP towards remediation work regarding the Harbour and the MPI Site, and (ii) the undertaking by Tembec Industries to develop and implement remediation and closure plans in connection with specifically identified environmental concerns and facilities and to conduct ongoing monitoring activities. Tembec Industries also agreed to effect periodic monitoring activities for a period of up to 25 years. Annual monitoring costs are not expected to be material.

In Fiscal 2013, a court ordered that ownership of the MPI site, including the mill, lands and related assets, be vested in SSPM Pontiac L.P. (“SSPM”). As part of this transaction, SSPM undertakes to implement all required remediation and closure work on the MPI site, to assume all liabilities and obligations arising from or relating to the MPI Site and to provide financial assurance to the MOE. Closing is expected to occur in the first quarter of Fiscal 2014, at which time registration of SSPM’s ownership will be registered against title to the Mill Site. Also, as part of this transaction, the MOE will release the financial assurance of approximately $4.8 million that Tembec Industries had posted with the MOE for the performance of the remediation work. In the event that conditions surface which are not contemplated in the settlement agreement, any or all of Tembec, Ball and GP could be exposed to additional expenses. Such further expenses could have a material adverse effect on Tembec’s business, financial condition and results of operations.

(ii) Other Environmental Matters

In addition to costs and liabilities relating to compliance with environmental laws and regulations, Tembec could become liable for environmental conditions at sites where it is currently operating, sites it formerly owned or operated and sites at which its wastes have been disposed. Tembec’s operations produce wastes, including hazardous waste, which must be properly disposed of under applicable environmental laws. These laws can impose clean up liability on generators of hazardous waste and other substances that are shipped off-site for disposal, regardless of fault or the legality of the disposal activities. Other laws may require Tembec to investigate and remediate contamination at its properties, including contamination that was caused in whole or in part by third parties. While Tembec believes that it can comply with environmental legislation and regulatory requirements and that the costs of doing so have been included within its budgeted cost estimates, it is possible that such compliance will prove to be more limiting and costly than anticipated as new laws, more stringent enforcement of existing requirements, or discovery of currently unknown conditions could result in additional costs and limitations on Tembec’s operations.

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In addition to potential clean up liability, Tembec may become subject to enforcement actions and sanctions and substantial monetary fines and penalties for violations of applicable laws, regulations or administrative conditions. Tembec may also be subject from time to time to legal proceedings brought by private parties or governmental agencies with respect to environmental matters, including matters involving alleged property damage or personal injury.

Future greenhouse gas/carbon legislation or regulations could increase Tembec’s costs of compliance with environmental laws and regulations.

The federal government of Canada has indicated its intent to regulate priority air pollutants and greenhouse gases (“GHGs”) under the Canada Clean Air Act and the Canadian Environmental Protection Act. The forest products sector is expected to be one of the targeted sectors for regulation under both acts. The priority air pollutants include particulate matter, sulphur oxides (“SOx”) and greenhouse gases. Under the proposed targets, Tembec’s mills may be required to reduce air pollutants, such as particulate matter, SOx emissions and GHGs. The cost of making any such reductions is currently unknown. Québec has already passed legislation establishing frameworks to reduce GHGs through cap-and-trade systems. Only the Corporation’s Temiscaming site in Québec is subject to these new regulatory standards. Additionally, Canadian federal laws and the laws of the provinces of Québec, Ontario and British Columbia already impose mandatory GHG reporting requirements on facilities that emit carbon dioxide equivalent (“CO2e”) beyond certain thresholds.

Certain provinces have also implemented carbon taxes. In British Columbia, the carbon tax is a consumer tax imposed on all businesses and individuals who purchase or use fuel in the province, or burn combustibles for heat or energy. The tax rates, from July 1, 2012 to June 30, 2013, are based on $25 per tonne of CO2 emissions from the combustion of each fuel. The tax rate increased by $5 per tonne and is now $30 per tonne. Québec introduced a carbon tax in 2007, although at a smaller rate, requiring energy producers, distributors and refiners in the province to pay about $200-million a year in taxes until 2013. In 2013, the Temiscaming site in Québec should not be subject to the carbon tax; however, it will fall under the new cap and trade regime at a cost roughly equivalent to the old carbon tax.

The enactment of Canadian federal and other provincial climate change regulation may depend on regulatory initiatives undertaken in the United States. The United States has indicated its intention to introduce environmental legislation and/or regulation and implement policies to reduce GHG emissions. The U.S. Environmental Protection Agency (the “EPA”) issued a rule that requires monitoring and reporting of GHG emissions annually by operators of large emitters. The EPA also issued a final rule regulating GHG emissions from new and modified large sources of GHG. However, since the U.S. Congress has not enacted a cap-and-trade program, the Canadian government has followed suit and no emission caps are expected in the near future. It is too early to determine the overall impact that U.S. and Canadian federal or provincial regulations and/or initiatives will have on Tembec when they come into effect.

Additional regulatory initiatives may be implemented in other jurisdictions to address GHG emissions and other climate-change-related concerns. If such initiatives are implemented and to the extent Tembec operates or offers its products for sale in affected jurisdictions, it may be required to incur additional capital expenditures, operating costs or mitigating expenses, such as carbon taxes or other charges, to comply with any such initiatives. Tembec cannot assure that the increased costs associated with compliance of future environmental laws and regulations will not have a material adverse effect on its business, financial condition and results of operations.

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Significant capital expenditures requirements could have an adverse impact on Tembec’s business, financial condition and results of operations.

The production of lumber, pulp and paper is capital intensive. The Corporation estimates that it must invest approximately $35 million to $40 million per year on capital expenditures to avoid degradation of its current operations. As the majority of the funding is provided by cash flow from operations, there can be no assurance that the funds will be available to meet all of the Corporation’s capital expenditure needs. Failure to reinvest can lead to older equipment that is less productive, less reliable and more costly to maintain and operate. The risk of technological obsolescence also increases. Capital expenditure projects can be large in scale, requiring the Corporation to maintain and/or acquire expertise in the design, planning and execution of major capital projects. There are inherent risks in the capital expenditure process, including the potential for project cost overruns, new equipment that does not perform to anticipated or projected levels, a lengthy start-up period and disruptions to normal operations. Due to relatively low operating cash flow generation over the last several years, the Corporation has limited capital expenditures. This has led to a “backlog” of capital expenditure projects in many operating facilities. Failure by the Corporation to proceed with the capital expenditures necessary to avoid a degradation of its current operations could have an adverse impact on the Corporation’s business, financial condition and results of operations.

Project Risk

The Corporation is undertaking an energy investment, the Project, which was initially estimated at $190 million, but was revised to $235 million in Fiscal 2013, for the installation of a high pressure liquor recovery boiler and a steam turbo-generator, which will result in the production of an additional 35 megawatts of electricity on average. The Corporation entered into a Power Purchase Agreement with Hydro Québec as part of the investment. Part of the Project will be financed with $132.8 million of new debt, which consists of $92.8 million in loans from Investissement Québec and a $40 million loan from IPD.

These Project related credit facilities contain terms and conditions specific to the Project, including Project completion commitments. If general economic conditions were to deteriorate significantly or if the Corporation was unable to meet the terms of the new Project related credit facilities, or if future operating performance is significantly below expectations, the Corporation may have to reduce or defer its capital expenditure plans, including the Project, which could have an adverse impact on Tembec’s business, financial condition and results of operations.

Restrictions on trade through tariffs, quotas or other trade barriers could adversely affect the ability of Tembec to access markets outside Canada.

Tembec’s financial results are highly dependent on its ability to sell its products outside of Canada. Although Tembec’s manufacturing operations are located primarily in Canada, sales to the Canadian market represented only 19% of its consolidated sales in fiscal 2013. Tariffs, quotas and other trade barriers that reduce or prohibit the movement of Tembec’s products across international borders constitute an ongoing significant risk.

Since October 12, 2006, as a result of the Softwood Lumber Agreement, all Tembec’s sawmills are subject to an export tax on shipments to the U.S., while Québec and Ontario sawmills are also subject to an export quota. Effective October 12, 2006, Tembec’s Québec and Ontario sawmills became subject to a combination of export taxes and volume restraints or quotas that vary depending on the option selected by individual Canadian provinces. Tembec’s eastern Canadian sawmills, located in Québec and Ontario, were subject to export quota limitations. Additionally, Tembec’s Ontario sawmills were subject to an average export tax of 1.3% in fiscal 2013. Tembec’s Québec sawmills were subject to an average export tax of 3.8% . The difference in tax rate is an account of an adverse arbitration award that came into effect in March 2011. The tax and quotas may adversely affect Tembec’s competitive cost position. China has recently imposed antidumping duties on viscose grade pulp imports. The impact of these duties on Tembec’s ability to access the Chinese market is still being assessed as of the date of this AIF.

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If new tariffs or quotas are created, or if existing tariffs increase or quotas decrease, there can be no assurance that Tembec will be able to effectively access foreign markets, which could have a material adverse effect on Tembec’s volume of sales and financial results.

Tembec’s substantial debt could adversely affect its financial condition and prevent it from fulfilling its obligations under its outstanding indebtedness.

Tembec has a substantial amount of debt, which requires significant interest and principal payments. There is no assurance that Tembec’s business will generate sufficient cash flow from operations in the future to service Tembec’s debt and meet its other ongoing obligations.

Tembec’s principal term debt does not require periodic payments for principal amortization. As the entire principal amount of US$305 million will become due in December 2018, it is possible Tembec will not have the required funds/liquidity to repay the principal due. Tembec may require access to the public or private debt markets to issue new debt instruments to replace or partially replace the existing term loan. There is no assurance that Tembec will be able to refinance this loan on commercially acceptable terms.

The credit agreements covering Tembec’s revolving and term debt contain terms and conditions that may limit management’s ability to act in certain circumstances. This may place restrictions on Tembec’s ability to incur additional indebtedness, to create liens or other encumbrances, to make certain payments and investments and to sell or otherwise dispose of assets and merge or consolidate with other entities. A failure to comply with the obligations contained in the credit agreements governing Tembec’s debt could result in acceleration of the related debt and acceleration of debt under other instruments that contain cross acceleration or cross default provisions.

Significant changes in pension fund investment performance or assumptions relating to pension costs, as well as increased funding contributions, may have a material effect on Tembec’s pension obligations, the funded status of its pension plans and its pension costs.

The funded status of Tembec’s pension plans is dependent upon many factors, including changes to the level of benefits provided by the plans, the future performance of assets set aside in trusts for these plans, the level of interest rates used to determine obligations and minimum funding levels, actuarial assumptions and any changes in governmental laws and regulations. Declines in the market value of the securities and other investments held by the plans and changes in interest rates could materially reduce the funded status of the plans and affect the level of pension expense and required contributions.

Tembec may not have adequate insurance for potential liabilities.

Tembec maintains insurance to cover many of its potential losses, and it is subject to various self-retentions and deductibles under its insurance. Actual or claimed defects in the products Tembec distributes may give rise to claims against it for losses and expose it to claims for damages. Tembec’s insurance may be inadequate or unavailable to protect it in the event of a claim or its insurance coverage may be cancelled or otherwise terminated. Tembec faces the following additional risks under its insurance coverage: (i) it may not be able to continue to obtain insurance on commercially reasonable terms or at all; (ii) it may be faced with types of liabilities that will not be covered by its insurance, such as damages from environmental contamination or terrorist attacks; (iii) the dollar amount of any liabilities may exceed its policy limits; and (iv) it may incur losses from interruption of its business that exceed its insurance coverage.

In addition, in the ordinary course of business, Tembec becomes the subject of various claims, lawsuits and administrative proceedings seeking damages or other remedies concerning its commercial operations, products, employees and other matters, including occasional claims by individuals alleging exposure to hazardous materials as a result of its products or operations. Some of these claims relate to the activities of businesses that Tembec has sold, and some relate to the activities of businesses that Tembec has acquired, even though these activities may have occurred prior to the acquisition of such businesses. Even a partially uninsured claim, if successful and of significant size, could have a material adverse effect on Tembec’s business, financial condition and results of operations. To mitigate risk associated with insurance coverage, Tembec reviews its strategy annually and assesses the various insurance products available to achieve better coverage at the lowest cost possible.

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Aboriginal land claims may affect Tembec’s operations.

Aboriginal groups have claimed substantial portions of land in various provinces over which they claim aboriginal title or in which they have a traditional interest. Canadian courts have recognized that aboriginal people may possess rights in respect of land used or occupied by their ancestors and have encouraged the federal and provincial governments and aboriginal people to resolve rights claims through the negotiation of treaties.

Tembec operates in territories in which aboriginal people assert rights and interests. To accommodate the traditional activities of the communities during forestry planning and operations, Tembec has concluded agreements with many First Nations including, in Ontario, the Missanabie Cree First Nation, the Taykwa Tagamou Nation, the Northeast Superior Regional Chiefs’ Forum (comprised of six First Nations which are the Brunswick House First Nation, the Chapleau Cree First Nation, the Hornepayne First Nation, the Michipicoten First Nation, the Missanabie Cree First Nation and Pic Mobert First Nation), and in Québec, the Timiscaming First Nation, the Wolf Lake First Nation, the Eagle Village First Nation, the Lac Simon First Nation, the Pikogan First Nation and the Long Point First Nation. In addition Tembec and Grand Council of the Cree (Québec) have a signed a communication protocol pertaining to the undertaking of Forest Stewardship Council (FSC) certification on the Paix des Braves territory and Tembec and Moose Cree First Nation have a Memorandum of Understanding (MOU) in place. While each agreement is unique, the agreements generally provide for identification of areas of concern, development of measures to harmonize Tembec’s interests with those of aboriginal groups, outline communications protocols and provide dispute resolution processes. Tembec also may provide financial support to assist the community in engaging resource management expertise.

Tembec cannot predict whether future aboriginal land claims will affect its ability to harvest timber from its current sources, or its ability to renew or secure other sources in the future. Furthermore, any failure to reach an agreement, conflict or disagreement with an aboriginal group could have a material adverse effect on its operations.

ITEM 5 - DIVIDENDS

The Corporation has not paid dividends on any of its shares since its incorporation. There is currently no restriction preventing the Corporation from paying dividends, other than as described below, nor any specific dividend policy. The Corporation is essentially dependent on its operating subsidiaries to generate the funds required for any dividend payment. The indenture dated as of August 17, 2010 (“Indenture”) which governs the 2018 Senior Secured Notes contains certain restrictions on the payment of dividends. Reference is made to the section on Limitation on Restricted Payments of the Indenture, which was filed on SEDAR on August 27, 2010 and may be found at www.sedar.com. The ABL Facility (as this expression is defined under Item 11 below) also contains certain restrictions on the payment of dividends. Reference is made to the Restrictive Payments section of the ABL Facility, which was filed on SEDAR and may be found at www.sedar.com.

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ITEM 6 - GENERAL DESCRIPTION OF CAPITAL STRUCTURE

6.1 GENERAL DESCRIPTION OF CAPITAL STRUCTURE

The Corporation is authorized to issue an unlimited number of common shares and an unlimited number of Class A preferred shares.

The holders of common shares are entitled to one vote for each common share held, at any meeting of shareholders of the Corporation, other than meetings of the holders of another class of shares, and to receive dividends and to share in the remaining properties and assets in the event of liquidation, dissolution or winding up of the Corporation.

As at December 16, 2013, there were 100,000,000 common shares issued and outstanding. The Class A preferred shares may be issued in one or more series, each series to consist of such number of shares as may be fixed by the board of directors of the Corporation. The Board may further fix the designation, rights, privileges, instructions and conditions attaching to, each series of preferred shares including, without limitation, any voting rights, dividends, terms and conditions of redemption, purchase and conversion or other provisions. As at December 16, 2013, there were no preferred shares issued or outstanding.

6.2 RATINGS

Pursuant to the previously noted issuance of the 2018 Senior Secured Notes, Moody’s Investors Service, Inc. (Moody’s) assigned a B3 rating to the 2018 Senior Secured Notes t and the same level for the Corporation’s corporate credit rating. Standard and Poor’s (S&P) assigned a Long Term Issuer Credit Rating of B- to the 2018 Senior Secured Notes as well as to the Corporation’s corporate credit rating. On February 15, 2013, S&P downgraded its rating to CCC+ and changed the outlook to “Developing”. On February 8, 2013, Moody’s changed its outlook from “stable” to “negative”.

Moody’s credit ratings are on a long-term debt rating scale that ranges from Aaa to C, which represents the range from highest to lowest quality of such securities rated. According to the Moody’s rating system, an obligation rated B3 is considered to be speculative and is subject to high credit risk. Moody applies numerical modifiers 1, 2 and 3 in each generic rating classification from Aa through Caa in its corporate bond rating system. The modifier 1 indicates that the issue ranks in the higher end of its generic rating category, the modifier 2 indicates a mid-range ranking and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.

S&P’s credit ratings are on a long-term debt rating scale that ranges from AAA to D, which represents the range from highest to lowest qualities of such securities rated. According to the S&P’s rating system, an obligation rated CCC is: “currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.” The ratings from AA to CCC may be modified by the addition of a + or – sign to show relative standing within the major rating categories.

Moody’s also assigns Speculative Grade Liquidity Ratings (“SGL ratings”) to corporations having a long term speculative rating. These SGL ratings are opinions of an issuer’s ability to generate cash from internal sources and the availability from external sources of committed financing, in relation to its cash obligations over the coming 12 months. It is on a scale between SGL-1 (the best) and SGL-4 (the worst). Moody’s assigned the Corporation a SGL-2 rating. According to Moody’s rating system, “issuers rated SGL-2 possess good liquidity; they are likely to meet their obligations over the coming 12 months through internal resources but may rely on external sources of committed financing. The issuer’s ability to access committed sources of financing is highly likely based on Moody’s evaluation of near-term covenant compliance.”

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The credit ratings assigned to the Corporation by the rating agencies are not a recommendation to buy, sell or hold securities of the Corporation and may be subject to revision or withdrawal at any time by the credit rating agencies.

ITEM 7 - MARKET FOR SECURITIES OF THE CORPORATION

The Corporation’s common shares are listed on the Toronto Stock Exchange under the symbol “TMB”. The following table sets forth the market price range, in Canadian dollars, and trading volumes of the Corporation’s common shares on the Toronto Stock Exchange each month since September 29, 2012.

COMMON SHARES
Fiscal Year from
September 29, 2012
to			Close	Trading
September 28, 2013	High	Low	Price	Volumes
October 2012	2.57	2.05	2.26	2,671,009
November 2012	2.52	1.70	2.26	4,837,829
December 2012	3.03	2.13	3.00	3,736,118
January 2013	3.36	2.70	2.94	4,297,720
February 2013	3.10	2.89	3.01	3,741,306
March 2013	3.60	3.00	3.30	2,775,423
April 2013	3.56	2.70	3.38	2,548,208
May 2013	3.47	2.73	2.80	2,105,845
June 2013	3.03	2.51	2.67	1,083,415
July 2013	2.87	2.29	2.38	1,967,246
August 2013	2.52	2.20	2.40	834,556
Sept. 1 to 28, 2013	2.65	2.36	2.41	477,550

ITEM 8 - DIRECTORS AND OFFICERS

The directors of the Corporation (the “Directors”) are elected annually to hold office until the next annual meeting or until a successor is elected or appointed.

8.1 INFORMATION CONCERNING DIRECTORS

The Board of Directors of the Corporation is composed of 11 members. The chairman of the Board and the majority of Directors and members of Board committees are independent, except for the Environment, Health & Safety Committee, which is composed of four members, two of which are independent and two who are not considered independent, namely, Mr. James M. Lopez (the President and Chief Executive Officer of the Corporation) and Mr. Michel J. Dumas (Executive Vice President, Finance and Chief Financial Officer of the Corporation).

Set forth below is information pertaining to the Directors of the Corporation based on data furnished by the Directors. The information with respect to ownership of common shares includes those shares for which such persons have voting power or investment power. Voting power and investment power are not shared with others unless specifically stated. All holdings information presented below is given as of September 28, 2013.

NORMAN M. BETTS, New Brunswick (Canada). Mr. Betts is an Associate Professor at the Faculty of Business Administration, University of New Brunswick. He is also the former Finance Minister and Minister of Business with the Province of New Brunswick. Mr. Betts chairs the audit committees of Tanzanian Royalty Exploration Corp., Adex Mining Inc. and 49 North Resources Inc.

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Mr. Betts was a Director of Former Tembec from January 2005 until February 29, 2008 and is a Director of the Corporation since February 29, 2008. He serves as chairman of the Audit Committee and Member of the Capital Expenditure Committee².

Mr. Betts owns 146 common shares, 258 stock options and 118,618 vested deferred share units related to common shares of the Corporation.

JAMES E. BRUMM, New York (United States of America). Currently, Mr. Brumm is President of Glastonbury Commons, Ltd., a consulting firm. He is also an Advisor to Mitsubishi Corporation of Japan. At Mitsubishi International Corporation (MIC), the North American subsidiary of Mitsubishi Corporation, Mr. Brumm previously served as Executive Vice President and General Counsel and served as a Director of both MIC and its parent company Mitsubishi Corporation. Mr. Brumm is a member of the Boards of Visitors of Columbia University Law School and and is a board member of First Peoples Worldwide, an organization supporting indigenous peoples communities. Mr. Brumm is also Vice Chair of the board The International Crane Foundation.

Mr. Brumm was a Director of Former Tembec from April 1999 until February 29, 2008 and is a director of the Corporation since February 29, 2008. He serves as member of the Corporate Governance and Human Resources Committee.

Mr. Brumm owns 2,263 common shares, 3,121 stock options, and 117,098 vested deferred share units related to common shares of the Corporation.

JAMES N. CHAPMAN, Connecticut (United States of America). Mr. Chapman is non-executive Advisory Director of SkyWorks Capital, LLC, an aircraft management services company, which he joined in December 2004. Prior to SkyWorks, he was associated with Regiment Capital Advisors, LP, an investment advisor based in Boston specializing in high yield investments, which he joined in January 2003. Mr. Chapman serves as a member of the board of directors of the public companies AerCap Holdings NV and Tower International, Inc. In addition, Mr. Chapman is a member of the board of directors of some private companies. Mr. Chapman was a director of Anchor Glass Container Corporation from August 2002 to March 2006, as well as Chrysler LLC from September 2007 to April 2009 and American Media Inc. from March 2009 to January 2011.

Mr. Chapman has been a Director of the Corporation since February 29, 2008 and serves as a member of the Corporate Governance and Human Resources Committee, as well as the Special Committee for Strategic Purposes.

Mr. Chapman owns 0 common shares, 0 stock options, and 116,264 vested deferred share units of the Corporation.

JAMES V. CONTINENZA, Minnesota (United States of America). Mr. Continenza is currently Chairman of the Board of Eastman Kodak Company and has served in senior leadership roles at a number of companies. Mr. Continenza currently serves on the boards of directors of The Berry Company, LLC, Blaze Recycling, LLC, Neff Rental, LLC, Portola Packaging, Inc., Southwest Georgia Ethanol, LLC, and previously served on the boards of directors of Anchor Glass Container Corp, Inc., Arch Wireless, Inc., Hawkeye Renewables, LLC, MAXIM Crane Works, Inc., Microcell Telecommunications, Inc., Rath Gibson, Inc., Rural Cellular Corp, Inc., and U.S. Mobility, Inc.

^{_____________________________
2} The Capital Expenditure Committee was dissolved on November 21, 2013.

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Mr. Continenza has been a Director of the Corporation since February 29, 2008 and serves as a member of the Corporate Governance and Human Resources Committee, the Special Committee for Strategic Purposes, as well as the Capital Expenditure Committee³.

Mr. Continenza owns 0 common shares, 0 stock options, and 323,240 vested deferred share units of the Corporation.

MICHEL J. DUMAS, Ontario (Canada). Mr. Dumas was named Executive Vice President, Finance and Chief Financial Officer of the Corporation in 1997. Mr. Dumas joined the Corporation in 1985 as Controller for the high-yield pulp mill in Temiscaming, Québec. In 1991, he became Vice President, Finance and Chief Financial Officer of Spruce Falls Inc., an affiliate of the Corporation. Mr. Dumas has also acted as a Director of various subsidiaries of the Corporation.

Mr. Dumas has been a Director of the Corporation since January 27, 2011 and is a member of the Environment, Health & Safety Committee.

Mr. Dumas owns 61,653 common shares, 13,542 stock options and 110,169 deferred share units of the Corporation.

JACQUES LEDUC, Québec (Canada). Mr. Leduc is a Director of Terrestar Corporation since April 2006. He is a co-founder and managing partner of Trio Capital Inc., a private equity and venture capital firm that he started in January 2006, which invests primarily in telecommunications and new media. He is also Chief Financial Officer and Treasurer of Terrestar Solutions Inc. since November 2009. He served as Chief Financial Officer of Microcell Telecommunications Inc., a nationwide wireless operator in Canada from February 2001 through November 2004, and as Vice President Finance and Director Corporate Planning from January 1995 to February 2001. Mr. Leduc is a Chartered Accountant.

Mr. Leduc has been a Director of the Corporation since January 27, 2011 and is a member of the Audit Committee and Chairman of the Capital Expenditure Committee⁴.

Mr. Leduc owns 0 common shares, 0 stock options, and 47,912 vested deferred share units of the Corporation.

JAMES M. LOPEZ, Ontario (Canada). Mr. Lopez was appointed President and Chief Executive Officer in January 2006 and has been a Director of the Corporation since January 2006. Prior to being named President and Chief Executive Officer, Mr. Lopez served as Executive Vice President and President of the Corporation’s Forest Products Segment from August 2003 to January 2006. From 1999 to August 2003, Mr. Lopez was Executive Vice President, Forest Resource Management Group of Tembec. Mr. Lopez also holds a seat on the board of directors of the Forest Products Association of Canada (FPAC) and is a co-chairman of the Bi-National Softwood Lumber Council and Softwood Lumber Board between Canada and the United States. He is a member of the board of directors of FP Innovations and he sits on the President’s Board of Advisors for California University of Pennsylvania.

Mr. Lopez was a Director of Former Tembec from January 2006 until February 29, 2008 and a Director of the Corporation since February 29, 2008. He is a member of the Environment, Health & Safety Committee.

^{_____________________________
3} The Capital Expenditure Committee was dissolved on November 21, 2013.
⁴ The Capital Expenditure Committee was dissolved on November 21, 2013.

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Mr. Lopez owns 66,480 common shares 16,281 stock options and 341,127 deferred share units of the Corporation.

PIERRE LORTIE, Québec (Canada). Mr. Lortie is Senior Business Advisor at the law firm Dentons LLP. He is also a director of Canam Group Inc. and Element Financial Corporation. Mr. Lortie also served as President of the Transition Committee of the Agglomeration of Montreal from its inception in June 2004 to the end of its mandate in December 2005. Mr. Lortie served as President and Chief Operating Officer of Bombardier Transportation, Bombardier Capital, Bombardier International, and as President of Bombardier Aerospace, Regional Aircraft. He has also served as Chairman of Canada’s Royal Commission on Electoral Reform and Party Financing. He has been Chairman of the Board, President and Chief Executive Officer of Provigo Inc., President and Chief Executive Officer of the Montreal Stock Exchange and a Senior Partner of Secor Inc.

Mr. Lortie has been a Director of the Corporation since January 27, 2011 and is a member of the Environment, Health & Safety Committee, as well as the Pension Committee⁵.

Mr. Lortie owns 20,000 common shares, 0 stock options, and 47,912 vested deferred share units of the Corporation.

FRANCIS M. SCRICCO, Massachusetts (United States of America). Mr. Scricco retired in November 2008 from Avaya Inc., a global provider of communications systems and software for enterprises where, since February 2007, he was the Senior Vice President, Manufacturing Logistics and Procurement. Prior to that, he was President of Avaya Global Services. Additionally, Mr. Scricco was formerly President and Chief Executive Officer of Arrow Electronics Inc. one of the world’s largest distributors of electronic components and computer products, as well as Inglis Ltd., Whirlpool Corporation’s Canadian subsidiary. Mr. Scricco is Chairman of the Board of Directors of Visteon Corporation a Director of Masonite Inc. and is a Director of one private company. Mr. Scricco began his career at The Boston Consulting Group and was also previously a General Manager at General Electric.

Mr. Scricco has been a Director of the Corporation since February 29, 2008 and serves as chairman of the Corporate Governance and Human Resources Committee, and Member of the Pension Committee⁵.

Mr. Scricco owns 100,000 common shares, 0 stock options and 116,264 vested deferred share units of the Corporation.

DAVID J. STEUART, Ontario (Canada). Mr. Steuart worked 37 years in the pulp and paper industry in senior executive positions, most recently from August 1998 to December 2006 with Bowater Incorporated as President, Pulp Division and as Senior Vice President. Mr. Steuart is a past Chairman of the Ontario Forest Industries Association. From September 1993 to July 1998, Mr. Steuart was President of the Pulp Division at Avenor Inc.

Mr. Steuart has been a Director of the Corporation since February 29, 2008, serves as chairman of the Environment, Health and Safety Committee.

Mr. Steuart owns 0 common shares, 0 stock options and 116,264 vested deferred share units of the Corporation.

LORIE WAISBERG, Ontario (Canada). Mr. Waisberg is a corporate director. Between August 2000 and October 2002, Mr. Waisberg served as Executive Vice President, Finance and Administration for Co-Steel Inc., a steel manufacturing company. From 1974 to August 2000, he was a partner at the Toronto office Goodmans LLP, a Canadian law firm. Mr. Waisberg is Chairman and a trustee of Chemtrade Logistics Income Fund and a director of Chantrell Ventures Corp., Metalex Ventures Limited, Primary Energy Recycling Corporation and U.S. Silver and Gold Inc., all publicly traded companies in Canada.

^{_____________________________
5} The Pension Committee was dissolved on November 21, 2013.

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Mr. Waisberg has been a Director of the Corporation since February 29, 2008 and is a member of the Audit Committee and Chairman of the Pension Committee⁶.

Mr. Waisberg owns 4,000 common shares, 0 stock options and 116,264 vested deferred share units of the Corporation.

8.1.1 Independence

The Corporation considers that all Directors, except Messrs. Lopez and Dumas, qualify as independent Directors within the meaning of National Instrument 58-101– Disclosure of Corporate Governance Practices and all Audit Committee members qualify as independent within the meaning of National Instrument 52-110 – Audit Committees. Mr. James M. Lopez is President and Chief Executive Officer of the Corporation and Mr. Michel J. Dumas is Executive Vice President, Finance and Chief Financial Officer of the Corporation, and are, therefore, not considered independent.

8.2	AUDIT COMMITTEE
8.2.1	General

The Corporation has an Audit Committee which currently consists of Messrs. Norman M. Betts (chairman), Jacques Leduc and Lorie Waisberg. All the members of the Audit Committee are considered “independent” and “financially literate” within the meaning of National Instrument 52-110 – Audit Committees with Messrs. Betts and Leduc possessing the professional designation of Chartered Accountant.

8.2.2 Charter of the Audit Committee

The mandate of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities and as such reviews the financial reporting process, the system of internal control and management of financial risks, the audit process, the attestation process regarding internal controls and the Corporation’s process for monitoring compliance with laws and regulations and its own corporate policies. In performing its duties, the committee maintains effective working relationships with the Board of Directors, management and internal and external auditors. The Audit Committee charter is attached hereto as Schedule “A” and is also posted on Tembec’s website at www.tembec.com.

^{_____________________________
6} The Pension Committee was dissolved on November 21, 2013.

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8.2.3 Relevant Education and Experience of the Audit Committee Members

The following is a brief summary of the education and experience of each member of the Audit Committee that is relevant to the performance of his responsibilities as a member of the Audit Committee, including any education or experience that has provided the member with an understanding of the accounting principles used by the Corporation to prepare its annual and interim financial statements.

Name of Audit Committee Member	Relevant Education and Experience
Norman M. Betts	Mr. Betts is a Fellow Chartered Accountant and received a doctor of philosophy degree in management, with a concentration in accounting and finance from Queen’s University. He is an Associate Professor at the Faculty of Business Administration, University of New Brunswick. He was made a Fellow of the New Brunswick Institute of Chartered Accountants in 2001. He is also the former Finance Minister and Minister of Business with the Province of New Brunswick. Mr. Betts chairs the audit committees of Tanzanian Royalty Exploration Corp., Adex Mining Inc. and 49 North Resources Inc.
Jacques Leduc	Mr. Leduc is a Chartered Accountant and holds a Master of Business Administration degree from HEC Montreal and a bachelor's degree in Business Administration from the Université du Québec à Montreal and was admitted by the Canadian Institute of Chartered Accountants in 1986. Mr. Leduc is Chief Financial Officer and Treasurer of Terrestar Solutions Inc. since November 2009. He served as Chief Financial Officer of Microcell Telecommunications Inc., a nationwide wireless operator in Canada from February 2001 through November 2004, and as Vice President Finance and Director Corporate Planning from January 1995 to February 2001.
Lorie Waisberg	Mr. Waisberg has participated in numerous continuing education programs regarding accounting issues. While practicing law for 30 years with Goodmans LLP, he provided legal advice on a wide range of accounting issues. In addition, Mr. Waisberg was retained as an expert witness on the role and responsibilities of boards and audit committees in relation to financial statements. Furthermore, Mr. Waisberg served as Executive Vice President of Co-Steel Inc. where the Chief Financial Officer reported to him and he was the principal liaison for internal and external audit. For over 30 years, Mr. Waisberg has served on the audit committee of several publicly traded entities. He currently serves as the chair of the audit committee of the public company Metalex Ventures Limited and also serves on the audit committee of the public company U.S. Silver and Gold Inc.

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8.2.4 External Auditor Service Fees

The following table shows fees paid to KPMG LLP in Canadian dollars in the past two fiscal years for various services provided to the Corporation:

		Year Ended		Year Ended
		September 29, 2012		September 28, 2013
Audit Fees	$	1,292,000	$	978,500
Audit-Related Fees	$	75,000	$	76,000
Tax Fees	$	106,000	$	159,000
Total	$	1,473,000	$	1,213,500

Audit Fees

These fees include professional services rendered by the external auditors for statutory audits of the annual financial statements and for other audits.

Audit-Related Fees

These fees include professional services that reasonably relate to the performance of the audit or review of Tembec’s financial statements. These services include accounting consultations related to accounting, financial reporting or disclosure matters not classified as “Audit Services”; assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities; financial audits of employee benefit plans; agreed upon or expanded procedures related to accounting records required to respond to or comply with financial, accounting or regulatory reporting matters.

Tax Fees

These fees include professional services for tax compliance, tax advice and tax planning. These services include review of tax returns, assistance with tax audits, capital structure, corporate transactions and other special purpose mandates approved by the Audit Committee.

8.2.5 Policies and Procedures for the Engagement of Non-Audit Services

The Corporation’s Audit Committee has adopted the Pre-Approval Policy and Procedures for Non-Audit Services Provided by External Auditors (as defined in the External Auditor Services and Fees Policy) which sets forth the procedures and the conditions pursuant to which these services proposed to be performed by external auditors are pre-approved. Under the terms of the policy, the Audit Committee has delegated to the Chairman of the Audit Committee pre-approval authority for Non-Audit Services not previously approved by the Audit Committee which involve the payment of fees not in excess of $50,000. Any service approved by the Chairman is reported to the Audit Committee at its next meeting subsequent to such pre-approval.

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8.3 INFORMATION CONCERNING NON-DIRECTOR PRINCIPAL OFFICERS

Non-Director Principal Officers	Office with the Corporation	Province/State and Country of Residence
Réginald Bastien	Corporate Controller	Québec, Canada
Chris Black(1)	Executive Vice President, President, Paper Pulp Group	Ontario, Canada
Linda Coates	Vice President, Human Resources and Corporate Affairs	Ontario, Canada
Paolo Dottori	Vice President, Energy, Environment and Technology	Ontario, Canada
Patrick LeBel	Vice President, General Counsel and Corporate Secretary	Québec, Canada
Marcus Moeltner	Vice President, Business Development	Ontario, Canada
Stephen J. Norris	Treasurer	Québec, Canada
Mahendra Patel	Vice President, Engineering, Purchasing and Services	Ontario, Canada
Christian Ribeyrolle	Executive Vice President, President, Specialty Cellulose Group and President, Tembec France SAS	Longues, France
Dennis Rounsville (2)	Executive Vice President, President, Forest Products Group	B.C., Canada

⁽¹⁾ As of October 15, 2013, Mr. Black has taken additional responsibilities as Executive Vice President, Forest Products, Paper and Paper Pulp Group.
⁽²⁾Mr. Rounsville ceased to act as an Officer of Tembec as of October 15, 2013.

During the past five years, each of the non-Director principal officers of the Corporation (the “Principal Officers“) have been engaged in their present principal occupations or in other executive capacities of the Corporation or with related or affiliated companies, except for Patrick LeBel who, from September 2006 to December 2009 was Senior Counsel for Tembec, Marcus Moeltner who from May 2008 to January 2011 was Vice President, Corporate Development of Tembec and from January 2005 to May 2008 was Vice President, Finance of Grant Forest Products Inc., Réginald Bastien who from January 1998 to September 2011 was Director of Taxation of Tembec and Linda Coates who from May 2011 to July 2012 was Vice President, Communications and Public Affairs, and from January 2007 to April 2011 was a consultant in communications and public affairs, Christian Ribeyrolle who from January 2008 to May, 2009 was Commercial Director, Specialty Cellulose for Tembec, and from May, 2009 to January, 2013 was Senior Vice President, Specialty Cellulose for Tembec. As at September 28, 2013, the Directors and Principal Officers beneficially owned, as a group, or exercised control or direction over, directly or indirectly, approximately 358,788 common shares representing approximately 0.36% of the common shares outstanding.

8.4 Cease Trade Orders, Bankruptcies, Penalties and Sanctions

To the knowledge of the Corporation and based on the information furnished by the Directors and the executive officers, none of the directors or the executive officers of the Corporation: (a) is, as at the date of this AIF, or has been within 10 years before the date of this AIF, a director, chief executive officer or chief financial officer of any corporation that: (i) while the Director or executive officer was acting in that capacity was subject to a cease trade order (or an order similar to a cease trade order, including a management cease trade order) or an order that denied the relevant corporation access to any exemption under securities legislation, that was in effect for a period of more than 30 consecutive days; or (ii) was subject to a cease trade or similar order or an order that denied the relevant corporation access to any exemption under securities legislation, that was in effect for a period of more than 30 consecutive days, that was issued after the Director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while the Director or executive officer acted as director, chief executive officer or chief financial officer; (b) is, as at the date of this AIF, or has been within the 10 years before the date of this AIF, a director or executive officer of any corporation that: while the Director or executive officer was acting as director or executive officer or within one year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or (c) has, within 10 years before the date of this AIF, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold his assets, except that:

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i)	Messrs. Norman M. Betts, James E. Brumm, James M. Lopez were directors of Former Tembec and Tembec Industries Inc. for varying periods of time immediately prior to the completion of the Recapitalization and Michel J. Dumas was a director of Tembec Industries Inc. prior to the Recapitalization;
ii)	Mr. Rounsville was executive officer of Former Tembec and Tembec Industries Inc. for varying periods of time immediately prior to the completion of the Recapitalization;
iii)	At the request of Tembec, Mr. James M. Lopez and Mr. Michel J. Dumas were directors of Marathon Pulp Inc. when it was declared bankrupt after failing to file a proposal within 30 days of filing a notice of intention to file a proposal under the Bankruptcy and Insolvency Act (Canada) (the "BIA") in March 2009;
iv)	At the request of Tembec, Mr. Michel J. Dumas was a director of Gestion Papiers Gaspésia Inc. and its subsidiary, Papiers Gaspésia Inc., when they filed for protection under (the "CCAA") in January 2004. On July 4, 2005, the plan of arrangement submitted by Papiers Gaspésia Inc. and Papiers Gaspésia Limited Partnership to their creditors was homologated by the Court and has been fully implemented;
v)	At the request of Tembec, Mr. Michel J. Dumas was a director of Jager Building Systems Inc. when it filed a voluntary assignment in bankruptcy under the BIA in September 2008;
vi)	At the request of Tembec, Mr. Michel J. Dumas was a director of Temlam Inc. when it filed a voluntary assignment in bankruptcy under the BIA in September 2008;
vii)	Mr. Betts was a director of Starfield Resources Inc. when it filed a notice of intention to make a proposal to its creditors under the BIA in March 2013;
viii)	Mr. James N. Chapman was a director of Anchor Glass Container Corporation when it filed for bankruptcy in August 2005 due to high natural gas prices and excess leverage;
ix)	Mr. James N. Chapman was a director of Chrysler LLC when it filed for protection from its creditors under Chapter 11 of the United States Bankruptcy Code in April 2009;
x)	Mr. James N. Chapman was a director of American Media Inc. when it filed for voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in November 2010;
xi)	Mr. Jacques Leduc was an executive officer of Microcell Telecommunications Inc. when it filed for and received protection under the CCAA in January 2003;

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xii)	Mr. Jacques Leduc is a director of Terrestar Corporation since April 2006 and is Chief Financial Officer and Treasurer of Terrestar Solutions Inc. and Terrestar Networks (Canada) Inc. since November 2009. Terrestar Corporation, Terrestar Networks (Canada) Inc. and Terrestar Networks Holdings (Canada) Inc. filed for and received protection under Chapter 11 of the United States Bankruptcy Code on October 19, 2010;
xiii)	Mr. Lorie Waisberg was a director of McWatters Mining Inc. when it initiated insolvency proceedings in 2001 and in 2004. Canadian securities regulators issued cease trade orders by reason of McWatters Mining Inc.’s failure to file required financial statements. The cease trade orders are no longer in effect and McWatters Mining Inc. has emerged from bankruptcy;
xiv)	Mr. Lorie Waisberg was a director of FMF Capital Group Ltd. when a subsidiary of FMF Capital Group Ltd., of which Mr. Waisberg was not a director, conveyed its assets to a trustee to facilitate the orderly wind-up of its business in May 2007.

None of the proposed nominees for election as Directors of the Corporation has been subject to: (i) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement after December 31, 2000 with a securities regulatory authority; or (ii) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable security holder in deciding whether to vote for the proposed Director.

ITEM 9 - LEGAL PROCEEDINGS

Tembec is involved in various legal proceedings relating to contracts, commercial disputes, taxes, environmental issues, employment and workers’ compensation claims and other matters. The Corporation periodically reviews the status of these proceedings with both inside and outside counsel. The Corporation believes that the ultimate disposition of these matters will not have a material adverse effect on its financial position.

ITEM 10 - TRANSFER AGENT AND REGISTRAR

Tembec’s transfer agent and registrar is Computershare Trust Company of Canada. The register of transfers of the common shares of Tembec maintained by Computershare Trust Company of Canada is located at its offices in Montreal, Québec

ITEM 11 - MATERIAL CONTRACTS

On August 17, 2010 Tembec Industries entered into an Indenture with Wilmington Trust FSB which governs the 2018 Senior Secured Notes issued by Tembec Industries in an aggregate principal amount of US$255 million. On February 23, 2012, Tembec Industries issued an additional US$50 million in 2018 Senior Secured Notes, bringing the aggregate principal amount of 2018 Senior Secured Notes issued by Tembec Industries to US$305 million. The 2018 Senior Secured Notes are guaranteed by the Corporation and certain of the Corporation’s subsidiaries. The Indenture requires compliance with certain terms and conditions that could in certain circumstances restrict the ability of the Corporation or its subsidiaries to incur additional indebtedness, to encumber or dispose of its assets or make certain payments or distributions. The Indenture also includes cross default provisions which may deem the Corporation and certain of its subsidiaries in default under the Indentures if one or more of them were to default on their obligations under other agreements. Reference is made to the Indenture, which was filed on SEDAR and may be found at www.sedar.com.

On March 4, 2011, the Corporation, as Guarantor, and Tembec Industries, Tembec Enterprises Inc., A.R.C. Resins Corporation and Tembec GP, as Borrowers, entered into together with the ABL Lenders, the ABL Facility, which is a revolving credit facility of $200 million maturing in February, 2016 secured by a first priority charge over receivables and inventories of the Borrowers (“ABL Facility”). Interest is based on the prime rate or the banker’s acceptances rate, as the case may be. As at September 28, 2013, the amount available under this facility was $120 million, amount of which $53 million was drawn and $56 million was reserved for letters of credit. This facility requires compliance with certain covenants that could in certain circumstances restrict the ability of the Corporation or its subsidiaries to incur additional indebtedness, to encumber or dispose of its assets or make certain payments or distributions. The ABL Facility also includes cross default provisions which may deem the Borrowers and the Guarantor in default under the ABL Facility if one or more of them were to default on their obligations under other agreements. In Fiscal 2013, the Borrowers and the Guarantor on one hand and the ABL Lenders on the other hand agreed to amend and extend the ABL Facility by one year. The maturity date of the Facility is set to expire on March 4, 2017. Tembec also negotiated a reduction of the aggregate resolving loan commitments from $200 million to $175 million and related adjustments to certain thresholds due to a reduction in the number of mills it operates. Reference is made to the ABL Facility, which was filed on SEDAR and may be found at www.sedar.com.

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  Annual Information Form

On March 9, 2012 Tembec, Tembec Industries and Tembec Energy L.P. entered into a $75-million loan, the IQ Loan, with Investissement Québec, a governmental agency, which will be used to finance a portion of the total cost of the Project which was initially estimated at $190 million, but revised to $235 million in Fiscal 2013. The loan bears interest at a rate of 5.5% compounded yearly and is secured by a second ranking charge over the Project’s assets. The loan shall be reimbursed in equal monthly payments over a period of 12 years starting 36 months after the initial loan disbursement and is subject to compliance with certain covenants and undertakings customary with such types of loans. Tembec has also granted to Investissement Québec a five-year option starting on the first loan disbursement date to acquire three million common shares of Tembec at a price of $7 per share. The IQ Loan also includes cross default provisions which may deem Tembec, Tembec Industries and Tembec Energy L.P. in default under the IQ Loan if any of them were to default on their obligations under other agreements. Reference is made to the IQ Loan which was filed on SEDAR and may be found at www.sedar.com.

On March 16, 2012 Tembec Energy L.P., entered into a long-term power purchase contract with Hydro-Québec acting through its Hydro-Québec Distribution division. The agreement will allow Tembec Energy L.P. to sell to Hydro-Québec, for a 25-year term, up to 50 megawatts of the electricity generated by a new turbine to be installed at its Temiscaming mill at green energy rates of $106 MW/hour, indexed annually with Consumer Price Index. (CPI) Reference is made to the power purchase contract which was filed on SEDAR and may be found at www.sedar.com.

On June 29, 2012, Tembec Energy L.P. entered into a $30 million loan, the IPD Loan with Integrated Private Debt Fund III LP (“IPD”), which will be used to finance the acquisition of the boiler and the turbine required in connection with the Project. Tembec intervened to the Loan to guarantee all obligations of Tembec Energy LP thereunder. The IPD Loan is secured by a first ranking change over all the Project’s assets. The interest rate on the IPD Loan will be 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 shall be reimbursed in blended monthly instalments over a period of eight years beginning approximately 24 months after the initial advance, with a “balloon” payment of $12 million to be repaid at the end of the ten-year term period and is subject to compliance with certain covenants and undertakings customary with such types of loans. The IPD Loan also includes cross default provisions which may deem Tembec and Tembec Energy L.P. in default under the IPD Loan if any of them were to default on their obligations under other agreements. Reference is made to the IPD Loan, which was filed on SEDAR and may be found at www.sedar.com.

On May 16, 2013, Tembec entered into a asset purchase agreement for the sale of its NBSK pulp mill and related assets and liabilities located in Skookumchuck, British Columbia to an affiliate of Paper Excellence Canada Holdings Corporation for a purchase price of $97 million, including $29 million in working capital. Reference is made to the asset purchase agreement which was filed on SEDAR and may be found at www.sedar.com.

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  Annual Information Form

On December 13, 2012, the Corporation adopted and entered into a shareholder rights plan agreement with Computershare Trust Company of Canada (the "Shareholder Rights Plan”). The adoption of the Shareholder Rights Plan was approved, ratified and confirmed by the shareholders on January 31, 2013. The purpose of the Shareholder Rights Plan is to provide the Corporation with sufficient time to explore and develop alternatives for maximizing shareholder value in the event of a take-over bid of the Corporation and to encourage fair treatment of all shareholders by providing them with an equal opportunity to participate in a take-over bid. The Shareholder Rights Plan, unless terminated in accordance with its terms, will expire following the date of the Corporation's annual meeting of shareholders to be held in year 2016. Copies of the Shareholder Rights Plan are available under the Corporation's profile at www.sedar.com or upon request to the Secretary of the Corporation at 800 René-Lévesque Blvd. West, Suite 1050, Montreal, Québec, H3B 1X9 (facsimile: (514) 871-1980).

On September 6, 2013, Tembec, Tembec Industries Inc. and Tembec Energy L.P. entered into an additional loan in the amount of $17.8 million with IQ, the Additional IQ Loan to finance a portion of the costs overruns of the Project. The Additional IQ Loan will bear interest at the same rate as that applicable under the initial $75 million loan entered into in Fiscal 2012 and is secured by a second priority charge over the Project’s assets. The Additional IQ Loan shall be reimbursed in equal monthly payments over a period of four years starting in April 2016, and is subject to compliance with certain covenants and undertakings customary with such types of loans. Tembec has also agreed to grant a five year option to IQ to subscribe for 712,000 common shares of the Corporation 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. The IQ Loan also includes cross default provisions which may deem Tembec, Tembec Industries and Tembec Energy L.P. in default under the Additional IQ Loan if any of them were to default on their obligations under other agreements. Reference is made to the IQ Loan which was filed on SEDAR and may be found at www.sedar.com.

On September 19, 2013, Tembec Energy L.P. has entered into an amended and restated credit agreement with IPD, the Restated Credit Agreement as Agent for the Project’s senior lenders, increasing its credit facility by $10 million, the Increased IPD Facility to finance a portion of the costs overruns of the Project. Tembec intervened to the Restated Credit Agreement to guarantee all obligations of Tembec Energy LP thereunder. The Increased IPD Facility will be subject to the current general terms and conditions of the credit facility with IPD. The Increased IPD Facility will be reimbursed 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 and is subject to compliance with certain covenants and undertakings customary with such types of loans. The Restated Credit Facility also includes cross default provisions which may deem Tembec and Tembec Energy L.P. in default under the Restated Credit Agreement if any of them were to default on their obligations under other agreements. Reference is made to the Restated Credit Agreement, which was filed on SEDAR and may be found at www.sedar.com.

ITEM 12 - INTERESTS OF EXPERTS

KPMG LLP are the external auditors of the Corporation who prepared the Independent Auditors' Report to the shareholders dated November 29, 2013, with respect to the 2013 Financial Statements consisting of consolidated balance sheets as of September 28, 2013 and September 29, 2012 and the consolidated statements of net earnings (loss), comprehensive earnings (loss), changes in shareholder’s equity and cash flows for the years then ended. KPMG LLP is independent with respect to Tembec within the meaning of the applicable rules and related interpretations prescribed by the relevant professional bodies in Canada and any applicable legislation.

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  Annual Information Form

ITEM 13 - ADDITIONAL INFORMATION

Additional information relating to Tembec, including the documents incorporated by reference in this AIF, may be found on SEDAR at www.sedar.com.

Additional information, including Directors’ and Executive Officers’ remuneration and indebtedness, principal holders of the Corporation’s securities and securities authorized for issuance under equity compensation plans, where applicable is contained in the Management Information Circular prepared in connection with the Annual General Meeting of Shareholders of the Corporation to be held on January 30, 2014. Additional financial information is provided in the Corporation’s 2013 Financial Statements and 2013 MD&A.

DEFINITIONS

Adjusted EBITDA – Earnings before interest, income taxes, depreciation, amortization and other items.

ADMT – Air Dryed Metric Tonne.

BIA – Bankruptcy and Insolvency Act (Canada).

Biomass – Bark and residual wood waste used as fuel to operate cogeneration facilities or boilers.

Board feet – The plural of board foot; a board foot is calculated by multiplying 1” x 12” x 12” = 1 foot board measure gross count. Lumber is then finished (planed/sanded) to a smaller size and sold based on the original gross count. The difference between gross size and net size is approximately 72%.

Capacity – The number of units which can be produced in a year based on operating with the normal number of shifts and maintenance interruptions.

Cogeneration – Generation of both power and steam in an industrial power plant.

Effluent – Outflowing waste discharge from a pulp and paper mill.

Hectare – 2.471 acres.

ISO-14001 – is an independent third party certification that confirms that Tembec’s internal Environmental Management system meets internationally accepted standards for protecting environmental values, and that the system is properly maintained and applied by Tembec.

Measurements

Tonne – metric ton – 1,000 kilograms or 2,204 pounds (1.1023 tons).

MBF – One thousand board feet (see board feet).

NBSK – northern bleached softwood kraft pulp.

Newsprint – A printing paper whose major use is in newspapers. It is made largely from groundwood or mechanical pulp.

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  Annual Information Form

Pulp – the generic term describing the fibres derived from wood. Pulp can result from a variety of pulping processes including cooking, refining, grinding or the processing and cleaning (de-inking) of waste paper. Pulp can be either in a wet or dry state. Types of pulp include:

Kraft pulp – chemical pulp produced by an alkaline cooking process using sodium sulphate.

High-yield pulp – pulp produced by a combined chemical, thermal and refining process.

Specialty cellulose pulp – chemical pulp produced by an acid cooking process which can be either ammonia, sodium or calcium based.

Wood chips - Small pieces of wood used to make pulp. The wood chips are produced either from wood waste in a sawmill or a log merchandiser or from pulp wood cut specifically for this purpose. Wood chips are generally uniform in size and are larger and coarser than sawdust.

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  Annual Information Form

SCHEDULE “A”
AUDIT COMMITTEE CHARTER

TEMBEC INC.

I. OVERALL PURPOSE / OBJECTIVES

The Audit Committee (the “Committee”) will assist the Board of Directors (the “Board”) of Tembec Inc. (the “Corporation”) in fulfilling its oversight responsibilities. The Committee will review the financial reporting process, the system of internal control and management of financial risks, the audit process, the attestation process regarding internal controls and the Corporation’s process for monitoring compliance with laws and regulations and its own corporate policies. In performing its duties, the Committee will maintain effective working relationships with the Board, management, and the internal and external auditors. The Corporation shall ensure that appropriate funding is provided to the Committee to compensate the auditors and any other advisors engaged by the Committee, as well as for ordinary administrative expenses.

Subject to any power (i) conferred to the Committee under the Corporation’s by-laws or any applicable laws, rules or regulations (including those of any stock exchange), or (ii) otherwise assigned to the Committee by resolution of the Board of Directors, the Committee shall have no decision-making authority other than as specifically contemplated in this Charter.

II. COMPOSITION

The Committee shall consist of not fewer than three directors, each of whom shall be “independent”, as defined in applicable securities legislation. All members of the Committee shall be “financially literate”, as defined in applicable securities legislation. Members of the Committee shall be appointed by the Board and shall serve at the pleasure of the Board. Unless a chairman is appointed by the Board, the members of the Committee will select its chairman (the “Chairman”).

III. MEETINGS

The Committee shall meet at least four times annually. The Committee shall meet at least quarterly with the external auditors and at least annually with the internal auditors to discuss any matters that the Committee believes should be discussed, including privately held conversations. Meetings of the Committee may be called by its Chairman or the chairman of the Board, the external auditors or the internal auditors. Minutes of all meetings of the Committee shall be maintained and submitted as soon as practicable to the Board. In addition, the Committee will report to the Board on the Committee’s activities at the Board meeting following each Committee meeting.

A majority of Committee members shall constitute a quorum.

The members of the Committee shall have the right, for the purposes of discharging the powers and responsibilities of the Committee, to inspect any relevant records of the Corporation and its subsidiaries. The Committee shall also have the authority to hire independent counsel and other advisors at the Corporation’s expense, if necessary to carry out its duties and the authority to set and pay the compensation for any independent counsel or advisor employed by the Committee. The Committee shall also have the authority to communicate directly with internal and external auditors.

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  Annual Information Form

IV. RESPONSIBILITIES AND DUTIES

The Audit Committee shall:

Documents/Reports Review

(1)	Review and reassess the adequacy of this Charter annually, report to the Board thereon and ensure that it is reproduced in the annual information form on an annual basis and posted in an up-to-date format on the Corporation’s website.
(2)	Review and discuss with management and the external auditor and, if appropriate, recommend for approval by the Board prior to any disclosure:

i.	interim unaudited financial statements;
ii.	audited annual financial statements, in conjunction with the report of the external auditors; and
iii.	all public disclosure documents containing audited or unaudited financial information, including management’s discussion and analysis of financial condition and results of operations, any prospectus and annual and interim earnings press releases.
iv.	This review shall include, where appropriate, an examination of:
v.	the existence and substance of significant accruals, estimates, or accounting judgments;
vi.	transactions with related parties and adequacy of disclosures; and
vii.	qualifications, if any, contained in letters of representation and the contents of review or audit reports from the Corporation’s external auditors, with respect to the Corporation’s financial statements.

(3)	Review any report which accompanies published financial statements (to the extent such a report discusses financial condition or operating results) for consistency of disclosure with the financial statements themselves.
(4)	Obtain an explanation from management of all significant variances between comparative reporting periods and an explanation from management for items which vary from expected or budgeted amounts as well as from previous reporting periods.
(5)	Review uncertainties, commitments, and contingent liabilities material to financial reporting.

External Audit

(6)

Recommend to the Board the firm to be proposed to the Corporation’s shareholders for appointment or reappointment as external auditors and recommend the fees to be paid to the external auditors. The external auditors are accountable to the Board and the Committee, as representatives of the Corporation’s shareholders, and the external auditors shall confirm same in their annual engagement letter. The external auditors must report directly to the Committee.

(7)

Pre-approve all services to be provided by the external auditors to the Corporation or any of its subsidiaries or adopt specific policies and procedures for the engagement of such services, provided that such pre-approval policies and procedures are detailed as to the particular service, the Committee is informed of each service and the procedures do not include delegation of the Committee responsibilities to management. The Committee may delegate to one or more members of the Committee the authority to pre-approve services provided by external auditors, provided that such member or members must present any such services so approved to the full Committee at its first scheduled meeting following such pre-approval.

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  Annual Information Form

(8)	On an annual basis, review and discuss a written report by the external auditors detailing all factors that might have an impact on the auditors’ independence, including all services provided and fees charged by the external auditors.
(9)	Oversee the work, review the performance of the external auditors and approve any proposed change of the external auditors. In such a case, approve the information required to be disclosed by regulations.
(10)	Approve the scope and plan of the annual audit, of the attest services and require the external auditors to review the quarterly financial statements and related documents.
(11)	Review the audit findings and recommendations and management’s response thereto.
(12)	Review any analysis prepared by management and/or the external auditor setting forth significant financial reporting issues and judgements made in connection with the preparation of the financial statements, including any analysis of the effects of alternative generally accepted accounting principles methods on the financial statements.
(13)	Review annually with the external auditors the acceptability and the quality of the implementation of generally accepted accounting principles focused on the accounting estimates and judgments made by management and their selection of accounting principles.
(14)	Review any disagreement between management and the external auditors regarding financial reporting and, to the extent possible, resolve any such disagreements.
(15)	At least annually consult with the external auditors out of the presence of management about the adequacy of internal controls (including the steps to be adopted in light of any material control deficiencies), the fullness and accuracy of the financial statements and any significant difficulties encountered during the course of the audit, including any restrictions on the scope of work or access to required information.
(16)	Monitor the rotation of the lead audit partner, concurring partner and other audit partners;
(17)	Review and approve the Corporation’s hiring policies for partners, employees and former partners and employees of its present external auditors and of its former external auditors.

Internal Audit and Internal Control

(18)	Review any decisions related to the need for internal auditing, including whether this function should be outsourced and in that case, approve the supplier which shall not be the external auditors.
(19)	Review and approve the appointment or removal of the director of internal audit who shall report to a senior officer other than the Corporate Controller.
(20)	Approve the mandate of the internal audit function, and review annually the internal audit plan and the corresponding budgets.

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  Annual Information Form

(21)	Ensure that management has established and maintained adequate internal controls and procedures for financial reporting and accounting, with particular emphasis on controls over computerized systems, and review annually a management assessment of the effectiveness of internal controls. In the event of a material deficiency in internal controls, the Committee shall work with the external auditors and internal auditors to resolve such deficiency.
(22)	Review significant internal audit findings, recommendations and management’s response.
(23)	Ensure the coordination of the work between internal and external auditors.
(24)	Ensure the internal auditor has ongoing access to the Chairman as well as all officers of the Corporation, particularly the chairman of the Board and the President.
(25)	At least annually, undertake private discussions with staff of the internal audit function to establish internal audit independence, the level of co-operation received from management, the degree of interaction with the external auditor, and any unresolved material differences of opinion or disputes.

Financial Risk Management

(26) Review periodically and inquire of management, the internal auditors and the external auditors concerning the financial risk or exposures of the Corporation and assess the steps management has taken to control such risks. Business financial risks include, but are not limited to, risks in the nature of treasury-related risks (including foreign exchange risks), information systems-related risks, disclosure quality and standards relating to financial reporting.

Financial Reporting Processes

(27)	In consultation with the external auditors and the internal auditors, review the integrity and adequacy of the financial reporting processes, both internal and external, including procedures for review of the Corporation’s public disclosure of financial information extracted or derived from its financial statements.
(28)	Consider and approve, if appropriate, changes to the accounting principles and practices as recommended by the external auditors, management or the internal auditors.

Disclosure Policy Oversight

(29)	Review, report and, where appropriate, provide recommendations to the Board on the Corporation’s disclosure policy and other related policies and procedures, and recommend changes as deemed appropriate. The Committee, in performing this task, will review any reports on or proposed amendments to the disclosure policy submitted to it by the Disclosure Committee.
(30)	Assist the Disclosure Committee and the Board in interpreting and applying the Corporation’s disclosure policy and other related policies and procedures.
(31)	Oversee compliance with the Corporation’s disclosure policy.

Legal compliance and other responsibilities

(32)	Review incidents of fraud, illegal acts, conflicts of interest and related-party transactions.
(33)	Establish procedures for the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls, or auditing matters, and the confidential, anonymous submission by employees of the Corporation of concerns regarding questionable accounting or auditing matters.

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  Annual Information Form

(34)	Review claims or potential claims and any other legal matters as reported to the Committee that could have an impact on the financial statements.
(35)	Satisfy itself that the corporate expense policy is being enforced in relation to officers of the Corporation.
(36)	Review material matters relating to audits of subsidiaries.
(37)	Review, assess and, if appropriate, recommend for approval by the Board any and all new borrowings.
(38)	Perform any other activities consistent with this Charter, the Corporation’s by-laws and policies and governing laws, as the Committee or the Board deems necessary or appropriate.

Remuneration of Committee Members

(39) No member of the Committee may earn fees from the Corporation or any of its subsidiaries other than fees for acting as a member of the Board or any Board committee (which fees may include cash or other in-kind consideration ordinarily available to directors, as well as all of the regular benefits that other directors receive). For greater certainty, no member of the Committee shall accept, directly or indirectly, any consulting, advisory or other compensatory fee from the Corporation.

49

EX-99.2

Exhibit 99.2

Consolidated Financial Statements of

TEMBEC INC.

Years ended September 28, 2013 and September 29, 2012

 

	KPMG LLP	Telephone    (514) 840-2100
	600 de Maisonneuve Blvd. West	Fax                 (514) 840-2187
	Suite 1500	Internet         www.kpmg.ca
	Tour KPMG
	Montréal, Québec H3A 0A3

INDEPENDENT AUDITORS' REPORT

To the Shareholders of Tembec Inc.

We have audited the accompanying consolidated financial statements of Tembec Inc., which comprise the consolidated balance sheets as at September 28, 2013 and September 29, 2012, the consolidated statements of net earnings (loss), comprehensive earnings (loss), changes in shareholders’ equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial Statements

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

Auditors’ Responsibility

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. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

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

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

KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.

Page 2

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Tembec Inc. as at September 28, 2013 and September 29, 2012, and its consolidated financial performance and its consolidated cash flows for the years then ended, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

November 29, 2013
Montreal, Canada

*CPA auditor, CA, public accounting permit no. A110592

TEMBEC INC.

Consolidated Balance Sheets

As at September 28, 2013 and September 29, 2012

(in millions of Canadian dollars)

		2013			2012
ASSETS
Current assets:
Cash and cash equivalents	$	73		$	87
Restricted cash		1			5
Trade and other receivables (notes 9 and 19)		157			200
Inventories (notes 5 and 9)		237			255
Prepaid expenses		6			7
Asset classified as held for sale (note 6)		7			-
		481			554
Property, plant and equipment (note 6)		496			485
Biological assets (note 7)		5			4
Employee future benefits (note 12)		24			-
Other long-term receivables (note 8)		10			12
Deferred tax assets (note 18)		5			4
	$	1,021		$	1,059
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Operating bank loans (note 9)	$	57		$	68
Trade, other payables and accrued charges		195			230
Interest payable		10			10
Income tax payable		8			3
Provisions (note 11)		6			3
Current portion of long-term debt (note 10)		16			16
		292			330
Long-term debt (note 10)		369			323
Provisions (note 11)		12			17
Employee future benefits (note 12)		126			285
Other long-term liabilities		2			2
		801			957
Shareholders' equity:
Share capital (note 13)		567			564
Deficit		(353	)		(453	)
Accumulated other comprehensive earnings (loss)		6			(9	)
		220			102
	$	1,021		$	1,059

Guarantees, commitments and contingencies (note 14)
Subsequent events (note 22)

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

On behalf of the Board:

James V. Continenza	James M. Lopez
Chairman of the Board	President and Chief Executive Officer

- 1 -

TEMBEC INC.

Consolidated Statements of Net Earnings (Loss)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

		2013			2012
Sales	$	1,534		$	1,666
Freight and other deductions		201			232
Lumber export taxes		3			7
Cost of sales (excluding depreciation and amortization) (note 15)		1,159			1,290
Selling, general and administrative (note 15)		72			74
Share-based compensation (note 13)		1			(1	)
Depreciation and amortization		40			46
Other items (note 16)		29			50
Operating earnings (loss)		29			(32	)
Interest, foreign exchange and other		28			41
Exchange loss (gain) on long-term debt		14			(13	)
Net finance costs (note 17)		42			28
Loss before income taxes		(13	)		(60	)
Income tax expense (note 18)		21			22
Net loss		(34	)		(82	)
Basic and diluted net loss in dollars per share (note 13)	$	(0.34	)	$	(0.82	)

Consolidated Statements of Comprehensive Earnings (Loss)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars)

		2013			2012
Net loss	$	(34	)	$	(82	)
Other comprehensive earnings (loss), net of income taxes:
Items that will never be reclassified to earnings (loss):
Defined benefit pension plans (note 12)		128			(42	)
Other benefit plans (note 12)		4			4
Income tax		2			-
		134			(38	)
Item that may be reclassified to earnings (loss) in future periods:
Foreign currency translation differences for foreign operations		15			(11	)
Other comprehensive earnings (loss) for the year		149			(49	)
Total comprehensive earnings (loss)	$	115		$	(131	)

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

- 2 -

TEMBEC INC.

Consolidated Statements of Changes in Shareholders’ Equity

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars)

				Translation
		Share		of foreign						Shareholders'
		capital		operations			Deficit			equity
Balance - beginning of year, September 24, 2011	$	564	$	2		$	(333	)	$	233
Net loss		-		-			(82	)		(82	)
Other comprehensive earnings (loss), net of income taxes:
Defined benefit pension plans (note 12)		-		-			(42	)		(42	)
Other benefit plans (note 12)		-		-			4			4
Foreign currency translation differences for foreign operations		-		(11	)		-			(11	)
Balance - end of year, September 29, 2012		564		(9	)		(453	)		102
Net loss		-		-			(34	)		(34	)
Other comprehensive earnings (loss), net of income taxes:
Defined benefit pension plans (note 12)		-		-			128			128
Other benefit plans (note 12)		-		-			4			4
Income tax		-		-			2			2
Foreign currency translation differences for foreign operations		-		15			-			15
Issue of warrants (note 13)		3		-			-			3
Balance - end of year, September 28, 2013	$	567	$	6		$	(353	)	$	220

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

- 3 -

TEMBEC INC.

Consolidated Statements of Cash Flows

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars)

		2013			2012
Cash flows from operating activities:
Net loss	$	(34	)	$	(82	)
Adjustments for:
Depreciation and amortization		40			46
Net finance costs (note 17)		42			28
Income tax expense (note 18)		21			22
Income tax paid		(15	)		(14	)
Excess cash contributions over employee future benefits expense		(34	)		(34	)
Provisions (note 11)		-			12
Impairment loss (note 16)		22			67
Gain on sale of assets		-			(30	)
Other		(6	)		(2	)
		36			13
Changes in non-cash working capital:
Trade and other receivables		16			(30	)
Inventories		3			(40	)
Prepaid expenses		1			(1	)
Trade, other payables and accrued charges		(33	)		(14	)
		(13	)		(85	)
		23			(72	)
Cash flows from investing activities:
Disbursements for property, plant and equipment		(127	)		(108	)
Proceeds from sale of net assets (note 16)		100			84
Change in restricted cash		4			-
Other		1			(1	)
		(22	)		(25	)
Cash flows from financing activities:
Change in operating bank loans		(11	)		62
Increase in long-term debt		40			74
Repayments of long-term debt		(8	)		(11	)
Interest paid		(40	)		(34	)
		(19	)		91
		(18	)		(6	)
Foreign exchange gain (loss) on cash and cash equivalents held in foreign currencies		4			(6	)
Net decrease in cash and cash equivalents		(14	)		(12	)
Cash and cash equivalents, beginning of year		87			99
Cash and cash equivalents, end of year	$	73		$	87

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

- 4 -

TEMBEC INC.

Consolidated Business Segment Information

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars)

The Company operates an integrated forest products business, which is managed in four segments. During the December 2012 quarter, the Company reorganized its internal reporting structure. The High-Yield Pulp segment was renamed the Paper Pulp segment and now includes the chemical pulp mill that was previously part of the Specialty Cellulose and Chemical Pulp segment. The latter was then renamed the Specialty Cellulose Pulp segment. The Forest Products and the Paper segments were unaffected by the organizational changes. The segments are:

The Forest Products segment consists primarily of forest and sawmills operations, which produce lumber and building materials.

The Specialty Cellulose Pulp segment consists primarily of manufacturing and marketing activities of specialty cellulose including the transformation and sale of resins and pulp by-products. A significant portion of chemical products sales are related to by-products generated by the two specialty cellulose pulp mills.

The Paper Pulp segment includes the manufacturing and marketing activities of high-yield pulps and chemical pulps.

The Paper segment consists primarily of production and sales of coated bleached board and newsprint.

Intersegment transfers of wood chips, pulp and other services are recorded at transfer prices agreed to by the parties, which are intended to approximate fair market value. The basis of presentation and the accounting policies used in these business segments are the same as those described in notes 2 and 3. Comparative prior period segment information has been restated to conform with the new segment presentation.

The performance of each segment is evaluated by management of the Company against short-term and long-term financial objectives as well as environmental, safety and other key criteria. The financial performance is measured based on earnings before interest, income taxes, depreciation and amortization, and other specific or non-recurring items (adjusted EBITDA). This measure is included in the internal reports that are reviewed by senior management. Segment adjusted EBITDA is used to measure performance as management believes that such information is the most relevant in evaluating financial results relative to other entities that operate within similar businesses. Net finance costs and income tax are not allocated to operating segments.

- 5 -

TEMBEC INC.

Consolidated Business Segment Information (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars)

																	2013
		Forest		Specialty		Paper								Consolidation
		Products		Cellulose Pulp		Pulp			Paper		Corporate			adjustments			Consolidated
Sales:
External	$	354	$	460	$	388		$	332	$	-		$	-		$	1,534
Internal		66		-		30			-		12			(108	)		-
		420		460		418			332		12			(108	)		1,534
Freight and other deductions		39		36		80			46		-			-			201
Lumber export taxes		3		-		-			-		-			-			3
Cost of sales		350		331		325			250		11			(108	)		1,159
Selling, general and administrative		11		20		8			11		22			-			72
Share-based compensation (note 13)		-		-		-			-		1			-			1
Earnings (loss) before the following (adjusted EBITDA):		17		73		5			25		(22	)		-			98
Depreciation and amortization		9		14		14			3		-			-			40
Other items (note 16)		-		-		24			-		5			-			29
Operating earnings (loss)	$	8	$	59	$	(33	)	$	22	$	(27	)	$	-		$	29
Additions to property, plant and equipment	$	7	$	110	$	10		$	9	$	1		$	-		$	137
Total assets	$	155	$	538	$	142		$	137	$	49		$	-		$	1,021
Total liabilities	$	57	$	210	$	32		$	71	$	431		$	-		$	801

																		2012
		Forest			Specialty		Paper								Consolidation
		Products			Cellulose Pulp		Pulp			Paper		Corporate			adjustments			Consolidated
Sales:
External	$	348		$	507	$	465		$	346	$	-		$	-		$	1,666
Internal		84			-		42			-		13			(139	)		-
		432			507		507			346		13			(139	)		1,666
Freight and other deductions		41			40		105			46		-			-			232
Lumber export taxes		7			-		-			-		-			-			7
Cost of sales		385			352		427			252		13			(139	)		1,290
Selling, general and administrative		15			20		7			11		21			-			74
Share-based compensation (note 13)		-			-		-			-		(1	)		-			(1	)
Earnings (loss) before the following (adjusted EBITDA):		(16	)		95		(32	)		37		(20	)		-			64
Depreciation and amortization		10			11		23			2		-			-			46
Other items (note 16)		(22	)		-		50			-		22			-			50
Operating earnings (loss)	$	(4	)	$	84	$	(105	)	$	35	$	(42	)	$	-		$	(32	)
Additions to property, plant and equipment	$	12		$	86	$	13		$	7	$	2		$	-		$	120
Total assets	$	216		$	398	$	302		$	120	$	23		$	-		$	1,059
Total liabilities	$	68		$	216	$	74		$	126	$	473		$	-		$	957

- 6 -

TEMBEC INC.

Consolidated Geographic Area Information

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars)

										2013
		Forest		Specialty		Paper
		Products		Cellulose Pulp		Pulp		Paper		Consolidated
Sales (by final destination):
Canada	$	187	$	39	$	4	$	65	$	295
United States		167		134		49		247		597
China		-		42		169		-		211
European Union		-		203		56		12		271
Other		-		42		110		8		160
	$	354	$	460	$	388	$	332	$	1,534

										2012
		Forest		Specialty		Paper
		Products		Cellulose Pulp		Pulp		Paper		Consolidated
Sales (by final destination):
Canada	$	194	$	41	$	7	$	61	$	303
United States		145		150		53		265		613
China		6		53		176		-		235
European Union		-		209		57		10		276
Other		3		54		172		10		239
	$	348	$	507	$	465	$	346	$	1,666

		2013		2012
Property, plant and equipment:
Canada	$	379	$	393
France		117		91
Other		-		1
	$	496	$	485

- 7 -

TEMBEC INC.

Notes to Consolidated Financial Statements

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

1.	Reporting entity and nature of operations
	Tembec Inc. (the “Corporation”) and its subsidiaries (collectively “Tembec” or the “Company”) operate an integrated forest products business.
	The Corporation is incorporated and domiciled in Canada and listed on the Toronto Stock Exchange under the symbol TMB. The address of the Company's registered office is 800 René-Lévesque Blvd. West, Suite 1050, Montreal, Quebec, Canada, H3B 1X9.
2.	Basis of presentation Statement of compliance
	These audited consolidated financial statements and the notes thereto have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
	These audited consolidated financial statements were authorized for issue by the Board of Directors on November 21, 2013.
	Basis of measurement
	The audited consolidated financial statements have been prepared on the historical cost basis, except for the following items in the consolidated balance sheet:
		Employee future benefits assets and liabilities are recognized as the net of the fair value of the plan assets less the present value of the defined benefit obligation;
		Biological assets are measured at fair value less costs to sell;
		Asset retirement obligations and reforestation obligations are measured at the discounted value of expected future cash flows;
		Liabilities for cash-settled share-based payment arrangements are measured at fair value;
		Embedded and freestanding derivative financial instruments are measured at fair value.
	Functional and presentation currency
	These audited consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency. Management believes that the Canadian dollar best reflects the currency of the primary economic environment in which Tembec operates. All financial information presented has been rounded to the nearest million, unless otherwise noted.
	Use of estimates and judgements
	The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

- 8 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

2.	Basis of presentation (continued)
	Use of estimates and judgements (continued)
	Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
	Critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements include the identification of triggering events indicating that property, plant and equipment might be impaired.
	Significant areas requiring the use of management estimates in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements and that may result in material adjustments to the carrying amounts within the next fiscal year include the determination of the net realizable value of inventories (note 5), provisions (note 11), recoverability of deferred tax assets (note 18), the measurement of defined benefit obligations and the valuation of pension plan assets (note 12).
	Other areas requiring the use of management estimates include the determination of the value of biological assets, financial instruments, guarantees, commitments, and contingencies. It also includes collectability of accounts receivable, estimating the useful life and residual value of property, plant and equipment, as well as assessing the recoverability of property, plant and equipment, and long- term receivables.
3.	Significant accounting policies Basis of consolidation
	These audited consolidated financial statements include the accounts of the Company. Investments over which the Corporation has effective control are fully consolidated. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Company.
	Foreign currency
	Foreign currency transactions
	Transactions in foreign currencies are translated to the respective functional currencies of each operation using exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency using the exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency using the exchange rate at the date that the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on translation are recognized in profit or loss.

- 9 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

3.	Significant accounting policies (continued) Foreign currency (continued)
	Foreign operations
	The assets and liabilities of foreign operations with functional currencies other than the Canadian dollar are translated to Canadian dollars using the exchange rates at the reporting date. The income and expenses of foreign operations are translated to Canadian dollars using the average exchange rates during the reporting period.
	Foreign currency differences are recognized in other comprehensive income. When a foreign operation is disposed of, in part or in full, the relevant amount in the foreign currency translation reserve is transferred to the statement of earnings (loss) as part of the gain or loss on disposal.
	Financial instruments
	Non-derivative financial assets and liabilities
	Cash and cash equivalents, restricted cash, trade and other receivables and long-term receivables are classified as loans and receivables, which is the Company’s only type of non-derivative financial asset. Operating bank loans, trade and other payables, interest payable and long-term debt are classified as other liabilities, which is the Company’s only type of non-derivative financial liability.
	The Company initially recognizes all financial assets and liabilities on the date that they are originated. Subsequent to initial recognition at fair value, the financial assets are accounted for on an amortized cost basis using the effective interest rate method. Subsequent to initial recognition at fair value plus any directly attributable transaction costs, the financial liabilities are accounted for on an amortized cost basis using the effective interest rate method.
	Transaction costs incurred upon the issuance of debt instruments or modification of a financial liability are deducted from the financial liability and are amortized using the effective interest method over the expected life of the related liability.
	Derivative financial instruments
	The Company may manage, from time to time, its foreign exchange exposure on anticipated net cash inflows, principally US dollars and euros, through the use of options and forward contracts.
	The Company may manage, from time to time, its exposure to commodity price risk associated with sales of lumber, pulp and newsprint through the use of cash-settled hedge (swap) contracts. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company does not currently apply hedge accounting.
	All derivatives are recognized initially at fair value. Attributable transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value and changes therein are accounted for in net finance costs.

- 10 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

3.	Significant accounting policies (continued) Financial instruments (continued)
	Common shares
	Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares are recognized as a deduction from equity, net of any tax effects.
	Warrants
	Warrants granted in connection with the second ranking term loan facilities have been issued as an equity-settled share-based payment transaction. Accordingly, they are classified as equity.
	Cash and cash equivalents / restricted cash
	Cash and cash equivalents, as well as restricted cash, comprise cash in financial institutions, short-term deposits and highly liquid money market instruments with maturities of three months or less from the date of acquisition. Cash and cash equivalents are presented net of outstanding cheques.
	Inventories
	Finished goods, work-in-process, wood chips, logs, and other raw materials are valued at the lower of cost, determined on an average cost basis, and net realizable value. In the case of manufactured inventories and work-in-process, cost includes expenditure incurred in acquiring raw materials, production or conversion costs and other costs incurred in bringing the inventory to their existing location and conditions as well as an appropriate share of production overheads based on normal operating capacity. For all raw materials to be used in the production of finished goods, net realizable value is determined on an as-converted-to-finished-goods basis. Operating, maintenance and spare parts inventories are valued at lower of average cost and net realizable value.
	Property, plant and equipment
	Recognition and measurement
	Property, plant and equipment are recorded at cost, after deducting investment tax credits and government assistance, less accumulated depreciation and accumulated impairment losses.
	Cost includes expenditures that are directly attributable to acquiring and bringing the assets to a working condition for their intended use. The Company capitalizes borrowing costs, which are directly attributable to the acquisition, construction or production of qualifying assets, unless development activities on these qualifying assets are suspended, in which case borrowing costs are expensed.
	Subsequent costs
	The cost of replacing a component of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company, and its cost can be measured reliably. The carrying amount of the replaced component is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognized in profit or loss as incurred.

- 11 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

3.	Significant accounting policies (continued) Property, plant and equipment (continued)
	Depreciation
	Depreciation is calculated over the depreciable amount, which is the cost of an asset less its residual value. Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment.
	The estimated useful lives of the current and comparative periods are as follows:

Assets	Period
Buildings	20 - 30 years
Production equipment:
Pulp and paper	20 - 30 years
Sawmill	10 - 15 years
Forest access roads	3 - 20 years

Assets under construction are recognized at cost and are not depreciated as the assets are not available for use. Repairs and maintenance as well as planned shutdown maintenance are charged to expense as incurred.

Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate.

Biological assets

Standing timber on privately held forest land that is managed for timber production is characterized as a biological asset. Accordingly, on each balance sheet date, the biological asset is valued at its fair value less costs to sell with any change therein, as a result of growth, harvest and change in valuation assumptions recognized in net income (loss) for the period. Standing timber is transferred to inventory at its fair value less costs to sell at the date the logs are removed from the forest. Land under standing timber is measured at cost and included in property, plant and equipment.

Leased assets

Leases in terms of which the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

Other leases are operating leases and the leased assets are not recognized in the Company’s balance sheet.

- 12 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

3.	Significant accounting policies (continued) Impairment
	Financial assets (including receivables)
	A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.
	Impairment losses recognized in prior periods are assessed at each balance sheet date for any indication that the loss has decreased or no longer exists. For financial assets measured at amortized cost, the reversal is recognized in profit or loss.
	Non-financial assets
	The carrying amounts of the Company’s non-financial assets, other than biological assets, inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated.
	The recoverable amount of an asset or cash-generating unit (CGU) is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or the CGU. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets.
	An impairment loss is recognized if the carrying amount of an asset or CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs reduce the carrying amounts of the assets in the unit that is subject to the impairment test on a pro rata basis.
	An impairment loss recognized in prior periods is assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
	Provisions
	A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost.

- 13 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

3.	Significant accounting policies (continued) Provisions (continued)
	Environmental costs
	The Company is subject to environmental laws and regulations enacted by federal, provincial, state and local authorities. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and that are not expected to contribute to current or future operations are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are likely, and when the costs, based on a specific plan of action in terms of the technology to be used and the extent of the corrective action required, can be reasonably estimated.
	Reforestation
	Forestry legislation in British Columbia requires the industry to assume the cost of reforestation on certain harvest licences. Accordingly, the Company records a liability for the costs of reforestation in the period in which the timber is harvested. In periods subsequent to the initial measurement, changes in the liability resulting from the passage of time and revisions to management’s estimates are recognized in net income as they occur.
	Site restoration
	In accordance with the Company’s published environmental policy and applicable legal requirements, a provision for site restoration in respect of contaminated land, and the related expense, is recognized when the land is contaminated.
	Restructuring
	A provision for restructuring is recognized when the Company has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs and losses are recognized on the same basis as if they arose independently of the restructuring.
	Onerous contracts
	A provision for onerous contracts is recognized when the expected benefits to be derived by the Company from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Company recognizes any impairment loss on the assets associated with that contract.

- 14 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

3.	Significant accounting policies (continued) Provisions (continued)
	Contingent liability
	A contingent liability is a possible obligation that arises from past events and of which the existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not within the control of the Company, or a present obligation that arises from past events (and therefore exists), but is not recognized because it is not probable that a transfer or use of assets, provision of services or any other transfer of economic benefits will be required to settle the obligation, or the amount of the obligation cannot be estimated reliably.
	Employee future benefits
	Employee future benefits include pension plans and other benefit plans. Other benefit plans include post-employment life insurance programs, healthcare and dental care benefits as well as certain other long-term benefits provided to disabled employees.
	Defined contribution pension plans
	A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in profit or loss in the periods during which services are rendered by employees.
	Defined benefit pension plans
	A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Company’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. Any unrecognized past service costs and the fair value of any plan assets are deducted. The discount rate is the yield at the reporting date on AA credit-rated bonds that have maturity dates approximating the terms of the Company’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Company, the recognized asset is limited to the total of any unrecognized past service costs and the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan in the Company. An economic benefit is available to the Company if it is realizable during the life of the plan, or on settlement of the plan liabilities.
	When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognized in profit or loss on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognized immediately in the statement of net earnings (loss).

- 15 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

3.	Significant accounting policies (continued) Employee future benefits (continued)
	The Company recognizes the current service cost in the employee future benefit costs. Interest cost and the expected return on plan assets are recognized in interest, foreign exchange and other. The actuarial gains and losses arising from defined benefit plans are recognized in other comprehensive income.
	Other benefit plans
	The Company’s net obligation in respect of long-term employee benefits, other than pension plans, is the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate is the yield at the reporting date on AA credit-rated bonds that have maturity dates approximating the terms of the Company’s obligations. The calculation is performed using the projected unit credit method. Any actuarial gains and losses are recognized in the statement of comprehensive earnings (loss) in the period in which they arise.
	Other employee benefits
	Short-term employee benefits
	Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.
	A liability is recognized for the amount expected to be paid under the short-term incentive plan if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.
	Share-based compensation transactions
	The Company uses the fair value based approach of accounting for all share options granted to its employees, whereby a compensation expense is recognized over the vesting period of the options, with a corresponding increase to contributed surplus. The Company bases the accruals of compensation cost on the best available estimate of the number of options that are expected to vest and revises that estimate if subsequent information indicates that actual forfeitures are likely to differ from initial estimates. Any consideration paid by plan participants in the exercise of share options or purchase of shares is credited to share capital. The contributed surplus component of share-based compensation is transferred to share capital upon the issuance of common shares.
	Deferred Share Units (DSU) are recognized in compensation expense and accrued liabilities as they are earned. DSUs are remeasured at each reporting period at fair value, until settlement. Performance-Conditioned Restricted Share Units (PCRSU) and Performance-Conditioned Share Units (PCSU) are recognized in compensation expense and accrued liabilities when it is likely that the performance conditions attached to the unit will be met. Compensation cost is prorated based on the underlying service period and the liability is remeasured at each reporting period at fair value, until settlement.

- 16 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

3.	Significant accounting policies (continued) Other employee benefits (continued)
	Termination benefits
	Termination benefits are recognized as an expense when the Company is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if the Company has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value.
	Sales
	Sale of goods is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. If it is probable that discounts will be granted and the amount can be measured reliably, then the discount is recognized as a reduction of revenue as the sales are recognized.
	Freight and other deductions
	Freight associated with shipping products to customer and handling finished goods as well as discounts on prompt payment are included in Freight and other deductions in the consolidated statement of net earnings (loss).
	Investment tax credits and government assistance
	Amounts received resulting from government assistance programs, including grants and investment tax credits for scientific research and experimental development, are reflected as a reduction of the cost of the asset or expense to which they relate at the time the eligible expenditure is incurred. Government financial assistance is recorded when there is reasonable assurance that the Company will comply with relevant conditions. Investment tax credits are recognized when the Company has made the qualifying expenditures and there is reasonable assurance that the credits will be realized.
	Finance costs and finance income
	Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions and the amortization of other related transactions costs. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in profit or loss using the effective interest method.
	Foreign currency gains and losses, gain or loss on embedded and freestanding derivative instruments, and interest on employee future benefit obligations and pension plan assets are reported on a net basis as finance cost or finance income.

- 17 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

3.	Significant accounting policies (continued) Income taxes
	Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.
	Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
	Deferred tax is recognized using the balance sheet method, with respect to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries and associates to the extent that it is probable that they will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
	A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
4.	New standards and interpretation not yet adopted
	IFRS 7 Financial Instruments – Disclosures
	In December 2011, the IASB amended the standard IFRS 7, Financial Instruments – Disclosures, to provide additional information about offsetting of financial assets and financial liabilities. IFRS 7 has been amended to require disclosures that will enable users of financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with an entity’s recognized financial assets and recognized financial liabilities, on the entity’s balance sheet. An entity provides information including the gross amounts subject to rights of set-off, amounts set off in accordance with the offsetting criteria, amounts of financial instruments subject to master netting arrangements or similar agreements, and the related net amounts to meet the disclosure objective. These amendments are effective for annual periods beginning on or after January 1, 2013. The Company will adopt the new standard, which will not have an impact on the amounts recorded, in its fiscal 2014 financial statements.

- 18 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

4.	New standards and interpretation not yet adopted (continued)
	IFRS 9 Financial Instruments
	In November 2009, the IASB issued IFRS 9, Financial Instruments (IFRS 9), and in October 2010, the IASB published amendments to IFRS 9 (IFRS 9 R).
	IFRS 9 R supersedes IFRS 9 and is effective for annual periods beginning on or after January 1, 2015, with early adoption permitted. For annual periods beginning before January 1, 2015, either IFRS 9 or IFRS 9 R may be applied. This standard provides guidance on the classification and measurement of financial liabilities and the presentation of gains and losses on financial liabilities designated at fair value through profit and loss. When an entity elects to measure a financial liability at fair value, gains or losses due to changes in the credit risk of the instrument must be recognized in other comprehensive income. The Company has not yet begun the process of assessing the impact that the new standard will have on its financial statements and does not plan to early adopt the new requirement.
	IFRS 13 Fair Value Measurement
	In May 2011, the IASB issued the standard, IFRS 13, Fair Value Measurement. IFRS 13 is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and in many cases does not reflect a clear measurement basis or consistent disclosures.
	The new standard is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. The Company will adopt the new standard, which will not have an impact on the amounts recorded, in its fiscal 2014 financial statements.
	Amendments to IAS 19 Employee Benefits
	In June 2011, the IASB published an amended version of IAS 19, Employee Benefits. Adoption of the amendment is required for annual periods beginning on or after January 1, 2013, with early adoption permitted. This standard was amended to:
	a)	require the interest cost and expected return on plan assets, which currently reflect different rates, be replaced with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (asset). The impact of this portion of the amended standard is an increase in net finance cost as the Company’s return on plan assets will effectively be at a lower rate.
	b)	eliminate the option to defer the recognition of gains and losses arising in defined benefit plans;

- 19 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

4.	New standards and interpretation not yet adopted (continued)
	c)	require gains and losses relating to those plans to be presented in other comprehensive income; and
	d)	improve the disclosure requirements concerning the characteristics of defined benefit plans and the risks arising from those plans.
	The amended standard also incorporates changes to the accounting for termination benefits. The amendment will be applied retrospectively. The Company estimates that the effect on the consolidated balance sheet as at September 28, 2013, would be an increase of the net defined benefit liability of $2 million and an increase of the deficit of $2 million. The effect on the consolidated statement of net earnings (loss) for the year ended September 28, 2013, would be an increase of the net finance costs by approximately $18 million and an increase of the other comprehensive earnings by the same amount. The Company is still in a process of assessing the impact that the new standard will have on the income tax expense in the statement of net earnings (loss) and in the statement of comprehensive earnings (loss). The Company will adopt the new requirements in its fiscal 2014 financial statements.
5.	Inventories

		2013		2012
Finished goods	$	111	$	118
Logs and wood chips		55		61
Supplies and materials		71		76
	$	237	$	255
Inventories carried at net realizable value	$	22	$	48

For the years ended in September 2013 and 2012, cost of sales consists primarily of inventories recognized as an expense. Inventories at September 28, 2013, were written down by $4 million (2012 - $6 million) to reflect net realizable value being lower than cost. The write-down and reversal, if any, are included in cost of sales.

The provision for net realizable values relating to logs and finished goods were as follows:

		2013		2012
Forest Products	$	1	$	1
Specialty Cellulose Pulp		3		1
Paper Pulp		-		4
Paper		-		-
	$	4	$	6

- 20 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

6. Property, plant and equipment

								Production equipment						Forest			Assets
								Pulp and						access			under
		Land			Buildings			Paper			Sawmill			roads			construction			Total
Cost
Balance, September 24, 2011	$	12		$	79		$	440		$	92		$	17		$	37		$	677
Additions		-			-			-			-			-			120			120
Transfers		-			1			47			7			3			(58	)		-
Interest capitalized on assets under construction		-			-			-			-			-			2			2
Disposals		(1	)		(4	)		(4	)		(30	)		(12	)		(4	)		(55	)
Effect of foreign currency translation		-			(1	)		(8	)		-			-			(1	)		(10	)
Balance, September 29, 2012		11			75			475			69			8			96			734
Additions		-			-			-			-			-			137			137
Transfers		-			8			38			3			3			(52	)		-
Interest capitalized on assets under construction		-			-			-			-			-			9			9
Disposals		(1	)		(21	)		(135	)		(1	)		-			(2	)		(160	)
Reclassification to assets held for sale		(7	)		-			-			-			-			-			(7	)
Effect of foreign currency translation		-			1			14			-			-			1			16
Balance, September 28, 2013	$	3		$	63		$	392		$	71		$	11		$	189		$	729
Depreciation
Balance, September 24, 2011	$	-		$	19		$	105		$	61		$	1		$	-		$	186
Depreciation		-			6			31			8			1			-			46
Impairment loss		-			-			43			-			1			-			44
Disposals		-			(3	)		(2	)		(19	)		(1	)		-			(25	)
Effect of foreign currency translation		-			-			(2	)		-			-			-			(2	)
Balance, September 29, 2012		-			22			175			50			2			-			249
Depreciation		-			6			27			7			-			-			40
Impairment loss		-			3			19			-			-			-			22
Disposals		-			(10	)		(70	)		(1	)		-			-			(81	)
Effect of foreign currency translation		-			-			3			-			-			-			3
Balance, September 28, 2013	$	-		$	21		$	154		$	56		$	2		$	-		$	233
Carrying amounts
At September 29, 2012	$	11		$	53		$	300		$	19		$	6		$	96		$	485
At September 28, 2013	$	3		$	42		$	238		$	15		$	9		$	189		$	496

- 21 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

6.	Property, plant and equipment (continued)
	On March 16, 2012, the Company announced a $190 million capital investment to upgrade its specialty cellulose manufacturing facility at Temiscaming, Quebec. During fiscal 2013, the Company completed a detailed re-estimation exercise for the project and is now forecasting a total estimated cost of $235 million. As at the end of September 2013, assets under construction include $137 million (2012 - $59 million) of capital expenditures for this project and had $41 million of outstanding commitments (see note 14).
	At the end of September 2013, the Company launched the BC Lands Sale Initiative. Accordingly, an amount of $7 million of land was classified as held for sale (see note 22).
	During fiscal 2013, the Company recorded an impairment charge of $22 million related to its pulp mill located in Skookumchuck, BC. It subsequently sold property, plant and equipment of the latter having a net book value of $79 million (see note 16).
	During fiscal 2012, the Company recorded an impairment loss of $44 million related to property, plant and equipment of the Chetwynd, BC, high-yield pulp mill. Subsequent to the announced indefinite idling of the pulp mill and following a review of its business plan, the Company undertook an impairment review and found that the carrying value of its assets exceeded their recoverable amount being the fair value less cost to sell. The recoverable amount was determined to be nominal.
7.	Biological assets
	The Company’s private timberlands are classified as a growing forest, with the standing timber defined and recognized as a biological asset at fair value less costs to sell at each reporting date, with the underlying land being considered a component of property, plant and equipment and recognized at cost.

Balance, September 24, 2011	$	4
Disposals		(1	)
Change in fair value less costs to sell		1
Balance, September 29, 2012		4
Change in fair value less costs to sell		1
Balance, September 28, 2013	$	5

		2013		2012
Current	$	-	$	-
Non-current		5		4
	$	5	$	4

- 22 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

8. Other long-term receivables

		2013		2012
Loan receivable - Temlam Inc.	$	7	$	7
Long-term loans to employees		1		2
Other		2		3
	$	10	$	12

9.	Operating bank loans
	On March 4, 2011, the Company entered into a $200 million asset-based revolving five-year working capital facility (ABL) expiring in March 2016. The facility has a first priority charge over the receivables and inventories of the Company`s Canadian operations. On March 25, 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 commitments from $200 million to $175 million and related adjustments to certain thresholds due to a reduction in the number of mills it operates.
	As at September 28, 2013, the amount available, based on eligible receivables and inventories, was $120 million of which $53 million was drawn and $56 million was reserved for letters of credit (2012 - $144 million of which $65 million was drawn and $48 million was reserved for letters of credit). Interest is calculated based either on the BA Rate, the LIBOR, the Canadian Prime Rate or the U.S. Base Rate, as the case may be, plus an applicable margin.
	The French operations are supported by “receivable factoring” agreements. As such, the borrowing base fluctuates periodically, depending on shipments and cash receipts. At the end of September 2013, the amount available was $28 million of which $4 million was drawn (2012 - $20 million of which $3 million was drawn).
	The Company’s exposure to liquidity risk is disclosed in note 19.

- 23 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

10. Long-term debt

		2013		2012
Tembec Industries Inc.
11.25% senior secured notes US $305 million, due December 15, 2018, with semi-annual interest payments due June 15 and December 15 of each year	$	314	$	300
Tembec Energy LP
5.5% term loan, secured by a second ranking charge, interest payable on a monthly basis, repayable in monthly instalments beginning in April 2016 and maturing in March 2028		40		-
6.35% term loan, secured by a first ranking charge, interest payable on a monthly basis, repayable in blended monthly instalments beginning July 15, 2014 to June 15, 2022 with a balloon payment of $12 million in July 2022		20		20
Tembec Tartas SAS
Secured term loans € 4 million (2012 - € 6 million), bearing interest at EURIBOR plus 2%, repayable in quarterly instalments beginning in March 2012 and maturing in December 2017		6		8
Unsecured term loans € 8 million (2012 - € 11 million), non-interest bearing, repayable and maturing at various dates from June 2014 to September 2020. The effective interest rate on these loans is 6%		11		14
Kirkland Lake Engineered Wood Products Inc.		9		8
Tembec Inc.		2		2
		402		352
Less current portion		16		16
Less unamortized financing costs		17		13
	$	369	$	323

On February 23, 2012, the Company completed an add-on offering of US $50 million in aggregate principal amount of 11.25% senior secured notes due December 15, 2018. The add-on offering notes were offered as additional notes under the indenture dated as of August 17, 2010, pursuant to which the Company had previously issued US $255 million in aggregate principal amount of 11.25% senior secured notes due December 15, 2018. The notes are senior obligations secured by a first priority lien on certain of the property and assets of the Company and the guarantors of the notes, other than receivables, inventory and certain intangibles upon which the note holders have a second priority lien. The notes are guaranteed by the Company and certain of its subsidiaries.

The senior secured notes are registered with the Securities and Exchange Commission (SEC) and the Company must maintain their registration throughout the life of the notes. If the obligations under the registration rights agreement are not satisfied, the Company will be required to pay additional interest to the holders of the notes up to a maximum annual amount of US $3 million.

- 24 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

10.	Long-term debt (continued)
	In connection with the specialty cellulose project in Temiscaming, Quebec, which is described in more detail in note 14, the Company entered into a $75 million term loan facility, bearing interest at 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. During fiscal 2013, the Company received five advances totalling $40 million on the term loan.
	On September 20, 2013, the Company entered into an additional loan facility to borrow up to $18 million with the same lender, at an interest rate of 5.5%. The loan has a four-year term repayable in monthly instalments beginning in April 2016 and maturing in March 2020. The additional loan is secured by a second ranking charge on the project assets. As at September 28, 2013, no amount was drawn under this additional facility.
	On June 29, 2012, the Company entered into a $30 million term loan facility to assist with the financing of the specialty cellulose project in Temiscaming, Quebec. On September 20, 2013, the Company has entered into an Amended and Restated Credit Agreement, increasing its credit facility from $30 million to $40 million. The loan is secured by a first ranking charge on the project assets. On July 12, 2012, the Company received an advance of $20 million bearing interest at 6.35% repayable in blended monthly instalments over a period of eight years beginning in July 2014, with a “balloon” payment of $12 million to be repaid in July 2022.
	Subsequent to the end of the fiscal year, on October 18, 2013, the Company received the second advance of $20 million bearing interest at 6.86%, 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.
	The Company’s credit agreements contain terms and conditions that could in certain circumstances restrict the ability of the Company to incur or guarantee additional indebtedness, to encumber or dispose of its assets or make certain payments or distributions.
	The Company’s exposure to liquidity risk, foreign currency, and interest rate risk is disclosed in note 19.

- 25 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

11. Provisions

										Total
		Site restoration			Reforestation			Other		provisions
Balance, September 24, 2011	$	4		$	15		$	5	$	24
Provisions made during the year		9			4			-		13
Paid during the year		-			(1	)		-		(1	)
Sale of BC Sawmills (note 16)		-			(16	)		-		(16	)
Balance, September 29, 2012		13			2			5		20
Provisions made during the year		1			-			-		1
Paid during the year		-			(1	)		-		(1	)
Sale of Skookumchuck, BC, pulp mill (note 16)		(2	)		-			-		(2	)
Balance, September 28, 2013	$	12		$	1		$	5	$	18

		2013		2012
Current	$	6	$	3
Non-current		12		17
	$	18	$	20

Site restoration

In accordance with Canadian law, land fill sites have a predetermined life and must be restored to their original condition at the end of their life. Because of the long-term nature of the liability, the most significant uncertainty in estimating the provision is the costs that will be incurred. In particular, the Company has assumed that the land fill sites will be restored using technology and materials that are currently available. The Company has been provided with a range of reasonably possible outcomes of the total cost, reflecting different assumptions about changes in technology and pricing of the individual components of the cost. The restoration is expected to occur over the next 30 years.

Fiscal 2013 includes charges of $1 million (2012 - $3 million) for other sites for which the Company has a legal obligation to carry out remediation.

Fiscal 2012 includes a charge of $4 million relating to the Marathon, Ontario, NBSK pulp mill site. An agreement was reached with the Province of Ontario and other implicated parties as to future remediation work. As part of the settlement, the Company received $2 million from a previous owner and agreed to carry out remediation work totalling approximately $6 million over the next several years.

- 26 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

11.	Provisions (continued) Reforestation
	In accordance with British Columbia law, the Company has an obligation to perform certain reforestation activities during periods of 12 to 15 years following the harvest. Because of the long- term nature of the liability, the most significant uncertainty in estimating the provision is the costs that will be incurred. In particular, the Company has assumed that current reforestation practice will continue to meet government policy, that adequate forest fire protection is in place, that suitable external funding will be made available to manage incremental forest pests and disease issues and that government policy with respect to reforestation will not change materially. The provision includes reforestation of different harvested areas, which are at different stages in the reforestation process. On March 23, 2012, the Company sold its British Columbia sawmills and, as part of the agreement, the buyer assumed the related reforestation obligation for an amount of $16 million.
12.	Employee future benefits
	Defined contribution pension plans
	The Company contributes to defined contribution pension plans, provincial pension plans, group registered retirement savings plans, deferred profit sharing plans, and 401(k) plans. The pension expense of $7 million (2012 – $9 million) under these plans is equal to the Company’s contribution.
	Defined benefit pension plans
	The Company has several defined benefit pension plans. Some of the defined benefit pension plans are contributory. Non-unionized employees in Canada joining the Company after January 1, 2000, participate in defined contribution pension plans. During fiscal 2013, the majority of the new unionized employees in Canada are only participating in defined contribution pension plans. The pension expense and the obligation related to the defined benefit pension plans are actuarially determined using the projected unit credit method.
	Other benefit plans
	The Company offers post-employment life insurance, healthcare and dental care plans to some of its retirees. The Company offers other long-term benefits as healthcare and dental care plans to disabled employees. The Company also assumes other long-term benefits as life insurance coverage to some of its disabled employees.
	The other benefit plans expenses and the obligations related to these plans are actuarially determined using management’s most probable assumptions.
	Actuarial valuations of these plans for accounting purposes are conducted on a triennial basis unless there are significant changes affecting the plans. The latest actuarial valuations were conducted either at January 1, 2010, May 1, 2012 or July 1, 2013.
	The other benefit plans are unfunded.

- 27 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

12.	Employee future benefits (continued)
	Company contributions for defined benefit pension plans
	Total cash payments for defined benefit pension plans consist of cash contributed by the Company to its funded pension plans and cash payments directly to beneficiaries for its unfunded benefit plans. The Company contributions were $44 million for 2013 (2012 – $42 million). In 2014, the Company expects to contribute approximately $34 million to its defined benefit pension plans in accordance with its normal funding policy.
	Description of fund assets
	The assets of the registered defined benefit pension plans are held by an independent trustee and accounted for separately in the Company’s pension funds. Based on the fair value of assets held at September 28, 2013, the defined benefit pension plan assets were comprised of 2% (1% in 2012) in cash and short-term investments, 4% (5% in 2012) in real estate, 43% (47% in 2012) in bonds and 51% (47% in 2012) in Canadian, U.S. and foreign equity.
	Funding policy
	The Company’s funding policy for registered defined benefit pension plans is to contribute annually the amount required to provide for benefits earned in the year and to fund past service obligations over periods not exceeding those permitted by the applicable regulatory authorities. Actuarial valuations for funding purposes are conducted on a triennial basis, unless required earlier by pension legislation or as deemed appropriate by management from time to time. The latest funding actuarial valuations were conducted for one plan on January 1, 2013, 12 plans on December 31, 2012, one plan on December 31, 2011, and one plan on December 31, 2010.
	Investment policy
	The Company follows a disciplined investment strategy, which provides diversification of investments by asset class, foreign currency, sector and company. The Corporate Governance and Human Resources Committee of the Board of Directors has approved an investment policy that establishes long-term asset mix targets based on a review of historical returns achieved by world-wide investment markets. Investment managers may deviate from these targets to the extent permitted by the investment policy. Their performance is evaluated in relation to the market performance on the target mix.
	The actual return on plan assets was $73 million for the year ended September 28, 2013, and $70 million for the year ended September 29, 2012.
	As at September 28, 2013 and September 29, 2012, the assets of the plan do not directly include the Company’s own financial instruments or any property occupied by, or other assets issued by, the Company.

- 28 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

12.	Employee future benefits (continued)
	Information about the Company’s defined benefit plans in aggregate
	The following tables present the change in the defined benefit obligation for the defined benefit plans as calculated by independent actuaries and the change in the fair value of plan assets: Change in defined benefit obligations for defined benefit plans:

		Pension plans						Other benefit plans
		2013			2012			2013			2012
Defined benefit obligation, at beginning of year	$	910		$	857		$	41		$	44
Current service cost		10			9			1			1
Interest cost		34			37			1			1
Employee contributions		2			2			-			-
Benefits paid		(45	)		(61	)		(1	)		(1	)
Actuarial loss (gain)		(98	)		73			(4	)		(4	)
Decrease in obligation due to curtailment		(1	)		(2	)		-			-
Sale of Skookumchuck, BC, pulp mill (note 16)		(3	)		-			(9	)		-
Past service cost		1			1			-			-
Effect of foreign currency translation		7			(6	)		-			-
Defined benefit obligation, at end of year	$	817		$	910		$	29		$	41

Change in fair value of plan assets for defined benefit plans:

		Pension plans						Other benefit plans
		2013			2012			2013			2012
Fair value of defined benefit plan assets, at beginning of year	$	667		$	618		$	-		$	-
Expected return on plan assets		42			39			-			-
Actuarial gain		31			31			-			-
Employer contributions		44			42			1			1
Employee contributions		2			2			-			-
Benefits paid		(45	)		(61	)		(1	)		(1	)
Effect of foreign currency translation		5			(4	)		-			-
Fair value of defined benefit plan assets, at end of year	$	746		$	667		$	-		$	-

- 29 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

12.	Employee future benefits (continued)
	Information about the Company’s defined benefit plans in aggregate (continued)
	The following table presents the difference between the fair value of plan assets and the actuarially determined defined benefit obligation for defined benefit plans. This difference is also referred to as either the deficit or surplus, as the case may be, or the funded status of the plans.
	Reconciliation of funded status for defined benefit plans:

		Pension plans
		2013			2012			2011			2010
Fair value of plan assets	$	746		$	667		$	618		$	617
Defined benefit obligation, wholly or partially funded plans		(780	)		(867	)		(820	)		(777	)
Plan deficit		(34	)		(200	)		(202	)		(160	)
Defined benefit obligation, unfunded plans		(37	)		(43	)		(37	)		(35	)
Unamortized past service costs		2			1			-			1
Asset non-recognized due to asset ceiling		(4	)		-			-			-
Liability arising from minimum funding requirement		-			(3	)		(3	)		(7	)
Net defined benefit liability	$	(73	)	$	(245	)	$	(242	)	$	(201	)

		Other benefit plans
		2013			2012			2011			2010
Fair value of plan assets	$	-		$	-		$	-		$	-
Defined benefit obligation, wholly or partially funded plans		-			-			-			-
Plan deficit		-			-			-			-
Defined benefit obligation, unfunded plans		(29	)		(41	)		(44	)		(47	)
Unamortized past service costs		-			1			2			-
Asset non-recognized due to asset ceiling		-			-			-			-
Liability arising from minimum funding requirement		-			-			-			-
Net defined benefit liability	$	(29	)	$	(40	)	$	(42	)	$	(47	)

- 30 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

12.	Employee future benefits (continued)
	Amounts recognized in the consolidated balance sheets for defined benefit plans:

		Pension plans
		2013			2012			2011			2010
Defined benefit asset	$	24		$	-		$	1		$	-
Defined benefit liability		(97	)		(245	)		(243	)		(201	)
Net defined benefit liability	$	(73	)	$	(245	)	$	(242	)	$	(201	)

		Other benefit plans
		2013			2012			2011			2010
Defined benefit asset	$	-		$	-		$	-		$	-
Defined benefit liability		(29	)		(40	)		(42	)		(47	)
Net defined benefit liability	$	(29	)	$	(40	)	$	(42	)	$	(47	)

		Total employee future benefits
		2013			2012			2011			2010
Defined benefit asset	$	24		$	-		$	1		$	-
Defined benefit liability		(126	)		(285	)		(285	)		(248	)
Net defined benefit liability	$	(102	)	$	(285	)	$	(284	)	$	(248	)

Components of benefit cost

The following tables present the impact on net earnings (loss) and other comprehensive earnings (loss) of the Company’s employee future benefits:

Recognized in net earnings (loss)

		Pension plans						Other benefit plans
		2013			2012			2013		2012
Recognized costs for defined benefit plans:
Current service cost	$	10		$	9		$	1	$	1
Past service cost		-			-			-		1
Total included in personnel expenses		10			9			1		2
Curtailment gain		(1	)		(2	)		-		-
Total included in other items		(1	)		(2	)		-		-
Interest cost		34			37			1		1
Expected return on plan assets		(42	)		(39	)		-		-
Total included in net finance costs		(8	)		(2	)		1		1
Total recognized costs for defined benefit plans		1			5			2		3
Recognized costs for defined contribution plans		7			9			-		-
Total expense for employee future benefits	$	8		$	14		$	2	$	3

- 31 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

12.	Employee future benefits (continued)
	Recognized in other comprehensive earnings (loss)

		Pension plans									Other benefit plans
		2013			2012			2011			2013		2012			2011
Actuarial gain (loss) - variation in assumptions	$	99		$	(77	)	$	(50	)	$	4	$	(2	)	$	-
Actuarial gain (loss) - experience adjustments		(1	)		4			9			-		6			-
Actuarial gain (loss) - actual rate of return exceeds (is below) expected rate of return		31			31			(27	)		-		-			-
Effect of limit on recognition of assets/minimum funding requirement		(1	)		-			4			-		-			-
Effect of foreign currency translation		(2	)		2			(1	)		-		-			-
Defined benefit plans	$	126		$	(40	)	$	(65	)	$	4	$	4		$	-

Since September 26, 2010, date of transition to IFRS, the cumulative amount of actuarial gains recognized in other comprehensive earnings (loss) is $30 million (2012 – losses of $102 million).

The actuarial gain on variation in discount rate recognized in the statement of comprehensive earnings (loss) at September 28, 2013, was based on an increase of the discount rate for pension plans from 3.69% used at September 29, 2012 to 4.60% at September 28, 2013. For September 29, 2012, the actuarial loss for pension plans was based on a decrease of the discount rate from 4.42% at September 24, 2011 to 3.69% at September 29, 2012.

Assumptions

Significant assumptions for defined benefit pension plans (weighted average):

	2013	2012	2011
Defined benefit obligation at end of year:
Discount rate	4.60%	3.69%	4.42%
Rate of compensation increase	2.50%	2.50%	2.50%
Net periodic benefit cost for the year:
Discount rate	3.69%	4.42%	4.87%
Rate of compensation increase	2.50%	2.50%	2.50%
Expected long-term return on assets	6.28%	6.39%	6.53%

- 32 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

12.	Employee future benefits (continued) Assumptions (continued)
	Significant assumptions for other benefit plans (weighted average):

		2013			2012			2011
Defined benefit obligation at end of year:
Discount rate		4.29%			3.68%			4.19%
Rate of compensation increase		2.50%			2.50%			2.50%
Net periodic benefit cost for the year:
Discount rate		3.68%			4.19%			4.73%
Rate of compensation increase		2.50%			2.50%			2.50%
Assumed healthcare cost trend rate at end of year:
Initial healthcare cost trend		6.00%			7.00%			7.50%
Annual rate of decline in trend rate		0.50%			0.50%			0.50%
Ultimate healthcare cost trend rate		4.50%			5.00%			5.00%
Year ultimate rate is reached		2016			2016			2016
Effect of change in healthcare cost trend rate (1% increase):
Total of service cost and interest cost	$	-		$	-		$	-
Defined benefit obligation	$	1		$	2		$	3
Effect of change in healthcare cost trend rate (1% decrease):
Total of service cost and interest cost	$	-		$	-		$	-
Defined benefit obligation	$	(1	)	$	(2	)	$	(3	)

13.	Share capital
	Authorized
	Unlimited number of common voting shares, without par value.
	Unlimited number of non-voting Class A preferred shares issuable in series without par value, with other attributes to be determined at time of issuance.
	Warrants
	In connection with the $75 million second ranking term loan facility, the Company has granted the lender an option to acquire 3 million common shares of the Corporation at a price of $7 per share. The warrants expire on August 30, 2017. During the December 2012 quarter, concurrently with the first disbursement under the term loan facility, the Company recorded the estimated value of the warrants, which was determined to be $3 million.
	In connection with the $18 million second ranking term loan facility (see note 10), the Company has agreed to grant the lender an option to acquire 712,000 common shares of the Corporation at a premium of 30% over the average trading price of the shares over the five business days prior to the issuance of the warrants. These warrants will be granted on the date of the first advance made under this facility, which has not yet occurred, and will expire five years thereafter.

- 33 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

13.	Share capital (continued)
	Issued and fully paid

		2013		2012
100,000,000 common shares	$	564	$	564
3,000,000 warrants		3		-
	$	567	$	564

Net loss per share

The following table provides the reconciliation between basic and diluted net loss per share:

		2013			2012
Net loss	$	(34	)	$	(82	)
Weighted average number of common shares outstanding		100,000,000			100,000,000
Dilutive effect of employee share options and warrants		-			-
Weighted average number of diluted common shares outstanding		100,000,000			100,000,000
Basic and diluted net loss in dollars per share	$	(0.34	)	$	(0.82	)

The warrants and employees share options had no dilutive effect for the above periods; however, these securities could potentially dilute earnings per share in future periods.

Shareholder Rights Plan

At the Annual and Special Meeting of Shareholders held on January 31, 2013, the Shareholder Rights Plan (the “Plan”), which had been previously adopted by the Board of Directors (the “Board”) of the Corporation, was approved and ratified by a majority of the Shareholders. The Plan is designed to encourage the fair treatment of the Company’s shareholders in the event of any take-over bid for the Company’s common shares. It provides the Board with sufficient time to assess and evaluate any unsolicited take-over bid, and to explore and develop, if appropriate, alternatives that enhance shareholder value and to give shareholders adequate time to consider any such transaction. Accordingly, as of the close of business on January 31, 2013, one right was issued and attached to each common share of the Corporation. Each right entitles the holder of the right to purchase from the Corporation an additional share of the Corporation subject to the terms and conditions of the Plan.

Share-based compensation

Under the prior Long-Term Incentive Plan, the Company had, from time to time, granted options to its employees. The plan provided for the issuance of common shares at an exercise price equal to the market price of the Company’s common shares on the date of the grant. These options vest over a five-year period and expire ten years from the date of issue. No options have been granted since 2006. No compensation expense was recorded for the years ended September 28, 2013 and September 29, 2012.

- 34 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

13.	Share capital (continued)
	The following table summarizes the changes in options outstanding and the impact on weighted average per share exercise price during the year:

	2013				2012
				Weighted				Weighted
				average				average
				exercise				exercise
	Shares			price	Shares			price
Balance, beginning of year	104,987		$	66.13	122,020		$	75.01
Options expired	(4,229	)	$	182.33	(5,791	)	$	188.34
Options forfeited	(4,906	)	$	83.98	(11,242	)	$	99.56
Balance, end of year	95,852		$	60.09	104,987		$	66.13
Exercisable, end of year	95,852		$	60.09	104,987		$	66.13

The following table summarizes the weighted average per share exercise price and the weighted remaining contractual life of the options outstanding as at September 28, 2013:

	Outstanding options and exercisable options
		Weighted		Weighted
		remaining		average
	Number of	contractual		exercise
Year granted	options	life		price
2004	4,941	0.22	$	137.89
2005	44,787	1.54	$	82.89
2006	46,124	2.22	$	29.63
	95,852	1.80	$	60.09

Other share-based compensation

Directors of the Company, which are not employees of the Company, are given the option to receive part of their annual retainer, meeting fees and awards under the Directors’ Share Award Plan in the form of Deferred Share Units (DSU). Each DSU is equivalent in value to a common share of the Company and is notionally credited with dividends when shareholders receive dividends from the Company. A DSU is paid to a director upon termination of Board service and is payable in the form of cash.

- 35 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

13.	Share capital (continued)
	The following table summarizes the grant of DSUs issued under the Directors’ Share Awards Plan:

	2013	2012
Balance, beginning of year	1,119,836	1,119,836
Granted	-	-
Paid	-	-
Balance, end of year	1,119,836	1,119,836
Vested, end of year	1,119,836	869,503

On November 15, 2011, the Board approved the establishment of a Performance-Conditioned Share Unit (PCSU) plan. Under the PCSU plan, designated senior executives will be granted a specified number of DSUs or PCSUs annually, which vest over successive three-year periods, based on total shareholder return over the performance period as determined relative to a peer group and the increase in value of the Company’s weighted average share price over the performance period.

The following table summarizes the grant of DSUs issued under the Performance-Conditioned Share Unit Plan:

	2013		2012
Balance, beginning of year	367,583		373,147
Granted	751,733		-
Forfeited	(130,969	)	(5,564	)
Balance, end of year	988,347		367,583
Vested, end of year	-		-

During fiscal 2009, the Company established a Performance-Conditioned Restricted Share Units (PCRSU) plan for designated senior executives. During the December 2011 quarter, 880,968 PCRSUs were forfeited as performance conditions attached to it were not achieved, and the remaining 1,143,039 PCRSUs were paid for a total consideration of $3 million. There are no PCRSUs outstanding and this plan was terminated.

The following table summarizes the details of share-based compensation expenses (credits) relating to its different share-based compensation plans:

		2013		2012
Directors' share award plan	$	1	$	(1	)
Performance-conditioned share unit plan		-		-
Performance-conditioned restricted share unit plan		-		-
	$	1	$	(1	)
Total carrying amount of liabilities for cash-settled arrangements	$	3	$	2

- 36 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

14.	Guarantees, commitments and contingencies Guarantees
	The Company and certain of its subsidiaries have granted irrevocable letters of credit, issued by highly-rated financial institutions, to third parties to indemnify them in the event the Company does not perform its contractual obligations. The Company has not recorded any additional liability with respect to these guarantees, as the Company does not expect to make any payments in excess of what is recorded in the Company’s financial statements. The letters of credit mature at various dates in fiscal 2014.
	Commitments
	Capital investment
	On March 16, 2012, the Company announced a $190 million capital investment to upgrade its specialty cellulose manufacturing facility at Temiscaming, Quebec. During fiscal 2013, the Company completed a detailed re-estimation exercise for the project and is now forecasting a total estimated cost of $235 million. The project involves the replacement of three old boilers with a new high- pressure boiler designed to burn waste sulphite liquor, a co-product of the specialty cellulose manufacturing process, producing steam for use at the facility. The project also calls for the installation of a new electrical turbine that will increase the Temiscaming facility's electricity production capacity from its current 10 megawatts to 60 megawatts. As at the end of September 2013, the Company had incurred $137 million of capital expenditures for this project and had $41 million of outstanding commitments.
	The Company has entered into a 25-year power purchase contract with Hydro-Quebec that will allow the Company to sell to Hydro-Quebec up to 50 megawatts of the incremental electricity generated by the new turbine at green energy rates of $106 per MW/hour, indexed annually to the consumer price index.
	The Company has entered into operating leases for expected minimum lease payments of $9 million. Outflows for the years following September 28, 2013, are as follows:

2014	$	4
2015	$	2
2016	$	2
2017	$	1
2018 and thereafter	$	-

Contingencies

The Company is party to claims and litigations arising in the normal course of operations. The Company does not expect that the resolution of these matters will have a material effect on the Company’s financial condition, earnings or liquidity.

- 37 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

15. Analysis of expenses by nature

		2013		2012
Wages and salaries	$	232	$	275
Employee benefits expense		85		97
Raw materials and other manufacturing costs		892		1,004
Changes in inventories		1		(37	)
Other expenses		21		25
	$	1,231	$	1,364
Cost of sales	$	1,159	$	1,290
Selling, general and administrative		72		74
	$	1,231	$	1,364

16.	Other items
	The following table provides a summary of the other items by business segment of the Company:

		2013			2012
Forest Products:
Gain on sale of BC sawmills	$	-		$	(24	)
Loss on sale/closure of hardwood flooring plants		-			2
		-			(22	)
Paper Pulp:
Loss on sale of Skookumchuck, BC, pulp mill		2			-
Impairment loss - Skookumchuck, BC, pulp mill		22			-
Impairment loss - Chetwynd, BC, pulp mill		-			50
		24			50
Corporate:
Costs for permanently idled facilities		7			10
Gain on sale of assets		(2	)		-
Impairment loss - Temlam loan receivable		-			16
Gain on sale of minority equity investment		-			(4	)
		5			22
Other items	$	29		$	50

2013

On May 17, 2013, the Company sold its pulp mill located in Skookumchuck, BC, for proceeds of $97 million. As a result of the sale, the Company recorded a loss of $2 million in the June 2013 quarter. The following table provides information related to Balance Sheet items of the mill at time of sale:

Current assets	$	41
Long-term assets		79
Current liabilities		(12	)
Employee future benefits and other		(9	)
	$	99

- 38 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

16.	Other items (continued) 2013 (continued)
	During the March 2013 quarter, the Company announced that it had reached an agreement to sell its pulp mill located in Skookumchuck, BC. The Company recorded an impairment charge of $22 million on the non-current assets to reflect anticipated net proceeds of sale.
	During fiscal 2013, the Company recorded a charge of $7 million relating to several permanently idled facilities. The costs relate to custodial, site security, legal and remediation activities.
	During the December 2012 quarter, the Company recorded a gain of $2 million relating to the sale of land and building in Cranbrook, BC.
	2012
	During the September 2012 quarter, the Company recorded an impairment loss of $50 million related to property, plant and equipment, including the related supplies and materials of the Chetwynd, BC, high-yield pulp mill. Subsequent to the announced indefinite idling of the pulp mill and following a review of its business plan, the Company undertook an impairment review and found that the carrying value of its assets exceeded their recoverable amount being the fair value less costs to sell. The recoverable amount was determined to be nominal.
	During fiscal 2012, the Company recorded charges of $10 million relating to several permanently idled facilities. The costs relate to custodial, site security, legal and remediation activities.
	On March 23, 2012, the Company sold its British Columbia Southern Interior wood products assets for proceeds of $66 million. The sale included the Elko and Canal Flats sawmills and approximately 1.1 million cubic meters of combined Crown tenures, private land and contract annual allowable cut. As a result of the sale, the Company recorded a gain of $24 million in the March 2012 quarter. The following table provides information related to balance sheet items of the two sawmills at the time of sale:

Current assets	$	35
Long-term assets		28
Current liabilities		(10	)
Long-term reforestation obligations		(9	)
Employee future benefits and other		(2	)
	$	42

During the March 2012 quarter, the Company recorded an impairment loss of $16 million related to the loan receivable from Temlam Inc. The latter is currently under creditor protection and owns an idled laminated veneer lumber (LVL) facility located in Amos, Quebec. The Company has a 50% secured interest in the facility. The cutting rights that were previously attached to the LVL facility were granted to another company. In the absence of a guaranteed fiber supply, the Company has concluded that the re-start of the facility is unlikely and has adjusted its carrying value to the amount anticipated to be realized upon liquidation or sale.

- 39 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

16.	Other items (continued) 2012 (continued)
	On December 22, 2011, the Company recorded a gain of $4 million relating to the sale of a minority equity position in two dissolving pulp mills located in the Province of New Brunswick.
	On November 25, 2011, the Company sold its Toronto, Ontario, hardwood flooring plant for proceeds of $13 million. Concurrently, the Company also announced the closure of its Huntsville, Ontario, hardwood flooring plant. The sale of the Toronto plant and the closure of the Huntsville plant resulted in a charge of $2 million that has been recorded in the December 2011 quarter.
17.	Net finance costs

		2013			2012
Interest on long-term debt	$	40		$	36
Interest on short-term debt		2			2
Bank charges and other financing expenses		3			2
Net foreign exchange loss (gain), excluding exchange on long-term debt		(1	)		4
Interest income		-			(1	)
Exchange loss (gain) on long-term debt		14			(13	)
Expected return on plan assets less accretion of employee future benefits obligation (note 12)		(7	)		-
Interest capitalized on assets under construction		(9	)		(2	)
	$	42		$	28
Finance costs	$	50		$	42
Finance income		(8	)		(14	)
Net finance costs	$	42		$	28

- 40 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

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

		2013			2012
Loss before income taxes	$	(13	)	$	(60	)
Income tax recovery based on combined federal and provincial income tax rates of 26.3% (2012 - 26.3%)	$	(3	)	$	(16	)
Increase (decrease) resulting from:
Difference in statutory income tax rates		1			6
Permanent differences		2			-
Unrecognized tax asset arising from current losses and other tax adjustements		21			32
		24			38
Income tax expense	$	21		$	22
Income taxes:
Current	$	20		$	11
Deferred		1			11
Income tax expense	$	21		$	22

Unrecognized deferred tax assets

Deferred tax assets have not been recognized in respect of the following:

		2013		2012
Deferred tax assets:
Non-capital loss carry-forwards and pool of deductible scientific research and development expenditures	$	414	$	405
Property, plant and equipment		91		66
Employee future benefits		29		78
Capital loss carry-forwards		1		3
Other		9		9
	$	544	$	561

Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profits will be available against which the Company can utilize the benefits.

- 41 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

18.	Income taxes (continued)
	Unrecognized deferred tax assets (continued)
	As at September 28, 2013, certain subsidiaries have accumulated the following losses and deductions for income tax purposes, which may be carried forward to reduce taxable income and taxes payable in future years:

			Expiring
		Amounts	dates
Non-capital loss carried forward for:
Canadian subsidiaries	$	1,178	2014 to 2033
U.S. subsidiaries	$	14	2028 to 2032
Pool of deductible scientific research and experimental development	$	374	Unlimited

Recognized deferred tax assets and liabilities

		Deferred tax assets						Deferred tax liabilities
		Non-capital			Property,
		loss carry-			plant and			Other
		forwards			equipment			liabilities			Total
Balance, September 24, 2011	$	11		$	5		$	(1	)	$	15
Through statement of net earnings (loss)		(11	)		(1	)		1			(11	)
Balance, September 29, 2012		-			4			-			4
Through statement of net earnings (loss)		6			(3	)		(4	)		(1	)
Through statement of comprehensive earnings (loss)		2			-			-			2
Balance, September 28, 2013	$	8		$	1		$	(4	)	$	5

19.	Financial instruments
	Fair value
	The carrying amount of cash and cash equivalents, restricted cash, trade and other receivables, operating bank loans, trade, other payables and accrued charges, and interest payable approximates their fair values because of the near-term maturity of those instruments. The carrying value of the long-term loans receivable and other financial long-term liabilities also approximates their fair values. The carrying value and the fair value of long-term debt are as follows:

		2013		2012
Carrying value	$	385	$	339
Fair value	$	428	$	369

- 42 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

19.	Financial instruments (continued)
	Fair value (continued)
	The fair value of the senior secured notes was estimated using quoted market prices; the fair value of the other long-term debt was estimated based on discounted cash flows using year-end market yields of similar instruments having the same maturity.
	Derivative financial instruments are the only financial instruments of the Company measured at fair value on a recurring basis and have been valued in accordance with Level 1 of the fair value hierarchy, which is based on unadjusted quoted prices in an active market. The Company had no derivative financial instruments at September 28, 2013 and September 29, 2012.
	Financial risk management
	Overview
	The Company has exposure to the following risks from its use of financial instruments:
		Credit risk
		Liquidity risk
		Market risk
		-	Foreign currency rate risk
		-	Interest rate risk
		-	Commodity price and operational risk
	The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management policy. The policy defines the method by which the Company manages its risk through properly and prudently administering the Company’s financial assets, liabilities and derivatives. Internal Audit measures the adequacy of the business control systems through the execution of an Internal Audit Plan approved by the Audit Committee.
	Exposure to credit risk
	Credit risk arises from the possibility that entities to which the Company sells products may experience financial difficulty and be unable to fulfill their contractual obligations. The Company does not have a significant exposure to any individual customer or counterparty. As required in the Risk Management Policy, the Company reviews a new customer’s credit history before extending credit and conducts regular reviews of its existing customers’ credit performance. All credit limits are subject to evaluation and revision at any time based on changes in levels of creditworthiness and must be reviewed at least once per year. Sales orders cannot be processed unless a credit limit has been properly approved. The Company may require payment guarantees, such as letters of credit, or obtain credit insurance coverage. Bad debt expense has not been significant in the past. The allowance for doubtful accounts for the Company, as at September 28, 2013 and September 29, 2012, was negligible.
	The Company also has credit risk relating to cash and cash equivalents. The Company manages risk by dealing only with highly-rated financial institutions.

- 43 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

19.	Financial instruments (continued) Financial risk management (continued)
	The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:

		2013		2012
Loans and receivables, other than cash, cash equivalents and restricted cash	$	167	$	212
Cash, cash equivalents and restricted cash	$	74	$	92

The maximum exposure to credit risk for trade accounts receivable as at September 28, 2013 and September 29, 2012, by geographical region was as follows:

		2013		2012
Canada	$	19	$	19
United States		31		51
European Union		42		42
China		4		5
Other		15		24
		111		141
Allowance for doubtful accounts		-		-
Trade receivables net		111		141
Other receivables including input tax credits		46		59
Accounts receivable	$	157	$	200

The aging of trade accounts receivable was as follows:

		2013				2012
		Gross		Allowance		Gross		Allowance
Not past due	$	102	$	-	$	134	$	-
Past due 0-30 days		7		-		5		-
Past due 31-60 days		2		-		2		-
	$	111	$	-	$	141	$	-

The movement in the allowance for doubtful accounts receivable in respect to trade accounts receivable was negligible in fiscal 2013 and fiscal 2012.

- 44 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

19.	Financial instruments (continued) Financial risk management (continued)
	Exposure to liquidity risk
	Liquidity risk arises from the possibility that the Company will not be able to meet its financial obligations as they fall due. The Company has an objective of maintaining liquidity equal to 12 months of maintenance capital expenditures, interest and principal repayments, seasonal working capital requirements and general corporate purposes, which would require approximately $135 million to $150 million of liquidity.
	Repayment of amounts due within one year is funded by normal collection of current trade accounts receivable. Liquidity in the form of cash, cash equivalents and unused revolving credit facilities is also maintained to assist in the solvency and financial flexibility of the Company. Liquidity as at September 28, 2013, totalled $109 million (2012 - $140 million). The decrease in liquidity was anticipated as the Company continued with its capital expenditure program. In order to address this situation, the Company entered into two secured term loan facilities totalling $133 million of which $73 million was undrawn. In addition, the Company is assessing several liquidity enhancing initiatives such as reducing or delaying capital expenditures, asset sales and seeking other sources of financing or funding.
	The following are the contractual maturities of financial liabilities, including interest payments:

													2013
		Carrying			Contractual								After
		amount			cash flows		Year 1		Years 2-3		Years 4-5		5 years
Secured bank loans	$	389	(1)	$	602	$	50	$	84	$	87	$	381
Unsecured loans		13			14		5		7		1		1
Operating bank loans		57			57		57		-		-		-
Trade and others		205			205		205		-		-		-
	$	664		$	878	$	317	$	91	$	88	$	382
(1) before financing costs

It is not expected that the cash outflows included in the maturity analysis could occur significantly earlier, or, excluding the effects of foreign exchange fluctuations on US dollar liabilities, at significantly different amounts.

Foreign currency rate risk management

The Company is exposed to currency risk on sales, purchases and long-term debt that are denominated in a currency other than the Canadian dollar. The currencies in which these transactions are primarily denominated are US dollar and euro.

- 45 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

19.	Financial instruments (continued) Financial risk management (continued)
	The Company’s revenues for most of its products are affected by fluctuations in the relative exchange rates of the Canadian dollar with respect to the US dollar and the euro. The Company generates approximately $900 million of US $ denominated sales annually from its Canadian operations. As a result, any decrease in the value of the US dollar and the euro relative to the Canadian dollar reduces the amount of revenues realized on sales in local currency. In addition, since business units purchase the majority of their production inputs in local currency, fluctuations in foreign exchange can significantly affect the unit’s relative cost position when compared to competing manufacturing sites in other currency jurisdictions.
	To reduce the impact of fluctuations in the value of the US dollar, the Company has adopted a policy, which allows for hedging up to 50% of its anticipated US $ receipts for up to 36 months in duration. As at September 28, 2013 and September 29, 2012, the Company did not hold any foreign exchange contracts.
	Foreign currency rate sensitivity analysis
	Based on 2014 planned sales volumes and prices, the following table illustrates the impact of a 1% change in the value of the US dollar versus the Canadian dollar and the euro. For illustrative purposes, an increase of 1% in the value of the US dollar is assumed. A decrease would have the opposite effects of those shown below:

Sales increase	$	10
Cost of sales increase		3
Operating earnings and adjusted EBITDA increase		7
Loss on translation of US $ denominated debt		3
Pre-tax earnings increase	$	4

Direct US $ purchases of raw materials, supplies and services provided a partial offset to the impact on sales. This does not include the potential indirect impact of currency on the cost of items purchased in the local currency. Interest expense on the Company’s US $ denominated debt provides a small offset to its US $ exposure.

Interest rate risk management and sensitivity analysis

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

Fluctuations of market interest rates have little impact on the Company’s financial results since the majority of the Company’s debts are fixed rate debts.

- 46 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

19.	Financial instruments (continued) Financial risk management (continued)
	Commodity price and operational risk management
	The Company’s financial performance is dependent on the selling prices of its products. The markets for most lumber, pulp and paper products are cyclical and are influenced by a variety of factors. These factors include periods of excess product supply due to industry capacity additions, periods of decreased demand due to weak general economic activity, inventory de-stocking by customers, and fluctuations in currency exchange rates. During periods of low prices, the Company is subject to reduced revenues and margins, resulting in substantial declines in profitability and possibly net losses. The Company may periodically purchase lumber, pulp and newsprint price derivative commodity contracts to mitigate the impact of price volatility. The Company had no derivative financial instruments at September 28, 2013 and September 29, 2012.
	The manufacturing activities conducted by the Company’s operations are subject to a number of risks, including availability and price of fibre and competitive prices for purchased energy and raw materials. To mitigate the impact of price fluctuations, the Company may periodically purchase derivative commodity contracts. As at September 28, 2013 and September 29, 2012, the Company did not hold any significant derivative commodity contracts.
20.	Capital management
	It is the Company’s objective to manage its capital to ensure adequate capital resources exist to support operations while maintaining its business growth. The Company sets the amount of capital in proportion to risk. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk of characteristics of the underlying assets.
	The Company monitors capital on the basis of net debt to total capitalization ratio. Net debt is calculated as a total debt (long-term debt plus bank indebtedness and operating bank loans) less cash, cash equivalents and restricted cash.
	Total capitalization includes net debt plus long-term provisions, employee future benefit liabilities, deferred tax liabilities, other long-term liabilities, and shareholders’ equity.
	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 28, 2013 (September 29, 2012 – 45%). The increase was due to a higher debt borrowed primarily to finance the 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.
	There were no changes in the Company’s approach to capital management during fiscal 2013.

- 47 -

TEMBEC INC.

Notes to Consolidated Financial Statements (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

21.	Related parties
	Key management personnel compensation
	The key management personnel of the Company are the members of the Board of Directors and certain executive officers. They control less than 1% of the voting shares of the Company.
	Key management personnel participate in the Company’s long-term incentive plans (see note 13). Key management personnel compensation is comprised of the following for the past two years:

		2013		2012
Short-term compensation benefits	$	4	$	4
Share-based compensation		1		(1	)
	$	5	$	3

22.	Subsequent events
	BC Land Sale Initiative
	On September 30, 2013, the Company announced the BC Lands Sale Initiative. As at November 29, 2013, the Company completed the sale of various parcels of land for total gross proceeds of $23 million.
	Antidumping duties - China
	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 after November 6, 2013. 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.

- 48 -

EX-99.3

Exhibit 99.3

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
as at November 29, 2013

The Management’s Discussion and Analysis (MD&A) section provides a review of the significant developments and issues that influenced Tembec Inc.’s financial performance during the fiscal year ended September 28, 2013, as compared to the fiscal year ended September 29, 2012. The MD&A should be read in conjunction with the audited consolidated financial statements for the fiscal year ended September 28, 2013. 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 section “Use of non-IFRS financial measures”.

The 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 this MD&A is as at November 29, 2013. Disclosure contained in this document is current to that date, unless otherwise stated.

Throughout the MD&A, “Tembec” or “Company” means Tembec Inc. and its consolidated subsidiaries. Tembec’s operations consist of five reportable business segments: Forest Products, Specialty Cellulose Pulp, Paper Pulp, Paper and Corporate. On September 28, 2013, the Company had approximately 3,500 employees, as compared to 3,700 at the end of the prior fiscal year. The Company operates manufacturing facilities in Quebec, Ontario, British Columbia, the state of Ohio as well as in Southern France. Principal facilities are described in the subsequent sections of the MD&A.

- 1 -

2013 vs. 2012

FINANCIAL SUMMARY
(in millions of dollars, unless otherwise noted)	2012		2013
Sales	1,666		1,534
Freight and other deductions	232		201
Lumber export taxes	7		3
Cost of sales (excluding depreciation and amortization)	1,290		1,159
SG&A	74		72
Share-based compensation	(1	)	1
Adjusted EBITDA	64		98
Depreciation and amortization	46		40
Other items	50		29
Operating earnings (loss)	(32	)	29
Interest, foreign exchange and other	41		28
Exchange loss (gain) on long-term debt	(13	)	14
Loss before income taxes	(60	)	(13	)
Income tax expense	22		21
Net loss	(82	)	(34	)
Basic and diluted net loss in dollars per share	(0.82	)	(0.34	)
Total comprehensive earnings (loss)	(131	)	115
Total assets (at year-end)	1,059		1,021
Total long-term debt (at year-end) (1)	339		385
Total long-term liabilities (at year-end)	627		509
(1) Includes current portion

Business segments

During the December 2012 quarter, the Company reorganized its internal reporting structure, which impacted segment disclosure included in the financial statements and MD&A. Prior to the change, the Company had reported the results of the Skookumchuck, British Columbia (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 was regrouped with the high-yield pulp mills in a new segment called Paper Pulp. The Specialty Cellulose and Chemical Pulp segment was renamed Specialty Cellulose Pulp. Comparative prior year segment information has been restated in the financial statements to conform to the new presentation.

- 2 -

SALES
					Total		Price		Volume & mix
(in millions of dollars)	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 fiscal 2012. 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.

In terms of geographical distribution, the U.S. remained the Company’s principal market with 39% of consolidated sales in fiscal 2013, as compared to 37% in the prior year. Canadian sales represented 19% of sales, as compared to 18% in the prior year. Sales outside of the U.S. and Canada represented the remaining 42% in fiscal 2013, as compared to 45% a year ago.

ADJUSTED EBITDA
					Total		Price		Cost & volume
(in millions of dollars)	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 of $98 million was $34 million higher than the prior year. Forest Products segment adjusted EBITDA was up $33 million from the prior year as a result of higher prices, partially offset by higher costs. Specialty Cellulose Pulp segment adjusted EBITDA declined 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 declined by $12 million due to lower prices and higher costs.

- 3 -

OPERATING EARNINGS (LOSS)
							Adjusted				Other
					Total		EBITDA		Depreciation		items
(in millions of dollars)	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 in fiscal 2012.

The Forest Products segment generated operating earnings of $8 million, as compared to an operating loss of $4 million in fiscal 2012. In addition to the previously noted improvement in adjusted EBITDA, the sale of the BC sawmills and the hardwood flooring operations in fiscal 2012 led to lower depreciation expense. During the prior fiscal year, the Company recorded a gain of $24 million related to the sale of the BC sawmills. The Company also sold its Toronto, Ontario, hardwood flooring plant and concurrently closed its Huntsville, Ontario, hardwood flooring plant. The combined effect was a charge of $2 million.

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 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, the segment saw depreciation expense decline by $9 million due to the sale of the Skookumchuck, BC, NBSK pulp mill. The prior year operating results included a $50 million asset impairment charge relating to the Chetwynd, BC, high-yield pulp mill. The current year included a $22 million asset impairment charge and a subsequent $2 million loss on sale related to the Skookumchuck pulp mill.

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

Corporate segment results improved by $15 million, primarily due to “Other items”. In fiscal 2013, the Company generated a $2 million gain related to the sale of the Cranbrook, BC, office. The prior year included a $16 million loss relating to the impairment of a loan receivable from Temlam Inc. The latter is currently under creditor protection and owns an idled laminated veneer lumber (LVL) facility located in Amos, Quebec. The Company has a 50% secured interest in the facility. The prior year also included a gain of $4 million relating to the sale of a minority equity interest in two dissolving pulp mills.

- 4 -

SEGMENT REVIEW – 2013 vs. 2012

FOREST PRODUCTS
(in millions of dollars)	2012		2013
Sales (1)	432		420
Freight and other deductions	41		39
Lumber export taxes	7		3
Cost of sales (1)	385		350
SG&A	15		11
Adjusted EBITDA	(16	)	17
Adjusted EBITDA margin on sales	(3.7	)%	4.0%
Depreciation and amortization	10		9
Other items:
Gain on sale of BC sawmills	(24	)	-
Loss on sale/closure of flooring operations	2		-
Operating earnings (loss)	(4	)	8
Identifiable assets (excluding cash)	216		155
(1) Includes intersegment sales eliminated on consolidation

The Forest Products segment is divided into two main areas of activity: forest resource management and manufacturing operations.

The Forest Resource Management group is responsible for managing all of the Company’s Canadian forestry operations. This includes the harvesting of timber, either directly or by contractual agreements, and all silviculture and regeneration work required to ensure a sustainable supply for the manufacturing units. The group is also responsible for third party timber purchases, which are needed to supplement total requirements. The group’s main objective is the optimization of the flow of timber into various manufacturing units. As the Company’s forest activity in Canada is conducted primarily on Crown lands, the Forest Resource Management group works closely with provincial governments to ensure harvesting plans and operations comply with established regulations and that stumpage charged by the provinces is reasonable and reflects the fair value of the timber being harvested. During fiscal 2013, the Company’s operations harvested and delivered 3.2 million cubic metres of timber, compared to 3.9 million cubic metres in the prior year. Additional supply of approximately 0.6 million cubic metres was secured mainly through purchases and exchanges with third parties, compared to 0.8 million cubic metres in the prior year.

The Forest Products segment includes operations located in Quebec and Ontario. At the end of the March 2012 quarter, the Company sold its two BC sawmills. The sawmills had a capacity of 450 million board feet of lumber, which represented approximately 29% of the Company’s total SPF lumber capacity at that time. The SPF lumber operations can produce approximately 880 million board feet of lumber. The specialty wood operations can annually produce 30 million board feet of hardwood lumber. During the December 2011 quarter, the Company sold its Toronto, Ontario, hardwood flooring plant and announced the closure of its Huntsville, Ontario, hardwood flooring plant. The two operations had a combined capacity of 20 million square feet of hardwood flooring. The Company’s engineered wood operations consist of two finger joint lumber operations, which were idle for all of fiscal 2012 and fiscal 2013.

- 5 -

The following summarizes the current annual capacity of each facility by product group:

SPF LUMBER	mbf
Stud lumber - La Sarre, QC	135,000
Stud lumber - Senneterre, QC	100,000
Stud lumber - Cochrane, ON	110,000
Stud lumber - Kapuskasing, ON	105,000
Random lumber - Béarn, QC	110,000
Random lumber - Chapleau, ON	135,000
Random lumber - Hearst, ON	160,000
Finger joint lumber - Cranbrook, BC	25,000
	880,000
SPECIALTY WOOD	mbf
Hardwood lumber - Huntsville, ON	30,000
ENGINEERED WOOD	mbf
Engineered finger joint lumber - La Sarre, QC	60,000
Engineered finger joint lumber - Kirkland Lake, ON	30,000
	90,000

The segment is dominated by SPF lumber, which represented 97% of building material sales in fiscal 2013, compared to 94% in the prior year. The volume of SPF lumber sold in fiscal 2013 decreased by 92 million board feet or 11%. The sale of the Company’s two BC sawmills at the end of the March 2012 quarter had a significant impact on shipments and volumes. Shipments of lumber from the two sawmills during the first two quarters of the prior year totalled 172 million board feet. Lumber shipments from the Company’s Eastern sawmills increased by 80 million board feet, partially offsetting the previously noted decrease. Shipments were equal to 82% of capacity, up from 73% in fiscal 2012. Market conditions for lumber improved and this translated into increased demand and prices. US $ reference prices for random lumber were up by US $71 per mbf on average while stud lumber increased by US $51 per mbf. 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. The combined result was a $59 per mbf price increase from a year ago.

Specialty wood represented 3% of building material sales in fiscal 2013, down from 6% in the prior year. The decline was due to the sale of the Toronto, Ontario, hardwood flooring plant and the closure of the Huntsville, Ontario, hardwood flooring plant.

There were no engineered wood sales in fiscal 2012 and 2013. The two finger joint facilities were idle for all of fiscal 2012 and fiscal 2013.

The Forest Products segment produced and shipped approximately 870,000 tonnes of wood chips in fiscal 2013, 67% of which were directed to the Company’s pulp and paper operations. In 2012, the segment produced 977,000 tonnes and shipped 80% of this volume to the pulp and paper mills. The internal transfer price of wood chips is based on current and expected market transaction prices.

- 6 -

Total sales for this segment reached $420 million, a decrease of $12 million over the prior year. After eliminating internal sales, the Forest Products segment generated 23% of Company consolidated sales, up from 21% in the prior year. The segment’s main market is North America, which represented 100% of consolidated sales in fiscal 2013, compared to 97% in the prior year.

	Sales				Shipments			Selling prices
	($ millions)				(000 units		)	($ / unit)
	2012		2013		2012	2013		2012	2013
SPF lumber (mbf)	282		295		835.7	743.8		337	396
Specialty wood
Hardwood (mbf)	8		9		12.7	13.6		629	662
Hardwood flooring (000 square ft)	10		-		2.2	-		4,545	-
	18		9
Engineered Wood
Engineered finger joint lumber (mbf)	-		-		-	-		-	-
Total building materials	300		304
Wood chips, logs and by-products	132		116
Total sales	432		420
Internal wood chips and other sales	(84	)	(66	)
Consolidated sales	348		354

- 7 -

Markets

The Company markets its lumber with its own internal sales force.

The benchmark random length Eastern SPF average lumber price (#2 and better delivered Great Lakes) increased from US $370 per mbf to US $441 per mbf in 2013. The reference price for stud lumber also increased with the Eastern average lumber price (delivered Great Lakes) up from US $353 per mbf to US $404 per mbf. The prices were driven by an improving U.S. housing market. Housing starts in the U.S. on a seasonally adjusted basis averaged 906,000 units in fiscal 2013, an increase over the 729,000 units in fiscal 2012. However, these remain below the 2 million unit mark experienced in the 2004-2006 period and the +1.2 million average that would be indicative of normal market conditions. While the Company recognized several years ago that U.S. housing starts could not maintain the 2 million unit per year run rate, and that a degree of market correction would likely occur at some point, the duration of the correction has been significantly longer than those of prior cycles. The negative effects of the sub-prime mortgage difficulties, the latter having fuelled the strong demand in 2004-2006, have been much greater in terms of impact than originally anticipated. During fiscal 2013, the Company shipped 388,800 mbf into the U.S. market from its Eastern sawmills. In the prior year, shipments to the U.S. from the Eastern sawmills were 295,000 mbf and shipments from the two Western sawmills were 77,200 mbf in the first six months of fiscal 2012. The improved U.S. market conditions drove the 32% increase in Eastern lumber shipments to the U.S.

While the U.S. housing market improved, this was not the case for the Canadian housing market. Housing starts in Canada on a seasonally adjusted basis averaged 190,000 units, an 11% decline from 214,000 units in the prior year. The weaker Canadian demand for lumber did not affect prices, which are determined primarily by the much larger U.S. market. During fiscal 2013, the Company shipped 355,000 mbf into the Canadian market from its Eastern sawmills. In the prior year, Canadian shipments from the Eastern sawmills totalled 369,200 mbf and shipments from the two Western sawmills were 94,300 mbf in the first six months of fiscal 2012.

The Company’s financial performance continued to be impacted by export taxes on lumber shipped to the U.S. Effective October 12, 2006, the governments of Canada and the United States implemented an agreement for the settlement of the softwood lumber dispute. The Softwood Lumber Agreement (SLA) requires that an export tax be collected by the Government of Canada, which is based on the price and volume of lumber shipped. Since that date, the Company’s Eastern Canadian sawmills have been subject to export quota limitations and a 5% export tax on lumber shipped to the U.S. The SLA provides that during periods of relatively high prices, as was the case during the spring and summer months of 2013, the export tax rate declines. In fiscal 2013, the average tax rate on Eastern lumber shipped to the U.S. was 1.9% and the total cost was $3 million. In fiscal 2012, the average tax rate on Eastern lumber shipments to the U.S. was 4.8% and the total cost was $4 million. The rate decline was due to the higher prices. The impact of the lower rate was partially offset by the increased shipments to the U.S. market.

The Company sold its two British Columbia sawmills in March 2012. As such, the MD&A data includes the mills financial results for the first six months in fiscal 2012. The BC sawmills were subject to a 15% export tax, but shipments were not quota limited. In fiscal 2012, the average rate on shipments was 15% and the total cost was $3 million.

- 8 -

Operating Results

The following summarizes adjusted EBITDA variances by major element:

	Variance - favourable (unfavourable)
					Inventory
		Export	Mill		NRV
(in millions of dollars)	Price	taxes	costs		adjustments		Freight		Other	TOTAL
SPF lumber	43	1	(12	)	(3	)	(3	)	6	32
Other segment items	-	-	-		-		-		1	1
	43	1	(12	)	(3	)	(3	)	7	33

In fiscal 2013, adjusted EBITDA was $17 million compared to negative adjusted EBITDA of $16 million in the prior year. SPF lumber adjusted EBITDA improved by $32 million. The previously noted higher selling prices for lumber increased adjusted EBITDA by $43 million. The higher prices were assisted by currency as the Canadian dollar averaged US $0.985, a 0.7% decrease from US $0.992 in the prior year. The previously noted decline in export taxes on Eastern lumber shipped to the U.S. increased adjusted EBITDA by a further $1 million. Sawmill manufacturing costs increased by $12 million, primarily due to increased fibre costs. In the prior year, the segment had benefited from a $3 million favourable adjustment to the carrying values of logs and lumber inventories. There was no net realizable value adjustment in fiscal 2013. The $6 million positive variance in “Other” related primarily to the two BC sawmills. In the first six months of the prior year, the sawmills had generated negative adjusted EBITDA of $5 million. The adjusted EBITDA margin to total sales was 4.0% compared to negative 3.7% in the prior year.

The following summarizes operating results variances by major element:

				Variance
				favourable
(in millions of dollars)	2012		2013	(unfavourable)
Adjusted EBITDA	(16	)	17	33
Depreciation and amortization	10		9	1
Other items (gain)	(22	)	-	(22	)
Operating earnings (loss)	(4	)	8	12

The Forest Products segment generated operating earnings of $8 million, as compared to an operating loss of $4 million in fiscal 2012. In addition to the previously noted improvement in adjusted EBITDA, the sale of the BC sawmills and the hardwood flooring operations led to lower depreciation expense. During the prior fiscal year, the Company recorded a gain of $24 million related to the sale of the BC sawmills. The Company sold its Toronto, Ontario, hardwood flooring plant and concurrently closed its Huntsville, Ontario, hardwood flooring plant. The combined effect was a charge of $2 million.

- 9 -

SPECIALTY CELLULOSE PULP
(in millions of dollars)	2012	2013
Sales - Pulp	407	360
Sales - Chemicals	100	100
	507	460
Freight and other deductions	40	36
Cost of sales	352	331
SG&A	20	20
Adjusted EBITDA	95	73
Adjusted EBITDA margin on sales	18.7%	15.9%
Depreciation and amortization	11	14
Operating earnings	84	59
Identifiable assets (excluding cash)	544	538

The Specialty Cellulose Pulp segment consists of two manufacturing facilities, which produce specialty cellulose pulps.

The specialty cellulose pulp mills have an annual capacity of 310,000 tonnes per year. The pulp produced at the two pulp mills is a high purity cellulose utilized in a wide variety of specialized products such as pharmaceuticals, food additives, and industrial chemicals. The Temiscaming mill also produces “viscose” grade pulp, which is utilized in the production of viscose staple fibre, which in turn is used to produce rayon for the textile industry.

The specialty cellulose mills generate lignin as a by-product of the sulphite process, which is sold to third parties. The Temiscaming mill also includes a facility that produces ethanol as a by-product that is also sold to third parties.

The segment also includes a stand-alone resin business, which produces powder and liquid phenolic resins at two operating sites in Quebec: Temiscaming and Longueuil. The Company also operates a third facility located in Toledo, Ohio, which manufactures powder and liquid amino-resins. The chemical business periodically purchases and re-sells third party pulp mill by-product chemicals.

- 10 -

The following summarizes the annual operating capacity of each facility:

SPECIALTY CELLULOSE	tonnes
Specialty cellulose - Temiscaming, QC	160,000
Specialty cellulose - Tartas, France	150,000
	310,000
CHEMICALS
Resin and related products - Temiscaming and Longueuil, QC; Toledo, Ohio	170,000
Lignin - Temiscaming, QC; Tartas, France	190,000
Ethanol - Temiscaming, QC (million litres)	12.1

Total sales for the Specialty Cellulose Pulp segment were $460 million, a decrease of $47 million from the prior year. The decrease was due to lower shipments of specialty grades. The Specialty Cellulose Pulp segment generated 30% of Company consolidated sales, unchanged from the prior year. The Specialty Cellulose Pulp segment is a global business. In 2013 and fiscal 2012, 62% of consolidated sales were generated outside of Canada and the U.S.

	Sales		Shipments			Selling prices
	($ millions)		(000 units		)	($ / unit)
	2012	2013	2012	2013		2012	2013
Specialty pulp
Specialty cellulose (tonnes)	353	318	215.1	186.3		1,641	1,705
Viscose grade (tonnes)	54	43	42.3	44.9		1,264	951
	407	361	257.4	231.2
Chemicals
Resin and related products (tonnes)	55	56	55.7	50.6		987	1,107
Lignin (tonnes)	29	26	132.4	94.8		219	274
Ethanol (000 litres)	9	9	10.0	10.3		900	874
	93	91
Other sales	7	8
Consolidated sales	507	460

- 11 -

Markets

The Company markets its pulp on a world-wide basis, primarily through its own sales force. Permanent sales offices are maintained in Toronto, Canada and Dax, France. Contractual arrangements with third party representatives are also utilized.

The shipments to capacity ratio for specialty pulp was 75% in fiscal 2013 versus 83% in the prior year. The decrease in shipment ratio was due primarily to a decrease of 28,800 tonnes in specialty grade pulp shipments. During fiscal 2012 and 2013, both mills operated as planned and no production curtailments were taken for market conditions. However, demand for specialty grades was weaker in fiscal 2013 and as a result the mills operated at a reduced rate, producing 16,700 fewer tonnes than in the prior year. Despite the lower demand, realized prices increased by $64 per tonne, assisted by a Canadian dollar that was weaker versus the euro and the US dollar. Market conditions in the viscose grade continued to weaken from the record levels reached in 2011 and prices declined by $313 per tonne. The viscose grade market continues to suffer from excess production capacity brought on by the very high prices reached in 2011. The Company has a strategy of gradually reducing its exposure to the viscose market by producing additional specialty grade volume. Unfortunately, the weaker specialty market conditions experienced in fiscal 2013 did not permit the Company to make any progress with this strategy. In fiscal 2013, viscose grade shipments totalled 44,900 tonnes, compared to 42,300 tonnes in the prior year.

Operating Results

The following summarizes adjusted EBITDA variances by major element:

	Variance - favourable (unfavourable)
			Mill		Inventory NRV
(in millions of dollars)	Price		costs		adjustments		Mix & volume		Other	TOTAL
Specialty cellulose	(2	)	(10	)	(1	)	(12	)	1	(24	)
Chemicals	5		(3	)	-		-		-	2
	3		(13	)	(1	)	(12	)	1	(22	)

Fiscal 2013 adjusted EBITDA was $73 million compared to $95 million in the prior year, a decrease of $22 million. Higher realized prices for specialty grades increased adjusted EBITDA by $12 million. But this was more than offset by the significant decline in viscose grade prices, which reduced adjusted EBITDA by $14 million. Manufacturing costs at the two specialty pulp mills increased by $10 million, primarily for chemicals and under-absorption of fixed costs as the two mills produced 16,700 fewer tonnes in fiscal 2013. During the current year, the segment also absorbed a net realizable value charge of $1 million on the carrying value of its viscose grade pulp inventories as pricing ended the year at levels that were less than total estimated delivered cost. Adjusted EBITDA was also negatively impacted by a volume variance of $12 million caused by lower shipments of specialty grade pulp.

The $5 million favourable chemicals price variance was due to higher lignin and resin prices. However, resin raw material costs increased by $4 million and resin profitability declined by $2 million. The increase of $2 million in chemicals adjusted EBITDA was due to the Canadian lignin business, which experienced higher prices and lower costs.

The Temiscaming specialty cellulose mill purchased approximately 305,700 bone dry tonnes of wood chips in fiscal 2013, down from 370,200 in the prior year. Of this amount, approximately 73% was supplied by the Forest Products segment, compared to 66% in the prior year. The remaining requirements were purchased from third parties under contracts and agreements of various durations. The pulp mill located in Southern France purchased 284,000 bone dry tonnes of wood in fiscal 2013 as compared to 287,000 bone dry tonnes in the prior year. The fibre is sourced from many private landowners.

- 12 -

Overall, lower viscose grade prices and higher manufacturing costs reduced adjusted EBITDA margins from 18.7% in 2012 to 15.9% in 2013.

The following summarizes operating results variances by major element:

			Variance
			favourable
(in millions of dollars)	2012	2013	(unfavourable)
Adjusted EBITDA	95	73	(22	)
Depreciation and amortization	11	14	(3	)
Operating earnings	84	59	(25	)

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

- 13 -

PAPER PULP
(in millions of dollars)	2012		2013
Sales (1)	507		418
Freight and other deductions	105		80
Cost of sales (1)	427		325
SG&A	7		8
Adjusted EBITDA	(32	)	5
Adjusted EBITDA margin on sales	(6.3	)%	1.2%
Depreciation and amortization	23		14
Other item:
Chetwynd impairment loss	50		-
Skookumchuck asset impairment loss	-		22
Loss on sale of Skookumchuck	-		2
Operating loss	(105	)	(33	)
Identifiable assets (excluding cash)	156		142
(1) Includes intersegment sales eliminated on consolidation

The Paper Pulp segment consisted of four market pulp manufacturing facilities. Prior to May 2013, the Company owned and operated a chemical softwood kraft (NBSK) paper pulp mill located in Skookumchuck, BC. The mill had a capacity to produce 270,000 tonnes per year. Its financial results are included in the segment’s results for all of fiscal 2012 and for approximately eight months in fiscal 2013. The remaining three facilities are hardwood high-yield pulp mills. They produce pulp with a combination of mechanical and chemical processes. The Company produces hardwood grades made from maple, aspen and birch. High-yield pulps have a lower tensile and tear strength than kraft pulps but they offer advantages on bulk and opacity. They compete against other hardwood or “short fibre” grades, with Bleached Eucalyptus Kraft (BEK) being the most prominent. The Chetwynd, BC, mill has been idle since September 2012 due to relatively low prices resulting from significant new capacity start-ups of BEK pulp mills in the Southern hemisphere.

The following summarizes the annual capacity of each facility:

HIGH-YIELD PULP	tonnes
Hardwood high-yield - Temiscaming, QC	315,000
Hardwood high-yield - Matane, QC	250,000
Hardwood high-yield - Chetwynd, BC	240,000
	805,000

This segment shipped 542,700 tonnes of high-yield pulp in fiscal 2013 compared to 640,700 tonnes in the prior year. The Chetwynd, BC, pulp mill did not operate in fiscal 2013, reducing shipments by 175,800 tonnes. This reduction was partially offset by higher shipments from the Company’s two other high-yield pulp mills. NBSK pulp shipments declined by 58,400 tonnes as a result of the sale of the Skookumchuck pulp mill in mid-May 2013.

- 14 -

High-yield pulp shipments include 61,600 tonnes consumed by the Company’s paperboard operations, as compared to 60,100 tonnes in the prior year. The paperboard operations did not utilize any internally produced NBSK in fiscal 2013, as compared to 17,300 tonnes consumed in the prior year.

Total sales for the Paper Pulp segment were $418 million, a decrease of $89 million from the prior year. After eliminating internal sales, the Paper Pulp segment generated 25% of Company consolidated sales, as compared to 28% in the prior year. The Paper Pulp segment is more export oriented than the other business segments within the Company. In 2013, 86% of consolidated pulp sales were generated outside of Canada and the U.S., as compared to 87% in the prior year. China alone accounted for 44% of sales compared to 38% in the prior year.

	Sales				Shipments				Selling prices
	($ millions)				(000 tonnes			)	($ / tonne)
	2012		2013		2012		2013		2012	2013
Hardwood high-yield pulp	352		308		640.7		542.7		549	568
NBSK pulp	155		110		222.5		164.1		697	670
Total sales	507		418		863.2		706.8
Internal sales	(42	)	(30	)	(77.4	)	(61.6	)
Consolidated sales	465		388		785.8		645.2

Markets

The Company markets its pulp on a world-wide basis, primarily through its own sales force. Sales offices are maintained in Toronto, Canada and Dax, France. Contractual arrangements with third party representatives are also utilized.

The shipments to capacity ratio for high-yield pulp was at 96% versus 80% in the prior year. The fiscal 2013 ratio does not include the capacity of the Chetwynd pulp mill, which has been indefinitely idled since September 2012 due to relatively weak demand and pricing for high-yield pulp. While the reference price for BEK increased by US $53 per tonne, the increase in high-yield pricing was a more modest US $14 per tonne. Currency was relatively unchanged as the Canadian dollar averaged US $0.985, a 0.7% decline from US $0.992 in the prior year. Overall, Canadian dollar prices for high-yield pulp increased by $19 per tonne. Inventory levels ended the year at 22 days of supply as compared to 35 days at the end of fiscal 2012.

The shipments to capacity ratio for NBSK pulp was 96% in fiscal 2013, up from 82% in the prior year. In fiscal 2012, the Skookumchuck mill productivity had been adversely affected by 17 days of unplanned downtime to effect repairs on its recovery boiler. The benchmark price (delivered China) increased by US $1 per tonne. However, discounts to reference prices increased year-over-year and NBSK price realizations declined by $27 per tonne.

- 15 -

Operating Results

The following summarizes adjusted EBITDA variances by major element:

	Variance - favourable (unfavourable)
			Mill		Inventory NRV
(in millions of dollars)	Price		costs		adjustments	Other		TOTAL
High-yield pulp	13		(8	)	5	11		21
NBSK pulp	(4	)	19		2	1		18
Other segment items	-		-		-	(2	)	(2	)
	9		11		7	10		37

Fiscal 2013 adjusted EBITDA was $5 million compared to negative $32 million in the prior year. The previously noted increase in high-yield pulp selling prices increased adjusted EBITDA by $13 million. This was partially offset by a $4 million reduction due to weaker NBSK prices. Mill level costs at the two high-yield pulp mills increased by $8 million, primarily due to higher chemical costs. Manufacturing costs at the NBSK mill improved significantly. In the prior year, the mill had absorbed costs related to 17 days of unplanned downtime to repair its recovery boiler. 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, low pulp selling prices in the September 2012 quarter had generated a charge of $3 million on the estimated NRV of finished goods inventories. During the fiscal 2013, pricing gradually improved and the Company recorded a gain of $4 million relating to NRV adjustments on the carrying value of finished goods inventories. The $11 million favourable variance in “Other” category relates primarily to the Chetwynd high-yield pulp mill, which generated negative adjusted EBITDA of $12 million in the prior year.

The pulp mills purchased approximately 834,500 bone dry tonnes of wood chips in fiscal 2013, down from 1,189,000 in the prior year. The decline was due to the idling of the Chetwynd high-yield pulp mill and the sale of the Skookumchuck NBSK pulp mill. Of this amount, approximately 20% was supplied by the Forest Products segment, compared to 29% in the prior year. The remaining requirements were purchased from third parties under contracts and agreements of various durations.

Overall, higher high-yield pulp prices and lower NBSK costs increased profitability with an adjusted EBITDA margin of 1.2% compared to negative 6.3% in the prior year.

The following summarizes operating results variances by major element:

					Variance
					favourable
(in millions of dollars)	2012		2013		(unfavourable)
Adjusted EBITDA	(32	)	5		37
Depreciation and amortization	23		14		9
Other items	50		24		26
Operating loss	(105	)	(33	)	72

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

- 16 -

PAPER
(in millions of dollars)	2012	2013
Sales	346	332
Freight and other deductions	46	46
Cost of sales	252	250
SG&A	11	11
Adjusted EBITDA	37	25
Adjusted EBITDA margin on sales	10.7%	7.5%
Depreciation and amortization	2	3
Operating earnings	35	22
Identifiable assets (excluding cash)	120	137

The Paper segment currently includes two paper manufacturing facilities with a total of three paper machines. The mill located in Kapuskasing, Ontario, produces newsprint on two machines. The facility located in Temiscaming, Quebec, produces multi-ply coated bleached board on one machine. The board mill is partially integrated with a high-yield pulp mill. The total capacity of the Paper segment is 420,000 tonnes.

The following summarizes the products and capacity of each facility:

COATED BLEACHED BOARD	tonnes
Temiscaming, QC	180,000
NEWSPRINT
Kapuskasing, ON	240,000

Coated bleached board shipments represented 44% of Paper segment shipments in fiscal 2013, unchanged from the prior year. As a percentage of total segment sales, coated bleached board represented 61% of sales compared to 59% in the prior year.

Newsprint shipments represented 56% of Paper segment shipments in fiscal 2013, unchanged from the prior year. In terms of total segment sales, newsprint represented 39% of sales compared to 41% in the prior year.

Sales for the Paper segment totalled $332 million, as compared to $346 million in the prior year. The segment generated 22% of Company consolidated sales, as compared to 21% in fiscal 2012. The focus of the paper business is North America, which accounted for 94% of consolidated sales in 2013, unchanged from the prior year. The U.S. alone accounted for 74% of sales in fiscal 2013, as compared to 77% in the prior year.

	Sales		Shipments			Selling prices
	($ millions)		(000 tonnes		)	($ / tonne)
	2012	2013	2012	2013		2012	2013
Coated bleached board (rolls and sheets)	204	201	171.2	169.9		1,192	1,183
Newsprint	142	131	221.8	215.9		640	608
Consolidated sales	346	332	393.0	385.8

- 17 -

Markets

The benchmark reference price for coated bleached board rolls (16 point) averaged US $1,118 per short ton in fiscal 2013, a US $14 per short ton decrease over the prior year. Relatively stable pricing was supported by good market demand. The shipments to capacity ratio for coated bleached board was 94% in fiscal 2013 compared to 95% in the prior year. These percentages reflect the good market fundamentals of the North American coated bleached board market over the last two years. The board mill operated at “full” capacity in both fiscal 2012 and fiscal 2013, with no market downtime taken in either year. The small decline in US $ prices was partially offset by currency as the Canadian dollar averaged $0.985, a 0.7% decrease from US $0.992 in the prior year. Overall, average price realizations for rolls and sheets declined by $9 per short ton. The inventory level at year-end was at 36 days, compared to 50 days at the end of the prior year.

The benchmark newsprint price (48.8 gram – East Coast) averaged US $617 per tonne in fiscal 2013, a decrease of US $23 per tonne from the prior year. The shipments to capacity ratio for newsprint was 90% as compared to 92% in the prior year. While these ratios would normally be indicative of a stable market, that was not the case for North American newsprint, as demand continued to decline. Inventory levels at year-end were at 11 days, as compared to 14 days at the end of the prior year, which is a normal level for the newsprint mill.

Operating Results

The following summarizes adjusted EBITDA variances by major element:

	Variance - favourable (unfavourable)
			Mill		Freight
(in millions of dollars)	Price		costs		SGA		Other		TOTAL
Coated bleached board	(2	)	(6	)	1		1		(6	)
Newsprint	(7	)	4		(2	)	-		(5	)
Other segment items	-		-		-		(1	)	(1	)
	(9	)	(2	)	(1	)	-		(12	)

Fiscal 2013 adjusted EBITDA was $25 million compared to $37 million in the prior year. Lower coated bleached board and newsprint prices reduced adjusted EBITDA by $9 million. Manufacturing costs at the coated bleached board mill increased by $6 million, primarily for purchased pulp, chemicals and under-absorption of fixed costs, as the mill produced 7,400 fewer tonnes. Manufacturing costs at the newsprint mill declined by $4 million, primarily as a result of lower energy costs.

The coated bleached board mill utilizes a combination of chemical kraft and high-yield pulp to produce a three-ply sheet. During fiscal 2013, the mill utilized 61,600 tonnes of high-yield pulp supplied by the Temiscaming high-yield pulp mill versus 60,000 tonnes in fiscal 2012. In the prior year, the mill consumed 17,300 tonnes of NBSK supplied by the Company’s Skookumchuck pulp mill. There were no internal NBSK shipments in fiscal 2013. The balance of pulp requirements is purchased from third parties.

- 18 -

The newsprint mill utilizes virgin fibre, primarily in the form of wood chips. During fiscal 2013, the operations purchased 234,400 bone dry tonnes of virgin fibre, of which approximately 81% was internally sourced. In the prior year, 238,500 bone dry tonnes of virgin fibre were purchased, with 80% being sourced internally.

Overall, the lower prices and the higher costs reduced adjusted EBITDA margins from 10.7% to 7.5% .

The following summarizes operating results variances by major element:

			Variance
			favourable
(in millions of dollars)	2012	2013	(unfavourable)
Adjusted EBITDA	37	25	(12	)
Depreciation and amortization	2	3	(1	)
Operating earnings	35	22	(13	)

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

- 19 -

CORPORATE
(in millions of dollars)	2012		2013
General and administrative expenses	21		21
Share-based compensation	(1	)	1
Other items:
Custodial - idled facilities	10		7
Gain on sale of BC office	-		(2	)
Impairment of Temlam loan receivable	16		-
Gain on sale of minority equity investment	(4	)	-
Operating expenses	42		27

The Company recorded a $1 million expense for share-based compensation in the current year as 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 most recent year, as compared to $10 million in the prior year.

In fiscal 2013, the Company generated a gain of $2 million related to the sale of the Cranbrook, BC, office.

The prior year includes a $16 million loss relating to the impairment of a loan receivable from Temlam Inc. The latter is currently under creditor protection and owns an idled laminated veneer lumber (LVL) facility located in Amos, Quebec. The Company has a 50% secured interest in the facility. The cutting rights that were previously attached to the LVL facility were granted to another company. In the absence of a guaranteed fibre supply, the Company concluded that the re-start of the facility was unlikely and adjusted its carrying value to the amount anticipated to be realized upon liquidation or sale. The prior year also included a gain of $4 million relating to the sale of a minority equity interest in two dissolving pulp mills.

- 20 -

NON-OPERATING ITEMS

INTEREST, FOREIGN EXCHANGE AND OTHER
(in millions of dollars)	2012		2013
Interest on debt	38		42
Interest income	(1	)	-
Capitalized interest	(2	)	(9	)
Foreign exchange items	4		(1	)
Employee future benefits	-		(7	)
Bank charges and other	2		3
	41		28

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.

TRANSLATION OF FOREIGN DEBT

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.

INCOME TAXES

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

(in millions of dollars)	2012		2013
Loss before income taxes	(60	)	(13	)
Anticipated income tax recovery	(16	)	(3	)
Increase (decrease):
Difference in statutory rates	6		1
Unrecognized tax asset	32		21
Permanent differences	-		2
Income tax expense	22		21

- 21 -

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.

NET LOSS

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.

	2012				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 assets 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

- 22 -

COMPREHENSIVE EARNINGS (LOSS)

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

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

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 recognition of a deferred tax asset generated by previously unrecognized losses of the U.S. operations. It has been determined that the 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.

SUBSEQUENT EVENTS

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 completed the sale of 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.

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QUARTERLY FINANCIAL INFORMATION

(in millions of dollars, except per share amounts)

	2012								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
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) in dollars 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

FOURTH QUARTER ANALYSIS

The Company reported net earnings of $6 million or $0.06 per share in the fourth quarter ended September 28, 2013, compared to a net loss of $47 million or $0.47 per share in the same quarter of fiscal 2012. The weighted average number of common shares outstanding was 100 million, unchanged from the prior year.

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 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.

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.

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 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.

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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.

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 increased 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.

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.

The fourth quarter 2013 interim MD&A issued on November 21, 2013, provides a more extensive analysis of items having impacted the Company’s fourth quarter financial results.

- 25 -

SUMMARY OF QUARTERLY RESULTS

On a quarterly basis, sales and margins were negatively impacted by relatively low lumber and paper pulp prices. Currency continued to negatively impact Canadian operations as the Canadian dollar remained close to parity over the last eight quarters, averaging US $0.987 with a quarterly average high of US $1.009 and a low of US $0.963.

The Forest Products segment generated adjusted EBITDA of $1 million during the last eight quarters. This represents an average margin of 0.1% on sales of $852 million. The U.S. lumber and housing market was relatively weak during the last two years and the Company’s lumber shipments to capacity ratio averaged 78%. The U.S. market has recently improved and lumber prices have followed this trend. The Forest Products segment posted four quarters of positive adjusted EBITDA in fiscal 2013, with a margin of 4.0% . The financial performance was negatively impacted by export taxes on lumber shipped to the United States. The total amount incurred over the last two years was $10 million. However, the impact of lumber export taxes is declining as the lumber market improves and prices increase. The $3 million incurred in fiscal 2013 represents the lowest level since export taxes were imposed in 2006.

The Specialty Cellulose Pulp segment generated adjusted EBITDA of $168 million during the last eight quarters. This represents an average margin of 17.4% on sales of $967 million. The margins averaged 18.7% in fiscal 2012 when specialty cellulose pulp prices were higher. A weakening of pulp prices in fiscal 2013 resulted in weaker results and average margins declined to 15.9% .

The Paper Pulp segment generated negative adjusted EBITDA of $27 million during the last eight quarters. This represents a negative margin of 2.9% on sales of $925 million. The market for paper pulp has been weak over the last two years, but improved slightly in fiscal 2013. This allowed the segment to generate positive adjusted EBITDA of $5 million in fiscal 2013.

The Paper segment generated adjusted EBITDA of $62 million over the last eight quarters. This represents an average margin of 9.1% on sales of $678 million. Prices for coated bleached board and newsprint have not fluctuated significantly over the last two years and segment financial results have been relatively stable.

Corporate general and administrative expenses of the Company have averaged approximately $5 million per quarter over the last two years and there has been no significant changes in the composition of those expenses.

Overall, the Company generated adjusted EBITDA of $162 million in the last eight quarters. This represents an average margin of approximately 5.1% on sales of $3.2 billion.

Other items reduced the Company’s operating earnings by $79 million during the last eight quarters. While there were several offsetting favourable and unfavourable items, the most significant unfavourable items were a $50 million asset impairment charge taken in the September 2012 quarter and an asset impairment charge of $22 million taken in the March 2013 quarter.

The Company recorded a loss of $1 million on the translation of its foreign-denominated debt over the last two years. However, the impact of the quarterly US debt translation gains and losses added considerable volatility to the financial results, with the impact ranging from a gain of $13 million in the September 2012 quarter to a loss of $11 million in the June 2013 quarter.

During the last two years, the Company has recorded an income tax expense of $43 million. The expense relates primarily to its French operations as the Canadian operations have significant amounts of unrecognized tax assets.

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FINANCIAL POSITION AND LIQUIDITY

FREE CASH FLOW
(in millions of dollars)	2012		2013
Cash flow from operations before working capital changes	13		36
Less:
Additions to property, plant and equipment	120		137
Interest on debt	38		42
Free cash flow (negative)	(145	)	(143	)

Cash flow from operations before working capital changes in fiscal 2013 was $36 million, compared to $13 million in the prior year. The increase in cash flow was caused by the higher adjusted EBITDA. 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. The increase in working capital was caused by a $33 million decline in trade payables and accruals. The prior year-end balance included significant payables and accruals for construction and annual maintenance shutdowns. As a result, cash flow from operations improved from negative $72 million in fiscal 2012 to $23 million in fiscal 2013.

CAPITAL SPENDING
(in millions of dollars)	2012	2013
Forest Products	12	7
Specialty Cellulose Pulp - Cogen project	56	78
Specialty Cellulose Pulp - Other	30	32
Paper Pulp	13	10
Paper	7	9
Corporate	2	1
Net capital expenditures	120	137
As a % of consolidated sales	7.2%	8.9%
As a % of depreciation	261%	343%

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.

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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.

ACQUISITIONS, INVESTMENTS AND DIVESTITURES

On November 25, 2011, the Company sold its Toronto, Ontario, hardwood flooring plant for proceeds of $13 million. Concurrently, the Company also announced the closure of its Huntsville, Ontario, hardwood flooring plant. The sale of the Toronto plant and the closure of the Huntsville plant resulted in a charge of $2 million that was recorded in the Company’s fiscal 2012 financial results.

On March 23, 2012, the Company sold its British Columbia Southern Interior wood products assets for proceeds of $66 million. The sale included the Elko and Canal Flats sawmills and approximately 1.1 million cubic meters of combined Crown tenures, private land and contract annual allowable cut. As a result of the sale, the Company recorded a gain of $24 million in the fiscal 2012 financial results.

On May 17, 2013, the Company sold its NBSK pulp mill located in Skookumchuck, BC, for proceeds of $97 million. As a result of the sale, the Company recorded an asset impairment charge of $22 million and a loss on sale of $2 million in the fiscal 2013 financial results.

FINANCING ACTIVITIES

The Company’s objective is to maintain the net debt to total capitalization ratio at 40% or less. The goal is to keep a relatively strong balance sheet and maintain the ability of the Company to access capital markets at favourable rates. The net debt to total capitalization ratio of the Company was 52% as at September 28, 2013, as compared to 45% at the end of the prior fiscal year. The increase was due to new debt to fund the previously noted Temiscaming specialty cellulose Cogen project. The Company anticipates that the net debt to total capitalization ratio will remain in excess of its target until the Temiscaming Cogen project is completed and begins to generate the projected incremental adjusted EBITDA.

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LONG-TERM DEBT
(in millions of dollars)	2012	2013
Tembec Industries - US $305 million 11.25% senior secured notes due December 2018	300	314
Temiscaming project financing - 6.35% secured term loan	20	20
Temiscaming project financing - 5.5% secured term loan	-	40
French operations	22	17
Kirkland Lake Engineered Wood Products Inc.	8	9
Other debt	2	2
Total long-term debt	352	402
Less net unamortized financing costs	13	17
	339	385
Current portion included in above	16	16

In August 2010, the Company completed a private offering of US $255 million of 11.25% senior secured notes maturing in December 2018. In February 2012, the Company issued a further US $50 million of senior secured notes with the same terms and conditions as the original US $255 million notes. The notes are senior secured obligations of the Company, secured by a first priority lien on the majority of the property and assets of the Company. They are also secured by a second priority lien on accounts receivable, inventories and certain intangibles.

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 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 September 2013 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 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 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 be granted on the date of the first advance under the second $18 million tranche, which cannot occur until the Company has drawn the entire $75 million of the first tranche.

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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 September 2013 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.

The two previously noted facilities will be utilized to fund $73 million of the $98 million required to complete the Temiscaming, Quebec, specialty cellulose project. The Company intends to fund the remaining amount from available cash resources and cash flows from operations.

The debt of the French operations relates to the Company’s specialty cellulose pulp mill. The decrease in debt was due to scheduled amortization payments.

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.

The current portion of long-term debt includes $9 million related to the Kirkland Lake Engineered Wood Products facility. This operation has been idle for several years and the loan has been subject to a “standstill” agreement between the Company and the lender. This is a non-recourse facility and while it is classified as a current item, the Company considers it highly unlikely that it will repay this facility in the next 12 months.

At the end of September 2013, the Company had total cash of $74 million (including restricted cash) plus unused operating lines of $35 million for total liquidity of $109 million. At the end of September 2012, the Company had total cash of $92 million and unused operating lines of $48 million for total liquidity of $140 million. The Company has set an objective of maintaining a minimum liquidity of $135 million to $150 million. The Company defines “operating lines” to include loans of various durations which are secured by charges on accounts receivable and/or inventories. Operating lines are used primarily to fund short-term requirements associated with both seasonal and cyclical inventory increases which can occur in the Company’s business segments. The Company would not normally draw on the operating lines to fund capital expenditures or normal average working capital requirements. The operating lines are established across several entities and jurisdictions to ensure they meet the needs of the various operating units.

The following table summarizes the unused operating lines at the end of the last two fiscal years:

OPERATING LINES
(in millions of dollars)	2012		2013
Borrowing base	187		168
Less: availability reserve	(23	)	(20	)
Net availability	164		148
Outstanding letters of credit	(48	)	(56	)
Amount drawn	(68	)	(57	)
Unused amount	48		35

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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. The Company does not have any other significant off-balance sheet arrangements.

The French operations are supported by “receivable factoring” agreements. As such, the borrowing base fluctuates periodically, depending on shipments and cash receipts.

COMMON SHARES
(in millions)	2012	2013
Shares outstanding - opening	100	100
Shares outstanding - ending	100	100

There were no shares issued in fiscal 2012 and fiscal 2013.

Prior to February 29, 2012, there were 11,093,943 outstanding warrants. The warrants were convertible into an equal amount of common shares. They would have been deemed to be exercised and automatically converted into common shares if the 20-day volume-weighted average trading price of a single common share reached or exceeded $12.00 or immediately prior to any transaction that would have constituted a change of control at a purchase price per common share equal to at least $12.00. The warrants expired unexercised on February 29, 2012.

Pursuant to options granted under the prior Long-Term Incentive Plan (LTIP), an additional 95,852 shares may be issued. The weighted average exercise price of the options was $60.09 per share with expiry dates up to 2016. As at September 28, 2013, all of the options were exercisable.

On August 30, 2012, 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. As well, the Company agreed to grant the same lender a five-year option to acquire 712,000 common shares at a premium of 30% on 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 a future advance.

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FINANCIAL INSTRUMENTS AND CONTRACTUAL OBLIGATIONS

FINANCIAL ASSETS AND LIABILITIES	September 28, 2013
(in millions of dollars)	Carrying value	Fair value
Financial assets
Cash and cash equivalents	73	73
Restricted cash	1	1
Trade and other receivables	157	157
Loans receivable	10	10
Financial liabilities
Operating bank loans	57	57
Trade, other payables and accrued charges	195	195
Interest payable	10	10
Long-term debt (including current portion)	385	428

The carrying values for cash and cash equivalents, restricted cash, trade and other receivables, loans receivable, operating bank loans, trade, other payables and accrued charges, and interest payable approximate their fair values due to the near-term maturity of these instruments.

The fair value of the long-term debt is $43 million higher than its carrying value. Unamortized financing costs increased the fair value by $17 million. The fair value was increased by a further $26 million as the Company’s US $305 million senior secured notes were trading above par at year-end.

FINANCIAL RISKS

Credit Risk

Credit risk arises from the possibility that entities to which the Company sells products may experience financial difficulty and be unable to fulfill their contractual obligations. The Company does not have a significant exposure to any individual customer or counterparty. The Company reviews a new customer’s credit history before extending credit and conducts regular reviews of its existing customers’ credit performance. All credit limits are subject to evaluation and revision at any time based on changes in levels of creditworthiness and must be reviewed at least once per year. Sales orders cannot be processed unless a credit limit has been properly approved. The Company may require payment guarantees, such as letters of credit, or obtain credit insurance coverage. Bad debt expense has not been significant in the past. The allowance for doubtful accounts at September 2013 was negligible, unchanged from the prior year.

Liquidity Risk

Liquidity risk arises from the possibility that the Company will not be able to meet its financial obligations as they fall due. The Company has an objective of maintaining liquidity equal to 12 months of maintenance capital expenditures, interest and principal repayments and seasonal working capital requirements, which would require approximately $135 million to $150 million of liquidity. As noted previously, the Company had total cash of $74 million plus unused operating lines of $35 million, for total liquidity of $109 million as at September 28, 2013.

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The Company currently has sufficient available cash resources and access to additional funding to meet its commitments for at least the next 12-month period. This is based on certain assumptions regarding general economic conditions, the availability of borrowings on existing credit facilities to fund operating and capital requirements and the projected operating results of the various business segments. Access to future borrowings is dependent on meeting the terms and conditions contained in the Company’s various credit facilities. An adverse perception in the capital markets of the Company’s financial condition or prospects could limit future access to debt and equity markets.

The Company is currently proceeding with an ambitious capital expenditure program, including a $235 million project at the Temiscaming specialty cellulose mill, which is increasing liquidity risk. The Company has negotiated two credit agreements that will provide up to $133 million of project financing for the Temiscaming specialty cellulose project. These project credit facilities contain terms and conditions specific to the project, including project completion commitments. If general economic conditions were to deteriorate significantly, or if the Company was unable to meet the terms of the new project credit facilities, or if future operating performance is significantly below expectations, the Company may have to reduce or defer its capital expenditure plans.

Foreign Currency Risk

This item is discussed in detail in a subsequent section of the MD&A, “Significant Risks and Uncertainties”.

Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. This will have little impact on the Company’s financial results since the majority of the Company’s debts are at fixed interest rates.

Commodity Price and Operational Risk

These items are discussed in detail in a subsequent section of the MD&A, “Significant Risks and Uncertainties”.

CONTRACTUAL OBLIGATIONS	Total	Within 1	2 - 3	4 - 5	After 5
(in millions of dollars)		year	years	years	years
Long-term debt	402	16	13	11	362
Interest on long-term debt	214	40	78	77	19
Operating leases	9	4	4	1	-
Purchase obligations	170	106	54	10	-
Pension obligations:
Current service costs	119	8	15	15	81
Past service costs	172	37	65	33	37
	1,086	211	229	147	499

The table above shows the Company’s contractual obligations as at September 28, 2013. The Company has long-term debt with contractual maturities and applicable interest. The operating lease obligations relate primarily to property and equipment rentals entered into in the normal course of business. Purchase obligations relate to ongoing normal commercial commitments to purchase timber, wood chips, energy, chemicals and other operating inputs. They also include outstanding obligations relating to capital expenditures. Pension obligations have two components. The current service costs are limited to a 15-year period and are based on estimated future employee service for existing registered defined benefit plans. Past service costs include estimated solvency and going concern amortization payments.

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2012 vs. 2011

FINANCIAL SUMMARY
(in millions of dollars, unless otherwise noted)	2011		2012
Sales	1,743		1,666
Adjusted EBITDA	98		64
Depreciation and amortization	48		46
Other items	3		50
Operating earnings (loss)	47		(32	)
Net loss	(5	)	(82	)
Basic and diluted net loss in dollars per share	(0.05	)	(0.82	)
Total assets (at year-end)	1,093		1,059
Total long-term debt (at year-end) (1)	289		339
Total long-term liabilities (at year-end)	574		627
(1) includes current portion

Sales decreased by $77 million as compared to fiscal 2011. Currency was favourable as the Canadian dollar averaged US $0.992, a 2.1% decrease from US $1.013 in the prior year. Forest Products segment sales decreased by $39 million as a result of lower shipments, partially offset by higher prices. Specialty Cellulose and Chemical Pulp segment sales decreased by $31 million due to significantly lower shipments and prices. High-Yield Pulp segment sales decreased by $26 million due to lower shipments and prices. Paper segment sales increased by $7 million due to primarily to higher prices.

In fiscal 2012, adjusted EBITDA declined by $34 million over the prior year. Forest Products segment adjusted EBITDA was up $31 million from the prior year primarily as a result of higher prices. Specialty Cellulose and Chemical Pulp segment adjusted EBITDA declined by $48 million due to higher costs and lower prices. High-Yield Pulp segment adjusted EBITDA declined by $26 million due to higher costs and lower prices. Paper segment adjusted EBITDA improved by $8 million due to higher prices and lower costs.

OPERATING EARNINGS (LOSS)
							Adjusted				Other
					Total		EBITDA		Depreciation		items
(in millions of dollars)	2011		2012		variance		variance		variance		variance
Forest Products	(64	)	(4	)	60		31		4		25
Specialty Cellulose and Chemical Pulp	121		71		(50	)	(48	)	(2	)	-
High-Yield Pulp	(14	)	(92	)	(78	)	(26	)	(2	)	(50	)
Paper	26		35		9		8		1		-
Corporate	(22	)	(42	)	(20	)	1		1		(22	)
	47		(32	)	(79	)	(34	)	2		(47	)

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The Company generated an operating loss of $32 million in fiscal 2012 compared to operating earnings of $47 million in the prior year.

The Forest Products segment generated an operating loss of $4 million, as compared to an operating loss of $64 million in fiscal 2011. In addition to the previously noted improvement in adjusted EBITDA, the sale of the BC sawmills and the hardwood flooring operations led to lower depreciation expense. During fiscal 2012, the Company recorded a gain of $24 million related to the sale of the BC sawmills. The Company sold its Toronto, Ontario, hardwood flooring plant and concurrently closed its Huntsville, Ontario, hardwood flooring plant. The combined effect was a charge of $2 million. In the prior year, the segment recorded a charge of $2 million relating to the permanent closure of the Taschereau, Quebec, sawmill. The charge was for severance and other closure costs. The Company also absorbed a charge of $1 million related to severance payments at an idled planer mill in Cranbrook, BC.

The Specialty Cellulose and Chemical Pulp segment generated operating earnings of $71 million compared to operating earnings of $121 million in the prior year. The previously noted decline in adjusted EBITDA led to the lower operating earnings.

The High-Yield Pulp segment generated an operating loss of $92 million compared to an operating loss of $14 million in the prior year. In addition to the previously noted decline in adjusted EBITDA, the segment absorbed an impairment charge of $50 million relating to the property, plant and equipment, including supplies and materials, of the Chetwynd, BC, pulp mill.

The Paper segment generated operating earnings of $35 million compared to operating earnings of $26 million in the prior year. The previously noted improvement in adjusted EBITDA led to the higher operating earnings.

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 $10 million in fiscal 2012, as compared to $7 million in the prior year. Fiscal 2012 includes a $16 million loss relating to the impairment of a loan receivable from Temlam Inc. The latter is currently under creditor protection and owns an idled laminated veneer lumber (LVL) facility located in Amos, Quebec. The Company has a 50% secured interest in the facility. The cutting rights that were previously attached to the LVL facility were granted to another company. In the absence of a guaranteed fibre supply, the Company concluded that the re-start of the facility is unlikely and has adjusted its carrying value to the amount anticipated to be realized upon liquidation or sale. Fiscal 2012 also includes a gain of $4 million relating to the sale of a minority equity interest in two dissolving pulp mills. The prior year includes a gain of $4 million related to the filing of Tembec USA LLC under Chapter 7 of the Bankruptcy Code of the United States. The gain was generated by a reduction in the Company’s accrued benefit obligation. The period also included a gain of $3 million related to the sale of hydro-electric generating assets located in Smooth Rock Falls, Ontario.

INTEREST, FOREIGN EXCHANGE AND OTHER
(in millions of dollars)	2011		2012
Interest on debt	32		38
Interest income	(1	)	(1	)
Capitalized interest	-		(2	)
Fees - new working capital facility	2		-
Foreign exchange items	-		4
Change in fair value of warrants (gain)	(5	)	-
Bank charges and other	3		2
	31		41

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The increase in the interest expense relates primarily to the issue of a US $50 million additional tranche of 11.25% senior secured notes in February 2012. This brought the total amount outstanding of 11.25% senior secured notes to US $305 million, which constitutes the bulk of the Company’s annual interest expense. 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, losses are generated. This was the case in fiscal 2012.

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.

During fiscal 2011, the Company recorded a loss of $1 million on the translation of its US $ denominated debt as the relative value of the Canadian dollar decreased from US $0.975 to US $0.971.

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 tax recovery of $16 million based on the Company’s effective tax rate of 26.3% . Fiscal 2012 absorbed a $32 million unfavourable variance related to period losses for which no deferred tax asset was recognized. Based on past financial performance, deferred income tax assets of the Company`s Canadian operations have not been recognized as it has not been determined that future realization of these assets is probable. The expense was also increased by $6 million due to higher statutory income tax rates in France.

During fiscal 2011, the Company recorded an income tax expense of $20 million on earnings before income taxes of $15 million. The income tax expense reflected a $16 million unfavourable variance versus an anticipated tax expense of $4 million based on the Company’s effective tax rate of 27.8% . Fiscal 2011 absorbed a $10 million unfavourable variance related to period losses for which no deferred tax asset was recognized. The expense was also increased by $6 million due to higher statutory income tax rates in France.

The Company generated a net loss of $82 million or $0.82 per share for the year ended September 29, 2012, compared to a net loss of $5 million or $0.05 per share for the year ended September 24, 2011.

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CRITICAL ACCOUNTING ESTIMATES

Property, plant and equipment depreciation

The Company records its property, plant and equipment, primarily production buildings and equipment, at cost. Interest costs are capitalized for projects in excess of $1 million that have a duration in excess of one year. Investment tax credits or capital assistance received reduce the cost of the related assets. Property, plant and equipment acquired as a result of a business acquisition are recorded at their estimated fair value. Depreciation of property, plant and equipment is provided over their estimated useful lives, generally on a straight-line basis. The estimated useful lives of property, plant and equipment are based on judgement and the best currently available information. Changes in circumstances can result in the actual useful lives differing from our estimates. Revisions to the estimated useful lives of property, plant and equipment constitute a change in accounting estimate and are dealt with prospectively by amending the amount of future depreciation expense. There were no significant revisions to the estimated useful lives of property, plant and equipment in fiscal 2013 and fiscal 2012.

Impairment of non-financial assets

The Company must review the carrying value of non-financial assets when events or changes in circumstances indicate that the value may have been impaired and is not recoverable through future operations and cash flows. If any such indication exists, then the asset’s recoverable amount is estimated. The recoverable amount of a non-financial asset is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets. An impairment loss is recognized if the carrying amount of an asset exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. An impairment loss recognized in prior periods is assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. To estimate future cash flows, the Company uses operating and financial assumptions, primarily those contained in its most recent multi-year operating plan. In fiscal 2012, the Company recorded $50 million related to the impairment of the Chetwynd, BC, high-yield pulp mill. In fiscal 2013, the Company recorded $22 million related to the impairment of the Skookumchuck, BC, NBSK pulp mill prior to its sale.

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Employee future benefits

The Company contributes to several defined benefit pension plans, primarily related to employees covered by collective bargaining agreements. The Company also provides post-retirement benefits to retirees, primarily healthcare related. For post-retirement benefits, funding of disbursements is done on a “pay as you go” basis. The Company uses independent actuarial firms to quantify the amount of pension and post-retirement obligations. The Company, based on its own experience and recommendations from its actuarial firms, evaluates the underlying assumptions on an annual basis. Discount rates utilized to calculate the present value of future obligations is prescribed by IFRS accounting standards. Changes in estimates or assumptions can have a substantial impact on the amount of pension and post-retirement benefit expense, the carrying values on the balance sheet, and, in the case of defined benefit plans, the amount of plan surplus or deficit. At September 28, 2013, the fair value of defined benefit pension plan assets was $746 million, an amount equal to 91% of the estimated accrued benefit pension obligations of $817 million, generating a shortfall of $71 million. The plan deficit was $243 million at the end of the prior year. The deficit decrease of $172 million that occurred over the 12-month period was due to several items. The deficit was decreased by $31 million as the return on plan assets exceeded the assumed rate of return. The deficit was further reduced by $34 million as employer contributions of $44 million exceeded the current service cost of $10 million. Finally, an actuarial gain of $98 million decreased the obligations at the end of the fiscal year. This item was caused by an increase in the applicable discount rate from 3.69% to 4.60% . The discount rate is tied to rates applicable to high-quality corporate bonds (AA or higher) in effect at the end of the fiscal year. Pension expense included in cost of sales in fiscal 2013 was $10 million, as compared to $9 million in the prior year. Based on current assumptions, employer contributions and pension expense in cost of sales in fiscal 2014 are expected to be approximately $34 million and $9 million respectively. There is no assurance that current assumptions will materialize in future periods. The defined benefit pension plans may be unable to earn the assumed rate of return. Market driven changes to discount rates and other variables may result in changes to anticipated Company contribution amounts.

With regard to other employee future benefit plans, the accrued benefit obligation at year-end was $29 million, a decrease from $41 million in the prior year. The obligation declined by $9 million due to the sale of the Skookumchuck pulp mill. The previously noted increase in discount rates generated an actuarial gain, decreasing the obligation by $4 million. Employer contributions were $1 million in fiscal 2013 and fiscal 2012. The Company recognized an expense of $2 million in fiscal 2013 as compared to $3 million in the prior year. Based on current assumptions, the amount of employer contributions and the amount of expense to be recognized in fiscal 2014 are expected to be approximately $2 million for each item.

Deferred income taxes

Deferred income tax is provided for using the asset and liability method and recognizes temporary differences between the tax values and the financial statement carrying amounts of balance sheet items as well as certain carry-forward items. The Company only recognizes a deferred income tax asset to the extent that the future realization of the tax asset is probable. This is based on estimates and assumptions as to the future financial performance of the various taxable legal entities in the various tax jurisdictions. At September 28, 2013, the Company had unrecognized deferred tax assets of $544 million, a decrease from $561 million at the end of the prior year.

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USE OF NON-IFRS FINANCIAL MEASURES

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 operating earnings to the Company’s definition of adjusted EBITDA:

(in millions of dollars)	2012		2013
Operating earnings (loss)	(32	)	29
Depreciation and amortization	46		40
Other items	50		29
Adjusted EBITDA	64		98

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.

Net debt refers to debt less cash, restricted cash and cash equivalents.

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.

(in millions of dollars)	2012		2013
Long-term debt	323		369
Net unamortized financing costs	13		17
Current p portion g of long-term debt	16		16
indebtedness	68		57
Less: total cash	(92	)	(74	)
Net debt	328		385
Long-term liabilities	304		140
Shareholders' equity	102		220
Total capitalization	734		745
Net debt to total capitalization ratio	45%		52%

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CHANGES IN ACCOUNTING POLICIES AND ESTIMATES

During the years ended September 29, 2012 and September 28, 2013, there were no new standards that impacted the Company’s consolidated financial statements.

IMPACT OF ACCOUNTING PRONOUNCEMENTS ON FUTURE REPORTING PERIODS

IFRS 7 FINANCIAL INSTRUMENTS – DISCLOSURES

In December 2011, the IASB amended the standard IFRS 7, Financial Instruments – Disclosures, to provide additional information about offsetting of financial assets and financial liabilities. IFRS 7 has been amended to require disclosures that will enable users of financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with an entity’s recognized financial assets and recognized financial liabilities, on the entity’s balance sheet. An entity provides information including the gross amounts subject to rights of set-off, amounts set off in accordance with the offsetting criteria, amounts of financial instruments subject to master netting arrangements or similar agreements, and the related net amounts to meet the disclosure objective.

These amendments are effective for annual periods beginning on or after January 1, 2013. The Company will adopt the new standard, which will not have an impact on the amounts recorded, in its fiscal 2014 financial statements.

IFRS 9 FINANCIAL INSTRUMENTS

In November 2009, the IASB issued IFRS 9, Financial Instruments (IFRS 9), and in October 2010, the IASB published amendments to IFRS 9 (IFRS 9 R).

IFRS 9 R supersedes IFRS 9 and is effective for annual periods beginning on or after January 1, 2015, with early adoption permitted. For annual periods beginning before January 1, 2015, either IFRS 9 or IFRS 9 R may be applied. This standard provides guidance on the classification and measurement of financial liabilities and the presentation of gains and losses on financial liabilities designated at fair value through profit and loss. When an entity elects to measure a financial liability at fair value, gains or losses due to changes in the credit risk of the instrument must be recognized in other comprehensive income. The Company has not yet begun the process of assessing the impact that the new standard will have on its financial statements and does not plan to early adopt the new requirement.

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IFRS 13 FAIR VALUE MEASUREMENT

In May 2011, the IASB issued the standard, IFRS 13, Fair Value Measurement. IFRS 13 is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and in many cases does not reflect a clear measurement basis or consistent disclosures.

The new standard is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. The Company will adopt the new standard, which will not have an impact on the amounts recorded, in its fiscal 2014 financial statements.

AMENDMENTS TO IAS 19 EMPLOYEE BENEFITS

In June 2011, the IASB published an amended version of IAS 19, Employee Benefits. Adoption of the amendment is required for annual periods beginning on or after January 1, 2013, with early adoption permitted. This standard was amended to:

a)	require the interest cost and expected return on plan assets, which currently reflect different rates, be replaced with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (asset). The impact of this portion of the amended standard is an increase in net finance cost as the Company’s return on plan assets will effectively be at a lower rate.
b)	eliminate the option to defer the recognition of gains and losses arising in defined benefit plans;
c)	require gains and losses relating to those plans to be presented in other comprehensive income; and
d)	improve the disclosure requirements concerning the characteristics of defined benefit plans and the risks arising from those plans.

The amended standard also incorporates changes to the accounting for termination benefits. The amendment will be applied retrospectively. The Company estimates that the effect on the consolidated balance sheet as at September 28, 2013, would be an increase of the net defined benefit liability of $2 million and an increase of the deficit of $2 million. The effect on the consolidated statement of net earnings (loss) for the year ended September 28, 2013, would be an increase of the net finance costs by approximately $18 million and an increase of the other comprehensive earnings by the same amount. The Company is still in a process of assessing the impact that the new standard will have on the income tax expense in the statement of net earnings (loss) and in the statement of comprehensive earnings (loss). The Company will adopt the new requirements in its fiscal 2014 financial statements.

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SIGNIFICANT RISKS AND UNCERTAINTIES

PRODUCT PRICES

The Company’s financial performance is dependent on the selling prices of its products. The markets for lumber, paper pulp and paper products are cyclical and are influenced by a variety of factors. These factors include periods of excess product supply due to industry capacity additions, periods of decreased demand due to weak general economic activity, inventory de-stocking by customers, and fluctuations in currency exchange rates. During periods of low prices, the Company is subject to reduced revenues and margins, resulting in substantial declines in profitability and possibly net losses.

Based on 2014 planned sales volumes, the following table illustrates the approximate annual impact of changes to average Canadian dollar selling prices on adjusted EBITDA:

Selling price sensitivity	Impact on	Average
	adjusted EBITDA	selling prices ($
	($ millions)	Sept. 2013 quarter
Specialty cellulose pulp - $25/tonne	7	1,598
Paper pulp - $25/tonne	12	606
Coated bleached board and newsprint - $25/tonne	10	887
SPF lumber - $10/mbf	7	378

The Company’s strategy is to develop niche products where possible; maintain low cost, high-quality flexible production facilities; establish and develop long-term relationships with its customers. In addition, the Company may periodically purchase lumber, pulp and newsprint derivative commodity contracts to mitigate the impact of price volatility. At September 28, 2013 and at September 29, 2012, the Company did not hold any significant product derivative commodity contracts.

FOREIGN EXCHANGE

The Company’s revenues for most of its products are affected by fluctuations in the relative exchange rates of the US dollar and the euro as compared to the Canadian dollar. The Company generates approximately $900 million of US $ denominated sales annually from its Canadian operations. As a result, any decrease in the value of the US dollar and the euro relative to the Canadian dollar reduces the amount of revenues realized on sales in local currency. In addition, since business units purchase the majority of their production inputs in local currency, fluctuations in foreign exchange can significantly affect the unit’s relative cost position when compared to competing manufacturing sites in other currency jurisdictions.

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Based on 2014 planned sales volumes and prices, the following table illustrates the impact of a 1% change in the value of the US dollar versus the Canadian dollar and the euro. For illustrative purposes, an increase of 1% in the value of the US dollar is assumed. A decrease would have the opposite effects of those shown below:

FOREIGN EXCHANGE SENSITIVITY
(in millions of dollars)
Sales increase	10
Cost of sales increase	3
Adjusted EBITDA increase	7
Interest expense increase	-
Cash flow increase	7
Loss on translation of US $ denominated debt	3
Pre-tax earnings increase	4

Direct US $ purchases of raw materials, supplies and services provide a partial offset to the impact on sales. The above does not include the potential indirect impact of currency on the cost of items purchased in Canadian dollars.

To potentially further reduce the impact of fluctuations in the value of the US dollar, the Company has a policy which permits hedging up to 50% of its anticipated US $ receipts for up to 36 months in duration. At September 28, 2013 and September 29, 2012, the Company did not hold any foreign exchange contracts.

OPERATIONAL RISKS

The manufacturing activities conducted by the Company’s operations are subject to a number of risks including availability and price of fibre, competitive prices for purchased energy, a productive and reliable workforce, compliance with environmental regulations, maintenance and replacement/upgrade of process equipment to manufacture competitive quality products and the requirement to operate the manufacturing facilities at high rates of utilization and efficiency to maintain a competitive cost structure.

Fibre represents the Company’s major raw material in the production of wood products, pulp and paper. In Canada, virgin fibre or timber is sourced primarily by agreements with provincial governments. The agreements are granted for various terms from five to 25 years and are generally subject to regular renewals every five years. The agreements incorporate commitments with respect to sustainable forest management, silvicultural work, forest and soil renewal, as well as cooperation with other forest users. In addition, the Company has undertaken, on a voluntary basis, to have its timber harvesting certified by the Forest Stewardship Council (FSC). The Company expects the agreements to be extended as they come up for renewal. Aboriginal groups have claimed substantial portions of land in various provinces over which they claim aboriginal title or in which they have a traditional interest and for which they are seeking compensation from various levels of government. The Company has taken a proactive approach to enhance the economic participation of First Nations in its operations wherever feasible. The Company’s operation in France sources its fibre requirements from various private sources, primarily through long-term supply arrangements.

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Energy is an important component of mill costs, especially for high-yield pulp mills and newsprint mills. In 2013, purchased energy costs totalled approximately $94 million, 50% of which was electricity. Electrical purchases are made primarily from large public utilities, at rates set by regulating bodies. In certain jurisdictions, electricity is deregulated, which can lead to greater price volatility. To mitigate the effect of price fluctuations on its financial performance, the Company employs several tactics, including the securing of longer term supply agreements, the purchase of derivative commodity contracts and operational curtailments in periods of high prices (load shedding). At September 2013 and September 2012, the Company did not hold any derivative commodity contracts relating to purchased electricity. Fossil fuels, primarily natural gas, are purchased at market rates. The Company periodically purchases derivative commodity contracts to reduce its exposure. At September 28, 2013 and September 29, 2012, the Company did not hold any natural gas derivative commodity contracts.

Nearly all the Company’s manufacturing units have a unionized workforce. Over the past 30 years, the Company has successfully negotiated new collective agreements in nearly all instances, with relatively few work stoppages. At many of the Company’s facilities, as well as those of the North American industry as a whole, we have seen reductions in employment levels resulting from technological and process improvements resulting in a workforce with more years of service. This increases the relative costs of pensions and benefits. At September 2013, the Company had approximately 2,700 employees covered by collective bargaining agreements. At September 28, 2013, there were seven agreements covering 26 employees that had expired. During fiscal 2014, six collective agreement covering 875 employees will expire. The remaining contracts expire at various dates up to January 2019. The Company anticipates it will reach satisfactory agreements on contracts currently under active negotiations and those expiring in the future.

The Company’s operations are subject to industry-specific environmental regulations relating to air emissions, wastewater (effluent) discharges, solid waste, landfill operations, forestry practices, and site remediation. The Company has made significant progress in reducing the environmental impact of its operations over the last 15 years. This has occurred as a result of changes in manufacturing processes, the installation of specialized equipment to treat/eliminate the materials being discharged and the implementation of standardized practices such as ISO 14001.

The production of lumber, pulp and paper is capital intensive. The Company estimates that it must invest approximately $35 million to $40 million per year on capital expenditures to avoid degradation of its current operations. As the majority of the funding is provided by cash flow from operations, there can be no assurance that the funds will be available to meet all of the Company’s capital expenditure needs. Failure to reinvest can lead to older equipment that is less productive, less reliable and more costly to maintain and operate. The risk of technological obsolescence also increases. Capital expenditure projects can be large in scale, requiring the Company to maintain and/or acquire expertise in the design, planning and execution of major capital projects. There are inherent risks in the capital expenditure process, including the potential for project cost overruns, new equipment that does not perform to anticipated or projected levels, a lengthy start-up period and disruptions to normal operations. Due to relatively low operating cash flow generation over the last several years, the Company has limited capital expenditures. This has led to a “backlog” of capital expenditure projects in many operating facilities. The Company is currently proceeding with a $235 million Cogen project at the Temiscaming specialty cellulose mill. As a portion of the funding for the Cogen project is to be provided by operating cash flows, there is a risk that the Company may experience delays or cost overruns in executing this project or other required capital expenditures.

Because of the relatively high fixed cost component of certain manufacturing processes, especially in pulp and paper, the operations are 24/7 with target efficiency in the 80-85% range. Failure to operate at these levels jeopardizes the continued existence of a mill. Producers are forced to operate the facilities at “full” rate even when demand is not sufficient to absorb all of the output. This can lead to oversupply and lower prices, further increasing the inherent cyclicality of the industry.

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TRADE RESTRICTIONS / LUMBER EXPORT TAXES

The Company’s manufacturing operations are located primarily in Canada. However, sales into the Canadian market represented only 19% of consolidated sales in fiscal 2013. As such, the Company’s financial results are highly dependent on its ability to sell its products into the “export” markets. Tariffs and trade barriers that reduce or prohibit the movement of our products across international borders constitute an ongoing risk. The agreement between Canada and the United States over softwood lumber is a case in point. On October 12, 2006, Canada and the United States entered into an agreement to govern the shipment of Canadian softwood lumber into the United States. The outcome was less than satisfactory. Through a combination of quotas and export taxes, the agreement will ensure that Canadian producers of softwood lumber will remain at a competitive disadvantage versus U.S. producers when it comes to accessing the U.S. market. China has recently imposed antidumping duties on viscose grade pulp imports. The impact of these duties on the Company’s ability to access the Chinese market is still being assessed as of the date of this report.

FINANCIAL RISKS / DEBT SERVICE

Of the total long-term debt of $402 million, 78% relates to the US $305 million senior secured notes maturing December 2018. The notes do not require periodic payments for principal amortization. Since the entire principal amount will become due on the maturity date, it is possible the Company will not have the required funds/liquidity to repay the principal due. The Company may require access to the public or private debt markets to issue new debt instruments to replace or partially replace the notes. There is no assurance that the Company will be able to refinance the notes on commercially acceptable terms.

In addition to the above significant risks, the Company’s Annual Information Form (AIF) provides a comprehensive list of risk factors related to the Company’s operations. The AIF can be found on SEDAR.

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EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company’s President and Chief Executive Officer and the Company’s Executive Vice President, Finance and Chief Financial Officer have designed, or have caused to be designed under their supervision, disclosure controls and procedures to provide reasonable assurance that material information relating to the Company has been made known to them and that information required to be disclosed in the Company’s annual filings, interim filings or other reports filed by it or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified by applicable securities legislation. The Company’s President and Chief Executive Officer and the Company’s Executive Vice President, Finance and Chief Financial Officer have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Company’s disclosure controls and procedures and have determined, based on that evaluation, that such disclosure controls and procedures are effective at the financial year-end.

INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company’s President and Chief Executive Officer and the Company’s Executive Vice President, Finance and Chief Financial Officer have designed, or have caused to be designed under their supervision, internal control over financial reporting as defined under National Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Company’s President and Chief Executive Officer and the Company’s Executive Vice President, Finance and Chief Financial Officer have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Company’s internal control over financial reporting and have determined, based on the criteria established in Enterprise Risk Management – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and on this evaluation, that such internal controls over financial reporting are effective at the financial year-end.

CHANGES IN INTERNAL CONTROLS

During the period covered by this report, there have been no changes that have materially affected, or are reasonably likely to materially affect Tembec’s internal control over financial reporting.

OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS

The Audit Committee reviews the Company’s annual MD&A and related financial statements with management and the external auditors, and recommends their approval to the Board. Management and the internal auditor of the Company also present periodically to the committee a report of their assessment of the Company’s internal controls and procedures for financial reporting.

ADDITIONAL INFORMATION

Additional information relating to Tembec, including the Annual Information Form, can be found on SEDAR at sedar.com and on the Company’s website at tembec.com.

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MANAGEMENT RESPONSIBILITY

The consolidated financial statements and all information in the Financial Report are the responsibility of the Company’s management. The consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and, where necessary, include amounts which are based on best estimates and judgement. Financial information presented throughout the Financial Report is consistent with the data presented in the consolidated financial statements.

A system of internal accounting and administrative controls is maintained by management in order to provide reasonable assurance that transactions are appropriately authorized, assets are safeguarded and financial records are properly maintained to provide accurate and reliable financial statements.

The Company’s external auditors are responsible for auditing the consolidated financial statements and giving an opinion thereon. In addition, the Company employs internal auditors to evaluate the effectiveness of its systems, policies and procedures.

The Board of Directors has appointed an Audit Committee, consisting solely of independent directors, which reviews the consolidated financial statements and recommends their approval to the Board of Directors. The Committee meets periodically with the external auditors, the internal auditors and management to review their respective activities and the discharge of each of their responsibilities. Both the external and internal auditors have direct access to the Committee to discuss the scope of their audit work and the adequacy of internal control systems and financial reporting procedures.

The accompanying consolidated financial statements have been audited by the external auditors, KPMG LLP, whose report follows.

JAMES M. LOPEZ	MICHEL J. DUMAS
President and Chief Executive Officer	Executive Vice President, Finance
	and Chief Financial Officer

November 29, 2013

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EX-99.4

Exhibit 99.4

	TEMBEC
	FINANCIAL REPORT 2013
01	Message to Shareholders
04	Management’s Discussion and Analysis
48	Management Responsibility
49	Independent Auditors’ Report
50	Consolidated Financial Statements
95	Directors and Officers
96	Shareholder Information
	APPENDIX
	Sustainability Report Summary

The covers are printed on 10pt. FSC-certified Kallima® Coated Cover C2S,
manufactured by Tembec’s Temiscaming, Quebec, coated bleached board mill.

TEMBEC INC.
©2013 All rights reserved
Printed in Canada

MESSAGE
TO SHAREHOLDERS

Fiscal 2013 was an important year for the Company as it made significant strides in the implementation of the Transformation Plan. This included the divestment of certain non-core businesses and reaching the 50% completion mark on the Temiscaming Energy Project investment. The completion of the Transformation Plan will drive further margin improvements and reduce the volatility of the Company’s earnings.

Tembec continued its journey towards becoming a world-class Company in health and safety performance by reducing recordable incidents by 16% in 2013. This follows reductions of 32% in 2012 and 25% in 2011 and now marks eight consecutive years of improvement in the Company’s health and safety performance. The commitment and contribution of the Company’s employees have been critical elements in the sustained improvement.

The financial results were below expectations, but improved materially over the previous year. Adjusted EBITDA for 2013 was $98 million versus $64 million in the previous year. The Company’s Specialty Cellulose business continued to be the main driver of earnings, although market conditions weakened somewhat throughout the year. The Paper business generated steady earnings with stable market conditions. The Forest Products business continued a positive trend that started in late 2012 with prices in a range to allow for positive adjusted EBITDA. The Paper Pulp business contributed modest earnings in a fairly stable market.

The Company continued to manage its cash flow judiciously while continuing with its investment in the $235 million energy project at the Temiscaming specialty cellulose facility. Additional projects identified in the Business Improvement Plan have been deferred until cash flow permits, which will likely occur after the start-up of the Temiscaming Project.

INVESTMENTS

The construction of the new liquor recovery boiler and 50-megawatt (MW) steam turbine that began in 2012 is now more than 50% complete. The project will replace three obsolete, low-pressure boilers with a new high-pressure boiler. In addition to the electricity revenue, the project will provide efficiency benefits to the specialty cellulose mill and reduce maintenance and capital costs.

The critical element of the Temiscaming energy investment is a purchase power agreement with Hydro-Quebec that was signed in 2012. The agreement provides for a guaranteed purchase of electricity produced by the new turbine at a fixed price of $106 per MW/hour (based on 2012 rates), which is adjusted for inflation annually, for a 25 year-term.

The construction budget for the Temiscaming Project was revised from $190 million to $235 million in 2013. The higher cost was due to the decision to increase the capacity of the boiler by 20% over the initial design. This was done to accommodate a future capacity expansion of the specialty cellulose mill. The projected benefit was also increased from $42 million to $48 million per year.

While capital expenditures were limited throughout the year, the Company did complete a low consistency refiner project at the Kapuskasing newsprint mill to reduce electricity consumption. The project was partially funded by Ontario’s “Industrial Accelerator Program”. The Company also began installing the first of four new autograders at sawmill sites.

Tembec Financial Report 2013      1

Message to Shareholders

Defined Benefit Pension Plans

The Company administers several defined benefit pension plans on behalf of current and past employees. As highlighted in last year’s report, the rapid and significant declines in interest rates over the last several years created significant deficits in the plans, requiring large increases in the Company’s contributions. Throughout this period, investments in the plans continued to generate very good returns.

Fortunately, the negative trend for the pension plan deficits and ensuing contributions has ended, and positive conditions are now converging to rectify the situation. Long-term interest rates have increased, which has reduced the deficits. This, combined with another year of good investment performance and the high level of contributions made by the Company, has significantly reduced the deficits of the various registered plans. The deficit decreased from $200 million in September 2012 to $34 million at the end of fiscal 2013.

The declining deficit will allow the Company to significantly reduce contributions in 2014 and the trend should continue in subsequent years.

Forest Products

The lumber business showed signs of recovery in 2012 with increased demand and improved prices. Economic conditions and housing affordability in the United States have created an improved environment for new home construction. Strong demand for lumber in China continued throughout the year, drawing a large volume of product from the North American markets. These items helped to keep the lumber markets in relative balance, which led to improved product prices.

U.S. housing starts did improve materially from 2012 to 2013. However, the housing starts remain substantially below normalized levels. In 2013, the housing starts trended towards 1 million per year, but this is below a trend line number of approximately 1.5 million per year. This indicates that there is a strong probability for further increases in lumber demand as the economic recovery continues. The Company anticipates that a full housing recovery will not occur until 2016.

Chinese lumber demand from North America has been a significant boost for producers and has partially mitigated the low demand for new home construction. However, the Chinese demand has been mainly for random lengths and has not had much effect on stud lumber. For this reason, the selling price of stud lumber dropped significantly below random length prices in the second half of 2013. This has had an impact on the financial results for Eastern Canadian producers, such as ourselves, who produce large volumes of stud lumber. It is believed that part of this price gap is seasonal and will decline during the peak home construction season.

Specialty Cellulose

The Company has made the Specialty Cellulose business the center piece of its Transformation Plan. This business has the potential to generate superior margins with considerably lower volatility than other segments of the forest products industry. Favorable long-term trends exist for the products and there are large barriers of entry for new entrants. For these reasons, the Company has decided to focus its capital investments in the two specialty cellulose mills.

The initial focus of investment in the specialty mills was on the Tartas, France, operation. Over the last decade, the mill was converted from fluff pulp grades to 100% specialty cellulose grades. This required substantial investments in process changes, environmental improvements and most recently, green energy. The investments and transformation have made the Tartas mill a world-class facility in both product quality and cost structure among mills in this sector.

The Company has now turned its focus to the Temiscaming specialty cellulose facility with the objective of duplicating the results at Tartas. This mill has been a producer of specialty cellulose for decades and provided the product technology to convert the French facility. However, certain sections of the mill are in need of upgrades. The first in a two-step investment plan is the aforementioned energy investment, which will not only significantly reduce manufacturing costs, but will improve process reliability and product quality. The second investment will involve new digesters and related equipment.

2      Tembec Financial Report 2013

Message to Shareholders

After several good years of demand growth and price increases, certain specialty cellulose markets experienced softness in demand in 2013. This was most prevalent in the “ether” grades for construction related materials. Other specialty grades remained relatively stable. Markets have been impacted by poor economic conditions in Europe and generally lackluster global economic growth. These conditions are likely to continue for the next 12-24 months. The Specialty Cellulose business is expected to drive the Company’s profitability through this period.

Paper Pulp

The Company sold its Skookumchuck NBSK mill in 2013, further reducing its exposure to the paper pulp sector. It now operates two high-yield pulp mills in Quebec. This is part of the ongoing refocusing of the Company driven by the Transformation Plan. The lower margins and higher volatility of this sector do not meet the objective of generating higher margins with reduced volatility.

The markets for hardwood paper pulp could be challenging in the short and medium-term due to the anticipated start-up of over 4 million tonnes of new capacity in Brazil. There is a risk of excess supply of pulp and downward pressure on price. The Company has been preparing for this eventuality by focusing on a product differentiation strategy with its maple pulp and on cost reduction efforts in the pulp mill operations.

Paper

The coated bleached board and newsprint operations have been consistent generators of profitability for the Company. The coated bleached board business has been stable with relatively firm pricing. The newsprint business continues to experience demand decline in North America and prices have declined over the last year. Future capacity reduction will be required in order to maintain adequate prices.

TRANSFORMATION PLAN

The Company’s Management and Board of Directors continue with its ambitious multi-year Transformation Plan, with the objective of improving margins, reducing earnings volatility and ultimately driving shareholder value. This has taken place during a period of challenging business conditions that presented some unexpected issues as highlighted in this report.

The Transformation Plan targets the Specialty Cellulose business as the key core business of the Company, and focuses investment on green energy projects within these operations. The Plan also contemplates strategic options for the other businesses to maximize the value to shareholders. The divestment of certain assets has occurred as a result of this Plan.

LIGHT AT THE END OF THE TUNNEL

Managing cash flow and generating profitability has been challenging during the implementation of the Transformation Plan. However, the Company believes that significant improvements will occur throughout 2014 to enhance financial performance and cash flow. The Temiscaming Energy Project will be concluded within the year, drastically reducing capital expenditures, and the operating cash flow will improve with the start-up of the boiler and turbine by the Fall of 2014. The sale of approximately $75 million of land in British Columbia is anticipated in 2014. The Company’s contributions to the defined benefit pension plans will drop in 2014 and continue to rapidly taper down thereafter. All these events are expected to converge and favorably impact the cash flow, profitability, and balance sheet of the Company. Other parts of the Transformation Plan will also be executed as conditions allow. It is expected that shareholders will be rewarded for their patience as the Company works toward completion of the Transformation Plan.

JAMES M. LOPEZ	JAMES V. CONTINENZA
President and Chief Executive Officer	Executive Chairman of the Board

Tembec Financial Report 2013      3

MANAGEMENT’S DISCUSSION
AND ANALYSIS as at November 29, 2013

The Management’s Discussion and Analysis (MD&A) section provides a review of the significant developments and issues that influenced Tembec Inc.’s financial performance during the fiscal year ended September 28, 2013, as compared to the fiscal year ended September 29, 2012. The MD&A should be read in conjunction with the audited consolidated financial statements for the fiscal year ended September 28, 2013. 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 section “Use of non-IFRS financial measures”.

The 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 this MD&A is as at November 29, 2013. Disclosure contained in this document is current to that date, unless otherwise stated.

Throughout the MD&A, “Tembec” or “Company” means Tembec Inc. and its consolidated subsidiaries. Tembec’s operations consist of five reportable business segments: Forest Products, Specialty Cellulose Pulp, Paper Pulp, Paper and Corporate. On September 28, 2013, the Company had approximately 3,500 employees, as compared to 3,700 at the end of the prior fiscal year. The Company operates manufacturing facilities in Quebec, Ontario, British Columbia, the state of Ohio as well as in Southern France. Principal facilities are described in the subsequent sections of the MD&A.

Tembec Financial Report 2013      4

Management’s Discussion and Analysis

2013 vs. 2012

FINANCIAL SUMMARY
(in millions of dollars, unless otherwise noted)	2012		2013
Sales	1,666		1,534
Freight and other deductions	232		201
Lumber export taxes	7		3
Cost of sales (excluding depreciation and amortization)	1,290		1,159
SG&A	74		72
Share-based compensation	(1	)	1
Adjusted EBITDA	64		98
Depreciation and amortization	46		40
Other items	50		29
Operating earnings (loss)	(32	)	29
Interest, foreign exchange and other	41		28
Exchange loss (gain) on long-term debt	(13	)	14
Loss before income taxes	(60	)	(13	)
Income tax expense	22		21
Net loss	(82	)	(34	)
Basic and diluted net loss in dollars per share	(0.82	)	(0.34	)
Total comprehensive earnings (loss)	(131	)	115
Total assets (at year-end)	1,059		1,021
Total long-term debt (at year-end) (1)	339		385
Total long-term liabilities (at year-end)	627		509
(1) Includes current portion

Business segments

During the December 2012 quarter, the Company reorganized its internal reporting structure, which impacted segment disclosure included in the financial statements and MD&A. Prior to the change, the Company had reported the results of the Skookumchuck, British Columbia (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 was regrouped with the high-yield pulp mills in a new segment called Paper Pulp. The Specialty Cellulose and Chemical Pulp segment was renamed Specialty Cellulose Pulp. Comparative prior year segment information has been restated in the financial statements to conform to the new presentation.

Tembec Financial Report 2013      5

Management’s Discussion and Analysis

SALES
					Total		Price		Volume & mix
(in millions of dollars)	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	)

Tembec Financial Report 2013      6

Management’s Discussion and Analysis

Sales decreased by $132 million as compared to fiscal 2012. 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.

In terms of geographical distribution, the U.S. remained the Company’s principal market with 39% of consolidated sales in fiscal 2013, as compared to 37% in the prior year. Canadian sales represented 19% of sales, as compared to 18% in the prior year. Sales outside of the U.S. and Canada represented the remaining 42% in fiscal 2013, as compared to 45% a year ago.

ADJUSTED EBITDA
					Total		Price		Cost & volume
(in millions of dollars)	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 of $98 million was $34 million higher than the prior year. Forest Products segment adjusted EBITDA was up $33 million from the prior year as a result of higher prices, partially offset by higher costs. Specialty Cellulose Pulp segment adjusted EBITDA declined 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 declined by $12 million due to lower prices and higher costs.

OPERATING EARNINGS (LOSS)
							Adjusted				Other
					Total		EBITDA		Depreciation		items
(in millions of dollars)	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

Tembec Financial Report 2013      7

Management’s Discussion and Analysis

The Company generated operating earnings of $29 million compared to an operating loss of $32 million in fiscal 2012.

The Forest Products segment generated operating earnings of $8 million, as compared to an operating loss of $4 million in fiscal 2012. In addition to the previously noted improvement in adjusted EBITDA, the sale of the BC sawmills and the hardwood flooring operations in fiscal 2012 led to lower depreciation expense. During the prior fiscal year, the Company recorded a gain of $24 million related to the sale of the BC sawmills. The Company also sold its Toronto, Ontario, hardwood flooring plant and concurrently closed its Huntsville, Ontario, hardwood flooring plant. The combined effect was a charge of $2 million.

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 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, the segment saw depreciation expense decline by $9 million due to the sale of the Skookumchuck, BC, NBSK pulp mill. The prior year operating results included a $50 million asset impairment charge relating to the Chetwynd, BC, high-yield pulp mill. The current year included a $22 million asset impairment charge and a subsequent $2 million loss on sale related to the Skookumchuck pulp mill.

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

Corporate segment results improved by $15 million, primarily due to “Other items”. In fiscal 2013, the Company generated a $2 million gain related to the sale of the Cranbrook, BC, office. The prior year included a $16 million loss relating to the impairment of a loan receivable from Temlam Inc. The latter is currently under creditor protection and owns an idled laminated veneer lumber (LVL) facility located in Amos, Quebec. The Company has a 50% secured interest in the facility. The prior year also included a gain of $4 million relating to the sale of a minority equity interest in two dissolving pulp mills.

Tembec Financial Report 2013      8

Management’s Discussion and Analysis

SEGMENT REVIEW – 2013 vs. 2012

FOREST PRODUCTS
(in millions of dollars)	2012		2013
Sales (1)	432		420
Freight and other deductions	41		39
Lumber export taxes	7		3
Cost of sales (1)	385		350
SG&A	15		11
Adjusted EBITDA	(16	)	17
Adjusted EBITDA margin on sales	(3.7	)%	4.0%
Depreciation and amortization	10		9
Other items:
Gain on sale of BC sawmills	(24	)	-
Loss on sale/closure of flooring operations	2		-
Operating earnings (loss)	(4	)	8
Identifiable assets (excluding cash)	216		155
(1) Includes intersegment sales eliminated on consolidation

The Forest Products segment is divided into two main areas of activity: forest resource management and manufacturing operations.

The Forest Resource Management group is responsible for managing all of the Company’s Canadian forestry operations. This includes the harvesting of timber, either directly or by contractual agreements, and all silviculture and regeneration work required to ensure a sustainable supply for the manufacturing units. The group is also responsible for third party timber purchases, which are needed to supplement total requirements. The group’s main objective is the optimization of the flow of timber into various manufacturing units. As the Company’s forest activity in Canada is conducted primarily on Crown lands, the Forest Resource Management group works closely with provincial governments to ensure harvesting plans and operations comply with established regulations and that stumpage charged by the provinces is reasonable and reflects the fair value of the timber being harvested. During fiscal 2013, the Company’s operations harvested and delivered 3.2 million cubic metres of timber, compared to 3.9 million cubic metres in the prior year. Additional supply of approximately 0.6 million cubic metres was secured mainly through purchases and exchanges with third parties, compared to 0.8 million cubic metres in the prior year.

The Forest Products segment includes operations located in Quebec and Ontario. At the end of the March 2012 quarter, the Company sold its two BC sawmills. The sawmills had a capacity of 450 million board feet of lumber, which represented approximately 29% of the Company’s total SPF lumber capacity at that time. The SPF lumber operations can produce approximately 880 million board feet of lumber. The specialty wood operations can annually produce 30 million board feet of hardwood lumber. During the December 2011 quarter, the Company sold its Toronto, Ontario, hardwood flooring plant and announced the closure of its Huntsville, Ontario, hardwood flooring plant. The two operations had a combined capacity of 20 million square feet of hardwood flooring. The Company’s engineered wood operations consist of two finger joint lumber operations, which were idle for all of fiscal 2012 and fiscal 2013.

Tembec Financial Report 2013      9

Management’s Discussion and Analysis

The following summarizes the current annual capacity of each facility by product group:

SPF LUMBER	mbf
Stud lumber - La Sarre, QC	135,000
Stud lumber - Senneterre, QC	100,000
Stud lumber - Cochrane, ON	110,000
Stud lumber - Kapuskasing, ON	105,000
Random lumber - Béarn, QC	110,000
Random lumber - Chapleau, ON	135,000
Random lumber - Hearst, ON	160,000
Finger joint lumber - Cranbrook, BC	25,000
	880,000
SPECIALTY WOOD	mbf
Hardwood lumber - Huntsville, ON	30,000
ENGINEERED WOOD	mbf
Engineered finger joint lumber - La Sarre, QC	60,000
Engineered finger joint lumber - Kirkland Lake, ON	30,000
	90,000

The segment is dominated by SPF lumber, which represented 97% of building material sales in fiscal 2013, compared to 94% in the prior year. The volume of SPF lumber sold in fiscal 2013 decreased by 92 million board feet or 11%. The sale of the Company’s two BC sawmills at the end of the March 2012 quarter had a significant impact on shipments and volumes. Shipments of lumber from the two sawmills during the first two quarters of the prior year totalled 172 million board feet. Lumber shipments from the Company’s Eastern sawmills increased by 80 million board feet, partially offsetting the previously noted decrease. Shipments were equal to 82% of capacity, up from 73% in fiscal 2012. Market conditions for lumber improved and this translated into increased demand and prices. US $ reference prices for random lumber were up by US $71 per mbf on average while stud lumber increased by US $51 per mbf. 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. The combined result was a $59 per mbf price increase from a year ago.

Tembec Financial Report 2013      10

Management’s Discussion and Analysis

Specialty wood represented 3% of building material sales in fiscal 2013, down from 6% in the prior year. The decline was due to the sale of the Toronto, Ontario, hardwood flooring plant and the closure of the Huntsville, Ontario, hardwood flooring plant.

There were no engineered wood sales in fiscal 2012 and 2013. The two finger joint facilities were idle for all of fiscal 2012 and fiscal 2013.

The Forest Products segment produced and shipped approximately 870,000 tonnes of wood chips in fiscal 2013, 67% of which were directed to the Company’s pulp and paper operations. In 2012, the segment produced 977,000 tonnes and shipped 80% of this volume to the pulp and paper mills. The internal transfer price of wood chips is based on current and expected market transaction prices.

Total sales for this segment reached $420 million, a decrease of $12 million over the prior year. After eliminating internal sales, the Forest Products segment generated 23% of Company consolidated sales, up from 21% in the prior year. The segment’s main market is North America, which represented 100% of consolidated sales in fiscal 2013, compared to 97% in the prior year.

	Sales				Shipments			Selling prices
	($ millions)				(000 units		)	($ / unit)
	2012		2013		2012	2013		2012	2013
SPF lumber (mbf)	282		295		835.7	743.8		337	396
Specialty wood
Hardwood (mbf)	8		9		12.7	13.6		629	662
Hardwood flooring (000 square ft)	10		-		2.2	-		4,545	-
	18		9
Engineered Wood
Engineered finger joint lumber (mbf)	-		-		-	-		-	-
Total building materials	300		304
Wood chips, logs and by-products	132		116
Total sales	432		420
Internal wood chips and other sales	(84	)	(66	)
Consolidated sales	348		354

Tembec Financial Report 2013      11

Management’s Discussion and Analysis

Markets

The Company markets its lumber with its own internal sales force.

The benchmark random length Eastern SPF average lumber price (#2 and better delivered Great Lakes) increased from US $370 per mbf to US $441 per mbf in 2013. The reference price for stud lumber also increased with the Eastern average lumber price (delivered Great Lakes) up from US $353 per mbf to US $404 per mbf. The prices were driven by an improving U.S. housing market. Housing starts in the U.S. on a seasonally adjusted basis averaged 906,000 units in fiscal 2013, an increase over the 729,000 units in fiscal 2012. However, these remain below the 2 million unit mark experienced in the 2004-2006 period and the +1.2 million average that would be indicative of normal market conditions. While the Company recognized several years ago that U.S. housing starts could not maintain the 2 million unit per year run rate, and that a degree of market correction would likely occur at some point, the duration of the correction has been significantly longer than those of prior cycles. The negative effects of the sub-prime mortgage difficulties, the latter having fuelled the strong demand in 2004-2006, have been much greater in terms of impact than originally anticipated. During fiscal 2013, the Company shipped 388,800 mbf into the U.S. market from its Eastern sawmills. In the prior year, shipments to the U.S. from the Eastern sawmills were 295,000 mbf and shipments from the two Western sawmills were 77,200 mbf in the first six months of fiscal 2012. The improved U.S. market conditions drove the 32% increase in Eastern lumber shipments to the U.S.

While the U.S. housing market improved, this was not the case for the Canadian housing market. Housing starts in Canada on a seasonally adjusted basis averaged 190,000 units, an 11% decline from 214,000 units in the prior year. The weaker Canadian demand for lumber did not affect prices, which are determined primarily by the much larger U.S. market. During fiscal 2013, the Company shipped 355,000 mbf into the Canadian market from its Eastern sawmills. In the prior year, Canadian shipments from the Eastern sawmills totalled 369,200 mbf and shipments from the two Western sawmills were 94,300 mbf in the first six months of fiscal 2012.

The Company’s financial performance continued to be impacted by export taxes on lumber shipped to the U.S. Effective October 12, 2006, the governments of Canada and the United States implemented an agreement for the settlement of the softwood lumber dispute. The Softwood Lumber Agreement (SLA) requires that an export tax be collected by the Government of Canada, which is based on the price and volume of lumber shipped. Since that date, the Company’s Eastern Canadian sawmills have been subject to export quota limitations and a 5% export tax on lumber shipped to the U.S. The SLA provides that during periods of relatively high prices, as was the case during the spring and summer months of 2013, the export tax rate declines. In fiscal 2013, the average tax rate on Eastern lumber shipped to the U.S. was 1.9% and the total cost was $3 million. In fiscal 2012, the average tax rate on Eastern lumber shipments to the U.S. was 4.8% and the total cost was $4 million. The rate decline was due to the higher prices. The impact of the lower rate was partially offset by the increased shipments to the U.S. market.

The Company sold its two British Columbia sawmills in March 2012. As such, the MD&A data includes the mills financial results for the first six months in fiscal 2012. The BC sawmills were subject to a 15% export tax, but shipments were not quota limited. In fiscal 2012, the average rate on shipments was 15% and the total cost was $3 million.

Tembec Financial Report 2013      12

Management’s Discussion and Analysis

Operating Results

The following summarizes adjusted EBITDA variances by major element:

	Variance - favourable (unfavourable)
					Inventory
		Export	Mill		NRV
(in millions of dollars)	Price	taxes	costs		adjustments		Freight		Other	TOTAL
SPF lumber	43	1	(12	)	(3	)	(3	)	6	32
Other segment items	-	-	-		-		-		1	1
	43	1	(12	)	(3	)	(3	)	7	33

In fiscal 2013, adjusted EBITDA was $17 million compared to negative adjusted EBITDA of $16 million in the prior year. SPF lumber adjusted EBITDA improved by $32 million. The previously noted higher selling prices for lumber increased adjusted EBITDA by $43 million. The higher prices were assisted by currency as the Canadian dollar averaged US $0.985, a 0.7% decrease from US $0.992 in the prior year. The previously noted decline in export taxes on Eastern lumber shipped to the U.S. increased adjusted EBITDA by a further $1 million. Sawmill manufacturing costs increased by $12 million, primarily due to increased fibre costs. In the prior year, the segment had benefited from a $3 million favourable adjustment to the carrying values of logs and lumber inventories. There was no net realizable value adjustment in fiscal 2013. The $6 million positive variance in “Other” related primarily to the two BC sawmills. In the first six months of the prior year, the sawmills had generated negative adjusted EBITDA of $5 million. The adjusted EBITDA margin to total sales was 4.0% compared to negative 3.7% in the prior year.

The following summarizes operating results variances by major element:

				Variance
				favourable
(in millions of dollars)	2012		2013	(unfavourable)
Adjusted EBITDA	(16	)	17	33
Depreciation and amortization	10		9	1
Other items (gain)	(22	)	-	(22	)
Operating earnings (loss)	(4	)	8	12

The Forest Products segment generated operating earnings of $8 million, as compared to an operating loss of $4 million in fiscal 2012. In addition to the previously noted improvement in adjusted EBITDA, the sale of the BC sawmills and the hardwood flooring operations led to lower depreciation expense. During the prior fiscal year, the Company recorded a gain of $24 million related to the sale of the BC sawmills. The Company sold its Toronto, Ontario, hardwood flooring plant and concurrently closed its Huntsville, Ontario, hardwood flooring plant. The combined effect was a charge of $2 million.

Tembec Financial Report 2013      13

Management’s Discussion and Analysis

SPECIALTY CELLULOSE PULP
(in millions of dollars)	2012	2013
Sales - Pulp	407	360
Sales - Chemicals	100	100
	507	460
Freight and other deductions	40	36
Cost of sales	352	331
SG&A	20	20
Adjusted EBITDA	95	73
Adjusted EBITDA margin on sales	18.7%	15.9%
Depreciation and amortization	11	14
Operating earnings	84	59
Identifiable assets (excluding cash)	544	538

The Specialty Cellulose Pulp segment consists of two manufacturing facilities, which produce specialty cellulose pulps.

The specialty cellulose pulp mills have an annual capacity of 310,000 tonnes per year. The pulp produced at the two pulp mills is a high purity cellulose utilized in a wide variety of specialized products such as pharmaceuticals, food additives, and industrial chemicals. The Temiscaming mill also produces “viscose” grade pulp, which is utilized in the production of viscose staple fibre, which in turn is used to produce rayon for the textile industry.

The specialty cellulose mills generate lignin as a by-product of the sulphite process, which is sold to third parties. The Temiscaming mill also includes a facility that produces ethanol as a by-product that is also sold to third parties.

The segment also includes a stand-alone resin business, which produces powder and liquid phenolic resins at two operating sites in Quebec: Temiscaming and Longueuil. The Company also operates a third facility located in Toledo, Ohio, which manufactures powder and liquid amino-resins. The chemical business periodically purchases and re-sells third party pulp mill by-product chemicals.

The following summarizes the annual operating capacity of each facility:

SPECIALTY CELLULOSE	tonnes
Specialty cellulose - Temiscaming, QC	160,000
Specialty cellulose - Tartas, France	150,000
	310,000
CHEMICALS
Resin and related products - Temiscaming and Longueuil, QC; Toledo, Ohio	170,000
Lignin - Temiscaming, QC; Tartas, France	190,000
Ethanol - Temiscaming, QC (million litres)	12.1

Total sales for the Specialty Cellulose Pulp segment were $460 million, a decrease of $47 million from the prior year. The decrease was due to lower shipments of specialty grades. The Specialty Cellulose Pulp segment generated 30% of Company consolidated sales, unchanged from the prior year. The Specialty Cellulose Pulp segment is a global business. In 2013 and fiscal 2012, 62% of consolidated sales were generated outside of Canada and the U.S.

Tembec Financial Report 2013      14

Management’s Discussion and Analysis

	Sales		Shipments			Selling prices
	($ millions)		(000 units		)	($ / unit)
	2012	2013	2012	2013		2012	2013
Specialty pulp
Specialty cellulose (tonnes)	353	318	215.1	186.3		1,641	1,705
Viscose grade (tonnes)	54	43	42.3	44.9		1,264	951
	407	361	257.4	231.2
Chemicals
Resin and related products (tonnes)	55	56	55.7	50.6		987	1,107
Lignin (tonnes)	29	26	132.4	94.8		219	274
Ethanol (000 litres)	9	9	10.0	10.3		900	874
	93	91
Other sales	7	8
Consolidated sales	507	460

Markets

The Company markets its pulp on a world-wide basis, primarily through its own sales force. Permanent sales offices are maintained in Toronto, Canada and Dax, France. Contractual arrangements with third party representatives are also utilized.

The shipments to capacity ratio for specialty pulp was 75% in fiscal 2013 versus 83% in the prior year. The decrease in shipment ratio was due primarily to a decrease of 28,800 tonnes in specialty grade pulp shipments. During fiscal 2012 and 2013, both mills operated as planned and no production curtailments were taken for market conditions. However, demand for specialty grades was weaker in fiscal 2013 and as a result the mills operated at a reduced rate, producing 16,700 fewer tonnes than in the prior year. Despite the lower demand, realized prices increased by $64 per tonne, assisted by a Canadian dollar that was weaker versus the euro and the US dollar. Market conditions in the viscose grade continued to weaken from the record levels reached in 2011 and prices declined by $313 per tonne. The viscose grade market continues to suffer from excess production capacity brought on by the very high prices reached in 2011. The Company has a strategy of gradually reducing its exposure to the viscose market by producing additional specialty grade volume. Unfortunately, the weaker specialty market conditions experienced in fiscal 2013 did not permit the Company to make any progress with this strategy. In fiscal 2013, viscose grade shipments totalled 44,900 tonnes, compared to 42,300 tonnes in the prior year.

Tembec Financial Report 2013      15

Management’s Discussion and Analysis

Operating Results

The following summarizes adjusted EBITDA variances by major element:

	Variance - favourable (unfavourable)
			Mill		Inventory NRV
(in millions of dollars)	Price		costs		adjustments		Mix & volume		Other	TOTAL
Specialty cellulose	(2	)	(10	)	(1	)	(12	)	1	(24	)
Chemicals	5		(3	)	-		-		-	2
	3		(13	)	(1	)	(12	)	1	(22	)

Fiscal 2013 adjusted EBITDA was $73 million compared to $95 million in the prior year, a decrease of $22 million. Higher realized prices for specialty grades increased adjusted EBITDA by $12 million. But this was more than offset by the significant decline in viscose grade prices, which reduced adjusted EBITDA by $14 million. Manufacturing costs at the two specialty pulp mills increased by $10 million, primarily for chemicals and under-absorption of fixed costs as the two mills produced 16,700 fewer tonnes in fiscal 2013. During the current year, the segment also absorbed a net realizable value charge of $1 million on the carrying value of its viscose grade pulp inventories as pricing ended the year at levels that were less than total estimated delivered cost. Adjusted EBITDA was also negatively impacted by a volume variance of $12 million caused by lower shipments of specialty grade pulp.

The $5 million favourable chemicals price variance was due to higher lignin and resin prices. However, resin raw material costs increased by $4 million and resin profitability declined by $2 million. The increase of $2 million in chemicals adjusted EBITDA was due to the Canadian lignin business, which experienced higher prices and lower costs.

The Temiscaming specialty cellulose mill purchased approximately 305,700 bone dry tonnes of wood chips in fiscal 2013, down from 370,200 in the prior year. Of this amount, approximately 73% was supplied by the Forest Products segment, compared to 66% in the prior year. The remaining requirements were purchased from third parties under contracts and agreements of various durations. The pulp mill located in Southern France purchased 284,000 bone dry tonnes of wood in fiscal 2013 as compared to 287,000 bone dry tonnes in the prior year. The fibre is sourced from many private landowners.

Overall, lower viscose grade prices and higher manufacturing costs reduced adjusted EBITDA margins from 18.7% in 2012 to 15.9% in 2013.

The following summarizes operating results variances by major element:

			Variance
			favourable
(in millions of dollars)	2012	2013	(unfavourable)
Adjusted EBITDA	95	73	(22	)
Depreciation and amortization	11	14	(3	)
Operating earnings	84	59	(25	)

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

Tembec Financial Report 2013      16

Management’s Discussion and Analysis

PAPER PULP
(in millions of dollars)	2012		2013
Sales (1)	507		418
Freight and other deductions	105		80
Cost of sales (1)	427		325
SG&A	7		8
Adjusted EBITDA	(32	)	5
Adjusted EBITDA margin on sales	(6.3	)%	1.2%
Depreciation and amortization	23		14
Other item:
Chetwynd impairment loss	50		-
Skookumchuck asset impairment loss	-		22
Loss on sale of Skookumchuck	-		2
Operating loss	(105	)	(33	)
Identifiable assets (excluding cash)	156		142
(1) Includes intersegment sales eliminated on consolidation

The Paper Pulp segment consisted of four market pulp manufacturing facilities. Prior to May 2013, the Company owned and operated a chemical softwood kraft (NBSK) paper pulp mill located in Skookumchuck, BC. The mill had a capacity to produce 270,000 tonnes per year. Its financial results are included in the segment’s results for all of fiscal 2012 and for approximately eight months in fiscal 2013. The remaining three facilities are hardwood high-yield pulp mills. They produce pulp with a combination of mechanical and chemical processes. The Company produces hardwood grades made from maple, aspen and birch. High-yield pulps have a lower tensile and tear strength than kraft pulps but they offer advantages on bulk and opacity. They compete against other hardwood or “short fibre” grades, with Bleached Eucalyptus Kraft (BEK) being the most prominent. The Chetwynd, BC, mill has been idle since September 2012 due to relatively low prices resulting from significant new capacity start-ups of BEK pulp mills in the Southern hemisphere.

The following summarizes the annual capacity of each facility:

HIGH-YIELD PULP	tonnes
Hardwood high-yield - Temiscaming, QC	315,000
Hardwood high-yield - Matane, QC	250,000
Hardwood high-yield - Chetwynd, BC	240,000
	805,000

This segment shipped 542,700 tonnes of high-yield pulp in fiscal 2013 compared to 640,700 tonnes in the prior year. The Chetwynd, BC, pulp mill did not operate in fiscal 2013, reducing shipments by 175,800 tonnes. This reduction was partially offset by higher shipments from the Company’s two other high-yield pulp mills. NBSK pulp shipments declined by 58,400 tonnes as a result of the sale of the Skookumchuck pulp mill in mid-May 2013.

High-yield pulp shipments include 61,600 tonnes consumed by the Company’s paperboard operations, as compared to 60,100 tonnes in the prior year. The paperboard operations did not utilize any internally produced NBSK in fiscal 2013, as compared to 17,300 tonnes consumed in the prior year.

Total sales for the Paper Pulp segment were $418 million, a decrease of $89 million from the prior year. After eliminating internal sales, the Paper Pulp segment generated 25% of Company consolidated sales, as compared to 28% in the prior year. The Paper Pulp segment is more export oriented than the other business segments within the Company. In 2013, 86% of consolidated pulp sales were generated outside of Canada and the U.S., as compared to 87% in the prior year. China alone accounted for 44% of sales compared to 38% in the prior year.

Tembec Financial Report 2013      17

Management’s Discussion and Analysis

	Sales				Shipments				Selling prices
	($ millions)				(000 tonnes			)	($ / tonne)
	2012		2013		2012		2013		2012	2013
Hardwood high-yield pulp	352		308		640.7		542.7		549	568
NBSK pulp	155		110		222.5		164.1		697	670
Total sales	507		418		863.2		706.8
Internal sales	(42	)	(30	)	(77.4	)	(61.6	)
Consolidated sales	465		388		785.8		645.2

Markets

The Company markets its pulp on a world-wide basis, primarily through its own sales force. Sales offices are maintained in Toronto, Canada and Dax, France. Contractual arrangements with third party representatives are also utilized.

The shipments to capacity ratio for high-yield pulp was at 96% versus 80% in the prior year. The fiscal 2013 ratio does not include the capacity of the Chetwynd pulp mill, which has been indefinitely idled since September 2012 due to relatively weak demand and pricing for high-yield pulp. While the reference price for BEK increased by US $53 per tonne, the increase in high-yield pricing was a more modest US $14 per tonne. Currency was relatively unchanged as the Canadian dollar averaged US $0.985, a 0.7% decline from US $0.992 in the prior year. Overall, Canadian dollar prices for high-yield pulp increased by $19 per tonne. Inventory levels ended the year at 22 days of supply as compared to 35 days at the end of fiscal 2012.

The shipments to capacity ratio for NBSK pulp was 96% in fiscal 2013, up from 82% in the prior year. In fiscal 2012, the Skookumchuck mill productivity had been adversely affected by 17 days of unplanned downtime to effect repairs on its recovery boiler. The benchmark price (delivered China) increased by US $1 per tonne. However, discounts to reference prices increased year-over-year and NBSK price realizations declined by $27 per tonne.

Tembec Financial Report 2013      18

Management’s Discussion and Analysis

Operating Results

The following summarizes adjusted EBITDA variances by major element:

	Variance - favourable (unfavourable)
			Mill		Inventory NRV
(in millions of dollars)	Price		costs		adjustments	Other		TOTAL
High-yield pulp	13		(8	)	5	11		21
NBSK pulp	(4	)	19		2	1		18
Other segment items	-		-		-	(2	)	(2	)
	9		11		7	10		37

Fiscal 2013 adjusted EBITDA was $5 million compared to negative $32 million in the prior year. The previously noted increase in high-yield pulp selling prices increased adjusted EBITDA by $13 million. This was partially offset by a $4 million reduction due to weaker NBSK prices. Mill level costs at the two high-yield pulp mills increased by $8 million, primarily due to higher chemical costs. Manufacturing costs at the NBSK mill improved significantly. In the prior year, the mill had absorbed costs related to 17 days of unplanned downtime to repair its recovery boiler. 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, low pulp selling prices in the September 2012 quarter had generated a charge of $3 million on the estimated NRV of finished goods inventories. During the fiscal 2013, pricing gradually improved and the Company recorded a gain of $4 million relating to NRV adjustments on the carrying value of finished goods inventories. The $11 million favourable variance in “Other” category relates primarily to the Chetwynd high-yield pulp mill, which generated negative adjusted EBITDA of $12 million in the prior year.

The pulp mills purchased approximately 834,500 bone dry tonnes of wood chips in fiscal 2013, down from 1,189,000 in the prior year. The decline was due to the idling of the Chetwynd high-yield pulp mill and the sale of the Skookumchuck NBSK pulp mill. Of this amount, approximately 20% was supplied by the Forest Products segment, compared to 29% in the prior year. The remaining requirements were purchased from third parties under contracts and agreements of various durations.

Overall, higher high-yield pulp prices and lower NBSK costs increased profitability with an adjusted EBITDA margin of 1.2% compared to negative 6.3% in the prior year.

The following summarizes operating results variances by major element:

					Variance
					favourable
(in millions of dollars)	2012		2013		(unfavourable)
Adjusted EBITDA	(32	)	5		37
Depreciation and amortization	23		14		9
Other items	50		24		26
Operating loss	(105	)	(33	)	72

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

Tembec Financial Report 2013      19

Management’s Discussion and Analysis

PAPER
(in millions of dollars)	2012	2013
Sales	346	332
Freight and other deductions	46	46
Cost of sales	252	250
SG&A	11	11
Adjusted EBITDA	37	25
Adjusted EBITDA margin on sales	10.7%	7.5%
Depreciation and amortization	2	3
Operating earnings	35	22
Identifiable assets (excluding cash)	120	137

The Paper segment currently includes two paper manufacturing facilities with a total of three paper machines. The mill located in Kapuskasing, Ontario, produces newsprint on two machines. The facility located in Temiscaming, Quebec, produces multi-ply coated bleached board on one machine. The board mill is partially integrated with a high-yield pulp mill. The total capacity of the Paper segment is 420,000 tonnes.

The following summarizes the products and capacity of each facility:

COATED BLEACHED BOARD	tonnes
Temiscaming, QC	180,000
NEWSPRINT
Kapuskasing, ON	240,000

Coated bleached board shipments represented 44% of Paper segment shipments in fiscal 2013, unchanged from the prior year. As a percentage of total segment sales, coated bleached board represented 61% of sales compared to 59% in the prior year.

Newsprint shipments represented 56% of Paper segment shipments in fiscal 2013, unchanged from the prior year. In terms of total segment sales, newsprint represented 39% of sales compared to 41% in the prior year.

Sales for the Paper segment totalled $332 million, as compared to $346 million in the prior year. The segment generated 22% of Company consolidated sales, as compared to 21% in fiscal 2012. The focus of the paper business is North America, which accounted for 94% of consolidated sales in 2013, unchanged from the prior year. The U.S. alone accounted for 74% of sales in fiscal 2013, as compared to 77% in the prior year.

	Sales		Shipments			Selling prices
	($ millions)		(000 tonnes		)	($ / tonne)
	2012	2013	2012	2013		2012	2013
Coated bleached board (rolls and sheets)	204	201	171.2	169.9		1,192	1,183
Newsprint	142	131	221.8	215.9		640	608
Consolidated sales	346	332	393.0	385.8

Tembec Financial Report 2013      20

Management’s Discussion and Analysis

Markets

The benchmark reference price for coated bleached board rolls (16 point) averaged US $1,118 per short ton in fiscal 2013, a US $14 per short ton decrease over the prior year. Relatively stable pricing was supported by good market demand. The shipments to capacity ratio for coated bleached board was 94% in fiscal 2013 compared to 95% in the prior year. These percentages reflect the good market fundamentals of the North American coated bleached board market over the last two years. The board mill operated at “full” capacity in both fiscal 2012 and fiscal 2013, with no market downtime taken in either year. The small decline in US $ prices was partially offset by currency as the Canadian dollar averaged $0.985, a 0.7% decrease from US $0.992 in the prior year. Overall, average price realizations for rolls and sheets declined by $9 per short ton. The inventory level at year-end was at 36 days, compared to 50 days at the end of the prior year.

The benchmark newsprint price (48.8 gram – East Coast) averaged US $617 per tonne in fiscal 2013, a decrease of US $23 per tonne from the prior year. The shipments to capacity ratio for newsprint was 90% as compared to 92% in the prior year. While these ratios would normally be indicative of a stable market, that was not the case for North American newsprint, as demand continued to decline. Inventory levels at year-end were at 11 days, as compared to 14 days at the end of the prior year, which is a normal level for the newsprint mill.

Tembec Financial Report 2013      21

Management’s Discussion and Analysis

Operating Results

The following summarizes adjusted EBITDA variances by major element:

	Variance - favourable (unfavourable)
			Mill		Freight
(in millions of dollars)	Price		costs		SGA		Other		TOTAL
Coated bleached board	(2	)	(6	)	1		1		(6	)
Newsprint	(7	)	4		(2	)	-		(5	)
Other segment items	-		-		-		(1	)	(1	)
	(9	)	(2	)	(1	)	-		(12	)

Fiscal 2013 adjusted EBITDA was $25 million compared to $37 million in the prior year. Lower coated bleached board and newsprint prices reduced adjusted EBITDA by $9 million. Manufacturing costs at the coated bleached board mill increased by $6 million, primarily for purchased pulp, chemicals and under-absorption of fixed costs, as the mill produced 7,400 fewer tonnes. Manufacturing costs at the newsprint mill declined by $4 million, primarily as a result of lower energy costs.

The coated bleached board mill utilizes a combination of chemical kraft and high-yield pulp to produce a three-ply sheet. During fiscal 2013, the mill utilized 61,600 tonnes of high-yield pulp supplied by the Temiscaming high-yield pulp mill versus 60,000 tonnes in fiscal 2012. In the prior year, the mill consumed 17,300 tonnes of NBSK supplied by the Company’s Skookumchuck pulp mill. There were no internal NBSK shipments in fiscal 2013. The balance of pulp requirements is purchased from third parties.

The newsprint mill utilizes virgin fibre, primarily in the form of wood chips. During fiscal 2013, the operations purchased 234,400 bone dry tonnes of virgin fibre, of which approximately 81% was internally sourced. In the prior year, 238,500 bone dry tonnes of virgin fibre were purchased, with 80% being sourced internally.

Overall, the lower prices and the higher costs reduced adjusted EBITDA margins from 10.7% to 7.5%.

The following summarizes operating results variances by major element:

			Variance
			favourable
(in millions of dollars)	2012	2013	(unfavourable)
Adjusted EBITDA	37	25	(12	)
Depreciation and amortization	2	3	(1	)
Operating earnings	35	22	(13	)

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

Tembec Financial Report 2013      22

Management’s Discussion and Analysis

CORPORATE
(in millions of dollars)	2012		2013
General and administrative expenses	21		21
Share-based compensation	(1	)	1
Other items:
Custodial - idled facilities	10		7
Gain on sale of BC office	-		(2	)
Impairment of Temlam loan receivable	16		-
Gain on sale of minority equity investment	(4	)	-
Operating expenses	42		27

The Company recorded a $1 million expense for share-based compensation in the current year as 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 most recent year, as compared to $10 million in the prior year.

In fiscal 2013, the Company generated a gain of $2 million related to the sale of the Cranbrook, BC, office.

The prior year includes a $16 million loss relating to the impairment of a loan receivable from Temlam Inc. The latter is currently under creditor protection and owns an idled laminated veneer lumber (LVL) facility located in Amos, Quebec. The Company has a 50% secured interest in the facility. The cutting rights that were previously attached to the LVL facility were granted to another company. In the absence of a guaranteed fibre supply, the Company concluded that the re-start of the facility was unlikely and adjusted its carrying value to the amount anticipated to be realized upon liquidation or sale. The prior year also included a gain of $4 million relating to the sale of a minority equity interest in two dissolving pulp mills.

Tembec Financial Report 2013      23

Management’s Discussion and Analysis

NON-OPERATING ITEMS

INTEREST, FOREIGN EXCHANGE AND OTHER
(in millions of dollars)	2012		2013
Interest on debt	38		42
Interest income	(1	)	-
Capitalized interest	(2	)	(9	)
Foreign exchange items	4		(1	)
Employee future benefits	-		(7	)
Bank charges and other	2		3
	41		28

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.

TRANSLATION OF FOREIGN DEBT

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.

INCOME TAXES

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

(in millions of dollars)	2012		2013
Loss before income taxes	(60	)	(13	)
Anticipated income tax recovery	(16	)	(3	)
Increase (decrease):
Difference in statutory rates	6		1
Unrecognized tax asset	32		21
Permanent differences	-		2
Income tax expense	22		21

Tembec Financial Report 2013      24

Management’s Discussion and Analysis

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.

NET LOSS

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.

	2012				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 assets 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

Tembec Financial Report 2013      25

Management’s Discussion and Analysis

COMPREHENSIVE EARNINGS (LOSS)

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

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

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 recognition of a deferred tax asset generated by previously unrecognized losses of the U.S. operations. It has been determined that the 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.

SUBSEQUENT EVENTS

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 completed the sale of 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.

Tembec Financial Report 2013      26

Management’s Discussion and Analysis

QUARTERLY FINANCIAL INFORMATION
(in millions of dollars, except per share amounts)

	2012								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
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) in dollars 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

FOURTH QUARTER ANALYSIS

The Company reported net earnings of $6 million or $0.06 per share in the fourth quarter ended September 28, 2013, compared to a net loss of $47 million or $0.47 per share in the same quarter of fiscal 2012. The weighted average number of common shares outstanding was 100 million, unchanged from the prior year.

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 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.

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.

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 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.

Tembec Financial Report 2013      27

Management’s Discussion and Analysis

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.

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 increased 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.

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.

The fourth quarter 2013 interim MD&A issued on November 21, 2013, provides a more extensive analysis of items having impacted the Company’s fourth quarter financial results.

Tembec Financial Report 2013      28

Management’s Discussion and Analysis

SUMMARY OF QUARTERLY RESULTS

On a quarterly basis, sales and margins were negatively impacted by relatively low lumber and paper pulp prices. Currency continued to negatively impact Canadian operations as the Canadian dollar remained close to parity over the last eight quarters, averaging US $0.987 with a quarterly average high of US $1.009 and a low of US $0.963.

The Forest Products segment generated adjusted EBITDA of $1 million during the last eight quarters. This represents an average margin of 0.1% on sales of $852 million. The U.S. lumber and housing market was relatively weak during the last two years and the Company’s lumber shipments to capacity ratio averaged 78%. The U.S. market has recently improved and lumber prices have followed this trend. The Forest Products segment posted four quarters of positive adjusted EBITDA in fiscal 2013, with a margin of 4.0% . The financial performance was negatively impacted by export taxes on lumber shipped to the United States. The total amount incurred over the last two years was $10 million. However, the impact of lumber export taxes is declining as the lumber market improves and prices increase. The $3 million incurred in fiscal 2013 represents the lowest level since export taxes were imposed in 2006.

The Specialty Cellulose Pulp segment generated adjusted EBITDA of $168 million during the last eight quarters. This represents an average margin of 17.4% on sales of $967 million. The margins averaged 18.7% in fiscal 2012 when specialty cellulose pulp prices were higher. A weakening of pulp prices in fiscal 2013 resulted in weaker results and average margins declined to 15.9% .

The Paper Pulp segment generated negative adjusted EBITDA of $27 million during the last eight quarters. This represents a negative margin of 2.9% on sales of $925 million. The market for paper pulp has been weak over the last two years, but improved slightly in fiscal 2013. This allowed the segment to generate positive adjusted EBITDA of $5 million in fiscal 2013.

The Paper segment generated adjusted EBITDA of $62 million over the last eight quarters. This represents an average margin of 9.1% on sales of $678 million. Prices for coated bleached board and newsprint have not fluctuated significantly over the last two years and segment financial results have been relatively stable.

Corporate general and administrative expenses of the Company have averaged approximately $5 million per quarter over the last two years and there has been no significant changes in the composition of those expenses.

Overall, the Company generated adjusted EBITDA of $162 million in the last eight quarters. This represents an average margin of approximately 5.1% on sales of $3.2 billion.

Other items reduced the Company’s operating earnings by $79 million during the last eight quarters. While there were several offsetting favourable and unfavourable items, the most significant unfavourable items were a $50 million asset impairment charge taken in the September 2012 quarter and an asset impairment charge of $22 million taken in the March 2013 quarter.

The Company recorded a loss of $1 million on the translation of its foreign-denominated debt over the last two years. However, the impact of the quarterly US debt translation gains and losses added considerable volatility to the financial results, with the impact ranging from a gain of $13 million in the September 2012 quarter to a loss of $11 million in the June 2013 quarter.

During the last two years, the Company has recorded an income tax expense of $43 million. The expense relates primarily to its French operations as the Canadian operations have significant amounts of unrecognized tax assets.

Tembec Financial Report 2013      29

Management’s Discussion and Analysis

FINANCIAL POSITION AND LIQUIDITY

FREE CASH FLOW
(in millions of dollars)	2012		2013
Cash flow from operations before working capital changes	13		36
Less:
Additions to property, plant and equipment	120		137
Interest on debt	38		42
Free cash flow (negative)	(145	)	(143	)

Cash flow from operations before working capital changes in fiscal 2013 was $36 million, compared to $13 million in the prior year. The increase in cash flow was caused by the higher adjusted EBITDA. 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. The increase in working capital was caused by a $33 million decline in trade payables and accruals. The prior year-end balance included significant payables and accruals for construction and annual maintenance shutdowns. As a result, cash flow from operations improved from negative $72 million in fiscal 2012 to $23 million in fiscal 2013.

CAPITAL SPENDING
(in millions of dollars)	2012	2013
Forest Products	12	7
Specialty Cellulose Pulp - Cogen project	56	78
Specialty Cellulose Pulp - Other	30	32
Paper Pulp	13	10
Paper	7	9
Corporate	2	1
Net capital expenditures	120	137
As a % of consolidated sales	7.2%	8.9%
As a % of depreciation	261%	343%

Tembec Financial Report 2013      30

Management’s Discussion and Analysis

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.

ACQUISITIONS, INVESTMENTS AND DIVESTITURES

On November 25, 2011, the Company sold its Toronto, Ontario, hardwood flooring plant for proceeds of $13 million. Concurrently, the Company also announced the closure of its Huntsville, Ontario, hardwood flooring plant. The sale of the Toronto plant and the closure of the Huntsville plant resulted in a charge of $2 million that was recorded in the Company’s fiscal 2012 financial results.

On March 23, 2012, the Company sold its British Columbia Southern Interior wood products assets for proceeds of $66 million. The sale included the Elko and Canal Flats sawmills and approximately 1.1 million cubic meters of combined Crown tenures, private land and contract annual allowable cut. As a result of the sale, the Company recorded a gain of $24 million in the fiscal 2012 financial results.

On May 17, 2013, the Company sold its NBSK pulp mill located in Skookumchuck, BC, for proceeds of $97 million. As a result of the sale, the Company recorded an asset impairment charge of $22 million and a loss on sale of $2 million in the fiscal 2013 financial results.

FINANCING ACTIVITIES

The Company’s objective is to maintain the net debt to total capitalization ratio at 40% or less. The goal is to keep a relatively strong balance sheet and maintain the ability of the Company to access capital markets at favourable rates. The net debt to total capitalization ratio of the Company was 52% as at September 28, 2013, as compared to 45% at the end of the prior fiscal year. The increase was due to new debt to fund the previously noted Temiscaming specialty cellulose Cogen project. The Company anticipates that the net debt to total capitalization ratio will remain in excess of its target until the Temiscaming Cogen project is completed and begins to generate the projected incremental adjusted EBITDA.

Tembec Financial Report 2013      31

Management’s Discussion and Analysis

LONG-TERM DEBT
(in millions of dollars)	2012	2013
Tembec Industries - US $305 million 11.25% senior secured notes due December 2018	300	314
Temiscaming project financing - 6.35% secured term loan	20	20
Temiscaming project financing - 5.5% secured term loan	-	40
French operations	22	17
Kirkland Lake Engineered Wood Products Inc.	8	9
Other debt	2	2
Total long-term debt	352	402
Less net unamortized financing costs	13	17
	339	385
Current portion included in above	16	16

In August 2010, the Company completed a private offering of US $255 million of 11.25% senior secured notes maturing in December 2018. In February 2012, the Company issued a further US $50 million of senior secured notes with the same terms and conditions as the original US $255 million notes. The notes are senior secured obligations of the Company, secured by a first priority lien on the majority of the property and assets of the Company. They are also secured by a second priority lien on accounts receivable, inventories and certain intangibles.

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 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 September 2013 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 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 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 be granted on the date of the first advance under 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 September 2013 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.

Tembec Financial Report 2013      32

Management’s Discussion and Analysis

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.

The two previously noted facilities will be utilized to fund $73 million of the $98 million required to complete the Temiscaming, Quebec, specialty cellulose project. The Company intends to fund the remaining amount from available cash resources and cash flows from operations.

The debt of the French operations relates to the Company’s specialty cellulose pulp mill. The decrease in debt was due to scheduled amortization payments.

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.

The current portion of long-term debt includes $9 million related to the Kirkland Lake Engineered Wood Products facility. This operation has been idle for several years and the loan has been subject to a “standstill” agreement between the Company and the lender. This is a non-recourse facility and while it is classified as a current item, the Company considers it highly unlikely that it will repay this facility in the next 12 months.

At the end of September 2013, the Company had total cash of $74 million (including restricted cash) plus unused operating lines of $35 million for total liquidity of $109 million. At the end of September 2012, the Company had total cash of $92 million and unused operating lines of $48 million for total liquidity of $140 million. The Company has set an objective of maintaining a minimum liquidity of $135 million to $150 million. The Company defines “operating lines” to include loans of various durations which are secured by charges on accounts receivable and/or inventories. Operating lines are used primarily to fund short-term requirements associated with both seasonal and cyclical inventory increases which can occur in the Company’s business segments. The Company would not normally draw on the operating lines to fund capital expenditures or normal average working capital requirements. The operating lines are established across several entities and jurisdictions to ensure they meet the needs of the various operating units.

The following table summarizes the unused operating lines at the end of the last two fiscal years:

OPERATING LINES
(in millions of dollars)	2012		2013
Borrowing base	187		168
Less: availability reserve	(23	)	(20	)
Net availability	164		148
Outstanding letters of credit	(48	)	(56	)
Amount drawn	(68	)	(57	)
Unused amount	48		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.

Tembec Financial Report 2013      33

Management’s Discussion and Analysis

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. The Company does not have any other significant off-balance sheet arrangements.

The French operations are supported by “receivable factoring” agreements. As such, the borrowing base fluctuates periodically, depending on shipments and cash receipts.

COMMON SHARES
(in millions)	2012	2013
Shares outstanding - opening	100	100
Shares outstanding - ending	100	100

There were no shares issued in fiscal 2012 and fiscal 2013.

Prior to February 29, 2012, there were 11,093,943 outstanding warrants. The warrants were convertible into an equal amount of common shares. They would have been deemed to be exercised and automatically converted into common shares if the 20-day volume-weighted average trading price of a single common share reached or exceeded $12.00 or immediately prior to any transaction that would have constituted a change of control at a purchase price per common share equal to at least $12.00. The warrants expired unexercised on February 29, 2012.

Pursuant to options granted under the prior Long-Term Incentive Plan (LTIP), an additional 95,852 shares may be issued. The weighted average exercise price of the options was $60.09 per share with expiry dates up to 2016. As at September 28, 2013, all of the options were exercisable.

On August 30, 2012, 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. As well, the Company agreed to grant the same lender a five-year option to acquire 712,000 common shares at a premium of 30% on 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 a future advance.

Tembec Financial Report 2013      34

Management’s Discussion and Analysis

FINANCIAL INSTRUMENTS AND CONTRACTUAL OBLIGATIONS

FINANCIAL ASSETS AND LIABILITIES	September 28, 2013
(in millions of dollars)	Carrying value	Fair value
Financial assets
Cash and cash equivalents	73	73
Restricted cash	1	1
Trade and other receivables	157	157
Loans receivable	10	10
Financial liabilities
Operating bank loans	57	57
Trade, other payables and accrued charges	195	195
Interest payable	10	10
Long-term debt (including current portion)	385	428

The carrying values for cash and cash equivalents, restricted cash, trade and other receivables, loans receivable, operating bank loans, trade, other payables and accrued charges, and interest payable approximate their fair values due to the near-term maturity of these instruments.

The fair value of the long-term debt is $43 million higher than its carrying value. Unamortized financing costs increased the fair value by $17 million. The fair value was increased by a further $26 million as the Company’s US $305 million senior secured notes were trading above par at year-end.

FINANCIAL RISKS

Credit Risk

Credit risk arises from the possibility that entities to which the Company sells products may experience financial difficulty and be unable to fulfill their contractual obligations. The Company does not have a significant exposure to any individual customer or counterparty. The Company reviews a new customer’s credit history before extending credit and conducts regular reviews of its existing customers’ credit performance. All credit limits are subject to evaluation and revision at any time based on changes in levels of creditworthiness and must be reviewed at least once per year. Sales orders cannot be processed unless a credit limit has been properly approved. The Company may require payment guarantees, such as letters of credit, or obtain credit insurance coverage. Bad debt expense has not been significant in the past. The allowance for doubtful accounts at September 2013 was negligible, unchanged from the prior year.

Liquidity Risk

Liquidity risk arises from the possibility that the Company will not be able to meet its financial obligations as they fall due. The Company has an objective of maintaining liquidity equal to 12 months of maintenance capital expenditures, interest and principal repayments and seasonal working capital requirements, which would require approximately $135 million to $150 million of liquidity. As noted previously, the Company had total cash of $74 million plus unused operating lines of $35 million, for total liquidity of $109 million as at September 28, 2013.

The Company currently has sufficient available cash resources and access to additional funding to meet its commitments for at least the next 12-month period. This is based on certain assumptions regarding general economic conditions, the availability of borrowings on existing credit facilities to fund operating and capital requirements and the projected operating results of the various business segments. Access to future borrowings is dependent on meeting the terms and conditions contained in the Company’s various credit facilities. An adverse perception in the capital markets of the Company’s financial condition or prospects could limit future access to debt and equity markets.

Tembec Financial Report 2013      35

Management’s Discussion and Analysis

The Company is currently proceeding with an ambitious capital expenditure program, including a $235 million project at the Temiscaming specialty cellulose mill, which is increasing liquidity risk. The Company has negotiated two credit agreements that will provide up to $133 million of project financing for the Temiscaming specialty cellulose project. These project credit facilities contain terms and conditions specific to the project, including project completion commitments. If general economic conditions were to deteriorate significantly, or if the Company was unable to meet the terms of the new project credit facilities, or if future operating performance is significantly below expectations, the Company may have to reduce or defer its capital expenditure plans.

Foreign Currency Risk

This item is discussed in detail in a subsequent section of the MD&A, “Significant Risks and Uncertainties”.

Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. This will have little impact on the Company’s financial results since the majority of the Company’s debts are at fixed interest rates.

Commodity Price and Operational Risk

These items are discussed in detail in a subsequent section of the MD&A, “Significant Risks and Uncertainties”.

CONTRACTUAL OBLIGATIONS	Total	Within 1	2 - 3	4 - 5	After 5
(in millions of dollars)		year	years	years	years
Long-term debt	402	16	13	11	362
Interest on long-term debt	214	40	78	77	19
Operating leases	9	4	4	1	-
Purchase obligations	170	106	54	10	-
Pension obligations:
Current service costs	119	8	15	15	81
Past service costs	172	37	65	33	37
	1,086	211	229	147	499

The table above shows the Company’s contractual obligations as at September 28, 2013. The Company has long-term debt with contractual maturities and applicable interest. The operating lease obligations relate primarily to property and equipment rentals entered into in the normal course of business. Purchase obligations relate to ongoing normal commercial commitments to purchase timber, wood chips, energy, chemicals and other operating inputs. They also include outstanding obligations relating to capital expenditures. Pension obligations have two components. The current service costs are limited to a 15-year period and are based on estimated future employee service for existing registered defined benefit plans. Past service costs include estimated solvency and going concern amortization payments.

Tembec Financial Report 2013      36

Management’s Discussion and Analysis

2012 vs. 2011

FINANCIAL SUMMARY
(in millions of dollars, unless otherwise noted)	2011		2012
Sales	1,743		1,666
Adjusted EBITDA	98		64
Depreciation and amortization	48		46
Other items	3		50
Operating earnings (loss)	47		(32	)
Net loss	(5	)	(82	)
Basic and diluted net loss in dollars per share	(0.05	)	(0.82	)
Total assets (at year-end)	1,093		1,059
Total long-term debt (at year-end) (1)	289		339
Total long-term liabilities (at year-end)	574		627
(1) includes current portion

Sales decreased by $77 million as compared to fiscal 2011. Currency was favourable as the Canadian dollar averaged US $0.992, a 2.1% decrease from US $1.013 in the prior year. Forest Products segment sales decreased by $39 million as a result of lower shipments, partially offset by higher prices. Specialty Cellulose and Chemical Pulp segment sales decreased by $31 million due to significantly lower shipments and prices. High-Yield Pulp segment sales decreased by $26 million due to lower shipments and prices. Paper segment sales increased by $7 million due to primarily to higher prices.

In fiscal 2012, adjusted EBITDA declined by $34 million over the prior year. Forest Products segment adjusted EBITDA was up $31 million from the prior year primarily as a result of higher prices. Specialty Cellulose and Chemical Pulp segment adjusted EBITDA declined by $48 million due to higher costs and lower prices. High-Yield Pulp segment adjusted EBITDA declined by $26 million due to higher costs and lower prices. Paper segment adjusted EBITDA improved by $8 million due to higher prices and lower costs.

OPERATING EARNINGS (LOSS)
							Adjusted				Other
					Total		EBITDA		Depreciation		items
(in millions of dollars)	2011		2012		variance		variance		variance		variance
Forest Products	(64	)	(4	)	60		31		4		25
Specialty Cellulose and Chemical Pulp	121		71		(50	)	(48	)	(2	)	-
High-Yield Pulp	(14	)	(92	)	(78	)	(26	)	(2	)	(50	)
Paper	26		35		9		8		1		-
Corporate	(22	)	(42	)	(20	)	1		1		(22	)
	47		(32	)	(79	)	(34	)	2		(47	)

Tembec Financial Report 2013      37

Management’s Discussion and Analysis

The Company generated an operating loss of $32 million in fiscal 2012 compared to operating earnings of $47 million in the prior year.

The Forest Products segment generated an operating loss of $4 million, as compared to an operating loss of $64 million in fiscal 2011. In addition to the previously noted improvement in adjusted EBITDA, the sale of the BC sawmills and the hardwood flooring operations led to lower depreciation expense. During fiscal 2012, the Company recorded a gain of $24 million related to the sale of the BC sawmills. The Company sold its Toronto, Ontario, hardwood flooring plant and concurrently closed its Huntsville, Ontario, hardwood flooring plant. The combined effect was a charge of $2 million. In the prior year, the segment recorded a charge of $2 million relating to the permanent closure of the Taschereau, Quebec, sawmill. The charge was for severance and other closure costs. The Company also absorbed a charge of $1 million related to severance payments at an idled planer mill in Cranbrook, BC.

The Specialty Cellulose and Chemical Pulp segment generated operating earnings of $71 million compared to operating earnings of $121 million in the prior year. The previously noted decline in adjusted EBITDA led to the lower operating earnings.

The High-Yield Pulp segment generated an operating loss of $92 million compared to an operating loss of $14 million in the prior year. In addition to the previously noted decline in adjusted EBITDA, the segment absorbed an impairment charge of $50 million relating to the property, plant and equipment, including supplies and materials, of the Chetwynd, BC, pulp mill.

The Paper segment generated operating earnings of $35 million compared to operating earnings of $26 million in the prior year. The previously noted improvement in adjusted EBITDA led to the higher operating earnings.

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 $10 million in fiscal 2012, as compared to $7 million in the prior year. Fiscal 2012 includes a $16 million loss relating to the impairment of a loan receivable from Temlam Inc. The latter is currently under creditor protection and owns an idled laminated veneer lumber (LVL) facility located in Amos, Quebec. The Company has a 50% secured interest in the facility. The cutting rights that were previously attached to the LVL facility were granted to another company. In the absence of a guaranteed fibre supply, the Company concluded that the re-start of the facility is unlikely and has adjusted its carrying value to the amount anticipated to be realized upon liquidation or sale. Fiscal 2012 also includes a gain of $4 million relating to the sale of a minority equity interest in two dissolving pulp mills. The prior year includes a gain of $4 million related to the filing of Tembec USA LLC under Chapter 7 of the Bankruptcy Code of the United States. The gain was generated by a reduction in the Company’s accrued benefit obligation. The period also included a gain of $3 million related to the sale of hydro-electric generating assets located in Smooth Rock Falls, Ontario.

INTEREST, FOREIGN EXCHANGE AND OTHER
(in millions of dollars)	2011		2012
Interest on debt	32		38
Interest income	(1	)	(1	)
Capitalized interest	-		(2	)
Fees - new working capital facility	2		-
Foreign exchange items	-		4
Change in fair value of warrants (gain)	(5	)	-
Bank charges and other	3		2
	31		41

Tembec Financial Report 2013      38

Management’s Discussion and Analysis

The increase in the interest expense relates primarily to the issue of a US $50 million additional tranche of 11.25% senior secured notes in February 2012. This brought the total amount outstanding of 11.25% senior secured notes to US $305 million, which constitutes the bulk of the Company’s annual interest expense. 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, losses are generated. This was the case in fiscal 2012.

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.

During fiscal 2011, the Company recorded a loss of $1 million on the translation of its US $ denominated debt as the relative value of the Canadian dollar decreased from US $0.975 to US $0.971.

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 tax recovery of $16 million based on the Company’s effective tax rate of 26.3% . Fiscal 2012 absorbed a $32 million unfavourable variance related to period losses for which no deferred tax asset was recognized. Based on past financial performance, deferred income tax assets of the Company`s Canadian operations have not been recognized as it has not been determined that future realization of these assets is probable. The expense was also increased by $6 million due to higher statutory income tax rates in France.

During fiscal 2011, the Company recorded an income tax expense of $20 million on earnings before income taxes of $15 million. The income tax expense reflected a $16 million unfavourable variance versus an anticipated tax expense of $4 million based on the Company’s effective tax rate of 27.8% . Fiscal 2011 absorbed a $10 million unfavourable variance related to period losses for which no deferred tax asset was recognized. The expense was also increased by $6 million due to higher statutory income tax rates in France.

The Company generated a net loss of $82 million or $0.82 per share for the year ended September 29, 2012, compared to a net loss of $5 million or $0.05 per share for the year ended September 24, 2011.

CRITICAL ACCOUNTING ESTIMATES

Property, plant and equipment depreciation

The Company records its property, plant and equipment, primarily production buildings and equipment, at cost. Interest costs are capitalized for projects in excess of $1 million that have a duration in excess of one year. Investment tax credits or capital assistance received reduce the cost of the related assets. Property, plant and equipment acquired as a result of a business acquisition are recorded at their estimated fair value. Depreciation of property, plant and equipment is provided over their estimated useful lives, generally on a straight-line basis. The estimated useful lives of property, plant and equipment are based on judgement and the best currently available information. Changes in circumstances can result in the actual useful lives differing from our estimates. Revisions to the estimated useful lives of property, plant and equipment constitute a change in accounting estimate and are dealt with prospectively by amending the amount of future depreciation expense. There were no significant revisions to the estimated useful lives of property, plant and equipment in fiscal 2013 and fiscal 2012.

Impairment of non-financial assets

The Company must review the carrying value of non-financial assets when events or changes in circumstances indicate that the value may have been impaired and is not recoverable through future operations and cash flows. If any such indication exists, then the asset’s recoverable amount is estimated. The recoverable amount of a non-financial asset is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets. An impairment loss is recognized if the carrying amount of an asset exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. An impairment loss recognized in prior periods is assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. To estimate future cash flows, the Company uses operating and financial assumptions, primarily those contained in its most recent multi-year operating plan. In fiscal 2012, the Company recorded $50 million related to the impairment of the Chetwynd, BC, high-yield pulp mill. In fiscal 2013, the Company recorded $22 million related to the impairment of the Skookumchuck, BC, NBSK pulp mill prior to its sale.

Tembec Financial Report 2013      39

Management’s Discussion and Analysis

Employee future benefits

The Company contributes to several defined benefit pension plans, primarily related to employees covered by collective bargaining agreements. The Company also provides post-retirement benefits to retirees, primarily healthcare related. For post-retirement benefits, funding of disbursements is done on a “pay as you go” basis. The Company uses independent actuarial firms to quantify the amount of pension and post-retirement obligations. The Company, based on its own experience and recommendations from its actuarial firms, evaluates the underlying assumptions on an annual basis. Discount rates utilized to calculate the present value of future obligations is prescribed by IFRS accounting standards. Changes in estimates or assumptions can have a substantial impact on the amount of pension and post-retirement benefit expense, the carrying values on the balance sheet, and, in the case of defined benefit plans, the amount of plan surplus or deficit. At September 28, 2013, the fair value of defined benefit pension plan assets was $746 million, an amount equal to 91% of the estimated accrued benefit pension obligations of $817 million, generating a shortfall of $71 million. The plan deficit was $243 million at the end of the prior year. The deficit decrease of $172 million that occurred over the 12-month period was due to several items. The deficit was decreased by $31 million as the return on plan assets exceeded the assumed rate of return. The deficit was further reduced by $34 million as employer contributions of $44 million exceeded the current service cost of $10 million. Finally, an actuarial gain of $98 million decreased the obligations at the end of the fiscal year. This item was caused by an increase in the applicable discount rate from 3.69% to 4.60% . The discount rate is tied to rates applicable to high-quality corporate bonds (AA or higher) in effect at the end of the fiscal year. Pension expense included in cost of sales in fiscal 2013 was $10 million, as compared to $9 million in the prior year. Based on current assumptions, employer contributions and pension expense in cost of sales in fiscal 2014 are expected to be approximately $34 million and $9 million respectively. There is no assurance that current assumptions will materialize in future periods. The defined benefit pension plans may be unable to earn the assumed rate of return. Market driven changes to discount rates and other variables may result in changes to anticipated Company contribution amounts.

With regard to other employee future benefit plans, the accrued benefit obligation at year-end was $29 million, a decrease from $41 million in the prior year. The obligation declined by $9 million due to the sale of the Skookumchuck pulp mill. The previously noted increase in discount rates generated an actuarial gain, decreasing the obligation by $4 million. Employer contributions were $1 million in fiscal 2013 and fiscal 2012. The Company recognized an expense of $2 million in fiscal 2013 as compared to $3 million in the prior year. Based on current assumptions, the amount of employer contributions and the amount of expense to be recognized in fiscal 2014 are expected to be approximately $2 million for each item.

Deferred income taxes

Deferred income tax is provided for using the asset and liability method and recognizes temporary differences between the tax values and the financial statement carrying amounts of balance sheet items as well as certain carry-forward items. The Company only recognizes a deferred income tax asset to the extent that the future realization of the tax asset is probable. This is based on estimates and assumptions as to the future financial performance of the various taxable legal entities in the various tax jurisdictions. At September 28, 2013, the Company had unrecognized deferred tax assets of $544 million, a decrease from $561 million at the end of the prior year.

Tembec Financial Report 2013      40

Management’s Discussion and Analysis

USE OF NON-IFRS FINANCIAL MEASURES

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 operating earnings to the Company’s definition of adjusted EBITDA:

(in millions of dollars)	2012		2013
Operating earnings (loss)	(32	)	29
Depreciation and amortization	46		40
Other items	50		29
Adjusted EBITDA	64		98

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.

Net debt refers to debt less cash, restricted cash and cash equivalents.

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.

(in millions of dollars)	2012		2013
Long-term debt	323		369
Net unamortized financing costs	13		17
Current p portion g of long-term debt	16		16
indebtedness	68		57
Less: total cash	(92	)	(74	)
Net debt	328		385
Long-term liabilities	304		140
Shareholders' equity	102		220
Total capitalization	734		745
Net debt to total capitalization ratio	45%		52%

Tembec Financial Report 2013      41

Management’s Discussion and Analysis

CHANGES IN ACCOUNTING POLICIES AND ESTIMATES

During the years ended September 29, 2012 and September 28, 2013, there were no new standards that impacted the Company’s consolidated financial statements.

IMPACT OF ACCOUNTING PRONOUNCEMENTS ON FUTURE REPORTING PERIODS

IFRS 7 FINANCIAL INSTRUMENTS – DISCLOSURES

In December 2011, the IASB amended the standard IFRS 7, Financial Instruments – Disclosures, to provide additional information about offsetting of financial assets and financial liabilities. IFRS 7 has been amended to require disclosures that will enable users of financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with an entity’s recognized financial assets and recognized financial liabilities, on the entity’s balance sheet. An entity provides information including the gross amounts subject to rights of set-off, amounts set off in accordance with the offsetting criteria, amounts of financial instruments subject to master netting arrangements or similar agreements, and the related net amounts to meet the disclosure objective.

These amendments are effective for annual periods beginning on or after January 1, 2013. The Company will adopt the new standard, which will not have an impact on the amounts recorded, in its fiscal 2014 financial statements.

IFRS 9 FINANCIAL INSTRUMENTS

In November 2009, the IASB issued IFRS 9, Financial Instruments (IFRS 9), and in October 2010, the IASB published amendments to IFRS 9 (IFRS 9 R).

IFRS 9 R supersedes IFRS 9 and is effective for annual periods beginning on or after January 1, 2015, with early adoption permitted. For annual periods beginning before January 1, 2015, either IFRS 9 or IFRS 9 R may be applied. This standard provides guidance on the classification and measurement of financial liabilities and the presentation of gains and losses on financial liabilities designated at fair value through profit and loss. When an entity elects to measure a financial liability at fair value, gains or losses due to changes in the credit risk of the instrument must be recognized in other comprehensive income. The Company has not yet begun the process of assessing the impact that the new standard will have on its financial statements and does not plan to early adopt the new requirement.

IFRS 13 FAIR VALUE MEASUREMENT

In May 2011, the IASB issued the standard, IFRS 13, Fair Value Measurement. IFRS 13 is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and in many cases does not reflect a clear measurement basis or consistent disclosures.

The new standard is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. The Company will adopt the new standard, which will not have an impact on the amounts recorded, in its fiscal 2014 financial statements.

Tembec Financial Report 2013      42

Management’s Discussion and Analysis

AMENDMENTS TO IAS 19 EMPLOYEE BENEFITS

In June 2011, the IASB published an amended version of IAS 19, Employee Benefits. Adoption of the amendment is required for annual periods beginning on or after January 1, 2013, with early adoption permitted. This standard was amended to:

a)	require the interest cost and expected return on plan assets, which currently reflect different rates, be replaced with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (asset). The impact of this portion of the amended standard is an increase in net finance cost as the Company’s return on plan assets will effectively be at a lower rate.
b)	eliminate the option to defer the recognition of gains and losses arising in defined benefit plans;
c)	require gains and losses relating to those plans to be presented in other comprehensive income; and
d)	improve the disclosure requirements concerning the characteristics of defined benefit plans and the risks arising from those plans.

The amended standard also incorporates changes to the accounting for termination benefits. The amendment will be applied retrospectively. The Company estimates that the effect on the consolidated balance sheet as at September 28, 2013, would be an increase of the net defined benefit liability of $2 million and an increase of the deficit of $2 million. The effect on the consolidated statement of net earnings (loss) for the year ended September 28, 2013, would be an increase of the net finance costs by approximately $18 million and an increase of the other comprehensive earnings by the same amount. The Company is still in a process of assessing the impact that the new standard will have on the income tax expense in the statement of net earnings (loss) and in the statement of comprehensive earnings (loss). The Company will adopt the new requirements in its fiscal 2014 financial statements.

SIGNIFICANT RISKS AND UNCERTAINTIES

PRODUCT PRICES

The Company’s financial performance is dependent on the selling prices of its products. The markets for lumber, paper pulp and paper products are cyclical and are influenced by a variety of factors. These factors include periods of excess product supply due to industry capacity additions, periods of decreased demand due to weak general economic activity, inventory de-stocking by customers, and fluctuations in currency exchange rates. During periods of low prices, the Company is subject to reduced revenues and margins, resulting in substantial declines in profitability and possibly net losses.

Based on 2014 planned sales volumes, the following table illustrates the approximate annual impact of changes to average Canadian dollar selling prices on adjusted EBITDA:

Selling price sensitivity	Impact on	Average
	adjusted EBITDA	selling prices ($
	($ millions)	Sept. 2013 quarter
Specialty cellulose pulp - $25/tonne	7	1,598
Paper pulp - $25/tonne	12	606
Coated bleached board and newsprint - $25/tonne	10	887
SPF lumber - $10/mbf	7	378

The Company’s strategy is to develop niche products where possible; maintain low cost, high-quality flexible production facilities; establish and develop long-term relationships with its customers. In addition, the Company may periodically purchase lumber, pulp and newsprint derivative commodity contracts to mitigate the impact of price volatility. At September 28, 2013 and at September 29, 2012, the Company did not hold any significant product derivative commodity contracts.

Tembec Financial Report 2013      43

Management’s Discussion and Analysis

FOREIGN EXCHANGE

The Company’s revenues for most of its products are affected by fluctuations in the relative exchange rates of the US dollar and the euro as compared to the Canadian dollar. The Company generates approximately $900 million of US $ denominated sales annually from its Canadian operations. As a result, any decrease in the value of the US dollar and the euro relative to the Canadian dollar reduces the amount of revenues realized on sales in local currency. In addition, since business units purchase the majority of their production inputs in local currency, fluctuations in foreign exchange can significantly affect the unit’s relative cost position when compared to competing manufacturing sites in other currency jurisdictions.

Based on 2014 planned sales volumes and prices, the following table illustrates the impact of a 1% change in the value of the US dollar versus the Canadian dollar and the euro. For illustrative purposes, an increase of 1% in the value of the US dollar is assumed. A decrease would have the opposite effects of those shown below:

FOREIGN EXCHANGE SENSITIVITY
(in millions of dollars)
Sales increase	10
Cost of sales increase	3
Adjusted EBITDA increase	7
Interest expense increase	-
Cash flow increase	7
Loss on translation of US $ denominated debt	3
Pre-tax earnings increase	4

Direct US $ purchases of raw materials, supplies and services provide a partial offset to the impact on sales. The above does not include the potential indirect impact of currency on the cost of items purchased in Canadian dollars.

To potentially further reduce the impact of fluctuations in the value of the US dollar, the Company has a policy which permits hedging up to 50% of its anticipated US $ receipts for up to 36 months in duration. At September 28, 2013 and September 29, 2012, the Company did not hold any foreign exchange contracts.

OPERATIONAL RISKS

The manufacturing activities conducted by the Company’s operations are subject to a number of risks including availability and price of fibre, competitive prices for purchased energy, a productive and reliable workforce, compliance with environmental regulations, maintenance and replacement/upgrade of process equipment to manufacture competitive quality products and the requirement to operate the manufacturing facilities at high rates of utilization and efficiency to maintain a competitive cost structure.

Fibre represents the Company’s major raw material in the production of wood products, pulp and paper. In Canada, virgin fibre or timber is sourced primarily by agreements with provincial governments. The agreements are granted for various terms from five to 25 years and are generally subject to regular renewals every five years. The agreements incorporate commitments with respect to sustainable forest management, silvicultural work, forest and soil renewal, as well as cooperation with other forest users. In addition, the Company has undertaken, on a voluntary basis, to have its timber harvesting certified by the Forest Stewardship Council (FSC). The Company expects the agreements to be extended as they come up for renewal. Aboriginal groups have claimed substantial portions of land in various provinces over which they claim aboriginal title or in which they have a traditional interest and for which they are seeking compensation from various levels of government. The Company has taken a proactive approach to enhance the economic participation of First Nations in its operations wherever feasible. The Company’s operation in France sources its fibre requirements from various private sources, primarily through long-term supply arrangements.

Energy is an important component of mill costs, especially for high-yield pulp mills and newsprint mills. In 2013, purchased energy costs totalled approximately $94 million, 50% of which was electricity. Electrical purchases are made primarily from large public utilities, at rates set by regulating bodies. In certain jurisdictions, electricity is deregulated, which can lead to greater price volatility. To mitigate the effect of price fluctuations on its financial performance, the Company employs several tactics, including the securing of longer term supply agreements, the purchase of derivative commodity contracts and operational curtailments in periods of high prices (load shedding).

Tembec Financial Report 2013      44

Management’s Discussion and Analysis

At September 2013 and September 2012, the Company did not hold any derivative commodity contracts relating to purchased electricity. Fossil fuels, primarily natural gas, are purchased at market rates. The Company periodically purchases derivative commodity contracts to reduce its exposure. At September 28, 2013 and September 29, 2012, the Company did not hold any natural gas derivative commodity contracts.

Nearly all the Company’s manufacturing units have a unionized workforce. Over the past 30 years, the Company has successfully negotiated new collective agreements in nearly all instances, with relatively few work stoppages. At many of the Company’s facilities, as well as those of the North American industry as a whole, we have seen reductions in employment levels resulting from technological and process improvements resulting in a workforce with more years of service. This increases the relative costs of pensions and benefits. At September 2013, the Company had approximately 2,700 employees covered by collective bargaining agreements. At September 28, 2013, there were seven agreements covering 26 employees that had expired. During fiscal 2014, six collective agreement covering 875 employees will expire. The remaining contracts expire at various dates up to January 2019. The Company anticipates it will reach satisfactory agreements on contracts currently under active negotiations and those expiring in the future.

The Company’s operations are subject to industry-specific environmental regulations relating to air emissions, wastewater (effluent) discharges, solid waste, landfill operations, forestry practices, and site remediation. The Company has made significant progress in reducing the environmental impact of its operations over the last 15 years. This has occurred as a result of changes in manufacturing processes, the installation of specialized equipment to treat/eliminate the materials being discharged and the implementation of standardized practices such as ISO 14001.

The production of lumber, pulp and paper is capital intensive. The Company estimates that it must invest approximately $35 million to $40 million per year on capital expenditures to avoid degradation of its current operations. As the majority of the funding is provided by cash flow from operations, there can be no assurance that the funds will be available to meet all of the Company’s capital expenditure needs. Failure to reinvest can lead to older equipment that is less productive, less reliable and more costly to maintain and operate. The risk of technological obsolescence also increases. Capital expenditure projects can be large in scale, requiring the Company to maintain and/or acquire expertise in the design, planning and execution of major capital projects. There are inherent risks in the capital expenditure process, including the potential for project cost overruns, new equipment that does not perform to anticipated or projected levels, a lengthy start-up period and disruptions to normal operations. Due to relatively low operating cash flow generation over the last several years, the Company has limited capital expenditures. This has led to a “backlog” of capital expenditure projects in many operating facilities. The Company is currently proceeding with a $235 million Cogen project at the Temiscaming specialty cellulose mill. As a portion of the funding for the Cogen project is to be provided by operating cash flows, there is a risk that the Company may experience delays or cost overruns in executing this project or other required capital expenditures.

Because of the relatively high fixed cost component of certain manufacturing processes, especially in pulp and paper, the operations are 24/7 with target efficiency in the 80-85% range. Failure to operate at these levels jeopardizes the continued existence of a mill. Producers are forced to operate the facilities at “full” rate even when demand is not sufficient to absorb all of the output. This can lead to oversupply and lower prices, further increasing the inherent cyclicality of the industry.

Tembec Financial Report 2013      45

Management’s Discussion and Analysis

TRADE RESTRICTIONS / LUMBER EXPORT TAXES

The Company’s manufacturing operations are located primarily in Canada. However, sales into the Canadian market represented only 19% of consolidated sales in fiscal 2013. As such, the Company’s financial results are highly dependent on its ability to sell its products into the “export” markets. Tariffs and trade barriers that reduce or prohibit the movement of our products across international borders constitute an ongoing risk. The agreement between Canada and the United States over softwood lumber is a case in point. On October 12, 2006, Canada and the United States entered into an agreement to govern the shipment of Canadian softwood lumber into the United States. The outcome was less than satisfactory. Through a combination of quotas and export taxes, the agreement will ensure that Canadian producers of softwood lumber will remain at a competitive disadvantage versus U.S. producers when it comes to accessing the U.S. market. China has recently imposed antidumping duties on viscose grade pulp imports. The impact of these duties on the Company’s ability to access the Chinese market is still being assessed as of the date of this report.

FINANCIAL RISKS / DEBT SERVICE

Of the total long-term debt of $402 million, 78% relates to the US $305 million senior secured notes maturing December 2018. The notes do not require periodic payments for principal amortization. Since the entire principal amount will become due on the maturity date, it is possible the Company will not have the required funds/liquidity to repay the principal due. The Company may require access to the public or private debt markets to issue new debt instruments to replace or partially replace the notes. There is no assurance that the Company will be able to refinance the notes on commercially acceptable terms.

In addition to the above significant risks, the Company’s Annual Information Form (AIF) provides a comprehensive list of risk factors related to the Company’s operations. The AIF can be found on SEDAR.

Tembec Financial Report 2013      46

Management’s Discussion and Analysis

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company’s President and Chief Executive Officer and the Company’s Executive Vice President, Finance and Chief Financial Officer have designed, or have caused to be designed under their supervision, disclosure controls and procedures to provide reasonable assurance that material information relating to the Company has been made known to them and that information required to be disclosed in the Company’s annual filings, interim filings or other reports filed by it or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified by applicable securities legislation. The Company’s President and Chief Executive Officer and the Company’s Executive Vice President, Finance and Chief Financial Officer have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Company’s disclosure controls and procedures and have determined, based on that evaluation, that such disclosure controls and procedures are effective at the financial year-end.

INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company’s President and Chief Executive Officer and the Company’s Executive Vice President, Finance and Chief Financial Officer have designed, or have caused to be designed under their supervision, internal control over financial reporting as defined under National Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Company’s President and Chief Executive Officer and the Company’s Executive Vice President, Finance and Chief Financial Officer have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Company’s internal control over financial reporting and have determined, based on the criteria established in Enterprise Risk Management – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and on this evaluation, that such internal controls over financial reporting are effective at the financial year-end.

CHANGES IN INTERNAL CONTROLS

During the period covered by this report, there have been no changes that have materially affected, or are reasonably likely to materially affect Tembec’s internal control over financial reporting.

OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS

The Audit Committee reviews the Company’s annual MD&A and related financial statements with management and the external auditors, and recommends their approval to the Board. Management and the internal auditor of the Company also present periodically to the committee a report of their assessment of the Company’s internal controls and procedures for financial reporting.

ADDITIONAL INFORMATION

Additional information relating to Tembec, including the Annual Information Form, can be found on SEDAR at sedar.com and on the Company’s website at tembec.com.

Tembec Financial Report 2013      47

MANAGEMENT
RESPONSIBILITY

The consolidated financial statements and all information in the Financial Report are the responsibility of the Company’s management. The consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and, where necessary, include amounts which are based on best estimates and judgement. Financial information presented throughout the Financial Report is consistent with the data presented in the consolidated financial statements.

A system of internal accounting and administrative controls is maintained by management in order to provide reasonable assurance that transactions are appropriately authorized, assets are safeguarded and financial records are properly maintained to provide accurate and reliable financial statements.

The Company’s external auditors are responsible for auditing the consolidated financial statements and giving an opinion thereon. In addition, the Company employs internal auditors to evaluate the effectiveness of its systems, policies and procedures.

The Board of Directors has appointed an Audit Committee, consisting solely of independent directors, which reviews the consolidated financial statements and recommends their approval to the Board of Directors. The Committee meets periodically with the external auditors, the internal auditors and management to review their respective activities and the discharge of each of their responsibilities. Both the external and internal auditors have direct access to the Committee to discuss the scope of their audit work and the adequacy of internal control systems and financial reporting procedures.

The accompanying consolidated financial statements have been audited by the external auditors, KPMG LLP, whose report follows.

JAMES M. LOPEZ	MICHEL J. DUMAS
President and Chief Executive Officer	Executive Vice President, Finance
	and Chief Financial Officer

November 29, 2013

Tembec Financial Report 2013      48

INDEPENDENT
AUDITORS' REPORT

To the Shareholders of Tembec Inc.

We have audited the accompanying consolidated financial statements of Tembec Inc., which comprise the consolidated balance sheets as at September 28, 2013 and September 29, 2012, the consolidated statements of net earnings (loss), comprehensive earnings (loss), changes in shareholders’ equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

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

Auditors’ Responsibility
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. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

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

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

Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Tembec Inc. as at September 28, 2013 and September 29, 2012, and its consolidated financial performance and its consolidated cash flows for the years then ended, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

November 29, 2013
Montreal, Canada

*CPA auditor, CA, public accounting permit no. A110592

Tembec Financial Report 2013      49

Consolidated Financial Statements

Consolidated Balance Sheets

As at September 28, 2013 and September 29, 2012

(in millions of Canadian dollars)

		2013			2012
ASSETS
Current assets:
Cash and cash equivalents	$	73		$	87
Restricted cash		1			5
Trade and other receivables (notes 9 and 19)		157			200
Inventories (notes 5 and 9)		237			255
Prepaid expenses		6			7
Asset classified as held for sale (note 6)		7			-
		481			554
Property, plant and equipment (note 6)		496			485
Biological assets (note 7)		5			4
Employee future benefits (note 12)		24			-
Other long-term receivables (note 8)		10			12
Deferred tax assets (note 18)		5			4
	$	1,021		$	1,059
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Operating bank loans (note 9)	$	57		$	68
Trade, other payables and accrued charges		195			230
Interest payable		10			10
Income tax payable		8			3
Provisions (note 11)		6			3
Current portion of long-term debt (note 10)		16			16
		292			330
Long-term debt (note 10)		369			323
Provisions (note 11)		12			17
Employee future benefits (note 12)		126			285
Other long-term liabilities		2			2
		801			957
Shareholders' equity:
Share capital (note 13)		567			564
Deficit		(353	)		(453	)
Accumulated other comprehensive earnings (loss)		6			(9	)
		220			102
	$	1,021		$	1,059

Guarantees, commitments and contingencies (note 14)
Subsequent events (note 22)
The accompanying notes are an integral part of these consolidated financial statements.

On behalf of the Board:

James V. Continenza	James M. Lopez
Chairman of the Board	President and Chief Executive Officer

Tembec Financial Report 2013      50

Consolidated Financial Statements

Consolidated Statements of Net Earnings (Loss)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars, unless otherwise noted)

		2013			2012
Sales	$	1,534		$	1,666
Freight and other deductions		201			232
Lumber export taxes		3			7
Cost of sales (excluding depreciation and amortization) (note 15)		1,159			1,290
Selling, general and administrative (note 15)		72			74
Share-based compensation (note 13)		1			(1	)
Depreciation and amortization		40			46
Other items (note 16)		29			50
Operating earnings (loss)		29			(32	)
Interest, foreign exchange and other		28			41
Exchange loss (gain) on long-term debt		14			(13	)
Net finance costs (note 17)		42			28
Loss before income taxes		(13	)		(60	)
Income tax expense (note 18)		21			22
Net loss		(34	)		(82	)
Basic and diluted net loss in dollars per share (note 13)	$	(0.34	)	$	(0.82	)

Consolidated Statements of Comprehensive Earnings (Loss)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars)

		2013			2012
Net loss	$	(34	)	$	(82	)
Other comprehensive earnings (loss), net of income taxes:
Items that will never be reclassified to earnings (loss):
Defined benefit pension plans (note 12)		128			(42	)
Other benefit plans (note 12)		4			4
Income tax		2			-
		134			(38	)
Item that may be reclassified to earnings (loss) in future periods:
Foreign currency translation differences for foreign operations		15			(11	)
Other comprehensive earnings (loss) for the year		149			(49	)
Total comprehensive earnings (loss)	$	115		$	(131	)

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

Tembec Financial Report 2013      51

Consolidated Financial Statements

Consolidated Statements of Changes in Shareholders’ Equity

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars)

				Translation
		Share		of foreign						Shareholders'
		capital		operations			Deficit			equity
Balance - beginning of year, September 24, 2011	$	564	$	2		$	(333	)	$	233
Net loss		-		-			(82	)		(82	)
Other comprehensive earnings (loss), net of income taxes:
Defined benefit pension plans (note 12)		-		-			(42	)		(42	)
Other benefit plans (note 12)		-		-			4			4
Foreign currency translation differences for foreign operations		-		(11	)		-			(11	)
Balance - end of year, September 29, 2012		564		(9	)		(453	)		102
Net loss		-		-			(34	)		(34	)
Other comprehensive earnings (loss), net of income taxes:
Defined benefit pension plans (note 12)		-		-			128			128
Other benefit plans (note 12)		-		-			4			4
Income tax		-		-			2			2
Foreign currency translation differences for foreign operations		-		15			-			15
Issue of warrants (note 13)		3		-			-			3
Balance - end of year, September 28, 2013	$	567	$	6		$	(353	)	$	220

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

Tembec Financial Report 2013      52

Consolidated Financial Statements

Consolidated Statements of Cash Flows

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars)

		2013			2012
Cash flows from operating activities:
Net loss	$	(34	)	$	(82	)
Adjustments for:
Depreciation and amortization		40			46
Net finance costs (note 17)		42			28
Income tax expense (note 18)		21			22
Income tax paid		(15	)		(14	)
Excess cash contributions over employee future benefits expense		(34	)		(34	)
Provisions (note 11)		-			12
Impairment loss (note 16)		22			67
Gain on sale of assets		-			(30	)
Other		(6	)		(2	)
		36			13
Changes in non-cash working capital:
Trade and other receivables		16			(30	)
Inventories		3			(40	)
Prepaid expenses		1			(1	)
Trade, other payables and accrued charges		(33	)		(14	)
		(13	)		(85	)
		23			(72	)
Cash flows from investing activities:
Disbursements for property, plant and equipment		(127	)		(108	)
Proceeds from sale of net assets (note 16)		100			84
Change in restricted cash		4			-
Other		1			(1	)
		(22	)		(25	)
Cash flows from financing activities:
Change in operating bank loans		(11	)		62
Increase in long-term debt		40			74
Repayments of long-term debt		(8	)		(11	)
Interest paid		(40	)		(34	)
		(19	)		91
		(18	)		(6	)
Foreign exchange gain (loss) on cash and cash equivalents held in foreign currencies		4			(6	)
Net decrease in cash and cash equivalents		(14	)		(12	)
Cash and cash equivalents, beginning of year		87			99
Cash and cash equivalents, end of year	$	73		$	87

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

Tembec Financial Report 2013      53

Consolidated Financial Statements

Consolidated Business Segment Information

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars)

The Company operates an integrated forest products business, which is managed in four segments. During the December 2012 quarter, the Company reorganized its internal reporting structure. The High-Yield Pulp segment was renamed the Paper Pulp segment and now includes the chemical pulp mill that was previously part of the Specialty Cellulose and Chemical Pulp segment. The latter was then renamed the Specialty Cellulose Pulp segment. The Forest Products and the Paper segments were unaffected by the organizational changes. The segments are:

The Forest Products segment consists primarily of forest and sawmills operations, which produce lumber and building materials.

The Specialty Cellulose Pulp segment consists primarily of manufacturing and marketing activities of specialty cellulose including the transformation and sale of resins and pulp by-products. A significant portion of chemical products sales are related to by-products generated by the two specialty cellulose pulp mills.

The Paper Pulp segment includes the manufacturing and marketing activities of high-yield pulps and chemical pulps.

The Paper segment consists primarily of production and sales of coated bleached board and newsprint.

Intersegment transfers of wood chips, pulp and other services are recorded at transfer prices agreed to by the parties, which are intended to approximate fair market value. The basis of presentation and the accounting policies used in these business segments are the same as those described in notes 2 and 3. Comparative prior period segment information has been restated to conform with the new segment presentation.

The performance of each segment is evaluated by management of the Company against short-term and long-term financial objectives as well as environmental, safety and other key criteria. The financial performance is measured based on earnings before interest, income taxes, depreciation and amortization, and other specific or non-recurring items (adjusted EBITDA). This measure is included in the internal reports that are reviewed by senior management. Segment adjusted EBITDA is used to measure performance as management believes that such information is the most relevant in evaluating financial results relative to other entities that operate within similar businesses. Net finance costs and income tax are not allocated to operating segments.

Tembec Financial Report 2013      54

Consolidated Financial Statements

Consolidated Business Segment Information (continued)

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars)

																	2013
		Forest		Specialty		Paper								Consolidation
		Products		Cellulose Pulp		Pulp			Paper		Corporate			adjustments			Consolidated
Sales:
External	$	354	$	460	$	388		$	332	$	-		$	-		$	1,534
Internal		66		-		30			-		12			(108	)		-
		420		460		418			332		12			(108	)		1,534
Freight and other deductions		39		36		80			46		-			-			201
Lumber export taxes		3		-		-			-		-			-			3
Cost of sales		350		331		325			250		11			(108	)		1,159
Selling, general and administrative		11		20		8			11		22			-			72
Share-based compensation (note 13)		-		-		-			-		1			-			1
Earnings (loss) before the following (adjusted EBITDA):		17		73		5			25		(22	)		-			98
Depreciation and amortization		9		14		14			3		-			-			40
Other items (note 16)		-		-		24			-		5			-			29
Operating earnings (loss)	$	8	$	59	$	(33	)	$	22	$	(27	)	$	-		$	29
Additions to property, plant and equipment	$	7	$	110	$	10		$	9	$	1		$	-		$	137
Total assets	$	155	$	538	$	142		$	137	$	49		$	-		$	1,021
Total liabilities	$	57	$	210	$	32		$	71	$	431		$	-		$	801

																		2012
		Forest			Specialty		Paper								Consolidation
		Products			Cellulose Pulp		Pulp			Paper		Corporate			adjustments			Consolidated
Sales:
External	$	348		$	507	$	465		$	346	$	-		$	-		$	1,666
Internal		84			-		42			-		13			(139	)		-
		432			507		507			346		13			(139	)		1,666
Freight and other deductions		41			40		105			46		-			-			232
Lumber export taxes		7			-		-			-		-			-			7
Cost of sales		385			352		427			252		13			(139	)		1,290
Selling, general and administrative		15			20		7			11		21			-			74
Share-based compensation (note 13)		-			-		-			-		(1	)		-			(1	)
Earnings (loss) before the following (adjusted EBITDA):		(16	)		95		(32	)		37		(20	)		-			64
Depreciation and amortization		10			11		23			2		-			-			46
Other items (note 16)		(22	)		-		50			-		22			-			50
Operating earnings (loss)	$	(4	)	$	84	$	(105	)	$	35	$	(42	)	$	-		$	(32	)
Additions to property, plant and equipment	$	12		$	86	$	13		$	7	$	2		$	-		$	120
Total assets	$	216		$	398	$	302		$	120	$	23		$	-		$	1,059
Total liabilities	$	68		$	216	$	74		$	126	$	473		$	-		$	957

Tembec Financial Report 2013      55

Consolidated Financial Statements

Consolidated Geographic Area Information

Years ended September 28, 2013 and September 29, 2012

(in millions of Canadian dollars)

										2013
		Forest		Specialty		Paper
		Products		Cellulose Pulp		Pulp		Paper		Consolidated
Sales (by final destination):
Canada	$	187	$	39	$	4	$	65	$	295
United States		167		134		49		247		597
China		-		42		169		-		211
European Union		-		203		56		12		271
Other		-		42		110		8		160
	$	354	$	460	$	388	$	332	$	1,534

										2012
		Forest		Specialty		Paper
		Products		Cellulose Pulp		Pulp		Paper		Consolidated
Sales (by final destination):
Canada	$	194	$	41	$	7	$	61	$	303
United States		145		150		53		265		613
China		6		53		176		-		235
European Union		-		209		57		10		276
Other		3		54		172		10		239
	$	348	$	507	$	465	$	346	$	1,666

		2013		2012
Property, plant and equipment:
Canada	$	379	$	393
France		117		91
Other		-		1
	$	496	$	485

Tembec Financial Report 2013      56

Notes to Consolidated Financial Statements

(in millions of Canadian dollars, unless otherwise noted)

1.	Reporting entity and nature of operations
	Tembec Inc. (the “Corporation”) and its subsidiaries (collectively “Tembec” or the “Company”) operate an integrated forest products business.
	The Corporation is incorporated and domiciled in Canada and listed on the Toronto Stock Exchange under the symbol TMB. The address of the Company's registered office is 800 René-Lévesque Blvd. West, Suite 1050, Montreal, Quebec, Canada, H3B 1X9.
2.	Basis of presentation
	Statement of compliance
	These audited consolidated financial statements and the notes thereto have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
	These audited consolidated financial statements were authorized for issue by the Board of Directors on November 21, 2013.
	Basis of measurement
	The audited consolidated financial statements have been prepared on the historical cost basis, except for the following items in the consolidated balance sheet:
		Employee future benefits assets and liabilities are recognized as the net of the fair value of the plan assets less the present value of the defined benefit obligation;
		Biological assets are measured at fair value less costs to sell;
		Asset retirement obligations and reforestation obligations are measured at the discounted value of expected future cash flows;
		Liabilities for cash-settled share-based payment arrangements are measured at fair value;
		Embedded and freestanding derivative financial instruments are measured at fair value.
	Functional and presentation currency
	These audited consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency. Management believes that the Canadian dollar best reflects the currency of the primary economic environment in which Tembec operates. All financial information presented has been rounded to the nearest million, unless otherwise noted.
	Use of estimates and judgements
	The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

Tembec Financial Report 2013      57

Notes to Consolidated Financial Statements

2.	Basis of presentation (continued)
	Use of estimates and judgements (continued)
	Critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements include the identification of triggering events indicating that property, plant and equipment might be impaired.
	Significant areas requiring the use of management estimates in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements and that may result in material adjustments to the carrying amounts within the next fiscal year include the determination of the net realizable value of inventories (note 5), provisions (note 11), recoverability of deferred tax assets (note 18), the measurement of defined benefit obligations and the valuation of pension plan assets (note 12).
	Other areas requiring the use of management estimates include the determination of the value of biological assets, financial instruments, guarantees, commitments, and contingencies. It also includes collectability of accounts receivable, estimating the useful life and residual value of property, plant and equipment, as well as assessing the recoverability of property, plant and equipment, and long- term receivables.
3.	Significant accounting policies
	Basis of consolidation
	These audited consolidated financial statements include the accounts of the Company. Investments over which the Corporation has effective control are fully consolidated. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Company.
	Foreign currency
	Foreign currency transactions
	Transactions in foreign currencies are translated to the respective functional currencies of each operation using exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency using the exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency using the exchange rate at the date that the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on translation are recognized in profit or loss.

Foreign operations

The assets and liabilities of foreign operations with functional currencies other than the Canadian dollar are translated to Canadian dollars using the exchange rates at the reporting date. The income and expenses of foreign operations are translated to Canadian dollars using the average exchange rates during the reporting period.

Foreign currency differences are recognized in other comprehensive income. When a foreign operation is disposed of, in part or in full, the relevant amount in the foreign currency translation reserve is transferred to the statement of earnings (loss) as part of the gain or loss on disposal.

Tembec Financial Report 2013      58

Notes to Consolidated Financial Statements

3.	Significant accounting policies (continued)
	Financial instruments
	Non-derivative financial assets and liabilities
	Cash and cash equivalents, restricted cash, trade and other receivables and long-term receivables are classified as loans and receivables, which is the Company’s only type of non-derivative financial asset. Operating bank loans, trade and other payables, interest payable and long-term debt are classified as other liabilities, which is the Company’s only type of non-derivative financial liability.
	The Company initially recognizes all financial assets and liabilities on the date that they are originated. Subsequent to initial recognition at fair value, the financial assets are accounted for on an amortized cost basis using the effective interest rate method. Subsequent to initial recognition at fair value plus any directly attributable transaction costs, the financial liabilities are accounted for on an amortized cost basis using the effective interest rate method.
	Transaction costs incurred upon the issuance of debt instruments or modification of a financial liability are deducted from the financial liability and are amortized using the effective interest method over the expected life of the related liability.
	Derivative financial instruments
	The Company may manage, from time to time, its foreign exchange exposure on anticipated net cash inflows, principally US dollars and euros, through the use of options and forward contracts.
	The Company may manage, from time to time, its exposure to commodity price risk associated with sales of lumber, pulp and newsprint through the use of cash-settled hedge (swap) contracts. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company does not currently apply hedge accounting.
	All derivatives are recognized initially at fair value. Attributable transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value and changes therein are accounted for in net finance costs.

Common shares

Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares are recognized as a deduction from equity, net of any tax effects.

Warrants

Warrants granted in connection with the second ranking term loan facilities have been issued as an equity-settled share-based payment transaction. Accordingly, they are classified as equity.

Cash and cash equivalents / restricted cash

Cash and cash equivalents, as well as restricted cash, comprise cash in financial institutions, short-term deposits and highly liquid money market instruments with maturities of three months or less from the date of acquisition. Cash and cash equivalents are presented net of outstanding cheques.

Tembec Financial Report 2013      59

Notes to Consolidated Financial Statements

3.	Significant accounting policies (continued)
	Inventories
	Finished goods, work-in-process, wood chips, logs, and other raw materials are valued at the lower of cost, determined on an average cost basis, and net realizable value. In the case of manufactured inventories and work-in-process, cost includes expenditure incurred in acquiring raw materials, production or conversion costs and other costs incurred in bringing the inventory to their existing location and conditions as well as an appropriate share of production overheads based on normal operating capacity. For all raw materials to be used in the production of finished goods, net realizable value is determined on an as-converted-to-finished-goods basis. Operating, maintenance and spare parts inventories are valued at lower of average cost and net realizable value.
	Property, plant and equipment
	Recognition and measurement
	Property, plant and equipment are recorded at cost, after deducting investment tax credits and government assistance, less accumulated depreciation and accumulated impairment losses.
	Cost includes expenditures that are directly attributable to acquiring and bringing the assets to a working condition for their intended use. The Company capitalizes borrowing costs, which are directly attributable to the acquisition, construction or production of qualifying assets, unless development activities on these qualifying assets are suspended, in which case borrowing costs are expensed.
	Subsequent costs
	The cost of replacing a component of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company, and its cost can be measured reliably. The carrying amount of the replaced component is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognized in profit or loss as incurred.

Depreciation

Depreciation is calculated over the depreciable amount, which is the cost of an asset less its residual value. Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment.

The estimated useful lives of the current and comparative periods are as follows:

Assets	Period
Buildings	20 - 30 years
Production equipment:
Pulp and paper	20 - 30 years
Sawmill	10 - 15 years
Forest access roads	3 - 20 years

Assets under construction are recognized at cost and are not depreciated as the assets are not available for use. Repairs and maintenance as well as planned shutdown maintenance are charged to expense as incurred.

Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate.

Tembec Financial Report 2013      60

Notes to Consolidated Financial Statements

3. Significant accounting policies (continued)

Biological assets

Standing timber on privately held forest land that is managed for timber production is characterized as a biological asset. Accordingly, on each balance sheet date, the biological asset is valued at its fair value less costs to sell with any change therein, as a result of growth, harvest and change in valuation assumptions recognized in net income (loss) for the period. Standing timber is transferred to inventory at its fair value less costs to sell at the date the logs are removed from the forest. Land under standing timber is measured at cost and included in property, plant and equipment.

Leased assets

Leases in terms of which the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

Other leases are operating leases and the leased assets are not recognized in the Company’s balance sheet.

Impairment

Financial assets (including receivables)

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

Impairment losses recognized in prior periods are assessed at each balance sheet date for any indication that the loss has decreased or no longer exists. For financial assets measured at amortized cost, the reversal is recognized in profit or loss.

Non-financial assets

The carrying amounts of the Company’s non-financial assets, other than biological assets, inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated.

The recoverable amount of an asset or cash-generating unit (CGU) is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or the CGU. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets.

An impairment loss is recognized if the carrying amount of an asset or CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs reduce the carrying amounts of the assets in the unit that is subject to the impairment test on a pro rata basis.

An impairment loss recognized in prior periods is assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

Tembec Financial Report 2013      61

Notes to Consolidated Financial Statements

3.	Significant accounting policies (continued)
	Provisions
	A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost.

Environmental costs

The Company is subject to environmental laws and regulations enacted by federal, provincial, state and local authorities. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and that are not expected to contribute to current or future operations are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are likely, and when the costs, based on a specific plan of action in terms of the technology to be used and the extent of the corrective action required, can be reasonably estimated.

Reforestation

Forestry legislation in British Columbia requires the industry to assume the cost of reforestation on certain harvest licences. Accordingly, the Company records a liability for the costs of reforestation in the period in which the timber is harvested. In periods subsequent to the initial measurement, changes in the liability resulting from the passage of time and revisions to management’s estimates are recognized in net income as they occur.

Site restoration

In accordance with the Company’s published environmental policy and applicable legal requirements, a provision for site restoration in respect of contaminated land, and the related expense, is recognized when the land is contaminated.

Restructuring

A provision for restructuring is recognized when the Company has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs and losses are recognized on the same basis as if they arose independently of the restructuring.

Onerous contracts

A provision for onerous contracts is recognized when the expected benefits to be derived by the Company from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Company recognizes any impairment loss on the assets associated with that contract.

Contingent liability

A contingent liability is a possible obligation that arises from past events and of which the existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not within the control of the Company, or a present obligation that arises from past events (and therefore exists), but is not recognized because it is not probable that a transfer or use of assets, provision of services or any other transfer of economic benefits will be required to settle the obligation, or the amount of the obligation cannot be estimated reliably.

Tembec Financial Report 2013      62

Notes to Consolidated Financial Statements

3. Significant accounting policies (continued)

Employee future benefits

Employee future benefits include pension plans and other benefit plans. Other benefit plans include post-employment life insurance programs, healthcare and dental care benefits as well as certain other long-term benefits provided to disabled employees.

Defined contribution pension plans

A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in profit or loss in the periods during which services are rendered by employees.

Defined benefit pension plans

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Company’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. Any unrecognized past service costs and the fair value of any plan assets are deducted. The discount rate is the yield at the reporting date on AA credit-rated bonds that have maturity dates approximating the terms of the Company’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Company, the recognized asset is limited to the total of any unrecognized past service costs and the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan in the Company. An economic benefit is available to the Company if it is realizable during the life of the plan, or on settlement of the plan liabilities.

When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognized in profit or loss on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognized immediately in the statement of net earnings (loss).

The Company recognizes the current service cost in the employee future benefit costs. Interest cost and the expected return on plan assets are recognized in interest, foreign exchange and other. The actuarial gains and losses arising from defined benefit plans are recognized in other comprehensive income.

Other benefit plans

The Company’s net obligation in respect of long-term employee benefits, other than pension plans, is the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate is the yield at the reporting date on AA credit-rated bonds that have maturity dates approximating the terms of the Company’s obligations. The calculation is performed using the projected unit credit method. Any actuarial gains and losses are recognized in the statement of comprehensive earnings (loss) in the period in which they arise.

Tembec Financial Report 2013      63

Notes to Consolidated Financial Statements

3. Significant accounting policies (continued)

Other employee benefits

Short-term employee benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

A liability is recognized for the amount expected to be paid under the short-term incentive plan if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.

Share-based compensation transactions

The Company uses the fair value based approach of accounting for all share options granted to its employees, whereby a compensation expense is recognized over the vesting period of the options, with a corresponding increase to contributed surplus. The Company bases the accruals of compensation cost on the best available estimate of the number of options that are expected to vest and revises that estimate if subsequent information indicates that actual forfeitures are likely to differ from initial estimates. Any consideration paid by plan participants in the exercise of share options or purchase of shares is credited to share capital. The contributed surplus component of share-based compensation is transferred to share capital upon the issuance of common shares.

Deferred Share Units (DSU) are recognized in compensation expense and accrued liabilities as they are earned. DSUs are remeasured at each reporting period at fair value, until settlement.

Performance-Conditioned Restricted Share Units (PCRSU) and Performance-Conditioned Share Units (PCSU) are recognized in compensation expense and accrued liabilities when it is likely that the performance conditions attached to the unit will be met. Compensation cost is prorated based on the underlying service period and the liability is remeasured at each reporting period at fair value, until settlement.

Termination benefits

Termination benefits are recognized as an expense when the Company is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if the Company has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value.

Sales

Sale of goods is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. If it is probable that discounts will be granted and the amount can be measured reliably, then the discount is recognized as a reduction of revenue as the sales are recognized.

Freight and other deductions

Freight associated with shipping products to customer and handling finished goods as well as discounts on prompt payment are included in Freight and other deductions in the consolidated statement of net earnings (loss).

Tembec Financial Report 2013      64

Notes to Consolidated Financial Statements

3. Significant accounting policies (continued)

Investment tax credits and government assistance

Amounts received resulting from government assistance programs, including grants and investment tax credits for scientific research and experimental development, are reflected as a reduction of the cost of the asset or expense to which they relate at the time the eligible expenditure is incurred. Government financial assistance is recorded when there is reasonable assurance that the Company will comply with relevant conditions. Investment tax credits are recognized when the Company has made the qualifying expenditures and there is reasonable assurance that the credits will be realized.

Finance costs and finance income

Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions and the amortization of other related transactions costs. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in profit or loss using the effective interest method.

Foreign currency gains and losses, gain or loss on embedded and freestanding derivative instruments, and interest on employee future benefit obligations and pension plan assets are reported on a net basis as finance cost or finance income.

Income taxes

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

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

Deferred tax is recognized using the balance sheet method, with respect to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries and associates to the extent that it is probable that they will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

Tembec Financial Report 2013      65

Notes to Consolidated Financial Statements

4.	New standards and interpretation not yet adopted
	IFRS 7 Financial Instruments – Disclosures
	In December 2011, the IASB amended the standard IFRS 7, Financial Instruments – Disclosures, to provide additional information about offsetting of financial assets and financial liabilities. IFRS 7 has been amended to require disclosures that will enable users of financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with an entity’s recognized financial assets and recognized financial liabilities, on the entity’s balance sheet. An entity provides information including the gross amounts subject to rights of set-off, amounts set off in accordance with the offsetting criteria, amounts of financial instruments subject to master netting arrangements or similar agreements, and the related net amounts to meet the disclosure objective. These amendments are effective for annual periods beginning on or after January 1, 2013. The Company will adopt the new standard, which will not have an impact on the amounts recorded, in its fiscal 2014 financial statements.

IFRS 9 Financial Instruments

In November 2009, the IASB issued IFRS 9, Financial Instruments (IFRS 9), and in October 2010, the IASB published amendments to IFRS 9 (IFRS 9 R).

IFRS 9 R supersedes IFRS 9 and is effective for annual periods beginning on or after January 1, 2015, with early adoption permitted. For annual periods beginning before January 1, 2015, either IFRS 9 or IFRS 9 R may be applied. This standard provides guidance on the classification and measurement of financial liabilities and the presentation of gains and losses on financial liabilities designated at fair value through profit and loss. When an entity elects to measure a financial liability at fair value, gains or losses due to changes in the credit risk of the instrument must be recognized in other comprehensive income. The Company has not yet begun the process of assessing the impact that the new standard will have on its financial statements and does not plan to early adopt the new requirement.

IFRS 13 Fair Value Measurement

In May 2011, the IASB issued the standard, IFRS 13, Fair Value Measurement. IFRS 13 is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and in many cases does not reflect a clear measurement basis or consistent disclosures.

The new standard is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. The Company will adopt the new standard, which will not have an impact on the amounts recorded, in its fiscal 2014 financial statements.

Tembec Financial Report 2013      66

Notes to Consolidated Financial Statements

4.	New standards and interpretation not yet adopted (continued)
	Amendments to IAS 19 Employee Benefits
	In June 2011, the IASB published an amended version of IAS 19, Employee Benefits. Adoption of the amendment is required for annual periods beginning on or after January 1, 2013, with early adoption permitted. This standard was amended to:
	a)	require the interest cost and expected return on plan assets, which currently reflect different rates, be replaced with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (asset). The impact of this portion of the amended standard is an increase in net finance cost as the Company’s return on plan assets will effectively be at a lower rate.
	b)	eliminate the option to defer the recognition of gains and losses arising in defined benefit plans;
	c)	require gains and losses relating to those plans to be presented in other comprehensive income; and
	d)	improve the disclosure requirements concerning the characteristics of defined benefit plans and the risks arising from those plans.
	The amended standard also incorporates changes to the accounting for termination benefits. The amendment will be applied retrospectively. The Company estimates that the effect on the consolidated balance sheet as at September 28, 2013, would be an increase of the net defined benefit liability of $2 million and an increase of the deficit of $2 million. The effect on the consolidated statement of net earnings (loss) for the year ended September 28, 2013, would be an increase of the net finance costs by approximately $18 million and an increase of the other comprehensive earnings by the same amount. The Company is still in a process of assessing the impact that the new standard will have on the income tax expense in the statement of net earnings (loss) and in the statement of comprehensive earnings (loss). The Company will adopt the new requirements in its fiscal 2014 financial statements.
5.	Inventories

		2013		2012
Finished goods	$	111	$	118
Logs and wood chips		55		61
Supplies and materials		71		76
	$	237	$	255
Inventories carried at net realizable value	$	22	$	48

For the years ended in September 2013 and 2012, cost of sales consists primarily of inventories recognized as an expense. Inventories at September 28, 2013, were written down by $4 million (2012 - $6 million) to reflect net realizable value being lower than cost. The write-down and reversal, if any, are included in cost of sales.

The provision for net realizable values relating to logs and finished goods were as follows:

		2013		2012
Forest Products	$	1	$	1
Specialty Cellulose Pulp		3		1
Paper Pulp		-		4
Paper		-		-
	$	4	$	6

Tembec Financial Report 2013      67

Notes to Consolidated Financial Statements

6. Property, plant and equipment

								Production equipment						Forest			Assets
								Pulp and						access			under
		Land			Buildings			Paper			Sawmill			roads			construction			Total
Cost
Balance, September 24, 2011	$	12		$	79		$	440		$	92		$	17		$	37		$	677
Additions		-			-			-			-			-			120			120
Transfers		-			1			47			7			3			(58	)		-
Interest capitalized on assets under construction		-			-			-			-			-			2			2
Disposals		(1	)		(4	)		(4	)		(30	)		(12	)		(4	)		(55	)
Effect of foreign currency translation		-			(1	)		(8	)		-			-			(1	)		(10	)
Balance, September 29, 2012		11			75			475			69			8			96			734
Additions		-			-			-			-			-			137			137
Transfers		-			8			38			3			3			(52	)		-
Interest capitalized on assets under construction		-			-			-			-			-			9			9
Disposals		(1	)		(21	)		(135	)		(1	)		-			(2	)		(160	)
Reclassification to assets held for sale		(7	)		-			-			-			-			-			(7	)
Effect of foreign currency translation		-			1			14			-			-			1			16
Balance, September 28, 2013	$	3		$	63		$	392		$	71		$	11		$	189		$	729
Depreciation
Balance, September 24, 2011	$	-		$	19		$	105		$	61		$	1		$	-		$	186
Depreciation		-			6			31			8			1			-			46
Impairment loss		-			-			43			-			1			-			44
Disposals		-			(3	)		(2	)		(19	)		(1	)		-			(25	)
Effect of foreign currency translation		-			-			(2	)		-			-			-			(2	)
Balance, September 29, 2012		-			22			175			50			2			-			249
Depreciation		-			6			27			7			-			-			40
Impairment loss		-			3			19			-			-			-			22
Disposals		-			(10	)		(70	)		(1	)		-			-			(81	)
Effect of foreign currency translation		-			-			3			-			-			-			3
Balance, September 28, 2013	$	-		$	21		$	154		$	56		$	2		$	-		$	233
Carrying amounts
At September 29, 2012	$	11		$	53		$	300		$	19		$	6		$	96		$	485
At September 28, 2013	$	3		$	42		$	238		$	15		$	9		$	189		$	496

Tembec Financial Report 2013      68

Notes to Consolidated Financial Statements

6.	Property, plant and equipment (continued)
	On March 16, 2012, the Company announced a $190 million capital investment to upgrade its specialty cellulose manufacturing facility at Temiscaming, Quebec. During fiscal 2013, the Company completed a detailed re-estimation exercise for the project and is now forecasting a total estimated cost of $235 million. As at the end of September 2013, assets under construction include $137 million (2012 - $59 million) of capital expenditures for this project and had $41 million of outstanding commitments (see note 14).
	At the end of September 2013, the Company launched the BC Lands Sale Initiative. Accordingly, an amount of $7 million of land was classified as held for sale (see note 22).
	During fiscal 2013, the Company recorded an impairment charge of $22 million related to its pulp mill located in Skookumchuck, BC. It subsequently sold property, plant and equipment of the latter having a net book value of $79 million (see note 16).
	During fiscal 2012, the Company recorded an impairment loss of $44 million related to property, plant and equipment of the Chetwynd, BC, high-yield pulp mill. Subsequent to the announced indefinite idling of the pulp mill and following a review of its business plan, the Company undertook an impairment review and found that the carrying value of its assets exceeded their recoverable amount being the fair value less cost to sell. The recoverable amount was determined to be nominal.
7.	Biological assets
	The Company’s private timberlands are classified as a growing forest, with the standing timber defined and recognized as a biological asset at fair value less costs to sell at each reporting date, with the underlying land being considered a component of property, plant and equipment and recognized at cost.

Balance, September 24, 2011	$	4
Disposals		(1	)
Change in fair value less costs to sell		1
Balance, September 29, 2012		4
Change in fair value less costs to sell		1
Balance, September 28, 2013	$	5

		2013		2012
Current	$	-	$	-
Non-current		5		4
	$	5	$	4

Tembec Financial Report 2013      69

Notes to Consolidated Financial Statements

8. Other long-term receivables

		2013		2012
Loan receivable - Temlam Inc.	$	7	$	7
Long-term loans to employees		1		2
Other		2		3
	$	10	$	12

9.	Operating bank loans
	On March 4, 2011, the Company entered into a $200 million asset-based revolving five-year working capital facility (ABL) expiring in March 2016. The facility has a first priority charge over the receivables and inventories of the Company`s Canadian operations. On March 25, 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 commitments from $200 million to $175 million and related adjustments to certain thresholds due to a reduction in the number of mills it operates.
	As at September 28, 2013, the amount available, based on eligible receivables and inventories, was $120 million of which $53 million was drawn and $56 million was reserved for letters of credit (2012 - $144 million of which $65 million was drawn and $48 million was reserved for letters of credit). Interest is calculated based either on the BA Rate, the LIBOR, the Canadian Prime Rate or the U.S. Base Rate, as the case may be, plus an applicable margin.
	The French operations are supported by “receivable factoring” agreements. As such, the borrowing base fluctuates periodically, depending on shipments and cash receipts. At the end of September 2013, the amount available was $28 million of which $4 million was drawn (2012 - $20 million of which $3 million was drawn).
	The Company’s exposure to liquidity risk is disclosed in note 19.

Tembec Financial Report 2013      70

Notes to Consolidated Financial Statements

10. Long-term debt

		2013		2012
Tembec Industries Inc.
11.25% senior secured notes US $305 million, due December 15, 2018, with semi-annual interest payments due June 15 and December 15 of each year	$	314	$	300
Tembec Energy LP
5.5% term loan, secured by a second ranking charge, interest payable on a monthly basis, repayable in monthly instalments beginning in April 2016 and maturing in March 2028		40		-
6.35% term loan, secured by a first ranking charge, interest payable on a monthly basis, repayable in blended monthly instalments beginning July 15, 2014 to June 15, 2022 with a balloon payment of $12 million in July 2022		20		20
Tembec Tartas SAS
Secured term loans € 4 million (2012 - € 6 million), bearing interest at EURIBOR plus 2%, repayable in quarterly instalments beginning in March 2012 and maturing in December 2017		6		8
Unsecured term loans € 8 million (2012 - € 11 million), non-interest bearing, repayable and maturing at various dates from June 2014 to September 2020. The effective interest rate on these loans is 6%		11		14
Kirkland Lake Engineered Wood Products Inc.		9		8
Tembec Inc.		2		2
		402		352
Less current portion		16		16
Less unamortized financing costs		17		13
	$	369	$	323

On February 23, 2012, the Company completed an add-on offering of US $50 million in aggregate principal amount of 11.25% senior secured notes due December 15, 2018. The add-on offering notes were offered as additional notes under the indenture dated as of August 17, 2010, pursuant to which the Company had previously issued US $255 million in aggregate principal amount of 11.25% senior secured notes due December 15, 2018. The notes are senior obligations secured by a first priority lien on certain of the property and assets of the Company and the guarantors of the notes, other than receivables, inventory and certain intangibles upon which the note holders have a second priority lien. The notes are guaranteed by the Company and certain of its subsidiaries.

The senior secured notes are registered with the Securities and Exchange Commission (SEC) and the Company must maintain their registration throughout the life of the notes. If the obligations under the registration rights agreement are not satisfied, the Company will be required to pay additional interest to the holders of the notes up to a maximum annual amount of US $3 million.

Tembec Financial Report 2013      71

Notes to Consolidated Financial Statements

10.	Long-term debt (continued)
	In connection with the specialty cellulose project in Temiscaming, Quebec, which is described in more detail in note 14, the Company entered into a $75 million term loan facility, bearing interest at 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. During fiscal 2013, the Company received five advances totalling $40 million on the term loan.
	On September 20, 2013, the Company entered into an additional loan facility to borrow up to $18 million with the same lender, at an interest rate of 5.5%. The loan has a four-year term repayable in monthly instalments beginning in April 2016 and maturing in March 2020. The additional loan is secured by a second ranking charge on the project assets. As at September 28, 2013, no amount was drawn under this additional facility.
	On June 29, 2012, the Company entered into a $30 million term loan facility to assist with the financing of the specialty cellulose project in Temiscaming, Quebec. On September 20, 2013, the Company has entered into an Amended and Restated Credit Agreement, increasing its credit facility from $30 million to $40 million. The loan is secured by a first ranking charge on the project assets. On July 12, 2012, the Company received an advance of $20 million bearing interest at 6.35% repayable in blended monthly instalments over a period of eight years beginning in July 2014, with a “balloon” payment of $12 million to be repaid in July 2022.
	Subsequent to the end of the fiscal year, on October 18, 2013, the Company received the second advance of $20 million bearing interest at 6.86%, 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.
	The Company’s credit agreements contain terms and conditions that could in certain circumstances restrict the ability of the Company to incur or guarantee additional indebtedness, to encumber or dispose of its assets or make certain payments or distributions.
	The Company’s exposure to liquidity risk, foreign currency, and interest rate risk is disclosed in note 19.

Tembec Financial Report 2013      72

Notes to Consolidated Financial Statements

11. Provisions

										Total
		Site restoration			Reforestation			Other		provisions
Balance, September 24, 2011	$	4		$	15		$	5	$	24
Provisions made during the year		9			4			-		13
Paid during the year		-			(1	)		-		(1	)
Sale of BC Sawmills (note 16)		-			(16	)		-		(16	)
Balance, September 29, 2012		13			2			5		20
Provisions made during the year		1			-			-		1
Paid during the year		-			(1	)		-		(1	)
Sale of Skookumchuck, BC, pulp mill (note 16)		(2	)		-			-		(2	)
Balance, September 28, 2013	$	12		$	1		$	5	$	18

		2013		2012
Current	$	6	$	3
Non-current		12		17
	$	18	$	20

Site restoration

In accordance with Canadian law, land fill sites have a predetermined life and must be restored to their original condition at the end of their life. Because of the long-term nature of the liability, the most significant uncertainty in estimating the provision is the costs that will be incurred. In particular, the Company has assumed that the land fill sites will be restored using technology and materials that are currently available. The Company has been provided with a range of reasonably possible outcomes of the total cost, reflecting different assumptions about changes in technology and pricing of the individual components of the cost. The restoration is expected to occur over the next 30 years.

Fiscal 2013 includes charges of $1 million (2012 - $3 million) for other sites for which the Company has a legal obligation to carry out remediation.

Fiscal 2012 includes a charge of $4 million relating to the Marathon, Ontario, NBSK pulp mill site. An agreement was reached with the Province of Ontario and other implicated parties as to future remediation work. As part of the settlement, the Company received $2 million from a previous owner and agreed to carry out remediation work totalling approximately $6 million over the next several years.

Tembec Financial Report 2013      73

Notes to Consolidated Financial Statements

11.	Provisions (continued)
	Reforestation
	In accordance with British Columbia law, the Company has an obligation to perform certain reforestation activities during periods of 12 to 15 years following the harvest. Because of the long- term nature of the liability, the most significant uncertainty in estimating the provision is the costs that will be incurred. In particular, the Company has assumed that current reforestation practice will continue to meet government policy, that adequate forest fire protection is in place, that suitable external funding will be made available to manage incremental forest pests and disease issues and that government policy with respect to reforestation will not change materially. The provision includes reforestation of different harvested areas, which are at different stages in the reforestation process. On March 23, 2012, the Company sold its British Columbia sawmills and, as part of the agreement, the buyer assumed the related reforestation obligation for an amount of $16 million.
12.	Employee future benefits
	Defined contribution pension plans
	The Company contributes to defined contribution pension plans, provincial pension plans, group registered retirement savings plans, deferred profit sharing plans, and 401(k) plans. The pension expense of $7 million (2012 – $9 million) under these plans is equal to the Company’s contribution.
	Defined benefit pension plans
	The Company has several defined benefit pension plans. Some of the defined benefit pension plans are contributory. Non-unionized employees in Canada joining the Company after January 1, 2000, participate in defined contribution pension plans. During fiscal 2013, the majority of the new unionized employees in Canada are only participating in defined contribution pension plans. The pension expense and the obligation related to the defined benefit pension plans are actuarially determined using the projected unit credit method.
	Other benefit plans
	The Company offers post-employment life insurance, healthcare and dental care plans to some of its retirees. The Company offers other long-term benefits as healthcare and dental care plans to disabled employees. The Company also assumes other long-term benefits as life insurance coverage to some of its disabled employees.
	The other benefit plans expenses and the obligations related to these plans are actuarially determined using management’s most probable assumptions.
	Actuarial valuations of these plans for accounting purposes are conducted on a triennial basis unless there are significant changes affecting the plans. The latest actuarial valuations were conducted either at January 1, 2010, May 1, 2012 or July 1, 2013.
	The other benefit plans are unfunded.

Tembec Financial Report 2013      74

Notes to Consolidated Financial Statements

12.	Employee future benefits (continued)
	Company contributions for defined benefit pension plans
	Total cash payments for defined benefit pension plans consist of cash contributed by the Company to its funded pension plans and cash payments directly to beneficiaries for its unfunded benefit plans. The Company contributions were $44 million for 2013 (2012 – $42 million). In 2014, the Company expects to contribute approximately $34 million to its defined benefit pension plans in accordance with its normal funding policy.
	Description of fund assets
	The assets of the registered defined benefit pension plans are held by an independent trustee and accounted for separately in the Company’s pension funds. Based on the fair value of assets held at September 28, 2013, the defined benefit pension plan assets were comprised of 2% (1% in 2012) in cash and short-term investments, 4% (5% in 2012) in real estate, 43% (47% in 2012) in bonds and 51% (47% in 2012) in Canadian, U.S. and foreign equity.
	Funding policy
	The Company’s funding policy for registered defined benefit pension plans is to contribute annually the amount required to provide for benefits earned in the year and to fund past service obligations over periods not exceeding those permitted by the applicable regulatory authorities. Actuarial valuations for funding purposes are conducted on a triennial basis, unless required earlier by pension legislation or as deemed appropriate by management from time to time. The latest funding actuarial valuations were conducted for one plan on January 1, 2013, 12 plans on December 31, 2012, one plan on December 31, 2011, and one plan on December 31, 2010.
	Investment policy
	The Company follows a disciplined investment strategy, which provides diversification of investments by asset class, foreign currency, sector and company. The Corporate Governance and Human Resources Committee of the Board of Directors has approved an investment policy that establishes long-term asset mix targets based on a review of historical returns achieved by world-wide investment markets. Investment managers may deviate from these targets to the extent permitted by the investment policy. Their performance is evaluated in relation to the market performance on the target mix.
	The actual return on plan assets was $73 million for the year ended September 28, 2013, and $70 million for the year ended September 29, 2012.
	As at September 28, 2013 and September 29, 2012, the assets of the plan do not directly include the Company’s own financial instruments or any property occupied by, or other assets issued by, the Company.

Tembec Financial Report 2013      75

Notes to Consolidated Financial Statements

12.	Employee future benefits (continued)
	Information about the Company’s defined benefit plans in aggregate
	The following tables present the change in the defined benefit obligation for the defined benefit plans as calculated by independent actuaries and the change in the fair value of plan assets: Change in defined benefit obligations for defined benefit plans:

		Pension plans						Other benefit plans
		2013			2012			2013			2012
Defined benefit obligation, at beginning of year	$	910		$	857		$	41		$	44
Current service cost		10			9			1			1
Interest cost		34			37			1			1
Employee contributions		2			2			-			-
Benefits paid		(45	)		(61	)		(1	)		(1	)
Actuarial loss (gain)		(98	)		73			(4	)		(4	)
Decrease in obligation due to curtailment		(1	)		(2	)		-			-
Sale of Skookumchuck, BC, pulp mill (note 16)		(3	)		-			(9	)		-
Past service cost		1			1			-			-
Effect of foreign currency translation		7			(6	)		-			-
Defined benefit obligation, at end of year	$	817		$	910		$	29		$	41

Change in fair value of plan assets for defined benefit plans:

		Pension plans						Other benefit plans
		2013			2012			2013			2012
Fair value of defined benefit plan assets, at beginning of year	$	667		$	618		$	-		$	-
Expected return on plan assets		42			39			-			-
Actuarial gain		31			31			-			-
Employer contributions		44			42			1			1
Employee contributions		2			2			-			-
Benefits paid		(45	)		(61	)		(1	)		(1	)
Effect of foreign currency translation		5			(4	)		-			-
Fair value of defined benefit plan assets, at end of year	$	746		$	667		$	-		$	-

Tembec Financial Report 2013      76

Notes to Consolidated Financial Statements

12.	Employee future benefits (continued)
	Information about the Company’s defined benefit plans in aggregate (continued)
	The following table presents the difference between the fair value of plan assets and the actuarially determined defined benefit obligation for defined benefit plans. This difference is also referred to as either the deficit or surplus, as the case may be, or the funded status of the plans.
	Reconciliation of funded status for defined benefit plans:

		Pension plans
		2013			2012			2011			2010
Fair value of plan assets	$	746		$	667		$	618		$	617
Defined benefit obligation, wholly or partially funded plans		(780	)		(867	)		(820	)		(777	)
Plan deficit		(34	)		(200	)		(202	)		(160	)
Defined benefit obligation, unfunded plans		(37	)		(43	)		(37	)		(35	)
Unamortized past service costs		2			1			-			1
Asset non-recognized due to asset ceiling		(4	)		-			-			-
Liability arising from minimum funding requirement		-			(3	)		(3	)		(7	)
Net defined benefit liability	$	(73	)	$	(245	)	$	(242	)	$	(201	)

		Other benefit plans
		2013			2012			2011			2010
Fair value of plan assets	$	-		$	-		$	-		$	-
Defined benefit obligation, wholly or partially funded plans		-			-			-			-
Plan deficit		-			-			-			-
Defined benefit obligation, unfunded plans		(29	)		(41	)		(44	)		(47	)
Unamortized past service costs		-			1			2			-
Asset non-recognized due to asset ceiling		-			-			-			-
Liability arising from minimum funding requirement		-			-			-			-
Net defined benefit liability	$	(29	)	$	(40	)	$	(42	)	$	(47	)

Tembec Financial Report 2013      77

Notes to Consolidated Financial Statements

12.	Employee future benefits (continued)
	Information about the Company’s defined benefit plans in aggregate (continued)
	Amounts recognized in the consolidated balance sheets for defined benefit plans:

		Pension plans
		2013			2012			2011			2010
Defined benefit asset	$	24		$	-		$	1		$	-
Defined benefit liability		(97	)		(245	)		(243	)		(201	)
Net defined benefit liability	$	(73	)	$	(245	)	$	(242	)	$	(201	)

		Other benefit plans
		2013			2012			2011			2010
Defined benefit asset	$	-		$	-		$	-		$	-
Defined benefit liability		(29	)		(40	)		(42	)		(47	)
Net defined benefit liability	$	(29	)	$	(40	)	$	(42	)	$	(47	)

		Total employee future benefits
		2013			2012			2011			2010
Defined benefit asset	$	24		$	-		$	1		$	-
Defined benefit liability		(126	)		(285	)		(285	)		(248	)
Net defined benefit liability	$	(102	)	$	(285	)	$	(284	)	$	(248	)

Components of benefit cost

The following tables present the impact on net earnings (loss) and other comprehensive earnings (loss) of the Company’s employee future benefits:

Recognized in net earnings (loss)

		Pension plans						Other benefit plans
		2013			2012			2013		2012
Recognized costs for defined benefit plans:
Current service cost	$	10		$	9		$	1	$	1
Past service cost		-			-			-		1
Total included in personnel expenses		10			9			1		2
Curtailment gain		(1	)		(2	)		-		-
Total included in other items		(1	)		(2	)		-		-
Interest cost		34			37			1		1
Expected return on plan assets		(42	)		(39	)		-		-
Total included in net finance costs		(8	)		(2	)		1		1
Total recognized costs for defined benefit plans		1			5			2		3
Recognized costs for defined contribution plans		7			9			-		-
Total expense for employee future benefits	$	8		$	14		$	2	$	3

Tembec Financial Report 2013      78

Notes to Consolidated Financial Statements

12.	Employee future benefits (continued)
	Recognized in other comprehensive earnings (loss)

		Pension plans									Other benefit plans
		2013			2012			2011			2013		2012			2011
Actuarial gain (loss) - variation in assumptions	$	99		$	(77	)	$	(50	)	$	4	$	(2	)	$	-
Actuarial gain (loss) - experience adjustments		(1	)		4			9			-		6			-
Actuarial gain (loss) - actual rate of return exceeds (is below) expected rate of return		31			31			(27	)		-		-			-
Effect of limit on recognition of assets/minimum funding requirement		(1	)		-			4			-		-			-
Effect of foreign currency translation		(2	)		2			(1	)		-		-			-
Defined benefit plans	$	126		$	(40	)	$	(65	)	$	4	$	4		$	-

Since September 26, 2010, date of transition to IFRS, the cumulative amount of actuarial gains recognized in other comprehensive earnings (loss) is $30 million (2012 – losses of $102 million).

The actuarial gain on variation in discount rate recognized in the statement of comprehensive earnings (loss) at September 28, 2013, was based on an increase of the discount rate for pension plans from 3.69% used at September 29, 2012 to 4.60% at September 28, 2013. For September 29, 2012, the actuarial loss for pension plans was based on a decrease of the discount rate from 4.42% at September 24, 2011 to 3.69% at September 29, 2012.

Tembec Financial Report 2013      79

Notes to Consolidated Financial Statements

12. Employee future benefits (continued)

Assumptions

Significant assumptions for defined benefit pension plans (weighted average):

	2013	2012	2011
Defined benefit obligation at end of year:
Discount rate	4.60%	3.69%	4.42%
Rate of compensation increase	2.50%	2.50%	2.50%
Net periodic benefit cost for the year:
Discount rate	3.69%	4.42%	4.87%
Rate of compensation increase	2.50%	2.50%	2.50%
Expected long-term return on assets	6.28%	6.39%	6.53%

Significant assumptions for other benefit plans (weighted average):

		2013			2012			2011
Defined benefit obligation at end of year:
Discount rate		4.29%			3.68%			4.19%
Rate of compensation increase		2.50%			2.50%			2.50%
Net periodic benefit cost for the year:
Discount rate		3.68%			4.19%			4.73%
Rate of compensation increase		2.50%			2.50%			2.50%
Assumed healthcare cost trend rate at end of year:
Initial healthcare cost trend		6.00%			7.00%			7.50%
Annual rate of decline in trend rate		0.50%			0.50%			0.50%
Ultimate healthcare cost trend rate		4.50%			5.00%			5.00%
Year ultimate rate is reached		2016			2016			2016
Effect of change in healthcare cost trend rate (1% increase):
Total of service cost and interest cost	$	-		$	-		$	-
Defined benefit obligation	$	1		$	2		$	3
Effect of change in healthcare cost trend rate (1% decrease):
Total of service cost and interest cost	$	-		$	-		$	-
Defined benefit obligation	$	(1	)	$	(2	)	$	(3	)

Tembec Financial Report 2013      80

Notes to Consolidated Financial Statements

13.	Share capital
	Authorized
	Unlimited number of common voting shares, without par value.
	Unlimited number of non-voting Class A preferred shares issuable in series without par value, with other attributes to be determined at time of issuance.
	Warrants
	In connection with the $75 million second ranking term loan facility, the Company has granted the lender an option to acquire 3 million common shares of the Corporation at a price of $7 per share. The warrants expire on August 30, 2017. During the December 2012 quarter, concurrently with the first disbursement under the term loan facility, the Company recorded the estimated value of the warrants, which was determined to be $3 million.
	In connection with the $18 million second ranking term loan facility (see note 10), the Company has agreed to grant the lender an option to acquire 712,000 common shares of the Corporation at a premium of 30% over the average trading price of the shares over the five business days prior to the issuance of the warrants. These warrants will be granted on the date of the first advance made under this facility, which has not yet occurred, and will expire five years thereafter.

Issued and fully paid

		2013		2012
100,000,000 common shares	$	564	$	564
3,000,000 warrants		3		-
	$	567	$	564

Net loss per share

The following table provides the reconciliation between basic and diluted net loss per share:

		2013			2012
Net loss	$	(34	)	$	(82	)
Weighted average number of common shares outstanding		100,000,000			100,000,000
Dilutive effect of employee share options and warrants		-			-
Weighted average number of diluted common shares outstanding		100,000,000			100,000,000
Basic and diluted net loss in dollars per share	$	(0.34	)	$	(0.82	)

The warrants and employees share options had no dilutive effect for the above periods; however, these securities could potentially dilute earnings per share in future periods.

Tembec Financial Report 2013      81

Notes to Consolidated Financial Statements

13. Share capital (CONTINUED)

Shareholder Rights Plan

At the Annual and Special Meeting of Shareholders held on January 31, 2013, the Shareholder Rights Plan (the “Plan”), which had been previously adopted by the Board of Directors (the “Board”) of the Corporation, was approved and ratified by a majority of the Shareholders. The Plan is designed to encourage the fair treatment of the Company’s shareholders in the event of any take-over bid for the Company’s common shares. It provides the Board with sufficient time to assess and evaluate any unsolicited take-over bid, and to explore and develop, if appropriate, alternatives that enhance shareholder value and to give shareholders adequate time to consider any such transaction. Accordingly, as of the close of business on January 31, 2013, one right was issued and attached to each common share of the Corporation. Each right entitles the holder of the right to purchase from the Corporation an additional share of the Corporation subject to the terms and conditions of the Plan.

Share-based compensation

Under the prior Long-Term Incentive Plan, the Company had, from time to time, granted options to its employees. The plan provided for the issuance of common shares at an exercise price equal to the market price of the Company’s common shares on the date of the grant. These options vest over a five-year period and expire ten years from the date of issue. No options have been granted since 2006. No compensation expense was recorded for the years ended September 28, 2013 and September 29, 2012.

The following table summarizes the changes in options outstanding and the impact on weighted average per share exercise price during the year:

	2013				2012
				Weighted				Weighted
				average				average
				exercise				exercise
	Shares			price	Shares			price
Balance, beginning of year	104,987		$	66.13	122,020		$	75.01
Options expired	(4,229	)	$	182.33	(5,791	)	$	188.34
Options forfeited	(4,906	)	$	83.98	(11,242	)	$	99.56
Balance, end of year	95,852		$	60.09	104,987		$	66.13
Exercisable, end of year	95,852		$	60.09	104,987		$	66.13

The following table summarizes the weighted average per share exercise price and the weighted remaining contractual life of the options outstanding as at September 28, 2013:

	Outstanding options and exercisable options
		Weighted		Weighted
		remaining		average
	Number of	contractual		exercise
Year granted	options	life		price
2004	4,941	0.22	$	137.89
2005	44,787	1.54	$	82.89
2006	46,124	2.22	$	29.63
	95,852	1.80	$	60.09

Tembec Financial Report 2013      82

Notes to Consolidated Financial Statements

13. Share capital (continued)

Other share-based compensation

Directors of the Company, which are not employees of the Company, are given the option to receive part of their annual retainer, meeting fees and awards under the Directors’ Share Award Plan in the form of Deferred Share Units (DSU). Each DSU is equivalent in value to a common share of the Company and is notionally credited with dividends when shareholders receive dividends from the Company. A DSU is paid to a director upon termination of Board service and is payable in the form of cash.

The following table summarizes the grant of DSUs issued under the Directors’ Share Awards Plan:

	2013	2012
Balance, beginning of year	1,119,836	1,119,836
Granted	-	-
Paid	-	-
Balance, end of year	1,119,836	1,119,836
Vested, end of year	1,119,836	869,503

On November 15, 2011, the Board approved the establishment of a Performance-Conditioned Share Unit (PCSU) plan. Under the PCSU plan, designated senior executives will be granted a specified number of DSUs or PCSUs annually, which vest over successive three-year periods, based on total shareholder return over the performance period as determined relative to a peer group and the increase in value of the Company’s weighted average share price over the performance period.

The following table summarizes the grant of DSUs issued under the Performance-Conditioned Share Unit Plan:

	2013		2012
Balance, beginning of year	367,583		373,147
Granted	751,733		-
Forfeited	(130,969	)	(5,564	)
Balance, end of year	988,347		367,583
Vested, end of year	-		-

During fiscal 2009, the Company established a Performance-Conditioned Restricted Share Units (PCRSU) plan for designated senior executives. During the December 2011 quarter, 880,968 PCRSUs were forfeited as performance conditions attached to it were not achieved, and the remaining 1,143,039 PCRSUs were paid for a total consideration of $3 million. There are no PCRSUs outstanding and this plan was terminated.

The following table summarizes the details of share-based compensation expenses (credits) relating to its different share-based compensation plans:

		2013		2012
Directors' share award plan	$	1	$	(1	)
Performance-conditioned share unit plan		-		-
Performance-conditioned restricted share unit plan		-		-
	$	1	$	(1	)
Total carrying amount of liabilities for cash-settled arrangements	$	3	$	2

Tembec Financial Report 2013      83

Notes to Consolidated Financial Statements

14.	Guarantees, commitments and contingencies
	Guarantees
	The Company and certain of its subsidiaries have granted irrevocable letters of credit, issued by highly-rated financial institutions, to third parties to indemnify them in the event the Company does not perform its contractual obligations. The Company has not recorded any additional liability with respect to these guarantees, as the Company does not expect to make any payments in excess of what is recorded in the Company’s financial statements. The letters of credit mature at various dates in fiscal 2014.
	Commitments
	Capital investment
	On March 16, 2012, the Company announced a $190 million capital investment to upgrade its specialty cellulose manufacturing facility at Temiscaming, Quebec. During fiscal 2013, the Company completed a detailed re-estimation exercise for the project and is now forecasting a total estimated cost of $235 million. The project involves the replacement of three old boilers with a new high- pressure boiler designed to burn waste sulphite liquor, a co-product of the specialty cellulose manufacturing process, producing steam for use at the facility. The project also calls for the installation of a new electrical turbine that will increase the Temiscaming facility's electricity production capacity from its current 10 megawatts to 60 megawatts. As at the end of September 2013, the Company had incurred $137 million of capital expenditures for this project and had $41 million of outstanding commitments.
	The Company has entered into a 25-year power purchase contract with Hydro-Quebec that will allow the Company to sell to Hydro-Quebec up to 50 megawatts of the incremental electricity generated by the new turbine at green energy rates of $106 per MW/hour, indexed annually to the consumer price index.
	The Company has entered into operating leases for expected minimum lease payments of $9 million. Outflows for the years following September 28, 2013, are as follows:

2014	$	4
2015	$	2
2016	$	2
2017	$	1
2018 and thereafter	$	-

Contingencies

The Company is party to claims and litigations arising in the normal course of operations. The Company does not expect that the resolution of these matters will have a material effect on the Company’s financial condition, earnings or liquidity.

Tembec Financial Report 2013      84

Notes to Consolidated Financial Statements

15. Analysis of expenses by nature

		2013		2012
Wages and salaries	$	232	$	275
Employee benefits expense		85		97
Raw materials and other manufacturing costs		892		1,004
Changes in inventories		1		(37	)
Other expenses		21		25
	$	1,231	$	1,364
Cost of sales	$	1,159	$	1,290
Selling, general and administrative		72		74
	$	1,231	$	1,364

16.	Other items
	The following table provides a summary of the other items by business segment of the Company:

		2013			2012
Forest Products:
Gain on sale of BC sawmills	$	-		$	(24	)
Loss on sale/closure of hardwood flooring plants		-			2
		-			(22	)
Paper Pulp:
Loss on sale of Skookumchuck, BC, pulp mill		2			-
Impairment loss - Skookumchuck, BC, pulp mill		22			-
Impairment loss - Chetwynd, BC, pulp mill		-			50
		24			50
Corporate:
Costs for permanently idled facilities		7			10
Gain on sale of assets		(2	)		-
Impairment loss - Temlam loan receivable		-			16
Gain on sale of minority equity investment		-			(4	)
		5			22
Other items	$	29		$	50

Tembec Financial Report 2013      85

Notes to Consolidated Financial Statements

16. Other items (continued)

2013

On May 17, 2013, the Company sold its pulp mill located in Skookumchuck, BC, for proceeds of $97 million. As a result of the sale, the Company recorded a loss of $2 million in the June 2013 quarter. The following table provides information related to Balance Sheet items of the mill at time of sale:

Current assets	$	41
Long-term assets		79
Current liabilities		(12	)
Employee future benefits and other		(9	)
	$	99

During the March 2013 quarter, the Company announced that it had reached an agreement to sell its pulp mill located in Skookumchuck, BC. The Company recorded an impairment charge of $22 million on the non-current assets to reflect anticipated net proceeds of sale.

During fiscal 2013, the Company recorded a charge of $7 million relating to several permanently idled facilities. The costs relate to custodial, site security, legal and remediation activities.

During the December 2012 quarter, the Company recorded a gain of $2 million relating to the sale of land and building in Cranbrook, BC.

2012

During the September 2012 quarter, the Company recorded an impairment loss of $50 million related to property, plant and equipment, including the related supplies and materials of the Chetwynd, BC, high-yield pulp mill. Subsequent to the announced indefinite idling of the pulp mill and following a review of its business plan, the Company undertook an impairment review and found that the carrying value of its assets exceeded their recoverable amount being the fair value less costs to sell. The recoverable amount was determined to be nominal.

During fiscal 2012, the Company recorded charges of $10 million relating to several permanently idled facilities. The costs relate to custodial, site security, legal and remediation activities.

On March 23, 2012, the Company sold its British Columbia Southern Interior wood products assets for proceeds of $66 million. The sale included the Elko and Canal Flats sawmills and approximately 1.1 million cubic meters of combined Crown tenures, private land and contract annual allowable cut. As a result of the sale, the Company recorded a gain of $24 million in the March 2012 quarter. The following table provides information related to balance sheet items of the two sawmills at the time of sale:

Current assets	$	35
Long-term assets		28
Current liabilities		(10	)
Long-term reforestation obligations		(9	)
Employee future benefits and other		(2	)
	$	42

Tembec Financial Report 2013      86

Notes to Consolidated Financial Statements

16.	Other items (continued)
	2012 (continued)

During the March 2012 quarter, the Company recorded an impairment loss of $16 million related to the loan receivable from Temlam Inc. The latter is currently under creditor protection and owns an idled laminated veneer lumber (LVL) facility located in Amos, Quebec. The Company has a 50% secured interest in the facility. The cutting rights that were previously attached to the LVL facility were granted to another company. In the absence of a guaranteed fiber supply, the Company has concluded that the re-start of the facility is unlikely and has adjusted its carrying value to the amount anticipated to be realized upon liquidation or sale.

	On December 22, 2011, the Company recorded a gain of $4 million relating to the sale of a minority equity position in two dissolving pulp mills located in the Province of New Brunswick.
	On November 25, 2011, the Company sold its Toronto, Ontario, hardwood flooring plant for proceeds of $13 million. Concurrently, the Company also announced the closure of its Huntsville, Ontario, hardwood flooring plant. The sale of the Toronto plant and the closure of the Huntsville plant resulted in a charge of $2 million that has been recorded in the December 2011 quarter.
17.	Net finance costs

		2013			2012
Interest on long-term debt	$	40		$	36
Interest on short-term debt		2			2
Bank charges and other financing expenses		3			2
Net foreign exchange loss (gain), excluding exchange on long-term debt		(1	)		4
Interest income		-			(1	)
Exchange loss (gain) on long-term debt		14			(13	)
Expected return on plan assets less accretion of employee future benefits obligation (note 12)		(7	)		-
Interest capitalized on assets under construction		(9	)		(2	)
	$	42		$	28
Finance costs	$	50		$	42
Finance income		(8	)		(14	)
Net finance costs	$	42		$	28

Tembec Financial Report 2013      87

Notes to Consolidated Financial Statements

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

		2013			2012
Loss before income taxes	$	(13	)	$	(60	)
Income tax recovery based on combined federal and provincial income tax rates of 26.3% (2012 - 26.3%)	$	(3	)	$	(16	)
Increase (decrease) resulting from:
Difference in statutory income tax rates		1			6
Permanent differences		2			-
Unrecognized tax asset arising from current losses and other tax adjustements		21			32
		24			38
Income tax expense	$	21		$	22
Income taxes:
Current	$	20		$	11
Deferred		1			11
Income tax expense	$	21		$	22

Unrecognized deferred tax assets

Deferred tax assets have not been recognized in respect of the following:

		2013		2012
Deferred tax assets:
Non-capital loss carry-forwards and pool of deductible scientific research and development expenditures	$	414	$	405
Property, plant and equipment		91		66
Employee future benefits		29		78
Capital loss carry-forwards		1		3
Other		9		9
	$	544	$	561

Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profits will be available against which the Company can utilize the benefits.

Tembec Financial Report 2013      88

Notes to Consolidated Financial Statements

18.	Income taxes (continued)
	Unrecognized deferred tax assets (continued)
	As at September 28, 2013, certain subsidiaries have accumulated the following losses and deductions for income tax purposes, which may be carried forward to reduce taxable income and taxes payable in future years:

			Expiring
		Amounts	dates
Non-capital loss carried forward for:
Canadian subsidiaries	$	1,178	2014 to 2033
U.S. subsidiaries	$	14	2028 to 2032
Pool of deductible scientific research and experimental development	$	374	Unlimited

Recognized deferred tax assets and liabilities

		Deferred tax assets						Deferred tax liabilities
		Non-capital			Property,
		loss carry-			plant and			Other
		forwards			equipment			liabilities			Total
Balance, September 24, 2011	$	11		$	5		$	(1	)	$	15
Through statement of net earnings (loss)		(11	)		(1	)		1			(11	)
Balance, September 29, 2012		-			4			-			4
Through statement of net earnings (loss)		6			(3	)		(4	)		(1	)
Through statement of comprehensive earnings (loss)		2			-			-			2
Balance, September 28, 2013	$	8		$	1		$	(4	)	$	5

19.	Financial instruments
	Fair value
	The carrying amount of cash and cash equivalents, restricted cash, trade and other receivables, operating bank loans, trade, other payables and accrued charges, and interest payable approximates their fair values because of the near-term maturity of those instruments. The carrying value of the long-term loans receivable and other financial long-term liabilities also approximates their fair values. The carrying value and the fair value of long-term debt are as follows:

		2013		2012
Carrying value	$	385	$	339
Fair value	$	428	$	369

Tembec Financial Report 2013      89

Notes to Consolidated Financial Statements

19.	Financial instruments (continued)
	Fair value (continued)
	The fair value of the senior secured notes was estimated using quoted market prices; the fair value of the other long-term debt was estimated based on discounted cash flows using year-end market yields of similar instruments having the same maturity.
	Derivative financial instruments are the only financial instruments of the Company measured at fair value on a recurring basis and have been valued in accordance with Level 1 of the fair value hierarchy, which is based on unadjusted quoted prices in an active market. The Company had no derivative financial instruments at September 28, 2013 and September 29, 2012.
	Financial risk management
	Overview
	The Company has exposure to the following risks from its use of financial instruments:
		Credit risk
		Liquidity risk
		Market risk
		-	Foreign currency rate risk
		-	Interest rate risk
		-	Commodity price and operational risk
	The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management policy. The policy defines the method by which the Company manages its risk through properly and prudently administering the Company’s financial assets, liabilities and derivatives. Internal Audit measures the adequacy of the business control systems through the execution of an Internal Audit Plan approved by the Audit Committee.
	Exposure to credit risk
	Credit risk arises from the possibility that entities to which the Company sells products may experience financial difficulty and be unable to fulfill their contractual obligations. The Company does not have a significant exposure to any individual customer or counterparty. As required in the Risk Management Policy, the Company reviews a new customer’s credit history before extending credit and conducts regular reviews of its existing customers’ credit performance. All credit limits are subject to evaluation and revision at any time based on changes in levels of creditworthiness and must be reviewed at least once per year. Sales orders cannot be processed unless a credit limit has been properly approved. The Company may require payment guarantees, such as letters of credit, or obtain credit insurance coverage. Bad debt expense has not been significant in the past. The allowance for doubtful accounts for the Company, as at September 28, 2013 and September 29, 2012, was negligible.
	The Company also has credit risk relating to cash and cash equivalents. The Company manages risk by dealing only with highly-rated financial institutions.

Tembec Financial Report 2013      90

Notes to Consolidated Financial Statements

19.	Financial instruments (continued)
	Financial risk management (continued)
	The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:

		2013		2012
Loans and receivables, other than cash, cash equivalents and restricted cash	$	167	$	212
Cash, cash equivalents and restricted cash	$	74	$	92

The maximum exposure to credit risk for trade accounts receivable as at September 28, 2013 and September 29, 2012, by geographical region was as follows:

		2013		2012
Canada	$	19	$	19
United States		31		51
European Union		42		42
China		4		5
Other		15		24
		111		141
Allowance for doubtful accounts		-		-
Trade receivables net		111		141
Other receivables including input tax credits		46		59
Accounts receivable	$	157	$	200

The aging of trade accounts receivable was as follows:

		2013				2012
		Gross		Allowance		Gross		Allowance
Not past due	$	102	$	-	$	134	$	-
Past due 0-30 days		7		-		5		-
Past due 31-60 days		2		-		2		-
	$	111	$	-	$	141	$	-

The movement in the allowance for doubtful accounts receivable in respect to trade accounts receivable was negligible in fiscal 2013 and fiscal 2012.

Tembec Financial Report 2013      91

Notes to Consolidated Financial Statements

19.	Financial instruments (continued)
	Financial risk management (continued)
	Exposure to liquidity risk
	Liquidity risk arises from the possibility that the Company will not be able to meet its financial obligations as they fall due. The Company has an objective of maintaining liquidity equal to 12 months of maintenance capital expenditures, interest and principal repayments, seasonal working capital requirements and general corporate purposes, which would require approximately $135 million to $150 million of liquidity.
	Repayment of amounts due within one year is funded by normal collection of current trade accounts receivable. Liquidity in the form of cash, cash equivalents and unused revolving credit facilities is also maintained to assist in the solvency and financial flexibility of the Company. Liquidity as at September 28, 2013, totalled $109 million (2012 - $140 million). The decrease in liquidity was anticipated as the Company continued with its capital expenditure program. In order to address this situation, the Company entered into two secured term loan facilities totalling $133 million of which $73 million was undrawn. In addition, the Company is assessing several liquidity enhancing initiatives such as reducing or delaying capital expenditures, asset sales and seeking other sources of financing or funding.
	The following are the contractual maturities of financial liabilities, including interest payments:

 

													2013
		Carrying			Contractual								After
		amount			cash flows		Year 1		Years 2-3		Years 4-5		5 years
Secured bank loans	$	389	(1)	$	602	$	50	$	84	$	87	$	381
Unsecured loans		13			14		5		7		1		1
Operating bank loans		57			57		57		-		-		-
Trade and others		205			205		205		-		-		-
	$	664		$	878	$	317	$	91	$	88	$	382
(1) before financing costs

It is not expected that the cash outflows included in the maturity analysis could occur significantly earlier, or, excluding the effects of foreign exchange fluctuations on US dollar liabilities, at significantly different amounts.

Foreign currency rate risk management

The Company is exposed to currency risk on sales, purchases and long-term debt that are denominated in a currency other than the Canadian dollar. The currencies in which these transactions are primarily denominated are US dollar and euro.

The Company’s revenues for most of its products are affected by fluctuations in the relative exchange rates of the Canadian dollar with respect to the US dollar and the euro. The Company generates approximately $900 million of US $ denominated sales annually from its Canadian operations. As a result, any decrease in the value of the US dollar and the euro relative to the Canadian dollar reduces the amount of revenues realized on sales in local currency. In addition, since business units purchase the majority of their production inputs in local currency, fluctuations in foreign exchange can significantly affect the unit’s relative cost position when compared to competing manufacturing sites in other currency jurisdictions.

To reduce the impact of fluctuations in the value of the US dollar, the Company has adopted a policy, which allows for hedging up to 50% of its anticipated US $ receipts for up to 36 months in duration. As at September 28, 2013 and September 29, 2012, the Company did not hold any foreign exchange contracts.

Tembec Financial Report 2013      92

Notes to Consolidated Financial Statements

19.	Financial instruments (continued)
	Financial risk management (continued)
	Foreign currency rate sensitivity analysis
	Based on 2014 planned sales volumes and prices, the following table illustrates the impact of a 1% change in the value of the US dollar versus the Canadian dollar and the euro. For illustrative purposes, an increase of 1% in the value of the US dollar is assumed. A decrease would have the opposite effects of those shown below:

Sales increase	$	10
Cost of sales increase		3
Operating earnings and adjusted EBITDA increase		7
Loss on translation of US $ denominated debt		3
Pre-tax earnings increase	$	4

Direct US $ purchases of raw materials, supplies and services provided a partial offset to the impact on sales. This does not include the potential indirect impact of currency on the cost of items purchased in the local currency. Interest expense on the Company’s US $ denominated debt provides a small offset to its US $ exposure.

Interest rate risk management and sensitivity analysis

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

Fluctuations of market interest rates have little impact on the Company’s financial results since the majority of the Company’s debts are fixed rate debts.

	Commodity price and operational risk management
	The Company’s financial performance is dependent on the selling prices of its products. The markets for most lumber, pulp and paper products are cyclical and are influenced by a variety of factors. These factors include periods of excess product supply due to industry capacity additions, periods of decreased demand due to weak general economic activity, inventory de-stocking by customers, and fluctuations in currency exchange rates. During periods of low prices, the Company is subject to reduced revenues and margins, resulting in substantial declines in profitability and possibly net losses. The Company may periodically purchase lumber, pulp and newsprint price derivative commodity contracts to mitigate the impact of price volatility. The Company had no derivative financial instruments at September 28, 2013 and September 29, 2012.
	The manufacturing activities conducted by the Company’s operations are subject to a number of risks, including availability and price of fibre and competitive prices for purchased energy and raw materials. To mitigate the impact of price fluctuations, the Company may periodically purchase derivative commodity contracts. As at September 28, 2013 and September 29, 2012, the Company did not hold any significant derivative commodity contracts.
20.	Capital management
	It is the Company’s objective to manage its capital to ensure adequate capital resources exist to support operations while maintaining its business growth. The Company sets the amount of capital in proportion to risk. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk of characteristics of the underlying assets.

Tembec Financial Report 2013      93

Notes to Consolidated Financial Statements

20. Capital management (CONTINUED)

The Company monitors capital on the basis of net debt to total capitalization ratio. Net debt is calculated as a total debt (long-term debt plus bank indebtedness and operating bank loans) less cash, cash equivalents and restricted cash.

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

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 28, 2013 (September 29, 2012 – 45%). The increase was due to a higher debt borrowed primarily to finance the 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.

There were no changes in the Company’s approach to capital management during fiscal 2013.

21.	Related parties
	Key management personnel compensation
	The key management personnel of the Company are the members of the Board of Directors and certain executive officers. They control less than 1% of the voting shares of the Company.
	Key management personnel participate in the Company’s long-term incentive plans (see note 13). Key management personnel compensation is comprised of the following for the past two years:

		2013		2012
Short-term compensation benefits	$	4	$	4
Share-based compensation		1		(1	)
	$	5	$	3

22.	Subsequent events
	BC Land Sale Initiative
	On September 30, 2013, the Company announced the BC Lands Sale Initiative. As at November 29, 2013, the Company completed the sale of various parcels of land for total gross proceeds of $23 million.
	Antidumping duties - China
	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 after November 6, 2013. 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.

Tembec Financial Report 2013      94

DIRECTORS	OFFICERS
JAMES V. CONTINENZA (1) (4) (6)	JAMES V. CONTINENZA
Executive Chairman of the Board, Tembec Inc.	Executive Chairman of the Board
JAMES M. LOPEZ (3)	JAMES M. LOPEZ
President and Chief Executive Officer, Tembec Inc.	President and Chief Executive Officer
NORMAN M. BETTS (2) (6)	RÉGINALD BASTIEN
Associate Professor, Faculty of Administration,	Corporate Controller
University of New Brunswick
	CHRIS BLACK
JAMES E. BRUMM (1)	Executive Vice President,
Company Director	Forest Products, Pulp and Paper
JAMES N. CHAPMAN (1) (4)	MICHEL J. DUMAS
Company Director	Executive Vice President,
	Finance and Chief Financial Officer
MICHEL J. DUMAS (3)
Executive Vice President, Finance	PATRICK LEBEL
and Chief Financial Officer, Tembec Inc.	Vice President,
	General Counsel and Corporate Secretary
JACQUES LEDUC (2) (6)
Company Director	STEPHEN J. NORRIS
	Treasurer
PIERRE LORTIE (3) (5)
Company Director	CHRISTIAN RIBEYROLLE
	Executive Vice President,
FRANCIS M. SCRICCO (1) (5)	Specialty Cellulose and President, Tembec France SAS
Company Director
DAVID J. STEUART (3)
Company Director
LORIE WAISBERG (2) (5)
Company Director

(1)	Member of the Corporate Governance and Human Resources Committee
(2)	Member of the Audit Committee
(3)	Member of the Environment, Health and Safety Committee
(4)	Member of the Special Committee for Strategic Purposes
(5)	Member of the Pension Committee
(6)	Member of the Capital Expenditure Committee

Tembec Financial Report 2013      95

SHAREHOLDER INFORMATION

STOCK EXCHANGE LISTING	Tembec files all mandatory information with Canadian securities
The common shares of Tembec Inc. are listed on the Toronto	regulatory authorities and this information is available from
Stock Exchange under the symbol TMB.	Tembec upon request.
NUMBER OF SHARES	HEAD OFFICE
As at September 28, 2013, there were 100,000,000 Tembec	Tembec Inc.
common shares outstanding.	800 René-Lévesque Blvd West
	Suite 1050
TRANSFER AGENT AND REGISTRAR	Montreal, Quebec H3B 1X9
Our transfer agent, Computershare Trust Company of Canada,	Canada
can assist you with a variety of shareholder related services,	Tel.: 514 871-0137
including changes of address and lost share certificates.	Fax: 514 397-0896
	tembec.com
Computershare Trust Company of Canada
Customer Service	CORPORATE OFFICES
1500 University Street	Tembec Inc.
Suite 700	405 The West Mall
Montreal, Quebec H3A 3S8	Suite 800
Canada	Toronto, Ontario M9C 5J1
Tel.: 1 800 564-6253	Canada
	Tel.: 416 775-2856
ANNUAL GENERAL MEETING	Fax: 416 621-3119
The Annual General Meeting of Shareholders of Tembec Inc.	tembec.com
will be held on Thursday, January 30, 2014, at 11:00 a.m.,
Eastern time, at:	Tembec Inc.
	10 Gatineau Road
Fairmont The Queen Elizabeth	P.O. Box 5000
Duluth Room	Temiscaming, Quebec J0Z 3R0
900 René-Lévesque Blvd West	Canada
Montreal, Quebec H3B 4A5	Tel.: 819 627-4387
Canada	Fax: 819 627-1178
Tel.: 514 861-3511	tembec.com
An archived version of the webcast of the Annual General Meeting	Additional copies of the following documents and other
of Shareholders will be available on Tembec’s website after the	information can also be obtained at the above address or on
Meeting.	Tembec’s and SEDAR’s websites.
ADDITIONAL INFORMATION MAY BE OBTAINED FROM	• 2013 Financial Report
Tembec Inc.	• Quarterly Reports
Communications and Public Affairs Department	• Management Information Circular
10 Gatineau Road	• Annual Information Form
P.O. Box 5000
Temiscaming, Quebec J0Z 3R0	Pour obtenir un exemplaire de la version française du rapport
Canada	financier, veuillez vous adresser au Service des communications
Tel.: 819 627-4387	et des affaires publiques.
Fax: 819 627-1178

96      Tembec Financial Report 2013

1 | HEALTH AND SAFETY – ALL TEMBEC OPERATIONS

Nothing is more important to Tembec than ensuring the health and safety of its employees, and employees are one of the most important stakeholder groups.

Indicator	2011	2012	2013
Total OSHA Incident Rate	4.6	3.1	2.6
Total Severity Rate	174.8	72.2	71.0
Percentage of total workforce represented in formal joint management-worker health and safety committees	Over 75%
Percentage of employees covered by collective bargaining agreements	69%	76%	68%

2 | ENVIRONMENTAL RESPONSIBILITY AND SUSTAINABLE FOREST MANAGEMENT

Tembec recognizes its social obligation to demonstrate environmental leadership for the benefit of local communities and the community at large. As a company that works with renewable resources, Tembec knows responsible stewardship of those resources ensures a sound future. Tembec strives to continually improve its environmental performance as described in the 2013 Sustainability Report.

Reporting on sustainable forest management is vital to demonstrating corporate social responsibility. This topic is at the core of Tembec’s business model, and is a key concern for many Aboriginal groups as well as several stakeholders such as customers, investors and ENGOs. Tembec is proud to say that 100% of its forest operations are FSC® certified.

3 | ENGAGEMENT WITH STAKEHOLDERS AND ABORIGINAL PEOPLE

Tembec’s engagement approach is based on the desire to work collaboratively with groups and individuals who have rights and interests on forest lands on which Tembec operates, and who live in proximity to our facilities. Based on the importance of stewardship, and access and use of forest lands by both the Company and Aboriginal People, Tembec supports the development of long-term relationships that are beneficial to Aboriginal communities, the Company and the public. Tembec also engages extensively with other key stakeholders: employees, labor unions, customers, municipalities, suppliers, trade associations and non-government organizations.

 

EX-99.5

Exhibit 99.5

Unaudited supplemental condensed consolidating financial information of

TEMBEC INC.

Years ended September 28, 2013 and September 29, 2012

TEMBEC INC.

SUPPLEMENTAL INFORMATION

September 28, 2013

Supplemental condensed consolidating financial information

The following condensed consolidating financial information is prepared in compliance with National Instrument 51-102 – Continuous Disclosure Obligations, under Canadian securities laws.

The senior secured notes (the “Notes”) of Tembec Industries Inc. (the "Subsidiary Issuer") are fully and unconditionally guaranteed on a joint and several basis by Tembec Inc. (the "Parent Company") and most of the Subsidiary Issuer’s subsidiaries located in Canada (the “Guarantor Subsidiaries”). The Subsidiary Issuer and each of the Guarantor Subsidiaries are 100% owned by the Parent Company. The Notes are not guaranteed by the Company’s other subsidiaries (the “Other Subsidiaries”).

The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the balance sheets as at September 28, 2013 and September 29, 2012, the statements of comprehensive earnings (loss) and the statements of cash flows for the years then ended, for the Parent Company and for the Subsidiary Issuer. It also provides the same information on a combined basis for the Guarantor Subsidiaries and the Other Subsidiaries.

The supplemental condensed consolidating financial information, which has been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), reflects the investments of the Parent Company in the Subsidiary Issuer using the equity method. Investments of the Subsidiary Issuer in the Guarantor Subsidiaries and Other Subsidiaries are also accounted for using this method.

More information on the Company and its significant accounting policies are included in the audited consolidated financial statements for the year ended September 28, 2013.

TEMBEC Supplemental Information for fiscal 2013 1

TEMBEC INC.

SUPPLEMENTAL INFORMATION

September 28, 2013

Supplemental condensed consolidating financial information

Condensed Consolidated Balance Sheets

(unaudited)(in millions of Canadian dollars)

		September 28, 2013
		Parent			Subsidiary			Guarantor			Other		Consolidation
		Company			Issuer			Subsidiaries			Subsidiaries		Adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-		$	-		$	19		$	54	$	-		$	73
Restricted cash		-			-			-			1		-			1
Trade and other receivables		36			311			273			76		(539	)		157
Inventories		-			-			200			37		-			237
Prepaid expenses		-			1			4			1		-			6
Assets classified as held for sale		-			-			7			-		-			7
		36			312			503			169		(539	)		481
Investments		257			463			-			-		(720	)		-
Property, plant and equipment		-			7			366			123		-			496
Biological assets		-			-			5			-		-			5
Employee future benefits		-			6			18			-		-			24
Other long-term receivables		-			8			-			2		-			10
Deferred tax assets		-			-			-			5		-			5
	$	293		$	796		$	892		$	299	$	(1,259	)	$	1,021
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Operating bank loans	$	-		$	-		$	53		$	4	$	-		$	57
Trade, other payables and accrued charges		71			188			415			60		(539	)		195
Interest payable		-			10			-			-		-			10
Income tax payable		-			(1	)		-			9		-			8
Provisions		-			6			-			-		-			6
Current portion of long-term debt		1			-			1			14		-			16
		72			203			469			87		(539	)		292
Long-term debt		1			303			53			15		(3	)		369
Provisions		-			-			12			-		-			12
Employee future benefits		-			90			16			20		-			126
Other long-term liabilities		-			-			2			-		-			2
		73			596			552			122		(542	)		801
Shareholders' equity:
Share capital		567			555			731			34		(1,320	)		567
Retained earnings (deficit)		(353	)		(361	)		(391	)		137		615			(353	)
Accumulated other comprehensive earnings (loss)		6			6			-			6		(12	)		6
		220			200			340			177		(717	)		220
	$	293		$	796		$	892		$	299	$	(1,259	)	$	1,021

TEMBEC Supplemental Information for fiscal 2013 2

TEMBEC INC.

SUPPLEMENTAL INFORMATION

September 28, 2013

Supplemental condensed consolidating financial information

Condensed Consolidated Balance Sheets (continued)

(unaudited)(in millions of Canadian dollars)

		September 29, 2012
		Parent			Subsidiary			Guarantor			Other			Consolidation
		Company			Issuer			Subsidiaries			Subsidiaries			Adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-		$	1		$	29		$	57		$	-		$	87
Restricted cash		-			-			5			-			-			5
Trade and other receivables		36			307			210			65			(418	)		200
Inventories		-			-			228			27			-			255
Prepaid expenses		-			1			5			1			-			7
Assets classified as held for sale		-			-			-			-			-			-
		36			309			477			150			(418	)		554
Investments		102			372			-			-			(474	)		-
Property, plant and equipment		-			6			379			100			-			485
Biological assets		-			-			4			-			-			4
Employee future benefits		-			-			-			-			-			-
Other long-term receivables		-			10			-			2			-			12
Deferred tax assets		-			(1	)		-			5			-			4
	$	138		$	696		$	860		$	257		$	(892	)	$	1,059
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Operating bank loans	$	-		$	-		$	65		$	3		$	-		$	68
Trade, other payables and accrued charges		34			113			442			59			(418	)		230
Interest payable		-			10			-			-			-			10
Income tax payable		-			-			-			3			-			3
Provisions		-			1			2			-			-			3
Current portion of long-term debt		1			-			-			15			-			16
		35			124			509			80			(418	)		330
Long-term debt		1			289			18			23			(8	)		323
Provisions		-			5			12			-			-			17
Employee future benefits		-			195			52			38			-			285
Other long-term liabilities		-			-			2			-			-			2
		36			613			593			141			(426	)		957
Shareholders' equity:
Share capital		564			555			696			40			(1,291	)		564
Retained earnings (deficit)		(453	)		(463	)		(429	)		85			807			(453	)
Accumulated other comprehensive earnings (loss)		(9	)		(9	)		-			(9	)		18			(9	)
		102			83			267			116			(466	)		102
	$	138		$	696		$	860		$	257		$	(892	)	$	1,059

TEMBEC Supplemental Information for fiscal 2013 3

TEMBEC INC.

SUPPLEMENTAL INFORMATION

September 28, 2013

Supplemental condensed consolidating financial information

Condensed Consolidated Statements of Comprehensive Earnings (Loss)

(unaudited)(in millions of Canadian dollars, unless otherwise noted)

		Year ended September 28, 2013
		Parent		Subsidiary				Guarantor			Other			Consolidation
		Company			Issuer			Subsidiaries			Subsidiaries			Adjustments			Consolidated
Sales	$	-		$	2		$	1,296		$	259		$	(23	)	$	1,534
Freight and other deductions		-			-			189			17			(5	)		201
Lumber export taxes		-			-			3			-			-			3
Cost of sales (excluding depreciation and amortization)		-			-			1,024			153			(18	)		1,159
Selling, general and administrative		-			8			51			13			-			72
Share-based compensation		-			1			-			-			-			1
Depreciation and amortization		-			2			30			8			-			40
Other items		-			-			27			2			-			29
Operating earnings (loss)		-			(9	)		(28	)		66			-			29
Interest, foreign exchange and other		5			(5	)		18			(6	)		16			28
Exchange loss (gain) on long-term debt		-			14			-			-			-			14
Net finance costs (income)		5			9			18			(6	)		16			42
Earnings (loss) before income taxes and share of results for equity accounting		(5	)		(18	)		(46	)		72			(16	)		(13	)
Income tax expense (recovery)		-			-			-			21			-			21
Share of results for equity accounting		(29	)		(14	)		-			-			43			-
Net earnings (loss)		(34	)		(32	)		(46	)		51			27			(34	)
Other comprehensive earnings (loss), net of income taxes:
Defined benefit pension plans and other benefit plans		132			132			84			15			(231	)		132
Income tax		2			2			-			2			(4	)		2
Foreign currency translation differences for foreign operations		15			15			-			15			(30	)		15
Total comprehensive earnings (loss)	$	115		$	117		$	38		$	83		$	(238	)	$	115
Basic and diluted net loss in dollars per share																$	(0.34	)

TEMBEC Supplemental Information for fiscal 2013 4

TEMBEC INC.

SUPPLEMENTAL INFORMATION

September 28, 2013

Supplemental condensed consolidating financial information

Condensed Consolidated Statements of Comprehensive Earnings (Loss) (continued)

(unaudited)(in millions of Canadian dollars, unless otherwise noted)

		Year ended September 29, 2012
		Parent			Subsidiary			Guarantor			Other			Consolidation
		Company			Issuer			Subsidiaries			Subsidiaries			Adjustments			Consolidated
Sales	$	-		$	1		$	1,409		$	279		$	(23	)	$	1,666
Freight and other deductions		-			-			217			20			(5	)		232
Lumber export taxes		-			-			7			-			-			7
Cost of sales (excluding depreciation and amortization)		-			-			1,132			176			(18	)		1,290
Selling, general and administrative		-			8			59			7			-			74
Share-based compensation		-			(1	)		-			-			-			(1	)
Depreciation and amortization		-			1			39			6			-			46
Other items		(1	)		19			32			-			-			50
Operating earnings (loss)		1			(26	)		(77	)		70			-			(32	)
Interest, foreign exchange and other		-			3			38			-			-			41
Exchange loss (gain) on long-term debt		-			(13	)		-			-			-			(13	)
Net finance costs (income)		-			(10	)		38			-			-			28
Earnings (loss) before income taxes and share of results for equity accounting		1			(16	)		(115	)		70			-			(60	)
Income tax expense (recovery)		1			(1	)		-			22			-			22
Share of results for equity accounting		(82	)		(67	)		-			-			149			-
Net earnings (loss)		(82	)		(82	)		(115	)		48			149			(82	)
Other comprehensive earnings (loss), net of income taxes:
Defined benefit pension plans and other benefit plans		(38	)		(38	)		(20	)		(5	)		63			(38	)
Income tax		-			-			-			-			-			-
Foreign currency translation differences for foreign operations		(11	)		(11	)		-			(11	)		22			(11	)
Total comprehensive earnings (loss)	$	(131	)	$	(131	)	$	(135	)	$	32		$	234		$	(131	)
Basic and diluted net loss in dollars per share																$	(0.82	)

TEMBEC Supplemental Information for fiscal 2013 5

TEMBEC INC.

SUPPLEMENTAL INFORMATION

September 28, 2013

Supplemental condensed consolidating financial information

Condensed Consolidated Statements of Cash Flows

(unaudited)(in millions of Canadian dollars)

		Year ended September 28, 2013
		Parent			Subsidiary			Guarantor			Other			Consolidation
		Company			Issuer			Subsidiaries			Subsidiaries			Adjustments			Consolidated
Cash flows from operating activities:
Net earnings (loss)	$	(34	)	$	(32	)	$	(46	)	$	51		$	27		$	(34	)
Adjustments for:
Depreciation and amortization		-			2			30			8			-			40
Net finance costs		5			9			18			(6	)		16			42
Income tax expense (recovery)		-			-			-			21			-			21
Income tax paid		-			-			-			(15	)		-			(15	)
Excess cash contributions over employee future benefits expense		-			(23	)		(7	)		(4	)		-			(34	)
Provisions		-			-			-			-			-			-
Share of results for equity accounting		29			14			-			-			(43	)		-
Impairment loss		-			-			22			-			-			22
Gain on sale of assets		-			-			-			-			-			-
Other		-			(2	)		(3	)		(1	)		-			(6	)
		-			(32	)		14			54			-			36
Change in non-cash working capital:
Trade and other receivables		-			(16	)		(92	)		(10	)		134			16
Inventories		-			-			12			(9	)		-			3
Prepaid expenses		-			-			1			-			-			1
Trade, other payables and accrued charges		34			43			26			(2	)		(134	)		(33	)
		34			27			(53	)		(21	)		-			(13	)
		34			(5	)		(39	)		33			-			23
Cash flows from investing activities:
Disbursements for property, plant and equipment		-			(1	)		(109	)		(17	)		-			(127	)
Proceeds from sale of net assets		-			-			100			-			-			100
Change in restricted cash		-			-			5			(1	)		-			4
Investments in a subsidiary		(31	)		-			-			-			31			-
Interest received		-			42			5			1			(48	)		-
Other		-			1			-			-			-			1
		(31	)		42			1			(17	)		(17	)		(22	)
Cash flow from financing activities:
Change in operating bank loans		-			-			(12	)		1			-			(11	)
Increase in long-term debt		-			-			40			-			-			40
Repayments of long-term debt		-			-			-			(8	)		-			(8	)
Proceeds from issue of share capital		-			-			31			-			(31	)		-
Interest paid		(3	)		(37	)		(31	)		(17	)		48			(40	)
Other		-			(1	)		-			1			-			-
		(3	)		(38	)		28			(23	)		17			(19	)
		-			(1	)		(10	)		(7	)		-			(18	)
Foreign exchange gain (loss) on cash and cash equivalents held in foreign currencies		-			-			-			4			-			4
Net increase (decrease) in cash and cash equivalents		-			(1	)		(10	)		(3	)		-			(14	)
Cash and cash equivalents, beginning of year		-			1			29			57			-			87
Cash and cash equivalents, end of year	$	-		$	-		$	19		$	54		$	-		$	73

TEMBEC Supplemental Information for fiscal 2013 6

TEMBEC INC.

SUPPLEMENTAL INFORMATION

September 28, 2013

Supplemental condensed consolidating financial information

Condensed Consolidated Statements of Cash Flows (continued)

(unaudited)(in millions of Canadian dollars)

		Year ended September 29, 2012
		Parent			Subsidiary			Guarantor			Other			Consolidation
		Company			Issuer			Subsidiaries			Subsidiaries			Adjustments			Consolidated
Cash flows from operating activities:
Net earnings (loss)	$	(82	)	$	(82	)	$	(115	)	$	48		$	149		$	(82	)
Adjustments for:
Depreciation and amortization		-			1			39			6			-			46
Net finance costs		-			(10	)		38			-			-			28
Income tax expense (recovery)		1			(1	)		-			22			-			22
Income tax paid		-			-			-			(14	)		-			(14	)
Excess cash contributions over employee future benefits expense		-			(15	)		(12	)		(7	)		-			(34	)
Provisions		-			6			6			-			-			12
Share of results for equity accounting		82			67			-			-			(149	)		-
Impairment loss		-			16			51			-			-			67
Gain on sale of assets		(1	)		(3	)		(26	)		-			-			(30	)
Other		(1	)		2			(3	)		-			-			(2	)
		(1	)		(19	)		(22	)		55			-			13
Change in non-cash working capital:
Trade and other receivables		-			29			19			(20	)		(58	)		(30	)
Inventories		-			-			(40	)		-			-			(40	)
Prepaid expenses		-			-			-			(1	)		-			(1	)
Trade, other payables and accrued charges		33			(62	)		(33	)		(10	)		58			(14	)
		33			(33	)		(54	)		(31	)		-			(85	)
		32			(52	)		(76	)		24			-			(72	)
Cash flows from investing activities:
Disbursements for property, plant and equipment		-			(2	)		(86	)		(20	)		-			(108	)
Proceeds from sale of net assets		1			3			80			-			-			84
Change in restricted cash		-			-			(5	)		5			-			-
Investments in a subsidiary		(28	)		-			-			-			28			-
Interest received		-			34			-			-			(34	)		-
Other		-			(1	)		-			-			-			(1	)
		(27	)		34			(11	)		(15	)		(6	)		(25	)
Cash flow from financing activities:
Change in operating bank loans		-			-			65			(3	)		-			62
Increase in long-term debt		-			50			18			6			-			74
Repayments of long-term debt		(5	)		-			-			(6	)		-			(11	)
Proceeds from issue of share capital		-			-			28			-			(28	)		-
Interest paid		-			(31	)		(35	)		(2	)		34			(34	)
Other		-			-			-			-			-			-
		(5	)		19			76			(5	)		6			91
		-			1			(11	)		4			-			(6	)
Foreign exchange loss on cash and cash equivalents held in foreign currencies		-			-			-			(6	)		-			(6	)
Net increase (decrease) in cash and cash equivalents		-			1			(11	)		(2	)		-			(12	)
Cash and cash equivalents, beginning of year		-			-			40			59			-			99
Cash and cash equivalents, end of year	$	-		$	1		$	29		$	57		$	-		$	87

TEMBEC Supplemental Information for fiscal 2013 7

EX-99.6

 Exhibit 99.6

	KPMG LLP	Telephone (514) 840-2100
	600 de Maisonneuve Blvd. West	Fax (514) 840-2187
	Suite 1500	Internet www.kpmg.ca
	Tour KPMG
	Montréal (Québec) H3A 0A3

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Tembec Inc.

We consent to the use of our report dated November 29, 2013 with respect to the consolidated financial statements of Tembec Inc. included in this annual report on Form 40-F.

Yours very truly,

December 16, 2013

Montreal, Canada

___________________
*CPA auditor, CA, public accountancy permit No. A110592

KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.

EX-99.7

Exhibit 99.7

CERTIFICATION

I, James Lopez, President and Chief Executive Officer of Tembec Inc., certify that;

1.	I have reviewed this Annual Report on Form 40-F of Tembec Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles:
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 16, 2013

By: (s) James Lopez
Name: James Lopez
Title: President and Chief Executive Officer

EX-99.8

Exhibit 99.8

CERTIFICATION

I, Michel Dumas, Executive Vice President, Finance and Chief Financial Officer of Tembec Inc., certify that;

1.	I have reviewed this Annual Report on Form 40-F of Tembec Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles:
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 16, 2013

By: (s) Michel Dumas
Name: Michel Dumas
Title: Executive Vice President, Finance and Chief Financial Officer

EX-99.9

Exhibit 99.9

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, James Lopez, President and Chief Executive Officer of Tembec Inc. (the “Company”) , hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

a.	the Annual Report on Form 40-F of the Company for the fiscal year ended September 28, 2013 (the “Annual Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
b.	the information contained in the Annual Report fairly presents in all material respects the financial condition and results of operations of the Company.

Date: December 16, 2013

By: (s) James Lopez
Name: James Lopez
Title: President and Chief Executive Officer

This written statement is being furnished to the Securities and Exchange Commission as an exhibit to the Company’s Annual Report on Form 40-F. A signed original of this statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies this Annual Report on Form 40-F pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

EX-99.10

Exhibit 99.10

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Michel Dumas, Executive Vice President, Finance and Chief Financial Officer of Tembec Inc. (the “Company”) , hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

a.	the Annual Report on Form 40-F of the Company for the fiscal year ended September 28, 2013 (the “Annual Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
b.	the information contained in the Annual Report fairly presents in all material respects the financial condition and results of operations of the Company.

Date: December 16, 2013

By: (s) Michel Dumas
Name: Michel Dumas
Title: Executive Vice President, Finance and Chief Financial Officer

This written statement is being furnished to the Securities and Exchange Commission as an exhibit to the Company’s Annual Report on Form 40-F. A signed original of this statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies this Annual Report on Form 40-F pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.