Fraser Papers Inc.
TSX : FPS

Fraser Papers Inc.

April 29, 2009 13:30 ET

Fraser Papers Announces Financial Results for the First Quarter of 2009

TORONTO, ONTARIO--(Marketwire - April 29, 2009) -

(All financial references are in U.S. dollars unless otherwise noted)

Fraser Papers Inc. (TSX:FPS) ("Fraser Papers" or the "Company") today reported financial results for the first quarter ended April 4, 2009.

The Company generated an EBITDA loss of $10.6 million in the first quarter compared to an EBITDA loss of $11.9 million in the first quarter of 2008. Improved results from the Company's paper operations were offset by a sharp decline in the market for northern bleached hardwood kraft pulp and continuing low lumber prices. During the first quarter of 2009 the Company took substantial market-related downtime at each of its pulp, paper and lumber operations to reduce working capital.

The Company generated a loss (after interest, depreciation and income taxes) of $16.7 million or $0.33 per share in the first quarter compared to a loss of $19.1 million or $0.44 per share in the first quarter of 2008.



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HIGHLIGHTS

- Despite substantial downtime, generated $1.7 million in EBITDA in the
paper business reflecting higher net selling prices from sales of
specialty papers and lower input costs compared to the first quarter of
2008.

- Counter to a broad decline in paper demand for most grades across North
American markets, increased shipments of specialty paper grades by 11%
or 11,000 tons compared to the fourth quarter of 2008 and by 3% or 3,000
compared with the same period last year.

- Improved product mix with specialty paper grades making up 79% of the
Company's sales volumes in 2009 compared to 70% in the first quarter of
2008.

- Added to existing currency hedge program with positions now representing
approximately 60% of 2009 and 30% 2010 exposure at an average forward
rate of $0.79.
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FINANCIAL SUMMARY
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Three Months Ended
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US$ MILLIONS, EXCEPT PER
SHARE AMOUNTS Apr 4, 2009 Dec 31, 2008 Mar 29, 2008
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EBITDA $ (10.6) $ (3.3) $ (11.9)

Loss $ (16.7) $ (15.9) $ (19.1)
Per share $ (0.33) $ (0.32) $ (0.44)
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"Despite weak economic activity that has translated into a broad decline in demand for most paper grades, shipments of our specialty products have performed better on a relative basis. We were able to improve our market share in a number of segments and continued to reduce our exposure to commodity papers," said Peter Gordon, CEO of Fraser Papers. "While our paper products appear to be holding their own in very challenging market conditions and certain input costs have dropped from historic highs, our cost structure remains uncompetitive and we are not yet generating positive earnings. We need to continue to focus on lowering our fibre, power and labour costs and improving our productivity."

RESULTS OF OPERATIONS

EBITDA in the first quarter of 2009 was a loss of $10.6 million, compared to an EBITDA loss of $3.3 million in the fourth quarter of 2008. The deterioration in operating results was due to continued demand weakness for the Company's products and significant market-related downtime at each of the Company's operations.

EBITDA in the current quarter improved modestly by $1.3 million compared to results from the first quarter of 2008. Lower oil prices and a weaker Canadian dollar provided $18 million of additional benefit on a year-over-year basis. This was offset by a $12 million impact from market-related shutdown, $2 million in lower pulp and lumber prices, and $4 million in increased pension expense.

MARKET UPDATE AND OPERATING RESULTS

During the first quarter of 2009, mill nets for the Company's paper products fell modestly by an average of $21 per ton or 2% over the fourth quarter of 2008. Pricing for the Company's specialty packaging and printing grades held well while prices for groundwood grades and commodity grades dropped. Increased competition from manufacturers switching to specialty groundwood grades and lower demand for commodity grades were the key reasons. Compared to the first quarter of 2008, mill net realizations have improved $39 per ton or 4% equal to $5.4 million of revenue.

Total paper shipments were up marginally from the fourth quarter of 2008 as the seasonal activity from the Company's financial printing segment was partly offset by lower shipments of commodity papers. Total shipments of paper were down 9% compared to the first quarter of 2008 as the Company took extensive market-related downtime to lower finished goods inventories and generate additional cash from operations. During the quarter, Fraser Papers took downtime of 197 machine days at its mills in Madawaska, Maine and Gorham, New Hampshire, equivalent to approximately 23% of total manufacturing capacity as well as 11 days of downtime at its integrated pulp mill in Edmundston, New Brunswick. The Company continued to focus its production, product development and sales efforts on specialty packaging, printing and high-bright groundwood papers. These three specialty products accounted for 79% of shipments in the quarter as compared to 70% last year and 74% in the fourth quarter of 2008.

Shipments of northern bleached hardwood kraft pulp from the Company's pulp mill in Thurso, Quebec were comparable to the fourth quarter of 2008 but down 31% from the first quarter of 2008. Weak demand for pulp, which began in 2008, continued in the quarter as paper producers announced widespread downtime and world hardwood pulp inventories grew to 47 days supply at March 31, 2009, well above the 35 days considered to represent a balanced market. As a result, the Company took 41 days of downtime at its market pulp mill in Thurso, Quebec to control inventories.

During the first quarter, a number of U.S. kraft pulp producers announced they had applied and received over $100 million in lucrative tax credits earned by using black liquor as a fuel source in their recovery boilers. These tax credits were intended to encourage the use of ethanol in motor vehicles, not to subsidize the traditional burning of organic residue in industrial processes like kraft pulping.

Commenting on these tax credits, Mr. Gordon noted: "This tax credit was never intended to apply to the pulp industry and will only serve to subsidize the production of kraft pulp in an oversupplied market at a cost to U.S. taxpayers in the billions of dollars. We have advised the Provincial and Federal governments that this tax loophole threatens the viability of non-U.S. based hardwood and softwood pulp mills, including our own in Thurso, Quebec and Edmundston, New Brunswick."

During the first quarter, benchmark prices for NBHK pulp fell 17% or $119 per tonne compared to the fourth quarter of 2008 and 25% or $202 compared to the first quarter of 2008.

Lumber markets remained weak during the quarter as U.S. housing starts remained at historically low levels. Lumber prices continued to fall with the Boston delivered reference price averaging $240 per Mfbm compared to $276 in the fourth quarter of 2008. As a result of low prices and weak demand, the Company's four lumbermills operated at 16% of capacity during the quarter. None of the four mills were in operation at the end of the quarter.

BUSINESS INITIATIVES

Fraser Papers focuses on producing specialty papers for a variety of packaging and printing applications. During the first quarter, Fraser Papers increased its shipments of specialty papers by 13% compared to the fourth quarter of 2008 and 3% compared to the first quarter of 2008, despite broader decline in paper demand. These increases were achieved as a result of product and market development initiatives in response to customer needs. During the first quarter of 2009, the Company launched six new grades. Approximately 27% of the products manufactured were developed in the previous 24 months, including specialty packaging applications for consumable products and quick service applications.

During the quarter the Company invested CAD$4.6 million in the Plaster Rock lumbermill modernization. Total spending to date on the CAD$17.5 million project is CAD$7.3 million. The project includes the installation of a biomass boiler which will displace the use of oil as a fuel source and lumbermill modernization equipment which will improve production efficiencies and lower costs at the mill. The project is expected to be complete during the summer of 2009 and is being financed primarily through a term loan provided by the Government of New Brunswick.

The Company has hedged approximately 50% of its historical Canadian dollar cost exposure to reduce the impact that foreign exchange could have on its cost structure. The Company's hedging program resulted in an effective exchange rate of CAD$1.00 equals US$0.799 for Canadian dollar-denominated costs compared to a published rate of CAD$1.00 equals US$0.803.

CASH FLOW AND LIQUIDITY

The Company generated free cash flow of $18.6 million during the quarter due to the reduction of inventories and accounts receivable. As a result, the Company was able to repay $18.1 million owing under its revolving credit facility.

During the quarter the Company received notice that its application to extend the amortization period of its pension deficit funding from five years to ten years had been granted by the Superintendent of Pensions in New Brunswick. As a result, the Company has been able to reduce its pension funding in the quarter by approximately $1 million relative to the scheduled funding levels. Actuarial reports scheduled to be filed in the third quarter of 2009 are expected to result in an increase in this amount in the fourth quarter. The Company noted that its pension and other employee benefit obligations are material and are expected require approximately $32.3 million in funding over the next 12 months.

The Company has $25 million under a one year term loan coming due in September and is currently pursuing its refinancing options. The Company will need the support of shareholders to refinance this debt, which is guaranteed by the Company's largest shareholder.

OUTLOOK

The Company expects a challenging business environment for the foreseeable future due to the recession in the North American economy and continued tightness in the credit markets. Business activity continues sluggish and this has translated into weaker demand for certain paper grades, smaller order files and weaker pricing later in the quarter. Specialty packaging volumes are expected to remain steady as the Company has successfully increased share in a number of areas while developing new products to penetrate others. Demand for specialty printing and high bright groundwood papers is expected to see a seasonal slowdown through the second and third quarters of the year. The Company is committed to minimizing its investment in working capital and will balance production, inventories and customer orders.

World hardwood pulp inventories have increased to unsustainable levels and oversupply is being artificially encouraged by a direct tax subsidy provided to U.S. producers that is estimated to amount to several billion dollars in 2009. The Company, along with other Canadian producers, have asked the Canadian Government for a remedy, including equal tax treatment. Without a satisfactory outcome the Company's two pulp mills are significantly disadvantaged and at risk.

While there are indications that the pace of decline in the U.S. housing market has slowed, there are no clear signs of a recovery. As a result, lumber prices are expected to remain depressed for the balance of 2009. The Company will continue evaluating the lumber mill operations against the chip requirements of its East Papers operations.

The labour agreements at the Company's Thurso and Edmundston pulp mills expire on April 30 and June 30 respectively. A third labour agreement at the Madawaska paper mill expires on October 31. The Company expects that it will have to achieve significant modifications to these agreements in order to ensure these operations are competitive in the future.

The Company will require additional financing during 2009 to fund its operations, pension fund obligations and the maturity of the $25 million term loan facility in September. Given the challenging conditions in the credit markets, the Company has begun discussions with a number of its stakeholders including its major shareholder, its lenders, unionized employees, provincial and state governments and material suppliers to identify opportunities to meet these obligations.

Fraser Papers is an integrated specialty paper Company that produces a broad range of specialty packaging and printing papers. The Company has operations in New Brunswick, Maine, New Hampshire and Quebec. Fraser Papers is listed on the Toronto Stock Exchange under the symbol: FPS. For more information, visit the Fraser Papers web site at www.fraserpapers.com.

Note: This press release contains forward-looking information and forward-looking statements within the meaning of Canadian provincial securities laws. These forward-looking statements include, among others, statements with respect to: continuing demand for the Company's paper products; ongoing business strategy; impact and timing of the Plaster Rock lumbermill modernization; future outcome of the Company's hedging program; impact of actuarial report filings on pension funding obligations; pension and other employee benefit obligations for the next 12 months; shareholder support of debt refinancing and financing requirements; expectations and estimations with respect future market conditions; future operational downtime; pricing for the Company's products; negotiation of modified labour agreements; and, the expected impact of specific events on financial results in future quarters. The words "appear, "continue", "will", "expect", "could", "result", "approximately", "intend", "continue", "remain", similar words, variations of those words, and other expressions which may be predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievement expressed or implied by such forward-looking statements. Factors that could cause actual results, performance or achievements of the Company to differ materially from those set forth in the forward-looking statements include general economic conditions, interest rates, availability of equity and debt financing, pricing and demand for any products the Company sells, increases in costs of production, decisions by political or regulatory bodies in Canada or the United States and other risks detailed from time to time in the documents filed by the Company with the securities regulators in Canada. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Management's Discussion and Analysis of Financial Condition and Results of Operations

April 28, 2009

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") presents the factors that had a material effect on our results of operations for the period ended April 4, 2009. This MD&A should be read in conjunction with the accompanying unaudited interim consolidated financial statements and notes thereto for the period ended April 4, 2009 as well as the MD&A and the audited consolidated financial statements for the year ended December 31, 2008. Also discussed is our financial condition as of the end of those periods. Our consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). This MD&A contains forward-looking statements (see "Forward-Looking Information").

The United States dollar is our reporting currency and the functional currency of all our operations. All figures herein are in United States dollars unless otherwise noted.

In this MD&A, "Fraser Papers", "we", "our" and "us" mean Fraser Papers Inc. and all of its subsidiaries while "Company" means Fraser Papers Inc. as a separate corporation. "Brookfield" means Brookfield Asset Management Inc. (a related party by virtue of a controlling equity interest in the Company) and all of its subsidiaries. Brookfield owns approximately 70.5% of all outstanding common shares of the Company.

EBITDA, net debt, net debt to net debt plus equity, free cash flow and cash costs are non-GAAP measures described in the Definitions section. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. There are no directly comparable GAAP measures to any of these measures. A quantitative reconciliation of each non-GAAP measure to the nearest comparable GAAP measure is provided at the end of this MD&A.

STRATEGY

Our business strategy continues to be:

- Focusing on value-added products, with an emphasis toward specialty applications for packaging, printing and groundwood paper grades;

- Receiving recognition for the value proposition that our superior customer service and technical support provide to our customers;

- Continuing innovation and development of new products to support ongoing growth of our business;

- Achieving operating excellence that surpasses industry benchmarks for manufacturing efficiency, energy consumption and fibre costs at all our facilities; and

- Maintaining a culture focused on execution and performance.

In addition to executing this strategy, we will continue to look for opportunities to grow our specialty paper franchise opportunistically, based on value. We have significantly narrowed our operational focus in recent years such that future growth can be specifically targeted to our core business.

Value-added Products

Fraser Papers competes in specific market segments with particular expertise in the manufacture of lightweight freesheet and groundwood papers for a number of specialty applications. Our focus is on select printing and consumer packaging applications. Typically, these discrete market segments are small relative to the broader North American commodity markets and are a good match for our paper machine capabilities and capacities. We focus on markets which are generally between 50,000 to 500,000 tons in size and provide Fraser Papers with the opportunity to have an influential market share. Over time, we seek to grow the volume of business we have in these core paper market segments where we feel we can achieve the best margins. These market segments involve food and other consumer packaging paper grades, financial printing, label papers and other lightweight freesheet papers and specialty high-bright groundwood papers. Fraser Papers has increased shipments of specialty papers from 70% of total paper shipments in the first quarter of 2008 to 79% in the first quarter of 2009.

To better serve our customers' needs, we have the technical capability to produce high quality printing papers as an uncoated or coated freesheet or a groundwood product. This enables our customers to receive additional value from Fraser Papers' product offerings. We have the unique ability to produce both freesheet and groundwood products for our customers, providing them with a choice that most of our competitors cannot offer.

Superior Customer Service and Technical Support

Fraser Papers' customer service team is continually seeking solutions to customers' needs. With our market knowledge, attention to detail and beneficial partnerships, we provide solutions to multiple markets with custom products. We have implemented processes to make it easier to do business with Fraser Papers by providing quick response time on all inquiries. We understand the service expectations of our customer base and offer vendor managed inventory programs and just-in-time product availability where quick turnaround solutions are required. We are currently building online tools to enhance the overall customer experience with Fraser Papers.

Fraser Papers' technical support team is regularly in our customers' manufacturing locations proactively helping them lower the overall cost of their process that uses our paper, as well as resolving issues unrelated to the paper we sell them. The technical support team, like the customer service team, responds quickly and efficiently to all customer requests. For highly complex technical solutions, the Fraser Papers technical centre and product development teams assist the technical service group. For example, this technical team recently worked closely with a number of packaging customers to assist them in improving converting efficiency, print quality and increasing production rates with newly developed packaging designs.

Innovation

Product development is a significant driver of revenue growth and margin improvement and is an important component of Fraser Papers' marketing initiatives. Our strategy is to focus on products that bring value from the service and technical features that differentiate us from our competition. We are developing new products in the label, industrial food service and quick serve restaurant markets as well as new technologies for use in our operations in areas of fibre development and pigment optimization.

During the first quarter of 2009, we developed six new specialty products for applications in the packaging, financial printing, converting and consumer goods market segments. We achieved our goal of continually developing new products as approximately 27% of the volume produced in the first quarter of 2009 represents products that were developed in the past 24 months.

Improved Operating Performance

The manufacture of pulp and paper is a capital intensive business requiring significant investment in large machinery and equipment. It is imperative that these assets perform consistently at a high level in order to ensure the lowest possible cost position. To this end, we have undertaken a number of initiatives expected to lower our operating costs.

- Throughput improvements at our Gorham, New Hampshire paper mill have increased production volumes during the quarter. During 2008, the Gorham mill indefinitely shut two paper machines. Based on the three operating paper machines during the first quarter of 2009, the Gorham paper mill produced 361 tons per operating day which represents a 4% improvement from the first quarter of 2008.

- The Madawaska, Maine paper mill has also improved its throughput. During the first quarter of 2009, the mill increased throughput by 1% to 1,237 tons per operating day compared to the first quarter of 2008.

- Fraser Papers has implemented initiatives throughout the company to reduce its reliance on fossil fuels.

-- A heat recovery system was installed and commissioned at the Thurso, Quebec pulp mill in the second quarter of 2008. This helped reduce oil consumption at Thurso during the first quarter of 2009 by 921,000 gallons or 35% compared to the first quarter of 2008, representing a quarterly savings of approximately $0.9 million.

-- Through steam and water reduction efforts, the Gorham, New Hampshire paper mill reduced oil consumption by 969,000 gallons or 31% compared to the first quarter of 2008. This represents a quarterly savings of $0.9 million.

-- In the first quarter of 2009, oil consumption at East Papers was lower by 164,000 gallons, or a 9% improvement compared to the first quarter of 2008, reducing oil consumption to 0.44 barrels per ton of paper produced and representing a quarterly savings of $0.2 million.

-- The Company is investing in the modernization of the Plaster Rock, New Brunswick lumbermill, which includes, among other things, the installation of a biomass boiler which will replace oil fired boilers. This project is expected to be completed during the summer of 2009.

Margin Improvements

Fraser Papers' margin improvement initiatives focus on year-over-year improvements in EBITDA assuming constant selling prices, exchange rates and commodity prices.

Margin improvements in 2009 were derived primarily from improved product mix and improved fibre usage efficiencies. We have continued to optimize our manufacturing processes through improving machine efficiencies and improving production scheduling. Despite the disruption associated with market downtime, paper production per operating day on our nine paper machines is up 2% compared to the first quarter of 2008. Increased employment benefit plan expense offset these improvements. However, we believe that a more efficient operating platform will position Fraser Papers to benefit when demand for paper improves.

These initiatives were supplemented with cost decreases in fibre, energy and the weakened Canadian / U.S. foreign exchange, partially offset by an increase in chemical costs, which totaled $9.4 million in 2009 compared to the first quarter of 2008.



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2009 YTD
PRE-TAX US$MILLIONS Non-controllable Items
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Decreased fibre pricing $ (6.7)
Decreased energy pricing 3.4
Increased chemical pricing (0.7)
Canadian / U.S. foreign exchange 13.4
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Total $ 9.4
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Decreased fibre pricing includes predominantly the impact of lower pricing for purchased pulp. Since Fraser Papers sells and also purchases market pulp, improved purchased fibre pricing of $6.4 million has been more than offset by deteriorating revenue realizations in the pulp operations of $13.1 million.

Decreased energy pricing includes the impact of lower costs for oil partially offset by increased costs for biomass and electricity. The Company has invested capital to reduce our reliance on oil including the energy reduction projects at East Papers, Gorham and Thurso and a biomass boiler at the Plaster Rock, New Brunswick lumbermill.

In the past, certain chemical prices have trended with the price of oil since many chemical products are petroleum-based. Chemical companies implemented significant price increases during 2008. While oil pricing subsided during the fourth quarter of 2008, chemical prices did not. Fraser Papers is working with suppliers to manage the impact of the increases.

Approximately 53% of Fraser Papers' assets are located in Canada but essentially 100% of our sales are transacted in U.S. dollars. From time to time, the Company enters into arrangements to fix the exchange rate on certain of its Canadian dollar-denominated cash flows (see "Hedging Activities"). The Canadian dollar exchange rate realized in the first quarter of 2009 was US$0.80 (after giving effect to the Company's hedging program) compared to the realized US$0.98 in the first quarter of 2008.

Every facility took market downtime during the first quarter of 2009. The downtime taken at the paper operations negatively affected EBITDA by $7.7 million.

OVERVIEW

We are executing a comprehensive turnaround of Fraser Papers' financial and operating affairs. During the first quarter of 2009, with weakened markets in certain paper segments and most of the pulp and lumber business, we took downtime at all of our facilities in an effort to reduce costs and manage inventory levels. Despite improved energy pricing and a weakened Canadian dollar, weakened paper, pulp and lumber markets led to negative EBITDA in the first quarter of 2009.

During the last half of 2008, a worldwide credit crisis developed followed quickly by a significant decline in world equity values and reduced economic activity. As a result, many of the world's largest economies are currently in a recession. In the first quarter of 2009, demand for certain of Fraser Papers' pulp and paper products also fell significantly. Specifically, demand for commodity grades of pulp and paper, certain label papers, lighter-weight printing freesheet papers and high-bright groundwood papers fell as a result of reduced economic activity in the banking and manufacturing sectors. Our packaging papers appear to be less affected by the recent economic downturn.

We took unprecedented market downtime during the quarter at our paper facilities. Our East Papers operations took 142 machine days of market downtime on its six paper machines, which averages over three weeks of market downtime on each machine during the quarter. Additionally, we took the Edmundston sulphite pulp mill down for 11 days. At our Gorham, New Hampshire paper mill, we took 55 machine days of market downtime on the three operating paper machines.

A sharp reduction in global demand for market pulp was experienced in the fourth quarter of 2008 and has continued into 2009. Announced worldwide pulp mill closures for 2008 and 2009 are estimated to be in excess of 4 million tonnes of annual capacity. Worldwide hardwood pulp inventories decreased marginally to 47 days of supply but are still significantly higher than normal inventory levels of 35 days. The high level of inventory is forcing significant pricing pressure and, as a result, we were forced to take market-related downtime at the Thurso pulp mill during the first quarter and expect further downtime throughout 2009.

Fraser Papers' lumber operations have seen a significant reduction in demand over the past two years as North American housing starts fell throughout 2007 and 2008. The continued weak housing markets have depressed demand for lumber and other building products. Our lumber operations, which are an essential source of softwood fibre for our core pulp and paper operations in the form of wood chips and biomass fuel, operated at only 16% of capacity during the quarter. Two facilities were shut the entire quarter and two operated only a total of 12 weeks during the quarter. Under current market conditions, over 60% of the lumbermills in New Brunswick are shut, reducing the available supply of woodchips and putting upward pressure on the price of this key fibre input for our business.

Fraser Papers continues to focus on achieving better performance across all operations with improvements in throughput, process efficiencies and the lowest possible cost structure in order to produce paper that we can sell profitably into growing market segments. However, the Company still faces financial challenges particularly around funding its operations, pension fund obligations and the maturity of the $25 million term loan facility in September. Given the challenging conditions in the credit markets, the Company has begun discussions with a number of its stakeholders including its major shareholder, its lenders, unionized employees, provincial and state governments and material suppliers to identify opportunities to meet these obligations.



SUMMARY OF QUARTERLY RESULTS

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Earnings/(Loss) per
US$MILLIONS, EXCEPT PER share (basic and
SHARE AMOUNTS Net Sales Earnings/(Loss) diluted)
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2009
1st Quarter $ 156.1 $ (16.7) $ (0.33)
2008
4th Quarter $ 165.5 $ (15.9) $ (0.32)
3rd Quarter 162.1 (21.3) (0.42)
2nd Quarter 180.3 (15.6) (0.31)
1st Quarter 180.7 (19.1) (0.44)
2007
4th Quarter(1) 186.3 (20.3) (0.69)
3rd Quarter(1) 172.3 24.7 0.84
2nd Quarter(1) 181.7 (37.6) (1.28)
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(1) 2007 quarters' Earnings/(Loss) adjusted for accounting change related
to inventory (see "Changes in Accounting Policy").


FINANCIAL RESULTS

Net sales for the first quarter of 2009 were $156.1 million, which was a decline of $9.4 million compared to the net sales of $165.5 million in the fourth quarter of 2008 due to reduced pulp and lumber shipments.

Loss for the first quarter of 2009 was $16.7 million compared to a loss of $15.9 million in the fourth quarter of 2008. This $0.8 million deterioration in relative performance was the result of unfavourable EBITDA due to market downtime at all of our facilities, offset partially by improved income tax recovery.

Net sales for the first quarter of 2009 decreased by $24.6 million compared to net sales of $180.7 million in the first quarter of 2008. The decrease was due primarily to the decline in the pulp and lumber markets.

The loss of $16.7 million in first quarter of 2009 was an improvement of $2.4 million compared to the loss of $19.1 million in the first quarter of 2008. The improvement was due to improved income tax recovery and improved EBITDA from lower fossil fuel usage, lower pricing for energy and fibre and the effect of a weaker Canadian dollar.



SELECT QUARTERLY INFORMATION
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Three months ended
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Apr 4 Dec 31 Mar 29
2009 2008 2008
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Fraser Papers Inc
Net Sales 156.1 165.5 180.7
EBITDA(1) (US$millions) (10.6) (3.3) (11.9)

Paper operations
Net Sales 140.2 137.9 148.6
EBITDA(1) (US$millions) 1.7 9.8 (6.8)
Average Revenue Realized (US$ per ton) 1,001 1,022 962
Average Cash Cost(1) (US$ per ton) 958 919 1,003

Pulp operations
Net Sales 10.3 13.5 21.7
EBITDA(1) (US$millions) (8.2) (8.7) (0.9)
Less: Impact of outages - (3.0) -
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Adjusted EBITDA(2) (8.2) (5.7) (0.9)
Average Revenue Realized ($ per tonne)(3) 407 491 594
Adjusted Average Cash Costs ($ per tonne)(1) 574 624 595

Lumber operations
Net Sales 5.6 14.1 10.4
EBITDA(1) (US$millions) (4.1) (4.4) (4.2)
Average Revenue Realized ($ per Mfbm) 218 227 242
Average Cash Cost(1) ($ per Mfbm) 353 294 299
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(1) See "Definitions" section.
(2) Adjusted EBITDA has been adjusted for outages.
(3) Pulp average revenues realized include internal sales.


Fraser Papers generated negative EBITDA of $10.6 million in the first quarter of 2009 compared to negative EBITDA of $3.3 million in the fourth quarter of 2008 and negative EBITDA of $11.9 million in the first quarter of 2008.

Paper operations generated EBITDA of $1.7 million in the first quarter of 2009 compared to EBITDA of $9.8 million in the fourth quarter of 2008 and negative EBITDA of $6.8 million in first quarter of 2008. The paper operations' EBITDA for the first quarter of 2009 was a decline of $8.1 million from the fourth quarter 2008 EBITDA due to market downtime taken at both of our paper facilities. The first quarter 2009 paper operations' EBITDA improved by $8.5 million from the negative EBITDA of the first quarter of 2008 due to improved pricing for paper, fibre and energy and the weakened Canadian dollar, partially offset by market downtime.

Pulp operations generated negative EBITDA of $8.2 million in the first quarter of 2009 compared to negative EBITDA of $8.7 million in the fourth quarter of 2008. EBITDA improved by $0.5 million due an unplanned maintenance outage costing $3.0 million in the fourth quarter, partially offset by market downtime and lower production due to the deteriorating pulp market.

In the first quarter of 2009, EBITDA from pulp operations declined by $7.3 million compared to the $0.9 million negative EBITDA in the first quarter of 2008. The decrease reflected a $187 per tonne reduction in realized pricing and market-related downtime as a result of weakened pulp markets which were partially offset by lower energy costs and the impact of a weaker Canadian dollar.

Lumber operations' EBITDA loss of $4.1 million improved by $0.3 million compared to the fourth quarter of 2008 as a result of market curtailment and reduced market pricing. The lumber operations' EBITDA was essentially the same as the first quarter of 2008.

INTERNATIONAL FINANCIAL REPORTING STANDARDS

The Accounting Standards Board ("AcSB") confirmed in February 2008 that International Financial Reporting Standards ("IFRS") will replace Canadian GAAP for publicly accountable enterprises for financial periods beginning on and after January 1, 2011. The Company intends to adopt on January 1, 2011.

Impact of Adoption of IFRS

IFRS are premised on a conceptual framework similar to Canadian GAAP. However, significant differences exist in certain matters of recognition, measurement and disclosure. As the Company continues to evaluate the impact of adoption of IFRS on its processes and accounting policies, we will provide updated disclosure where appropriate. While the adoption of IFRS will not have a material impact on the reported cash flows of the Company, it is expected to have a material impact on the Company's consolidated balance sheet and statement of income.

Property, Plant and Equipment

Under International Accounting Standard ("IAS") 16 Property, Plant and Equipment, an entity is required to account for each class of property, plant and equipment using either the cost model or the revaluation model. The cost model is generally consistent with Canadian GAAP where an item of property, plant and equipment is carried at its original cost, less accumulated depreciation and accumulated impairment losses. Under the revaluation model, each item of property, plant and equipment is revalued on a periodic basis and carried at its revalued amount, less any accumulated depreciation and accumulated impairment losses.

Impairments

Under Canadian GAAP, for assets other than financial assets, a write-down to estimated fair value is recognized if the estimated undiscounted future cash flows from an asset or group of assets are less than their carrying value. Under IAS 36, Impairment of Assets, assets must be written down to their recoverable amount, (determined as the higher of a) the estimated fair value less costs to sell or b) value in use), if the recoverable amount is less than the carrying value. Unlike Canadian GAAP, IAS 36 requires the reversal of an impairment loss where the recoverable amount exceeds the previously written down carrying value.

Employee Benefits Plans

Under Canadian GAAP, actuarial gains and losses on employee benefit plans are deferred and amortized over the expected average remaining service life (EARSL) of the employee group. In addition, accrued pension benefit obligations and plan assets for defined benefit pension plans are required to be disclosed in the notes to the consolidated financial statements. Under IAS 19, Employee Benefits, on transition to IFRS, an entity may elect to recognize the obligation in excess of plan assets on the balance sheet as a liability, recognizing unamortized actuarial gains or losses directly in equity. Future actuarial gains and losses could be recorded as a direct charge to equity or amortized over EARSL.

Share-Based Payment

The Company issues stock-based awards in the form of stock options that vest evenly over a five-year period. Under Canadian GAAP, the Company recognizes the fair value of the award, determined at the time of the grant, on a straight-line basis over the five-year vesting period. Under IAS 19, the fair value of each option is determined with respect to when it vests as well as when it is issued. As such, the fair value of each vested tranche is considered a separate option grant. The expense associated with each grant is recognized as compensation expense over the term of its respective vesting period. Accordingly, this will result in a faster recognition of the cost of each option issuance than under Canadian GAAP.

First-time Adoption of International Financial Reporting Standards

IFRS 1 First-time Adoption of International Financial Reporting Standards, provides guidance for the initial adoption of IFRS. IFRS 1 generally requires that an entity apply all IFRS effective at the end of its first IFRS reporting period retrospectively. However, IFRS 1 does require certain mandatory exceptions and limited optional exemptions in specified areas of certain standards from this general requirement. The Company is currently evaluating the exceptions and exemptions under IFRS 1 and will provide updated disclosure when available.



LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------------------------------
Three months ended
----------------------------------
Apr 4 Dec 31 Mar 29
US$MILLIONS 2009 2008 2008
----------------------------------------------------------------------------
Cash flow from operating activities
before changes in working capital (9.7) (14.5) (13.3)
Cash flow from operating activities
after changes in working capital 24.5 (22.1) (11.5)

Total working capital (1) 81.5 115.4 116.7
Net capital investments 5.9 6.2 3.4

Net debt 77.9 96.4 41.1
Net debt to net debt plus equity 23% 25% 11%

Maximum revolving credit facility 115.0 115.0 115.0
Revolving credit facility utilized 69.6 86.7 77.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Total working capital includes accounts receivable, inventory and
accounts payable and accrued liabilities.


Operating Cash Flows

During the quarter, cash flow from operations before changes in working capital was an outflow of $9 million compared to an outflow of $13.3 million during the first quarter of 2008. The $3.6 million decrease was primarily the result of improved EBITDA and reduced employment benefit plan funding (see "Employee Benefit Plans").

During the first quarter of 2009, the net change in non-cash working capital was an inflow of $34. million compared to an inflow of $1.8 million during the first quarter of 2008.

Accounts receivable were reduced in the first quarter of 2009 by $13.2 million compared to a decrease $2.9 million in the comparable quarter of 2008. The reduced accounts receivable were due to improved collections and lower paper, pulp and lumber sales in the first quarter of 2009.

Inventory was reduced in the first quarter of 2009 by $28.1 million compared to an increase of $0.9 million in the comparable quarter of 2008. During the quarter, the Company sold approximately 19,600 tons of paper to Brookfield for proceeds of approximately $20.3 million. Proceeds on the sale were used to repay amounts owing on the Company's revolving credit facility. The Company has agreed to supply paper to Brookfield through July 31, 2009 at market prices, less a customary merchant's discount Additionally, the Company has managed the level of its finished goods inventories by taking market downtime at its paper and pulp facilities instead of increasing inventory in order to reduce its overall working capital levels.

Accounts payable in the first quarter of 2009 decreased by $7.4 million as a result of the market-related downtime in March 2009 compared to a decrease of $1.8 million in the first quarter of 2008.

The Company's ability to generate positive future cash flows is dependent upon many factors including market pricing for our products. We continue to focus on initiatives that will reduce fixed costs, improve efficiencies and optimize the use of raw materials. We increased the selling price for certain of our products during 2008; however, we are experiencing some pricing pressures due to the current economic environment. We believe these initiatives will position Fraser Papers to benefit as demand for our products return to historic levels resulting in improved operating cash flows.

Investing Cash Flows

In the first quarter of 2009, capital investments totaled $5.9 million compared to $3.4 million in the first quarter of 2008. In 2008, the Company announced a CAD$17.5 million capital investment for the modernization of our Plaster Rock, New Brunswick lumbermill that will include the installation of biomass boiler and upgrades to the lumbermill's sawing and kiln equipment. Spending on the project the first quarter of 2009 was $3.7 million for major equipment procurement. The completion of the project is expected in the summer of 2009. Funding for this project has been supported primarily from available liquidity sources, including a term loan facility with the province of New Brunswick (see "Financing Cash Flows"). Other investments during the first quarter of 2009 were primarily maintenance in nature.

Financing Cash Flows

During the quarter, the Company borrowed $3.4 million under a term loan facility with the province New Brunswick primarily to support the modernization of the Plaster Rock, New Brunswick lumbermill Total borrowings under the term loan facility at April 4, 2009 were $19.7 million (CAD$24.3 million) Working capital reductions allowed the Company to repay $18.1 million under its revolving term facility during the quarter. Total borrowings under the revolving credit facility at April 4, 2009 were $30. million. In addition, the Company had utilized $39.5 million of the facility in support of letters of credit.

Net debt as of April 4, 2009 was $77.9 million, resulting in a net debt to net debt plus equity ratio of 23% We believe that our conservative capital structure is appropriate given the long lives of our productive assets. The Company expects to require additional financing during 2009 to fund its operations, contributions of approximately $32.3 million to benefit plans over the next twelve months and the maturity of the $25 million term loan facility. Financing could involve the issuance of debt and/or equity Fraser Papers is dependant on the continued financial support of Brookfield. Without this support, it possible that the Company may not be able to secure alternative sources of financing with terms that are satisfactory to the Company.

Seasonal Cash Flow Requirements

Quarterly results are affected by certain seasonal factors such as market demand and the impact of weather on logging activities.

Market demand varies seasonally for certain products such as financial printing papers. The peak of the financial printing season is in the first and second quarters of the year. Since shipping volume during the peak financial season exceeds our production capacity in certain grades, we build inventory in order to supply our customers' needs. The build of paper inventory will have a negative effect on cash flows from operations after changes in working capital in the quarter of inventory build, but will have a positive effect in the quarter of inventory reduction.

Weather causes seasonal variation in certain raw materials. During spring, seasonal rainfall creates poor ground conditions in the timberlands which reduce logging activities. In anticipation of this mud season each spring, Fraser Papers builds log inventories to provide an adequate supply of fibre until ground conditions improve. The build of inventory will have a negative effect on cash flows from operations after changes in working capital but will have a positive effect in the quarter of inventory reduction.

EMPLOYEE BENEFIT PLANS

Fraser Papers has five registered pension plans in three jurisdictions: two plans in the province of New Brunswick, two plans in the province of Quebec and one plan in the United States. In 2008, we filed actuarial valuations for the two plans in New Brunswick and the plan in the United States. In 2009, we are required to file actuarial valuations for one plan in New Brunswick and the plan in the United States. The two plans in the province of Quebec require an actuarial filing no later than December 31, 2009 although the province may require an actuarial valuation at their discretion. The second registered pension plan in the province of New Brunswick requires an actuarial filing no later than December 31, 2010. Pension regulators in various jurisdictions are considering a number of changes to their pension filing and funding requirements as a result of the significant reductions in pension asset values over the past number of months. The impact of these possible changes on the pension plan funding requirements has not been determined at this time.

For the first quarter of 2009, employee benefit plans funding was $4.6 million, a decrease of $1.0 million from the first quarter of 2008 funding level of $5.6 million. During the quarter the Company received notice that its application to extend the amortization period of its pension deficit funding from five years to eleven years had been granted by the Superintendent of Pensions in New Brunswick. As a result, the Company has been able to reduce its pension funding in the quarter by approximately $1.0 million relative to the scheduled funding levels. Actuarial reports scheduled to be filed in the third quarter of 2009 are expected to result in an increase in pension funding in the fourth quarter. The Company's pension and other employee benefit obligations are material and will require approximately $32.3 million in funding over the next twelve months (see "Contractual Obligations").

Benefit plan expense for the first quarter of 2009 was $8.1 million compared to the $4.9 million expense in the first quarter of 2008. The increase is due to the amortization of investment losses in 2008.

CONTRACTUAL OBLIGATIONS

The following table presents the total contractual obligations, including purchase obligations which are enforceable and legally binding and employee benefit obligations as of April 4, 2009:



----------------------------------------------------------------------------
Less than One to Four to After five
US$MILLIONS Total one year three years five years years
----------------------------------------------------------------------------
Debt $ 74.8 $ 25.0 $ 34.8 $ 4.7 $ 10.3
Operating leases 0.9 0.4 0.4 0.1 -
Purchase obligations 16.4 16.1 0.3 - -
Employee benefit
obligations 213.4 32.3 76.8 46.4 57.9
----------------------------------------------------------------------------
Total contractual
obligations $ 305.5 $ 73.8 $ 112.3 $ 51.2 $ 68.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Obligations under operating leases include future payments for office facilities and equipment leases. The purchase obligations are commitments for the purchase of energy and chemical supplies. Employee benefit obligations are accrued defined benefit pension plan and post-retirement benefit plan obligations in excess of defined benefit pension plan assets.

Brookfield has provided guarantees to the Company's lenders in support of its revolving credit facility and one-year term loan. The maximum amount of the guarantees is $50.0 million. The Company agreed to pay Brookfield a guarantee fee equal to an annualized rate of approximately 2.0% of the maximum amount of the guarantee and provided Brookfield with a guarantee that it will repay Brookfield any amounts paid by Brookfield to the Company's lenders. As security, the Company has provided Brookfield with a fixed charge on certain of its assets.

HEDGING ACTIVITIES

From time to time, the Company enters into arrangements to fix the future price for certain products or to fix the exchange rate on certain of its Canadian dollar-denominated cash flows.

As of April 4, 2009, the Company had $34.1 million in foreign exchange contracts outstanding as fair value hedges against certain Canadian dollar-denominated net monetary liabilities. For the first quarter of 2009, the Company realized $1.1 million of losses on these contracts and at April 4, 2009, there were $0.8 million in unrealized gains on these contracts. The gains or losses on fair value hedges are offset by net losses or net gains on the net liabilities being hedged.

As of April 4, 2009, the Company had $170.2 million in net forward foreign exchange contracts outstanding as a hedge against future net Canadian dollar cash flows. In addition, the Company had sold forward $9.6 million of Canadian dollars as part of its short term cash management activities. These contracts have varying maturity dates in 2009 and 2010. During the first quarter of 2009, the Company realized a $0.4 million gain related to foreign exchange contracts used to hedge Canadian dollar cash flows. At April 4, 2009, the unrealized gains on outstanding contracts amounted to $4.5 million. After giving effect to the realized gains on these hedges, the average realized exchange rate for 2008 was CAD$1.00 equals US$0.799 compared to the published average rate of CAD$1.00 equals US$0.803.

Realized and unrealized gains or losses on Canadian dollar-denominated net liabilities hedges and realized gains or losses on cash flow hedges are recorded in the consolidated statements of operations and deficit, in the same manner as the realized and unrealized gains or losses on the net monetary liabilities and realized gains or losses on cash flows being hedged. Unrealized gains or losses on cash flow hedges are recorded in consolidated statements of other comprehensive income until such time as the Canadian dollar-denominated cash flows being hedged are realized.

Fraser Papers enters into lumber forward contracts to fix the lumber price for a portion of its future production. During the first quarter of 2009, lumber futures contracts representing 1.7 million board feet of lumber matured. Accordingly, a realized gain of $0.7 million was reported in the consolidated statements of operations for the three month period ended April 4, 2009. There were no outstanding lumber futures contracts on April 4, 2009.

OPERATING RESULTS

Fraser Papers operates one business segment comprised of 11 paper machines at two locations, one market pulp facility, two internal pulp facilities and four lumbermills.

Products include paper (including specialty packaging and printing papers, commodity freesheet papers, specialty high-bright groundwood papers, commodity groundwood papers and towel), as well as hardwood pulp and softwood lumber.

Paper Operations

We own and operate a paper mill in Gorham, New Hampshire and an integrated pulp and paper facility in Edmundston, New Brunswick / Madawaska, Maine (East Papers).



----------------------------------------------------------------------------
Three months ended
------------------------------
Apr 4 Dec 31 Mar 29
2009 2008 2008
----------------------------------------------------------------------------
Sales (US$millions) 140.2 137.9 148.6
EBITDA (US$millions)(1) 1.7 9.8 (6.8)

EBITDA ($ per ton)(1) 12 73 (45)
EBITDA margin(1)(2) 1% 7% (5%)

Shipments (000 tons)
Specialty packaging 21 19 23
Specialty printing 51 50 51
Commodity freesheet papers 9 9 18
Specialty high-bright groundwood 38 30 33
Commodity groundwood 9 16 17
Towel 11 10 10
----------------------------------------------------------------------------
139 134 152

Average Revenue Realized ($ per ton)
Specialty packaging 1,253 1,277 1,173
Specialty printing 1,088 1,087 1.027
Commodity freesheet papers 918 924 867
Specialty high-bright groundwood 862 940 864
Commodity groundwood 725 766 843
Towel 871 963 841
----------------------------------------------------------------------------
Weighted Average ($ per ton) 1,001 1,022 962

Average Cash Operating Cost ($ per ton)(1) 958 919 1,003

Reference Prices ($ per ton)(3)
50# offset rolls 908 941 860
22.1# white directory 800 755 745
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) See "Definitions" section.
(2) EBITDA Margin is EBITDA as a percentage of Sales.
(3) Reference prices are from RISI, Inc. ("RISI").


Our business strategy is to target market segments where we can achieve a meaningful or leadership position and where we can match our technical competencies with the demand for lightweight specialty freesheet and groundwood papers. In the first quarter of 2009, we had approximately 79% of our paper sales that fit this description, and the strategy is to transition most of the balance into new or existing specialty packaging, printing or groundwood products.

Average selling prices for paper decreased in the first quarter of 2009 compared to 2008 due to the weakened general economy. Fraser Papers took market-related downtime on each of its paper machines to balance inventories against customer orders in the first quarter. The market-related downtime was focused primarily on commodity and groundwood products.

Specialty packaging products are typically used for food applications and include both stain resistant and non-stain resistant qualities. Fraser Papers has the ability to meet narrow technical standards for applications such as pet food bags and dry mix consumer pouches and bags. With our focus on new products and applications, specialty packaging volumes increased by 2,000 tons over the fourth quarter of 2008. Specialty packaging pricing decreased by $24 per ton compared to the fourth quarter of 2008 due to pricing pressure as a result of coated paper producers becoming more aggressive to gain volume in the higher margin specialty applications.

Specialty printing papers include coated and uncoated freesheet products that are characterized by narrow technical specifications and niche applications including labeling and thermal point-of-sale receipts as well as lightweight opaque grades for financial printing applications. Fraser Papers' specialty printing volumes increased 1,000 tons to 51,000 tons which is comparable to the fourth quarter and first quarter of 2008.

We continue to narrow our focus toward higher margin specialty packaging and printing paper products in strategic markets. For the first quarter of 2009, commodity freesheet volume represents only 6% of total shipments, decreased from 12% in the first quarter of 2008.

Specialty high-bright groundwood papers include products that are used for financial printing and other publishing applications where high performance and superior print quality are required. In the first quarter of 2009, specialty high-bright groundwood shipments were 38,000 tons which is a 15% increase from the 2008 first quarter shipments of 33,000 tons. This increase is indicative of certain applications migrating from freesheet products to high-bright groundwood products and new product applications.

Compared with the first quarter of 2008, Fraser Papers' shipments of commodity groundwood products in 2008 decreased by 8,000 tons as we increased the volumes of specialty high-bright groundwood grades.

Three months ended April 4, 2009 compared to three months ended December 31, 2008

The paper operations generated EBITDA of $1.7 million in the first quarter on sales of $140.2 million. This compares to EBITDA of $9.8 million in the fourth quarter of 2008 on sales of $137.9 million. Selling prices declined by $21 per ton as demand for commodity and groundwood grades declined. The decrease in EBITDA was as a result of lower selling prices and market downtime on each of our paper machines and at the Edmundston sulphite pulp mill.

Shipments increased by 4% during the quarter due to new specialty packaging and high-bright groundwood business.

Three months ended April 4, 2009 compared to three months ended March 29, 2008

The paper operations generated EBITDA of $1.7 million in the first quarter on sales of $140.2 million. This compares to negative EBITDA of $6.8 million in the first quarter of 2008 on sales of $148.6 million. Higher selling prices of $39 per ton and reduced fibre and energy costs contributed to improved margins.

Shipments in the first quarter of 2009 were 9% below the first quarter of 2008 as demand weakened significantly late in 2008. Additionally, shipments decreased during the quarter due to the temporary closure of two paper machines in Gorham, New Hampshire, during the first quarter of 2008.



Pulp Operations
We own and operate a NBHK market pulp mill in Thurso, Quebec.

----------------------------------------------------------------------------
Three months ended
------------------------------
Apr 4 Dec 31 Mar 29
2009 2008 2008
----------------------------------------------------------------------------
Sales (US$millions) 10.3 13.5 21.7
EBITDA (US$millions)(1) (8.2) (8.7) (0.9)

Pulp EBITDA ($ per tonne)(1) (191) (207) (15)
EBITDA Margin(1)(2) (80%) (64%) (4%)

Shipments (000 tonnes)(3) 43 42 62

Average Revenue Realized ($ per tonne)(3) 407 491 594

Average Cash Operating Costs ($ per tonne)(1) 574 624 595

Reference Price ($ per tonne)(4)
NBHK market pulp 595 714 797
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) See "Definitions" section.
(2) EBITDA Margin is EBITDA as a percentage of Sales.
(3) Pulp volumes and average revenues realized include internal sales.
(4) Reference prices are from RISI's Pulp & Paper Week.


Demand for market pulp is expected to decline by an additional 5% during 2009 after a 2.8% decline in 2008. As a result, hardwood pulp inventories are at 47 days compared to the balanced market level of 35 days. For the first quarter of 2009, compared to the first quarter of 2008, the average benchmark price decreased $202 per tonne to $595 per tonne. As a result, the Thurso pulp mill took 41 days of market downtime in the first quarter.

A recent development affecting pulp producers is an interpretation of the U.S. Revenue Code regarding alternative fuel tax credits. Market pulp producers in the United States are claiming that the black liquor produced in the pulping process qualifies for this credit. The benefit of this credit is estimated to be $150 per tonne of pulp produced. This would represent a 35% reduction in production costs at Thurso. This subsidy enables U.S. market pulp producers to lower pricing, clearly benefitting U.S. based mills over Canadian based mills. While Fraser Papers' paper business may benefit from the lower pulp pricing, our market pulp business does not have any operations in the United States eligible for the tax credit.

We direct a portion of our market pulp for internal use. Fraser Papers also purchases softwood kraft pulp from third parties to supplement internal production. In the first quarter of 2009, net pulp sales amounted to 8,000 tonnes.

Three months ended April 4, 2009 compared to three months ended December 31, 2008

The pulp operations generated negative EBITDA of $8.2 million in the first quarter of 2009 on sales of $10.3 million. This was a $0.5 million EBITDA improvement from the previous quarter when the pulp operations generated negative EBITDA of $8.7 million on $13.5 million of sales. During the first quarter, the pulp mill took market downtime for 41 days in order to balance inventories with key customer orders. In addition, revenue realizations declined 17% or $84 per tonne as worldwide selling prices dropped precipitously.

Three months ended April 4, 2009 compared to three months ended March 29, 2008

The pulp operations generated negative EBITDA of $8.2 million in the first quarter of 2009 on sales of $10.3 million. This was a $7.3 million decrease in EBITDA from the previous year's quarter when the pulp operations generated negative EBITDA of $0.9 million on $21.7 million of sales. Realized revenues decreased by 31% or $187 per tonne.

Shipments decreased by 31% in the first quarter of 2009 compared to the first quarter of 2008 due to market downtime.

Lumber Operations

Our lumber operations are comprised of four lumbermills located in Plaster Rock, New Brunswick; Juniper, New Brunswick; Ashland, Maine; and Masardis, Maine.



----------------------------------------------------------------------------
Three months ended
--------------------------------
Apr 4 Dec 31 Mar 29
2009 2008 2008
----------------------------------------------------------------------------
Sales (US$millions) 5.6 14.1 10.4
EBITDA (US$millions)(1) (4.1) (4.4) (4.2)

EBITDA ($ per Mfbm)(1) (158) (75) (98)
EBITDA Margin(1)(2) (73%) (31%) (40%)

Shipments (MMfbm) 26 59 43

Average Revenue Realized ($ per Mfbm) 218 227 242

Average Cash Operating Cost ($ per Mfbm)(1) 353 294 299

Reference Price ($ per Mfbm)(3)
Boston SPF 2X4 #2&Btr 240 276 284
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) See "Definitions" section.
(2) EBITDA Margin is EBITDA as a percentage of Sales.
(3) Reference prices are from Random Lengths.


Market conditions deteriorated significantly for our lumber operations during 2008 and continued into 2009. Average benchmark lumber prices (Eastern Boston SPF 2X4) decreased 13% or $36 per Mfbm from the fourth quarter of 2008. Consequently, we took market downtime at all of our lumbermills in the first quarter. The softness in U.S. housing activity continues where annual construction starts have fallen from their peak of an annualized 2.3 million in January 2006 to an annualized 0.51 million in March 2009; a 78% decline.

In the first quarter, we took market-related downtime at all of our lumbermills: all 13 weeks in the quarter for Ashland and Masardis, Maine; five weeks at Juniper, New Brunswick; and seven weeks at Plaster Rock, New Brunswick. This equates to a total of 38 weeks of lumbermill market downtime during the quarter. The lumber business produced at 16% of capacity during the quarter.

We continue to evaluate our lumbermill operating schedule in reference to the availability of cost effective woodchips for our pulp operations in Edmundston, New Brunswick.

Three months ended April 4, 2009 compared to three months ended December 31, 2008

The lumber operations generated negative EBITDA of $4.1 million in the first quarter of 2009 on sales of $5.6 million. This compares to negative EBITDA in the fourth quarter of 2008 of $4.4 million on sales of $14.1 million. EBITDA improved by $0.3 million over the fourth quarter due to cost reductions as a result of the market downtime.

As a result of the market downtime, shipments in the first quarter of 2009 decreased by 33 MMfbm or 56% from the fourth quarter of 2008.

Three months ended April 4, 2009 compared to three months ended March 29, 2008

The lumber operations generated negative EBITDA of $4.1 million in the first quarter of 2009 on sales of $5.6 million. This compares to negative EBITDA in the first quarter of 2008 of $4.2 million on sales of $10.4 million. EBITDA improved by $0.1 million over the first quarter of 2008 due to the market downtime cost reductions.

Shipments in the first quarter of 2009 were 17 MMfbm lower than the first quarter of 2008 as a result of the market downtime at all of the lumbermills.

CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES

The critical accounting policies and the accounting estimates used in the preparation of the April 4, 2009 interim financial statements are substantially the same as the ones disclosed in the Annual Report for the year ended December 31, 2008. These estimates may be materially different from actual future cash flows due to a variety of factors.

RISKS AND UNCERTAINTIES

The significant risks and uncertainties faced by Fraser Papers are substantially the same as those disclosed in the Annual Report and the Annual Information Form for the year ended December 31, 2008.

Many of Fraser Papers' raw material inputs and supplies are purchased on the open market and as such are subject to market price fluctuations. With the recent reductions in the prices for global commodities, we expect to benefit from these reductions. In particular, during the first quarter of 2009, Fraser Papers consumed approximately 135,000 barrels of oil and purchased approximately 16,000 tonnes of market pulp.

Approximately 53% of Fraser Papers' assets are located in Canada while essentially 100% of the sales are U.S. dollar-denominated. Fraser Papers incurs approximately CAD$360 million per year of Canadian dollar-denominated expenses, and we expect to benefit from the recent weakening of the Canadian currency.

Recent events in world capital markets have made it difficult for many companies to obtain or renew debt financing. Without the continued support of Brookfield, there can be no certainty that the Company will be able to secure alternative sources of financing with terms that are satisfactory to the Company.

CONTROLS AND PROCEDURES

Disclosure controls and procedures ("DC&P") are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), on a timely basis so that appropriate decisions can be made regarding public disclosure. An evaluation of the effectiveness of the design and operation of the Company's DC&P was conducted as of April 4, 2009 by management, including the CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that Fraser Papers' DC&P, as defined in National Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings, are effective.

Under the supervision of the CEO and CFO, the Company has designed internal control over financial reporting ("ICFR") to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. The CEO and CFO considered the need to disclose in this MD&A any change in the Company's ICFR that has occurred during the year that has materially affected, or is reasonably likely to materially affect the Company's internal controls and have not identified any such changes. An evaluation of the effectiveness of the design and operation of the Company's ICFR was conducted as of April 4, 2009, by management, including the CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that Fraser Papers' ICFR as defined in National Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings, are effective and have not identified any material weakness related to design.

FORWARD-LOOKING INFORMATION

This MD&A contains forward-looking information and statements relating but not limited to: anticipated or prospective financial performance; results of operations; future investment in our operations; anticipated growth in target markets; profit margins; business strategy, including product development; our operating platform; energy reduction initiatives; expectations and estimations of future market conditions; evolving criteria and demand for certain paper grades; seasonal inventory build-up, reduction and the impact on financial results; impact of actuarial report filings on pension funding obligations; pension and other employee benefit obligations; hedging activities; the effect of reduced pulp pricing; the Company's liquidity position, including financing requirements; Brookfield's ongoing support; the adoption of IFRS; future operating performance and operational downtime; and the expected impact of specific events on financial results in the future.

Forward-looking information typically contains statements with words such as "should", "continue", "toward", "ongoing", "target", "result", "grow", "can", "future", "seek", "will", "achieve", "maintain", "look", "believe", "feel", "expect", "may", "estimate", "plan", "possible", "could", "anticipate", "likely", "impact", "would", similar words, or variations of those words that suggest future outcomes. In addition, forward-looking statements may reflect the outlook on future changes in volumes, prices, costs, estimated amounts and timing of cash flows, or other expectations or beliefs, objectives or assumptions about future events or performance. Readers should be aware that these statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements.

The significant risks that impact Fraser Papers' business and future performance are discussed in the Annual Information Form as well as the Annual Report and other filings with Canadian securities regulatory authorities. Fraser Papers cautions that the list of risks and factors discussed in those documents may not be exhaustive. Readers should consider those risks, as well as other uncertainties and factors and potential events. Although Fraser Papers believes it has reasonable basis for making the forward-looking statements included in this report, readers are cautioned not to place undue reliance on such forward-looking information.

Fraser Papers undertakes no obligation, except as required by law, to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise.

The "Outlook" sections that follow in this document are based on the Fraser Papers' views and the actual outcome is uncertain.

OUTLOOK

The Company expects a challenging business environment for the foreseeable future due to the recession in the North American economy and continued tightness in the credit markets. Business activity continues sluggish and this has translated into weaker demand for certain paper grades, smaller order files and weaker pricing later in the quarter. Specialty packaging volumes are expected to remain steady as the Company has successfully increased share in a number of areas while developing new products to penetrate others. Demand for specialty printing and high bright groundwood papers is expected to see a seasonal slowdown through the second and third quarters of the year. The Company is committed to minimizing its investment in working capital and will balance production, inventories and customer orders.

World hardwood pulp inventories have increased to unsustainable levels and oversupply is being artificially encouraged by a direct tax subsidy provided to U.S. producers that is estimated to amount to several billion dollars in 2009. The Company, along with other Canadian producers, have asked the Canadian Government for a remedy, including equal tax treatment. Without a satisfactory outcome the Company's two pulp mills are significantly disadvantaged and at risk.

While there are indications that the pace of decline in the U.S. housing market has slowed, there are no clear signs of a recovery. As a result, lumber prices are expected to remain depressed for the balance of 2009. The Company will continue evaluating the lumber mill operations against the chip requirements of its East Papers operations.

The labour agreements at the Company's Thurso and Edmundston pulp mills expire on April 30 and June 30 respectively. A third labour agreement at the Madawaska paper mill expires on October 31. The Company expects that it will have to achieve significant modifications to these agreements in order to ensure these operations are competitive in the future.

The Company will require additional financing during 2009 to fund its operations, pension fund obligations and the maturity of the $25 million term loan facility in September. Given the challenging conditions in the credit markets, the Company has begun discussions with a number of its stakeholders including its major shareholder, its lenders, unionized employees, provincial and state governments and material suppliers to identify opportunities to meet these obligations.

DEFINITIONS

As there is no generally accepted method of calculating the measures outlined below, these measures as calculated by Fraser Papers may not be comparable to similar titled measures reported by other companies.

EBITDA is earnings from continuing operations before interest, taxes, depreciation and amortization, and restructuring charges. EBITDA is presented as a useful indicator of a company's ability to meet debt service and capital expenditure requirements. Fraser Papers interprets EBITDA trends as an indicator of relative operating performance.

Free cash flow is the company's cash flow from operating activities minus capital investments.

Net debt is debt less cash and cash equivalents. Net debt to net debt plus equity is provided as a useful indicator of a company's financial leverage.

Net debt to net debt plus equity is net debt divided by the sum of net debt and shareholders' equity. Net debt to net debt plus equity is provided as a useful indicator of a company's financial leverage.

Cash costs include all cash costs of operations and exclude depreciation and amortization. Cash costs are presented to provide additional information about the cash generating capabilities of Fraser Papers' operations. This measure captures the key costs of operations and is a key performance measure that management uses to evaluate costs at the operations.



EBITDA

------------------------------------
Three months ended
----------------------------------------------------------------------------
Apr 4 Dec 31 Mar 29
US$MILLIONS 2009 2008 2008
----------------------------------------------------------------------------
Profit / (Loss) $ (16.7) $ (15.9) $ (19.1)
Add: Interest expense, net 1.2 1.3 0.7
Less: Income tax (recovery)/expense (3.2) (0.3) (0.9)
Add: Other - - -
Add: Depreciation 8.1 11.6 7.4
----------------------------------------------------------------------------
EBITDA $ (10.6) $ (3.3) $ (11.9)
----------------------------------------------------------------------------
----------------------------------------------------------------------------



NET DEBT

----------------------------------------------------------------------------
As at
----------------------------
Apr 4 Dec 31
US$MILLIONS 2009 2008
----------------------------------------------------------------------------
Long-term debt $ 49.4 $ 64.0
Add: Current Debt 25.0 25.0
Add: Bank indebtedness 3.5 7.4
Add: Borrowings under credit facility - -
----------------------------------------------------------------------------
NET DEBT $ 77.9 $ 96.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------



NET DEBT TO NET DEBT PLUS EQUITY

----------------------------------------------------------------------------
As at
-----------------------------
Apr 4 Dec 31
US$MILLIONS 2009 2008
----------------------------------------------------------------------------
Net debt $ 77.9 $ 96.4
Add: Shareholders' equity 268.3 284.3
----------------------------------------------------------------------------
Net debt plus equity 346.2 380.7

Net debt $ 77.9 $ 96.4
Divided by: Net debt plus equity 346.2 380.7
----------------------------------------------------------------------------
NET DEBT TO NET DEBT PLUS EQUITY 23% 25%
----------------------------------------------------------------------------
----------------------------------------------------------------------------


FREE CASH FLOW

----------------------------------------------------------------------------
Three months ended
-----------------------------------
Apr 4 Dec 31 Mar 29
US$MILLIONS 2009 2008 2008
----------------------------------------------------------------------------
Cash flow from operating activities $ 24.5 $ (22.1) $ (11.5)
Less: Capital investments (5.9) (6.2) (3.4)
----------------------------------------------------------------------------
FREE CASH FLOW $ 18.6 $ (28.3) $ (14.9)
----------------------------------------------------------------------------
----------------------------------------------------------------------------



CASH COST
----------------------------------------------------------------------------
Three months ended
---------------------------------
Apr 4 Dec 31 Mar 29
US$MILLIONS 2009 2008 2008
----------------------------------------------------------------------------
Net sales $ 156.1 $ 165.5 $ 180.7
Less: EBITDA 10.6 3.3 11.9
----------------------------------------------------------------------------
Cash Cost $ 166.7 $ 168.8 $ 192.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------


NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS

Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying unaudited interim financial statements of the Company have been prepared by and are the responsibility of the Company's management.

The Company's independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.



FRASER PAPERS INC.
INTERIM CONSOLIDATED BALANCE SHEETS
APRIL 4, 2009

(unaudited)
----------------------------------------------------------------------------
As at As at
US$MILLIONS Apr 4, 2009 Dec 31, 2008
----------------------------------------------------------------------------
Assets

Current assets:
Accounts receivable $ 54.7 $ 67.9
Inventory (note 2) 97.4 125.5
Future income taxes 0.4 0.3
----------------------------------------------------------------------------
152.5 193.7

Property, plant and equipment 253.9 256.0
Other assets 59.0 60.9
----------------------------------------------------------------------------

$ 465.4 $ 510.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities and Shareholder's Equity

Current liabilities:
Bank indebtedness $ 3.5 $ 7.4
Accounts payable and accrued liabilities 70.6 78.0
Current debt (note 3) 25.0 25.0
----------------------------------------------------------------------------
99.1 110.4

Long-term debt (note 3) 49.4 64.0
Other liabilities 48.6 48.4
Future income taxes - 3.5
Shareholders' equity (note 6) 268.3 284.3
----------------------------------------------------------------------------

$ 465.4 $ 510.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(See accompanying notes to financial statements)



FRASER PAPERS INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
APRIL 4, 2009

(unaudited)
----------------------------------------------------------------------------
Three Months Ended
-------------------------
Apr 4 Mar 29
US$MILLIONS, EXCEPT PER SHARE AMOUNTS 2009 2008
----------------------------------------------------------------------------

Net sales $ 156.1 $ 180.7

Cost of goods sold 161.2 185.6
Selling, general and administration costs 5.5 7.0
----------------------------------------------------------------------------
Loss before the following: $ (10.6) $ (11.9)

Interest income 0.1 0.2
Interest expense (1.3) (0.9)
----------------------------------------------------------------------------
Loss before depreciation and income taxes (11.8) (12.6)

Depreciation (8.1) (7.4)
Income tax recovery (note 5) 3.2 0.9
----------------------------------------------------------------------------

Loss $ (16.7) $ (19.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Loss per share (basic and fully diluted) $ (0.33) $ (0.44)

Weighted average number of shares (thousands) 50,167 43,281

Deficit
Balance, beginning of period $ (274.9) $ (203.0)
Loss (16.7) (19.1)
----------------------------------------------------------------------------

Balance, end of period $ (291.6) $ (222.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(See accompanying notes to financial statements)



FRASER PAPERS INC.
INTERIM CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
AND ACCUMULATED OTHER COMPREHENSIVE INCOME
APRIL 4, 2009

(unaudited)
----------------------------------------------------------------------------
Three Months Ended
-----------------------
Apr 4 Mar 29
US$MILLIONS 2009 2008
----------------------------------------------------------------------------

Loss $ (16.7) $ (19.1)

Changes in unrealized net gains on cash flow hedges 1.1 -
Changes in unrealized net losses on lumber hedges (0.7) -
Tax impact of above 0.1 -
----------------------------------------------------------------------------
Other comprehensive income 0.5 -

----------------------------------------------------------------------------
Comprehensive loss $ (16.2) $ (19.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Accumulated other comprehensive income

Balance, beginning of period 2.6 0.2
Other comprehensive income for the period 0.5 -
----------------------------------------------------------------------------

Balance, end of period $ 3.1 $ 0.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(See accompanying notes to financial statements)



FRASER PAPERS INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
APRIL 4, 2009

(unaudited)
----------------------------------------------------------------------------
Three Months Ended
----------------------
Apr 4 Mar 29
US$MILLIONS 2009 2008
----------------------------------------------------------------------------

Cash provided by (used for):
Operating Activities
Loss $ (16.7) $ (19.1)
Items not affecting cash:
Depreciation 8.1 7.4
Future income taxes (note 5) (3.4) (1.0)
Employment benefit plan expense (note 4) 8.1 4.9
Other items (1.2) 0.1
Employment benefit plan funding (note 4) (4.6) (5.6)
----------------------------------------------------------------------------
(9.7) (13.3)

Net change in non-cash working capital balances 34.2 1.8
----------------------------------------------------------------------------
24.5 (11.5)
----------------------------------------------------------------------------
Investing Activities
Capital investments (5.9) (3.4)
----------------------------------------------------------------------------
(5.9) (3.4)
----------------------------------------------------------------------------
Financing Activities
Net borrowings (repayments) under revolving credit
facility (note 3) (18.1) 3.2
Borrowing under term loan (note 3) 3.4 -
Proceeds from rights offering - 59.7
Repayment of long-term debt - (50.0)
----------------------------------------------------------------------------
(14.7) 12.9
----------------------------------------------------------------------------

Increase (decrease) in cash and cash equivalents $ 3.9 $ (2.0)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(See accompanying notes to financial statements)



FRASER PAPERS INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

US$MILLIONS, EXCEPT PER SHARE AMOUNTS


NOTE 1. BASIS OF PRESENTATION

These interim consolidated financial statements have been prepared using the same accounting policies and methods as the consolidated financial statements of Fraser Papers for the year ended December 31, 2008. These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") for interim financial statements and do not contain all of the disclosures required for annual financial statements. As a result, these interim consolidated financial statements should be read in conjunction with the consolidated financial statements of Fraser Papers for the year ended December 31, 2008. These interim consolidated financial statements include any adjustments that are, in the opinion of management, necessary to fairly state the results of interim periods in accordance with GAAP.

NOTE 2. INVENTORY

During the quarter, Fraser Papers recorded a charge of $3.7 (2008 - $6.3) in the consolidated statements of operations to reduce the carrying value of certain of its inventories to lower of original cost or net realizable value. $17.8 (December 31, 2008 - $37.3) of inventory is recorded at net realizable value at April 4, 2009. No reversals of prior charges were recorded in first quarter of 2008 or 2009.



NOTE 3. LONG-TERM DEBT

Apr 4 Dec 31
US$MILLIONS 2009 2008
----------------------------------------------------------------------------

Revolving credit facility $ 30.1 $ 48.2
Term loan facility 19.7 16.3
Term credit facility 25.0 25.0
Deferred financing costs (0.4) (0.5)
----------------------------------------------------------------------------
74.4 89.0
Current portion of long-term debt (25.0) (25.0)
----------------------------------------------------------------------------

$ 49.4 $ 64.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Maximum borrowings under the Company's revolving credit facility are $115.0. The revolving credit facility bears interest at market rates and is due in April 2011. Borrowings under the facility are secured by a first charge against accounts receivable and inventory of Fraser Papers. At April 4, 2009, $69.6 (December 31, 2008 - $86.7) of the facility was utilized, $30.1 (December 31, 2008 - $48.2) for operating bank loans and the balance in the form of letters of credit.

Maximum borrowings under the Company's term loan facility are CAD$40.0. The facility bears interest at a fixed rate of 4.7% and is due December 2014. Borrowings under the facility are secured by a first charge on property, plant and equipment located in New Brunswick. Principal payments under the loan will be made in quarterly installments over the term of the loan with a lump sum payment on maturity. The first principal repayment is due no later than March 2010. At April 4, 2009, CAD$24.3 (December 31, 2008 - CAD$20.0) had been drawn under this facility.

Borrowings under the Company's term credit facility bear interest at market rates and are due in September 2009. Brookfield Asset Management Inc. (together with its affiliates "Brookfield") has provided a guarantee to the lenders in support of this credit facility and is required to meet certain financial covenants.

The effective interest rate on long-term debt was 2.9% for the first quarter of 2009 (2008 - 4.8%).

During the first quarter of 2009, the Company made interest payments of $0.7 (2008 - $0.9).

NOTE 4. EMPLOYEE BENEFIT COSTS

During the quarter, employee benefit expense for pensions and post retirement benefits totaled $7.3 (2008 - $4.1) . In the first quarter of 2008, the Company received regulatory approval relating to a partial wind-up of pension plan obligations as a result of a disposition of timberland assets in New Brunswick in 2006 and recorded a settlement expense of $1.3 in selling, general and administrative costs.

Employee benefit plan funding amounted to $3.8 during the quarter (2008 - $4.8). During the quarter, the Company received notice that it had been granted funding relief under pension regulations in New Brunswick allowing the Company to extend the amortization of its solvency deficit from five to 11 years. The Company currently projects its pension and other employee benefit contributions to be $32.3 over the next 12 months.

Costs of goods sold in the consolidated statements of operations includes $0.8 (2008 - $0.8) related to contributions to Fraser Papers' defined contribution pension plans.

NOTE 5. INCOME TAXES

Interim income tax expense is calculated based on expected annual effective tax rates.



----------------------------------------------------------------------------
Three Months Ended
-----------------------------
Apr 4 Mar 29
US$MILLIONS 2009 2008
----------------------------------------------------------------------------
Current tax expense $ (0.2) $ (0.1)
Future income tax recovery 3.4 1.0
----------------------------------------------------------------------------
Income tax recovery $ 3.2 $ 0.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------


During the quarter, payments of $0.1 were made for income and income-related taxes (2008 -- nil).



NOTE 6. SHAREHOLDERS' EQUITY

----------------------------------------------------------------------------
Apr 4 Dec 31
US$MILLIONS 2009 2008
----------------------------------------------------------------------------

Common shares -- 50,166,789 shares outstanding $ 549.7 $ 549.7

Contributed surplus 7.1 6.9

Accumulated other comprehensive income 3.1 2.6

Deficit (291.6) (274.9)
----------------------------------------------------------------------------
$ 268.3 $ 284.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------


NOTE 7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Foreign Currency Rate Risk

Fraser Papers holds certain assets and liabilities which are denominated in Canadian dollars and incurs a significant portion of its costs in Canadian dollars. From time to time Fraser Papers enters into forward foreign exchange contracts to hedge the impact of foreign exchange rate changes on these assets, liabilities and costs. Fraser Papers does not use derivative financial instruments for speculative purposes.

As at April 4, 2009, the Company had outstanding forward foreign exchange contracts of $34.1 (December 31, 2008 - $41.0), which are designated as a fair value hedge against certain Canadian dollar-denominated net monetary liabilities. The consolidated statements of operations for the quarter include a realized loss of $1.1 (2008 - $0.6) on matured forward foreign exchange contracts and an unrealized gain of $0.8 (2008 - loss of $0.3) on outstanding contracts. These realized and unrealized gains or losses are offset by realized and unrealized losses or gains on the net monetary liabilities being hedged.

As at April 4, 2009, the Company had forward foreign exchange contracts of $170.2 (December 31, 2008 - $100.3) as a hedge of anticipated future Canadian dollar net cash outflows. In addition, the Company had sold forward $9.6 (December 31, 2008 - $10.8) Canadian dollars as part of its short term cash management activities. These contracts have varying maturity dates in 2009 and 2010. The consolidated statements of operations for the quarter include a realized gain of $0.4 (2008 - $1.6) on matured forward foreign exchange contracts. An unrealized gain of $4.5 (2008 - $0.4) is recorded in other comprehensive income. These contracts effectively fix the exchange rate at which certain future Canadian dollar-denominated cash flows will be incurred.

Credit Risk

Fraser Papers does not have a trade receivable balance larger than $5.3 from any individual customer as at April 4, 2009 (December 31, 2008 - $5.8) . The Company reviews each customer's credit rating before extending or increasing credit and conducts regular reviews of existing customers' credit performance. The consolidated statements of operations for the quarter includes bad debt expense of $0.2 (2008 - nil). The allowance for doubtful accounts as at April 4, 2009 was $0.2 (December 31, 2008 - $0.4).

Sensitivity Information

Fluctuations in market prices expose the Company to potential negative effects from market risk, which is composed of changes in currency exchange rates (currency risk), changes in interest rates (interest rate risk) and changes in the selling prices of the Company's products (price risk).

Currency Risk

With production facilities in Canada, a significant portion of the Company's operating costs are sourced in Canadian dollars. For the quarter ended April 4, 2009, a US$0.01 change in the foreign exchange rate would have impacted pre-tax loss, before the impact of the Company's hedging program, by $0.9. Including the impact of the Company's hedging program, the impact would have been $0.6.

Interest Rate Risk

Interest rates on the Company's borrowings are subject to change and could affect the profitability of the Company. The Company currently manages its interest rate risk by maintaining three borrowing facilities to support its liquidity requirements. One of these facilities attracts interest at a fixed rate of 4.7% while the others attract interest at floating rates. Interest rate swaps are an available alternative to further reduce the Company's exposure to fluctuations in interest rates. For the quarter, a 100 basis point change in market interest rates would have impacted pre-tax loss by $0.2.

Price Risk

Markets for some of Fraser Papers' products are highly cyclical in nature. From time to time, Fraser Papers enters into commodity futures contracts which serve to hedge a portion of Fraser Papers' future sales against changes in the selling price for these products. Fraser Papers does not use derivative financial instruments for speculative purposes.

The Company is exposed to variability in commodity prices on the sale of its paper, pulp and lumber products. A $25/ton change in the value received on the sale of paper products, would have impacted pre-tax loss for the quarter by $3.5. A $25/tonne change in pulp prices would have affected pre-tax loss for the quarter by $0.2. For the quarter, pre-tax loss would have been impacted by $0.6 with a change in lumber prices of $25/Mbfm. The Company considers the use of pulp and lumber hedges to limit its exposure to variability in pricing.

For the quarter, lumber futures contracts representing 1.7 million board feet of lumber (2008 - nil) matured. These contracts effectively fixed the selling price for lumber delivered on the expiry date and were designated as a hedge of a portion of future lumber sales. The consolidated statements of operations for the quarter ended April 4, 2009 include a realized gain of $0.7 (2008 - nil) on matured lumber futures contracts. No contracts were outstanding or entered into during the quarter.

NOTE 8. CAPITAL MANAGEMENT

The Company has maintained a conservative net debt to net debt plus equity ratio and endeavours to maintain adequate liquidity to achieve its business plans. Fraser Papers manages the term of its debt in consideration of the expected life of its net assets. As such, shareholders' equity is maintained at amounts in excess of the carrying value of property, plant and equipment. The Company's current net debt to net debt plus equity ratio is 23%.

The Company monitors capital on the basis of the net debt to net debt plus equity ratio. Net debt is bank indebtedness plus long-term debt, less cash and cash equivalents. Equity comprises all components of shareholders' equity.

The Company expects to require additional financing during 2009 to fund its operations, contributions of approximately $32.3 to benefit plans over the next twelve months and the maturity of the $25 term loan facility. Financing could involve the issuance of debt and/or equity. Fraser Papers is dependant on the continued financial support of Brookfield. Without this support, it is possible that the Company may not be able to secure alternative sources of financing with terms that are satisfactory to the Company.

NOTE 9. COMMITMENTS AND CONTINGENCIES

Brookfield has provided a guarantee to the lenders of the Company in support of its credit facilities. The maximum amount of the guarantees is $50.0. Fraser Papers has provided Brookfield with a guarantee that it will repay Brookfield any amounts paid by Brookfield to Fraser Papers' lenders. The guarantee is secured by a fixed charge on certain of Fraser Papers' property, plant and equipment and other assets.

NOTE 10. RELATED PARTY TRANSACTIONS

Brookfield is a related party by virtue of owning a controlling equity interest in the Company. Acadian Timber Income Fund ("Acadian") is a related party by virtue of Brookfield's equity holdings in Acadian. All related party transactions are recorded at the exchange amount.

During the quarter, Fraser Papers purchased approximately $1.0 (2008 - $1.4) of electricity for its Gorham paper mill from Brookfield. Included in accounts payable and accrued liabilities is $0.7 (December 31, 2008 - $1.0) related to these purchases.

Fraser Papers has invested in units of Katahdin Paper Company LLC ("Katahdin"), an indirectly, wholly-owned subsidiary of Brookfield. The units earn a preferential cumulative distribution of 5% per annum. Cumulative distributions accrued on this investment amount to $2.7 (December 31, 2008 - $2.6) . The investment is accounted for using the cost method and is included in other assets.

During the quarter, Fraser Papers earned a management fee of $0.9 (2008 - $2.1) from Katahdin. Included in accounts receivable is $0.9 (2008 -- $0.6) due from Katahdin.

During the quarter, Fraser Papers sold $0.2 (2008 - $0.5) of goods and services to Katahdin. There is no balance (December 31, 2008 - $0.1) in accounts receivable related to these sales.

Fraser Papers has entered into 20 year fibre supply agreements with Acadian. During the quarter, purchases of fibre from Acadian amounted to $9.7 (2008 - $7.4) . Included in accounts payable and accrued liabilities is $1.5 (2008 - $1.0) related to these purchases.

During the quarter, Fraser Papers sold $20.3 (2008 - nil) of paper to Brookfield. Included in accounts receivable is $0.5 (December 31, 2008 - nil) related to these sales.

Brookfield has provided the Company with a facility with a notional amount of $350.0 to enter into forward foreign exchange contracts as part of the Company's hedging activities. At April 4, 2009, the Company had entered into forward foreign exchange contracts of $34.1 (December 31, 2008 - $41.0) as a hedge against certain Canadian dollar-denominated net monetary liabilities and $170.2 (December 31, 2008 - $100.3) as a hedge of anticipated future Canadian dollar cash outflows, under this facility.

The Company has agreed to pay guarantee fees to Brookfield in connection with Brookfield's guarantees to Fraser Papers' lenders in support of Fraser Papers' credit facilities. The fees are equal to an annualized rate of approximately 2.0% of the maximum amount of the guarantee of $50.0 (or $1.0 per year).

Fraser Papers is dependant on the continued financial support of Brookfield. Without this support, it is possible that the Company may not be able to secure alternative sources of financing with terms that are satisfactory to the Company.

NOTE 11. COMPARATIVE FIGURES

Certain comparative figures have been reclassified from those previously presented to conform to the current year's presentation.

Contact Information