Tembec invests in cellulose, power generation

It will also increase
Temiscaming’s annual production capacity of specialty cellulose by 5,000
metric tonnes, and make Temiscaming one of the world’s lowest-cost
specialty cellulose manufacturing facilities.

This project is the first phase of a two-phase investment plan for
the facility. It will involve the replacement of three old boilers with a
new high-pressure boiler designed to burn waste sulfite liquor, a
co-product of the specialty cellulose manufacturing process, producing
green steam for use at the facility. The project also calls for the
installation of a new electricity turbine that will be driven by this
steam. The turbine
will increase the Temiscaming facility's green electricity production
capacity from its current 10 megawatts to, eventually, 60 megawatts. The
boiler is scheduled to start up in December 2013, followed by the
turbine, in May 2014.

Hydro-Québec will offtake the additional green electricity produced
by this turbine under a 25-year contract at $106 MW/hour, indexed with
CPI, which will strengthen and stabilize Tembec’s revenues through the
economic cycle.

The $190-million investment in Phase 1 will be financed with $105
million of new debt, which includes a $75-million loan from
Investissement Québec; the balance of $85 million will come from free
cash flow from Tembec operations.

“This game-changing project for Tembec will make Temiscaming one of
the most competitive mills in the global pulp and paper market. I want
to acknowledge the critical support of the Québec Government, through
Investissement Québec, and the continuing commitment of our employees to
remaining competitive,” stated James Lopez, Tembec’s President and
Chief Executive Officer.

“This exciting project shows Québec’s commitment to supporting its
regional resource-based industries, and helping them compete on the
world stage. By working together proactively with local governments and
Investissement Québec, we are pleased to reinforce Tembec’s leadership
position in specialty cellulose, a growing and sustainable industry,”
stated Québec Premier Jean Charest.

Once the new equipment is in operation, Tembec expects a four-year
return on investment, through new revenues from green electricity, the
additional production of 5,000 metric tonnes of specialty cellulose and
lower costs. Tembec’s management expects the project will reach an
annual run-rate EBITDA (earnings before interest, taxes, depreciation
and amortization) contribution of approximately $40—$45 million by
fiscal year 2015 assuming implementation as scheduled and planned.

The new boiler, turbine and emission control equipment will be sized
to accommodate Phase 2 of the project, a follow-on investment of $120
million which is currently projected for 2014- 2015, Phase 2 would
increase Temiscaming’s annual specialty cellulose production capacity by
30,000 metric tonnes, boost green electricity generation by 10
megawatts to attain full turbine capacity, and further reduce operating
costs.

Tembec is the world’s second leading producer of specialty cellulose

Refined from wood pulp, specialty cellulose is a component of
products in the pharmaceuticals, food, cosmetics, personal care,
construction and electronics industries, among others. It is a high
margin business, growing in the range of 4% to 5% per year, and enjoys
more stable demand than forest product commodities.

Tembec’s combined investment of $310 million in the Temiscaming
specialty cellulose facility – $190 million in Phase 1, and $120 million
in Phase 2 – will be one of the largest in the forest products industry
in many years. It will further reinforce Tembec’s position as the
world’s second leading producer of specialty cellulose.

The overall project will increase Tembec’s annual production capacity
of specialty cellulose from the current 310,000 metric tonnes to
345,000 metric tonnes. The Temiscaming facility’s production capacity
will increase from the current 160,000 metric tonnes to 195,000 metric
tonnes. Tembec’s Tartas, France, specialty cellulose facility has a
current production capacity of 150,000 metric tonnes.

Tembec’s new 25-year power contract with Hydro-Québec

Tembec’s limited partnership, Tembec Energy L.P., has entered into a
long-term power purchase contract with Hydro-Québec acting through its
Hydro-Québec Distribution division. The agreement will allow Tembec to
sell to Hydro-Québec, for a 25-year term, up to 50 megawatts of the
electricity generated by a new turbine to be installed at its
Temiscaming mill at green energy rates of $106 MW/hour, indexed with
CPI.

Tembec’s loan agreement with Investissement Québec

In connection with the project, Tembec has also entered into a
$75-million loan with Investissement Québec, a governmental agency,
which will be used to finance a portion of the total cost of the project
which is currently estimated at $190 million. The loan bears interest
at a rate of 5.5% compounded yearly and is secured by a second priority
charge over the project’s assets. The loan shall be reimbursed in equal
monthly payments over a period of 12 years starting 36 months after the
initial loan disbursement and is subject to compliance with certain
covenants and undertakings customary with such types of loans. Under
this loan, Tembec has also agreed to grant to Investissement Québec a
five-year option to purchase three million common shares of Tembec at a
price of $7 per share.

Tembec is a manufacturer of forest products – lumber, pulp, paper and
specialty cellulose – and a global leader in sustainable forest
management practices. Principal operations are in Canada and France.
With annual sales of approximately $2 billion, Tembec has 4,000
employees and is listed on the TSX (TMB).