VANCOUVER, BRITISH COLUMBIA--Canfor Pulp Income Fund (the "Fund") (TSX:CFX.UN - News) announced today its third quarter 2008 results as well as the results of Canfor Pulp Limited Partnership (the "Partnership") in which the Fund has a 49.8% ownership.
The Partnership reported sales of $215.4 million and net income of $11.1 million, or $0.15 per unit, for the quarter ended September 30, 2008. Included in net income is a charge of $12.7 million representing a reduction in the value of outstanding natural gas forward contracts, a result of decreases in the market price of natural gas during the quarter. This unrealized reduction on natural gas forward contracts compares to an unrealized increase in value in the second quarter of 2008 of $8.0 million.
The Partnership generated adjusted distributable cash (defined as standardized distributable cash before changes in working capital and long-term deferred maintenance, and after provision for accrued capital expenditures) of $38.0 million, or $0.53 per unit, in the third quarter of 2008. Capital expenditures, net of amounts funded from insurance proceeds, were $5.7 million in the quarter. For the third quarter of 2008, based on estimates of full year cash flow and capital expenditures, the Partnership and Fund maintained monthly distributions of $0.12 per unit for a total of $0.36 per unit in the quarter.
The third quarter 2008 results are lower than those in the same period a year ago, when sales were $228.9 million with net income of $33.2 million or $0.46 per unit, as increased NBSK list prices were offset by lower sales volumes and higher freight costs, higher unit manufacturing costs and the impact of natural gas forward contracts valuations.
The Fund earned net income of $5.2 million, or $0.15 per Fund unit, in the third quarter of 2008, compared to net income of $7.0 million, or $0.20 per Fund unit, in the second quarter of 2008. Net income before future income taxes of $5.5 million represents the Fund's share of the Partnership's earnings for the third quarter of 2008.
The Prince George Pulp Mill continues to operate at a slightly reduced rate due to operation of a temporary chip screening system. Construction of a permanent system is nearing completion and the system is expected to be operational before the end of the year. Pulp production volume lost as a result of the Prince George Pulp Mill using the temporary chip screening system is approximately 7,000 tonnes in the third quarter compared to 6,000 tonnes in the second quarter of 2008. The financial impact of this reduced production volume is offset by accrued business interruption insurance recoveries of $3.5 million in the third quarter and $3.3 million in the second quarter.
There were no scheduled maintenance outages in the third quarter of 2008. The Intercontinental Pulp Mill and Prince George Pulp and Paper Mill are scheduled to complete their maintenance outages in the fourth quarter of 2008, which will result in an estimated 15,000 tonnes of reduced production. The Intercontinental Pulp Mill will increase the capacity of its pulp machine during the outage. Scheduled maintenance outages taken at the Northwood and Intercontinental Pulp Mills in the second quarter of 2008 resulted in approximately 33,000 tonnes of reduced production in that quarter.
Recent global events are having an impact on world pulp markets with a resultant slowdown of pulp demand. This has caused pulp inventories to rise and prices in US dollars to decline. Although the depreciation of the Canadian dollar is mitigating the pulp price reduction, with rising inventories, the Partnership has decided to take market related production curtailments of approximately 30,000 tonnes of pulp and 10,000 tonnes of kraft paper. These curtailments are expected to occur over the next several months.
On October 22, 2008 the Fund announced a cash distribution of $0.12 per Fund unit for the month of October to be paid on November 15, 2008.
Additional Information
A conference call to discuss the third quarter 2008 financial and operating results will be held on Tuesday, October 28 at 8:00 a.m. Pacific time.
To participate in the call, please dial 416-641-2140 or Toll-Free 1-800-952-4972. For instant replay access, please dial 416-695-5800 or Toll-Free 1-800-408-3053 and enter participant pass code 3272040. The conference call will be webcast live and will be available at www.canforpulp.com/investors/webcasts.asp.
This news release and the attached interim Management's Discussion and Analysis (MD&A) and financial statements are available on the Partnership's website at www.canforpulp.com.
About Canfor Pulp Income Fund
The Fund is an unincorporated, open-ended trust established under the laws of Ontario, created to indirectly acquire and hold an interest in the Canfor Pulp Limited Partnership. The Fund indirectly holds a 49.8% interest in the Partnership with Canadian Forest Products Ltd. (a subsidiary of Canfor Corporation) holding the remaining 50.2% interest in the Partnership.
Forward Looking Statements
Certain statements in this press release constitute "forward-looking statements" which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Words such as "expects", "anticipates", "intends", "plans", "will", "believes", "seeks", "estimates", "should", "may", "could" and variations of such words and similar expressions are intended to identify such forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by the Fund with the securities regulatory authorities in all of the provinces and territories of Canada to which recipients of this press release are referred to for additional information concerning the Fund and Partnership, its prospects and uncertainties relating to the Fund and Partnership and its prospects. These statements are based on management's current expectations and beliefs and actual events or results may differ materially. New risk factors may arise from time to time and it is not possible for management to predict all of those risk factors or the extent to which any factor or combination of factors may cause actual results, performance and achievements of the Fund and Partnership to be materially different from those contained in forward-looking statements. The forward-looking statements are based on current information and expectations and the Fund and Partnership assume no obligation to update such information to reflect later events or developments, except as required by law.
Forward-looking statements in this MD&A include statements made under:
- "Critical Accounting Estimates";
- "Markets - Pulp", the last paragraph under that heading;
- "Outlook - Pulp";
- "Markets - Paper", the last paragraph under that heading;
- "Outlook - Kraft Paper";
- "Critical Accounting Estimates";
- "Distributable Cash and Cash Distributions".
Material risk factors that could cause actual results to differ materially from the forward-looking statements contained in this MD&A include: general economic, market and business conditions; product selling prices; raw material and operating costs; exchange rates; changes in law and public policy; and opportunities available to or pursued by the Fund and Partnership. Additional information concerning these and other factors can be found in the Fund's Annual Information Form dated February 25, 2008, which is available on www.sedar.com.
Canfor Pulp Income Fund and Canfor Pulp Limited Partnership
Third Quarter 2008
Management's Discussion and Analysis
Canfor Pulp Income Fund (the Fund) earns income from its 49.8% indirect interest in Canfor Pulp Limited Partnership (the Partnership). The Fund accounts for its investment in the Partnership on the equity basis and does not consolidate the operations of the Partnership. In order for the Fund's unitholders to understand the results of operations, the unaudited interim consolidated financial statements with accompanying notes are presented for both the Fund and the Partnership. This Management's Discussion and Analysis (MD&A) provides a review of the significant developments that have impacted the Partnership's and the Fund's performance for the quarter and nine months ended September 30, 2008 relative to the same periods in the prior year and relative to the previous quarter. This MD&A should be read in conjunction with the unaudited interim consolidated financial statements and accompanying notes as well as the annual MD&A and audited consolidated financial statements and notes which are included in the Fund's 2007 Annual Report. Additional information relating to the Fund and the Partnership, including the Fund's Annual Information Form (AIF) dated February 25, 2008, is available on SEDAR at www.sedar.com or at www.canforpulp.com.
Factors that could impact future operations are also discussed. These factors may be influenced by known and unknown risks and uncertainties that could cause the actual results to be materially different from those stated in this discussion. Factors that could have a material impact on any future oriented statements made herein include, but are not limited to: general economic, market and business conditions; product selling prices; raw material and operating costs; exchange rates; changes in law and public policy; and opportunities available to or pursued by the Partnership.
In this document, references are made to EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization and before other non-operating income and expenses) and adjusted distributable cash. The Partnership considers EBITDA to be an important indicator for identifying trends in the Partnership's performance and of the Partnership's ability to generate funds to meet its debt service, capital expenditure requirements and to make cash distributions to its partners. Adjusted distributable cash is a measure of cash flow used by management to determine the level of cash distributions. EBITDA and adjusted distributable cash should not be considered as alternatives to net income or cash flow from operations as determined in accordance with Canadian generally accepted accounting principles. As there is no standardized method of calculating EBITDA, the Partnership's use of this term may not be directly comparable with similarly titled measures used by other companies or income funds.
Calculations of EBITDA and adjusted distributable cash are provided in a schedule at the end of this MD&A.
The information in this report is as at October 27, 2008.
CANFOR PULP INCOME FUND
The Fund is an unincorporated open-ended trust established under the laws of Ontario on April 21, 2006, pursuant to the Fund Declaration. The principal head office of the Fund is located at 1700 West 75th Avenue, Vancouver, BC, Canada. The Fund has been established to acquire and hold, through a wholly owned trust, the Canfor Pulp Trust (the Trust), investments in Limited Partnership Units of the Partnership, and such other investments as the Trustees of the Fund may determine. The general partner of the Partnership is Canfor Pulp Holding Inc. (the General Partner) and each limited partner holds an ownership interest in the General Partner equal to its proportionate interest in the Partnership.
At October 27, 2008, there are a total of 35,493,505 Fund units issued and outstanding, and the Fund indirectly holds a total of 35,493,542 units of the Partnership, representing 49.8% of the Partnership and Canfor holds 35,776,483 Class B Exchangeable Limited Partnership Units, representing 50.2% of the Partnership.
Each unitholder participates pro-rata in any distributions from the Fund. Under present income tax legislation, income tax obligations related to the distributions of the Fund are the obligations of the unitholders and the Fund is only taxable on any amount not allocated to the unitholders.
SELECTED QUARTERLY FUND FINANCIAL INFORMATION
(thousands of
dollars, except
per unit amounts, Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
unaudited) 2008 2008 2008 2007 2007 2007 2007 2006
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Equity income in
Canfor Pulp
Limited
Partnership 5,513 9,046 21,667 5,999 16,541 17,900 24,203 12,184
Net income
(loss)(1) 5,208 7,015 21,667 8,703 16,541 (21,437) 24,203 12,184
Net income
(loss) per
Fund unit(1) $0.15 $0.20 $0.61 $0.25 $0.46 $(0.60) $0.68 $0.56
Distributions
earned from the
Partnership
and declared
to unitholders 12,778 12,777 12,778 13,487 19,167 17,747 14,907 24,147
Distributions
declared per
Fund unit $0.36 $0.36 $0.36 $0.38 $0.54 $0.50 $0.42 $0.80
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Note: 1 In the second quarter of 2007 the Fund recorded a non-cash future
income tax charge of $39.3 million to net income relating to the
Fund's 49.8% ownership in the Partnership and based on temporary
differences between the accounting and tax basis of the
Partnership's assets and liabilities expected to reverse after
January 1, 2011.
OPERATING RESULTS AND LIQUIDITY
For the quarter ended September 30, 2008, the Fund had net income of $5.2 million, or $0.15 per Fund unit. Net income is the Fund's share of the Partnership's earnings for the third quarter of 2008, less a future income tax expense of $0.3 million. The future income tax expense represents an adjustment to the future income tax liability based on the Fund's share of the differences between book and income tax values of the Partnership's assets and liabilities. Distributions declared by the Partnership and accruing to the Fund were $12.8 million of which $4.3 million was receivable at September 30, 2008. Cash distributions received from the Partnership are the only source of liquidity for the Fund. The Fund's requirements for administrative services are minimal and are funded and expensed by the Partnership. For further information refer to the Partnership's discussion of operating results and liquidity on pages 7 through 13 of this interim management discussion and analysis.
FUND DISTRIBUTIONS
The Fund is entirely dependent on distributions from the Partnership to make its own distributions and declares distributions on a monthly basis with the record date on the last business day of each month and payable within the 15 days following. Distributions payable by the Partnership to the Fund and distributions payable by the Fund to its unitholders are recorded when declared. During the third quarter of 2008, the Fund declared distributions of $0.36 per Fund unit or $12.8 million.
Monthly cash distributions from the Partnership are not directly equal to the Fund's pro-rata share of the Partnership's income under the equity method, primarily due to capital expenditures, unrealized changes in value of derivative instruments, amortization and other non-cash expenses of the Partnership, and reserves for future capital expenditures and contingencies.
RISKS AND UNCERTAINTIES
The Fund is subject to certain risks and uncertainties related to the nature of its investment in the Partnership and the structure of the Fund, as well as all of the risks and uncertainties related to the business of the Partnership. A comprehensive discussion of these risks and uncertainties is contained in the Fund's Annual Information Form dated February 25, 2008, which is available on www.sedar.com.
FUND UNITS
At October 27, 2008, there are a total of 35,493,505 Fund units outstanding.
RELATED PARTY TRANSACTIONS
All accounting, treasury, legal and administrative functions for the Fund are performed on its behalf, without charge, by the Partnership pursuant to a support agreement. Distributions earned from the Partnership for the three months ended September 30, 2008 were $12.8 million of which $8.5 million was paid, with the balance of $4.3 million receivable on September 30, 2008.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts recorded in the financial statements. Management regularly reviews these estimates and assumptions based on currently available information. The determination of the future income tax liability requires management to estimate the future impacts of the Partnership's amortization of capital assets, capital cost allowance claims for tax purposes and changes to actuarial estimates of employee benefit plans. Changes in these estimates could have a material impact on the calculation of the liability.
CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2008, the Fund adopted the Canadian Institute of Chartered Accountants' new Handbook Sections; 1535 "Capital Disclosures", 3862 "Financial Instruments - Disclosures" and 3863 "Financial Instruments - Presentation". Handbook sections 3862 and 3863 replace section 3861 "Financial Instruments - Disclosure and Presentation". These recommendations have been incorporated into the unaudited interim consolidated financial statements.
Section 1535 - Capital Disclosures
This Section establishes standards for disclosing information about an entity's capital and how it is managed. Under this standard the Fund is required to disclose qualitative and quantitative information that enables users of the financial statements to evaluate the Fund's objectives, policies and processes for managing capital.
Section 3862 - Financial Instruments - Disclosures
This Section requires entities to provide disclosure of quantitative and qualitative information in their financial statements that enable users to evaluate (a) the significance of financial instruments for the entity's financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and management's objectives, policies and procedures for managing such risks.
Section 3863 - Financial Instruments - Presentation
This Section establishes standards for presentation of financial instruments and non-financial derivatives.
CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS
On February 13, 2008, the Accounting Standards Board announced that publicly accountable entities will be required to prepare financial statements in accordance with International Financial Reporting Standards ("IFRS") for interim and annual financial statements for fiscal years beginning on or after January 1, 2011. The Fund is currently developing a conversion implementation plan and assessing the impacts of the conversion on the consolidated financial statements and disclosures of the Fund.
CANFOR PULP LIMITED PARTNERSHIP
Structure
The Partnership is a limited partnership formed on April 21, 2006, under the laws of Manitoba to acquire and carry on the NBSK pulp and paper business of Canfor. The business consists of two NBSK pulp mills and one NBSK pulp and paper mill located in Prince George, BC and a marketing group based in Vancouver, BC (the Pulp Business).
At October 27, 2008, the Fund indirectly holds a total of 14,254,005 Class A Limited Partnership Units and 21,239,537 Class B Limited Partnership Units, representing 49.8% of the Partnership and Canfor owns the remaining 50.2%. The Partnership is managed, on behalf of the limited partners, by Canfor Pulp Holding Inc., the General Partner. Below is a simplified schematic of the ownership structure.
To view Partnership Structure please click on the following link: http://media3.marketwire.com/docs/CFX1027.pdf
Business
The Partnership is a leading global supplier of pulp and paper products with operations based in the central interior of British Columbia. The Partnership's strategy is to maximize cash flows and enhance the value of its assets by: (i) preserving its low-cost operating position, (ii) maintaining the premium quality of its products and (iii) opportunistically acquiring high quality assets.
The Partnership owns and operates three mills with annual capacity to produce over one million tonnes of northern softwood market kraft pulp, 90% of which is bleached to become NBSK pulp for sale to the market, and approximately 140,000 tonnes of kraft paper.
SUMMARY OF SELECTED PARTNERSHIP RESULTS
(millions of dollars, except for per Q3 Q2 YTD Q3 YTD
unit amounts, unaudited) 2008 2008 2008 2007 2007
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Sales 215.4 212.6 639.4 228.9 706.5
EBITDA (1) 40.6 24.0 107.1 48.8 160.6
Operating income 27.5 11.6 69.7 35.4 122.6
Net income 11.1 18.2 72.8 33.2 117.7
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Per Partnership unit, basic and diluted
Net income 0.15 0.26 1.02 0.46 1.65
EBITDA 0.57 0.33 1.50 0.68 2.25
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Average exchange rate (US$/Cdn$) (2) 0.960 0.990 0.982 0.957 0.905
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Notes: 1 For calculation of EBITDA, see supplementary financial
information.
2 Source - Bank of Canada (average noon rate for the period).
EBITDA for the third quarter of 2008 increased by $16.6 million from the second quarter of 2008 and decreased by $8.2 million when compared to the third quarter of 2007. The increase from the second quarter is mainly attributable to lower unit manufacturing costs and a weaker Canadian dollar, partially offset by higher freight costs. Lower unit manufacturing costs are the result of reduced operating, labour and maintenance costs and increased production attributable to the scheduled maintenance outages in the second quarter of 2008. Realized pulp prices in Canadian dollar terms increased approximately 2% due to the impact of a weaker Canadian dollar which averaged 3% lower than the previous quarter. Freight costs rose 10% over the previous quarter as higher fuel surcharges increased costs of delivering pulp and paper to our customers.
When compared to the third quarter of 2007 the $8.2 million decrease in EBITDA was primarily attributable to higher unit manufacturing costs, higher freight costs and lower sales volumes, offset by higher realized paper prices in Canadian dollar terms. Unit manufacturing costs increased 6% due to higher fibre, chemical and energy costs. Freight costs increased 19% when compared to the third quarter of 2007. Fibre costs increased 12% over the same period in 2007 due to higher freight costs and a 19% increase in delivered volume of higher cost whole log chips. Realized paper prices in Canadian dollar terms increased 10% when compared to the third quarter of 2007.
For the nine-month period ended September 30, 2008, EBITDA of $107.1 million decreased $53.5 million when compared to the same period in 2007. The decrease in EBITDA is attributable to the stronger Canadian dollar, lower pulp sales volumes and higher unit manufacturing and freight costs, partially offset by increased NBSK pulp list prices. The Canadian dollar strengthened by 8%, an unfavourable impact of $47 million over the same period in the prior year. Pulp sales volumes decreased by 9% when compared to the prior year due to the impact of the Prince George Pulp and Paper Mill fire and increased scheduled maintenance downtime in 2008. Unit manufacturing costs increased by 11% due to the impact of lower production volumes and higher energy, chemical and fibre costs. Freight costs increased 6% when compared to 2007.
OPERATING RESULTS BY BUSINESS SEGMENT
Pulp
(millions of dollars unless otherwise Q3 Q2 YTD Q3 YTD
noted, unaudited) 2008 2008 2008 2007 2007
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Sales 182.0 178.6 537.2 199.3 612.0
EBITDA (1) 39.1 24.1 107.2 52.0 171.3
EBITDA margin (1) 21% 13% 20% 26% 28%
Operating income (1) 26.2 12.8 72.0 39.6 136.5
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Average NBSK pulp list price - (US$
per tonne, delivered to USA) 880 880 880 837 812
Average NBSK pulp list price - (Cdn$
per tonne, delivered to USA) 917 889 896 875 897
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Production - pulp (000 mt) 255.6 226.1 713.2 265.7 782.9
Shipments - Partnership-produced
pulp (000 mt) 234.5 233.8 697.2 257.1 770.0
Marketed on behalf of HSLP & Canfor
(000 mt) 135.5 151.9 415.8 139.2 423.9
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Note: 1 Comparative figures have been reclassified to conform to current
year presentation.
Third quarter 2008 operating income of the pulp segment increased by $13.4 million from the second quarter of 2008 and decreased by $13.4 million when compared to the third quarter in 2007. Compared to the second quarter of 2008, the increase is primarily due to lower unit manufacturing costs and a weaker Canadian dollar, partially offset by higher freight costs. Lower unit manufacturing costs are the result of reduced operating, labour and maintenance costs for pulp and paper and increased production attributable to the scheduled maintenance outages in the second quarter of 2008. Higher fuel costs increased both the cost of delivering pulp to customers and the delivered cost of fibre to the mills. Overall realized pulp prices in Canadian dollar terms increased approximately 2% due to the weakening of the Canadian dollar. Pulp production volume reduction as a result of the Prince George Pulp Mill fire and subsequent operation using the temporary chip screening system is approximately 7,000 tonnes in the third quarter of 2008 and 6,000 tonnes in the second quarter of 2008. The financial impact of this reduced production volume was offset by accrued business interruption insurance recoveries of $3.5 million in the third quarter of 2008 and $3.3 million in the second quarter of 2008.
The third quarter 2008 results are lower than those in the same period a year ago, due to higher unit manufacturing and freight costs, and lower sales volumes. Unit manufacturing costs increased 6% over the prior year primarily due to a 10% increase in fibre costs and higher energy and chemical prices. Freight costs of delivering pulp to our customers increased by 23% when compared to the same period in 2007 as higher fuel surcharges and export container rates increased the cost of delivering pulp to our customers. Fibre cost increases over the prior year quarter were mainly attributable to a higher percentage of higher cost whole log chip consumption, combined with increased freight costs.
For the nine month period ended September 30, 2008, operating income of $72.0 million was $64.5 million less than the same period in 2007. The decrease is attributable to the lower sales volumes, higher unit manufacturing costs, and a stronger Canadian dollar offset by increased NBSK pulp list prices. The Canadian dollar strengthened by 8%, an unfavourable impact of $41 million over the same period in the prior year. Sales volumes decreased by 9% when compared to the prior year due to the impact of the Prince George Pulp and Paper Mill fire and increased scheduled maintenance downtime in 2008. Offsetting the impact of the fire was an accrual for business interruption insurance recoveries of $18.2 million. Unit manufacturing costs increased by 11% due to the impact of lower production volumes and higher maintenance, energy, chemical and fibre costs. Fibre costs increased by 12% when compared to the prior year, due to higher prices for residual chips and a higher percentage of whole log chips. Pulp realized prices in Canadian dollar terms decreased by 3% as a 9% increase in pulp list prices was more than offset by a 9% strengthening of the Canadian dollar and a slight increase in discounts due to geographic mix.
Operations
NBSK production during the third quarter was 29,500 tonnes greater than the second quarter of 2008, and 10,100 tonnes less than the third quarter of 2007. The Prince George Pulp and Paper Mill continues to operate at a slightly reduced rate due to operation on a temporary chip screening system. Construction of a permanent system is nearing completion and expected to be operational in the fourth quarter of 2008. Pulp production volume reduction of 7,000 tonnes during the quarter as a result of the fire and subsequent operation using the temporary system was similar to the second quarter of 2008 and 35,000 tonnes for the nine months ended September 30, 2008. There were no scheduled maintenance outages in the third quarter of 2008 as compared to 33,000 tonnes of reduced production in the second quarter of 2008. Reduced production in respect of scheduled maintenance outages in 2007 were approximately 4,100 tonnes in the third quarter and 21,000 tonnes for the nine months ended September 30, 2007.
Markets - Pulp
The pulp market weakened during the third quarter of 2008. Market pulp inventories (World 20 Producers) of softwood kraft market pulp were at 36 days of supply at the end of the third quarter, an increase of 7 days from the level at the end of the second quarter. Inventories of 30 days are generally considered to be representative of a balanced market. Shipments in the first nine months of 2008 of Northern softwood kraft market pulp were lower by 2.9% compared to the same period in 2007.
The weakening paper demand in the third quarter has resulted in a reduction of wood pulp purchases by papermakers. This has caused pulp inventories held by producers to rise, and pulp prices to fall in all of the Partnership's major markets. Northern European NBSK prices finished the third quarter at US$850 per tonne (a decrease of US$50 per tonne from the beginning of the quarter, although US$20 per tonne higher than the end of the third quarter of 2007). North American pulp prices fell $15 during the quarter, from US$885 in July to US$870 in September. As we enter the fourth quarter, list prices have declined a further US$20 per tonne.
Outlook - Pulp
The Intercontinental Pulp Mill and Prince George Pulp and Paper Mill are scheduled to complete their maintenance outages in the fourth quarter of 2008, which will result in an estimated 15,000 tonnes of reduced production. The Intercontinental Pulp Mill will increase the capacity of its pulp machine during the outage.
Due to general weakness and the global financial crisis, we are seeing a slowdown in pulp demand resulting in an increase in inventories and decreasing prices. The impact of price declines in US dollar terms is mitigated by lower oil and natural gas prices and a weakened Canadian dollar. However, with rising inventories, the Partnership has decided to take market related production curtailments of approximately 30,000 tonnes of pulp and 10,000 tonnes of kraft paper. These curtailments are expected to occur over the next several months.
Paper
(millions of dollars unless otherwise Q3 Q2 YTD Q3 YTD
noted, unaudited) 2008 2008 2008 2007 2007
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Sales 33.4 34.0 102.2 29.6 94.5
EBITDA (1) 5.3 3.1 10.7 0.5 1.9
EBITDA margin (1) 16% 9% 10% 2% 2%
Operating income (loss) (1) 4.3 2.1 7.8 (0.5) (1.2)
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Production - paper (000 mt) 35.9 34.2 102.5 33.0 98.5
Shipments - paper (000 mt) 31.6 33.7 100.4 30.8 97.1
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Note: 1 Comparative figures have been reclassified to conform to current
year presentation.
Operating income of the paper segment for the third quarter of 2008 was $4.3 million, $2.2 million higher than the second quarter of 2008 and $4.8 million higher than third quarter last year. The improvement over the second quarter of 2008 was due to a 5% improvement in realized prices in Canadian dollar terms and lower unit manufacturing costs, partially offset by lower sales volumes. The decrease in manufacturing costs was primarily the result of lower spending on maintenance and operating supplies. When compared to the third quarter of 2007 the improved operating earnings were due to a 10% increase in realized prices in Canadian dollar terms, lower unit manufacturing costs and higher sales volumes.
For the nine month period ending September 30, 2008, operating income of $7.8 million increased by $9.0 million when compared to the same period in 2007. The increase was attributable to a 5% increase in realized prices in Canadian dollar terms, higher sales volumes and lower unit manufacturing costs due to lower raw material costs for slush pulp.
Operations
The paper machine had a strong operating quarter setting a record of 392 tonnes per day for tonnes made to customer orders and matching a record average operating rate of 395 tonnes per day. Paper production in the third quarter of 2008 increased by 1,700 tonnes over the second quarter of 2008 and 2,900 tonnes when compared to the third quarter of 2007. In the first quarter of 2008, the fire at the Prince George Pulp and Paper Mill resulted in reduced production of approximately 2,500 tonnes. There was no scheduled maintenance taken during 2008 with 1,800 tonnes of reduced production in the third quarter of 2007 due to a scheduled maintenance outage.
Markets - Paper
Similar to the first half of 2008, CPLP experienced solid demand for its Kraft paper sales for most of the third quarter. However market conditions changed in September; a combination of the world financial crisis and worsening overall economic conditions in the USA has impacted paper markets across the world, resulting in a significant decline in paper demand.
Overall, CPLP prime paper shipments were up 3.3% for the first 9 months of 2008. Bleached paper shipments are up as well, accounting for 83% of the Partnership's total this year compared to 71% for the same period last year at the same point in time.
The American Forest & Paper Association reported (AF&PA) that Kraft Paper shipments in the first six months of 2008 were up 9.7% over 2007. However, in July & August, AF&PA reported that shipments fell 3.6% and 5.4% respectively versus 2007. Although September statistics have not been released, they are expected to be down again. As well, the Pulp and Paper Product Council reported that Canadian Kraft paper shipments for August were down 1.4% and up only 0.1% in the first eight months of 2008.
Outlook - Kraft Paper Markets
Looking forward, weak demand is expected to continue through the fourth quarter of 2008 and into 2009. Prices have declined in both offshore and domestic markets, with demand reductions and inventories building. RISI's September price forecast shows no further change in pricing in the fourth quarter of 2008, but with general paper packaging grade pricing reducing up to 10% in 2009. Currency movement (Cdn and Euro vs. the US) may mitigate US dollar pricing reductions.
Non-Segmented Costs
Q3 Q2 YTD Q3 YTD
(millions of dollars, unaudited) 2008 2008 2008 2007 2007
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Unallocated costs 3.0 3.3 10.1 3.7 12.7
Interest expense, net 2.1 1.7 5.5 1.6 5.0
Reduction (increase) in unrealized
value of derivative instruments 12.7 (8.0) (2.2) 3.1 5.1
Unrealized foreign exchange loss
(gain) on long-term debt 5.2 (0.6) 7.9 (7.4) (18.6)
Foreign exchange loss (gain) on
working capital (3.8) 0.3 (6.1) 4.9 13.2
Net property damage insurance gain - - (8.5) - -
Other expense 0.2 - 0.3 - 0.2
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19.4 (3.3) 7.0 5.9 17.6
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Unallocated Costs
Unallocated costs, comprised principally of general and administrative expenses, totalled $3.0 million in the third quarter of 2008 compared to $3.3 million in the second quarter of 2008 and $3.7 million in the third quarter of 2007. Unallocated costs decreased slightly when compared to the second quarter of 2008 due to lower administration costs. When compared to the third quarter of 2007 the lower costs are attributable to lower accruals for performance based incentive plans.
For the nine months ended September 30, 2008 unallocated costs of $10.1 million were $2.6 million lower than the same period a year ago due to lower accruals for performance based incentive plans and a reduction in corporate services provided by Canfor.
Interest Expense
The net interest expense during the third quarter of 2008 of $2.1 million, increased by $0.4 million when compared to the prior quarter, due to the cost of funding short-term working capital requirements.
Other Non-segmented Items
The reduction in the value of derivative instruments of $12.7 million recorded in the quarter relates to a revaluation to market of outstanding natural gas swaps at the end of the quarter and is the result of decreases in the market price of natural gas during the quarter. For the nine months ended September 30, 2008 the Partnership has recorded a net unrealized gain of $2.2 million. The natural gas swaps are used to fix the price on a portion of the Partnership's future natural gas requirements.
The foreign exchange loss on long-term debt and the foreign exchange gain on working capital are the direct result of translating US dollar balances at period-end exchange rates.
SUMMARY OF FINANCIAL POSITION
The following table summarizes the Partnership's financial position as at the end of and for the following periods:
(millions of dollars, Q3 YTD Q3 YTD
except for ratios, unaudited) 2008 2008 2007 2007
--------------------------------------------------------------------------
Ratio of current assets to
current liabilities 1.96 1.96 1.83 1.83
Ratio of net debt to
partners' equity(1) 0.22 0.22 0.12 0.12
Increase (decrease) in cash
and cash equivalents (8.3) (8.5) 6.4 12.1
Comprised of cash flow from
(used in):
Operating activities(2) 26.8 83.3 49.2 141.3
Financing activities (26.5) (72.8) (38.5) (116.9)
Investing activities(2) (8.6) (19.0) (4.3) (12.3)
--------------------------------------------------------------------------
Notes: 1 Net debt consists of long-term debt and operating loans, net of
cash and cash equivalents.
2 Comparative figures have been reclassified to conform to current
year presentation.
Changes in Financial Position
Cash generated from operating activities was $26.8 million in the third quarter of 2008 compared to $49.2 million in the third quarter of 2007. The decrease was primarily due to an increase of cash used in working capital. The increase of cash used in working capital is due to increased cost and volume of finished goods, an increase in insurance receivables for the Prince George Pulp and Paper Mill fire insurance claim and a reduction in accounts payable to settle outstanding liabilities relating to the scheduled maintenance expenditures in the second quarter of 2008.
The cash used in financing activities of $26.5 million in the quarter represents $25.7 million of distributions paid to the limited partners, namely Canfor and the Fund, and a $0.8 million repayment on the Partnership's operating line.
The cash used in investing activities in the quarter is comprised of $8.6 million relating to capital expenditures net of accruals.
LIQUIDITY AND FINANCIAL REQUIREMENTS
At the end of the current quarter, the Partnership's cash and cash equivalents liability balance of $5.9 million consisted of outstanding cheques net of cash on hand. Cash and cash equivalents include cash on hand and highly liquid investments with an original maturity date of 90 days or less net of outstanding cheques. The Partnership does not have holdings in asset backed commercial paper. The Partnership has a $75 million syndicated unsecured revolving bank credit facility (the Revolving Facility), maturing in November 2009, of which $43.4 million is available with $27.4 million of the Revolving Facility reserved for a standby letter of credit issued to BC Hydro and $4.2 million drawn to fund working capital requirements as of September 30, 2008.
OUTSTANDING UNITS
At October 27, 2008, there were 71,270,025 Limited Partnership Units outstanding, of which 35,493,542 units (consisting of 14,254,005 Class A Limited Partnership Units and 21,239,537 Class B Limited Partnership Units) are owned by the Fund through Canfor Pulp Trust and 35,776,483 Class B Exchangeable Limited Partnership Units are owned indirectly by Canfor.
RELATED PARTY TRANSACTIONS
The Partnership's transactions with related parties are consistent with the transactions described in the December 31, 2007 audited consolidated financial statements and are based on agreed upon amounts, and are summarized in note 12 of the unaudited interim consolidated financial statements.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the quarter ending September 30, 2008, there were no changes in the Partnership's internal controls over financial reporting that materially affected, or would be reasonably likely to materially affect, such controls.
RISKS AND UNCERTAINTIES
A comprehensive discussion of risks and uncertainties is included in the Fund's Annual Information Form dated February 25, 2008, which is available on www.sedar.com.
SELECTED QUARTERLY PARTNERSHIP FINANCIAL INFORMATION
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
(unaudited) 2008 2008 2008 2007 2007 2007 2007 2006
---------------------------------------------------------------------------
Sales and Income
(millions of
dollars)
Sales (1) 215.4 212.6 211.4 215.1 228.9 239.4 238.2 225.2
Operating
income (1) 27.5 11.6 30.6 11.7 35.4 39.2 48.0 45.6
EBITDA (1) 40.6 24.0 42.5 27.9 48.8 51.7 60.1 58.2
Net income 11.1 18.2 43.5 12.1 33.2 35.9 48.6 44.8
---------------------------------------------------------------------------
Per Partnership
unit (dollars) (2)
Net income basic
and diluted 0.15 0.26 0.61 0.17 0.46 0.51 0.68 0.63
---------------------------------------------------------------------------
Statistics
Pulp shipments
(000 mt) 234.5 233.8 228.9 253.6 257.1 259.8 253.1 249.8
Paper shipments
(000 mt) 31.6 33.7 35.1 32.4 30.8 35.9 30.4 32.7
---------------------------------------------------------------------------
Average
exchange rate
(US$/Cdn$) (3) 0.960 0.990 0.996 1.019 0.957 0.911 0.854 0.878
---------------------------------------------------------------------------
Average NBSK
pulp list
price - (US$
per tonne,
delivered to
USA) 880 880 880 857 837 810 790 770
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Notes: 1 Comparative figures have been reclassified to conform to current
year presentation.
2 Based on Partnership units outstanding at September 30, 2008
(71,270,025) for all periods.
3 Source - Bank of Canada (average noon rate for the period).
Sales are primarily influenced by changes in market pulp prices, sales volumes and fluctuations in Canadian dollar exchange rates. Operating income, net income and EBITDA are primarily impacted by the level of sales and price fluctuations in raw material inputs, freight costs, energy prices, maintenance costs and the timing of scheduled maintenance downtime. Net income is also impacted by fluctuations in the Canadian dollar exchange rates, market price of natural gas, the revaluation to the period end rate of US dollar denominated working capital balances and long-term debt, and revaluation of outstanding natural gas commodity swaps. Included in the first quarter of 2008 net income is a $8.5 million net gain for property damage insurance, relating to the fire at the Prince George Pulp and Paper Mill.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts recorded in the financial statements. On an ongoing basis, management reviews its estimates, including those related to useful lives for amortization, impairment of long-lived assets; pension and other employee future benefit plans and asset retirement obligations based upon currently available information. While it is reasonably possible that circumstances may arise which cause actual results to differ from these estimates, management does not believe it is likely that any such differences will materially affect the Partnership's financial condition.
CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2008, the Partnership adopted the Canadian Institute of Chartered Accountants' new Handbook Sections; 1535 "Capital Disclosures", 3031 "Inventories", 3862 "Financial Instruments - Disclosures" and 3863 "Financial Instruments - Presentation". Handbook sections 3862 and 3863 replace section 3861 "Financial Instruments - Disclosure and Presentation". These recommendations have been incorporated into the unaudited interim consolidated financial statements.
Section 1535 - Capital Disclosures
This Section establishes standards for disclosing information about an entity's capital and how it is managed. Under this standard the Partnership is required to disclose qualitative and quantitative information that enables users of the financial statements to evaluate the Partnership's objectives, policies and processes for managing capital.
Section 3031 - Inventories
This Section replaces section 3030 and prescribes the accounting treatment for inventories and provides guidance on the determination of costs and its subsequent recognition as an expense, including any write-down to net realizable value. It also provides guidance on assigning costs to inventories and in conjunction with section 3061 "Property Plant and Equipment", provides guidance on classification of major spare parts.
As a result of its adoption of the new guidance, the Partnership reclassified $6.8 million in major spare parts from inventory to property, plant and equipment in the first quarter of 2008. This reclassification was made retrospectively, without prior period restatement or adjustments to opening equity as it was deemed impracticable to determine the impact on prior periods.
Section 3862 - Financial Instruments - Disclosures
This Section requires entities to provide disclosure of quantitative and qualitative information in their financial statements that enable users to evaluate (a) the significance of financial instruments for the entity's financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and management's objectives, policies and procedures for managing such risks.
Section 3863 - Financial Instruments - Presentation
This Section establishes standards for presentation of financial instruments and non-financial derivatives.
CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS
On February 13, 2008, the Accounting Standards Board announced that publicly accountable entities will be required to prepare financial statements in accordance with International Financial Reporting Standards ("IFRS") for interim and annual financial statements for fiscal years beginning on or after January 1, 2011. The Partnership is currently developing a conversion implementation plan and assessing the impacts of the conversion on the consolidated financial statements and disclosures of the Partnership.
CANFOR PULP LIMITED PARTNERSHIP
SUPPLEMENTARY FINANCIAL INFORMATION
(millions of Three months ended Nine months ended
dollars, September 30, September 30, September 30, September 30,
unaudited) 2008 2007 2008 2007
--------------------------------------------------------------------------
RECONCILIATION OF
NET INCOME TO
EBITDA
Net Income $ 11.1 $ 33.2 $ 72.8 $ 117.7
Add (deduct):
Amortization 13.2 13.4 36.8 38.0
Net interest
expense 2.1 1.6 5.5 5.0
Unrealized foreign
exchange loss (gain)
on long-term debt 5.2 (7.4) 7.9 (18.6)
Reduction (increase)
in unrealized value
of derivative
instruments 12.7 3.1 (2.2) 5.1
Foreign exchange
loss (gain) on
working capital (3.8) 4.9 (6.1) 13.2
Loss on disposal of
fixed assets 0.7 - 1.2 -
Net property damage
insurance gain - - (8.5) -
Gain on settlement
of asset retirement
obligation (0.9) - (0.9) -
Other expense 0.3 - 0.6 0.2
--------------------------------------------------------------------------
EBITDA $ 40.6 $ 48.8 $ 107.1 $ 160.6
--------------------------------------------------------------------------
--------------------------------------------------------------------------
EBITDA per
Partnership unit $ 0.57 $ 0.68 $ 1.50 $ 2.25
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(millions of Three months ended Nine months ended
dollars, September 30, September 30, September 30, September 30,
unaudited) 2008 2007 2008 2007
--------------------------------------------------------------------------
CALCULATION OF
STANDARDIZED AND
ADJUSTED
DISTRIBUTABLE CASH
Cash flow from
operating
activities $ 26.8 $ 49.2 $ 83.3 $ 141.3
Deduct: Capital
expenditures - cash (2.9) (4.3) (21.3) (12.3)
--------------------------------------------------------------------------
Standardized
distributable cash $ 23.9 $ 44.9 $ 62.0 $ 129.0
--------------------------------------------------------------------------
Adjustments to
standardized
distributable cash:
Add (deduct):
Increase (decrease)
in non-cash working
capital 20.1 (6.8) 30.1 1.8
Net long-term
deferred
maintenance (3.2) 1.4 (1.1) (0.6)
Capital
expenditures -
accruals (2.8) (2.5) 2.8 (4.8)
--------------------------------------------------------------------------
Adjusted
distributable
cash(1) $ 38.0 $ 37.0 $ 93.8 $ 125.4
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Standardized
distributable
cash - per
Partnership unit
(in dollars) $ 0.34 $ 0.63 $ 0.87 $ 1.81
Adjusted
distributable
cash - per
Partnership unit
(in dollars)(1) $ 0.53 $ 0.52 $ 1.32 $ 1.76
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cash distributions
declared (paid and
payable) $ 25.7 $ 38.5 $ 77.0 $ 104.0
Cash distributions
declared - per
Partnership unit
(in dollars) $ 0.36 $ 0.54 $ 1.08 $ 1.46
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Note: 1 Comparative figures have been reclassified to conform to current
year presentation.
DISTRIBUTABLE CASH AND CASH DISTRIBUTIONS
In accordance with the Canadian Institute of Chartered Accountants July 2007 interpretive release "Standardized Distributable Cash in Income Trusts and other Flow-Through Entities", the Partnership has adopted the distributable cash calculation which conforms to the current guidance. In summary, for the purposes of the Partnership, standardized distributable cash is defined as the periodic cash flows from operating activities as reported in the GAAP financial statements, including the effects of changes in non-cash working capital less total capital expenditures as reported in the GAAP financial statements.
Adjusted distributable cash is defined as the standardized distributable cash prior to the effects of changes in non-cash working capital and long-term deferred maintenance, and after provision for accrued capital expenditures.
Management determines the level of cash distributions based on the level of cash flow from operations before changes in non-cash working capital and long-term deferred maintenance, less actual capital expenditures, a reserve for future major capital replacements (estimated at $4 million per year) and a contingency reserve. During the year distributions are based on estimates of full year cash flow and capital spending; thus distributions may be adjusted as these estimates change. It is expected that normal seasonal fluctuations in working capital will be funded from cash resources or the revolving short-term credit facility.
Distributions are declared monthly with date of record on the last day of the month and payable within 15 days following.
Canfor Pulp Income Fund
Consolidated Statements of Income, Comprehensive Income and Accumulated
Earnings and Distributions
(thousands of
dollars,
except unit and Three months ended Nine months ended
per unit amounts, September 30, September 30, September 30, September 30,
unaudited) 2008 2007 2008 2007
--------------------------------------------------------------------------
Income
Equity income in
Canfor Pulp Limited
Partnership $ 5,513 $ 16,541 $ 36,226 $ 58,644
--------------------------------------------------------------------------
Net income before
future income taxes 5,513 16,541 36,226 58,644
Future income taxes
(note 7) 305 - 2,336 39,337
--------------------------------------------------------------------------
Net income 5,208 16,541 33,890 19,307
Distributions
declared (note 5) (12,778) (19,167) (38,333) (51,821)
--------------------------------------------------------------------------
Distributions in
excess of earnings $ (7,570) $ (2,626) $ (4,443) $ (32,514)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net income per unit,
basic and diluted $ 0.15 $ 0.46 $ 0.95 $ 0.54
Weighted average
number of units 35,493,505 35,493,542 35,493,517 35,493,542
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net income for
the period $ 5,208 $ 16,541 $ 33,890 $ 19,307
Equity interest in
other comprehensive
income (loss) of
Canfor Pulp Limited
Partnership (104) 123 (284) 1,202
--------------------------------------------------------------------------
Comprehensive
income $ 5,104 $ 16,664 $ 33,606 $ 20,509
--------------------------------------------------------------------------
Accumulated Earnings
and Distributions
--------------------------------------------------------------------------
Balance, beginning
of period -
distributions in
excess of earnings $ (41,669) $ (37,386) $ (44,796) $ (7,498)
Distributions in
excess of earnings -
current period (7,570) (2,626) (4,443) (32,514)
--------------------------------------------------------------------------
Balance, end of
period - Accumulated
distributions in
excess of earnings $ (49,239) $ (40,012) $ (49,239) $ (40,012)
--------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Canfor Pulp Income Fund
Consolidated Statements of Cash Flows
(thousands of Three months ended Nine months ended
dollars, September 30, September 30, September 30, September 30,
unaudited) 2008 2007 2008 2007
--------------------------------------------------------------------------
Cash generated from
(used in)
Operating activities
Net income $ 5,208 $ 16,541 $ 33,890 $ 19,307
Items not
affecting cash:
Equity income in
Canfor Pulp Limited
Partnership (5,513) (16,541) (36,226) (58,644)
Future income
taxes 305 - 2,336 39,337
Distributions
received from
Canfor Pulp Limited
Partnership 12,778 19,167 38,333 58,209
--------------------------------------------------------------------------
12,778 19,167 38,333 58,209
--------------------------------------------------------------------------
Financing activities
Distributions paid to
Unitholders $ (12,778) $ (19,167) $ (38,333) $ (58,209)
--------------------------------------------------------------------------
Beginning, change and
ending balance in
cash and cash
equivalents $ - $ - $ - $ -
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Canfor Pulp Income Fund
Consolidated Balance Sheets
As at As at
September 30, December 31,
(thousands of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
ASSETS
Current assets
Distributions receivable from Canfor
Pulp Limited Partnership (notes 5,6) $ 4,259 $ 4,259
--------------------------------------------------------------------------
Total current assets 4,259 4,259
--------------------------------------------------------------------------
Equity investment in Canfor Pulp
Limited Partnership (note 4) 289,067 291,458
--------------------------------------------------------------------------
$ 293,326 $ 295,717
--------------------------------------------------------------------------
--------------------------------------------------------------------------
LIABILITIES
Current liabilities
Distributions payable (note 5) $ 4,259 $ 4,259
--------------------------------------------------------------------------
Total current liabilities 4,259 4,259
--------------------------------------------------------------------------
Future income taxes (note 7) 38,969 36,633
--------------------------------------------------------------------------
$ 43,228 $ 40,892
--------------------------------------------------------------------------
UNITHOLDERS' EQUITY
Unitholders' equity - 35,493,505
Fund units outstanding $ 299,351 $ 299,351
Accumulated earnings and distributions (49,239) (44,796)
Accumulated other comprehensive
income (loss) (note 8) (14) 270
--------------------------------------------------------------------------
Total Unitholders' Equity 250,098 254,825
--------------------------------------------------------------------------
$ 293,326 $ 295,717
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Description of the Fund and basis of presentation of financial statements
(note 1).
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Approved by the Trustees
Stan Bracken-Horrocks Charles Jago
Canfor Pulp Income Fund
Notes to the Unaudited Interim Consolidated Financial Statements as at September 30, 2008
1. Description of the Fund and Basis of Presentation of Financial Statements
Canfor Pulp Income Fund (the Fund) is an unincorporated open-ended trust established under the laws of Ontario on April 21, 2006, pursuant to the Fund Declaration. The principal head office of the Fund is located at 1700 West 75th Avenue, Vancouver, B.C., Canada. The Fund has been established to acquire and hold, through a wholly owned trust, the Canfor Pulp Trust (the Trust), investments in the Limited Partnership Units of the Canfor Pulp Limited Partnership (the Partnership), and such other investments as the Trustees of the Fund may determine. The general partner of the Partnership is Canfor Pulp Holding Inc. (the General Partner) and each partner holds an ownership interest in the General Partner equal to its Partnership interest.
Each unitholder participates pro-rata in any distributions from the Fund.
The Fund is entirely dependent on distributions from the Partnership to make its own distributions.
2. Significant Accounting Policies
These unaudited interim consolidated financial statements do not include all of the disclosures required by Canadian generally accepted accounting principles for annual financial statements and, accordingly, should be read in conjunction with the audited consolidated financial statements and notes included in the Fund's 2007 Annual Report. These unaudited interim consolidated financial statements follow the same accounting policies and methods of computation as used in the 2007 audited consolidated financial statements, except as noted below.
3. New Accounting Pronouncements
Effective January 1, 2008, the Fund adopted the Canadian Institute of Chartered Accountants' new Handbook Sections; 1535 "Capital Disclosures", 3862 "Financial Instruments - Disclosures" and 3863 "Financial Instruments - Presentation". Handbook sections 3862 and 3863 replace section 3861 "Financial Instruments - Disclosure and Presentation". These recommendations have been incorporated into these unaudited interim consolidated financial statements.
Section 1535 - Capital Disclosures
This Section establishes standards for disclosing information about an entity's capital and how it is managed. Under this standard the Fund is required to disclose qualitative and quantitative information that enables users of the financial statements to evaluate the Fund's objectives, policies and processes for managing capital (note 9).
Section 3862 - Financial Instruments - Disclosures
This Section requires entities to provide disclosure of quantitative and qualitative information in their financial statements that enable users to evaluate (a) the significance of financial instruments for the entity's financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and management's objectives, policies and procedures for managing such risks (note 10).
Section 3863 - Financial Instruments - Presentation
This Section establishes standards for presentation of financial instruments and non-financial derivatives.
4. Equity Investment in Canfor Pulp Limited Partnership
The Fund's equity investment in the Partnership is as follows:
Nine months
ended Year ended
September 30, December 31,
(thousands of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Balance, beginning of period 291,458 290,938
Equity interest in income of
the Partnership 36,226 64,643
Equity interest in other comprehensive
income (loss) of the Partnership (284) 1,185
Distributions from the Partnership (38,333) (65,308)
--------------------------------------------------------------------------
Balance, end of period 289,067 291,458
--------------------------------------------------------------------------
--------------------------------------------------------------------------
5. Distributions
The Fund declared distributions during the first nine months of 2008 as follows:
(thousands of dollars, except per unit amounts, unaudited)
Amount per
Fund Unit Amount
Record Date Payable Date $ $
---------------------------------------------------------------------------
January 31, 2008 February 15, 2008 0.12 4,260
February 29, 2008 March 14, 2008 0.12 4,260
March 31, 2008 April 15, 2008 0.12 4,259
April 30, 2008 May 15, 2008 0.12 4,259
May 30, 2008 June 13, 2008 0.12 4,259
June 30, 2008 July 15, 2008 0.12 4,259
July 31, 2008 August 15, 2008 0.12 4,259
August 29, 2008 September 15, 2008 0.12 4,259
September 30, 2008 October 15, 2008 0.12 4,259
---------------------------------------------------------------------------
1.08 38,333
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The Fund's monthly distributions are based on the Partnership's monthly distributions.
Monthly cash distributions from the Partnership are based on the Partnership's cash flow and are not directly equal to the Fund's pro-rata share of the Partnership's income under the equity method.
6. Related Party Transactions
All accounting, treasury, legal and administrative functions for the Fund are performed on its behalf, without charge, by the Partnership pursuant to a support agreement. Distributions earned from the Partnership for the three months ended September 30, 2008 was $12.8 million of which $8.5 million was paid, with the balance of $4.3 million receivable on September 30, 2008.
7. Future Income Taxes
The following table reconciles the income tax expense calculated using statutory tax rates to the actual income tax expense.
Nine months
ended Year ended
September 30, December 31,
(thousands of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Expected income tax expense at statutory
tax rate of nil (2007 - nil) - -
Future income taxes on temporary differences 2,336 36,633
--------------------------------------------------------------------------
2,336 36,633
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The future income tax liability is based on the Fund's 49.8% ownership of the Partnership's temporary differences as follows:
September 30, December 31,
(thousands of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Future income tax liability:
Equity investment in the Partnership 46,512 46,747
Expected reversal of temporary
differences prior to 2011 (7,543) (10,114)
--------------------------------------------------------------------------
38,969 36,633
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Based on a current estimate of the income tax liability at the beginning of 2011, the Fund has recorded a future income tax liability and corresponding non-cash future tax charge to net income. This non-cash charge relates to the Fund's 49.8% ownership in the Partnership and is based on temporary differences between the accounting and tax basis of the Partnership's assets and liabilities expected to reverse after January 1, 2011.
8. Accumulated Other Comprehensive Income (Loss)
Nine months
ended Year ended
September 30, December 31,
(thousands of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Balance, beginning of period 270 (915)
Other comprehensive income (loss) (284) 1,185
--------------------------------------------------------------------------
Balance, end of period (14) 270
--------------------------------------------------------------------------
--------------------------------------------------------------------------
9. Capital Disclosures
The Fund's capital is comprised solely of unitholders' equity. The Fund's only source of liquidity is distributions received from the Partnership. The Fund's objective when managing capital is to make its own distributions to unitholders based on the distributions received from the Partnership.
September 30, December 31,
(thousands of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Unitholders' equity (1) 250,112 254,555
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Note 1: Excludes accumulated other comprehensive income.
The Fund has no external capital requirements or covenants.
10. Financial Instruments
The Fund's financial instruments consist of distributions receivable from the Partnership and distributions payable to unitholders. Distributions receivable are classified as loans and receivables and are measured at amortized cost. Distributions payable are classified as other liabilities and are measured at amortized cost. The carrying values of these financial instruments approximate their fair values due to the relatively short period to maturity of these instruments.
The Fund is exposed to certain risks related to the nature of its investment in the Partnership and the structure of the Fund, as well as the underlying risks related to the business of the Partnership. The Fund relies on the objectives, policies and processes of the Partnership for managing these risks.
11. Segmented Information
The Fund operates in one industry segment, namely investing in pulp and paper producing assets in one geographic region, Canada.
Canfor Pulp Limited Partnership
Consolidated Statements of Income, Comprehensive Income and
Partners' Equity
(millions of
dollars, except
units and per unit Three months ended Nine months ended
amounts, September 30, September 30, September 30, September 30,
unaudited) 2008 2007 2008 2007
--------------------------------------------------------------------------
Revenue
Sales $ 215.4 $ 228.9 $ 639.4 $ 706.5
Business
interruption
insurance
(note 18) 3.5 - 18.2 -
--------------------------------------------------------------------------
218.9 228.9 657.6 706.5
Costs and expenses
Manufacturing and
product costs 143.6 147.1 451.5 442.2
Freight and other
distribution costs 29.8 27.1 82.3 84.7
Amortization 13.2 13.4 36.8 38.0
Selling and
administration
costs 5.7 5.9 18.2 19.0
Settlement of
asset retirement
obligation (0.9) - (0.9) -
--------------------------------------------------------------------------
191.4 193.5 587.9 583.9
Operating income 27.5 35.4 69.7 122.6
Net property damage
insurance gain
(note 18) - - 8.5 -
Interest expense, net (2.1) (1.6) (5.5) (5.0)
Foreign exchange
(loss) gain on
long-term debt (5.2) 7.4 (7.9) 18.6
Reduction (increase)
in unrealized value
of derivative
instruments
(note 14) (12.7) (3.1) 2.2 (5.1)
Foreign exchange
(loss) gain on
working capital 3.8 (4.9) 6.1 (13.2)
Other expense (0.2) - (0.3) (0.2)
--------------------------------------------------------------------------
(16.4) (2.2) 3.1 (4.9)
Net income 11.1 33.2 72.8 117.7
Other comprehensive
income (loss)
Adjustment for
realized derivatives
(note 17) (0.2) 0.2 (0.5) 2.4
--------------------------------------------------------------------------
Comprehensive
income $ 10.9 $ 33.4 $ 72.3 $ 120.1
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net income per
Partnership unit
(in dollars)
(note 13)
Basic and diluted $ 0.15 $ 0.46 $ 1.02 $ 1.65
Weighted average
Partnership units
outstanding 71,270,025 71,270,025 71,270,025 71,270,025
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Partners' Equity
Balance, beginning
of period $ 595.0 $ 605.1 $ 584.9 $ 583.9
Net income 11.1 33.2 72.8 117.7
Distributions to
partners (note 16) (25.7) (38.5) (77.0) (104.0)
Other comprehensive
income (loss)
(note 17) (0.2) 0.2 (0.5) 2.4
--------------------------------------------------------------------------
Balance, end of
period $ 580.2 $ 600.0 $ 580.2 $ 600.0
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Canfor Pulp Limited Partnership
Consolidated Statements of Cash Flows
(millions of Three months ended Nine months ended
dollars, September 30, September 30, September 30, September 30,
unaudited) 2008 2007 2008 2007
--------------------------------------------------------------------------
Cash and cash
equivalents
generated from
(used in)
Operating
activities
Net income $ 11.1 $ 33.2 $ 72.8 $ 117.7
Items not
affecting cash:
Amortization 13.2 13.4 36.8 38.0
Foreign exchange
loss (gain) on
long-term debt 5.2 (7.4) 7.9 (18.6)
Reduction
(increase) in
unrealized value
of derivative
instruments 12.7 3.1 (2.2) 5.1
Employee future
benefits 2.0 2.5 6.1 6.9
Loss on disposal
of fixed assets 0.7 - 1.2 -
Net property
damage insurance
gain (note 18) - - (8.5) -
Settlement of
asset retirement
obligation (0.9) - (0.9) -
Change in deferred
maintenance
provision 3.4 0.9 6.9 5.0
Other 0.2 - 0.5 -
Salary pension plan
contribution (0.5) (1.0) (1.4) (6.6)
Long-term deferred
maintenance
expenditure (0.2) (2.3) (5.8) (4.4)
--------------------------------------------------------------------------
Cash flow from
operations before
working capital
changes 46.9 42.4 113.4 143.1
Changes in non-cash
working capital
(note 15) (20.1) 6.8 (30.1) (1.8)
--------------------------------------------------------------------------
Cash flow from
operating activities 26.8 49.2 83.3 141.3
--------------------------------------------------------------------------
Financing activities
Distributions paid
to partners (25.7) (38.5) (77.0) (116.9)
Operating loan draw
(repayment) (note 9) (0.8) - 4.2 -
--------------------------------------------------------------------------
(26.5) (38.5) (72.8) (116.9)
--------------------------------------------------------------------------
Investing activities
Property, plant and
equipment, net
(note 15) (8.6) (4.3) (27.0) (12.3)
Insurance proceeds
(note 18) - - 8.0 -
--------------------------------------------------------------------------
(8.6) (4.3) (19.0) (12.3)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Increase (decrease)
in cash and cash
equivalents (8.3) 6.4 (8.5) 12.1
Cash and cash
equivalents,
beginning of period 2.4 34.1 2.6 28.4
--------------------------------------------------------------------------
Cash and cash
equivalents,
end of period $ (5.9) $ 40.5 $ (5.9) $ 40.5
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cash and cash equivalents include cash on hand and highly liquid
investments with an original maturity date of 90 days or less net of
outstanding cheques.
Supplementary cash flow information (note 15).
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Canfor Pulp Limited Partnership
Consolidated Balance Sheets
As at As at
September 30, December 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ - $ 2.6
Accounts receivable (notes 12, 18)
Trade 131.3 145.6
Insurance 10.5 -
Other 2.6 9.9
Inventories (notes 3, 4) 163.7 136.8
Prepaid expenses 23.3 15.6
--------------------------------------------------------------------------
Total current assets 331.4 310.5
--------------------------------------------------------------------------
Property, plant and equipment (note 5) 577.3 585.6
Deferred charges and other assets (note 6) 12.1 12.9
--------------------------------------------------------------------------
$ 920.8 $ 909.0
--------------------------------------------------------------------------
--------------------------------------------------------------------------
LIABILITIES
Current liabilities
Cash and cash equivalents $ 5.9 $ -
Operating loan (note 9) 4.2 -
Accounts payable and accrued
liabilities (note 12) 150.6 156.9
Distributions payable (note 16) 8.6 8.6
--------------------------------------------------------------------------
Total current liabilities 169.3 165.5
--------------------------------------------------------------------------
Long-term debt (note 9) 116.6 108.7
Long-term liabilities (note 10) 54.7 49.9
--------------------------------------------------------------------------
$ 340.6 $ 324.1
--------------------------------------------------------------------------
PARTNERS' EQUITY - 14,254,005 Class A
Limited Partnership Units and 57,016,020
Class B Limited Partnership Units (note 1) 580.2 584.9
--------------------------------------------------------------------------
$ 920.8 $ 909.0
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Description of the Partnership and basis of presentation of financial
statements (note 1).
Subsequent event (note 18).
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Approved on behalf of Canfor Pulp Limited Partnership by its
General Partner, Canfor Pulp Holding Inc.,
Stan Bracken-Horrocks Paul Richards
Director Director
Canfor Pulp Limited Partnership
Notes to the Unaudited Interim Consolidated Financial Statements as at September 30, 2008
1. Business Description and Basis of Presentation
Canfor Pulp Limited Partnership (the Partnership) is a limited partnership formed on April 21, 2006, under the laws of Manitoba, to acquire and carry on the NBSK pulp and paper business of Canadian Forest Products Ltd. a subsidiary of Canfor Corporation (collectively Canfor). The business consists of two NBSK pulp mills and one NBSK pulp and paper mill located in Prince George, British Columbia and a marketing group based in Vancouver, British Columbia (the Pulp Business).
At September 30, 2008, Canfor owned 50.2% and Canfor Pulp Income Fund (the Fund) indirectly owned 49.8% of the issued and outstanding units of the Partnership.
The general partner of the Partnership is Canfor Pulp Holding Inc. (the General Partner), which holds an interest of 0.001% of the Partnership.
These unaudited interim consolidated financial statements are those of the Partnership and do not include the assets, liabilities, revenues and expenses of its partners. The Partnership, other than its incorporated subsidiaries, is not subject to income taxes as its income is allocated for tax purposes to its partners. Accordingly, no recognition has been made for income taxes related to Partnership income in these financial statements. The tax attributes of the Partnership's net assets flow directly to the partners.
Certain comparative figures have been reclassified to conform to current year presentation.
Economic Dependence
The Partnership depends on Canfor to provide approximately 65% (2007 Year - 66%) of its fibre supply as well as to provide certain key business and administrative services as described in the Fund's 2007 Annual Report. As a result of these relationships the Partnership considers its operations to be dependent on its ongoing relationship with Canfor.
2. Significant Accounting Policies
These unaudited interim consolidated financial statements do not include all of the note disclosures required by Canadian generally accepted accounting principles for annual financial statements. Except as described in note 3, the Partnership's accounting policies are as disclosed in the annual consolidated financial statements of the Partnership included in the Fund's 2007 Annual Report available at www.canforpulp.com or www.sedar.com.
3. New Accounting Pronouncements
Effective January 1, 2008, the Partnership adopted the Canadian Institute of Chartered Accountants' new Handbook Sections; 1535 "Capital Disclosures", 3031 "Inventories", 3862 "Financial Instruments - Disclosures" and 3863 "Financial Instruments - Presentation". Handbook sections 3862 and 3863 replace section 3861 "Financial Instruments - Disclosure and Presentation". These recommendations have been incorporated into these unaudited interim consolidated financial statements.
Section 1535 - Capital Disclosures
This Section establishes standards for disclosing information about an entity's capital and how it is managed. Under this standard the Partnership is required to disclose qualitative and quantitative information that enables users of the financial statements to evaluate the Partnership's objectives, policies and processes for managing capital (note 11).
Section 3031 - Inventories
This Section replaces section 3030 and prescribes the accounting treatment for inventories and provides guidance on the determination of costs and its subsequent recognition as an expense, including any write-down to net realizable value. It also provides guidance on assigning costs to inventories and in conjunction with section 3061 "Property, Plant and Equipment", provides guidance on classification of major spare parts.
As a result of its adoption of the new guidance, the Partnership reclassified $6.8 million dollars in major spare parts from inventory to property, plant and equipment in the first quarter of 2008. This reclassification was made retrospectively, without prior period restatement or adjustments to opening equity as it was considered impracticable to determine the impact on prior periods.
Section 3862 - Financial Instruments - Disclosures
This Section requires entities to provide disclosure of quantitative and qualitative information in their financial statements that enable users to evaluate (a) the significance of financial instruments for the entity's financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and management's objectives, policies and procedures for managing such risks (note 14).
Section 3863 - Financial Instruments - Presentation
This Section establishes standards for presentation of financial instruments and non-financial derivatives.
4. Inventories
September 30, December 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Pulp 82.7 63.7
Paper 16.2 14.0
Wood chips 20.1 10.7
Processing materials and supplies (note 3) 44.7 48.4
--------------------------------------------------------------------------
163.7 136.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
5. Property, Plant and Equipment
September 30, 2008
-------------------------------------
Accumulated
(millions of dollars, unaudited) Cost amortization Net
---------------------------------------------------------------------------
Land and improvements 14.5 - 14.5
Buildings, machinery and equipment 1,296.0 748.0 548.0
Construction in progress 14.8 - 14.8
---------------------------------------------------------------------------
1,325.3 748.0 577.3
---------------------------------------------------------------------------
---------------------------------------------------------------------------
December 31, 2007
-------------------------------------
Accumulated
(millions of dollars, unaudited) Cost amortization Net
---------------------------------------------------------------------------
Land and improvements 14.5 - 14.5
Buildings, machinery and equipment 1,294.7 726.8 567.9
Construction in progress 3.2 - 3.2
---------------------------------------------------------------------------
1,312.4 726.8 585.6
---------------------------------------------------------------------------
---------------------------------------------------------------------------
6. Deferred Charges and Other Assets
September 30, December 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Pension benefit plan 11.4 11.3
Maintenance shutdown costs 0.3 1.4
Other 0.4 0.2
--------------------------------------------------------------------------
12.1 12.9
--------------------------------------------------------------------------
--------------------------------------------------------------------------
7. Employee Future Benefits
The Partnership, in participation with Canfor, has funded and unfunded defined benefit plans, as well as a defined contribution plan, that provide pension, other retirement and post-employment benefits to substantially all salaried employees and for its hourly employees covered under collective agreements. The defined benefit plans are based on years of service and final average salary. The post-employment benefit plans are non-contributory and include a range of health care and other benefits.
Total employee future benefit expenses were as follows:
Three months ended Nine months ended
(millions of September 30, September 30, September 30, September 30,
dollars, unaudited) 2008 2007 2008 2007
--------------------------------------------------------------------------
Pension plans 0.9 1.2 2.8 3.6
Other employee
future benefit
plans 1.5 1.5 4.5 4.6
Contributions
to forest industry
union plans 1.7 1.7 5.1 5.0
--------------------------------------------------------------------------
4.1 4.4 12.4 13.2
--------------------------------------------------------------------------
--------------------------------------------------------------------------
8. Asset Retirement Obligations
Nine months
ended Year ended
September 30, December 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Balance beginning of period 11.3 -
Accrued obligation - ash pond - 2.4
Accrued obligations - landfills - 8.9
Accretion expense 0.4 0.1
Current expenditures (1.2) (0.3)
Settlement of ash pond obligation (0.9) -
Change in estimate - 0.2
--------------------------------------------------------------------------
Balance end of period 9.6 11.3
Less current portion - included in accounts
payable and other accrued liabilities - (2.1)
--------------------------------------------------------------------------
Long-term portion 9.6 9.2
--------------------------------------------------------------------------
--------------------------------------------------------------------------
9. Credit Facilities and Long-term Debt
The Partnership has a $75 million syndicated unsecured revolving bank credit facility (the Revolving Facility), maturing in November 2009, of which $43.4 million is available with $27.4 million of the Revolving Facility reserved for a standby letter of credit issued to BC Hydro and $4.2 million drawn to fund working capital requirements as of September 30, 2008. The Revolving Facility bears interest and fees at rates that vary depending on the ratio of net debt to operating earnings before interest, taxes, depreciation and amortization (EBITDA) and which may, at the Partnership's option, be based on lenders' Canadian prime rate, bankers acceptances, US dollar base rate or US dollar LIBOR rate.
At September 30, 2008 the Partnership has outstanding long-term debt of $116.6 million (US$110.0 million) in the form of unsecured US dollar private placement notes (the Notes). The Notes bear interest at 6.41% and are repayable in full on their maturity date of November 30, 2013.
Each agreement relative to the Notes and Revolving Facility contains similar covenants with respect to certain financial ratios and at September 30, 2008 the Partnership was in compliance with all covenants.
The fair value of long-term debt at September 30, 2008 was $117.8 million (US$111.1 million).
10. Long-term Liabilities
September 30, December 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Accrued pension obligations 5.4 4.3
Post-employment benefits 39.5 35.6
Derivative financial instruments 0.2 0.8
Asset retirement obligations (note 8) 9.6 9.2
--------------------------------------------------------------------------
54.7 49.9
--------------------------------------------------------------------------
--------------------------------------------------------------------------
11. Capital Disclosures
The Partnership's objectives when managing capital are to safeguard its assets and maintain a globally competitive cost structure, continue as a going concern and provide returns to its partners in the form of distributions and capital appreciation. In addition, the Partnership works with all relevant stakeholders to ensure the safety of its operations and employees, and remain in compliance with all environmental regulations.
The Partnership's capital is comprised of net debt and Partners' equity:
September 30, December 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Total debt 120.8 108.7
Cash and cash equivalents 5.9 (2.6)
--------------------------------------------------------------------------
Net debt 126.7 106.1
Total Partners' equity(1) 580.2 584.4
--------------------------------------------------------------------------
706.9 690.5
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Note: 1 Excludes accumulated other comprehensive income - note 17.
Management determines the level of cash distributions based on the level of cash flow from operations before changes in non-cash working capital and long-term deferred maintenance, less actual capital expenditures, a reserve for future major capital replacements (estimated at $4 million per year) and a contingency reserve. During the year distributions are based on estimates of full year cash flow and capital spending; thus distributions may be adjusted as these estimates change. It is expected that normal seasonal fluctuations in non-cash working capital will be funded from cash resources or the revolving short-term credit facility, and thus will not significantly affect the level of distributions.
12. Related Party Transactions
The Partnership's transactions with related parties are consistent with the transactions described in the December 31, 2007 audited consolidated financial statements and are based on agreed upon amounts between the parties, and are summarized below:
Three months ended Nine months ended
(millions of September 30, September 30, September 30, September 30,
dollars, unaudited) 2008 2007 2008 2007
--------------------------------------------------------------------------
Transactions
Canfor 34.0 39.9 111.0 109.1
Howe Sound LP -
commission 0.7 0.7 2.1 2.3
Howe Sound LP- sale
of wood chips 0.1 - 0.5 -
Lakeland Mills Ltd.
and Winton Global
Lumber Ltd. -
purchase of wood
chips 1.1 2.6 5.1 9.6
September 30, September 30,
2008 2007
--------------------------------------------------------------------------
Balance Sheet
Included in accounts payable and
accrued liabilities:
Canfor 36.7 29.7
Howe Sound LP 36.4 52.4
Lakeland Mills Ltd. and Winton
Global Lumber Ltd. 0.4 0.8
Included in trade accounts receivable:
Product marketed for Canfor 19.4 13.1
Product marketed for Howe Sound LP 34.0 41.4
--------------------------------------------------------------------------
Transactions and payables to Canfor include purchases of wood chips, pulp and administrative services.
13. Income per Partnership Unit
Basic income per Partnership unit is based on the weighted average number of Limited Partnership units outstanding during the period. All outstanding Partnership units were issued on July 1, 2006, and there was no change in the number of outstanding Partnership units during the quarter.
14. Financial Instruments
Classification of Financial Instruments
The Partnership has classified its cash and cash equivalents as held-for-trading. Accounts receivable are classified as loans and receivables and are measured at amortized cost. Accounts payable and accrued charges, operating loan and long-term debt, including interest payable, are classified as other liabilities, all of which are measured at amortized cost. Derivative instruments are recorded in the balance sheet at fair value. The Partnership has no derivatives embedded in its financial or non-financial contracts that are not closely related to the host contract.
Financial Risk Management
The Partnership is exposed to a number of risks as a result of holding financial instruments. These risks include credit risk, liquidity risk and market risk.
Risk management is carried out by the risk management committee under a "Risk Management Controls Policy". The policy sets out the responsibilities, reporting and counter party credit and communication requirements associated with all CPLP risk management activity. Responsibility for overall philosophy, direction and approval is that of the Board of Directors.
I. Credit risk:
Credit risk is the risk of financial loss to the Partnership if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Financial instruments that potentially subject the Partnership to credit risk include cash and cash equivalents and accounts receivable.
Cash and cash equivalents includes cash on deposit, temporary investments with an original maturity date of 90 days or less net of outstanding cheques. In order to mitigate the risk of financial loss, cash on deposit is held with major Canadian and international financial institutions and temporary investments are held with major Canadian and international financial institutions and highly rated commercial paper. The Partnership does not have holdings in asset backed commercial paper. The cash and cash equivalents liability balance at September 30, 2008 of $5.9 million consisted of outstanding cheques net of cash on hand.
The Partnership utilizes a combination of credit insurance and self-insurance to manage the risk associated with trade receivables. Approximately 75% of the outstanding trade receivables are covered under credit insurance while the majority of the balance is with large and financially sound customers. In addition, the Partnership requires letters of credit on certain export trade receivables and periodically discounts these letters of credit without recourse. During the third quarter of 2008 the Partnership discounted $21.1 million of letters of credit relating to outstanding trade receivables. The Partnership's trade receivable balance at September 30, 2008 was $131.3 million.
II. Liquidity risk:
Liquidity risk is the risk that the Partnership will be unable to meet its financial obligations as they fall due. The Partnership manages liquidity risk through management of its capital structure in conjunction with cash flow forecasting including anticipated investing and financing activities, and use of the Revolving Facility to meet short-term working capital requirements.
The Partnership utilizes discounting of letters of credit on outstanding trade receivables' to manage liquidity risk. During the third quarter of 2008 the Partnership sold $21.1 million of letters of credit on outstanding trade receivables.
At September 30, 2008, the Partnership accounts payable and accrued liabilities totalled $150.6 million, all of which fall due for payment within one year of the balance sheet date.
III. Market risk:
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in interest rates and foreign currency.
a. Interest rate risk:
The Partnership is exposed to interest rate risk though its financial assets and financial obligations bearing variable interest rate and through its off-balance sheet lease obligations. The Partnership's cash and cash equivalents include term deposits with an original maturity date of 90 days or less.
The Partnership manages interest rate risk by maximizing the interest earned on excess funds while maintaining the liquidity necessary to meet day-to-day operating cash flow requirements and payment of monthly declared distributions to unitholders.
Fluctuations in the market interest rates are not expected to have a material impact on the Partnership's results of operations due to the short-term nature of the respective financial assets and obligations and the fixed interest rate on long-term debt.
The Partnership currently does not use derivative instruments to reduce its exposure to interest rate risk.
b. Currency risk:
The Partnership is exposed to foreign exchange risk. The Partnership's products are sold globally with prices primarily denominated in US dollars or linked to prices quoted in US dollars with certain expenditures transacted in US dollars. In addition the Partnership holds financial assets and liabilities in US dollars. These primarily include US dollar bank accounts and investments, trade accounts receivable and long-term debt.
The Partnership entered into US dollar forward contracts in the third quarter of 2008 to reduce it's exposure to fluctuations in US exchange rates on US dollar denominated accounts receivable and accounts payable balances.
Derivative Instruments
Periodically, the Partnership uses a variety of derivative instruments to reduce its exposure to risks associated with fluctuations in foreign exchange rates, pulp prices and natural gas.
For the three months ended September 30, 2008, the Partnership recorded realized gains of $0.8 million (September 30, 2007 - loss of $0.2 million), on maturing commodity swaps hedging natural gas purchases as a credit to manufacturing and product costs. At September 30, 2008, the Partnership had outstanding commodity swaps hedging future natural gas purchases of 3.5 million gigajoules extending to September, 2011. At September 30, 2008 the unrealized loss of $1.0 million (December 31, 2007 $2.7 million), on these outstanding commodity swaps is recorded as a liability in accounts payable and accrued liabilities and in long-term liabilities.
For the three months ended September 30, 2008, the Partnership recorded realized gains of $0.2 million (September 30, 2007 - nil), on maturing US dollar forward sales contracts as a credit to foreign exchange gain on working capital. At September 30, 2008 the Partnership had outstanding US dollar forward sales contracts totaling $50.0 million at an average exchange rate of 0.943 ($US/Cdn), extending to December 2008. At September 30, 2008 the unrealized loss of $0.1 million (December 31, 2007 - nil), on these outstanding US dollar forward sales contracts is recorded as a liability in accounts payable and accrued liabilities.
15. Supplementary Cash Flow Information
Three months ended Nine months ended
(millions of September 30, September 30, September 30, September 30,
dollars, unaudited) 2008 2007 2008 2007
--------------------------------------------------------------------------
Changes in non-cash
working capital
Accounts receivable 16.8 26.5 21.6 (15.1)
Insurance receivable (3.7) - (8.8) -
Inventories (17.4) (12.9) (33.7) (20.8)
Prepaid expenses (1.6) (4.9) (7.7) (9.4)
Accounts payable and
accrued liabilities (13.9) (1.9) (0.3) 43.5
Asset retirement
obligations (0.3) - (1.2) -
--------------------------------------------------------------------------
(20.1) 6.8 (30.1) (1.8)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Capital
expenditures
Capital
expenditures - cash 8.6 4.3 27.0 12.3
Less Property
damage insurance
proceeds (5.7) - (5.7) -
--------------------------------------------------------------------------
Net capital
expenditures - cash 2.9 4.3 21.3 12.3
Capital
expenditures - net
accruals 2.8 2.5 (2.8) 4.8
Asset retirement
obligations -
long-term - 8.9 - 8.9
--------------------------------------------------------------------------
5.7 15.7 18.5 26.0
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net interest
paid (received) 0.2 (0.3) 3.7 3.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
16. Distributions
The Partnership declared distributions in the first nine months of 2008 as follows:
(millions of dollars, except per unit amounts, unaudited)
Amount per
Partnership Unit Amount
Record Date Payable Date $ $
---------------------------------------------------------------------------
January 31, 2008 February 15, 2008 0.12 8.5
February 29, 2008 March 14, 2008 0.12 8.5
March 31, 2008 April 15, 2008 0.12 8.6
April 30, 2008 May 15, 2008 0.12 8.5
May 30, 2008 June 13, 2008 0.12 8.6
June 30, 2008 July 15, 2008 0.12 8.6
July 31, 2008 August 15, 2008 0.12 8.5
August 29, 2008 September 15, 2008 0.12 8.6
September 30, 2008 October 15, 2008 0.12 8.6
---------------------------------------------------------------------------
1.08 77.0
---------------------------------------------------------------------------
---------------------------------------------------------------------------
17. Accumulated Other Comprehensive Income
Nine months
ended Year ended
September 30, December 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Balance, beginning of period 0.5 (1.8)
Adjustment for derivatives recorded
in other comprehensive income (loss) (0.5) 2.3
--------------------------------------------------------------------------
Balance, end of period - 0.5
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Since the inception of the Partnership, the total of the cumulative net income, accumulated other comprehensive income, less cumulative distributions is as follows:
September 30,
(millions of dollars, unaudited) 2008
--------------------------------------------------------------------------
Cumulative net income 289.3
Cumulative distributions (296.6)
--------------------------------------------------------------------------
(7.3)
Partners' capital - at July 1, 2006 587.5
--------------------------------------------------------------------------
Partner's equity, end of period 580.2
--------------------------------------------------------------------------
--------------------------------------------------------------------------
18. Prince George Pulp and Paper Mill Fire and Insurance
On January 15, 2008 a fire at the Prince George Pulp & Paper Mill destroyed the chip screening and in-feed system. The Partnership has accrued a property damage insurance receivable of $12.2 million in the first 9 months of 2008, which is net of aggregate policy deductibles of $3.25 million. Net insurance proceeds, less the write-off of the net book value of the damaged assets, were recorded as a non-operating gain on disposal of assets of $8.5 million in the first quarter.
The Partnership also accrued business interruption insurance proceeds totaling $18.2 million to recover the estimated $19.2 million impact of lost production during the year, less a three day equivalent deductible of $1.0 million.
The Partnership has received cash advances totaling $22.9 million, of which $13.4 million related to the business interruption claim and $9.5 million for property damage, of which $8.0 million has been classified as an investing activity on the cash flow statement, with the balance of $1.5 million representing a reimbursement of demolition costs. Subsequent to September 30, 2008, a further $4.2 million has been received as partial payment against the accrued insurance receivable.
19. Segmented Information (a)
(millions of dollars, Unallocated
unaudited) Pulp Paper Costs Total
---------------------------------------------------------------------------
Three months ended
September 30, 2008
---------------------------------------------------------------------------
Sales to external
customers (b) 182.0 33.4 - 215.4
Sales of pulp to paper
segment (c) 21.1 (21.1) - -
Operating income (loss) 26.2 4.3 (3.0) 27.5
Amortization 12.2 1.0 - 13.2
Capital expenditures, net 11.2 - 0.2 11.4
Three months ended
September 30, 2007
---------------------------------------------------------------------------
Sales to external
customers (b) 199.3 29.6 - 228.9
Sales of pulp to paper
segment (c) 19.8 (19.8) - -
Operating income (loss) 39.6 (0.5) (3.7) 35.4
Amortization 12.4 1.0 - 13.4
Capital expenditures, net 15.3 0.4 - 15.7
Nine months ended
September 30, 2008
---------------------------------------------------------------------------
Sales to external
customers (b) 537.2 102.2 - 639.4
Sales of pulp to paper
segment (c) 61.4 (61.4) - -
Operating income (loss) 72.0 7.8 (10.1) 69.7
Amortization 33.8 2.9 0.1 36.8
Capital expenditures, net 23.5 0.4 0.3 24.2
Identifiable assets 831.8 71.9 17.1 920.8
Nine months ended
September 30, 2007
---------------------------------------------------------------------------
Sales to external
customers (b) 612.0 94.5 - 706.5
Sales of pulp to paper
segment (c) 61.0 (61.0) - -
Operating income (loss) 136.5 (1.2) (12.7) 122.6
Amortization 34.8 3.1 0.1 38.0
Capital expenditures, net 24.5 1.4 0.1 26.0
Identifiable assets 815.5 71.7 60.5 947.7
---------------------------------------------------------------------------
(a) Operations are presented by product lines. Operations are considered to
be in one geographic area since all production facilities are in
Canada. Substantially all sales are exported outside Canada, with sales
to the United States representing 44% (Year 2007 - 41%).
(b) Sales to the largest customer represented approximately 24% of pulp
segment sales (Year 2007 - 24%).
(c) Sales of slush pulp to the paper segment are accounted for at
approximate market value. The sales are transacted as a cost transfer
and are not reflected in Pulp sales.
