CFPUF.. $13.643.. First selection
Canfor Pulp Income Fund Announces Strong First Quarter 2010 Results and Increase in Monthly Distribution
VANCOUVER, BRITISH COLUMBIA, Apr 26, 2010 (MARKETWIRE via COMTEX) -- Canfor Pulp Income Fund (the Fund) /quotes/comstock/11t!cfx.un (CA:CFX.UN 14.20, 0.00, 0.00%) announced today its first quarter 2010 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 $239.5 million and net income of $32.5 million, or $0.46 per unit, for the quarter ended March 31, 2010. The Partnership generated EBITDA of $44.1 million in the quarter. The Fund reported net income of $16.5 million, representing the Fund's share of the Partnership's net income and a future income tax recovery of $0.3 million.
In the quarter, the Partnership generated adjusted distributable cash of $41.0 million, or $0.57 per unit, and the Partnership and the Fund declared distributions of $0.32 per unit.
Improved Partnership results compared to the fourth quarter of 2009 were attributable to higher prices for the Partnership's pulp and paper products, lower unit manufacturing costs and increased pulp shipments, partially offset by the stronger Canadian dollar.
First quarter results were negatively impacted by a shutdown at the Prince George Pulp and Paper Mill, which reduced pulp production by approximately 22,000 tonnes and reduced EBITDA by approximately $11.0 million. Included in these amounts were approximately 4,000 tonnes and $4.0 million attributable to advancing the annual maintenance outage originally planned for the second quarter of 2010, which was moved to coincide with unplanned maintenance requiring the shutdown of the mill's recovery boiler. Mitigating the production loss was a record quarter at the Northwood Pulp Mill for both total tonnes and average daily rate.
Pulp markets remained strong as steady pulp demand coupled with large incremental supply side reductions maintained world inventories of pulp at very low levels throughout the quarter. The tight markets allowed producers to implement further price increases in the quarter. NBSK US dollar North American list prices were US$830 per tonne in December 2009 rising to US$910 in March 2010 with announced prices for May of US$1,000. Mitigating the impact of stronger global pulp markets for Canadian producers was the 3% appreciation of the Canadian dollar in relation to the US dollar from December 2009 to March 2010.
The pulp market is expected to remain strong through the second quarter of 2010 as inventories held by producers and customers are well below what is considered to be a balanced market. Industry downtime is expected to continue to impact the supply/demand balance. Factors impacting industry downtime include reduced production due to planned maintenance downtime in the second quarter of 2010, delays of Chilean mills returning to capacity after the February 27 earthquake, and delayed restarts of idled mills.
On April 21, 2010 the Fund announced the monthly distribution of $0.12 per Fund unit for the month of April 2010, to be paid on May 14, 2010. Today the Fund announced an increase in the monthly distribution to $0.20 per Fund unit for the month of May 2010, to be paid on June 15, 2010, to unitholders of record at the close of business on May 31, 2010.
Additional Information
A conference call to discuss the first quarter 2010 financial and operating results will be held on Wednesday, April 28, 2010 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 4188430. The conference call will be webcast live and will be available at www.canforpulp.com/investors/webcasts.asp.
This news release is available on the Partnership's website at www.canforpulp.com.
About Canfor Pulp Income Fund
Canfor Pulp Income Fund is an unincorporated, open-ended trust established under the laws of Ontario, created to indirectly acquire and hold an interest in 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 (collectively Canfor) 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 the Partnership, its prospects and uncertainties relating to the Fund, the 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 the 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 the Partnership assume no obligation to update such information to reflect later events or developments, except as required by law.
Forward-looking statements in this press release include statements made under:
- "Critical Accounting Estimates";
- "SIFT Conversion Rules";
- "Conversion to International Financial Reporting Standards";
- "Outlook - Pulp";
- "Outlook - Kraft Paper";
- "Financial Requirements and Liquidity";
- "Critical Accounting Estimates";
- "Conversion to International Financial Reporting Standards";
- "Distributable Cash and Cash Distributions".
Material risk factors that could cause actual results to differ materially from the forward-looking statements contained in this press release 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 the Partnership. Additional information concerning these and other factors can be found in the Fund's AIF dated February 18, 2010, which is available on www.sedar.com.
Canfor Pulp Income Fund and Canfor Pulp Limited Partnership
First Quarter 2010
The information in this report is as at April 26, 2010.
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 April 26, 2010, there were a total of 35,493,505 Fund units issued and outstanding, and the Fund indirectly held a total of 35,493,542 units of the Partnership, representing 49.8% of the Partnership. Canadian Forest Products Ltd. (Canfor) held 35,776,483 Class B Exchangeable Limited Partnership Units, representing 50.2% of the Partnership. The Class B Exchangeable Limited Partnership Units are indirectly exchangeable for an equivalent number of Fund Units pursuant to the terms of an exchange agreement (Exchange Agreement) dated July 1, 2006 among Canfor, the Fund, the Trust, the Partnership and the General Partner. The Exchange Agreement contains, among other things, the procedure through which the Class B Exchangeable Limited Partnership Units may be exchanged for Fund Units.
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, Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
unaudited) 2010 2009 2009 2009 2009 2008 2008 2008
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Equity income
(loss) in Canfor
Pulp Limited
Partnership 16,222 7,562 9,098 724 (10,740) (12,947) 5,513 9,046
Net income (loss) 16,544 6,903 8,497 4,406 (10,740) (13,686) 5,208 7,015
Net income (loss)
per Fund unit $0.47 $0.20 $0.24 $0.12 $(0.30) $(0.39) $0.15 $0.20
Distributions
earned from the
Partnership and
declared to
unitholders 11,357 4,969 1,065 1,065 2,130 9,938 12,778 12,777
Distributions
declared per Fund
unit $0.32 $0.14 $0.03 $0.03 $0.06 $0.28 $0.36 $0.36
Partnership
adjusted
distributable cash
per unit(1) $0.57 $0.31 $0.16 $0.02 $(0.06) $0.02 $0.54 $0.19
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Note: (1) Represents the Partnership's adjusted distributable cash on which
the Fund is dependent to make its own distributions. For further
details on the Partnership's adjusted distributable cash see the
Partnership's disclosure on at the end of this news release.
Equity income (loss) in Canfor Pulp Limited Partnership represents the fund's share of the Partnership's net income (loss). Net income (loss) is also impacted by future income tax expense (recovery) which is primarily influenced by changes in substantively enacted tax rates and the difference between the tax basis of the Fund's pro-rata ownership of the Partnership's assets and liabilities and the respective amounts reported in the financial statements.
OPERATING RESULTS AND LIQUIDITY
For the quarter ended March 31, 2010, the Fund had net income of $16.5 million or $0.47 per Fund unit. The net income was the Fund's share of the Partnership's income for the first quarter of 2010, and also includes a future income tax recovery of $0.3 million. The future income tax recovery represents an adjustment to the future income tax liability based on the Fund's share of the differences between accounting and income tax values of the Partnership's assets and liabilities. The Fund's equity income in the Partnership increased by $8.6 million when compared to the prior quarter due to the Fund's share of increased operating earnings of the Partnership, partially offset by the Fund's share of non-operating items. The Fund's share of operating earnings increased by $9.0 million due primarily to higher realized prices in Canadian dollar terms for the Partnership's pulp and paper products and lower unit manufacturing costs. The Fund's share of non-operating items included in equity income of the Partnership for the first quarter of 2010 is nil, as the foreign exchange gain on translation of US dollar denominated long-term debt and the gain on derivative financial instruments were offset by a foreign exchange loss on working capital and net interest expense. Distributions declared by the Partnership and accruing to the Fund were $11.4 million of which $4.3 million was receivable at March 31, 2010. 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.
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 first quarter of 2010, the Fund declared distributions of $0.32 per Fund unit or $11.4 million.
Monthly cash distributions from the Partnership are not directly equal to the Fund's pro-rata share of the Partnership's income (loss) under the equity method. This is primarily due to capital expenditures, foreign exchange gains or losses on translation of US dollar denominated debt, changes in value of derivative instruments, amortization, and other non-cash expenses of the Partnership.
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 18, 2010, which is available on www.sedar.com and www.canforpulp.com.
FUND UNITS
At April 26, 2010, there were 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 March 31, 2010 were $11.4 million of which $7.1 million was received, with the balance of $4.3 million receivable on March 31, 2010.
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. Significant areas requiring the use of management's estimates are the determination of future income taxes, and assessing whether there has been an other than temporary decline in the value of the investment in the Partnership. 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. The Fund accounts for its investment in the Partnership using the equity method. The Fund analyzes the carrying value of its investment in the Partnership by considering the underlying value of the Partnership's business. This assessment includes various long-term assumptions related to the Partnership's operations which may not be reflected in the current market value of the Fund. Changes in these estimates could have a material impact on the calculation of the future income tax liability or equity investment in the Partnership.
SIFT CONVERSION RULES
On June 12, 2007, legislation was substantively enacted whereby distributions made by publicly traded income trusts and partnerships will be taxed similar to that of income earned and distributed by a corporation. The Specified Investment Flow-Through Trust (SIFT) tax will become effective on January 1, 2011. On March 12, 2009 the Canadian government enacted legislation (SIFT Conversion Rules) which enables the conversion of a SIFT into a corporation on a tax-free rollover basis, prior to 2013. The Fund has reviewed its options and a Plan of Arrangement will be presented for approval by unitholders' at the annual general meeting on April 27, 2010. If approved, the Plan of Arrangement will result in the reorganization of the Fund's income trust structure into a dividend paying public corporation to be named "Canfor Pulp Products Inc." (CPPI), and the unitholders' will become the sole shareholders of CPPI which will own the 49.8% interest in the Partnership. The Fund expects the date of conversion to take place on or about January 1, 2011.
CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS
On February 13, 2008, the Accounting Standards Board (AcSB) 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 will rely on the resources of the Partnership to ensure compliance with IFRS. The Partnership intends to convert to these new standards according to the timetable set for these new rules.
A detailed analysis has been completed and a number of areas were identified for further consideration before the date of transition. Various accounting policy choices have been identified to date and are being considered by the steering committee of the Partnership. The Partnership continues to monitor standards development as issued by the International Accounting Standards Board (IASB) and the AcSB, as well as regulatory developments as issued by the Canadian Securities Administrators, which may affect the timing, nature, or disclosure of the Partnership's adoption of IFRS. The IASB has issued several exposure drafts for new or amended IFRS, which will likely have mandatory application for the 2011 calendar year.
The Partnership will continue to review all proposed and continuing projects of the IASB to determine their impact on the Fund, and will continue to invest in training and resources throughout the transition period to facilitate a timely conversion.
The impact on the Fund's future financial position and results of operations is primarily dependent on changes in accounting policies that may materially impact the Partnership's consolidated financial statements.
For further details on the Partnership's transition plan see the Partnership's disclosure.
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 Northern Bleached Softwood Kraft (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 April 26, 2010, the Fund indirectly held 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.
Ownership Structure
To view the Ownership Structure diagram, please click on the following link: http://media3.marketwire.com/docs/cfx426os.jpg.
The 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 unit Q1 Q4 Q1
amounts, unaudited) 2010 2009 2009
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Sales 239.5 220.2 186.3
EBITDA (1) 44.1 27.3 2.2
Operating income (loss) 32.5 14.4 (9.8)
Net income (loss) 32.5 15.2 (21.6)
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Per Partnership unit, basic and diluted
Net income (loss) $0.46 $0.21 $(0.30)
EBITDA $0.62 $0.39 $0.03
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Average exchange rate (US$/Cdn$) (2) 0.961 0.947 0.803
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Notes: (1) For calculation of EBITDA, see supplementary financial
information at the end of this news release.
(2) Source - Bank of Canada (average noon rate for the period).
EBITDA for the first quarter of 2010 increased by $16.8 million from the fourth quarter of 2009 and was $41.9 million higher when compared to the first quarter of 2009. The improved results when compared to the fourth quarter of 2009 are attributable to higher prices for pulp and paper products, lower unit manufacturing costs and higher pulp shipments, partially offset by the stronger Canadian dollar and lower electricity sales. Realized pulp prices in Canadian dollar terms increased 6% due to a 7% increase in NBSK pulp US dollar list price, partially offset by the strengthening of the Canadian dollar. Realized paper prices in Canadian dollar terms increased 8% when compared to the fourth quarter of 2009. Unit manufacturing costs decreased 4% when compared to the prior quarter due to lower spending on maintenance costs, partially offset by higher fibre costs. Fibre costs increased 2% when compared to the prior quarter due to an increase in the price of sawmill residual chips.
The Prince George Pulp and Paper Mill maintenance outage, initially scheduled to take place in the second quarter of 2010 was moved to coincide with unplanned maintenance requiring the shutdown of the mill's recovery boiler. This shutdown reduced pulp production by approximately 22,000 tonnes and reduced EBITDA by approximately $11.0 million in the quarter. Included in these amounts were approximately 4,000 tonnes and $4.0 million attributable to the maintenance outage originally planned for the second quarter of 2010. The major maintenance expenditures incurred during the shutdown were deferred and will be amortized in accordance with the Partnership's accounting policy for treating "Major Maintenance Costs".
When compared to the first quarter of 2009, the $41.9 million increase in EBITDA was primarily attributable to a 31% increase in NBSK pulp US dollar list price, lower unit manufacturing costs and higher sales volumes, all of which were partially offset by a stronger Canadian dollar and lower realized paper prices in Canadian dollar terms. Realized pulp prices in Canadian dollar terms increased 15% as a 31% increase in NBSK pulp US dollar list price and a decrease in the proportion of sales into lower margin business, were partially offset by a 20% strengthening of the Canadian dollar. Unit manufacturing costs were 9% lower when compared to the same period in the prior year. The reduction in unit manufacturing costs was the result of higher production volumes, and lower fibre, chemical and energy costs. Production volumes were higher primarily as a result of the market curtailment in January 2009 and significantly improved operating rates in the current period. The reduction in fibre costs is attributable to a reduction in the volume and cost of whole log chips, partially offset by increased price of sawmill residual chips. Paper prices decreased 15% when compared to the first quarter of 2009 due to the stronger Canadian dollar, partially offset by improved paper markets.
OPERATING RESULTS BY BUSINESS SEGMENT
Pulp
(millions of dollars unless otherwise Q1 Q4 Q1
noted, unaudited) 2010 2009 2009
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Sales 204.8 186.9 159.2
EBITDA (loss) 47.9 29.9 (0.5)
EBITDA margin 23% 16% 0%
Operating income (loss) 37.1 17.9 (11.6)
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Average NBSK pulp list price - (US$ per
tonne, delivered to USA) 880 820 673
Average NBSK pulp list price - (Cdn$ per
tonne, delivered to USA) 916 866 838
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Production - pulp (000 mt) 253.8 251.9 230.4
Shipments - Partnership-produced pulp (000 mt) 268.4 258.6 240.3
Marketed on behalf of HSLP & Canfor (000 mt) 138.7 126.1 107.2
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The first quarter 2010 operating income for the pulp segment of $37.1 million was a $19.2 million improvement when compared to the fourth quarter of 2009. The improved results are attributable to higher realized prices in Canadian dollar terms, lower unit manufacturing costs and higher shipment volumes, partially offset by a reduction in electricity sales. The increased realized pulp prices in Canadian dollar terms of 6% was primarily attributable to a similar increase in NBSK pulp US dollar list price partially offset by the strengthening of the Canadian dollar. The lower unit manufacturing costs resulted from lower spending on maintenance costs, partially offset by higher fibre costs. Maintenance costs were lower due to the impact of the scheduled maintenance outage at the Northwood Pulp Mill in the fourth quarter of 2009. Fibre costs increased 2% when compared to the prior quarter due to an increase in the price of sawmill residual chips.
First quarter 2010 operating income of the pulp segment increased by $48.7 million when compared to the same period a year ago. The improved results were primarily attributable to a 31% increase in NBSK pulp US dollar list price, lower unit manufacturing costs and higher sales volumes, all of which were partially offset by a stronger Canadian dollar. Realized pulp prices in Canadian dollar terms increased 15% as a 31% increase in NBSK pulp US dollar list price and the impact of a higher proportion of sales in the first quarter of 2009 into lower margin business were partially offset by a 20% strengthening of the Canadian dollar. Unit manufacturing costs were 10% lower when compared to the same period in the prior year. The reduction in unit manufacturing costs was the result of higher production volumes, and lower fibre, chemical and energy costs. Production volumes were higher primarily as a result of the market curtailment in January 2009 and significantly improved operating rates in the current period.
Operations
During the quarter, the Northwood Pulp Mill achieved production records for both total tonnes and average daily operating rate. NBSK market pulp production during the first quarter was 1,900 tonnes higher than the fourth quarter of 2009, and 23,400 tonnes higher than the first quarter of 2010. The improved production when compared to the prior quarter is a result of higher operating rates in the current period and reduced production in the fourth quarter of 2009 as a result of the planned Northwood Pulp Mill maintenance outage, partially offset by a maintenance outage completed at the Prince George Pulp and Paper (PGPP) Mill. The PGPP Mill maintenance outage, initially scheduled to take place in the second quarter of 2010, was moved to coincide with unplanned maintenance requiring the shutdown of the mill's recovery boiler.
The increase of market pulp production when compared to the same period in the prior year is attributable to the higher operating rates in the current period and the impact of the market curtailment in January 2009, partially offset by the extended maintenance outage completed at the PGPP Mill in the first quarter of 2010.
Markets - Pulp
Pulp markets tightened further in the first quarter of 2010 as a result of improved demand and large incremental supply side reductions. Constrained supply conditions at the end of 2009 were the result of pulp mill closures during the year. In the first quarter of 2010, a number of supply side events have created even tighter pulp market conditions. The largest impact was the Chilean earthquake on February 27, 2010 which removed approximately 8% of global softwood pulp supply for an expected duration of two to three months. Additional impacts on global softwood pulp supply were weather related issues in the southern US and Russia throughout the first quarter, and a Finnish port strike in March 2010.
Pulp consumption levels have been steadily increasing since the second quarter of 2009. The printing and writing paper manufacturing sector experienced improved demand through February 2010, with demand up 10.6% over February 2009. For February year to date, printing and writing paper demand is up 9.1% versus the same period in 2009.
The steady improvement in consumption coupled with the supply side reductions have resulted in very low pulp inventory levels. At the end of March 2010, World 20(1) producers of bleached softwood pulp inventories stood at 23 days of supply. By comparison, March 2009 inventories stood at 40 days of supply. Market conditions are considered balanced when inventories fall in the 27-30 days of supply range.
As a result of these tight market conditions, producers were successful at implementing further price increases in the first quarter of 2010. The NBSK pulp list price in North America during March 2009 was US$650 per tonne with price increases throughout 2009 resulting in a price of US$830 per tonne for December 2009. Price increases in the first quarter of 2010 have resulted in a price for March 2010 of US$910 per tonne. In Canadian dollar terms the price increases have been somewhat mitigated by the strengthening of the Canadian dollar which has appreciated 19% over the past year.
Note: (1) World 20 data is based on twenty producing countries representing 80% of world chemical market pulp capacity and is based on information compiled and prepared by the Pulp and Paper Products Council (PPPC).
Outlook - Pulp
We expect the market to remain strong through the second quarter of 2010. Inventories held by producers and customers are at low levels compared to what is considered a balanced market and are expected to fall further mainly due to the Chilean pulp mill downtime. A NBSK pulp list price increase in May to US$1,000 per tonne for North America was successfully implemented. With the supply/demand balance in the favour of producers, there is potential for additional price increases through the second quarter of 2010. Any relative weakness of the US dollar versus the Canadian dollar or the Euro is also likely to exert upward pressure on NBSK pulp US dollar list prices.
A scheduled maintenance outage is planned for the Intercontinental Pulp Mill in the second quarter of 2010 with an estimated 9,000 tonnes of reduced production.
Paper
(millions of dollars unless otherwise Q1 Q4 Q1
noted, unaudited) 2010 2009 2009
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Sales 34.5 32.3 27.1
EBITDA 0.1 0.9 4.6
EBITDA margin 0% 3% 17%
Operating income (loss) (0.6) 0.1 3.8
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Production - paper (000 mt) 31.0 38.4 28.4
Shipments - paper (000 mt) 37.7 38.1 25.2
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The operating income of the paper segment for the first quarter of 2010 was $0.7 million lower than the fourth quarter of 2009 and $4.4 million lower than the same period last year. The decrease when compared to the fourth quarter of 2009 was primarily attributable to higher unit manufacturing costs, partially offset by higher realized paper prices in Canadian dollar terms. Higher unit manufacturing costs were the result of higher costs for slush pulp and the impact of lower production volumes. The slush pulp is transferred to the paper segment at a market price with the increase directly attributable to the increase in the realized pulp price in Canadian dollar terms. Lower production volumes are the result of a maintenance outage completed in the first quarter of 2010 and lower operating rates when compared to the prior quarter. Realized prices in Canadian dollar terms increased by approximately 8%.
When compared to the first quarter of 2009 the reduction in operating earnings was due to a 15% decrease in realized prices in Canadian dollar terms and higher unit manufacturing costs, partially offset by higher sales volumes. Higher unit manufacturing costs were primarily attributable to higher costs for slush pulp partially offset by higher production volumes. Production volumes were higher primarily as a result of the market curtailment in January 2009. Sales volumes increased 12,500 tonnes due to the market curtailment and weak demand in the first quarter of 2009.
Operations
When compared to the fourth quarter of 2009, paper production decreased by 7,400 tonnes due to a scheduled maintenance outage and the unplanned recovery boiler maintenance in the first quarter of 2010, and lower overall operating rates when compared to the fourth quarter of 2009. When compared to the same period in the prior year, production was 2,600 tonnes higher due to the impact of the market curtailment in the first quarter of 2009, partially offset by reduced production as a result of the scheduled maintenance outage and the recovery boiler maintenance in the current period.
Markets
Kraft paper demand in the first quarter remained strong. The American Forest and Paper Association reported that US total kraft paper shipments for March 2010 increased 22% from February and 33% when compared to March 2009. The Paper Shipping Sack Manufacturers' Association shipping sack statistics for March 2010 reveal that industry paper consumption was up 7% from the previous month and 11% when compared to March 2009. Price increases have been announced for all markets and are expected to take effect in the second quarter of 2010.
The Partnership's total prime paper shipments in the first quarter of 2010 remained relatively unchanged from the prior quarter of 2009 and were 12,000 tonnes higher than the first quarter of 2009. Prime bleached shipments increased to 73% of the total from 63% in the prior quarter and the same period in the prior year.
Outlook - Kraft Paper
The current strong demand is expected to continue through the second quarter of 2010. Prices are expected to increase as North American price announcements in the first quarter of 2010 are expected to be fully implemented in April 2010 and European price increases are expected to take effect in May 2010. The impact of increased prices in US dollar terms is vulnerable to the relative strength of the Canadian dollar in relation to other currencies, primarily the US dollar.
Non-Segmented Costs
Q1 Q4 Q1
(millions of dollars, unaudited) 2010 2009 2009
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Unallocated costs 4.0 3.6 2.0
Interest expense, net 2.0 2.2 2.6
Foreign exchange (gain) loss on long-term
debt (3.4) (2.9) 3.9
Loss (gain) on derivative financial
instruments (0.4) (0.5) 5.7
Foreign exchange loss (gain) on working
capital 1.8 0.5 (0.6)
Other (income) expense - (0.1) 0.2
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4.0 2.8 13.8
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Unallocated Costs
Unallocated costs, comprised principally of general and administrative expenses, totalled $4.0 million in the first quarter of 2010 compared to $3.6 million in the fourth quarter of 2009 and $2.0 million in the first quarter of 2009. The increase in unallocated costs when compared to the same period in the prior year is attributable to higher accruals for performance based incentive plans.
Interest Expense
The decreased net interest expense in relation to the first quarter of 2009 was attributable to the reduction in operating line borrowing.
Other Non-segmented Items
The foreign exchange gain on long-term debt resulted from translating the US$110 million debt at period-end exchange rates, reflecting the stronger Canadian dollar.
The net gain of $0.4 million on derivative financial instruments recorded in the first quarter of 2010 relates to the settlement of maturing contracts during the quarter and the revaluation to market of outstanding contracts at the end of the quarter for natural gas swaps and US dollar forward contracts. A loss of $0.9 million on settlement of natural gas swaps was recorded in the first quarter of 2010. The natural gas swaps are used to fix the price on a portion of the Partnership's future natural gas requirements. The increasing value of the Canadian dollar in the first quarter of 2010 resulted in a net gain for the quarter of $2.5 million on settlement of US dollar forward contracts to hedge the impact of currency fluctuations on US dollar working capital. This gain was offset by the foreign exchange loss on working capital of $1.8 million. The revaluation to market of outstanding derivative instruments recorded in the quarter resulted in a loss of $1.2 million and relates to a revaluation to market of outstanding natural gas swaps and outstanding US dollar forward contracts at the end of the quarter.
SUMMARY OF FINANCIAL POSITION
The following table summarizes the Partnership's financial position as at the end of and for the following periods:
March 31, December 31,
(millions of dollars, except for ratios, unaudited) 2010 2009
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Ratio of current assets to current liabilities 2.08 2.04
Ratio of net debt to partners' equity (1) 0.14 0.19
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Q1 Q1
2010 2009
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Increase in cash and cash equivalents 21.2 1.6
Comprised of cash flow from (used in):
Operating activities 43.5 21.8
Financing activities (19.9) (14.0)
Investing activities (2.4) (6.2)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Note: 1 Net debt consists of long-term debt and operating loans, net of
cash and cash equivalents.
Changes in Financial Position
Cash generated from operating activities was $43.5 million in the first quarter of 2010 compared to $21.8 million in the first quarter of 2009. The increase in cash generated from operations was primarily attributable to higher realized pulp and paper prices in Canadian dollar terms, lower unit manufacturing costs and higher sales volumes. The increase of cash used in working capital during the first quarter of 2010 was primarily the result of an increase in the value of trade receivables due to price increases for the Partnership's pulp and paper products, and an increase in deferred maintenance expenditures due to completion of the PGPP Mill maintenance outage in the first quarter of 2010, partially offset by a reduction in the volume of the Partnership's finished goods inventories.
The cash used in financing activities of $19.9 million in the quarter represents distributions paid to the limited partners, namely Canfor and the Fund.
The cash used in investing activities in the quarter is comprised of $2.4 million relating to capital expenditures.
FINANCIAL REQUIREMENTS AND LIQUIDITY
At March 31, 2010 the Partnership had outstanding long-term debt of $111.7 million (December 31, 2009 - $115.1 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.
At March 31, 2010, the Partnership had cash and cash equivalents of $34.7 million. The Partnership has a $40.0 million bank credit facility with a maturity date of November 30, 2011, of which $0.5 million was utilized at March 31, 2010 for a standby letter of credit issued for general business purposes. In addition, the Partnership has a separate facility with a maturity date of November 30, 2011, to cover the $16.0 million standby letter of credit issued to BC Hydro under the Electricity Purchase Agreement. Interest and other costs of the bank credit facility are at prevailing market rates. The leverage ratio and interest coverage ratio are consistent with the financial covenants under the Note Agreement.
The Partnership manages cash resources to fund current and future operations through management of its capital structure in conjunction with cash flow forecasting, including anticipated investing and financing activities. As required, the Partnership uses the bank credit facility to meet short-term working capital requirements. The Partnership also reviews on an ongoing basis, the level of distributions, capital expenditures and timing of scheduled major maintenance outages and may adjust these periodically to manage cash resources.
The Partnership also discounts letters of credit on outstanding trade receivables to reduce credit and foreign currency exposure, and to increase short-term liquidity.
The Notes and bank credit agreements each contain similar financial covenants including a maximum allowable debt:EBITDA leverage ratio and minimum required EBITDA:interest coverage ratio. The Partnership remained in compliance with all covenants at March 31, 2010.
On October 9, 2009 the Canadian federal government announced the allocation of credits from the billion dollar Pulp and Paper Green Transformation Program (the Program). The Partnership has been allocated $122.2 million from the Program announced by the Canadian government on June 17, 2009. The Program is designed as a reimbursement of funds to be spent on qualifying energy and environmental capital projects. Credits may be used until the program end date of March 31, 2012. The Partnership has submitted two projects for Program approval and expects to submit further projects over the balance of 2010. These projects are expected to provide economic and environmental benefits to the Partnership's operations.
OUTSTANDING UNITS
At April 26, 2010, 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) were owned by the Fund through Canfor Pulp Trust and 35,776,483 Class B Exchangeable Limited Partnership Units were owned indirectly by Canfor.
RELATED PARTY TRANSACTIONS
The Partnership's transactions with related parties are consistent with the transactions described in the December 31, 2009 audited consolidated financial statements and are based on agreed upon amounts, and are summarized in note 9 of the unaudited interim consolidated financial statements.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the quarter ending March 31, 2010, 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 18, 2010, which is available on www.sedar.com and www.canforpulp.com.
SELECTED QUARTERLY PARTNERSHIP FINANCIAL INFORMATION
(millions of
dollars unless
otherwise noted, Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
unaudited) 2010 2009 2009 2009 2009 2008 2008 2008
----------------------------------------------------------------------------
Sales and Income
Sales 239.5 220.2 202.0 205.0 186.3 186.1 215.4 212.6
Operating income
(loss) 32.5 14.4 12.4 (5.0) (9.8) (1.0) 27.5 11.6
EBITDA 44.1 27.3 25.1 7.2 2.2 9.8 40.6 24.0
Net income (loss) 32.5 15.2 18.3 1.5 (21.6) (26.0) 11.1 18.2
----------------------------------------------------------------------------
Per Partnership
unit (dollars)
Net income (loss)
basic and diluted $0.46 $0.21 $0.26 $0.02 $(0.30) $(0.36) $0.15 $0.26
----------------------------------------------------------------------------
Statistics
Pulp shipments
(000 mt) 268.4 258.6 259.5 286.2 240.3 208.2 234.5 233.8
Paper shipments
(000 mt) 37.7 38.1 37.4 34.3 25.2 24.4 31.6 33.7
----------------------------------------------------------------------------
Average exchange
rate
(US$/Cdn$)(1) 0.961 0.947 0.912 0.858 0.803 0.825 0.960 0.990
----------------------------------------------------------------------------
Average NBSK pulp
list price -
(US$ per tonne,
delivered to USA) 880 820 733 645 673 787 880 880
----------------------------------------------------------------------------
Per Partnership
unit (dollars)
Adjusted
distributable
cash per unit(2) $0.57 $0.31 $0.16 $0.02 $(0.06) $0.02 $0.54 $0.19
Distributions
declared per unit $0.32 $0.14 $0.03 $0.03 $0.06 $0.28 $0.36 $0.36
----------------------------------------------------------------------------
Notes: 1 Source - Bank of Canada (average noon rate for the period).
2 For further details on the Partnership's adjusted distributable
cash see the Partnership's disclosure at the end of this news
release.
Sales are primarily influenced by changes in market pulp prices, sales volumes and fluctuations in Canadian dollar exchange rates. Operating income (loss), net income (loss) and EBITDA are primarily impacted by: the level of sales; freight costs; fluctuations of fibre, chemical, and energy prices; level of spending and the timing of scheduled maintenance downtime; and production curtailments. Net income (loss) is also impacted by fluctuations in Canadian dollar exchange rates, the 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 swaps and US dollar forward contracts.
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 asset 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.
CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS
Project Update
The Partnership has completed the detailed diagnostic phase of its transition plan. The key areas where changes in accounting policies are expected that may impact the Partnership's consolidated financial statements are set out in the Fund's 2009 annual report. The list and comments should not be regarded as a complete list of changes that will result from transition to IFRS. It is intended to highlight those areas we believe to be most significant; however, analysis of changes is still in process and not all decisions have been finalized where choices of accounting policies are available.
At March 31, 2010, the Partnership could not reasonably determine the full impact that adopting IFRS would have on its financial statements, as the current status of the project reflects the Partnership's most recent assumptions and expectations; circumstances may arise, such as changes in existing IFRS, or changes in the regulatory or economic environment, which could alter these assumptions and/or expectations. These disclosures reflect the Partnership's expectations based on information available at March 31, 2010. Changes in IFRS standards or circumstances relating to the Partnership may cause the Partnership to revise its expectations, its project plan, and its potential IFRS accounting policy choices prior to the conversion date.
No significant changes to systems (including information technology systems) have been identified to date. The implementation team will continue to assess the impact on systems as the project progresses.
A draft opening balance sheet prepared under IFRS at the date of transition (January 1, 2010) is planned to be completed in 2010. In addition, during 2010, draft financial statements and disclosure information will be prepared for each quarter (to be used for comparative purposes in 2011). Reporting under IFRS will commence for interim and annual periods in 2011.
First-time Adoption of International Financial Reporting Standards (IFRS 1)
At adoption of IFRS, an entity is required to apply IFRS 1, which provides guidance for an entity's initial adoption of IFRS. IFRS 1 generally requires an entity to apply all IFRS effective at the end of its first IFRS reporting period retrospectively. However, IFRS 1 provides certain mandatory exceptions and permits limited optional exemptions in specified areas of certain standards from this general requirement. The Partnership has decided to take the following optional elections provided by IFRS 1. All other available elections are either not applicable or not material to the Partnership. Note that these elections are subject to change as further work is completed.
- Borrowing costs:
IAS 23, Borrowing Costs, requires the capitalization of borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Canadian GAAP allows an accounting policy choice to expense these costs as incurred or capitalize them. The Partnership expects to elect to apply the requirements of IAS 23 prospectively from January 1, 2010.
- Employee Benefits:
The Partnership may elect to recognize all cumulative actuarial gains and losses at the date of transition to IFRS. Actuarial gains and losses would have to be recalculated under IFRS from the inception of each of our defined benefit plans if the exemption is not taken.
- Business combinations:
The Partnership expects to apply the business combinations exemption in IFRS 1 to not apply IFRS 3 Business Combinations retrospectively to past business combinations. Accordingly, the Partnership will not modify the carrying amounts of assets and liabilities arising on business combinations occurring before the transition date.
Disclosure Controls and Internal Controls over Financial Reporting
Financial reporting controls will change due to the transition to IFRS. The majority of change surrounds new or modified processes due to the fact that IFRS requires more judgment with respect to various accounting treatments. Processes and controls will be put in place to ensure the Partnership is making the appropriate judgments and following the IFRS accounting policies selected.
CANFOR PULP LIMITED PARTNERSHIP
SUPPLEMENTARY FINANCIAL INFORMATION
Three months ended
March 31, March 31,
(millions of dollars, unaudited) 2010 2009
--------------------------------------------------------------------------
RECONCILIATION OF NET INCOME (LOSS) TO EBITDA
Net income (loss) $ 32.5 $ (21.6)
Add (deduct):
Amortization 11.6 12.0
Net interest expense 2.0 2.6
Foreign exchange (gain) loss on long-term debt (3.4) 3.9
Loss (gain) on derivative financial instruments (0.4) 5.7
Foreign exchange loss (gain) on working capital 1.8 (0.6)
Other expense - 0.2
--------------------------------------------------------------------------
EBITDA $ 44.1 $ 2.2
--------------------------------------------------------------------------
--------------------------------------------------------------------------
EBITDA per Partnership unit $ 0.62 $ 0.03
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
March 31, March 31,
(millions of dollars, unaudited) 2010 2009
--------------------------------------------------------------------------
CALCULATION OF STANDARDIZED AND ADJUSTED
DISTRIBUTABLE CASH
Cash flow from operating activities $ 43.5 $ 21.8
Deduct: Capital expenditures - cash (2.4) (6.0)
--------------------------------------------------------------------------
Standardized distributable cash $ 41.1 $ 15.8
--------------------------------------------------------------------------
Adjustments to standardized distributable cash:
Add (deduct):
Increase (decrease) in non-cash working capital 1.8 (22.8)
Net long-term deferred maintenance (2.0) (0.9)
Capital expenditure accruals - net 0.1 3.6
--------------------------------------------------------------------------
Adjusted distributable cash $ 41.0 $ (4.3)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Standardized distributable cash - per
Partnership unit (in dollars) $ 0.58 $ 0.22
Adjusted distributable cash - per Partnership
unit (in dollars) $ 0.57 $ (0.06)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cash distributions declared (paid and payable) $ 22.8 $ 4.3
Cash distributions declared - per Partnership
unit (in dollars) $ 0.32 $ 0.06
--------------------------------------------------------------------------
--------------------------------------------------------------------------
DISTRIBUTABLE CASH AND CASH DISTRIBUTIONS
The Partnership reports standardized distributable cash in accordance with the Canadian Institute of Chartered Accountants July 2007 interpretive release "Standardized Distributable Cash in Income Trusts and other Flow-Through Entities". In summary, for the purposes of the Partnership, standardized distributable cash is defined as the periodic cash flows from operating activities, 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, asset retirement obligation expenditures and accruals, and after provision for accrued capital expenditures.
The Board 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, asset retirement obligation expenditures and accruals, less capital expenditures. 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 (Loss), Comprehensive Income (Loss) and
Accumulated Earnings and Distributions
Three months ended
(thousands of dollars, except unit and per unit March 31, March 31,
amounts, unaudited) 2010 2009
---------------------------------------------------------------------------
Income
Equity income (loss) in Canfor Pulp Limited
Partnership $ 16,222 $ (10,740)
---------------------------------------------------------------------------
Net income (loss) before future income taxes 16,222 (10,740)
Future income tax recovery (note 6) (322) -
---------------------------------------------------------------------------
Net income (loss) 16,544 (10,740)
Distributions declared (note 4) 11,357 2,130
---------------------------------------------------------------------------
Earnings in excess of distributions - surplus
(deficit) $ 5,187 $ (12,870)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net income (loss) per unit, basic and diluted $ 0.47 $ (0.30)
Weighted average number of units 35,493,505 35,493,505
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net income (loss) for the period $ 16,544 $ (10,740)
Equity interest in other comprehensive loss of
Canfor Pulp Limited Partnership (27) (21)
---------------------------------------------------------------------------
Comprehensive income (loss) $ 16,517 $ (10,761)
---------------------------------------------------------------------------
Accumulated Earnings and Distributions
---------------------------------------------------------------------------
Balance, beginning of period - distributions in
excess of earnings $ (73,026) $ (72,863)
Earnings in excess of distributions - surplus
(deficit), current period 5,187 (12,870)
---------------------------------------------------------------------------
Balance, end of period - distributions in
excess of earnings $ (67,839) $ (85,733)
---------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Canfor Pulp Income Fund
Consolidated Statements of Cash Flows
Three months ended
March 31, March 31,
(thousands of dollars, unaudited) 2010 2009
--------------------------------------------------------------------------
Cash generated from (used in)
Operating activities
Net income (loss) $ 16,544 $ (10,740)
Items not affecting cash:
Equity (income) loss in Canfor Pulp Limited
Partnership (16,222) 10,740
Future income tax recovery (322) -
Distributions received from Canfor Pulp Limited
Partnership 9,938 3,194
--------------------------------------------------------------------------
9,938 3,194
--------------------------------------------------------------------------
Financing activities
Distributions paid to unitholders $ (9,938) $ (3,194)
--------------------------------------------------------------------------
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
March 31, December 31,
(thousands of dollars, unaudited) 2010 2009
---------------------------------------------------------------------------
ASSETS
Current assets
Distributions receivable from Canfor Pulp
Limited Partnership (notes 4,5) $ 4,259 $ 2,839
---------------------------------------------------------------------------
Total current assets 4,259 2,839
---------------------------------------------------------------------------
Equity investment in Canfor Pulp Limited
Partnership (note 3) 268,482 263,644
---------------------------------------------------------------------------
$ 272,741 $ 266,483
---------------------------------------------------------------------------
---------------------------------------------------------------------------
LIABILITIES
Current liabilities
Distributions payable (note 4) $ 4,259 $ 2,839
---------------------------------------------------------------------------
Total current liabilities 4,259 2,839
---------------------------------------------------------------------------
Future income taxes (note 6) 36,965 37,287
---------------------------------------------------------------------------
$ 41,224 $ 40,126
---------------------------------------------------------------------------
UNITHOLDERS' EQUITY
Unitholders' equity - 35,493,505 Fund units
outstanding $ 299,351 $ 299,351
Accumulated earnings and distributions (67,839) (73,026)
Accumulated other comprehensive income (note 7) 5 32
---------------------------------------------------------------------------
Total Unitholders' Equity 231,517 226,357
---------------------------------------------------------------------------
$ 272,741 $ 266,483
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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"
Stan Bracken-Horrocks Charles Jago
Canfor Pulp Income Fund
Notes to the Unaudited Interim Consolidated Financial Statements as at March 31, 2010
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, BC, 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 2009 Annual Report available at www.canforpulp.com or www.sedar.com. These unaudited interim consolidated financial statements follow the same accounting policies and methods of computation as used in the 2009 audited consolidated financial statements.
3. Equity Investment in Canfor Pulp Limited Partnership
The Fund's equity investment in the Partnership is as follows:
Three months ended Year ended
(thousands of dollars, unaudited) March 31, 2010 December 31, 2009
---------------------------------------------------------------------------
Balance, beginning of period 263,644 266,274
Equity interest in income of the
Partnership 16,222 6,644
Equity interest in other
comprehensive loss of the Partnership (27) (45)
Distributions from the Partnership (11,357) (9,229)
---------------------------------------------------------------------------
Balance, end of period 268,482 263,644
---------------------------------------------------------------------------
---------------------------------------------------------------------------
4. Distributions
The Fund declared distributions during the first three months of 2010 as follows:
(thousands of dollars, except per unit amounts, unaudited)
Amount per Fund Unit Amount
Record Date Payable Date $ $
---------------------------------------------------------------------------
---------------------------------------------------------------------------
January 29, 2010 February 15, 2010 0.08 2,839
February 26, 2010 March 15, 2010 0.12 4,259
March 31, 2010 April 15, 2010 0.12 4,259
---------------------------------------------------------------------------
0.32 11,357
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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.
5. 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 March 31, 2010 were $11.4 million of which $7.1 million was received, with the balance of $4.3 million receivable on March 31, 2010.
6. Future Income Taxes
The following table reconciles the income tax expense calculated using statutory tax rates to the actual income tax expense.
Three months ended Year ended
(thousands of dollars, unaudited) March 31, 2010 December 31, 2009
-------------------------------------------------------------------------
Expected income tax expense at
statutory tax rate of nil (2009 - nil) - -
Future income tax recovery on
temporary differences (322) (2,422)
-------------------------------------------------------------------------
(322) (2,422)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The temporary differences based on the Fund's 49.8% ownership of the Partnership are as follows:
(thousands of dollars, unaudited) March 31, 2010 December 31, 2009
-------------------------------------------------------------------------
Future income tax liability:
Equity investment in the Partnership 42,852 42,347
Expected reversal of temporary
differences prior to January 1, 2011 (5,887) (5,060)
-------------------------------------------------------------------------
36,965 37,287
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The future income tax liability is based on a current estimate of the balance at the beginning of 2011. The balance 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.
7. Accumulated Other Comprehensive Income
Three months ended Year ended
(thousands of dollars, unaudited) March 31, 2010 December 31, 2009
-------------------------------------------------------------------------
Balance, beginning of period 32 77
Other comprehensive loss (27) (45)
-------------------------------------------------------------------------
Balance, end of period 5 32
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. 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.
9. 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 (Loss), Comprehensive Income (Loss)
and Partners' Equity
Three months ended
(millions of dollars, except units and per unit March 31, March 31,
amounts, unaudited) 2010 2009
---------------------------------------------------------------------------
Revenue
Sales $ 239.5 $ 186.3
---------------------------------------------------------------------------
239.5 186.3
Costs and expenses
Manufacturing and product costs 157.9 149.8
Freight and other distribution costs 31.1 28.8
Amortization 11.6 12.0
Selling and administration costs 6.4 5.5
---------------------------------------------------------------------------
207.0 196.1
Operating income (loss) 32.5 (9.8)
Interest expense, net (2.0) (2.6)
Foreign exchange gain (loss) on long-term debt 3.4 (3.9)
Gain (loss) on derivative financial instruments
(note 11) 0.4 (5.7)
Foreign exchange gain (loss) on working capital (1.8) 0.6
Other - (0.2)
---------------------------------------------------------------------------
- (11.8)
---------------------------------------------------------------------------
Net income (loss) and comprehensive income
(loss) $ 32.5 $ (21.6)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net income (loss) per Partnership unit
(note 10)
Basic and diluted $ 0.46 $ (0.30)
Weighted average Partnership units outstanding 71,270,025 71,270,025
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Partners' Equity
Balance, beginning of period $ 529.1 $ 534.4
Net income (loss) 32.5 (21.6)
Distributions declared to partners (note 13) (22.8) (4.3)
---------------------------------------------------------------------------
Balance, end of period $ 538.8 $ 508.5
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Canfor Pulp Limited Partnership
Consolidated Statements of Cash Flows
Three months ended
March 31, March 31,
(millions of dollars, unaudited) 2010 2009
---------------------------------------------------------------------------
Cash and cash equivalents generated from (used in)
Operating activities
Net income (loss) $ 32.5 $ (21.6)
Items not affecting cash:
Amortization 11.6 12.0
Foreign exchange (gain) loss on long-term debt (3.4) 3.9
Reduction in value of outstanding derivative 1.2 2.9
instruments (note 11)
Employee future benefits 2.0 1.5
Change in long-term maintenance provision 4.4 0.9
Salary pension plan contribution (0.6) (0.6)
Long-term maintenance expenditure (2.4) -
---------------------------------------------------------------------------
Cash flow from operations before working capital
changes 45.3 (1.0)
Decrease (increase) in non-cash working capital
(note 12) (1.8) 22.8
---------------------------------------------------------------------------
43.5 21.8
---------------------------------------------------------------------------
Financing activities
Distributions paid to partners (19.9) (6.4)
Operating loan repayment (note 7) - (7.6)
---------------------------------------------------------------------------
(19.9) (14.0)
---------------------------------------------------------------------------
Investing activities
Property, plant and equipment, net (note 12) (2.4) (6.0)
Net insurance proceeds - (0.2)
---------------------------------------------------------------------------
(2.4) (6.2)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Increase in cash and cash equivalents 21.2 1.6
Cash and cash equivalents, beginning of period 13.5 0.4
---------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 34.7 $ 2.0
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Supplementary cash flow information (note 12).
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
March 31, December 31,
(millions of dollars, unaudited) 2010 2009
---------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 34.7 $ 13.5
Accounts receivable (note 9)
Trade 121.0 110.5
Other 11.3 8.6
Inventories (note 3) 128.7 135.4
Prepaid expenses and other assets 22.3 18.4
---------------------------------------------------------------------------
Total current assets 318.0 286.4
---------------------------------------------------------------------------
Property, plant and equipment (note 4) 524.8 534.1
Other long-term assets (note 5) 14.7 17.1
---------------------------------------------------------------------------
$ 857.5 $ 837.6
---------------------------------------------------------------------------
---------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities
(note 9) $ 144.3 $ 134.5
Distributions payable (note 13) 8.6 5.7
---------------------------------------------------------------------------
Total current liabilities 152.9 140.2
---------------------------------------------------------------------------
Long-term debt (note 7) 111.7 115.1
Long-term liabilities (note 8) 54.1 53.2
---------------------------------------------------------------------------
$ 318.7 $ 308.5
---------------------------------------------------------------------------
PARTNERS' EQUITY - 14,254,005 Class A Limited
Partnership Units and 57,016,020 Class B
Limited Partnership Units (note 1) 538.8 529.1
---------------------------------------------------------------------------
$ 857.5 $ 837.6
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Description of the Partnership and basis of presentation of financial
statements (note 1).
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"
Stan Bracken-Horrocks Paul Richards
Director Director
Canfor Pulp Limited Partnership
Notes to the Unaudited Interim Consolidated Financial Statements as at March 31, 2010
1. Business Description and Basis of Presentation of Financial Statements
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 March 31, 2010, 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 60% (2009 Year - 63%) of its fibre supply as well as to provide certain key business and administrative services as described in the Fund's 2009 Annual Report available at www.canforpulp.com or www.sedar.com. 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. The Partnership's accounting policies are as disclosed in the annual consolidated financial statements of the Partnership included in the Fund's 2009 Annual Report available at www.canforpulp.com or www.sedar.com. These unaudited interim consolidated financial statements follow the same accounting policies and methods of computation as used in the 2009 audited consolidated financial statements.
3. Inventories
(millions of dollars, unaudited) March 31, 2010 December 31, 2009
--------------------------------------------------------------------------
Pulp 46.7 55.2
Paper 11.5 15.9
Wood chips 27.5 21.5
Processing materials and supplies 43.0 42.8
--------------------------------------------------------------------------
128.7 135.4
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4. Property, Plant and Equipment
March 31, 2010
---------------------------------------
Accumulated
(millions of dollars, unaudited) Cost amortization Net
---------------------------------------------------------------------------
Land and improvements 5.4 - 5.4
Asset retirement - Landfill 2.3 0.8 1.5
Buildings, machinery and equipment 1,347.6 831.6 516.0
Construction in progress 1.9 - 1.9
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1,357.2 832.4 524.8
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---------------------------------------------------------------------------
December 31, 2009
---------------------------------------
Accumulated
(millions of dollars, unaudited) Cost amortization Net
---------------------------------------------------------------------------
Land and improvements 5.4 - 5.4
Asset retirement - Landfill 2.3 0.8 1.5
Buildings, machinery and equipment 1,344.1 820.1 524.0
Construction in progress 3.2 - 3.2
---------------------------------------------------------------------------
1,355.0 820.9 534.1
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---------------------------------------------------------------------------
5. Other Long-term Assets
December 31,
(millions of dollars, unaudited) March 31, 2010 2009
---------------------------------------------------------------------------
Pension benefit plan 10.9 11.3
Maintenance shutdown costs 3.4 5.4
Other 0.4 0.4
---------------------------------------------------------------------------
14.7 17.1
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6. 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
(millions of dollars, unaudited) March 31, 2010 March 31, 2009
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Pension plans 1.5 1.2
Other employee future benefit plans 1.1 0.9
Contributions to forest industry union plans 1.6 1.6
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4.2 3.7
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7. Credit Facilities and Long-term Debt
At March 31, 2010 the Partnership had outstanding long-term debt of $111.7 million (December 31, 2009 - $115.1 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.
The Partnership has a $40.0 million bank credit facility with a maturity date of November 30, 2011, of which $0.5 million was utilized at March 31, 2010 for a standby letter of credit issued for general business purposes. In addition, the Partnership has a separate facility with a maturity date of November 30, 2011, to cover the $16.0 million standby letter of credit issued to BC Hydro under the Electricity Purchase Agreement. Interest and other costs of the bank credit facility are at prevailing market rates. The leverage ratio and interest coverage ratio are consistent with the financial covenants under the Note Agreement.
The Notes and bank credit agreements each contain similar financial covenants including a maximum allowable debt:EBITDA leverage ratio and minimum required EBITDA:interest coverage ratio. The Partnership remained in compliance with all covenants at March 31, 2010 and throughout the period.
The fair value of long-term debt at March 31, 2010 was $117.8 million (US$116.0 million).
8. Long-term Liabilities
March December
(millions of dollars, unaudited) 31, 2010 31, 2009
---------------------------------------------------------------------------
Accrued pension obligations 6.1 5.8
Post-employment benefits 43.9 43.2
Derivative financial instruments (note 12) 1.1 1.2
Asset retirement obligations 3.0 3.0
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54.1 53.2
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9. Related Party Transactions
The Partnership's transactions with related parties are consistent with the transactions described in the December 31, 2009 audited consolidated financial statements and are based on agreed upon amounts between the parties, and are summarized below:
Three months ended
March March
(millions of dollars, unaudited) 31, 2010 31, 2009
---------------------------------------------------------------------------
Transactions
Canfor 34.2 27.5
Howe Sound LP - commission 0.6 0.6
Howe Sound LP - sale of wood chips - 0.1
Lakeland Mills Ltd.
- purchase of wood chips 1.2 0.5
March December
31, 2010 31, 2009
---------------------------------------------------------------------------
Balance Sheet
Included in accounts payable and accrued
liabilities:
Canfor 33.0 40.8
Howe Sound LP 21.6 17.6
Lakeland Mills Ltd. 0.4 0.4
Included in trade accounts receivable:
Product marketed for Canfor 15.7 24.4
Product marketed for Howe Sound LP 17.1 16.5
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Transactions and payables to Canfor include purchases of wood chips, pulp and administrative services.
10. Net Income (Loss) per Partnership Unit
Basic net income (loss) 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.
11. Derivative Financial Instruments
The Partnership uses derivative instruments to reduce its exposure to risks associated with fluctuations in foreign exchange rates, pulp and natural gas prices.
For the first quarter of 2010 the Partnership recorded a net gain on derivative financial instruments of $0.4 million (first quarter 2009 - loss of $5.7 million) relating to the settlement of maturing contracts during the quarter, and the revaluation to market of outstanding contracts at the end of the quarter, for natural gas swaps and US dollar forward contracts.
The Partnership recorded losses of $0.9 million during the first quarter of 2010 (first quarter 2009 - loss of $1.4 million) relating to settlement of maturing natural gas contracts as a charge to non-operating income. At March 31, 2010 the Partnership had outstanding commodity swaps hedging future natural gas purchases of 1.3 million gigajoules extending to October 2011. At March 31, 2010 the unrealized loss of $4.6 million (March 31, 2009 - loss of $7.2 million) on these outstanding commodity swaps was recorded as a liability in accounts payable and accrued liabilities and in long-term liabilities.
The Partnership recorded a gain of $2.5 million during the first quarter of 2010 (first quarter 2009 - loss of $1.4 million) on settlement of maturing US dollar forward contracts as a charge to non-operating income. At March 31, 2010 the Partnership had outstanding US dollar forward contracts of $73.8 million extending to July 2010. At March 31, 2010 the unrealized gain of $1.0 million (March 31, 2009 - loss of $0.1 million) on these outstanding US dollar forward contracts was recorded as an asset in other accounts receivable.
12. Supplementary Cash Flow Information
Three months ended
March March
(millions of dollars, unaudited) 31, 2010 31, 2009
---------------------------------------------------------------------------
Decrease (increase) in non-cash working capital
Accounts receivable - trade and other (13.2) (17.7)
Insurance receivable - 3.0
Inventories 6.7 15.9
Prepaid expenses and other assets (4.0) 2.9
Accounts payable and accrued liabilities 8.7 18.7
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(1.8) 22.8
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Capital expenditures
Capital expenditures - cash 2.4 6.0
Capital expenditures accruals - net (0.1) (3.6)
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2.3 2.4
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---------------------------------------------------------------------------
Net interest paid 0.2 0.3
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13. Distributions
The Partnership declared distributions in the first three months of 2010 as follows:
(millions of dollars, except per unit amounts, unaudited)
Amount per
Partnership Unit Amount
Record Date Payable Date $ $
---------------------------------------------------------------------------
---------------------------------------------------------------------------
January 29, 2010 February 15, 2010 0.08 5.7
February 26, 2010 March 15, 2010 0.12 8.5
March 31, 2010 April 15, 2010 0.12 8.6
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0.32 22.8
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14. Accumulated Other Comprehensive Income
Three months
ended Year ended
March December
(millions of dollars, unaudited) 31, 2010 31, 2009
---------------------------------------------------------------------------
Balance, beginning of period - 0.1
Adjustment for exchange translation - (0.2)
Adjustment for derivatives recorded in other
comprehensive income - 0.1
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Balance, end of period - -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Since the inception of the Partnership, the total of the cumulative comprehensive income, less cumulative distributions is as follows:
(millions of dollars, unaudited) March 31, 2010
---------------------------------------------------------------------------
Cumulative comprehensive income 309.2
Cumulative distributions (357.9)
---------------------------------------------------------------------------
(48.7)
Partners' capital - at July 1, 2006 587.5
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Partners' equity, end of period 538.8
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15. Segmented Information (a)
Unallocated
(millions of dollars, unaudited) Pulp Paper Costs Total
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Three months ended March 31, 2010
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Sales to external customers (b) 204.8 34.5 0.2 239.5
Sales of pulp to paper segment (c) 18.7 (18.7) - -
Operating income (loss) 37.1 (0.6) (4.0) 32.5
Amortization 10.8 0.7 0.1 11.6
Capital expenditures, net 1.7 0.4 0.2 2.3
Identifiable assets 738.4 63.6 55.5 857.5
Three months ended March 31, 2009
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Sales to external customers (b) 159.2 27.1 - 186.3
Sales of pulp to paper segment (c) 13.7 (13.7) - -
Operating income (loss) (11.6) 3.8 (2.0) (9.8)
Amortization 11.1 0.8 0.1 12.0
Capital expenditures, net 2.4 - - 2.4
Identifiable assets 761.9 73.8 20.1 855.8
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(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 41% (Year 2009 - 36%).
(b) Sales to the largest customer represented approximately 11% of pulp
segment sales (Year 2009 - 7%).
(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.
Contacts:
Canfor Pulp Income Fund
Terry Hodgins
Chief Financial Officer and Secretary
604-661-5421
Terry.Hodgins@canforpulp.com
www.canforpulp.com
SOURCE: Canfor Pulp Income Fund
mailto:Terry.Hodgins@canforpulp.com
http://www.canforpulp.com
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