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2014
canfor pulp
products inc.
annual
report
Company overview
CPPI is a leading global supplier of pulp and paper products with operations in
the central interior of British Columbia (“BC”) employing approximately 1,300
people throughout the organization. Canfor Pulp owns and operates three mills
in Prince George, BC with a total capacity of 1.1 million tonnes of Premium
Reinforcing Northern Bleached Softwood Kraft Pulp and 140,000 tonnes of kraft
paper, as well as one mill in Taylor, BC1 with an annual production capacity of
220,000 tonnes of Bleached Chemi-Thermo Mechanical Pulp (“BCTMP”). Canfor
Pulp is the largest North American and one of the largest global producers of
market NBSK Pulp. CPPI shares are traded on The Toronto Stock Exchange
under the symbol CFX.
finanCial HigHligHts
Sales and income ( m i l l i o n s o f C a n a d i a n d o l l a r s )
Sales
Operating income
Net income
Per common share ( C a n a d i a n d o l l a r s )
Net income attributable to equity
shareholders of the Company
Book value
Share price
High
Low
Close - December 31
Financial position ( m i l l i o n s o f C a n a d i a n d o l l a r s )
Working capital
Total assets
Net debt (cash)
Common shareholders’ equity
Additional information2
Return on invested capital - consolidated
Return on common shareholders’ equity
Ratio of current assets to current liabilities
Ratio of net debt to capitalization
Operating income before amortization
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Operating income before amortization margin
Capital expenditures (mil l i o n s of C an a dian d o l l ar s)
2014
980.5
125.4
89.5
1.26
6.92
14.70
9.89
14.56
179.2
827.4
(26.8)
489.6
19.6%
19.3%
2.5:1
-5.8%
188.1
19.2%
57.7
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2013
886.8
73.8
41.8
0.59
6.17
12.00
8.02
10.27
101.0
768.6
47.1
438.0
12.1%
10.1%
1.8:1
9.7%
143.7
16.2%
61.2
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(1) S u b s e q u e n t t o y e a r e n d , o n J a n u a r y 3 0 , 2 0 15 , C P P I p u r c h a s e d f r o m C a n f o r t h e B C T M P
Ta y l o r P u l p M i l l .
( 2 ) S e e D e f i n i t i o n s o f S e l e c t e d F i n a n c i a l Te r m s o n p a g e 5 7.
www.Canfor.Com
energy
We use forest biomass and sawmill residues to power
and heat our mills and generate clean renewable energy.
It is good for the environment and our bottom line.
clean
+
renewable
Message to shareholders
FRom the pResident
Global softwood markets and the weaker Canadian dollar
Work force renewal continues to be an area of significant
delivered better-than-expected prices in 2014. While we were
effort as our solid long-term employee base reach retirement
challenged with higher fibre and energy costs in addition to
age, requiring more effort on recruitment, training and
lower year-over-year shipments, we were still able to maintain
leadership growth. Canfor created and filled a new executive
our strong financial position and top-quartile performance with
position in 2014 to lead the overall talent strategy for both
initiatives that delivered improvements in operational excellence,
companies as we leverage our enterprise-wide culture of
higher value products and increased energy revenue.
safety, innovation and engagement to ensure recognition as the
2014 was a pivotal year for our customers as we rolled out
preferred employer in our peer group.
our worldwide total fibre solution with the successful start of
In February 2015, Prince George welcomed the nation while
Fibre United. This sales, service and marketing cooperative
hosting the 2015 Canada Winter Games with class, unending
agreement with UPM Pulp has grown our product offerings
energy and the graciousness I have come to know and love
while strengthening our technical selling proposition across the
about this community. It was an honour to be the Executive
premium reinforcing pulp market. Canfor Pulp now represents
Chair for the Host Society organizing this great event over
UPM’s pulp products in North America and Japan while UPM
the last five years, and I was proud to see hundreds of our
represents our products in Europe and China. Customers will
employees volunteer their time. Canfor and Canfor Pulp were
benefit with a wider range of products, faster response times
official community partners for the Games, and we invited
and advanced technical support.
close to 900 students from across northern British Columbia
Our pulp and paper operations delivered improved
to be part of the experience as we hosted a day that included
performance over the year with reliability gains, increased
tours of post-secondary education facilities, exposure to our
operating days and shorter scheduled outages. The Prince
career opportunities and participation in the Canfor section at
George Pulp and Paper Mill set an annual production record
one of the most popular sporting events each day. By the end
while the other facilities delivered modest improvements.
of February Canfor’s brand was the number one most sought
Execution of our long-term strategic goals continued, with solid
after memorabilia, we received national exposure, and our
progress on several important capital upgrades focused on
Canfor House hospitality centre was held up as one of the best-
cost reduction and expansion of our green energy business.
attended venues of the whole Games.
Completion of the upgraded cogeneration facilities at
As we look forward to 2015, we will continue to maintain
Northwood Pulp allowed power exports to commence early
our position as an industry leader with strong financial
in 2014, and installation of a new turbine at Intercontinental
performance by focusing on lower operating costs while
Pulp will see power exports commence in early 2015. With the
growing our green energy business and being ready to
completion of this project, power generation is expected to
capitalize on attractive growth opportunities. Our pulp
match consumption with all three facilities exporting a portion
continues to represent the strongest and highest-quality
of their generation for green energy sales that will contribute
fibre in the world. The market understands that there is no
about $25 million annually to our bottom line while moving
substitute for quality, and while markets naturally fluctuate, we
closer to our goal of self-sufficiency.
see continued demand for NBSK pulp and paper based on its
Integration efforts continued across both companies with
superior quality and versatility.
stronger alignment continuing to yield benefits. In January
I would like to thank our board members for their guidance,
2015, we acquired Taylor Pulp, a bleached chemi-thermo-
all our employees for their daily contributions, and especially
mechanical pulp mill in northern British Columbia from Canfor.
all of our shareholders for their continued confidence.
Taylor has a strong, talented workforce with good assets and
great opportunities which align with our core business and
operational expertise. In addition, the acquisition of Taylor
secures close to two-thirds of our fibre supply from Canfor. In
2014, a new position to manage residual fibre streams across
Canfor and Canfor Pulp was created, which will strengthen our
integrated residual fibre team with a focus on long-term fibre
security and optimization.
Brett Robinson
President
FRom the chaiRman
Canfor Pulp delivered solid performance in 2014. Our mills
In 2014, Canfor Pulp and Canfor signed on to be an official
improved their operational performance, markets and prices
sponsor of the 2015 Canada Winter Games in Prince George,
were stable, global demand for our premium products was
where three of our pulp mills are located. Canfor Pulp
solid, and we made good progress on our capital projects.
President Brett Robinson served as Executive Chair of the Host
We maintained our top-quartile performance, and advanced
Society for the Games, and he worked tirelessly in 2014 so
our integration with Canfor through management’s commitment
visitors and viewers alike were able to learn more about Prince
to operating on a One Canfor basis. We also continued our
George and what it has to offer. To all the Canfor and Canfor
leadership in energy generation in 2014 – when an upgrade to
Pulp ‘volunteers’ who worked to make the Canada Winter
the Intercontinental Pulp Mill is finished in a few months’ time,
Games a success, and especially to Brett Robinson, I offer our
we will have achieved our goal to be energy self-sufficient across
sincere thanks for all you have done!
our operations. We take pride in the fact that Canfor Pulp is
I want to take this opportunity to thank fellow board
one of the largest single producers of renewable bioenergy in
members for their exceptional advice and leadership, and to
North America. We have invested significant amounts of capital
thank Canfor Pulp CEO Don Kayne, President, Brett Robinson
to support our green energy business, and are pleased to be
and their executive and operations teams for their ongoing
delivering environmental and economic benefits.
efforts to successfully advance Canfor Pulp’s business strategy.
Green energy is just one example of Canfor Pulp’s
On behalf of the board, thanks as well to all of our dedicated
commitment to innovation. Teams across the organization
employees, shareholders, customers and business partners for
are focused on delivering innovative solutions in all aspects
your many contributions. We look forward to working with you
of the business – whether through strategic partnerships to
in 2015, and beyond.
serve customers, initiatives to improve use of residuals, or
investigating new technologies.
Our quality products and emphasis on innovation make
Canfor Pulp an ideal choice for a promising career. Canfor and
Canfor Pulp are preferred employers with excellent benefits
and compensation, safe workplaces and operations centred in
great communities. It is a message we are taking to schools,
colleges and universities across Western Canada.
michael Korenberg
Chairman of the Board
custoMers
We work with our partners around the world to build leading
technology that delivers premium products for specialty applications.
Our access to high-grade fibre, our range of superior pulp and
paper products and our partnerships with academic and industry
organizations provide long-term certainty, quality and assurance
to our customers.
people
We work hard to provide
our people with the
training, tools and
resources that support
safe, successful and
fulfilling careers.
in this report
08
Management’s Discussion & Analysis
08 company overview
10 overview of 2014
12 overview of consolidated Results - 2014 compared to 2013
13 operating Results by Business segment - 2014 compared to 2013
16 summary of Financial position
16 changes in Financial position
17 Financial Requirements and Liquidity
18 transactions with Related parties
19 selected Quarterly Financial information
20 three-Year comparative Review
21 Quarter ended december 31, 2014 vs. Quarter ended december 31, 2013
23 specific items affecting comparability
23 outlook
23 critical accounting estimates
25 Future changes in accounting policies
25 Risks and Uncertainties
29 outstanding share data
29 disclosure controls and internal controls over Financial Reporting
30
Consolidated Financial Statements
31 management’s Responsibility
31
independent auditor’s Report
32 consolidated Balance sheets
33 consolidated statements of income
34 consolidated statements of other comprehensive income (Loss) and changes in equity
35 consolidated statements of cash Flows
36 notes to the consolidated Financial statements
51 Additional Information
52 summary of consolidated production and shipments
2014 selected Quarterly Financial information
53
54
2013 selected Quarterly Financial information
55 directors and officers
56 map of operations
57 mill operations
57 corporate and shareholder information
57 definitions of selected Financial terms
managEmEnt’s
DIsCussIon & analysIs
This Management’s Discussion and Analysis (“MD&A”) provides a
review of Canfor Pulp Products Inc.’s (“CPPI” or “the Company”)
financial performance for the year ended December 31, 2014
relative to the year ended December 31, 2013, and the financial
position of the Company at December 31, 2014. It should be
read in conjunction with CPPI’s Annual Information Form and
its audited consolidated financial statements and accompanying
notes for the years ended December 31, 2014 and 2013. The
financial information contained in this MD&A has been prepared
in accordance with International Financial Reporting Standards
(“IFRS”), which is the required reporting framework for Canadian
publicly accountable enterprises.
Throughout this discussion, reference is made to Operating
Income before Amortization which CPPI considers to be a
relevant indicator for measuring trends in the Company’s
performance and its ability to generate funds to meet its debt
service and capital expenditure requirements, and to pay
dividends. Reference is also made to Adjusted Net Income (Loss)
(calculated as Net Income (Loss) less specific items affecting
comparability with prior periods – for the full calculation, see
reconciliation included in the section “Analysis of Specific
Material Items Affecting Comparability of Net Income (Loss)”)
and Adjusted Net Income (Loss) per Share (calculated as
Adjusted Net Income (Loss) divided by weighted average number
of shares outstanding during the period). Operating Income
before Amortization, Adjusted Net Income (Loss) and Adjusted
Net Income (Loss) per Share are not generally accepted earnings
measures and should not be considered as an alternative to net
income or cash flows as determined in accordance with IFRS. As
there is no standardized method of calculating these measures,
CPPI’s Operating Income before Amortization, Adjusted Net
Income (Loss) and Adjusted Net Income (Loss) per Share may
not be directly comparable with similarly titled measures used
by other companies. Reconciliations of Operating Income before
Amortization to operating income (loss) and Adjusted Net Income
(Loss) to Net Income (Loss) reported in accordance with IFRS are
included in this MD&A.
Company oVERVIEW
CPPI is a company incorporated and domiciled in Canada
and listed on The Toronto Stock exchange. The consolidated
financial statements of the Company as at and for the year
ended December 31, 2014 comprise the Company and its
subsidiary entities. The Company’s operations consist of two
Northern Bleached Softwood kraft (“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”).
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;
currency exchange rates; interest rates; changes in law and
public policy; the outcome of labour and trade disputes; and
opportunities available to or pursued by CPPI.
All financial references are in millions of Canadian dollars
unless otherwise noted. The information in this report is as at
February 4, 2015.
FORwARD LOOkINg STATeMeNTS
Certain statements in this MD&A 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”, “projects”, “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. These
statements are based on management’s current expectations
and beliefs and actual events or results may differ materially.
There are many factors that could cause such actual events or
results expressed or implied by such forward-looking statements
to differ materially from any future results expressed or implied
by such statements. Forward-looking statements are based on
current expectations and the Company assumes no obligation to
update such information to reflect later events or developments,
except as required by law.
On March 2, 2012, Canadian Forest Products Ltd. (“Canfor”)
acquired 35,776,483 common shares of CPPI in exchange for
its 35,776,483 Class B exchangeable LP Units of Canfor Pulp
Limited Partnership (“the Partnership”) and 35,776,483 common
shares of Canfor Pulp Holding Inc. (“the general Partner”),
pursuant to the terms of an exchange Agreement made as of
January 1, 2011 among Canfor, CPPI, the general Partner and
the Partnership (“the exchange”). As a result of the exchange,
CPPI’s interest in both the Partnership and the general Partner
increased from 49.8% to 100% and Canfor acquired a 50.2%
interest in CPPI, immediately following the exchange.
8
Canfor pulp annual report 2014 On December 27, 2013, the Partnership was wound up and
the net assets were transferred to Canfor Pulp Holding Inc., a
wholly owned subsidiary of CPPI. Subsequent to the transfer,
Canfor Pulp Holding Inc. was renamed Canfor Pulp Ltd.
At December 31, 2014, Canfor held a 50.5% interest in CPPI,
an increase of 0.1% from December 31, 2013 as a result of share
purchases in 2014 under a Normal Course Issuer Bid. Further
discussion of the Normal Course Issuer Bid is provided in the
“Financial Requirements and Liquidity” section of this document.
CPPI employs approximately 1,160 people in its wholly
owned subsidiaries and jointly owned operations.
The following chart illustrates, on a simplified basis, the
ownership structure of CPPI (collectively the Company) as at
December 31, 2014.
Simplified OwnerShip Structure
pulp
The Company owns and operates three mills with annual
capacity to produce 1.1 million tonnes of northern softwood
market kraft pulp, 90% of which is bleached to become NBSk
pulp and approximately 140,000 tonnes of kraft paper.
On January 30, 2015, the Company purchased from Canfor,
the Taylor Pulp Mill operation located in Taylor, BC, which
has an annual capacity of 220,000 tonnes of bleached chemi-
thermo-mechanical pulp (“BCTMP”). Further discussion of the
purchase is provided in “Transactions with Related Parties”,
later in this document.
The Northwood Pulp Mill is a two line mill with annual
production capacity of approximately 600,000 tonnes of NBSk
pulp, making it the largest NBSk pulp facility in North America.
Northwood’s pulp is used to make a variety of products
including printing and writing paper, tissue and specialty papers
and is primarily delivered to customers in North America,
europe and Asia.
The Intercontinental Pulp Mill is a single line pulp mill
with annual production capacity of approximately 320,000
tonnes of NBSk pulp. Intercontinental’s pulp is used to make
substantially the same product as that from Northwood and is
delivered to the same markets.
The Prince george Pulp and Paper Mill is an integrated two
line pulp and paper mill with an annual market pulp production
capacity of approximately 145,000 tonnes. The Prince george
Pulp and Paper Mill supplies pulp markets in North America,
europe, Asia, and its internal paper making facilities.
paper
CPPI’s paper machine, located at the Prince george Pulp and
Paper Mill, has an annual production capacity of approximately
140,000 tonnes of kraft paper. The Prince george Pulp and Paper
Mill produces high performance papers, high porous bleached
and unbleached kraft and specialty papers. The paper mill
supplies primarily North American and european markets.
BuSineSS Strategy
The Company’s overall business strategy is to be a pulp and
paper industry leader with strong financial performance
accomplished through:
Preserving its low-cost operating position,
Maintaining the premium quality of its products,
growing the green energy business,
Developing an enterprise-wide culture of safety, innovation
and engagement where CPPI is recognized as the preferred
employer in its operating regions, and
Capitalizing on attractive growth opportunities.
9
management’s discussion and analysis oVERVIEW oF 2014
global softwood pulp markets and prices were better than
anticipated in 2014, as markets remained relatively stable
through the year supported by solid global demand. Concerns
around possible downward pressure on softwood pulp prices
in 2014 from a significant increase in eucalyptus pulp capacity
from South America proved ill-founded as annual softwood
pulp demand remained steady and global softwood pulp
producer inventories held in the balanced range for most of
2014, before increasing in December 2014, in part reflecting
a slight softening of demand. Reflecting balanced markets,
North American NBSk pulp list prices climbed above $1,000 per
tonne in January 2014 and stayed there through the rest of the
year, although producers continued to come under pressure to
increase discounts, in part reflecting the competitive landscape
for key business accounts in North America. Pulp list prices to
China and europe also saw strong gains in 2014, increasing 5%
and 7% from 2013, respectively, while global pulp demand was
broadly in line with the prior year.
The Company continued to maintain its top-quartile margin
position in 2014, and its reputation for offering premium
reinforcing pulp products was further enhanced in 2014 through its
sales and marketing cooperation agreement with UPM-kymmene
Corporation (“UPM”). Operational excellence remained a key
focus and while the year was not without its challenges, solid
progress was made during the year as the Company completed
several important capital upgrades and the mills exhibited solid
operational performance as they worked to fully optimize the
recently renewed asset base, with the Prince george Pulp and
Paper Mill setting a new production record in 2014.
The Company’s green energy business continued to expand in
2014 through the completion of upgrades to cogeneration assets
at the Northwood Pulp Mill and commencement of upgrades to
the turbine at the Intercontinental Pulp Mill, the latter targeted
for completion in the second quarter of 2015. The Company has
agreements with a BC energy company for all of the cogeneration
projects, which provide for commitments related to electrical
load displacement and the sale of incremental power generation
under energy purchase agreements.
Operating results for the pulp segment benefitted from
the better than anticipated market conditions as well as the
favourable impact of a 7 cent, or 7%, weaker Canadian dollar
and, to a lesser extent, an improved, higher-margin sales mix
and increasing energy revenues. These gains were somewhat
offset by increased fibre costs (linked mostly to improved NBSk
pulp sales realizations), higher energy costs, and lower year-
over-year shipments, the latter of which reflected a significant
drawdown of inventories in late 2013.
Results for the Company’s paper segment were broadly in
line with the previous year as improved paper sales realizations
and higher sales and production volumes were offset principally
by higher slush pulp prices.
The Company continued to preserve its strong financial
position through 2014, ending the year with net cash of
$77 million, up from $14 million a year earlier. Quarterly
dividends moved up 1.25 cents to 6.25 cents per share in 2014,
representing an average yield (to the average share price) in the
current year of approximately 2%.
As mentioned, subsequent to year end, CPPI completed the
purchase of the Taylor Pulp Mill from Canfor, which will result in
further integration benefits for both companies.
A review of the more significant developments in 2014 follows.
marketS and pricing
(i) pulp – Better than anticipated SOftwOOd
pulp marketS SuppOrting hiStOrically-high
pricing in 2014
As mentioned, global softwood pulp markets were better than
anticipated in 2014, as markets remained relatively stable
through the year supported by solid demand from most markets.
Additional hardwood pulp capacity, principally from South
America, was absorbed into global markets through 2014;
however, markets remained strong with limited incremental
softwood pulp supply and solid demand for NBSk pulp. global
shipments of bleached softwood kraft pulp remained relatively
unchanged compared to 2013. Prices moved up in the first
quarter of 2014 supported by a combination of solid demand
and constrained supply, the latter reflecting unusually severe
weather and a truckers’ strike in North America, and remained
relatively stable for the balance of the year. global softwood
producer inventories remained in the balanced range through
most of 2014, contributing to the historically higher pricing levels.
The benchmark North American NBSk pulp list price
averaged US$1,025 per tonne1 in 2014, up US$84, or 9%, from
the prior year. NSBk pulp list prices in North America saw solid
increases at the beginning of 2014, settling at a three-year high of
$1,030 per tonne for 8 months before declining US$10 per tonne
in late 2014 to end the year at US$1,020 per tonne, up US$30 per
tonne, or 3%, from the end of 2013. List prices to europe and
China also saw strong gains in 2014, up US$64 and US$33 per
tonne, respectively. In addition, higher sales realizations also
reflected a 7% weaker Canadian dollar and an improved sales
mix. Continued upward pressure on discounts, particularly in
North America, partly eroded the solid gains in NBSk pulp list
prices and the favourable foreign exchange trend.
The following charts show the NBSk pulp price movements
in 2014 (Chart 1) and the global pulp inventory levels (Chart
2), and serves to highlight the relatively stable list prices and
producer inventories through the year, as discussed above.
(1) R e s o u r c e I n f o r m a t i o n S y s t e m s , I n c .
10
Canfor pulp annual report 2014 chart 1 – nBS k pulp liSt price delivered tO u. S. –
in uS and canadian dOll arS
capital and OperatiOnS review
IMPROVeD OPeRATIONAL PeRFORMANCe AND ReNeweD
FOCUS ON ReLIABILITy IN 2014; CONTINUeD INVeSTMeNT
IN ASSeT BASe AND PROgReSS IN gROwINg HIgH ReTURN
gReeN eNeRgy BUSINeSS
Pulp and paper operational performance improved in 2014
with increased operating days, reflecting shorter scheduled
outages, and improved operating rates compared to 2013. The
Company made headway against operational targets, with
overall operating rates showing further signs of improvement at
the end of 2014 and heading into 2015. Scheduled maintenance
outages were completed at all facilities in 2014.
energy revenue continued to build in 2014 reflecting eleven
months of energy output from the upgrades to the Northwood
Pulp Mill turbines, commissioned in the first quarter of 2014,
as well as increased power generation from the turbine at the
Company’s Prince george operation, which was completed
in the previous year. The Company continued to advance
the upgrades to the turbine at the Intercontinental Pulp Mill,
which is targeted to be complete and commence selling power
under an electricity Purchase Agreement by the second
quarter of 2015. Following completion of the upgrades to the
Intercontinental Pulp Mill turbine in 2015, the Company projects
it will be over 100% energy self-sufficient, with the energy
business anticipated to contribute approximately $25 million to
operating income before amortization annually.
integratiOn with canfOr
The Company continues to build on the successful integration
of the CPPI and Canfor leadership teams and key business
areas that commenced in 2012. Both companies continued
to recognize sustainable benefits from further integration
and alignment, specifically in the areas of residual fibre
management, transportation and logistics.
$/ Tonne
$1,200
$1,100
$1,000
$900
$800
$700
$600
$500
2008
2009
2010
2011
2012
2013
2014
US$
CDN$
S o u r c e : R e s o u r c e I n f o r m a t i o n S y s t e m s I n c .
N o t e : C a n a d i a n p r i c e i s c a l c u l a t e d a s t h e U S p r i c e m u l t i p l i e d b y t h e a v e r a g e
m o n t h l y e x c h a n g e r a t e s p e r t h e B a n k o f C a n a d a .
chart 2 – wOrld SO f t wOOd pulp inventOrie S
Days of Supply
45
40
35
30
25
20
15
10
2008
2009
2010
2011
2012
2013
2014
S o u r c e : P u l p a n d P a p e r P r o d u c t s C o u n c i l
Towards the end of 2013, CPPI entered into a strategic sales
and marketing cooperation agreement with UPM. Beginning
January 1, 2014, CPPI’s sales network represented and
co-marketed UPM pulp products in North America and Japan,
while UPM’s pulp sales network represented and co-marketed
CPPI’s products in europe and China.
(ii) paper - kraft paper marketS remaining
StrOng in 2014
kraft bleached paper markets remained steady through
2014. The Company’s order files for both North American and
offshore markets were solid through the year. Anticipated new
capacity in europe did not impact overall supply due to start up
delays. The Paper Shipping Sack Manufacturers’ Association
(“PSSMA”) reported strong operating rates for the United States
(“US”) of 85% in 2014, up from 83% in 2013. Demand also
remained relatively stable for kraft paper, with total kraft paper
shipments to the US, down 2% compared to 2013, according to
the American Forest and Paper Association.
11
management’s discussion and analysis oVERVIEW oF ConsolIDatED REsults – 2014 CompaRED to 2013
Selected financial infOrmatiOn and StatiSticS
( m i l l i o n s o f C a n a d i a n d o l l a r s , e x c e p t f o r p e r s h a r e a m o u n t s )
Sales
Operating income before amortization2
Operating income
Foreign exchange loss on long-term debt
Loss on derivative financial instruments3
Net income
Net income per share, basic and diluted
ROIC – Consolidated4
Average exchange rate (US$ per C$1.00)5
2014
980.5
188.1
125.4
-
(1.9)
89.5
1.26
19.6%
0.905
$
$
$
$
$
$
$
$
2013
886.8
143.7
73.8
(7.3)
(0.1)
41.8
0.59
12.1%
0.971
$
$
$
$
$
$
$
$
( 2 ) A m o r t i z a t i o n i n c l u d e s c e r t a i n c a p i t a l i z e d m a j o r m a i n t e n a n c e c o s t s .
( 3 )
I n c l u d e s g a i n s ( l o s s e s ) f r o m f o r e i g n e x c h a n g e , e n e r g y, p u l p f u t u r e s a n d i n t e r e s t r a t e s w a p d e r i v a t i v e s ( s e e “ U n a l l o c a t e d a n d O t h e r I t e m s ” s e c t i o n f o r m o r e d e t a i l s ) .
( 4 ) C o n s o l i d a t e d R e t u r n o n I n v e s t e d C a p i t a l ( “ R O I C ” ) i s e q u a l t o o p e r a t i n g i n c o m e / l o s s , p l u s r e a l i z e d g a i n s / l o s s e s o n d e r i v a t i v e s a n d o t h e r i n c o m e /e x p e n s e , d i v i d e d b y t h e
a v e r a g e i n v e s t e d c a p i t a l d u r i n g t h e y e a r. I n v e s t e d c a p i t a l i s e q u a l t o c a p i t a l a s s e t s , p l u s l o n g - t e r m i n v e s t m e n t s a n d n e t n o n - c a s h w o r k i n g c a p i t a l .
( 5 ) S o u r c e – B a n k o f C a n a d a ( a v e r a g e n o o n r a t e f o r t h e p e r i o d ) .
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Operating income (loss) by segment:
Pulp
Paper
Unallocated
total operating income
Add: Amortization
total operating income before amortization6
Add (deduct):
working capital movements
Defined benefit pension plan contributions
Income taxes paid, net
Other operating cash flows, net
cash from operating activities
Add (deduct):
Dividends paid
Finance expenses paid
Capital additions, net
Share purchases
Drawdown of long-term debt
Repayment of long-term debt
Other, net
change in cash / operating loans
( 6 ) A m o r t i z a t i o n i n c l u d e s c e r t a i n c a p i t a l i z e d m a j o r m a i n t e n a n c e c o s t s .
analySiS Of Specific itemS affecting cOmparaBility Of net incOme
A f t e r - t a x i m p a c t
( m i l l i o n s o f C a n a d i a n d o l l a r s , e x c e p t f o r p e r s h a r e a m o u n t s )
net income, as reported
Loss on derivative financial instruments
Foreign exchange loss on long-term debt
Change in substantively enacted tax rate
Net impact of above items
adjusted net income
net income per share (epS), as reported
Net impact of above items per share
adjusted net income per share
12
2014
2013
115.0
22.0
(11.6)
125.4
62.7
188.1
(13.9)
(6.1)
(24.4)
9.7
153.4
(16.8)
(2.7)
(57.7)
(2.0)
-
-
0.3
74.5
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
63.2
22.7
(12.1)
73.8
69.9
143.7
16.1
(10.1)
(0.4)
7.6
156.9
(14.2)
(9.1)
(61.2)
(2.4)
50.0
(116.6)
0.7
4.1
2014
2013
89.5
1.4
-
-
1.4
90.9
1.26
0.02
1.28
$
$
$
$
$
$
$
$
$
41.8
0.1
6.4
2.4
8.9
50.7
0.59
0.12
0.71
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Canfor pulp annual report 2014
The Company recorded net income of $89.5 million, or $1.26 per
share, for the year ended December 31, 2014, up $47.7 million,
or $0.67 per share, from $41.8 million, or $0.59 per share,
reported for the year ended December 31, 2013.
Operating income for 2014 was $125.4 million, up $51.6 million
from operating income of $73.8 million for 2013. The higher 2014
operating income was driven by significantly higher earnings
from the pulp segment, principally due to higher NBSk pulp sales
realizations, which more than offset lower shipment volumes
and increased fibre (market-driven) and energy costs. The paper
segment earnings in 2014 were in line with the previous year as
improved paper sales realizations and higher sales and production
volumes were offset by higher slush pulp prices.
A more detailed review of the Company’s operational
performance and results is provided in “Operating Results by
Business Segment – 2014 compared to 2013”, which follows this
overview of consolidated results.
opERatIng REsults By BusInEss sEgmEnt – 2014 CompaRED to 2013
The following discussion of CPPI’s operating results relates to the operating segments and the non-segmented items as per the
Segmented Information note in the Company’s consolidated financial statements.
CPPI’s operations include the Pulp and Paper segments.
pulp
SeLeCTeD FINANCIAL INFORMATION AND STATISTICS – PULP
Summarized results for the Pulp segment for 2014 and 2013 are as follows:
( m i l l i o n s o f C a n a d i a n d o l l a r s , u n l e s s o t h e r w i s e n o t e d )
Sales
Operating income before amortization7
Operating income
Capital expenditures
Average pulp price delivered to US - US$8
Average pulp price in Cdn$
Production – pulp (000 mt)
Shipments – pulp (000 mt)
Marketed on behalf of Canfor (000 mt)
( 7 ) A m o r t i z a t i o n i n c l u d e s c e r t a i n c a p i t a l i z e d m a j o r m a i n t e n a n c e c o s t s .
( 8 ) P e r t o n n e , N B S k p u l p l i s t p r i c e d e l i v e r e d t o U S ( R e s o u r c e I n f o r m a t i o n S y s t e m s , I n c ) .
Overvie w
The Pulp segment reported operating income of $115.0 million
for 2014, up $51.8 million from $63.2 million in 2013. Improved
earnings compared to 2013 principally reflected higher unit
sales realizations, resulting from both improved NBSk pulp
list prices, benefiting from relatively stable pulp markets
through the year, and the favourable impact of the 7% weaker
Canadian dollar. These gains were offset in part by lower
shipments, largely reflecting the higher-than-normal shipments
into China during the fourth quarter of 2013, and higher unit
manufacturing costs, resulting mainly from market-driven
increases in fibre costs and increased energy costs. The
current year pulp segment results also included higher energy
revenue compared to 2013, attributable to the upgrades to the
Northwood Pulp Mill turbines, which were completed in the first
quarter of 2014 and increased power generation at the Prince
george Pulp Mill related to improved operational efficiency.
$
$
$
$
$
$
2014
816.4
174.2
115.0
56.2
1,025
1,133
985.6
968.4
207.0
$
$
$
$
$
$
2013
738.4
129.3
63.2
60.1
941
969
981.2
998.4
214.6
marke tS
global softwood pulp markets were relatively stable through
2014 supported by solid demand from most markets. Additional
hardwood pulp capacity was absorbed into global markets
through 2014; however, with limited incremental softwood pulp
capacity and solid demand for NBSk pulp, market conditions
remained solid. On the supply side, extreme weather and a
truckers’ strike in North America in early 2014 constrained
producer shipments. global softwood inventories held by
producers remained in the balanced range for the majority
of 2014 due largely to the aforementioned solid demand and
aforementioned supply constraints, all of which contributed to
historically high price levels.
At the end of December 2014, world 209 producers of
bleached softwood pulp inventories were at 31 days’ supply,
increasing just out of the balanced range due in part to strong
producer operating rates. By comparison, December 2013
inventories were at 27 days’ supply. Market conditions are
generally considered balanced when inventories are in the
27-30 days of supply range.
( 9 ) w o r l d 2 0 d a t a i s b a s e d o n t w e n t y p r o d u c i n g c o u n t r i e s r e p r e s e n t i n g 8 0 %
o f w o r l d c h e m i c a l m a r k e t p u l p c a p a c i t y a n d i s b a s e d o n i n f o r m a t i o n
c o m p i l e d a n d p r e p a r e d b y t h e P u l p a n d P a p e r P r o d u c t s C o u n c i l
( “ P P P C ” ) .
13
management’s discussion and analysis
SaleS
The Company’s pulp shipments in 2014 were 968,400 tonnes,
down approximately 30,000 tonnes, or 3%, from the prior year.
The reduced shipment volumes largely reflected higher-than-
normal shipments into China at the end of the previous year.
As mentioned, NBSk pulp list prices experienced solid gains
in all regions in 2014. North American NBSk pulp list prices
averaged US$1,025 per tonne in 2014, up US$84, or 9%, from
US$941 per tonne. North American NBSk pulp list prices were
at a three-year high of $1,030 per tonne for most of the year,
before gradually trending down in the last quarter of 2014, and
ended the year at US$1,020 per tonne, up US$30 per tonne,
or 3%, from the end of 2013. NBSk pulp average list prices to
europe and China also saw strong gains in 2014, up US$64 and
US$33 per tonne, respectively. Pulp sales realizations in 2014
were further bolstered by the 7% weaker Canadian dollar and
increased sales to higher-margin regions, partially offset by
continued upward pressure on discounts in North American
markets. Increased sales in 2014 also included higher energy
revenue, reflecting the output from the upgrades to the
Northwood Pulp Mill turbines, completed in early 2014, as well
as increased power generation at the Prince george Pulp Mill.
Oper atiOn S
Pulp production, at 985,600 tonnes in 2014, was slightly ahead
of the prior year, principally related to improved operating rates,
which were in part offset by increased transfers of slush pulp to
the paper segment. 2014 results were impacted by outages at
the Northwood, Prince george and Intercontinental Pulp Mills,
with the reductions in overall production broadly in line with
2013. During 2014, the Prince george Pulp and Paper Mill set
an annual record for total production, surpassing the previous
record set in 2013, while the other mills saw more modest
improvements in operational performance with a renewed focus
on reliability.
Unit manufacturing costs were up compared to the prior
year, principally driven by a significant increase in fibre costs,
and, to a lesser extent, marginally higher unit conversion costs,
primarily reflecting higher energy costs in the current year.
The increase in fibre costs compared to 2013 resulted largely
from market-driven increases in delivered sawmill residual and
whole log chip prices, and to a lesser extent, increased freight
costs reflecting longer haul distances following certain sawmill
closures in 2014, offset somewhat by a slightly lower proportion
of higher-cost whole log chips (17% of total consumption in
2014, compared to 18% in 2013).
paper
SeLeCTeD FINANCIAL INFORMATION AND STATISTICS – PAPeR
Summarized results for the Paper segment for 2014 and 2013 are as follows:
( m i l l i o n s o f C a n a d i a n d o l l a r s , u n l e s s o t h e r w i s e n o t e d )
Sales
Operating income before amortization10
Operating income
Capital expenditures
Production – paper (000 mt)
Shipments – paper (000 mt)
(10 ) A m o r t i z a t i o n i n c l u d e s c e r t a i n c a p i t a l i z e d m a j o r m a i n t e n a n c e c o s t s .
$
$
$
$
2014
162.8
25.4
22.0
1.1
144.0
142.5
$
$
$
$
2013
147.1
26.4
22.7
0.9
134.7
138.8
Overvie w
Operating income for the paper segment was $22.0 million for
2014 in line with 2013. Improved paper sales realizations and
higher sales and production volumes were offset by higher
slush pulp prices, reflecting improved market pulp prices.
marke tS
kraft bleached paper markets remained steady through
2014. The Company’s order files for both North American and
offshore markets were solid through the year. Anticipated new
capacity in europe did not impact overall supply due to start up
delays. The Paper Shipping Sack Manufacturers’ Association
(“PSSMA”) reported strong operating rates for the US of 85% in
2014, up from 83% in 2013. Demand also remained relatively
stable for kraft paper, with total kraft paper shipments to the
US, down 2% compared to 2013, according to the American
Forest and Paper Association.
The Company’s prime bleached paper shipments in 2014
represented 82% of sales volumes, a 4% improvement from 2013.
SaleS
The Company’s paper shipments in 2014 were 142,500 tonnes,
an increase of 3,700 tonnes, or 3%, from 2013. Unit sales
realizations for paper products were up moderately from 2013,
principally reflecting the 7% weaker Canadian dollar. Unit sales
realizations in 2014 also benefited from higher prices and sales
volumes to North America and a 4% increase in bleached paper
shipments, which more than offset a decline in prices to europe.
Oper atiOn S
Paper production in 2014 was 144,000 tonnes, up 9,300 tonnes,
or 7%, from 2013, primarily due to higher overall operating
rates and a shorter scheduled maintenance outage in 2014.
Both years included a scheduled maintenance outage of the
Company’s paper machine, with the outage in the current year
being approximately 5 days shorter than in 2013. Paper unit
manufacturing costs were well up compared to 2013, with
higher slush pulp costs (linked to higher market pulp prices)
more than offsetting the impact of higher production levels.
The Company’s Paper Machine set annual production records
for both rate and tonnes in 2014.
14
Canfor pulp annual report 2014
unallOcated and Other itemS
SeLeCTeD FINANCIAL INFORMATION
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Corporate costs
Finance expense, net
Foreign exchange loss on long-term debt
Loss on derivative financial instruments
Other income (expense), net
2014
2013
$
$
$
$
$
(11.6)
(5.5)
-
(1.9)
2.0
$
$
$
$
$
(12.1)
(11.8)
(7.3)
(0.1)
5.2
cOrpOrate cOStS
Corporate costs, which comprise corporate, head office and
general and administrative expenses, were $11.6 million in
2014, down $0.5 million from 2013, in part reflecting a higher
allocation of certain incentive based compensation costs to the
operating segments in 2014.
finance incOme and expenSe
Net finance expense for 2014 was $5.5 million, down $6.3 million
from 2013. The decrease reflected lower debt balances in 2014
coupled with lower employee future benefit net interest costs,
due in part to the improved financial position of the Company’s
largest defined benefit plan. Net finance expense in the
previous year also included costs associated with the Company’s
energy-related $50.0 million term debt and an extension of the
Company’s operating loan facility. Included in finance expense for
both periods is the expense related to the Company’s retirement
benefit obligations, with total interest expense of $3.0 million in
2014 compared to $4.1 million in 2013.
gain (lOSS) On derivative financial inStrumentS
The Company uses a variety of derivative financial instruments to
reduce its exposure to risks associated with fluctuations in foreign
exchange rates, energy costs, interest rates and pulp prices.
For 2014, the Company recorded a net loss of $1.9 million
related to its derivative financial instruments, principally
reflecting unrealized losses on crude oil collars stemming from
a sharp decline in oil prices at the end of 2014, with oil prices
declining further early in 2015. Further contributing to the net
loss were realized losses on pulp futures through 2014, as well
as unrealized losses on foreign exchange collars, as a result
of the weakening of the Canadian dollar at the close of 2014
relative to the exchange rate at the close of 2013.
Additional information on the derivative financial
instruments in place at year end can be found in the “Financial
Requirements and Liquidity” section, later in this document.
Other incOme (expenSe), net
Other income, net for 2014 of $2.0 million included favourable
exchange movements on US dollar denominated cash,
receivables and payables.
incOme tax expenSe
The Company recorded an income tax expense of $30.5 million in 2014 with an overall effective tax rate of 25% (2013: 30%).
The reconciliation of income taxes calculated at the statutory rate to the actual income tax provision is as follows:
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Net income before income taxes
Income tax expense at statutory rate
2014 – 26.0% (2013 – 25.75%)11
Add (deduct):
entities with different income tax rates and other tax adjustments
Permanent difference from capital gains and other non-deductible items
Change in substantively enacted tax rate11
Income tax expense
2014
$
120.0
$
(31.2)
0.8
(0.1)
-
(30.5)
$
$
$
$
2013
59.8
(15.4)
0.8
(1.0)
(2.4)
(18.0)
(11) e f f e c t i v e A p r i l 1, 2 0 13 , t h e B r i t i s h C o l u m b i a P r o v i n c i a l g o v e r n m e n t i n c r e a s e d c o r p o r a t e t a x r a t e f r o m 10 % t o 11% .
Other cOmprehenSive incOme (lOSS)
CPPI measures its accrued benefit obligations and the fair
value of plan assets for accounting purposes as at December
31 of each year. Any actuarial gains or losses which arise
are recognized immediately by means of a credit or charge
through other comprehensive income. For 2014, an after-tax
amount of $19.1 million was charged to other comprehensive
income, which comprised losses on the defined benefit post-
employment compensation plans and other non-pension post-
employment benefits. The losses in 2014 largely reflected
a lower discount rate used to value the net defined benefit
obligation coupled with actuarial adjustments made as part
of the tri-annual funding valuation of the Company’s largest
employee future benefit plan offset in part by the return on
plan assets. In 2013, an after-tax amount of $26.2 million
was credited to other comprehensive income, primarily
reflecting the return on plan assets and a higher discount rate
over that year offset in part by adjustments to mortality rate
assumptions. For more information, see the “employee Future
Benefits” part of the “Critical Accounting estimates” section
later in this report.
15
management’s discussion and analysis
summaRy oF FInanCIal posItIon
The following table summarizes CPPI’s financial position as at December 31, 2014 and 2013:
( m i l l i o n s o f C a n a d i a n d o l l a r s , e x c e p t f o r r a t i o s )
Cash and cash equivalents
Operating working capital
Net working capital
Property, plant and equipment
Retirement benefit surplus
Other long-term assets
Net assets
Long-term debt
Retirement benefit obligations
Long-term provisions
Deferred income taxes, net
Total equity
Ratio of current assets to current liabilities
Net debt to total capitalization
$
$
$
$
2014
76.8
102.4
179.2
524.1
-
0.9
704.2
50.0
94.9
4.2
65.5
489.6
704.2
2.5 : 1
(5.8)%
$
$
$
$
2013
13.5
87.5
101.0
528.1
8.2
2.3
639.6
50.0
75.8
3.0
72.8
438.0
639.6
1.8 : 1
9.7%
The ratio of current assets to current liabilities at the end of
2014 was 2.5:1, compared to 1.8:1 at the end of 2013, driven
largely by an improved net cash position at the end of 2014. See
further discussion in “Changes in Financial Position” section.
The Company’s net debt to capitalization was (5.8)% at
December 31, 2014, reflecting the net positive cash position
(December 31, 2013: 9.7%). The decrease is explained
principally by higher cash balances at the end of 2014, reflecting
improved cash earnings, coupled with a higher total equity
balance at year end.
CHangEs In FInanCIal posItIon
At the end of 2014, CPPI had $76.8 million of cash and cash equivalents.
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Cash generated from (used in)
Operating activities
Financing activities
Investing activities
Increase in cash and cash equivalents
2014
2013
$
$
153.4
(32.7)
(57.4)
63.3
$
$
156.9
(81.8)
(60.4)
14.7
The changes in the components of these cash flows during 2014 are discussed in the following sections.
Operating activitieS
financing activitieS
For the 2014 year, CPPI generated cash from operations of $153.4
million, down $3.5 million from cash generated of $156.9 million
in the previous year. Higher cash earnings in the pulp segment in
2014 were more than offset by 2014 tax instalment payments of
$24.4 million and an increase in non-cash working capital. The
latter increase in part reflected higher finished pulp and paper
inventories, while lower accounts receivable balances were
offset by increased prepaid maintenance and accounts payable
balances, both largely reflecting the timing of payments.
Financing activities in 2014 used cash of $32.7 million, $49.1
million lower than the $81.8 million used in 2013. Financing
cash flows included dividend payments of $16.8 million, up
$2.6 million from the previous year. Finance expenses paid
in 2014 at $2.7 million, were down $6.4 million from 2013,
reflecting lower debt levels in 2014 as well as finance costs
paid in the previous year related to the final interest payment
on the Company’s US$110 million term debt. Cash used for
financing activities also included $2.0 million for the purchase
of 177,518 CPPI common shares under the Company’s renewed
Normal Course Issuer Bid; in 2013, $2.4 million of shares were
purchased (see further discussion of the shares purchased
under a Normal Course Issuer Bid in the following “Financial
Requirements and Liquidity” section). The previous year
cash used for financing activities also included repayment of
the Company’s US$110 million 6.41% interest rate debt and
issuance of new $50 million term debt. At December 31, 2014,
CPPI had no amounts drawn on its operating loan facility, with
$11.2 million repaid during 2014.
16
Canfor pulp annual report 2014
inveSting activitieS
Net cash used for investing activities in 2014 was $57.4 million,
compared to $60.4 million used in 2013. Property, plant
and equipment additions in 2014 totaled $57.7 million which
included final payments related to the Northwood Pulp Mill
turbine upgrades that were completed in the first quarter
of 2014 and payments related to the Intercontinental Pulp
Mill’s turbine upgrade. The Company anticipates that it will
complete the upgrades to the Intercontinental Pulp Mill turbine
and commence selling power under an electricity Purchase
Agreement in the second quarter of 2015.
FInanCIal REQuIREmEnts anD lIQuIDIty
Operating lOanS
At December 31, 2014, the Company had $130.0 million of
unsecured operating loan facilities which were unused, except
for $12.2 million reserved for several standby letters of credit,
leaving $117.8 million of available undrawn operating loans.
deBt cOvenantS
CPPI has certain financial covenants on its debt obligations that
stipulate maximum net debt to total capitalization ratios and
minimum net worth amounts based on total shareholders’ equity.
The net debt to total capitalization is calculated by dividing total
debt less cash and cash equivalents, by shareholders’ equity plus
total debt less cash and cash equivalents.
In circumstances when net debt to total capitalization
exceeds a threshold, CPPI is subject to an interest coverage
ratio that requires a minimum amount of earnings before
interest, taxes, depreciation and amortization relative to net
interest expense. CPPI is not currently subject to this test.
Provisions contained in CPPI’s long-term borrowing
agreements also limit the amount of indebtedness that the
Company may incur and the amount of dividends it may pay on
its common shares. The amount of dividends the Company is
permitted to pay under its long-term borrowing agreements
is determined by reference to consolidated net earnings less
certain restricted payments.
Management reviews results and forecasts to monitor the
Company’s compliance with these covenant requirements. CPPI
was in compliance with all its debt covenants for the year ended
December 31, 2014.
nOrmal cOurSe iSSuer Bid
On March 5, 2014, the Company renewed its normal course
issuer bid whereby it can purchase for cancellation up to
3,550,367 common shares or approximately 5% of its issued
and outstanding common shares as of February 28, 2014. The
renewed normal course issuer bid is set to expire on March
4, 2015. In 2014, CPPI purchased 177,518 common shares for
$2.0 million (an average price of $11.27 per common share).
As a result of the share purchases, Canfor’s interest in CPPI
increased from 50.4% at December 31, 2013 to 50.5% at
December 31, 2014.
2015 prOjected capital Spending and deBt
repaymentS
Based on its current outlook for 2015, assuming no
deterioration in market conditions during the year, the Company
plans to invest approximately $60 million in capital projects,
which will consist primarily of various improvement projects as
well as maintenance of business expenditures. There are no
scheduled debt payments in 2015. CPPI has sufficient liquidity
in its cash reserves and operating loans to finance its planned
capital expenditures as required during 2015.
derivative financial inStrumentS
As at December 31, 2014, the Company had the following derivatives:
a. Foreign exchange collars of US$104.0 million. There were unrealized losses of $0.3 million on the foreign exchange derivatives at the
end of the year. The contracts in place at the end of 2014 were as follows:
uS dollar collars
0 – 12 months
2014
notional amount
exchange rates
(millions of US dollars)
(protection/topside,
per dollar)
$ 104.0 $ 1.11/ $ 1.22
b. CPPI partly uses western Texas Intermediate oil (“wTI”) contracts as proxy to hedge its diesel purchases. At 2014 year end, the
Company had 102 thousand barrels of wTI oil collars outstanding, which will be settled in 2015, with weighted average protection of
$58.14 per barrel and topside of $77.35 per barrel. There were unrealized losses of $0.7 million on these contracts at the end of the year.
c. From time to time, CPPI enters into futures contracts on commodity exchanges for pulp. At 2014 year end, the Company had no futures
contracts outstanding.
d. CPPI utilizes interest rate swaps to reduce its exposure to financial obligations bearing variable interest rates. At December 31, 2014,
the Company had $35.0 million in fixed interest rate swaps with interest rates ranging from 2.32% to 2.34%, maturing in 2015.
17
management’s discussion and analysis
cOmmitmentS
The following table summarizes CPPI’s financial contractual obligations at December 31, 2014 for each of the next five years
and thereafter:
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Long-term debt obligations
Operating leases
2015
2016
2017
2018
2019
thereafter
total
$
$
$
-
0.8
0.8
$
$
$
-
0.2
0.2
$
$
$
-
0.1
0.1
$ 50.0
$
-
$ 50.0
$
$
$
-
-
-
$
$
$
-
-
-
$ 50.0
$
1.1
$ 51.1
Other contractual obligations not included in the table above or
highlighted previously are:
The Company has entered into three separate energy
agreements with a BC energy company and electricity
transmission provider (the “energy Agreements”) for all
three of the Company’s mills, with commencement dates
ranging from 2006 through 2015. These agreements are
for the commitment of electrical load displacement and the
sale of incremental power from the Company’s pulp and
paper mills. These energy Agreements include incentive
grants from the BC energy company for capital investments
to increase electrical generation capacity, and also call
for performance guarantees to ensure minimum required
amounts of electricity are generated, with penalty clauses
if they are not met. As part of these commitments, the
Company has entered into standby letters of credit for these
guarantees. The standby letters of credit have variable expiry
dates, depending on the capital invested and the length of the
energy Agreement involved. As at December 31, 2014 the
Company had posted $12.2 million of standby letters of credit
under these agreements, and had no repayment obligations
under the terms of any of these agreements.
tRansaCtIons WItH RElatED paRtIEs
The Company undertakes transactions with various related
entities. These transactions are in the normal course of
business and are generally on similar terms as those accorded
to unrelated third parties, except where noted otherwise. The
pricing under the Company’s Fibre Supply Agreement with
Canfor was renewed effective November 1, 2013. The current
pricing under the agreement expires September 1, 2016 and
may be amended as necessary to ensure that it is reflective of
market conditions.
The Company purchased wood chips, logs and hog fuel from
Canfor sawmills in the amount of $147.5 million in 2014.
Canfor provides certain business and administrative services
to the Company under a services agreement. The total value of
the services provided by Canfor in 2014 was $10.6 million.
Contractual commitments totaling $0.6 million, principally
related to the construction of capital assets, mostly related
to the turbine project at the Intercontinental Pulp Mill.
The Company’s asset retirement obligations represent
estimated undiscounted future payments of $7.2 million
to remediate the landfills at the end of their useful lives.
Payments relating to landfill closure costs are expected to
occur at periods ranging from 4 to 37 years which have been
discounted at risk free rates ranging from 1.4% to 2.4%. The
estimated discounted value is $3.5 million and the amount is
included in other long-term provisions.
Obligations to pay pension and other post-employment
benefits, for which a net liability for accounting purposes
at December 31, 2014 was $94.9 million. As at December
31, 2014, CPPI estimated that it would make contribution
payments of $3.4 million to its defined benefit plans in 2015
based on the last actuarial valuation for funding purposes.
Purchase obligations and contractual obligations in the
normal course of business. For example, purchase
obligations of a more substantial dollar amount generally
relate to the pulp business and are subject to “force
majeure” clauses. In these instances, actual volumes
purchased may vary significantly from contracted amounts
depending on the Company’s requirements in any given year.
The Company provides certain business and administrative
services to Canfor under an incidental services agreement. Total
value of the services provided to Canfor in 2014 was $2.8 million.
The Company markets bleached chemi-thermo mechanical
pulp production from Canfor’s Taylor Pulp Mill for which it
earned commissions totaling $1.8 million in 2014. The Company
sold NBSk pulp to the Taylor Pulp Mill for packaging use
totaling $3.4 million in 2014. Subsequent to the acquisition of
the Taylor Pulp Mill on January 30, 2015 (described further in
the “Acquisition of Taylor Pulp Mill” section below), the Taylor
Pulp Mill became a division of CPPI and these transactions
became internal.
18
Canfor pulp annual report 2014
At December 31, the following amounts were included in the balance sheet of the Company:
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Balance Sheet
Included in accounts payable and accrued liabilities:
Canfor
Included in trade and other accounts receivable:
Products marketed for Canfor
as at
december 31,
2014
$
$
18.0
1.7
Additional details on related party transactions are contained in note 16 to CPPI’s 2014 consolidated financial statements.
acquiSitiOn Of taylOr pulp mill
On January 30, 2015, CPPI completed the purchase of Canfor’s
Taylor Pulp Mill located in Taylor, BC, which has an annual
capacity of 220,000 tonnes of BCTMP, for cash proceeds of
approximately $15.0 million including working capital. The
transaction also includes a long-term fibre supply agreement
under which Canfor will supply fibre to the Taylor Pulp Mill
at prices that approximate fair market value. In addition
to the cash proceeds, Canfor may also receive contingent
consideration over a 3 year period, starting January 31, 2015,
based on the Taylor Pulp Mill’s annual adjusted operating
income before amortization. On the acquisition date, the
fair value of the contingent consideration was approximately
$1.8 million. CPPI recognized long-term assets acquired net
of liabilities assumed of approximately $2.8 million and net
working capital of approximately $14.0 million.
sElECtED QuaRtERly FInanCIal InFoRmatIon
2014
2013
q4
q3
q2
q1
Q4
Q3
Q2
Q1
Sales and income
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Sales
Operating income before amortization12
Operating income
Net income
per common share ( C a n a d i a n d o l l a r s )
Net income – basic and diluted
Book value13
Dividends declared
Statistics
Pulp shipments (000 mt)
Paper shipments (000 mt)
Average exchange rate – US$/Cdn$
Average NBSk pulp list price
delivered to US (US$)
$ 264.0
$ 43.2
$ 28.0
$ 20.7
$ 0.29
$ 6.92
$ 0.0625
258.6
35.8
$ 0.881
$ 237.6
$ 47.7
$ 31.4
$ 24.3
$ 0.34
$ 6.86
$ 0.0625
240.5
35.7
$ 0.918
$ 252.5
$ 44.8
$ 29.6
$ 18.8
$ 0.27
$ 6.56
$ 0.0625
246.9
39.7
$ 0.917
$ 226.4
$ 52.4
$ 36.4
$ 25.7
$ 0.36
$ 6.39
$ 0.0625
222.4
31.3
$ 0.906
$ 245.6
$ 39.5
$ 24.0
$ 14.2
$ 196.1
$ 27.8
$ 11.3
9.1
$
$ 227.6
$ 38.5
$ 19.5
7.6
$
$ 217.5
$ 37.9
$ 19.0
$ 10.9
$ 0.20
$ 6.17
$ 0.0500
$ 0.13
$ 5.79
$ 0.0500
$ 0.11
$ 5.67
$ 0.0500
$ 0.15
$ 5.53
$ 0.0500
273.3
31.1
$ 0.953
212.2
35.5
$ 0.963
255.0
37.2
$ 0.977
257.9
35.0
$ 0.991
$ 1,025
$ 1,030
$ 1,030
$ 1,017
$
983
$
947
$
937
$
897
(12 ) A m o r t i z a t i o n i n c l u d e s c e r t a i n c a p i t a l i z e d m a j o r m a i n t e n a n c e c o s t s .
(13 ) B o o k v a l u e p e r c o m m o n s h a r e i s e q u a l t o s h a r e h o l d e r s ’ e q u i t y a t t h e e n d o f t h e p e r i o d , d i v i d e d b y t h e n u m b e r o f c o m m o n s h a r e s o u t s t a n d i n g a t t h e e n d o f t h e p e r i o d .
Sales are primarily influenced by changes in market pulp
prices, sales volumes and fluctuations in Canadian dollar
exchange rates. Operating income, net income and operating
income before amortization are primarily impacted by: sales
revenue; freight costs; fluctuations of fibre, chemical and
energy prices; level of spending and timing of maintenance
downtime; and production curtailments. Net income is also
impacted by fluctuations in Canadian dollar exchange rates,
the revaluation to the period end rate of US dollar denominated
working capital balances and long-term debt, and revaluation of
outstanding energy swaps, pulp futures and US dollar forward
contracts and collars.
19
management’s discussion and analysis
( m i l l i o n s o f C a n a d i a n d o l l a r s )
q4
q3
q2
q1
Q4
Q3
Q2
Q1
2014
2013
Operating income (loss) by segment:
Pulp
Paper
Unallocated
total operating income
Add: Amortization
total operating income before
amortization14
Add (deduct):
working capital movements
Defined benefit pension plan
contributions
Income taxes paid, net
Other operating cash flows, net
cash from operating activities
Add (deduct):
Dividends paid
Finance expenses paid
Capital additions, net
Share purchases
Drawdown of long-term debt
Repayment of long-term debt
Other, net
change in cash / operating loans
$ 23.7
7.2
$
$
(2.9)
$ 28.0
$ 15.2
$ 27.5
6.5
$
$
(2.6)
$ 31.4
$ 16.3
$ 28.8
3.8
$
$
(3.0)
$ 29.6
$ 15.2
$ 35.0
4.5
$
$
(3.1)
$ 36.4
$ 16.0
$ 24.1
3.8
$
$
(3.9)
$ 24.0
$ 15.5
8.3
$
5.9
$
$
(2.9)
$ 11.3
$ 16.5
$ 15.4
7.1
$
(3.0)
$
$ 19.5
$ 19.0
$ 15.4
5.9
$
$
(2.3)
$ 19.0
$ 18.9
$ 43.2
$ 47.7
$ 44.8
$ 52.4
$ 39.5
$ 27.8
$ 38.5
$ 37.9
$
8.5
$ (13.2)
$ 10.7
$
(19.9)
$ 27.9
$
(10.1)
$
5.5
$
(7.2)
(1.1)
$
(1.0)
$
$
3.6
$ 53.2
(4.4)
$
$
(0.7)
$ (11.3)
-
$
-
$
$
-
$
0.2
$ 37.0
$
(1.2)
$ (12.5)
$
3.9
$ 24.7
(4.4)
$
$
(0.6)
$ (16.2)
(2.0)
$
-
$
-
$
0.1
$
1.6
$
(1.3)
$
(1.3)
$
$
(1.3)
$ 51.6
(4.5)
$
$
(0.6)
$ (20.2)
-
$
-
$
-
$
$
-
$ 26.3
(2.5)
$
(9.6)
$
$
3.5
$ 23.9
(3.5)
$
$
(0.8)
$ (10.0)
-
$
-
$
-
$
-
$
9.6
$
(2.5)
$
(0.3)
$
$
4.5
$ 69.1
(3.5)
$
(4.9)
$
(19.9)
$
$
-
$ 50.0
$ (116.6)
$
-
$ (25.8)
(2.3)
$
(0.1)
$
$
(0.4)
$ 14.9
(3.5)
$
$
(0.2)
$ (26.5)
(1.4)
$
-
$
-
$
0.5
$
(16.2)
$
(2.5)
$
-
$
$
3.1
$ 44.6
(3.6)
$
(3.8)
$
(7.9)
$
(1.0)
$
-
$
-
$
$
0.1
$ 28.4
(2.8)
$
-
$
$
0.4
$ 28.3
(3.6)
$
(0.2)
$
(6.9)
$
-
$
-
$
-
$
$
0.1
$ 17.7
(14 ) A m o r t i z a t i o n i n c l u d e s c e r t a i n c a p i t a l i z e d m a j o r m a i n t e n a n c e c o s t s .
tHREE-yEaR CompaRatIVE REVIEW
( m i l l i o n s o f C a n a d i a n d o l l a r s , e x c e p t p e r s h a r e a m o u n t s )
Sales
Net income
Total assets
Total long-term financial liabilities
Net income per share, basic and diluted
Dividends/distributions declared per share/unit15
2014
980.5
$
89.5
$
827.4
$
50.0
$
$
1.26
$ 0.2375
2013
886.8
41.8
768.6
50.0
0.59
0.20
$
$
$
$
$
$
2012
810.4
13.4
758.0
-
0.14
0.52
$
$
$
$
$
$
(15 ) I n c l u d e d i n 2 0 12 C P P I d i v i d e n d s d e c l a r e d p e r s h a r e w a s a $ 0 . 2 2 p e r s h a r e d i v i d e n d d e c l a r e d i n M a y 2 0 12 w h i c h w a s p a i d t o n o n - C a n f o r s h a r e h o l d e r s a s C a n f o r h a d w a i v e d
i t s r i g h t t o r e c e i v e t h e d i v i d e n d a s p a r t o f t h e e x c h a n g e .
20
Canfor pulp annual report 2014
QuaRtER EnDED DECEmBER 31, 2014 Vs. QuaRtER EnDED DECEmBER 31, 2013
Overview Of Operating reSultS
The Company recorded operating income of $28.0 million and
net income of $20.7 million for the fourth quarter of 2014,
compared to operating income of $24.0 million and net income
of $14.2 million for the fourth quarter of 2013. The net income
per share was $0.29 for the fourth quarter of 2014, compared to
$0.20 per share in the fourth quarter of 2013.
An overview of the results by business segment for the fourth
quarter of 2014 compared to the last quarter of 2013 follows.
pulp
SeLeCTeD FINANCIAL INFORMATION AND STATISTICS – PULP
Summarized results for the Pulp segment for the fourth quarter of 2014 and 2013 were as follows:
( m i l l i o n s o f C a n a d i a n d o l l a r s , u n l e s s o t h e r w i s e n o t e d )
Sales
Operating income before amortization16
Operating income
Average pulp price delivered to US – US$17
Average price in Cdn$
Production – pulp (000 mt)
Shipments – pulp (000 mt)
Marketed on behalf of Canfor (000 mt)
(16 ) A m o r t i z a t i o n i n c l u d e s c e r t a i n c a p i t a l i z e d m a j o r m a i n t e n a n c e c o s t s .
(17 ) P e r t o n n e , N B S k p u l p l i s t p r i c e d e l i v e r e d t o U S ( R e s o u r c e I n f o r m a t i o n S y s t e m s , I n c . ) .
Overvie w
Operating income for the pulp segment was $23.7 million for the
fourth quarter of 2014, in line with the fourth quarter of 2013.
The pulp segment’s results were relatively flat compared
to the fourth quarter of 2013, with strong gains in sales
realizations offset by higher unit manufacturing costs and
lower shipment volumes. The higher sales realizations were
largely a result of the 8% weaker Canadian dollar and marginal
improvements in pulp US dollar prices in most regions, while
shipments for the last quarter of 2013 were at higher-than-
normal levels. Unit manufacturing costs were up moderately,
primarily reflecting higher market-driven fibre costs and the
impact of a longer scheduled maintenance outage in the current
quarter compared to a scheduled outage taken in the fourth
quarter of 2013. The current quarter results also included
higher energy revenue compared to the fourth quarter of 2013.
marke tS
global softwood pulp markets were relatively stable in the
fourth quarter of 2014, softening slightly towards the end of the
quarter, with pricing down modestly in North America and China
and solid demand in most regions through the quarter. global
softwood pulp producer inventory levels remained balanced
during the first two months of the quarter before increasing in
December 2014 to 31 days of supply, up 4 days from September
201418, driven in part by strong producer operating rates.
Market conditions are generally considered balanced when
inventories are in the 27-30 days of supply range.
global shipments of bleached softwood kraft pulp were
relatively unchanged from the fourth quarter of 2013, with
stable demand seen to most regions compared to the same
period in 201319.
(18 ) w o r l d 2 0 d a t a i s b a s e d o n t w e n t y p r o d u c i n g c o u n t r i e s r e p r e s e n t i n g
8 0 % o f w o r l d c h e m i c a l m a r k e t p u l p c a p a c i t y a n d i s b a s e d o n
i n f o r m a t i o n c o m p i l e d a n d p r e p a r e d b y t h e P P P C .
(19 ) A s r e p o r t e d b y P u l p a n d P a p e r P r o d u c t s C o u n c i l ( “ P P P C ” ) s t a t i s t i c s .
$
$
$
$
$
q4
2014
221.4
38.0
23.7
1,025
1,164
241.1
258.6
55.4
$
$
$
$
$
Q4
2013
212.3
38.8
24.1
983
1,032
246.1
273.3
56.2
Sale S
The Company’s pulp shipments in the fourth quarter of 2014
totalled 258,600 tonnes, down 14,700 tonnes, or 5%, from
the same period in 2013, due in part to higher-than-normal
shipments into China in the fourth quarter of 2013, partly offset
by improved demand in North America. Compared to the fourth
quarter of 2013, pulp sales realizations showed strong gains,
largely as a result of the 8% weaker Canadian dollar, increased
US-dollar pulp prices in most regions, and increased shipments
to higher-margin regions. The average NBSk pulp list price
to North America increased US$42 per tonne, or 4%, with list
prices to europe seeing similar gains. Partially offsetting
these gains were increased discounts in North America and a
3% decrease in the average list price to China. Higher energy
revenue compared to the same period in 2013 continued to
reflect output from the upgrades to the Northwood Pulp Mill
turbines, completed in early 2014, as well as increased power
generation from the turbine at the Company’s Prince george
Pulp Mill facility.
Oper atiOn S
Pulp production in the current quarter was 241,100 tonnes,
down 5,000 tonnes, or 2%, from the fourth quarter of 2013.
The current quarter included a scheduled maintenance outage
at the Northwood Pulp Mill which resulted in reduced market
pulp production of 17,000 tonnes. In comparison, production in
the fourth quarter of 2013 reflected a scheduled maintenance
outage at the Prince george Pulp Mill, which resulted in
reduced market pulp production of 4,000 tonnes. Current
quarter production levels were favourably impacted by higher
operating rates than the same period in 2013.
Compared to the fourth quarter of 2013, unit manufacturing
costs were up, reflecting the impact of higher fibre costs
coupled with higher costs attributable to the longer
maintenance outage in the current quarter. The higher fibre
costs resulted largely from market-driven increases in sawmill
residual and whole log chip prices and, to a lesser extent, an
increased proportion of higher-cost whole log chips.
21
management’s discussion and analysis
paper
SeLeCTeD FINANCIAL INFORMATION AND STATISTICS – PAPeR
Summarized results for the Paper segment for the fourth quarter of 2014 and 2013 were as follows:
( m i l l i o n s o f C a n a d i a n d o l l a r s , u n l e s s o t h e r w i s e n o t e d )
Sales
Operating income before amortization20
Operating income
Production – paper (000 mt)
Shipments – paper (000 mt)
( 2 0 ) A m o r t i z a t i o n i n c l u d e s c e r t a i n c a p i t a l i z e d m a j o r m a i n t e n a n c e c o s t s .
Overvie w
Operating income for the paper segment was $7.2 million for the
fourth quarter of 2014, up $3.4 million from the fourth quarter
of 2013. The higher operating income compared to the fourth
quarter of 2013 reflected increased shipment volumes and higher
unit sales realizations coupled with lower unit conversion costs
principally resulting from higher production volume in the current
quarter due to a scheduled maintenance outage in the comparable
period in 2013. These gains were partially offset by market-driven
increases in slush pulp costs in the current quarter.
marke tS
global kraft paper demand remained strong through the fourth
quarter of 2014 with full order files for both North American and
offshore markets. Anticipated new capacity in europe did not
impact overall supply in the period due to start up delays.
SaleS
The Company’s paper shipments in the fourth quarter of 2014
were 35,800 tonnes, up 4,700 tonnes, or 15%, from the fourth
quarter of 2013, principally reflecting higher production levels.
Prime bleached shipments, which attract higher prices, were up
6% from the fourth quarter of 2013.
unallOcated itemS
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Corporate costs
Finance expense, net
Foreign exchange loss on long-term debt
Loss on derivative financial instruments
Other income (expense), net
$
$
$
q4
2014
42.5
8.0
7.2
36.0
35.8
$
$
$
Q4
2013
33.2
4.6
3.8
30.8
31.1
Unit sales realizations were well up compared to the same
period in 2013, largely the result of the 8% weaker Canadian
dollar as well as increased prices and the higher prime
bleached paper shipments.
Oper atiOn S
Paper production in the fourth quarter of 2014 was 36,000 tonnes,
up 5,200 tonnes, or 17%, from the fourth quarter of 2013. The
increase in production compared to the fourth quarter of 2013 was
mostly due to a scheduled maintenance outage at the Company’s
paper machine in October 2013. Operating rates in the current
quarter were improved from the same period in 2013, further
contributing to higher production volumes. Unit manufacturing
costs showed a marginal increase compared to the fourth quarter
of 2013, as higher costs for slush pulp, principally reflecting higher
market pulp prices, and chemical costs, were partly offset by
lower maintenance and operating costs, mostly due to a scheduled
maintenance outage in the comparative period and corresponding
lower production volumes.
q4
2014
(2.9)
(1.4)
-
(0.8)
1.8
$
$
$
$
$
Q4
2013
(3.9)
(3.2)
(3.4)
(0.1)
2.2
$
$
$
$
$
Corporate costs were $2.9 million for the fourth quarter of
2014, down $1.0 million from the fourth quarter of 2013. The
comparable period in 2013 included costs associated with the
wind-up of Canfor Pulp Limited Partnership at the end of 2013.
Net finance expense for the fourth quarter of 2014 was $1.4
million, down $1.8 million from the fourth quarter of 2013. The
decrease from the same quarter in 2013 reflected lower debt
levels in the current quarter coupled with lower employee
future benefit net interest costs, due in part to the improved
financial position of the Company’s largest defined benefit plan.
Net finance expense in the comparable period in 2013 also
included costs associated with new term debt and extension of
the Company’s operating loan facility.
The Company uses a variety of derivative financial
instruments as partial economic hedges against unfavourable
changes in foreign exchange rates, energy costs, interest rates
and pulp prices. For the fourth quarter of 2014, the Company
recorded a net loss of $0.8 million largely reflecting unrealized
losses on crude oil collars stemming from the sharp decline
in oil prices at the end of 2014, with oil prices declining further
early in 2015. Also contributing to the loss, to a lesser degree,
were unrealized losses on US dollar foreign exchange collars
mostly as a result of the weakening of the Canadian dollar at the
close of the current quarter relative to the exchange rate at the
close of the third quarter of 2014.
Other income, net for the fourth quarter of 2014 of $1.8
million reflected favourable exchange movements on US dollar
denominated cash, receivables and payables, resulting from the
weakening of the Canadian dollar through the quarter.
22
Canfor pulp annual report 2014
spECIFIC ItEms aFFECtIng CompaRaBIlIty
Specific itemS affecting cOmparaBility Of net incOme
Factors that impact the comparability of the quarters are noted below:
A f t e r - t a x i m p a c t
( m i l l i o n s o f C a n a d i a n d o l l a r s , e x c e p t f o r p e r s h a r e a m o u n t s )
2014
2013
net income, as reported
(gain) loss on derivative financial
instruments
Foreign exchange (gain) loss on
long-term debt
Change in substantively enacted
tax rate
Net impact of above items
adjusted net income
net income per share (epS),
as reported
Net impact of above items per share21
adjusted net income per share21
q4
q3
q2
q1
Q4
Q3
Q2
Q1
$ 20.7
$ 24.3
$ 18.8
$ 25.7
$ 14.2
$
9.1
$
7.6
$ 10.9
$
0.6
$
0.2
$
(0.4)
$
1.0
$
0.1
$
(1.5)
$
2.0
$
(0.5)
$
-
$
-
$
-
$
-
$
3.0
$
(2.0)
$
3.4
$
2.0
-
$
$
0.6
$ 21.3
$ 0.29
$ 0.01
$ 0.30
-
$
$
0.2
$ 24.5
$ 0.34
$
-
$ 0.34
-
$
$
(0.4)
$ 18.4
-
$
$
1.0
$ 26.7
$ 0.27
$ (0.01)
$ 0.26
$ 0.36
$ 0.01
$ 0.37
-
$
$
3.1
$ 17.3
$ 0.20
$ 0.04
$ 0.24
$
$
$
-
(3.5)
5.6
2.4
$
$
7.8
$ 15.4
$ 0.13
$ (0.05)
$ 0.08
$ 0.11
$ 0.11
$ 0.22
-
$
$
1.5
$ 12.4
$ 0.15
$ 0.02
$ 0.17
( 2 1) T h e y e a r - t o - d a t e n e t i m p a c t o f t h e a d j u s t i n g i t e m s p e r s h a r e a n d a d j u s t e d n e t i n c o m e p e r s h a r e d o e s n o t e q u a l t h e s u m o f t h e q u a r t e r l y p e r s h a r e a m o u n t s d u e t o r o u n d i n g .
outlooK
pulp marketS
For the month of January 2015, NBSk pulp list prices were
down from December 2014, with the NBSk pulp list price to
North America at US$1,010 per tonne, down US$10 per tonne,
and the list prices to China and europe down US$20 per tonne
at US$680 per tonne and US$915 per tonne, respectively. For
the month of February 2015, the Company has announced a
NBSk pulp list price of US$1,000 per tonne in North America.
There are no maintenance outages planned for the first quarter
of 2015. NBSk pulp list prices are anticipated to continue to
soften modestly through the first quarter of 2015, with a modest
growth in producer inventories due in part to minimal industry
maintenance during the first quarter and NBSk pulp production
facilities running at or near capacity; however, the continued
weakening of the Canadian dollar is currently projected to
outweigh the forecast declines in NBSk pulp list prices. For
CRItICal aCCountIng EstImatEs
The preparation of financial statements in conformity with
International Financial Reporting Standards (“IFRS”) 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. 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 CPPI’s financial position.
Unless otherwise indicated the critical accounting estimates
discussed affect all of the Company’s reportable segments.
the second quarter of 2015, producer inventories are forecast to
decline during the industry’s spring maintenance period.
Maintenance outages are currently planned at the
Intercontinental and Prince george Mills in the second quarter
of 2015 with a projected 10,000 tonnes of reduced production
and at the Northwood Mill in the fourth quarter of 2015 with a
projected 25,000 tonnes of reduced production.
paper marketS
kraft paper markets are softening slightly heading into the
first quarter of 2015. There is potential for some modest
downward pressure on prices in North American markets in the
first quarter of 2015 with increased competition for business
from european paper producers. Any decreases in prices are
anticipated to be mitigated by a projected further weakening of
the Canadian dollar.
emplOyee future BenefitS
CPPI has various defined benefit and defined contribution plans
providing both pension and other retirement benefits to most
of its salaried employees and certain hourly employees not
covered by forest industry union plans. CPPI also provides
certain health care benefits and pension bridging benefits to
eligible retired employees. The costs and related obligations of
the pension and other retirement benefit plans are accrued in
accordance with the requirements of IFRS.
23
management’s discussion and analysis
CPPI uses independent actuarial firms to perform actuarial
valuations of the fair value of pension and other retirement
benefit plan obligations. The application of IFRS requires
judgments regarding certain assumptions that affect the
accrued benefit provisions and related expenses, including
the discount rate used to calculate the present value of the
obligations, the rate of compensation increase, mortality
assumptions and the assumed health care cost trend rates.
Management evaluates these assumptions annually based on
experience and the recommendations of its actuarial firms.
Changes in these assumptions result in actuarial gains or
losses, which are recognized in full in each period with an
adjustment through Other Comprehensive Income (Loss).
The actuarial assumptions used in measuring CPPI’s benefit plan provisions and benefit costs are as follows:
Discount rate
Rate of compensation increases
Future salary increases
Initial medical cost trend rate
Ultimate medical cost trend rate
year ultimate rate is reached
december 31, 2014
December 31, 2013
pension
Benefit
plans
3.90%
3.00%
2.50%
n/a
n/a
n/a
Other
Benefit
plans
3.90%
n/a
n/a
7.00%
4.50%
2021
Pension
Benefit
Plans
4.80%
3.00%
3.00%
n/a
n/a
n/a
Other
Benefit
Plans
4.90%
n/a
n/a
7.00%
4.50%
2021
In addition to the significant assumptions listed in the table above, the average life expectancy of a 65 year old at December 31, 2014
is between 20.8 years and 24.0 years (2013 – 19.8 years and 23.0 years). As at December 31, 2014, the weighted average duration of the
defined benefit obligation is 12.4 years (2013 – 11.4 years). The weighted average duration of the other benefit plans is 13.9 years
(2013 – 13.7 years).
Assumed discount rates and medical cost trend rates have a significant effect on the accrued benefit obligation. A one percentage
point change in these assumptions would have the following effects on the accrued benefit obligation for 2014:
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Pension benefit plans
Discount rate
Other benefit plans
Discount rate
Initial medical cost trend rate
1% Increase
1% Decrease
$
$
$
(15.8)
(10.6)
9.5
$
$
$
17.8
13.4
(8.0)
See “Financial Requirements and Liquidity” section for further discussion regarding the funding position of CPPI’s pension plans.
aSSet retirement OBligatiOnS
aSSet impairmentS
CPPI records the estimated fair value of a liability for asset
retirement obligations, such as landfill closures, in the period in
which they are incurred. For landfill closure costs, the fair value
is determined using estimated closure costs discounted over the
estimated useful life. Payments relating to landfill closure costs
are expected to occur at periods ranging from 4 to 37 years and
have been discounted at risk-free rates ranging from 1.4% to
2.4%. The actual closure costs and periods of payment may differ
from the estimates used in determining the year end liability. On
initial recognition, the fair value of the liability is added to the
carrying amount of the associated asset and amortized over its
useful life. The liability is accreted over time through charges to
earnings and reduced by actual costs of settlement.
CPPI reviews the carrying values of its long-lived assets,
including property, plant and equipment on a regular basis
as events or changes in circumstances may warrant. An
impairment loss is recognized in net income at the amount that
the asset’s carrying amount exceeds its recoverable amount.
The recoverable amount is the higher of an asset’s fair value
less costs to sell and value in use. No impairments were
recorded in 2014 or 2013.
deferred taxeS
In accordance with IFRS, CPPI recognizes deferred income tax
assets when it is probable that the deferred income tax assets
will be realized. This assumption is based on management’s
best estimate of future circumstances and events. If these
estimates and assumptions are changed in the future, the value
of the deferred income tax assets could be reduced or increased,
resulting in an income tax expense or recovery. CPPI reevaluates
its deferred income tax assets on a regular basis.
24
Canfor pulp annual report 2014
valuatiOn Of finiShed prOduct inventOrieS
Finished product inventories are recorded at the lower of cost
and net realizable value. The cost of inventories is based on the
weighted average cost principle, and includes raw materials,
direct labour, other direct costs and related production
overheads (based on normal operating capacity). Net realizable
value is the estimated selling price in the ordinary course
of business, less estimated costs of completion and selling
expenses. CPPI estimates the net realizable value of the
finished goods inventories based on actual and forecasted sales
orders. Based on these estimates there is no requirement to
write-down the Company’s finished goods inventories, which
are carried at cost at December 31, 2014.
FutuRE CHangEs In aCCountIng polICIEs
In July 2014, the IASB issued IFRS 9, Financial Instruments. The
required adoption date for IFRS 9 is January 1, 2018 and the
Company is in process of assessing the impact, if any, on the
financial statements of this new standard.
In May 2014, the IASB issued IFRS 15, Revenue from
Contracts with Customers, which will supersede IAS
RIsKs anD unCERtaIntIEs
Risks and uncertainties fall into the general business areas of
markets, international commodity prices, competition, currency
exchange rates, environmental issues, raw materials, capital
requirements, dependence on certain relationships, government
regulations, public policy and labour disputes, and Native land
claims. The future impact of the various uncertainties and
potential risks described in the following paragraphs (together
with the risks and uncertainties identified under each of the
Company’s business segments) cannot be quantified or predicted
with certainty. However, CPPI does not foresee unmanageable
adverse effects on its business operations from, and believes
that it is well positioned to deal with, such matters as may arise.
The risks and uncertainties are set out in alphabetical order.
aBOriginal iSSueS
Canfor Pulp sources the majority of its fibre from areas
subject to claims of Aboriginal rights or title. Canadian judicial
decisions have recognized the continued existence of Aboriginal
rights and title to lands continuously and exclusively used or
occupied by Aboriginal groups; however, until recently, the
courts have not identified any specific lands where Aboriginal
title exists. In June 2014, the Supreme Court of Canada, for the
first time, recognized Aboriginal title for the Tsilhqot’in Nation
over approximately 1,750 square kilometres of land in central
BC (“william decision”). It found that provisions of BC’s Forest
Act, dealing with the disposition or harvest of Crown timber,
no longer applied to timber located on these lands, but also
confirmed provincial law can apply on Aboriginal title lands.
while Aboriginal title had previously been assumed over
specific, intensively occupied areas such as villages, the william
decision marks the first time Canada’s highest court has
recognized Aboriginal title over a specific piece of land and, in
so doing, affirmed a broader territorial use-based approach to
Aboriginal title. The decision also defines what Aboriginal title
means and the types of land uses consistent with this form of
collective ownership.
The impacts of the Supreme Court of Canada’s decision
on the timber supply from Crown lands is unknown at this
time; and the Company does not know if the decision will lead
18, Revenue, IAS 11, Construction Contracts and related
interpretations. The new standard is effective for annual
periods beginning on or after January 1, 2017. The Company is
in the process of assessing the impact, if any, on the financial
statements of this new standard.
to changes in BC laws or policies. Canfor Pulp supports the
work of tenure holders to engage, cooperate and exchange
information and views with First Nations and government to
foster good relationships and minimize risks to the Company’s
operational plans.
capital requirementS
The pulp and paper industries are capital intensive, and the
Company regularly incurs capital expenditures to expand its
operations, maintain its equipment, increase its operating
efficiency and comply with environmental laws. The Company’s
total capital expenditures during 2014 were approximately $57.7
million. The Company anticipates available cash resources and
cash generated from operations will be sufficient to fund its
operating needs and capital expenditures.
cOmpetitive marketS
The Company’s products are sold primarily in North America,
europe, and Asia. The markets for the Company’s products
are highly competitive on a global basis, with a number of
major companies competing in each market with no company
holding a dominant position. Competitive factors include quality
of product, reliability of supply and customer service. The
Company’s competitive position is influenced by: the availability,
quality, and cost of raw materials; energy and labour costs; free
access to markets; currency exchange rates; plant efficiencies;
and productivity in relation to its competitors.
currency exchange riSk
The Company’s operating results are sensitive to fluctuations
in the exchange rate of the Canadian dollar to the US dollar,
as prices for the Company’s products are denominated in US
dollars or linked to prices quoted in US dollars. Therefore, an
increase in the value of the Canadian dollar relative to the US
dollar reduces the amount of revenue in Canadian dollar terms
realized by the Company from sales made in US dollars, which
in turn, reduces the Company’s operating margin and the cash
flow available.
25
management’s discussion and analysis Through its pension funding requirements, the Company
through Canfor, is exposed to the risk of fluctuating market
values for the securities making up the plan assets, and to
changes in prevailing interest rates which determine the
discount rate used in calculating the estimated future liabilities.
The funding requirements may also change to the extent that
other assumptions used are revised, such as inflation rates or
mortality assumptions.
For CPPI’s pension benefit plans, a one percentage point
increase in the discount rate used in calculating the actuarial
estimate of future liabilities would reduce the accrued benefit
obligation by an estimated $15.8 million and a one percentage point
decrease in the discount rate would increase the accrued benefit
obligation by an estimated $17.8 million. These changes would
only impact the Company’s funding requirements in years where
a new actuarial funding valuation was performed and regulatory
approval for a change in funding contributions was obtained.
envirOnmental lawS, regulatiOnS and cOmpliance
The Company is subject to a wide range of general and industry-
specific laws and regulations relating to the protection of
the environment, including those governing air emissions,
wastewater discharges, the storage, management and
disposal of hazardous substances and wastes, the cleanup of
contaminated sites, landfill operation and closure obligations,
and health and safety matters. These laws and regulations
require the Company to comply with specific requirements
as described in regulations. Regulations may also require
the Company to obtain authorizations and comply with the
authorization requirements of the appropriate governmental
authorities which have considerable discretion over the terms
and timing of said authorizations and permits.
The Company has incurred, and expects to continue to
incur, capital, operating and other expenditures complying with
applicable environmental laws and regulations and as a result
of environmental remediation on asset retirement obligations.
The provision for these future environmental remediation
expenditures was $3.5 million as of December 31, 2014. It is
possible that the Company could incur substantial costs, such
as civil or criminal fines, sanctions and enforcement actions,
cleanup and closure costs, and third-party claims for property
damage and personal injury as a result of violations of, or
liabilities under, environmental laws and regulations. The
amount and timing of environmental expenditures is difficult to
predict, and, in some cases, the Company’s liability may exceed
forecasted amounts. The discovery of additional contamination
or the imposition of additional cleanup obligations at the
Company’s or third-party sites may result in significant
additional costs. Any material expenditure incurred could
adversely impact the Company’s financial condition or preclude
the Company from making capital expenditures that would
otherwise benefit the Company’s business. enactment of new
environmental laws or regulations or changes in existing laws
or regulations, or interpretation thereof, could have a significant
impact on the Company.
cyclicality Of prOduct priceS
The Company’s financial performance is dependent upon
the selling prices of its pulp and paper products, which have
fluctuated significantly in the past. The markets for these
products are highly cyclical and may be characterized by (i)
periods of excess product supply due to industry capacity
additions, increased production and other factors; and (ii)
periods of insufficient demand due to weak general economic
conditions. The economic climate of each region where the
Company’s products are sold has a significant impact upon the
demand, and therefore, the prices for pulp and paper. Prices of
pulp, in particular, have historically been unpredictable.
dependence On canfOr
In 2014, approximately 59% of the fibre used by the Company
was derived from the Fibre Supply Agreement with Canfor.
Following the purchase of the Taylor Pulp Mill from Canfor on
January 30, 2015 and the related fibre supply agreement, the
Company anticipates approximately 62% of the fibre used will
be derived from Canfor. The Company’s financial results could
be materially adversely affected if Canfor is unable to provide
the current volume of wood chips as a result of mill closures,
whether temporary or permanent.
dependence On key cuStOmerS
In 2014, the Company’s top five customers accounted for
approximately 27% of its pulp sales. In the event that the
Company cannot maintain these customer relationships or the
demand from these customers is diminished for any reason in
the future, there is a risk that the Company would be forced to
find alternative markets in which to sell its pulp, which in turn,
could result in lower prices or increased distribution costs
thereby adversely affecting its sales margins.
dividendS
CPPI paid quarterly dividends of $0.0625 per share through
2014 and may, subject to market conditions, continue to pay
a comparable level of dividends through 2015. There is no
assurance that the dividends will be maintained at this level and
the market value of CPPI shares may fluctuate depending on
the amount of dividends paid in the future. The board retains
the discretion to change the policy at any time and reviews the
policy on a quarterly basis.
emplOyee future BenefitS
The Company, in participation with Canfor, has several defined
benefit plans, which provide pension benefits to certain salaried
employees. Benefits are based on a combination of years of
service and final average salary. Cash payments required to
fund the pension plan are determined by actuarial valuation
completed at least once every three years, with the most
recent actuarial valuation for the largest plan completed as of
December 31, 2013.
The funded surplus (deficit) of each defined benefit plan is
calculated as the difference between the fair market value of
plan assets and an actuarial estimate of future liabilities. Any
deficit in the registered plans determined following an actuarial
valuation must be funded in accordance with regulatory
requirements, normally over 5 or 15 years. Some of the
unregistered plans are also partially funded.
26
Canfor pulp annual report 2014 financial riSk management and
earningS SenSitivitieS
Demand for pulp and paper products are closely related to global
business conditions and tends to be cyclical in nature. Product
prices can be subject to volatile change. CPPI competes in a
global market and the majority of its products are sold in US
dollars. Consequently, changes in foreign currency relative to
the Canadian dollar can impact CPPI’s revenues and earnings.
FINANCIAL RISk MANAgeMeNT
CPPI is exposed to a number of risks as a result of holding
financial instruments. These risks include credit risk, liquidity
risk and market risk.
The CPPI Risk Management Committee manages risk in
accordance with a Board approved Risk Management Controls
Policy. The policy sets out the responsibilities, reporting
and counter party credit and communication requirements
associated with all of the Company’s risk management activity.
Responsibility for overall philosophy, direction and approval is
that of the Board of Directors.
( a ) c redit riSk:
Credit risk is the risk of financial loss to CPPI if a counterparty to
a financial instrument fails to meet its contractual obligations.
Financial instruments that are subject to credit risk include
cash and cash equivalents and accounts receivable. Cash and
cash equivalents includes cash held through major Canadian
and international financial institutions as well as temporary
investments with an original maturity date of three months or less.
CPPI utilizes a combination of credit insurance and self-
insurance to manage the risk associated with trade receivables.
As at December 31, 2014, approximately 81% of the outstanding
trade receivables are covered under credit insurance. In
addition, CPPI requires letters of credit on certain export trade
receivables and regularly discounts these letters of credit
without recourse. CPPI recognizes the sale of the letters of
credit on the settlement date, and accordingly reduces the
related trade accounts receivable balance. CPPI’s trade
receivable balance at December 31, 2014 was $60.7 million. At
December 31, 2014, approximately 98% of the trade accounts
receivable balance was within CPPI’s established credit terms.
(B) liquidit y riS k:
Liquidity risk is the risk that CPPI will be unable to meet its
financial obligations as they come due. CPPI manages liquidity
risk through regular cash-flow forecasting in conjunction with
an adequate committed operating loan facility.
At December 31, 2014, CPPI had no amounts drawn on its
operating loans, and accounts payable and accrued liabilities of
$123.2 million, all of which are due within twelve months of the
balance sheet date.
(c) m arke t 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, foreign currency, commodity and energy prices.
(i) Interest rate risk:
CPPI is exposed to interest rate risk through its current
financial assets and financial obligations bearing variable
interest rates.
CPPI uses interest rate swaps to reduce its exposure to
financial obligations bearing variable interest rates
(See “Derivative Financial Instruments” section later in
this document).
As noted earlier in this section (under “employee Future
Benefits”), CPPI is also exposed to interest rate risk in relation
to the measurement of the Company’s pension liabilities.
(ii) Currency risk:
CPPI is exposed to foreign exchange risk primarily related to
the US dollar, as CPPI 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 Company holds financial assets
and liabilities in US dollars. These primarily include US
dollar bank accounts, investments and trade accounts.
A portion of the currency risk associated with US dollar
denominated sales is naturally offset by US dollar
denominated expenses. The Company enters into US dollar
collars to reduce exposure to fluctuations in US exchange
rates on US dollar denominated accounts receivable and
accounts payable balances (See “Derivative Financial
Instruments” section later in this document).
(iii) Commodity price risk:
CPPI’s financial performance is dependent on the
selling price of its products and the purchase price of
raw material inputs. Consequently, CPPI is exposed
to changes in commodity prices for pulp and paper, as
well as changes in fibre, freight, chemical and natural
gas prices. The markets for pulp and paper are cyclical
and are influenced by a variety of factors. These factors
include periods of excess supply due to industry capacity
additions, periods of decreased demand due to weak global
economic activity, inventory destocking by customers
and fluctuations in currency exchange rates. During
periods of low prices, CPPI is subject to reduced revenues
and margins, which adversely impact profitability. The
Company may periodically use derivative instruments to
mitigate commodity price risk (See “Derivative Financial
Instruments” section later in this document).
(iv) energy price risk:
CPPI is exposed to energy price risk relating to purchases of
natural gas and diesel oil for use in its operations.
The exposure is hedged up to 100% through the use of
floating to fixed swap contracts or option contracts with
maturity dates up to a maximum of eighteen months. In
the case of diesel, CPPI uses wTI oil contracts to hedge its
exposure (See “Derivative Financial Instruments” section
later in this document).
DeRIVATIVe FINANCIAL INSTRUMeNTS
Subject to risk management policies approved by its Board of
Directors, CPPI, from time to time, uses derivative instruments,
such as forward exchange contracts and option contracts to
hedge future movements of exchange rates and futures and
forward contracts to hedge pulp prices, commodity prices
and energy costs. See section “Financial Requirements and
Liquidity” for details of CPPI’s derivative financial instruments
outstanding at year end.
27
management’s discussion and analysis
eARNINgS SeNSITIVITIeS
raw material cOStS
estimates of the sensitivity of CPPI’s pre-tax results to
currency fluctuations and prices for its principal products,
based on 2015 Business Plan forecast production and year end
foreign exchange rates, are set out in the following table:
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Impact on annual
pre-tax earnings
NBSk Pulp – US$10 change per tonne22
Natural gas cost – $1 change per gigajoule
Chip cost – $1 change per tonne
Canadian dollar – US$0.01 change per Canadian dollar23
$ 8
$ 4
$ 3
$ 7
( 2 2 ) e x c l u d i n g i m p a c t s o f e x c h a n g e r a t e , f r e i g h t , d i s c o u n t i n g , p o t e n t i a l c h a n g e i n
f i b r e c o s t s a n d o t h e r d e d u c t i o n s .
( 2 3 ) R e p r e s e n t s i m p a c t o n o p e r a t i n g i n c o m e a n d e x c l u d e s t h e i m p a c t o n o p e r a t i n g
l o a n s d e n o m i n a t e d i n U S $ . D e c r e a s e o f U S $ 0 . 0 1 p e r C a n a d i a n d o l l a r r e s u l t s
i n a n i n c r e a s e t o p r e - t a x a n n u a l e a r n i n g s a n d a n i n c r e a s e o f U S $ 0 . 0 1 p e r
C a n a d i a n d o l l a r r e s u l t s i n a d e c r e a s e t o p r e - t a x a n n u a l e a r n i n g s .
gOvernmental regulatiOnS
The Company is subject to a wide range of general and industry-
specific environmental, health and safety and other laws and
regulations imposed by federal, provincial and local authorities.
If the Company is unable to extend or renew a material
approval, license or permit required by such laws, or if there is
a delay in renewing any material approval, license or permit, the
Company’s business, financial condition, results of operations
and cash flows could be materially adversely affected. In
addition, future events such as any changes in these laws
and regulations or any change in their interpretation or
enforcement, or the discovery of currently unknown conditions,
may give rise to unexpected expenditures or liabilities.
increaSed induStry prOductiOn capacity
The Company currently faces substantial competition in the
pulp industry and may face increased industry competition in
the years to come if new manufacturing facilities are built or
if existing mills are improved. If increases in pulp production
capacity exceed increases in pulp demand, selling prices for
pulp could decline and adversely affect the Company’s business,
financial condition, results of operations and cash flows, and
the Company may not be able to compete with competitors who
have greater financial resources and who are better able to
weather a prolonged decline in prices.
maintenance OBligatiOnS and facility diSruptiOnS
The Company’s manufacturing processes are vulnerable to
operational problems that can impair its ability to manufacture
its products. The Company could experience a breakdown in any
of its machines, or other important equipment, and from time
to time, the Company schedules planned and incurs unplanned
outages to conduct maintenance that cannot be performed
safely or efficiently during operations. Such disruptions could
cause significant loss of production, which could have a material
adverse effect on the Company’s business, financial condition and
operating results.
The principal raw material utilized by the Company in its
manufacturing operations is wood chips. The Company’s Fibre
Supply Agreement with Canfor contains a pricing formula that
currently results in the Company paying market price for wood
chips and contains provisions to adjust the pricing to reflect
market conditions. The current pricing under the agreement
expires September 1, 2016, and may be amended as necessary
to ensure it is reflective of market conditions. Prices for wood
chips are not within the Company’s control and are driven by
market demand, product availability, environmental restrictions,
logging regulations, the imposition of fees or other restrictions
on exports of lumber into the US and other matters. The
Company is not always able to increase the selling prices of
its products in response to increases in raw material costs.
Residual chip pricing depends on current sawmills running at
current levels. In order to meet the raw materials requirements
of its mills, the Company may be forced to further supplement
with increased purchases of higher-cost whole log chips.
tranSpOrtatiOn ServiceS
The Company relies on third parties for transportation of
its products, as well as delivery of raw materials principally
by railroad, trucks and ships. If any significant third party
transportation providers were to fail to deliver the raw
materials or products or distribute them in a timely manner, the
Company may be unable to sell those products at full value, or
at all, or be unable to manufacture its products in response to
customer demand, which may have a material adverse effect
on its financial condition and operating results. In addition, if
any of these significant third parties were to cease operations
or cease doing business with the Company, the Company may
be unable to replace them at a reasonable cost. Transportation
services may also be impacted by seasonal factors, which could
impact the timely delivery of raw materials and distribution of
products to customers and have a resulting material adverse
impact on CPPI’s financial condition and operating results. As
a result of increased government regulation on truck driver
work hours and rail capacity constraints, access to adequate
transportation capacity has at times been strained and could
affect the Company’s ability to move its log, lumber and wood
chips at market competitive prices.
wOrk StOppageS
Any labour disruptions and any costs associated with labour
disruptions at the Company’s mills could have a material
adverse effect on the Company’s production levels and results
of operations. The Company has collective agreements with the
UNIFOR and PPwC (Pulp, Paper and woodworkers of Canada),
with both agreements expiring on April 30, 2017. Any future
inability to negotiate acceptable contracts could result in a
strike or work stoppage by the affected workers and increased
operating costs as a result of higher wages or benefits paid to
unionized workers.
28
Canfor pulp annual report 2014
outstanDIng sHaRE Data
At February 4, 2015, there were 70,829,823 common shares issued and outstanding.
DIsClosuRE ContRols anD IntERnal ContRols oVER FInanCIal REpoRtIng
The Company has established disclosure controls and
procedures to ensure that information disclosed in this MD&A
and the related financial statements was properly recorded,
processed, summarized and reported to the Board of Directors
and the Audit Committee. The Company’s chief executive officer
(“CeO”) and chief financial officer (“CFO”) have evaluated the
effectiveness of these disclosure controls and procedures for
the year ending December 31, 2014, and have concluded that
they are effective.
The CeO and CFO acknowledge responsibility for the design
of internal controls over financial reporting (“ICFR”), and confirm
that there were no changes in these controls that occurred during
the year ended December 31, 2014 which materially affected, or
are reasonably likely to materially affect, the Company’s ICFR.
Based upon their evaluation of these controls for the year ended
December 31, 2014, the CeO and CFO have concluded that these
controls are operating effectively.
Additional information about the Company, including its 2014 Annual Information Form, is available at www.sedar.com or at www.canforpulp.com.
29
management’s discussion and analysis ConsolIDatED
FInanCIal
statEmEnts
30
Canfor pulp annual report 2014 managEmEnt’s REsponsIBIlIty
The information and representations in these consolidated
financial statements are the responsibility of management and
have been approved by the Board of Directors. The consolidated
financial statements were prepared by management in
accordance with International Financial Reporting Standards
and, where necessary, reflect management’s best estimates
and judgments at this time. It is reasonably possible that
circumstances may arise which cause actual results to differ.
Management does not believe it is likely that any differences will
be material.
Canfor Pulp Products Inc. maintains systems of internal
accounting controls, policies and procedures to provide
reasonable assurance as to the reliability of the financial
records and the safeguarding of its assets.
The Board of Directors is responsible for ensuring that
management fulfills its responsibilities for financial reporting
and is ultimately responsible for reviewing and approving the
financial statements. The Board carries out these activities
primarily through its Audit Committee.
The Audit Committee is comprised of three Directors who
are not employees of the Company. The Committee meets
InDEpEnDEnt auDItoR’s REpoRt
tO the SharehOlderS Of canfOr pulp prOductS inc.
we have audited the accompanying consolidated financial
statements of Canfor Pulp Products Inc. and its subsidiaries,
which comprise the consolidated balance sheets as at December
31, 2014 and December 31, 2013 and the consolidated statements
of income, the consolidated statements of other comprehensive
income (loss), the consolidated statements of changes in equity,
and the consolidated statements of cash flows for the years then
ended, and the related notes, which comprise a summary of
significant accounting policies and other explanatory information.
management’S reSpOnSiBility fOr the
cOnSOlidated financial StatementS
Management is responsible for the preparation and fair
presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards,
and for such internal control as management determines is
necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether
due to fraud or error.
auditOr’S reSpOnSiBility
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. we conducted our
audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with
ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on
the auditor’s judgment, including the assessment of the
risks of material misstatement of the consolidated financial
periodically throughout the year with management, external
auditors and internal auditors to review their respective
responsibilities, results of the reviews of internal accounting
controls, policies and procedures and financial reporting
matters. The external and internal auditors meet separately
with the Audit Committee.
The consolidated financial statements have been reviewed
by the Audit Committee and approved by the Board of Directors.
The consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, the external auditors, whose
report follows.
February 4, 2015
Don B. kayne
Chief executive Officer
Alan Nicholl
Chief Financial Officer
statements, whether due to fraud or error. In making those
risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation
of the consolidated financial statements in order to design
audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. An audit also
includes evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of
the consolidated financial statements.
we believe that the audit evidence we have obtained in our
audits is sufficient and appropriate to provide a basis for our
audit opinion.
OpiniOn
In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of Canfor
Pulp Products Inc. and its subsidiaries as at December 31,
2014 and December 31, 2013 and its financial performance
and its cash flows for the years then ended in accordance with
International Financial Reporting Standards.
February 4, 2015
PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, British Columbia
31
consolidated financial statements as at
As at
december 31, December 31,
2013
2014
$
$
$
$
$
$
76.8
60.7
10.0
143.7
11.2
302.4
524.1
-
0.9
827.4
-
123.2
123.2
50.0
94.9
4.2
65.5
337.8
522.1
(32.5)
489.6
$
$
$
$
$
$
13.5
71.0
10.3
128.0
7.2
230.0
528.1
8.2
2.3
768.6
10.6
118.4
129.0
50.0
75.8
3.0
72.8
330.6
523.4
(85.4)
438.0
$
827.4
$
768.6
ConsolIDatED BalanCE sHEEts
( m i l l i o n s o f C a n a d i a n d o l l a r s )
aSSetS
current assets
Cash and cash equivalents
Accounts receivable - Trade
- Other
Inventories ( N o t e 5 )
Prepaid expenses and other assets
Total current assets
property, plant and equipment ( N o t e 6 )
retirement benefit surplus ( N o t e 10 )
Other long-term assets
total assets
liaBilitieS
current liabilities
Operating loans ( N o t e 8 )
Accounts payable and accrued liabilities ( N o t e 7 )
Total current liabilities
long-term debt ( N o t e 9 )
retirement benefit obligations ( N o t e 10 )
Other long-term provisions
deferred income taxes, net ( N o t e 14 )
total liabilities
equity
Share capital ( N o t e 12 )
Retained earnings (deficit)
total equity
total liabilities and equity
Subsequent events ( N o t e 2 1)
The accompanying notes are an integral part of these consolidated financial statements.
APPROVeD By THe BOARD
Director, S.e. Bracken-Horrocks Director, M.J. korenberg
32
Canfor pulp annual report 2014
ConsolIDatED statEmEnts oF InComE
ye a r e n d e d D e c e m b e r 3 1 ( m i l l i o n s o f C a n a d i a n d o l l a r s , e x c e p t p e r s h a r e d a t a )
Sales
costs and expenses
Manufacturing and product costs
Freight and other distribution costs
Amortization
Selling and administration costs
Restructuring and severance costs
Operating income
Finance expense, net ( N o t e 13 )
Foreign exchange loss on long-term debt
Loss on derivative financial instruments ( N o t e 2 0 )
Other income, net
Net income before income taxes
Income tax expense ( N o t e 14 )
net income
net income per common share: ( i n C a n a d i a n d o l l a r s )
- Basic and diluted ( N o t e 12 )
The accompanying notes are an integral part of these consolidated financial statements.
2014
2013
$
980.5
$
886.8
635.5
129.1
62.7
27.8
-
855.1
125.4
(5.5)
-
(1.9)
2.0
120.0
(30.5)
89.5
$
595.1
123.3
69.9
24.0
0.7
813.0
73.8
(11.8)
(7.3)
(0.1)
5.2
59.8
(18.0)
41.8
$
$
1.26
$
0.59
33
consolidated financial statements
ConsolIDatED statEmEnts oF otHER
CompREHEnsIVE InComE (loss)
anD CHangEs In EQuIty
ye a r e n d e d D e c e m b e r 3 1 ( m i l l i o n s o f C a n a d i a n d o l l a r s )
2014
2013
CONSOLIDATeD STATeMeNTS OF OTHeR COMPReHeNSIVe INCOMe (LOSS)
net income
Other comprehensive income (loss)
Items that will not be recycled through net income:
Defined benefit plan actuarial gains (losses) ( N o t e 10 )
Income tax recovery (expense) on defined benefit plan actuarial gains (losses) ( N o t e 14 )
Other comprehensive income (loss), net of tax
total comprehensive income
CONSOLIDATeD STATeMeNTS OF CHANgeS IN eQUITy
Share capital
Balance at beginning of year
Share purchases ( N o t e 12 )
Balance at end of year ( N o t e 12 )
retained earnings (deficit)
Balance at beginning of year
Net income
Defined benefit plan actuarial gains (losses), net of tax
Dividends declared
Share purchases ( N o t e 12 )
Balance at end of year
total equity
The accompanying notes are an integral part of these consolidated financial statements.
$
89.5
$
41.8
(25.8)
6.7
(19.1)
70.4
523.4
(1.3)
522.1
(85.4)
89.5
(19.1)
(16.8)
(0.7)
(32.5)
$
$
$
$
$
35.5
(9.3)
26.2
68.0
525.3
(1.9)
523.4
(138.7)
41.8
26.2
(14.2)
(0.5)
(85.4)
$
$
$
$
$
$
489.6
$
438.0
34
Canfor pulp annual report 2014
ConsolIDatED statEmEnts
oF CasH FloWs
ye a r e n d e d D e c e m b e r 3 1 ( m i l l i o n s o f C a n a d i a n d o l l a r s )
2014
2013
cash generated from (used in):
Operating activities
Net income
Items not affecting cash:
Amortization
Income tax expense
Changes in mark-to-market value of derivative financial instruments
employee future benefits
Net finance expense
Foreign exchange loss on long-term debt
Other, net
Defined benefit plan contributions
Income taxes paid, net
Net change in non-cash working capital ( N o t e 15 )
financing activities
Change in operating bank loans
Proceeds from long-term debt ( N o t e 9 )
Repayment of long-term debt
Finance expenses paid
Dividends paid
Share purchases ( N o t e 12 )
Other, net
investing activities
Additions to property, plant and equipment, net
Other, net
increase in cash and cash equivalents*
Cash and cash equivalents at beginning of year*
cash and cash equivalents at end of year*
*Cash and cash equivalents include cash on hand less unpresented cheques.
The accompanying notes are an integral part of these consolidated financial statements.
$
89.5
$
41.8
62.7
30.5
0.8
4.6
5.5
-
4.2
(6.1)
(24.4)
167.3
(13.9)
153.4
(11.2)
-
-
(2.7)
(16.8)
(2.0)
-
(32.7)
(57.7)
0.3
(57.4)
63.3
13.5
76.8
69.9
18.0
0.2
5.1
11.8
7.3
(2.8)
(10.1)
(0.4)
140.8
16.1
156.9
10.6
50.0
(116.6)
(9.1)
(14.2)
(2.4)
(0.1)
(81.8)
(61.2)
0.8
(60.4)
14.7
(1.2)
13.5
$
$
35
consolidated financial statements
notEs to tHE ConsolIDatED
FInanCIal statEmEnts
( m i l l i o n s o f C a n a d i a n d o l l a r s u n l e s s o t h e r w i s e n o t e d )
1. REpoRtIng EntIty
Canfor Pulp Products Inc. (“CPPI”) is a company incorporated
and domiciled in Canada and listed on The Toronto Stock
exchange. The address of the Company’s registered office
is 100-1700 west 75th Avenue, Vancouver, British Columbia,
Canada, V6P 6g2. The consolidated financial statements of
the Company as at and for the year ended December 31, 2014
comprise the Company and its subsidiaries (together referred to
as “CPPI” or “the Company”). The Company’s operations consist
of two Northern Bleached Softwood kraft (“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”).
On December 27, 2013, the Canfor Pulp Limited Partnership
was wound up and the net assets were transferred to
Canfor Pulp Holding Inc., a wholly owned subsidiary of CPPI.
Subsequent to the transfer, Canfor Pulp Holding Inc. was
renamed Canfor Pulp Ltd. At December 31, 2014, Canfor
Corporation (“Canfor”) held a 50.5% interest in CPPI, an
increase of 0.1% from December 31, 2013 as a result of share
purchases in 2014 (Note 12).
2. BasIs oF pREpaRatIon
Statement Of cOmpliance
uSe Of eStimateS and judgmentS
The consolidated financial statements of the Company have
been prepared in accordance with International Financial
Reporting Standards (“IFRSs” or “IFRS”) as issued by the
International Accounting Standards Board (“IASB”).
The consolidated financial statements were authorized for
issue by the Board of Directors on February 4, 2015.
BaSiS Of meaSurement
The consolidated financial statements have been prepared on
the historical cost basis, except for the following material items:
Financial instruments classified as fair value through profit
and loss are measured at fair value;
Asset retirement obligations are measured at the discounted
value of expected future cash flows; and
The retirement benefit surplus and obligation related to
the defined benefit pension plans is the net of the accrued
benefit obligation and the fair value of the plan assets.
The preparation of the consolidated financial statements
in accordance with IFRSs requires management to make
judgments, estimates and assumptions that effect the
application of accounting policies and the reported amounts
of assets, liabilities, income and expenses. Actual results may
differ from these estimates.
The Company regularly reviews its estimates and
assumptions; however, it is possible that circumstances may
arise which cause actual results to differ from management
estimates, and these differences could be material. Revisions to
accounting estimates are recognized in the period in which the
estimates are revised and in any future periods affected.
Information about the significant areas of estimation
uncertainty and critical judgments in applying accounting
policies that have the most significant effect on the amounts
recognized in the consolidated financial statements is included
in the applicable notes:
Note 10 – employee Future Benefits; and
Note 11 – Asset Retirement Obligations.
36
Canfor pulp annual report 2014 3. sIgnIFICant aCCountIng polICIEs
The following accounting policies have been applied to the
financial information presented.
this category for CPPI are trade and other receivables, and cash
and cash equivalents.
BaSiS Of cOnSOlidatiOn
Subsidiaries are entities controlled by the Company. Control
exists when CPPI is able to govern the financial and operating
activities of those other entities to generate returns for the
Company. Inter-company transactions, balances and unrealized
gains and losses on transactions between different entities
within the Company are eliminated.
BuSineSS cOmBinatiOnS
Business combinations are accounted for using the acquisition
method as at the acquisition date. CPPI measures goodwill at the
acquisition date as the fair value of the consideration transferred
including any non-controlling interest less the fair value of the
identifiable assets acquired and liabilities assumed. when
the excess is negative, a bargain purchase gain is recognized
immediately in net income. Transaction costs in connection with
business combinations are expensed as incurred.
caSh and caSh equivalentS
Cash and cash equivalents include cash in bank accounts and
highly liquid money market instruments with maturities of three
months or less from the date of acquisition, and are valued
at cost, which approximates market value. Cash is presented
net of unpresented cheques. when the amount of unpresented
cheques is greater than the amount of cash, the net amount is
presented as cheques issued in excess of cash on hand. Interest
is earned at variable rates dependent on amount, credit quality
and term of the Company’s deposits.
financial inStrumentS
NON-DeRIVATIVe FINANCIAL INSTRUMeNTS
Non-derivative financial instruments comprise investments in
equity securities, trade and other receivables, cash and cash
equivalents, loans and advances, and trade and other payables.
Non-derivative financial instruments are recognized initially
at fair value plus, for instruments not at fair value through net
income, any directly attributable transaction costs. Subsequent
to initial recognition, non-derivative financial instruments are
measured as described below:
Financial assets at fair value through net income - An
instrument is classified at fair value through net income if it is
held for trading or is designated as such upon initial recognition.
Financial instruments at fair value through net income are
measured at fair value, and changes therein are recognized in
the statements of income, with attributable transaction costs
being recognized in net income when incurred.
Available-for-sale financial assets - Available for sale
financial assets are non-derivatives that are either designated
in this category or not classified in any other categories.
Loans and receivables - Loans and receivables are non-
derivative financial assets with fixed or determinable payments
that are not quoted in an active market. These are measured
at amortized cost using the effective interest method, less any
impairment losses. The effective interest method is used to
spread the total costs of or income from a financial instrument
over the life of the instrument. Financial assets included within
Other liabilities - All of CPPI’s financial liabilities are
measured at amortized cost using the effective interest method.
DeRIVATIVe FINANCIAL INSTRUMeNTS
CPPI uses derivative financial instruments in the normal course
of its operations as a means to manage its foreign exchange,
interest rate, pulp price, and energy price risk. The Company’s
policy is not to utilize derivative financial instruments for
trading or speculative purposes.
CPPI’s derivative financial instruments are not designated as
hedges for accounting purposes. Consequently, such derivatives
for which hedge accounting is not applied are carried on the
balance sheet at fair value, with changes in fair value (realized
and unrealized) being recognized in the statements of income as
‘gain (loss) on derivative financial instruments’.
The fair value of the derivatives is determined with
reference to period end market trading prices for derivatives
with comparable characteristics.
inventOrieS
Inventories include pulp, paper, wood chips, logs, and materials
and supplies. These are measured at the lower of cost and net
realizable value. The cost of inventories is based on the weighted
average cost principle, and includes raw materials, direct
labour, other direct costs and related production overheads
(based on normal operating capacity). Net realizable value is the
estimated selling price in the ordinary course of business, less
estimated costs of completion and selling expenses.
prOperty, plant and equipment
Items of property, plant and equipment, including expenditure
on major overhauls, are measured at cost less accumulated
amortization and impairment losses.
Cost includes expenditures which are directly attributable to
the acquisition of the asset. The cost of self-constructed assets
includes the cost of materials and direct labour, borrowing costs
(as applicable), and any other costs directly attributable to bringing
assets to be used in the manner intended by management.
expenditure on major overhauls, refits or repairs is
capitalized where it enhances the life or performance of an
asset above its originally assessed standard of performance.
Certain expenditures relating to replacement of components
incurred during major maintenance are capitalized and
amortized over the estimated benefit period of such
expenditures. The costs of the day-to-day servicing of property,
plant and equipment are recognized in net income as incurred.
The cost of replacing a major component of an item of
property, plant and equipment is recognized in the carrying
amount of the item if it is probable that the future economic
benefits embodied within the part will flow to CPPI and its cost
can be measured reliably. The carrying amount of the replaced
component is removed.
Amortization is recognized in net income on a straight-line
basis over the estimated useful lives of each component of an
item of property, plant and equipment, as set out in the table
below. Land is not amortized. The significant majority of CPPI’s
amortization expense for property, plant and equipment relates
to manufacturing and product costs.
37
consolidated financial statements Amortization methods, useful lives and residual values are
DeFINeD BeNeFIT PLANS
reviewed, and adjusted if appropriate, at each reporting date.
The following rates have been applied to CPPI’s capital assets:
Buildings
Pulp and paper machinery and equipment
Mobile equipment
Office furniture and equipment
Major overhauls
10 to 50 years
20 years
4 years
10 years
1 to 2 years
gOvernment aSSiStance
government assistance relating to the acquisition of property,
plant and equipment is recorded as a reduction of the cost of
the asset to which it relates, with any amortization calculated
on the net amount. government grants related to income
are recognized as income or a reimbursement of costs on a
systematic basis over the periods necessary to match them with
the related costs which they were intended to compensate.
aSSet impairment
CPPI’s property, plant and equipment are reviewed for
impairment whenever events or circumstances indicate that the
carrying amount may not be recoverable.
An impairment loss is recognized in net income at the
amount the asset’s carrying amount exceeds its recoverable
amount. The recoverable amount is the higher of an asset’s fair
value less costs of disposal and value in use. For the purposes
of assessing impairment, assets are grouped at the lowest
levels for which there are separately identifiable cash inflows
that are largely independent of cash inflows from other assets
or groups of assets (cash-generating units).
Non-financial assets, for which an impairment was recorded
in a prior period are reviewed for possible reversal of the
impairment at each reporting date. when an impairment loss
is reversed, the increased carrying amount of the asset cannot
exceed the carrying amount that would have been determined
(net of amortization) had no impairment loss been recognized in
prior years.
Financial assets are reviewed at each reporting date
to determine whether there is evidence indicating they are
impaired. A financial asset is considered to be impaired if
objective evidence indicates that one or more events have had a
negative impact on estimated future cash flows from that asset.
An impairment loss in respect of a financial asset measured
at amortized cost is calculated as the difference between its
carrying amount and the present value of the estimated future
cash flows discounted at the original effective interest rate. All
impairment losses are recognized in net income.
emplOyee BenefitS
DeFINeD CONTRIBUTION PLANS
A defined contribution plan is a post-employment benefit plan
under which an entity makes contributions to a separate entity
and has no legal or constructive obligation to pay further
amounts. Obligations for contributions to defined contribution
pension plans are recognized as an employee benefit expense
when they are earned.
For hourly employees covered by industry union defined
contribution pension plans, the statements of income are
charged with CPPI’s contributions required under the
collective agreements.
38
A defined benefit plan is a post-employment benefit plan other
than a defined contribution plan. CPPI, in participation with
Canfor, has defined benefit plans that provide both pension and
other retirement benefits to most of its salaried employees and
certain hourly employees not covered by forest industry union
plans. The Company also provides certain health care benefits
and pension bridging benefits to eligible retired employees.
The surplus and obligation recognized in the balance sheet
in respect of a defined benefit pension plan is the net of the
accrued benefit obligation and the fair value of the plan assets.
The accrued benefit obligation is calculated separately for
each plan by estimating the amount of future benefit earned by
employees in respect of their service in the current and prior
periods; that benefit is discounted to determine its present
value. The discount rate used to determine the present value of
the obligation is the yield at the reporting date on high quality
corporate bonds that have maturity dates approximating the
terms of CPPI’s obligations. The calculation is performed
annually by a qualified actuary using the projected unit credit
method and a measurement date of December 31. The pension
surplus or obligation is adjusted on a quarterly basis for any
material changes in underlying assumptions.
CPPI recognizes all actuarial gains and losses arising from
defined benefit plans in other comprehensive income in the year
in which they occur.
prOviSiOnS
CPPI recognizes a provision if, as a result of a past event, it has
a present legal or constructive obligation that can be estimated
reliably, and it is probable that an outflow of economic benefits
will be required to settle the obligation. The provision recorded
is management’s best estimate of the expenditure required
to settle the present obligation at the end of the reporting
period. Provisions are determined by discounting the expected
future cash flows at a pre-tax rate that reflects current market
assessments of the time value of money and the risks specific
to the liability. The expense arising from the unwinding of the
discount due to the passage of time is recorded as a finance cost.
The main class of provision recognized by CPPI is as follows:
ASSeT ReTIReMeNT OBLIgATIONS
CPPI recognizes a liability for asset retirement obligations in the
period in which they are incurred. The site restoration costs are
capitalized as part of the cost of the related item of property,
plant and equipment and amortized on a basis consistent with
the expected useful life of the related asset. Asset retirement
obligations are discounted at the risk-free rate in effect at the
balance sheet date.
revenue recOgnitiOn
CPPI’s revenues are derived from the sale of pulp, paper,
energy and commissions. Revenue is measured at the fair
value of the consideration received or receivable net of
applicable sales taxes, returns, rebates and discounts and after
eliminating sales within the Company. Revenue is recognized
when the significant risks and rewards of ownership have
been transferred to the buyer, recovery of the consideration is
probable, the associated costs and possible returns of the goods
can be estimated reliably, there is no continuing management
involvement with the goods, and the amounts of revenue can
be measured reliably. energy revenue is recognized when CPPI
Canfor pulp annual report 2014
has met the terms and conditions under both the electricity
Purchase and Load Displacement Agreements.
Amounts charged to customers for shipping and handling
are recognized as revenue, and shipping and handling costs
incurred by CPPI are reported as a component of freight and
other distribution costs.
incOme taxeS
Income tax expense comprises current and deferred tax.
Current and deferred tax are recognized in net income except to
the extent that they relate to items recognized directly in equity
or in other comprehensive income.
Current tax is the expected tax payable or receivable on
the taxable income or loss for the period, using the tax rates
enacted or substantively enacted at the reporting date, and any
adjustment to tax payable in respect of previous periods.
CPPI recognizes deferred income tax in respect of
temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for taxation purposes. Deferred income tax is measured
at tax rates expected to be applied to the temporary differences
when they reverse, based on the laws that have been enacted or
substantively enacted by the reporting date.
A deferred income tax asset is recognized for unused tax
losses, tax credits and deductible temporary differences, to
the extent that it is probable that future taxable profits will be
available against which they can be utilized. Deferred income
tax assets are reviewed at each reporting date and are reduced
to the extent that it is no longer probable that the related tax
benefit will be realized.
Investment tax credits are credited to manufacturing and
product costs in the period in which it becomes reasonably
assured that the Company is entitled to them. Unused
investment tax credits are recorded as other current or long-
term assets in the Company’s balance sheet, depending upon
when the benefit is expected to be received.
4. aCCountIng stanDaRDs IssuED anD not applIED
In July 2014, the IASB issued IFRS 9, Financial Instruments. The
required adoption date for IFRS 9 is January 1, 2018 and the
Company is in process of assessing the impact, if any, on the
financial statements of this new standard.
In May 2014, the IASB issued IFRS 15, Revenue from
Contracts with Customers, which will supersede IAS
fOreign currency tranSlatiOn
Items included in the financial statements of each of the
Company’s entities are measured using the currency of the
primary economic environment in which the entity operates (the
“functional currency”). The consolidated financial statements
are presented in Canadian dollars, which is the Company’s
functional currency.
The majority of CPPI sales are denominated in foreign
currencies, principally the US dollar. Transactions in foreign
currencies are translated to the functional currencies of
the respective entities at exchange rates at the dates of
transactions. Monetary assets and liabilities denominated in
foreign currencies at the reporting date are translated to the
functional currency at the exchange rate on that date. Foreign
currency differences arising on translation are recognized in
net income.
The assets and liabilities of foreign operations are
translated to the Canadian dollar at exchange rates at the
reporting date. The income and expenses of foreign operations
are translated to the Canadian dollar at exchange rates at the
transaction dates. Foreign exchange differences are recognized
in other comprehensive income.
Segment repOrting
Operating segments are reported in a manner consistent with
the internal reporting provided to the chief operating decision-
maker. Segment results reported to the chief operating
decision-maker include items directly attributable to a segment
as well as those that can be allocated on a reasonable basis.
Unallocated items mainly comprise interest bearing liabilities,
head office expenses, and income tax assets and liabilities.
Segment capital expenditure is the total cost incurred during
the period to acquire property, plant and equipment.
18, Revenue, IAS 11, Construction Contracts and related
interpretations. The new standard is effective for annual
periods beginning on or after January 1, 2017. The Company is
in the process of assessing the impact, if any, on the financial
statements of this new standard.
5. InVEntoRIEs
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Pulp
Paper
wood chips and logs
Materials and supplies
as at
As at
december 31, December 31,
2013
2014
$
$
68.8
17.4
12.1
45.4
143.7
$
$
52.8
15.7
14.1
45.4
128.0
In 2014, costs of raw materials, consumables and changes in finished products recognized as manufacturing and product costs
amounted to $344.6 million (2013 - $321.8 million).
39
consolidated financial statements
6. pRopERty, plant anD EQuIpmEnt
( m i l l i o n s o f C a n a d i a n d o l l a r s )
cost
Balance at January 1, 2013
Additions1
Disposals
Transfers
Balance at December 31, 2013
Additions1
Disposals
Transfers
Balance at December 31, 2014
amortization
Balance at January 1, 2013
Amortization for the year
Disposals
Balance at December 31, 2013
Amortization for the year
Disposals
Balance at December 31, 2014
carrying amounts
At January 1, 2013
At December 31, 2013
at december 31, 2014
land and
improvements
Buildings,
machinery
and
equipment
$ 1,421.5
-
(8.2)
44.7
$ 1,458.0
-
(3.6)
26.3
$ 1,480.7
$
(932.5)
(48.9)
7.9
(973.5)
(47.7)
3.0
$ (1,018.2)
$
5.4
-
-
-
5.4
-
-
-
5.4
-
-
-
-
-
-
-
5.4
5.4
5.4
$
$
$
489.0
484.5
462.5
$
$
$
$
$
$
$
$
$
(1) N e t o f c a p i t a l e x p e n d i t u r e s f i n a n c e d b y g o v e r n m e n t g r a n t s .
7. aCCounts payaBlE anD aCCRuED lIaBIlItIEs
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Trade payables and accrued liabilities
Accrued payroll and related liabilities
Income tax payable
Other
8. opERatIng loans
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Available Operating Loans:
Operating loan facility
Facility for letters of credit related to energy agreements
Total operating loans
Drawn
energy letters of credit
Total available operating loans
40
asset
retirement construction
in progress
- landfill
major
overhauls
total
$
$
$
$
$
$
$
$
$
2.1
-
-
-
2.1
-
-
-
2.1
(0.9)
(0.1)
-
(1.0)
-
-
(1.0)
1.2
1.1
1.1
$
$
$
$
$
$
$
$
16.0
67.6
-
(68.1)
15.5
59.3
-
(35.4)
39.4
-
-
-
-
-
-
-
16.0
15.5
39.4
$
$
$
$
$
$
$
$
$
42.5
-
(33.4)
23.4
32.5
-
(7.1)
9.1
34.5
(23.3)
(20.9)
33.3
(10.9)
(15.0)
7.1
(18.8)
$ 1,487.5
67.6
(41.6)
-
$ 1,513.5
59.3
(10.7)
-
$ 1,562.1
$
$
(956.7)
(69.9)
41.2
(985.4)
(62.7)
10.1
(1,038.0)
19.2
21.6
15.7
$
$
$
530.8
528.1
524.1
as at
As at
december 31, December 31,
2013
2014
$
$
59.6
29.9
13.7
20.0
123.2
$
$
58.0
30.0
8.7
21.7
118.4
as at
As at
december 31, December 31,
2013
2014
$
$
110.0
20.0
130.0
-
(12.2)
117.8
$
$
110.0
20.0
130.0
(10.6)
(12.2)
107.2
Canfor pulp annual report 2014
The terms of the Company’s operating loan facility include
interest payable at floating rates that vary depending on the
ratio of net debt to total capitalization and is based on the
lenders’ Canadian prime rate, bankers acceptances, US dollar
base rate or US dollar LIBOR rate, plus a margin. The facility
has certain financial covenants that stipulate maximum net debt
to total capitalization ratios and minimum net worth amounts
based on shareholders’ equity. The maturity date of this facility
is January 31, 2018.
9. long-tERm DEBt
On November 5, 2013, CPPI completed a $50.0 million
unsecured non-revolving term debt financing, which is
repayable on November 5, 2018 with no penalty for early
repayment. The interest rate on the new term debt is based on
the lenders’ Canadian prime rate or bankers acceptance rate
in the year of payment. On November 29, 2013, CPPI repaid its
$116.6 million (US$110.0 million) 6.41% term debt.
10. EmployEE FutuRE BEnEFIts
The Company, in participation with Canfor, has several
funded and unfunded defined benefit plans, as well as defined
contribution plans, that provide pension, other retirement
and post-employment benefits to substantially all salaried
employees and certain hourly employees. The defined benefit
plans are based on years of service and final average salary.
CPPI’s other post-retirement benefit plans are non-contributory
and include a range of health care and other benefits. Total
cash payments for employee future benefits for 2014 were $14.1
million (2013 – $17.8 million), consisting of cash contributed
by CPPI to its funded pension plans, cash payments directly
to beneficiaries for its unfunded other benefit plans, and cash
contributed to its defined contribution plans.
FAIR MARkeT VALUe OF PLAN ASSeTS
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Beginning of year
Interest income on plan assets
Return on plan assets greater than discount rate
Reallocation of assets in proportion to obligations
CPPI contributions
employee contributions
Benefit payments
Administrative expenses
end of year
Plan assets consist of the following:
Asset category
equity securities
Debt securities
Cash and cash equivalents
The Company has a separate facility with a maturity date
of June 30, 2015 to cover energy-related letters of credit. At
December 31, 2014, $9.4 million of energy-related letters of credit
were covered under this facility with the balance of $2.8 million
covered under the Company’s general operating loan facility.
As at December 31, 2014, the Company was in compliance
with all covenants relating to its operating loans.
As at December 31, 2014, the Company was in compliance
with all covenants relating to the long-term debt.
fair value Of tOtal lOng-term deBt
At December 31, 2014, the fair value of the Company’s
long-term debt approximates its amortized cost of
$50.0 million (2013 - $50.0 million).
defined Benefit planS
CPPI measures its accrued benefit obligations and the fair value
of plan assets for accounting purposes as at December 31 of
each year.
CPPI has one registered defined benefit plan for which an
actuarial valuation is performed every three years. The plan
underwent an actuarial valuation for funding purposes as of
December 31, 2013. The next actuarial valuation for funding
purposes is currently scheduled for December 31, 2016.
Information about CPPI’s defined benefit plans, in
aggregate, is as follows:
2014
2013
pension
Benefit
plans
Other
Benefit
plans
Pension
Benefit
Plans
Other
Benefit
Plans
$
$
105.1
4.5
3.9
(3.9)
4.6
0.1
(5.1)
(0.3)
108.9
$
$
-
-
-
-
1.5
-
(1.5)
-
-
$
$
87.3
3.9
8.5
-
8.3
0.2
(3.0)
(0.1)
105.1
$
$
-
-
-
-
1.6
-
(1.6)
-
-
as at
As at
december 31, December 31,
2013
2014
Percentage of Plan Assets
60%
35%
5%
100%
16%
83%
1%
100%
41
consolidated financial statements
ACCRUeD BeNeFIT OBLIgATIONS
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Beginning of year
Current service cost
Interest cost
employee contributions
Benefit payments
Actuarial loss (gain)
Other
end of year
2014
2013
pension
Benefit
plans
Other
Benefit
plans
Pension
Benefit
Plans
Other
Benefit
Plans
$
$
107.6
3.2
4.5
0.1
(5.1)
15.6
-
125.9
$
$
64.1
1.6
3.0
-
(1.5)
10.0
(0.3)
76.9
$
$
110.3
3.2
4.6
0.2
(3.0)
(7.7)
-
107.6
$
$
79.9
2.0
3.4
-
(1.6)
(19.3)
(0.3)
64.1
Of the defined benefit plan obligation of $125.9 million (2013 - $107.6 million), $115.2 million (2013 - $98.6 million) relates to plans that
are wholly or partly funded, $10.7 million (2013 - $9.0 million) relates to plans that are wholly unfunded. At December 31, 2014 the
total obligation for the other benefit plans of $76.9 million (2013 - $64.1 million) is unfunded.
ReCONCILIATION OF FUNDeD STATUS OF BeNeFIT PLANS TO AMOUNTS ReCORDeD IN THe FINANCIAL STATeMeNTS
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Fair market value of plans assets
Accrued benefit obligations
Funded status of plans – deficit
Other pension plans
Total accrued liability, net
The net accrued benefit liability is included in CPPI’s balance sheet as follows:
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Retirement benefit surplus
Retirement benefit obligations
Total accrued benefit liability, net
COMPONeNTS OF PeNSION COST
december 31, 2014 December 31, 2013
pension
Benefit
plans
Other
Benefit
plans
Pension
Benefit
Plans
Other
Benefit
Plans
$
$
$
108.9
(125.9)
(17.0)
(1.0)
(18.0)
$
$
$
-
(76.9)
(76.9)
-
(76.9)
$
$
$
105.1
(107.6)
(2.5)
(1.0)
(3.5)
$
$
$
-
(64.1)
(64.1)
-
(64.1)
december 31, 2014 December 31, 2013
pension
Benefit
plans
$
$
-
(18.0)
(18.0)
Other
Benefit
plans
$
$
-
(76.9)
(76.9)
Pension
Benefit
Plans
$
$
8.2
(11.7)
(3.5)
Other
Benefit
Plans
$
$
-
(64.1)
(64.1)
The following table shows the before tax impact on net income and other comprehensive income of the Company’s pension and other
defined benefit plans:
( m i l l i o n s o f C a n a d i a n d o l l a r s )
recognized in net income
Current service cost
Administration expense
Interest cost
Other
Total included in net income
recognized in other comprehensive income
Actuarial (gain) – experience
Actuarial loss – demographic
Actuarial loss (gain) – financial assumptions
Return on plan assets (greater) than discount rate
Administrative greater than expected
Reallocation of assets in proportion to obligations
Total included in other comprehensive income
42
2014
2013
pension
Benefit
plans
Other
Benefit
plans
Pension
Benefit
Plans
Other
Benefit
Plans
$
$
$
$
3.2
0.1
-
-
3.3
(2.0)
3.3
14.3
(3.9)
0.2
3.9
15.8
$
$
$
$
1.6
-
3.0
(0.3)
4.3
(0.2)
2.0
8.2
-
-
-
10.0
$
$
$
$
3.2
0.1
0.7
0.2
4.2
(0.2)
2.8
(10.3)
(8.5)
-
-
(16.2)
$
$
$
$
2.0
-
3.4
(0.3)
5.1
(11.8)
0.4
(7.9)
-
-
-
(19.3)
Canfor pulp annual report 2014
SIgNIFICANT ASSUMPTIONS
The actuarial assumptions used in measuring CPPI’s benefit plan provisions and benefit costs are as follows:
Discount rate
Rate of compensation increases
Future salary increases
Initial medical cost trend rate
Ultimate medical cost trend rate
year ultimate rate is reached
december 31, 2014 December 31, 2013
pension
Benefit
plans
Other
Benefit
plans
Pension
Benefit
Plans
Other
Benefit
Plans
3.90%
3.00%
2.50%
n/a
n/a
n/a
3.90%
n/a
n/a
7.00%
4.50%
2021
4.80%
3.00%
3.00%
n/a
n/a
n/a
4.90%
n/a
n/a
7.00%
4.50%
2021
In addition to the significant assumptions listed in the table above, the average life expectancy of a 65 year old at December 31, 2014 is
between 20.8 years and 24.0 years (2013 – 19.8 years and 23.0 years). As at December 31, 2014, the weighted average duration of the
defined benefit plan obligation is 12.4 years (2013 – 11.4 years). The weighted average duration of the other benefit plans is 13.9 years
(2013 – 13.7 years).
SeNSITIVITy ANALySIS
defined cOntriButiOn and Other planS
Assumed discount rates and medical cost trend rates have
a significant effect on the accrued benefit obligation. A one
percentage point change in these assumptions would have the
following effects on the accrued benefit obligation for 2014:
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Pension benefit plans
Discount rate
Other benefit plans
Discount rate
Initial medical cost trend rate
1%
Increase
1%
Decrease
$
$
$
(15.8)
(10.6)
9.5
$
$
$
17.8
13.4
(8.0)
As at December 31, 2014, CPPI estimated that it will make
contribution payments of $3.4 million to its defined benefit plans in
2015 based on the last actuarial valuation for funding purposes.
11. assEt REtIREmEnt oBlIgatIons
The total expense recognized in 2014 for CPPI’s defined
contribution plans was $1.3 million (2013 - $1.2 million).
CPPI contributes to a pulp industry pension plan providing
pension benefits. This plan is accounted for as defined
contribution plan. Contributions to this plan, not included in the
expense for defined contribution plan above, amounted to $6.7
million in 2014 (2013 - $6.7 million).
Other
CPPI’s total employee benefits expense includes salaries
and wages, future employee benefits and terminations as
applicable. The total benefits expense in 2014 was $146.2
million (2013 - $142.0 million).
The following table provides a reconciliation of the asset retirement obligations as at December 31, 2014 and 2013:
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Asset retirement obligations at beginning of year
Accretion expense
Changes in estimates
Asset retirement obligations at end of year
2014
2013
$
$
2.7
0.1
0.7
3.5
$
$
3.3
0.1
(0.7)
2.7
43
consolidated financial statements
CPPI’s asset retirement obligations represent estimated
undiscounted future payments of $7.2 million to remediate landfills
at the operations at the end of their useful lives. The payments are
expected to occur at periods ranging from 4 to 37 years and have
been discounted at risk-free rates ranging from 1.4% to 2.4% (2013
– 1.9% to 3.2%). The $0.7 million changes in estimates associated
with the asset retirement obligation principally reflects a lower
discount rate used in valuation of the obligation.
CPPI has certain assets that have indeterminable retirement
dates and, therefore, there is an indeterminate settlement date
for the related asset retirement obligations. As a result, no
asset retirement obligations are recorded for these assets.
These assets include wastewater and effluent ponds that
will have to be drained once the related operating facility is
closed and storage sites for which removal of chemicals, fuels
and other related materials will be required once the related
operating facility is closed. when the retirement dates of these
assets become determinable and an estimate can be made, an
asset retirement obligation will be recorded.
It is possible that changes in future conditions could require a
material change in the recognized amount of the asset retirement
obligations. The asset retirement obligations balance is included
in other long-term provisions on the balance sheet.
12. sHaRE CapItal
authOrized
Unlimited number of common shares, no par value
iSSued and fully paid
( m i l l i o n s o f C a n a d i a n d o l l a r s , e x c e p t n u m b e r o f s h a r e s )
Common shares at beginning of year
Shares purchased
Common shares at end of year
The holders of common shares are entitled to vote at all
meetings of shareholders of the Company and are entitled to
receive dividends when declared.
Basic net income per share is calculated by dividing the
net income available to common shareholders by the weighted
average number of common shares outstanding during the
period. The weighted average number of common shares
outstanding for 2014 was 70,949,525 (2013 – 71,149,822), and
reflected shares purchased under the Company’s Normal
Course Issuer Bid (see below).
13. FInanCE ExpEnsE, nEt
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Finance expense
Less: Interest income
Finance expense, net
2014
2013
number of
Shares
amount
Number of
Shares
Amount
71,007,341
(177,518)
70,829,823
$
$
523.4
(1.3)
522.1
71,269,790
(262,449)
71,007,341
$
$
525.3
(1.9)
523.4
nOrmal cOurSe iSSuer Bid
On March 5, 2014, the Company renewed its normal course
issuer bid whereby it can purchase for cancellation up to
3,550,367 common shares or approximately 5% of its issued
and outstanding common shares as of February 28, 2014. The
renewed normal course issuer bid is set to expire on March
4, 2015. In 2014, CPPI purchased 177,518 common shares for
$2.0 million (an average price of $11.27 per common share), of
which $1.3 million was charged to share capital and $0.7 million
was charged to retained earnings. As a result of the share
purchases in 2014, Canfor’s interest in CPPI increased from
50.4% at December 31, 2013 to 50.5% at December 31, 2014.
In 2013, under a previous normal course issuer bid, CPPI
purchased 262,449 common shares for $2.4 million (an average
price of $9.14 per common share), of which $1.9 million was
charged to share capital and $0.5 million was charged to
retained earnings.
2014
(5.8)
0.3
(5.5)
$
$
2013
(12.2)
0.4
(11.8)
$
$
For the year ended December 31, 2014, finance expense, net
related substantially to interest expense on term debt and net
interest expense on retirement benefit obligations. Included
in finance expense, net in 2014 was $3.0 million related to
retirement benefit obligations (2013 - $4.1 million) and
$1.4 million related to term debt (2013 - $6.6 million).
44
Canfor pulp annual report 2014
14. InComE taxEs
The components of income tax expense are as follows:
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Current
Deferred
Income tax expense
2014
(31.0)
0.5
(30.5)
$
$
2013
(14.4)
(3.6)
(18.0)
$
$
The reconciliation of income taxes calculated at the statutory rate to the actual income tax provision is as follows:
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Income tax expense at statutory rate 2014 – 26.0% (2013 - 25.75%)2
Add (deduct):
Permanent difference from capital gains and other non-deductible items
entities with different income tax rates and other tax adjustments
Change in substantively enacted tax rate2
Income tax expense
2014
2013
$
(31.2)
$
(15.4)
(0.1)
0.8
-
(30.5)
$
(1.0)
0.8
(2.4)
(18.0)
$
( 2 ) e f f e c t i v e A p r i l 1, 2 0 13 , t h e B r i t i s h C o l u m b i a P r o v i n c i a l g o v e r n m e n t i n c r e a s e d t h e c o r p o r a t e t a x r a t e f r o m 10 % t o 11% .
In addition to the amounts recorded to net income, a tax recovery of $6.7 million was recorded to other comprehensive income for
the year ended December 31, 2014 (2013 - $9.3 million expense) in relation to actuarial gains/losses on defined benefit employee
compensation plans.
The tax effects of the significant components of temporary differences that give rise to deferred income tax assets and liabilities are
as follows:
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Deferred income tax assets
Loss carry forwards
Retirement benefit obligations
Other
Deferred income tax liabilities
Depreciable capital assets
Other
Total deferred income taxes, net
as at
As at
december 31, December 31,
2013
2014
$
$
$
$
-
24.6
1.8
26.4
(91.9)
-
(91.9)
(65.5)
$
$
$
$
5.6
17.4
1.3
24.3
(96.6)
(0.5)
(97.1)
(72.8)
Of the amounts included in the table, $0.6 million of the deferred tax assets are forecast to be recovered within twelve months of the
balance sheet date (2013 - $5.9 million deferred tax asset).
15. nEt CHangE In non-CasH WoRKIng CapItal
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Net decrease (increase) in non-cash working capital
2014
11.5
(15.6)
(5.6)
(4.2)
(13.9)
$
$
2013
(0.3)
6.1
2.7
7.6
16.1
$
$
45
consolidated financial statements
16. RElatED paRty tRansaCtIons
In 2014, the Company depended on Canfor to provide
approximately 59% (2013 - 61%) of its fibre supply as well as
to provide certain key business and administrative services
as described below. As a result, of these relationships,
the Company considers its operations to be dependent on
its ongoing relationship with Canfor. The pricing under the
Company’s Fibre Supply Agreement with Canfor was renewed
effective November 1, 2013. The current pricing under the
agreement expires September 1, 2016 and may be amended as
necessary to ensure that it is reflective of market conditions.
CPPI undertakes transactions with various related entities.
These transactions are in the normal course of business and
are generally on similar terms as those accorded to unrelated
third parties, except where noted otherwise.
The Company purchased wood chips, logs and hog fuel from
Canfor sawmills in the amount of $147.5 million in 2014 (2013 -
$126.1 million).
Canfor provides certain business and administrative
services to CPPI under a services agreement. The total value of
the services provided by Canfor in 2014 was $10.6 million (2013 -
$8.7 million). These amounts are included in manufacturing and
product costs and selling and administration costs.
CPPI provides certain business and administrative services
to Canfor under an incidental services agreement. Total value
of the services provided to Canfor in 2014 was $2.8 million
(2013 - $2.5 million). These amounts are included as a cost
recovery in manufacturing and product costs and selling and
administration costs.
The Company markets bleached chemi-thermo mechanical
pulp (“BCTMP”) production from Canfor’s Taylor Pulp Mill
(“Taylor”) for which it earned commissions totaling $1.8 million
in 2014 (2013 - $2.0 million), included in sales. The Company
did not purchase BCTMP from Taylor for resale in 2014 (2013
– $0.2 million). The Company sold NBSk pulp to Taylor for
packaging use totaling $3.4 million in 2014 (2013 – $3.0 million).
Subsequent to the purchase of the Taylor Pulp Mill on January
30, 2015 (Note 21b), the Taylor Pulp Mill became a division of
CPPI and these transactions became internal.
At December 31, the following amounts were included in the balance sheet of the Company:
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Balance Sheet
Included in accounts payable and accrued liabilities:
Canfor
Included in trade and other accounts receivable:
Products marketed for Canfor
key management perSOnnel
as at
As at
december 31, December 31,
2013
2014
$
$
18.0
1.7
$
$
18.9
9.0
key management includes members of the Board of Directors and the Senior executive management team. The compensation expense
for key management for services is as follows:
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Short-term benefits
Post-employment benefits
2014
2013
$
$
3.4
0.2
3.6
$
$
3.9
0.3
4.2
Short-term benefits for most members of the Board of Directors include an annual retainer as well as attendance fees.
Other related partieS
During the year, CPPI made contributions to certain post-employment benefit plans for the benefit of CPPI employees.
Note 10 employee Future Benefits contains further details.
Subsequent to year end CPPI completed the purchase of Canfor’s Taylor Pulp Mill. Note 21 Subsequent events contains further details.
46
Canfor pulp annual report 2014
17. sEgmEnt InFoRmatIon
The Company has two reportable segments which operate as
separate business units and represent separate product lines.
Sales between pulp and paper segments are accounted for
at prices that approximate fair value. These include sales of
slush pulp from the pulp segment to the paper segment.
Information regarding the operations of each reportable
segment is included in the table below. The accounting policies
of the reportable segments are the same as described in Note 3.
( m i l l i o n s o f C a n a d i a n d o l l a r s )
year ended december 31, 2014
Sales to external customers
Sales to other segments
Operating income (loss)
amortization
capital expenditures3
identifiable assets
year ended December 31, 2013
Sales to external customers
Sales to other segments
Operating income (loss)
Amortization
Capital expenditures3
Identifiable assets
The Company’s interest-bearing liabilities are not
considered to be segment liabilities but rather are managed
centrally by the treasury function. Other liabilities are not
split by segment for the purposes of allocating resources and
assessing performance.
pulp
paper
unallocated
elimination
adjustment
$
$
$
$
$
$
$
$
$
$
$
$
816.4
93.8
115.0
59.2
56.2
677.9
738.4
76.2
63.2
66.1
60.1
674.9
162.8
-
22.0
3.4
1.1
57.6
147.1
-
22.7
3.7
0.9
56.7
1.3
-
(11.6)
0.1
0.4
91.9
1.3
-
(12.1)
0.1
0.2
37.0
-
(93.8)
-
-
-
-
-
(76.2)
-
-
-
-
total
980.5
-
125.4
62.7
57.7
827.4
886.8
-
73.8
69.9
61.2
768.6
$
$
$
$
$
$
$
$
$
$
$
$
( 3 ) C a p i t a l e x p e n d i t u r e s r e p r e s e n t c a s h p a i d f o r c a p i t a l a s s e t s d u r i n g t h e p e r i o d a n d i n c l u d e c a p i t a l e x p e n d i t u r e s f i n a n c e d b y g o v e r n m e n t g r a n t s .
geOgraphic infOrmatiOn
CPPI’s products are marketed worldwide, with sales made to customers in a number of different countries. In presenting information
on the basis of geographical location, revenue is based on the geographical location of customers.
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Sales by location of customer
Canada
United States
europe
Asia
Other
18. CommItmEnts
2014
2013
$
$
54.8
301.0
86.3
492.5
45.9
980.5
$
$
41.3
238.3
106.9
464.5
35.8
886.8
At the end of the year, CPPI had contractual commitments for
the construction of capital assets for $0.6 million (2013 - $4.0
million). These commitments are expected to be settled over the
following year.
CPPI has committed to operating leases for property, plant
and equipment. As at December 31, 2014 and 2013, the future
minimum lease payments under these operating leases were
as follows:
( m i l l i o n s o f C a n a d i a n d o l l a r s )
within one year
Between one and five years
Total
as at
As at
december 31, December 31,
2013
2014
$
$
0.8
0.3
1.1
$
$
1.7
1.0
2.7
47
consolidated financial statements
During the year ended December 31, 2014, $2.9 million (2013
- $2.9 million) was recognized as an expense in the income
statement in respect to operating leases.
In addition to the above commitments, the Company has
operational agreements with minimum usage requirements. No
issues were identified with meeting these obligations.
eNeRgy AgReeMeNTS
The Company has entered into three separate energy
agreements with a BC energy company and electricity
transmission provider (the “energy Agreements”) for all
three of the Company’s mills, with commencement dates
ranging from 2006 through 2015. These agreements are for
the commitment of electrical load displacement and the sale
of incremental power from the Company’s pulp and paper
mills. These energy Agreements include incentive grants from
the BC energy company for capital investments to increase
electrical generation capacity, and also call for performance
guarantees to ensure minimum required amounts of electricity
are generated, with penalty clauses if they are not met. As part
of these commitments, the Company has entered into standby
letters of credit for these guarantees. The standby letters
of credit have variable expiry dates, depending on the capital
invested and the length of the energy Agreement involved. As
at December 31, 2014 CPPI had posted $12.2 million of standby
letters of credit (2013 - $12.2 million) under these agreements,
and had no repayment obligations under the terms of any of
these agreements.
At December 31, 2014, CPPI had no amounts drawn (2013 –
$10.6 million) on its operating loans and accounts payable and
accrued liabilities of $123.2 million (2013 - $118.4 million), all of
which are due within twelve months of the balance sheet date.
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, foreign currency, commodity and energy prices.
(i) i ntere St r ate riS k:
CPPI is exposed to interest rate risk through its current
financial assets and financial obligations bearing variable
interest rates.
CPPI utilizes interest rate swaps to reduce its exposure
to financial obligations bearing variable interest rates. At
December 31, 2014, CPPI had $35.0 million in fixed interest rate
swaps (2013 – $105.0 million) with interest rates ranging from
2.32% to 2.34%, maturing in 2015.
(ii) c urrency riSk:
CPPI is exposed to foreign exchange risk primarily related to
the US dollar, as CPPI 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 Company holds financial assets and
liabilities in US dollars. These primarily include US dollar bank
accounts, investments and trade accounts.
An increase (decrease) in the value of the Canadian
dollar by US$0.01 would result in a pre-tax: (i) loss (gain)
of approximately $0.6 million in relation to working capital
balances denominated in US dollars at year end (including cash,
accounts receivable and accounts payable).
A portion of the currency risk associated with US dollar
denominated sales is naturally offset by US dollar denominated
expenses. A portion of the remaining exposure is covered
by foreign exchange collar contracts that effectively limit the
minimum and maximum Canadian dollar recovery related to the
sale of those US dollars.
19. FInanCIal RIsK anD CapItal managEmEnt
financial riSk management
CPPI is exposed to a number of risks as a result of holding
financial instruments. These risks include credit risk, liquidity
risk and market risk.
The CPPI Risk Management Committee manages risk in
accordance with a Board approved Risk Management Controls
Policy. The policy sets out the responsibilities, reporting
and counter party credit and communication requirements
associated with all of the Company’s risk management activity.
Responsibility for overall philosophy, direction and approval is
that of the Board of Directors.
CReDIT RISk:
Credit risk is the risk of financial loss to CPPI if a counterparty to
a financial instrument fails to meet its contractual obligations.
Financial instruments that are subject to credit risk include
cash and cash equivalents and accounts receivable. Cash and
cash equivalents includes cash held through major Canadian
and international financial institutions as well as temporary
investments with an original maturity date of three months or
less. The cash and cash equivalents balance at December 31,
2014 is $76.8 million (2013 – $13.5 million).
CPPI utilizes credit insurance to manage the risk associated
with trade receivables. As at December 31, 2014, approximately
81% (2013 - 87%) of the outstanding trade receivables are
covered under credit insurance. In addition, CPPI requires
letters of credit on certain export trade receivables and
regularly discounts these letters of credit without recourse.
CPPI recognizes the sale of the letters of credit on the
settlement date, and accordingly reduces the related trade
accounts receivable balance. CPPI’s trade receivable balance at
December 31, 2014 was $60.7 million (2013 - $71.0 million). At
December 31, 2014, approximately 98% (2013 – 96%) of the trade
accounts receivable balance was within CPPI’s established
credit terms.
LIQUIDITy RISk:
Liquidity risk is the risk that CPPI will be unable to meet
its financial obligations as they come due. The Company
manages liquidity risk through regular cash-flow forecasting in
conjunction with an adequate committed operating loan facility.
48
Canfor pulp annual report 2014 CPPI had the following foreign exchange derivatives at December 31, 2014 and 2013:
uS dollar collars
0-12 months
as at december 31, 2014 As at December 31, 2013
notional
amount
exchange
rates
Notional
Amount
exchange
Rates
( m i l l i o n s o f
U S d o l l a r s )
( p r o t e c t i o n /
t o p s i d e
p e r d o l l a r )
( m i l l i o n s o f
U S d o l l a r s )
( p r o t e c t i o n /
t o p s i d e
p e r d o l l a r )
$
104.0
$1.11/$1.22
$
90.0
$1.04/$1.11
(iii) cOmm Odit y price ri Sk:
CPPI’s financial performance is dependent on the selling price
of its products and the purchase price of raw material inputs.
Consequently, CPPI is exposed to changes in commodity
prices for pulp and paper, as well as changes in fibre, freight,
chemical and natural gas prices. The markets for pulp and
paper are cyclical and are influenced by a variety of factors.
These factors include periods of excess supply due to industry
capacity additions, periods of decreased demand due to weak
global economic activity, inventory destocking by customers and
fluctuations in currency exchange rates. During periods of low
prices, CPPI is subject to reduced revenues and margins, which
adversely impact profitability.
From time to time, CPPI enters into futures contracts
on commodity exchanges for pulp. Under the Price Risk
Management Controls Policy up to 5% of pulp sales may be sold
in this way.
CPPI had the following pulp futures contracts at December 31, 2014 and 2013:
as at december 31, 2014 As at December 31, 2013
notional
amount
( t o n n e s )
average
rate
( U S d o l l a r s
p e r t o n n e )
Notional
Amount
( t o n n e s )
Average
Rate
( U S d o l l a r s
p e r t o n n e )
-
$
-
12,000
$ 945.00
As at December 31, 2014, the Company had 102 thousand
barrels of wTI oil collars outstanding, which will be settled in
2015, with weighted average protection of $58.14 per barrel
and topside of $77.35 per barrel. As at December 31, 2013, the
Company had no wTI oil collars outstanding.
pulp
Future Sales Contracts
0-12 months
(iv) e nergy p rice riSk:
CPPI is exposed to energy price risk relating to purchases of
natural gas and diesel oil for use in its operations.
The exposure is hedged up to 100% through the use of
floating to fixed swap contracts or option contracts with
maturity dates up to a maximum of eighteen months. In the
case of diesel, CPPI uses western Texas Intermediate oil
(“wTI”) contracts to hedge its exposure.
capital management
CPPI’s objectives when managing capital are to maintain a strong balance sheet and a globally competitive cost structure, that ensure
adequate liquidity to maintain and develop the business through the commodity price cycle.
CPPI’s capital is comprised of net debt and shareholders’ equity:
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Total debt (including operating loans)
Less: Cash and cash equivalents
Net debt (cash)
Total equity
as at
As at
december 31, December 31,
2013
2014
$
$
$
50.0
76.8
(26.8)
489.6
462.8
$
$
$
60.6
13.5
47.1
438.0
485.1
49
consolidated financial statements
The Company has certain financial covenants in its debt obligations
that stipulate maximum net debt to total capitalization ratios and
minimum net worth amounts based on total shareholders’ equity.
The net debt to total capitalization is calculated by dividing total
debt less cash and cash equivalents, by shareholders’ equity plus
total debt less cash and cash equivalents.
CPPI’s strategy is to ensure it remains in compliance with all
of its existing debt covenants, so as to ensure continuous access
to capital. CPPI was in compliance with all its debt covenants for
the years ended December 31, 2014 and 2013.
There were no changes in the Company’s approach to
capital management in the year. Neither the Company nor
any of its subsidiaries are subject to externally imposed
capital requirements.
20. FInanCIal InstRumEnts
claSSificatiOn and meaSurement Of
financial inStrumentS
CPPI’s cash and cash equivalents, accounts receivable, loans
and advances, operating loans, accounts payable and accrued
liabilities, and long-term debt are measured at amortized cost
subsequent to initial recognition.
Derivative instruments are measured at fair value. IFRS 13,
Fair Value Measurement, requires classification of these items
within a hierarchy that prioritizes the inputs to fair
value measurement.
DeRIVATIVe FINANCIAL INSTRUMeNTS
The three levels of the fair value hierarchy are:
Level 1 – Unadjusted quoted prices in active markets for
identical assets or liabilities;
Level 2 – Inputs other than quoted prices that are observable for
the asset or liability, either directly or indirectly;
Level 3 – Inputs that are not based on observable market data.
The Company uses a variety of derivative financial instruments to reduce its exposure to risks associated with fluctuations in foreign
exchange rates, pulp prices, energy costs and interest rates. At December 31, 2014, the fair value of derivative financial instruments
was a net liability of $1.0 million (2013 – net liability of $0.1 million). The fair value of these financial instruments was determined
based on prevailing market rates for instruments with similar characteristics.
The following table summarizes the gain (loss) on derivative financial instruments for the years ended December 31, 2014 and 2013:
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Foreign exchange collars
energy derivatives
Interest rate swaps
Pulp futures
Loss on derivative financial instruments
2014
(0.3)
(0.7)
(0.1)
(0.8)
(1.9)
$
$
2013
0.1
0.1
(0.2)
(0.1)
(0.1)
$
$
These financial instruments are classified as held for trading and as level 2 in the fair value hierarchy. There were no financial
instrument transfers between fair value hierarchy levels during 2014 or 2013.
21. suBsEQuEnt EVEnts
(a) dividendS
On February 4, 2015, the Board of Directors declared a quarterly dividend of $0.0625 per share, payable on February 24, 2015, to
shareholders of record on February 17, 2015.
(B) purchaSe Of taylOr pulp mill
On January 30, 2015, CPPI completed the purchase of the BCTMP Taylor Pulp Mill from Canfor for cash proceeds of approximately $15.0
million including working capital. The transaction also includes a long-term fibre supply agreement under which Canfor will supply
fibre to the Taylor Pulp Mill at prices that approximate fair market value. In addition to the cash proceeds, Canfor may also receive
contingent consideration over a 3 year period, starting January 31, 2015, based on the Taylor Pulp Mill’s annual adjusted operating
income before amortization. On the acquisition date the fair value of the contingent consideration was approximately $1.8 million.
CPPI recognized long-term assets acquired net of liabilities assumed of approximately $2.8 million and net working capital of
approximately $14.0 million. The acquisition has been accounted for in accordance with IFRS 3 Business Combinations.
50
Canfor pulp annual report 2014
aDDItIonal
InFoRmatIon
51
consolidated financial statements summaRy oF ConsolIDatED
pRoDuCtIon anD sHIpmEnts
1st qtr
2nd qtr
3rd qtr
4th qtr
258.7
36.7
237.7
35.4
248.1
35.9
241.1
36.0
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
264.5
34.8
250.0
35.3
220.6
33.8
246.1
30.8
1st qtr
2nd qtr
3rd qtr
4th qtr
222.4
31.3
246.9
39.7
240.5
35.7
258.6
35.8
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
257.9
35.0
255.0
37.2
212.2
35.5
273.3
31.1
year
985.6
144.0
year
981.2
134.7
year
968.4
142.5
year
998.4
138.8
( u n a u d i t e d )
pRoDuCtIon
2014
Pulp – 000 mt
kraft Paper – 000 mt
2013
Pulp – 000 mt
kraft Paper – 000 mt
sHIpmEnts
2014
Pulp – 000 mt
kraft Paper – 000 mt
2013
Pulp – 000 mt
kraft Paper – 000 mt
52
Canfor pulp annual report 2014
2014 sElECtED QuaRtERly
FInanCIal InFoRmatIon
( u n a u d i t e d )
1st qtr
2nd qtr
3rd qtr
4th qtr
year
Sales and income ( m i l l i o n s o f C a n a d i a n d o l l a r s )
Sales
Manufacturing and product costs
Freight and other distribution costs
Amortization
Selling and administration costs
Operating income
Finance expense, net
gain (loss) on derivative financial instruments
Other income (expense), net
Net income before income taxes
Income tax expense
net income
net income attributable to:
equity shareholders of the Company
net income per common share: ( C a n a d i a n d o l l a r s )
Attributable to equity shareholders of the Company
- Basic and diluted
cash generated from (used in) ( m i l l i o n s o f C a n a d i a n d o l l a r s )
Operating activities
Financing activities
Dividend paid
Share purchases
Other
Investing activities
Property, plant, equipment, net
Other
$
$
226.4
138.5
28.9
16.0
6.6
36.4
(1.5)
(1.4)
0.9
34.4
(8.7)
25.7
$
$
252.5
166.4
33.9
15.2
7.4
29.6
(1.3)
0.6
(3.7)
25.2
(6.4)
18.8
$
$
237.6
151.3
32.0
16.3
6.6
31.4
(1.3)
(0.3)
3.0
32.8
(8.5)
24.3
$
$
264.0
179.3
34.3
15.2
7.2
28.0
(1.4)
(0.8)
1.8
27.6
(6.9)
20.7
$
$
980.5
635.5
129.1
62.7
27.8
125.4
(5.5)
(1.9)
2.0
120.0
(30.5)
89.5
$
25.7
$
18.8
$
24.3
$
20.7
$
89.5
$
0.36
$
0.27
$
0.34
$
0.29
$
1.26
$
23.9
$
51.6
$
24.7
$
53.2
$
153.4
(3.5)
-
(7.0)
(10.5)
(10.0)
-
(10.0)
(4.5)
-
(5.6)
(10.1)
(20.2)
-
(20.2)
(4.4)
(2.0)
(0.6)
(7.0)
(16.2)
0.1
(16.1)
(4.4)
-
(0.7)
(5.1)
(11.3)
0.2
(11.1)
(16.8)
(2.0)
(13.9)
(32.7)
(57.7)
0.3
(57.4)
increase in cash and cash equivalents
$
3.4
$
21.3
$
1.6
$
37.0
$
63.3
53
additional information
2013 sElECtED QuaRtERly
FInanCIal InFoRmatIon
( u n a u d i t e d )
1st qtr
2nd qtr
3rd qtr
4th qtr
year
Sales and income ( m i l l i o n s o f C a n a d i a n d o l l a r s )
Sales
Manufacturing and product costs
Freight and other distribution costs
Amortization
Selling and administration costs
Restructuring, mill closure and severance costs
Operating income
Finance expense, net
Foreign exchange gain (loss) on long-term debt
gain (loss) on derivative financial instruments
Other income (expense), net
Net income before income taxes
Income tax expense
net income
net income attributable to:
equity shareholders of the Company
net income per common share: ( C a n a d i a n d o l l a r s )
Attributable to equity shareholders of the Company
- Basic and diluted
cash generated from (used in) ( m i l l i o n s o f C a n a d i a n d o l l a r s )
Operating activities
Financing activities
Long-term debt
Dividend paid
Share purchases
Other
Investing activities
Property, plant, equipment, net
Other
$
$
217.5
143.3
30.9
18.9
5.4
-
19.0
(3.1)
(2.3)
0.7
0.7
15.0
(4.1)
10.9
$
$
227.6
151.7
31.9
19.0
5.5
-
19.5
(2.5)
(3.9)
(2.6)
3.8
14.3
(6.7)
7.6
$
$
196.1
135.1
27.3
16.5
5.9
-
11.3
(3.0)
2.3
1.9
(1.5)
11.0
(1.9)
9.1
$
$
245.6
165.0
33.2
15.5
7.2
0.7
24.0
(3.2)
(3.4)
(0.1)
2.2
19.5
(5.3)
14.2
$
$
886.8
595.1
123.3
69.9
24.0
0.7
73.8
(11.8)
(7.3)
(0.1)
5.2
59.8
(18.0)
41.8
$
10.9
$
7.6
$
9.1
$
14.2
$
41.8
$
0.15
$
0.11
$
0.13
$
0.20
$
0.59
$
28.3
$
44.6
$
14.9
$
69.1
$
156.9
-
(3.6)
-
(0.2)
(3.8)
(6.9)
0.1
(6.8)
-
(3.6)
(1.0)
(3.8)
(8.4)
(7.9)
0.1
(7.8)
-
(3.5)
(1.4)
(0.2)
(5.1)
(26.5)
0.5
(26.0)
(66.6)
(3.5)
-
5.6
(64.5)
(19.9)
0.1
(19.8)
(66.6)
(14.2)
(2.4)
1.4
(81.8)
(61.2)
0.8
(60.4)
increase (decrease) in cash and cash equivalents
$
17.7
$
28.4
$
(16.2)
$
(15.2)
$
14.7
C e r t a i n p r e v i o u s l y p u b l i s h e d f i g u r e s h a v e b e e n r e c l a s s i f i e d t o c o n f o r m t o t h e c u r r e n t p r e s e n t a t i o n .
54
Canfor pulp annual report 2014
DIRECtoRs anD oFFICERs
DIRECtoRs
The names, principal occupations and municipalities of residence of the Directors of the Company as at December 31, 2014 are as
below. For more information visit www.canforpulp.com
peter j.g. Bentley, O.C., O.B.C., LL.D. (2)(3)(4)(5)
Chairman emeritus
Canfor Corporation
Vancouver, British Columbia
charles j. jago, PhD, C.M., O.B.C. (2)(4)
Former President of University of
Northern British Columbia
Prince george, British Columbia
conrad a. pinette (2)(4)(5)
Corporate Director
Vancouver, British Columbia
Stan e. Bracken-horrocks, FCA (1)(3)(5)
Retired Partner of
PricewatehouseCoopers, LLP
kelowna, British Columbia
david m. calabrigo, Q.C.
Senior Vice President, Corporate Development,
Legal Affairs and Corporate Secretary
Canfor Corporation
Vancouver, British Columbia
michael j. korenberg (1)(3)(5)
Deputy Chairman and Managing Director
The Jim Pattison group
Chairman
Canfor Pulp Products Inc.
west Vancouver, British Columbia
william w. Stinson (1)(2)(4)(5)
Chairman and CeO
westshore Terminals Investment Corp.
Vancouver, British Columbia
oFFICERs
The names and municipalities of residence of the officers of the Company and the offices held by each of them as at
December 31, 2014 are as below. For more information visit www.canforpulp.com
michael j. korenberg
Chairman
west Vancouver, British Columbia
alan r. nicholl
Chief Financial Officer
west Vancouver, British Columbia
Sean curran
Vice President, Sales and Marketing
Tsawwassen, British Columbia
don B. kayne
Chief executive Officer
Tsawwassen, British Columbia
Brett robinson
President
Tsawwassen, British Columbia
david m. calabrigo, Q.C.
Corporate Secretary
Vancouver, British Columbia
martin pudlas
Vice President, Operations
Prince george, British Columbia
(1) M e m b e r o f t h e A u d i t C o m m i t t e e , w h i c h r e v i e w s t h e C o m p a n y ’s f i n a n c i a l s t a t e m e n t s , t h e s c o p e a n d r e s u l t s o f t h e e x t e r n a l a u d i t o r ’s w o r k , t h e a d e q u a c y o f i n t e r n a l
a c c o u n t i n g a n d a u d i t p r o g r a m s a n d c o m p l i a n c e w i t h a c c o u n t i n g a n d r e p o r t i n g s t a n d a r d s .
( 2 ) M e m b e r o f t h e J o i n t M a n a g e m e n t R e s o u r c e s a n d C o m p e n s a t i o n C o m m i t t e e , w h i c h o v e r s e e s h u m a n r e s o u r c e s a n d c o m p e n s a t i o n p o l i c i e s a n d e n s u r e s m a n a g e m e n t
d e v e l o p m e n t a n d s u c c e s s i o n p r o g r a m s a r e i n p l a c e .
( 3 ) M e m b e r o f t h e J o i n t C o r p o r a t e g o v e r n a n c e C o m m i t t e e , w h i c h e n s u r e s t h a t t h e C o m p a n y t h r o u g h i t s B o a r d o f D i r e c t o r s s u s t a i n s a n e f f e c t i v e a p p r o a c h t o
c o r p o r a t e g o v e r n a n c e .
( 4 ) M e m b e r o f t h e J o i n t e n v i r o n m e n t a l , H e a l t h a n d S a f e t y C o m m i t t e e , w h i c h d e v e l o p s , r e v i e w s a n d m a k e s r e c o m m e n d a t i o n s o n m a t t e r s r e l a t e d t o t h e C o m p a n y ’s
e n v i r o n m e n t a l , h e a l t h a n d s a f e t y p o l i c i e s , a n d m o n i t o r s c o m p l i a n c e w i t h t h o s e p o l i c i e s a n d w i t h g o v e r n m e n t r e g u l a t i o n s .
( 5 ) M e m b e r o f t h e J o i n t C a p i t a l e x p e n d i t u r e C o m m i t t e e , w h i c h r e v i e w s p r o p o s e d c a p i t a l e x p e n d i t u r e s .
T h e t e r m o f o f f i c e o f e a c h D i r e c t o r e x p i r e s o n t h e d a t e o f t h e n e x t A n n u a l g e n e r a l M e e t i n g o f t h e C o m p a n y .
55
additional information
map oF opERatIons
pRInCE gEoRgE
WEstERn CanaDa
2
1
3
4
5
pulp & paper
Intercontinental Pulp Mill . . . . . . . . . . . . 1
Northwood Pulp Mill . . . . . . . . . . . . . . . . 2
Prince george Pulp and Paper Mill . . . . 3
Taylor Pulp Mill1. . . . . . . . . . . . . . . . . . . . . 4
Canfor Pulp Innovation . . . . . . . . . . . . . . . 5
(1) S u b s e q u e n t t o y e a r e n d , o n J a n u a r y 3 0 , 2 0 15 , C P P I
p u r c h a s e d f r o m C a n f o r t h e B C T M P Ta y l o r P u l p M i l l .
CanFoR pulp InnoVatIon
Canfor Pulp Innovation (CPI) was established and charged with
a “search and apply” mandate for technology which determined
that we adopt an Open Innovation approach to Canfor Pulp’s R&D
investment. Located in a purpose built facility in Burnaby, CPI
is unique in Canada, right-sized and ultra-responsive to Canfor
Pulp’s customers and mills.
CPI operates under 4 strategic themes; cost reduction,
strength & quality, tissue, and new products. Delivering an annual
program comprising of approximately twenty projects, CPI’s
Open Innovation delivery model comprises of 4 levels: CPI staff;
contracted industry leading expertise; and partnerships and
technical contracts.
Sponsored research with an international suite of
collaborators is now delivering new opportunities from our
growing intellectual property portfolio. CPI is delivering
opportunities for continuous customer and mill improvements
contributing to ensuring that Canfor Pulp remains a global
quality and technology leader in NBSk.
56
Canfor pulp annual report 2014 DEFInItIons anD InFoRmatIon
mIll opERatIons
DEFInItIons oF sElECtED FInanCIal tERms
Pulp1 ( 0 0 0 t o n n e s )
kraft Paper ( 0 0 0 t o n n e s )
2014
production
capacity
985.6
144.0
1,065.0
140.0
Book value per common Share is the shareholders’ equity at
the end of the year, divided by the number of common shares
outstanding at the end of the year.
net debt is total debt less cash and cash equivalents and
temporary investments.
net income (loss) per common Share is calculated as
described in Note 12 to the Consolidated Financial Statements.
return on common Shareholders’ equity is equal to net
income (loss) attributable to shareholders of the Company for the
year, divided by the average total shareholders’ equity during
the year.
return on invested capital is equal to operating income (loss),
plus realized gains (losses) on derivatives and other income
(expense), divided by the average invested capital during the
year. Invested capital is equal to capital assets, plus long-term
investments and net non-cash working capital.
working capital is total current assets (including cash and cash
equivalents) less total current liabilities.
(1) S u b s e q u e n t t o y e a r e n d , o n J a n u a r y 3 0 , 2 0 15 , C P P I p u r c h a s e d f r o m C a n f o r
t h e B C T M P Ta y l o r P u l p M i l l , l o c a t e d i n Ta y l o r, B C w i t h a n a n n u a l p r o d u c t i o n
c a p a c i t y o f 2 2 0 , 0 0 0 t o n n e s o f B C T M P.
CoRpoRatE anD sHaREHolDER InFoRmatIon
annual general meeting
The Annual general Meeting
of the shareholders of Canfor
Pulp Products Inc. will be held
at The westin wall Centre,
3099 Corvette way, Richmond,
BC on Tuesday, April 28th,
2015 at 11:00 a.m.
auditors
PricewaterhouseCoopers LLP
Vancouver, BC
transfer agent and registrar
CST Trust Company Inc.
Vancouver, Calgary, Regina,
winnipeg, Toronto, Montreal
and Halifax
Stock listing
Toronto Stock exchange
Symbol: CFX
investor contact
Patrick elliott
Vice President & Treasurer,
Canfor Corporation
t: (604) 661-5441
f: (604) 661-5429
e: patrick.elliott@canfor.com
Rick Remesch
Corporate Controller
t: (604) 661-5221
f: (604) 648-1952
e: rick.remesch@canforpulp.com
canfor pulp products inc.
head Office
#230 – 1700 west 75th
Avenue, Vancouver, BC
V6P 6g2
t: (604) 661-5241
f: (604) 661-5226
e: info@canforpulp.com
www.canforpulp.com
canfor pulp innovation
138 – 8610 glenlyon Parkway,
Burnaby, BC V5J 0B6
t: (604) 228-6710
f: (604) 228-6723
CPPI also produces an
Annual Information Form.
To obtain this publication or
more information about the
company, please contact
Canfor Pulp Products Inc.,
Public Affairs or visit our
website at http://www.
canforpulp.com/investors/
public affairs contact
Corinne Stavness
Director, Public Affairs &
Responsibility
t: (604) 661-5225
f: (604) 661-5219
e: corinne.stavness@canfor.com
57
additional information
58
Canfor pulp annual report 2014 Company overview
CPPI is a leading global supplier of pulp and paper products with operations in
the central interior of British Columbia (“BC”) employing approximately 1,300
people throughout the organization. Canfor Pulp owns and operates three mills
in Prince George, BC with a total capacity of 1.1 million tonnes of Premium
Reinforcing Northern Bleached Softwood Kraft Pulp and 140,000 tonnes of kraft
paper, as well as one mill in Taylor, BC1 with an annual production capacity of
220,000 tonnes of Bleached Chemi-Thermo Mechanical Pulp (“BCTMP”). Canfor
Pulp is the largest North American and one of the largest global producers of
market NBSK Pulp. CPPI shares are traded on The Toronto Stock Exchange
under the symbol CFX.
finanCial HigHligHts
Sales and income ( m i l l i o n s o f C a n a d i a n d o l l a r s )
Sales
Operating income
Net income
Per common share ( C a n a d i a n d o l l a r s )
Net income attributable to equity
shareholders of the Company
Book value
Share price
High
Low
Close - December 31
Financial position ( m i l l i o n s o f C a n a d i a n d o l l a r s )
Working capital
Total assets
Net debt (cash)
Common shareholders’ equity
Additional information2
Return on invested capital - consolidated
Return on common shareholders’ equity
Ratio of current assets to current liabilities
Ratio of net debt to capitalization
Operating income before amortization
( m i l l i o n s o f C a n a d i a n d o l l a r s )
Operating income before amortization margin
Capital expenditures (mil l i o n s of C an a dian d o l l ar s)
2014
980.5
125.4
89.5
1.26
6.92
14.70
9.89
14.56
179.2
827.4
(26.8)
489.6
19.6%
19.3%
2.5:1
-5.8%
188.1
19.2%
57.7
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2013
886.8
73.8
41.8
0.59
6.17
12.00
8.02
10.27
101.0
768.6
47.1
438.0
12.1%
10.1%
1.8:1
9.7%
143.7
16.2%
61.2
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(1) S u b s e q u e n t t o y e a r e n d , o n J a n u a r y 3 0 , 2 0 15 , C P P I p u r c h a s e d f r o m C a n f o r t h e B C T M P
Ta y l o r P u l p M i l l .
( 2 ) S e e D e f i n i t i o n s o f S e l e c t e d F i n a n c i a l Te r m s o n p a g e 5 7.
www.Canfor.Com
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2014
canfor pulp
products inc.
annual
report