Canfor Pulp Products Inc. Annual Report 2015

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FY2015 Annual Report · Canfor Pulp Products Inc.

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C A N F O R P U L P P R O D U C T S I N C .
A N N U A L R E P O R T

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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, BC 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.

FIN AN CIAL HIGHL IGHT S

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 information1

Return on invested capital - consolidated
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)

(1)

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.

2015

1,174.7
143.2
106.6

1.52
6.96

17.02
10.11
13.53

163.9
841.3
32.5
479.7

23.0%
2.1:1
6.3%

208.4
17.7%
68.3

$
$
$

$
$

$
$
$

$
$
$
$

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%
2.5:1
(5.8)%

188.1
19.2%
57.7

$
$
$

$
$

$
$
$

$
$
$
$

WWW.CANFOR.COM

I N N O V A T I O N

The completion of a 32-MW turbine generator at
Intercontinental Pulp means all of our three
Prince George pulp mills are selling power –
and we are closing in on our target to generate a million
megawatt hours of clean, renewable energy annually.

M E S S A G E T O S H A R E H O L D E R S

FROM THE PRESIDENT

Canfor Pulp had another strong year in 2015, achieved through

This is key to pulp customers who are producing increasingly

higher NBSK pulp and kraft paper sales, improved operating

sophisticated products, and depend on high-quality pulp.

rates and shipment volumes and more revenue through our

Our interest in innovation goes beyond manufacturing.

energy investments. Lower NBSK prices were more than

In 2014, we launched Fibre United, a cooperative sales and

offset by a weaker Canadian dollar. In addition, Canfor Pulp

marketing agreement with UPM Pulp. Canfor Pulp sells UPM

completed the acquisiton of the Taylor bleached chemi-thermo-

products in North America and Japan, and UPM sells our

mechanical pulp (“BCTMP”) mill from Canfor in January 2015.

products in Europe and China. The arrangement has been

Subsequent to the acquisition, Taylor’s team has become

successful as we are able to sell a broader offering of products

focused on their quest for top quartile, with opportunities

and offer enhanced technical service to our customers. Fibre

identified within operational excellence, energy efficiency and

United caught the attention of RISI, an authoritative global

higher margin products.

source of forest products information and data. It included

Strong operational performance resulted as improvements

Canfor Pulp on its Top 50 Power List, saying we are “pushing

in the first half of the year delivered excellent results in the

the envelope with a pioneering sales agreement with Finnish-

seconf half and have carried into 2016. This led to increased

based UPM, Fiber United, covering four major markets”.

operating rates at all our NBSK Pulp Mills as we optimized new

In 2015, I was honoured to be part of important events in

equipment and processes.

Prince George. Early in the year, I completed a five-year journey

I am proud of the fact that our modern kraft mills operate

as the executive chair of the Games Host Society and welcomed

as large-scale biorefineries. It allows us to manufacture

500 high school students from across northern BC to Prince

premium pulp products while generating clean energy. In

George when the Canada Winter Games came to the city.

2015, we completed the 32-MW turbine generator unit at

We completed the year by marking the 50th anniversary of

Intercontinental Pulp, and are now generating and selling

the operation of Prince George Pulp and Paper.

power from all three of our Prince George mills. As a result,

These events gave me a chance to look back on Canfor

our total energy revenues were up about 25% from 2014, and

Pulp’s proud past, and look ahead to our strong future. We have

should go higher in 2016 with all three turbines operating

come a long way since 1965 when pulp mills “pulped” wood into

for a full year. We are nearing our goal to generate a million

its cellulose components for paper products with very little

megawatt hours annually.

consideration for the resources that were being used. Today,

In 2015, we earned FortisBC’s Efficiency in Action Award in

we are constantly finding ways to become more efficient with

the industrial sector for upgrades at Prince George Pulp and

water, heat and chemicals, while at the same time improving

Paper that reduced our natural gas use by 67,000 gigajoules in

our environmental foot print. Our modern industry offers so

the first 18 months alone.

many amazing career opportunities – it was an eye opener for

Canfor Pulp continues to be at the forefront of our

many of the students we hosted at the Canada Winter Games.

industry in looking for ways to improve our products and

I expect I will be meeting some of these students again – as

operations. We practice open innovation through Canfor

members of the team of skilled, innovative employees Canfor

Pulp Innovation, maintaining a unique network that includes

Pulp relies on as we continue to meet our quality standards and

world-class consultants in refining and paper making,

develop our next-generation products.

research organizations dedicated to the development of

As we look forward to 2016, we will continue to maintain

next-generation fibre measurement and fibre products, and

our position as an industry leader with strong financial

university researchers.

performance by focusing on lower operating costs while

In 2015, Canfor Pulp became the first company to use the

growing our productivity, optimizing our green energy

Valmet Process Quality Vision system to inspect 100% of the

business and being ready to capitalize on attractive growth

pulp shipped from two of our mills. The system identifies and

opportunities. Our pulp continues to represent the strongest

records dirt and shives in the finished pulp so we can be sure

and highest-quality fibre in the world. The market understands

the pulp delivered to customers meets our high standards.

that there is no substitute for quality, and while markets

CANFOR PULP PRODUCTS INC. ANNUAL REPORT 2015

naturally fluctuate, we see continued demand for NBSK pulp

and paper based on its superior quality and versatility.

I would like to thank our board members for their guidance,

all our employees for their daily contributions, and especially

all of our shareholders for their continued confidence.

Brett Robinson

President

FROM THE CHAIRMAN

Canfor Pulp’s reputation for premium products, unsurpassed

We also brought Canfor Pulp and Canfor closer together in

customer service and cutting-edge technology consistently

2015. Through our fully integrated One Canfor model, we are

earn us immense brand loyalty and respect around the globe.

able to offer consistent execution across all business streams

In 2015, our board supported actions that helped us uphold this

and all geographic regions. It gives us leverage others simply

position, while achieving solid returns. Between our regular

do not have, taking us to the next level where we can attain

quarterly dividend, a special non-recurring dividend and share

efficiencies and outperform competitors.

buy-backs under Canfor Pulp’s normal course issuer bid, we

Canfor Pulp and Canfor have much in common – both

are pleased to have returned more than $122 million to our

depend on high-quality sustainable fibre and both have

shareholders during 2015, while maintaining a strong balance

exceptional people who continually watch for ways to improve

sheet to take advantage of both organic and potential non-

our products, our service and our operations. One Canfor is

organic opportunities.

yielding multiple benefits across both companies.

Our operations teams delivered superior operational

In January 2015, Canfor Pulp acquired Taylor Pulp, a BCTMP

performance in 2015 – setting a combined production record

mill, from Canfor. It is a strong strategic fit for Canfor Pulp, and

in August 2015 of 3,476 tonnes per day across our three Prince

aligns the mill with Canfor Pulp’s core business and operational

George pulp mills. The implementation of the Valmet Process

expertise. And, when Canfor Pulp opened a fully integrated

Quality Vision system to inspect 100% of the pulp shipped

sales office in Seoul, Korea in June 2015, we were pleased that

from two of our mills - Interncontinental and Northwood has

Canfor joined us to represent its products in the Korean market.

been especiallty important to our customers because they are

As a result, we are optimizing our strength in that market, and

making increasingly sophisticated products and have every right

better serving all of our customers – pulp, paper and lumber.

to expect to be able to rely on the high standards they command

I remain grateful to my fellow board members for their

from their suppliers.

advice and leadership, and to our senior management who work

Canfor Pulp manufactures premium pulp and specialty

so well with us to support Canfor Pulp’s success.

paper products for markets around the world – 85% of our

My sincere thanks as well to all of our dedicated employees,

pulp production is premium reinforcing pulp. And the organic

who are responsible for the superb quality, customer service

materials that remain after the pulping process are converted

and operational performance that keep Canfor Pulp at the

into clean, renewable energy that powers our processes and

forefront of our industry, and to our many loyal customers,

British Columbia’s electricity grid. In 2015, we began operating

business partners and shareholders.

a 32-MW turbine generator at the Intercontinental pulp mill,

which means we are now generating power from all three of our

Prince George mills.

Renewable energy is just one example of Canfor Pulp’s

commitment to the environment. All of the fibre we use comes

from British Columbia, and all the forest operations from which

we source fibre are in full legal compliance with provincial

forest laws. In 2015, 82% of this fibre supply was certified to one

of three internationally recognized certification standards.

Michael Korenberg

Chairman of the Board

T E C H N O L O G Y

We never stop looking for ways to improve our premium
products or our production efficiency. We have achieved
higher tensile strengths so customers can reduce
their costs by using less fibre in their paper without
impacting strength or runnability.

C U L T U R E

Safety is our single highest priority, and we take pride
in the fact that our employees consistently keep us a
safety leader in our sector. In 2015, we achieved our
best safety record in the last 12 years.

IN T HIS REPORT

MANAGEMENT’S DISCUSSION & ANALYSIS

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29
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Company Overview
Overview of 2015
Overview of Consolidated Results - 2015 Compared to 2014
Operating Results by Business Segment - 2015 Compared to 2014
Summary of Financial Position
Changes in Financial Position
Liquidity and Financial Requirements
Transactions with Related Parties
Selected Quarterly Financial Information
Three-Year Comparative Review
Fourth Quarter Results
Specific Items Affecting Comparability
Outlook
Critical Accounting Estimates
Future Changes in Accounting Policies
Risks and Uncertainties
Outstanding Share Data
Disclosure Controls and Internal Controls Over Financial Reporting

30 CONSOLIDATED FINANCIAL STATEMENTS

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Management’s Responsibility
Independent Auditor’s Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Other Comprehensive Income (Loss)
and Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements

ADDITIONAL INFORMATION

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Summary of Consolidated Production and Shipments
2015 Selected Quarterly Financial Information
2014 Selected Quarterly Financial Information
Directors and Officers
Map of Operations
Canfor Pulp Innovation
Mill Operations
Corporate and Shareholder Information
Definitions of Selected Financial Terms

MANAGEMENT’S
DISCUSSION & ANALYSIS

ThisManagement’sDiscussionandAnalysis(“MD&A”)providesa
reviewofCanforPulpProductsInc.’s(“CPPI”or“theCompany”)
financialperformancefortheyearendedDecember31,2015
relative to the yearended December31, 2014, and the financial
positionoftheCompanyatDecember31,2015. Itshouldbe
readinconjunctionwithCPPI’sAnnualInformationFormand
itsauditedconsolidatedfinancialstatementsandaccompanying
notesfortheyearsendedDecember31,2015and2014. The
financialinformationcontainedinthisMD&Ahasbeenprepared
inaccordancewithInternationalFinancialReportingStandards
(“IFRS”),whichistherequiredreportingframeworkforCanadian
publiclyaccountableenterprises.

Throughoutthisdiscussion,referenceismadetoOperating

IncomebeforeAmortizationwhichCPPIconsiderstobea
relevantindicatorformeasuringtrendsintheCompany’s
performanceanditsabilitytogeneratefundstomeetitsdebt
serviceandcapitalexpenditurerequirements,andtopay
dividends. ReferenceisalsomadetoAdjustedNetIncome(Loss)
(calculatedasNetIncome(Loss)lessspecificitemsaffecting
comparabilitywithpriorperiods–forthefullcalculation,see
reconciliationincludedinthesection“AnalysisofSpecific
MaterialItemsAffectingComparabilityofNetIncome(Loss)”)
andAdjustedNetIncome(Loss)perShare(calculatedas
Adjusted NetIncome (Loss)divided byweighted average number
ofsharesoutstandingduringtheperiod). OperatingIncome
beforeAmortization,AdjustedNetIncome(Loss)andAdjusted
NetIncome(Loss)perSharearenotgenerallyacceptedearnings
measuresandshouldnotbeconsideredasanalternativetonet
incomeorcashflowsasdeterminedinaccordancewithIFRS. As
thereisnostandardizedmethodofcalculatingthesemeasures,
CPPI’sOperatingIncome before Amortization, Adjusted Net
Income(Loss)andAdjustedNetIncome(Loss)perSharemay
notbedirectlycomparablewithsimilarlytitledmeasuresused
byothercompanies. ReconciliationsofOperatingIncomebefore
AmortizationtoOperatingIncome(loss)andAdjustedNetIncome
(Loss)toNetIncome(Loss)reportedinaccordancewithIFRSare
includedinthisMD&A.

Factorsthatcouldimpactfutureoperationsarealso
discussed. Thesefactorsmaybeinfluencedbyknownand
unknownrisksanduncertaintiesthatcouldcausetheactual
resultstobemateriallydifferentfromthosestatedinthis
discussion. Factorsthatcouldhaveamaterialimpactonany
futureorientedstatementsmadehereininclude,butarenot
limitedto:generaleconomic,marketandbusinessconditions;
productsellingprices;rawmaterialandoperatingcosts;
currencyexchangerates;interestrates;changesinlawand
publicpolicy;theoutcomeoflabourandtradedisputes;and
opportunitiesavailabletoorpursuedbyCPPI.

AllfinancialreferencesareinmillionsofCanadiandollars
unlessotherwisenoted. Theinformationinthisreportisasat
February17,2016.

FORWARDLOOKINGSTATEMENTS

CertainstatementsinthisMD&Aconstitute“forward-
lookingstatements”whichinvolveknownandunknownrisks,
uncertaintiesandotherfactorsthatmaycauseactualresults
tobemateriallydifferentfromanyfutureresults,performance
orachievementsexpressedorimpliedbysuchstatements.
Wordssuchas“expects”,“anticipates”,“projects”,“intends”,
“plans”,“will”,“believes”,“seeks”,“estimates”,“should”,“may”,
“could”,andvariationsofsuchwordsandsimilarexpressions
areintendedtoidentifysuchforward-lookingstatements. These
statementsarebasedonmanagement’scurrentexpectations
andbeliefsandactualeventsorresultsmaydiffermaterially.
Therearemanyfactorsthatcouldcausesuchactualeventsor
resultsexpressedorimpliedbysuchforward-lookingstatements
todiffermateriallyfromanyfutureresultsexpressedorimplied
bysuchstatements. Forward-lookingstatementsarebasedon
currentexpectationsandtheCompanyassumesnoobligationto
updatesuchinformationtoreflectlatereventsordevelopments,
exceptasrequiredbylaw.

CANFOR PULP ANNUAL REPORT 2015

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, 2015 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, a Bleached Chemi-Thermo Mechanical
Pulp (“BCTMP”) mill located in Taylor, British Columbia and a
marketing group based in Vancouver, British Columbia.

At December 31, 2015, Canfor Corporation (“Canfor”) held
a 51.9% interest in CPPI, an increase of 1.4% from December
31, 2014 as a result of CPPI’s share purchases in 2015 under a
Normal Course Issuer Bid. Further discussion of the Normal
Course Issuer Bid is provided in the “Liquidity and Financial
Requirements” section of this document.

CPPI employs 1,278 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, 2015.

SIMPLIFIED OWNERSHIP STRUCTURE

Canfor
Corporation
(British Columbia)

Shareholders

100% of Shares

48.1% of Shares

Canadian
Forest
Products Ltd.
(British Columbia)

51.9%
of Shares

Canfor Pulp
Products Inc.
(British Columbia)

100% of Shares

Canfor
Pulp Ltd.
(Canada)

The Pulp and Paper Business

PULP

The Company owns and operates three NBSK pulp 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.
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 of 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.

On January 30, 2015, the Company purchased from Canfor,

the Taylor pulp mill which has an annual capacity of 220,000
tonnes of BCTMP. Further discussion of the purchase is provided
in “Transactions with Related Parties”, later in this document.

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.

MANAGEMENT’S DISCUSSION AND ANALYSIS

During 2015, the Company paid a special dividend of $1.125

per common share and continued its quarterly dividend of
$0.0625 per common share returning a total of $96.5 million
to shareholders in the year. Share purchases under the
Company’s Normal Course Issuer Bid were also expanded
during the year with just under 1.9 million common shares or
approximately 2.7% of the Company’s share capital repurchased
in 2015. The Company maintained its strong balance sheet with
no amounts drawn on its operating loan facility and low net debt
to capitalization levels through 2015, finishing the year with net
debt of $32.5 million and a net debt to total capitalization ratio
of 6.3%.

A review of the more significant developments and results

by operating segment in 2015 follows.

MARKETS AND PRICING

(i) PULP – INCREMENTAL HARDWOOD CAPACITY
TRANSLATES INTO DOWNWARD PRESSURE ON PRICING
IN 2015 BUT IMPACT MORE THAN OFFSET BY FAVOURABLE
CURRENCY MOVEMENTS

Global softwood pulp markets saw downward pressure through
2015 in all regions. While overall global pulp demand was
steady, additional hardwood pulp capacity, principally from
South America, was absorbed into global markets, particularly
China during the year. Global softwood producer inventories
increased in the first quarter of 2015 as producers ran well with
limited maintenance downtime, before reversing in the second
quarter as many producers took their seasonal maintenance
outages. In the second half of 2015, global softwood producer
inventory levels remained at the high end of the balanced range.

The benchmark North American NBSK pulp list price
averaged US$972 per tonne1 in 2015, a decrease of US$53 per
tonne, or 5%, from the prior year. List prices to Europe and
China were also under pressure in 2015, down US$78 and
US$89 per tonne, respectively. As outlined above, more than
offsetting the lower pricing was a 14% weaker Canadian dollar
resulting in overall improved sales realizations in Canadian
dollar terms.

The following charts show the NBSK pulp list price movements

in 2015 before taking account of customer discounts and rebates
(Chart 1) and the global pulp inventory levels (Chart 2).

OVERVIEW OF 2015

The Company had another strong year in 2015, as highlighted
by its return on invested capital of 23%, which was up
approximately 3% from the solid financial performance reported
for 2014. This was achieved through higher NBSK pulp and
kraft paper sales realizations, which were boosted by a weaker
Canadian dollar, improved operating rates and shipment
volumes, as well as greater contributions from the Company’s
recent energy investments.

The significant weakening of the Canadian dollar through
2015 more than offset the impact of increased hardwood pulp
supply which added downward pressure to softwood pulp prices
during the year. NBSK pulp list prices to North America started
the year above US$1,000 per tonne and trended modestly lower
through 2015 before finishing the year at US$940 per tonne.
Overall average discounts to the list price in 2015 were up
slightly compared to the prior year. Pulp list prices to China
and Europe saw more pronounced declines, down 12% and 8%
in 2015, respectively. Global pulp demand was relatively stable
in 2015 while global inventory levels were on the high end of
the balanced range through most of the year. Lower NBSK
pulp prices were more than offset by a 14% weakening of the
Canadian dollar, enabling the Company to deliver higher year-
over-year unit sales realizations.

Operational excellence remained a top priority in 2015, with
the Company seeing solid productivity progress with increased
operating rates at all its NBSK pulp mills, in part reflecting
improved equipment reliability compared to the prior year.
Following several capital upgrades over the last few years,
operational performance stabilized and fewer operational
disruptions were experienced as the mills optimized new
equipment and processes. In 2016, Management remains
focused on operational excellence and is targeting further
operating rate improvements.

Energy revenues continued to grow in 2015 with the

turbines at all three NBSK pulp mills now operating and selling
power. The last of these at the Intercontinental Pulp mill was
completed in early 2015 and started selling power in April 2015.
Total energy revenues were up approximately 25% from 2014
and further growth is forecast for 2016 as all three turbines
operate for a full year.

The Company’s paper business also performed well in 2015
following its strong operating performance in the prior year. In
a similar fashion to NBSK pulp markets and sales realizations,
the weakening of the Canadian dollar in 2015 more than offset
somewhat weaker kraft paper US dollar denominated prices
during the year resulting in higher kraft paper sales realizations
compared to 2014.

As mentioned above, CPPI purchased the Taylor pulp mill
from Canfor at the beginning of 2015, expanding into the BCTMP
market as well as securing additional long-term fibre supply
for the Company. In contrast to NBSK pulp markets, BCTMP
markets remained under significant pressure during 2015
with prices declining steadily through most of the year before
stabilizing somewhat in the fourth quarter. The lower prices
were partly mitigated by the 14% weaker Canadian dollar,
but not enough to prevent the Taylor pulp mill from incurring
operating losses in 2015.

(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 .

CANFOR PULP ANNUAL REPORT 2015

CHART 1 – NBSK PULP LIST PRICE DELIVERED TO U.S. –
IN US AND CANADIAN DOLL ARS

CAPITAL AND OPERATIONS REVIEW

$/tonne

$1,400

$1,300

$1,200

$1,100

$1,000

$900

$800

$700

$600

$500

2009

2010

2011

2012

2013

2014

2015

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 SOF T WOOD PULP INVENTORIE S

Days of Supply

2009

2010

2011

2012

2013

2014

2015

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

Since the beginning of 2014, CPPI’s sales network has
represented and co-marketed UPM-Kymmene (“UPM”) pulp
products in North America and Japan, while UPM’s pulp
sales network represent and co-market CPPI’s products in
Europe and China, as part of a strategic sales and marketing
cooperation agreement with UPM. This arrangement has been
working very well for both parties, allowing both CPPI and
UPM to sell a broader offering of pulp products and offering
enhanced technical service to customers.

(ii) PAPER - KRAFT PAPER MARKETS SOFTEN IN 2015 BUT
RECEIVE BOOST FROM WEAKER CANADIAN DOLLAR

Kraft bleached paper markets came under pressure through
2015. Offshore markets saw price declines through the year
while decreases in North American markets were seen in the
latter half of 2015. The Paper Shipping Sack Manufacturers’
Association (“PSSMA”) reported that total sack paper shipments
to the US for 2015 were down 7% compared to 2014. On a more
positive note, Canadian dollar kraft paper sales realizations
reflected the positive impact of the lower Canadian dollar
during the year.

IMPROVED EQUIPMENT RELIABILITY AND FOCUS ON
OPERATIONAL EXCELLENCE DRIVING INCREASED NBSK
OPERATING RATES IN 2015; ENERGY BUSINESS DELIVERING
TARGETED EARNINGS

Total NBSK production increased from 2014, reflecting
additional operating days and improved operating rates in 2015.
NBSK operating rates exceeded target levels and improved by
approximately 75 tonnes per day (2%) on average in 2015. Kraft
paper production was down somewhat from 2014 reflecting
record operating rates in the prior year, but the paper machine
still performed at historically high rates. Notwithstanding the
depressed BCTMP markets, the Taylor pulp mill operated at or
near target rates through most of 2015. Scheduled maintenance
outages were completed at all facilities in 2015.

Energy revenues increased in 2015 reflecting a full year of
energy output from the Northwood pulp mill turbine and nine
months of output from the Intercontinental pulp mill turbine
which started selling power at the beginning of April. With all
three turbines operating, the Company will be 100% energy
self-sufficient and remains on track to deliver its targeted
earnings and cash flow for 2016 and beyond.

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 new and sustainable benefits from further integration
and alignment, specifically in the areas of residual fibre
management, transportation and logistics. The integration
of the Taylor pulp mill with CPPI has been seamless and a
number of opportunities to further improve Taylor’s operating
performance have been identified.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OVERVIEW OF CONSOLIDATED RESULTS – 2015 COMPARED TO 2014

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
Loss on derivative financial instruments3
Net income
Net income per share, basic and diluted
ROIC – Consolidated4
Average exchange rate (US$/CDN$)5

2015

$ 1,174.7
208.4
$
143.2
$
(8.8)
$
106.6
$
1.52
$
23.0%
0.782

2014

980.5
188.1
125.4
(1.9)
89.5
1.26
19.6%
0.905

$
$
$
$
$
$

( 2 )

( 3 )

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 .

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 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
Acquisition of Taylor Pulp Mill
Share purchases
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
Mark-to-market gain on Taylor Pulp contingent consideration7
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

2015

2014

$
$
$
$
$
$

$
$
$
$
$

$
$
$
$
$
$
$

$
$
$
$
$

$
$
$

127.0
27.6
(11.4)
143.2
65.2
208.4

(32.9)
(3.9)
(36.0)
9.8
145.4

(96.5)
(2.7)
(68.3)
(12.6)
(25.3)
0.7
(59.3)

2015

106.6
6.5
(1.3)
5.2
111.8

1.52
0.07
1.59

$
$
$
$
$
$

$
$
$
$
$

$
$
$
$
$
$
$

$
$
$
$
$

$
$
$

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

2014

89.5
1.4
-
1.4
90.9

1.26
0.02
1.28

( 7 ) A s p a r t o f t h e p u r c h a s e o f t h e Ta y l o r p u l p m i l l o n J a n u a r y 3 0 , 2 0 15 , C P P I m a y p a y c o n t i n g e n t c o n s i d e r a t i o n b a s e d o n t h e Ta y l o r p u l p m i l l ’s f u t u r e e a r n i n g s o v e r a t h r e e y e a r

p e r i o d . O n t h e a c q u i s i t i o n d a t e , t h e c o n t i n g e n t c o n s i d e r a t i o n w a s v a l u e d a t $1. 8 m i l l i o n . D u r i n g 2 0 15 , t h e c o n t i n g e n t c o n s i d e r a t i o n l i a b i l i t y w a s r e v a l u e d t o n i l , r e s u l t i n g
i n a g a i n o f $1. 8 m i l l i o n ( b e f o r e t a x ) r e c o r d e d t o O t h e r I n c o m e ( s e e f u r t h e r d i s c u s s i o n i n t h e “A c q u i s i t i o n o f Ta y l o r P u l p M i l l ” s e c t i o n ) .

CANFOR PULP ANNUAL REPORT 2015

The Company recorded net income of $106.6 million, or $1.52
per share, for the year ended December 31, 2015, up $17.1
million, or $0.26 per share, from $89.5 million, or $1.26 per
share, reported for the year ended December 31, 2014.

Operating income for 2015 was $143.2 million, up $17.8

million from operating income of $125.4 million for 2014.
Higher operating earnings were driven principally by stronger
NBSK pulp and kraft paper sales realizations, increased

pulp shipment volumes and, to a lesser extent, higher energy
revenues, all of which more than offset a market-related
increase in fibre costs and challenging BCTMP markets in 2015.

A more detailed review of the Company’s operational
performance and results is provided in “Operating Results by
Business Segment – 2015 compared to 2014”, which follows this
overview of consolidated results.

OPERATING RESULTS BY BUSINESS SEGMENT – 2015 COMPARED TO 2014

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 2015 and 2014 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 amortization8
Operating income
Capital expenditures
Average pulp price delivered to US - US$9
Average pulp price in Cdn$
Production – pulp (000 mt)10
Shipments – pulp (000 mt)10
Marketed on behalf of Canfor (000 mt)

2015

$ 1,006.1
188.5
$
127.0
$
62.5
$
972
$
1,243
$
1,215.4
1,227.6
15.2

$
$
$
$
$
$

2014

816.4
174.2
115.0
56.2
1,025
1,133
985.6
968.4
207.0

( 8 )

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 .

( 9 ) 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 ) .

(10 ) P u l p p r o d u c t i o n a n d s h i p m e n t v o l u m e s i n 2 0 15 i n c l u d e B C T M P v o l u m e s s u b s e q u e n t t o C P P I ’s a c q u i s i t i o n o f t h e Ta y l o r B C T M P m i l l o n J a n u a r y 3 0 , 2 0 15 ( S e e f u r t h e r

d i s c u s s i o n i n t h e “A c q u i s i t i o n o f Ta y l o r P u l p M i l l ” s e c t i o n ) . F o l l o w i n g t h e a c q u i s i t i o n , C P P I n o l o n g e r m a r k e t s a n y p r o d u c t o n b e h a l f o f C a n f o r.

OVERVIE W
The Pulp segment reported operating income of $127.0 million
for 2015, up $12.0 million from $115.0 million for 2014. The
improvement in operating income compared to 2014 was principally
the result of higher NBSK unit sales realizations, increased NBSK
pulp shipments and operating rates as well as higher energy
revenues. Partly offsetting these factors were market-driven
increases to NBSK pulp fibre costs and operating losses at the
Taylor pulp mill which was acquired on January 30, 2015.

MARKE TS
As mentioned above, global softwood pulp markets saw
downward pressure on prices in all regions through 2015. While
overall global pulp demand was steady, additional hardwood
pulp capacity, principally from South America, was absorbed
into global markets, particularly China. Global shipments of
bleached softwood kraft pulp were up slightly compared to
2014. Global softwood pulp producer inventories trended as
forecast in the first half of 2015, increasing in the first quarter
of 2015 with limited industry maintenance downtime; and then
falling through the spring maintenance period in the second
quarter of 2015. Thereafter, inventories remained at the high
end of the balanced range through the second half of 2015.
At the end of December 2015, World 2011 producers of
bleached softwood pulp inventories were at 29 days’ supply,
remaining within the balanced range, due in part to strong
shipments towards the end of the year. By comparison,
December 2014 inventories were at 31 days’ supply. Market
conditions are generally considered balanced when inventories
are in the 27-30 days of supply range.

(11) 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 ” ) .

MANAGEMENT’S DISCUSSION AND ANALYSIS

SALE S
The Company’s pulp shipments in 2015 were 1,227,600 tonnes,
up 259,200 tonnes, or 27%, from 2014 largely reflecting the
addition of the Taylor pulp mill on January 30, 2015. Excluding
the Taylor pulp mill, NSBK shipments were modestly higher
than 2014, for the most part reflecting stronger production
volumes in the second half of 2015, and included proportionately
higher shipments to North America and China than 2014.
As mentioned, North American NBSK pulp list prices
averaged US$972 per tonne in 2015, down US$53, or 5%, from
US$1,025 per tonne while average NBSK pulp list prices to
Europe and China saw more pronounced declines in 2015,
down US$78 per tonne and US$89 per tonne respectively.
Despite lower list prices, NBSK pulp unit sale realizations were
modestly higher in 2015 largely reflecting the benefit of the
14% weaker Canadian dollar in 2015. Customer discounts and
rebates on NBSK sales in 2015 were up slightly compared to the
prior year.

BCTMP products historically sell at a discount to NBSK
pulp prices; as such, the inclusion the Taylor pulp mill’s BCTMP
products in the Company’s overall product offering lowered
the average overall pulp unit sales realizations through 2015.
BCTMP markets were under pressure for much of 2015 and as
a result, US-dollar BCTMP prices trended downward through
the year.

Revenues in the pulp segment were bolstered by higher
energy revenue in 2015 largely reflecting the incremental power
production from the Intercontinental pulp mill turbine which
started selling power in April 2015.

OPER ATIONS
Pulp production, at 1,215,400 tonnes in 2015, was 229,800
tonnes, or 23%, higher than 2014 principally reflecting the
acquisition of the Taylor pulp mill on January 30, 2015.
Excluding BCTMP production from the Taylor pulp mill
subsequent to the acquisition date, NBSK production was
modestly higher reflecting additional operating days and higher
operating rates, particularly in the second half of 2015. 2015
results included maintenance outages at all of the Company’s
pulp mills with reductions in overall production volumes
relatively consistent with the prior year.

Pulp unit manufacturing costs were slightly lower compared

to 2014 principally reflecting the inclusion of the lower cost
BCTMP Taylor pulp operation in 2015. Excluding the impacts
of Taylor pulp, NBSK unit manufacturing costs were up slightly
from 2014 principally due to modestly higher fibre costs while
unit conversion costs were broadly in line with the prior year.
The increase in NBSK fibre costs compared to 2014 resulted
largely from market-driven increases in delivered sawmill
residual chips somewhat offset by lower freight costs and lower
prices for whole-log chips in 2015.

PAPER

SELECTED FINANCIAL INFORMATION AND STATISTICS – PAPER

Summarized results for the Paper segment for 2015 and 2014 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 amortization12
Operating income
Capital expenditures
Production – paper (000 mt)
Shipments – paper (000 mt)

(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 .

OVERVIE W
Operating income for the paper segment was $27.6 million
for 2015 representing a $5.6 million increase from the prior
year largely reflecting significantly higher paper unit sales
realizations, largely the result of the 14% weaker Canadian
dollar, partly offset by higher unit manufacturing costs and
lower paper shipment volumes in 2015.

MARKE TS
As previously mentioned, Kraft bleached paper markets
came under pressure in 2015. Offshore markets saw price
declines through the year while the North American market
experienced weakness in the latter half of 2015. More than
offsetting lower kraft bleached paper prices was the benefits
of the weaker Canadian dollar in 2015. The Paper Shipping
Sack Manufacturers’ Association (“PSSMA”) reported total sack
paper shipments to the US, down 7% compared to 2014.

The Company’s prime bleached paper shipments in 2015
represented 85% of prime sales volumes, a 3% improvement
from 2014.

CANFOR PULP ANNUAL REPORT 2015

$
$
$
$

2015

166.7
31.2
27.6
5.8
136.8
133.4

$
$
$
$

2014

162.8
25.4
22.0
1.1
144.0
142.5

SALE S
The Company’s paper shipments in 2015 were 133,400 tonnes,
a decrease of 9,100 tonnes, or 6%, from 2014 primarily the
result of lower production levels during 2015. Paper unit sales
realizations were significantly higher in 2015 reflecting the
favourable impact of the 14% weaker Canadian dollar as well as
proportionately higher prime bleached shipments, which more
than offset lower US-dollar prices.

OPER ATIONS
Paper production in 2015 was 136,800 tonnes, down 7,200
tonnes, or 5%, from 2014 primarily reflecting modestly lower
operating rates and additional scheduled maintenance days
in 2015. In the prior year, the Company’s paper machine set
annual production and operating rate records. Paper unit
manufacturing costs were moderately higher compared to 2014,
reflecting higher slush pulp costs (linked to higher Canadian
dollar market pulp prices) and increased operating supply costs
coupled with lower production levels in 2015.

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
Loss on derivative financial instruments
Other income (expense), net

2015

(11.4)
(6.0)
(8.8)
14.5

$
$
$
$

2014

(11.6)
(5.5)
(1.9)
2.0

$
$
$
$

CORPORATE COSTS

Corporate costs, which comprise corporate, head office and
general and administrative expenses, were $11.4 million in 2015
and were down slightly from the prior year.

FINANCE INCOME AND EXPENSE

Net finance expense for 2015 was $6.0 million, up $0.5 million from
2014. The increase principally reflected higher finance expense
associated with the Company’s letters of credit as well as slightly
higher employee future benefit net interest costs. These factors
were partly offset by lower interest expense on the Company’s
operating loan and term debt balances compared to 2014.

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.

In 2015, the Company recorded a net loss of $8.8 million

related to its derivative financial instruments, principally
reflecting realized losses on the Company’s foreign exchange
and crude oil collars as a result of the significant declines in the
Canadian dollar and oil prices through 2015.

Additional information on the derivative financial

instruments in place at year end can be found in the “Liquidity
and Financial Requirements” section, later in this document.

OTHER INCOME (EXPENSE), NET

Other income, net for 2015 of $14.5 million included favourable
foreign exchange movements on US dollar denominated
cash, receivables and payables resulting from the significant
weakening of the Canadian dollar through the year. Also
included in other income, net was a $1.8 million mark-to-market
gain related to the Taylor pulp mill contingent consideration
liability, reflecting lower forecast BCTMP prices over the
contingent consideration period (see further discussion in the
“Acquisition of Taylor Pulp Mill” section).

INCOME TAX EXPENSE

The Company recorded an income tax expense of $36.3 million in 2015 with an overall effective tax rate of 25% (2014: 25%).
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
2015 – 26.0% (2014 – 26.0%)
Add (deduct):

Entities with different income tax rates and other tax adjustments
Permanent difference from capital gains and other non-deductible items

Income tax expense

2015

142.9

(37.2)

1.0
(0.1)
(36.3)

2014

120.0

(31.2)

0.8
(0.1)
(30.5)

OTHER COMPREHENSIVE INCOME (LOSS)

CPPI measures its accrued benefit obligations and the fair
value of plan assets for accounting purposes at the end of each
quarter. Any actuarial gains or losses which arise are recognized
immediately by means of a credit or charge through other
comprehensive income. For 2015, an after-tax gain of $5.6 million
was recorded in other comprehensive income, including gains
on the defined benefit post-employment pension plans and the
other non-pension post-employment benefits. The gains in 2015
largely reflected an increase in the discount rate used to value
the net defined benefit obligation and a return on pension plan

assets greater than the discount rate coupled with a reduction
in the medical claims cost assumptions in the non-pension post-
employment plans. Offsetting these factors were unfavourable
actuarial experience adjustments in both the non-pension
and pension plans. In 2014, the after-tax loss of $19.1 million
recorded to other comprehensive income 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.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SUMMARY OF FINANCIAL POSITION

The following table summarizes CPPI’s financial position as at December 31, 2015 and 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 , 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
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

2015

17.5
146.4
163.9
532.3
0.9
697.1

50.0
93.0
6.2
68.2
479.7
697.1

2.1 : 1
6.3%

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)%

The ratio of current assets to current liabilities at the end of
2015 was 2.1:1, compared to 2.5:1 at the end of 2014, partly the
result of lower cash and cash equivalents with the payment
of a special dividend during 2015. See further discussion in
“Changes in Financial Position” section.

The Company’s net debt to capitalization was 6.3% at
December 31, 2015 (December 31, 2014: (5.8)%) reflecting
strong financial performance during 2015 along with the special
dividend paid out during the year.

CHANGES IN FINANCIAL POSITION

At the end of 2015, CPPI had $17.5 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 (decrease) in cash and cash equivalents

2015

2014

145.4
(124.5)
(80.2)
(59.3)

153.4
(32.7)
(57.4)
63.3

The changes in the components of these cash flows during 2015 are discussed in the following sections.

OPERATING ACTIVITIES

For the 2015 year, CPPI generated cash from operations of
$145.4 million, down $8.0 million from cash generated of $153.4
million in the previous year. Higher cash earnings in 2015 were
more than offset by increased tax installment payments and
an increase in non-cash working capital at December 31, 2015.
The increase in non-cash working capital in 2015 in large part
reflected increased pulp shipments towards the end of the year
and the impact of the weaker Canadian dollar on translation of
US-dollar denominated accounts receivable balances, as well
as higher wood chip inventory levels offset in part by higher
accounts payable balances and lower finished inventory levels.

FINANCING ACTIVITIES

In 2015, cash used in financing activities of $124.5 million was
$91.8 million higher than the $32.7 million used in the prior
year. During 2015, CPPI paid a special dividend of $79.0 million,
or $1.125 per common share, as well as quarterly dividends of
$17.5 million, or $0.0625 per common share in each quarter.

The Company also increased share repurchase activity under
its Normal Course Issuer Bid in 2015, spending a total of $25.3
million on common share repurchases during the year (see
further discussion of the shares purchased under a Normal
Course Issuer Bid in the following “Liquidity and Financial
Requirements” section). Finance expenses paid during 2015
was consistent with the prior year.

INVESTING ACTIVITIES

Net cash used for investing activities in 2015 was $80.2 million,
compared to $57.4 million used in 2014. Capital expenditures
of $68.3 million in 2015 included final payments related to the
Intercontinental pulp mill turbine upgrade as well as increased
capital maintenance spending and capital expenditures on
certain projects in the paper segment. On January 30, 2015,
CPPI completed the acquisition of the Taylor pulp mill from
Canfor for cash consideration of $12.6 million (see further
discussion in the “Acquisition of Taylor Pulp Mill” section).

CANFOR PULP ANNUAL REPORT 2015

2016 PROJECTED CAPITAL SPENDING AND
DEBT REPAYMENTS

Based on its current outlook for 2016, assuming no
deterioration in market conditions during the year, the
Company anticipates that it will invest approximately $75.0
million in capital projects (2015 - $68.3 million), which will
consist primarily of various improvement projects as well
as maintenance of business expenditures, including major
maintenance spending. There are no scheduled debt payments
in 2016. CPPI has sufficient liquidity in its cash reserves and
operating loans to finance its planned capital expenditures as
required during 2016.

DERIVATIVE FINANCIAL INSTRUMENTS

As at December 31, 2015, the Company had no derivative
financial instruments outstanding.

a. CPPI uses US dollar derivative financial instruments to partly
hedge its exposure to currency risk. During the year, the
Company recognized losses of $8.3 million on US dollar collars
as a result of the significant weakening of the Canadian dollar
over the course of 2015.

b. CPPI partly uses Western Texas Intermediate oil (“WTI”)

contracts as proxy to hedge its diesel purchases. During the
year, the Company recognized losses of $0.4 million on its oil
collars reflecting the decline in oil prices in 2015.

c. From time to time, CPPI enters into futures contracts on

commodity exchanges for pulp. The Company did not enter into
any pulp futures contracts during 2015.

d. CPPI utilizes interest rate swaps to reduce its exposure to financial

obligations bearing variable interest rates. During 2015, CPPI
recognized a loss of $0.1 million on its interest rate swaps.

LIQUIDITY AND FINANCIAL REQUIREMENTS

OPERATING LOANS

At December 31, 2015, the Company had $130.0 million of
unsecured operating loan facilities which were unused, except
for $13.0 million reserved for several standby letters of credit,
leaving $117.0 million of available undrawn operating loans.

DEBT COVENANTS

CPPI has certain financial covenants on its debt obligations
that stipulate maximum debt to total capitalization ratio. The
debt to total capitalization is calculated by dividing total debt by
shareholders’ equity plus total debt. In 2015, the minimum net
worth financial covenant, which was based on shareholders’
equity, was removed.

In circumstances when 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, 2015.

NORMAL COURSE ISSUER BID

On March 5, 2015, the Company renewed its normal course
issuer bid whereby it can purchase for cancellation up to
3,541,491 common shares or approximately 5% of its issued
and outstanding common shares as of February 28, 2015. The
renewed normal course issuer bid is set to expire on March
4, 2016. In 2015, CPPI purchased 1,877,951 common shares
for $25.6 million (an average price of $13.63 per common
share). Cash paid for purchases in 2015 was $25.3 million,
with the balance paid in January 2016. As a result of the share
purchases, Canfor’s interest in CPPI increased from 50.5% at
December 31, 2014 to 51.9% at December 31, 2015.

MANAGEMENT’S DISCUSSION AND ANALYSIS

COMMITMENTS

The following table summarizes CPPI’s financial contractual obligations at December 31, 2015 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

2016

2017

2018

2019

2020

Thereafter

Total

-
0.4
0.4

-
0.2
0.2

$ 50.0
0.2
$ 50.2

-
-
-

$ 50.0
0.8
$ 50.8

Other contractual obligations not included in the table above or
highlighted previously are:

The Company has energy agreements with a BC energy
company and electricity transmission provider (the “Energy
Agreements”) for 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, 2015
the Company had posted $11.6 million of standby letters
of credit under these agreements, and had no repayment
obligations under the terms of any of these agreements.

Contractual commitments totaling $1.8 million, principally
related to the construction of capital assets.

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 current pricing under the Company’s Fibre Supply
Agreement with Canfor expires September 1, 2016 and may be
amended as necessary to ensure that it is reflective of market
conditions. In 2015, the Company depended on Canfor to provide
approximately 64% (2014 - 59%) of its fibre supply.

The Company’s asset retirement obligations represent
estimated undiscounted future payments of $9.3 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 7 to 36 years which have been
discounted at risk free rates ranging from 1.0% to 2.2%. The
estimated discounted value is $5.5 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, 2015 was $93.0 million. As at December
31, 2015, CPPI estimated that it would make contribution
payments of $4.2 million to its defined benefit plans in 2016
based on the last actuarial valuation for funding purposes.

As part of the acquisition of the Taylor pulp mill, CPPI may also
pay contingent consideration to Canfor, based on the Taylor pulp
mill’s financial performance over a three-year period.

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 purchased wood chips, logs and hog fuel from

Canfor sawmills in the amount of $182.2 million in 2015.

Canfor provides certain business and administrative services

to the Company under a services agreement. The total value of
the services provided by Canfor in 2015 was $11.5 million.

The Company provides certain business and administrative
services to Canfor under an incidental services agreement. Total
value of the services provided to Canfor in 2015 was $3.6 million.

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

As at
December 31, December 31,
2014

2015

15.6

18.0

1.7

Additional details on related party transactions are contained in note 16 to CPPI’s 2015 consolidated financial statements.

CANFOR PULP ANNUAL REPORT 2015

ACQUISITION OF TAYLOR PULP MILL

On January 30, 2015, CPPI completed the purchase of the Taylor
pulp mill from Canfor for cash consideration of $12.6 million
including working capital. The acquisition also includes a long-
term fibre supply agreement under which Canfor will supply
the Taylor pulp mill with fibre at prices that approximate fair
market value. In addition to the cash consideration paid on the
acquisition date, CPPI may also pay contingent consideration to
Canfor, based on the Taylor pulp mill’s financial performance
over a three-year period. The fair value of this contingent
consideration of $1.8 million at the acquisition date was adjusted

to nil during December 31, 2015 (with the associated gain
recorded to Other Income) to reflect lower forecast BCTMP
prices over the contingent consideration period. CPPI recognized
long-term assets acquired net of liabilities assumed at a fair
value of $2.8 million and net working capital of $11.6 million.
If the acquisition had occurred on January 1, 2015, CPPI’s
consolidated sales for the year ended December 31, 2015 would
have increased by approximately $8.9 million and consolidated
net income for the year ended December 31, 2015 would have
increased by approximately $0.2 million. The Taylor pulp mill’s
results are recorded in the pulp segment.

SELECTED QUARTERLY FINANCIAL INFORMATION

2015

2014

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 amortization13
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 value14
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$)

$ 330.8
$ 56.2
$ 38.6
$ 29.7

$ 0.43
$ 6.96
$ 0.0625

356.2
35.4
$ 0.749

$ 294.1
$ 58.7
$ 42.3
$ 31.2

$ 0.45
$ 6.65
$ 0.0625

307.4
32.1
$ 0.764

$ 276.0
$ 36.4
$ 20.9
$ 17.7

$ 0.25
$ 7.40
$ 1.1875

291.9
33.8
$ 0.813

$ 273.8
$ 57.1
$ 41.4
$ 28.0

$ 0.40
$
7.17
$ 0.0625

272.1
32.1
$ 0.806

$ 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

945

967

980

995

$ 1,025

$ 1,030

$ 1,017

(13 ) 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 .

(14 ) 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 derivatives, pulp futures and US dollar
forward contracts and collars.

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 )

2015

2014

Operating income (loss) by segment:
Pulp
Paper
Unallocated
Total operating income
Add: Amortization
Total operating income before
amortization15
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
Acquisition of Taylor Pulp Mill
Share purchases
Other, net
Change in cash / operating loans

$ 34.4
6.9
$
(2.7)
$
$ 38.6
$ 17.6

$ 38.2
7.1
$
(3.0)
$
$ 42.3
$ 16.4

$ 18.1
5.7
$
(2.9)
$
$ 20.9
$ 15.5

$ 36.3
7.9
$
(2.8)
$
$ 41.4
$ 15.7

$ 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

$ 56.2

$ 58.7

$ 36.4

$ 57.1

$ 43.2

47.7

$ 44.8

$ 52.4

$ (11.8)

$ (10.5)

(1.1)

(9.5)

8.5

$ (13.2)

$ 10.7

$ (19.9)

$
(1.7)
$
(2.0)
2.4
$
$ 43.1

(4.4)
$
(0.7)
$
$ (27.6)
-
$
(9.6)
$
0.1
$
0.9
$

$
(0.5)
$ (18.3)
2.8
$
$ 32.2

$ (83.3)
(0.9)
$
$ (14.5)
-
$
(6.7)
$
$
0.1
$ (73.1)

$
(1.3)
$
(3.2)
(0.3)
$
$ 30.5

(4.4)
$
(0.6)
$
$ (12.8)
-
$
(7.3)
$
0.3
$
5.7
$

$
(0.4)
$ (12.5)
4.9
$
$ 39.6

(4.4)
$
(0.5)
$
$ (13.4)
$ (12.6)
(1.7)
$
0.2
$
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
$

(15 ) 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
Term debt
Net income per share, basic and diluted
Dividends declared per share

FOURTH QUARTER RESULTS

OVERVIEW

The Company recorded operating income of $38.6 million
and net income of $29.7 million for the fourth quarter of 2015,
compared to operating income of $42.3 million and net income
of $31.2 million for the third quarter of 2015 and operating
income of $28.0 million and net income of $20.7 million for the

PULP

SELECTED FINANCIAL INFORMATION AND STATISTICS – PULP

2015

$ 1,174.7
106.6
$
841.3
$
50.0
$
1.52
$
1.375
$

2014

980.5
89.5
827.4
50.0
1.26
0.250

$
$
$
$
$
$

2013

886.8
41.8
768.6
50.0
0.59
0.200

$
$
$
$
$
$

fourth quarter of 2014. Net income per share was $0.43 for
the fourth quarter of 2015, compared to $0.45 per share in the
third quarter of 2015 and $0.29 per share in the fourth quarter
of 2014.

An overview of the results by business segment for the
fourth quarter of 2015 compared to the third quarter of 2015 and
the fourth quarter of 2014 follows.

Summarized results for the Pulp segment for the fourth quarter of 2015, third quarter of 2015 and fourth quarter of 2014 were as follows:
Q4
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 , u n l e s s o t h e r w i s e n o t e d )

Q4
2015

Q3
2015

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 . ) .

CANFOR PULP ANNUAL REPORT 2015

$
$
$
$
$

286.9
50.9
34.4
945
1,262
322.5
356.2
-

$
$
$
$
$

253.5
53.7
38.2
967
1,266
310.5
307.4
-

$
$
$
$
$

221.4
38.0
23.7
1,025
1,164
241.1
258.6
55.4

OVERVIE W
Operating income for the pulp segment was $34.4 million for the
fourth quarter of 2015 down $3.8 million from the third quarter
of 2015 and up $10.7 million from the same quarter in 2014. Pulp
segment financial results and information in 2015 include the
Taylor pulp mill which was acquired on January 30, 2015.

Pulp segment results in the fourth quarter of 2015 reflected

increased pulp production and shipment volumes as well as
higher energy revenues, which largely offset slightly lower
NBSK pulp unit sales realizations and costs associated with the
scheduled maintenance outage at the Company’s Northwood
pulp mill in October. The increased pulp production and energy
revenue reflected improved operating rates, and, in the case of
energy revenue, seasonally higher energy prices. In response
to challenging BCTMP market conditions, operations were
temporarily curtailed for eight days at the Company’s Taylor
pulp mill.

Pulp segment results were well up from the fourth

quarter of 2014 as lower unit manufacturing costs, higher pulp
shipments and higher energy revenues more than offset the
impact of challenging BCTMP markets in the current quarter.
NBSK unit sales realizations were broadly in line with the fourth
quarter of 2014 as lower list prices to all regions were offset
by the benefit of a significantly weaker Canadian dollar. Higher
total pulp production and shipments compared to the fourth
quarter of 2014 largely reflect the inclusion of the Taylor pulp
mill in 2015. In the comparative fourth quarter of 2014, the
Northwood pulp mill also completed a scheduled maintenance
outage which resulted in a reduction of market pulp production
of 17,000 tonnes.

MARKE TS
Global softwood pulp markets weakened somewhat through
most of the fourth quarter of 2015, before stabilizing towards
the end of the year. Global softwood pulp producer inventory
levels remained balanced through the quarter and finished at
29 days of supply at the end of December 2015, decreasing 1
day from the end of September 201518. 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 up

from both comparative periods driven primarily by increased
shipments to North America and China19.

SALE S
The Company’s pulp shipments in the fourth quarter of 2015
totalled 356,200 tonnes, up 48,800 tonnes, or 16%, from the
third quarter of 2015 and up 97,600 tonnes, or 38%, from the
same quarter in 2014. Higher pulp shipments in the current
quarter primarily reflected increased volumes to North America
and Asia. Compared to the fourth quarter of 2014, the increase
in pulp shipments was mostly due to the acquisition of the
Taylor pulp mill at the beginning of 2015.

The average North American US-dollar NBSK list price, as

published by RISI, was down US$22 per tonne, or 2%, compared
to the third quarter of 2015 with more pronounced declines
seen in the average European and China NBSK prices. The
average China US-dollar NBSK pulp list price was down US$38
per tonne, or 6%, compared to the third quarter of 2015. NBSK
pulp unit sales realizations were slightly lower in the current

(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 .

quarter reflecting these lower prices partly offset by the 2 cent,
or 2%, weaker Canadian dollar. BCTMP markets remained
challenging in the fourth quarter of 2015, with prices bottoming
out after the downward trend seen in the third quarter of 2015.
Average BCTMP prices were lower quarter-over-quarter, but
the favourable impact of the weaker Canadian dollar offset most
of this decline.

NBSK pulp unit sales realizations were broadly in line
with the fourth quarter of 2014 as lower prices to all regions
were offset by the favourable impact of a 13 cent, or 15%,
weaker Canadian dollar. The average North American NBSK
pulp US-dollar list price was down US$80 per tonne, or 8%,
with discounts showing a moderate increase over the same
period; European and China NBSK pulp prices showed more
pronounced decreases of US$118 and US$115 per tonne,
respectively. The Company’s overall unit sales realizations in
2015 reflected the inclusion of lower-priced BCTMP product
produced at the Taylor pulp mill.

Energy revenues were well up from both comparative
periods, and for the most part reflected increased power
generation and seasonally higher energy prices. Compared to
the same quarter in 2014, higher energy revenue also reflected
the incremental contribution from the Intercontinental pulp mill
turbine which started selling power in April 2015.

OPER ATIONS
Pulp production in the current quarter was 322,500 tonnes,
up 12,000 tonnes, or 4%, from the third quarter of 2015 and
up 81,400 tonnes, or 34%, from the same quarter in 2014.
Production in the current quarter reflected higher operating
rates and additional operating days offset by the scheduled
maintenance outage at the Northwood pulp mill, which reduced
market pulp production of 20,000 tonnes in October and 6,000
tonnes in the previous quarter. In December, the Company
temporarily curtailed operations at the Taylor pulp mill for
eight days in response to the challenging BCTMP market
conditions. BCTMP production made up approximately 17% of
the Company’s total pulp production in the fourth quarter of
2015. The significant increase in pulp production compared
to the fourth quarter of 2014 principally reflected incremental
production from the Taylor acquisition. Production in the fourth
quarter of 2014 was also impacted by a scheduled maintenance
outage at the Northwood pulp mill which reduced market pulp
production by 17,000 tonnes.

Overall pulp unit manufacturing costs were slightly
higher than the third quarter of 2015 largely reflecting costs
associated with the scheduled Northwood maintenance outage
and seasonally higher energy costs, offset by lower fibre costs,
related mostly to seasonal and market factors, and improved
productivity in the current quarter. Compared to the fourth
quarter of 2014, unit manufacturing costs were lower reflecting
the inclusion of the lower cost Taylor pulp mill as well as lower
natural gas prices. NBSK pulp fibre costs were broadly in line
with the fourth quarter of 2014 as slightly higher delivered costs
for sawmill residual chips (linked to Canadian dollar NBSK pulp
sales realizations) were offset by a decline in the proportion of
higher-cost whole log chips in the current quarter.

MANAGEMENT’S DISCUSSION AND ANALYSIS

PAPER

SELECTED FINANCIAL INFORMATION AND STATISTICS – PAPER

Summarized results for the Paper segment for the fourth quarter of 2015, third quarter of 2015 and fourth quarter of 2014 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 at $6.9 million for the
fourth quarter of 2015 was consistent with both comparative
periods, with production and shipment volumes up compared to
the prior quarter reflecting additional operating days. Compared to
the third quarter of 2015, unit sales realizations were down slightly
as lower market prices were partly offset by the weaker Canadian
dollar, while unit manufacturing costs were relatively unchanged
from the previous quarter. Compared to the same quarter in
2014, unit sales realizations benefited from the weaker Canadian
dollar, which more than offset lower US-dollar paper prices, while
unit manufacturing costs were moderately higher in the current
quarter mostly due to higher operating supply costs.

MARKE TS
Global kraft paper demand softened through the fourth
quarter of 2015, driven by weakness in both North American
and European markets. The continued strengthening of the
US dollar against global currencies has in part resulted in
increased competition in non-traditional markets in some
countries as they leverage favourable currency movements.

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
Gain (loss) on derivative financial instruments
Other income, net

$
$
$

Q4
2015

43.6
7.9
6.9
35.8
35.4

$
$
$

Q3
2015

40.5
8.0
7.1
34.6
32.1

$
$
$

Q4
2014

42.5
8.0
7.2
36.0
35.8

SALE S
The Company’s paper shipments in the fourth quarter of 2015
were 35,400 tonnes, up 3,300 tonnes, or 10%, from the previous
quarter and broadly in line with the same quarter in 2014.
Prime bleached shipments, which attract higher prices, were
in line with the third quarter of 2015 and 2% higher than for the
same quarter of 2014.

Unit sales realizations in the fourth quarter of 2015 were
down slightly compared to the previous quarter, reflecting lower
market prices and proportionately lower shipments to North
America partly offset by the weaker Canadian dollar. Compared
to the fourth quarter of 2014, unit sales realizations were
moderately higher reflecting the favourable impact of the weaker
Canadian dollar and slightly higher shipments of prime product,
which more than offset lower market prices to all regions.

OPER ATIONS
Paper production for the fourth quarter of 2015 was 35,800 tonnes,
up 1,200 tonnes, or 3%, from the previous quarter, reflecting
additional operating days in the current period, and was broadly in
line with the same quarter in 2014. Unit manufacturing costs were
relatively consistent with the previous quarter and moderately
higher than the fourth quarter of 2014 reflecting higher operating
supply costs partly offset by lower costs for slush pulp.

Q4
2015

(2.7)
(1.7)
0.9
1.9

$
$
$
$

Q3
2015

(3.0)
(1.7)
(4.9)
6.2

$
$
$
$

Q4
2014

(2.9)
(1.4)
(0.8)
1.8

$
$
$
$

Corporate costs were $2.7 million for the fourth quarter of 2015,
down from both comparable periods partly reflecting lower
travel related costs in the fourth quarter of 2015.

Net finance expense for the fourth quarter of 2015 was $1.7

million, in line with the previous quarter and up slightly from
the fourth quarter of 2014. The increase in finance expense
compared to the same quarter in 2014 principally reflected one-
time costs associated with the Company’s letters of credit.
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 2015, the Company
recorded a net gain of $0.9 million largely reflecting gains on US
dollar foreign exchange and crude oil collars as the instruments
matured in the quarter. At December 31, 2015, the Company
had no derivative financial instruments outstanding.

Other income, net for the fourth quarter of 2015 of $1.9
million reflected favourable exchange movements on US dollar
denominated cash, receivables and payables, resulting from the
weakening of the Canadian dollar through the quarter.

OTHER COMPREHENSIVE INCOME (LOSS)
In the fourth quarter of 2015, the Company recorded an after-tax
gain of $0.5 million in relation to changes in the valuation of the
Company’s employee future benefit plans. The gain principally
reflects a reduction in the medical claims cost assumptions in
the non-pension post-employment plans coupled with a return
on plan assets in the pension plans that was greater than the
discount rate. Offsetting these factors were unfavourable
actuarial experience adjustments in both the non-pension and
pension plans. After-tax gains of $2.8 million were recorded in
the third quarter of 2015 and an after-tax loss of $12.3 million
was recorded in the fourth quarter of 2015.

CANFOR PULP ANNUAL REPORT 2015

SUMMARY OF FINANCIAL POSITION

The following table summarizes CPPI’s cash flow for the following periods:

( 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 )

Increase (decrease) in cash and cash equivalents
Operating activities
Financing activities
Investing activities

Q4
2015

0.9
43.1
(14.7)
(27.5)

$
$
$
$

Q3
2015

(73.1)
32.2
(90.9)
(14.4)

$
$
$
$

Q4
2014

37.0
53.2
(5.1)
(11.1)

Cash generated from operating activities was $43.1 million in
fourth quarter of 2015, up $10.9 million from the previous quarter
principally reflecting lower tax installment payments, which
more than offset slightly lower cash earnings in the current
quarter. During the fourth quarter of 2015, non-cash working
capital increased by a similar amount to the third quarter of 2015
partly reflecting increased pulp shipments towards the end of the
year and the impact of the weaker Canadian dollar on US-dollar
denominated accounts receivable balances, as well as higher
wood chip inventory levels offset in part by a reduction in finished
inventory levels in the current quarter. In the comparative
fourth quarter of 2014, operating cash flows included lower
cash earnings offset by favourable non-cash working capital
movements that were mostly timing related.

Cash used for financing activities was $14.7 million in the

fourth quarter of 2015 down $76.2 million from the previous
quarter and up $9.6 million from the same quarter in 2014.

In the fourth quarter of 2015, CPPI purchased 692,985 common
shares under its Normal Course Issuer Bid for $9.7 million,
of which $9.6 million was paid in the current quarter. This
compares to 557,401 common shares purchased in the third
quarter of 2015 for $6.7 million and no shares purchased in the
fourth quarter of 2014 (see further discussion of the shares
purchased under the Normal Course Issuer Bid in the following
“Liquidity and Financial Requirements” section). CPPI paid $4.4
million ($0.0625 per share) in quarterly dividends during the
fourth quarter of 2015. In the third quarter of 2015, in addition
to the quarterly dividend the Company paid a special dividend of
$79.0 million ($1.1250 per share).

Cash used for investing activities of $27.5 million in the

current quarter primarily related to capital expenditures
associated with the scheduled maintenance outage at the
Northwood pulp mill and, to a lesser extent, certain energy
related projects and the acquisition of mobile equipment.

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 )

2015

2014

Net income, as reported
(Gain) loss on derivative financial
instruments
Mark-to-market gain on Taylor Pulp
contingent consideration21
Net impact of above items
Adjusted net income

Net income per share (EPS),
as reported
Net impact of above items per share22
Adjusted net income per share22

$ 29.7

$ 31.2

$ 17.7

$ 28.0

$ 20.7

$ 24.3

$ 18.8

$ 25.7

(0.7)

3.6

(3.4)

7.0

0.6

0.2

(0.4)

1.0

-
$
(0.7)
$
$ 29.0

$ 0.43
$ (0.01)
$ 0.42

-
$
3.6
$
$ 34.8

$ 0.45
$ 0.05
$ 0.50

(1.3)
$
(4.7)
$
$ 13.0

$ 0.25
$ (0.07)
$ 0.18

-
$
7.0
$
$ 35.0

$ 0.40
$ 0.10
$ 0.50

-
$
0.6
$
$ 21.3

$ 0.29
$ 0.01
$ 0.30

-
$
0.2
$
$ 24.5

$ 0.34
$
-
$ 0.34

-
$
(0.4)
$
$ 18.4

$ 0.27
$ (0.01)
$ 0.26

-
$
1.0
$
$ 26.7

$ 0.36
$ 0.01
$ 0.37

( 2 1) A s p a r t o f t h e p u r c h a s e o f t h e Ta y l o r p u l p m i l l o n J a n u a r y 3 0 , 2 0 15 , C P P I m a y p a y c o n t i n g e n t c o n s i d e r a t i o n b a s e d o n t h e Ta y l o r p u l p m i l l ’s f u t u r e e a r n i n g s o v e r a t h r e e y e a r

( 2 2 ) 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 .

MANAGEMENT’S DISCUSSION AND ANALYSIS

OUTLOOK

PULP MARKETS

For the month of January 2016, NBSK pulp list prices were
unchanged in North America at US$940 per tonne, while prices
to China decreased US$5 to US$590 per tonne. For the month
of March 2016, the Company has announced a list price of
US$960 per tonne in North America. In the second quarter of
2016, producer inventories are forecast to decline during the
industry’s traditional spring maintenance period.

The Company has no maintenance outages planned for
the first quarter of 2016. Maintenance outages are currently
planned at the Northwood and Intercontinental Mills in the
second quarter of 2016 with a projected 30,000 tonnes of
reduced production and at the Prince George Mill in the third

CRITICAL ACCOUNTING ESTIMATES

Thepreparationoffinancialstatementsinconformitywith
InternationalFinancialReportingStandards(“IFRS”)requires
managementtomakeestimatesandassumptionsthataffect
theamountsrecordedinthefinancialstatements.Management
regularlyreviewstheseestimatesandassumptionsbasedon
currentlyavailableinformation. Whileitisreasonablypossiblethat
circumstancesmayarisewhichcauseactualresultstodifferfrom
theseestimates,managementdoesnotbelieveitislikelythatany
suchdifferenceswillmateriallyaffectCPPI’sfinancialposition.
Unlessotherwiseindicatedthecriticalaccountingestimates
discussedaffectalloftheCompany’sreportablesegments.

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

quarter of 2016 with a projected 4,000 tonnes of reduced
production. A maintenance outage at the Taylor pulp mill is
scheduled for the fourth quarter of 2016 with a projected 7,000
tonnes of reduced production.

PAPER MARKETS

Kraft paper markets are projected to soften heading into the first
quarter of 2016 with potential for further downward pressure on
prices in North American markets in the second quarter of 2016.
A maintenance outage is currently planned at the Paper
machine during the third quarter of 2016 with a projected 4,000
tonnes of reduced production.

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.

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, 2015

December 31, 2014

Pension
Benefit
Plans

Other
Benefit
Plans

Pension
Benefit
Plans

Other
Benefit
Plans

4.1%
3.0%
2.5%

n/a
n/a
n/a

4.1%
n/a
n/a

7.0%
4.5%
2021

3.9%
3.0%
2.5%

n/a
n/a
n/a

3.9%
n/a
n/a

7.0%
4.5%
2021

In addition to the significant assumptions listed in the table above, the average life expectancy of a 65 year old at December 31, 2015 is
between 20.9 years and 24.0 years (2014 - 20.8 years and 24.0 years). As at December 31, 2015, the weighted average duration of the
defined benefit plan obligation, which reflects the average age of the plan members, is 12.0 years (2014 - 12.4 years). The weighted
average duration of the other benefit plans is 14.3 years (2014 - 13.9 years).

CANFOR PULP ANNUAL REPORT 2015

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 2015:

( 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

$
$

(15.5)

(10.8)
10.2

$
$

19.0

13.7
(8.5)

See “Liquidity and Financial Requirements” section for further discussion regarding the funding position of CPPI’s pension plans.

ASSET RETIREMENT OBLIGATIONS

DEFERRED TAXES

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 7 to 36 years and
have been discounted at risk-free rates ranging from 1.0% to
2.2%. 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.

ASSET IMPAIRMENTS

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 2015 or 2014.

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.

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, write-downs of
the Company’s finished goods inventories from cost to net
realizable value totaled $0.5 million at December 31, 2015 and
related to inventory at the Taylor pulp mill.

FUTURE CHANGES IN ACCOUNTING POLICIES

In May 2014, the International Accounting Standards Board
(“IASB”) issued IFRS 15, RevenuefromContractswith
Customers, which will supersede IAS 18, Revenue, IAS 11,
ConstructionContractsand related interpretations. The new
standard is effective for annual periods beginning on or after
January 1, 2018. The Company is in the process of assessing the
impact, if any, on the financial statements of this new standard.

In July 2014, the IASB issued IFRS 9, FinancialInstruments.
The required adoption date for IFRS 9 is January 1, 2018 and the
Company is in the process of assessing the impact, if any, on the
financial statements of this new standard.

In January 2016, the IASB issued IFRS 16, Leases, which
will supersede IAS 17, Leasesand related interpretations. The
required adoption date for IFRS 16 is January 1, 2019 and the
Company is in the process of assessing the impact, if any, on the
financial statements of this new standard.

RISKS AND UNCERTAINTIES

Risksanduncertaintiesfallintothegeneralbusinessareasof
markets,internationalcommodityprices,competition,currency
exchangerates,environmentalissues,rawmaterials,capital
requirements,dependenceoncertainrelationships,government
regulations,publicpolicyandlabourdisputes,andNativeland
claims. Thefutureimpactofthevariousuncertaintiesand
potentialrisksdescribedinthefollowingparagraphs(together

withtherisksanduncertaintiesidentifiedundereachofthe
Company’sbusinesssegments)cannotbequantifiedorpredicted
withcertainty. However,CPPIdoesnotforeseeunmanageable
adverseeffectsonitsbusinessoperationsfrom,andbelieves
thatitiswellpositionedtodealwith,suchmattersasmayarise.
Therisksanduncertaintiesaresetoutinalphabeticalorder.

MANAGEMENT’S DISCUSSION AND ANALYSIS

ABORIGINAL ISSUES

CYCLICALITY OF PRODUCT PRICES

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
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.

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 2015, approximately 64% of the fibre used by the Company
was derived from the Fibre Supply Agreement with 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 2015, the Company’s top five customers accounted for
approximately 33% 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.

CAPITAL REQUIREMENTS

DIVIDENDS

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 2015 were approximately $68.3
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, Japan 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.

CANFOR PULP ANNUAL REPORT 2015

CPPI paid quarterly dividends of $0.0625 per share through
2015 and may, subject to market conditions, continue to pay
a comparable level of dividends through 2016. The Company
also paid a special dividend of $79.0 million ($1.1250 per share)
to the shareholders of the Company as a result of strong
cash generated by the business in 2014 and 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.

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 $15.5 million and a one percentage point
decrease in the discount rate would increase the accrued benefit
obligation by an estimated $19.0 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.
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.

FINANCIAL RISK MANAGEMENT AND
EARNINGS SENSITIVITIES

Demand for pulp and paper products is 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 ) 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.

CPPI utilizes a combination of credit insurance and self-
insurance to manage the risk associated with trade receivables.
As at December 31, 2015, approximately 78% 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, 2015 was $101.8 million. At
December 31, 2015, approximately 99% of the trade accounts
receivable balance was within CPPI’s established credit terms.

(B) LIQUIDIT Y RISK:
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, 2015, CPPI had no amounts drawn on
its operating loans, and had accounts payable and accrued
liabilities of $144.2 million, all of which are due within twelve
months of the balance sheet date.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(C) MARKE 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 “Liquidity and Financial
Requirements” for details of CPPI’s derivative financial
instruments outstanding at year end.

EARNINGS SENSITIVITIES

Estimates of the sensitivity of CPPI’s pre-tax results to
currency fluctuations and prices for its principal products,
based on 2016 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 tonne23
BCTMP – US$10 change per tonne 23
Natural gas cost – $1 change per gigajoule
Chip cost – $1 change per tonne
Canadian dollar – US$0.01 change per Canadian dollar24

$ 9
$ 3
$ 6
$ 3
$ 7

( 2 3 ) 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 4 ) 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.

CANFOR PULP ANNUAL REPORT 2015

MAINTENANCE OBLIGATIONS AND FACILITY DISRUPTIONS

TRANSPORTATION SERVICES

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.

RAW MATERIAL COSTS

The principal raw material utilized by the Company in its
manufacturing operations is wood chips. The Company’s
evergreen 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. In a period of sawmill rationalization or reduced
sawmill wood chip supply, increased reliance on higher-cost
whole log chips may be required. 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.

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 wood chips, pulp and
paper 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
UNIFOR and the PPWC (Pulp, Paper and Woodworkers of
Canada), with both agreements expiring on April 30, 2017. Any
inability to negotiate acceptable contracts with the unions as
they expire 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. Market
conditions may cause shortages of both professional and skilled
labour, which could have an adverse impact on the operation and
management of CPPI’s facilities.

OUTSTANDING SHARE DATA

At December 31, 2015 and February 17, 2016, there were 68,951,872 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, 2015, 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, 2015 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, 2015, the CEO and CFO have
concluded that these controls are operating effectively.

Additional information about the Company, including its 2015 Annual Information Form, is available at www.sedar.com or at www.canfor.com.

MANAGEMENT’S DISCUSSION AND ANALYSIS

C O N S O L I D A T E D
F I N A N C I A L
S T A T E M E N T S

CANFOR PULP ANNUAL REPORT 2015

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
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
KPMG LLP, the external auditors, whose report follows.

February 17, 2016

Don B. Kayne
Chief Executive Officer

Alan Nicholl
Chief Financial Officer

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., which comprise
the consolidated balance sheet as at December 31, 2015, the
consolidated statement of income, the consolidated statement
of other comprehensive income (loss), changes in equity and
cash flows for the year then ended, and notes, comprising
a summary of significant accounting policies and other
explanatory information.

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 is sufficient
and appropriate to provide a basis for our audit opinion.

MANAGEMENT’S RESPONSIBILITY FOR THE
CONSOLIDATED FINANCIAL STATEMENTS

OPINION

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 audit. We conducted our
audit 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 our
judgment, including the assessment of the risks of material
misstatement of the consolidated financial statements, whether
due to fraud or error. In making those risk assessments, we
consider internal control relevant to the entity’s preparation

In our opinion, the consolidated financial statements present
fairly, in all material respects, the consolidated financial
position of Canfor Pulp Products Inc. as at December 31, 2015,
and its consolidated financial performance and its consolidated
cash flows for the year then ended in accordance with
International Financial Reporting Standards.

COMPARATIVE INFORMATION

The consolidated financial statements of Canfor Pulp Products
Inc. as at and for the year ended December 31, 2014 were
audited by another auditor who expressed an unmodified opinion
on those financial statements on February 4, 2015.

February 17, 2016

KPMG LLP
Chartered Accountants
Vancouver, British Columbia

CONSOLIDATED FINANCIAL STATEMENTS

As at

As at
December 31, December 31,
2014

2015

17.5
101.8
17.5
163.8
7.5
308.1
532.3
0.9
841.3

144.2
144.2
50.0
93.0
6.2
68.2
361.6

508.2
(28.5)
479.7

841.3

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

827.4

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 )
Other long-term assets
Total assets

LIABILITIES
Current liabilities
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

Commitments ( N o t e 18 ) & Subsequent Event ( N o t e 2 3 )

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

CANFOR PULP ANNUAL REPORT 2015

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

Operating income

Finance expense, net ( N o t e 13 )
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.

2015

2014

$ 1,174.7

980.5

769.3
169.0
65.2
28.0
1,031.5

143.2

(6.0)
(8.8)
14.5
142.9
(36.3)
106.6

1.52

635.5
129.1
62.7
27.8
855.1

125.4

(5.5)
(1.9)
2.0
120.0
(30.5)
89.5

1.26

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 )

2015

2014

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.

106.6

89.5

7.6
(2.0)
5.6
112.2

522.1
(13.9)
508.2

(32.5)
106.6
5.6
(96.5)
(11.7)
(28.5)

479.7

(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)

489.6

CANFOR PULP ANNUAL REPORT 2015

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 )

2015

2014

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
Finance expense, net
Other, net
Defined benefit plan contributions, net
Income taxes paid, net

Net change in non-cash working capital ( N o t e 15 )

Financing activities
Change in operating bank loans
Finance expenses paid
Dividends paid
Share purchases ( N o t e 12 )

Investing activities
Additions to property, plant and equipment, net
Acquisition of Taylor pulp mill ( N o t e 2 1)
Other, net

Increase (decrease) 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.

106.6

89.5

65.2
36.3
(1.0)
5.5
6.0
(0.4)
(3.9)
(36.0)
178.3
(32.9)
145.4

-
(2.7)
(96.5)
(25.3)
(124.5)

(68.3)
(12.6)
0.7
(80.2)
(59.3)
76.8
17.5

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

CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

Ye a r s e n d e d D e c e m b e r 3 1, 2 0 15 a n d 2 0 14 ( 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, 2015
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, a Bleached Chemi-Thermo Mechanical
Pulp (“BCTMP”) mill located in Taylor, British Columbia and a
marketing group based in Vancouver, British Columbia.

At December 31, 2015, Canfor Corporation (“Canfor”) held a
51.9% interest in CPPI, an increase of 1.4% from December 31,
2014 as a result of share purchases in 2015 (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 (“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 17, 2016.

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 IFRS requires management to make
judgments, estimates and assumptions that affect 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 6 – Property, Plant and Equipment;

Note 10 – Employee Future Benefits;

Note 11 – Asset Retirement Obligations; and

Note 14 – Income Taxes.

CANFOR PULP ANNUAL REPORT 2015

3. SIGNIFICANT ACCOUNTING POLICIES

The following accounting policies have been applied to the
financial information presented.

Other liabilities - All of CPPI’s financial liabilities are

measured at amortized cost using the effective interest method.

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 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
this category for CPPI are trade and other receivables, and cash
and cash equivalents.

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.

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 40 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.

CANFOR PULP ANNUAL REPORT 2015

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, the related service cost and,
where applicable, the past service cost is determined separately
for each defined benefit pension plan based on actuarial
determinations using the projected unit credit method. Under
the projected unit credit method, the accrued benefit obligation
is calculated as the present value of each member’s prospective
benefits earned in respect of credited service prior to the
valuation date and the related service cost is calculated as the
present value of the benefits the member is assumed to earn for
credited service in the ensuing year. The actuarial assumptions
used in these calculations, such as salary escalation and
health care inflation, are based upon best estimates selected
by CPPI. The discount rate assumptions are based on the yield
at the reporting date on high quality corporate bonds that have
maturity dates approximating the terms of CPPI’s obligations.
Actuarial gains and losses can arise from differences
between actual and expected outcomes or changes in the
actuarial assumptions. Actuarial gains and losses, including the
return on plan assets, are recognized in other comprehensive
income on a quarterly basis and in the period 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 substantially derived from the sale of
pulp, paper and energy. 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 has
met the terms and conditions under both its 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

4. ACCOUNTING STANDARDS ISSUED AND NOT APPLIED

In May 2014, the International Accounting Standards Board
(“IASB”) issued IFRS 15, RevenuefromContractswith
Customers, which will supersede IAS 18, Revenue, IAS 11,
ConstructionContracts and related interpretations. The new
standard is effective for annual periods beginning on or after
January 1, 2018. The Company is in the process of
assessing the impact, if any, on the financial statements of
this new standard.

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.

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 on 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 on the
reporting date. The income and expenses of foreign operations
are translated to the Canadian dollar at exchange rates on 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.

In January 2016, the IASB issued IFRS 16, Leases, which
will supersede IAS 17, Leases and related interpretations. The
required adoption date for IFRS 16 is January 1, 2019 and the
Company is in the process of assessing the impact, if any, on the
financial statements of this new standard.

CONSOLIDATED FINANCIAL STATEMENTS

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,
2014

2015

71.2
20.9
21.9
49.8
163.8

68.8
17.4
12.1
45.4
143.7

The above inventory balances are stated after inventory write-downs from cost to net realizable value. Write-downs at December 31,
2015 totaled $0.5 million (December 31, 2014 - nil). In 2015, costs of raw materials, consumables and changes in finished products
recognized as manufacturing and product costs amounted to $422.1 million (2014 - $344.6 million).

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, 2014
Additions1
Disposals
Transfers
Balance at December 31, 2014
Additions1
Acquisitions ( N o t e 2 1)
Disposals
Transfers
Balance at December 31, 2015

Amortization
Balance at January 1, 2014
Amortization for the year
Disposals
Balance at December 31, 2014
Amortization for the year
Disposals
Balance at December 31, 2015

Carrying amounts
At January 1, 2014
At December 31, 2014
At December 31, 2015

Land and
improvements

Buildings,
machinery
and
equipment

$ 1,458.0
-
(3.6)
26.3
$ 1,480.7
0.3
4.0
(10.6)
66.0
$ 1,540.4

(973.5)
(47.7)
3.0
$ (1,018.2)
(49.5)
9.9
$ (1,057.8)

5.4
-
-
-
5.4
-
-
-
-
5.4

-
-
-
-
-
-
-

5.4
5.4
5.4

$
$
$

484.5
462.5
482.6

$
$
$

(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

CANFOR PULP ANNUAL REPORT 2015

Asset

retirement Construction
in progress

- landfill

Major
overhauls

Total

$
$
$

2.1
-
-
-
2.1
0.9
0.1
-
-
3.1

(1.0)
-
-
(1.0)
(0.1)
-
(1.1)

1.1
1.1
2.0

$
$
$

15.5
59.3
-
(35.4)
39.4
68.8
-
-
(92.1)
16.1

-
-
-
-
-
-
-

15.5
39.4
16.1

$
$
$

32.5
-
(7.1)
9.1
34.5
-
-
(19.7)
26.1
40.9

(10.9)
(15.0)
7.1
(18.8)
(15.6)
19.7
(14.7)

21.6
15.7
26.2

$ 1,513.5
59.3
(10.7)
-
$ 1,562.1
70.0
4.1
(30.3)
-
$ 1,605.9

(985.4)
(62.7)
10.1
$ (1,038.0)
(65.2)
29.6
$ (1,073.6)

$
$
$

528.1
524.1
532.3

As at

As at
December 31, December 31,
2014

2015

75.6
37.5
13.4
17.7
144.2

59.6
29.9
13.7
20.0
123.2

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
Total operating loan and credit facility
Operating loan drawn
Letters of credit
Total available operating loan and letters of credit facility

The terms of the Company’s operating loan facility include
interest payable at floating rates that vary depending on the
ratio of 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 including a covenant based on maximum
debt to total capitalization of the Company. In 2015, the maturity
date of this facility was extended to January 31, 2019 and the
minimum net worth financial covenant which was based on
shareholders’ equity was removed.

9. LONG-TERM DEBT

CPPI has a $50.0 million unsecured non-revolving term loan,
which is repayable on November 5, 2018 with no penalty for
early repayment. The interest rate on the term loan is based
on the lenders’ Canadian prime rate or bankers acceptance
rate in the year of payment. The term debt has certain financial
covenants including a covenant based on maximum debt to total
capitalization of the Company. In 2015, the minimum net worth
financial covenant, which was based on shareholders’ equity,
was removed.

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

10. EMPLOYEE FUTURE BENEFITS

The Company, in participation with Canfor, has several funded
and unfunded defined benefit pension 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
pension 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,
net of withdrawals, for 2015 were $13.1 million (2014 - $14.1
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.

As at

As at
December 31, December 31,
2014

2015

110.0
20.0
130.0
-
(13.0)
117.0

110.0
20.0
130.0
-
(12.2)
117.8

The Company has a separate facility to cover letters of
credit. In 2015, the Company extended the maturity on this
facility to June 30, 2016. At December 31, 2015, $9.4 million of
letters of credit are covered under this facility with the balance
of $3.6 million covered under the Company’s general operating
loan facility.

As at December 31, 2015, the Company is in compliance with

all covenants relating to its operating loans.

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.

As at December 31, 2015, the Company is in compliance with

all covenants relating to its long-term debt.

FAIR VALUE OF TOTAL LONG-TERM DEBT

At December 31, 2015, the fair value of the Company’s long-term
debt approximates its amortized cost of $50.0 million (2014 -
$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 pension plan for
which an actuarial valuation is performed every three years.
The pension 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. In addition, CPPI has a non-contributory plan that provides
certain non-pension post-retirement benefits to its members.
The non-contributory plan underwent an actuarial valuation
for funding purposes in 2013, and is currently undergoing an
actuarial valuation as at December 31, 2015, which will be
completed later in 2016.

Information about CPPI’s defined benefit plans, in

aggregate, is as follows:

CONSOLIDATED FINANCIAL STATEMENTS

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
Employer contributions, net
Employee contributions
Taylor Pulp Transfer
Benefit payments
Administrative expenses
End of year

Plan assets consist of the following:

Asset category
Equity securities
Debt securities
Cash and cash equivalents

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)
Taylor Pulp Transfer
Other
End of year

2015

2014

Pension
Benefit
Plans

Other
Benefit
Plans

Pension
Benefit
Plans

Other
Benefit
Plans

108.9
4.5
2.4
-
2.0
0.1
6.9
(5.7)
(0.1)
119.0

-
-
-
-
1.8
-
-
(1.8)
-
-

105.1
4.5
3.9
(3.9)
4.6
0.1
-
(5.1)
(0.3)
108.9

-
-
-
-
1.5
-
-
(1.5)
-
-

As at

As at
December 31, December 31,
2014

2015

Percentage of Plan Assets
16%
83%
1%
100%

17%
82%
1%
100%

2015

2014

Pension
Benefit
Plans

Other
Benefit
Plans

Pension
Benefit
Plans

Other
Benefit
Plans

125.9
3.2
5.1
0.1
(5.7)
0.1
7.2
-
135.9

76.9
2.1
2.9
-
(1.8)
(5.2)
-
-
74.9

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

Of the defined benefit pension plan obligation of $135.9 million (2014 - $125.9 million), $121.4 million (2014 - $115.2 million) relates to
plans that are wholly or partly funded, $14.5 million (2014 - $10.7 million) relates to plans that are wholly unfunded. At December 31,
2015, certain liabilities for pension benefit plans were secured by a letter of credit in the amount of $1.4 million (2014 - nil).

The total obligation for the other benefit plans of $74.9 million (2014 - $76.9 million) is unfunded.

RECONCILIATION OF FUNDED STATUS OF BENEFIT PLANS TO AMOUNTS RECORDED IN THE FINANCIAL STATEMENTS

December 31, 2015

December 31, 2014

Pension
Benefit
Plans

119.0
(135.9)
(16.9)
(1.2)
(18.1)

Other
Benefit
Plans

-
(74.9)
(74.9)
-
(74.9)

Pension
Benefit
Plans

108.9
(125.9)
(17.0)
(1.0)
(18.0)

Other
Benefit
Plans

-
(76.9)
(76.9)
-
(76.9)

( 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

CANFOR PULP ANNUAL REPORT 2015

COMPONENTS OF PENSION COST

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 loss (gain) – experience
Actuarial loss – demographic assumptions
Actuarial loss (gain) – financial assumptions
Return on plan assets greater than discount rate
Administrative costs greater (less) than expected
Reallocation of assets in proportion to obligations
Total included in other comprehensive income

SIGNIFICANT ASSUMPTIONS

2015

2014

Pension
Benefit
Plans

Other
Benefit
Plans

Pension
Benefit
Plans

Other
Benefit
Plans

3.2
0.2
0.6
-
4.0

3.4
-
(3.3)
(2.4)
(0.1)
-
(2.4)

2.1
-
2.9
(0.1)
4.9

3.1
-
(8.3)
-
-
-
(5.2)

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

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, 2015

December 31, 2014

Pension
Benefit
Plans

Other
Benefit
Plans

Pension
Benefit
Plans

Other
Benefit
Plans

4.1%
3.0%
2.5%

n/a
n/a
n/a

4.1%
n/a
n/a

7.0%
4.5%
2021

3.9%
3.0%
2.5%

n/a
n/a
n/a

3.9%
n/a
n/a

7.0%
4.5%
2021

SENSITIVITY ANALYSIS

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 2015:

( 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

$
$

(15.5)

(10.8)
10.2

$
$

19.0

13.7
(8.5)

As at December 31, 2015, CPPI estimated that it will make
contribution payments of $4.2 million to its defined benefit plans in
2016 based on the last actuarial valuation for funding purposes.

DEFINED CONTRIBUTION AND OTHER PLANS

The total expense recognized in 2015 for CPPI’s defined
contribution plans was $2.2 million (2014 - $1.3 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 $7.0
million in 2015 (2014 - $6.7 million).

CONSOLIDATED FINANCIAL STATEMENTS

11. ASSET RETIREMENT OBLIGATIONS

The following table provides a reconciliation of the asset retirement obligations as at December 31, 2015 and 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 )

Asset retirement obligations at beginning of year
Accretion expense
Acquisitions ( N o t e 2 1)
Changes in estimates
Asset retirement obligations at end of year

2015

2014

3.5
0.1
1.0
0.9
5.5

2.7
0.1
-
0.7
3.5

CPPI’s asset retirement obligations represent estimated
undiscounted future payments of $9.3 million to remediate landfills
at the operations at the end of their useful lives. The payments are
expected to occur at periods ranging from 7 to 36 years and have
been discounted at risk-free rates ranging from 1.0% to 2.2% (2014
- 1.4% to 2.4%). The $0.9 million changes in estimates associated
with the asset retirement obligation principally reflect 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

2015

2014

Number of
Shares

70,829,823
(1,877,951)
68,951,872

Amount

522.1
(13.9)
508.2

Number of
Shares

Amount

71,007,341
(177,518)
70,829,823

523.4
(1.3)
522.1

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 2015 was 70,105,543 (2014 - 70,949,525), and
reflected common shares purchased under the Company’s
Normal Course Issuer Bid.

NORMAL COURSE ISSUER BID

On March 5, 2015, the Company renewed its normal course
issuer bid whereby it can purchase for cancellation up to
3,541,491 common shares or approximately 5% of its issued

and outstanding common shares as of February 28, 2015. The
renewed normal course issuer bid is set to expire on March 4,
2016. In 2015, CPPI purchased 1,877,951 common shares for
$25.6 million (an average price of $13.63 per common share),
of which $13.9 million was charged to share capital and $11.7
million was charged to retained earnings. Cash payments for
share purchases totaled $25.3 million during the year with the
balance of $0.3 million paid in early January 2016. As a result of
the share purchases in 2015, Canfor’s interest in CPPI increased
from 50.5% at December 31, 2014 to 51.9% at December 31, 2015.
In 2014, under a previous normal course issuer bid, 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.

CANFOR PULP ANNUAL REPORT 2015

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 )

Interest expense on borrowings
Interest expense on retirement benefit obligations, net
Interest income
Other
Finance expense, net

2015

2014

(3.0)
(3.5)
0.7
(0.2)
(6.0)

(2.7)
(3.0)
0.3
(0.1)
(5.5)

For the year ended December 31, 2015, finance expense, net interest expense on retirement benefit obligations and interest related
substantially to interest expense on term debt, net expense related to the Company’s operating loan facility.

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

2015

(35.6)
(0.7)
(36.3)

2014

(31.0)
0.5
(30.5)

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 2015 – 26.0% (2014 - 26.0%)
Add (deduct):

Entities with different income tax rates and other tax adjustments
Permanent difference from capital gains and other non-deductible items

Income tax expense

2015

2014

(37.2)

(31.2)

1.0
(0.1)
(36.3)

0.8
(0.1)
(30.5)

In addition to the amounts recorded to net income, a tax expense of $2.0 million was recorded to other comprehensive income for
the year ended December 31, 2015 (2014 - $6.7 million recovery) 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
Retirement benefit obligations
Other

Deferred income tax liabilities
Depreciable capital assets
Other

Total deferred income taxes, net

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 increase in non-cash working capital

As at

As at
December 31, December 31,
2014

2015

23.9
2.1
26.0

(93.9)
(0.3)
(94.2)
(68.2)

2015

(49.7)
(4.8)
4.4
17.2
(32.9)

24.6
1.8
26.4

(91.9)
-
(91.9)
(65.5)

2014

11.5
(15.6)
(5.6)
(4.2)
(13.9)

CONSOLIDATED FINANCIAL STATEMENTS

16. RELATED PARTY TRANSACTIONS

In 2015, the Company depended on Canfor to provide
approximately 64% (2014 - 59%) 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 current pricing under
the Company’s Fibre Supply Agreement with Canfor 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 $182.2 million in 2015 (2014 -
$147.5 million).

Canfor provides certain business and administrative

services to CPPI under a services agreement. The total cost of
the services provided by Canfor in 2015 was $11.5 million (2014
- $10.6 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. The total
cost of the services provided to Canfor in 2015 was $3.6 million
(2014 - $2.8 million). These amounts are included as a cost
recovery in manufacturing and product costs and selling and
administration costs.

The Company has a demand loan agreement with Canfor
whereby each party may borrow funds from the other party
at its discretion. As part of the agreement, the demand loan
maturity may not exceed three months, and interest expense
is calculated based on the difference between the borrower’s
annualized borrowing rate and the average return on highly-
rated short-term investments. At December 31, 2015, no
amounts are outstanding on the demand loan.

In 2015, CPPI purchased wood chips from Lakeland Mills
Ltd. (“Lakeland”). Canfor had a 33% interest in Lakeland up until
the sale of its investment on July 1, 2015. Prior to the sale, CPPI
purchased $1.1 million in wood chips from Lakeland (2014 - nil).

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,
2014

2015

15.6

18.0

1.7

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
Termination benefits

2015

2014

3.4
0.1
0.5
4.0

3.4
0.2
-
3.6

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.

CANFOR PULP ANNUAL REPORT 2015

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 following table. The accounting

policies of the reportable segments are the same as described
in Note 3.

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.

( 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, 2015
Sales to external customers
Sales to other segments
Operating income (loss)
Amortization
Capital expenditures2
Identifiable assets

Year ended December 31, 2014
Sales to external customers
Sales to other segments
Operating income (loss)
Amortization
Capital expenditures2
Identifiable assets

Pulp

Paper

Unallocated

Elimination
Adjustment

Total

$ 1,006.1
93.4
$
127.0
$
61.5
$
$
62.5
746.4
$

$
$
$
$
$
$

816.4
93.8
115.0
59.2
56.2
677.9

166.7
-
27.6
3.6
5.8
64.0

162.8
-
22.0
3.4
1.1
57.6

1.9
-
(11.4)
0.1
-
30.9

1.3
-
(11.6)
0.1
0.4
91.9

-
(93.4)
-
-
-
-

-
(93.8)
-
-
-
-

$ 1,174.7
-
$
143.2
$
65.2
$
68.3
$
841.3
$

$
$
$
$
$
$

980.5
-
125.4
62.7
57.7
827.4

( 2 ) 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 s 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 t h a t w e r e p a r t i a l l y 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 . C a p i t a l

e x p e n d i t u r e s f o r t h e y e a r e n d e d D e c e m b e r 3 1, 2 0 15 e x c l u d e t h e a s s e t s p u r c h a s e d a s p a r t o f t h e a c q u i s i t i o n o f t h e Ta y l o r p u l p m i l l ( N o t e 2 1) .

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

2015

2014

78.8
356.1
74.3
631.9
33.6
$ 1,174.7

54.8
301.0
86.3
492.5
45.9
980.5

At the end of the year, CPPI has contractual commitments for
the construction of capital assets for $1.8 million (2014 - $0.6
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, 2015 and 2014, 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,
2014

2015

0.4
0.4
0.8

0.8
0.3
1.1

CONSOLIDATED FINANCIAL STATEMENTS

During the year ended December 31, 2015, $2.3 million (2014
- $2.9 million) was recognized as an expense in the income
statement in respect to operating leases.

ENERGY AGREEMENTS

The Company has entered into energy agreements with a
BC energy company and electricity transmission provider
(the “Energy Agreements”) for 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, 2015, CPPI has $11.6
million of standby letters of credit (2014 - $12.2 million) under
these agreements, and has no repayment obligations under the
terms of any of these agreements.

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.

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,
2015 is $17.5 million (2014 - $76.8 million).

CPPI utilizes credit insurance to manage the risk associated
with trade receivables. As at December 31, 2015, approximately
78% (2014 - 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, 2015
is $101.8 million (2014 - $60.7 million). At December 31, 2015,
approximately 99% (2014 - 98%) of the trade accounts receivable
balance are 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.

At December 31, 2015, CPPI has no amounts drawn (2014 - no
amounts drawn) on its operating loans and accounts payable and
accrued liabilities of $144.2 million (2014 - $123.2 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) INTERE ST R ATE RISK:
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, 2015, CPPI has no fixed interest rate swaps
outstanding (2014 - $35.0 million).

(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.

An increase (decrease) in the value of the Canadian dollar by

US$0.01 would result in a pre-tax loss (gain) of approximately
$1.3 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.

CANFOR PULP ANNUAL REPORT 2015

CPPI had the following foreign exchange derivatives at December 31, 2015 and 2014:

As at December 31, 2015

As at December 31, 2014

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

CPPI had no pulp futures contracts outstanding at

December 31, 2015 and 2014.

(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 Western Texas Intermediate oil
(“WTI”) contracts to hedge its exposure.

As at December 31, 2015, the Company has no WTI oil

collars outstanding. As at December 31, 2014, the Company had
102 thousand barrels of WTI oil collars outstanding.

US Dollar Collars

0-12 months

(iii) COMMODIT Y 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.

From time to time, CPPI enters into futures contracts

on commodity exchanges for pulp. Under the Price Risk
Management Controls Policy up to 1% of pulp sales may be sold
in this way.

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,
2014

2015

50.0
17.5
32.5
479.7
512.2

50.0
76.8
(26.8)
489.6
462.8

The Company has certain financial covenants in its debt
obligations including a maximum debt to total capitalization
ratio which is calculated by dividing total debt by shareholders’
equity plus total debt.

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, 2015 and 2014.

The Company manages its capital structure through rigorous

planning, budgeting and forecasting processes, and ongoing
management of operations, investments and capital expenditures.
In 2015, to meet CPPI’s operating, growth and return on invested
capital objectives, the Company’s management of capital
comprised share purchases and dividends, strategic acquisitions,
investment in the Company’s operations, development of energy-
related assets, and sustainable working capital reduction
initiatives. Neither the Company nor any of its subsidiaries are
subject to externally imposed capital requirements.

CONSOLIDATED FINANCIAL STATEMENTS

20. 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, FairValueMeasurement, requires classification of these
items within a hierarchy that prioritizes the inputs to fair
value measurement.
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. During 2015, the Company settled all of its
derivative financial instruments and none are outstanding as at
December 31, 2015 (2014 - net liability of $1.0 million).
The following table summarizes the losses on the

Company’s level 2 derivative financial instruments for the years
ended December 31, 2015 and 2014:

The following table summarizes the losses on the Company’s level 2 derivative financial instruments for the years ended
December 31, 2015 and 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 )

Foreign exchange collars
Crude oil collars
Interest rate swaps
Pulp futures
Loss on derivative financial instruments

2015

(8.3)
(0.4)
(0.1)
-
(8.8)

2014

(0.3)
(0.7)
(0.1)
(0.8)
(1.9)

There were no financial instrument transfers between fair value hierarchy levels during 2015 or 2014.

21. PURCHASE OF TAYLOR PULP MILL

On January 30, 2015, CPPI completed the purchase of the
Taylor pulp mill from Canfor for cash consideration of $12.6
million including working capital. The acquisition also
includes a long-term fibre supply agreement under which
Canfor will supply the Taylor pulp mill with fibre at prices
that approximate fair market value. In addition to the cash
consideration paid on the acquisition date, CPPI may also pay
contingent consideration to Canfor, based on the Taylor pulp
mill’s annual adjusted operating income before amortization
over a three-year period, starting January 31, 2015. On the
acquisition date, the fair value of the contingent consideration
was $1.8 million and was recorded as a long-term provision.
CPPI recognized long-term assets acquired net of liabilities
assumed at a fair value of $2.8 million and net working capital

22. SPECIAL DIVIDEND

of $11.6 million. The acquisition has been accounted for in
accordance with IFRS 3, BusinessCombinations.

If the acquisition had occurred on January 1, 2015, CPPI’s
consolidated sales for the year ended December 31, 2015 would
have increased by approximately $8.9 million and consolidated
net income for the year ended December 31, 2015 would have
increased by approximately $0.2 million. The Taylor pulp mill’s
results are recorded in the pulp segment.

Subsequent to the acquisition date in 2015, CPPI reversed

the $1.8 million contingent consideration provision resulting
in a gain recorded to Other Income to reflect lower forecast
Bleached Chemi-Thermo Mechanical Pulp prices over the
contingent consideration period. The fair value of the contingent
consideration provision is nil at December 31, 2015.

On August 10, 2015, the Company paid a special dividend of $79.0 million ($1.1250 per share) to the shareholders of the Company. The
special dividend was paid as a result of strong cash generated by the business in 2014 and 2015.

23. SUBSEQUENT EVENT

On February 17, 2016, the Board of Directors declared a quarterly dividend of $0.0625 per share, payable on March 8, 2016, to
shareholders of record on March 1, 2016.

CANFOR PULP ANNUAL REPORT 2015

A D D I T I O N A L
I N F O R M A T I O N

CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF CONSOLIDATED
PRODUCTION AND SHIPMENTS

( u n a u d i t e d )

PRODUCTION

2015

Pulp – 000 mt
Paper – 000 mt

2014

Pulp – 000 mt
Paper – 000 mt

SHIPMENTS

2015

Pulp – 000 mt
Paper – 000 mt

2014

Pulp – 000 mt
Paper – 000 mt

1st Qtr

2nd Qtr

3rd Qtr

4th Qtr

287.8
35.4

294.6
31.0

310.5
34.6

322.5
35.8

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

272.1
32.1

291.9
33.8

307.4
32.1

356.2
35.4

1st Qtr

2nd Qtr

3rd Qtr

4th Qtr

222.4
31.3

246.9
39.7

240.5
35.7

258.6
35.8

Year

1,215.4
136.8

Year

985.6
144.0

Year

1,227.6
133.4

Year

968.4
142.5

CANFOR PULP ANNUAL REPORT 2015

2015 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 and equipment, net
Acquisition of Taylor Pulp Mill
Other, net

273.8
171.1
38.1
15.7
7.5
41.4
(1.3)
(9.4)
7.0
37.7
(9.7)
28.0

28.0

0.40

39.6

(4.4)
(1.7)
(0.5)
(6.6)

(13.4)
(12.6)
0.2
(25.8)

276.0
191.5
41.5
15.5
6.6
20.9
(1.3)
4.6
(0.6)
23.6
(5.9)
17.7

17.7

0.25

30.5

(4.4)
(7.3)
(0.6)
(12.3)

(12.8)
-
0.3
(12.5)

294.1
186.2
42.4
16.4
6.8
42.3
(1.7)
(4.9)
6.2
41.9
(10.7)
31.2

31.2

0.45

32.2

(83.3)
(6.7)
(0.9)
(90.9)

(14.5)
-
0.1
(14.4)

330.8
220.5
47.0
17.6
7.1
38.6
(1.7)
0.9
1.9
39.7
(10.0)
29.7

$ 1,174.7
769.3
169.0
65.2
28.0
143.2
(6.0)
(8.8)
14.5
142.9
(36.3)
106.6

29.7

106.6

0.43

1.52

43.1

145.4

(4.4)
(9.6)
(0.7)
(14.7)

(27.6)
-
0.1
(27.5)

(96.5)
(25.3)
(2.7)
(124.5)

(68.3)
(12.6)
0.7
(80.2)

Increase (decrease) in cash and cash equivalents

7.2

5.7

(73.1)

0.9

(59.3)

ADDITIONAL INFORMATION

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 )

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

25.7

0.36

23.9

(3.5)
-
(7.0)
(10.5)

(10.0)
-
(10.0)

252.5
166.4
33.9
15.2
7.4
29.6
(1.3)
0.6
(3.7)
25.2
(6.4)
18.8

18.8

0.27

51.6

(4.5)
-
(5.6)
(10.1)

(20.2)
-
(20.2)

237.6
151.3
32.0
16.3
6.6
31.4
(1.3)
(0.3)
3.0
32.8
(8.5)
24.3

24.3

0.34

24.7

(4.4)
(2.0)
(0.6)
(7.0)

(16.2)
0.1
(16.1)

264.0
179.3
34.3
15.2
7.2
28.0
(1.4)
(0.8)
1.8
27.6
(6.9)
20.7

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

89.5

0.29

1.26

53.2

153.4

(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

CANFOR PULP ANNUAL REPORT 2015

DIRECTORS AND OFFICERS

DIRECTORS

The names, principal occupation and municipalities of residence of the Directors of the Company as at December 31, 2015 are as
below. For more information visit www.canfor.com

Charles J. Jago, PhD, C.M., O.B.C. (2)(4)
Corporate Director
Prince George, British Columbia

Conrad A. Pinette (2)(4)(5)
Corporate Director
Vancouver, British Columbia

Michael J. Korenberg (1)(3)(5)
Chairman
Canfor Pulp Products Inc.
West Vancouver, British Columbia

William W. Stinson (1)(2)(4)(5)
Chairman and Chief Executive Officer
Westshore Terminals Investment Corp.
Vancouver, British Columbia

Peter J.G. Bentley, O.C., O.B.C., LL.D. (2)(3)(4)(5)
Chairman Emeritus
Canfor Corporation
Vancouver, British Columbia

Stan E. Bracken-Horrocks, FCPA, FCA (1)(3)(5)
Corporate Director
Kelowna, British Columbia

David M. Calabrigo, Q.C.
Senior Vice President, Corporate Development,
Legal Affairs and Corporate Secretary
Canfor Corporation
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, 2015 are as below. For more information visit www.canfor.com

Michael J. Korenberg
Chairman
West Vancouver, British Columbia

Alan R. Nicholl
Chief Financial Officer
West Vancouver, British Columbia

Martin Pudlas
Vice President, Operations
Prince George, British Columbia

Donald B. Kayne
Chief Executive Officer
Tsawwassen, British Columbia

Brett R. Robinson
President
Tsawwassen, British Columbia

David M. Calabrigo, Q.C.
Corporate Secretary
Vancouver, British Columbia

Peter Hart
Vice President, Pulp and Paper Sales
and Marketing
Vancouver, 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 c o m p e n s a t i o n p o l i c i e s a p p r o v e d b y t h e B o a r d a n d t o m a k e r e c o m m e n d a t i o n s

t o t h e B o a r d r e g a r d i n g e x e c u t i v e c o m p e n s a t i o n .

( 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 .

( 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 .

ADDITIONAL INFORMATION

MAP OF OPERATIONS

PRINCE GEORGE

WESTERN CANADA

PULP & PAPER

Intercontinental Pulp Mill, BC . . . . . . . . . 1

Northwood Pulp Mill, BC . . . . . . . . . . . . . 2

Prince George Pulp and Paper Mill, BC . 3

Taylor Pulp Mill, BC. . . . . . . . . . . . . . . . . . 4

Canfor Pulp Innovation, BC . . . . . . . . . . . 5

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
contributed to ensuring that Canfor Pulp remains a global
quality and technology leader in NBSK.

CANFOR PULP ANNUAL REPORT 2015

DEFINITIONS AND INFORMATION

MILL OPERATIONS

DEFINITIONS OF SELECTED FINANCIAL TERMS

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 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.

Pulp ( 0 0 0 t o n n e s )
Paper ( 0 0 0 t o n n e s )

2015
Production

1,215
137

Capacity

1,285
140

CORPORATE AND SHAREHOLDER INFORMATION

Annual General Meeting
The Annual General Meeting
of Canfor Pulp Products Inc.
will be held at the Prince
George Playhouse at 2833
Recreation Place, Prince
George, BC, on Wednesday,
April 27th, 2016 at 11:00 am.

Auditors
KPMG LLP
Vancouver, BC

Transfer Agent and Registrar
CST Trust Company
1600-1066 W. Hastings St.
Vancouver, BC V6E 3X1

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,
Canfor Corporation
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.canfor.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://canfor.com/
investor-relations

Public Affairs Contact
Corinne Stavness
Senior Director, External
Affairs and Communications
T: (604) 661-5225
F: (604) 661-5219
E: corinne.stavness@canfor.com

ADDITIONAL INFORMATION

COMPANY OVERVIEW

FIN AN CIAL HIGHL IGHT S

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 information1

Return on invested capital - consolidated
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)

(1)

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.

2015

1,174.7
143.2
106.6

1.52
6.96

17.02
10.11
13.53

163.9
841.3
32.5
479.7

23.0%
2.1:1
6.3%

208.4
17.7%
68.3

$
$
$

$
$

$
$
$

$
$
$
$

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%
2.5:1
(5.8)%

188.1
19.2%
57.7

$
$
$

$
$

$
$
$

$
$
$
$

WWW.CANFOR.COM

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