CANFOR PU LP PRODUCT S INC.
2016
I N T H I S R E P O RT
03
M E S S AG E TO S H A R E H O L D E R S
05 2016 Management’s Discussion and Analysis
06 Company Overview
07 Overview of 2016
11 Overview of Consolidated Results - 2016 Compared to 2015
13 Operating Results by Business Segment - 2016 Compared to 2015
17 Summary of Financial Position
17 Changes in Financial Position
18 Liquidity and Financial Requirements
20 Transactions with Related Parties
21 Selected Quarterly Financial Information
22 Three-Year Comparative Review
23 Fourth Quarter Results
27 Specific Items Affecting Comparability
27 Outlook
28 Critical Accounting Estimates
29 Future Changes in Accounting Policies
30 Risks and Uncertainties
35 Outstanding Share Data
36 Disclosure Controls and Internal Controls Over Financial Reporting
38 CONSOLIDATED FINANCIAL STATEMENTS
39 Management’s Responsibility
40
Independent Auditors’ Report
42 Consolidated Balance Sheets
43 Consolidated Statements of Income
44 Consolidated Statements of Other Comprehensive Income (Loss)
44 Consolidated Statements of Changes in Equity
45 Consolidated Statements of Cash Flows
46 Notes to the Consolidated Financial Statements
66
ADDITIONAL INFORMATION
67 Directors and Officers
68 Corporate and Shareholder Information
MESSAGE TO SHAREHOLDERS
F R O M T H E P R E S I D E N T A N D C E O
In 2016, Canfor Pulp delivered strong operational performance
in all of our business lines – NBSK pulp and BCTMP, specialty
paper products and renewable energy generation.
Global pulp demand was stable, and there continues to be
increased demand in China. Paper markets remain strong – we
saw recovery in North America after market weakness in the first
half of the year, and China continues to recover from a weak 2015.
Our energy business had a modest increase in power generation
now that the turbines of our three NBSK pulp mills are all
operating and selling power, and we project further incremental
benefits into 2017.
In May, we signed an agreement to form a joint venture with
Licella Fibre Fuel Pty Ltd. of Australia to investigate opportunities
to integrate Licella’s unique catalytic hydrothermal reactor
upgrading platform with our pulp mills to economically convert
biomass, including residues from our kraft pulping processes,
into biocrude oil to potentially produce next-generation biofuels.
The agreement to form the Licella Pulp Joint Venture follows
preliminary trials where wood residue from our kraft mills was
successfully converted into a stable biocrude oil at Licella’s pilot
plants in New South Wales, Australia. If we find we can achieve
this economically, this would allow Canfor Pulp to further optimize
pulp production capacity while adding a new revenue stream.
This is just the latest example of our leadership in innovation.
Through Canfor Pulp Innovation, we are ultra-responsive to the
needs of our customers and our mills. The centre practices open
innovation through a unique network of contractors, suppliers and
partners, including world-class consultants in low consistency
refining and tissue, research organizations dedicated to the
development of next-generation fibre measurement and fibre
products, and university researchers.
In 2016, our significant achievements in energy efficiency
and environmental stewardship – including turbine generator
upgrades, updates to operating and maintenance practices, and
capital investments to improve our biomass boilers – earned us the
Canadian Industry Program for Energy Conservation Leadership
Award in the category of Employee Awareness and Training.
We continue to look for innovative ways to market our products
and support our valued customers. Fibre United, a cooperative
sales and marketing agreement we have with Finnish-based
UPM-Kymmene, continues to work well for both companies. We
are able to provide customers with a wide range of products and
enhanced technical services in China, Japan, Europe and North
America. In 2016, we announced that Fibre United would expand
to Korea, the world’s fifth-largest pulp market.
We never lose sight of the fact that while our location in British
Columbia gives us a definite fibre advantage, the real strength of
Canfor Pulp comes from our skilled and dedicated employees.
We work hard to support their ongoing professional development
through succession planning and training and development
programs, and a promote-from-within culture. For the second
year in a row, we received the Industry Training Authority’s 2016
Appreciation Award for our efforts to support the growth of BC’s
skilled workforce.
We are proud of the fact Canfor Pulp also registered its best
three-year average safety performance in 2016. Our medical
incident rate of 2.29 is a testament to the continued vigilance and
care of all our employees.
As we move into 2017, we are confident we will continue to
be an industry leader across all our businesses, with strong
demand for our quality pulp and paper products. Our success is
the outcome of the many contributions from our employees, the
excellent guidance and support from members of our Board, and
the continued confidence of our shareholders.
Brett Robinson
President, Canfor Pulp
Don Kayne
Chief Executive Officer
3
F R O M T H E P R E S I D E N T A N D C E O
F R O M T H E C H A I R M A N
MESSAGE TO SHAREHOLDERS
We are pleased to report that 2016 was another solid year
for Canfor Pulp’s pulp and paper products, and our green energy
business keeps growing.
The Company achieved net income of $57.8 million, or $0.86
a share, and we had an operating income of $98.2 million and
a return on invested capital of 13%. Canfor Pulp continued
quarterly dividends of $0.0625 per common share in 2016.
Through a normal course issuer bid that allows us to purchase
for cancellation up to 5% of issued or outstanding common
shares, Canfor Pulp repurchased just over 2.2 million common
shares in 2016, or about 3.3% of the share value. Combined,
Canfor Pulp’s dividends and share repurchases returned more
than $41 million to our shareholders.
Canfor Pulp has many advantages. By building upon them, we
have the opportunity to position the Company to meet the needs
of its customers today and into the future.
The Company’s premium product quality has enabled Canfor
Pulp to develop worldwide demand for our products – primarily in
Asia, North America and Europe – and valued customers who can
rely on us to provide the products and expertise necessary for them
to manufacture their increasingly sophisticated end products.
Without a doubt, the biggest advantage Canfor Pulp enjoys
is a willingness to be leaders and to find ways to use these
advantages to create new opportunities.
Our modern kraft mills operate as large-scale biorefineries,
manufacturing premium pulp products while producing clean
energy. The steam generated in our boilers generates electricity
and heats our operations, and the surplus power is exported
to the BC electricity network. Through the Licella Pulp Joint
Venture, we may one day be producing aviation fuel from our
pulp residues. We are delighted that this venture has merited
the support of the Canadian Federal Government’s Sustainable
Development Technology Canada program, which has awarded
$13 million in non-repayable credits to Canfor Pulp to support
the Company as it works to convert a promising technology into
world-class biorefinery outputs.
In 2014, we established a sales and marketing agreement with
UPM-Kymmene to offer customers better choice and technical
support. Based on the tremendous success that this venture
has achieved in meeting and exceeding the expectations of our
combined customers, we recently expanded it to include Korea in
addition to China, Japan, Europe and North America.
On behalf of the Board of Directors of Canfor Pulp, it is a
pleasure to be associated with a company with the vision to see
future opportunities, and the expertise and passion to make
them a reality.
My sincere thanks to Canfor Pulp’s management team and
dedicated employees who make this possible, and the customers,
business partners and shareholders we value so much. Thanks
also to my Board colleagues for their advice and significant
contributions. And, as he leaves the Board of Directors after more
than a decade of service, including as its initial Board Chairman
following the spin-out of Canfor Pulp as a separate reporting
issuer from its parent company, Canfor Corporation, I wish to
acknowledge, with sincere thanks, the many contributions made
to the Board, and the Company, by Charles Jago. Thank-you.
Michael Korenberg
Chairman of the Board
4
2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
This Management’s Discussion and Analysis (“MD&A”) provides a review of Canfor Pulp Products Inc.’s (“CPPI” or
“the Company”) financial performance for the year ended December 31, 2016 relative to the year ended December
31, 2015, and the financial position of the Company at December 31, 2016. It should be read in conjunction with
CPPI’s Annual Information Form and its audited consolidated financial statements and accompanying notes for the
years ended December 31, 2016 and 2015. The financial information contained in this MD&A has been prepared in
accordance with International Financial Reporting Standards (“IFRS”), which is the required reporting framework for
Canadian publicly accountable enterprises.
Throughout this discussion, reference is made to Operating Income before Amortization which CPPI considers to be a
relevant indicator for measuring trends in the Company’s performance and its ability to generate funds to meet its
debt service and capital expenditure requirements, and to pay dividends. Reference is also made to Adjusted Net
Income (Loss) (calculated as Net Income (Loss) less specific items affecting comparability with prior periods – for the
full calculation, see reconciliation included in the section “Analysis of Specific Material Items Affecting Comparability
of Net Income (Loss)”) and Adjusted Net Income (Loss) per Share (calculated as Adjusted Net Income (Loss) divided
by weighted average number of shares outstanding during the period). Operating Income before Amortization,
Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share are not generally accepted earnings
measures and should not be considered as an alternative to net income or cash flows as determined in accordance
with IFRS. As there is no standardized method of calculating these measures, CPPI’s Operating Income before
Amortization, Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share may not be directly comparable
with similarly titled measures used by other companies. Reconciliations of Operating Income before Amortization to
Operating Income (loss) and Adjusted Net Income (Loss) to Net Income (Loss) reported in accordance with IFRS are
included in this MD&A.
Factors that could impact future operations are also discussed. These factors may be influenced by known and
unknown risks and uncertainties that could cause the actual results to be materially different from those stated in
this discussion. Factors that could have a material impact on any future oriented statements made herein include,
but are not limited to: general economic, market and business conditions; product selling prices; raw material and
operating costs; currency exchange rates; interest rates; changes in law and public policy; the outcome of labour and
trade disputes; and opportunities available to or pursued by CPPI.
All financial references are in millions of Canadian dollars unless otherwise noted. The information in this report is as
at February 8, 2017.
Forward Looking Statements
Certain statements in this MD&A constitute “forward-looking statements” which involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially different from any future results,
performance or achievements expressed or implied by such statements. Words such as “expects”, “anticipates”,
“projects”, “intends”, “plans”, “will”, “believes”, “seeks”, “estimates”, “should”, “may”, “could”, and variations of such
words and similar expressions are intended to identify such forward-looking statements. These statements are based
on management’s current expectations and beliefs and actual events or results may differ materially. There are
many factors that could cause such actual events or results expressed or implied by such forward-looking statements
to differ materially from any future results expressed or implied by such statements. Forward-looking statements are
based on current expectations and the Company assumes no obligation to update such information to reflect later
events or developments, except as required by law.
5 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, 2016 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, 2016, Canfor Corporation (“Canfor”) held a 53.6% interest in CPPI, an increase of 1.7% from
December 31, 2015 as a result of CPPI’s share purchases in 2016 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 1,266 people in its wholly owned subsidiaries and jointly owned operations as at December 31, 2016.
The following chart illustrates, on a simplified basis, the ownership structure of CPPI (collectively the Company) as at
December 31, 2016.
Simplified Ownership Structure
CANFOR
CORPORATION
(British Columbia)
100% of Shares
CANADIAN FOREST
PRODUCTS LTD.
(British Columbia)
53.6% of Shares
Shareholders
46.4% of Shares
CANFOR PULP
PRODUCTS INC.
(British Columbia)
100% of Shares
CANFOR PULP LTD.
(Canada)
The Pulp and Paper
Business
6 Pulp
The Company owns and operates three NBSK pulp mills with annual capacity to produce approximately 1.1 million
tonnes of northern softwood market kraft pulp, 85% 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 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 150,000 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. The Taylor pulp mill supplies pulp markets in North America and Asia. 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, 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, and
Capitalizing on attractive growth opportunities.
OVERVIEW OF 2016
CPPI had a solid year in 2016, with operating income of $98.2 million and a return on invested capital of 13%.
Global pulp demand was relatively stable in 2016 while global inventory levels were on the high end of the balanced
range, reflecting slowly increasing pulp capacity through 2016. NBSK pulp list prices to China averaged US$599 per
tonne for the year, US$45 per tonne lower than in 2015. BCTMP markets remained under significant pressure
through the first half of 2016, but a price recovery in the second half of 2016 resulted in US-dollar prices being
broadly in line with the previous year. A 4% weaker Canadian dollar offset part of the impact from the lower NBSK
pulp US-dollar prices and, to a lesser extent, higher NBSK pulp shipments in 2016 to lower-margin regions.
Operating results for the pulp segment were down $47.4 million from the previous year, mostly due to the
aforementioned lower NBSK pulp unit sales realizations, and, to a lesser extent, weather related logistics challenges
that impacted shipments around year end. Excluding weather-related disruptions, productivity was in line with the
prior year, while fibre costs showed a small improvement, primarily due to lower prices for delivered sawmill residual
chips and a lower proportion of higher-cost whole log chips. The favourable BCTMP pricing in the third and fourth
quarters of 2016 combined with a 4% weaker Canadian dollar, enabled the Taylor pulp mill to deliver improved
operating results in 2016 compared to 2015.
The Company’s energy business and its power generation continued to grow in 2016 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
7 in early 2015 and started selling power in April 2015. With all three turbines operating, the Company is projecting
further incremental benefits of these green energy projects into 2017.
The Company’s paper business performed well in 2016, continuing on from its strong operating performance in the
prior year, as lower slush pulp costs more than offset a slight decrease in paper unit sales realizations. Reduced
costs for slush pulp reflected lower global softwood pulp prices, while a moderate decrease in US-dollar kraft paper
prices more than offset the favourable movement of the Canadian dollar.
During 2016, CPPI and Licella Fibre Fuel Pty Ltd. (“Licella”) agreed to form a joint venture under the name Licella
Pulp Joint Venture to investigate opportunities to integrate Licella’s Catalytic Hydrothermal Reactor platform into
CPPI’s pulp mills to economically convert biomass into next generation biofuels and biochemicals. Licella is a
subsidiary of Ignite Energy Resources Ltd. (“IER”) an Australian energy technology development company. This
additional residue stream refining would allow the Company to further optimize pulp production capacity. This
agreement follows a successful program of preliminary trials conducted on feedstock from the Company at Licella’s
pilot plants located in New South Wales, Australia, in which wood residue streams from CPPI’s kraft process were
successfully converted into a stable biocrude oil. In conjunction with the joint venture agreement, CPPI provided a
$7.0 million convertible credit facility to IER, the parent company of Licella, which matures on June 21, 2019. In
2016, the Company’s net income included the pre-tax write-down of $7.0 million of advances made in connection
with the biofuels initiative to Licella. Notwithstanding the future benefits that may result from this innovative effort,
the write-down reflected the research and development nature of the advances.
During 2016, the Company continued to repurchase shares under its Normal Course Issuer Bid, repurchasing just
over 2.2 million common shares, or approximately 3.3% of the Company’s share capital in 2016. Through 2016, the
Company also continued its quarterly dividends of $0.0625 per common share, returning a total of $16.9 million to
shareholders in the year.
The Company maintained its strong balance sheet through the year, finishing the year with net cash of $1.9 million
and a net debt to total capitalization ratio of (0.4)%.
A review of the more significant developments and results by operating segment in 2016 follows.
Markets and Pricing
(i)
Pulp – Global market supply pressures contribute to weaker price environment in 2016 despite
favourable currency movements
Global softwood pulp markets saw moderate downward pressure on average NBSK pulp list prices to China
throughout 2016, despite a slight rebound in prices in the second quarter of 2016. While overall global pulp demand
was steady, additional hardwood pulp capacity was absorbed into global markets, particularly China, during the year.
Global shipments of bleached softwood kraft pulp were up slightly in 2016 compared to 2015, primarily to China
where shipment levels were well above trend. Globally, softwood pulp producer inventories increased in the first
quarter of 2016 with limited industry maintenance downtime, then fell through the spring maintenance period in the
second quarter of 2016. Thereafter, inventories remained at, or slightly above, the high end of the balanced range
through the second half of 2016.
The benchmark China NBSK pulp list price averaged US$599 per tonne1 in 2016, down US$45 per tonne, or 7%, from
the prior year. This was offset in part by a 4% weaker Canadian dollar, resulting in an overall decline in NBSK pulp
sales realizations in Canadian dollar terms.
1 Resource Information Systems, Inc.
8 The following charts show the NBSK pulp list price movements in 2016 before taking account of customer discounts
and rebates (Chart 1), and the global pulp inventory levels (Chart 2).
Chart 1
Chart 2
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 represented and co-marketed CPPI’s products
in Europe and China, as part of a strategic sales and marketing cooperation agreement with UPM. This arrangement
has been working 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 - Continued pressure in kraft paper markets in 2016 in spite of boost from weaker
Canadian dollar
Downward pressure on kraft bleached paper markets, which commenced in the latter half of 2015, continued in
2016. The North American market experienced weakness particularly in the first half of 2016, while the China
market showed some indicators of improvement in 2016 after a weak 2015. The lower kraft bleached paper prices
were partly offset by the benefits of the weaker Canadian dollar in 2016.
9 Capital and Operations Review
Maintaining steady operational performance and strong balance sheet in light of market pressures and
weather challenges
Notwithstanding the global softwood pulp market pressures, total pulp production in 2016 was in line with 2015, with
higher BCTMP production reflecting a full year’s production at the Taylor pulp mill (11 months in 2015) and a modest
improvement in productivity through most of the year, offsetting the impact to operations in late 2016 from
inclement weather conditions in British Columbia. Kraft paper production in 2016 was also broadly in line with 2015,
reflecting a slight increase in productivity offset by additional scheduled maintenance days in 2016. Scheduled
maintenance outages were completed on time at all facilities in 2016.
The Company maintained its strong balance sheet position in 2016, finishing the year with a positive net cash
position. In addition to solid cash earnings generated for the 2016 year, the Company’s cash from operations also
included a reduction in non-cash working capital, in part reflecting the Company’s continued focus on inventory
management. Discretionary capital spending continued to prioritize operational excellence, with asset reliability and
energy generation remaining key focus areas.
10 OVERVIEW OF CONSOLIDATED RESULTS – 2016 COMPARED TO
2015
Selected Financial Information and Statistics
(millions of Canadian dollars, except for per share amounts)
Sales
Operating income before amortization2
Operating income
Loss on derivative financial instruments3
Net income
2016
1,101.9
172.0
98.2
-
57.8
$
$
$
$
$
$
$
$
$
$
2015
1,174.7
208.4
143.2
(8.8)
106.6
Net income per share, basic and diluted
ROIC – Consolidated4
Average exchange rate (US$ per C$1.00)5
2 Amortization includes certain capitalized major maintenance costs.
3 Includes gains (losses) from foreign exchange, energy, pulp futures and interest rate swap derivatives (see “Unallocated and Other Items” section
for more details).
4 Consolidated Return on Invested Capital (“ROIC”) 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.
5 Source – Bank of Canada (average noon rate for the period).
23.0%
13.0%
0.755
0.86
0.782
1.52
$
$
$
$
(millions of Canadian dollars)
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
Advances to Licella
Acquisition of Taylor pulp mill
Share purchases
Other, net
Change in cash / operating loans
6 Amortization includes certain capitalized major maintenance costs.
2016
2015
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
79.6
29.7
(11.1)
98.2
73.8
172.0
19.0
(8.3)
(33.6)
0.9
150.0
(16.9)
(3.2)
(64.0)
(7.0)
-
(24.7)
0.2
34.4
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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)
11 Analysis of Specific Items Affecting Comparability of Net Income
After-tax impact
(millions of Canadian dollars, except for per share amounts)
2016
2015
Net income, as reported
Loss on derivative financial instruments
Mark-to-market gain on Taylor pulp mill contingent consideration7
Net impact of above items
Adjusted net income
Net income per share (EPS), as reported
Net impact of above items per share
$
$
$
$
$
$
$
57.8
-
-
-
57.8
0.86
-
$
$
$
$
$
$
$
106.6
6.5
(1.3)
5.2
111.8
1.52
0.07
Adjusted net income per share
7 As part of the purchase of the Taylor pulp mill on January 30, 2015, CPPI may pay contingent consideration based on the Taylor pulp mill’s future
earnings over a three year period. On the acquisition date, the contingent consideration was valued at $1.8 million. During 2015, the contingent
consideration liability was revalued to nil, resulting in a gain of $1.8 million (before tax) recorded to Other Income (see further discussion in the
“Acquisition of Taylor pulp mill” section).
0.86
1.59
$
$
The Company recorded net income of $57.8 million, or $0.86 per share, for the year ended December 31, 2016, a
decrease of $48.8 million, or $0.66 per share, from $106.6 million, or $1.52 per share, reported for the year ended
December 31, 2015.
Operating income for 2016 was $98.2 million, down $45.0 million from operating income of $143.2 million for 2015.
These results primarily reflect decreases in NBSK pulp and kraft paper sales realizations, as the favourable impact of
the weaker Canadian dollar was more than offset by the decline in US-dollar NBSK pulp and kraft paper prices,
combined with a decline in pulp shipment volumes, primarily due to the weather-related delays in vessel shipments
around year end. Excluding weather-related disruptions, productivity was in line with the prior year, while fibre costs
were favourable in 2016, primarily due to lower prices for delivered sawmill residual chips and a lower proportion of
higher-cost whole log chips. BCTMP sales realizations were in line with the previous year.
A more detailed review of the Company’s operational performance and results is provided in “Operating Results by
Business Segment – 2016 compared to 2015”, which follows this overview of consolidated results.
12 OPERATING RESULTS BY BUSINESS SEGMENT – 2016 COMPARED
TO 2015
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 2016 and 2015 are as follows:
(millions of Canadian dollars, unless otherwise noted)
Sales
Operating income before amortization8
Operating income
Capital expenditures
Average NBSK pulp price delivered to China - US$9
Average NBSK pulp price delivered to China – Cdn$9
Production – pulp (000 mt)10
Shipments – pulp (000 mt)10
2016
2015
$
$
$
$
$
$
$
$
$
$
$
$
924.2
149.5
79.6
60.9
599
794
1,217.9
1,201.5
1,006.1
188.5
127.0
62.5
644
824
1,215.4
1,227.6
Marketed on behalf of Canfor (000 mt)
8 Amortization includes certain capitalized major maintenance costs.
9 Per tonne, NBSK pulp list price delivered to China (Resource Information Systems, Inc). Average NBSK pulp price delivered to China in Cdn$
calculated as average pulp price delivered to China – US$ multiplied by the average exchange rate – Cdn$ per US$1.00 according to Bank of Canada
average noon rate for the period.
10 Pulp production and shipment volumes in 2015 include BCTMP volumes subsequent to CPPI’s acquisition of the Taylor BCTMP mill on January 30,
2015 (See further discussion in the “Acquisition of Taylor pulp mill” section). Following the acquisition, CPPI no longer markets any product on behalf
of Canfor.
15.2
-
Overview
The Pulp segment reported operating income of $79.6 million for 2016, down $47.4 million from $127.0 million in
2015. These results were mostly due to lower NBSK pulp sales realizations, and to a lesser extent weather-related
logistics challenges that impacted shipments around the 2016 year end. Excluding weather-related disruptions,
productivity was in line with the prior year, while unit fibre costs showed a small improvement, primarily due to lower
prices for delivered sawmill residual chips and a lower proportion of higher-cost whole log chips.
Markets
As mentioned above, global softwood pulp markets saw moderate downward pressure on average NBSK pulp list
prices to China through 2016, despite a slight rebound in prices in the second quarter of 2016. While overall global
pulp demand was steady additional hardwood pulp capacity was absorbed into global markets, particularly China,
during the year. Global shipments of bleached softwood kraft pulp were up slightly in 2016 compared to 2015,
primarily to China where shipment levels were well above trend.
At the end of December 2016, World 2011 producers of bleached softwood pulp inventories were at 32 days’ supply,
just above the balanced range. By comparison, December 2015 inventories were at 29 days’ supply. Market
conditions are generally considered balanced when inventories are in the 27-30 days of supply range.
Sales
The Company’s pulp shipments in 2016 were 1,201,500 tonnes, down 26,100 tonnes, or 2%, from 2015. Lower pulp
shipments reflected the slippage of a vessel shipment to Asia into January 2017, combined with an overall decrease
in NBSK pulp shipments to North America through the 2016 year. BCTMP shipments made up approximately 18% of
total pulp shipments for 2016, up 2% from 2015, reflecting a full year of the Taylor pulp mill’s shipments.
11 World 20 data is based on twenty producing countries representing 80% of the world chemical market pulp capacity and is based on information
compiled and prepared by the Pulp and Paper Products Council (“PPPC”).
13 As mentioned, China NBSK pulp list prices averaged US$599 per tonne in 2016, down US$45 per tonne, or 7%.
Average NBSK pulp unit sales realizations were moderately lower in 2016 largely reflecting the lower list price to
China and a lower-value regional sales mix, which outweighed the benefit of the 4% weaker Canadian dollar in 2016.
Average BCTMP unit sales realizations were broadly in line with 2015, reflecting a challenging BCTMP market in the
first half of the year, which was offset by favourable improvements in BCTMP markets in the second half of the year,
combined with the benefit of the weaker Canadian dollar.
During 2016, the Company experienced its first full year of generating power at all three of its NBSK pulp mills, after
the Intercontinental pulp mill turbine started selling power in April 2015 and following the ramp-up of the Northwood
pulp mill turbines in the previous year. As a result of these green energy projects, the Company’s energy business
saw a modest increase in power generation in 2016, which was offset by weather-related operational challenges in
the fourth quarter. The Company is projecting further incremental benefits of these green energy projects into 2017.
Operations
Pulp production in 2016, at 1,217,900 tonnes, was consistent with that produced in 2015. NBSK pulp production saw
a slight decrease compared to 2015, primarily due to lower operating rates, particularly in the fourth quarter of 2016
as a result of severe cold weather challenges. 2016 was the Company’s first full year of BCTMP production following
the acquisition of the Taylor pulp mill on January 30, 2015. This incremental production, combined with modest
improvements in operating rates, resulted in increased BCTMP production when compared to 2015.
Pulp unit manufacturing costs were slightly lower compared to 2015 principally due to moderately lower fibre costs,
as pulp unit conversion costs were broadly in line with the prior year. The decrease in fibre costs compared to 2015
reflected lower market prices for delivered sawmill residual chips (linked to Canadian dollar NBSK pulp sales
realizations) combined with a significant increase in the proportion of lower-cost sawmill residual chips, mostly due to
additional chips supplied by Canfor.
Paper
Selected Financial Information and Statistics – Paper
Summarized results for the Paper segment for 2016 and 2015 are as follows:
(millions of Canadian dollars, unless otherwise noted)
Sales
Operating income before amortization12
Operating income
Capital expenditures
Production – paper (000 mt)
Shipments – paper (000 mt)
12 Amortization includes certain capitalized major maintenance costs.
Overview
2016
2015
$
$
$
$
$
$
$
$
176.1
33.5
29.7
1.7
135.8
142.5
166.7
31.2
27.6
5.8
136.8
133.4
Operating income for the paper segment was $29.7 million for 2016 representing a $2.1 million increase from the
prior year. This increase in operating income reflected modestly lower paper unit manufacturing costs, due to a
decline in slush pulp costs, combined with higher prime bleached shipments. These factors were partially offset by a
slight decrease in paper unit sales realizations, as the weaker Canadian dollar was more than offset by a decline in
US-dollar kraft paper prices.
Markets
As mentioned above, downward pressure on kraft bleached paper markets continued in 2016. The North American
market experienced weakness particularly in the first half of 2016, while the China market recovered somewhat after
a weak 2015. Lower kraft bleached paper prices were partly offset by the benefits of the weaker Canadian dollar in
2016. The Paper Shipping Sack Manufacturers’ Association (“PSSMA”) reported total sack paper shipments to the US
were down 5.5% compared to 2015.
14 Sales
The Company’s paper shipments in 2016 were 142,500 tonnes, an increase of 9,100 tonnes, or 7%, from 2015,
principally the result of higher volumes sold to North America. The Company’s prime bleached paper shipments,
which attract higher prices, in 2016 represented 86% of prime sales volumes, up 1% from 2015. Paper unit sales
realizations decreased slightly in 2016, reflecting the decline in US-dollar kraft paper prices, offset in part, by the
favourable impact of the weaker Canadian dollar as well as the proportionately higher prime bleached shipments.
Operations
Paper production in 2016 was 135,800 tonnes, broadly in line with 2015. This reflects a slight increase in operating
rates offset by additional scheduled maintenance days in 2016. Paper unit manufacturing costs were modestly lower
compared to 2015, reflecting a moderate decrease in slush pulp costs (linked to lower Canadian dollar market pulp
prices), offset in part, by higher maintenance and increased cost of chemicals in 2016.
Unallocated and Other Items
Selected Financial Information
(millions of Canadian dollars)
Corporate costs
Finance expense, net
Loss on derivative financial instruments
Other income (expense), net
Corporate Costs
2016
2015
$
$
$
$
(11.1) $
(6.6) $
-
$
(10.4) $
(11.4)
(6.0)
(8.8)
14.5
Corporate costs, which comprise corporate, head office and general and administrative expenses, were $11.1 million
in 2016, down slightly from the prior year.
Finance Income and Expense
Net finance expense for 2016 was $6.6 million, up $0.6 million from 2015. The increase principally reflected higher
interest earned in 2015 combined with one-time credit facility fees to extend the maturity of the operating loan in
2016 (see further discussion in the “Liquidity and Financial Requirements” section). Interest expense is reported net
of interest income.
Loss on Derivative Financial Instruments
From time to time, 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 2016, the Company had no derivative financial instruments outstanding. 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
Net other expense for 2016 of $10.4 million includes the $7.0 million write-down of research and development
related advances to Licella, combined with unfavourable foreign exchange movements on US-dollar denominated
cash, receivables and payables (see further discussion in the “Licella Pulp Joint Venture” section). In 2015, net other
income included favourable foreign exchange movements on US-dollar denominated working capital balances
combined with 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).
15 Licella Pulp Joint Venture
On May 27, 2016, CPPI and Licella agreed to form a joint venture under the name Licella Pulp Joint Venture to
investigate opportunities to integrate Licella’s Catalytic Hydrothermal Reactor platform into CPPI’s pulp mills to
economically convert biomass into next generation biofuels and biochemicals. Licella is a subsidiary of IER an
Australian energy technology development company. This additional residue stream refining would allow the
Company to further optimize pulp production capacity. This agreement follows a successful program of preliminary
trials conducted on feedstock from the Company at Licella’s pilot plants located in New South Wales, Australia, in
which wood residue streams from CPPI’s kraft process were successfully converted into a stable biocrude oil. In
conjunction with the joint venture agreement, CPPI provided a $7.0 million convertible credit facility to IER, the
parent company of Licella, which matures on June 21, 2019. In 2016, the Company’s net income included the pre-
tax write-down of $7.0 million of advances made in connection with the biofuels initiative to Licella. Notwithstanding
the future benefits that may result from this innovative effort, the write-down reflected the research and
development nature of the advances.
Income Tax Expense
The Company recorded an income tax expense of $23.4 million in 2016 with an overall effective tax rate of 29%
(2015 - 25%).
The reconciliation of income taxes calculated at the statutory rate to the actual income tax provision is as follows:
(millions of Canadian dollars)
Net income before income taxes
Income tax expense at statutory rate of 26%
Add (deduct):
Permanent difference from capital gains and other non-deductible items
Entities with different income tax rates and other tax adjustments
Income tax expense
Other Comprehensive Income (Loss)
2016
2015
81.2
$
142.9
(21.1)
$
(37.2)
$
$
(1.8)
(0.5)
$
(23.4)
$
(0.1)
1.0
(36.3)
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 2016, an after-tax loss of $11.5 million was recorded in Other
Comprehensive Income, including losses on the defined benefit pension plans and the other non-pension post-
employment benefits. The losses in 2016 largely reflected a decrease in the discount rate used to value the net
defined benefit obligation, combined with unfavourable actuarial experience adjustments in the pension plans and a
return on pension plan assets less than the discount rate.
In addition, in 2016, the Company purchased $33.7 million of annuities through its defined benefit plans to mitigate
its exposure to the future volatility in the related pension obligations, taking total annuities purchased by the
Company in the last three years to approximately $39.8 million. As at December 31, 2016, 24% of the defined
benefit pension plan obligations were fully hedged against changes in future discount rates and longevity risk
(potential increases in life expectancy of plan members). A further 46% was partially hedged against changes in
future discount rates through the plan’s investment in debt securities. At purchase of these annuities, transaction
costs of $3.6 million were recognized in Other Comprehensive Income principally reflecting the difference in the
annuity rate (which is comparable to solvency rates) as compared to the discount rate used to value the pension
obligations on a going concern basis.
In 2015, the after-tax gain of $5.6 million recorded to Other Comprehensive Income largely reflected a higher
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.
16 SUMMARY OF FINANCIAL POSITION
The following table summarizes CPPI’s financial position as at December 31, 2016 and 2015:
(millions of Canadian dollars, except for ratios)
2016
2015
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
$
51.9
$
$
$
138.9
190.8
518.7
2.2
711.7
50.0
109.1
6.2
61.7
484.7
$
$
$
711.7
$
17.5
146.4
163.9
532.3
0.9
697.1
50.0
93.0
6.2
68.2
479.7
697.1
Ratio of current assets to current liabilities
Net debt to total capitalization
2.5 : 1
2.1 : 1
(0.4)%
6.3%
The ratio of current assets to current liabilities at the end of 2016 was 2.5:1, compared to 2.1:1 at the end of 2015,
primarily as a result of higher cash and cash equivalent balances. See further discussion in “Changes in Financial
Position” section.
The Company’s net debt to capitalization was (0.4)% at December 31, 2016 (December 31, 2015: 6.3%) reflecting
the Company’s maintenance of low debt levels and strong cash position at the end of 2016.
CHANGES IN FINANCIAL POSITION
At the end of 2016, CPPI had $51.9 million of cash and cash equivalents.
(millions of Canadian dollars)
Cash generated from (used in)
Operating activities
Financing activities
Investing activities
Increase (decrease) in cash and cash equivalents
2016
2015
$
$
150.0
(44.8)
(70.8)
34.4
$
$
145.4
(124.5)
(80.2)
(59.3)
The changes in the components of these cash flows during 2016 are discussed in the following sections.
Operating Activities
For the 2016 year, CPPI generated cash from operating activities of $150.0 million, up $4.6 million from cash
generated of $145.4 million in the previous year. The increase in operating cash flows was principally from
favourable movements in non-cash working capital, offset in part by lower cash earnings in 2016. The improvement
in non-cash working capital in 2016 related principally to the decline in accounts receivable balances and residual
chip inventories.
Financing Activities
In 2016, cash used in financing activities of $44.8 million was $79.7 million lower than the $124.5 million used in the
prior year. During 2016, CPPI paid dividends totaling $16.9 million, or the equivalent of $0.0625 per common share
in each quarter. During 2015, CPPI paid a special dividend of $79.0 million, or $1.125 per common share, as well as
quarterly dividends totaling $17.5 million, or $0.0625 per common share in each quarter. During 2016, the Company
continued its share repurchase activity under its Normal Course Issuer Bid, spending a total of $24.7 million on
common share repurchases during the year, compared to a total of $25.3 million on common share repurchases in
17 2015 (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 2016 were $0.5 million higher than the prior
year.
Investing Activities
Net cash used for investing activities in 2016 was $70.8 million, compared to $80.2 million used in 2015. Capital
expenditures of $64.0 million in 2016 were associated with several capital projects including energy, maintenance of
business and improvement projects, as well as, to a lesser extent, the acquisition of mobile equipment. Cash used
for investing activities also included $7.0 million in advances to Licella, which comprised the aforementioned write-
down (see further discussion in the “Licella Pulp Joint Venture” section). 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).
LIQUIDITY AND FINANCIAL REQUIREMENTS
Operating Loan and Term Debt
At December 31, 2016, the Company had a $110.0 million unsecured operating loan facility which was unused,
except for $9.3 million reserved for several standby letters of credit, leaving $100.7 million available and undrawn on
the operating facility. In 2015, the maturity date of this facility was extended to January 31, 2019. Subsequent to
this extension, in 2016, the maturity date of this facility was extended to January 31, 2020. CPPI had a separate
facility to cover letters of credit, which expired on June 30, 2016 and was not extended. Letters of credit covered
under the expired facility were transferred to the operating loan facility.
CPPI has $50.0 million of floating interest rate term debt. In 2016, the Company extended the maturity of the term
debt from November 5, 2018 to January 31, 2020.
Debt Covenants
CPPI has certain financial covenants on its debt obligations that stipulate a 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, 2016, and expects to remain so
for the foreseeable future.
Normal Course Issuer Bid
On March 7, 2016, the Company renewed its normal course issuer bid whereby it can purchase for cancellation up to
3,446,139 common shares or approximately 5% of its issued and outstanding common shares as of March 1, 2016.
The renewed normal course issuer bid is set to expire on March 6, 2017. In 2016, CPPI purchased 2,252,504
common shares for $24.4 million (an average price of $10.83 per common share). Cash payments for share
purchases totaled $24.7 million during the year. As a result of the share purchases in 2016, Canfor’s interest in CPPI
increased from 51.9% at December 31, 2015 to 53.6% at December 31, 2016.
2017 Projected Capital Spending and Debt Repayments
Based on its current outlook for 2017, assuming no deterioration in market conditions during the year, the Company
anticipates that it will invest approximately $77.0 million in capital projects, which will consist primarily of various
improvement projects as well as maintenance of business expenditures, including major maintenance spending.
18 There are no scheduled debt payments in 2017. CPPI has sufficient liquidity in its cash reserves and operating loans
to finance its planned capital expenditures as required during 2017.
Derivative Financial Instruments
As at December 31, 2016, the Company had no derivative financial instruments outstanding. From time to time,
CPPI:
a. Uses US-dollar derivative financial instruments to partly hedge its exposure to currency risk. The Company
did not enter into any US-dollar collars during 2016.
b. Uses Western Texas Intermediate (“WTI”) oil contracts as proxy to hedge its diesel purchases. The
Company did not enter into any oil collars during 2016.
c.
Enters into futures contracts on commodity exchanges for pulp. The Company did not enter into any pulp
futures contracts during 2016.
d. Uses interest rate swaps to reduce its exposure to financial obligations bearing variable interest rates. The
Company did not enter into any interest rate swaps during 2016.
Commitments
The following table summarizes CPPI’s financial contractual obligations at December 31, 2016 for each of the next
five years and thereafter:
(millions of Canadian dollars)
2017
2018
2019
2020
2021
Thereafter
Total
Long-term debt obligations
Operating leases
$
$
- $
- $
- $
50.0 $
0.4
0.3
0.2
0.1
0.4 $
0.3 $
0.2 $
50.1 $
- $
-
- $
- $
-
- $
50.0
1.0
51.0
Other contractual obligations not included in the table above or highlighted previously are:
The Company has energy agreements with a BC energy company (the “Energy Agreements”) for three of the
Company’s mills. 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, 2016 the Company had posted $7.7
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 $1.6 million, principally related to the construction of capital assets.
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 6 to 35 years which have been discounted at risk free rates ranging from 1.3% to
2.3%. The estimated discounted value is $5.4 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, 2016 was $109.1 million. As at December 31, 2016, CPPI estimated that it would make
contribution payments of $4.4 million to its defined benefit pension plans in 2017 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.
19
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 expired September 1,
2016. The Company and Canfor agreed to extend the chip pricing formula under these agreements for one year,
with the opportunity to extend for one additional year if both parties agree. In 2016, the Company depended on
Canfor to provide approximately 63% of its fibre supply.
The Company purchased wood chips, logs and hog fuel from Canfor sawmills in the amount of $147.8 million in
2016.
Canfor provides certain business and administrative services to the Company under a services agreement. The total
amount charged for the services provided by Canfor in 2016 was $12.2 million.
The Company provides certain business and administrative services to Canfor under an incidental services
agreement. The total amount charged for the services provided to Canfor in 2016 was $3.5 million.
At December 31, 2016, an outstanding balance of $10.3 million is due to Canfor.
Additional details on related party transactions are contained in Note 16 to CPPI’s 2016 consolidated financial
statements.
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 included 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 of $11.6 million. The acquisition was accounted for in accordance with
IFRS 3, Business Combinations.
If the acquisition had occurred on January 1, 2015, CPPI’s consolidated 2015 sales would have increased by
approximately $8.9 million and consolidated 2015 net income would have increased by approximately $0.2 million.
The Taylor pulp mill’s results are included 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 (expense) to reflect lower forecast BCTMP prices over the contingent
consideration period. The fair value of the contingent consideration provision was nil at December 31, 2016.
20 SELECTED QUARTERLY FINANCIAL INFORMATION
Q4
2016
Q3
2016
Q2
2016
Q1
2016
Q4
2015
Q3
2015
Q2
2015
Q1
2015
Sales and income
(millions of Canadian dollars)
Sales
Operating income before amortization13
Operating income
Net income
Per common share (Canadian dollars)
Net income – basic and diluted
Book value14
$ 257.8 $
291.6 $
257.2 $
295.3 $
330.8 $
294.1 $
276.0 $
273.8
$
$
$
$
$
42.1 $
50.0 $
22.1 $
57.8 $
56.2 $
58.7 $
36.4 $
22.9 $
31.0 $
5.2 $
39.1 $
38.6 $
42.3 $
20.9 $
10.1 $
22.4 $
2.2 $
23.1 $
29.7 $
31.2 $
17.7 $
57.1
41.4
28.0
0.15 $ 0.34 $ 0.03 $
0.34 $
0.43
7.27 $ 7.14 $ 6.88 $
7.15 $
6.96
$
$
0.45 $
0.25 $
6.65 $
7.40 $
0.40
7.17
Dividends declared
$ 0.0625 $ 0.0625 $ 0.0625 $ 0.0625 $ 0.0625
$ 0.0625
$ 1.1875 $
0.0625
Statistics
Pulp shipments (000 mt)
275.4
319.8
287.2
319.1
356.2
307.4
291.9
272.1
Paper shipments (000 mt)
33.6
35.5
38.5
34.9
35.4
32.1
33.8
32.1
Average exchange rate – US$/Cdn$
$ 0.750 $ 0.766 $
0.776 $
0.728 $
0.749 $
0.764 $
0.813 $
0.806
Average NBSK pulp list price delivered to
China (US$)
13 Amortization includes certain capitalized major maintenance costs.
14 Book value per common share is equal to shareholders’ equity at the end of the period, divided by the number of common shares outstanding at
the end of the period.
590 $
595 $
600 $
595 $
617 $
638 $
675 $
663
$
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.
(millions of Canadian dollars)
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
Advances to Licella
Acquisition of Taylor pulp mill
Share purchases
Other, net
Q4
2016
Q3
2016
Q2
2016
Q1
2016
Q4
2015
Q3
2015
Q2
2015
Q1
2015
18.1 $
8.1 $
(3.3) $
22.9 $
19.2 $
26.7 $
7.2 $
(2.9) $
31.0 $
19.0 $
1.8 $
5.5 $
(2.1) $
5.2 $
16.9 $
33.0 $
8.9 $
(2.8) $
39.1 $
18.7 $
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
42.1 $
50.0 $
22.1 $
57.8 $
56.2 $
58.7 $
36.4 $
57.1
3.8 $
(3.9) $
31.9 $
(12.8) $
(11.8) $
(10.5) $
(1.1) $
(9.5)
(2.1) $
(0.8) $
4.1 $
(3.6) $
(18.6) $
2.2 $
(1.4) $
(2.6) $
(1.5) $
(1.2) $
(11.6) $
(3.9) $
(1.7) $
(2.0) $
2.4 $
(0.5) $
(18.3) $
2.8 $
(1.3) $
(3.2) $
(0.3) $
(0.4)
(12.5)
4.9
47.1 $
26.1 $
48.5 $
28.3 $
43.1 $
32.2 $
30.5 $
39.6
(4.2) $
(1.1) $
(18.3) $
(3.5) $
$
-
$
-
$
-
(4.1) $
(0.8) $
(14.0) $
$
-
-
$
(0.3) $
$
-
(4.3) $
(0.5) $
(18.6) $
(3.5) $
- $
(19.4) $
- $
(4.3) $
(0.8) $
(13.1) $
$
-
-
$
(5.0) $
0.2 $
(4.4) $
(0.7) $
(27.6) $
$
-
$
-
(9.6) $
0.1 $
(83.3) $
(0.9) $
(14.5) $
- $
- $
(6.7) $
0.1 $
(4.4) $
(0.6) $
(12.8) $
$
-
-
$
(7.3) $
0.3 $
(4.4)
(0.5)
(13.4)
-
(12.6)
(1.7)
0.2
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Change in cash / operating loans
15 Amortization includes certain capitalized major maintenance costs.
20.0 $
$
6.9 $
2.2 $
5.3 $
0.9 $
(73.1) $
5.7 $
7.2
21 THREE-YEAR COMPARATIVE REVIEW
(millions of Canadian dollars, except per share amounts)
Sales
Net income
Total assets
Term debt
Net income per share, basic and diluted
Dividends declared per share
2016
1,101.9
57.8
837.1
50.0
0.86
0.250
$
$
$
$
$
$
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
$
$
$
$
$
$
$
$
$
$
$
$
22 FOURTH QUARTER RESULTS
Overview
The Company recorded operating income of $22.9 million and net income of $10.1 million for the fourth quarter of
2016, compared to operating income of $31.0 million and net income of $22.4 million for the third quarter of 2016
and operating income of $38.6 million and net income of $29.7 million for the fourth quarter of 2015. Net income
per share was $0.15 for the fourth quarter of 2016, compared to $0.34 per share in the third quarter of 2016 and
$0.43 per share in the fourth quarter of 2015.
An overview of the results by business segment for the fourth quarter of 2016 compared to the third quarter of 2016
and the fourth quarter of 2015 follows.
Pulp
Selected Financial Information and Statistics – Pulp
Summarized results for the Pulp segment for the fourth quarter of 2016, third quarter of 2016 and fourth quarter of
2015 were as follows:
(millions of Canadian dollars, unless otherwise noted)
Sales
Operating income before amortization16
Operating income
Average NBSK pulp price delivered to China – US$17
Average NBSK pulp price delivered to China – Cdn$17
Production – pulp (000 mt)
$
$
$
$
$
Q4
2016
215.9
36.2
18.1
595
794
304.0
$
$
$
$
$
Q3
2016
Q4
2015
$
$
$
$
$
247.9
44.8
26.7
595
777
312.5
286.9
50.9
34.4
600
801
322.5
Shipments – pulp (000 mt)
16 Amortization includes certain capitalized major maintenance costs.
17 Per tonne, NBSK pulp list price delivered to China (as published by Resource Information Systems, Inc.); Average NBSK pulp price delivered to
China in Cdn$ calculated as average NBSK pulp price delivered to China – US$ multiplied by the average exchange rate – Cdn$ per US$1.00 according
to Bank of Canada average noon rate for the period.
275.4
319.8
356.2
Overview
Operating income for the pulp segment was $18.1 million for the fourth quarter of 2016, down $8.6 million from the
third quarter of 2016 and down $16.3 million from the fourth quarter of 2015.
Pulp segment results were down compared to the previous quarter reflecting the disruption to operations and
logistics caused by challenging weather conditions in British Columbia, which impacted productivity and pulp unit
manufacturing costs, as well as shipments around year end. These impacts were partially offset by the improvement
in average BCTMP unit sales realizations in the current quarter, reflecting higher market prices combined with the
benefit of a 2% weaker Canadian dollar. NBSK pulp unit sales realizations were broadly in line with the previous
quarter, as a slightly weaker Canadian dollar was offset by increased pricing pressure from customers.
Compared to the fourth quarter of 2015, the impact of inclement weather conditions in British Columbia on pulp
production and shipment volumes, as well as a modest decrease in NBSK pulp US-dollar prices, which more than
offset an increase in BCTMP prices, were the primary factors accounting for the lower quarter-over-quarter operating
income. Pulp unit manufacturing costs were relatively in line with the fourth quarter of 2015, with the weather-
related disruptions to operating performance and resulting higher unit conversion costs offset by lower fibre costs in
the current quarter.
Markets
Global softwood pulp markets were relatively stable through most of the fourth quarter of 2016 with average NBSK
pulp list prices to China, North America and Europe in line with the third quarter of 2016. Global softwood pulp
producer inventory levels saw a slight increase through the quarter and finished at 32 days of supply at the end of
December 2016, up 2 days from the end of September 201618. Market conditions are generally considered balanced
when inventories are in the 27-30 days of supply range.
18 World 20 data is based on twenty producing countries representing 80% of the world chemical market pulp capacity and is based on information
compiled and prepared by the PPPC.
23 Global shipments of bleached softwood kraft pulp decreased slightly in October before rebounding in November and
December, primarily driven by increased shipments to Asia19.
Sales
The Company’s pulp shipments in the fourth quarter of 2016 totalled 275,400 tonnes, down 44,400 tonnes, or 14%,
from the third quarter of 2016 and down 80,800 tonnes, or 23%, from the fourth quarter of 2015. Lower pulp
shipments in the current quarter reflected both the slippage of a vessel shipment to Asia into early January 2017,
combined with lower NBSK pulp production. BCTMP shipments made up approximately 19% of the current quarter’s
total pulp shipments, representing a 3% increase from the previous quarter. Compared to the fourth quarter of
2015, the decrease in pulp shipments was mostly attributable to a significant drawdown of inventories in late 2015,
as well as the lower NBSK pulp production and delayed shipment in the current quarter.
The average China US-dollar NBSK pulp list price, as published by RISI, was unchanged from the third quarter of
2016 and average NBSK pulp unit sales realizations were broadly in line with the previous quarter reflecting the
benefit of a 2% weaker Canadian dollar offset by increased pricing pressure from customers. Average BCTMP unit
sales realizations showed a healthy increase when compared to the previous quarter, reflecting improved BCTMP
markets combined with the benefit of a 2% weaker Canadian dollar.
Compared to the fourth quarter of 2015, the average China US-dollar NBSK pulp list price was down $5 per tonne, or
1%. The Company’s NBSK pulp unit sales realizations saw a modest decrease when compared to the fourth quarter
of 2015 primarily reflecting lower US-dollar prices. BCTMP unit sales realizations increased significantly when
compared to the fourth quarter of 2015, primarily reflecting the improvement in BCTMP markets compared to the
end of 2015.
Energy revenues moderately increased during the fourth quarter of 2016 compared to the previous quarter, primarily
reflecting increased power generation and seasonally higher energy prices. Compared to the fourth quarter of 2015,
energy revenue was down primarily due to decreased power generation as a result of the weather-related
operational challenges in the current quarter.
Operations
Pulp production in the fourth quarter at 304,000 tonnes was down 8,500 tonnes, or 3%, from the third quarter of
2016, and down 18,500 tonnes, or 6%, compared to the fourth quarter of 2015. Production in the current quarter
reflected a lower operating rate, primarily due to the cold weather challenges, which more than offset the quarter-
over quarter impact of the scheduled maintenance outages in both comparative quarters. In the third quarter of
2016, the Company completed the scheduled maintenance outages at the Prince George NBSK pulp mill and the
Taylor BCTMP mill, which reduced pulp production by 3,700 tonnes of NBSK pulp and 3,100 tonnes of BCTMP,
respectively. In the comparative fourth quarter of 2015, the Company completed a scheduled maintenance outage
at the Northwood pulp mill which reduced NBSK pulp production by approximately 20,000 tonnes.
Pulp unit manufacturing costs saw a slight increase from the previous quarter, reflecting higher energy usage
combined with seasonally higher energy costs, as well as the unfavourable impact of the lower production volumes
during the current quarter. Fibre costs were relatively flat compared to the third quarter of 2016 reflecting slightly
lower market prices for delivered sawmill residual chips (linked to Canadian dollar NBSK pulp sales realizations),
offset by a marginal increase in the proportion of higher-cost whole log chips in the current quarter.
Pulp unit manufacturing costs were broadly in line with the fourth quarter of 2015 as lower productivity combined
with higher energy usage and higher energy costs, was offset by slightly lower fibre costs in the current quarter
reflecting lower market prices for delivered sawmill residual chips as well as a decrease in the proportion of higher-
cost whole log chips.
19 As reported by Pulp and Paper Products Council (“PPPC”) statistics.
24 Paper
Selected Financial Information and Statistics – Paper
Summarized results for the Paper segment for the fourth quarter of 2016, third quarter of 2016 and fourth quarter of
2015 were as follows:
(millions of Canadian dollars, unless otherwise noted)
Sales
Operating income before amortization20
Operating income
Production – paper (000 mt)
Shipments – paper (000 mt)
20 Amortization includes certain capitalized major maintenance costs.
Overview
Q4
2016
Q3
2016
Q4
2015
$
$
$
41.8 $
9.1 $
8.1 $
36.0
33.6
$
$
$
43.6
8.1
7.2
32.4
35.5
43.6
7.9
6.9
35.8
35.4
Operating income for the paper segment at $8.1 million for the fourth quarter of 2016 was up $0.9 million from the
third quarter of 2016 and up $1.2 million from the fourth quarter in the prior year.
The increase in operating income compared to the third quarter of 2016 primarily reflected the impact of the 2%
weaker Canadian dollar, combined with lower paper unit manufacturing costs related to higher production during the
current quarter, given the absence of any scheduled maintenance downtime. Compared to the fourth quarter of
2015, paper unit sales realizations remained unchanged, while unit manufacturing costs were modestly lower
reflecting lower slush pulp costs and lower maintenance and operating supply costs.
Markets
Global kraft paper markets were stable through the fourth quarter of 2016. Previously announced price increases in
Europe were met with resistance which resulted in very little price movement.
Sales
The Company’s paper shipments in the fourth quarter of 2016 were 33,600 tonnes, down 1,900 tonnes, or 5%, from
the previous quarter and down 1,800 tonnes, or 5% from the fourth quarter of 2015, principally reflecting lower
volumes sold to Asia and Europe. Prime bleached shipments, which attract higher prices, were in line with both the
third quarter of 2016 and the fourth quarter of 2015.
Paper unit sales realizations in the fourth quarter of 2016 were up slightly compared to the previous quarter,
reflecting the 2% weaker Canadian dollar, which more than offset a small decline in market prices, and in line with
paper unit sales realizations when compared to the fourth quarter of 2015.
Operations
Paper production for the fourth quarter of 2016 was 36,000 tonnes, up 3,600 tonnes, or 11%, from the previous
quarter, principally reflecting the previous quarter’s nine-day scheduled maintenance outage which reduced paper
production by approximately 3,300 tonnes. Paper production in the current quarter was broadly in line with fourth
quarter of 2015.
Paper unit manufacturing costs were modestly lower than the previous quarter, for the most part reflecting the
scheduled maintenance outage in the previous quarter.
Compared to the fourth quarter of 2015, paper unit manufacturing costs were also modestly lower, reflecting lower
slush pulp costs due to slightly lower overall pulp sales realizations in the current quarter along with the timing of
spend on maintenance and operating supplies in the current quarter.
25 Unallocated Items
(millions of Canadian dollars)
Corporate costs
Finance expense, net
Gain (loss) on derivative financial instruments
Other income (expense), net
Q4
2016
Q3
2016
Q4
2015
$
$
$
$
(3.3)
(1.9)
-
(5.1)
$
$
$
$
(2.9) $
(1.6) $
$
$
-
0.8
(2.7)
(1.7)
0.9
1.9
Corporate costs were $3.3 million for the fourth quarter of 2016, up from both comparable periods primarily
reflecting increases in corporate, head office and general and administrative expenses in the fourth quarter of 2016.
Net finance expense for the fourth quarter of 2016 at $1.9 million, was $0.3 million higher from the previous quarter
and $0.2 million higher from the fourth quarter of 2015 and relates primarily to one-time credit facility fees to extend
the maturity of the operating loan (see further discussion in the “Liquidity and Financial Requirements” section).
From time to time, 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. In the fourth and third
quarters of 2016, the Company had no derivative financial instruments outstanding.
Net other expense for the fourth quarter of 2016 of $5.1 million includes the write-down of research and
development related advances to Licella (see further discussion in the “Licella Pulp Joint Venture” section), in part
offset by favourable exchange movements on US-dollar denominated working capital balances. This is compared to
net other income of $0.8 million in the previous quarter and $1.9 million in the fourth quarter of 2015, principally
relating to favourable exchange movements on US-dollar denominated working capital balances.
Other Comprehensive Income (Loss)
In the fourth quarter of 2016, the Company recorded an after-tax gain of $2.5 million related to changes in the
valuation of the Company’s employee future benefit plans. The gain reflected a 0.5% increase in the discount rate
used to value the employee future benefit plans. During the fourth quarter of 2016, the Company purchased $33.7
million of annuities through its defined benefit plans in order to mitigate its exposure to the future volatility
fluctuations in the related pension obligations. At purchase of these annuities, transaction costs of $3.6 million were
recognized in Other Comprehensive Income principally reflecting the difference in the annuity rate (which is
comparable to solvency rates) as compared to the discount rate used to value the pension obligations on a going
concern basis. The Company recorded an after-tax loss of $1.1 million in the previous quarter and an after-tax gain
of $0.5 million in the fourth quarter of 2015. For more information, see the “Employee Future Benefits” part of the
“Critical Accounting Estimates” section later in this report.
Summary of Financial Position
The following table summarizes CPPI’s cash flow for the following periods:
(millions of Canadian dollars)
Increase (decrease) in cash and cash equivalents
Operating activities
Financing activities
Investing activities
Q4
2016
20.0
47.1
(5.3)
(21.8)
$
$
$
$
$
$
$
$
Q3
2016
Q4
2015
$
6.9
26.1
$
(5.2) $
(14.0) $
0.9
43.1
(14.7)
(27.5)
Cash generated from operating activities was $47.1 million in the fourth quarter of 2016, up $21.0 million from the
previous quarter and $4.0 million from the fourth quarter of 2015. The increase in operating cash flows compared to
the previous quarter principally reflected lower tax installment payments, combined with favourable movements in
non-cash working capital, which more than offset the lower cash earnings. The improvement in non-cash working
capital related to the decline in accounts receivable balances and chip inventories in the current quarter.
Cash used for financing activities was $5.3 million in the fourth quarter of 2016, which was in line with the previous
quarter and down $9.4 million from the fourth quarter of 2015. Cash used for financing activities in the current
quarter included the Company’s quarterly dividend resulting in a payment $4.2 million ($0.0625 per share) as well as
interest paid of $1.1 million, which was an increase compared to both comparative periods. In the third and fourth
quarters of 2016, the Company did not repurchase common shares under its Normal Course Issuer Bid, however, in
26 the third quarter of 2016, $0.3 million was paid for common shares that were repurchased at the end of the
immediately preceding quarter (see further discussion of the shares purchased under the normal course issuer bid in
the “Liquidity and Financial Requirements” section). 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 that comparative
quarter.
Cash used for investing activities of $21.8 million in the current quarter primarily related to capital expenditures
associated with several capital projects including energy, maintenance of business and improvement projects, as well
as, to a lesser extent, the acquisition of mobile equipment. Cash used for investing activities also included a $3.5
million advance to Licella, which formed part of the aforementioned write-down (see further discussion in the “Licella
Pulp Joint Venture” section).
Q1
2015
28.0
7.0
SPECIFIC ITEMS AFFECTING COMPARABILITY
Specific Items Affecting Comparability of Net Income
Factors that impact the comparability of the quarters are noted below:
After-tax impact
(millions of Canadian dollars, except for per
share amounts)
Q4
2016
Q3
2016
Q2
2016
Q1
2016
Q4
2015
Q3
2015
Q2
2015
Net income, as reported
$
10.1 $
22.4 $
2.2 $
23.1 $
29.7 $
31.2 $
17.7
$
(Gain) loss on derivative financial instruments $
Mark-to market gain on Taylor pulp mill
contingent consideration21
Net impact of above items
Adjusted net income
$
$
$
-
-
-
$
$
$
- $
- $
- $
-
-
-
$
$
$
- $
(0.7) $
3.6 $
(3.4) $
- $
- $
- $
- $
(1.3) $
-
(0.7) $
3.6 $
(4.7) $
7.0
10.1 $
22.4 $
2.2 $
23.1 $
29.0 $
34.8 $
13.0
$
35.0
$
0.15 $ 0.34 $ 0.03 $ 0.34 $ 0.43
Net income per share (EPS), as reported $
Net impact of above items per share22
Adjusted net income per share22
21 As part of the purchase of the Taylor pulp mill on January 30, 2015, CPPI may pay contingent consideration based on the Taylor pulp mill’s future
earnings over a three year period. On the acquisition date, the contingent consideration was valued at $1.8 million. During 2015, the contingent
consideration liability was revalued to nil, resulting in a gain of $1.8 million (before tax) recorded to Other Income (see further discussion in the
“Acquisition of Taylor pulp mill” section).
22 The year-to-date net impact of the adjusting items per share and adjusted net income per share does not equal the sum of the quarterly per share
amounts due to rounding.
0.34 $ 0.03 $ 0.34 $
$ 0.25 $
$ (0.07) $ 0.10
$ 0.18 $ 0.50
(0.01) $
0.15 $
0.45
0.42
0.50
- $
- $
0.05
$
$
$
$
$
-
-
0.40
OUTLOOK
Pulp Markets
For the month of January 2017, the Company announced an increase of US$20 per tonne for NBSK pulp list price to
China, equating to US$630 per tonne, and an increase of US$10 per tonne for BCTMP. For the month of February
2017, the Company announced a further US$20 per tonne increase to both its NBSK pulp and BCTMP list prices to
China. Global softwood markets are currently seeing positive pricing momentum, for both NBSK pulp and BCTMP,
and this is anticipated to continue into the second quarter of 2017, when many pulp producers have their major
maintenance shutdowns.
The Company has no maintenance outages planned for the first quarter of 2017. Maintenance outages are currently
planned at the Northwood pulp mill in the second quarter of 2017 with a projected 25,000 tonnes of reduced
production and at the Intercontinental pulp mill in the third quarter of 2017 with a projected 8,000 tonnes of reduced
production. A maintenance outage at the Taylor pulp mill is scheduled for the second quarter of 2017 with a
projected 3,000 tonnes of reduced production.
Paper Markets
Kraft paper markets are projected to remain stable through the first quarter of 2017 and into the second quarter of
2017, with steady demand in the North American market continuing to lead the way globally.
27
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with International Financial Reporting Standards (“IFRS”)
requires management to make estimates and assumptions that affect the amounts recorded in the financial
statements. Management regularly reviews these estimates and assumptions based on currently available
information. While it is reasonably possible that circumstances may arise which cause actual results to differ from
these estimates, management does not believe it is likely that any such differences will materially affect CPPI’s
financial position. Unless otherwise indicated the critical accounting estimates discussed affect all of the Company’s
reportable segments.
Employee Future Benefits
CPPI has various defined benefit and defined contribution plans providing both pension and other non-pension post-
retirement benefits to most of its salaried employees and certain hourly employees not covered by forest industry
union plans. CPPI also provides certain health care benefits and pension bridging benefits to eligible retired
employees. The costs and related obligations of the pension and other non-pension post-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 non-
pension post-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
Initial medical cost trend rate
Ultimate medical cost trend rate
Year ultimate rate is reached
December 31, 2016
December 31, 2015
Defined
Benefit
Pension
Plans
3.9%
3.0%
n/a
n/a
n/a
Other
Benefit
Plans
3.9%
n/a
7.0%
4.5%
2022
Defined
Benefit
Pension
Plans
4.1%
3.0%
n/a
n/a
n/a
Other
Benefit
Plans
4.1%
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, 2016 is between 20.9 years and 24.1 years (2015 - 20.9 years and 24.0 years). As at December 31,
2016, the weighted average duration of the defined benefit plan obligation, which reflects the average age of the
plan members, is 12.1 years (2015 - 12.0 years). The weighted average duration of the other benefit plans is 14.6
years (2015 - 14.3 years).
Assumed discount rates and medical cost trend rates have a significant effect on the accrued retirement benefit
obligation and related plan assets. A one percentage point change in these assumptions would have the following
effects on the accrued retirement benefit obligation, before taking into account the impact of hedging, and related
plan annuity assets for 2016:
(millions of Canadian dollars)
Defined benefit pension plan liabilities
Discount rate
Defined benefit pension plan annuity assets
Discount rate
Other benefit plan liabilities
Discount rate
Initial medical cost trend rate
1% Increase 1% Decrease
$
$
$
$
(16.6) $
20.4
(3.6) $
4.3
(12.0) $
11.4
$
15.3
(9.5)
28
See “Liquidity and Financial Requirements” section for further discussion regarding the funding position of CPPI’s
pension plans.
Asset Retirement Obligations
CPPI records the estimated fair value of liabilities 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 6 to 35 years and have been discounted at risk-free rates ranging from 1.3% to 2.3%. 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 2016 or 2015.
Deferred Taxes
In accordance with IFRS, CPPI recognizes deferred income tax assets when it is probable that the deferred income
tax assets will be realized. This assumption is based on management's best estimate of future circumstances and
events. If these estimates and assumptions are changed in the future, the value of the deferred income tax assets
could be reduced or increased, resulting in an income tax expense or recovery. CPPI reevaluates its deferred income
tax assets on a regular basis.
Valuation of Finished Product Inventories
Finished product inventories are recorded at the lower of cost and net realizable value. The cost of inventories is
based on the weighted average cost principle, and includes raw materials, direct labour, other direct costs and
related production overheads (based on normal operating capacity). Net realizable value is the estimated selling
price in the ordinary course of business, less estimated costs of completion and selling expenses. CPPI estimates the
net realizable value of the finished goods inventories based on actual and forecasted sales orders. Based on these
estimates, there were no write-downs of the Company’s finished goods inventories from cost to net realizable at
December 31, 2016.
FUTURE CHANGES IN ACCOUNTING POLICIES
In May 2014, the International Accounting Standards Board (“IASB”) issued IFRS 15, Revenue from Contracts with
Customers, which will supersede IAS 18, Revenue, IAS 11, Construction Contracts and related interpretations. The
new standard is effective for annual periods beginning on or after January 1, 2018. The Company has performed a
preliminary assessment of the impact of the new standard, and currently anticipates no significant impact on its
financial statements.
In July 2014, the IASB issued IFRS 9, Financial Instruments. The required adoption date for IFRS 9 is January 1,
2018 and the Company does not anticipate the new standard to have a significant impact on its financial statements.
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 on the financial statements of this new standard.
29 RISKS AND UNCERTAINTIES
Risks and uncertainties fall into the general business areas of markets, international commodity prices, competition,
currency exchange rates, environmental issues, raw materials, capital requirements, dependence on certain
relationships, government regulations, public policy and labour disputes, and Native land claims. The future impact
of the various uncertainties and potential risks described in the following paragraphs (together with the risks and
uncertainties identified under each of the Company’s business segments) cannot be quantified or predicted with
certainty. However, CPPI does not foresee unmanageable adverse effects on its business operations from, and
believes that it is well positioned to deal with, such matters as may arise. The risks and uncertainties are set out in
alphabetical order.
Aboriginal Issues
CPPI 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. CPPI supports the
work of tenure holders to engage, cooperate and exchange information and views with First Nations and Government
to foster good relationships and minimize risks to the Company’s operational plans.
Capital Requirements
The pulp and paper industries are capital intensive, and the Company regularly incurs capital expenditures to expand
its operations, maintain its equipment, increase its operating efficiency and comply with environmental laws. The
Company’s total capital expenditures during 2016 were approximately $64.0 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 Asia, North America, Japan and Europe. 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.
30 Cyclicality of Product Prices
The Company’s financial performance is dependent upon the selling prices of its pulp and paper products, which
have fluctuated significantly in the past. The markets for these products are highly cyclical and may be characterized
by (i) periods of excess product supply due to industry capacity additions, increased production and other factors;
and (ii) periods of insufficient demand due to weak general economic conditions. The economic climate of each
region where the Company’s products are sold has a significant impact upon the demand, and therefore, the prices
for pulp and paper. Prices of pulp, in particular, have historically been unpredictable.
Dependence on Canfor
In 2016, approximately 63% 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 2016, the Company’s top five customers accounted for approximately 34% of its pulp sales. In the event that the
Company cannot maintain these customer relationships or the demand from these customers is diminished for any
reason in the future, there is a risk that the Company would be forced to find alternative markets in which to sell its
pulp, which in turn, could result in lower prices or increased distribution costs thereby adversely affecting its sales
margins.
Dividends
CPPI paid quarterly dividends of $0.0625 per share through 2016 and may, subject to market conditions, continue to
pay a comparable level of dividends through 2017. In 2015, 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 and other non-
pension post-retirement benefits to certain salaried and hourly employees. The defined benefit pension plans are
based on a combination of years of service and final average salary. CPPI’s other non-pension post-retirement
benefit plans are non-contributory and include a range of health care and other benefits.
Cash payments required to fund the registered pension plan are determined by an actuarial valuation completed at
least once every three years, with the most recent actuarial valuation completed as of December 31, 2015. Other
non-pension post-retirement benefit plans are unfunded, and the Company makes payments as required to cover
liabilities as they arise.
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 defined benefit pension 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 $16.6 million and a
one percentage point decrease in the discount rate would increase the accrued benefit obligation by an estimated
$20.4 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.
31 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 internal 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 activities. 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 credit insurance to manage the risk associated with trade receivables. As at December 31, 2016,
approximately 81% of the outstanding trade receivables are covered under credit insurance. In addition, CPPI
requires letters of credit on certain export trade receivables and regularly discounts these letters of credit without
recourse. CPPI recognizes the sale of the letters of credit on the settlement date, and accordingly reduces the
related trade accounts receivable balance. CPPI’s trade receivable balance at December 31, 2016 was $75.9 million.
At December 31, 2016, approximately 99% of the trade accounts receivable balance was within CPPI’s established
credit terms.
32 (b) 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, 2016, CPPI had no amounts drawn on its operating loans, and had accounts payable and accrued
liabilities of $125.4 million, all of which are due within twelve months of the balance sheet date.
(c) 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) Interest Rate risk:
CPPI is exposed to interest rate risk through its current financial assets and financial obligations bearing
variable interest rates.
CPPI may use 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. A portion of the remaining exposure is sometimes covered by foreign exchange
collar contracts that effectively limit the minimum and maximum Canadian dollar recovery related to the sale
of those US-dollars (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 energy 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 annual exposure is from time to time 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.
33 Earnings Sensitivities
Estimates of the sensitivity of CPPI's pre-tax results to currency fluctuations and prices for its principal products,
based on 2017 forecast production and year end foreign exchange rates, are set out in the following table:
(millions of Canadian dollars)
NBSK Pulp – US$10 change per tonne 23
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
Impact on annual
pre-tax earnings
$ 14
$ 3
$ 4
$ 2
$ 5
23 Excluding impacts of exchange rate, freight, discounting, potential change in fibre costs and other deductions.
24 Represents impact on operating income and excludes the impact on operating loans denominated in US$. Decrease of US$0.01 per Canadian dollar
results in an increase to pre-tax annual earnings and an increase of US$0.01 per Canadian dollar results in a decrease to pre-tax annual earnings.
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.
Information Technology Security
CPPI’s information technology systems serve an important role in the operation of its business. CPPI relies on
various technologies to access fibre, operate its production facilities, interact with customers, vendors and employees
and to report on its business. Interruption or failure of CPPI’s information technology systems could result in
material and adverse impacts on the Company’s financial condition, operations, production, sales, and reputation and
could also result in environmental and physical damage to Company operations or surrounding areas.
CPPI’s information technology systems and networks could be interrupted or fail due to a variety of causes, such as
natural disaster, fire, power outages, vandalism, or cyber-based attacks. Any such interruption or failure could result
in operational disruptions or the misappropriation of sensitive or proprietary data that could subject CPPI to civil and
criminal penalties, litigation or have a negative impact on the Company’s reputation. There can be no assurance that
such disruptions or misappropriations and the resulting repercussions will not negatively impact the Company’s cash
flows and have a material adverse effect on its business, operations, financial condition and operational results.
Although to date CPPI has not experienced any material losses relating to cyber risks, there can be no assurance that
the Company will not incur such losses in the future. CPPI’s risk and exposure cannot be fully mitigated due to the
nature of these threats. The Company continues the development and enhancement of internal controls, policies
and procedures designed to protect systems, servers, computers, software, data and networks from attack, damage
or unauthorized access remain a priority. CPPI has established a Management Cyber Risk Committee to assess and
monitor risk mitigation efforts and to respond to emerging threats. As cyber threats continue to evolve, the
Company may be required to expend additional resources to continue to modify or enhance protective measures or
to investigate and remediate any security vulnerabilities.
34 Maintenance Obligations and Facility Disruptions
The Company’s manufacturing processes are vulnerable to operational problems that can impair its ability to
manufacture its products. The Company could experience a breakdown in any of its machines, or other important
equipment, and from time to time, the Company schedules planned and incurs unplanned outages to conduct
maintenance that cannot be performed safely or efficiently during operations. Such disruptions could cause
significant loss of production, which could have a material adverse effect on the Company’s business, financial
condition and operating results.
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 expired September 1, 2016, and may be amended as necessary to ensure it is
reflective of market conditions. The Company and CFP agreed to extend the chip pricing formula under these
agreements for one year, with the opportunity to extend for one additional year if both parties agree. 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.
Transportation Services
The Company relies on third parties for transportation of its products, as well as delivery of raw materials principally
by railroad, trucks and ships. If any significant third party transportation providers were to fail to deliver the raw
materials or products or distribute them in a timely manner, the Company may be unable to sell those products at
full value, or at all, or be unable to manufacture its products in response to customer demand, which may have a
material adverse effect on its financial condition and operating results. In addition, if any of these significant third
parties were to cease operations or cease doing business with the Company, the Company may be unable to replace
them at a reasonable cost. Transportation services may also be impacted by seasonal factors, which could impact
the timely delivery of raw materials and distribution of products to customers and have a resulting material adverse
impact on CPPI’s financial condition and operating results. As a result of increased government regulation on truck
driver work hours and rail capacity constraints, access to adequate transportation capacity has at times been strained
and could affect the Company’s ability to move its 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’s collective agreements
with UNIFOR and PPWC at its Prince George operations expire 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. CPPI has received
Notice to Bargain from the UNIFOR and the PPWC. Bargaining will commence on May 1, 2017.
OUTSTANDING SHARE DATA
At December 31, 2016 and February 8, 2017, there were 66,699,368 common shares issued and outstanding.
35 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 ended December 31, 2016,
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, 2016 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, 2016, the CEO and CFO have concluded that these controls are
operating effectively.
Additional information about the Company, including its 2016 Annual Information Form, is available at
www.sedar.com or at www.canfor.com.
36 37 CONS OLIDATE D FIN ANCIA L STAT EM ENT S
38 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 8, 2017
Don B. Kayne
Chief Executive Officer
Alan Nicholl
Chief Financial Officer
39 KPMG LLP
PO Box 10426 777 Dunsmuir Street
Vancouver BC V7Y 1K3
Canada
Telephone (604) 691-3000
Fax (604) 691-3031
INDEPENDENT AUDITORS’ 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 sheets as at December 31, 2016 and December 31, 2015,
the consolidated statements of income, other comprehensive income (loss), changes in equity and
cash flows for the years then ended, and notes, comprising a summary of significant accounting
policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal
control as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted auditing standards.
Those standards require that we comply with ethical requirements and plan and perform the audits
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 and fair presentation of the consolidated financial statements in order to
design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. We believe that the audit evidence we have obtained in our audits is sufficient
and appropriate to provide a basis for our audit opinion.
KPMG LLP is a Canadian limited liability partnership and a member
firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss
entity. KPMG Canada provides services to KPMG LLP.
40
Opinion
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, 2016 and December
31, 2015, and its consolidated financial performance and its consolidated cash flows for the years
then ended in accordance with International Financial Reporting Standards.
Chartered Professional Accountants
February 8, 2017
Vancouver, Canada
41
Canfor Pulp Products Inc.
Consolidated Balance Sheets
(millions of Canadian dollars)
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable - Trade
- Other
Inventories (Note 5)
Prepaid expenses
Total current assets
Property, plant and equipment (Note 6)
Other long-term assets
Total assets
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities (Note 7)
$
125.4
$
Total current liabilities
Long-term debt (Note 9)
Retirement benefit obligations (Note 10)
Other long-term provisions
Deferred income taxes, net (Note 14)
Total liabilities
EQUITY
Share capital (Note 12)
Retained earnings (deficit)
Total equity
Total liabilities and equity
125.4
50.0
109.1
6.2
61.7
$
352.4
$
$
$
491.6
(6.9)
484.7
837.1
$
$
$
$
Commitments (Note 18) & Subsequent Event (Note 24)
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
As at
December 31,
2016
As at
December 31,
2015
$
$
51.9
75.9
16.8
166.5
5.1
316.2
518.7
2.2
$
837.1
$
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
42
Canfor Pulp Products Inc.
Consolidated Statements of Income
(millions of Canadian dollars, except per share data)
Sales
Costs and expenses
Manufacturing and product costs
Freight and other distribution costs
Amortization
Selling and administration costs
Operating income
Finance expense, net (Note 13)
Loss on derivative financial instruments (Note 20)
Other income (expense), net (Note 21)
Net income before income taxes
Income tax expense (Note 14)
Net income
Net income per common share: (in Canadian dollars)
Attributable to equity shareholders of the Company
-
Basic and diluted (Note 12)
The accompanying notes are an integral part of these consolidated financial statements.
Years ended December 31,
2015
2016
$
1,101.9
$
1,174.7
746.8
155.5
73.8
27.6
1,003.7
98.2
(6.6)
-
(10.4)
81.2
(23.4)
$
57.8
$
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
$
0.86 $
1.52
43 Canfor Pulp Products Inc.
Consolidated Statements of Other Comprehensive Income (Loss)
(millions of Canadian dollars)
Net income
Other comprehensive income (loss)
Items that will not be recycled through net income:
Defined benefit plan actuarial gains (losses) (Note 10)
Income tax recovery (expense) on defined benefit plan actuarial gains (losses) (Note 14)
Other comprehensive income (loss), net of tax
Total comprehensive income
Consolidated Statements of Changes in Equity
(millions of Canadian dollars)
Share capital
Balance at beginning of year
Share purchases (Note 12)
Balance at end of year (Note 12)
Retained earnings (deficit)
Balance at beginning of year
Net income
Defined benefit plan actuarial gains (losses), net of tax
Dividends declared
Share purchases (Note 12)
Balance at end of year
Total equity
The accompanying notes are an integral part of these consolidated financial statements.
Years ended December 31,
2016
2015
$
57.8
$
106.6
(15.5)
4.0
(11.5)
7.6
(2.0)
5.6
$
46.3
$
112.2
Years ended December 31,
2016
2015
$
$
508.2 $
(16.6)
491.6 $
$
(28.5) $
57.8
(11.5)
(16.9)
(7.8)
(6.9) $
$
$
522.1
(13.9)
508.2
(32.5)
106.6
5.6
(96.5)
(11.7)
(28.5)
484.7 $
479.7
44
Canfor Pulp Products Inc.
Consolidated Statements of Cash Flows
(millions of Canadian dollars)
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
Write-down of advances to Licella (Note 21)
Other, net
Defined benefit plan contributions, net
Income taxes paid, net
Net change in non-cash working capital (Note 15)
Financing activities
Finance expenses paid
Dividends paid
Share purchases (Note 12)
Investing activities
Additions to property, plant and equipment, net
Advances to Licella (Note 21)
Acquisition of Taylor pulp mill (Note 22)
Other, net
Increase (decrease) in cash and cash equivalents*
Cash and cash equivalents at beginning of year*
Years ended December 31,
2016
2015
$
57.8
$
106.6
73.8
23.4
-
5.1
6.6
7.0
(0.8)
(8.3)
(33.6)
131.0
19.0
150.0
(3.2)
(16.9)
(24.7)
(44.8)
(64.0)
(7.0)
-
0.2
(70.8)
34.4
17.5
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
Cash and cash equivalents at end of year*
$
51.9
$
*Cash and cash equivalents include cash on hand less unpresented cheques.
The accompanying notes are an integral part of these consolidated financial statements.
45
Canfor Pulp Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(millions of Canadian dollars unless otherwise noted)
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, 2016 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, 2016, Canfor Corporation (“Canfor”) held a 53.6% interest in CPPI, an increase of 1.7% from
December 31, 2015 as a result of share purchases in 2016 (Note 12).
2.
Basis of Preparation
Statement of compliance
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 8, 2017.
Basis of measurement
The consolidated financial statements have been prepared on a historical cost basis, except for the following material
items:
Financial instruments classified as fair value through net income are measured at fair value;
Financial instruments classified as available-for-sale are measured at fair value with gains or losses, other
than impairment losses, recorded in other comprehensive income until realized;
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 are net of the
accrued benefit obligation and the fair value of the plan assets.
Use of estimates and judgments
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;
Note 14 – Income Taxes; and
Note 21 – Licella Pulp Joint Venture.
46 3.
Significant Accounting Policies
The following accounting policies have been applied to the financial information presented.
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.
For joint operations, the Company recognizes its assets, liabilities and transactions, including its share of those
incurred jointly, in its consolidated financial statements.
Business combinations
Business combinations are accounted for using the acquisition method as at the acquisition date. 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 original
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. These are measured at fair value through other comprehensive
income, other than impairment losses.
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.
Other liabilities - All of CPPI’s financial liabilities are measured at amortized cost using the effective interest method.
Derivative financial instruments
CPPI uses derivative financial instruments in the normal course of its operations as a means to manage its foreign
exchange, interest rate, pulp price, and energy price risk. The Company’s policy is not to utilize derivative financial
instruments for trading or speculative purposes.
CPPI’s derivative financial instruments are not designated as hedges for accounting purposes. Consequently, such
derivatives for which hedge accounting is not applied are carried on the balance sheet at fair value, with changes in
fair value (realized and unrealized) being recognized in the statements of income as ‘gain (loss) on derivative
financial instruments’.
The fair value of the derivatives is determined with reference to period end market trading prices for derivatives with
comparable characteristics.
47 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 majority of
CPPI’s amortization expense for property, plant and equipment relates to manufacturing and product costs.
Amortization methods, useful lives and residual values are 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
Government assistance
10 to 40 years
20 years
4 years
10 years
1 to 2 years
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 unit
or “CGU”).
48 Non-financial assets, for which 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 and are not reversed.
Employee future 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 plans are recognized as an employee future benefits expense when they are earned.
For hourly employees covered by industry union defined contribution plans, the statement of income is charged with
CPPI’s contributions required under the collective agreements.
Defined benefit plans
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 non-pension post-retirement benefits to
most of its salaried employees and certain hourly employees not covered by forest industry union plans. The other
non-pension post-retirement benefits include 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.
49 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 expense. 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 taxes are recognized in net income
except to the extent that they relate to items recognized directly in equity or in other comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using the tax rates
enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous
periods.
CPPI recognizes deferred income tax in respect of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred income tax is
measured at tax rates expected to be applied to the temporary differences when they reverse, based on the laws
that have been enacted or substantively enacted by the reporting date.
A deferred income tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to
the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred
income tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable
that the related tax benefit will be realized.
Investment tax credits are credited to manufacturing and product costs in the period in which it becomes reasonably
assured that the Company is entitled to them. Unused investment tax credits are recorded as other current or long-
term assets in the Company’s balance sheet, depending upon when the benefit is expected to be received.
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.
50 The majority of CPPI sales are denominated in foreign currencies, principally the US dollar. Transactions in foreign
currencies are translated to the functional currency 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.
4.
Accounting Standards Issued and Not Applied
In May 2014, the International Accounting Standards Board (“IASB”) issued IFRS 15, Revenue from Contracts with
Customers, which will supersede IAS 18, Revenue, IAS 11, Construction Contracts and related interpretations. The
new standard is effective for annual periods beginning on or after January 1, 2018. The Company has performed a
preliminary assessment of the impact of the new standard, and currently anticipates no significant impact on its
financial statements.
In July 2014, the IASB issued IFRS 9, Financial Instruments. The required adoption date for IFRS 9 is January 1,
2018 and the Company does not anticipate the new standard to have a significant impact on its financial statements.
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
on the financial statements of this new standard.
5.
Inventories
(millions of Canadian dollars)
Pulp
Paper
Wood chips and logs
Materials and supplies
As at
December 31,
2016
84.2
$
As at
December 31,
2015
71.2
$
15.7
15.4
51.2
20.9
21.9
49.8
$ 166.5
$
163.8
The above inventory balances are stated after inventory write-downs from cost to net realizable value. There were no
inventory write-downs at December 31, 2016 (2015 - $0.5 million).
In 2016, of the total manufacturing and product costs of $746.8 million, $394.7 million related to the costs of raw
materials, consumables and changes in finished products (2015 - $422.1 million).
51
Land and
improvements
Buildings,
machinery and
equipment
Asset
retirement
- landfill
Construction
in progress
Major
overhauls
6.
Property, Plant and Equipment
(millions of Canadian dollars)
Cost
Balance at January 1, 2015
Additions1
Acquisitions (Note 22)
Disposals
Transfers
Balance at December 31, 2015
Additions1
Disposals
Transfers
Balance at December 31, 2016
Amortization
Balance at January 1, 2015
Amortization for the year
Disposals
Balance at December 31, 2015
Amortization for the year
Disposals
Balance at December 31, 2016
$
5.4 $
-
-
-
-
5.4 $
-
-
-
5.4 $
-
-
-
-
-
-
-
$
$
$
$
$
$
$
$
Carrying Amounts
At January 1, 2015
At December 31, 2015
At December 31, 2016
1Net of capital expenditures financed by government grants.
5.4 $
5.4 $
5.4 $
$
$
$
$
$
$
$
$
1,480.7
0.3
4.0
(10.6)
66.0
1,540.4
-
(10.6)
48.5
1,578.3
(1,018.2)
(49.5)
9.9
(1,057.8)
(50.5)
7.3
(1,101.0)
$
2.1
0.9
0.1
-
-
3.1
-
(0.2)
-
2.9
$
$
$
(1.0) $
(0.1)
-
(1.1) $
(0.1)
-
(1.2) $
39.4
68.8
-
-
(92.1)
16.1
63.7
-
(61.5)
18.3
-
-
-
-
-
-
-
462.5
482.6
477.3
$
$
$
1.1
2.0
1.7
$
$
$
39.4
16.1
18.3
$
$
$
$
$
$
$
$
$
Total
1,562.1
70.0
4.1
(30.3)
-
1,605.9
63.7
(25.9)
-
1,643.7
34.5
-
-
(19.7)
26.1
40.9
-
(15.1)
13.0
38.8
$
$
$
(18.8) $
(15.6)
19.7
(14.7) $
(23.2)
15.1
(22.8) $
(1,038.0)
(65.2)
29.6
(1,073.6)
(73.8)
22.4
(1,125.0)
$
15.7
26.2
$
16.0 $
524.1
532.3
518.7
7.
Accounts Payable and Accrued Liabilities
(millions of Canadian dollars)
Trade payables and accrued liabilities
Accrued payroll and related liabilities
Income tax payable
Other
8.
Operating Loans
(millions of Canadian dollars)
Available operating loans:
Operating loan facility
Facility for letters of credit
Total operating loan facility
Letters of credit
Total available operating loan facility
As at
December 31,
2016
71.9
As at
December 31,
2015
75.6
$
37.4
1.1
15.0
125.4
$
37.5
13.4
17.7
144.2
As at
December 31,
2016
As at
December 31,
2015
110.0
$
-
110.0
(9.3)
100.7
$
110.0
20.0
130.0
(13.0)
117.0
$
$
$
$
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. Subsequent to this extension, in 2016, the maturity date of this facility was extended to
January 31, 2020. No amounts were drawn on the operating loan facility as at December 31, 2016 (2015 - nil).
52
CPPI had a separate facility to cover letters of credit, which expired in 2016. At December 31, 2016, $9.3 million of
letters of credit outstanding are covered under the general operating loan facility.
As at December 31, 2016, the Company is in compliance with all covenants relating to its operating loans.
9.
Long-Term Debt
CPPI has a $50.0 million unsecured non-revolving term loan with no penalty for early repayment. In 2016, CPPI
extended the maturity date on the term loan from November 5, 2018 to January 31, 2020. 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 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, 2016, the Company is in compliance with all covenants relating to its long-term debt.
Fair value of total long-term debt
At December 31, 2016, the fair value of the Company’s long-term debt approximates its amortized cost of $50.0
million (2015 - $50.0 million).
10.
Employee Future Benefits
The Company, in participation with Canfor, has several funded and unfunded defined benefit pension plans, defined
contribution plans, and other non-pension post-retirement benefit plans that provide 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 non-pension post-retirement benefit plans are non-contributory and include a
range of health care and other benefits.
Total cash payments for employee future benefits for 2016 were $17.8 million (2015 - $13.1 million), consisting of
cash contributed by CPPI to its funded pension plans, cash payments directly to beneficiaries for its unfunded other
non-pension post-retirement benefit plans, and cash contributed to its defined contribution plans.
Defined benefit plans
CPPI measures its accrued retirement benefit obligations and the fair value of plan assets for accounting purposes as
at December 31 of each year.
As at December 31, 2016, 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, 2015, which was completed in 2016. In addition, CPPI has other non-contributory benefit plans that
provide certain non-pension post-retirement benefits to its members. The other non-contributory plans also
underwent a valuation as of December 31, 2015, which was completed in 2016.
53 Information about CPPI’s defined benefit plans, in aggregate, is as follows:
Fair market value of plan assets
2016
2015
(millions of Canadian dollars)
Beginning of year
Interest income on plan assets
Return on plan assets greater (less) than discount rate
Employer contributions
Employee contributions
Taylor pulp mill transfer
Benefit payments
Administration expense
End of year
Plan assets consist of the following:
Asset category
Equity securities
Debt securities
Annuities
Cash and cash equivalents
Accrued benefit obligations
(millions of Canadian dollars)
Beginning of year
Current service cost
Interest cost
Employee contributions
Benefit payments
Actuarial loss (gain)
Taylor pulp mill transfer
Other
End of year
Defined
Benefit
Pension
Plans
119.0 $
$
Other
Benefit
Plans
-
$
4.9
(1.6)
6.3
0.1
-
(4.7)
(0.1)
$
123.9 $
-
-
2.0
-
-
(2.0)
-
-
Defined
Benefit
Pension
Plans
108.9
4.5
2.4
2.0
0.1
6.9
(5.7)
(0.1)
Other
Benefit
Plans
-
$
-
-
1.8
-
-
(1.8)
-
-
$
119.0
$
As at
December 31,
2016
As at
December 31,
2015
Percentage of Plan Assets
15%
56%
29%
-
100%
17%
77%
5%
1%
100%
2016
2015
Defined
Benefit
Pension
Plans
135.9 $
$
Other
Benefit
Plans
74.9
$
Defined
Benefit
Pension
Plans
125.9
Other
Benefit
Plans
76.9
$
2.8
5.5
0.1
(4.7)
8.4
-
-
1.9
3.0
-
(2.0)
5.5
-
0.3
3.2
5.1
0.1
(5.7)
0.1
7.2
-
2.1
2.9
-
(1.8)
(5.2)
-
-
$
148.0 $
83.6
$
135.9
$
74.9
Of the defined benefit pension plan obligation of $148.0 million (2015 - $135.9 million), $132.8 million (2015 -
$121.4 million) relates to plans that are wholly or partly funded and $15.2 million (2015 - $14.5 million) relates to
plans that are wholly unfunded. At December 31, 2016, certain liabilities for pension benefit plans were secured by
letters of credit in the amount of $1.6 million (2015 - $1.4 million).
The total obligation for the other benefit plans of $83.6 million (2015 - $74.9 million) is unfunded.
54
Annuity contracts
In 2016, the Company purchased $33.7 million of buy-in annuities through its defined benefit pension plans,
increasing total annuities purchased to $39.8 million. Future cash flows from the annuities will match the amount and
timing of benefits payable under the plans, substantially mitigating the exposure to future volatility in the related
pension obligations. Transaction costs of $3.6 million related to the purchase were recognized in other
comprehensive income (loss), principally reflecting the difference in the annuity rate (which is comparable to
solvency rates) compared to the discount rate used to value the obligations on a going concern basis.
At December 31, 2016, reflecting the buy-in annuities, 24% (2015 - 4%) of the defined benefit pension plan
obligations were fully hedged against changes in future discount rates and longevity risk (potential increases in life
expectancy of plan members). A further 46% was partially hedged against changes in future discount rates through
the plan’s investment in debt securities (2015 - 67%).
Reconciliation of funded status of defined benefit plans to amounts recorded in the financial
statements
December 31, 2016
December 31, 2015
(millions of Canadian dollars)
Fair market value of plan assets
Accrued benefit obligations
Funded status of plans – deficit
Other pension plans
Total accrued benefit liability, net
Components of pension cost
Defined
Benefit
Pension
Plans
123.9 $
(148.0)
Other
Benefit
Plans
-
(83.6)
Defined
Benefit
Pension
Plans
$
119.0
$
(135.9)
(24.1) $
(83.6) $
(16.9)
$
(1.4)
-
(1.2)
Other
Benefit
Plans
-
(74.9)
(74.9)
-
(25.5) $
(83.6) $
(18.1) $
(74.9)
$
$
$
The following table shows the before tax impact on net income and other comprehensive income (loss) of the
Company’s defined benefit pension and other non-pension post-retirement benefit plans:
(millions of Canadian dollars)
Recognized in net income
Current service cost
Administration expense
Interest cost
Other
Total charge included in net income
Recognized in other comprehensive income (loss)
Actuarial loss (gain) – experience
Actuarial loss (gain) – financial assumptions
Return on plan assets less (greater) than discount rate
Administration expense less than expected
Total charge (credit) included in other comprehensive
2016
2015
Defined
Benefit
Pension
Plans
Other
Benefit
Plans
Defined
Benefit
Pension
Plans
Other
Benefit
Plans
$
$
$
2.8
$
1.9
$
0.1
0.6
-
-
3.0
0.3
3.5 $
5.2
$
4.6 $
(0.1) $
3.8
1.6
-
5.6
-
-
3.2
0.2
0.6
-
4.0
3.4
(3.3)
(2.4)
(0.1)
$
$
$
2.1
-
2.9
(0.1)
4.9
3.1
(8.3)
-
-
income (loss)
$
10.0 $
5.5 $
(2.4)
$
(5.2)
55
Significant assumptions
The actuarial assumptions used in measuring CPPI’s benefit plan provisions and benefit costs are as follows:
Discount rate
Rate of compensation increases
Initial medical cost trend rate
Ultimate medical cost trend rate
Year ultimate rate is reached
December 31, 2016
Defined
Benefit
Pension
Plans
3.9%
3.0%
n/a
n/a
n/a
Other
Benefit
Plans
3.9%
n/a
7.0%
4.5%
2022
December 31, 2015
Defined
Benefit
Pension
Plans
4.1%
Other
Benefit
Plans
4.1%
3.0%
n/a
n/a
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, 2016 is between 20.9 years and 24.1 years (2015 - 20.9 years and 24.0 years). As at December 31,
2016, the weighted average duration of the defined benefit plan obligation, which reflects the average age of the
plan members, is 12.1 years (2015 - 12.0 years). The weighted average duration of the other benefit plans is 14.6
years (2015 - 14.3 years).
Sensitivity analysis
Assumed discount rates and medical cost trend rates have a significant effect on the accrued retirement benefit
obligation and related plan assets. A one percentage point change in these assumptions would have the following
effects on the accrued retirement benefit obligation, before taking into account the impact of hedging, and related
plan annuity assets for 2016:
(millions of Canadian dollars)
Defined benefit pension plan liabilities
Discount rate
Defined benefit pension plan annuity assets
Discount rate
Other benefit plan liabilities
Discount rate
Initial medical cost trend rate
1% Increase
1% Decrease
$
$
$
$
(16.6)
$
20.4
(3.6)
$
4.3
(12.0)
11.4
$
$
15.3
(9.5)
As at December 31, 2016, CPPI estimates that it will make contribution payments of $4.4 million to its defined benefit
pension plans in 2017 based on the last actuarial valuation for funding purposes.
Defined contribution and other plans
The total expense recognized in 2016 for CPPI’s defined contribution plans was $2.3 million (2015 - $2.2 million).
CPPI contributes to a pulp industry pension plan providing pension benefits. This plan is accounted for as a defined
contribution plan. Contributions to this plan, not included in the expense for the defined contribution plan above,
amounted to $7.2 million in 2016 (2015 - $7.0 million).
11.
Asset Retirement Obligations
The following table provides a reconciliation of the asset retirement obligations as at December 31, 2016 and 2015:
(millions of Canadian dollars)
Asset retirement obligations at beginning of year
Accretion expense
Acquisitions (Note 22)
Changes in estimates
Asset retirement obligations at end of year
$
2016
5.5
0.1
-
(0.2)
5.4
$
2015
3.5
0.1
1.0
0.9
5.5
$
$
56
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 6 to 35 years and have been discounted at risk-free rates ranging from 1.3% to 2.3% (2015 - 1.0% to 2.2%).
The $0.2 million of changes in estimates associated with the asset retirement obligations principally reflect higher
discount rates used in the valuation of the obligations.
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
(millions of Canadian dollars, except number of shares)
Common shares at beginning of year
Common shares purchased
Common shares at end of year
Number of
Shares
68,951,872
(2,252,504)
66,699,368
2016
$
$
Amount
508.2
Number of
Shares
70,829,823
(16.6)
(1,877,951)
2015
$
491.6
68,951,872
$
Amount
522.1
(13.9)
508.2
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 2016 is 67,519,888 (2015 - 70,105,543), and reflects common shares purchased
under the Company’s normal course issuer bid.
Normal course issuer bid
On March 7, 2016, the Company renewed its normal course issuer bid whereby it can purchase for cancellation up to
3,446,139 common shares or approximately 5% of its issued and outstanding common shares as of March 1, 2016.
The renewed normal course issuer bid is set to expire on March 6, 2017. In 2016, CPPI purchased 2,252,504
common shares for $24.4 million (an average price of $10.83 per common share), of which $16.6 million was
charged to share capital and $7.8 million was charged to retained earnings. Cash payments for share purchases
totaled $24.7 million during the year. As a result of the share purchases in 2016, Canfor’s interest in CPPI increased
from 51.9% at December 31, 2015 to 53.6% at December 31, 2016.
In 2015, under a previous normal course issuer bid, 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 2015 year.
13.
Finance Expense, Net
(millions of Canadian dollars)
Interest expense on borrowings
Interest expense on retirement benefit obligations, net
Interest income
Other
Finance expense, net
2016
2015
$
$
(3.0)
(3.6)
0.2
(0.2)
(6.6)
$
$
(3.0)
(3.5)
0.7
(0.2)
(6.0)
57 14.
Income Taxes
The components of income tax expense are as follows:
(millions of Canadian dollars)
Current
Deferred
Income tax expense
2016
(25.9)
2.5
(23.4)
$
$
$
$
2015
(35.6)
(0.7)
(36.3)
The reconciliation of income taxes calculated at the statutory rate to the actual income tax provision is as follows:
(millions of Canadian dollars)
Income tax expense at statutory rate of 26.0%
Add (deduct):
Permanent difference from capital gains and other non-deductible items
Entities with different income tax rates and other tax adjustments
Income tax expense
2016
2015
$
(21.1)
$
(37.2)
(1.8)
(0.5)
(23.4)
$
(0.1)
1.0
(36.3)
$
In addition to the amounts recorded to net income, a tax recovery of $4.0 million was recorded in other
comprehensive income (loss) for the year ended December 31, 2016 (2015 - expense of $2.0 million) in relation to
actuarial gains/losses on the defined benefit plans.
The tax effects of the significant components of temporary differences that give rise to deferred income tax assets
and liabilities are as follows:
(millions of Canadian dollars)
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
(millions of Canadian dollars)
Accounts receivable
Inventories
Prepaid expenses
Accounts payable and accrued liabilities
Net decrease (increase) in non-cash working capital
16. Related Party Transactions
As at
December 31,
2016
As at
December 31,
2015
$
$
$
$
$
$
$
28.0
2.1
30.1
$
(91.2)
$
(0.6)
(91.8)
(61.7)
$
23.9
2.1
26.0
(93.9)
(0.3)
(94.2)
(68.2)
2016
2015
24.2
(2.9)
2.5
(4.8)
19.0
$
(49.7)
(4.8)
4.4
17.2
$
(32.9)
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.
In 2016, the Company depended on Canfor to provide approximately 63% (2015 - 64%) of its fibre supply as well as
certain key business and administrative services. As a result of these relationships, the Company considers its
operations to be dependent on its ongoing relationship with Canfor. The current market-based pricing under the
Company’s Fibre Supply Agreement with Canfor expired September 1, 2016. The Company and Canfor agreed to
extend the chip pricing formula under this agreement one year with the opportunity to extend for one additional year
if both parties agree.
The Company purchased wood chips, logs and hog fuel from Canfor sawmills in the amount of $147.8 million in 2016
(2015 - $182.2 million).
58
Canfor provides certain business and administrative services to CPPI under a services agreement. The total amount
charged for the services provided by Canfor in 2016 was $12.2 million (2015 - $11.5 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 amount charged for the services provided to Canfor in 2016 was $3.5 million (2015 - $3.6 million). These
amounts are included as cost recoveries 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, 2016, no amounts are outstanding on the demand
loan.
At December 31, 2016, an outstanding balance of $10.3 million (2015 - $15.6 million) is due to Canfor.
During 2016, CPPI also made contributions to certain post-employment benefit plans for the benefit of CPPI
employees and provided services to its joint venture with Licella Fibre Fuel Pty Ltd. See Note 10, Employee Future
Benefits, and Note 21, Licella Pulp Joint Venture, for further details.
Key management personnel
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:
(millions of Canadian dollars)
Short-term benefits
Post-employment benefits
Termination benefits
2016
2015
3.0
0.2
0.1
3.3
$
$
3.4
0.1
0.5
4.0
$
$
Short-term benefits for most members of the Board of Directors include an annual retainer as well as attendance
fees.
59 17.
Segment Information
The Company has two reportable segments which operate as separate business units and represent separate product
lines.
Sales between the 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 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.
(millions of Canadian dollars)
Year ended December 31, 2016
Pulp
Paper
Unallocated
Elimination
Adjustment
Total
Sales to external customers
$
924.2 $
176.1
$
1.6
$
-
$
1,101.9
Sales to other segments
Operating income (loss)
Amortization
Capital expenditures2
Identifiable assets
Year ended December 31, 2015
85.9
79.6
69.9
60.9
719.9
-
29.7
3.8
1.7
55.6
-
(11.1)
0.1
1.4
61.6
Sales to external customers
$
1,006.1
$
166.7
$
1.9
$
(85.9)
-
-
-
-
-
-
98.2
73.8
64.0
837.1
$
1,174.7
Sales to other segments
Operating income (loss)
93.4
127.0
-
27.6
-
(11.4)
(93.4)
-
-
143.2
Amortization
Capital expenditures2
Identifiable assets
841.3
2Capital expenditures represent cash paid for capital assets during the periods and include capital expenditures that were partially financed by
government grants. Capital expenditures for the year ended December 31, 2015 exclude the assets purchased as part of the acquisition of the Taylor
pulp mill (Note 22).
746.4
30.9
64.0
62.5
61.5
68.3
65.2
5.8
0.1
3.6
-
-
-
-
Geographic information
CPPI’s products are marketed worldwide, with sales made to customers in a number of different countries. The
following table presents revenue based on the geographical location of CPPI’s customers:
(millions of Canadian dollars)
Sales by location of customer
Canada
Asia
United States
Europe
Other
2016
2015
$
77.4
$
615.9
279.8
59.4
69.4
78.8
631.9
356.1
74.3
33.6
$ 1,101.9
$
1,174.7
60
18.
Commitments
At the end of the year, CPPI has contractual commitments for the construction of capital assets for $1.6 million (2015
- $1.8 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, 2016 and 2015, the
future minimum lease payments under these operating leases were as follows:
(millions of Canadian dollars)
Within one year
Between one and five years
Total
As at
December 31,
2016
0.4
$
0.6
1.0
$
As at
December 31,
2015
0.4
0.4
0.8
$
$
During the year ended December 31, 2016, $1.7 million (2015 - $2.3 million) was recognized as an expense in the
statement of income in respect to operating leases.
Energy Agreements
The Company has entered into energy agreements with a BC energy company (the “Energy Agreements”) for three
of the Company’s mills. 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, 2016, CPPI has $7.7 million of standby letters of
credit (2015 - $11.6 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.
The CPPI internal Risk Management Committee manages risk in accordance with a Board approved Risk Management
Controls Policy. The policy sets out the responsibilities, reporting and counterparty credit and communication
requirements associated with all of the Company’s risk management activities. Responsibility for overall philosophy,
direction and approval is that of the Board of Directors.
Credit risk:
Credit risk is the risk of financial loss to CPPI if a counterparty to a financial instrument fails to meet its contractual
obligations.
Financial instruments that are subject to credit risk include cash and cash equivalents and accounts receivable. Cash
and cash equivalents includes cash held through major Canadian and international financial institutions as well as
temporary investments with an original maturity date of three months or less. The cash and cash equivalents balance
at December 31, 2016 is $51.9 million (2015 - $17.5 million).
CPPI utilizes credit insurance to manage the risk associated with trade receivables. As at December 31, 2016,
approximately 81% (2015 - 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, 2016 is
$75.9 million (2015 - $101.8 million). At December 31, 2016, approximately 99% (2015 - 99%) of the trade accounts
receivable balance are within CPPI’s established credit terms.
61
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, 2016, CPPI has no amounts drawn (2015 - no amounts drawn) on its operating loans and has
accounts payable and accrued liabilities of $125.4 million (2015 - $144.2 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)
Interest rate risk:
CPPI is exposed to interest rate risk through its current financial assets and financial obligations bearing
variable interest rates.
CPPI may use interest rate swaps to reduce its exposure to financial obligations bearing variable interest
rates. At December 31, 2016 and 2015, CPPI had no fixed interest rate swaps outstanding.
(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 $1.1 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 sometimes covered by foreign exchange
collar contracts that effectively limit the minimum and maximum Canadian dollar recovery related to the sale
of those US dollars.
CPPI had no foreign exchange derivatives outstanding at December 31, 2016 and 2015.
(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 energy 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.
CPPI had no pulp futures contracts outstanding at December 31, 2016 and 2015.
(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 annual exposure is from time to time 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 (“WTI”) oil contracts to hedge its exposure.
At December 31, 2016 and 2015, the Company had no WTI oil collars outstanding.
62 Capital management
CPPI’s objectives when managing capital are to maintain a strong balance sheet and a globally competitive cost
structure that ensures adequate liquidity to maintain and develop the business through the commodity price cycle.
CPPI’s capital is comprised of net debt and shareholders’ equity:
(millions of Canadian dollars)
Total debt (including operating loans)
Less: Cash and cash equivalents
Net debt (cash)
Total equity
As at
December 31,
2016
50.0
51.9
(1.9)
484.7
482.8
$
$
$
As at
December 31,
2015
50.0
17.5
32.5
479.7
512.2
$
$
$
The Company has certain financial covenants on 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 to ensure continuous
access to capital. CPPI was in compliance with all its debt covenants for the years ended December 31, 2016 and
2015.
The Company manages its capital structure through rigorous planning, budgeting and forecasting processes, and
ongoing management of operations, investments and capital expenditures. In 2016, to meet CPPI’s operating,
growth and return on invested capital objectives, the Company’s management of capital comprised share purchases
and dividends, 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.
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, Fair Value Measurement, 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 from time to time 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, 2016 (2015 -
nil).
The following table summarizes the losses on the Company’s level 2 derivative financial instruments for the years
ended December 31, 2016 and 2015:
(millions of Canadian dollars)
Foreign exchange collars
Energy derivatives
Interest rate swaps
Loss on derivative financial instruments
2016
-
-
-
-
$
$
$
$
2015
(8.3)
(0.4)
(0.1)
(8.8)
There were no financial instrument transfers between fair value hierarchy levels in 2016 or 2015.
63
21.
Licella Pulp Joint Venture
On May 27, 2016, CPPI and Licella Fibre Fuel Pty Ltd. (“Licella”) agreed to form a joint venture under the name
Licella Pulp Joint Venture to investigate opportunities to integrate Licella’s Catalytic Hydrothermal Reactor platform
into CPPI’s pulp mills to economically convert biomass into next generation biofuels and biochemicals. Licella is a
subsidiary of Ignite Energy Resources Ltd. (“IER”) an Australian energy technology development company.
Under IFRS 11, Joint Arrangements, the joint venture is classified as a joint operation and CPPI will recognize its
assets, liabilities and transactions, including its share of those incurred jointly, in its consolidated financial
statements. For the year ended December 31, 2016, the Company’s share of the joint venture’s expenses was $1.6
million, which has been recognized in manufacturing and product costs. The Company is required to contribute the
first $20.0 million of any funding requirements, including cash and non-cash contributions, to the joint venture.
In conjunction with the joint venture agreement and CPPI’s commitment to innovation and the development of
potentially transforming technology, CPPI provided a convertible credit facility to IER, the parent company of Licella,
which matures on June 21, 2019. The advances on this credit facility are convertible, at CPPI’s option, into common
shares of IER.
With regards to the convertible credit facility, during 2016, CPPI advanced $7.0 million to Licella and exercised its
option to convert $3.5 million of the amount advanced into common shares of IER. Due to the inherent nature of
this type of innovation and technology development, CPPI considers these advances to be substantially research and
development in nature. As a result, at December 31, 2016, CPPI has recognized losses of $7.0 million in other
income (expense). This reflects the Company’s consideration of the intrinsic risk associated with these advances.
22.
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 included 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 of $11.6 million. The acquisition was accounted for in accordance with IFRS 3,
Business Combinations.
If the acquisition had occurred on January 1, 2015, CPPI’s consolidated 2015 sales would have increased by
approximately $8.9 million and consolidated 2015 net income 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 was nil at
December 31, 2016.
23.
Special Dividend
In 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.
24.
Subsequent Event
On February 8, 2017, the Board of Directors declared a quarterly dividend of $0.0625 per share, payable on February
28, 2017, to shareholders of record on February 21, 2017.
64 65 ADDITI ON AL INFORMATIO N
66 DIRECTORS AND OFFICERS
DIRECTORS
The name and municipality, province and country of residence of the Directors of the Company and their principal occupations as at
December 31, 2016 are as below. For more information visit www.canfor.com.
John Baird (4)(5)
Corporate Director
Toronto, Ontario, Canada
Conrad Pinette (2)(4)(5)
Corporate Director
Vancouver, British Columbia, Canada
Charles Jago, PH.D., C.M., O.B.C.(2)(4)
Corporate Director
Prince George, British Columbia, Canada
William Stinson (1)(2)(4)(5)
Chairman and Chief Executive Officer
Westshore Terminals Investment Corporation
Vancouver, British Columbia, Canada
Peter Bentley, O.C., O.B.C., LL.D. (2)(3)(4)(5)
Chairman Emeritus
Canfor Corporation
Vancouver, British Columbia, Canada
Stan Bracken-Horrocks, FCPA, FCA (1)(3)(5)
Corporate Director
Kelowna, British Columbia, Canada
Michael Korenberg (1)(3)(5)
Chairman
Canfor Pulp Products Inc. and The Wreath Group
West Vancouver, British Columbia, Canada
OFFICERS
The name and municipality, province and country of residence of the executive officers of the Company and the offices held by
them as at December 31, 2016 are as below. For more information visit www.canfor.com.
Michael Korenberg
Chairman
West Vancouver, British Columbia, Canada
Alan Nicholl
Chief Financial Officer
West Vancouver, British Columbia, Canada
Martin Pudlas
Vice President, Operations
Prince George, British Columbia, Canada
Donald Kayne
Chief Executive Officer
Tsawwassen, British Columbia, Canada
David Calabrigo, Q.C.
Corporate Secretary
Vancouver, British Columbia, Canada
Peter Hart
Vice President, Pulp and Paper Sales
and Marketing
Vancouver, British Columbia, Canada
Brett Robinson
President
Tsawwassen, British Columbia, Canada
(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 m a k e s 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 .
67
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.
CORPORATE AND SHAREHOLDER INFORMATION
Annual General Meeting
The Annual General Meeting of Canfor Pulp Products Inc. will be held at the Terminal City Club at 837 West Hastings Street, Vancouver,
BC, on Wednesday, April 26, 2017 at 11:30 a.m.
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
CPPI also produces an Annual Information Form. To obtain this publication or more information about the Company, please contact
Canfor Pulp Products Inc. or visit our website at http://canfor.com/investor-relations
Investor Contact
Patrick Elliott
Vice President & Treasurer
Canfor Corporation
T: (604) 661-5441
E: patrick.elliott@canfor.com
Media Contact
Corinne Stavness
Senior Director, Corporate Affairs
Canfor Corporation
T: (604) 661-5225
E: corinne.stavness@canfor.com
Katrina Wilson
Corporate Controller
Canfor Pulp Products Inc.
T: (604) 661-5349
E: katrina.wilson@canforpulp.com
Canfor Pulp Innovation
138 – 8610 Glenlyon Parkway
Burnaby, BC
V5J 0B6
T: (604) 228-6710
Canfor Pulp Products Inc.
Head Office
#230 – 1700 West 75th Avenue
Vancouver, BC
V6P 6G2
T: (604) 661-5241
E: info@canforpulp.com
www.canfor.com
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WWW.CANFOR.COM
WWW.CANFOR.COM