2017
CANFOR PULP PRODUCTS INC.
ANNUAL REPORT
I N T H I S R E P O RT
02
M E S S AG E TO S H A R E H O L D E R S
Company Overview
Overview of 2017
Overview of Consolidated Results - 2017 Compared to 2016
Operating Results by Business Segment - 2017 Compared to 2016
Summary of Financial Position
Changes in Financial Position
Liquidity and Financial Requirements
Transactions with Related Parties
Licella Pulp Joint Venture
Collective Agreements With Labour Unions
Selected Quarterly Financial Information
Three-Year Comparative Review
Fourth Quarter Results
Specific Items Affecting Comparability
03 2017 Management’s Discussion and Analysis
04
05
08
10
13
14
14
17
17
17
18
19
20
24
25 Outlook
25
27
27
33
34
Critical Accounting Estimates
Future Changes in Accounting Policies
Risks and Uncertainties
Outstanding Share Data
Disclosure Controls and Internal Controls Over Financial Reporting
36 CONSOLIDATED FINANCIAL STATEMENTS
37 Management’s Responsibility
Independent Auditors’ Report
38
Consolidated Balance Sheets
39
Consolidated Statements of Income
40
Consolidated Statements of Other Comprehensive Income (Loss)
41
41 Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
42
Notes to the Consolidated Financial Statements
43
62
ADDITIONAL INFORMATION
63
64
Directors and Officers
Corporate and Shareholder Information
MESSAGE TO SHAREHOLDERS
F R O M T H E C E O
Thanks to the dedication and hard work of our incredibly
talented employees, Canfor Pulp Products Inc. (Canfor Pulp) had
an excellent year in 2017 – our operating income was the second-
highest in our history, we set a new record high for sales revenue
and our return on invested capital was 23%.
Global pulp market conditions were better than we had
planned for, particularly in the back half of 2017, and we expect
the growing global softwood pulp demand will keep markets
solid through much of 2018. Favourable Bleached Chemi-
Thermomechanical Pulp (BCTMP) pricing in 2017 along with
productivity improvements enabled the Taylor pulp mill to
deliver the best operating results since it was acquired in 2015.
Growing our green energy revenues remains a key element of
our core strategy. In 2017, our mills generated 950,000 megawatt
hours of electricity, and we expect to reach our target of one million
megawatt hours in 2018. Through our joint venture agreement
with Licella Fibre Fuel Pty Ltd., we are continuing to explore the
potential to convert residuals and by-products from the kraft
pulp mill production process into a low-cost biocrude oil that
could be refined into next-generation biofuels and biochemicals.
In March of 2017, we received approval for up to $13.2 million of
funding from Sustainable Development Technology Canada, which
supports the development and deployment of clean technology in
Canada.
We continue to invest in our operations, and in 2017 we
began work on two major capital investments that will improve
cost competitiveness, enhance environmental performance and
increase power generation.
• A $40 million upgrade of the refining line at our Taylor mill
will be completed in 2018. Partially funded through BC Hydro’s
conservation program incentives, it will improve energy efficiency
and reduce greenhouse gas emissions.
• A $65 million project to install a 32-megawatt condensing
turbo-generator at the Northwood pulp mill remains on schedule
to be completed early in 2019, and will increase electrical energy
generation from biomass and reduce greenhouse gas emissions.
In June 2017, we ratified new four-year collective agreements
with the unions that represent two-thirds of our employees –
UNIFOR and Pulp, Paper and Woodworkers of Canada.
Canfor Pulp’s fibre advantage allows us to maintain our
position as a global leader in the specialty pulp segment.
More than half of our pulp production is used for high-quality
specialty products, including electrical papers, non-woven
applications, abrasive papers and labels. The reinforcing fibres
are also used in the premium tissue market and high-end
printing and writing grades.
We take this even further through our Canfor Pulp Innovation
research centre. The centre allows us to provide best-in-class
technical support to our mills as they continually improve their
operations, and to deliver direct assistance to customers so they
can take maximum advantage of our premium quality pulp and
paper products.
Our sector holds immense career potential for a wide range
of disciplines. In 2017, we once again received a Certification of
Recognition from the Industry Training Authority to recognize the
apprenticeship program at our three Prince George pulp mills and
our involvement in providing training opportunities through the
College of New Caledonia’s Career Technical Centre program.
We have also been selected by The Career Directory, a guide
for new graduates published by the Canada’s Top 100 Employers
team, as a top employer for recent graduates. Through our
succession planning, training and development programs, we
offer a promote-from-within culture that gives our employees
exceptional opportunities for career advancement and growth.
Safety remains our single highest priority, and our employees
once again delivered an excellent safety performance in 2017.
Our medical incident rate was 2.12 – the best in a decade. We
regularly undertake events to promote employee involvement in
safety, and to continue to raise awareness about the importance
of working safely.
In March 2018, Brett Robinson, President of Canfor Pulp, left
the Company and his responsibilities were consolidated under
my position as CEO of Canfor Pulp and Canfor Corporation. Brett
was with our Company for more than 25 years, and he leaves a
strong legacy.
On behalf of myself, our Board of Directors and the employees
of Canfor Pulp, I want to thank Brett for his many contributions to
our Company.
I also want to thank my executive and senior management
team, and all of our employees for their tremendous dedication.
It is truly the key to our success. And my thanks as well to the
members of our Board for their support and guidance, and to our
shareholders for their ongoing confidence in Canfor Pulp.
Don Kayne
Chief Executive Officer
2
2017 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, 2017 relative to the year ended December 31,
2016, and the financial position of the Company at December 31, 2017. 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, 2017 and 2016. 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 under
IFRS 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 other
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 22, 2018.
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.
3 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, 2017 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, 2017, Canfor Corporation (“Canfor”) held a 54.8% interest in CPPI, an increase of 1.2% from
December 31, 2016 as a result of CPPI’s share purchases in 2017 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 1,279 people in its wholly owned subsidiaries and jointly owned operations as at December 31, 2017.
The following chart illustrates, on a simplified basis, the ownership structure of CPPI (collectively the Company) as at
December 31, 2017.
Simplified Ownership Structure
CANFOR
CORPORATION
(British Columbia)
100% of Shares
CANADIAN FOREST
PRODUCTS LTD.
(British Columbia)
54.8% of Shares
Shareholders
45.2% of Shares
CANFOR PULP
PRODUCTS INC.
(British Columbia)
100% of Shares
CANFOR PULP LTD.
(Canada)
The Pulp and Paper
Business
4 Pulp
The Company owns and operates three NBSK pulp mills with an annual production capacity of 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 pulp 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.
The Company also owns and operates the Taylor pulp mill, which it purchased from Canfor in early 2015. This
BCTMP facility has an annual production capacity of 220,000 tonnes, and supplies pulp markets in North America and
Asia.
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
bleached and unbleached kraft and specialty papers. The paper mill supplies primarily North American, Asian 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 its green energy business,
Developing an enterprise-wide culture of safety, innovation and engagement, and
Capitalizing on attractive growth opportunities.
OVERVIEW OF 2017
2017 was an excellent year for Canfor Pulp, with operating income of $154.6 million, the second highest in history,
combined with record high annual sales dollars at $1.2 billion, and a return on invested capital of 23%.
Global pulp market conditions were relatively stable for the first half of 2017, but improved considerably in the latter
part of the year, mostly as a result of a decision by the Chinese government to restrict recovered paper imports as
well as various unforeseen global pulp supply disruptions. NBSK pulp list prices to China averaged US$7121 per tonne
for the year, US$113 per tonne higher than in 2016, and ended the 2017 year at a near-record high price of US$890
per tonne. Prices to other regions saw more modest year-over-year gains. The appreciation of US-dollar prices
across all regions significantly outweighed the effects of a modest strengthening of the Canadian dollar and increased
discounts in North American markets during the year.
Operating results for the pulp segment were $140.5 million, up $60.9 million from the previous year, as the Company
benefited from the improved market conditions. The increased average NBSK pulp unit sales realizations more than
offset market-related increases in fibre costs, and higher chemical and energy costs. Favourable BCTMP pricing
throughout 2017 enabled the Company’s Taylor pulp mill to deliver its best operating results since its acquisition in
January 2015. During 2017, the Company enhanced labour stability for its operations with ratification of new four-
year collective labour agreements with its unions.
1 Resource Information Systems, Inc.
5 The Company’s energy business continued to increase its power generation in 2017 and remains focused on both
expanding its power generating capability and improving its energy efficiency. In mid-2017, the Company announced
the installation of a new condensing turbo-generator at its Northwood NBSK pulp mill and a major upgrade of the
refining line at the Taylor BCTMP mill at a combined cost of $105 million. These two projects will yield a significant
improvement in overall mill energy efficiency and will result in a material reduction in total fuel consumption. As at
December 31, 2017, both projects are progressing as planned.
The Company’s paper business had a solid year in 2017, delivering a stable operational performance consistent with
prior years, with improved US-dollar kraft paper prices mostly offsetting the impact of the stronger Canadian dollar
and higher slush pulp prices.
During 2017, the Company repaid its $50.0 million floating interest rate term debt, more than two-years in advance of
its maturity date, and continued to repurchase shares under its Normal Course Issuer Bid, repurchasing just over 1.4
million common shares, or approximately 2.2% of the Company’s share capital over the year. During 2017, the
Company also continued its quarterly dividends of $0.0625 per common share, returning a total of $16.5 million to
shareholders in the year. The Company ended the 2017 year with cash of $76.7 million.
A review of the more significant developments and results by operating segment in 2017 follows.
Markets and Pricing
(i)
Pulp – Better than anticipated global pulp markets contribute to positive pricing momentum in
second half of 2017
Global pulp market conditions were better than anticipated in 2017, particularly in the second half of the year.
Against a backdrop of solid global demand and various unforeseen global pulp supply disruptions, the Chinese
government’s decision to restrict imports of recycled mixed paper led to domestic buyers increasing their demand for
virgin pulp. As a result of this incremental demand, benchmark NBSK pulp list prices to China climbed US$225 per
tonne between August and December to reach a six-year high at the end of 2017. For the 2017 year as a whole, the
China list price averaged US$712 per tonne, up US$113 per tonne, or 19%, from 2016; transaction prices to North
America and Europe saw more modest gains.
Overall, global shipments of bleached softwood kraft pulp saw modest increases in 2017 compared to 2016. Global
softwood pulp producer inventories increased in the first quarter of 2017 with limited industry maintenance
downtime, then fell through the spring maintenance period in the second quarter of 2017, and remained within the
balanced range of 27-30 days through the second half of 2017.
The following charts show the NBSK pulp list price movements in 2017, before taking account of customer discounts
and rebates (Chart 1), and the global pulp inventory levels (Chart 2).
Chart 1
6 Chart 2
CPPI’s sales network represents and co-markets UPM-Kymmene (“UPM”) pulp products in North America, Japan and
Korea, while UPM’s pulp sales network represents and co-markets CPPI’s products in Europe and China, as part of a
strategic sales and marketing cooperation agreement. This arrangement continues to work well for both parties,
allowing both CPPI and UPM to sell a broader offering of pulp products and enhanced technical service to customers.
(ii)
Paper – Kraft paper markets remain strong in 2017
Bleached kraft paper markets were healthy throughout 2017. Positive pricing momentum experienced in the first half
of the year, continued into the latter part of the year. The higher US-dollar bleached kraft paper prices were partly
offset by the stronger Canadian dollar in 2017.
Capital and Operations Review
Maintained steady operational performance and strong balance sheet in 2017; Continued ongoing
investment in asset base and focus on high return energy projects
Total pulp and paper production in 2017 was largely in line with 2016. During 2017, the Company completed
scheduled maintenance outages at its Northwood and Intercontinental NBSK pulp mills, as well as at its Taylor BCTMP
mill (in the case of Taylor, this included preliminary work associated with the previously announced major energy
project at that mill). During the fourth quarter of 2017, an unscheduled outage and subsequent repairs at the
Northwood pulp mill, related to a tube leak in the facility’s number five recovery boiler, resulted in a reduction in
overall pulp production of approximately 11,000 tonnes.
Capital spending in 2017 totalled $83.1 million, and included the completion of several smaller high-return
discretionary projects, as well as the commencement of the Taylor and Northwood pulp mill energy projects. Heading
into 2018, both projects are progressing as planned, with the Taylor project currently estimated to commence ramp
up in the latter part of 2018 and the Northwood project remaining on track to be commissioned in early 2019.
The Company maintained its strong balance sheet position in 2017, finishing the year with the early repayment of its
$50.0 million floating interest rate term debt and a solid cash position. The Company’s cash from operations
throughout 2017 allowed the Company to continue to distribute earnings back to its shareholders, with dividend
payments totaling $16.5 million, or the equivalent of $0.0625 per common share in each quarter, and to continue
share repurchase activity under its Normal Course Issuer Bid, buying back 1,448,109 common shares, at an average
price of $12.29 per common share, for a total of $17.8 million.
7 OVERVIEW OF CONSOLIDATED RESULTS – 2017 COMPARED TO
2016
Selected Financial Information and Statistics
(millions of Canadian dollars, except for per share amounts)
Sales
Operating income before amortization2
Operating income
Net income
2017
1,197.9
229.0
154.6
102.1
$
$
$
$
2016
1,101.9
172.0
98.2
57.8
$
$
$
$
Net income per share, basic and diluted
ROIC – Consolidated3
Average exchange rate (US$ per C$1.00)4
2 Amortization includes amortization of certain capitalized major maintenance costs.
3 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.
4 Source – Bank of Canada (monthly average rate for the period).
22.8%
13.0%
0.770
0.755
1.55
0.86
$
$
$
$
(millions of Canadian dollars)
Operating income (loss) by segment:
Pulp
Paper
Unallocated
Total operating income
Add: Amortization5
Total operating income before amortization5
Add (deduct):
Working capital movements
Defined benefit plan contributions, net
Income taxes paid, net
Other operating cash flows, net
Cash from operating activities
Add (deduct):
Repayment of long-term debt
Dividends paid
Finance expenses paid
Capital additions, net
Advances to Licella Fibre Fuels Pty Ltd. (“Licella”)
Share purchases
Other, net
Change in cash / operating loans
5 Amortization includes amortization of certain capitalized major maintenance costs.
2017
2016
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
140.5
26.0
(11.9)
154.6
74.4
229.0
(6.4)
(7.0)
(19.1)
(1.8)
194.7
(50.0)
(16.5)
(3.3)
(83.1)
-
(17.7)
0.7
24.8
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
8 Analysis of Specific Items Affecting Comparability of Net Income
After-tax impact
(millions of Canadian dollars, except for per share amounts)
Net income, as reported
Change in substantively enacted tax legislation
Net impact of above items
Adjusted net income
Net income per share (EPS), as reported
Net impact of above items per share
Adjusted net income per share
2017
2016
$
$
$
$
$
$
$
102.1
2.8
2.8
104.9
1.55
0.04
1.59
$
$
$
$
$
$
$
57.8
-
-
57.8
0.86
-
0.86
The Company recorded net income of $102.1 million, or $1.55 per share, for the year ended December 31, 2017, an
increase of $44.3 million, or $0.69 per share, from $57.8 million, or $0.86 per share, reported for the year ended
December 31, 2016.
Operating income for 2017 was $154.6 million, the second highest in history, and up $56.4 million from operating
income of $98.2 million reported for 2016. These results include record high annual sales dollars at $1.2 billion. The
improved results of the pulp segment were principally due to higher US-dollar NBSK pulp and BCTMP list prices, which
more than offset the 2% stronger Canadian dollar and increased fibre (market-driven), chemical and energy costs.
The paper segment earnings showed a modest decline compared to the previous year, as improved average paper
unit sales realizations were more than offset by higher slush pulp prices, due to the higher Canadian dollar NBSK
market pulp prices.
A more detailed review of the Company’s operational performance and results is provided in “Operating Results by
Business Segment – 2017 compared to 2016”, which follows this overview of consolidated results.
9 OPERATING RESULTS BY BUSINESS SEGMENT – 2017 COMPARED
TO 2016
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 2017 and 2016 are as follows:
(millions of Canadian dollars, unless otherwise noted)
Sales
Operating income before amortization6
Operating income
Capital expenditures
Average NBSK pulp price delivered to China - US$7
Average NBSK pulp price delivered to China – Cdn$7
Production – pulp (000 mt)
2017
1,024.5
210.9
140.5
81.3
712
925
$
$
$
$
$
$
$
$
$
$
$
$
2016
924.2
149.5
79.6
60.9
599
794
1,205.0
1,217.9
Shipments – pulp (000 mt)
6 Amortization includes amortization of certain capitalized major maintenance costs.
7 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 monthly average rate for the period.
1,216.4
1,201.5
Markets
As mentioned above, overall global pulp demand in 2017 was unexpectedly strong, particularly in the second half of
the year, driven in part by China and its new regulations restricting the import of recycled mixed paper. Despite the
additional capacity that came on-line in 2017, unforeseen global pulp supply disruptions led to less capacity being
available for global pulp markets. These factors resulted in significant upward pressure on average pulp list prices
most notably in the latter part of the year. For the year as a whole, global shipments of bleached softwood kraft pulp
saw modest increases in 2017 compared to 2016, primarily to Asian markets (including China), and North America8.
At the end of December 2017, World 209 producers of bleached softwood pulp inventories were within the balanced
range, at 30 days’ supply. By comparison, December 2016 inventories were at 32 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 2017 were 1,216,400 tonnes, broadly in line with 2016.
As previously mentioned, China US-dollar NBSK pulp list prices averaged US$712 per tonne in 2017, up US$113 per
tonne, or 19% compared to 2016. Consequently, average NBSK pulp unit sales realizations saw solid increases year
over year, principally reflecting the increase in US-dollar pricing, which more than offset increases in customer
discounts, the 2% stronger Canadian dollar and a lag in the timing of shipments (versus orders). Average BCTMP
unit sales realizations were notably higher in 2017 compared to the previous year, reflecting strong BCTMP demand
and US-dollar pricing throughout most of the 2017 year, partially offset by the stronger Canadian dollar.
In 2017, energy revenue was up compared to the prior year, primarily reflecting higher energy pricing combined with
stronger power generation, particularly over the winter months, which more than offset operational challenges at the
Company’s Northwood NBSK pulp mill in the fourth quarter of 2017.
8 As reported PPPC statistics.
9 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”).
10 Operations
Pulp production in 2017, at 1,205,000 tonnes, was broadly in line with that produced in 2016, with total pulp
production comparable year-over-year after adjusting for scheduled and unplanned maintenance outages. In 2017,
the Company completed scheduled outages at its Northwood and Intercontinental NBSK pulp mills, as well as at its
Taylor BCTMP mill, which, in part, included preliminary work associated with the previously announced energy project
at that mill. During the fourth quarter of 2017, an unscheduled outage and subsequent repairs at the Northwood
pulp mill, related to a tube leak in the facility’s number five recovery boiler, resulted in a reduction in overall pulp
production of approximately 11,000 tonnes.
Pulp unit manufacturing costs modestly increased when compared to 2016, reflecting moderately higher fibre costs,
combined with a significant increase in chemical costs and, to a lesser extent, higher energy costs. The increase in
fibre costs compared to 2016 reflected higher market prices for delivered sawmill residual chips (linked to Canadian
dollar NBSK pulp sales realizations) combined with a marginal increase in the proportion of higher-cost whole log
chips.
Paper
Selected Financial Information and Statistics – Paper
Summarized results for the Paper segment for 2017 and 2016 are as follows:
(millions of Canadian dollars, unless otherwise noted)
2017
2016
Sales
Operating income before amortization10
Operating income
Capital expenditures
Production – paper (000 mt)
Shipments – paper (000 mt)
10 Amortization includes amortization of certain capitalized major maintenance costs.
Markets
$
$
$
$
$
$
$
$
173.0
29.9
26.0
1.8
138.0
139.0
176.1
33.5
29.7
1.7
135.8
142.5
As mentioned above, bleached kraft paper markets were healthy throughout 2017. Positive pricing momentum in the
first half of the year, continued into the latter part of the year.
Sales
The Company’s paper shipments in 2017 at 139,000 tonnes, were broadly in line with 2016. The Company’s prime
bleached paper shipments represented 88% of prime sales volumes in 2017, up 2% from 2016. Paper unit sales
realizations for 2017 were broadly in line with 2016, reflecting the improvement in US-dollar kraft paper prices as well
as the proportionately higher prime bleached shipments, offset by the unfavourable impact of the stronger Canadian
dollar.
Operations
Paper production in 2017 was 138,000 tonnes, up 2,200 tonnes, or 2%, from 2016, as a slight decline in operating
rates was more than offset by the favourable impact on paper production of no scheduled maintenance outages in
2017 (in 2016, scheduled maintenance outages reduced paper production by approximately 5,100 tonnes). Paper
unit manufacturing costs were moderately higher compared to 2016, largely reflecting a significant increase in slush
pulp costs (linked to higher Canadian dollar NBSK market pulp prices) and, to a lesser extent, higher routine
maintenance spend in 2017, offset in part by the favourable impact of increased paper production in the current year.
11 Unallocated and Other Items
Selected Financial Information
(millions of Canadian dollars)
Corporate costs
Finance expense, net
Other income (expense), net
Corporate Costs
2017
2016
$
$
$
(11.9) $
(7.2) $
(6.5) $
(11.1)
(6.6)
(10.4)
Corporate costs, which comprise corporate, head office and general and administrative expenses, were $11.9 million
in 2017, an increase of $0.8 million when compared to the prior year. This variance was primarily attributable to the
recognition of carbon offset credits in 2016, with no carbon offset credits sold in 2017.
Finance Expense, Net
Net finance expense for 2017 was $7.2 million, up $0.6 million from 2016. The increase principally reflected higher
finance expenses associated with the Company’s letters of credit, as well as an increase in employee future benefit
net interest costs. These factors were partially offset by interest income earned in 2017.
Other Income (Expense), Net
Other expenses, net of $6.5 million for 2017 principally related to unfavourable foreign exchange movements on US-
dollar denominated working capital balances, largely US-dollar denominated cash and accounts receivables. In 2016,
other expenses net, included the $7.0 million write-down of research and development related advances to Licella,
combined with unfavourable foreign exchange movements on US-dollar denominated working capital balances (see
further discussion in the “Licella Pulp Joint Venture” section).
Income Tax Expense
The Company recorded an income tax expense of $38.8 million in 2017 with an overall effective tax rate of 28%.
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):
2017
$
$
140.9
(36.6)
$
$
Permanent difference from capital gains and other non-deductible items
Entities with different income tax rates and other tax adjustments
Change in substantively enacted tax legislation
(0.1)
0.7
(2.8)
Income tax expense
$
(38.8)
$
2016
81.2
(21.1)
(1.8)
(0.5)
-
(23.4)
In 2017, the Provincial Government of British Columbia passed legislation increasing the provincial corporate tax rate
from 11% to 12% effective January 1, 2018. A $2.8 million increase to income tax expense was recorded in net
income in 2017 to record the impact on deferred taxes, with an additional $0.3 million being recorded in other
comprehensive income (loss) as an income tax recovery on defined benefit plan actuarial losses.
Other Comprehensive Income (Loss)
CPPI measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as at
December 31 of each year. Any actuarial gains or losses which arise are recognized immediately by means of a credit
or an expense through Other Comprehensive Income. For 2017, an after-tax gain of $18.9 million was recorded in
Other Comprehensive Income, as losses on the Company’s defined benefit pension plans were more than offset by
gains on other non-pension post-employment benefits. The losses associated with the defined benefit pension plans
largely reflected a lower discount rate used to value the net defined benefit obligation, offset in part by favourable
12 actuarial experience adjustments in the pension plans and the return generated on pension plan assets. The gains
related to the other non-pension post-employment benefits principally reflected a 50% reduction in Medical Services
Plan (“MSP”) premiums following a change in legislation in British Columbia, and, to a lesser extent, a reduction in the
MSP growth trend rate used to value the obligation, offset in part by a 0.5% lower discount rate.
In 2017, the Company purchased $37.3 million of buy-in annuities through its defined benefit pension plans,
increasing total annuities purchased to $77.1 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 $1.6 million related to the purchase were recognized in other comprehensive
income (loss), principally reflecting the difference in the annuity rate compared to the discount rate used to value the
obligations on a going concern basis.
When taking into account the impact of hedging, 45% of the change to the defined benefit pension plans is fully
hedged against changes in discount rates and longevity risk (potential increases in life expectancy of plan members)
through buy-in annuities, and a further 17% is partially hedged through the plan’s investment in debt securities.
In 2016, the after-tax loss of $11.5 million recorded in Other Comprehensive Income 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. 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 financial position as at December 31, 2017 and 2016:
(millions of Canadian dollars, except for ratios)
Cash and cash equivalents
Operating working capital
Net working capital
Property, plant and equipment and intangible assets
Other long-term assets
Net assets
Long-term debt
Retirement benefit obligations
Long-term provisions
Deferred income taxes, net
Total equity
2017
$
76.7
$
$
$
126.8
203.5
526.7
0.5
730.7
$
-
$
85.2
6.5
67.6
571.4
$
730.7
$
2016
51.9
138.9
190.8
520.4
0.5
711.7
50.0
109.1
6.2
61.7
484.7
711.7
Ratio of current assets to current liabilities
Net debt to total capitalization
2.3 : 1
(15.5)%
2.5 : 1
(0.4)%
The ratio of current assets to current liabilities at the end of 2017 was 2.3:1, compared to 2.5:1 at the end of 2016,
primarily as a result of an increase in accounts payable and accrued liabilities due to timing of spend, offset in part by
higher cash and cash equivalent balances. See further discussion in “Changes in Financial Position” section.
The Company’s net debt to capitalization was negative 15.5% at December 31, 2017 (December 31, 2016: negative
0.4%) reflecting the Company’s zero debt levels and strong cash position at the end of 2017.
13 CHANGES IN FINANCIAL POSITION
At the end of 2017, CPPI had $76.7 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
2017
2016
$
$
194.7
$
(87.5)
(82.4)
24.8
$
150.0
(44.8)
(70.8)
34.4
The changes in the components of these cash flows during 2017 are discussed in the following sections.
Operating Activities
For the 2017 year, CPPI generated cash from operating activities of $194.7 million, up $44.7 million from cash
generated of $150.0 million in the previous year. The increase in operating cash flows was principally related to
higher cash earnings combined with lower tax installment payments in 2017, partially offset by unfavourable
movements in non-cash working capital. The increase in non-cash working capital in 2017 related principally to
higher accounts receivable balances, primarily due to higher average NBSK and BCTMP pulp unit sales realizations
towards the end of year, offset by increased accounts payable and accrued liabilities, due to the timing of spend.
Financing Activities
In 2017, cash used in financing activities of $87.5 million was $42.7 million higher than the $44.8 million used in the
prior year. Financing activities in 2017 comprised the early repayment of the Company’s $50.0 million floating
interest rate term debt, as well as dividend payments totaling $16.5 million, or the equivalent of $0.0625 per common
share in each quarter, down $0.4 million from the previous year. In addition, during 2017, the Company continued
its share repurchase activity under its Normal Course Issuer Bid, spending a total of $17.7 million on common share
repurchases during the year, compared to a total of $24.7 million on common share repurchases in 2016 (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 2017 were broadly in line with the prior year.
Investing Activities
Net cash used for investing activities in 2017 was $82.4 million, compared to $70.8 million used in 2016. Capital
expenditures of $83.1 million in 2017 were associated with several capital projects including the previously announced
Northwood and Taylor energy projects, as well as maintenance of business and other improvement projects (see
further discussion in the “Northwood and Taylor Pulp Mill Energy Projects” section). In 2016, 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).
LIQUIDITY AND FINANCIAL REQUIREMENTS
Operating Loan and Term Debt
At December 31, 2017, the Company had a $110.0 million unsecured operating loan facility which was unused,
except for $9.2 million reserved for several standby letters of credit, leaving $100.8 million available and undrawn on
the operating facility. 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.
On December 29, 2017, the Company repaid the full principal balance of its term loan of $50.0 million. The interest
rate on the term loan was based on the lenders’ Canadian prime rate or bankers’ acceptance rate in the year of
payment.
14 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 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, 2017, and expects to remain so
for the foreseeable future.
Normal Course Issuer Bid
On March 7, 2017, the Company renewed its normal course issuer bid whereby it can purchase for cancellation up to
3,332,038 common shares or approximately 5% of its issued and outstanding common shares as of March 1, 2017.
The renewed normal course issuer bid is set to expire on March 6, 2018. In 2017, CPPI purchased 1,448,109
common shares for $17.8 million (an average price of $12.29 per common share). Cash payments for share
purchases totaled $17.7 million during the year. As a result of the share purchases in 2017, Canfor’s interest in CPPI
increased from 53.6% at December 31, 2016 to 54.8% at December 31, 2017.
As at February 22, 2018, based on trade date, there were 65,250,759 common shares of the Company outstanding,
as a result of share purchases subsequent to year end, and Canfor’s ownership interest in CPPI remained at 54.8%.
2018 Projected Capital Spending and Debt Repayments
Based on its current outlook, assuming no deterioration in market conditions during the year, the Company
anticipates that it will invest approximately $90.0 million in capital projects, which will consist primarily of various
improvement projects, including the Northwood and Taylor pulp mill energy projects, outlined below, as well as the
implementation of a new ERP software system and other maintenance of business expenditures, including major
maintenance spending. CPPI has sufficient liquidity in its cash reserves and operating loans to finance its planned
capital expenditures as required during 2018. As at December 31, 2017 the Company has no debt outstanding and as
a result no debt due for repayment in 2018.
Northwood and Taylor Pulp Mill Energy Projects
On July 26, 2017, the Company announced plans to undertake capital projects at its Northwood and Taylor pulp mills.
The Northwood project will install a new 32 megawatt condensing turbo-generator for an estimated cost of $65.0
million. The Taylor project will upgrade the refining line for an estimated cost of $40.0 million. The Taylor project
will be partially funded through BC Hydro’s conservation program incentives. These projects will yield a significant
improvement in overall mill energy efficiency and will result in a reduction in total fuel consumption. The sustaining
benefits of the projects will also include reductions in mill water use, steam use per tonne of pulp and natural gas
consumption.
As at December 31, 2017, both projects are progressing as planned. The Taylor project is currently estimated to
commence ramp up in the later part of 2018, following an extended scheduled outage to complete tie-in work in the
second quarter of 2018. The Northwood project is currently scheduled to be commissioned in 2019.
15 Derivative Financial Instruments
As at December 31, 2017, 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 2017.
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 2017.
c.
Enters into futures contracts on commodity exchanges for pulp. The Company did not enter into any pulp
futures contracts during 2017.
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 2017.
Commitments
The following table summarizes CPPI’s financial contractual obligations at December 31, 2017 for each of the next
five years and thereafter:
(millions of Canadian dollars)
2018
2019
2020
2021
2022
Thereafter
Total
Operating leases
$
0.5 $
0.4 $
0.2 $
0.1 $
- $
- $
1.2
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, 2017 the Company had posted $6.7 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 $12.2 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 5 to 34 years which have been discounted at risk free rates ranging from 1.9% to
2.3%. The estimated discounted value is $5.5 million and the amount is included in Other long-term provisions.
Obligations to pay pension and other post-employment benefits, for which a net liability for accounting purposes
at December 31, 2017 was $85.2 million. As at December 31, 2017, CPPI estimated that it would make
contribution payments of $5.2 million to its defined benefit pension plans in 2018 based on the last actuarial
valuation for funding purposes.
Purchase obligations and contractual obligations in the normal course of business. 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.
16 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 one of the Company’s Fibre Supply Agreements with Canfor expired September 1, 2016.
The Company and Canfor agreed to extend the chip pricing formula under this agreement for one year, with the
opportunity to extend for one additional year if both parties agree. Both parties have since agreed to an extension of
the expiry date to September 1, 2018.
In 2017, the Company purchased wood chips, logs and hog fuel from Canfor sawmills in the amount of $175.3
million.
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 2017 was $12.5 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 2017 was $3.8 million.
At December 31, 2017, an outstanding balance of $13.1 million is due to Canfor.
The Jim Pattison Group is Canfor’s largest shareholder. During 2017, CPPI sold paper to subsidiaries owned by The
Jim Pattison Group totalling $3.5 million. CPPI also made purchases from subsidiaries owned by The Jim Pattison
Group totalling $0.3 million. No amounts related to these sales or purchases were outstanding as at December 31,
2017.
Additional details on related party transactions are contained in Note 16 to CPPI’s 2017 consolidated financial
statements.
LICELLA PULP JOINT VENTURE
In May 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 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.
In March 2017, the Canadian Federal Government through its Sustainable Development Technology Canada program
announced the funding over several years of approximately $13.2 million, contingent on future spending, to allow the
Licella Pulp Joint Venture to further develop and demonstrate a technology that will economically convert biomass
into biofuels and biochemicals. During 2017, the Company, together with its joint venture partner, Licella, has
actively continued to advance work associated with the feasibility study and risk reduction process for industrializing
this biofuel and biochemical technology.
COLLECTIVE AGREEMENTS WITH LABOUR UNIONS
In June 2017, the Company ratified a new four-year collective agreements with Unifor and PPWC (Public and Private
Workers of Canada). Both agreements expire on April 30, 2021.
17 SELECTED QUARTERLY FINANCIAL INFORMATION
Q4
2017
Q3
2017
Q2
2017
Q1
2017
Q4
2016
Q3
2016
Q2
2016
Q1
2016
Sales and income
(millions of Canadian dollars)
Sales
Operating income before amortization11
Operating income
Net income
Per common share (Canadian dollars)
Net income – basic and diluted
Book value12
$ 322.9 $ 284.9 $ 280.9 $ 309.2 $
257.8 $
291.6 $
257.2 $
295.3
$
$
$
$
$
85.6 $
39.4 $
50.0 $
54.0 $
42.1 $
50.0 $
22.1 $
66.8 $
21.1 $
31.5 $
35.2 $
22.9 $
31.0 $
45.2 $
12.6 $
20.2 $
24.1 $
10.1 $
22.4 $
5.2 $
2.2 $
57.8
39.1
23.1
0.69 $
0.19 $
0.31 $ 0.36 $
0.15
8.76 $
7.78 $
7.63 $
7.55 $
7.27
$
$
0.34
7.14
$
$
0.03 $
6.88 $
0.34
7.15
Dividends declared
$ 0.0625 $ 0.0625 $ 0.0625 $ 0.0625 $ 0.0625
$ 0.0625
$ 0.0625 $
0.0625
Common Share Repurchases
Share volume repurchased (000 shares)
8
568
608
264
Shares repurchased (millions of Canadian
dollars)
Statistics
$
0.1
$
7.2 $
7.5
$
3.0 $
-
-
$
-
-
1,840
413
$ 19.5 $
4.9
Pulp shipments (000 mt)
299.7
303.3
276.3
337.1
275.4
319.8
287.2
319.1
Paper shipments (000 mt)
35.8
34.0
35.5
33.7
33.6
35.5
38.5
34.9
Average exchange rate – US$/Cdn$
$ 0.786 $ 0.798 $ 0.744 $ 0.756 $
0.750 $
0.766 $
0.776 $
0.728
Average NBSK pulp list price delivered to
China (US$)
11 Amortization includes amortization of certain capitalized major maintenance costs.
12 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.
670 $
863 $
645 $
670 $
595 $
617 $
595 $
590
$
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 operating rates and 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.
18 (millions of Canadian dollars)
Operating income (loss) by segment:
Pulp
Paper
Unallocated
Total operating income
Add: Amortization13
Total operating income before
amortization13
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):
Repayment of long-term debt
Dividends paid
Finance expenses paid
Capital additions, net
Advances to Licella
Share purchases
Other, net
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Q4
2017
Q3
2017
Q2
2017
Q1
2017
Q4
2016
Q3
2016
Q2
2016
Q1
2016
62.4 $
7.4 $
(3.0) $
66.8 $
18.8 $
19.0 $
4.9 $
(2.8) $
21.1 $
18.3 $
28.0 $
6.6 $
(3.1) $
31.5 $
18.5 $
31.1 $
7.1 $
(3.0) $
35.2 $
18.8 $
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
85.6 $
39.4 $
50.0 $
54.0 $
42.1 $
50.0 $
22.1 $
57.8
(5.2) $
1.0 $
(2.0) $
(0.2) $
3.8 $
(3.9) $
31.9 $
(12.8)
(2.2) $
(1.5) $
1.7 $
(1.6) $
(16.5) $
(1.2) $
(1.7) $
(0.9) $
(0.9) $
(1.5) $
(0.2) $
(1.4) $
(2.1) $
(0.8) $
4.1 $
(3.6) $
(18.6) $
2.2 $
(1.4) $
(2.6) $
(1.5) $
(1.2)
(11.6)
(3.9)
78.4 $
21.1 $
44.5 $
50.7 $
47.1 $
26.1 $
48.5 $
28.3
(50.0) $
(4.1) $
(1.0) $
(28.1) $
$
-
$
-
0.2 $
-
$
(4.1) $
(0.9) $
(19.0) $
$
-
(7.5) $
0.2 $
-
$
(4.1) $
(0.7) $
(19.2) $
-
$
(7.4) $
0.1 $
-
$
(4.2) $
(0.7) $
(16.8) $
-
$
(2.8) $
0.2 $
-
$
(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
5.3
Change in cash / operating loans
13 Amortization includes amortization of certain capitalized major maintenance costs.
(10.2) $
(4.6) $
$
13.2 $
26.4 $
20.0 $
6.9 $
2.2 $
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
2017
1,197.9
102.1
892.2
-
1.55
0.250
$
$
$
$
$
$
$
$
$
$
$
$
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
19 FOURTH QUARTER RESULTS
Overview
The Company recorded operating income of $66.8 million and net income of $45.2 million for the fourth quarter of
2017, compared to operating income of $21.1 million and net income of $12.6 million for the third quarter of 2017
and operating income of $22.9 million and net income of $10.1 million for the fourth quarter of 2016. Net income per
share was $0.69 for the fourth quarter of 2017, compared to $0.19 per share in the third quarter of 2017 and $0.15
per share in the fourth quarter of 2016.
An overview of the results by business segment for the fourth quarter of 2017 compared to the third quarter of 2017
and the fourth quarter of 2016 follows.
Pulp
Selected Financial Information and Statistics – Pulp
(millions of Canadian dollars, unless otherwise noted)
Sales
Operating income before amortization14
Operating income
Average NBSK pulp price delivered to China – US$15
Average NBSK pulp price delivered to China – Cdn$15
Production – pulp (000 mt)
$
$
$
$
$
Q4
2017
277.3
80.1
62.4
863
1,098
307.6
$
$
$
$
$
Q3
2017
243.6
36.3
19.0
670
839
305.1
$
$
$
$
$
Q4
2016
215.9
36.2
18.1
595
794
304.0
Shipments – pulp (000 mt)
14 Amortization includes amortization of certain capitalized major maintenance costs.
15 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 monthly average rate for the period.
299.7
275.4
303.3
Markets
Global pulp markets experienced a strong surge in demand which commenced late in the third quarter of 2017 and
continued through the fourth quarter of 2017. This growth in demand, principally from China, was in part due to
China’s new regulations restricting the import of recycled mixed paper, combined with impact of various unforeseen
global pulp supply disruptions in the second half of 2017. At the end of December 2017, global softwood pulp
producer inventory levels were in a balanced range at 30 days of supply16 (Market conditions are generally considered
balanced when inventories are in the 27-30 days of supply range).
Global shipments of bleached softwood pulp increased by 3.0% for 2017 when compared to 2016, driven primarily by
increased year-over-year shipments to North America and Asian countries, including China17.
Sales
The Company’s pulp shipments for the fourth quarter of 2017 totalled 299,700 tonnes, broadly in line with the third
quarter of 2017 and up 24,300 tonnes, or 9%, from the fourth quarter of 2016. Pulp shipments in the current
quarter reflected the benefit of a 14,000 tonne vessel shipment slippage into the beginning of the quarter; however,
this was offset by a weather related 14,000 tonne vessel delay at the end of December. Compared to the fourth
quarter of 2016, the increase in pulp shipments was mostly attributable to the delayed shipment from September into
October 2017, coupled with the drawdown of inventories at the end of the current quarter.
16 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”).
17 As reported by PPPC statistics.
20 The average China US-dollar NBSK pulp list price of US$863 per tonne, as published by RISI, was up US$193 per
tonne, or 29%, from the third quarter of 2017, which was the principal reason for a significantly higher average NBSK
pulp unit sales realizations quarter over quarter. This was combined to a lesser extent, with the benefit of a 1 cent or
1% weaker Canadian dollar, offset in part by the timing impact of a higher proportion of shipments in the period
relating to orders taken in the third quarter of 2017, when prices were lower. Average BCTMP unit sales realizations
also experienced a healthy increase when compared to the previous quarter, reflecting improved BCTMP markets
combined with the benefit of a 1% weaker Canadian dollar.
Compared to the fourth quarter of 2016, the average China US-dollar NBSK pulp list price was up $268 per tonne, or
45%. The Company’s NBSK pulp unit sales realizations saw a substantial increase when compared to the fourth
quarter of 2016, primarily reflecting the notable strengthening in US-dollar prices, offset in part by a 4 cent or 5%
stronger Canadian dollar combined with the unfavourable impact of the timing of shipments (versus orders) and
increased customer discounts in North America. Average BCTMP unit sales realizations also increased significantly
when compared to the fourth quarter of 2016, primarily reflecting the improvement in BCTMP market demand, which
more than offset the stronger Canadian dollar.
Energy revenues increased during the fourth quarter of 2017 compared to the previous quarter, reflecting seasonally
higher energy prices combined with strong power generation at the Company’s Intercontinental and Prince George
NBSK pulp mills, offset in part by reduced power generation at the Northwood NBSK pulp mill due to the unscheduled
outage in the current period. Energy revenues in the current quarter were in line with the the fourth quarter of 2016,
primarily due to comparable Company-wide power generation quarter over quarter, largely correlated to pulp
production variances between the periods.
Operations
Pulp production in the fourth quarter at 307,600 tonnes was broadly in line with both comparative periods.
Production in the current quarter reflected an unscheduled outage and subsequent repairs on one production line at
the Company’s Northwood NBSK pulp mill as a result of a tube leak in the number five recovery boiler, which reduced
pulp production by approximately 11,000 tonnes. In addition, the Company completed a planned scheduled outage
at the Taylor BCTMP mill, which reduced pulp production by approximately 3,000 tonnes. An efficient start-up
following the downtime and improved operating rates during the quarter partly offset the impact of these outages on
pulp production in the current quarter. In the third quarter of 2017, the Company completed a scheduled
maintenance outage at the Intercontinental NBSK pulp mill, which reduced pulp production by approximately 10,000
tonnes. In the comparative fourth quarter of 2016, the Company experienced a lower operating rate, primarily due to
extreme cold weather challenges during that comparative period.
Pulp unit manufacturing costs were largely consistent with the third quarter of 2017, as increased maintenance spend
combined with higher energy usage in the current quarter, primarily due to the aforementioned unplanned outage,
were offset by improved productivity in the latter part of the quarter and lower chemical costs. Fibre costs were
relatively flat compared to the third quarter of 2017 as higher market prices for delivered sawmill residual chips
(linked to Canadian dollar NBSK pulp sales realizations), coupled with a modest increase in the proportion of higher-
cost whole log chips in the current quarter, were offset by seasonal pricing adjustments arising from the adverse
weather conditions in the current quarter.
Compared to the fourth quarter of 2016, pulp unit manufacturing costs saw a modest increase, principally due to
higher fibre costs, and to a lesser extent, higher chemical pricing and increased maintenance spend in the current
quarter, partially offset by improved productivity and lower energy costs. Increased fibre costs in the current quarter
largely reflected significantly higher market prices for delivered sawmill residual chips combined with a larger
proportion of higher-cost whole log chips.
21 Paper
Selected Financial Information and Statistics – Paper
(millions of Canadian dollars, unless otherwise noted)
Sales
Operating income before amortization18
Operating income
Production – paper (000 mt)
$
$
$
Shipments – paper (000 mt)
18 Amortization includes amortization of certain capitalized major maintenance costs.
Markets
Q4
2017
45.6 $
8.4 $
7.4 $
35.0
35.8
Q3
2017
Q4
2016
$
$
$
41.2
5.9
4.9
34.8
34.0
41.8
9.1
8.1
36.0
33.6
Global kraft paper markets were healthy through the fourth quarter of 2017. The positive momentum from North
American markets experienced in the first half of 2017 continued through the back half of 2017, while certain
offshore markets, particularly Asia, saw increasing demand.
Sales
The Company’s paper shipments in the fourth quarter of 2017 were 35,800 tonnes, up 1,800 tonnes, or 5%, from the
previous quarter and up 2,200 tonnes, or 7% from the fourth quarter of 2016, principally reflecting the favourable
timing of shipments.
Paper unit sales realizations in the fourth quarter of 2017 saw a modest increase when compared to the previous
quarter, reflecting higher market-driven US-dollar pricing combined with the 1% weaker Canadian dollar. Compared
to the same quarter of 2016, paper unit sales realizations saw a slight improvement, as favourable pricing more than
offset the 5% stronger Canadian dollar.
Operations
Paper production for the fourth quarter of 2017 of 35,000 tonnes, was broadly in line with the previous quarter, and
down 1,000 tonnes, or 3%, when compared to the fourth quarter of 2016, principally reflecting a slightly lower
operating rate in the current quarter.
Paper unit manufacturing costs increased compared to both the third quarter of 2017 and the fourth quarter of 2016.
The increase compared to the immediately prior quarter were primarily driven by significantly higher slush pulp costs,
associated with higher average NBSK sales realizations, in the current quarter. Compared to the fourth quarter of
2016, the increase in paper unit manufacturing costs principally reflected the higher slush pulp costs and, to a lesser
extent, increases in maintenance spend and higher chemical costs in the current quarter.
22 Unallocated Items
(millions of Canadian dollars)
Corporate costs
Finance expense, net
Other income (expense), net
Q4
2017
(3.0)
(1.9)
-
$
$
$
$
$
$
Q3
2017
(2.8) $
(1.8) $
(3.0) $
Q4
2016
(3.3)
(1.9)
(5.1)
Corporate costs were $3.0 million for the fourth quarter of 2017, up $0.2 million when compared to the third quarter
of 2017 and down $0.3 million when compared to the fourth quarter of 2016.
Net finance expense for the fourth quarter of 2017 at $1.9 million, was broadly in line with both comparative periods
and related primarily to interest expense associated with the Company’s employee future benefit plans and term debt
as well as fees associated with Company’s outstanding letters of credit.
Other expenses, net, were $nil for the fourth quarter of 2017, down when compared to both comparative periods. In
the fourth quarter of 2017, realized foreign exchange gains during the current quarter were offset by unrealized
losses on US-dollar denominated cash and accounts receivable at the end of the period. In the fourth quarter of
2016, in addition to foreign exchange movements on working capital balances, the net other expense 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.
Other Comprehensive Income (Loss)
In the fourth quarter of 2017, the Company recorded an after-tax gain of $22.3 million related to changes in the
valuation of the Company’s employee future benefit plans.
Compared to the third quarter of 2017, the gain primarily reflected a 50% reduction in MSP premiums following a
change in legislation in British Columbia, and, to a lesser extent, a reduction in the MSP growth trend rate used to
value the obligation and the return generated on plan assets. The gains were partially offset by a 0.4% decrease in
the discount rate used to value the obligation. This compared to an after-tax gain of $4.6 million in the previous
quarter and an after-tax gain of $2.5 million in the fourth quarter of 2016, with the gains in both cases largely
reflecting higher discount rates.
During the fourth quarter of 2017, the Company purchased $19.3 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 $0.5 million were recognized in Other Comprehensive Income
principally reflecting the difference in the annuity rate as compared to the discount rate used to value the pension
obligations on a going concern basis. For more information, see the “Employee Future Benefits” part of the “Critical
Accounting Estimates” section later in this report.
23 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
2017
(4.6)
78.4
(55.1)
(27.9)
$
$
$
$
$
$
$
$
Q3
2017
Q4
2016
(10.2) $
21.1
$
(12.5) $
(18.8) $
20.0
47.1
(5.3)
(21.8)
Cash generated from operating activities was $78.4 million in the fourth quarter of 2017, up $57.3 million from the
previous quarter and $31.3 million from the fourth quarter of 2016. The increase in operating cash flows compared
to the previous quarter principally reflected higher cash earnings combined with lower tax installment payments,
partially offset by unfavourable movements in non-cash working capital. The increase in non-cash working capital in
the current quarter related principally to higher accounts receivable balances, primarily due to higher average NBSK
and BCTMP pulp unit sales realizations, partly offset by increased accounts payable and accrued liabilities, which were
mostly timing related.
Cash used for financing activities was $55.1 million in the fourth quarter of 2017, up $42.6 million from the third
quarter of 2017 and $49.8 million from the fourth quarter of 2016. Cash used for financing activities in the current
quarter included the early repayment of the Company’s $50.0 million long-term debt, combined with the Company’s
quarterly dividend payment of $4.1 million ($0.0625 per share) as well as interest paid of $1.0 million. In the fourth
quarter of 2017, the Company repurchased 7,575 common shares under its normal course issuer, bid for $0.1 million,
which was paid subsequent to year end. This compared to $7.5 million for common shares repurchased in the third
quarter of 2017. In the fourth quarter of 2016, the Company did not repurchase common shares under its normal
course issuer bid (see further discussion of the shares purchased under the “Normal Course Issuer Bid” part of the
“Liquidity and Financial Requirements” section).
Cash used for investing activities of $27.9 million in the current quarter primarily related to capital expenditures
associated with several capital projects including the previously announced energy projects at the Company’s
Northwood and Taylor pulp mills.
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
2017
Q3
2017
Q2
2017
Q1
2017
Q4
2016
Q3
2016
Q2
2016
Q1
2016
Net income, as reported
$
45.2 $
12.6 $
20.2 $
24.1 $
10.1 $
22.4 $
2.2 $
23.1
Change in substantively enacted tax
legislation
Net impact of above items
Adjusted net income
$
$
$
2.8 $
2.8 $
-
-
$
$
-
-
$
$
-
-
$
$
-
-
$
$
-
-
$
$
-
-
$
$
-
-
48.0 $
12.6 $
20.2 $
24.1 $
10.1 $
22.4 $
2.2 $
23.1
Net income per share (EPS), as reported $
Net impact of above items per share19
Adjusted net income per share19
0.19 $ 0.31 $
19 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.
0.19 $ 0.31 $
0.36 $ 0.15
$ 0.03 $
0.36 $
0.73 $
0.04 $
0.69 $
$ 0.03 $ 0.34
0.34
0.34
0.15
-
0.34
$
$
$
$
$
$
$
$
$
$
-
-
-
-
-
-
24 OUTLOOK
Pulp Markets
Global softwood kraft pulp markets are projected to remain well positioned through the first quarter of 2018, with
continued strong shipments into Asian markets, particularly China, and sustained demand in other markets. The
Company has announced NBSK pulp list price increases of US$10 per tonne to China for January 2018, and two
consecutive price increases to North America, each of US$30 per tonne, for February and March 2018. A balanced
kraft pulp market is projected to continue into the second quarter of 2018, when many pulp producers have their
traditional spring maintenance outages. The BCTMP market is seeing some reduced demand in the first quarter of
2018, which is resulting in downward price pressure. Early 2018 weather related transportation disruptions are
projected to result in delayed shipments and modestly higher costs for the first quarter of 2018. The pulp outlook for
the second half of the year is more uncertain given incremental pulp capacity currently projected to come online and
the potential for the reinstatement of some import permits for recovered paper in China through 2018.
The Company has no maintenance outages planned for the first quarter of 2018. Maintenance outages are currently
planned at the Prince George NBSK pulp mill and at the Taylor BCTMP mill in the second quarter of 2018 with a
projected 5,000 tonnes of reduced NBSK pulp production and 11,000 tonnes of reduced BCTMP production,
respectively. The schedule outage at the Taylor BCTMP mill will include work associated with the previously
announced energy project. A maintenance outage at the Northwood NBSK pulp mill is scheduled in the third quarter
of 2018 with a projected 22,000 tonnes of reduced NBSK pulp production.
Paper Markets
Bleached kraft paper demand is currently solid and is expected to remain positive through the first half of 2018. Price
increases announced in the latter part of 2017 are projected to be realized in the first quarter of 2018.
A maintenance outage is currently planned at the Company’s paper machine during the second quarter of 2018 with a
projected 4,000 tonnes of reduced paper production.
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).
25 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, 2017
December 31, 2016
Defined
Benefit
Pension
Plans
3.4%
3.0%
n/a
n/a
n/a
Other
Benefit
Plans
3.4%
n/a
6.5%
4.5%
2022
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
In addition to the significant assumptions listed in the table above, the average life expectancy of a 65 year old at
December 31, 2017 is between 21.0 years and 24.1 years (December 31, 2016 - 20.9 years and 24.1 years). As at
December 31, 2017, the weighted average duration of the defined benefit plan obligation, which reflects the average
age of the plan members, is 12.3 years (December 31, 2016 - 12.1 years). The weighted average duration of the
other benefit plans is 14.2 years (December 31, 2016 - 14.6 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, taking into account the hedging impact of plan annuity assets,
for 2017:
(millions of Canadian dollars)
Defined benefit pension plan liabilities, net of annuity assets
Discount rate
Other benefit plan liabilities
Discount rate
Initial medical cost trend rate
1% Increase 1% Decrease
$
$
$
(10.7) $
13.2
(7.9) $
$
7.5
10.0
(6.2)
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 5 to 34 years and have been discounted at risk-free rates ranging from 1.9% 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 2017 or 2016.
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.
26 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, 2017.
FUTURE CHANGES IN ACCOUNTING POLICIES
In May 2014, the 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 an assessment of the impact of the new
standard, and has determined that adoption of this standard will have no significant impact on the Company’s
financial statements.
In July 2014, the IASB issued IFRS 9, Financial Instruments. The required adoption date for IFRS 9 is January 1,
2018. The Company has performed an assessment of the impact of the new standard, and has determined that
adoption of this standard will have no significant impact on the Company’s 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. IFRS 16 introduces a single, on-balance sheet lease
accounting model for lessees. A lessee recognizes a right-of-use asset representing its right to use the underlying
asset and a lease liability representing its obligation to make lease payments. In addition, the nature of expenses
related to those leases will change as IFRS 16 replaces straight-line operating lease expense with a depreciation
expense for right-of-use assets and interest expense on lease liabilities.
It is expected that IFRS 16 will have an impact on the Company's financial statements with recognition of new assets
and liabilities for its operating leases; however, the Company is still in the process of assessing the quantitative
impact on its financial statements of this new standard. The Company's future minimum lease payments, on an
undiscounted basis, under non-cancellable operating leases at December 31, 2017 are $1.2 million.
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.
27 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 2017 were approximately $83.1 million. The Company anticipates
available cash resources and cash generated from operations will be sufficient to fund its operating needs and capital
expenditures.
Climate Change
The Company’s operations are subject to adverse events brought on by both natural and man-made disasters. These
events include, but are not limited to, severe weather conditions, forest fires, earthquakes and timber diseases and
insect infestations. These events could damage or destroy the Company’s operating facilities, adversely affect Canfor’s
timber supply or result in reduced transportation availability. These events could have similar effect on the facilities of
the Company’s suppliers and customers. Any of the damage caused by these events could increase costs and
decrease production capacity at the Company’s operations having an adverse effect on the Company’s financial
results. The Company believes there are reasonable insurance arrangements in place to cover certain outcomes of
such incidents however; there can be no guarantees that these arrangements will fully protect the Company against
such losses.
Competitive Markets
The Company’s products are sold primarily in Asia and North America, with smaller volumes to other markets. 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 price, quality of
product, volume, availability and reliability of supply, financial viability and customer service. The Company’s
competitive position is influenced by: the availability, quality, and cost of raw materials; chemical, 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.
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 cyclical and may be characterized by
(i) periods of excess product supply due to industry capacity additions, increased global 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, to some degree, been unpredictable.
Dependence on Canfor
In 2017, approximately 62% of the fibre used by the Company was derived from the Fibre Supply Agreements 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.
28 Dependence on Key Customers
In 2017, the Company’s top five customers accounted for approximately 29% 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 2017 and may, subject to market conditions, continue to
pay a comparable level of dividends through 2018. There is no assurance that the dividends will be maintained at this
level and the market value of CPPI shares may fluctuate depending on the amount of dividends paid in the future.
The board retains the discretion to change the policy at any time and reviews the policy on a quarterly basis.
Employee Future Benefits
The Company, in participation with Canfor, has several defined benefit plans, which provide pension benefits to
certain salaried employees. Benefits are based on a combination of years of service and final average salary. Cash
payments required to fund the pension plan are determined by actuarial valuation completed at least once every three
years, with the most recent actuarial valuation for the largest plan completed as of December 31, 2015.
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.
The Company utilizes investments in buy-in annuities to reduce its exposure to these risks. Future cash flows from the
annuities match the amount and timing of benefits payable under the plans, substantially mitigating the exposure to
future volatility in the related pension obligations.
For CPPI’s pension benefit plans, a one percentage point increase in the discount rate used in calculating the actuarial
estimate of future liabilities would reduce the accrued benefit obligation by an estimated $10.7 million and a one
percentage point decrease in the discount rate would increase the accrued benefit obligation by an estimated $13.2
million. These changes would only impact the Company’s funding requirements in years where a new actuarial
funding valuation was performed and regulatory approval for a change in funding contributions was obtained.
Environmental Laws, Regulations and Compliance
The Company is subject to a wide range of general and industry-specific laws and regulations relating to the
protection of the environment, including those governing air emissions, wastewater discharges, the storage,
management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, landfill operation
and closure obligations, and health and safety matters. These laws and regulations require the Company to comply
with specific requirements as described in regulations. Regulations may also require the Company to obtain
authorizations and comply with the authorization requirements of the appropriate governmental authorities which
have considerable discretion over the terms and timing of said authorizations and permits.
The Company has incurred, and expects to continue to incur, capital, operating and other expenditures complying
with applicable environmental laws and regulations and as a result of environmental remediation on asset retirement
obligations. It is possible that the Company could incur substantial costs, such as civil or criminal fines, sanctions and
enforcement actions, cleanup and closure costs, and third-party claims for property damage and personal injury as a
result of violations of, or liabilities under, environmental laws and regulations. The amount and timing of
environmental expenditures is difficult to predict, and, in some cases, the Company’s liability may exceed forecasted
amounts. The discovery of additional contamination or the imposition of additional cleanup obligations at the
29 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 Price 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.
(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, or redemption date, of three months or less. The cash and
cash equivalents balance at December 31, 2017 is $76.7 million.
CPPI utilizes credit insurance to manage the risk associated with trade receivables. As at December 31, 2017,
approximately 76% 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, 2017 is $101.7 million before an
allowance for doubtful accounts of $0.2 million. At December 31, 2017, approximately 99% of the trade accounts
receivable balance are within CPPI’s established credit terms.
(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, 2017, CPPI has no amounts drawn on its operating loan. At December 31, 2017 CPPI had accounts
payable and accrued liabilities of $161.5 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. At December 31, 2017 CPPI had no fixed interest rate swaps outstanding.
30 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.
An increase (decrease) in the value of the Canadian dollar by US$0.01 would result in a pre-tax loss (gain) of
approximately $1.2 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 (See “Derivative Financial Instruments” section later in this document).
CPPI had no foreign exchange derivatives outstanding at December 31, 2017.
(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
Company’s 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, 2017.
(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).
CPPI had no WTI oil collars outstanding at December 31, 2017.
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.
31 Earnings Sensitivities
Estimates of the sensitivity of CPPI's pre-tax results to currency fluctuations and prices for its principal products,
based on 2018 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 20
BCTMP – US$10 change per tonne 20
Natural gas cost – $1 change per gigajoule
Chip cost – $1 change per tonne
Canadian dollar – US$0.01 change per Canadian dollar21
Impact on annual
pre-tax earnings
$ 11
$ 3
$ 7
$ 3
$ 8
20 Excluding impacts of exchange rate, freight, discounting, potential change in fibre costs and other deductions.
21 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
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, failure or unsuccessful implementation and integration 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 to develop and enhance 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.
32 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 Agreements with Canfor contain 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 one of these agreements expired September 1, 2016, and may be amended as necessary to
ensure it is reflective of market conditions. The Company and Canfor agreed to extend the chip pricing formula under
this agreement until September 1, 2018. Prices for wood chips are not within the Company’s control and are driven
by market demand, product availability, environmental restrictions, logging regulations, the imposition of fees or other
restrictions on exports of lumber into the US and other matters. The Mountain Pine Beetle epidemic in the region
continues to impact overall fibre supply for the interior sawmills. The Prince George Timber Supply Area allowable
annual cut (“AAC”) has recently been reduced and is scheduled for another reduction in 2023. This has the potential
to significantly reduce the availability of residual chips that the Company currently consumes from regional sawmills,
and an increased reliance on higher-cost whole log chips may be required. Residual chip pricing also depends on
current sawmills running at current levels. If the residual chip supply is reduced, as a result of AAC reductions, lower
sawmill production or sawmill closures, whether temporary or permanent, it is expected that the market price for
wood chips will increase. The Company is not always able to increase the selling prices of its products in response to
increases in raw material costs.
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. Any inability to negotiate acceptable
contracts with the Unifor and PPWC 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.
OUTSTANDING SHARE DATA
At February 22, 2018, based on trade date, there were 65,250,759 common shares issued and outstanding.
33 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, 2017, 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, 2017 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, 2017, the CEO and CFO have concluded that these controls are
operating effectively.
Additional information about the Company, including its 2017 Annual Information Form, is available at
www.sedar.com or at www.canfor.com.
34 35 CONS OLIDATE D FIN ANCIA L STAT EM ENT S
36 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 controls over financial reporting, 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 controls over financial reporting, 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 22, 2018
Don B. Kayne
Chief Executive Officer
Alan Nicholl
Chief Financial Officer
37 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, 2017 and December 31, 2016, 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
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.
the appropriateness of accounting policies used and
includes evaluating
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, 2017 and December 31, 2016, 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 22, 2018
Vancouver, Canada
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.
38 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 and intangible assets (Note 6)
Other long-term assets
Total assets
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities (Note 7)
$
161.5
$
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
161.5
-
85.2
6.5
67.6
$
320.8
$
$
$
$
480.9
90.5
571.4
892.2
$
$
$
Commitments (Note 18) and Subsequent Event (Note 23)
The accompanying notes are an integral part of these consolidated financial statements.
APPROVED BY THE BOARD
Director, S.E. Bracken-Horrocks
Director, C.A. Pinette
As at
December 31,
2017
As at
December 31,
2016
$
76.7
$
101.5
17.1
165.5
4.2
365.0
526.7
0.5
$
892.2
$
51.9
75.9
16.8
166.5
5.1
316.2
520.4
0.5
837.1
125.4
125.4
50.0
109.1
6.2
61.7
352.4
491.6
(6.9)
484.7
837.1
39 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)
Other expense, net
Net income before income taxes
Income tax expense (Note 14)
Net income
Years ended December 31,
2016
2017
$
1,197.9
$
1,101.9
786.7
155.0
74.4
27.2
746.8
155.5
73.8
27.6
1,043.3
1,003.7
154.6
(7.2)
(6.5)
140.9
(38.8)
$
102.1
$
98.2
(6.6)
(10.4)
81.2
(23.4)
57.8
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.
$
1.55
$
0.86
40 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 losses/gains (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
2017
$
102.1
$
57.8
25.2
(6.3)
18.9
(15.5)
4.0
(11.5)
$
121.0
$
46.3
Years ended December 31,
2016
2017
$
$
$
$
$
491.6 $
508.2
(10.7)
(16.6)
480.9 $
491.6
(6.9) $
(28.5)
102.1
18.9
(16.5)
(7.1)
90.5
$
57.8
(11.5)
(16.9)
(7.8)
(6.9)
571.4 $
484.7
41
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
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
Repayment of long-term debt (Note 9)
Finance expenses paid
Dividends paid
Share purchases (Note 12)
Investing activities
Additions to property, plant and equipment and intangible assets, net (Note 6)
Advances to Licella (Note 21)
Other, net
Increase in cash and cash equivalents*
Cash and cash equivalents at beginning of year*
Cash and cash equivalents at end of year*
*Cash and cash equivalents include cash on hand less unpresented cheques.
The accompanying notes are an integral part of these consolidated financial statements.
Years ended December 31,
2017
2016
$
102.1
$
57.8
74.4
38.8
4.3
7.2
-
0.4
(7.0)
(19.1)
201.1
(6.4)
194.7
(50.0)
(3.3)
(16.5)
(17.7)
(87.5)
(83.1)
-
0.7
(82.4)
24.8
51.9
$
76.7
$
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
51.9
42
Canfor Pulp Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and December 31, 2016
(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, 2017 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, 2017, and February 22, 2018, Canfor Corporation (“Canfor”) held a 54.8% interest in CPPI, an
increase of 1.2% from December 31, 2016 as a result of share purchases in 2017 (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 22, 2018.
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 may cause actual results to differ from management estimates. Revisions to accounting estimates are
recognized in the period in which the estimates are revised and in any future periods affected.
43 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 and Intangible Assets;
Note 10 – Employee Future Benefits;
Note 11 – Asset Retirement Obligations;
Note 14 – Income Taxes; and
Note 21 – Licella Pulp Joint Venture.
Certain comparative amounts for the prior year have been reclassified to conform to the current year’s presentation.
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.
Cash and cash equivalents
Cash and cash equivalents include cash in bank accounts and highly liquid money market instruments with original
maturities, or redemption dates, 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 initially at fair value and
subsequently at amortized cost using the effective interest method, less any impairment losses. The
effective interest method spreads 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 initially at fair value less transaction costs,
and subsequently at amortized cost using the effective interest method.
44 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, commodity price, and energy price risk. The Company’s policy is not to utilize derivative
financial instruments for trading or speculative purposes.
The Company’s derivative financial instruments are not designated as hedges for accounting purposes. Consequently,
such derivatives for which hedge accounting is not applied are carried on the balance sheet at fair value, with
changes in fair value (realized and unrealized) being recognized in the statements of income as ‘gain (loss) on
derivative financial instruments’.
The fair value of the derivatives is determined with reference to period end market trading prices for derivatives with
comparable characteristics.
Inventories
Inventories include pulp, paper, wood chips, logs, and materials and supplies. These are measured at the lower of
cost and net realizable value, and are presented net of applicable write-downs. 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, roads and paving
Pulp and paper machinery and equipment
Mobile equipment
Office furniture and equipment
Major overhauls
Intangible assets
Computer software
10 to 40 years
8 to 20 years
4 years
10 years
1 to 5 years
Software development costs relate to major software systems purchased or developed by the Company. These costs
are amortized on a straight-line basis over periods not exceeding four to ten years.
45 Government assistance
Government assistance relating to the acquisition of property, plant and equipment is recorded as a reduction of the
cost of the asset to which it relates, with any amortization calculated on the net amount. Government grants related
to income are recognized as income or a reimbursement of costs on a systematic basis over the periods necessary to
match them with the related costs which they were intended to compensate.
Asset impairment
CPPI’s property, plant and equipment are reviewed for impairment whenever events or circumstances indicate that
the carrying amount may not be recoverable.
An impairment loss is recognized in net income at the amount the asset’s carrying amount exceeds its recoverable
amount. The recoverable amount is the higher of an asset’s fair value less costs to sell 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”).
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 forest industry union defined contribution or benefit 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
certain 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 or 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.
46 Actuarial gains and losses can arise from differences between actual and expected outcomes or changes in the
actuarial assumptions or legislated amounts payable. Actuarial gains and losses, including the return on plan assets,
are recognized in other comprehensive income in the period in which they occur.
Provisions
CPPI recognizes a provision if, as a result of a past event, it has a present legal or constructive obligation that can be
estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.
The provision recorded is management’s best estimate of the expenditure required to settle the present obligation at
the end of the reporting period. Provisions are determined by discounting the expected future cash flows at a pre-tax
rate that reflects current market assessments of the time value of money and the risks specific to the liability. The
expense arising from the unwinding of the discount due to the passage of time is recorded as a finance 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 taxes. 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.
47 The majority of CPPI’s 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 and intangible assets.
4.
Accounting Standards Issued and Not Applied
In May 2014, the 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 an assessment of the impact of the new
standard, and has determined that adoption of this standard will have no significant impact on the Company’s
financial statements.
In July 2014, the IASB issued IFRS 9, Financial Instruments. The required adoption date for IFRS 9 is January 1,
2018. The Company has performed an assessment of the impact of the new standard, and has determined that
adoption of this standard will have no significant impact on the Company’s 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. IFRS 16 introduces a single, on-balance sheet lease
accounting model for lessees. A lessee recognizes a right-of-use asset representing its right to use the underlying
asset and a lease liability representing its obligation to make lease payments. In addition, the nature of expenses
related to those leases will change as IFRS 16 replaces straight-line operating lease expense with a depreciation
expense for right-of-use assets and interest expense on lease liabilities.
It is expected that IFRS 16 will have an impact on the Company's financial statements with recognition of new assets
and liabilities for its operating leases. The Company is still in the process of assessing the quantitative impact on its
financial statements of this new standard. The Company's future minimum lease payments, on an undiscounted
basis, under non-cancellable operating leases at December 31, 2017 is disclosed in Note 18, Commitments.
5.
Inventories
(millions of Canadian dollars)
Pulp
Paper
Wood chips and logs
Materials and supplies
As at
December 31,
2017
$ 78.5
14.9
19.9
52.2
$
As at
December 31,
2016
84.2
15.7
15.4
51.2
$ 165.5
$
166.5
There were no inventory write-downs at December 31, 2017 or December 31, 2016.
In 2017, total manufacturing and product costs were $786.7 million (December 31, 2016 - $746.8 million), of which
$429.2 million was related to the costs of raw materials, consumables and changes in finished products (December
31, 2016 - $394.7 million).
48 6.
Property, Plant and Equipment and Intangible Assets
(millions of Canadian dollars)
Cost
Balance at January 1, 2016
Additions1
Disposals
Transfers
Balance at December 31, 2016
Additions1
Disposals
Transfers
Balance at December 31, 2017
Amortization
Balance at January 1, 2016
Amortization for the year
Disposals
Balance at December 31, 2016
Amortization for the year
Disposals
Balance at December 31, 2017
Land and
improvements
Buildings,
machinery and
equipment
Other property,
plant and
equipment2
Construction
in progress
Intangible
assets3
Total property,
plant and
equipment and
intangible assets
$
$
$
$
$
$
5.4 $
-
-
-
5.4 $
-
-
-
5.4 $
-
-
-
-
-
-
-
$
$
$
$
$
$
$
$
1,540.4
-
(10.6)
48.5
1,578.3
-
(38.7)
28.8
1,568.4
(1,057.8)
(50.5)
7.3
(1,101.0)
(53.4)
37.1
(1,117.3)
$
44.0
-
(15.3)
13.0
41.7
-
(25.4)
23.3
39.6
$
$
$
(15.8) $
(23.3)
15.1
(24.0) $
(20.9)
25.4
(19.5) $
16.1 $
63.7
-
(61.5)
18.3 $
77.5
-
(52.1)
43.7 $
7.1
1.3
-
-
8.4
4.8
(1.5)
-
11.7
-
-
-
-
-
-
-
$
$
$
(6.7)
-
-
(6.7)
(0.1)
1.5
(5.3)
$
$
$
$
$
$
1,613.0
65.0
(25.9)
-
1,652.1
82.3
(65.6)
-
1,668.8
(1,080.3)
(73.8)
22.4
(1,131.7)
(74.4)
64.0
(1,142.1)
Carrying Amounts
At January 1, 2016
At December 31, 2016
At December 31, 2017
1Net of capital expenditures financed by government grants.
2 Other property, plant and equipment is comprised of buildings, machinery and equipment, as well as capitalized landfill retirement costs.
3At December 31, 2017, Intangible assets contained $5.7 million of work in progress assets (December 31, 2016 - $1.0 million) and as such had no
related amortization in the period.
$
28.2
17.7
$
20.1 $
16.1 $
18.3 $
43.7 $
5.4 $
5.4 $
5.4 $
482.6
477.3
451.1
532.7
520.4
526.7
0.4
1.7
6.4
$
$
$
$
$
$
$
$
$
7.
Accounts Payable and Accrued Liabilities
(millions of Canadian dollars)
Trade payables and accrued liabilities
Accrued payroll and related liabilities
Income tax payable
8.
Operating Loans
(millions of Canadian dollars)
Available operating loans:
Operating loan facility
Letters of credit
Total available operating loan facility
As at
December 31,
2017
102.6
39.7
19.2
$
As at
December 31,
2016
86.9
37.4
1.1
$
$
161.5
$
125.4
As at
December 31,
2017
As at
December 31,
2016
$
$
110.0
(9.2)
$
100.8
$
110.0
(9.3)
100.7
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 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, 2017
or December 31, 2016.
As at December 31, 2017, the Company is in compliance with all covenants relating to its operating loan.
49
9.
Long-Term Debt
On December 29, 2017, the Company repaid the full principal balance of its term loan of $50.0 million. Prior to
repayment, the interest rate on the term loan was based on the lenders’ Canadian prime rate or bankers’ acceptance
rate in the year of payment.
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 2017 were $16.8 million (December 31, 2016 - $17.8 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 and other
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, 2017, CPPI has one registered defined benefit pension plan for which an actuarial valuation is
performed every three years. The largest 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.
Information about CPPI’s defined benefit plans, in aggregate, is as follows:
Fair market value of plan assets
2017
2016
(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
Benefit payments
Administration expense
$
Defined
Benefit
Pension
Plans
123.9 $
4.8
1.8
4.3
0.1
(4.7)
(0.1)
Other
Benefit
Plans
- $
-
-
2.7
-
(2.7)
-
Defined
Benefit
Pension
Plans
119.0
4.9
(1.6)
6.3
0.1
(4.7)
(0.1)
$
Other
Benefit
Plans
-
-
-
2.0
-
(2.0)
-
End of year
$
130.1 $
- $
123.9
$
-
Plan assets consist of the following:
Asset category
Equity securities
Debt securities
Annuities
Cash and cash equivalents
As at
December 31,
2017
As at
December 31,
2016
Percentage of Plan Assets
22%
5%
72%
1%
100%
15%
56%
29%
-
100%
50 Accrued benefit obligations
2017
2016
(millions of Canadian dollars)
Beginning of year
Current service cost
Settlement adjustment
Interest cost
Employee contributions
Benefit payments
Actuarial loss (gain)
Other
End of year
$
Defined
Benefit
Pension
Plans
148.0 $
2.9
-
5.7
0.1
(4.7)
6.8
-
$
Other
Benefit
Plans
83.6
2.1
(0.5)
3.2
-
(2.7)
(30.3)
(0.5)
$
Defined
Benefit
Pension
Plans
135.9
2.8
-
5.5
0.1
(4.7)
8.4
-
Other
Benefit
Plans
74.9
1.9
-
3.0
-
(2.0)
5.5
0.3
$
158.8 $
54.9
$
148.0
$
83.6
Of the defined benefit pension plan obligation of $158.8 million (December 31, 2016 - $148.0 million), $143.3 million
(December 31, 2016 - $132.8 million) relates to plans that are wholly or partly funded and $15.5 million (December
31, 2016 - $15.2 million) relates to plans that are wholly unfunded, with letters of credit securing $2.5 million
(December 31, 2016 - $1.6 million) of the unfunded liability.
The total obligation for the non-pension post-retirement benefit plans of $54.9 million (December 31, 2016 - $83.6
million) is unfunded.
Annuity contracts
In 2017, the Company purchased $37.3 million (December 31, 2016 - $33.7 million) of buy-in annuities through its
defined benefit pension plans, increasing total annuities purchased to $77.1 million (December 31, 2016 - $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 $1.6
million (December 31, 2016 - $3.6 million) related to the purchase were recognized in other comprehensive income
(loss), principally reflecting the difference in the annuity rate compared to the discount rate used to value the
obligations on a going concern basis.
Voluntary Retiree Buyout Program
In October 2017, certain non-pension post-retirement benefit plan members of the Company were given an offer to
receive lump-sum payment in exchange for settlement of their future non-pension post-retirement benefit obligations
under the Voluntary Retiree Buyout Program (“the Program”). Acceptance of the offer constitutes an irrevocable
election to terminate future benefit obligations by plan members, and as such, settlement was recorded at the time
of election by members. The deadline for elections made under the Program was October 31, 2017, and the resulting
payments were made from November 2017 through January 2018. Under the program, $1.3 million of non-pension
post-retirement benefit obligations were settled and derecognized in 2017, resulting in a settlement adjustment of
$0.5 million, which was included in operating income. For the year ended December 31, 2017, $0.5 million was paid
out under the Program, with an additional $0.3 million paid in January 2018.
Medical Services Plan changes
On November 2, 2017, the Legislative Assembly of British Columbia enacted the Budget Measures Implementation
Act, 2017, which included a 50% reduction in Medical Services Plan (“MSP”) premiums effective January 1, 2018.
This change in legislation was recognized in actuarial financial assumptions in 2017, and resulted in a $28.5 million
pre-tax reduction of the non-pension post-retirement benefit obligation and a corresponding gain recognized through
other comprehensive income (loss).
In addition, in measuring the accrued benefit obligation at December 31, 2017, the MSP growth trend rate actuarial
financial assumption was reduced from 4.5% to 2.0% resulting in an additional $9.3 million pre-tax gain recognized
through other comprehensive income (loss) in 2017.
51 Reconciliation of funded status of defined benefit plans to amounts recorded in the financial
statements
(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
December 31, 2017
Defined
Benefit
Pension
Plans
Other
Benefit
Plans
$ 130.1 $
(158.8)
-
$
(54.9)
$ (28.7) $
(1.6)
(54.9) $
-
December 31, 2016
Defined
Benefit
Pension
Plans
123.9 $
(148.0)
(24.1) $
(1.4)
Other
Benefit
Plans
-
(83.6)
(83.6)
-
$ (30.3) $
(54.9) $
(25.5) $
(83.6)
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
Settlement adjustment
Administration expense
Interest cost
Other
2017
2016
Defined
Benefit
Pension
Plans
Other
Benefit
Plans
Defined
Benefit
Pension
Plans
Other
Benefit
Plans
$
$
2.9
-
-
0.9
-
$
2.1
(0.5)
-
3.2
(0.2)
$
2.8
-
0.1
0.6
-
1.9
-
-
3.0
0.3
5.2
(0.1)
5.6
-
-
Total charge included in net income
$
3.8 $
4.6
$
3.5
$
Recognized in other comprehensive income (loss)
Actuarial loss (gain) – experience
Actuarial loss (gain) – financial assumptions
Return on plan assets less (greater) than discount rate
Administrative costs greater than expected
$
(3.3) $
10.1
(0.1) $
(30.2)
(1.8)
0.1
-
-
$
4.6
3.8
1.6
-
Total charge (credit) included in other comprehensive income (loss) $
5.1 $
(30.3) $
10.0
$
5.5
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, 2017
Defined
Benefit
Pension
Plans
Other
Benefit
Plans
3.4%
3.0%
n/a
n/a
n/a
3.4%
n/a
6.5%
4.5%
2022
December 31, 2016
Defined
Benefit
Pension
Plans
3.9%
3.0%
Other
Benefit
Plans
3.9%
n/a
n/a
n/a
n/a
7.0%
4.5%
2022
In addition to the significant assumptions listed in the table above, the average life expectancy of a 65 year old at
December 31, 2017 is between 21.0 years and 24.1 years (December 31, 2016 - 20.9 years and 24.1 years). As at
December 31, 2017, the weighted average duration of the defined benefit plan obligation, which reflects the average
age of the plan members, is 12.3 years (December 31, 2016 - 12.1 years). The weighted average duration of the
other benefit plans is 14.2 years (December 31, 2016 - 14.6 years).
52
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, taking into account the hedging impact of plan annuity assets,
for 2017:
(millions of Canadian dollars)
Defined benefit pension plan liabilities, net of annuity assets
Discount rate
Other benefit plan liabilities
Discount rate
Initial medical cost trend rate
1% Increase
1% Decrease
$
$
$
(10.7)
$
13.2
(7.9)
7.5
$
$
10.0
(6.2)
When taking into account the impact of hedging, 45% (December 31, 2016 - 24%) of the change to the defined
benefit pension plans is fully hedged against changes in discount rates and longevity risk (potential increases in life
expectancy of plan members) through buy-in annuities, and a further 17% (December 31, 2016 - 46%) is partially
hedged through the plan’s investment in debt securities.
As at December 31, 2017, CPPI estimates that it will make contribution payments of $5.2 million to its defined benefit
pension plans in 2018 based on the last actuarial valuation for funding purposes.
Defined contribution and other plans
The total expense recognized in 2017 for CPPI’s defined contribution plans was $2.5 million (December 31, 2016 -
$2.3 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 $7.3 million in 2017 (December 31, 2016 - $7.2 million).
11.
Asset Retirement Obligations
The following table provides a reconciliation of the asset retirement obligations as at December 31, 2017 and
December 31, 2016:
(millions of Canadian dollars)
Asset retirement obligations at beginning of year
Accretion expense
Changes in estimates
Asset retirement obligations at end of year
2017
2016
$
$
5.4
0.1
-
5.5
$
$
5.5
0.1
(0.2)
5.4
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 5 to 34 years and have been discounted at risk-free rates ranging from 1.9% to 2.3% (December 31, 2016 -
1.3% to 2.3%).
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.
53 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 year4
4Based on trade date.
2017
2016
Number of
Shares
66,699,368
(1,448,109)
65,251,259
Amount
491.6
(10.7)
Number of
Shares
68,951,872
(2,252,504)
480.9
66,699,368
$
$
Amount
508.2
(16.6)
491.6
$
$
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 2017 is 65,887,110 (December 31, 2016 - 67,519,888), and reflects common shares
purchased under the Company’s normal course issuer bid.
Normal course issuer bid
On March 7, 2017, the Company renewed its normal course issuer bid whereby it can purchase for cancellation up to
3,332,038 common shares or approximately 5% of its issued and outstanding common shares as of March 1, 2017.
The renewed normal course issuer bid is set to expire on March 6, 2018. In 2017, CPPI purchased 1,448,109
common shares for $17.8 million (an average price of $12.29 per common share), of which $10.7 million was
charged to share capital and $7.1 million was charged to retained earnings. Cash payments for share purchases
totaled $17.7 million during the year. As a result of the share purchases in 2017, Canfor’s interest in CPPI increased
from 53.6% at December 31, 2016 to 54.8% at December 31, 2017.
As at February 22, 2018, based on trade date, there were 65,250,759 common shares of the Company outstanding,
as a result of share purchases subsequent to year end, and Canfor’s ownership interest in CPPI remained 54.8%.
In 2016, under a previous normal course issuer bid, the Company 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 2016
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
14.
Income Taxes
The components of income tax expense are as follows:
(millions of Canadian dollars)
Current
Deferred
Income tax expense
2017
(3.7)
(4.1)
0.7
(0.1)
(7.2)
$
$
2016
(3.0)
(3.6)
0.2
(0.2)
(6.6)
$
$
2017
(39.3)
0.5
(38.8)
$
$
$
$
2016
(25.9)
2.5
(23.4)
54 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
Change in substantively enacted tax legislation
Income tax expense
2017
2016
$
(36.6)
$
(21.1)
(0.1)
0.7
(2.8)
(38.8)
$
(1.8)
(0.5)
-
(23.4)
$
In 2017, the Provincial Government of British Columbia passed legislation increasing the provincial corporate tax rate
from 11% to 12% effective January 1, 2018. A $2.8 million increase to income tax expense was recorded in net
income in 2017 to record the impact on deferred taxes, with an additional $0.3 million being recorded in other
comprehensive income (loss) as an income tax recovery on defined benefit plan actuarial losses.
In addition, a tax expense of $6.6 million, before the tax rate adjustment, in relation to actuarial gains on the defined
benefit plans (December 31, 2016 - recovery of $4.0 million on actuarial losses) was recorded in other
comprehensive income (loss) for the year ended December 31, 2017.
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,
2017
As at
December 31,
2016
$
$
22.6
1.9
24.5
(91.9)
(0.2)
(92.1)
$
$
$
(67.6)
$
28.0
2.1
30.1
(91.2)
(0.6)
(91.8)
(61.7)
2017
(20.5)
0.6
0.9
12.6
(6.4)
$
$
$
2016
24.2
(2.9)
2.5
(4.8)
$
19.0
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 2017, the Company depended on Canfor to provide approximately 62% (December 31, 2016 - 63%) 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 pricing under one of
the Company’s Fibre Supply Agreements with Canfor expired on September 1, 2016. The Company and Canfor
agreed to extend the chip pricing formula under this agreement for one year, with the opportunity to extend for one
additional year if both parties agree. Both parties have since agreed to an extension of the expiry date to September
1, 2018.
The Company purchased wood chips, logs and hog fuel from Canfor sawmills in the amount of $175.3 million in 2017
(December 31, 2016 - $147.8 million).
55 Canfor provides certain business and administrative services to CPPI under a services agreement. The total amount
charged for the services provided by Canfor in 2017 was $12.5 million (December 31, 2016 - $12.2 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 2017 was $3.8 million (December 31, 2016 - $3.5
million). These amounts are included as cost recoveries in manufacturing and product costs and selling and
administration costs.
At December 31, 2017, an outstanding balance of $13.1 million (December 31, 2016 - $10.3 million) was due to
Canfor.
The Jim Pattison Group is Canfor’s largest shareholder. During 2017, CPPI sold paper to subsidiaries owned by The
Jim Pattison Group totalling $3.5 million (December 31, 2016 - $4.3 million). CPPI also made purchases from
subsidiaries owned by The Jim Pattison Group totalling $0.3 million (December 31, 2016 - $0.3 million). No amounts
related to these sales or purchases were outstanding as at December 31, 2017 or December 31, 2016.
During 2017, the Company 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
2017
2016
3.4
0.2
-
3.6
$
$
3.0
0.2
0.1
3.3
$
$
Short-term benefits for members of the Board of Directors include an annual retainer as well as attendance fees.
17.
Segment Information
The Company has two reportable segments, pulp and paper, which operate as separate business units and represent
separate product lines. The following summary describes the operations of each of the Company’s reportable
segments:
Pulp – Includes purchase of residual fibre, and production and sale of pulp products, including NBSK pulp
and BCTMP as well as energy revenues; and
Paper – Includes production and sale of paper products, including bleached, unbleached, and coloured kraft
paper.
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.
56 (millions of Canadian dollars)
Year ended December 31, 2017
Sales to external customers
Sales to other segments
Operating income (loss)
Amortization
Capital expenditures5
Identifiable assets
$
Pulp
Paper
Unallocated
Elimination
Adjustment
1,024.5 $
92.0
140.5
70.4
81.3
751.3
173.0
-
26.0
3.9
1.8
55.2
$
$
0.4
-
-
$
(92.0)
(11.9)
0.1
-
85.7
-
-
-
-
Total
1,197.9
-
154.6
74.4
83.1
892.2
$
Year ended December 31, 2016
Sales to external customers
1,101.9
Sales to other segments
-
Operating income (loss)
98.2
Amortization
73.8
Capital expenditures5
64.0
Identifiable assets
837.1
5Capital expenditures represent cash paid for capital assets during the periods and include capital expenditures that were partially financed by
government grants.
1.6
-
(11.1)
0.1
1.4
61.6
176.1
-
29.7
3.8
1.7
55.6
924.2
82.8
79.6
69.9
60.9
719.9
(82.8)
-
-
-
-
$
$
$
$
-
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
18.
Commitments
2017
2016
$
$
78.3
710.0
288.8
49.1
71.7
77.4
615.9
279.8
59.4
69.4
$ 1,197.9
$
1,101.9
At the end of the year, CPPI has contractual commitments for the construction of capital assets for $12.2 million
(December 31, 2016 - $1.6 million). These commitments are expected to be settled over the following year.
In addition, CPPI has committed to operating leases for property, plant and equipment with future minimum lease
payments under these operating leases as follows:
(millions of Canadian dollars)
Within one year
Between one and five years
Total
As at
December 31,
2017
0.5
0.7
$
As at
December 31,
2016
0.4
0.6
$
$
1.2
$
1.0
During the year ended December 31, 2017, $1.9 million (December 31, 2016 - $1.7 million) was recognized as an
expense for operating leases.
57 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, 2017, CPPI has $6.7 million of standby letters of
credit (December 31, 2016 - $7.7 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 Price 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, or redemption date, of three months or less. The cash and
cash equivalents balance at December 31, 2017 is $76.7 million (December 31, 2016 - $51.9 million).
CPPI utilizes credit insurance to manage the risk associated with trade receivables. As at December 31, 2017,
approximately 76% (December 31, 2016 - 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,
2017 is $101.7 million, before an allowance for doubtful accounts of $0.2 million (December 31, 2016 - $76.9 million
and $1.0 million, respectively). At December 31, 2017, approximately 99% (December 31, 2016 - 99%) of the trade
accounts receivable balance are within CPPI’s established credit terms.
Liquidity risk:
Liquidity risk is the risk that CPPI will be unable to meet its financial obligations as they come due. The Company
manages liquidity risk through regular cash flow forecasting in conjunction with an adequate committed operating
loan facility.
At December 31, 2017, and December 31, 2016, CPPI has no amounts drawn on its operating loan. At December 31,
2017 CPPI had accounts payable and accrued liabilities of $161.5 million (December 31, 2016 - $125.4 million), all of
which are due within twelve months of the balance sheet date.
58 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, 2017 and December 31, 2016, 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 $1.2 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, 2017 and December 31, 2016.
(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
Company’s 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, 2017 and December 31, 2016.
(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, 2017 and December 31, 2016, the Company had no WTI oil collars outstanding.
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.
59 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 cash
Total equity
As at
December 31,
2017
$
$
$
-
76.7
(76.7)
571.4
494.7
As at
December 31,
2016
50.0
51.9
(1.9)
484.7
482.8
$
$
$
The Company manages its capital structure through rigorous planning, budgeting and forecasting processes, and
ongoing management of operations, investments and capital expenditures. In 2017, 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 cost 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.
At times, the Company uses a variety of derivative financial instruments to reduce its exposure to risks associated
with fluctuations in foreign exchange rates, energy costs and interest rates. As at December 31, 2017 and December
31, 2016, the Company had no derivative financial instruments outstanding.
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, 2017, the Company’s share of the joint venture’s expenses was $1.1
million (December 31, 2016 - $0.6 million) which have 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, of which $1.7 million has been contributed as at December 31, 2017.
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.
60 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, in 2016, CPPI recognized losses of $7.0 million in other income (expense). This
reflects the Company’s consideration of the intrinsic risk associated with these advances. No advances were made by
CPPI in 2017.
22.
Contingencies
In the ordinary course of its business activities, the Company may be subject to, or enter into, legal actions and
claims with customers, unions, suppliers or others. During 2017, the Company settled an outstanding claim with one
of its suppliers and recognized a recovery of $2.8 million in manufacturing and products costs.
In circumstances where the Company is not able to determine the outcome of a legal action and claim with certainty,
no amount is recognized or accrued in the consolidated financial statements. Although there can be no assurance as
to the disposition of a legal action and claim, it is the opinion of the Company’s management, based upon the
information available at this time, that the expected outcome of a legal action and claim, individually or in aggregate,
is unlikely to have a material adverse effect on the operating results and financial condition of the Company as a
whole.
23.
Subsequent Event
On February 22, 2018, the Board of Directors declared a quarterly dividend of $0.0625 per share, payable on March
14, 2018, to shareholders of record on March 7, 2018.
61 ADDITI ON AL INFORMATIO N
62 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, 2017 are as below. For more information visit www.canfor.com.
Peter Bentley, O.C., O.B.C., LL.D.(2)(3)(4)(5)
Chairman Emeritus
Canfor Corporation
Vancouver, British Columbia, Canada
Barbara Hislop(1)(3)(4)
President
Variety - The Children’s Charity
London, England
William Stinson(1)(2)(4)(5)
Chairman and Chief Executive Officer
Westshore Terminals Investment Corporation
Vancouver, British Columbia, Canada
Michael Korenberg
Chairman
The Wreath Group
West Vancouver, British Columbia, Canada
Donald Kayne(6)
Chief Executive Officer
Canfor Pulp Products Inc.
Tsawwassen, British Columbia, Canada
Conrad Pinette(2)(3)(4)(5)
Chairman
Canfor Pulp Products Inc.
Vancouver, British Columbia, Canada
Stan Bracken-Horrocks, FCPA, FCA (1)(3)(5)
Corporate Director
Kelowna, British Columbia, Canada
John Baird(3)(4)(5)
Corporate Director
Toronto, Ontario, 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, 2017 are as below. For more information visit www.canfor.com.
David Calabrigo, Q.C.
Corporate Secretary
Vancouver, British Columbia, Canada
Alan Nicholl(6)
Chief Financial Officer
West Vancouver, British Columbia, Canada
Donald Kayne(6)
Chief Executive Officer
Tsawwassen, British Columbia, Canada
Martin Pudlas
Vice President, Operations
Prince George, British Columbia, Canada
Brett Robinson(6)
President
Tsawwassen, British Columbia, Canada
Conrad Pinette
Chairman
Vancouver, British Columbia, Canada
Peter Hart
Vice President, Pulp and Paper
Sales and Marketing
Vancouver, 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 .
( 6 ) O n M a r c h 5 , 2 0 18 B r e t t R o b i n s o n d e p a r t e d C a n f o r, a n d h i s p o s i t i o n , P r e s i d e n t o f C a n f o r P u l p , w a s c o n s o l i d a t e d u n d e r D o n K a y n e . A t t h e s a m e t i m e A l a n N i c h o l l a s s u m e d t h e
t i t l e , r o l e , a n d r e s p o n s i b i l i t i e s o f C h i e f F i n a n c i a l O f f i c e r a n d E x e c u t i v e V i c e P r e s i d e n t , F i n a n c e a n d C a n f o r P u l p P r o d u c t s I n c . O p e r a t i o n 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 .
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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 25, 2018 at 11:30 a.m.
Auditors
KPMG LLP
Vancouver, BC
Transfer Agent and Registrar
AST Trust Company (Canada)
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@canfor.com
www.canfor.com
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WWW.CANFOR.COM