2019
ANNUAL REPORT
CANFOR PULP PRODUCTS INC.
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
2019 Management’s Discussi on and Analysis
03
04
05
09
10
13
14
14
16
16
17
17
18
19
22
23
24
30
30
Company Overview
Overview of 2019
Overview of Consolidated Results - 2019 Compared to 2018
Operating Results by Business Segment - 2019 Compared to 2018
Summary of Financial Position
Changes in Financial Position
Liquidity and Financial Requirements
Transactions with Related Parties
Licella Pulp Joint Venture
Co-Marketing Arrangement with UPM-Kymmene
Selected Quarterly Financial Information
Three-Year Comparative Review
Fourth Quarter Results
Outlook
Critical Accounting Estimates
Risks and Uncertainties
Outstanding Share Data
Disclosure Controls and Internal Controls Over Financial Reporting
31 C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
32 Management’s Responsibility
Independent Auditors’ Report
33
Consolidated Balance Sheets
37
Consolidated Statements of Income (Loss)
38
39
Consolidated Statements of Other Comprehensive Income
39 Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
40
Notes to the Consolidated Financial Statements
41
60
A D D I T I O N A L I N F O R M AT I O N
61
62
Directors and Officers
Corporate and Shareholder Information
MESSAGE TO SHAREHOLDERS
FROM THE CEO
While 2019 was a challenging year for Canfor Pulp Products
Inc. (Canfor Pulp), we continue to be encouraged by the growing
recognition of the important role that sustainable pulp and paper
products have to play as part of the solution to the changing climate.
Following record high pricing in 2018, global pulp prices were
weak throughout 2019, largely due to high global pulp inventory
levels, combined with weaker than anticipated global demand,
particularly from Europe where demand from printing and writing
fell sharply. These weak market conditions were the most impactful
in China, which is our largest pulp market.
The Company was also impacted by challenging operating
conditions in British Columbia. The shrinking fibre supply due to
sawmill curtailments resulted in significantly reduced chip residuals
and caused major disruptions to our pulp mill operations in 2019.
As a result, we took phased summer curtailments at all of our pulp
mills. We are working to reinforce our fibre supply by securing cost-
competitive fibre agreements over the long term.
Our energy business increased its power generation in 2019
following the commercialization and ramp-up of Northwood Pulp
Mill’s new 32-megawatt condensing turbo generator earlier in the
year. In addition, our paper business had improved results in 2019,
largely due to lower slush pulp prices. In May 2019, a new ERP
software system called Pulp Edge was implemented on schedule to
modernize our supply chain. The system is improving alignment and
integration between customer orders and production.
Despite the current challenges facing our business, we believe
there is a bright future. Today, over 45% of pulp product offerings go
into higher value specialty end uses, everything from fibre cement
to wet wipes and coffee pods. We are seeing more and more pulp
applications being turned into sustainable and innovative products
as the world continues to move away from plastics and fossil fuels.
As a result, believe we have a role to play as part of the solution
to our changing climate. In 2019 we started a process to assess
our sustainability reporting, look for opportunities to improve
our business practices and continue to identify opportunities to
participate in the growing circular economy. This work will continue
into 2020.
Canfor Pulp continues to work on the technology to produce a
low carbon biocrude from woody biomass, which would support the
movement towards a circular economy. Many fossil fuel producers,
particularly major petrochemical companies, are moving quickly to
tap into potential new streams of renewable energy and fuels and
our low carbon biocrude has the potential to play a significant role
in that transition.
We continued our quarterly dividend program in 2019, with $16.4
million returned to shareholders.
Recognizing the challenging market and operating conditions the
Company experienced in 2019, we implemented a $40 million cost
reduction initiative in early 2020. The majority of cost reductions will
be achieved by improving reliability, reducing overhead costs and
improving fibre utilization.
A strategic priority for Canfor Pulp is building a more inclusive
culture and diverse workplace. Our goal is that by 2030, the diversity
of our people is reflective of the communities we operate in. In support
of this goal, we created our Inclusion and Diversity Blueprint in 2019
– an action plan to engage, educate and act differently. Some of the
changes we have made include using more inclusive language in job
descriptions, launching the MentorMe program that matches women
mentors and mentees, and training our employees on identifying bias
and the importance of creating an inclusive workplace. We have had
a very positive response to the changes we are making across the
company and we will be continuing to implement more changes.
We continue to make progress on reducing our medical incident
rates with the goal of everyone returning home safely every day. Now
more than ever, given the COVID-19 pandemic sweeping the globe in
2020, ensuring the health and safety of our employees, customers,
suppliers and communities is our top priority. We have implemented
an action plan across the Company to ensure we are following the
recommendations of the World Health Organization, the Government
of Canada and the Government of British Columbia to combat the
spread of the virus.
The full impact of COVID-19 on our employees, our company and the
economy remains to be seen, but undoubtedly it will have a significant
impact. Our top priorities are protecting the health and well-being of
our employees and taking the necessary measures to safeguard the
business to ensure its ongoing sustainability.
I want to take this opportunity to thank our employees across
the Company for their contributions and to thank my outstanding
Executive and Management team for their leadership and support. I
would also like to extend my appreciation to our Board of Directors for
their continued support and guidance.
Don Kayne
Chief Executive Officer
2
2019 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, 2019 relative to the year ended December
31, 2018, and the financial position of the Company at December 31, 2019. 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, 2019 and 2018 (available at www.canfor.com). 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 (Loss) 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 repayment 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
(Loss) 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 (Loss) 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 (Loss) 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. Certain comparative amounts have
been reclassified to conform to current presentation. The information in this report is as at February 20, 2020.
Forward Looking Statements
Certain statements in this press release constitute “forward-looking statements” which involve known and unknown
risks, uncertainties and other factors that may cause actual results to be materially different from any future results,
performance or achievements expressed or implied by such statements. Words such as “expects”, “anticipates”,
“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, 2019 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 (“BC”); a Bleached
Chemi-Thermo Mechanical Pulp (“BCTMP”) mill located in Taylor, BC and a marketing group based in Vancouver, BC.
At December 31, 2019, Canfor Corporation (“Canfor”) held a 54.8% interest in CPPI, unchanged from December 31,
2018.
CPPI employs 1,292 people in its wholly owned subsidiaries and jointly owned operations as at December 31, 2019.
The following chart illustrates, on a simplified basis, the ownership structure of CPPI (collectively the Company) as at
December 31, 2019.
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, the significant majority 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 specialty products, premium tissue and printing and writing 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 products as that of Northwood,
and is delivered to North America, Europe and Asia.
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 and Asia, as well as 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 230,000 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, including a wide range of high performance bleached and unbleached
kraft and specialty papers. The paper mill supplies primarily North American, Asian and European markets.
Business Strategy
CPPI’s overall business strategy is to be a pulp and paper industry leader with strong financial performance,
accomplished through:
• Optimizing the value from its premium quality pulp and paper products in specialty end use applications;
•
•
Attaining world-class supply chain performance;
Preserving its low-cost operating position and maintaining a strong financial position;
• Growing its green energy business;
•
Contributing to the climate change solution by producing sustainable pulp products that support the
bioeconomy;
• Developing an enterprise-wide culture of safety, innovation and engagement; and
•
Capitalizing on accretive growth and diversification opportunities.
OVERVIEW OF 2019
Following record-high pulp prices and operating income in 2018, Canfor Pulp saw a sharp reversal of market
conditions in 2019, which along with the impact of significant sawmill curtailments on supply and costs, weighed
heavily on financial results. For the 2019 year, the Company reported an operating loss of $31.0 million and a net
loss of $0.47 per share, compared to operating income of $246.6 million and net income of $2.83 per share for the
year ended December 31, 2018.
Global pulp market fundamentals were extremely challenging throughout 2019. Prices to China, the world’s largest
consumer of softwood pulp, fell US$330 per tonne, or 36%, from the mid-2018 peak to end 2019 at US$5801 per
tonne, their lowest level in over 10 years. The rapid decline reflected a combination of weaker than anticipated global
demand, particularly in Europe where demand for printing and writing papers fell sharply, and continued elevated
global pulp inventory levels. For the 2019 year as a whole, NBSK pulp list prices to China averaged US$6341 per
tonne, a decrease of US$244 per tonne, or 28%, from 2018, while North American NBSK pulp list prices averaged
US$1,2391 per tonne for 2019, down US$98 per tonne, or 7% from 2018 (before taking account of customer
discounts). BCTMP prices saw similar weakness in demand and pricing pressure throughout 2019, with US-dollar
prices to China falling US$112 per tonne, or 19%, year-over-year.
1 Resource Information Systems, Inc.
5
Operating losses in the pulp segment were $43.9 million in 2019, down $292.8 million from the previous year, for the
most part reflecting substantially lower average pulp unit sales realizations. To a lesser extent, results were also
impacted by lower production and shipments in response to the deteriorating pulp market conditions and fibre supply
disruptions, which necessitated the Company taking phased summer curtailments at all of its NBSK pulp mills in
Prince George, BC, as well as at its BCTMP mill in Taylor, BC, reducing NBSK pulp production and BCTMP production
by 80,000 tonnes and 60,000 tonnes, respectively.
Higher pulp unit manufacturing costs primarily reflected reduced production in 2019, combined with increased fibre
and energy costs, the latter mostly resulting from reduced residual supply related to the sawmill curtailments. For
most of 2019, the Company experienced significant fibre supply disruptions, driven largely from BC Interior sawmill
curtailments, which led to higher fibre costs as the Company sourced incremental volumes of materially higher-cost
whole log chips. Recognizing the challenging market conditions and increased fibre costs, the Company commenced
a $40 million cost reduction initiative at the beginning of 2020, with targeted savings achieved through improving
reliability, reducing overhead cost and improving fibre utilization, with the full amount of annualized savings
anticipated by the end of 2021.
The Company’s energy business increased its power generation in 2019 following the commercialization and ramp-up
of Northwood pulp mill’s Turbo Generator Condensing turbine in the first quarter of 2019. As mentioned, energy
costs reflected reduced supplies of biomass from reduced sawmill operating rates. With less disruptions currently
forecast for 2020, the Company projects the benefits of this major project will be substantially realized in 2020.
The Company’s paper business results improved in 2019, principally due to lower slush pulp prices, driven by
deteriorating NBSK pulp prices in the current year.
Through 2019, the Company continued its quarterly dividends of $0.0625 per common share, returning a total of
$16.4 million to shareholders in the year.
Notwithstanding the challenging market and operating conditions, the Company maintained a solid balance sheet
with low net debt to capitalization levels through 2019, finishing the year with net debt of $58.0 million and a net
debt to total capitalization ratio of 9.4%.
A review of the more significant developments and results by operating segment in 2019 follows.
Markets and Pricing
(i)
Pulp – Challenging global pulp fundamentals result in substantial downward pressure on
pricing in 2019
The elevated inventory levels experienced towards the end of 2018 persisted through 2019, as a sharp fall-off in pulp
demand in the Americas and Europe negated a modest increase in Chinese demand. Markets and prices remained
under pressure through most of the year, as European pulp producers looked to liquidate their excess inventories in
offshore markets, particularly China. As mentioned, NBSK pulp list prices to China for the year averaged US$634 per
tonne, US$244 per tonne, or 28%, lower than the 2018 average price. The pulp market weakness experienced in
Asia in late 2018 spilled over to North America in 2019 as the year progressed; list prices to that region falling from
US$1,405 per tonne in January to US$1,115 per tonne in December.
Global softwood pulp producer inventories started 2019 at a record-high 42 days of supply, well in excess of the
balanced range of 27-33 days. As mentioned, although China demand somewhat improved through 2019, the
slowdown in demand from other regions, particularly Europe, ensured that inventory levels remained above the
balanced range during 2019; softwood inventories ended the year at 37 days of supply, five days lower than the
beginning of 2019.
The following charts show the NBSK pulp list price movements in 2019, before taking account of customer discounts
and rebates (Chart 1), global pulp shipments by destination (Chart 2), and the global pulp inventory levels (Chart 3).
6
Chart 1
Chart 2
Chart 3
7
(ii)
Paper – Kraft paper markets soften in 2019 but receive boost from lower slush pulp pricing
Global bleached kraft paper markets also came under pressure in 2019 with high paper inventory levels and weather-
related challenges, particularly in North America, impacting demand and pricing. Offshore markets saw steady price
declines through the year, while North American markets experienced weakness through the latter half of 2019. The
lower kraft bleached paper prices were more than offset by a 2% weaker Canadian dollar and a higher value regional
mix. Despite the pressure on paper pricing, the Company’s paper business benefited from substantial reductions in
slush pulp pricing throughout 2019, associated with the declining NBSK pulp prices in the current year.
Fibre Supply
Sawmill curtailments in 2019 leading to major disruptions to fibre availability and higher prices
The Company’s supply of sawmill residual chips was significantly impacted in 2019, as weak global lumber market
fundamentals, combined with a challenging log cost environment in BC, resulted in extensive permanent and
temporary sawmill curtailments in the BC Interior during the year. Consequently, the Company’s fibre purchases
included an increase in the proportion of higher-cost whole log chips. The Company took a number of actions in
response to sawmill rationalization in BC, and in the latter half of 2019, secured additional fibre supply, which will
support its operations over the medium to long-term by ensuring a balanced and economical fibre supply for its pulp
mills. Recognizing the BC Interior fibre dynamics, there has also been a significant focus on optimizing fibre
procurement, as well as maximizing fibre utilization and recovery.
Capital and Operations Review
Market-related curtailments taken in response to major sawmill curtailments; Significant focus on cost
reduction and operational reliability in 2020
Total pulp and paper production in 2019 was down 90,000 tonnes, or 7%, compared to the prior year. The
aforementioned phased summer curtailments, which reduced pulp production by 140,000 tonnes, and, to a lesser
extent, kiln-related operational upsets more than offset the loss of production from an extended recovery boiler
outage at the Northwood pulp mill in the fall of 2018 (approximately 70,000 tonnes) .
In light of the challenging market and operating conditions, Management in early 2020 commenced a $40 million cost
reduction initiative aimed at reducing unit manufacturing costs. Most of the savings will be achieved from improving
reliability, reducing overhead cost and improving fibre utilization, with the full amount of annualized savings targeted
by the end of 2021.
Capital spending in 2019 totalled $103.0 million and principally comprised Northwood pulp mill’s commercialization of
a new 32 megawatt condensing turbo-generator, construction of a new raw water treatment plant at the Company’s
Intercontinental pulp mill (which is anticipated to be completed by the end of 2020), and a new ERP software
system, which went live on schedule in May 2019. In 2020, Management currently anticipates lower capital spending
in light of the current challenging market conditions, with the implementation and start-up of the raw water
treatment plant and several lower-cost fibre-related projects being the key areas of focus. In addition, Management
continues to assess and evaluate long-term recovery boiler solutions for its Northwood NBSK pulp mill.
8
OVERVIEW OF CONSOLIDATED RESULTS – 2019 COMPARED TO
2018
Selected Financial Information and Statistics
(millions of Canadian dollars, except for per share amounts)
Sales
Operating income before amortization2
Operating income (loss)
Net income (loss)
Net income (loss) per share, basic and diluted
ROIC – Consolidated3
$
$
$
$
$
2019
1,087.9
61.9
(31.0)
(30.5)
(0.47)
(4.0)%
$
$
$
$
$
2018
1,374.3
326.2
246.6
184.4
2.83
37.0%
Average exchange rate (US$ per C$1.00)4
0.772
Results for 2019 include the adoption of IFRS 16 Leases, from January 1, 2019, on a prospective basis. Comparative periods have not been restated.
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).
0.754
$
$
Selected Cash Flow Information
(millions of Canadian dollars)
Operating income (loss) by segment:
Pulp
Paper
Unallocated
Total operating income (loss)
Add: Amortization5
Total operating income before amortization
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):
Payment of lease obligations6
Dividends paid
Finance expenses paid
Capital additions, net
Proceeds from long-term debt
Share purchases
Other, net
Change in cash / operating loans
2019
2018
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(43.9)
22.9
(10.0)
(31.0)
92.9
61.9
7.7
(5.4)
(4.6)
(0.2)
59.4
(1.1)
(16.4)
(3.8)
(103.0)
50.0
(0.2)
0.2
(14.9)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
248.9
11.0
(13.3)
246.6
79.6
326.2
(25.6)
(6.6)
(90.4)
11.6
215.2
-
(163.2)
(3.3)
(120.5)
-
(0.1)
2.1
(69.8)
Results for 2019 include the adoption of IFRS 16 Leases, from January 1, 2019, on a prospective basis. Comparative periods have not been restated.
5 Amortization includes amortization of certain capitalized major maintenance costs.
6 On adoption of IFRS 16 Leases, payment of lease obligations represents cash payments towards reduction of outstanding lease obligations and
related interest, which were previously included with cash from operating activities.
9
OPERATING RESULTS BY BUSINESS SEGMENT – 2019 COMPARED
TO 2018
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 2019 and 2018 are as follows:
(millions of Canadian dollars, unless otherwise noted)
Sales
Operating income before amortization7
Operating income (loss)
Inventory write-downs
Adjusted operating income (loss)
Capital expenditures
Average NBSK pulp price delivered to China - US$8
Average NBSK pulp price delivered to China – Cdn$8
Production – pulp (000 mt)
$
$
$
$
$
$
$
$
2019
2018
918.9
45.4
(43.9)
10.7
(33.2)
96.4
634
841
1,035
$
$
$
$
$
$
$
$
1,192.9
324.2
248.9
-
248.9
113.3
878
1,137
1,117
Shipments – pulp (000 mt)
1,132
Results for 2019 include the adoption of IFRS 16 Leases, from January 1, 2019, on a prospective basis. Comparative periods have not been restated.
7 Amortization includes amortization of certain capitalized major maintenance costs.
8 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.
1,027
Markets
As mentioned, global pulp market fundamentals were extremely challenging throughout 2019. Prices to China, the
world’s largest consumer of softwood pulp, fell US$330 per tonne, or 36%, from the mid-2018 peak to end 2019 at
US$580 per tonne. As the price weakness in Asia spilled over to North America in 2019, list prices (before taking
account of customer discounts) to the latter region fell from US$1,405 per tonne in January to US$1,115 per tonne in
December.
World 209 global softwood pulp producer inventories started 2019 at a record-high 42 days of supply, well in excess
of the balanced range of 27-33 days. As mentioned, although China demand somewhat improved through 2019, the
slowdown in demand from other regions, particularly Europe, ensured that inventory levels remained above the
balanced range during 2019; softwood inventories ended the year at 37 days of supply, five days lower than the
beginning of 2019.
Sales
The Company’s pulp shipments in 2019 were 1.03 million tonnes, down 105,000 tonnes, or 9%, from 2018,
principally due to a 7% decrease in pulp production, largely curtailment related, when compared to the prior year.
As mentioned, for the 2019 year as a whole, NBSK pulp list prices to China and North America were down sharply
year-over-year. Accordingly, average NBSK pulp unit sales realizations were down significantly from 2018 with the
sizeable drop in US-dollar list prices more than offsetting the benefit of the 2% weaker Canadian dollar in 2019.
Average BCTMP unit sales realizations also reflected substantial price-related decreases in 2019 from the prior year.
Higher energy revenues in 2019 compared to the prior year reflected increased energy production, largely driven by
the commercialization and ramp-up of the previously announced Turbo Generator Condensing turbine at the
Northwood pulp mill in the first quarter of 2019, which more than offset the decrease in operating days associated
with the aforementioned market-related curtailments in the current year.
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 2019, at 1.03 million tonnes, was down 82,000 tonnes, or 7%, from 2018 principally reflecting
phased summer production curtailments and, to a lesser extent, kiln-related operational challenges, which more than
offset the unplanned recovery boiler outage at the Northwood pulp mill in the previous year. The Company’s Prince
George pulp mill (“PG Pulp mill”) ran well, while its other two kraft pulp mills at Intercontinental and Northwood
experienced several operational upsets in 2019, the majority of which were kiln-related. The Company’s Taylor
BCTMP mill, after a challenging start to the year, finished 2019 strongly, setting a new production record in the
fourth quarter.
Higher pulp unit manufacturing costs in 2019 primarily reflected the lower year-over-year production, combined with
increased fibre and energy costs. The moderate escalation in fibre costs compared to 2018 primarily reflected an
increased proportion of higher-cost whole log chips, which more than offset lower market-based prices for sawmill
residuals (linked to higher Canadian NBSK pulp prices).
Paper
Selected Financial Information and Statistics – Paper
Summarized results for the Paper segment for 2019 and 2018 are as follows:
(millions of Canadian dollars, unless otherwise noted)
Sales
Operating income before amortization10
Operating income
Capital expenditures
Production – paper (000 mt)
$
$
$
$
2019
2018
168.4
26.4
22.9
5.1
127
$
$
$
$
180.9
15.2
11.0
3.7
135
Shipments – paper (000 mt)
130
Results for 2019 include the adoption of IFRS 16 Leases, from January 1, 2019, on a prospective basis. Comparative periods have not been restated.
10 Amortization includes amortization of certain capitalized major maintenance costs.
119
Markets
As previously mentioned, global bleached kraft paper markets came under pressure in 2019 with high paper
inventory levels and weather-related challenges, particularly in North America, impacting demand and pricing.
Offshore markets saw steady price declines through the year, while North American markets experienced weakness
through the latter half of 2019.
Sales
The Company’s paper shipments in 2019, at 119,000 tonnes, were down 11,000 tonnes from 2018, primarily
reflecting the impact of a 6% production decrease in the current year. Paper unit sales realizations for 2019 were
slightly higher than 2018, as the weaker Canadian dollar combined with a higher-value regional mix, more than offset
declining US-dollar kraft paper prices in 2019.
Operations
Paper production in 2019 was 127,000 tonnes, down 8,000 tonnes, from 2018, principally as a result of a market and
fibre-related extended mill scheduled outage in the early fall of 2019. Lower paper unit manufacturing costs in 2019
were the result of significant decreases in slush pulp costs (linked to substantially lower Canadian dollar NBSK market
pulp prices), which more than offset the impacts from lower production levels and increased operating supply costs
in 2019.
11
Unallocated and Other Items
Selected Financial Information
(millions of Canadian dollars)
Corporate costs
Finance expense, net
2019
2018
$
$
(10.0)
(6.6)
$
$
(13.3)
(4.2)
8.7
Other income (expense), net
Results for 2019 include the adoption of IFRS 16 Leases, from January 1, 2019, on a prospective basis. Comparative periods have not been restated.
(4.0)
$
$
Corporate Costs
Corporate costs of $10.0 million in 2019, down $3.3 million compared to the prior year, largely reflected reduced
head office and general administrative expenses in the current year, and organizational reductions in senior
management in the comparative period.
Finance Expense, Net
Net finance expense for 2019 was $6.6 million, up $2.4 million from 2018. The increase primarily reflected lower
interest earned as a result of reduced cash balances held throughout the current year, and to a lesser extent, higher
interest expense associated with amounts drawn on the Company’s operating loan and new non-revolving term loan
in 2019.
Other Income (Expense), Net
Other expense, net, of $4.0 million for 2019 principally related to unfavourable foreign exchange movements on US-
dollar denominated working capital balances, compared to favourable foreign exchange movements on US-dollar
denominated working capital balances totalling $8.7 million in the prior year.
Income Tax Recovery (Expense)
The Company recorded an income tax recovery of $11.1 million in 2019 with an overall effective tax rate of 27%.
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 (loss) before income taxes
Income tax recovery (expense) at statutory rate of 27% (2018 – 27%)
Add (deduct):
Entities with different income tax rates and other tax adjustments
Permanent difference from capital gains and other non-deductible items
$
$
$
$
2019
(41.6)
11.2
-
(0.1)
2018
251.1
(67.8)
0.2
0.9
Income tax recovery (expense)
(66.7)
Results for 2019 include the adoption of IFRS 16 Leases, from January 1, 2019, on a prospective basis. Comparative periods have not been restated.
11.1
$
$
In addition to the amounts recorded in net income (loss), a tax expense of $3.3 million was recorded to other
comprehensive income (loss) in relation to actuarial gains on the defined benefit plans in 2019 (December 31, 2018 –
expense of $1.5 million in relation to actuarial gains).
Other Comprehensive Income
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 2019, a gain of $12.2 million (before tax) 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. Gains on the Company’s non-pension post-employment benefits primarily related to a 50% reduction in
Medical Services Plan (“MSP”) premiums following a change in legislation in BC. The 50% reduction in MSP in 2019,
when combined with the initial 50% reduction recognized in 2017, resulted in a gain of $56.7 million, or $0.87 per
12
common share ($41.8 million after tax, or $0.64 per common share), reflected as a reduction in the Company’s non-
pension post-retirement benefit obligation. The losses associated with the defined benefit pension plans principally
reflected unfavourable actuarial experience adjustments and a 0.6% reduction in the discount rate in the current
year, offset in part by a higher than anticipated return on plan assets.
In 2018, the gain of $5.5 million (before tax) recognized in Other Comprehensive Income largely reflected gains on
other non-pension post-employment benefits, partially offset by losses on the Company’s defined benefit pension
plan.
In 2018, the Company purchased $8.9 million of buy-in annuities through its defined benefit pension plans,
increasing total annuities purchased to $86.0 million at December 31, 2018. Transaction costs of $0.7 million related
to the purchase were recognized in Other Comprehensive Income, principally reflecting the difference in the annuity
rate compared to the discount rate used to value the obligations on a going concern basis. In 2019, no annuities
were purchased by the Company. 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.
After taking into account the impact of annuities, 46% 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 23% is partially offset through the plan’s investment in debt securities.
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, 2019 and 2018:
(millions of Canadian dollars, except for ratios)
2019
2018
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
Long-term lease obligations
Retirement benefit obligations
Other long-term provisions
Deferred income taxes, net
Total equity
$
6.0
$
168.1
174.1
580.8
8.7
$
763.6
$
50.0
1.9
68.6
7.1
77.7
558.3
$
763.6
$
6.9
161.4
168.3
578.2
3.5
750.0
-
-
80.0
6.6
66.8
596.6
750.0
Ratio of current assets to current liabilities
2.1 : 1
1.9 : 1
Net debt (cash) to total capitalization
(1.2)%
Results for 2019 include the adoption of IFRS 16 Leases, from January 1, 2019, on a prospective basis. Comparative periods have not been restated.
9.4%
Reflecting 2019’s market conditions, operating rates, as well as the Company’s management of working capital, the
ratio of current assets to current liabilities at the end of 2019 was 2.1:1, compared to 1.9:1 at the end of 2018. See
further discussion in “Changes in Financial Position” section.
The Company’s net debt to capitalization was 9.4% at December 31, 2019 (December 31, 2018: negative 1.2%),
primarily reflecting the Company’s new $50.0 million non-revolving term loan, and to a lesser extent, the draw-down
of the Company’s operating loan facility in the current year.
13
CHANGES IN FINANCIAL POSITION
At the end of 2019, CPPI had $6.0 million of cash and cash equivalents.
(millions of Canadian dollars)
Decrease in cash and cash equivalents
Operating activities
Financing activities
Investing activities
2019
2018
$
$
$
$
(0.9)
59.4
42.5
(102.8)
$
$
$
$
(69.8)
215.2
(166.6)
(118.4)
Results for 2019 include the adoption of IFRS 16 Leases, from January 1, 2019, on a prospective basis. Comparative periods have not been restated.
The changes in the components of these cash flows during 2019 are discussed in the following sections.
Operating Activities
For the 2019 year, CPPI generated cash from operating activities of $59.4 million, down $155.8 million from cash
generated of $215.2 million in the previous year. The decrease in operating cash flows was principally due to
materially lower cash earnings, partially offset by lower tax installment payments in 2019 and favourable non-cash
working capital movements. The latter primarily reflected lower accounts receivable and inventory balances, driven
mainly by the deterioration of NBSK pulp and BCTMP list prices year-over-year, offset, in part, by timing-related
decrease in accounts payable and accrued liabilities.
Financing Activities
In 2019, cash generated by financing activities was $42.5 million, compared to cash used of $166.6 million in the
prior year. Financing activities in 2019 comprised the receipt of a $50.0 million term loan and $14.0 million draw-
down of the operating loan facility, partially offset by quarterly dividend payments totaling $16.4 million (reflecting a
dividend of $0.0625 per common share in each quarter). Cash used for financing activities in 2018 principally related
to a special dividend to shareholders totaling $146.8 million (or $2.25 per common share) as a result of strong cash
generated by the business, combined with quarterly dividends totaling $16.4 million (also $0.0625 per common share
in each quarter). Finance expenses paid during 2019 were broadly in line with the prior year.
Investing Activities
Net cash used for investing activities in 2019 was $102.8 million, compared to $118.4 million used in 2018. Capital
expenditures of $103.0 million in 2019 principally comprised Northwood pulp mill’s commercialization of a new 32
megawatt condensing turbo-generator, construction of a new raw water treatment plant (which is anticipated to be
completed by the end of 2020), and a new ERP software system, which went live on schedule in May 2019.
LIQUIDITY AND FINANCIAL REQUIREMENTS
Operating Loan and Term Debt
At December 31, 2019, the Company had a $110.0 million unsecured operating loan facility, with $14.0 million of the
facility drawn, and $13.2 million reserved for several standby letters of credit, leaving $82.8 million available and
undrawn on its operating loan facility at the end of the year.
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. On September 30, 2019, the maturity date
of the Company’s operating loan facility was extended from April 6, 2022 to April 6, 2023.
On September 30, 2019, the Company entered into a new non-revolving term loan for $50.0 million. The loan is
repayable on September 30, 2022, with interest based on the lenders’ Canadian prime rate, bankers’ acceptances,
US-dollar base rate or US-dollar LIBOR rate, plus a margin. The term loan covenants are consistent with the
Company’s existing operating loan facility.
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 fully in compliance with all its debt covenants for the year ended December 31, 2019, and expects to
remain so for the foreseeable future.
Normal Course Issuer Bid
On March 4, 2019, the Company renewed its normal course issuer bid whereby it can purchase for cancellation up to
3,262,537 common shares or approximately 5% of its issued and outstanding common shares as of March 1, 2019.
The renewed normal course issuer bid is set to expire on March 6, 2020. The Company does not currently intend to
renew the normal course issuer bid following its expiry.
In 2019, CPPI purchased 17,200 common shares at an average price of $10.67 per common share.
As at December 31, 2019 and February 20, 2020 there were 65,233,559 common shares of the Company issued and
outstanding, and Canfor’s ownership interest in CPPI was 54.8% (December 31, 2018 – 54.8%).
2020 Projected Capital Spending and Debt Repayments
Based on its current outlook, assuming no further deterioration in market conditions during the year, the Company
anticipates that it will invest approximately $40.0 million in capital projects in 2020, which will consist primarily of the
implementation and start-up of the raw water treatment plant at the Intercontinental pulp mill and several lower-cost
fibre-related projects being the key areas of focus. In addition, Management continues to assess and evaluate long-
term recovery boiler solutions for its Northwood NBSK pulp mill. The Company currently plans to utilize its cash flow
from operations and its available cash and operating loans to finance its capital expenditures during 2020.
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 further details. As at December 31, 2019 the Company had no derivative financial
instruments outstanding.
Commitments
Contractual obligations the Company is committed to include:
• Other contractual commitments, not previously mentioned, total $63.9 million, which includes commitments for
the construction of capital assets and other working capital items. Commitments related to leases of property,
plant and equipment are detailed in Note 7 of CPPI’s 2019 consolidated financial statements.
•
The Company has energy purchase agreements with a BC energy company (the “Energy Agreements”) for all
three of the Company’s kraft pulp mills. Two of these agreements are for the sale of incremental electrical
energy and the third agreement is for load displacement. One of these Energy Agreements includes incentive
funding from a BC energy company to support capital investments for the new turbo-generator. All agreements
include performance guarantees to ensure minimum contractual 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, 2019 the Company had
posted $7.2 million of standby letters of credit under these agreements, and had no repayment obligations under
the terms of any of these agreements.
15
•
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 1 to 32 years which have been discounted at risk free rates ranging from 1.7% to
1.8%. The estimated discounted value is $6.6 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, 2019 was $68.6 million. As at December 31, 2019, CPPI estimated that it would make
contribution payments of $5.0 million to its defined benefit pension plans in 2020 based on the last actuarial
valuation for funding purposes.
•
Purchase 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.
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.
In 2019, the Company depended on Canfor to provide approximately 70% of its fibre supply (2018: 66%) 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. In 2018, the Company and Canfor entered into a
new pricing agreement, which included a market-based chip pricing formula. The new pricing agreement was
effective July 1, 2018, for a three-year term, to June 30, 2021.
In 2019, the Company purchased wood chips, logs and hog fuel from Canfor sawmills in the amount of $234.8
million (2018: $252.8 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 2019 was $16.3 million. These amounts are included in
manufacturing and product costs and selling and administration costs within CPPI’s 2019 consolidated financial
statements.
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 2019 was $3.5 million. These amounts
are included as cost recoveries in manufacturing and product costs and selling and administration costs within CPPI’s
2019 consolidated financial statements. At December 31, 2019, an outstanding balance of $19.3 million was due to
Canfor.
The Jim Pattison Group is Canfor’s largest shareholder with an ownership interest of 50.9% at December 31, 2019.
During 2019, the Company sold paper to subsidiaries owned by The Jim Pattison Group totaling $3.7 million. The
Company also made purchases from subsidiaries owned by The Jim Pattison Group totaling $0.7 million. No amounts
related to these sales or purchases were outstanding as at December 31, 2019.
Additional details on related party transactions are contained in Note 17 to CPPI’s 2019 consolidated financial
statements.
LICELLA PULP JOINT VENTURE
In May 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. Under the terms of
the joint venture agreement:
•
Canfor Pulp agreed to bring its enterprise and knowledge surrounding kraft pulping processes, while Licella
agreed to contribute its next generation bio-technology;
16
•
Canfor Pulp’s ownership interest in the joint venture is 10%, with the following rights to increase its
interest:
o After $20.0 million of initial contributions and the successful conclusion of a pre-feasibility study,
culminating in the decision to build a first commercial bio-crude plant at the Company’s
Intercontinental NBSK pulp mill (“First Plant”), Canfor Pulp’s interest increases to 20%;
o Upon successful commissioning of the First Plant, Canfor Pulp’s interest in the joint venture
increases to 50%.
Since forming the joint venture in May 2016, to December 31, 2019, Canfor Pulp has contributed $6.9 million (net of
government funding) to the joint venture. Due to the more challenging fibre environment in BC in 2019, the risks
associated with accessing cost-competitive biomass feedstock have increased.
CO-MARKETING ARRANGEMENT WITH UPM-KYMMENE
In prior years, CPPI’s sales network represented and co-marketed UPM-Kymmene (“UPM”) pulp products in North
America, Japan and Korea, while UPM’s pulp sales network represented and co-marketed CPPI’s products in Europe
and China, as part of a strategic sales and marketing cooperation agreement, named Fibre United. In 2019, the
Company and UPM made a joint decision to end this strategic sales and marketing cooperation agreement to enable
the development of each company’s strategic directions. For CPPI, this means conducting its own direct marketing to
its markets including China, Japan and Korea. The cooperation remained in place until the end of 2019. The
transition to the new marketing arrangements has gone smoothly.
SELECTED QUARTERLY FINANCIAL INFORMATION
Q4
2019
Q3
2019
Q2
2019
Q1
2019
Q4
2018
Q3
2018
Q2
2018
Q1
2018
Sales and income (loss)
(millions of Canadian dollars)
Sales
$ 247.5 $ 216.9 $
319.5 $
304.0 $
289.7 $
328.5 $
396.4 $
Operating income (loss) before amortization11 $
0.1 $
(20.3) $
41.7 $
40.4 $
(23.5) $
(44.0) $
18.4 $
18.1 $
(19.5) $
(32.4) $
10.6 $
10.8 $
36.1 $
15.6 $
14.2 $
80.7 $
105.1 $
60.5 $
42.9 $
85.4 $
63.0 $
Operating income (loss)
Net income (loss)
Per common share (Canadian dollars)
Net income (loss)– basic and diluted
Book value12
$
$
$
$
(0.30) $
(0.50) $
0.16 $
0.17 $ 0.21 $
0.66 $
0.97 $
8.56 $
8.92 $
9.47 $
9.21 $
9.14 $
11.22 $
10.62 $
359.7
104.3
85.1
64.3
0.99
9.72
Dividends declared
$ 0.0625 $ 0.0625 $
0.0625 $
0.0625 $ 0.0625 $
2.3125 $
0.0625 $ 0.0625
Statistics
Pulp shipments (000 mt)
267
213
Paper shipments (000 mt)
26
27
288
33
259
33
231
32
262
34
329
33
310
32
Average exchange rate – US$/Cdn$
$
0.758 $ 0.757 $ 0.748 $ 0.752 $
0.758 $
0.765 $ 0.774 $
0.791
Average NBSK pulp list price delivered to
China (US$)
585 $
Results for 2019 include the adoption of IFRS 16 Leases, from January 1, 2019, on a prospective basis. Comparative periods have not been restated.
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.
887 $ 910 $
710 $
653 $
588 $
805 $
$
910
Sales are primarily influenced by changes in market pulp prices, sales volumes and fluctuations in Canadian dollar
exchange rates. Operating income (loss), net income (loss) and operating income (loss) 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 (loss)
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.
17
(millions of Canadian dollars)
Operating income (loss) by segment:
Pulp
Paper
Unallocated
Total operating income (loss)
Add: Amortization13
Total operating income (loss) before
amortization
Add (deduct):
Working capital movements
Defined benefit pension plan
contributions
Income taxes received (paid), net
Other operating cash flows, net
Cash from operating activities
Add (deduct):
Payment of lease obligations14
Dividends paid
Finance expenses paid
Capital additions, net
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Q4
2019
Q3
2019
Q2
2019
Q1
2019
Q4
2018
Q3
2018
Q2
2018
Q1
2018
(26.8) $
5.0 $
(45.5) $ 12.9 $ 15.5
5.9
8.1 $
3.9 $
$
$
15.2 $
3.5 $
60.7 $
3.1 $
86.6 $
1.5 $
86.4
2.9
(1.7) $
(2.4) $
(2.6) $
(3.3) $
(3.1) $
(3.3) $
(2.7) $
(4.2)
(23.5) $
23.6 $
(44.0) $ 18.4 $ 18.1
23.7 $ 23.3 $ 22.3
$
$
15.6 $
20.5 $
60.5 $
20.2 $
85.4 $
19.7 $
85.1
19.2
0.1 $
(20.3) $ 41.7 $ 40.4
$
36.1 $
80.7 $
105.1 $ 104.3
6.2 $
22.2 $ 13.4 $ (34.1) $
(9.4) $
13.7 $
(7.7) $
(22.2)
(1.4) $
(0.1) $
(1.5) $
(0.1) $
(1.4) $
(0.4) $
(1.1) $
(4.0) $
(1.6) $
(36.3) $
(1.6) $
(35.2) $
(1.7) $
0.2 $
(1.7)
(19.1)
0.4 $
1.0 $
(1.0) $
(0.6) $
6.3 $
(2.5) $
2.0 $
5.8
5.2 $
1.3 $ 52.3 $
0.6
$
(4.9) $
55.1 $
97.9 $
67.1
(0.3)
(0.4)
(0.2)
(0.2) $ - $ - $ - $ -
(4.1) $
(1.1) $
(4.1) $
(1.0) $
(4.1) $
(1.0) $
(4.1) $
(0.7) $
(150.9) $
(0.8) $
(4.1) $
(0.8) $
(4.1) $
(1.0) $
(4.1)
(0.7)
(27.1) $
(26.0) $ (24.4) $ (25.5) $
(42.5) $
(33.4) $
(24.8) $
(19.8)
Proceeds from long-term debt
$ - $
50.0 $
Share purchases
Other, net
$ - $
(0.2) $
$ - $
0.2 $
-
-
-
$
$
-
-
-
$ - $ - $ - $ -
$ - $ - $ - $
(0.1)
$
0.6 $
0.7 $
0.5 $
0.3
Change in cash / operating loans
Results for 2019 include the adoption of IFRS 16 Leases, from January 1, 2019, on a prospective basis. Comparative periods have not been restated.
13 Amortization includes amortization of certain capitalized major maintenance costs.
14 On adoption of IFRS 16 Leases, payment of lease obligations represents cash payments towards reduction of outstanding lease obligations and
related interest, which were previously included with cash from operating activities.
22.6 $ (29.9) $
(198.5) $
(27.4) $
19.8 $
68.5 $
17.5 $
42.7
$
THREE-YEAR COMPARATIVE REVIEW
(millions of Canadian dollars, except per share amounts)
Sales
Net income (loss)
Total assets
Term debt
Net income (loss) per share, basic and diluted
Dividends declared per share
2019
1,087.9
(30.5)
920.8
50.0
$
$
$
$
(0.47) $
0.0625 $
2018
1,374.3 $
184.4 $
932.0 $
2017
1,197.9
102.1
892.2
- $
-
2.83 $
2.50 $
1.55
0.250
$
$
$
$
$
$
18
FOURTH QUARTER RESULTS
Overview
The Company reported an operating loss of $23.5 million and a net loss of $19.5 million for the fourth quarter of
2019, compared to an operating loss of $44.0 million and a net loss of $32.4 million for the third quarter of 2019 and
an operating income of $15.6 million and a net income of $14.2 million for the fourth quarter of 2018. A net loss per
share was $0.30 for the fourth quarter of 2019, compared to a net loss per share of $0.50 in the third quarter of
2019 and a net income of $0.21 per share in the fourth quarter of 2018.
The lower reported loss in the current period principally reflected higher pulp shipments and lower pulp unit
manufacturing costs, both factors largely attributable to increased production at the Company’s NBSK pulp and
BCTMP mills, following market-related curtailments throughout the prior quarter.
An overview of the results by business segment for the fourth quarter of 2019 compared to the third quarter of 2019
and the fourth quarter of 2018 follows.
Pulp
Selected Financial Information and Statistics – Pulp
(millions of Canadian dollars, unless otherwise noted)
Sales
Operating income (loss) before amortization15
Operating income (loss)
Average NBSK pulp price delivered to China – US$16
Average NBSK pulp price delivered to China – Cdn$16
Production – pulp (000 mt)
$
$
$
$
$
Q4
Q3
2019
213.1
(4.0)
(26.8)
588
776
286
$
$
$
$
$
2019
179.8
(22.8)
(45.5)
585
773
174
$
$
$
$
$
Q4
2018
243.5
34.7
15.2
805
1,062
224
231
Shipments – pulp (000 mt)
Results for 2019 include the adoption of IFRS 16 Leases, from January 1, 2019, on a prospective basis. Comparative periods have not been restated.
15 Amortization includes amortization of certain capitalized major maintenance costs.
16 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.
267
213
Markets
Global pulp prices remained at depressed levels through the fourth quarter of 2019, with weak pricing in Asia spilling
over to North America and Europe as the quarter progressed. Purchasing activity from China picked up during the
quarter, but elsewhere demand remained weak, particularly in Europe. US-dollar NBSK pulp list prices to China
averaged US$588 per tonne, broadly in line with the prior quarter, reflecting the aforementioned demand and supply
factors. Average US-dollar NBSK pulp list prices to North America experienced a decline of US$55 per tonne, or 5%,
averaging US$1,115 per tonne in the current quarter (before discounts, which were largely unchanged from the
previous quarter), as published by RISI.
Global softwood pulp producer inventory levels remained above the balanced range during the current quarter and
were at 37 days17 of supply in December 2019, an increase of 2 days from September 2019; market conditions are
generally considered balanced when inventories are in the 27-33 days of supply range.
Sales
The Company’s pulp shipments for the fourth quarter of 2019 totalled 267,000 tonnes, up 54,000 tonnes, or 25%,
from the previous quarter and up 36,000 tonnes, or 16%, from the fourth quarter of 2018. Pulp shipments in the
current quarter principally reflected an increase in pulp production when compared to both comparative quarters,
offset in part by a rebuild of pulp inventories to more normal levels in the current quarter after material drawdowns
in both comparative periods.
17 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”).
19
Average NBSK pulp unit sales realizations were modestly lower than the prior quarter, principally reflecting the lower
prices to North America. BCTMP unit sales realizations showed a modest increase from the previous quarter as
BCTMP prices edged upwards in the latter part of the quarter.
Compared to the fourth quarter of 2018, the Company’s average NBSK pulp unit sales realizations were well down,
primarily driven by the US$217 per tonne, or 27%, decrease in the average US-dollar NBSK pulp list price to China,
combined with a decline in the average US-dollar price to North America by US$313 per tonne (before discounts), or
22%. Average BCTMP unit sales realizations also showed a sharp decline compared to the fourth quarter of 2018,
reflecting lower BCTMP US-dollar pricing in the current quarter.
Energy revenues were up compared to the third quarter of 2019, principally reflecting seasonally higher energy prices
combined with an increase in operating days in the current quarter, following the downtime taken in the summer
months. Compared to the fourth quarter of 2018, energy revenues were up significantly, primarily due to the
increased power generation at the Northwood pulp mill and additional operating days in the current quarter.
Operations
Pulp production was 286,000 tonnes for the fourth quarter of 2019, up 112,000 tonnes, or 64%, from the third
quarter of 2019, largely reflecting phased summer curtailments taken in the previous quarter, offset in part by an
extended market-related curtailment in early October at the Company’s PG Pulp mill. To a lesser extent, improved
productivity at the Company’s PG Pulp mill and at its Taylor BCTMP mill, which set a new record-high for production
in the current quarter, largely offset kiln-related operational disruptions at the Company’s Northwood and
Intercontinental pulp mills in December.
Compared to the fourth quarter of 2018, pulp production was up 62,000 tonnes, or 28%, primarily reflecting the
Company’s extended Northwood recovery boiler maintenance outage in the comparative period.
Pulp unit manufacturing costs were down significantly compared to both comparative quarters, primarily reflecting
increased production offset, in part, by seasonally higher energy costs. Fibre costs were slightly lower than the third
quarter of 2019 and significantly lower than the fourth quarter of 2018, principally driven by lower market-based
prices for sawmill residual chips (linked to falling Canadian dollar NBSK pulp sales realizations), which more than
offset an increased proportion of higher-cost whole log chips, reflecting ongoing sawmill-related fibre supply
disruptions.
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)
Q4
Q3
$
$
$
2019
34.2 $
5.8 $
5.0 $
28
2019
37.1
4.8
3.9
28
$
$
$
Q4
2018
46.1
4.4
3.5
36
Shipments – paper (000 mt)
32
Results for 2019 include the adoption of IFRS 16 Leases, from January 1, 2019, on a prospective basis. Comparative periods have not been restated.
18 Amortization includes amortization of certain capitalized major maintenance costs.
26
27
Markets
Global kraft paper markets continued to remain weak through the fourth quarter of 2019 in most key markets,
particularly for bleached kraft paper.
Sales
The Company’s paper shipments in the fourth quarter of 2019 were 26,000 tonnes, broadly in line with the previous
quarter. Compared to the fourth quarter of 2018 paper shipments were down 6,000 tonnes, or 19%, principally
reflecting lower production at the PG pulp and paper mill in the current quarter.
Paper unit sales realizations in the fourth quarter of 2019 were moderately lower than the previous quarter and
significantly lower than the same quarter of 2018, primarily reflecting sustained weak US-dollar prices throughout
most of the current period.
20
Operations
Paper production for the fourth quarter of 2019 was 28,000 tonnes, broadly in line with the prior quarter, and down
8,000 tonnes, or 22%, from the fourth quarter of 2018, principally due to the quarter-over-quarter impact of
downtime, which in the current quarter related to a two week market-related curtailment at the beginning of
October, a continuation from the prior quarter.
Paper unit manufacturing costs were moderately lower than the third quarter of 2019 reflecting lower slush pulp
costs associated with the decreased Canadian dollar NBSK pulp unit sales realizations, combined with lower unit
manufacturing costs in the current quarter, principally driven by the scheduled maintenance outage completed in the
previous quarter. Compared to the fourth quarter of 2018 paper unit manufacturing costs showed a significant
decline principally due to materially lower slush pulp costs, offset in part by the impact of the downtime, which
contributed to higher paper unit manufacturing costs in the current quarter.
Unallocated Items
(millions of Canadian dollars)
Q4
Q3
2019
2019
Q4
2018
Corporate costs
(3.1)
Finance expense, net
(0.9)
4.8
Other income (expense), net
Results for 2019 include the adoption of IFRS 16 Leases, from January 1, 2019, on a prospective basis. Comparative periods have not been restated.
(2.4) $
(1.6) $
$
1.2
(1.7)
(1.6)
(1.5)
$
$
$
$
$
$
Corporate costs were $1.7 million for the fourth quarter of 2019, down $0.7 million when compared to the third
quarter of 2019, and down $1.4 million when compared to the fourth quarter of 2018, largely reflecting reduced
head office and general administrative expenses in the current quarter.
Net finance expense for the fourth quarter of 2019 was $1.6 million, in line with the third quarter of 2019 and up
$0.7 million when compared to the fourth quarter of 2018. The increase when compared to the fourth quarter of
2018 largely reflected lower interest earned as a result of reduced cash balances held throughout the current
quarter, combined with higher interest expense associated with the Company’s new non-revolving term loan entered
into on September 30, 2019.
Other expense, net, of $1.5 million for the fourth quarter of 2019 principally related to unfavourable foreign
exchange movements on US-dollar denominated working capital balances.
Other Comprehensive Income (Loss)
In the fourth quarter of 2019, the Company recorded a gain of $0.1 million (before tax) related to changes in the
valuation of the Company’s employee future benefits plans, as unfavourable actuarial experience adjustments,
combined with increased interest and service costs, were more than offset by a higher than anticipated return on
plan assets.
This compared to a gain of $1.0 million (before tax) recognized in the third quarter of 2019, which primarily reflected
a higher than anticipated return on plan assets, and, to a lesser extent, lower interest and service costs associated
with the 50% reduction in MSP premiums in the second quarter of 2019, following a change in legislation in BC.
In the fourth quarter of 2018, the Company recorded a gain of $1.5 million (before tax) largely as a result of lower
than anticipated returns on plan assets.
21
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
Q4
Q3
2019
(13.4)
5.2
8.5
$
$
$
$
$
$
2019
19.8
1.3
44.3
$
$
$
Q4
2018
(198.5)
(4.9)
(151.7)
Investing activities
Results for 2019 include the adoption of IFRS 16 Leases, from January 1, 2019, on a prospective basis. Comparative periods have not been restated.
(27.1)
(41.9)
(25.8)
$
$
$
Operating Activities
Cash generated from operating activities was $5.2 million in the fourth quarter of 2019, up $3.9 million from the
previous quarter and up $10.1 million from the fourth quarter of 2018. The increase in operating cash flows
compared to the previous quarter principally reflected higher cash earnings in the current period, more than
offsetting a build in finished pulp inventories to more normal levels, combined with timing-related decrease in
accounts payable and accrued liabilities. Compared to the fourth quarter of 2018, the increase in operating cash
flows reflected lower income tax installment payments and favourable movements in non-cash working capital
balances in the current period, which more than offset the material decrease in cash earnings.
Financing Activities
Cash generated from financing activities in the fourth quarter of 2019 was $8.5 million, compared to cash generated
of $44.3 million in the third quarter of 2019 and cash used of $151.7 million in the fourth quarter of 2018. Cash
generated by financing activities in the current quarter included a $14.0 million draw down of the Company’s
operating loan facility, offset in part by payment of a quarterly dividend of $4.1 million ($0.0625 per common share).
Financing activities in the third quarter of 2019 included to the receipt of a $50.0 million term loan, partially offset by
payment of a quarterly dividend of $4.1 million ($0.0625 per common share). Cash used for financing activities in the
fourth quarter of 2018 included the payment of a special dividend ($2.25 per common share) in addition to the
quarterly dividend, which combined, totaled $150.9 million.
Investing Activities
Cash used for investing activities of $27.1 million in the current quarter primarily related to capital expenditures
associated with several capital projects including the construction of a raw water treatment plant at the Company’s
Intercontinental NBSK pulp mill (scheduled to be completed by the end of 2020).
OUTLOOK
Pulp Markets
Recognizing the challenging markets, the Company launched a $40 million cost reduction initiative at the beginning
of 2020, aimed at reducing unit manufacturing costs. Most of the savings will be achieved through improving
reliability, reducing overhead cost and improving fibre utilization, with the full amount of annualized savings targeted
by the end of 2021.
Looking forward, while global softwood kraft pulp markets are projected to remain fairly challenging for the first part
of 2020, market conditions and prices should gradually improve through the balance of the year as global inventories
become more in-line with demand. The potential impact of the emerging coronavirus on global pulp demand,
particularly from China, is uncertain, and the Company continues to monitor the situation. Given the fibre dynamics
in the BC Interior, fibre costs are projected to remain under pressure, particularly for incremental pulp log supply. On
a more positive note, however, as a result of additional sawmill residual and pulp log fibre supply secured in the
latter part of 2019, the Company is not currently anticipating any material fibre-related curtailments in 2020.
The Company has no maintenance outages planned for the first quarter of 2020. A maintenance outage is currently
planned at the Northwood NBSK pulp mill in the second quarter of 2020 with a projected 30,000 tonnes of reduced
NBSK pulp production. In addition, maintenance outages are scheduled at the Intercontinental NBSK pulp mill and
the Taylor BCTMP mill in the third quarter of 2020 with a projected 10,000 tonnes of reduced NBSK pulp production
and a projected 5,000 tonnes of reduced BCTMP production, respectively.
22
Paper Markets
Bleached kraft paper demand is currently anticipated to stabilize in the first half of 2020 as inventories within the
market return to more normalized levels.
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.
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, 2019
December 31, 2018
Defined Benefit
Pension Plans
3.0%
3.0%
n/a
n/a
n/a
Other Benefit
Plans
3.0%
n/a
5.5%
4.5%
2022
Defined Benefit
Pension Plans
3.6%
3.0%
n/a
n/a
n/a
Other Benefit
Plans
3.6%
n/a
5.5%
4.5%
2022
Assumed discount rates and medical cost trend rates have a significant effect on the accrued retirement benefit
obligation and related plan assets. In addition, the average life expectancy of a 65-year-old at December 31, 2019
and December 31, 2018 is between 21.1 years and 24.2 years. As at December 31, 2019, the weighted average
duration of the defined benefit plan obligation, which reflects the average age of the plan members, is 12.8 years
(December 31, 2018 - 12.0 years). The weighted average duration of the other benefit plans is 13.7 years
(December 31, 2018 – 13.3 years).
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 1 to 32 years and have been discounted at risk-free rates ranging from 1.7% to 1.8%. 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
23
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 and right-of-use
assets, on a regular basis as events or changes in circumstances may warrant. An impairment loss is recognized in
net income (loss) 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
2019 or 2018.
Deferred Taxes
In accordance with IFRS, CPPI recognizes deferred income tax assets when it is probable that the deferred income
tax assets will be realized. This assumption is based on management's best estimate of future circumstances and
events. If these estimates and assumptions are changed in the future, the value of the deferred income tax assets
could be reduced or increased, resulting in an income tax expense or recovery. CPPI reevaluates its deferred income
tax assets on a regular basis.
Valuation of Finished Product Inventories
Finished product inventories are recorded at the lower of cost and net realizable value. The cost of inventories is
based on the weighted average cost principle, and includes raw materials, direct labour, other direct costs and
related production overheads (based on normal operating capacity). Net realizable value is the estimated selling price
in the ordinary course of business, less estimated costs of completion and selling expenses. CPPI estimates the net
realizable value of the finished goods inventories based on actual and forecasted sales orders. Based on these
estimates, net write-downs of the Company’s finished pulp and raw materials inventories from cost to net realizable
totaled $10.7 million at December 31, 2019 (December 31, 2018 – nil).
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.
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 2019 were approximately $103.0 million. The Company anticipates
available cash and operating loans, as well as 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 human-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.
24 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 2019, approximately 70% 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.
Dependence on Key Customers
In 2019, the Company’s top five customers accounted for approximately 34% of its pulp sales. In the event that the
Company cannot maintain these customer relationships or the demand from these customers is diminished for any
reason in the future, there is a risk that the Company would be forced to find alternative markets in which to sell its
pulp, which in turn, could result in lower prices or increased distribution costs thereby adversely affecting its sales
margins.
Dividends
CPPI paid quarterly dividends of $0.0625 per common share through 2019 and currently anticipates to continue to
pay a comparable level of dividends through 2020. 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 of directors retains the discretion to change the policy at any time and reviews the policy on a quarterly
basis.
On February 20, 2020, the board of directors declared a quarterly dividend of $0.0625 per share, payable on March
11, 2020, to the shareholders of record on March 4, 2020.
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, 2017.
25 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, net of annuity assets, by an
estimated $11.9 million and a one percentage point decrease in the discount rate would increase the accrued benefit
obligation by an estimated $14.8 million. These changes would only impact the Company’s funding requirements in
years where a new actuarial funding valuation was performed and regulatory approval for a change in funding
contributions was obtained.
Environmental Laws, Regulations and Compliance
The Company is subject to a wide range of general and industry-specific laws and regulations relating to the
protection of the environment, including those governing air emissions, wastewater discharges, the storage,
management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, landfill operation
and closure obligations, and health and safety matters. These laws and regulations require the Company to comply
with specific requirements as described in regulations. Regulations may also require the Company to obtain
authorizations and comply with the authorization requirements of the appropriate governmental authorities which
have considerable discretion over the terms and timing of said authorizations and permits.
The Company has incurred, and expects to continue to incur, capital, operating and other expenditures complying
with applicable environmental laws and regulations and as a result of environmental remediation on asset retirement
obligations. It is possible that the Company could incur substantial costs, such as civil or criminal fines, sanctions and
enforcement actions, cleanup and closure costs, and third-party claims for property damage and personal injury as a
result of violations of, or liabilities under, environmental laws and regulations. The amount and timing of
environmental expenditures is difficult to predict, and, in some cases, the Company’s liability may exceed forecasted
amounts. The discovery of additional contamination or the imposition of additional cleanup obligations at the
Company’s or third-party sites may result in significant additional costs. Any material expenditure incurred could
adversely impact the Company’s financial condition or preclude the Company from making capital expenditures that
would otherwise benefit the Company’s business. Enactment of new environmental laws or regulations or changes in
existing laws or regulations, or interpretation thereof, could have a significant impact on the Company.
Financial Risk Management and Earnings Sensitivities
Demand for pulp and paper products is closely related to global business conditions and tends to be cyclical in
nature. Product prices can be subject to volatile change. CPPI competes in a global market and the majority of its
products are sold in US-dollars. Consequently, changes in foreign currency relative to the Canadian dollar can impact
CPPI’s revenues and earnings.
Financial Risk Management
CPPI is exposed to a number of risks as a result of holding financial instruments. These risks include credit risk,
liquidity risk and market risk.
CPPI’s internal Risk Management Committee manages risk in accordance with a Board approved Price Risk
Management Controls Policy. The policy provides the framework for risk management related to commodity price,
foreign exchange, interest rate and counterparty credit risk of the Company.
26
(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, trade and other accounts
receivable. Contract assets are also subject to credit risk. 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, 2019 is
$6.0 million.
CPPI utilizes credit insurance to manage the risk associated with trade accounts receivables. As at December 31,
2019, approximately 77% of the outstanding trade accounts receivables are covered under credit insurance. In
addition, CPPI requires letters of credit on certain export trade accounts 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 accounts receivable balance at
December 31, 2019 is $81.5 million before a loss allowance of $1.0 million. At December 31, 2019, 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 and term loan.
At December 31, 2019, CPPI had $14.0 million drawn on its operating loan facility, accounts payable and accrued
liabilities of $142.2 million, and long-term debt of $50.0 million repayable on September 30, 2022.
(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.
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 and non-pension post-retirement 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 $0.9 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.
(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
27 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.
(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.
At December 31, 2019 the Company had no fixed interest rate swaps, foreign exchange contracts, pulp futures,
energy fixed swaps or option contracts outstanding.
Earnings Sensitivities
Estimates of the sensitivity of CPPI's pre-tax results to currency fluctuations and prices for its principal products,
based on 2019 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 19
BCTMP – US$10 change per tonne 19
Natural gas cost – $1 change per gigajoule
Chip cost – $1 change per tonne
Canadian dollar – US$0.01 change per Canadian dollar20
Impact on annual
pre-tax earnings
$ 10
$ 3
$ 9
$ 3
$ 7
19 Excluding impacts of exchange rate, freight, discounting, potential change in fibre costs and other deductions.
20 Represents impact on operating income (loss) 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 major competition in the global 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.
Indigenous Relations
CPPI sources the majority of its fibre from areas subject to claims of Indigenous rights or title. In November 2019,
the Government of British Columbia passed legislation (Declaration on the Rights of Indigenous Peoples Act) to
implement the United Nations Declaration on the Rights of Indigenous Peoples. The legislation aims to create a path
forward that respects the human rights of Indigenous peoples while introducing better transparency and
predictability to the work the BC government and Indigenous peoples do together. This work aims to foster increased
and lasting certainty on the land base while ensuring that the benefits of sustainable forest harvesting are realized
equitably by those engaged in and impacted by the forest sector.
Canadian judicial decisions have recognized the continued existence of Indigenous rights and title to lands
continuously and exclusively used or occupied by Indigenous groups; however, until recently, the courts have not
28
identified any specific lands where Indigenous title exists. In June 2014, the Supreme Court of Canada, for the first
time, recognized Indigenous 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
Indigenous title lands.
While Indigenous 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 Indigenous title over a specific piece of
land and, in so doing, affirmed a broader territorial use-based approach to Indigenous title. The decision also defines
what Indigenous title means and the types of land uses consistent with this form of collective ownership.
The impacts of the Declaration on the Rights of Indigenous Peoples Act and the Willian 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 Indigenous Nations and Government to foster good relationships and minimize risks to the Company’s
operational plans.
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.
Labour Agreements and Competition for Professional Skilled Labour
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. The
Company negotiated its collective agreements with UNIFOR and PPWC at its Prince George operations in 2017; the
new labour agreements expire on April 30, 2021.
Maintenance Obligations and Facility Disruptions
The Company’s manufacturing processes are vulnerable to operational problems that can impair its ability to
manufacture its products. The Company could experience a breakdown in any of its machines, or other important
equipment, and from time to time, the Company schedules planned and incurs unplanned outages to conduct
maintenance that cannot be performed safely or efficiently during operations. Such disruptions could cause
significant loss of production, which could have a material adverse effect on the Company’s business, financial
condition and operating results. The Company believes there are reasonable insurance arrangements in place to
29 cover certain outcomes of such incidents; however, there can be no guarantees that these arrangements will fully
protect the Company against such losses.
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 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 expires June 30, 2021, and may be amended as necessary to ensure it is reflective of
market conditions. Prices for wood chips are not within the Company’s control and are driven by market demand,
product availability, environmental restrictions, logging regulations, the imposition of fees or other restrictions on
exports of lumber into the US and other matters. The impact of the Mountain Pine Beetle infestation in the region
continues to impact overall fibre supply for the BC 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 will be required. A lower AAC in the region may also reduce
the availability of pulpwood for whole log chips. 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.
OUTSTANDING SHARE DATA
At February 20, 2020 there were 65,233,559 common shares issued and outstanding.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER
FINANCIAL REPORTING
The Company has established disclosure controls and procedures to ensure that information disclosed in this MD&A
and the related financial statements was properly recorded, processed, summarized and reported to the board of
directors and the Audit Committee. The Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”) have evaluated the effectiveness of these disclosure controls and procedures for the year ended December
31, 2019, and have concluded that they are effective.
The CEO and CFO acknowledge responsibility for the design of ICFR, and confirm that there were no changes in
these controls that occurred during the year ended December 31, 2019 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, 2019, the CEO and CFO have concluded that these controls are operating effectively.
Additional information about the Company, including its 2019 Annual Information Form, is available at
www.sedar.com or at www.canfor.com.
30 C ONSO LIDATE D FI NANCIAL STATEM ENTS
31 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.
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 Audit 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 20, 2020
Don B. Kayne
Chief Executive Officer
Alan Nicholl
Chief Financial Officer
32 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.
Opinion
We have audited the consolidated financial statements of Canfor Pulp Products Inc. (the “Company”),
which comprise:
the consolidated balance sheets as at December 31, 2019 and December 31, 2018;
the consolidated statements of income (loss) for the years then ended;
the consolidated statements of other comprehensive income (loss) for the years then ended;
the consolidated statements of changes in equity for the years then ended;
the consolidated statements of cash flows for the years then ended; and,
notes to the consolidated financial statements, including a summary of significant accounting policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the
consolidated financial position of the Company as at December 31, 2019 and December 31, 2018, and its
consolidated financial performance and its consolidated cash flows for the years then ended in
accordance with International Financial Reporting Standards.
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the “Auditors’ Responsibilities for the
Audit of the Financial Statements” section of our auditors’ report.
We are independent of the Company in accordance with the ethical requirements that are relevant to our
audit of the financial statements in Canada and we have fulfilled our other responsibilities in accordance
with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. KPMG Canada provides services to KPMG LLP.
33
Other Information
Management is responsible for the other information. Other information comprises:
the information included in Management’s Discussion and Analysis filed with the relevant Canadian
Securities Commissions.
the information, other than the financial statements and the auditors’ report thereon, included in a
document likely to be entitled “2019 Canfor Pulp Products Inc. Annual Report”.
Our opinion on the financial statements does not cover the other information and we do not and will not
express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the other information is materially inconsistent with the
financial statements or our knowledge obtained in the audit, or otherwise appears to be materially
misstated.
We obtained Management’s Discussion and Analysis filed with the relevant Canadian Securities
Commissions as at the date of this auditors’ report. If, based on the work we have performed on this other
information, we conclude that there is a material misstatement of this other information, we are required to
report that fact in the auditors’ report.
We have nothing to report in this regard.
The 2019 Canfor Pulp Products Inc. Annual Report is expected to be made available to us after the date of
this auditors’ report. If, based on the work we will perform on this other information, we conclude that there
is a material misstatement of this other information, we are required to report that fact to those charged with
governance for the financial statements.
Responsibilities of Management and Those Charged with Governance for the
Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with International Financial Reporting Standards, and for such internal control as management
determines is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to
continue as a going concern, disclosing as applicable, matters related to going concern and using the going
concern basis of accounting unless management either intends to liquidate the Company or to cease
operations, or has no realistic alternative but to do so.
Those charged with governance for the financial statements are responsible for overseeing the Company’s
financial reporting process.
34
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes
our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with Canadian generally accepted auditing standards will always detect a material
misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of the
financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit.
We also:
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud
or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that
is sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.
Obtain an understanding of internal control relevant to the audit 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 Company's internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
Conclude on the appropriateness of management's use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Company's ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report
to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify
our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’
report. However, future events or conditions may cause the Company to cease to continue as a going
concern.
Evaluate the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the underlying transactions and events in
a manner that achieves fair presentation.
Communicate with those charged with governance for the financial statements regarding, among other
matters, the planned scope and timing of the audit and significant audit findings, including any
significant deficiencies in internal control that we identify during our audit.
35
Provide those charged with governance for the financial statements with a statement that we have
complied with relevant ethical requirements regarding independence, and communicate with them all
relationships and other matters that may reasonably be thought to bear on our independence, and
where applicable, related safeguards.
Chartered Professional Accountants
The engagement partner on the audit resulting in this auditors’ report is John Desjardins.
Vancouver, Canada
February 20, 2020
36
Canfor Pulp Products Inc.
Consolidated Balance Sheets
(millions of Canadian dollars)
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable - Trade
- Other
Income taxes receivable
Inventories (Note 5)
Prepaid expenses and other
Total current assets
Property, plant and equipment and intangible assets (Note 6)
Right-of-use assets (Note 7(a))
Other long-term assets
Total assets
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities (Note 8)
Operating loan (Note 9)
Current portion of lease obligations (Note 7(b))
Total current liabilities
Long-term debt (Note 10)
Lease obligations (Note 7(b))
Retirement benefit obligations (Note 11)
Other long-term provisions (Note 12)
Deferred income taxes, net (Note 15)
Total liabilities
EQUITY
Share capital (Note 13)
Retained earnings
Total equity
Total liabilities and equity
As at
December 31,
2019
As at
December 31,
2018
$
6.0 $
80.5
6.6
29.7
193.7
14.8
331.3
580.8
2.5
6.2
$
920.8 $
$
142.2
$
14.0
1.0
157.2
50.0
1.9
68.6
7.1
77.7
$
362.5
$
$
$
$
480.8
$
77.5
558.3
920.8
$
$
6.9
107.6
11.4
5.4
207.1
11.9
350.3
578.2
-
3.5
932.0
182.0
-
-
182.0
-
-
80.0
6.6
66.8
335.4
480.9
115.7
596.6
932.0
Commitments and Contingencies (Note 19) and Subsequent Event (Note 24)
The accompanying notes are an integral part of these consolidated financial statements.
APPROVED BY THE BOARD
“S.E. Bracken-Horrocks”
Director, S.E. Bracken-Horrocks
“C.A. Pinette”
Director, C.A. Pinette
37
Canfor Pulp Products Inc.
Consolidated Statements of Income (Loss)
(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 (loss)
Finance expense, net (Note 14)
Other income (expense), net
Net income (loss) before income taxes
Income tax recovery (expense) (Note 15)
Net income (loss)
Years ended December 31,
2018
2019
$
1,087.9
$
1,374.3
854.7
145.5
92.9
25.8
870.9
145.4
79.6
31.8
1,118.9
1,127.7
(31.0)
(6.6)
(4.0)
(41.6)
11.1
$
(30.5)
$
246.6
(4.2)
8.7
251.1
(66.7)
184.4
Net income (loss) per common share: (in Canadian dollars)
Attributable to equity shareholders of the Company
-
Basic and diluted (Note 13)
The accompanying notes are an integral part of these consolidated financial statements.
$
(0.47)
$
2.83
38
Canfor Pulp Products Inc.
Consolidated Statements of Other Comprehensive Income
(millions of Canadian dollars)
Net income (loss)
Other comprehensive income
Items that will not be recycled through net income (loss):
Defined benefit plan actuarial gains (Note 11)
Income tax expense on defined benefit plan actuarial gains (Note 15)
Other comprehensive income, net of tax
Total comprehensive income (loss)
Consolidated Statements of Changes in Equity
(millions of Canadian dollars)
Share capital
Balance at beginning of year
Share purchases (Note 13)
Balance at end of year
Retained earnings
Balance at beginning of year
Net income (loss)
Defined benefit plan actuarial gains, net of tax
Dividends declared (Note 23)
Impact of change in accounting policy (Notes 4 and 7)
Share purchases (Note 13)
Balance at end of year
Total equity
The accompanying notes are an integral part of these consolidated financial statements.
Years ended December 31,
2018
2019
$
(30.5)
$
184.4
12.2
(3.3)
8.9
5.5
(1.5)
4.0
$
(21.6)
$
188.4
Years ended December 31,
2018
2019
$
$
480.9
$
480.9
(0.1)
-
480.8
$
480.9
$
115.7 $
(30.5)
8.9
(16.4)
(0.1)
(0.1)
90.5
184.4
4.0
(163.2)
-
-
$
$
77.5
558.3
$
$
115.7
596.6
39
Canfor Pulp Products Inc.
Consolidated Statements of Cash Flows
(millions of Canadian dollars)
Cash generated from (used in):
Operating activities
Net income (loss)
Items not affecting cash:
Amortization
Income tax expense (recovery)
Employee future benefits expense
Finance expense, net
Other, net
Defined benefit plan contributions, net
Income taxes paid, net
Net change in non-cash working capital (Note 16)
Financing activities
Payment of lease obligations (Note 7(b))
Increase in operating loan (Note 9)
Proceeds from long-term debt (Note 10)
Finance expenses paid
Dividends paid (Note 23)
Share purchases (Note 13)
Investing activities
Additions to property, plant and equipment and intangible assets, net (Note 6)
Other, net
Decrease in cash and cash equivalents*
Cash and cash equivalents at beginning of year*
Cash and cash equivalents at end of year*
*Cash and cash equivalents include cash on hand less unpresented cheques.
The accompanying notes are an integral part of these consolidated financial statements.
Years ended December 31,
2019
2018
$
(30.5) $
184.4
92.9
(11.1)
3.5
6.6
0.3
(5.4)
(4.6)
51.7
7.7
59.4
(1.1)
14.0
50.0
(3.8)
(16.4)
(0.2)
42.5
(103.0)
0.2
(102.8)
(0.9)
6.9
$
6.0
$
79.6
66.7
4.0
4.2
(1.1)
(6.6)
(90.4)
240.8
(25.6)
215.2
-
-
-
(3.3)
(163.2)
(0.1)
(166.6)
(120.5)
2.1
(118.4)
(69.8)
76.7
6.9
40
Canfor Pulp Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and December 31, 2018
(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,
2019 comprise the Company and its subsidiaries (hereinafter 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, 2019, and February 20, 2020, Canfor Corporation (“Canfor”) held a 54.8% interest in CPPI, unchanged
from December 31, 2018.
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 20, 2020.
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 measured at fair value;
Asset retirement obligations measured at the discounted value of expected future cash flows; and
The retirement benefit surplus and obligations related to the defined benefit pension plans, measured net of
the accrued benefit obligations 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’s estimates. Revisions to accounting estimates are
recognized in the period in which the estimates are revised and in any future periods affected.
Information about the significant areas of estimation uncertainty and critical judgments in applying accounting policies
that have the most significant effect on the amounts recognized in the consolidated financial statements is included in
the applicable notes:
• Note 5 – Inventories;
• Note 11 – Employee Future Benefits;
• Note 6 – Property, Plant and Equipment and
• Note 12 – Asset Retirement Obligations;
Intangible Assets;
• Note 7 – Leases;
• Note 15 – Income Taxes; and
• Note 22 – Licella Pulp Joint Venture.
Certain comparative amounts for the prior year have been reclassified to conform to the current year’s presentation.
41
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 liquid money market instruments with original maturities,
or redemption dates, of three months or less from the date of acquisition, and are valued at amortized 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
Financial instruments comprise cash and cash equivalents, trade and other accounts receivables, accounts payable and
accrued liabilities, as well as the Company’s operating loan and long-term debt. From time to time, 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. When applicable, CPPI’s derivative financial instruments are not designated as hedges for
accounting purposes.
CPPI’s financial instruments are classified and measured as follows:
Financial Assets:
Cash and cash equivalents
Trade and other accounts receivables
Financial Liabilities:
Accounts payable and accrued liabilities
Operating loan
Long-term debt
Classification and measurement of financial assets
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Financial assets are classified as either measured at amortized cost, fair value through other comprehensive income
(“FVOCI”), or fair value through net income (“FVTPL”) based on the business model in which a financial asset is
managed, its contractual cash flow characteristics and when certain conditions are met:
•
•
•
Amortized cost – measured at amortized cost using the effective interest rate method. Where applicable,
amortized cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and
impairments are recognized in net income.
FVOCI – measured at FVOCI if not designated as FVTPL. Interest income, foreign exchange gains and losses
and impairments are recognized in net income. Other net gains and losses are recognized in other
comprehensive income (“OCI”). On derecognition, gains and losses accumulated in OCI are reclassified to net
income.
FVTPL – measured at FVTPL if not classified as amortized cost or FVOCI with net gains and losses, including
any interest or dividend income, recognized in net income.
Equity investments are required to be classified as measured at fair value. However, on initial recognition of an equity
investment that is not held-for-trading, the Company may irrevocably elect to present subsequent changes in the
investments fair value in OCI. This election is made on an investment by investment basis. The Company does not
currently hold any equity investments.
42
Classification and measurement of financial liabilities
Financial liabilities are classified as either measured at amortized cost or FVTPL. A financial liability is classified as FVTPL
if it is held-for-trading, a derivative, or if it is designated such on initial recognition. Financial liabilities at FVTPL are
measured at fair value with net gains and losses, including interest expense, recognized in net income. Other financial
liabilities are subsequently measured at amortized cost using the effective interest rate method. Interest expense and
foreign exchange gains and losses are recognized in net income. Any gains or losses on derecognition are also
recognized in net income.
Impairment
The Company applies the simplified approach in determining expected credit losses (“ECLs”), which requires a
probability-weighted estimate of expected lifetime credit losses to be recognized upon initial recognition of financial
assets measured at amortized cost and contract assets. Credit losses are measured as the present value of cash
shortfalls from all possible default events, discounted at the effective interest rate of the financial asset. Loss allowances
for financial assets at amortized cost are deducted from the gross carrying amount of the assets.
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.
Leases
Policy applicable from January 1, 2019
Lease Definition
At inception of a contract, the Company assesses whether the contract is, or contains, a lease. A contract is, or contains,
a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
An identified asset may be implicitly or explicitly specified in a contract, but must be physically distinct, and must not
have the ability for substitution by a lessor. The Company has the right to control an identified asset if it obtains
substantially all of its economic benefits and either pre-determines, or directs how and for what purpose the asset is
used.
Measurement of Right-of-Use Assets and Lease Obligations
At lease commencement, the Company recognizes a right-of-use asset (“ROU asset”) and a lease obligation. The ROU
asset is initially measured at cost, which comprises the initial amount of the lease obligation adjusted for any lease
payments made at, or before, the commencement date, plus any initial direct costs incurred, less any lease incentives
received.
The ROU asset is subsequently amortized on a straight-line basis over the shorter of the term of the lease, or the useful
life of the assets determined on the same basis as the Company’s property, plant and equipment. The ROU asset is
periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease obligation.
The lease obligation is initially measured at the present value of lease payments remaining at the lease commencement
date, discounted using the Company’s incremental borrowing rate. Lease payments included in the measurement of
the lease obligation, when applicable, may comprise fixed payments, variable payments that depend on an index or
rate, amounts expected to be payable under a residual value guarantee and the exercise price under a purchase,
extension or termination option that the Company is reasonably certain to exercise.
The lease obligation is subsequently measured at amortized cost using the effective interest method. It is remeasured
when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the
Company’s estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes
its assessment of whether it will exercise a purchase, extension or termination option. When the lease obligation is
remeasured, a corresponding adjustment is made to the carrying amount of the ROU asset.
43
Recognition Exemptions
The Company has elected not to recognize ROU assets and lease obligations for short-term leases that have a lease
term of twelve months or less or for leases of low-value assets. Payments associated with these leases are recognized
as an operating expense on a straight-line basis over the lease term within costs and expenses on the consolidated
statement of income.
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 the location and condition necessary for it 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 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 of five to ten years.
Government assistance
Government assistance relating to the acquisition of property, plant and equipment is recorded as a reduction of the
cost of the asset to which it relates, with any amortization calculated on the net amount. Government grants related
to income are recognized as income or a reimbursement of costs on a systematic basis over the periods necessary to
match them with the related costs which they were intended to compensate.
Asset impairment
CPPI’s property, plant and equipment, ROU assets and intangible assets are reviewed for impairment whenever events
or circumstances indicate that the carrying amount may not be recoverable.
44
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.
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 consolidated 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 consolidated balance sheet in respect of a defined benefit pension plan
is the net of the accrued benefit obligation and the fair value of the plan assets. The accrued benefit obligation, the
related service cost and, where applicable, the past service cost is determined separately for each defined benefit
pension plan based on actuarial determinations using the projected unit credit method. Under the projected unit credit
method, the accrued benefit obligation is calculated as the present value of each member’s prospective benefits earned
in respect of credited service prior to the valuation date and the related service cost is calculated as the present value
of the benefits the member is assumed to earn for credited service in the ensuing year. The actuarial assumptions used
in these calculations, such as salary escalation and health care inflation, are based upon best estimates selected by
CPPI. The discount rate assumptions are based on the yield at the reporting date on high quality corporate bonds that
have maturity dates approximating the terms of CPPI’s obligations.
Actuarial gains and losses can arise from differences between actual and expected outcomes or changes in the actuarial
assumptions 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.
45 Revenue recognition
CPPI’s revenues are derived from the sale of pulp, paper and energy. Revenue is measured based on the consideration
specified in a contract with a customer, net of applicable sales taxes, returns, rebates and discounts and after
eliminating sales within the Company. Revenue for pulp and paper is recognized when control of products is transferred
to customers. Energy revenue is recognized at month-end based on energy produced and transferred to the customer
under the terms and conditions of electricity purchase and load displacement agreements.
The timing of transfer of control to customers varies depending on the individual terms of the contract of sale, but is
typically at the time pulp and paper is loaded onto a truck or rail carrier, upon vessel departure, or when pulp and
paper has been picked up by the buyer at a designated transfer point at the Company’s mill or warehouse. The amount
of revenue recognized is adjusted for commissions, volume rebates and discounts at the point in time control is
transferred.
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 consolidated balance sheet, depending upon when the benefit is expected to be received.
Foreign currency translation
Items included in the financial statements of each of the Company’s entities are measured using the currency of the
primary economic environment in which the entity operates (the “functional currency”). The consolidated financial
statements are presented in Canadian dollars, which is the Company’s functional currency.
The majority of CPPI’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 arising from translation of foreign operations 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.
46 4.
Change in Significant Accounting Policy
Effective January 1, 2019, the Company adopted IFRS 16 Leases (“IFRS 16”), which supersedes IAS 17 Leases (“IAS
17”) and related interpretations. Under IAS 17, leases were previously classified as either operating or financing for
lessees based on an assessment of whether the lease transferred significantly all of the risks and rewards incidental to
ownership of the underlying asset to the Company. As the Company’s leases were previously classified as operating,
straight-line operating lease expense was recognized over the lease term in the comparative period.
IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees, with a ROU asset representing the
Company’s right to use the underlying asset, and a lease obligation representing its obligation to make lease payments.
Amortization expense for ROU assets and interest expense for lease obligations replaces the straight-line operating
lease expense recognized under IAS 17.
The Company has applied IFRS 16 using the modified retrospective approach, under which the cumulative effect of
initial application is recognized in retained earnings at January 1, 2019. Short-term and low-value recognition
exemptions were applied, as well as certain practical expedients allowing for the use of hindsight to assess the lease
term for contracts with extension options, the exclusion of initial direct costs from measurement of the ROU asset and
the exclusion of leases with a term of less than one year remaining at the transition date.
The impact of transition is outlined under Note 7, with changes in accounting policies, effective January 1, 2019,
included in Note 3.
5.
Inventories
(millions of Canadian dollars)
Pulp
Paper
Wood chips and logs
Materials and supplies
As at
December 31,
2019
72.8
29.7
35.9
55.3
$
As at
December 31,
2018
83.2
22.2
48.3
53.4
193.7
$
207.1
$
$
The above inventory balances are stated at the lower of cost and net realizable value. For the year ended December
31, 2019, a net $10.7 million inventory write-down expense was recognized (December 31, 2018 – nil), resulting in an
inventory provision for finished pulp and raw materials of $10.7 million at December 31, 2019 (December 31, 2018 –
nil).
Inventory expensed in 2019 and 2018 includes manufacturing and product costs and amortization.
6.
Property, Plant and Equipment and Intangible Assets
$
(millions of Canadian dollars)
Cost
Balance at January 1, 2018
Additions1
Disposals
Transfers
Balance at December 31, 2018 $
Additions1
Disposals
Transfers
Balance at December 31, 2019 $
Land and
improvements
Buildings,
machinery and
equipment
Other property,
plant and
equipment2
Construction
in progress
Intangible
assets
Total property,
plant and
equipment and
intangible assets
5.4 $
-
-
-
5.4 $
-
-
-
5.4 $
1,568.4
-
(32.3)
98.2
1,634.3
-
(9.9)
38.5
1,662.9
$
$
$
39.6
0.4
(22.4)
41.0
58.6
0.5
(17.6)
21.4
62.9
$
43.7 $
113.3
-
(139.2)
17.8 $
89.1
-
(59.9)
47.0 $
$
$
11.7
18.7
(1.7)
-
28.7
5.5
-
-
34.2
$
$
$
1,668.8
132.4
(56.4)
-
1,744.8
95.1
(27.5)
-
1,812.4
47
$
(millions of Canadian dollars)
Amortization
Balance at January 1, 2018
Amortization for the year
Disposals
Balance at December 31, 2018 $
Amortization for the year
Disposals
Balance at December 31, 2019 $
Land and
improvements
Buildings,
machinery and
equipment
Other property,
plant and
equipment2
Construction
in progress
Intangible
assets
- $
-
-
- $
-
-
- $
(1,117.3) $
(56.8)
31.0
(1,143.1) $
(60.0)
9.0
(1,194.1) $
(19.5) $
(22.3)
22.4
(19.4) $
(27.4)
17.6
(29.2) $
- $
-
-
- $
-
-
- $
(5.3)
(0.5)
1.7
(4.1)
(4.2)
-
(8.3)
Carrying Amounts
At January 1, 2018
At December 31, 2018
At December 31, 2019
$
$
$
5.4 $
5.4 $
5.4 $
451.1
491.2
468.8
$
$
$
$
20.1
$
39.2
33.7 $
6.4
43.7 $
24.6
17.8 $
47.0 $ 25.9
1Net of capital expenditures financed by government grants.
2 Other property, plant and equipment is comprised of major overhauls and capitalized landfill retirement costs.
7.
Leases
Total property,
plant and
equipment and
intangible assets
$
$
$
$
$
$
(1,142.1)
(79.6)
55.1
(1,166.6)
(91.6)
26.6
(1,231.6)
526.7
578.2
580.8
The Company’s leased assets include land, buildings, vehicles, machinery and equipment. Effective January 1, 2019, the
Company adopted IFRS 16 as outlined in Note 4, recognizing $3.3 million of ROU assets and $3.4 million of lease
obligations, with the difference of $0.1 million recognized in retained earnings.
The following table reconciles the Company’s lease commitments disclosed in the consolidated financial statements as
at and for the year ended December 31, 2018, to the lease obligations recognized on initial application of IFRS 16:
(millions of Canadian dollars)
Operating lease commitments at December 31, 2018
Recognition exemption for short-term and low-value leases
Discounted using the incremental borrowing rate at January 1, 2019
Lease remeasurements and other transitional adjustments
Lease obligations recognized at January 1, 2019
$
$
1.7
(0.1)
(0.2)
2.0
3.4
Lease obligations were measured at the present value of remaining lease payments at the transition date, discounted
at the Company’s incremental borrowing rate. The weighted average incremental borrowing rate applied at January 1,
2019 was 4.2%.
(a) Right-of-Use Assets
(millions of Canadian dollars)
Cost
Balance at January 1, 2019
Additions
Balance at December 31, 2019
Amortization
Balance at January 1, 2019
Amortization for the year
Balance at December 31, 2019
Carrying Amounts
At January 1, 2019
At December 31, 2019
Land
Machinery and
equipment
Other facilities
and equipment
0.1 $
-
0.1 $
-
-
-
$
$
0.1 $
0.1 $
5.5 $
0.3
5.8 $
(2.7) $
(0.9)
(3.6) $
2.8 $
2.2 $
1.4
0.2
1.6
$
$
(1.0) $
(0.4)
(1.4) $
0.4
0.2
$
$
Total
7.0
0.5
7.5
(3.7)
(1.3)
(5.0)
3.3
2.5
$
$
$
$
$
$
48
(b) Lease Obligations
Contractual undiscounted cash flows associated with the Company’s lease obligations are as follows:
(millions of Canadian dollars)
Within one year
Between one and five years
Beyond five years
Total undiscounted lease obligations
Discounted lease obligations recognized on the Company’s consolidated balance sheet are as follows:
(millions of Canadian dollars)
Current
Non-current
Total discounted lease obligations
As at
December 31,
2019
1.1
$
2.0
0.2
3.3
1.0
1.9
2.9
$
$
$
Interest expense on lease obligations for 2019 was $0.1 million and is included in finance expense, net.
Operating lease expenses relating to short-term and low-value leases not included in the measurement of lease
obligations for 2019 was $0.6 million.
Total cash outflows for leases in 2019 were $1.7 million, including $0.6 million for short-term and low-value leases.
8.
Accounts Payable and Accrued Liabilities
(millions of Canadian dollars)
Trade payables and accrued liabilities
Accrued payroll and related liabilities
9. Operating Loan
(millions of Canadian dollars)
Operating loan facility
Letters of credit
Operating loan facility drawn
Total available operating loan facility
As at
December 31,
2019
108.4
As at
December 31,
2018
137.1
$
33.8
142.2
$
44.9
182.0
As at
December 31,
2019
110.0
As at
December 31,
2018
110.0
$
(13.2)
(14.0)
82.8
$
(11.1)
-
98.9
$
$
$
$
On September 30, 2019, the maturity date of the Company’s operating loan facility was extended from April 6, 2022
to April 6, 2023.
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. As at December 31, 2019, the Company is fully in compliance with all covenants relating to its operating
loan facility.
10. Long-Term Debt
On September 30, 2019, the Company entered into a new non-revolving term loan for $50.0 million. The loan is
repayable on September 30, 2022, with interest based on the lenders’ Canadian prime rate, bankers’ acceptances, US
dollar base rate or US dollar LIBOR rate, plus a margin. The term loan covenants are consistent with the Company’s
existing operating loan facility.
As at December 31, 2019, the Company was fully in compliance with all covenants relating to its long-term debt.
49
Fair value of total long-term debt
At December 31, 2019, the fair value of the Company’s long-term debt approximates its amortized cost of $50.0 million
(December 31, 2018 - nil).
11. 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 2019 were $15.9 million (December 31, 2018 - $17.0 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, 2019, CPPI has one registered defined benefit pension plan for which an actuarial valuation is
performed at least every three years. The largest pension plan underwent an actuarial valuation for funding purposes
as of December 31, 2017, which was completed in 2018. The next actuarial valuation for funding purposes is currently
scheduled for December 31, 2020, to be completed in 2021. 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 an actuarial valuation as of December 31, 2017, which was completed in 2018.
Information about CPPI’s defined benefit plans, in aggregate, is as follows:
Fair market value of plan assets
2019
(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
$
Other Benefit
Plans
2018
$
Defined Benefit
Pension Plans
130.1
$
4.4
(8.1)
5.0
0.1
(4.7)
(0.1)
Other Benefit
Plans
-
-
-
1.6
-
(1.6)
-
-
-
-
1.7
-
(1.7)
-
126.7 $
4.6
12.8
3.7
0.1
(4.5)
(0.1)
End of year
$
143.3 $
-
$
126.7
$
-
Plan assets consist of the following:
Asset category
Equity securities
Debt securities
Annuities
Cash and cash equivalents
As at
December 31,
2019
As at
December 31,
2018
Percentage of Plan Assets
16%
28%
56%
0%
100%
14%
26%
60%
0%
100%
50
Accrued benefit obligations
2019
2018
(millions of Canadian dollars)
Beginning of year
Current service cost
Interest cost
Employee contributions
Benefit payments
Actuarial loss (gain)
Other
End of year
Defined Benefit
Pension Plans
$
Other Benefit
Plans
49.2
0.8
1.5
-
(1.7)
(14.3)
-
155.7 $
2.6
5.5
0.1
(4.5)
14.9
-
Defined Benefit
Pension Plans
$
Other Benefit
Plans
54.9
1.3
1.8
-
(1.6)
(7.0)
(0.2)
158.8 $
2.8
5.3
0.1
(4.7)
(6.6)
-
$
174.3 $
35.5
$
155.7 $
49.2
Of the defined benefit pension plan obligation of $174.3 million (December 31, 2018 - $155.7 million), $157.5 million
(December 31, 2018 - $140.2 million) relates to plans that are wholly or partly funded and $16.8 million (December
31, 2018 - $15.5 million) relates to plans that are wholly unfunded, with letters of credit securing $6.0 million (December
31, 2018 - $4.4 million) of the unfunded liability.
The total obligation for the non-pension post-retirement benefit plans of $35.5 million (December 31, 2018 - $49.2
million) is unfunded.
Annuity contracts
In 2018, the Company purchased $8.9 million of buy-in annuities through its defined benefit pension plans, increasing
total annuities purchased to $86.0 million at December 31, 2018. Transaction costs of $0.7 million related to the
purchases were recognized in other comprehensive income in 2018, principally reflecting the difference in the annuity
rate compared to the discount rate used to value the obligations on a going concern basis.
In 2019, no buy-in annuities were purchased by the Company. 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.
Medical Services Plan changes
On May 15, 2019, Bill 20 – Medicare Protection Amendment Act, 2019 (“Bill 20”), received Royal Assent. Bill 20
eliminated Medical Services Plan (“MSP”) premiums effective January 1, 2020. This change was recognized in actuarial
financial assumptions in the second quarter of 2019 and resulted in an $18.9 million pre-tax reduction of the non-
pension post-retirement benefit obligation and a corresponding gain recognized through other comprehensive income.
The 50% reduction in MSP in the second quarter of 2019, when combined with the initial 50% reduction recognized in
the fourth quarter of 2017, resulted in a gain of $56.7 million, or $0.87 per common share ($41.8 million after tax, or
$0.64 per common share), reflected as a reduction in the Company’s non-pension post-retirement benefit obligation.
Reconciliation of funded status of defined benefit plans to amounts recorded in the financial
statements
December 31, 2019
December 31, 2018
(millions of Canadian dollars)
Defined Benefit
Pension Plans
Other Benefit
Plans
-
Defined Benefit
Pension Plans
143.3 $
$
126.7 $
Other Benefit
Plans
-
Fair market value of plan assets
$
Accrued benefit obligations
Funded status of plans – deficit
Other pension plans
(174.3)
(31.0)
(2.1)
(35.5)
(35.5)
-
(155.7)
(29.0)
(1.8)
Total accrued benefit liability, net
$
(33.1) $
(35.5) $
(30.8) $
(49.2)
(49.2)
-
(49.2)
51
Components of pension cost
The following table shows the before tax impact on net income (loss) and other comprehensive income of the
Company’s defined benefit pension and other non-pension post-retirement benefit plans:
(millions of Canadian dollars)
Recognized in net income (loss)
Current service cost
Administrative cost
Interest cost
Other
Total expense included in net income (loss)
Recognized in other comprehensive income
Actuarial loss (gain) – experience
Actuarial loss (gain) – financial assumptions
Actuarial gain – elimination of MSP
Return on plan assets less (greater) than discount rate
2019
2018
Defined Benefit
Pension Plans
Other Benefit
Plans
Defined Benefit
Pension Plans
Other Benefit
Plans
$
$
$
$
2.6
0.1
0.9
-
3.6
$
$
2.1
12.8
-
(12.8)
$
$
$
0.8
-
1.5
-
2.3
(0.1)
4.7
(18.9)
-
-
2.8 $
0.1
0.9
-
3.8 $
(2.2) $
(4.4)
-
8.1
1.5 $
1.3
-
1.8
(0.2)
2.9
(4.1)
(2.9)
-
-
(7.0)
Total loss (gain) in other comprehensive income
$
2.1
$
(14.3)
$
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, 2019
December 31, 2018
Defined Benefit
Pension Plans
Other Benefit
Plans
Defined Benefit
Pension Plans
Other Benefit
Plans
3.0%
3.0%
n/a
n/a
n/a
3.0%
n/a
5.5%
4.5%
2022
3.6%
3.0%
n/a
n/a
n/a
3.6%
n/a
5.5%
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, 2019 and December 31, 2018 is between 21.1 years and 24.2 years. As at December 31, 2019, the
weighted average duration of the defined benefit plan obligation, which reflects the average age of the plan members,
is 12.8 years (December 31, 2018 - 12.0 years). The weighted average duration of the other benefit plans is 13.7 years
(December 31, 2018 - 13.3 years).
Sensitivity analysis
Assumed discount rates and medical cost trend rates have a significant effect on the accrued retirement benefit
obligation and related plan assets. A one percentage point change in these assumptions would have the following
effects on the accrued retirement benefit obligation, including the hedging impact of plan annuity assets, for 2019:
(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
$
$
$
(11.9)
(4.3)
1.7
$
$
$
14.8
5.3
(1.8)
When taking into account the impact of hedging, 46% (December 31, 2018 - 49%) 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 23% (December 31, 2018 - 20%) is partially hedged through
the plan’s investment in debt securities.
52
As at December 31, 2019, contribution payments of $4.5 million are estimated to be made to the Company’s defined
benefit pension plans in 2020 based on the last actuarial valuation for funding purposes.
Defined contribution and other plans
The total expense recognized in 2019 for CPPI’s defined contribution plans was $2.9 million (December 31, 2018 - $2.8
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 $7.6 million in 2019 (December 31, 2018 - $7.6 million).
12. Asset Retirement Obligations
The following table provides a reconciliation of the asset retirement obligations as at December 31, 2019 and December
31, 2018:
(millions of Canadian dollars)
Asset retirement obligations at beginning of year
Accretion expense
Changes in estimates
Asset retirement obligation at end of year
2019
2018
$
$
6.0
0.1
0.5
6.6
$
$
5.5
0.1
0.4
6.0
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
1 to 32 years and have been discounted at risk-free rates ranging from 1.7% to 1.8% (December 31, 2018 - 1.9% to
2.2%).
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.
13. 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 year3
3Based on trade date.
Number of
Shares
65,250,759
(17,200)
2019
$
Amount
480.9
(0.1)
Number of
Shares
65,251,259
(500)
2018
$
65,233,559
$
480.8
65,250,759
$
Amount
480.9
-
480.9
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 (loss) per share is calculated by dividing the net income (loss) 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 2019 is 65,243,435 (December 31, 2018 - 65,250,763), and reflects common shares
purchased under the Company’s normal course issuer bid.
53
Normal course issuer bid
On March 4, 2019, the Company renewed its normal course issuer bid whereby it can purchase for cancellation up to
3,262,537 common shares or approximately 5% of its issued and outstanding common shares as of March 1, 2019.
The renewed normal course issuer bid is set to expire on March 6, 2020. The Company does not currently intend to
renew the normal course issuer bid following its expiry.
In 2019, CPPI purchased 17,200 common shares at an average price of $10.67 per common share.
As at December 31, 2019 and February 20, 2020 there were 65,233,559 common shares of the Company outstanding,
and Canfor’s ownership interest in CPPI was 54.8% (December 31, 2018 – 54.8%).
14. Finance Expense, Net
(millions of Canadian dollars)
Interest expense on borrowings
Interest expense on retirement benefit obligations, net
Interest income
Other finance expenses
Finance expense, net
15. Income Taxes
The components of income tax recovery (expense) are as follows:
(millions of Canadian dollars)
Current
Deferred
Income tax recovery (expense)
2019
2018
$
$
(3.9)
(2.4)
0.1
(0.4)
(6.6)
$
$
(3.3)
(2.7)
1.9
(0.1)
(4.2)
2019
2018
$
$
18.7
(7.6)
11.1
$
$
(69.0)
2.3
(66.7)
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 recovery (expense) at statutory rate of 27.0% (2018 – 27.0%)
Add (deduct):
Entities with different income tax rates and other tax adjustments
Permanent difference from capital gains and other non-deductible items
Income tax recovery (expense)
2019
2018
$
$
11.2
-
(0.1)
11.1
$
$
(67.8)
0.2
0.9
(66.7)
In addition, a tax expense of $3.3 million in relation to actuarial gains on the defined benefit plans (December 31, 2018
- expense of $1.5 million) was recorded in other comprehensive income for the year ended December 31, 2019.
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
As at
December 31,
2019
As at
December 31,
2018
$
$
$
18.0
4.3
22.3
(99.2)
(0.8)
(100.0)
$
(77.7)
$
$
$
$
$
$
21.2
3.6
24.8
(91.5)
(0.1)
(91.6)
(66.8)
54
16. Net Change in Non-Cash Working Capital
(millions of Canadian dollars)
Accounts receivable
Inventories
Prepaid expenses and other
Accounts payable and accrued liabilities
Net change in non-cash working capital
17. Related Party Transactions
$
$
2019
28.1
13.4
(2.9)
(30.9)
$
7.7
$
2018
(2.4)
(41.6)
(2.9)
21.3
(25.6)
CPPI undertakes transactions with various related entities. These transactions are in the normal course of business,
except where noted otherwise.
In 2019, the Company depended on Canfor to provide approximately 70% (December 31, 2018 - 66%) 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. In 2018, the Company and Canfor
entered into a new pricing agreement, which included a market-based chip pricing formula. The new pricing agreement
was effective July 1, 2018, for a three-year term, to June 30, 2021.
The Company purchased wood chips, logs and hog fuel from Canfor sawmills in the amount of $234.8 million in 2019
(December 31, 2018 - $252.8 million).
Canfor provides certain business and administrative services to CPPI under a services agreement. The total amount
charged for the services provided by Canfor in 2019 was $16.3 million (December 31, 2018 - $14.8 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 2019 was $3.5 million (December 31, 2018 - $4.0 million). These
amounts are included as cost recoveries in manufacturing and product costs and selling and administration costs. At
December 31, 2019, an outstanding balance of $19.3 million (December 31, 2018 - $31.6 million) was due to Canfor.
The Jim Pattison Group is Canfor’s largest shareholder with an ownership interest of 50.9% at December 31, 2019
(December 31, 2018 – 50.9%). During 2019, CPPI sold paper to subsidiaries owned by The Jim Pattison Group totalling
$3.7 million (December 31, 2018 - $3.0 million). CPPI also made purchases from subsidiaries owned by The Jim Pattison
Group totalling $0.7 million (December 31, 2018 - $0.7 million). A nominal amount related to these sales or purchases
were outstanding as at December 31, 2019 and December 31, 2018.
During 2019 and 2018, Canfor 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 11, Employee Future
Benefits, and Note 22, 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
2019
1.3
-
1.3
$
$
$
$
2018
3.1
0.1
3.2
Short-term benefits for members of the Board of Directors include an annual retainer as well as attendance fees.
18.
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 paper.
55 Sales between the pulp and paper segments are accounted for at prices that approximate fair value. These include
sales of slush pulp from the pulp segment to the paper segment.
Information regarding the operations of each reportable segment is included in the following table. The accounting
policies of the reportable segments are described in Note 3.
The Company’s interest-bearing liabilities are not considered to be segment liabilities, but rather, are managed centrally
by the treasury function. Other liabilities are not split by segment for the purposes of allocating resources and assessing
performance.
(millions of Canadian dollars)
Year ended December 31, 2019
Sales from contracts with
customers
Sales to other segments
Operating income (loss)
Amortization
Capital expenditures4
Identifiable assets
Year ended December 31, 2018
Sales from contracts with customers
Sales to other segments
Operating income (loss)
Amortization
Capital expenditures4
Identifiable assets
Pulp
Paper
Unallocated
Elimination
Adjustment
Total
$
918.9 $
88.9
(43.9)
89.3
96.4
809.1
$
1,192.9
119.7
248.9
75.3
113.3
841.7
$
$
$
168.4
-
22.9
3.5
5.1
66.3
180.9
-
11.0
4.2
3.7
66.1
$
$
0.6
-
(10.0)
0.1
1.5
45.4
0.5
-
(13.3)
0.1
3.5
24.2
-
(88.9)
-
-
-
-
-
(119.7)
-
-
-
-
$
1,087.9
-
(31.0)
92.9
103.0
920.8
$
1,374.3
-
246.6
79.6
120.5
932.0
4 Capital expenditures represent cash paid for capital assets during the periods and include capital expenditures that were partially financed by government grants.
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
$
2019
2018
$
82.5
585.9
317.6
46.0
55.9
81.0
840.9
323.7
60.3
68.4
$
1,087.9
$
1,374.3
19. Commitments and Contingencies
At December 31, 2019, CPPI has contractual commitments for $63.9 million (December 31, 2018 - $11.8 million). The
majority of these commitments are expected to be settled between one and five years. In addition, CPPI has committed
to leases of property, plant and equipment as outlined under Note 7.
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.
In circumstances where the Company is not able to determine the outcome of a legal action and claim, no amount is
recognized in the consolidated financial statements, with an amount accrued only when a reliable estimate of the
obligation can be made. 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.
56
Energy Agreements
The Company has energy purchase agreements with a BC energy company (the “Energy Agreements”) for all three of
the Company’s kraft mills. Two of these agreements are for the sale of incremental electrical energy and the third
agreement is for load displacement. One of these Energy Agreements included incentive funding from a BC energy
company to support capital investments for the new turbo generator. All agreements include performance guarantees
to ensure minimum contractual 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, 2019 the Company had posted $7.2 million of standby letters of credit (December 31,
2018 - $6.7 million) under these agreements, and had no repayment obligations under the terms of any of these
agreements.
20.
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.
CPPI’s internal Risk Management Committee manages risk in accordance with a Board approved Price Risk Management
Controls Policy. This policy provides the framework for risk management related to commodity price, foreign exchange,
interest rate and counterparty credit risk of the Company.
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, trade and other accounts
receivable. Contract assets are also subject to credit risk. 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, 2019 is $6.0 million
(December 31, 2018 - $6.9 million).
CPPI utilizes credit insurance to mitigate the risk associated with some of its trade accounts receivables. As at December
31, 2019, approximately 77% (December 31, 2018 - 78%) of the outstanding trade accounts receivables are covered
by credit insurance. In addition, CPPI requires letters of credit on certain export trade accounts 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 accounts receivable balance
at December 31, 2019 is $81.5 million, before a loss allowance of $1.0 million (December 31, 2018 - $108.6 million
and $1.0 million, respectively). At December 31, 2019, approximately 99% (December 31, 2018 - 98%) of the trade
accounts receivable balance are within CPPI’s established credit terms.
Liquidity risk:
Liquidity risk is the risk that CPPI will be unable to meet its financial obligations as they come due. The Company
manages liquidity risk through regular cash flow forecasting in conjunction with an adequate operating loan facility and
long-term debt.
At December 31, 2019, CPPI had $14.0 million drawn on its operating loan facility (December 31, 2018 – nil), accounts
payable and accrued liabilities of $142.2 million (December 31, 2018 - $182.0 million), and long-term debt of $50.0
million (December 31, 2018 – nil).
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.
57 (i) Interest rate risk:
CPPI is exposed to interest rate risk through its current financial assets, operating loan facility and long-term
debt which bear variable interest rates. CPPI may use interest rate swaps to reduce its exposure to financial
obligations bearing variable interest rates.
(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 $0.9 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.
(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.
(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.
At December 31, 2019 and December 31, 2018, the Company had no fixed interest rate swaps, foreign exchange
contracts, pulp futures, energy fixed swaps or option contracts 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.
CPPI’s capital is comprised of net debt and shareholders’ equity:
(millions of Canadian dollars)
Total debt (including operating loan)
Less: Cash and cash equivalents
Net debt (cash)
Total equity
As at
December 31,
2019
64.0
(6.0)
58.0
558.3
$
$
616.3
$
$
$
$
As at
December 31,
2018
-
(6.9)
(6.9)
596.6
589.7
The Company manages its capital structure through rigorous planning, budgeting and forecasting processes, and
ongoing management of operations, investments and capital expenditures. In 2019, to meet CPPI’s operating, growth
and return on invested capital objectives, the Company’s management of capital was comprised primarily of 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.
58 21.
Financial Instruments
CPPI’s cash and cash equivalents, trade and other accounts receivables, loans and advances, operating loan, long-term
debt and accounts payable and accrued liabilities are classified as measured at amortized cost in accordance with IFRS
9, Financial Instruments. The carrying amounts of these instruments, excluding long-term debt, approximate fair value
at December 31, 2019.
When applicable, derivative instruments are classified as measured at FVTPL. 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, 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, 2019 and December 31,
2018, the Company had no derivative financial instruments outstanding.
22.
Licella Pulp Joint Venture
In May 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.
Under the terms of the joint venture agreement:
•
•
CPPI agreed to bring its enterprise and knowledge surrounding kraft pulping processes, while Licella agreed
to contribute its next generation bio-technology;
CPPI’s ownership interest in the joint venture is 10%, with the following rights to increase its interest:
o
o
After $20.0 million of initial contributions and the successful conclusion of a pre-feasibility study,
culminating in the decision to build a first commercial bio-crude plant at the Company’s
Intercontinental NBSK pulp mill (“First Plant”), CPPI’s interest increases to 20%;
Upon successful commissioning of the First Plant, CPPI’s interest in the joint venture increases to
50%.
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. Since
forming the joint venture in May 2016, to December 31, 2019, CPPI has contributed $6.9 million (net of government
funding) to the joint venture which has been recognized as a component of manufacturing and product costs.
23.
Special Dividend
On November 13, 2018, the Company paid a special dividend of $146.8 million ($2.25 per share) to the shareholders
of the Company. The special dividend was paid as a result of strong cash generated by the business in 2018.
24.
Subsequent Event
On February 20, 2020, the Board of Directors declared a quarterly dividend of $0.0625 per share, payable on March
11, 2020, to the shareholders of record on March 4, 2020.
59 ADDI TION AL INF ORMATION
60 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, 2019 are as below. For more information visit www.canfor.com.
Stan Bracken-Horrocks, FCPA, FCA (1)(3)(5)
Corporate Director
Kelowna, British Columbia, Canada
William Stinson(1)(2)(4)(5)
Chairman and Chief Executive Officer
Westshore Terminals Investment Corporation
Vancouver, British Columbia, Canada
John Baird (1)(3)(4)(5)
Senior Advisor
Bennett Jones LLP
Toronto, Ontario, Canada
Conrad Pinette
Chairman
Canfor Pulp Products Inc.
Vancouver, British Columbia, Canada
Donald Kayne
Chief Executive Officer
Canfor Pulp Products Inc.
Tsawwassen, British Columbia, Canada
OFFICERS
The name and municipality, province and country of residence of the executive officers of the Company and the offices held by
them as at December 31, 2019 are as below. For more information visit www.canfor.com.
David Calabrigo, Q.C.
Senior Vice President, Corporate Development,
Legal Affairs and Corporate Secretary
Vancouver, British Columbia, Canada
Alan Nicholl
Chief Financial Officer and Executive Vice
President, Finance and Canfor Pulp Operations
West Vancouver, British Columbia, Canada
Conrad Pinette
Chairman
Vancouver, British Columbia, Canada
Donald Kayne
Chief Executive Officer
Tsawwassen, British Columbia, Canada
Brian Yuen
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 .
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.
61
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 pulp.
CORPORATE AND SHAREHOLDER INFORMATION
Annual General Meeting
The Annual General Meeting of Canfor Pulp Products Inc. will be held at Canfor Head Office at #100 – 1700 West 75th Avenue
Vancouver, BC, V6P 6G2, on Thursday, April 23, 2020 at 12:30 p.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.
Media Contact
Michelle Ward
Director, Corporate Communications
Canfor Corporation
T: (604) 661-5225
E: communications@canfor.com
Canfor Pulp Products Inc.
Head Office
#100 – 1700 West 75th Avenue
Vancouver, BC, V6P 6G2
T: (604) 661-5241
E: info@canfor.com
www.canfor.com
Investor Contact
Patrick Elliott
Vice President, Corporate
Finance and Strategy
Canfor Corporation
T: (604) 661-5441
E: patrick.elliott@canfor.com
Canfor Pulp Innovation
138 – 8610 Glenlyon Parkway
Burnaby, BC, V5J 0B6
T: (604) 228-6710
62
CANFOR.COM