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Press release from Marketwire

Canfor Pulp Products Inc. Announces First Quarter 2011 Results and Quarterly Dividend

Monday, May 02, 2011

Canfor Pulp Products Inc. Announces First Quarter 2011 Results and Quarterly Dividend20:42 EDT Monday, May 02, 2011VANCOUVER, BRITISH COLUMBIA--(Marketwire - May 2, 2011) - Canfor Pulp Products Inc. (CPPI) (TSX:CFX) today announced its first quarter 2011 results as well as the results of Canfor Pulp Limited Partnership (the Partnership) in which CPPI has a 49.8% ownership.The Partnership reported sales of $252.3 million and net income of $50.7 million, or $0.71 per unit, for the quarter ended March 31, 2011. The Partnership generated EBITDA of $66.7 million in the quarter. Net income of the Partnership improved by 7% when compared to the prior quarter as a result of lower unit manufacturing costs, offset by lower shipment volumes and the impact of a stronger Canadian dollar. There were no significant maintenance outages during the quarter.CPPI reported net income of $40.6 million, representing CPPI's share of the Partnership's income less a current tax provision of $4.9 million. Also included in CPPI net income is a deferred tax recovery of $21.3 million resulting from a change in the statutory income tax rate on conversion of Canfor Pulp Income Fund to a taxable Canadian corporation effective January 1, 2011.In the quarter, the Partnership generated distributable cash of $54.6 million, or $0.77 per unit. Based on strong first quarter results of the Partnership and a positive pulp market outlook for the balance of the year, CPPI announced its first quarterly dividend of $0.40 per share to be paid on May 19, 2011 to shareholders of record at the close of business on May 12, 2011.Global softwood demand remained very strong in the first quarter of 2011 with record shipments in March 2011 led by demand in China. Global softwood producer inventories remained tight at 24 days of supply as the strong global shipments offset seasonally strong supply. As a result of continued tight market conditions, producers were successful at implementing NBSK pulp list price increases of US$30 per tonne for North America and Europe during the first quarter of 2011 to US$990 and US$980 respectively. The Partnership's NBSK pulp list price for China increased from US$840 in December 2010 to US$900 in March 2011, driven by strong demand from that region.The global softwood pulp market is expected to remain tight through the second quarter of 2011. Supply is expected to be curtailed due to annual maintenance downtime coupled with extended outages in Canada to implement several large capital projects funded under the Canadian Federal Government Green Transformation Program. For the Partnership, scheduled maintenance outages at the Prince George and Intercontinental Pulp Mills were successfully completed early in the second quarter of 2011 with approximately 12,000 tonnes of reduced production.Additional InformationA conference call to discuss the first quarter 2011 financial and operating results will be held on Wednesday, May 4, 2011 at 8:00 a.m. Pacific time.To participate in the call, please dial 416-340-8530 or Toll-Free 1-877-240-9772. For instant replay access, please dial 905-694-9451 or Toll-Free 1-800-408-3053 and enter participant pass code 1356351. The conference call will be webcast live and will be available at www.canforpulp.com/investors/webcasts.asp.This news release is available on the Partnership's website at www.canforpulp.com.About Canfor Pulp Products Inc.Canfor Pulp Products Inc. (CPPI) is the successor to the Canfor Pulp Income Fund (the Fund) following the completion of the conversion of the Fund from an income trust structure to a corporate structure by court approved plan of arrangement under the Business Corporations Act (British Columbia) (the BCBCA) on January 1, 2011 (the Conversion). The Conversion involved the exchange, on a one-for-one basis, of all outstanding Fund Units for common shares of CPPI (CPPI Shares). Upon implementation of the Conversion, on January 1, 2011, the unitholders of the Fund became the sole shareholders of CPPI which became sole owner of all of the outstanding Fund Units.Immediately following the conversion, the Fund was wound up, CPPI received all of the assets and assumed all of the liabilities of the Fund and CPPI became the direct holder of the 49.8% interest in the Partnership previously held by the Fund.Forward-Looking StatementsCertain 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", "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. In some instances, material assumptions are disclosed elsewhere in this press release in respect of forward-looking statements. Other risks and uncertainties are detailed from time to time in reports filed by CPPI with the securities regulatory authorities in all of the provinces and territories of Canada to which recipients of this press release are referred for additional information concerning CPPI and the Partnership, their prospects and uncertainties relating to CPPI and the Partnership. Although we believe that the expectations reflected by the forward-looking statements presented in this press release are reasonable, these forward-looking statements are based on management's current expectations and beliefs and actual events or results may differ materially. New risk factors may arise from time to time and it is not possible for management to predict all of those risk factors or the extent to which any factor or combination of factors may cause actual events and results, performance and achievements of CPPI and the Partnership to be materially different from those contained in forward-looking statements. The forward-looking statements speak only as of the date on which such statement is made, are based on current information and expectations and CPPI and the Partnership assume no obligation to update such information to reflect later events or developments, except as required by law.Forward-looking statements in this press release include statements made under:-- "Critical Accounting Estimates";-- "Changes in Accounting Policies";-- "Outlook - Pulp";-- "Outlook - Kraft Paper";-- "Financial Requirements and Liquidity";-- "Critical Accounting Estimates";-- "Changes in Accounting Policies";-- "Distributable Cash and Cash Distributions".Material risk factors that could cause actual results to differ materially from the forward-looking statements contained in this press release include: general economic, market and business conditions; product selling prices; raw material and operating costs; exchange rates; changes in law and public policy; and opportunities available to or pursued by CPPI and the Partnership. Additional information concerning these and other factors can be found in CPPI's Annual Information Form dated February 11, 2011, which is available on www.sedar.com.Canfor Pulp Products Inc. and Canfor Pulp Limited PartnershipFirst quarter 2011The information in this report is as at May 2, 2011.CANFOR PULP PRODUCTS INC.CPPI is the successor to the Fund following the completion of the conversion of the Fund from an income trust structure to a corporate structure by court approved plan of arrangement under the Business Corporations Act (British Columbia) (the "BCBCA") on January 1, 2011 (the "Conversion"). The Conversion involved the exchange, on a one-for-one basis, of all outstanding Fund Units for common shares of CPPI ("CPPI Shares"). Upon implementation of the Conversion, on January 1, 2011, the unitholders of the Fund became the sole shareholders of CPPI which became sole owner of all of the outstanding Fund Units.CPPI was incorporated on March 12, 2010 under the BCBCA and did not carry on any active business prior to the Conversion, other than executing the arrangement agreement pursuant to which the Conversion was implemented and carrying-out certain steps in connection with the implementation of the Conversion and the subsequent winding-up of the Fund and Canfor Pulp Trust (the Trust). CPPI became the direct holder of the 49.8% interest in the Partnership and the General Partner previously held by the Fund (indirectly through the Trust). The general partner of the Partnership is Canfor Pulp Holding Inc. (the General Partner) and each limited partner holds an ownership interest in the General Partner equal to its proportionate interest in the Partnership.At May 2, 2011, there were a total of 35,493,307 CPPI shares issued and outstanding, and CPPI held a total of 35,493,542 units of the Partnership, representing 49.8% of the Partnership. Canadian Forest Products Ltd. (Canfor) held 35,776,483 Class B Exchangeable Limited Partnership Units, representing 50.2% of the Partnership. The Class B Exchangeable Limited Partnership Units are exchangeable for an equivalent number of CPPI shares pursuant to the terms of an amended exchange agreement (Exchange Agreement) dated January 1, 2011 among Canfor, CPPI, the Partnership and the General Partner. The Exchange Agreement contains, among other things, the procedure through which the Class B Exchangeable Limited Partnership Units may be exchanged for CPPI shares.The shareholders of CPPI will participate pro-rata in any dividends from CPPI. It is the current intention of CPPI to designate any dividends paid on CPPI shares to be eligible dividends to the extent permitted by the Canadian Income Tax Act such that individuals would benefit from the enhanced gross-up and dividend tax credit mechanism under the Canadian Income Tax Act.SELECTED QUARTERLY FINANCIAL INFORMATIONThe information in the table below for 2010 represents the results under International Financial Reporting Standards (IFRS) for the Fund prior to conversion to a corporation. Equity income in Canfor Pulp Limited Partnership represents CPPI's share of the Partnership's net income. In accordance with International Accounting Standard (IAS) 32 the Fund units were classified as a financial liability and measured at amortized cost with changes recorded through net income. In addition the Fund's distributions were classified as a financing expense in the statement of comprehensive income (loss). Net income (loss) was also impacted by deferred income tax expense (recovery) which is primarily influenced by changes in substantively enacted tax rates and the difference between the tax basis of CPPI's pro-rata ownership of the Partnership's assets and liabilities and the respective amounts reported in the financial statements.--------------------------------------------------------------------------(thousands of dollars, CPPI The Fund except per unit amounts, Q1 Q4 Q3 Q2 unaudited) 2011 2010 2010 2010 --------------------------------------------------------------------------Equity income in Canfor Pulp Limited Partnership 25,227 23,639 27,374 21,681Net income (loss) 40,625 (11,335) 3,239 (71,803)Net income (loss) per share $1.14 ($0.32) ($0.09) ($2.02)Distributions earned from the Partnership 27,685 37,268 24,491 18,457Dividends/distributions declared per share/ unit - $1.05 $0.69 $0.52Partnership distributable cash per unit(1) $0.77 $0.68 $0.78 $0.88----------------------------------------------------------------------------------------------------------------------------------------------------(thousands of dollars, Q4 Q3 Q2 except per unit amounts, Q1 2009 2009 2009 unaudited) 2010 (2) (2) (2)--------------------------------------------------------------------------Equity income in Canfor Pulp Limited Partnership 16,473 7,562 9,098 724Net income (loss) (118,842) 6,903 8,497 4,406Net income (loss) per share ($3.34) $0.20 $0.24 $0.12Distributions earned from the Partnership 11,357 4,969 1,065 1,065Dividends/distributions declared per share/unit $0.32 $0.14 $0.03 $0.03Partnership distributable cash per unit(1) $0.57 $0.31 $0.16 $0.02--------------------------------------------------------------------------Note: (1) Represents the Partnership's distributable cash on which CPPI is dependent to make its own dividends.For further details on the Partnership's distributable cash see the disclosure. (2) Presented under previous Canadian GAAP. See CPPI's disclosure.OPERATING RESULTS AND LIQUIDITYFor the quarter ended March 31, 2011, CPPI had net income of $40.6 million or $1.14 per share. The net income was CPPI's share of the Partnership's net income for the quarter and also includes an income tax recovery of $16.4 million. The income tax recovery is comprised of deferred tax recovery of $21.3 million which results primarily from a change in the statutory income tax rate as a result of the conversion of the Fund to a taxable Canadian corporation effective January 1, 2011, partially offset by the current tax provision of $4.9 million. CPPI's equity income in the Partnership increased $1.6 million when compared to the prior quarter. The increase was primarily attributable to CPPI's share of higher operating earnings, partially offset by lower income from non-operating items of the Partnership. CPPI's share of operating earnings of the Partnership increased $1.9 million as a result of lower unit manufacturing costs partially offset by lower realized prices in Canadian dollar terms and lower sales volumes. CPPI's share of non-operating items of the Partnership was $0.4 million and was primarily the result of the foreign exchange gain on translation of US dollar denominated long-term debt and a net gain on derivative financial instruments, partially offset by a foreign exchange loss on working capital and interest expense. In addition, CPPI incurred expenses in relation to the conversion of the Fund into a corporation.Distributions declared by the Partnership and accruing to CPPI were $27.7 million of which $9.2 million was receivable at March 31, 2011. Cash distributions received from the Partnership are the only source of liquidity for CPPI. For further information refer to the Partnership's discussion of operating results and liquidity in this press release.CPPI DIVIDENDSCPPI is entirely dependent on distributions from the Partnership to make dividend payments to its shareholders. Distributions payable by the Partnership to CPPI and dividends payable by CPPI to its shareholders are recorded when declared. On May 2, 2011, a dividend of $0.40 per share was declared, to be paid on May 19, 2011 to shareholders of record on May 12, 2011.Monthly cash distributions from the Partnership were not directly equal to CPPI's pro-rata share of the Partnership's income under the equity method. This was primarily due to capital expenditures, foreign exchange gains or losses on translation of US dollar denominated debt, changes in value of derivative instruments, amortization, and other non-cash expenses of the Partnership.RISKS AND UNCERTAINTIESCPPI is subject to certain risks and uncertainties related to the nature of its investment in the Partnership, as well as all of the risks and uncertainties related to the business of the Partnership. A comprehensive discussion of these risks and uncertainties is contained in CPPI's Annual Information Form dated February 11, 2011, which is available on www.sedar.com and www.canforpulp.com.CPPI SHARESAt May 2, 2011, there were a total of 35,493,307 CPPI shares outstanding.RELATED PARTY TRANSACTIONSAll accounting, treasury, legal and administrative functions for CPPI are performed on its behalf by the Partnership pursuant to a support agreement. The value of these services during the first quarter of 2011 was $1.0 million and included a one time charge of $0.8 million for costs related to conversion to a corporation on January 1, 2011. These services were included as an administrative expense of CPPI with the balance outstanding as an accounts payable to the Partnership at March 31, 2011.Distributions earned from the Partnership for the three months ended March 31, 2011 were $27.7 million of which $18.5 million was received, with the balance of $9.2 million receivable on March 31, 2011.CRITICAL ACCOUNTING ESTIMATESThe preparation of financial statements in conformity with 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. Significant areas requiring the use of management's estimates are the determination of deferred income taxes, and assessing whether there has been an other than temporary decline in the value of the investment in the Partnership. CPPI accounted for its investment in the Partnership using the equity method. CPPI analyzed the carrying value of its investment in the Partnership by considering the underlying value of the Partnership's business. This assessment included various long-term assumptions related to the Partnership's operations which may not be reflected in the current market value of CPPI. Changes in these estimates could have a material impact on the calculation of the deferred income tax liability or equity investment in the Partnership.CHANGE IN ACCOUNTING POLICIESTransition to and Initial Adoption of International Financial Reporting StandardsIFRS replaced Canadian GAAP for publicly accountable enterprises effective for fiscal years beginning on or after January 1, 2011. The financial statements for the three months ended March 31, 2011, have been prepared in accordance with IAS 34 and International Financial Reporting Standard 1 (IFRS 1), using accounting policies consistent with IFRS as issued by the International Accounting Standards Board (IASB) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC). CPPI relies on the resources of the Partnership to ensure compliance with IFRS. Previously, CPPI prepared its annual and interim financial statements in accordance with Canadian GAAP. The preparation of the first quarter 2011 financial statements resulted in changes to certain accounting policies compared with the most recent annual financial statements prepared under Canadian GAAP.The accounting policies listed below have been applied consistently to all periods presented in the financial statements. They also have been applied in preparing an opening IFRS balance sheet as at January 1, 2010, for the purposes of the transition to IFRS, as required by IFRS 1. The policies applied in these financial statements are based on IFRS issued and outstanding as of May 2, 2011, the date the Board of Directors approved the statements. Any subsequent changes to IFRS that are given effect in CPPI's annual consolidated financial statements for the year ending December 31, 2011 could result in restatement of these financial statements, including the transition adjustments recognized on change-over to IFRS.Impact of Adopting IFRS on the Company's Accounting PoliciesThe Company has changed certain accounting policies to be consistent with IFRS. As a result of the conversion to a corporation effective January 1, 2011, the items discussed below do not impact CPPI's Cash, Total Assets, Total Liabilities, Total Shareholders' Equity or Net Income Before Income Taxes for 2011.The impact of the application of these accounting policies on the comparative 2010 financial statements of the Fund is summarized as follows:(a) Fund UnitsUnder the terms of the trust indenture, unitholders had a puttable option, whereby the Fund would have been required to redeem Fund units at the request of the unitholder and required the Fund to distribute all of the taxable income received from the Partnership.Under Canadian GAAP the Fund units were classified as equity. IAS 32 requires that the Fund units be classified as a financial liability under IFRS prior to conversion to a corporation and the Fund's distributions be classified as a financing expense recorded in the statement of comprehensive income. The financial liability is recorded at amortized cost, with fair value being the best approximation of amortized cost, and changes in amortized cost recorded in the statement of comprehensive income (loss). Upon conversion to a corporation effective January 1, 2011, the Fund units were converted on a one-for-one basis into shares of CPPI and the shares are classified as equity with quarterly dividends treated as an equity distribution.Impact on Condensed Balance Sheets of the Fund:(thousands of dollars, except As at As at As at for per unit amounts, December 31, March 31, January 1, unaudited) 2010 2010 2010--------------------------------------------------------------------------Increase in fund unit liability 509,687 434,795 310,568Reduction in equity 509,687 434,795 310,568Unit market price for valuation 14.36 12.25 8.75----------------------------------------------------------------------------------------------------------------------------------------------------Impact on Condensed Statements of Comprehensive Income (Loss) of the Fund: Twelve months Three months ended ended December 31, March 31,(thousands of dollars, unaudited) 2010 2010--------------------------------------------------------------------------Increase in value of Fund units (revaluation loss) 199,119 124,227Reclassification to financing expense (distributions declared) 91,573 11,357--------------------------------------------------------------------------Reduction in comprehensive income 290,692 135,584----------------------------------------------------------------------------------------------------------------------------------------------------(b) Deferred income tax rateUnder Canadian GAAP the Fund recorded temporary tax differences that are expected to reverse after 2010 based on Specified Investment Flow Through (SIFT) entity tax rates. However, International Accounting Standard 12 (IAS 12) requires that companies should use the undistributed rate for recording taxes. Therefore, under IFRS the rate to apply to temporary differences that are expected to reverse after 2010 would be the highest marginal personal tax rate rather than the SIFT rate. The highest marginal personal tax rate is the rate at which tax would be payable by the Fund should distributions not be declared (43.7%). Subsequent to January 1, 2011 as a result of the conversion of the Fund into a corporation, the temporary tax differences are to be measured at the substantively enacted corporate tax rate in effect at the date of reversal of the temporary differences. This results in a significant tax recovery in the quarter ended March 31, 2011.Impact on Condensed Balance Sheets of the Fund: As at As at As at(thousands of dollars, December 31, March 31, January 1, unaudited) 2010 2010 2010--------------------------------------------------------------------------Increase in deferred tax liability 17,415 18,403 18,350Reduction in equity 17,415 18,403 18,350----------------------------------------------------------------------------------------------------------------------------------------------------CANFOR PULP LIMITED PARTNERSHIPStructureThe Partnership is a limited partnership formed on April 21, 2006, under the laws of Manitoba to acquire and carry on the Northern Bleached Softwood Kraft (NBSK) pulp and paper business of Canfor. The business consists of two NBSK pulp mills and one NBSK pulp and paper mill located in Prince George, BC and a marketing group based in Vancouver, BC (the Pulp Business).The conversion of the Fund into a dividend paying public corporation named Canfor Pulp Products Inc. (CPPI) was completed on January 1, 2011 under the previously announced plan of arrangement approved by the Fund's unitholders in April 2010. Under the arrangement, unitholders of the Fund received, for each unit of the Fund held, one common share of CPPI. Below is a simplified schematic of the ownership structure after the conversion on January 1, 2011.At May 2, 2011, CPPI held a total of 14,254,005 Class A Limited Partnership Units and 21,239,537 Class B Limited Partnership Units, representing 49.8% of the Partnership and Canfor owns the remaining 50.2%. The Partnership is managed, on behalf of the limited partners, by Canfor Pulp Holding Inc., the General Partner.To view accompanying chart, please click on the following link: http://media3.marketwire.com/docs/Ownership_Structure.jpgThe BusinessThe Partnership is a leading global supplier of pulp and paper products with operations based in the central interior of British Columbia. The Partnership's strategy is to maximize cash flows and enhance the value of its assets by: (i) preserving its low-cost operating position, (ii) maintaining the premium quality of its products, and (iii) opportunistically acquiring high quality assets.The Partnership owns and operates three mills with annual capacity to produce over one million tonnes of northern softwood market kraft pulp, 90% of which is bleached to become NBSK pulp for sale to the market, and approximately 140,000 tonnes of kraft paper.SUMMARY OF SELECTED PARTNERSHIP RESULTS(millions of dollars, except for per unit amounts, Q1 Q4 Q1 unaudited) 2011 2010 2010--------------------------------------------------------------------------Sales 252.3 266.1 239.5EBITDA(1) 66.7 62.3 49.3Operating income 49.9 46.1 33.0Net income 50.7 47.4 33.0----------------------------------------------------------------------------------------------------------------------------------------------------Per Partnership unit, basic and diluted Net income $0.71 $0.67 $0.46 EBITDA(1) $0.94 $0.88 $0.69----------------------------------------------------------------------------------------------------------------------------------------------------Average exchange rate (US$/Cdn$)(2) 1.014 0.987 0.961----------------------------------------------------------------------------------------------------------------------------------------------------Notes: (1) For calculation of EBITDA, see supplementary financial information. (2) Source - Bank of Canada (average noon rate for the period).First quarter 2011 EBITDA of $66.7 million was $4.4 million higher when compared to the fourth quarter of 2010 and was $17.4 million higher when compared to the first quarter of 2010. The increase when compared to the fourth quarter of 2010 was attributable to lower unit manufacturing costs partially offset by lower shipment volumes and lower realized pulp prices. Unit manufacturing costs decreased 6% when compared to the prior quarter as a result of lower fibre costs and the impact of higher production volumes. The decrease in fibre costs when compared to the prior quarter was due to a decrease in the price of residual and whole log chips. Shipment volumes of the Partnership's pulp and paper products decreased 4% when compared to the prior quarter. Realized pulp prices in Canadian dollar terms decreased slightly as the impact of the stronger Canadian dollar was partially offset by an increase of sales into higher margin regions.When compared to the first quarter of 2010, the $17.4 million increase in EBITDA was primarily attributable to higher realized prices for the Partnership's pulp and paper products and higher shipment volumes, partially offset by higher unit manufacturing costs. Realized pulp prices in Canadian dollar terms increased by 7% as a 10% increase in NBSK pulp US dollar list prices and a higher proportion of sales into higher margin business, primarily in China, were partially offset by a 6% strengthening of the Canadian dollar. Realized paper prices in Canadian dollar terms increased by 14% when compared to the first quarter of 2010 as a result of general global price increases and an increase in sales into higher margin regions. Higher unit manufacturing costs were the result of higher fibre costs, higher chemical prices and higher spending on fixed costs, partially offset by the impact of higher production volumes.OPERATING RESULTS BY BUSINESS SEGMENTPulp Q1 Q4 Q1(millions of dollars unless otherwise noted, unaudited) 2011 2010 2010--------------------------------------------------------------------------Sales 217.3 224.7 204.8EBITDA(1) 66.6 62.3 52.9EBITDA margin(1) 31% 28% 26%Operating income 50.8 47.0 37.5--------------------------------------------------------------------------Average NBSK pulp list price - (US$ per tonne, delivered to USA) 970 967 880Average NBSK pulp list price - (Cdn$ per tonne, delivered to USA) 957 980 916--------------------------------------------------------------------------Production - pulp (000 mt) 264.5 261.4 253.8Shipments - Partnership-produced pulp (000 mt) 265.3 272.3 268.4Marketed on behalf of HSLP & Canfor (000 mt) 53.1 58.8 138.7----------------------------------------------------------------------------------------------------------------------------------------------------Note: (1) For calculation of EBITDA, see supplementary financial information.The first quarter 2011 operating income for the pulp segment of $50.8 million was a $3.8 million increase when compared to the fourth quarter of 2010. The improvement in operating income was attributable to lower unit manufacturing costs, partially offset by lower shipment volumes and lower realized prices in Canadian dollar terms. Unit manufacturing costs decreased 5% when compared to the prior quarter as the impact of lower fibre costs, reduced spending on maintenance supplies and services and the impact of higher production volumes, were partially offset by higher chemical prices and higher energy costs. The decrease in fibre costs when compared to the prior quarter was primarily due to a decrease in the price of residual and whole log chips. Realized pulp prices in Canadian dollar terms decreased slightly as the impact of the stronger Canadian dollar was offset by an increase of sales into higher margin regions. Shipment volumes of the Partnership's pulp products decreased by 3% when compared to the prior quarter due to managing inventory levels in preparation for the Partnership's scheduled maintenance downtime in the second quarter of 2011.Operating income of the pulp segment in the first quarter of 2011 increased by $13.3 million when compared to the same period a year ago, due to higher NBSK pulp US dollar list prices, partially offset by a stronger Canadian dollar and higher unit manufacturing costs. Realized pulp prices in Canadian dollar terms increased by 7% as a 10% increase in NBSK pulp US dollar list prices and a higher proportion of sales into higher margin business, primarily in China, were partially offset by a 6% strengthening of the Canadian dollar. Higher unit manufacturing costs were the result of higher fibre costs and higher chemical prices, all of which were partially offset by the impact of higher production volumes. Fibre costs increased 4% due to higher prices for sawmill residual chips, which are tied to the price of pulp, partially offset by reductions in the cost and volume of whole log chips.OperationsThere were no scheduled maintenance outages in the first quarter of 2011. NBSK market pulp production during the first quarter of 2011 was 3,100 tonnes higher than the fourth quarter of 2010, and 10,700 tonnes higher than the first quarter of 2010. The increased production when compared to the prior quarter was a result of the extended maintenance outage at the Northwood Pulp Mill in the fourth quarter of 2010. The increased production when compared to the same period in 2010 was the result of an extended maintenance outage in the first quarter of 2010 at the Prince George Pulp Mill.Markets - PulpGlobal softwood demand remained very strong in the first quarter of 2011 with record shipments in March 2011 led by demand in China. According to the World 20(1) report, world global bleached softwood shipments for March were 20% higher when compared to the same period in 2010 and for the first quarter in 2011 were 10% higher than the same period in 2010. Pulp and Paper Products Council (PPPC) statistics reported an increase in global demand for printing and writing papers of 1% for February 2011 year-to-date as compared to the same period in 2010.Global softwood inventories remained tight as the strong global shipments in the first quarter of 2011 were partially offset by seasonally strong supply. At the end of March 2011, World 20(1) producers of bleached softwood pulp inventories were at 24 days of supply, a drop of 1 day from December 2010. Market conditions are generally considered balanced when inventories fall in the 27-30 days of supply range.As a result of continued tight market conditions, producers were successful at implementing NBSK pulp list price increases of US$30 per tonne for North America and Europe during the first quarter of 2011 to US$990 and US$980 respectively. The Partnership's NBSK pulp list price for China increased from US$840 in December 2010 to US$900 in March 2011, driven by strong demand from that region.Note: (1) World 20 data is based on twenty producing countries representing 80% of world chemical market pulp capacity and is based on information compiled and prepared by the Pulp and Paper Products Council.Outlook - PulpThe global softwood pulp market is expected to remain tight through the second quarter of 2011. A price increase of US$30 per tonne was announced for all markets effective April 1, 2011. Demand remains solid with continued strong shipments into China. In the second quarter of 2011, annual maintenance downtime coupled with extended outages due to several large capital projects in Canada funded under the Canadian Federal Government Green Transformation Program, are expected to curtail supply. Any relative weakness of the US dollar versus the Canadian dollar and the Euro is expected to exert upward pressure on US dollar list prices.Scheduled maintenance outages at the Prince George and Intercontinental Pulp Mills were successfully completed early in the second quarter of 2011 with approximately 12,000 tonnes of reduced production. A maintenance outage is planned at the Northwood Pulp Mill in the third quarter of 2011 which will be extended to complete work and commissioning of the recovery boiler upgrade project funded under the Canadian Federal Government's Green Transformation Program, with an estimated 40,000 tonnes of reduced production.Paper Q1 Q4 Q1(millions of dollars unless otherwise noted, unaudited) 2011 2010 2010--------------------------------------------------------------------------Sales 34.0 40.9 34.5EBITDA(1) 2.9 2.1 0.3EBITDA margin(1) 9% 5% 1%Operating income (loss) 2.0 1.3 (0.5)--------------------------------------------------------------------------Production - paper (000 mt) 34.5 34.7 31.0Shipments - paper (000 mt) 32.6 39.0 37.7----------------------------------------------------------------------------------------------------------------------------------------------------Note: (1) For calculation of EBITDA, see supplementary financial information.The first quarter 2011 operating income of the paper segment improved $0.7 million when compared to the fourth quarter of 2010, and was $2.5 million higher when compared to the same period last year. The increase when compared to the fourth quarter of 2010 was primarily attributable to lower unit manufacturing costs partially offset by lower sales volumes. The lower unit manufacturing costs were the result of lower prices for slush pulp and reduced spending on fixed costs. The slush pulp is transferred to the paper segment at a market price with the decrease directly attributable to the decrease in the realized pulp price in Canadian dollar terms. Sales volumes decreased by 6,400 tonnes when compared to the prior quarter as the high level of shipments in the fourth quarter of 2010 reduced inventories to a level considered to be at the low end of the target range.When compared to the first quarter of 2010 the increase in operating earnings was due to a 14% increase in realized paper prices in Canadian dollar terms, partially offset by higher unit manufacturing costs and lower sales volumes. The increase in paper prices were due to steady demand and general paper price increases throughout 2010. The paper price increases mitigated part of the impact of the increases in global pulp prices, the major raw material cost. Increased unit manufacturing costs were primarily attributable to higher costs for slush pulp, partially offset by lower spending on fixed costs. Sales volumes decreased by 5,100 tonnes in the first quarter of 2011.OperationsPaper production for the first quarter of 2011 was 34,500 tonnes, relatively unchanged when compared to the fourth quarter of 2010. When compared to the same period in the prior year, production was 3,500 tonnes higher as a result of a scheduled maintenance outage in the first quarter of 2010.Markets - Kraft PaperKraft paper demand was strong in March 2011 after a slow start to the year as a result of severe winter weather conditions across the eastern US. American Forest and Paper Association reported that US total Kraft paper shipments for March 2011 increased 13% from February and 2% when compared to March 2010. The Paper Shipping Sack Manufacturers' Association shipping sack statistics for March reveal that industry paper consumption was up 17% from the previous month. However, total consumption during the first quarter of 2011 was down 3% when compared to the same period in 2010. Price increases were announced in February 2011 to take effect on the first of April for North America and Europe.The Partnership's prime paper shipments in the first quarter of 2011 decreased 17% from the fourth quarter of 2010 due to increased shipments in the fourth quarter of 2010 to reduce inventory levels. Prime bleached shipments decreased by 12% when compared to the fourth quarter of 2010.Outlook - Kraft PaperKraft paper demand is strong and with healthy order files markets are expected to remain positive through the first half of 2011. Announced price increases are in place in all market sectors as of April 1, 2011. A scheduled maintenance outage is planned at the Partnership's paper machine in the second quarter of 2011 with an estimated 3,600 tonnes of reduced production. The Partnership's prices in US dollar terms are vulnerable to the relative strength of the Canadian dollar in relation to other currencies, primarily the US dollar.Non-Segmented Costs Q1 Q4 Q1(millions of dollars, unaudited) 2011 2010 2010--------------------------------------------------------------------------Unallocated costs 2.9 2.2 4.0Interest expense, net 2.1 1.9 2.0Foreign exchange gain on long-term debt (2.5) (3.9) (3.4)Foreign exchange loss on working capital 1.1 2.8 1.8Gain on derivative financial instruments (1.6) (2.3) (0.4)Other expense 0.1 0.2 ----------------------------------------------------------------------------------------------------------------------------------------------------- 2.1 0.9 4.0----------------------------------------------------------------------------------------------------------------------------------------------------Unallocated CostsUnallocated costs, comprised principally of general and administrative expenses, totaled $2.9 million in the first quarter of 2011 compared to $2.2 million in the fourth quarter of 2010 and $4.0 million in the first quarter of 2010. The lower unallocated costs in the fourth quarter of 2010 were primarily attributable to several non-recurring items.Interest ExpenseFor the first quarter of 2011 the net interest expense remained relatively unchanged from the prior quarter.Other Non-segmented ItemsThe foreign exchange gain on long-term debt of $2.5 million resulted from translating the US$110 million debt at period-end exchange rates, reflecting the stronger Canadian dollar as of March 31, 2011.The foreign exchange loss on working capital of $1.1 million resulted from translating US dollar balances at period-end exchange rates.The net gain of $1.6 million on derivative financial instruments recorded in the first quarter of 2011 relates to the revaluation to market of outstanding contracts at the end of the quarter for natural gas swaps and US dollar forward contracts, partially offset by the settlement of maturing contracts during the quarter. The revaluation to market of outstanding derivative instruments recorded in the quarter resulted in a gain of $0.4 million and relates to a revaluation to market of outstanding natural gas swaps and outstanding US dollar forward contracts at the end of the quarter. A loss of $1.1 million on settlement of natural gas swaps was recorded in the first quarter of 2011. The natural gas swaps are used to fix the price on a portion of the Partnership's future natural gas requirements. In the first quarter of 2011 the Partnership recorded a net gain of $2.3 million on settlement of US dollar forward contracts to hedge the impact of currency fluctuations on US dollar working capital.SUMMARY OF FINANCIAL POSITIONThe following table summarizes the Partnership's financial position as at the end of and for the following periods:(millions of dollars, except for ratios, unaudited) March 31, 2011 December 31, 2010--------------------------------------------------------------------------Ratio of current assets to current liabilities 2.04 1.90Ratio of net debt to partners' equity (1) 0.12 0.09---------------------------------------------------------------------------------------------------------------------------------------------------- Q1 Q1 2011 2010--------------------------------------------------------------------------Increase (decrease) in cash and cash equivalents (13.5) 21.2Comprised of cash flow from (used in): Operating activities 75.2 47.8 Financing activities (76.6) (20.1) Investing activities (12.1) (6.5)----------------------------------------------------------------------------------------------------------------------------------------------------Note: (1) Net debt consists of long-term debt, net of cash and cash equivalents.Changes in Financial PositionCash generated from operating activities was $75.2 million in the first quarter of 2011 compared to $47.8 million in the first quarter of 2010. The increase in cash generated from operating activities is the result of improved operating earnings and an increase in cash generated from working capital. The increase of cash generated from working capital during the first quarter of 2011 was primarily the result of reductions in the volume of chip inventories and pulp finished goods, and a decrease in prepaid balances. The increase in cash generated from operations was primarily attributable to lower unit manufacturing costs partially offset by lower shipment volumes and lower realized prices for the Partnership's pulp and paper products.The cash used in financing activities of $76.6 million in the quarter represents $0.3 million in interest payments and $76.3 million in distributions paid to the limited partners, namely Canfor, and CPPI. The Fund was wound up on January 1, 2011 and the final distribution to unitholders was declared on December 31, 2010 and paid on January 14, 2011.The cash used in investing activities in the quarter is comprised of $16.7 million relating to expenditures under the Canadian Federal Government's Green Transformation Program (the Program) and $6.8 million in capital expenditures, partially offset by $9.6 million of funds received for claims under the Program and $1.8 million in funds received under other grant programs.FINANCIAL REQUIREMENTS AND LIQUIDITYAt March 31, 2011 the Partnership had outstanding long-term debt of $106.9 million (2010 - $109.4 million, US$110.0 million for both 2011 and 2010) in the form of unsecured US dollar private placement notes (the Notes). The Notes bear interest at 6.41% and are repayable in full on their maturity date of November 30, 2013.At March 31, 2011, the Partnership had cash and cash equivalents of $50.7 million, of which $18.5 million was committed to pay declared distributions on April 15, 2011. The Partnership has a $40.0 million bank credit facility with a maturity date of November 30, 2013, of which $0.5 million was utilized at March 31, 2011 for a standby letter of credit issued for general business purposes. In addition, the Partnership has a separate facility with a maturity date of November 30, 2013, to cover the $13.0 million standby letter of credit issued to BC Hydro under the Electricity Purchase Agreement. During the first quarter of 2011 the Partnership established a $30.0 million bridge loan credit facility with a maturity date of December 31, 2012 to fund timing differences between expenditures and reimbursements for projects funded under the Canadian Federal Government Green Transformation Program. Interest and other costs of the credit facilities are at prevailing market rates.The Partnership manages cash resources to fund current and future operations through management of its capital structure in conjunction with cash flow forecasting, including anticipated investing and financing activities. The Partnership uses the bank credit facility to meet short-term working capital requirements. The Partnership also reviews on an ongoing basis, the level of distributions, capital expenditures and timing of scheduled major maintenance outages and may adjust these periodically to manage cash resources.The Partnership periodically discounts letters of credit on outstanding trade receivables to reduce borrowing costs, to reduce credit and foreign currency exposure, and to increase short-term liquidity.The Notes and bank credit agreements each contain similar financial covenants including a maximum allowable debt:EBITDA leverage ratio and minimum required EBITDA:interest coverage ratio. The Partnership remained in compliance with all covenants at March 31, 2011.On October 9, 2009 the Canadian Federal Government announced the allocation of credits from the billion dollar Pulp and Paper Green Transformation Program (the Program). The Partnership has been allocated $122.2 million from the Program. The Program is designed as a reimbursement of funds to be spent on qualifying energy and environmental capital projects. Credits may be used until the Program end date of March 31, 2012. The Partnership has received Program approval to proceed with four projects totaling $157.4 million of which $122.2 million will be funded under the Program. As of March 31, 2011 the Partnership has incurred $55.8 million and received reimbursements totaling $29.8 million with the balance of $26.0 million receivable on March 31, 2011. The Partnership submits claims for expenditures on approved projects under the Program on a monthly basis. These projects are expected to provide economic and environmental benefits to the Partnership's operations.OUTSTANDING UNITSAt May 2, 2011, there were 71,270,025 Limited Partnership Units outstanding, of which 35,493,542 units (consisting of 14,254,005 Class A Limited Partnership Units and 21,239,537 Class B Limited Partnership Units) were owned by CPPI and 35,776,483 Class B Exchangeable Limited Partnership Units were owned by Canfor.RELATED PARTY TRANSACTIONSThe Partnership's transactions with related parties are consistent with the transactions described in the December 31, 2010 audited consolidated financial statements and are based on agreed upon amounts, and are summarized in note 10 of the unaudited interim consolidated financial statements.INTERNAL CONTROLS OVER FINANCIAL REPORTINGDuring the quarter ending March 31, 2011, there were no changes in the Partnership's internal controls over financial reporting that materially affected, or would be reasonably likely to materially affect, such controls.RISKS AND UNCERTAINTIESA comprehensive discussion of risks and uncertainties is included in CPPI's Annual Information Form dated February 11, 2011, which is available on www.sedar.com and www.canforpulp.com.SELECTED QUARTERLY PARTNERSHIP FINANCIAL INFORMATION(millions of dollars unless otherwise Q1 Q4 Q3 Q2 Q1 Q4(2) Q3(2) Q2(2) noted, unaudited) 2011 2010 2010 2010 2010 2009 2009 2009---------------------------------------------------------------------------Sales and IncomeSales 252.3 266.1 247.9 247.6 239.5 220.2 202.0 205.0Operating income (loss) 49.9 46.1 52.5 52.1 33.0 14.4 12.4 (5.0)EBITDA 66.7 62.3 68.7 69.4 49.3 27.3 25.1 7.2Net income 50.7 47.4 55.0 43.6 33.0 15.2 18.3 1.5---------------------------------------------------------------------------Per Partnership unit (dollars)Net income basic and diluted $0.71 $0.67 $0.77 $0.61 $0.46 $0.21 $0.26 $0.02---------------------------------------------------------------------------StatisticsPulp shipments (000 mt) 265.3 272.3 246.0 252.3 268.4 258.6 259.5 286.2Paper shipments (000 mt) 32.6 39.0 33.6 34.4 37.7 38.1 37.4 34.3---------------------------------------------------------------------------Average exchange rate (US$/Cdn$)(1) 1.014 0.987 0.962 0.973 0.961 0.947 0.912 0.858---------------------------------------------------------------------------Average NBSK pulp list price - (US$ per tonne, delivered to USA) 970 967 1,000 993 880 820 733 645---------------------------------------------------------------------------Per Partnership unit (dollars)Distributable cash per unit(3) $0.77 $0.68 $0.78 $0.88 $0.57 $0.31 $0.16 $0.02Distributions declared per unit $0.78 $1.05 $0.69 $0.52 $0.32 $0.14 $0.03 $0.03------------------------------------------------------------------------------------------------------------------------------------------------------Notes: (1) Source - Bank of Canada (average noon rate for the period). (2) Presented under previous Canadian GAAP.See the Partnership's disclosure. (3) For further details on the Partnership's distributable cash see the Partnership's disclosure on.Sales are primarily influenced by changes in market pulp prices, sales volumes and fluctuations in Canadian dollar exchange rates. Operating income (loss), net income and EBITDA are primarily impacted by: sales revenue; freight costs; fluctuations of fibre, chemical, and energy prices; level of spending and the timing of scheduled maintenance downtime; and production curtailments. Net income is also impacted by fluctuations in Canadian dollar exchange rates, the market price of natural gas, the revaluation to the period end rate of US dollar denominated working capital balances and long-term debt, and revaluation of outstanding natural gas swaps and US dollar forward contracts.CRITICAL ACCOUNTING ESTIMATESThe preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the amounts recorded in the financial statements. On an ongoing basis, management reviews its estimates, including those related to asset useful lives for amortization, impairment of long-lived assets, pension and other employee future benefit plans and asset retirement obligations, based upon 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 the Partnership's financial condition.CHANGE IN ACCOUNTING POLICIESTransition to and Initial Adoption of IFRSIFRS replaced Canadian GAAP for publicly accountable enterprises effective for fiscal years beginning on or after January 1, 2011. The financial statements for the three months ended March 31, 2011, have been prepared in accordance with IAS 34, and IFRS 1, using accounting policies consistent with IFRS as issued by the IASB and IFRIC. Previously, the Partnership prepared its annual and interim financial statements in accordance with Canadian GAAP. The preparation of these financial statements resulted in changes to certain accounting policies compared with the most recent annual financial statements prepared under Canadian GAAP.The accounting policies listed below have been applied consistently to all periods presented in the financial statements. They also have been applied in preparing an opening IFRS balance sheet as at January 1, 2010, for the purposes of the transition to IFRS, as required by IFRS 1. The policies applied in these financial statements are based on IFRS issued and outstanding as of May 2, 2011, the date the Board of Directors approved the statements. Any subsequent changes to IFRS that are given effect in the Partnership's annual consolidated financial statements for the year ending December 31, 2011 could result in restatement of these financial statements, including the transition adjustments recognized on change-over to IFRS.IMPACT OF ADOPTING IFRS ON THE PARTNERSHIP'S BUSINESSThe adoption of IFRS has resulted in some changes to the Partnership's accounting systems and business processes. However, the impact has been minimal. The Partnership has not identified any contractual arrangements that are significantly impacted by the adoption of IFRS. The Partnership's staff involved in the preparation of financial statements has been appropriately trained on the relevant aspects of IFRS and the changes to accounting policies. The Partnership's Audit Committee has been regularly updated throughout the IFRS transition process, and is aware of the key aspects of IFRS as they impact the Partnership or CPPI.First-time Adoption of IFRSThe adoption of IFRS requires the application of IFRS 1, which provides guidance for an entity's initial adoption of IFRS. IFRS 1 generally requires retrospective application of IFRS effective at the end of its first annual IFRS reporting period. However, IFRS 1 also provides certain optional exemptions and mandatory exceptions to this retrospective treatment. The Partnership has elected to apply the following optional exemptions in its preparation of an opening IFRS balance sheet as at January 1, 2010, the Partnership's transition date:- Borrowing costs:IAS 23, Borrowing Costs, requires the capitalization of borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Under Canadian GAAP, there was an accounting policy choice to expense these costs as incurred or capitalize them. The Partnership has elected to apply the requirements of IAS 23 prospectively from January 1, 2010.- Employee Benefits:The Partnership has elected to recognize all cumulative actuarial gains and losses at the date of transition to IFRS. Actuarial gains and losses would have to be recalculated under IFRS from the inception of each of our defined benefit plans if the exemption was not taken.- Business combinations:The Partnership has elected to apply the business combinations exemption in IFRS 1. Accordingly, the Partnership will not modify the carrying amounts of assets and liabilities arising on business combinations occurring before the transition date.IFRS 1 does not permit changes to estimates that have been made previously. Accordingly, estimates used in the preparation of the Partnership's opening IFRS statement of financial position at the transition date are consistent with those made under previous Canadian GAAP.Impact of Adopting IFRS on the Partnership's Accounting PoliciesThe Partnership has changed certain accounting policies to be consistent with IFRS. The following summarizes the significant changes to the Partnership's accounting policies on adoption of IFRS.(a) Major MaintenanceIAS 16 requires major inspections and overhauls to be accounted as a separate component of Property, Plant and Equipment (PP&E) if the component is used for more than one reporting period. This treatment is only intended for major expenditures that occur at regular intervals over the life of the asset as costs of routine repairs and maintenance will continue to be expensed as incurred. The regularly scheduled major maintenance outages required on the Partnership's plant and equipment qualify for treatment under this standard with the expenditures being classified as property, plant and equipment.Impact on Condensed Consolidated Balance Sheets(millions of dollars, As at As at As at unaudited) December 31, 2010 March 31, 2010 January 1, 2010--------------------------------------------------------------------------Increase in property plant and equipment 13.9 21.6 20.7Reduction in prepaid expenses and other assets 10.8 18.2 15.3Reduction in other long-term assets 3.1 3.4 5.4----------------------------------------------------------------------------------------------------------------------------------------------------Impact on Condensed Consolidated Statements of Comprehensive Income Twelve months ended Three months ended(millions of dollars, unaudited) December 31, 2010 March 31, 2010--------------------------------------------------------------------------Increase in amortization expense 18.7 4.7--------------------------------------------------------------------------Reduction in manufacturing and product costs 18.7 4.7----------------------------------------------------------------------------------------------------------------------------------------------------Impact on Condensed Consolidated Statements of Cash Flows Twelve months ended Three months ended(millions of dollars, unaudited) December 31, 2010 March 31, 2010--------------------------------------------------------------------------Increase in net cash from operations 14.6 4.1Reduction in cash from investing activities 14.6 4.1----------------------------------------------------------------------------------------------------------------------------------------------------(b) Employee Future BenefitsActuarial gains and losses are permitted under IAS 19, Employee Benefits, to be recognized directly in other comprehensive income rather than through net income. Actuarial gains and losses have been recognized in other comprehensive income.IAS 19 requires the past service cost element of defined benefit plans to be expensed on an accelerated basis, with vested past service costs expensed immediately and unvested past service costs recognized on a straight-line basis until the benefits become vested. Under Canadian GAAP, past service costs were generally amortized on a straight-line basis over the expected average remaining service period of active employees under the plan. Vested past service costs have been expensed immediately under IFRS.Under Canadian GAAP, certain gains and losses which were unrecognized at the time of adopting the current Canadian accounting standard were permitted to be amortized over a period under transitional provisions of the current standard. Under IFRS the transitional provisions have been recognized on the transition date.Impact on Condensed Consolidated Balance Sheets(millions of dollars, As at As at As at unaudited) December 31, 2010 March 31, 2010 January 1, 2010--------------------------------------------------------------------------Increase in post employment benefits obligation 26.8 26.2 17.0Reduction in other long-term assets 14.0 10.9 11.2--------------------------------------------------------------------------Reduction in Partner's equity 40.8 37.1 28.2----------------------------------------------------------------------------------------------------------------------------------------------------Impact on Condensed Consolidated Statements of Comprehensive Income(millions of dollars, unaudited) December 31, 2010 March 31, 2010--------------------------------------------------------------------------Decrease in employee benefits expense 1.0 0.5Reduction in other comprehensive income 13.6 9.4----------------------------------------------------------------------------------------------------------------------------------------------------(c) Impairment of assetsCanadian GAAP used a two-step approach to impairment testing: first comparing asset carrying values with undiscounted future cash flows to determine whether impairment exists; and then measuring any impairment by comparing asset carrying values with fair values. IAS 36, Impairment of Assets, uses a one-step approach for both testing for and measurement of impairment, with asset carrying values compared directly with the higher of fair value less costs to sell and value in use (discounted cash flows). This may potentially result in more write downs where carrying values of assets were previously supported under Canadian GAAP on an undiscounted cash flow basis, but could not be supported on a discounted cash flow basis.In addition, the extent of any new write-downs may be partially offset by the requirement under IAS 36 to reverse any previous impairments where circumstances have changed such that the impairments have been reduced. Canadian GAAP prohibited reversal of impairment losses.The Partnership's accounting policies related to impairment of assets have been changed to reflect these differences. There is no impact on the unaudited condensed interim financial statements.CANFOR PULP LIMITED PARTNERSHIPSUPPLEMENTARY FINANCIAL INFORMATION Three months ended(millions of dollars, unaudited) March 31, 2011 March 31, 2010----------------------------------------------------------------------------------------------------------------------------------------------------RECONCILIATION OF NET INCOME TO EBITDANet income $ 50.7 $ 33.0Add (deduct): Amortization 16.5 16.3 Interest expense 2.1 2.0 Foreign exchange gain on long-term debt (2.5) (3.4) Gain on derivative financial instruments (1.6) (0.4) Foreign exchange loss on working capital 1.1 1.8 Other expense 0.4 ---------------------------------------------------------------------------EBITDA $ 66.7 $ 49.3----------------------------------------------------------------------------------------------------------------------------------------------------EBITDA per Partnership unit $ 0.94 $ 0.69---------------------------------------------------------------------------------------------------------------------------------------------------- Three months ended(millions of dollars, unaudited) March 31, 2011 March 31, 2010----------------------------------------------------------------------------------------------------------------------------------------------------CALCULATION OF DISTRIBUTABLE CASHCash flow from operations before working capital changes $ 66.0 $ 50.0Add (deduct): Capital expenditures - net(1) (5.7) (7.9) Major maintenance capital - net (3.6) 0.9 Interest (2.1) (2.0)--------------------------------------------------------------------------Distributable cash $ 54.6 $ 41.0----------------------------------------------------------------------------------------------------------------------------------------------------Distributable cash - per Partnership unit (in dollars) $ 0.77 $ 0.57----------------------------------------------------------------------------------------------------------------------------------------------------Cash distributions declared (paid and payable) $ 55.6 $ 22.8Cash distributions declared - per Partnership unit (in dollars) $ 0.78 $ 0.32----------------------------------------------------------------------------------------------------------------------------------------------------Note: (1) Presented net of government funded projects.DISTRIBUTABLE CASH AND CASH DISTRIBUTIONSThe Board determines the level of cash distributions based on the level of cash flow from operations before changes in non-cash working capital and major maintenance capital due to its operating nature, asset retirement obligation expenditures and accruals, less capital expenditures and interest expense. During the year distributions are based on estimates of full year cash flow and capital spending; thus distributions may be adjusted as these estimates change. It is expected that normal seasonal fluctuations in working capital will be funded from cash resources or the revolving short-term credit facility.Canfor Pulp Products Inc.Condensed Balance Sheets(unaudited)(thousands of As at As at As at dollars) March 31, 2011 December 31, 2010 January 1, 2010---------------------------------------------------------------------------ASSETSCurrent assets Cash and cash equivalents $ 18,463 $ - $ - Distributions receivable from Canfor Pulp Limited Partnership (note 7) 9,228 19,521 2,839---------------------------------------------------------------------------Total current assets 27,691 19,521 2,839---------------------------------------------------------------------------Equity investment in Canfor Pulp Limited Partnership (note 6) 237,866 240,425 249,593--------------------------------------------------------------------------- $ 265,557 $ 259,946 $ 252,432---------------------------------------------------------------------------LIABILITIESCurrent liabilities Due to Canfor Pulp Limited Partnership (note 7) $ 977 $ - $ - Distributions payable - 19,521 2,839 Income taxes payable 4,964 - ----------------------------------------------------------------------------Total current liabilities 5,941 19,521 2,839---------------------------------------------------------------------------Fund units (note 5) - 509,687 310,568Deferred income tax liability (note 8) 31,521 52,854 55,637--------------------------------------------------------------------------- $ 37,462 $ 582,062 $ 369,044---------------------------------------------------------------------------SHAREHOLDERS' EQUITY (DEFICIT) Unitholders' deficit (Note 5) $ - $ (322,116) $ (116,612) Shareholders' capital (Note 5) 509,687 - - Retained earnings (deficit) (281,592) - ----------------------------------------------------------------------------Total Shareholders' equity (deficit) 228,095 (322,116) (116,612)--------------------------------------------------------------------------- $ 265,557 $ 259,946 $ 252,432---------------------------------------------------------------------------Subsequent event (note 11)Canfor Pulp Products Inc.Condensed Statements of Comprehensive Income (loss)(unaudited)(thousands of dollars, except unit and per unit amounts) Three months ended March 31, 2011 March 31, 2010---------------------------------------------------------------------------IncomeEquity income in Canfor Pulp Limited Partnership $ 25,227 $ 16,473Cost and expensesAdministrative expenses (note 7) 969 -Increase in amortized cost of Fund units - 124,227Financing expense (distributions declared) - 11,357--------------------------------------------------------------------------- 969 135,584---------------------------------------------------------------------------Net income (loss) before income taxes 24,258 (119,111)Income tax recovery (note 8) 16,367 269---------------------------------------------------------------------------Net income (loss) $ 40,625 $ (118,842)Equity interest in other comprehensive loss related to actuarial losses of Canfor Pulp Limited Partnership (101) (4,722)---------------------------------------------------------------------------Comprehensive income (loss) $ 40,524 $ (123,564)---------------------------------------------------------------------------Net income (loss) per share, basic and diluted $ 1.14 $ (3.34)Weighted average number of shares/ units (note 4) 35,493,307 35,493,307---------------------------------------------------------------------------Canfor Pulp Products Inc.Condensed Statements of Changes in Equity(unaudited)(thousands of dollars) Three months ended March 31, 2011 March 31, 2010---------------------------------------------------------------------------Share capital (unitholders capital)Balance beginning of period $ - $ -Corporate conversion (notes 1,5) 509,687 ----------------------------------------------------------------------------Balance beginning and end of period 509,687 ----------------------------------------------------------------------------Retained earnings (deficit)Balance beginning of period (322,116) (116,612)Net income (loss) for the period 40,625 (118,842)Defined benefit plan actuarial losses of the Partnership included in other comprehensive income (101) (4,722)---------------------------------------------------------------------------Balance at end of period $ (281,592) $ (240,176)Total equity $ 228,095 $ (240,176)---------------------------------------------------------------------------Canfor Pulp Products Inc.Condensed Statements of Cash Flows(unaudited) Three months ended(thousands of dollars) March 31, 2011 March 31, 2010---------------------------------------------------------------------------Cash generated from (used in)Operating activitiesNet income (loss) before tax $ 24,258 $ (119,111) Items not affecting cash: Equity income in Canfor Pulp Limited Partnership (25,227) (16,473) Increase in amortized cost of Fund units - 124,227 Financing expense (distributions declared) - 11,357Distributions received from Canfor Pulp Limited Partnership 37,976 9,938---------------------------------------------------------------------------Cash flow from operations before working capital changes 37,007 9,938---------------------------------------------------------------------------Due to Canfor Pulp Limited Partnership 977 ----------------------------------------------------------------------------Net cash from operations 37,984 9,938---------------------------------------------------------------------------Financing activitiesDistributions paid to unitholders $ (19,521) $ (9,938)---------------------------------------------------------------------------Change in cash and cash equivalents $ 18,463 $ ----------------------------------------------------------------------------Beginning balance in cash and cash equivalents - ----------------------------------------------------------------------------Ending balance in cash and cash equivalents $ 18,463 $ ----------------------------------------------------------------------------The accompanying notes are an integral part of these unaudited financialstatements.Canfor Pulp Products Inc.Notes to the Condensed Financial Statements as at March 31, 2011(unaudited)1. General information and reporting entityCanfor Pulp Products Inc. (CPPI) is domiciled in Canada and listed on the Toronto Stock Exchange. The address of CPPI's registered office is 1700 - 666 Burrard Street, Vancouver, British Columbia, Canada V6C 2X8. The unaudited financial statements (the financial statements) include the accounts of CPPI.CPPI has been established to acquire and hold an interest in Canfor Pulp Limited Partnership (the Partnership). The Partnership produces and sells Northern Bleached Softwood Kraft (NBSK) Pulp and fully bleached, high performance Kraft Paper. The Partnership operations consist of two NBSK pulp mills and one NBSK pulp and paper mill located in Prince George, British Columbia and a marketing group based in Vancouver, British Columbia.At March 31, 2011, Canadian Forest Products Ltd. (Canfor) owns 50.2% and CPPI owns 49.8% of the issued and outstanding units of the Partnership.Corporate Conversion ArrangementCPPI is a company formed on March 16, 2010. On January 1, 2011 Canfor Pulp Income Fund (the Fund) completed a plan of arrangement whereby the Fund unitholders exchanged their Fund units for common shares in CPPI on a one-for-one basis. The unitholders of the Fund became the sole shareholders of CPPI which became the sole owner of all of the outstanding Fund units. Immediately following the conversion, the Fund was wound up, CPPI received all of the assets and assumed all of the liabilities of the Fund and CPPI became the direct holder of the 49.8% interest in the Partnership previously held by the Fund.The financial statements have been prepared on a continuity of interest basis, which recognizes CPPI as the successor entity to the Fund. As a result, in current and future financial statements and Management's Discussion and Analysis, CPPI will refer to common shares, shareholders and dividends which were formerly referred to as units, unitholders and distributions under the trust structure; comparative amounts will reflect the history of the Fund.2. Basis of preparation and adoption of IFRSStatement of Compliance and Conversion to International Financial Reporting StandardsCPPI prepares its financial statements in accordance with Canadian generally accepted accounting principles as set out in the Handbook of the Canadian Institute of Chartered Accountants (CICA Handbook). In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards (IFRS), and require publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011. Accordingly, CPPI has commenced reporting on this basis in these financial statements. In these financial statements, the term "Canadian GAAP" refers to Canadian GAAP before the adoption of IFRS.These financial statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting and IFRS 1, using accounting policies consistent with IFRS as issued by the International Accounting Standards Board (IASB) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC).Subject to certain transition elections disclosed in note 5, CPPI has consistently applied the same accounting policies in its opening IFRS balance sheet at January 1, 2010 and throughout all periods presented, as if these policies had always been in effect. Note 5 discloses the impact of the transition to IFRS on CPPI's balance sheet, statements of comprehensive income (loss) and statements of cash flows, including the nature and effect of significant changes in accounting policies from those used in CPPI's financial statements for the year ended December 31, 2010 under Canadian GAAP.The policies applied in these financial statements are based on IFRS issued and outstanding as of May 2, 2011, the date the Board of Directors approved the statements. Any subsequent changes to IFRS that are given effect in CPPI's annual financial statements for the year ending December 31, 2011 could result in restatement of these financial statements, including the transition adjustments recognized on change-over to IFRS. The financial statements should be read in conjunction with CPPI's Canadian GAAP annual financial statements for the year ended December 31, 2010.Basis of measurementThese financial statements have been prepared on the historical cost basis.Functional and presentation currencyThese financial statements are presented in Canadian dollars, which is CPPI's functional currency.Use of estimates and judgmentsThe preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. It is reasonably possible that circumstances may arise that cause actual results to differ from management estimates, however, management does not believe it is likely that such differences will materially affect CPPI's financial position.Significant areas requiring the use of management estimates are the valuation of CPPI's investment in the Partnership relative to its market value and the determination of deferred income tax.3. Significant accounting policiesIncome TaxesIncome tax expense consists of current and deferred tax expense. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at period end, adjusted for amendments to tax payable with regards to previous years.Deferred income tax assets and liabilities are determined based on the difference between the tax basis of CPPI's and Partnership's assets and liabilities and the respective amounts reported in the financial statements. Deferred tax assets or liabilities are calculated using the substantively enacted tax rates for the periods in which the differences are expected to be settled. Deferred tax assets are recognized to the extent that they are considered more likely than not to be realized.Cash and cash equivalentsCash and cash equivalents include cash on hand and highly liquid investments with an original maturity date of 90 days or less.4. Net Income per ShareBasic net income per Share is based on the weighted average number of Shares outstanding during the year. At March 31, 2011 and December 31, 2010 the Partnership had 35,776,483 Class B Exchangeable Limited Partnership Units outstanding which can be exchanged for Shares of CPPI at the option of the holder Canfor. Any issuance of new Shares as a result of such an exchange would be accompanied by a corresponding increase in CPPI's investment in the Partnership through the acquisition of Class B Exchangeable Limited Partnership Units. As a result, this potential conversion would not result in any dilution of CPPI's net income per share.5. Transition to International Financial Reporting StandardsApplication of IFRS 1These financial statements are the first financial statements prepared by CPPI under IFRS. CPPI has applied IAS 34 and IFRS 1 First-time adoption of IFRS in preparing these financial statements.CPPI's transition date to IFRS is January 1, 2010. CPPI prepared its opening IFRS balance sheet at that date. In preparing its opening IFRS balance sheet and comparative information for the quarter ended March 31, 2010 CPPI has adjusted amounts reported previously in financial statements prepared in accordance with Canadian GAAP.An explanation of how the transition from Canadian GAAP to IFRS has affected CPPI's financial position, financial performance and cash flows is set out in the tables in this note and the notes that accompany the tables.In preparing these financial statements in accordance with IFRS 1, CPPI has applied the mandatory exception from retrospective application for Estimates.Estimates under IFRS 1 as at January 1, 2010 should be consistent with estimates made for the same date under Canadian GAAP, unless there is evidence that those estimates were in error. All other mandatory exceptions and optional exemptions from full retrospective application are not applicable for CPPI.Reconciliations between IFRS and Canadian GAAPThe following reconciliations provide a quantification of the material impacts of the transition to IFRS on the Fund before the conversion of the Fund into a corporation (Note 1).Reconciliation of Equity at January 1, 2010 As at(thousands of dollars, unaudited) January 1, 2010---------------------------------------------------------------------------Previous Canadian GAAP - Total equity $ 226,357Fund units(1) (310,568)CPPI share of Partnership IFRS transition adjustments(2) (14,051)Deferred income taxes(3) (18,350)---------------------------------------------------------------------------IFRS - Total equity (deficit) $ (116,612)---------------------------------------------------------------------------Reconciliation of equity at March 31, 2010 As at(thousands of dollars, unaudited) March 31, 2010---------------------------------------------------------------------------Previous Canadian GAAP - Total equity $ 231,517Fund units(1) (434,795)CPPI share of Partnership IFRS transition adjustments(2) (14,051)Deferred income taxes(3) (18,403)Effect of the increase in equity income from the Partnership under IFRS 251Effect of the increase in CPPI's share in the Partnership's other comprehensive loss under IFRS (4,695)---------------------------------------------------------------------------IFRS - Total equity (deficit) $ (240,176)---------------------------------------------------------------------------Reconciliation of equity at December 31, 2010 As at(thousands of dollars, unaudited) December 31, 2010---------------------------------------------------------------------------Previous Canadian GAAP - Total equity $ 225,301Fund units(1) (509,687)CPPI share of Partnership IFRS transition adjustments(2) (14,051)Deferred income taxes(3) (17,415)Effect of the increase in equity income from the Partnership under IFRS 523Effect of the increase in CPPI's share in the Partnership's other comprehensive loss under IFRS (6,787)---------------------------------------------------------------------------IFRS - Total equity (deficit) $ (322,116)---------------------------------------------------------------------------Reconciliation of comprehensive income (loss) for the three months ended March 31, 2010 Three months ended March 31,(thousands of dollars, unaudited) 2010---------------------------------------------------------------------------Comprehensive income previous Canadian GAAP $ 16,517Effect of the increase in equity income from the Partnership under IFRS 251Fund units(1) (124,227)Distributions classified as a financing expense(1) (11,357)Deferred income taxes(3) (53)Effect of the increase in CPPI's share in the Partnership's other comprehensive loss under IFRS (4,695)---------------------------------------------------------------------------Comprehensive loss - IFRS $ (123,564)---------------------------------------------------------------------------Reconciliation of comprehensive income (loss) for the year ended December 31, 2010 Year ended(thousands of dollars, unaudited) December 31, 2010---------------------------------------------------------------------------Comprehensive income previous Canadian GAAP $ 90,517Effect of the increase in equity income from the Partnership under IFRS 523Fund units(1) (199,119)Distributions classified as a financing expense(1) (91,573)Deferred income taxes(3) 935Effect of the increase in CPPI's share in the Partnership's other comprehensive loss under IFRS (6,787)---------------------------------------------------------------------------Comprehensive loss - IFRS $ (205,504)---------------------------------------------------------------------------Notes to the Reconciliations1. IAS 32 Classification - Under Canadian GAAP the Fund units were classified as equity. IAS 32 requires that the Fund units be classified as a financial liability under IFRS prior to conversion to a corporation. Under the terms of the Fund's trust indenture, unitholders had a puttable option, whereby the Fund would have been required to redeem Fund units at the request of the unitholder and required the Fund to distribute all of the taxable income received from the Partnership. In addition, the Fund's distributions were classified as a financing expense recorded in the statement of comprehensive income. The liability was recorded at amortized cost with changes recorded in the statement of comprehensive income. Upon conversion to a corporation effective January 1, 2011, the Fund units were converted on a one-for-one basis into shares of CPPI and the shares are classified as equity with dividends treated as an equity distribution.2. Canfor Pulp Limited Partnership conversion - As a result of a change in accounting policies for the Partnership due to the conversion to IFRS, CPPI's equity income, investment and other comprehensive income has been restated. For further details on the impact of the transition on the Partnership see the Partnership's disclosure.3. IAS 12 tax rate - Under Canadian GAAP the Fund recorded temporary tax differences that are expected to reverse after 2010 based on specified investment flow through entity (SIFT) tax rates. However, IAS 12 requires that companies should use the undistributed rate for recording taxes. Therefore, under IFRS the rate to apply to temporary differences that are expected to reverse after 2010 would be the highest marginal personal tax rate (43.7%) rather than the SIFT rate. The highest marginal personal tax rate is the rate at which tax would be payable by the Fund should distributions not be declared. Subsequent to January 1, 2011 as a result of the conversion of the Fund into a corporation, the temporary tax differences are to be measured at the corporate tax rate (25.0%).6. Equity Investment in Canfor Pulp Limited PartnershipCPPI's equity investment in the Partnership is as follows: Three months ended Year ended(thousands of dollars, unaudited) March 31, 2011 December 31, 2010---------------------------------------------------------------------------Balance, beginning of period 240,425 249,593Equity interest in income of the Partnership 25,227 89,166Equity interest in other comprehensive loss of the Partnership (101) (6,761)Distributions from the Partnership (27,685) (91,573)---------------------------------------------------------------------------Balance, end of period 237,866 240,425------------------------------------------------------------------------------------------------------------------------------------------------------7. Related Party TransactionsAll accounting, treasury, legal and administrative functions for CPPI are performed on its behalf by the Partnership pursuant to a support agreement. The value of these services during the first quarter of 2011 was $1.0 million and was included as an administrative expense of CPPI with the balance outstanding as an accounts payable to the Partnership at March 31, 2011.Distributions earned from the Partnership for the three months ended March 31, 2011 were $27.7 million of which $18.5 million was received, with the balance of $9.2 million receivable on March 31, 2011.8. Income TaxesImmediately prior to converting to a corporation on January 1, 2011, the Fund, as a publicly traded income trust, was to be taxed on income starting in 2011, similarly to rules applying to corporations. Accordingly, deferred income tax assets and liabilities of the Fund were recognized with respect to estimated temporary differences between the carrying value of existing assets and liabilities and their respective tax bases that were expected to reverse starting in 2011 at the substantively enacted tax rate. The Fund was not subject to, and did not recognize, any deferred income tax assets or liabilities on temporary differences expected to reverse prior to 2011. Three months ended(thousands of dollars, unaudited) March 31, 2011 March 31, 2010---------------------------------------------------------------------------Current income tax $ 4,964 $ -Deferred income tax (21,331) (269)---------------------------------------------------------------------------Income tax recovery $ (16,367) $ (269)------------------------------------------------------------------------------------------------------------------------------------------------------The following table reconciles the income tax expense calculated using statutory tax rates to the actual income tax expense. Three months ended(thousands of dollars, unaudited) March 31, 2011---------------------------------------------------------------------------Income tax expense at statutory rate, 2011 - 26.5% (2010 - nil) $ 6,428Add (deduct): Permanent difference from capital gains on translation of US denominated debt (169) Change in statutory income tax rate (note 5) (22,626)---------------------------------------------------------------------------Income tax recovery $ (16,367)------------------------------------------------------------------------------------------------------------------------------------------------------9. Financial InstrumentsCPPI's financial instruments consist of cash and cash equivalents, distributions receivable from the Partnership, amounts due to the Partnership and Fund units. Cash and cash equivalents are classified as held for trading, distributions receivable are classified as loans and receivables and are measured at amortized cost, and Fund units and due to the Partnership were classified as financial liabilities and measured at amortized cost. The carrying values of cash and cash equivalents, distributions receivable and due to the Partnership approximates the fair value due to the relatively short period to maturity. The Fund units were recorded at amortized costs which approximates fair value.CPPI is exposed to certain risks related to the nature of its investment in the Partnership as well as the underlying risks related to the business of the Partnership. CPPI relies on the objectives, policies and processes of the Partnership for managing these risks.10. Segmented InformationCPPI operates in one industry segment, namely investing in pulp and paper producing assets in one geographic region, Canada.11. Subsequent EventSubsequent to the period end, dividends were declared in the amount of $0.40 per share to be paid on May 19, 2011 to shareholders of record at the close of business on May 12, 2011.Canfor Pulp Limited PartnershipCondensed Consolidated Balance Sheets(unaudited) As at As at As at(millions of dollars) March 31, 2011 December 31, 2010 January 1, 2010---------------------------------------------------------------------------ASSETSCurrent assets Cash and cash equivalents $ 50.7 $ 64.2 $ 13.5 Accounts receivable (note 10) Trade 107.8 108.0 110.5 Other 11.7 14.8 8.6 Green Transformation Program (note 13) 26.0 17.9 - Inventories (note 7) 116.3 123.4 135.4 Prepaid expenses and other assets 9.2 11.0 3.1---------------------------------------------------------------------------Total current assets 321.7 339.3 271.1---------------------------------------------------------------------------Non-current assets Property, plant and equipment (note 5) 502.3 513.5 554.8 Other long-term assets 0.4 0.5 0.5--------------------------------------------------------------------------- $ 824.4 $ 853.3 $ 826.4---------------------------------------------------------------------------LIABILITIESCurrent liabilities Accounts payable and accrued liabilities $ 139.2 $ 139.3 $ 134.5 Distributions payable 18.5 39.2 5.7--------------------------------------------------------------------------- Total current liabilities 157.7 178.5 140.2---------------------------------------------------------------------------Non-current liabilities Long-term debt (note 9) 106.9 109.4 115.1 Post employment benefits (note 8) 79.2 79.8 66.0 Other long-term liabilities - - 1.2 Long-term provisions 3.2 3.1 3.0---------------------------------------------------------------------------Total liabilities $ 347.0 $ 370.8 $ 325.5---------------------------------------------------------------------------PARTNERS' EQUITY Partnership units (Note 6) 587.5 587.5 587.5 Cumulative distributions in excess of income (110.1) (105.0) (86.6)--------------------------------------------------------------------------- Total Partners' equity 477.4 482.5 500.9------------------------------------------------------------------------------------------------------------------------------------------------------ $ 824.4 $ 853.3 $ 826.4---------------------------------------------------------------------------The accompanying notes are an integral part of these interim consolidatedfinancial statements.Canfor Pulp Limited PartnershipCondensed Consolidated Statements of Comprehensive Income(Unaudited)(millions of dollars, except units and per Three months ended unit amounts) March 31, 2011 March 31, 2010---------------------------------------------------------------------------Revenue Sales $ 252.3 $ 239.5--------------------------------------------------------------------------- 252.3 239.5Costs and expenses Manufacturing and product costs 149.0 152.7 Freight and other distribution costs 30.7 31.1 Amortization 16.5 16.3 Selling and administration costs 6.2 6.4--------------------------------------------------------------------------- 202.4 206.5Operating income 49.9 33.0 Interest expense (2.1) (2.0) Foreign exchange gain on long-term debt 2.5 3.4 Gain on derivative financial instruments 1.6 0.4 Foreign exchange loss on working capital (1.1) (1.8) Other expense (0.1) ---------------------------------------------------------------------------- 0.8 ----------------------------------------------------------------------------Net income $ 50.7 $ 33.0 Other comprehensive income (loss) Actuarial losses recognized in accumulated distributions in excess of income (0.2) (9.4)--------------------------------------------------------------------------- Total comprehensive income $ 50.5 $ 23.6---------------------------------------------------------------------------Net income per Partnership unit, basic and diluted $ 0.71 $ 0.46Weighted average Partnership units outstanding 71,270,025 71,270,025---------------------------------------------------------------------------The accompanying notes are an integral part of these interim consolidatedfinancial statements.Canfor Pulp Limited PartnershipCondensed Consolidated Statements of Changes in Equity(Unaudited)(millions of dollars) Three months ended March 31, 2011 March 31, 2010---------------------------------------------------------------------------Partnership units---------------------------------------------------------------------------Balance at beginning and end of period $ 587.5 $ 587.5---------------------------------------------------------------------------Cumulative distributions in excess of incomeBalance beginning of period $ (105.0) $ (86.6)Net income for the period 50.7 33.0Defined benefit plan actuarial losses (0.2) (9.4)Distributions declared during the period (note 12) (55.6) (22.8)---------------------------------------------------------------------------Balance at end of period $ (110.1) $ (85.8)---------------------------------------------------------------------------Total equity $ 477.4 $ 501.7---------------------------------------------------------------------------The accompanying notes are an integral part of these consolidated interimfinancial statements.Canfor Pulp Limited PartnershipCondensed Consolidated Statements of Cash Flows(Unaudited) Three months ended(millions of dollars) March 31, 2011 March 31, 2010---------------------------------------------------------------------------Cash and cash equivalents generated from (used in)Operating activitiesNet income $ 50.7 $ 33.0 Adjustments for: Amortization 16.5 16.3 Unrealized foreign exchange gain on long-term debt (2.5) (3.4) Interest expense 2.1 2.0 Reduction (increase) in value of outstanding derivative instruments (0.4) 1.2 Employee future benefits 1.3 1.5 Loss on disposal of fixed assets 0.3 -Salary pension plan contribution (2.0) (0.6)---------------------------------------------------------------------------Cash flow from operations before working capital changes 66.0 50.0Decrease (increase) in non-cash working capital Accounts receivable - trade and other 2.5 (13.2) Inventories 7.2 6.7 Prepaid expenses and other assets 1.8 (1.1) Accounts payable and accrued liabilities (2.3) 5.4---------------------------------------------------------------------------Net cash from operations 75.2 47.8---------------------------------------------------------------------------Financing activities Distributions paid to partners (76.3) (19.9) Interest paid (0.3) (0.2)---------------------------------------------------------------------------Net cash used in financing (76.6) (20.1)---------------------------------------------------------------------------Investing activities Property, plant and equipment (6.8) (6.5) Green Transformation Program expenditures (16.7) - Green Transformation Program reimbursements 9.6 - Government grants received 1.8 ----------------------------------------------------------------------------Net cash used in investing (12.1) (6.5)------------------------------------------------------------------------------------------------------------------------------------------------------Increase (decrease) in cash and cash equivalents (13.5) 21.2Cash and cash equivalents, beginning of period 64.2 13.5---------------------------------------------------------------------------Cash and cash equivalents, end of period $ 50.7 $ 34.7------------------------------------------------------------------------------------------------------------------------------------------------------The accompanying notes are an integral part of these consolidated interimfinancial statements.Canfor Pulp Limited PartnershipNotes to the Condensed Consolidated Financial Statements as at March 31, 2011(Unaudited, in millions of dollars unless otherwise noted)1. General information and reporting entityCanfor Pulp Limited Partnership (the Partnership) is a limited Partnership formed on April 21, 2006, under the laws of Manitoba, to acquire and carry on the NBSK pulp and paper business of Canadian Forest Products Ltd. a subsidiary of Canfor Corporation (collectively Canfor). The Partnership is domiciled in Canada. The address of the Partnership's registered office is 230-1700 West 75th Avenue, Vancouver, British Columbia, Canada V6P 6G2. The consolidated interim financial statements (the financial statements) include the accounts of the Partnership and its subsidiaries.The Partnership is a producer of market NBSK Pulp and fully bleached, high performance Kraft Paper. The Partnership consists of two NBSK pulp mills and one NBSK pulp and paper mill located in Prince George, British Columbia and a marketing group based in Vancouver, British Columbia (the Pulp Business).At March 31, 2011, Canfor owns 50.2% and Canfor Pulp Products Inc. (CPPI) owns 49.8% of the issued and outstanding units of the Partnership.Economic DependenceThe Partnership depends on Canfor to provide approximately 54% (2010 - 56%) of its fibre supply as well as to provide certain key business and administrative services as described in note 10. As a result of these relationships the Partnership considers its operations to be dependent on its ongoing relationship with Canfor.2. Basis of preparation and adoption of IFRSStatement of Compliance and Conversion to International Financial Reporting StandardsThe Partnership prepares its financial statements in accordance with Canadian generally accepted accounting principles as set out in the Handbook of the Canadian Institute of Chartered Accountants (CICA Handbook). In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards, and require publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011. Accordingly, the Partnership has commenced reporting on this basis in these financial statements. In these financial statements, the term Canadian GAAP refers to Canadian GAAP before the adoption of International Financial Reporting Standards (IFRS).These financial statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting and IFRS 1, using accounting policies consistent with IFRS as issued by the International Accounting Standards Board (IASB) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC).Subject to certain transition elections disclosed in note 4, the Partnership has consistently applied the same accounting policies in its opening IFRS statement of financial position at January 1, 2010 and throughout all periods presented, as if these policies had always been in effect. Note 4 discloses the impact of the transition to IFRS on the Partnership's balance sheet, statements of comprehensive income (loss) and statements of cash flows, including the nature and effect of significant changes in accounting policies from those used in the Partnership's consolidated financial statements for the year ended December 31, 2010 under Canadian GAAP.The policies applied in these financial statements are based on IFRS issued and outstanding as of May 2, 2011, the date the Board of Directors approved the statements. Any subsequent changes to IFRS that are given effect in the Partnership's annual consolidated financial statements for the year ending December 31, 2011 could result in restatement of these financial statements, including the transition adjustments recognized on change-over to IFRS. The financial statements should be read in conjunction with the Partnership's Canadian GAAP annual financial statements for the year ended December 31, 2010. Note 5 discloses IFRS information for the year ended December 31, 2010 that is material to an understanding of these financial statements.Basis of measurementThese financial statements have been prepared on the historical cost basis, except for derivative financial instruments measured at fair value through profit and loss.Functional and presentation currencyThese financial statements are presented in Canadian dollars, which is the Partnership's functional currency.Use of estimates and judgmentsThe preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. It is reasonably possible that circumstances may arise that cause actual results to differ from management estimates, however, management does not believe it is likely that such differences will materially affect the Partnership's financial position.Significant areas requiring the use of management estimates are inventory valuations, amortization rates, employee benefit plan assumptions, asset retirement obligations, impairment of long-lived assets and environmental remediation.3. Significant Accounting PoliciesPrinciples of ConsolidationThese financial statements include the accounts of the Partnership, its wholly owned subsidiaries and its 50% interest in Premium One Papers (a general partnership). The 50% interest in the general partnership is accounted for using proportionate consolidation.(i) SubsidiariesSubsidiaries are entities controlled by the Partnership. Control exists when the Partnership has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. All significant inter-company transactions have been eliminated.(ii) Investments in jointly controlled entities (Joint Ventures)Joint ventures are those entities over whose activities the Partnership has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. All joint ventures are accounted for using proportionate consolidation. Profits and losses resulting from 'upstream' and 'downstream' transactions are recognized in the Partnership's financial statements only to the extent of the unrelated interests in the joint venture.Cash and Cash EquivalentsCash and cash equivalents include cash on hand and highly liquid investments with an original maturity date of 90 days or less.Valuation of InventoriesInventories of pulp and paper products, wood chips and processing materials and supplies are valued at the lower of average cost and net realizable value. The cost of inventories includes production and conversion costs and other costs incurred in bringing them to their existing location and condition. The average cost includes an appropriate share of production overheads based on normal operating capacity.Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.Where market conditions result in the manufacturing costs of a product exceeding its net realizable value, a valuation allowance is made. Valuation provisions are also made for old, slow moving and obsolete finished goods and spare parts. Such valuation allowances are deducted from the carrying value of the inventories.Property, Plant and EquipmentItems of property, plant and equipment, including expenditure on major inspections and overhauls, are measured at cost less accumulated depreciation and accumulated impairment losses.Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, borrowing costs, any other costs directly attributable to bringing assets to a working condition for their intended uses, and the costs of dismantling and removing the items and restoring the site on which they are located. Borrowing costs that are directly attributable to the acquisition or construction of a qualifying asset form part of the cost of that asset.Expenditure on major maintenance, refits or repairs is capitalized where it enhances the life or performance of an asset above its originally assessed standard of performance. The costs of the day-to-day servicing of property, plant and equipment are recognized in net income as incurred.The cost of routine maintenance and repairs and the replacement of minor parts, are charged to expense as incurred. Certain expenditures relating to replacement of components incurred during major maintenance are capitalized and amortized over the estimated benefit period of such expenditures.When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.The cost of replacing a part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Partnership and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. Depreciation is recognized in net income on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated.Assets are amortized over the following estimated productive lives:Buildings 10 to 50 yearsPulp and paper machinery and equipment 20 yearsMobile equipment 4 yearsOffice furniture and equipment 10 yearsMajor maintenance 1 to 2 yearsGovernment AssistanceGovernment grants relating to the purchase of property, plant and equipment are deducted from the carrying value of the asset, the net cost being capitalized. Government grants related to income are recognized as income on a systematic basis over the periods necessary to match them with the related costs which they were intended to compensate.Impairment of non-financial assetsProperty, plant and equipment are tested for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units or CGUs). The recoverable amount is the higher of an asset's fair value less costs to sell and value in use (being the present value of the expected future cash flows of the relevant asset or CGU). An impairment loss is recognized for the amount by which the asset's carrying amount exceeds its recoverable amount.The Partnership evaluates impairment losses for potential reversals when events or circumstances warrant such consideration.ProvisionsA provision is recognized if, as a result of a past event, the Partnership 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. Provisions are measured at management's best estimate of the expenditure required to settle the obligation at the end of the reporting period, and are discounted to present value where the effect is material. The rate used to discount provisions reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost.Financial instrumentsFinancial assets and liabilities are recognized when the Partnership becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Partnership has transferred substantially all risks and rewards of ownership.At initial recognition, the Partnership classifies its financial instruments in the following categories depending on the purpose for which the instruments were acquired:(i) Financial assets and liabilities at fair value through net income: A financial asset or liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short-term. Derivatives are also included in this category. The only instruments held by the Partnership classified in this category are natural gas swaps and US dollar forward contracts.Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are expensed in the statement of comprehensive income (loss). Gains and losses arising from changes in fair value are presented in the statement of income within other gains and losses in the period in which they arise. Financial assets and liabilities at fair value through net income are classified as current except for the portion to be realized or paid beyond twelve months of the balance sheet date, which is classified as non-current.(ii) Available-for-sale investments: Available-for-sale investments are non-derivatives that are either designated in this category or not classified in any of the other categories. Currently, the Partnership does not have any assets included in this category.(iii) Loans and receivables: Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Partnership's loans and receivables are comprised of trade receivables and cash and cash equivalents, and are included in current assets due to their short-term nature. Loans and receivables are initially recognized at the amount expected to be received less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest method less a provision for impairment.(iv) Financial liabilities at amortized cost: Financial liabilities at amortized cost include trade payables, bank debt and long-term debt. Trade payables are initially recognized at the amount required to be paid less, when material, a discount to reduce the payables to fair value. Subsequently, trade payables are measured at amortized cost using the effective interest method. Bank debt and long-term debt are recognized initially at fair value, net of any transaction costs incurred, and subsequently at amortized cost using the effective interest method.Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are presented as non-current liabilities.(v) Derivative financial instruments: The Partnership utilizes derivative financial instruments in the normal course of its operations as a means to manage its foreign exchange and commodity price risk. For example, from time to time, it purchases foreign exchange forward sales contracts to hedge related foreign currency denominated accounts receivable balances and also enters into swap transactions to reduce its exposure to fluctuating natural gas price. The Partnership records all derivatives at fair value through profit and loss and its policy is not to utilize derivative financial instruments for trading or speculative purposes.Impairment of financial assetsAt each reporting date, the Partnership assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, the Partnership recognizes an impairment loss, as follows:(i) Financial assets carried at amortized cost: The loss is the difference between the amortized cost of the loan or receivable and the present value of the estimated future cash flows, discounted using the instrument's original effective interest rate.(ii) Available-for-sale financial assets: The impairment loss is the difference between the original cost of the asset and its fair value at the measurement date, less any impairment losses previously recognized in the statement of income.Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized.Employee Future BenefitsDefined Contribution PlansA defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. The cost of defined contribution pension plans is charged to expense as the contributions become payable. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in future payments is available.For hourly employees covered by industry union defined benefit pension plans, earnings are charged with the Partnership's contributions required under the collective agreements.Defined Benefit PlansA defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Partnership, in participation with Canfor, has defined benefit plans that provide both pension and other retirement benefits to most of its salaried employees and certain hourly employees not covered by forest industry union plans. The Partnership also provides certain health care benefits and pension bridging benefits to eligible retired employees.The Partnership's net obligation in respect of a defined benefit pension plan is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. Any unrecognized past service costs and the fair value of any plan assets are deducted. The discount rate is the yield at the reporting date on AA credit-rated bonds that have maturity dates approximating the terms of the partnership's obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is performed annually by a qualified actuary using the projected unit credit method.Actuarial gains or losses arise from the difference between the actual and expected long-term rates of return on plan assets for a period or from changes in actuarial assumptions used to determine the accrued benefit obligation. Actuarial gains and losses are recognized in full in the period in which they occur, in other comprehensive income without recycling to the statement of income in subsequent periods. Current service cost, the recognized element of any past service cost, the expected return on plan assets and the interest arising on the pension liability are included in the same line items in the statement of comprehensive income as the related compensation cost.Past service costs are deferred and amortized on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognized immediately in net income.The Partnership is not recognizing potential liabilities resulting from minimum funding requirements under solvency assumptions, if the Partnership can demonstrate its ability to provide a letter of credit in the amount of the shortfall.Partners' CapitalPartnership units are classified as equity. Incremental costs directly attributable to the issuance of units are recognized as a deduction from equity.Interest paidCash flows relating to interest paid have been classified as financing activities in the statement of cash flows.DistributionsDistributions on Partnership units are recognized in the financial statements in the period in which the distributions are approved by the Board of Directors of the Partnership and treated as an equity distribution.Revenue RecognitionRevenue comprises the fair value of the consideration received or receivable for the sale of goods in the ordinary course of the Partnership's activities. Sales are shown net of discounts, allowances and vendor rebates and after eliminating sales within the Partnership.Revenues are derived from the following major product lines: pulp, paper, energy and sales commissions. Sales are recognized after the Partnership has transferred the risks and rewards of ownership to the buyer, it is probable that the economic benefits associated with the transaction will flow to the entity, collection is reasonably assured and the Partnership retains neither a continuing right to dispose of the goods, nor effective control of those goods; usually, this means that sales are recorded upon delivery of goods to customers in accordance with agreed terms of delivery. Amounts charged to customers for shipping and handling are recognized as revenue, and shipping and handling costs incurred by the Partnership are reported as cost of sales.Income TaxesThe Partnership is not directly subject to federal or provincial income taxes. The taxable income or loss of the Partnership is required to be allocated to the Partnership's partners.Foreign Currency TranslationForeign currency transactionsItems included in the financial statements of each of the Partnership'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 Partnership's functional currency.Transactions in foreign currencies are translated to the functional currencies of the respective entities at exchange rates at the dates of transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are re-translated to the functional currency at the exchange rate at that date. Foreign currency differences arising on re-translation are recognized in net income.Foreign operationsThe assets and liabilities of foreign operations are translated to Canadian dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Canadian dollars at exchange rates at the dates of the transactions.Foreign currency differences are recognized and presented in other comprehensive income and in the foreign currency translation reserve in equity.New standards not yet adoptedStandards and interpretations issued but not yet effective:IFRS 9- Financial InstrumentsInternational Financial Reporting Standard 9, Financial Instruments (IFRS 9), was issued in November 2009. It addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39 for debt instruments with a new mixed measurement model having only two categories: Amortized cost and fair value through net income. IFRS 9 also replaces the models for measuring equity instruments and such instruments are either recognized at fair value through net income or at fair value through other comprehensive income. This standard is required to be applied for accounting periods beginning on or after January 1, 2013, with earlier adoption permitted.The Partnership anticipates that the adoption of this standard in future periods will have no material impact on the consolidated financial statements.4. Transition to International Financial Reporting StandardsApplication of IFRS 1These financial statements are the first consolidated interim financial statements prepared by the Partnership under IFRS. The Partnership has applied IAS 34 and IFRS 1 First-time adoption of IFRS in preparing these consolidated financial statements.The Partnership's transition date to IFRS is January 1, 2010. The Partnership prepared its opening IFRS balance sheet at that date. In preparing its opening IFRS balance sheet and comparative information for the quarter ended March 31, 2010 the Partnership has adjusted amounts reported previously in financial statements prepared in accordance with Canadian GAAP.An explanation of how the transition from Canadian GAAP to IFRS has affected the Partnership's financial position, financial performance and cash flows is set out in the tables in this note and the notes that accompany the tables.In preparing these condensed consolidated interim financial statements in accordance with IFRS 1, the Partnership has applied the mandatory exceptions and certain of the optional exemptions from full retrospective application of IFRS, as described below.Mandatory exceptions from full retrospective application followed by the PartnershipThe Partnership has applied the mandatory exception from retrospective application for Estimates.Estimates under IFRS 1 as at January 1, 2010 should be consistent with estimates made for the same date under Canadian GAAP, unless there is evidence that those estimates were in error. All other mandatory exceptions from full retrospective application are not applicable for the Partnership.Exemptions from full retrospective application elected by the PartnershipThe Partnership has elected to apply the following optional exemptions from full retrospective application.a. Business combinations exemptionThe Partnership has applied the business combinations exemption in IFRS 1. It has not restated business combinations which took place prior to the January 1, 2010 transition date.b. Employee benefits exemptionIFRS 1 includes an optional exemption for entities that elect to recognize actuarial gains and losses using the corridor method, or a method that results in faster recognition in net income than the corridor method, after the date of transition. An entity may choose to recognize all cumulative (and previously unrecognized) actuarial gains and losses in retained earnings at the date of transition, as long as the exemption is applied to all defined benefit plans, i.e. the exemption cannot be applied on a plan-by-plan basis. The Partnership has elected to recognize all cumulative actuarial gains and losses in "Cumulative distributions in excess of income" as at January 1, 2010.c. Borrowing costs exemptionThe Partnership has applied the transitional requirements of IAS 23. This allows the Partnership to capitalize borrowing costs in respect of qualifying assets for which the commencement date for capitalization is on or after January 1, 2010.d. Cumulative translation exemptionGenerally IAS 21 requires an entity to classify certain translation differences as a separate component of equity. However, an entity may deem the cumulative translation account for all foreign operations to be nil at the date of transition, and reclassify any such amounts determined in accordance with previous GAAP at that date to retained earnings. When this is the case, the gain or loss on a subsequent disposal of any foreign operation excludes translation differences that arose before the date of transition. The Partnership has elected to take this exemption and has recognized all cumulative translation differences in "Cumulative distributions in excess of income" as at January 1, 2010.e. Asset retirement obligations exemptionIFRS requires that asset retirement obligations be re-valued every reporting period using the then current discount rate. The Partnership has chosen to apply the relevant IFRS standard (IFRIC 1) prospectively effective the date of transition to IFRS. Had the Partnership not taken the exemption, it would have been required to retrospectively calculate changes over the life of the obligation.Reconciliations between IFRS and Canadian GAAPThe following reconciliations provide a quantification of the effect of the transition to IFRS.Reconciliation of Assets, Liabilities & Equity at January 1, 2010 As at January 1, 2010--------------------------------------------------------------------------- Effect of Canadian transition(millions of dollars, unaudited) GAAP to IFRS IFRS---------------------------------------------------------------------------ASSETSCurrent assets Cash and cash equivalents $ 13.5 $ - $ 13.5 Accounts receivable Trade 110.5 - 110.5 Other 8.6 - 8.6 Inventories 135.4 - 135.4 Prepaid expenses and other assets(2) 18.4 (15.3) 3.1---------------------------------------------------------------------------Total current assets 286.4 (15.3) 271.1--------------------------------------------------------------------------- Property, plant and equipment(2) 534.1 20.7 554.8 Other long-term assets(1,2) 17.1 (16.6) 0.5--------------------------------------------------------------------------- $ 837.6 $ (11.2) $ 826.4---------------------------------------------------------------------------LIABILITIESCurrent liabilities Accounts payable and accrued liabilities $ 134.5 $ - $ 134.5 Distributions payable 5.7 - 5.7---------------------------------------------------------------------------Total current liabilities 140.2 - 140.2---------------------------------------------------------------------------Long-term debt 115.1 - 115.1Post employment benefits(1) 49.0 17.0 66.0Long-term liabilities 1.2 - 1.2Long-term provisions 3.0 - 3.0--------------------------------------------------------------------------- $ 308.5 $ 17.0 $ 325.5---------------------------------------------------------------------------PARTNERS' EQUITY Partnership units 587.5 - 587.5 Accumulated earnings and distributions(1) (58.4) (28.2) (86.6)--------------------------------------------------------------------------- $ 529.1 $ (28.2) $ 500.9------------------------------------------------------------------------------------------------------------------------------------------------------ $ 837.6 $ (11.2) $ 826.4---------------------------------------------------------------------------Reconciliation of Assets, Liabilities & Equity at December 31, 2010 As at December 31, 2010--------------------------------------------------------------------------- Effect of Canadian transition(millions of dollars, unaudited) GAAP to IFRS IFRS---------------------------------------------------------------------------ASSETSCurrent assets Cash and cash equivalents $ 64.2 $ - $ 64.2 Accounts receivable Trade 108.0 - 108.0 Other 14.8 - 14.8 Green Transformation Program 17.9 - 17.9 Inventories 123.4 - 123.4 Prepaid expenses and other assets(1,2) 21.8 (10.8) 11.0---------------------------------------------------------------------------Total current assets $ 350.1 $ (10.8) $ 339.3--------------------------------------------------------------------------- Property, plant and equipment(2) 499.6 13.9 513.5 Other long-term assets(1,2) 17.6 (17.1) 0.5--------------------------------------------------------------------------- $ 867.3 $ (14.0) $ 853.3---------------------------------------------------------------------------LIABILITIESCurrent liabilities Accounts payable and accrued liabilities $ 139.3 $ - $ 139.3 Distributions payable 39.2 - 39.2---------------------------------------------------------------------------Total current liabilities 178.5 - 178.5---------------------------------------------------------------------------Long-term debt 109.4 - 109.4Post employment benefits(1,4) 53.0 26.8 79.8Long-term liabilities(4) - - -Long-term provisions(4) 3.1 - 3.1--------------------------------------------------------------------------- $ 344.0 $ 26.8 $ 370.8---------------------------------------------------------------------------PARTNERS' EQUITY Partnership units 587.5 - 587.5 Accumulated earnings and distributions(1) (64.2) (40.8) (105.0)--------------------------------------------------------------------------- 523.3 (40.8) 482.5--------------------------------------------------------------------------- $ 867.3 $ (14.0) $ 853.3---------------------------------------------------------------------------Reconciliation of equity at March 31, 2010 As at(millions of dollars, unaudited) March 31, 2010---------------------------------------------------------------------------Previous Canadian GAAP - Total equity $ 538.8Recognition of unamortized actuarial losses at date of transition(1) (28.2)Lower pension expense for quarter ended March 31, 2010(1) 0.5Actuarial losses on defined benefit plans for quarter ended March 31, 2010(1) (9.4)---------------------------------------------------------------------------IFRS - Total equity $ 501.7------------------------------------------------------------------------------------------------------------------------------------------------------Reconciliation of comprehensive income for three months ended March 31, 2010 Three months ended(millions of dollars, unaudited) March 31, 2010---------------------------------------------------------------------------Comprehensive income - Previous Canadian GAAP $ 32.5Lower pension expense for period(1) 0.5--------------------------------------------------------------------------- $ 33.0---------------------------------------------------------------------------Actuarial losses on defined benefit plans during the period(1) $ (9.4)---------------------------------------------------------------------------Comprehensive income IFRS $ (23.6)---------------------------------------------------------------------------Reconciliation of comprehensive income for year ended December 31, 2010 Year ended(millions of dollars, unaudited) December 31, 2010---------------------------------------------------------------------------Comprehensive income - Previous Canadian GAAP $ 178.0Lower pension expense for period(1) 1.0--------------------------------------------------------------------------- $ 179.0---------------------------------------------------------------------------Other comprehensive income (loss) - Previous Canadian GAAP $ 0.1Actuarial losses on defined benefit plans during the period(1) (13.6)---------------------------------------------------------------------------Comprehensive income IFRS $ 165.5---------------------------------------------------------------------------Notes to the Reconciliations1. Employee Benefits - Under IFRS the Partnership's accounting policy is to recognize all actuarial gains and losses immediately in other comprehensive income. At the date of transition, all previously unrecognized cumulative actuarial gains and losses and unrecognized past service costs were recognized in equity. The impact of this policy decision was a $28.2 million decrease in equity, an $11.2 million decrease in other long-term assets and a $17.0 million increase to long-term liabilities. All actuarial gains and losses arising in 2010 were recognized in other comprehensive income. A charge to accumulated earnings and distributions of $13.6 million for actuarial gains and losses related to the year ended December 31, 2010 was recorded (first quarter of 2010 a charge of $9.4 million was recorded to accumulated earnings and distributions). As a result of immediate recognition of previously unrecognized cumulative actuarial gains and losses the total pension expense for the year ended was reduced by $1.0 million under IFRS (first quarter of 2010 employee benefits expense was $0.5 million lower than previously reported). This reduced manufacturing costs by $1.0 million for the year ended December 31, 2010 (reduced manufacturing costs for the first quarter of 2010 by $0.5 million).2. Property, plant and equipment (PP&E) - For major maintenance, International Accounting Standard (IAS) 16 requires for major inspections and overhauls to be accounted as a separate component of PP&E. The Partnership has determined that a significant part of its major maintenance program qualifies as a separate component of PP&E under IFRS. As at January 1, 2010 the resulting impact is a $20.7 million increase to PP&E, a $15.3 million decrease to prepaid expenses and a $5.4 million decrease to other long-term assets. The impact on net income for the year ended December 31, 2010 was an increase in amortization of $18.7 million with an offsetting decrease to manufacturing costs. The impact on the first quarter of 2010 was an increase in amortization of $4.7 million with an offsetting decrease to manufacturing costs. The change in policy also increased expenditures on items of PP&E reported in the statements of cash flows by $11.9 million for the year ended December 31, 2010 and $5.6 million for the quarter ended March 31, 2010 restated to conform to IFRS. The long-term maintenance provision and long-term maintenance expenditure line items on the consolidated statements of cash flows are no longer applicable and those amounts are now included in PP&E.3. Statement of cash flows (interest received / paid) - Under IFRS an accounting policy choice is available as to where interest and distributions paid and interest and distributions received are presented in the statements of cash flows. The Partnership has elected to present distributions paid to partners and interest paid in financing activities and interest received in investing activities. Under Canadian GAAP interest received and paid were presented within operating activities.4. Reclassification of Employee Future Benefits and Asset Retirement Obligations - Under Canadian GAAP employee pension obligations, other retirees benefits and asset retirement obligations were included in long-term liabilities. Under IFRS, pension and other retirees benefits have been classified on the consolidated balance sheets as post employment benefits and asset retirement obligations have been classified as Long-term provisions.5. Property, Plant and Equipment Land Buildings, Asset Construc-(millions of and machinery retire- tion Major dollars, improve- and ment- in Main- unaudited) ments equipment landfill Progress tenance Total---------------------------------------------------------------------------CostBalance at January 1, 2010 5.4 1,344.1 2.3 3.2 30.3 1,385.3---------------------------------------------------------------------------Additions - 0.1 - 24.9 - 25.0Disposals - (0.6) - - (5.2) (5.8)Transfers - 12.5 - (24.4) 11.9 -Balance at December 31, 2010 5.4 1,356.1 2.3 3.7 37.0 1,404.5---------------------------------------------------------------------------Additions - - - 5.7 - 5.7Disposals - (0.9) - - - (0.9)Transfers - 2.3 - (2.3) - -Balance at March 31, 2011 5.4 1,357.5 2.3 7.1 37.0 1409.3---------------------------------------------------------------------------Accumulated depreciationBalance at January 1, 2010 - 820.1 0.8 - 9.6 830.5Additions - 47.3 0.1 - 18.7 66.1Disposals - (0.4) - - (5.2) (5.6)---------------------------------------------------------------------------Balance at December 31, 2010 - 867.0 0.9 - 23.1 891.0Additions - 12.1 - - 4.4 16.5Disposals - (0.5) - - - (0.5)Balance at March 31, 2011 - 878.6 0.9 - 27.5 907.0---------------------------------------------------------------------------Carrying amounts---------------------------------------------------------------------------At January 1, 2010 5.4 524.0 1.5 3.2 20.7 554.8---------------------------------------------------------------------------At December 31, 2010 5.4 489.1 1.4 3.7 13.9 513.5---------------------------------------------------------------------------At March 31, 2011 5.4 478.9 1.4 7.1 9.5 502.3---------------------------------------------------------------------------6. Net Income per Partnership UnitBasic net income per Partnership unit is based on the weighted average number of Limited Partnership units outstanding during the period. All outstanding Partnership units were issued on July 1, 2006, and there was no change in the number of outstanding Partnership units during the quarter.7. Inventories(millions of dollars, March 31, December 31, January 1, unaudited) 2011 2010 2010--------------------------------------------------------------------------Pulp 50.7 52.7 55.2Paper 11.6 10.1 15.9Wood chips 10.2 16.4 21.5Processing materials and supplies 43.8 44.2 42.8-------------------------------------------------------------------------- 116.3 123.4 135.4--------------------------------------------------------------------------8. Employee Future BenefitsThe Partnership, in participation with Canfor, has funded and unfunded defined benefit plans, as well as a defined contribution plan, that provide pension, other retirement and post-employment benefits to substantially all salaried employees and for its hourly employees covered under collective agreements. The defined benefit plans are based on years of service and final average salary. The post-employment benefit plans are non-contributory and include a range of health care and other benefits.Defined Benefit PlansThe Partnership measures its accrued benefit obligations and the fair value of plan assets for accounting purposes under IFRS as at December 31 of each year. In 2010, the Partnership had two registered defined benefit plans, for which actuarial valuations are performed every three years. The most recent actuarial valuation for funding purposes of the Partnership's single largest pension plan was as of December 31, 2009, and the next required plan valuation is currently scheduled for December 31, 2012.Information about the Partnership's defined benefit plans, in aggregate, is as follows: 2010---------------------------------------------------------------------------(millions of dollars, unaudited) Pension Benefit Plans Other Benefit Plans---------------------------------------------------------------------------Defined Benefit Plan AssetsFair market value of plan assets Beginning of year $ 53.8 $ - Actual return on plan assets 5.5 - Partnership contributions 8.2 1.3 Employee contributions 0.2 - Benefit payments (3.0) (1.3)--------------------------------------------------------------------------- End of year $ 64.7 $ ------------------------------------------------------------------------------------------------------------------------------------------------------- 2010---------------------------------------------------------------------------(millions of dollars, unaudited)Pension Benefit Plans Other Benefit Plans---------------------------------------------------------------------------Defined Benefit Plan ObligationsAccrued benefit obligation Beginning of year $ 74.6 $ 45.9 Current service cost 3.3 0.8 Interest cost 4.6 3.0 Employee Contributions 0.2 - Benefit payments (3.0) (1.3) Actuarial loss (gain) 6.1 8.8 Other - 1.3--------------------------------------------------------------------------- End of year $ 85.8 $ 58.5------------------------------------------------------------------------------------------------------------------------------------------------------Of the defined benefit plan obligation of $85.8 million (January 1, 2010 - $74.6 million), $12.1 million relates to plans that are wholly unfunded and $75.7 million relates to plans that are wholly or partly funded (January 1, 2010 - $11.7 million and $62.9 million, respectively).The total obligation for the other benefit plans of $58.5 million (January 1, 2010 - $45.9 million) is unfunded, except when expenditures are incurred.Reconciliation of Funded Status of Benefit Plans to Amounts Recorded in the Financial Statements December 31, 2010 January 1, 2010--------------------------------------------------------------------------- Pension Other Pension Other Benefit Benefit Benefit Benefit(millions of dollars, unaudited) Plans Plans Plans Plans---------------------------------------------------------------------------Fair market value of plans assets $ 64.7 $ - $ 53.8 $ -Accrued benefit obligation (85.8) (58.5) (74.6) (45.9)---------------------------------------------------------------------------Funded status of plans - surplus (deficit) (21.1) (58.5) (20.8) (45.9)---------------------------------------------------------------------------Accrued benefit liability (21.1) (58.5) (20.8) (45.9)Other pension plans (0.2) - (0.1) ----------------------------------------------------------------------------Total accrued benefit liability, net $ (21.3) $ (58.5) $ (20.9) $ (45.9)---------------------------------------------------------------------------The net accrued benefit liability is included in the Partnership's balancesheet as follows:Accounts payable and accrued liabilities $ - $ - $ (0.8) $ -Post employment benefits (21.3) (58.5) (20.1) (45.9)---------------------------------------------------------------------------Total accrued benefit liability, net $ (21.3) $ (58.5) $ (20.9) $ (45.9)------------------------------------------------------------------------------------------------------------------------------------------------------Components of pension costThe following table shows the before tax impact on net income and other comprehensive income of the Partnership's pension and other defined benefit plans. 2010--------------------------------------------------------------------------- Pension Other Benefit Benefit(millions of dollars, unaudited) Plans Plans---------------------------------------------------------------------------Recognized in net incomeCurrent service cost $ 3.3 $ 0.8Interest cost 4.6 3.0Expected return on plan assets (4.2) -Other - 1.3---------------------------------------------------------------------------Total pension cost recognized in net income $ 3.7 $ 5.1------------------------------------------------------------------------------------------------------------------------------------------------------Recognized in other comprehensive incomeActuarial loss (gain) immediately recognized $ 4.8 $ 8.8---------------------------------------------------------------------------Total pension cost recognized in other comprehensive income $ 4.8 $ 8.8------------------------------------------------------------------------------------------------------------------------------------------------------The expected return on plan assets is determined by considering the expected returns available on the assets based on the Partnership's current investment policy. Expected yields on fixed interest investments are based on gross redemption yields as at the balance sheet date. Expected returns on equity and property investments reflect long-term real rates of return experienced in the respective markets.Significant assumptionsThe actuarial assumptions used in measuring the Partnership's benefit plan provisions are as follows: December 31, 2010 January 1, 2010--------------------------------------------------------------------------- Pension Other Pension Other Benefit Benefit Benefit Benefit(weighted average assumptions) Plans Plans Plans Plans---------------------------------------------------------------------------Accrued benefit obligation at reporting date: Discount rate 5.50% 5.75% 6.25% 6.75% Rate of compensation increase 3.00% n/a 3.00% n/aBenefit costs for year ended December 31: Discount rate 6.25% 6.75% n/a n/a Expected rate of return on plan assets 7.50% n/a n/a n/a Future salary increases 3.00% n/a n/a n/a------------------------------------------------------------------------------------------------------------------------------------------------------Assumed health care cost trend rates(weighted average assumptions) December 31, 2010 January 1, 2010---------------------------------------------------------------------------Initial health care cost trend rate 7.16% 7.4%Ultimate health care trend rate 4.10% 4.10%Year ultimate rate is reached 2029 2029------------------------------------------------------------------------------------------------------------------------------------------------------Sensitivity analysisAssumed health care cost trend rates have a significant effect on the amounts reported for the other benefit plans. A one percentage-point change in assumed health care cost trend rates would have the following effects for 2010:(millions of dollars, unaudited) 1% Increase 1% Decrease---------------------------------------------------------------------------Effect on the aggregate service and interest cost $ 0.9 $ (0.7)Effect on defined benefit obligation $ 10.5 $ (8.4)------------------------------------------------------------------------------------------------------------------------------------------------------9. Credit Facilities and Long-term DebtAt March 31, 2011 the Partnership had outstanding long-term debt of $106.9 million (December 31, 2010 - $109.4 million, US$110.0 million) in the form of unsecured US dollar private placement notes (the Notes). The Notes bear interest at 6.41% and are repayable in full on their maturity date of November 30, 2013.The Partnership has a $40.0 million bank credit facility with a maturity date of November 30, 2013, of which $0.5 million was utilized at March 31, 2011 for a standby letter of credit issued for general business purposes. In addition, the Partnership has a separate facility with a maturity date of November 30, 2013, to cover the $13.0 million standby letter of credit issued to BC Hydro under the Electricity Purchase Agreement. During the quarter the Partnership has established a $30.0 million bridge loan credit facility to address timing difference between expenditures and reimbursements for projects funded under the Canadian Federal Government Green Transformation Program. Interest and other costs of the credit facilities are at prevailing market rates. The leverage ratio and interest coverage ratio are consistent with the financial covenants under the Note Agreement.The Notes and bank credit agreements each contain similar financial covenants including a maximum allowable debt:EBITDA leverage ratio and minimum required EBITDA:interest coverage ratio. The Partnership remained in compliance with all covenants at March 31, 2011 and throughout the period.The fair value of long-term debt at March 31, 2011 was $115.2 million (US$118.5 million).10. Related Party TransactionsThe Partnership's transactions with related parties are consistent with the transactions described in the December 31, 2010 audited consolidated financial statements and are based on agreed upon amounts between the parties, and are summarized below: Three months ended March 31, March 31,(millions of dollars, unaudited) 2011 2010---------------------------------------------------------------------------TransactionsCanfor 29.0 34.2CPPI administrative cost recovery 0.9 -Howe Sound LP - commission - 0.6Lakeland Mills Ltd. - purchase of wood chips 3.4 1.2--------------------------------------------------------------------------- March 31, December 31, 2011 2010---------------------------------------------------------------------------Balance SheetIncluded in accounts payable and accrued liabilities: Canfor 40.5 44.5 Lakeland Mills Ltd. 1.2 0.4Included in other accounts receivable: CPPI 1.0 -Included in trade accounts receivable: Product marketed for Canfor 25.8 23.2---------------------------------------------------------------------------Transactions and payables to Canfor include purchases of wood chips, pulp and administrative services.11. Derivative Financial InstrumentsThe Partnership uses derivative instruments to reduce its exposure to risks associated with fluctuations in foreign exchange rates, pulp and natural gas prices.For the first quarter of 2011 the Partnership recorded a net gain on derivative financial instruments of $1.6 million (first quarter 2010 - $0.4 million) relating to the settlement of maturing contracts during the quarter, and the revaluation to market of outstanding contracts at the end of the quarter, for natural gas swaps and US dollar forward contracts.The Partnership recorded losses of $1.1 million during the first quarter of 2011 (first quarter 2010 - $0.9 million) relating to settlement of maturing natural gas contracts as a charge to non-operating income. At March 31, 2011 the Partnership had outstanding commodity swaps hedging future natural gas purchases of 0.3 million gigajoules extending to October 2011. At March 31, 2011 the unrealized loss of $1.5 million (March 31, 2010 - loss of $4.6 million) on these outstanding commodity swaps was recorded as a liability in accounts payable and accrued liabilities and in long-term liabilities.The Partnership recorded a gain of $2.3 million during the first quarter of 2011 (first quarter 2010 -$2.5 million) on settlement of maturing US dollar forward contracts as a charge to non-operating income. At March 31, 2011 the Partnership had outstanding US dollar forward contracts of $61.3 million extending to July 2011. At March 31, 2011 the unrealized gain of $0.5 million (March 31, 2010 -$1.0 million) on these outstanding US dollar forward contracts was recorded as an asset in other accounts receivable.12. DistributionsThe Partnership declared distributions in the first three months of 2011 as follows:(millions of dollars, except per unit amounts, unaudited) Amount per Partnership Unit AmountRecord Date Payable Date $ $--------------------------------------------------------------------------January 31, 2011 February 15, 2011 0.26 18.5February 28, 2011 March 15, 2011 0.26 18.6March 31, 2011 April 15, 2011 0.26 18.5-------------------------------------------------------------------------- 0.78 55.6----------------------------------------------------------------------------------------------------------------------------------------------------13. Green Transformation ProgramOn October 9, 2009 the Canadian Federal Government announced the allocation of credits from the billion dollar Pulp and Paper Green Transformation Program (the Program). The Partnership has been allocated $122.2 million from the Program. The Program is designed as a reimbursement of funds to be spent on qualifying energy and environmental capital projects. Credits may be used until the Program end date of March 31, 2012. The Partnership has received Program approval to proceed with four projects totaling $157.4 million of which $122.2 million will be funded under the Program. As of March 31, 2011 the Partnership has incurred $55.8 million and received reimbursements totaling $29.8 million with the balance of $26.0 million receivable on March 31, 2011. The Partnership submits claims for expenditures on approved projects under the Program on a monthly basis. These projects are expected to provide economic and environmental benefits to the Partnership's operations.14. Segmented Information (a)The Partnership is a producer of market NBSK Pulp and fully bleached, high performance Kraft Paper. For management purposes, the Partnership has two reporting segments which operate as separate business units: Pulp and Paper. These divisions are the basis on which the Partnership reports its primary segment information. This segment reporting is consistent with the internal reporting provided to the executive management team, who operate as the Partnerships chief operating decision maker. The executive management team is responsible for allocating resources and assessing performance of the operating segments.The accounting policies of the segments are the same as those described in the summary of significant accounting policies.The Partnership accounts for interdivisional sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. All such sales and transfers are eliminated on consolidation.(millions of dollars, Unallocated unaudited) Pulp Paper Costs Total--------------------------------------------------------------------------Three months ended March 31, 2011----------------------------Sales to external customers (b) 217.3 34.0 1.0 252.3Sales of pulp to paper segment (c) 22.5 (22.5) - -Operating income (loss) 50.8 2.0 (2.9) 49.9Amortization 15.6 0.8 0.1 16.5Capital expenditures, net 4.3 0.8 0.6 5.7Identifiable assets 695.5 60.9 68.0 824.4Three months ended March 31, 2010----------------------------Sales to external customers (b) 204.8 34.5 0.2 239.5Sales of pulp to paper segment (c) 18.7 (18.7) - -Operating income (loss) 37.5 (0.5) (4.0) 33.0Amortization 15.4 0.8 0.1 16.3Capital expenditures, net 7.3 0.4 0.2 7.9Identifiable assets 738.4 63.6 44.6 846.6--------------------------------------------------------------------------(a) Operations are presented by product lines. Operations are considered to be in one geographic area since all production facilities are in Canada. Substantially all sales are exported outside Canada, with sales to the United States representing 31% (Year 2010 - 37%).(b) Sales to the largest customer represented approximately 8% of pulp segment sales (Year 2010 - 12%).(c) Sales of slush pulp to the paper segment are accounted for at approximate market value. The sales are transacted as a cost transfer and are not reflected in Pulp sales.FOR FURTHER INFORMATION PLEASE CONTACT: Terry HodginsCanfor Pulp Products Inc.Chief Financial Officer and Secretary604-661-5421Terry.Hodgins@canforpulp.comORRichard RemeschCanfor Pulp Products Inc.Corporate Controller604-661-5221Rick.Remesch@canforpulp.comwww.canforpulp.com