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Press release from Marketwire

Canfor Pulp Products Inc. Reports Results for Third Quarter of 2012

Monday, October 22, 2012

Canfor Pulp Products Inc. Reports Results for Third Quarter of 201221:35 EDT Monday, October 22, 2012VANCOUVER, BRITISH COLUMBIA--(Marketwire - Oct. 22, 2012) - Canfor Pulp Products Inc. ("CPPI") (TSX:CFX) today reported a net loss of $4.6 million, or $0.06 per share, for the third quarter of 2012, compared to net income of $3.3 million, or $0.05 per share for the second quarter of 2012 and net income of $23.9 million, or $0.33 per share for the third quarter of 2011. For the nine months ended September 30, 2012, the Company's net income was $9.0 million, or $0.07 per share compared to $122.8 million, or $1.72 per share for the nine months ended September 30, 2011.The Company reported an operating loss of $8.2 million for the third quarter of 2012, compared to operating income of $10.4 million in the second quarter of 2012, principally as a result of lower pulp sales realizations. Lower shipments, restructuring costs and one-time costs associated with new five year collective labour agreements were also contributing factors.The following table summarizes selected financial information for the Company for the comparative periods:(millions of dollars, except for per share amounts)Q32012Q22012YTD2012Q32011YTD2011Sales$177.7$210.8$608.5$233.9$728.3Operating income (loss)$(8.2)$10.4$13.7$36.4$136.9Net income (loss)$(4.6)$3.3$9.0$23.9$122.8Net income (loss) per share, basic and diluted$(0.06)$0.05$0.07$0.33$1.72Results in the third quarter of 2012 were significantly impacted by challenging markets resulting in downward pressure on prices, with Northern Bleached Softwood Kraft ("NBSK") list prices decreasing over 5% in all regions compared to the previous quarter. Global softwood pulp markets weakened through the summer months, with price erosion occurring for most of the quarter. While softwood pulp inventories remained relatively stable, global hardwood pulp producer inventories increased throughout the quarter. At the end of August (latest available data), global softwood producer inventory levels were at 30 days supply, up marginally compared to the end of the second quarter. Compared to the previous quarter, average list price for North America was down US$47 to US$853 per tonne. CPPI's average list price to China and price to Europe were down US$57. Sales realizations were also negatively impacted by a strengthening of the Canadian dollar against the US dollar, which was up 1.5% compared to the previous quarter. The Company's shipments and production levels for the third quarter reflected an extended scheduled outage for maintenance and capital upgrades at the Company's Prince George Pulp Mill, during which it completed a replacement of the recovery boiler lower furnace and upgrades to the boiler feedwater treatment system. The impact of the shut was partly offset by higher production at the Northwood Pulp Mill following the unscheduled recovery boiler-related outage from late May to early July. Both mills experienced slower than anticipated ramp ups in the period following the scheduled and unscheduled outages. Inventories subsequently returned to more normal levels by the end of the quarter. The Company's paper segment results were relatively unchanged in the current quarter, with lower shipment levels offset by higher unit sales realizations and reduced unit manufacturing costs. During the third quarter of 2012, the Company negotiated new five year collective labour agreements with its unions. The collective agreements included one-time costs of $3.2 million paid upon ratification, which were expensed in the period. The Company ended the quarter with cheques issued in excess of cash on hand of $4.4 million and operating loans of $7.0 million, with a further $32.2 million available under its operating lines.Commenting on the third quarter's results, CPPI's CEO, Don Kayne, said, "It was a tough quarter as we faced challenges presented by weaker markets and came out of an extended period of major maintenance and capital upgrades. The focus now is on getting our recently upgraded pulp mills up to targeted operating rates." For the month of October, in light of the Company's financial results for the third quarter of 2012, the Company has announced an increase in the NBSK pulp list price of US$20 per tonne in all regions. A scheduled maintenance outage at the Northwood Pulp Mill is projected to result in a reduction in market pulp production of approximately 6,000 tonnes in the fourth quarter. On October 22, 2012, in light of the Company's financial results for the third quarter of 2012, the Board of Directors decided to suspend the payment of its dividend for the quarter. The Board will continue to review the issuance of dividends on a quarterly basis.Additional Information and Conference Call A conference call to discuss the third quarter's financial and operating results will be held on Wednesday, October 24, 2012 at 8:00 AM Pacific time. To participate in the call, please dial 416-340-2216 or Toll-Free 866-226-1792. For instant replay access until November 7, 2012, please dial 800-408-3053 and enter participant pass code 5498580#. The conference call will be webcast live and will be available at www.canforpulp.com. This news release, the attached financial statements and a presentation used during the conference call can be accessed via the Company's website at http://www.canforpulp.com/investors/webcasts. 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", "projects", "intends", "plans", "will", "believes", "seeks", "estimates", "should", "may", "could", and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and actual events or results may differ materially. There are many factors that could cause such actual events or results expressed or implied by such forward-looking statements to differ materially from any future results expressed or implied by such statements. Forward-looking statements are based on current expectations and the Company assumes no obligation to update such information to reflect later events or developments, except as required by law. CPPI is a leading global supplier of pulp and paper products with operations based in the central interior of British Columbia. The Company 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. CPPI shares are traded on the Toronto Stock Exchange under the symbol CFX.Canfor Pulp Products Inc.Third Quarter 2012Management's Discussion and AnalysisThis interim Management's Discussion and Analysis ("MD&A") provides a review of Canfor Pulp Products Inc.'s ("CPPI" or "the Company") financial performance for the quarter ended September 30, 2012 relative to the quarters ended June 30, 2012 and September 30, 2011, and the financial position of the Company at September 30, 2012. It should be read in conjunction with CPPI's unaudited interim consolidated financial statements and accompanying notes for the quarters ended September 30, 2012 and 2011, as well as the 2011 annual MD&A and the 2011 audited consolidated financial statements and notes thereto, which are included in CPPI's Annual Report for the year ended December 31, 2011 (available at www.canforpulp.com). The financial information in this interim MD&A has been prepared in accordance with International Financial Reporting Standards ("IFRS"), which is the required reporting framework for Canadian publicly accountable enterprises.Throughout this discussion, reference is made to operating income before amortization which CPPI considers to be a relevant indicator for measuring trends in the Company's performance and its ability to generate funds to meet its debt service and capital expenditure requirements, and to pay dividends. Operating income before amortization is not a generally accepted earnings measure and should not be considered as an alternative to net income or cash flows as determined in accordance with IFRS. As there is no standardized method of calculating this measure, CPPI's operating income before amortization may not be directly comparable with similarly titled measures used by other companies. A reconciliation of operating income before amortization to operating income (loss) reported in accordance with IFRS is included in this MD&A.Factors that could impact future operations are also discussed. These factors may be influenced by both known and unknown risks and uncertainties that could cause the actual results to be materially different from those stated in this discussion. Factors that could have a material impact on any future oriented statements made herein include, but are not limited to: general economic, market and business conditions; product selling prices; raw material and operating costs; currency exchange rates; interest rates; changes in law and public policy; the outcome of labour and trade disputes; and opportunities available to or pursued by CPPI.All financial references are in millions of Canadian dollars unless otherwise noted. The information in this report is as at October 22, 2012. Forward-Looking StatementsCertain statements in this MD&A constitute "forward-looking statements" which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Words such as "expects", "anticipates", "projects", "intends", "plans", "will", "believes", "seeks", "estimates", "should", "may", "could", and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and actual events or results may differ materially. There are many factors that could cause such actual events or results expressed or implied by such forward-looking statements to differ materially from any future results expressed or implied by such statements. Forward-looking statements are based on current expectations and the Company assumes no obligation to update such information to reflect later events or developments, except as required by law.CPPI SHARE EXCHANGE On March 2, 2012, Canadian Forest Products Ltd. ("Canfor") acquired 35,776,483 common shares of Canfor Pulp Products, Inc. ("CPPI") in exchange for its 35,776,483 Class B Exchangeable LP Units of Canfor Pulp Limited Partnership ("the Partnership") and 35,776,483 common shares of Canfor Pulp Holding Inc. ("the General Partner"), pursuant to the terms of an Exchange Agreement made as of January 1, 2011 among Canfor, CPPI, the General Partner and the Partnership. As a result of the exchange, CPPI's interest in both the Partnership and the General Partner increased from 49.8% to 100% and Canfor acquired a 50.2% interest in CPPI.The discussion which follows refers to the results of the Partnership for the comparative periods prior to the quarter ended March 31, 2012. For the quarter ended March 31, 2012, and all subsequent quarters, the results of CPPI include the results of the Partnership.THIRD QUARTER 2012 OVERVIEW Selected Financial Information and Statistics 1(millions of dollars, except for per share amounts)Q32012Q22012YTD2012Q32011YTD2011Operating income (loss) by segment:Pulp$(8.4)$8.6$12.4$36.7$140.8Paper$5.0$4.8$12.5$3.2$6.1Unallocated and Other$(4.8)$(3.0)$(11.2)$(3.5)$(10.0)Total operating income (loss)$(8.2)$10.4$13.7$36.4$136.9Add: Amortization$15.2$14.7$47.1$13.9$45.4Total operating income before amortization$7.0$25.1$60.8$50.3$182.3Add (deduct):Working capital movements$(5.2)$0.6$9.8$0.3$(14.3)Salary pension plan contributions$(1.9)$(2.0)$(5.8)$(2.0)$(6.1)Other operating cash flows, net$1.5$(4.5)$(2.7)$2.7$3.0Cash from operating activities$1.4$19.2$62.1$51.3$164.9Add (deduct):Distributions / dividends paid$(3.6)$(7.8)$(19.2)$(30.6)$(158.2)Finance expenses paid1$(0.2)$(3.6)$(4.0)$(0.4)$(4.0)Capital additions, net2$(19.9)$(16.8)$(55.3)$(15.3)$(35.4)Acquisition of CPPI cash on exchange$-$-$6.8$-$-Other, net$-$0.1$0.2$0.5$0.5Change in cash / operating loans$(22.3)$(8.9)$(9.4)$5.5$(32.2)Average exchange rate (US$ per C$1.00)3$1.005$0.990$0.998$1.020$1.0231 Certain prior period amounts have been restated due to a change in accounting policy for treatment of net interest expense for defined benefit post-retirement plans. Further details can be found in the "Changes in Accounting Policy" section later in this document.2 Additions to property, plant and equipment are shown net of amounts received under Government funding initiatives.3 Source - Bank of Canada (average noon rate for the period).Results in the third quarter of 2012 were significantly impacted by challenging markets resulting in downward pressure on prices, with Northern Bleached Softwood Kraft ("NBSK") list prices decreasing over 5% in all regions compared to the previous quarter. Global softwood pulp markets weakened through the summer months, with price erosion occurring for most of the quarter. While softwood pulp inventories remained relatively stable, global hardwood pulp producer inventories increased throughout the quarter. At the end of August (latest available data), global softwood producer inventory levels were at 30 days supply, up marginally compared to the end of the second quarter. Compared to the previous quarter, average list price for North America was down US$47 to US$853 per tonne. CPPI's average list price to China and price to Europe were down US$57. Sales realizations were also negatively impacted by a strengthening of the Canadian dollar against the US dollar, which was up 1.5% compared to the previous quarter. The Company's shipments and production levels for the third quarter reflected an extended scheduled outage for maintenance and capital upgrades at the Company's Prince George Pulp Mill, during which it completed a replacement of the recovery boiler lower furnace and upgrades to the boiler feedwater treatment system. The impact of the shut was partly offset by higher production at the Northwood Pulp Mill following the unscheduled recovery boiler-related outage from late May to early July. Both mills experienced slower than anticipated ramp ups in the period following the scheduled and unscheduled outages. Inventories subsequently returned to more normal levels by the end of the quarter.The Company's paper segment results were relatively unchanged in the current quarter, with lower shipment levels offset by higher unit sales realizations and reduced unit manufacturing costs.During the third quarter of 2012, the Company negotiated new five year collective labour agreements with its unions. The collective agreements included one-time costs of $3.2 million paid upon ratification, which were expensed in the period. Compared to the third quarter of 2011, operating income was down $44.6 million, driven primarily by a $45.1 million reduction in the pulp segment. Lower pulp earnings reflected significantly lower prices for NBSK pulp products, lower shipment volumes and increased unit manufacturing costs. OPERATING RESULTS BY BUSINESS SEGMENT Pulp Selected Financial Information and Statistics - Pulp (millions of dollars unless otherwise noted)Q32012Q22012YTD2012Q32011YTD2011Sales$144.8$171.9$506.8$199.0$623.8Operating income before amortization$5.9$22.4$56.6$49.6$183.4Operating income (loss)$(8.4)$8.6$12.4$36.7$140.8Average pulp price delivered to U.S. - US$4$853$900$874$993$996Average price in Cdn$$849$909$876$974$974Production - pulp (000 mt)220.6212.9695.2220.8751.0Shipments - pulp (000 mt)214.4230.2715.2240.2747.5Marketed on behalf of Canfor54.551.9163.651.0165.84 Per tonne, NBSK pulp list price delivered to U.S. (Resource Information Systems, Inc.). Overview The operating loss for the pulp segment was $8.4 million for the third quarter of 2012, down $17.0 million from operating income of $8.6 million for the previous quarter and down $45.1 million from the third quarter of 2011. Results in the current quarter were impacted by lower market pulp prices and to a certain extent lower shipment volumes. Unit manufacturing costs were also up slightly, primarily due to one-time costs or $3.2 million associated with new five year collective labour agreements, partially offset by the impact of higher production volumes.NBSK pulp list prices decreased in all regions, with prices to North America down US$47 to US$853 per tonne. Sales realizations were also negatively impacted by the 1.5% stronger Canadian dollar compared to the previous quarter. Lower operating earnings compared to the third quarter of 2011 reflected a significant reduction in NBSK pulp prices, with North America prices down US$140 per tonne, coupled with Europe and China both down US$200 per tonne. Unit manufacturing costs were 3% higher, with the one-time costs associated with the new five year collective labour agreements and higher chemical costs, partially offset by lower fibre costs. Lower quarter-over-quarter shipments for the most part reflected the impact of the scheduled Prince George Pulp Mill outage in the current period and a return to more normal inventory levels. Markets Global softwood pulp markets weakened through the summer months, with price erosion occurring for most of the quarter. While softwood pulp inventories remained relatively stable, global hardwood pulp producer inventories increased throughout the quarter. After a weak start to the quarter, global softwood pulp demand showed signs of picking up in August, as evidenced by an 8.5% increase in shipments of bleached softwood sulphate pulp compared to the prior year5. The increase in softwood shipments was primarily due to increased purchasing from China, partially offset by reductions in shipments to North America and Europe. Global demand for printing and writing papers decreased 1.8% for the first eight months of 2012 as compared to 20115. At the end of August 2012, World 206 producers of bleached softwood pulp inventories were at 30 days of supply. By comparison, June 2012 inventories were at 29 days of supply.5 As reported by Pulp and Paper Products Council ("PPPC") statistics.6 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 PPPC. Sales The Company's pulp shipments in the third quarter of 2012 were 214,000 tonnes, down approximately 16,000 tonnes, from the previous quarter. For the most part, this reflected the impact of the extended capital and maintenance outage at the Prince George Pulp Mill in the first part of the quarter. Inventories also returned to more normal levels after the unscheduled outage at the Northwood Pulp Mill at the end of the previous quarter. Compared to the third quarter of 2011, shipments were down 26,000 tonnes, or 11%, principally related to the impacts of the extended Prince George shut as well as the impact from the earlier unscheduled Northwood shutdown. Increasing global hardwood pulp producer inventories combined with the seasonal slowdown through the summer months, resulted in further downward pressure on global softwood prices. North America NBSK pulp list prices averaged US$853 per tonne for the quarter, down US$47 from the previous quarter. CPPI's average list prices to China and Europe also decreased through the quarter with China pricing down US$57 to US$650 per tonne, and Europe also down US$57 to US$780 per tonnes. Sales realizations were also negatively impacted by the 1.5% stronger average Canadian dollar compared to the prior quarter. Compared to the third quarter of 2011, pulp sales realizations were well down as NBSK pulp list prices to all markets decreased. The average NBSK list price for North America decreased US$140 per tonne, while prices to Europe and China decreased US$200 per tonne. The price reductions were offset in part by a 1.5% weaker Canadian dollar. Operations Pulp production in the third quarter of 2012 was 221,000 tonnes, up 8,000 tonnes, or 4%, from the previous quarter and in line with the third quarter of 2011. The increase in production compared to the second quarter of 2012 reflected a reduction in outages in the current quarter.Pulp unit manufacturing costs increased slightly from the previous quarter, principally reflecting the one-time costs associated with the new five year collective labour agreements, partially offset by the impact of higher production volumes and a reduction in maintenance spending. Compared to the third quarter of 2011, unit manufacturing costs were 3% higher, with one-time costs associated with the new five year collective labour agreements and higher chemical costs, more than offsetting lower fibre costs. Lower fibre costs primarily resulted from lower-cost sawmill residual chips, where prices are linked to NBSK pulp sales realizations.Paper Selected Financial Information and Statistics -Paper (millions of dollars unless otherwise noted)Q32012Q22012YTD2012Q32011YTD2011Sales$32.8$38.2$100.9$34.9$103.1Operating income before amortization$5.9$5.7$15.3$4.1$8.7Operating income$5.0$4.8$12.5$3.2$6.1Production - paper (000 mt)31.930.094.836.7103.0Shipments - paper (000 mt)30.636.897.032.197.4Operating income for the paper segment was $5.0 million for the third quarter of 2012, relatively unchanged from the previous quarter and up $1.8 million from the third quarter of 2011. Compared to the second quarter of 2012, an increase in the realized price for paper products was offset by reduced shipment levels, while unit manufacturing costs were down slightly due to lower slush pulp costs. Compared to the third quarter of 2011, the positive variance largely resulted from lower slush pulp costs, reflecting lower market pulp prices, which more than offset lower paper sales realizations. Markets Global kraft paper demand was steady through the third quarter with healthy order files through September. The Paper Shipping Manufacturers' Association ("PSSMA") reported that the industry operating rate of 83% for August was the second highest in the last year and 3% more than August 2011. Sack shipments were also strong in August, 5% ahead of August 2011. Sales The Company's paper shipments in the third quarter of 2012 were 30,600 tonnes, a decrease of 6,200 tonnes from the previous quarter and 1,500 tonnes lower than the third quarter of 2011, principally reflecting the timing of shipments. Prime bleached shipments, which attract higher prices, increased 2% from the prior quarter and were up 7% compared to the third quarter of 2011. The 17% decrease in shipments from the second quarter of 2012 reflected a drawdown in inventories in the prior quarter resulting primarily from the Northwood outage. Shipments for the nine months ended September 30, 2012 were in line with the comparative period. Unit sales realizations for paper products were up 3% from the prior quarter, but were down 2% compared the third quarter of 2011. The increase over the prior quarter related primarily to increased paper prices in North America and a higher percentage of prime bleached sales. The decrease compared to the same period in the prior year was due to lower overall pricing for paper grades. Operations Paper production in the third quarter of 2012 was 31,900 tonnes, up approximately 2,000 tonnes from the previous quarter. The increased production related principally to a scheduled maintenance outage of the Company's paper machine in June 2012. Compared to the same period in 2011, paper production was down approximately 5,000 tonnes as a result of lower overall operating rates in the current period.Paper unit manufacturing costs in the current quarter were similar to the previous quarter. Compared to the third quarter of 2011, unit manufacturing costs were down significantly, largely reflecting the impact of lower market pulp prices on slush pulp costs in the paper segment, partially offset by the impact of lower production volumes on unit costs. Unallocated Items (millions of dollars)Q32012Q22012YTD2012Q3 2011YTD2011Corporate costs$(4.8)$(3.0)$(11.2)$(3.5)$(10.0)Finance expense, net$(2.8)$(2.8)$(8.4)$(2.6)$(8.1)Foreign exchange gain (loss) on long-term debt$3.9$(2.2)$3.7$(8.2)$(4.9)Gain (loss) on derivative financial instruments$1.9$(1.4)$1.8$(5.7)$(3.1)Foreign exchange gain (loss) on working capital$(1.5)$0.8$(1.5)$4.1$2.3Corporate costs were $4.8 million for the third quarter of 2012, up $1.8 million from the previous quarter and up $1.3 million from the third quarter of 2011. The increase from both comparative periods principally related to recent changes in senior management. Net finance expense for the third quarter of 2012 was $2.8 million, in line with the previous quarter and the third quarter of 2011. The finance expense for each period principally represents interest expense on long-term debt and stand-by fees for the Company's operating lines, as well as the finance expense relating to the Company's defined benefit post-retirement benefit plans.The Company recorded a foreign exchange translation gain on its US dollar denominated debt of $3.9 million for the third quarter of 2012, as a result of the strengthening of the Canadian dollar against the US dollar, which rose by over 3% between the respective quarter ends. In the second quarter of 2012, a weakening of the Canadian dollar resulted in a translation loss of $2.2 million, while the third quarter of 2011 showed a loss of $8.2 million.The Company uses a variety of derivative financial instruments as partial economic hedges against unfavourable changes in both foreign exchange rates and crude oil rates affecting freight surcharges. For the third quarter of 2012, the Company recorded a net gain of $1.9 million related to its derivative financial instruments, primarily reflecting gains on US dollar forward contracts related to the strengthening of the Canadian dollar. The following table summarizes the gains (losses) on derivative financial instruments for the comparable periods: (millions of dollars)Q32012Q22012YTD2012Q32011YTD2011Foreign exchange collars and forward contracts$1.8$(1.1)$1.9$(5.7)$(3.0)Crude oil collars$0.1$(0.3)$(0.1)$-$-Natural gas swaps$-$-$-$-$(0.1)$1.9$(1.4)$1.8$(5.7)$(3.1)Other Comprehensive Income (Loss)In the third quarter of 2012, the Company recorded an after-tax charge to the statements of other comprehensive income (loss) of $4.7 million in relation to changes in the valuation of its defined benefit post-employment compensation plans. The charge reflects a reduction in the discount rate used to value the plans offset slightly by a higher than expected rate of return on plan assets for the period. In the previous quarter a charge of $3.7 million was recorded, reflecting a reduction in discount rates and a lower than expected rate of return for the period. An after-tax loss of $11.4 million was recorded in the third quarter of 2011.SUMMARY OF FINANCIAL POSITIONThe following table summarizes CPPI's cash flow and selected ratios for and as at the end of the following periods: (millions of dollars)Q32012Q22012YTD2012Q32011YTD2011Increase (decrease) in cash and cash equivalents$(15.3)$(8.9)$(2.4)$5.5$(32.2)Operating activities$1.4$19.2$62.1$51.3$164.9Financing activities$3.2$(11.4)$(16.2)$(31.0)$(162.2)Investing activities$(19.9)$(16.7)$(48.3)$(14.8)$(34.9)Ratio of current assets to current liabilities2.1: 11.8 : 1Net debt to capitalization23.8%15.0%Changes in Financial Position Cash generated from operating activities was $1.4 million in the third quarter of 2012, down from $19.2 million generated in the second quarter. The decrease resulted largely from lower operating earnings. Also contributing to the decrease was lower cash generated from working capital movements with an increase in inventories, prepaids and lower accounts payable balances at quarter end, principally the result of maintenance and capital project payments, more than offsetting a decrease in accounts receivable which partly reflected the lower sales volume. Compared to the third quarter of 2011, cash generated from operating activities was down by $49.9 million reflecting the lower operating earnings and an additional decrease in non-cash working capital in the current quarter. Financing activities generated $3.2 million in cash in the current quarter, compared to cash used of $11.4 million in the previous quarter and $31.0 million in the third quarter of 2011. The current quarter cashflows included $7.0 million drawn on the Company's operating bank loans partially offset by distributions of $3.6 million, representing dividends declared and paid during the quarter. In the prior quarter, financing cash outflows included a distribution of $7.8 million to non-Canfor shareholders. In the third quarter of 2011, the distribution paid to unitholders was $30.6 million, reflecting higher earnings in that period. Finance payments in the current quarter were $0.2 million, primarily reflecting standby fees for the Company's operating lines. Finance payments in the second quarter of 2012 were $3.6 million principally relating to interest payments on the Company's long-term debt, while finance payments in the third quarter of 2011 were at a similar level to the current quarter.Cash used in investing activities in the current quarter was comprised of $29.9 million of capital expenditures partly offset by $10.0 million in cash received from the Green Transformation Program. Capital expenditures in the current quarter included the replacement of the recovery boiler lower furnace and completion of the upgrades to the boiler feedwater treatment system at the Prince George Pulp Mill, as well as maintenance capital related to the outages. Capital expenditures and grants received increased slightly from the previous quarter and the third quarter of 2011. Liquidity and Financial Requirements At September 30, 2012, CPPI had cheques issued in excess of cash on hand of $4.4 million, with $7.0 million drawn on its operating lines of credit, and an additional $0.8 million reserved for several standby letters of credit. In addition, the Company had a separate facility with a maturity date of November 30, 2013, to cover the $10.4 million standby letter of credit issued to BC Hydro under a power generation agreement. During the third quarter of 2012, the Company terminated its $30.0 million bridge loan credit facility in conjunction with the completion of the Canadian Federal Government Green Transformation Program ("Program"). The facility was used to fund timing differences between expenditures and reimbursements for projects funded by the Program. CPPI has US$110.0 million of senior debt that is scheduled for repayment on November 30, 2013. This debt is in the form of unsecured US dollar private placement notes and bears interest at 6.41%. The Company remained in compliance with the covenants relating to its operating lines of credit and long-term debt during the quarter, and expects to remain so for the foreseeable future.DividendsOn October 22, 2012, in light of the Company's financial results for the third quarter of 2012, the Board of Directors decided to suspend the payment of its dividend for the quarter. The Board will continue to review the issuance of dividends on a quarterly basisCollective Agreements with Labour UnionsThe Company ratified new five year collective agreements with the CEP (Communications, Energy and Paperworkers Union) and PPWC (Pulp, Paper and Woodworkers of Canada) during the third quarter of 2012. Both agreements expire on April 30, 2017. OUTLOOK Pulp For the month of October, the Company has announced an increase in the NBSK pulp list price of US$20 per tonne in all regions. A scheduled maintenance outage is planned in the fourth quarter at the Northwood Pulp Mill which is projected to result in a reduction in market pulp production of approximately 6,000 tonnes. PaperThere are signs of softening kraft paper demand heading into the fourth quarter as order files have weakened. This has resulted in some downward pressure on pricing in offshore markets, particularly Asia, although North America prices remain relatively stable.OUTSTANDING SHARES At October 22, 2012, there were 71,269,790 common shares outstanding. CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with International Financial Reporting Standards 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 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 Company's financial condition. CHANGES IN ACCOUNTING POLICY Effective January 1, 2012, the Company retroactively changed its accounting policy for the presentation of interest expense and expected rate of return on assets of defined benefit post-retirement plans. The net expense has been reclassified from operating income, included in manufacturing and product costs, to net finance expense. Management considers the classification of net pension interest expense with the Company's other interest expense to provide more relevant information on the operating results of the Company. The effect on the three months ended September 30, 2012 and nine months ended September 30, 2012 is an increase in operating income and an increase in net finance expense of $0.8 million and $2.4 million, respectively (2011 - $0.7 million and $2.2 million, respectively). There is no impact on amounts recorded in the consolidated balance sheet or opening equity as at January 1, 2012.NEW ACCOUNTING PRONOUNCEMENTS In the first half of 2011, the International Accounting Standards Board ("IASB") issued a number of new and revised accounting standards which are effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. These new and revised accounting standards have not yet been adopted by CPPI and the Company does not plan to early adopt any of the standards.The following new or revised standards are not expected to have a material impact on the amounts recorded in the financial statements of CPPI:IFRS 10, Consolidated Financial Statements;IFRS 11, Joint Arrangements; IFRS 12, Disclosure of Interests in Other Entities;IAS 27, Separate Financial Statements;Amended IAS 28, Investments in Associates and Joint Ventures; and IFRS 13, Fair Value Measurement.The Company is still in the process of assessing the full impact of Amended IAS 19, Employee Benefits. In the first half of 2011, the IASB also issued amended IAS 1, Presentation of Financial Statements, which is effective for annual periods beginning on or after July 1, 2012 and IFRS 9, Financial Instruments, which is effective for annual periods beginning on or after January 1, 2015, with early adoption permitted. IAS 1 and IFRS 9 are not expected to have a material impact on amounts recorded in the financial statements of CPPI. Further details of the new or revised accounting standards and potential impact on CPPI can be found in the Company's Annual Report for the year ended December 31, 2011.INTERNAL CONTROLS OVER FINANCIAL REPORTING During the quarter ended September 30, 2012, there were no changes in the Company'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 the Company's 2011 annual statutory reports which are available on www.canforpulp.com or www.sedar.com.SELECTED QUARTERLY FINANCIAL INFORMATION7Q3 2012Q2 2012Q1 2012Q4 2011Q3 2011Q2 2011Q1 2011Q4 2010Sales and income (millions of dollars)Sales$177.7$210.8$220.0$212.7$233.9$242.1$252.3$266.1Operating income before amortization$7.0$25.1$28.7$37.9$50.3$64.8$67.2$62.9Operating income (loss)$(8.2)$10.4$11.5$16.5$36.4$49.8$50.7$46.7Net income (loss)$(4.6)$3.3$10.3$15.8$23.9$48.2$50.7$47.4Per common share (dollars)Net income (loss) - basic and diluted$(0.06)$0.05$0.13$0.22$0.33$0.68$0.71$0.67StatisticsPulp shipments (000 mt)214.4230.2270.6231.0240.2242.0265.3272.3Paper shipments (000 mt)30.636.829.630.232.132.732.639.0Average exchange rate - US$ per C$1.00$1.005$0.990$0.999$0.977$1.020$1.033$1.014$0.987Average NBSK pulp list price delivered to U.S. (US$)$853$900$870$920$993$1,025$970$9677 Certain prior period amounts have been restated due to the share exchange transaction and a change in accounting policy for treatment of net interest expense for defined benefit post-retirement plans. Further details can be found earlier in this document.Sales are primarily influenced by changes in market pulp prices, sales volumes and fluctuations in Canadian dollar exchange rates. Operating income, net income and operating income before amortization are primarily impacted by: sales revenue; freight costs; fluctuations of fibre, chemical and energy prices; level of spending and timing of maintenance downtime; and production curtailments. Net income is also impacted by fluctuations in Canadian dollar exchange rates, the revaluation to the period end rate of US dollar denominated working capital balances and long-term debt and revaluation of outstanding natural gas swaps and US dollar forward contracts.Canfor Pulp Products Inc.Condensed Consolidated Balance Sheets(millions of Canadian dollars, unaudited)As at September 30, 2012As at December 31, 2011ASSETS(Note 11)Current assetsCash and cash equivalents$-$-Accounts receivable - Trade (Note 10)59.570.8- Green Transformation Program0.719.7- Other (Note 12)23.920.7Inventories (Note 2)132.6141.6Prepaid expenses and other assets15.25.8Total current assets231.9258.6Property, plant and equipment543.2532.0Other long-term assets0.50.6Total assets$775.6$791.2LIABILITIESCurrent liabilitiesCheques issued in excess of cash on hand$4.4$2.0Operating loans (Note 3(a))7.0-Accounts payable and accrued liabilities101.6117.9Distributions payable-7.8Total current liabilities113.0127.7Long-term debt (Note 3(b))108.2111.9Retirement benefit obligations107.994.8Long-term provisions3.23.1Deferred income taxes, net (Note 6)60.6-Total liabilities$392.9$337.5SHAREHOLDERS' EQUITYShare capital (Note 11)$525.3$294.9Retained earnings (deficit)(142.6)(67.3)Non-controlling interests in the Partnership (Note 11)-226.1Total equity$382.7$453.7Total liabilities and equity$775.6$791.2The accompanying notes are an integral part of these condensed consolidated financial statements. APPROVED BY THE BOARD Director, S.E. Bracken-HorrocksDirector, R.L. CliffCanfor Pulp Products Inc.Condensed Consolidated Statements of Income (Loss) (millions of Canadian dollars, unaudited) 3 months ended September 30,9 months ended September 30,2012201120122011Sales (Note 12)$177.7$233.9$608.5$728.3Costs and expensesManufacturing and product costs (Note 12)136.8149.2439.6 439.5Freight and other distribution costs26.128.887.688.2Amortization15.213.947.145.4Selling and administration costs6.15.618.818.3Restructuring and severance costs1.7-1.7-185.9197.5594.8591.4Operating income (loss)(8.2)36.413.7136.9Finance expense, net(2.8)(2.6)(8.4)(8.1)Foreign exchange gain (loss) on long-term debt3.9(8.2)3.7(4.9)Gain (loss) on derivative financial instruments (Note 5)1.9(5.7)1.8(3.1)Foreign exchange gain (loss) on working capital(1.5)4.1(1.5)2.3Net income (loss) before income taxes(6.7)24.09.3123.1Income tax recovery (expense) (Note 6)2.1(0.1)(0.3)(0.3)Net income (loss)$(4.6)$23.9$9.0$122.8Net income (loss) attributable to:Controlling interest in the Partnership$(4.6)$12.0$4.7$61.7Non-controlling interest in the Partnership (Note 11)-11.94.361.1Net income (loss)$(4.6)$23.9$9.0$122.8Net income (loss) per common share: (in dollars)Attributable to controlling interest in the Partnership- Basic and diluted (Note 7)$(0.06)$0.33$0.07$1.72The accompanying notes are an integral part of these condensed consolidated financial statements. Canfor Pulp Products Inc.Condensed Consolidated Statements of Other Comprehensive Income (Loss) (millions of Canadian dollars, unaudited) 3 months ended September 30,9 months ended September 30,2012201120122011Net income (loss)$(4.6)$23.9$9.0$122.8Other comprehensive income (loss)Defined benefit plan actuarial losses (Note 4)(6.2)(11.4)(14.3)(12.7)Income tax recovery on defined benefit plan actuarial losses (Note 6)1.5-3.5-Other comprehensive income (loss), net of tax(4.7)(11.4)(10.8)(12.7)Total comprehensive income (loss)$(9.3)$12.5$(1.8)$110.1Total comprehensive income (loss) attributable to:Controlling interest in the Partnership$(9.3)$6.3$(6.1)$55.3Non-controlling interest in the Partnership (Note 11)-6.24.354.8Total comprehensive income (loss)$(9.3)$12.5$(1.8)$110.1Condensed Consolidated Statements of Changes in Equity3 months ended September 30,9 months ended September 30,(millions of Canadian dollars, unaudited)2012201120122011Share capitalBalance at beginning of period$525.3$294.9$294.9$294.9Exchange transaction (Note 11)--230.4-Balance at end of period$525.3$294.9$525.3$294.9Retained earnings (deficit)Balance at beginning of period$(129.7)$(56.5)$(67.3)$(52.9)Exchange transaction (Note 11)--(57.8)-Net income (loss) excluding amount attributable to non-controlling interest in the Partnership(4.6) 12.04.7 61.7Defined benefit plan actuarial losses, net of tax(4.7)(5.7)(10.8)(6.4)Dividends/distributions declared excluding amount attributable to non-controlling interest in the Partnership(3.6)(10.8)(11.4)(63.4)Balance at end of period$(142.6)$(61.0)$(142.6)$(61.0)Total equity attributable to equity holders of the Company$382.7$233.9$382.7$233.9Non-controlling interest in the PartnershipBalance at beginning of period$-$236.9$226.1$240.5Net income attributable to non-controlling interest in the Partnership-11.94.361.1Defined benefit plan actuarial losses attributable to non-controlling interest in the Partnership-(5.7)-(6.3)Distributions to non-controlling interest in the Partnership-(10.6)-(62.8)Exchange transaction (Note 11)--(230.4)-Balance at end of period$-$232.5$-$232.5Total equity$382.7$466.4$382.7$466.4The accompanying notes are an integral part of these condensed consolidated financial statements. Canfor Pulp Products Inc.Condensed Consolidated Statements of Cash Flows (millions of Canadian dollars, unaudited)3 months ended September 30,9 months ended September 30,2012201120122011Cash generated from (used in):Operating activitiesNet income (loss)$(4.6)$23.9$9.0$122.8Items not affecting cash:Amortization15.213.947.145.4Income tax (recovery) expense(2.1)0.10.30.3Foreign exchange (gain) loss on long-term debt(3.9)8.2(3.7)4.9Changes in mark-to-market value of derivative financial instruments0.63.70.61.9Employee future benefits0.80.72.21.9Net finance expense2.82.68.48.1Other, net0.3-0.30.2Salary pension plan contributions(1.9)(2.0)(5.8)(6.1)Income taxes paid, net(0.6)(0.1)(6.1)(0.2)Net change in non-cash working capital (Note 8)(5.2)0.39.8(14.3)1.451.362.1164.9Financing activitiesIncrease in operating bank loans7.0 -7.0-Dividends / distributions paid(3.6)(30.6)(19.2)(158.2)Finance expenses paid(0.2)(0.4)(4.0)(4.0)3.2(31.0)(16.2)(162.2)Investing activitiesAdditions to property, plant and equipment(29.9)(11.2)(74.8)(28.3)Reimbursements under Green Transformation Program10.019.219.050.4Expenditures under Green Transformation Program-(24.1)(1.1)(61.0)Other government grants received-0.81.63.5Acquisition of CPPI cash on exchange (Note 11)--6.8-Other, net-0.50.20.5(19.9)(14.8)(48.3)(34.9)Increase (decrease) in cash and cash equivalents*(15.3)5.5(2.4)(32.2)Cash and cash equivalents at beginning of period*10.926.5(2.0)64.2Cash and cash equivalents at end of period*$(4.4)$32.0$(4.4)$32.0*Cash and cash equivalents include cash on hand less unpresented cheques. The accompanying notes are an integral part of these condensed consolidated financial statements. Canfor Pulp Products Inc. Notes to the Condensed Consolidated Financial Statements(unaudited, millions of Canadian dollars unless otherwise noted)1. Basis of PreparationThese condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34 Interim Financial Reporting, and include the accounts of Canfor Pulp Products Inc. ("CPPI") and its subsidiary entities, including Canfor Pulp Limited Partnership ("the Partnership"). The Partnership's 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 ("the Pulp Business").On March 2, 2012, Canadian Forest Products Ltd. ("Canfor") exchanged 35,776,483 Class B Exchangeable Limited Partnership Units ("the Exchange"), representing a 50.2% interest in the Partnership, for an equivalent number of CPPI shares pursuant to the terms of the exchange agreement dated January 1, 2011 between Canfor, CPPI, the Partnership and Canfor Pulp Holding Inc., the general partner of the Partnership ("the General Partner"). As a result of the Exchange, CPPI's interest in both the Partnership and the General Partner increased from 49.8% to 100% and Canfor acquired a 50.2% interest in CPPI (see note 11).At September 30, 2012, CPPI held a 100% interest in the Partnership and the General Partner and Canfor held a 50.2% interest in CPPI. The condensed consolidated interim financial statements ("the financial statements") at September 30, 2012 include the accounts of CPPI, the Partnership and its subsidiaries (together referred to as "CPPI" or "the Company"). Prior to March 2, 2012 Canfor held a direct controlling interest in the Partnership. For all periods ending prior to March 2, 2012, the financial statements present the financial position, results of operations, and cash flows of the Pulp Business from the perspective of Canfor's controlling interest in the Pulp Business as if operated as a stand-alone partnership entity subject to Canfor control. The acquisition of the Partnership by CPPI as a result of the Exchange has been accounted for as a continuity of interests by applying reverse acquisition accounting (see note 11).The financial statements prior to March 2, 2012 have been prepared on a Partnership entity basis. Accordingly, no recognition has been made for income taxes related to Partnership income in the financial statements prior to March 2, 2012. The tax attributes of the Partnership's net assets flowed directly to the partners.These interim financial statements do not include all of the disclosures required by International Financial Reporting Standards ("IFRS") for annual financial statements. Additional disclosures relevant to the understanding of these interim financial statements, including the accounting policies applied, can be found in the Company's Annual Report for the year ended December 31, 2011, available at www.canforpulp.com or www.sedar.com. The currency of presentation for these financial statements is the Canadian dollar. Change in accounting policy Effective January 1, 2012, the Company retroactively changed its accounting policy for the presentation of interest expense and expected rate of return on assets of defined benefit post-retirement plans. The net expense has been reclassified from operating income, included in manufacturing and product costs, to net finance expense. Management considers the classification of net pension interest expense with the Company's other interest expense to provide more relevant information on the operating results of the Company. The effect on the three months ended September 30, 2012 and nine months ended September 30, 2012 is an increase in operating income and net finance expense of $0.8 million and $2.4 million, respectively (2011 - $0.7 million and $2.2 million, respectively). There is no impact on amounts recorded in the consolidated balance sheet or opening equity as at January 1, 2012.Accounting standards issued and not applied In the first half of 2011, the International Accounting Standards Board ("IASB") issued a number of new and revised accounting standards which are effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. These new and revised accounting standards have not yet been adopted by CPPI and the Company does not plan to early adopt any of the standards. The following new or revised standards are not expected to have a material impact on the amounts recorded in the financial statements of CPPI:IFRS 10, Consolidated Financial Statements;IFRS 11, Joint Arrangements; IFRS 12, Disclosure of Interests in Other Entities;IAS 27, Separate Financial Statements;Amended IAS 28, Investments in Associates and Joint Ventures; and IFRS 13, Fair Value Measurement.The Company is still in the process of assessing the full impact of Amended IAS 19, Employee Benefits. In the first half of 2011, the IASB also issued amended IAS 1, Presentation of Financial Statements, which is effective for annual periods beginning on or after July 1, 2012 and IFRS 9, Financial Instruments, which is effective for annual periods beginning on or after January 1, 2015, with early adoption permitted. IAS 1 and IFRS 9 are not expected to have a material impact on amounts recorded in the financial statements of CPPI. Further details of the new or revised accounting standards and potential impact on CPPI can be found in the Company's Annual Report for the year ended December 31, 2011.2. Inventories(millions of Canadian dollars)As at September 30, 2012As at December 31, 2011Pulp$51.1$64.1Paper16.117.0Wood chips18.716.0Processing materials and supplies46.744.5$132.6$141.63. Operating Lines and Long-Term Debt(a) Available Operating Lines(millions of Canadian dollars)As at September 30, 2012As at December 31, 2011Main bank loan facility$40.0$40.0Bridge loan credit facility (maximum $30.0 million)-19.7Facility for BC Hydro letter of credit10.410.4Total operating lines50.470.1Drawn(7.0)-Letters of credit (for general business purposes)(0.8)(0.5)BC Hydro letter of credit(10.4)(10.4)Total available operating lines$32.2$59.2The terms of the Company's principal bank loan facility include interest payable at floating rates that vary depending on the ratio of net debt to operating earnings before interest, taxes, depreciation, amortization and certain other non-cash items, and is based on the lenders' Canadian prime rate, bankers acceptances, US dollar base rate or US dollar LIBOR rate, plus a margin. The maturity date of this facility is November 30, 2013. During the third quarter of 2012, the Company terminated its $30.0 million bridge loan credit facility in conjunction with the completion of the Canadian Federal Government Green Transformation Program ("Program"). The facility was used to fund timing differences between expenditures and reimbursements for projects funded by the Program. The Company has a separate facility with a maturity date of November 30, 2013 to cover a $10.4 million standby letter of credit issued to BC Hydro. As at September 30, 2012, the Company was in compliance with all covenants relating to its operating lines of credit.(b) Long-Term DebtAt September 30, 2012, the fair value of the Company's long-term debt, which was measured at its amortized cost of $108.2 million (US$110.0 million), was $112.0 million. The fair value of long-term debt was determined based on prevailing market rates for long-term debt with similar characteristics and risk profile.4. Employee Future BenefitsThe Company measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as at December 31 of each year. At the end of each interim reporting period, the Company estimates movements in its accrued benefit liabilities based upon movements in discount rates and the rates of return on plan assets, as well as any significant changes to the plans. Adjustments are also made for payments made and current service and interest costs.For the nine months ended September 30, 2012, $14.3 million (before tax) was charged to other comprehensive income. The charge reflects a reduction in the discount rate used to value the plans offset slightly by a higher than expected rate of return on plan assets for the period. For the three months ended September 30, 2012, the charge was $6.2 million (before tax). For the nine months ended September 30, 2011 an amount of $12.7 million was charged to other comprehensive income, and for the three months ended September 30, 2011 the charge was $11.4 million.For the Company's retirement benefit obligations, a one percentage point increase (decrease) in the discount rate would reduce (increase) the estimated retirement benefit obligations by approximately $20.0 million. The assumptions used to estimate the changes in net accrued benefit liabilities were as follows:Pension Benefit PlansDiscount rateSeptember 30, 20124.30%June 30, 20124.65%December 31, 20115.00%September 30, 20115.00%June 30, 20115.50%December 31, 20105.50%Rate of return on plan assets9 months ended September 30, 20126.60%6 months ended June 30, 20122.60%9 months ended September 30, 2011(2.50)%6 months ended June 30, 20111.80%Other Benefit PlansDiscount rateSeptember 30, 20124.50%June 30, 20124.90%December 31, 20115.30%September 30, 20115.40%June 30, 20115.75%December 31, 20105.75%5. Derivative Financial InstrumentsThe Company uses a variety of derivative financial instruments to reduce its exposure to risks associated with fluctuations in both foreign exchange rates and crude oil prices affecting freight surcharges. At September 30, 2012, the fair value of derivative financial instruments was a net liability of $0.2 million (December 31, 2011 - net asset of $0.4 million). The fair value of these financial instruments was determined based on prevailing market rates for instruments with similar characteristics.The following table summarizes the gain (loss) on derivative financial instruments for the three and nine month periods ended September 30, 2012 and 2011: (millions of Canadian dollars)3 months ended September 30,9 months ended September 30,2012201120122011Foreign exchange collars and forward contracts$1.8$(5.7)$1.9$(3.0)Crude oil collars0.1-(0.1)-Natural gas swaps---(0.1)$1.9$(5.7)$1.8$(3.1)The following table summarizes the fair value of the derivative financial instruments included in the balance sheet at September 30, 2012 and December 31, 2011:(millions of Canadian dollars)As at September 30, 2012As at December 31, 2011Foreign exchange collars and forward contracts$(0.2)$0.3Crude oil collars-0.1Net current asset (liability)$(0.2)$0.46. Income TaxesIncome tax expense includes current tax expense on income for the March 2, 2012 to September 30, 2012 period. Taxes were not significant prior to March 2, 2012 as the main reporting entity was not taxable. (millions of Canadian dollars) 3 months ended September 30, 20129 months ended September 30, 2012Current$1.5$0.6Deferred0.6(0.9)Income tax recovery (expense)$2.1$(0.3)The reconciliation of income taxes calculated at the statutory rate to the actual income tax provision is as follows: (millions of Canadian dollars)3 months ended September 30, 20129 months ended September 30, 2012Income tax recovery (expense) at statutory rate 2012 - 25.0%$1.7$(2.3)Add (deduct):Tax expense at rates other than statutory rate-(0.2)Permanent difference from capital gains and other non-deductible items0.40.4Permanent difference - exchange transaction-0.9Tax included in equity - exchange transaction-0.9Income tax recovery (expense)$2.1$(0.3)In addition to the amounts recorded to net income, a tax recovery of $1.5 million was recorded to other comprehensive income for the three month period ended September 30, 2012 in relation to the actuarial losses on defined benefit employee compensation plans. For the nine months ended September 30, 2012, the related tax recovery was $3.5 million.The tax effects of the significant components of temporary differences that give rise to deferred income tax assets and liabilities are as follows:(millions of Canadian dollars)As at September 30, 2012Deferred income tax assetsRetirement benefit obligations$26.7Other1.6$28.3Deferred income tax liabilitiesDepreciable capital assets$(86.4)Unrealized foreign exchange gains on debt(2.2)Other(0.3)$(88.9)Total deferred income taxes, net$(60.6)7. Earnings Per ShareBasic net income per share is calculated by dividing the net income available to common shareholders by the weighted average number of common shares outstanding during the period. As a result of the exchange transaction and the application of reverse acquisition accounting, the CPPI shares relating to the non-controlling interest shareholders were not included until March 2, 2012. This transaction led to an increase in the weighted average number of shares outstanding, with 71,269,790 shares outstanding as at September 30, 2012. The issuance of the new shares as a result of the exchange was accompanied by a corresponding increase in CPPI's investment in the Partnership and as a result there is no dilution of CPPI's net income per share.3 months ended September 30,9 months ended September 30,2012201120122011Weighted average number of common shares71,269,79035,776,48363,238,45835,776,4838. Net Change in Non-Cash Working Capital3 months ended September 30,9 months ended September 30,(millions of Canadian dollars)2012201120122011Accounts receivable$20.5$3.6$12.6$(9.3)Inventories(1.9)(2.0)8.9(8.7)Prepaid expenses and other assets(8.1)(3.5)(9.4)1.6Accounts payable and accrued liabilities(15.7)2.2(2.3)2.1Net increase (decrease) in non-cash working capital$(5.2)$0.3$9.8$(14.3)9. Segment Information The Company has two reportable segments which operate as separate business units and represent separate product lines.Sales between pulp and paper segments are accounted for at prices that approximate fair value. These include sales of slush pulp from the pulp segment to the paper segment.(millions of Canadian dollars)PulpPaperUnallocatedElimination AdjustmentConsolidated3 months ended September 30, 2012Sales to external customers$144.832.80.1-$177.7Sales to other segments$15.5--(15.5)$-Operating income (loss)$(8.4)5.0(4.8)-$(8.2)Amortization$14.30.9--$15.2Capital expenditures1$29.50.30.1-$29.93 months ended September 30, 2011Sales to external customers$199.034.9--$233.9Sales to other segments$23.9--(23.9)$-Operating income (loss)$36.73.2(3.5)-$36.4Amortization$12.90.90.1-$13.9Capital expenditures1$34.50.40.4-$35.39 months ended September 30, 2012Sales to external customers$506.8100.90.8-$608.5Sales to other segments$49.2--(49.2)$-Operating income (loss)$12.412.5(11.2)-$13.7Amortization$44.22.80.1-$47.1Capital expenditures1$74.60.80.5-$75.9Identifiable assets$693.661.420.6-$775.69 months ended September 30, 2011Sales to external customers$623.8103.11.4-$728.3Sales to other segments$68.0--(68.0)$-Operating income (loss)$140.86.1(10.0)-$136.9Amortization$42.62.60.2-$45.4Capital expenditures1$86.22.11.0-$89.3Identifiable assets$755.064.254.8-$874.01 Capital expenditures represent cash paid for capital assets during the period and include capital expenditures financed by federal government-funded Green Transformation Program.10. Related Party Transactions The Company depends on Canfor to provide approximately 59% (2011 - 55%) of its fibre supply as well as to provide certain key business and administrative services as described below. As a result of these relationships the Company considers its operations to be dependent on its ongoing relationship with Canfor.The transactions with Canfor are consistent with the transactions described in the December 31, 2011 audited consolidated financial statements of CPPI and the Partnership and are based on agreed upon amounts between the parties. These are summarized below: (millions of Canadian dollars)3 months ended September 30,9 months ended September 30,2012201120122011TransactionsCanfor - purchase of wood chips and other$27.4$33.2$79.2$89.4(millions of Canadian dollars)As at September 30, 2012As at December 31, 2011Balance SheetIncluded in accounts payable and accrued liabilities:Canfor$15.2$18.2Included in trade accounts receivable:Products marketed for Canfor$4.6$3.2Transactions and payables to Canfor include purchases of wood chips, pulp and administrative services.11. Acquisition of Interest in Canfor Pulp Limited Partnership As a result of the Exchange described in Note 1, CPPI increased its interest in both the Partnership and the General Partner from 49.8% to 100% and Canfor acquired a 50.2% interest in CPPI.The transaction was accounted for as a reverse acquisition under IFRS, with Canfor's interest in the Pulp Business being the acquirer for accounting purposes and CPPI the acquiree for accounting purposes. The Pulp Business is continuing to operate under CPPI, the legal parent. The financial statements have been presented, along with the comparative periods, from the accounting perspective that Canfor's interest in the Pulp Business is the continuing entity after the exchange transaction as it has gained control of the Company through a reverse transaction. Prior to March 2, 2012 49.8% of the Pulp Business was held by CPPI and reflected as non-controlling interest. Net income and comprehensive income attributable to CPPI's non-controlling interest in the Pulp business was $4.3 million for the nine months ended September 30, 2012. Canfor's interest in the Pulp Business was deemed to acquire CPPI on March 2, 2012 and the non-controlling interest was eliminated on that date.The condensed consolidated financial statements include the balance sheets, statements of income, statements of other comprehensive income, statements of changes in equity, and cash flows of CPPI, the Partnership and the subsidiaries of those entities from March 2, 2012.Management estimates that the fair value of CPPI's assets and liabilities approximate their carrying values at March 2, 2012 (note - CPPI's investment in the Partnership eliminates upon consolidation). Excluding the investment in the Partnership, the carrying values of the assets and liabilities of CPPI at March 2, 2012 were as follows:(millions of Canadian dollars)As at March 2, 2012Assets acquired:Cash and cash equivalents$6.8Liabilities assumed:Due to Canfor Pulp Limited Partnership$0.1Income taxes payable$0.2Deferred income tax liability$31.4As a result of the exchange there was no change in control for the Pulp Business. The difference between the carrying value of the non-controlling interest and the assets and liabilities acquired was recognized directly in equity as a charge to retained earnings (deficit).(millions of Canadian dollars)TotalCash$6.8Deferred taxes(63.2)Income taxes payable(1.3)Other liabilities(0.1)Charge to retained earnings (deficit) as at March 2, 2012$(57.8)The following table reconciles the equity of CPPI as previously reported at December 31, 2011 to the ending equity prior to the date of exchange at March 2, 2012.(millions of Canadian dollars)TotalBalance as previously reported at December 31, 2011$210.9Net income for the period January 1, 2012 to March 2, 20123.4Dividends paid(8.9)Equity as at March 2, 2012$205.412. Insurance Claim ReceivableDuring the previous quarter, an unscheduled shutdown of a recovery boiler at the Northwood Pulp Mill resulted in reduced production and subsequent repairs. The Company recognized a property damage insurance receivable of $5.6 million, which substantially offset the additional maintenance costs related to this failure. This amount was included as a reduction in Manufacturing and Product Costs in the income statement in the previous quarter and in the nine months ended September 30, 2012.The Company recognized a business interruption insurance receivable of $9.7 million, less a deductible of $5.0 million, to recover the estimated impact of year to date lost production. Of the net insurance proceeds of $4.7 million, $3.7 million was included in Revenue in the second quarter of 2012 and an additional $1.0 million was included in Revenue in the third quarter of 2012. As at September 30, 2012, the total insurance receivable amount, net of advances received, of $7.5 million is included within Other Accounts Receivable.FOR FURTHER INFORMATION PLEASE CONTACT: Contact Information: Media Contact:Christine KennedyCanfor's VP, Public Affairs & Corporate Communications(604) 661-5225Christine.Kennedy@canfor.comInvestor Contact:Pat ElliottCanfor's VP & Treasurer(604) 661-5441Patrick.Elliott@canfor.comRichard RemeschCorporate Controller(604) 661-5221Rick.Remesch@canforpulp.comwww.canforpulp.com