Canfor Pulp Income Fund
TSX : CFX.UN

Canfor Pulp Income Fund

April 29, 2008 06:00 ET

Canfor Pulp Income Fund Announces First Quarter 2008 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - April 29, 2008) - Canfor Pulp Income Fund (the "Fund") (TSX:CFX.UN) announced today its first quarter 2008 results as well as the results of Canfor Pulp Limited Partnership (the "Partnership") in which the Fund has a 49.8% ownership.

The Partnership reported sales of $211.4 million and net income of $43.5 million, or $0.61 per unit, for the quarter ended March 31, 2008. The impact of stronger pricing for pulp and paper and a relatively stable Canadian dollar during the quarter improved the results when compared to the fourth quarter of 2007 sales of $215.1 million and net income of $12.1 million, or $0.17 per unit. Unit manufacturing costs increased 4% when compared to the prior quarter due to the impact of lower production volumes and higher fibre, chemical and energy prices. Lower production and sales volumes were a result of a fire at the Prince George Pulp and Paper Mill. Included in earnings are $11.4 million for business interruption insurance and a $8.5 million net gain from property damage coverage. The first quarter 2008 results are lower than those in the same period a year ago, when sales were $238.2 million with net income of $48.6 million or $0.68 per unit, primarily due to the impact of the stronger Canadian dollar and higher fibre costs, which more than offset increases in NBSK pulp list prices.

The Partnership generated adjusted distributable cash (defined as standardized distributable cash before changes in working capital and long-term deferred maintenance provision, and after provision for accrued capital expenditures) of $42.4 million, or $0.60 per unit, in the first quarter of 2008. Capital expenditures incurred were $3.2 million in the quarter. Fluctuations in working capital are financed through the Partnership's accumulated cash and bank credit lines. For the first quarter of 2008, based on current estimates of full year cash flow and capital expenditures, the Partnership and Fund maintained monthly distributions of $0.12 per unit for a total of $0.36 per unit in the quarter.

Based on the Partnership's results, the Fund earned net income of $21.7 million, or $0.61 per Fund unit, in the first quarter of 2008, compared to net income of $8.7 million, or $0.25 per Fund unit, in the fourth quarter of 2007.

The fire at the Prince George Pulp and Paper Mill on January 15, 2008 destroyed the chip screening and in-feed system. Total pulp and paper production lost in the quarter due to the fire is estimated at approximately 37,500 tonnes. As a result, the first quarter 2008 NBSK pulp production of 231,500 tonnes decreased by 29,900 tonnes from the prior quarter. Production tonnes lost due to scheduled maintenance outages in the prior quarter were approximately 5,800 tonnes.

For the second quarter of 2008, maintenance outages are scheduled at the Northwood and Intercontinental Pulp Mills, that will result in an estimated 30,000 - 35,000 tonnes of lost production. The Intercontinental mill will take a mini-maintenance outage and Northwood an extended major-maintenance outage to perform maintenance and also to complete capital improvements on its digester and recovery boilers. The Intercontinental Pulp Mill is scheduled to complete its major maintenance outage in the fourth quarter of 2008, that will result in an estimated 8,000 tonnes of lost production, and is planning to upgrade the capacity of its pulp machine during the outage.

On April 21, 2008, the Fund had previously announced a cash distribution of $0.12 per Fund unit for the month of April to be paid May 15, 2008.

Additional Information

A conference call to discuss the first quarter 2008 financial and operating results will be held on Wednesday, April 30 at 8:00 a.m. Pacific time.

To participate in the call, please dial 416-695-9719 or Toll-Free 1-800-952-6845. For instant replay access, please dial 416-695-5800 or Toll-Free 1-800-408-3053 and enter participant pass code 3256674. The conference call will be webcast live and will be available at www.canforpulp.com/investors/webcasts.asp.

This news release and the attached interim Management's Discussion and Analysis (MD&A) and financial statements are available on the company's website at www.canforpulp.com.

About Canfor Pulp Income Fund

The Fund is an unincorporated, open-ended trust established under the laws of Ontario, created to indirectly acquire and hold an interest in the Canfor Pulp Limited Partnership. The Fund indirectly holds a 49.8% interest in the Partnership with Canadian Forest Products Ltd. (a subsidiary of Canfor Corporation) holding the remaining 50.2% interest in the Partnership.

Forward Looking Statements

Certain statements in this press release constitute "forward-looking statements" which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Words such as "expects", "anticipates", "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. The risks and uncertainties are detailed from time to time in reports filed by the Fund with the securities regulatory authorities in all of the provinces and territories of Canada to which recipients of this press release are referred to for additional information concerning the Fund and Partnership, its prospects and uncertainties relating to the Fund and Partnership and its prospects. These 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 results, performance and achievements of the Fund and Partnership to be materially different from those contained in forward-looking statements. The forward-looking statements are based on current information and expectations and the Fund and Partnership assume no obligation to update such information to reflect later events or developments, except as required by law.



Forward-looking statements in this MD&A include statements made under:

- "Canfor Pulp Income Fund Announces First Quarter 2008 Results", third
paragraph under that heading;
- "Operating Results and Liquidity"
- "Critical Accounting Estimates";
- "Markets - Pulp", the last paragraph under that heading;
- "Outlook - Pulp";
- "Outlook - Kraft Paper";
- "Critical Accounting Estimates";
- "Distributable Cash and Cash Distributions".


Material risk factors that could cause actual results to differ materially from the forward-looking statements contained in this MD&A 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 the Fund and Partnership. Additional information concerning these and other factors can be found in the Fund's Annual Information Form dated February 25, 2008, which is available on www.sedar.com.

Canfor Pulp Income Fund and Canfor Pulp Limited Partnership

First Quarter 2008

Management's Discussion and Analysis

Canfor Pulp Income Fund (the Fund) earns income from its 49.8% indirect interest in Canfor Pulp Limited Partnership (the Partnership). The Fund accounts for its investment in the Partnership on the equity basis and does not consolidate the operations of the Partnership. In order for the Fund's unitholders to understand the results of operations, the unaudited interim consolidated financial statements with accompanying notes are presented for both the Fund and the Partnership. The Partnership did not have an operating business prior to July 1, 2006, and the comparative results prior to this date represent the northern bleached softwood Kraft (NBSK) business of Canadian Forest Products Ltd., a subsidiary of Canfor Corporation (collectively Canfor), which the Partnership acquired on July 1, 2006. This Management's Discussion and Analysis (MD&A) provides a review of the significant developments that have impacted the Partnership's and the Fund's performance for the quarter ended March 31, 2008 relative to the same period in the prior year and relative to the previous quarter. This MD&A should be read in conjunction with the unaudited interim consolidated financial statements and accompanying notes as well as the annual MD&A and audited consolidated financial statements and notes which are included in the Fund's 2007 Annual Report. Additional information relating to the Fund and the Partnership, including the Fund's Annual Information Form (AIF) dated February 25, 2008, is available on SEDAR at www.sedar.com or at www.canforpulp.com.

Factors that could impact future operations are also discussed. These factors may be influenced by known and unknown risks and uncertainties that could cause the actual results to be materially different from those stated in this discussion. Factors that could have a material impact on any future oriented statements made herein include, but are not limited to: general economic, market and business conditions; product selling prices; raw material and operating costs; exchange rates; changes in law and public policy; and opportunities available to or pursued by the Partnership.

In this document, references are made to EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization and before other non-operating income and expenses) and adjusted distributable cash. The Partnership considers EBITDA to be an important indicator for identifying trends in the Partnership's performance and of the Partnership's ability to generate funds to meet its debt service, capital expenditure requirements and to make cash distributions to its partners. Adjusted distributable cash is a measure of cash flow used by management to determine the level of cash distributions. EBITDA and adjusted distributable cash should not be considered as alternatives to net income or cash flow from operations as determined in accordance with Canadian generally accepted accounting principles. As there is no standardized method of calculating EBITDA, the Partnership's use of this term may not be directly comparable with similarly titled measures used by other companies or income funds.

Calculations of EBITDA and adjusted distributable cash are provided in a schedule at the end of this MD&A.

In this MD&A, for all periods ending prior to July 1, 2006, the financial information presented for the Partnership represents its business on a carve out basis (continuity of interests) from Canfor, as if operated as a stand-alone partnership entity for the full periods. The financial information presented includes allocations of certain of Canfor's assets, liabilities and costs. The financial condition, results of operations and cash flows for these periods are not necessarily indicative of the financial condition, results of operations or cash flows that would have been incurred if the business was a separate legal entity.

The information in this report is as at April 28, 2008.

CANFOR PULP INCOME FUND

The Fund is an unincorporated open-ended trust established under the laws of Ontario on April 21, 2006, pursuant to the Fund Declaration. The principal head office of the Fund is located at 1700 West 75th Avenue, Vancouver, BC, Canada. The Fund has been established to acquire and hold, through a wholly owned trust, the Canfor Pulp Trust (the Trust), investments in Limited Partnership Units of the Partnership, and such other investments as the Trustees of the Fund may determine. 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 April 28, 2008, there are a total of 35,493,542 Fund units issued and outstanding, and the Fund indirectly holds a total of 35,493,542 units of the Partnership, representing 49.8% of the Partnership and Canfor holds 35,776,483 Class B Exchangeable Limited Partnership Units, representing 50.2% of the Partnership.

Each unitholder participates pro-rata in any distributions from the Fund. Under present income tax legislation, income tax obligations related to the distributions of the Fund are the obligations of the unitholders and the Fund is only taxable on any amount not allocated to the unitholders.



SELECTED QUARTERLY FUND FINANCIAL INFORMATION

(thousands of
dollars,
except
per unit
amounts, Q1 Q4 Q3 Q2 Q1 Q4 Q3
unaudited) 2008 2007 2007 2007 2007 2006 2006
---------------------------------------------------------------------------
Equity income
in Canfor
Pulp Limited
Partnership 21,667 5,999 16,541 17,900 24,203 12,184 8,374
Net income
(loss)(1) 21,667 8,703 16,541 (21,437) 24,203 12,184 8,374
Net income
(loss) per
Fund unit $ 0.61 $ 0.25 $ 0.46 ($0.60) $ 0.68 $ 0.56 $ 0.59
Distributions
earned
from the
Partnership 12,778 13,487 19,167 17,747 14,907 24,147 6,272
Distributions
declared to
unitholders 12,778 13,487 19,167 17,747 14,907 24,147 6,272
Distributions
declared per
Fund unit $ 0.36 $ 0.38 $ 0.54 $ 0.50 $ 0.42 $ 0.80 $ 0.44
---------------------------------------------------------------------------

Note: 1. In the second quarter of 2007 the Fund recorded a non-cash future
income tax charge of $39.3 million to net income relating to the
Fund's 49.8% ownership in the Partnership and based on temporary
differences between the accounting and tax basis of the
Partnership's assets and liabilities expected to reverse after
January 1, 2011.


OPERATING RESULTS AND LIQUIDITY


For the quarter ended March 31, 2008, the Fund had net income of $21.7 million, or $0.61 per Fund unit, representing its share of the Partnership's earnings for the period. Distributions declared by the Partnership and accruing to the Fund were $12.8 million of which $4.3 million was receivable at March 31, 2008. Cash distributions received from the Partnership are the only source of liquidity for the Fund. For the first quarter of 2008, based on current estimates of full year cash flow and capital expenditures, the Partnership and Fund maintained monthly distributions of $0.12 per unit for a total of $0.36 per unit in the quarter. The Fund's requirements for administrative services are minimal and are funded and expensed by the Partnership. For further information refer to the Partnership's discussion of operating results and liquidity of this interim management discussion and analysis.

FUND DISTRIBUTIONS

The Fund is entirely dependent on distributions from the Partnership to make its own distributions and declares distributions on a monthly basis with the record date on the last business day of each month and payable within the 15 days following. Distributions from the Fund's investment in the units of the Partnership and distributions payable by the Fund to its unitholders are recorded when declared. During the first quarter of 2008, the Fund declared distributions of $0.36 per Fund unit or $12.8 million.

Monthly cash distributions from the Partnership are not directly equal to the Fund's pro-rata share of the Partnership's income under the equity method, primarily due to differences between capital expenditures, amortization and other non-cash expenses of the Partnership, and reserves for future capital expenditures and contingencies.

RISKS AND UNCERTAINTIES

The Fund is subject to certain risks and uncertainties related to the nature of its investment in the Partnership and the structure of the Fund, 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 the Fund's Annual Information Form dated February 25, 2008, which is available on www.sedar.com.

RELATED PARTY TRANSACTIONS

All accounting, treasury, legal and administrative functions for the Fund are performed on its behalf, without charge, by the Partnership pursuant to a support agreement. Distributions earned from the Partnership for the three months ended March 31, 2008 were $12.8 million of which $8.5 million was paid, with the balance of $4.3 million receivable on March 31, 2008.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with Canadian generally accepted accounting principles 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. The determination of the future income tax liability requires management to estimate the future impacts of the Partnership's amortization of capital assets, capital cost allowance claims for tax purposes and changes to actuarial estimates of employee benefit plans. Changes in these estimates could have a material impact on the calculation of the liability.

CHANGES IN ACCOUNTING POLICIES

Effective January 1, 2008, the Fund adopted the Canadian Institute of Chartered Accountants' new Handbook Sections; 1535 "Capital Disclosures", 3862 "Financial Instruments - Disclosures" and 3863 "Financial Instruments - Presentation". Handbook sections 3862 and 3863 replace section 3861 "Financial Instruments - Disclosure and Presentation". These recommendations have been incorporated into these unaudited interim consolidated financial statements.

Section 1535 - Capital Disclosures

This Section establishes standards for disclosing information about an entity's capital and how it is managed. Under this standard the Fund is required to disclose qualitative and quantitative information that enables users of the financial statements to evaluate the Fund's objectives, policies and processes for managing capital.

Section 3862 - Financial Instruments - Disclosures

This Section requires entities to provide disclosure of quantitative and qualitative information in their financial statements that enable users to evaluate (a) the significance of financial instruments for the entity's financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and management's objectives, policies and procedures for managing such risks.

Section 3863 - Financial Instruments - Presentation

This Section establishes standards for presentation of financial instruments and non-financial derivatives.

CANFOR PULP LIMITED PARTNERSHIP

Structure

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 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).

At April 28, 2008, the Fund indirectly holds 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. Below is a simplified schematic of the ownership structure.

Partnership Structure

http://media3.marketwire.com/docs/partnership_structure.pdf

Business

The 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 Q1 Q4 Q1
per unit amounts, unaudited) 2008 2007 2007
----------------------------------------------------------------------
Sales 211.4 215.1 238.2
EBITDA (1) 42.5 27.9 60.1
Operating income 30.6 11.7 48.0
Net income 43.5 12.1 48.6
----------------------------------------------------------------------
Per Partnership unit, basic and
diluted
Net income 0.61 0.17 0.68
EBITDA 0.60 0.39 0.84
----------------------------------------------------------------------
Average exchange rate (US$/Cdn$) (2) 0.996 1.019 0.854
----------------------------------------------------------------------
----------------------------------------------------------------------

Notes: 1. For calculation of EBITDA, see supplementary financial
information.
2. Source - Bank of Canada (average noon rate for the period).


EBITDA for the first quarter of 2008 increased by $14.6 million from the previous quarter and decreased by $17.6 million when compared to the first quarter of 2007. The increase from the prior quarter is mainly attributable to stronger pricing for pulp and paper and the impacts of a weaker Canadian dollar. Realized pulp and paper prices in Canadian dollar terms improved by 5% and 10% respectively. The Canadian dollar weakened during the period with the Bank of Canada noon rate averaging 2.3% lower than the previous quarter resulting in a $4 million positive impact on operating income. Overall unit manufacturing costs increased by 4% in the period as the impact of lower production volumes combined with higher fibre, chemical and energy prices was partially offset by lower spending on maintenance costs. Fibre costs increased by 3% when compared to the prior quarter due to higher prices for residual sawmill chips and higher volumes of higher cost whole log chips.

Lower production and sales volumes for pulp in the quarter, when compared to the first and fourth quarters of 2007, were the result of a fire at the Prince George Pulp and Paper Mill on January 15, 2008 which destroyed the chip screening and in-feed system. Total pulp and paper production lost in the quarter due to the fire is estimated at approximately 37,500 tonnes. During the quarter, the Partnership accrued a property damage insurance receivable of $11.6 million, which is net of aggregate policy deductibles of $3.25 million. The property damage insurance accrual, less the write-off of the net book value of the damaged assets, is recorded as a non-operating gain on disposal of assets of $8.5 million in the quarter. The Partnership also accrued a business interruption insurance receivable of $14.4 million to recover the $12.4 million impact of lost production during the quarter less a three day equivalent deductible of $1.0 million, plus an additional $3.0 million to recover costs incurred to construct the temporary chip in-feed system.

When compared to the first quarter of 2007 the $17.6 million decrease in EBITDA was primarily due to the impact of the stronger Canadian dollar and higher fibre costs partially offset by increases in NBSK pulp list prices. The impact of the stronger Canadian dollar was approximately $29 million when compared to the same period last year. First quarter 2008 fibre costs increased 15% over the prior year quarter with the increase mainly attributable to a higher sawmill residual chip price and a higher percentage of whole log chip consumption. Offsetting the stronger Canadian dollar and increased fibre costs over the prior year period were increased NBSK pulp list prices of approximately 11%.



OPERATING RESULTS BY BUSINESS SEGMENT

Pulp

(millions of dollars unless Q1 Q4 Q1
otherwise noted, unaudited) 2008 2007 2007
----------------------------------------------------------------------
Sales 176.6 186.0 207.7
EBITDA (1) 44.0 31.2 64.1
EBITDA margin (1) 25% 17% 31%
Operating income (1) 33.0 16.0 53.1
----------------------------------------------------------------------
Average NBSK pulp list price -
(US$ per tonne, delivered to USA) 880 857 790
Average NBSK pulp list price
(Cdn$ per tonne, delivered to USA) 884 841 925
----------------------------------------------------------------------
Production - pulp (000 mt) 231.5 261.4 258.9
Shipments - Partnership-produced
pulp (000 mt) 228.9 253.6 253.1
Marketed on behalf of HSLP &
Canfor (000 mt) 128.4 148.0 132.6
----------------------------------------------------------------------
----------------------------------------------------------------------

Note: 1. Comparative figures have been reclassified to conform to current
year presentation.


First quarter 2008 operating income of the pulp segment increased by $17.0 million from the previous quarter and decreased by $20.1 million when compared to the same quarter in 2007. When compared to the prior quarter, improved NBSK list prices and a weaker Canadian dollar were partially offset by higher unit manufacturing costs. Overall realized prices in Canadian dollar terms improved by 5%, the result of a 3% improvement in NBSK pulp list prices and a 2.3% weakening of the Canadian dollar. The increase in unit manufacturing costs was primarily due to lower production volumes combined with higher prices for fibre, chemicals and energy, partially offset by lower spending on maintenance costs. Fibre costs increased by 3% when compared to the prior quarter due to higher prices for residual sawmill chips and higher percentage of higher cost whole log chips.

Lower production and sales volumes in the quarter, when compared to the prior and prior year quarters, were the result of a fire at the Prince George Pulp and Paper Mill on January 15, 2008 which destroyed the chip screening and in-feed system. Total pulp production lost in the quarter due to the fire is estimated at approximately 35,000 tonnes. Included in operating income is business interruption insurance of $11.4 million net of a three day equivalent deductible of $1.0 million.

The first quarter 2008 results are lower than those in the same period a year ago, due to the impact of the stronger Canadian dollar and higher fibre costs which were partially offset by increases in NBSK pulp list prices. The impact of the stronger Canadian dollar was approximately $25 million when compared to the same period last year. Fibre costs increased 15% over the prior year quarter with the increase mainly attributable to higher sawmill residual chip prices combined with a higher percentage of whole log chip consumption. Offsetting the stronger Canadian dollar and increased fibre costs were increased NBSK pulp list prices of approximately 11%.

Operations

NBSK production during the first quarter was 29,900 tonnes less than the fourth quarter of 2007 and 27,400 tonnes less than the first quarter of 2007. Total pulp production lost in the quarter due to the fire is estimated at approximately 35,000 tonnes. There was no additional downtime taken in the quarter. Production tonnes lost due to schedule maintenance outages were approximately 5,800 tonnes in the prior quarter and 8,500 tonnes in the first quarter of 2007.

Markets

The pulp market experienced strong fundamentals in the first quarter of 2008. Market pulp inventories (World 20 Producers) of softwood Kraft market pulp were at 33 days of supply (1). For comparative purposes, 30 days inventory is considered representative of a balanced market. Shipments in the first quarter of 2008 were similar to those in the same period in 2007. The printing and writing paper sector, which is the Partnership's largest customer sector for its pulp, realized growth in demand of 2.8% relative to the same period in 2007.

Market conditions were driven by forces which impacted supply. The relative strength of the Canadian dollar and the Euro compared to the US dollar negatively impacted revenues of producers whose reporting currencies were the Canadian dollar or Euro. Fibre costs for these same producers have been rising significantly, adding to the financial strain. Permanent closures at two mills in Scandinavia have been announced due to cost pressures and lack of fibre.

Note: 1. Pulp and Paper Products Council (PPPC)

Outlook - Pulp

Supporting the supply concerns is that producers typically conduct maintenance in the spring which results in reduced production and, therefore, reduced supply. During the second quarter of 2008, maintenance outages are scheduled at the Northwood and Intercontinental Pulp Mills that will result in an estimated 30,000 to 35,000 tonnes reduction in production. The Intercontinental Pulp Mill is scheduled to complete its major maintenance outage in the fourth quarter of 2008 that will result in an estimated 8,000 tonnes of reduction in production. Capital improvements at both mills should result in production growth in 2009. Adding to the reduction in supply, as a result of the fire, the Prince George Pulp and Paper Mill is expected to run at 90% to 95% of capacity until the new chip in feed system is operational which is expected to be in the fourth quarter of 2008.

The announced price for April 2008 for Northern Europe is US$920 per tonne, an increase of $40 per tonne over the price in March. No price increases have been announced for the North American markets and prices are expected to remain steady at US$880 per tonne in the near term. Since there remains much supply uncertainty in the market, and demand is holding prices are expected to fluctuate in a narrow range over the balance of the year.



Paper

(millions of dollars unless Q1 Q4 Q1
otherwise noted, unaudited) 2008 2007 2007
----------------------------------------------------------------------
Sales 34.8 29.1 30.5
EBITDA (1) 2.3 0.1 0.8
EBITDA margin (1) 7% 0% 3%
Operating (loss) income (1) 1.4 (0.9) (0.2)
----------------------------------------------------------------------
Production - paper (000 mt) 32.4 33.1 31.6
Shipments - paper (000 mt) 35.1 32.4 30.4
----------------------------------------------------------------------
----------------------------------------------------------------------

Note: 1. Comparative figures have been reclassified to conform to current
year presentation.


Operating income of the paper segment for the first quarter of 2008 was $1.4 million, $2.3 million more than the fourth quarter of 2007 and $1.6 million favourable when compared to the first quarter last year. The improvement over the prior quarter was due to a 10% improvement in realized prices in Canadian dollar terms, and higher shipment volumes partially offset by lower production volumes, and higher manufacturing costs. Manufacturing costs were primarily the result of higher raw material costs for slush pulp, reflecting the higher Canadian dollar market price for pulp. Lower production volumes were attributable to the impact of the fire at the Prince George Pulp and Paper Mill, which resulted in approximately 2 days of actual downtime. The Paper machine continued to operate with pulp transfers from the Intercontinental and Northwood Pulp Mills. When compared to the same period in 2007 the improved operating earnings were due to higher sales volumes, partially offset by a slight decrease in realized prices in Canadian dollar terms.

Operations

Paper production during the first quarter decreased by 700 tonnes over the prior quarter and increased by 800 tonnes when compared to the same period in 2007. Lost tonnes attributable to the fire were 2,500 tonnes. There was no scheduled maintenance taken during the quarter, compared to 1,800 tonnes of lost production in the prior quarter and 3,700 tonnes in the first quarter of 2007 due to maintenance outages.

Markets

Solid demand continued for Partnerships' bleached and unbleached paper in North America in the first quarter for what is normally the slowest period of the year. This reflected the strong Euro, reduced exports from Europe to North America and reduction in capacity in 2007. Order files increased for North American producers of Kraft paper.

The USA unbleached shipments of Kraft paper were up 6.8% in the first two months of 2008 and bleached paper shipments were up 17.5%(1).

Demand within the USA also increased(2), with extensible paper, a significant portion of the Partnerships' sales, realizing higher demand by 2.6% in the first two months of 2008 compared to the same period in 2007.

Notes: 1. American Forest & Paper Association
2. Paper Shipping Sack Manufacturers Association

Outlook - Kraft Paper Markets

Prices should remain strong through the first half of 2008 as all paper packaging grades have experienced a sharp increase in production costs and concerns of reduced supply as a result will support pricing. Some capacity increases are expected in the second half of 2008 which may moderate price increases.



Non-Segmented Costs

Q1 Q4 Q1
(millions of dollars, unaudited) 2008 2007 2007
-----------------------------------------------------------------------
Unallocated costs 3.8 3.4 4.9
Interest expense, net 1.7 1.7 1.8
Unrealized gain on derivative instruments (6.9) (1.8) (2.2)
Unrealized foreign exchange loss (gain)
on long-term debt 3.3 (0.9) (1.4)
Foreign exchange (gain) loss on working
Capital (1) (2.6) 0.6 1.1
Net property damage insurance gain (8.5) - -
Other expense 0.1 - 0.1
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(9.1) 3.0 4.3
-----------------------------------------------------------------------
-----------------------------------------------------------------------

Note: 1. Comparative figures have been reclassified to conform to current
year presentation.


Unallocated Costs

Unallocated costs, comprised principally of general and administrative expenses, totalled $3.8 million in the first quarter of 2008 compared to $3.4 million in the prior quarter and $4.9 million in the same period last year. Variances from the prior quarters are primarily due to changes in the accruals for performance based incentive plan payments.

Interest Expense

The net interest expense during the first quarter of 2008 was similar to the previous quarter and the first quarter of 2007.

Other Non-segmented Items

The unrealized gains and losses on derivative instruments result from the adoption of the Canadian Institute of Chartered Accountants (CICA) new Handbook Section 3855 "Financial Instruments" at January 1, 2007 and the Partnership's decision to discontinue its policy of hedge accounting. The net unrealized gain of $6.9 million recorded in the period relates to a revaluation to market of outstanding natural gas swaps at the end of the quarter and is the result of increases in the market price of natural gas. The natural gas swaps are used to fix the price on a portion of the Partnership's ongoing natural gas requirements.

The unrealized foreign exchange loss on long-term debt and the foreign exchange gain on working capital are the direct result of translating U.S. dollar balances at period-end exchange rates and reflect the effect of the weaker Canadian dollar.



SUMMARY OF FINANCIAL POSITION

The following table summarizes the Partnership's financial position as at
the end of the following periods:

(millions of dollars, except for ratios, Q1 Q1
unaudited) 2008 2007
--------------------------------------------------------------------------
Ratio of current assets to current
liabilities 1.97 1.92
Ratio of net debt to partners' equity (1) 0.15 0.16
Increase (decrease) in cash and cash
equivalents 20.3 (0.3)
Comprised of cash flow from (used in):
Operating activities (2) 50.7 48.5
Financing activities (25.6) (45.6)
Investing activities (2) (4.8) (3.2)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Notes: 1. Net debt consists of long-term debt net of cash and cash
equivalents.
2. Comparative figures have been reclassified to conform to current
year presentation.


Changes in Financial Position

Cash generated from operating activities was $50.7 million in the first quarter of 2008 compared to $48.5 million in the first quarter of 2007. The increase was due to a decrease in cash used in working capital offset by lower cash generated as a result of reduced earnings. The decrease of cash used in working capital was primarily the result of a decrease in cash used in trade receivables due to lower sales volumes and a stronger Canadian dollar, offset by an increase in insurance receivable for the business interruption insurance accrual.

The cash used in financing activities of $25.6 million in the quarter represents distributions paid to the limited partners, namely Canfor and the Fund.

The cash used in investing activities in the quarter is comprised of $9.3 million relating to capital expenditures net of accruals, offset by a cash advance of $4.5 million received as partial payment against the accrued property damage insurance receivable.

LIQUIDITY AND FINANCIAL REQUIREMENTS

At the end of the current quarter, the Partnership had cash and cash equivalents totalling $22.9 million. Cash and cash equivalents include cash on hand and highly liquid investments with an original maturity date of 90 days or less. The Partnership does not have holdings in asset backed commercial paper. The Partnership had bank operating lines of credit of $75.0 million, of which $27.4 million was reserved for a standby letter of credit issued to BC Hydro.

OUTSTANDING UNITS

At April 28, 2008, 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) are owned by the Fund through Canfor Pulp Trust and 35,776,483 Class B Exchangeable Limited Partnership Units are owned indirectly by Canfor.

RELATED PARTY TRANSACTIONS

The Partnership's transactions with related parties are consistent with the transactions described in the December 31, 2007 audited consolidated financial statements and are based on agreed upon amounts, and are summarized in note 12 of the unaudited interim consolidated financial statements.

RISKS AND UNCERTAINTIES

A comprehensive discussion of risks and uncertainties is included in the Fund's Annual Information Form dated February 25, 2008, which is available on www.sedar.com.



SELECTED QUARTERLY PARTNERSHIP FINANCIAL INFORMATION

Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
(unaudited) 2008 2007 2007 2007 2007 2006 2006 2006
---------------------------------------------------------------------------
Sales and Income
(millions of dollars)
Sales(1) 211.4 215.1 228.9 239.4 238.2 225.2 213.6 196.1
Operating income(1) 30.6 11.7 35.4 39.2 48.0 45.6 49.0 16.9
EBITDA(1) 42.5 27.9 48.8 51.7 60.1 58.2 61.8 28.0
Net income 43.5 12.1 33.2 35.9 48.6 44.8 41.9 15.9
---------------------------------------------------------------------------
Per Partnership unit
(dollars)(2)
Net income basic and
diluted 0.61 0.17 0.46 0.51 0.68 0.63 0.59 0.22
---------------------------------------------------------------------------
Statistics
Pulp shipments (000 mt) 228.9 253.6 257.1 259.8 253.1 249.8 251.4 244.6
Paper shipments (000 mt) 35.1 32.4 30.8 35.9 30.4 32.7 29.5 31.3
---------------------------------------------------------------------------

Average exchange rate
(US$/Cdn$)(3) 0.996 1.019 0.957 0.911 0.854 0.878 0.892 0.891
---------------------------------------------------------------------------

Average NBSK pulp list
price - (US$ per tonne,
delivered to USA) 880 857 837 810 790 770 757 705
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Notes: 1. Comparative figures have been reclassified to conform to current
year presentation.
2. Based on Partnership units outstanding at March 31, 2008
(71,270,025) for all periods.
3. Source - Bank of Canada (average noon rate for the period).


Sales are primarily influenced by changes in market pulp prices, sales volumes and fluctuations in Canadian dollar exchange rates. Operating income, net income and EBITDA are primarily impacted by the level of sales and price fluctuations in raw material inputs, energy prices, maintenance costs and the timing of scheduled maintenance downtime. Net income is also impacted by fluctuations in the Canadian dollar and market price of natural gas, due to the revaluation to the period end rate of US dollar denominated working capital balances and the US dollar denominated long-term debt, and revaluation of outstanding commodity swaps hedging natural gas purchases to market price of natural gas. Included in first quarter 2008 earnings are $11.4 million for business interruption insurance and a $8.5 million net gain for property damage insurance, relating to the fire at the Prince George Pulp and Paper Mill. The third quarter of 2006 also included a charge for transaction costs of $5.9 million related to the spinout of Canfor's pulp business into the Partnership.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with Canadian generally accepted accounting principles 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 Partnership's financial condition.

CHANGES IN ACCOUNTING POLICIES

Effective January 1, 2008, the Partnership adopted the Canadian Institute of Chartered Accountants' new Handbook Sections; 1535 "Capital Disclosures", 3031 "Inventories", 3862 "Financial Instruments - Disclosures" and 3863 "Financial Instruments - Presentation". Handbook sections 3862 and 3863 replace section 3861 "Financial Instruments - Disclosure and Presentation". These recommendations have been incorporated into these unaudited interim consolidated financial statements.

Section 1535 - Capital Disclosures

This Section establishes standards for disclosing information about an entity's capital and how it is managed. Under this standard the Partnership is required to disclose qualitative and quantitative information that enables users of the financial statements to evaluate the Partnership's objectives, policies and processes for managing capital.

Section 3031 - Inventories

This Section replaces section 3030 and prescribes the accounting treatment for inventories and provides guidance on the determination of costs and its subsequent recognition as an expense, including any write-down to net realizable value. It also provides guidance on assigning costs to inventories and in conjunction with section 3061 "Property Plant and Equipment", provides guidance on classification of major spare parts.

As a result of its adoption of the new guidance, the Partnership has reclassified $6.8 million in major spare parts from inventory to property plant and equipment. This reclassification was made retrospectively, without prior period restatement or adjustments to opening equity as it was deemed impracticable to determine the impact on prior periods.

Section 3862 - Financial Instruments - Disclosures

This Section requires entities to provide disclosure of quantitative and qualitative information in their financial statements that enable users to evaluate (a) the significance of financial instruments for the entity's financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and management's objectives, policies and procedures for managing such risks.

Section 3863 - Financial Instruments - Presentation

This Section establishes standards for presentation of financial instruments and non-financial derivatives.



CANFOR PULP LIMITED PARTNERSHIP
SUPPLEMENTARY FINANCIAL INFORMATION

Three months ended
March 31, March 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO EBITDA

Net Income $ 43.5 $ 48.6
Add (deduct):
Amortization 11.6 12.1
Net interest expense 1.7 1.8
Unrealized foreign exchange loss (gain)
on long-term debt 3.3 (1.4)
Unrealized gain on derivative instruments (6.9) (2.2)
Foreign exchange loss (gain) on working
capital (2.6) 1.1
Loss on disposal of fixed assets 0.2 -
Net property damage insurance gain (8.5) -
Other expense 0.2 0.1
--------------------------------------------------------------------------
EBITDA $ 42.5 $ 60.1
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Three months ended
March 31, March 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
CALCULATION OF STANDARDIZED AND ADJUSTED
DISTRIBUTABLE CASH

Cash flow from operating activities $ 50.7 $ 48.5
Deduct: Capital expenditures - cash (9.3) (3.2)
--------------------------------------------------------------------------
Standardized distributable cash $ 41.4 $ 45.3
--------------------------------------------------------------------------
Adjustments to standardized
distributable cash:
Add (deduct):
Increase (decrease) in non-cash working
capital (4.1) 6.6
Decrease in other non-cash items (2) (1.0) (0.5)
Capital expenditures - accruals 6.1 -
--------------------------------------------------------------------------
Adjusted distributable cash (1) $ 42.4 $ 51.4
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Standardized distributable cash - per
Partnership unit (in dollars) $ 0.58 $ 0.64
Adjusted distributable cash - per
Partnership unit (in dollars) (1) $ 0.60 $ 0.72
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cash distributions declared (paid and
payable) $ 25.6 $ 29.9
Cash distributions declared - per
Partnership unit (in dollars) $ 0.36 $ 0.42
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Notes: 1. Comparative figures have been reclassified to conform to current
year presentation.
2. This represents the change in the non-cash long-term portion of
the deferred maintenance provision and is included in "other"
in "cash flow from operations before working capital changes" on
the Partnership's consolidated statements of cash flows. The
current portion of the maintenance provision is included in
prepaids with the non-cash period change reflected in non-cash
working capital.


DISTRIBUTABLE CASH AND CASH DISTRIBUTIONS

In accordance with the Canadian Institute of Chartered Accountants July 2007 interpretive release "Standardized Distributable Cash in Income Trusts and other Flow-Through Entities", the Partnership has adopted the distributable cash calculation which conforms with the current guidance. In summary, for the purposes of the Partnership, standardized distributable cash is defined as the periodic cash flows from operating activities as reported in the GAAP financial statements, including the effects of changes in non-cash working capital less total capital expenditures as reported in the GAAP financial statements.

Adjusted distributable cash is defined as the standardized distributable cash prior to the effects of non-cash changes in working capital and long-term deferred maintenance provision, and after provision for accrued capital expenditures.

Management determines the level of cash distributions based on the level of cash flow from operations before working capital changes less actual capital expenditures, a reserve for future major capital replacements (estimated at $4 million per year) and a contingency reserve. 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, and thus will not significantly affect the level of distributions.

Distributions are declared monthly with date of record on the last day of the month and payable within 15 days following.



Canfor Pulp Income Fund
Consolidated Statements of Income, Comprehensive Income and Accumulated
Earnings and Distributions

Three months ended
(thousands of dollars, except unit and March 31, March 31,
per unit amounts, unaudited) 2008 2007
--------------------------------------------------------------------------

Income

Equity income in Canfor Pulp Limited
Partnership $ 21,667 $ 24,203
--------------------------------------------------------------------------

Net income 21,667 24,203

Distributions declared (note 5) (12,778) (14,907)
--------------------------------------------------------------------------

Earnings in excess of distributions $ 8,889 $ 9,296
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Weighted average number of units 35,493,542 35,493,542

--------------------------------------------------------------------------
--------------------------------------------------------------------------

Net income per unit, basic and diluted
(in dollars) $ 0.61 $ 0.68
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Net income for the period $ 21,667 $ 24,203

Other comprehensive income

Equity interest in other comprehensive
income (loss) of Canfor Pulp Limited
Partnership (54) 980
--------------------------------------------------------------------------
Comprehensive income $ 21,613 $ 25,183
--------------------------------------------------------------------------

Accumulated Earnings and Distributions
--------------------------------------------------------------------------
Balance, beginning of period -
Accumulated earnings in excess of
distributions - surplus (deficit) (44,796) (7,498)
Earnings in excess of distributions -
surplus (deficit) - current period 8,889 9,296
--------------------------------------------------------------------------
Balance, end of period - Accumulated
earnings in excess of distributions -
surplus (deficit) $ (35,907) $ 1,798
--------------------------------------------------------------------------

The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.


Canfor Pulp Income Fund
Consolidated Statements of Cash Flows

Three months ended
March 31, March 31,
(thousands of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Cash generated from (used in)

Operating activities
Net income $ 21,667 $ 24,203
Distributions received from Canfor Pulp
Limited Partnership 12,778 22,716
Items not affecting cash:
Equity income in Canfor Pulp Limited
Partnership (21,667) (24,203)
--------------------------------------------------------------------------
12,778 22,716
--------------------------------------------------------------------------
Financing activities
Distributions paid to Unitholders $ (12,778) $ (22,716)

--------------------------------------------------------------------------
Beginning, change and ending balance in
cash and cash equivalents $ - $ -
--------------------------------------------------------------------------
--------------------------------------------------------------------------

The accompanying notes are an integral part of these unaudited interim
financial statements.


Canfor Pulp Income Fund
Consolidated Balance Sheets

As at As at
March 31, December 31,
(thousands of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------

ASSETS

Current Assets
Distributions receivable from Canfor Pulp
Limited Partnership (note 6) $ 4,259 $ 4,259

--------------------------------------------------------------------------
Total current assets 4,259 4,259
--------------------------------------------------------------------------

Equity investment in Canfor Pulp Limited
Partnership (note 4) 300,293 291,458

--------------------------------------------------------------------------
$ 304,552 $ 295,717
--------------------------------------------------------------------------
--------------------------------------------------------------------------
LIABILITIES

Current liabilities
Distributions payable (note 5) $ 4,259 $ 4,259

--------------------------------------------------------------------------
Total current liabilities 4,259 4,259
--------------------------------------------------------------------------

Future income taxes 36,633 36,633
--------------------------------------------------------------------------
40,892 40,892
--------------------------------------------------------------------------
UNITHOLDERS' EQUITY

Unitholders' equity - 35,493,542 Fund
units outstanding 299,351 299,351
Accumulated earnings and distributions (35,907) (44,796)
Accumulated other comprehensive income
(note 7) 216 270
--------------------------------------------------------------------------
Total Unitholders' Equity 263,660 254,825
--------------------------------------------------------------------------
$ 304,552 $ 295,717
--------------------------------------------------------------------------

Description of the fund and basis of presentation of financial statements
(note 1).

The accompanying notes are an integral part of these unaudited interim
financial statements.

Approved by the Trustees

Stan Bracken-Horrocks Charles Jago


Canfor Pulp Income Fund

Notes to the Unaudited Interim Consolidated Financial Statements as at March 31, 2008

1. Description of the Fund and Basis of Presentation of Financial Statements

Canfor Pulp Income Fund (the Fund) is an unincorporated open-ended trust established under the laws of Ontario on April 21, 2006, pursuant to the Fund Declaration. The principal head office of the Fund is located at 1700 West 75th Avenue, Vancouver, B.C., Canada. The Fund has been established to acquire and hold, through a wholly owned trust, the Canfor Pulp Trust (the Trust), investments in the Limited Partnership Units of the Canfor Pulp Limited Partnership (the Partnership), and such other investments as the Trustees of the Fund may determine. The general partner of the Partnership is Canfor Pulp Holding Inc. (the General Partner) and each partner holds an ownership interest in the General Partner equal to its Partnership interest.

Each unitholder participates pro-rata in any distributions from the Fund.

The Fund is entirely dependent on distributions from the Partnership to make its own distributions.

2. Significant Accounting Policies

These unaudited interim consolidated financial statements do not include all of the disclosures required by Canadian generally accepted accounting principles for annual financial statements and, accordingly, should be read in conjunction with the audited consolidated financial statements and notes included in the Fund's 2007 Annual Report. These unaudited interim consolidated financial statements follow the same accounting policies and methods of computation as used in the 2007 audited consolidated financial statements, except as noted below.

3. Changes in Accounting Policies

Effective January 1, 2008, the Fund adopted the Canadian Institute of Chartered Accountants' new Handbook Sections; 1535 "Capital Disclosures", 3862 "Financial Instruments - Disclosures" and 3863 "Financial Instruments - Presentation". Handbook sections 3862 and 3863 replace section 3861 "Financial Instruments - Disclosure and Presentation". These recommendations have been incorporated into these unaudited interim consolidated financial statements.

Section 1535 - Capital Disclosures

This Section establishes standards for disclosing information about an entity's capital and how it is managed. Under this standard the Fund is required to disclose qualitative and quantitative information that enables users of the financial statements to evaluate the Fund's objectives, policies and processes for managing capital (note 8).

Section 3862 - Financial Instruments - Disclosures

This Section requires entities to provide disclosure of quantitative and qualitative information in their financial statements that enable users to evaluate (a) the significance of financial instruments for the entity's financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and management's objectives, policies and procedures for managing such risks (note 9).

Section 3863 - Financial Instruments - Presentation

This Section establishes standards for presentation of financial instruments and non-financial derivatives.

4. Equity Investment in Canfor Pulp Limited Partnership

The Fund's equity investment in the Partnership is as follows:



Three months
ended Year ended
March 31, December 31,
(thousands of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Balance, beginning of period 291,458 289,490
Accounting policy change - Partners'
equity of the Partnership - 2,363
Accounting policy change - Accumulated
other comprehensive loss of the
Partnership (note 7) - (915)
Equity in income of the Partnership 21,667 64,643
Equity interest in other comprehensive
income (loss) of the Partnership (54) 1,185
Distributions from the Partnership (12,778) (65,308)
--------------------------------------------------------------------------
Balance, end of period 300,293 291,458
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Accounting policy changes above represent the Fund's share (49.8%) of the Partnership's adjustments to opening Partners' equity arising from the adoption of new accounting pronouncements and changes in accounting policies, all as described in notes to the unaudited interim consolidated financial statements of the Partnership.

5. Distributions

The Fund declared distributions during the first three months of 2008 as
follows:



(thousands of dollars, except per unit amounts, unaudited)
Amount per
Fund Unit Amount
Record Date Payable Date $ $
---------------------------------------------------------------------------
January 31, 2008 February 15, 2008 0.12 4,260
February 29, 2008 March 14, 2008 0.12 4,259
March 31, 2008 April 15, 2008 0.12 4,259
---------------------------------------------------------------------------
0.36 12,778
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The Fund's monthly distributions are based on the Partnership's monthly
distributions.


Monthly cash distributions from the Partnership are based on the Partnership's cash flow and are not directly equal to the Fund's pro-rata share of the Partnership's income under the equity method.

6. Related Party Transactions

All accounting, treasury, legal and administrative functions for the Fund are performed on its behalf, without charge, by the Partnership pursuant to a support agreement. Distributions earned from the Partnership for the three months ended March 31, 2008 was $12.8 million of which $8.5 million was paid, with the balance of $4.3 million receivable on March 31, 2008.

7. Accumulated Other Comprehensive Income



Three months
ended Year ended
March 31, December 31,
(thousands of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Balance, beginning of period 270 (915)
Other comprehensive income (loss) (54) 1,185
--------------------------------------------------------------------------
Balance, end of period 216 270
--------------------------------------------------------------------------
--------------------------------------------------------------------------


8. Capital Disclosures

The Fund's capital is comprised solely of unitholders' equity. The Fund's only source of liquidity is distributions received from the Partnership. The Fund's objective when managing capital is to make its own distributions to unitholders based on the distributions received from the Partnership. The Fund relies on the objectives, policies and processes of the Partnership for managing these risks.



March 31, December 31,
(thousands of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Unitholders' equity(1) 263,444 254,555
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Note: 1. Excludes accumulated other comprehensive income.


The Fund has no external capital requirements or covenants.

9. Financial Instruments

The Fund's financial instruments consist of distributions receivable from the Partnership and distributions payable to unitholders. Distributions receivable are classified as loans and receivables and are measured at amortized cost. Distributions payable are classified as other liabilities and are measured at amortized cost. The carrying values of these financial instruments approximate their fair values due to the relatively short period to maturity of these instruments.

The Fund is exposed to certain risks related to the nature of its investment in the Partnership and the structure of the Fund, as well as the underlying risks related to the business of the Partnership. The Fund relies on the objectives, policies and processes of the Partnership for managing these risks.

10. Segmented Information

The Fund operates in one industry segment, namely investing in pulp and paper producing assets in one geographic region, Canada.



Canfor Pulp Limited Partnership
Consolidated Statements of Income, Comprehensive Income and Partners'
Equity

Three months ended
(millions of dollars, except units and per March 31, March 31,
unit amounts, unaudited) 2008 2007
--------------------------------------------------------------------------

Revenue
Sales $ 211.4 $ 238.2
Business interruption insurance (note 18) 11.4 -
--------------------------------------------------------------------------
222.8 238.2

Costs and expenses
Manufacturing and product costs 148.9 143.2
Freight and other distribution costs 25.3 28.5
Amortization 11.6 12.1
Selling and administration costs 6.4 6.4
--------------------------------------------------------------------------
192.2 190.2

Operating income 30.6 48.0

Interest expense, net (1.7) (1.8)
Unrealized foreign exchange gain (loss) on
long-term debt (3.3) 1.4
Unrealized gain on derivative instruments
(note 14) 6.9 2.2
Foreign exchange gain (loss) on working
capital 2.6 (1.1)
Net property damage insurance gain (note 18) 8.5 -
Other expense (0.1) (0.1)
--------------------------------------------------------------------------
12.9 0.6

Net Income 43.5 48.6

Other comprehensive income (loss)
Adjustment for realized
derivatives (note 17) (0.1) 2.0
--------------------------------------------------------------------------
Comprehensive Income $ 43.4 $ 50.6
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Net income per Partnership unit (in
dollars) (note 13)
Basic and diluted $ 0.61 $ 0.68

Weighted average Partnership units
outstanding 71,270,025 71,270,025
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Partners' Equity
Balance, beginning 584.9 583.9
Net income 43.5 48.6
Distributions to partners (note 16) (25.6) (30.2)
Other comprehensive income (loss) (note 17) (0.1) 2.0
--------------------------------------------------------------------------
Balance, end of period $ 602.7 $ 604.3
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Subsequent event (note 18).

The accompanying notes are an integral part of these unaudited interim
financial statements.


Canfor Pulp Limited Partnership
Consolidated Statements of Cash Flows

Three months ended
March 31, March 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------

Cash and cash equivalents generated from
(used in)
Operating activities
Net income $ 43.5 $ 48.6
Items not affecting cash:
Amortization 11.6 12.1
Unrealized foreign exchange loss (gain) on
long-term debt 3.3 (1.4)
Unrealized gain on derivative instruments (6.9) (2.2)
Employee future benefits 2.2 1.7
Loss on disposal of fixed assets 0.2 -
Net property damage insurance gain (note 18) (8.5) -
Other 1.2 (0.3)
Salary pension plan contribution - (3.4)
--------------------------------------------------------------------------
Cash flow from operations before working
capital changes 46.6 55.1
Decrease (increase) in non-cash working
capital (note 15) 4.1 (6.6)
--------------------------------------------------------------------------
Cash flow from operating activities 50.7 48.5
--------------------------------------------------------------------------
Financing activities
Distributions paid to partners (25.6) (45.6)
--------------------------------------------------------------------------
(25.6) (45.6)
--------------------------------------------------------------------------
Investing activities
Property, plant and equipment, net (note 15) (9.3) (3.2)
Insurance proceeds (note 18) 4.5 -
--------------------------------------------------------------------------
(4.8) (3.2)
--------------------------------------------------------------------------

--------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents 20.3 (0.3)
Cash and cash equivalents, beginning of
period 2.6 28.4
--------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 22.9 $ 28.1
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Supplementary cash flow information (note 15).

The accompanying notes are an integral part of these unaudited interim
financial statements.


Canfor Pulp Limited Partnership
Consolidated Balance Sheets

As at As at
March 31, December 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
ASSETS

Current assets
Cash and cash equivalents $ 22.9 $ 2.6
Accounts receivable (notes 12, 18)
Trade 141.7 145.6
Insurance 19.8 -
Other 9.3 9.9
Inventories (note 3, 4) 140.5 136.8
Prepaid expenses 12.8 15.6

--------------------------------------------------------------------------
Total current assets 347.0 310.5
--------------------------------------------------------------------------

Property, plant and equipment (note 5) 582.5 585.6

Deferred charges and other assets (note 6) 12.5 12.9

--------------------------------------------------------------------------
$ 942.0 $ 909.0
--------------------------------------------------------------------------
--------------------------------------------------------------------------

LIABILITIES

Current liabilities

Accounts payable and accrued liabilities
(note 12) $ 167.6 $ 156.9
Distributions payable (note 16) 8.6 8.6

--------------------------------------------------------------------------
Total current liabilities 176.2 165.5
--------------------------------------------------------------------------

Long-term debt (note 9) 112.0 108.7
Long-term liabilities (note 10) 51.1 49.9
--------------------------------------------------------------------------
$ 339.3 $ 324.1
--------------------------------------------------------------------------

PARTNERS' EQUITY - 14,254,005 Class A
Limited Partnership Units and 57,016,020
Class B Limited Partnership Units (note 1) 602.7 584.9
--------------------------------------------------------------------------
$ 942.0 $ 909.0
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Subsequent event (note 18).

The accompanying notes are an integral part of these unaudited interim
financial statements.

Approved on behalf of Canfor Pulp Limited Partnership by its General
Partner, Canfor Pulp Holding Inc.,

Stan Bracken-Horrocks Paul Richards
Director Director


Canfor Pulp Limited Partnership

Notes to the Unaudited Interim Consolidated Financial Statements as at March 31, 2008

1. Business Description and Basis of Presentation

Canfor 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 business 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, 2008, Canfor owned 50.2% and Canfor Pulp Income Fund (the Fund) indirectly owned 49.8% of the issued and outstanding units of the Partnership.

The general partner of the Partnership is Canfor Pulp Holding Inc. (the General Partner), which holds an interest of 0.001% of the Partnership.

These unaudited interim consolidated financial statements are those of the Partnership and do not include the assets, liabilities, revenues and expenses of its partners. The Partnership, other than its incorporated subsidiaries, is not subject to income taxes as its income is allocated for tax purposes to its partners. Accordingly, no recognition has been made for income taxes related to Partnership income in these financial statements. The tax attributes of the Partnership's net assets flow directly to the partners.

Certain comparative figures have been reclassified to conform to current year presentation.

Economic Dependence

The Partnership depends on Canfor to provide approximately 68% (2007 Year - 66%) of its fibre supply as well as to provide certain key business and administrative services as described in the Fund's 2007 Annual Report. As a result of these relationships the Partnership considers its operations to be dependent on its ongoing relationship with Canfor.

2. Significant Accounting Policies

These unaudited interim consolidated financial statements do not include all of the note disclosures required by Canadian generally accepted accounting principles for annual financial statements. Except as described in note 3, the Partnership's accounting policies are as disclosed in the annual consolidated financial statements of the Partnership included in the Fund's 2007 Annual Report available at www.canforpulp.com or www.sedar.com.

3. Changes in Accounting Policies

Effective January 1, 2008, the Partnership adopted the Canadian Institute of Chartered Accountants' new Handbook Sections; 1535 "Capital Disclosures", 3031 "Inventories", 3862 "Financial Instruments - Disclosures" and 3863 "Financial Instruments - Presentation". Handbook sections 3862 and 3863 replace section 3861 "Financial Instruments - Disclosure and Presentation". These recommendations have been incorporated into these unaudited interim consolidated financial statements.

Section 1535 - Capital Disclosures

This Section establishes standards for disclosing information about an entity's capital and how it is managed. Under this standard the Partnership is required to disclose qualitative and quantitative information that enables users of the financial statements to evaluate the Partnership's objectives, policies and processes for managing capital (see note 11).

Section 3031 - Inventories

This Section replaces section 3030 and prescribes the accounting treatment for inventories and provides guidance on the determination of costs and its subsequent recognition as an expense, including any write-down to net realizable value. It also provides guidance on assigning costs to inventories and in conjunction with section 3061 "Property Plant and Equipment", provides guidance on classification of major spare parts.

As a result of its adoption of the new guidance, the Partnership has reclassified $6.8 million in major spare parts from inventory to property plant and equipment. This reclassification was made retrospectively, without prior period restatement or adjustments to opening equity as it was deemed impracticable to determine the impact on prior periods.

Section 3862 - Financial Instruments - Disclosures

This Section requires entities to provide disclosure of quantitative and qualitative information in their financial statements that enable users to evaluate (a) the significance of financial instruments for the entity's financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and management's objectives, policies and procedures for managing such risks (see note 14).

Section 3863 - Financial Instruments - Presentation

This Section establishes standards for presentation of financial instruments and non-financial derivatives.

4. Inventories



March 31, December 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Pulp 68.0 63.7
Paper 11.9 14.0
Wood chips 16.9 10.7
Processing materials and supplies 43.7 48.4
--------------------------------------------------------------------------
140.5 136.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------


5. Property Plant and Equipment



March 31, 2008
-------------------------------------
Accumulated
(millions of dollars, unaudited) Cost amortization Net
---------------------------------------------------------------------------
Land and improvements 14.5 - 14.5
Buildings, machinery and equipment 1,292.3 730.7 561.6
Construction in progress 6.4 - 6.4
---------------------------------------------------------------------------
1,313.2 730.7 582.5
---------------------------------------------------------------------------
---------------------------------------------------------------------------

December 31, 2007
-------------------------------------
Accumulated
(millions of dollars, unaudited) Cost amortization Net
---------------------------------------------------------------------------
Land and improvements 14.5 - 14.5
Buildings, machinery and equipment 1,294.7 726.8 567.9
Construction in progress 3.2 - 3.2
---------------------------------------------------------------------------
1,312.4 726.8 585.6
---------------------------------------------------------------------------
---------------------------------------------------------------------------


6. Deferred Charges and Other Assets



March 31, December 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Pension benefit plan 10.9 11.3
Maintenance shutdown costs 0.4 1.4
Derivative financial instruments 0.8 -
Other 0.4 0.2
--------------------------------------------------------------------------
12.5 12.9
--------------------------------------------------------------------------
--------------------------------------------------------------------------


7. Employee Future Benefits

The 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.

Total employee future benefit expenses were as follows:



Three months ended
March 31, March 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Pension plans 0.9 1.2
Other employee future benefit plans 1.5 1.5
Contributions to forest industry union plans 1.6 1.6
--------------------------------------------------------------------------
4.0 4.3
--------------------------------------------------------------------------
--------------------------------------------------------------------------


8. Asset Retirement Obligations



Three months
ended Year ended
March 31, December 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Balance beginning of period 11.3 -
Accrued obligation - ash pond - 2.4
Accrued obligations - landfills - 8.9
Accretion expense 0.2 0.1
Current expenditures (0.5) (0.3)
Change in estimate - 0.2
--------------------------------------------------------------------------
Balance end of period 11.0 11.3

Less current portion - included in accounts
payable and other accrued liabilities (1.6) (2.1)
--------------------------------------------------------------------------
Long-term portion 9.4 9.2
--------------------------------------------------------------------------
--------------------------------------------------------------------------


9. Credit Facilities and Long-term Debt

The Partnership has a 3-year $75 million syndicated unsecured revolving bank credit facility (the Revolving Facility) with $27.4 million of the Revolving Facility reserved for a standby letter of credit issued to BC Hydro. The Revolving Facility bears interest and fees at rates that vary depending on the ratio of net debt to operating earnings before interest, taxes, depreciation and amortization (EBITDA) and which may, at the Partnership's option, be based on lenders' Canadian prime rate, bankers acceptances, US dollar base rate or US dollar LIBOR rate.

Each agreement relative to the Notes and Revolving Facility contains similar covenants with respect to certain financial ratios and at March 31, 2008 the Partnership was in compliance with all covenants.

At March 31, 2008 the Partnership has outstanding long-term debt of $112.0 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 fair value of long-term debt at March 31, 2008 was $119.5 million (US$117.4 million).

10. Long-term Liabilities



March 31, December 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Accrued pension obligations 4.8 4.3
Post-employment benefits 36.9 35.6
Derivative financial instruments - 0.8
Asset retirement obligations (note 8) 9.4 9.2
--------------------------------------------------------------------------
51.1 49.9
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--------------------------------------------------------------------------


11. Capital Disclosures

The Partnership's objectives when managing capital are to safeguard its assets and maintain a globally competitive cost structure, continue as a going concern and provide returns to its partners in the form of distributions and capital appreciation. In addition, the Partnership works with all relevant stakeholders to ensure the safety of its operations and employees, and remain in compliance with all environmental regulations.

The Partnership's capital is comprised of net debt and Partners' equity:



March 31, December 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Total debt 112.0 108.7
Less cash and cash equivalents (22.9) (2.6)
--------------------------------------------------------------------------
Net debt 89.1 106.1
Total Partners' equity(1) 602.3 584.4
--------------------------------------------------------------------------
691.4 690.5
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Note: 1. Excludes accumulated other comprehensive income.


Management determines the level of cash distributions based on the level of cash flow from operations before working capital changes less actual capital expenditures, a reserve for future major capital replacements (estimated at $4 million per year) and a contingency reserve. 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, and thus will not significantly affect the level of distributions.

During the three months ended March 31, 2008 the Partnership was in compliance with all external capital requirements and covenants related to its debt facilities.

12. Related Party Transactions

The Partnership's transactions with related parties are consistent with the transactions described in the December 31, 2007 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) 2008 2007
--------------------------------------------------------------------------
Transactions
Canfor 39.4 35.1
Howe Sound LP - commission 0.7 0.8
Howe Sound LP - purchase of wood chips 0.3 -
Lakeland Mills Ltd. and Winton Global
Lumber Ltd. - purchase of wood chips 1.1 3.4


March 31 December 31
2008 2007
--------------------------------------------------------------------------
Balance Sheet
Included in accounts payable and accrued
liabilities:
Canfor 36.1 30.8
Howe Sound LP 48.2 35.0
Lakeland Mills Ltd. and Winton Global
Lumber Ltd. 0.5 0.3
Included in trade accounts receivable:
Product marketed for Canfor 16.4 14.2
Product marketed for Howe Sound LP 43.7 31.8
--------------------------------------------------------------------------


Transactions and payables to Canfor include purchases of wood chips, pulp and administrative services.

13. Income per Partnership Unit

Basic 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.

14. Financial Instruments

Classification of Financial Instruments

The Partnership has classified its cash and cash equivalents as held-for-trading. Accounts receivable are classified as loans and receivables and are measured at amortized cost. Accounts payable and accrued charges, and long-term debt, including interest payable, are classified as other liabilities, all of which are measured at amortized cost. Derivative instruments are recorded in the balance sheet at fair value. The Partnership has no derivatives embedded in its financial or non-financial contracts that are not closely related to the host contract.

Financial Risk Management

The Partnership is exposed to a number of risks as a result of holding financial instruments. These risks include credit risk, liquidity risk and market risk.

Risk management is carried out by the risk management committee under a "Risk Management Controls Policy". The policy sets out the responsibilities, reporting and counter party credit and communication requirements associated with all CPLP risk management activity. Responsibility for overall philosophy, direction and approval is that of the Board of Directors.

I. Credit risk:

Credit risk is the risk of financial loss to the Partnership if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Financial instruments that potentially subject the Partnership to credit risk include cash and cash equivalents and accounts receivable.

Cash and cash equivalents includes cash on deposit and temporary investments with an original maturity date of 90 days or less. In order to mitigate the risk of financial loss, cash on deposit is held with major Canadian and international financial institutions and temporary investments are held with major Canadian and International financial institutions and highly rated commercial paper. The cash and cash equivalents balance at March 31, 2008 was $22.9 million.

The Partnership utilizes a combination of credit insurance and self-insurance to manage the risk associated with trade receivables. Approximately 75% of the outstanding trade receivables are covered under credit insurance while the majority of the balance is with large and financially sound customers. The Partnership's trade receivable balance at March 31, 2008 was $141.7 million.

II. Liquidity risk:

Liquidity risk is the risk that the Partnership will be unable to meet its financial obligations as they fall due. The Partnership manages liquidity risk through management of its capital structure in conjunction with cash flow forecasting including anticipated investing and financing activities.

At March 31, 2008, the Partnership's accounts payable and accrued liabilities totalled $167.6 million, all of which fall due for payment within one year of the balance sheet date.

III. Market risk:

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in interest rates and foreign currency.

a. Interest rate risk:

The Partnership is exposed to interest rate risk though its financial assets and financial obligations bearing variable interest rate and through its off balance sheet lease obligations. The Partnership's cash and cash equivalents include term deposits with an original maturity date of 90 days or less.

The Partnership manages interest rate risk by maximizing the interest earned on excess funds while maintaining the liquidity necessary to meet day-to-day operating cash flow requirements and payment of monthly declared distributions to unitholders.

Fluctuations in the market interest rates are not expected to have a material impact on the Partnership's results of operations due to the short term nature of the respective financial assets and obligations.

The Partnership currently does not use derivative instruments to reduce its exposure to interest rate risk.

b. Currency risk:

The Partnership is exposed to foreign exchange risk primarily in US dollars. The Partnership's products are sold globally with prices denominated in US dollars or linked to prices quoted in US dollars with certain expenditures transacted in US dollars. In addition the Partnership holds financial assets and liabilities in US dollars. These primarily include US dollar bank accounts and investments, trade accounts receivable and long-term debt.

For the periods ending March 31, 2007 and 2008, the Partnership has not used derivative instruments to reduce its exposure to currency risk.

Derivative Instruments

Periodically, the Partnership uses a variety of derivative instruments to reduce its exposure to risks associated with fluctuations in foreign exchange rates, pulp prices and natural gas.

For the three months ended March 31, 2008, the Partnership recorded realized losses of $0.6 million (March 31, 2007 - $0.4 million), on maturing commodity swaps hedging natural gas purchases as a charge to manufacturing and product costs. At March 31, 2008, the Partnership had outstanding commodity swaps hedging future natural gas purchases of 4.0 million gigajoules extending to October, 2010. At March 31, 2008 the unrealized gain of $4.0 million (March 31, 2007 - $2.4 million), on these outstanding commodity swaps is recorded as an asset in other receivables and in deferred charges and other assets.

15. Supplementary Cash Flow Information



Three months ended
March 31, March 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------

Changes in non-cash working capital

Accounts receivable 7.6 (35.9)
Insurance receivable (14.5) -
Inventories (10.5) (7.8)
Prepaid expenses 2.8 (3.8)
Accounts payable and accrued liabilities 19.2 40.9
Asset retirement obligations (0.5) -
--------------------------------------------------------------------------
4.1 (6.6)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Capital expenditures

Capital expenditures - cash 9.3 3.2
Capital expenditures - accruals (6.1) -
Asset retirement obligations - long-term - -
--------------------------------------------------------------------------
3.2 3.2
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Net interest paid - 0.5
--------------------------------------------------------------------------
--------------------------------------------------------------------------


16. Distributions

The Partnership declared distributions in the first three months of 2008 as follows:



(millions of dollars, except per unit amounts, unaudited)
Amount per
Partnership Unit Amount
Record Date Payable Date $ $
-------------------------------------------------------------------------
January 31, 2008 February 15, 2008 0.12 8.5
February 29, 2008 March 14, 2008 0.12 8.5
March 31, 2008 April 15, 2008 0.12 8.6
-------------------------------------------------------------------------
0.36 25.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------


17. Accumulated Other Comprehensive Income



Three months
ended Year ended
March 31, December 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
Balance, beginning of period 0.5 (1.8)
Adjustment for derivatives recorded in
other comprehensive income (loss) (0.1) 2.3
--------------------------------------------------------------------------
Balance, end of period 0.4 0.5
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Since the inception of the Partnership, the total of the cumulative net income, accumulated other comprehensive income, less cumulative distributions is as follows:



(millions of dollars, unaudited) March 31, 2008
--------------------------------------------------------
Cumulative net income 260.0
Cumulative distributions (245.2)
Accumulated other comprehensive income 0.4
--------------------------------------------------------
15.2
Partners' capital - at July 1, 2006 587.5
--------------------------------------------------------
Partners' equity, end of period 602.7
--------------------------------------------------------
--------------------------------------------------------


18. Prince George Pulp and Paper Mill Fire and Insurance

On January 15, 2008 a fire at the Prince George Pulp & Paper Mill destroyed the chip screening and in-feed system. During the quarter, the Partnership accrued a property damage insurance receivable of $11.6 million, which is net of aggregate policy deductibles of $3.25 million. Net insurance proceeds, less the write-off of the net book value of the damaged assets, is recorded as a non-operating gain on disposal of assets of $8.5 million in the quarter.

The Partnership also accrued a business interruption insurance receivable of $14.4 million to recover the estimated $12.4 million impact of lost production during the quarter less a three day equivalent deductible of $1.0 million. The accrual also includes a recovery of $3.0 million for costs incurred to construct a temporary chip in-feed system. Accordingly the net gain on insurance proceeds of $11.4 million has been classified as revenue.

Total insurance proceeds accrued in the period were $26.0 million, comprised of $14.4 million for business interruption and $11.6 million for property damage. During the quarter the Partnership received a cash advance of $6.2 million, of which $1.7 million related to the business interruption claim and $4.5 million for property damage which has been classified as an investing activity on the cash flow statement. Subsequent to March 31, a further $16.8 million has been received as partial payment against the accrued insurance receivable.

19. Segmented Information (a)



Unallocated
(millions of dollars, unaudited) Pulp Paper Costs Total
---------------------------------------------------------------------------
Three months ended March 31, 2008
---------------------------------------------------------------------------
Sales to external customers (b) 176.6 34.8 - 211.4
Sales of pulp to paper segment (c) 11.4 (11.4) - -
Operating income (loss) 33.0 1.4 (3.8) 30.6
Amortization 10.6 0.9 0.1 11.6
Capital expenditures, net 2.9 0.3 - 3.2
Identifiable assets 823.6 72.3 46.1 942.0

Three months ended March 31, 2007
---------------------------------------------------------------------------
Sales to external customers (b) 207.7 30.5 - 238.2
Sales of pulp to paper segment (c) 20.0 (20.0) - -
Operating income (loss) 53.1 (0.2) (4.9) 48.0
Amortization 11.0 1.0 0.1 12.1
Capital expenditures, net 2.8 0.4 - 3.2
Identifiable assets 820.3 71.1 50.8 942.2
---------------------------------------------------------------------------
(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 48% (Year 2007 - 41%).
(b) Sales to the largest customer represented approximately 27% of pulp
segment sales (Year 2007 - 24%).
(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.



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