Canfor Pulp Income Fund
TSX : CFX.UN

Canfor Pulp Income Fund

October 25, 2010 19:59 ET

Canfor Pulp Income Fund Announces Strong Third Quarter 2010 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Oct. 25, 2010) - Canfor Pulp Income Fund (the Fund) (TSX:CFX.UN) announced today its third quarter 2010 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 record sales of $247.9 million and net income of $54.5 million, or $0.76 per unit, for the quarter ended September 30, 2010. The Partnership generated EBITDA of $63.6 million in the quarter, similar to the record level in the second quarter of 2010. The Fund reported net income of $27.9 million, representing the Fund's share of the Partnership's net income and a future income tax recovery of $0.8 million.

In the quarter, the Partnership generated adjusted distributable cash of $55.3 million, or $0.78 per unit, and the Partnership and the Fund declared distributions of $0.69 per unit.

Partnership results were similar to the second quarter of 2010 as higher prices for the Partnership's pulp and paper products offset lower shipments and higher unit manufacturing costs.

The scheduled maintenance outage at the Northwood Pulp Mill, originally estimated to result in 10,000 tonnes of reduced production was extended for additional inspections and repairs to the recovery boilers. The additional work extended the outage into the fourth quarter of 2010 for a total of 24,000 tonnes of reduced production with approximately 18,000 tonnes in the third quarter and 6,000 tonnes in the fourth quarter.

Softwood pulp markets remained balanced through the quarter. Bleached softwood inventories have increased as a result of reduced demand from China and the typical seasonal slowdown through the summer months. Rising inventories resulted in a US$30 price decrease in North American markets from the US$1,020 peak in July 2010 to US$990 per tonne for September 2010.

Some North American bleached softwood capacity was restarted in late September which will result in a modest increase in supply. Conversely, seasonal maintenance downtime through October should mitigate this increase in supply in the near term. The North American NBSK pulp list price for October 2010 is announced at US$970 per tonne, a US$20 per tonne reduction from September 2010.

On October 20, 2010 the Fund announced a monthly distribution of $0.25 per Fund unit for the month of October, to be paid on November 15, 2010, to unitholders of record at the close of business on October 29, 2010.

Additional Information

A conference call to discuss the third quarter 2010 financial and operating results will be held on Tuesday, October 26, 2010 at 7:30 a.m. Pacific time.

To participate in the call, please dial 416-641-2140 or Toll-Free 1-866-852-2121. For instant replay access, please dial 416-695-5800 or Toll-Free 1-800-408-3053 and enter participant pass code 8663005. The conference call will be webcast live and will be available at www.canforpulp.com/investors/webcasts.asp.

This news release is available on the Partnership's website at www.canforpulp.com.

About Canfor Pulp Income Fund

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 Canfor Pulp Limited Partnership (the Partnership). The Fund indirectly holds a 49.8% interest in the Partnership with Canadian Forest Products Ltd., a subsidiary of Canfor Corporation (collectively Canfor) 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. In particular, material forward-looking statements in this press release include the expected effective date of the Arrangement. In some instances, material assumptions are disclosed elsewhere in this press release in respect of forward-looking statements. Other risks and uncertainties are detailed from time to time in reports filed by 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. Although we believe that the expectations reflected by the forward-looking statements presented in this press release are reasonable, these forward-looking statements are based on management's current expectations and beliefs and actual events or results may differ materially. New risk factors may arise from time to time and it is not possible for management to predict all of those risk factors or the extent to which any factor or combination of factors may cause actual events and results, performance and achievements of the Fund and Partnership to be materially different from those contained in forward-looking statements. The forward-looking statements speak only as of the date on which such statement is made, are based on current information and expectations and 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 press release include statements made under:

- "Critical Accounting Estimates";

- "SIFT Conversion Rules";

- "Conversion to International Financial Reporting Standards";

- "Outlook - Pulp";

- "Outlook - Kraft Paper";

- "Financial Requirements and Liquidity";

- "Critical Accounting Estimates";

- "Conversion to International Financial Reporting Standards";

- "Distributable Cash and Cash Distributions".

Material risk factors that could cause actual results to differ materially from the forward-looking statements contained in this press release include: general economic, market and business conditions; product selling prices; raw material and operating costs; exchange rates; changes in law and public policy; and opportunities available to or pursued by the Fund and the Partnership. Additional information concerning these and other factors can be found in the Fund's Annual Information Form dated February 18, 2010, which is available on www.sedar.com.

Canfor Pulp Income Fund and Canfor Pulp Limited Partnership

Third quarter 2010

The information in this report is as at October 25, 2010.

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 October 25, 2010, there were a total of 35,493,505 Fund units issued and outstanding, and the Fund indirectly held a total of 35,493,542 units of the Partnership, representing 49.8% of the Partnership. Canadian Forest Products Ltd. (Canfor) held 35,776,483 Class B Exchangeable Limited Partnership Units, representing 50.2% of the Partnership. The Class B Exchangeable Limited Partnership Units are indirectly exchangeable for an equivalent number of Fund Units pursuant to the terms of an exchange agreement (Exchange Agreement) dated July 1, 2006 among Canfor, the Fund, the Trust, the Partnership and the General Partner. The Exchange Agreement contains, among other things, the procedure through which the Class B Exchangeable Limited Partnership Units may be exchanged for Fund Units.

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.

The Fund expects to convert to a corporation on or about January 1, 2011, pursuant to a plan of arrangement approved at the annual general meeting on April 27, 2010.

SELECTED QUARTERLY FUND FINANCIAL INFORMATION



(thousands of
dollars,
per unit
amounts, Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
unaudited) 2010 2010 2010 2009 2009 2009 2009 2008
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Equity income
(loss) in
Canfor Pulp
Limited
Partner-
ship 27,124 21,430 16,222 7,562 9,098 724 (10,740) (12,947)
Net
income
(loss) 27,901 22,111 16,544 6,903 8,497 4,406 (10,740) (13,686)
Net income
(loss)
per Fund
unit $ 0.79 $ 0.62 $ 0.47 $ 0.20 $ 0.24 $ 0.12 $ (0.30) $ (0.39)
Distributions
earned from
the Partnership
and declared to
unit-
holders 24,491 18,457 11,357 4,969 1,065 1,065 2,130 9,938
Distributions
declared per
Fund
unit $ 0.69 $ 0.52 $ 0.32 $ 0.14 $ 0.03 $ 0.03 $ 0.06 $ 0.28
Partnership
adjusted
distributable
cash per
unit(1) $ 0.78 $ 0.88 $ 0.57 $ 0.31 $ 0.16 $ 0.02 $ (0.06) $ 0.02
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Note: (1) Represents the Partnership's adjusted distributable cash on
which the Fund is dependent to make its own distributions. For
further details on the Partnership's adjusted distributable cash
see the Partnership's disclosure.


Equity income (loss) in Canfor Pulp Limited Partnership represents the Fund's share of the Partnership's net income (loss). Net income (loss) is also impacted by future income tax expense (recovery) which is primarily influenced by changes in substantively enacted tax rates and the difference between the tax basis of the Fund's pro-rata ownership of the Partnership's assets and liabilities and the respective amounts reported in the financial statements.

OPERATING RESULTS AND LIQUIDITY

For the quarter ended September 30, 2010, the Fund had net income of $27.9 million or $0.79 per Fund unit. The net income was the Fund's share of the Partnership's net income for the quarter and also includes a future income tax recovery of $0.8 million. The future income tax recovery represents an adjustment to the future income tax liability based on the Fund's share of the differences between accounting and income tax values of the Partnership's assets and liabilities. The Fund's equity income in the Partnership increased $5.7 million when compared to the prior quarter. The increase was primarily attributable to the Fund's share of increased income from the Partnership's non-operating items, and was primarily the result of the foreign exchange gain on translation of US dollar denominated long-term debt and a gain on derivative financial instruments, partially offset by a foreign exchange loss on working capital. The Fund's share of operating earnings remained relatively unchanged from the prior quarter. Distributions declared by the Partnership and accruing to the Fund were $24.5 million, of which $8.9 million was receivable at September 30, 2010. Cash distributions received from the Partnership are the only source of liquidity for the Fund. 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.

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 payable by the Partnership to the Fund and distributions payable by the Fund to its unitholders are recorded when declared. During the third quarter of 2010, the Fund declared distributions of $0.69 per Fund unit or $24.5 million.

Monthly cash distributions from the Partnership are not directly equal to the Fund's pro-rata share of the Partnership's income (loss) under the equity method. This is primarily due to capital expenditures, foreign exchange gains or losses on translation of US dollar denominated debt, changes in value of derivative instruments, amortization, and other non-cash expenses of the Partnership.

RISKS AND 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 18, 2010, which is available on www.sedar.com and www.canforpulp.com.

FUND UNITS

At October 25, 2010, there were a total of 35,493,505 Fund units outstanding.

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 September 30, 2010 were $24.5 million of which $15.6 million was received, with the balance of $8.9 million receivable on September 30, 2010.

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. Significant areas requiring the use of management's estimates are the determination of future income taxes, and assessing whether there has been an other than temporary decline in the value of the investment in the Partnership. 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. The Fund accounts for its investment in the Partnership using the equity method. The Fund analyzes the carrying value of its investment in the Partnership by considering the underlying value of the Partnership's business. This assessment includes various long-term assumptions related to the Partnership's operations which may not be reflected in the current market value of the Fund. Changes in these estimates could have a material impact on the calculation of the future income tax liability or equity investment in the Partnership.

SIFT CONVERSION RULES

On June 12, 2007, legislation was substantively enacted whereby distributions made by publicly traded income trusts and partnerships will be taxed similar to that of income earned and distributed by a corporation. The Specified Investment Flow-Through Trust (SIFT) tax will become effective on January 1, 2011. On March 12, 2009 the Canadian government enacted legislation (SIFT Conversion Rules) which enables the conversion of a SIFT into a corporation on a tax-free rollover basis, prior to 2013. The Fund has reviewed its options and a Plan of Arrangement was presented and approved by unitholders at the annual general meeting on April 27, 2010.

The Plan of Arrangement will result in the reorganization of the Fund's income trust structure into a dividend paying public taxable corporation to be named "Canfor Pulp Products Inc." (CPPI), and the unitholders will become the sole shareholders of CPPI which will own the 49.8% interest in the Partnership. The Fund expects the date of conversion to take place on or about January 1, 2011.

CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

On February 13, 2008, the Accounting Standards Board (AcSB) announced that publicly accountable entities will be required to prepare financial statements in accordance with International Financial Reporting Standards (IFRS) for interim and annual financial statements for fiscal years beginning on or after January 1, 2011. The Fund will rely on the resources of the Partnership to ensure compliance with IFRS. The Partnership intends to convert to these new standards according to the timetable set for these new rules.

A detailed analysis has been completed and a number of areas were identified for further consideration before the date of transition. Various accounting policy choices have been identified to date and are being considered by the steering committee of the Partnership. The Partnership continues to monitor standards development as issued by the International Accounting Standards Board (IASB) and the AcSB, as well as regulatory developments as issued by the Canadian Securities Administrators, which may affect the timing, nature, or disclosure of the Partnership's adoption of IFRS.

The Partnership will continue to review all proposed and continuing projects of the IASB to determine their impact on the Fund, and will continue to invest in training and resources throughout the transition period to facilitate a timely conversion.

The impact on the future financial position and results of operations of CPPI formed under the Plan of Arrangement will depend on changes in accounting policies that may materially impact the Partnership's and CPPI's consolidated financial statements. The Fund does not expect any significant IFRS adjustments for CPPI after the Fund's trust structure has been reorganized into a corporation on or about January 1, 2011.

For further details on the Partnership's transition plan see the Partnership's disclosure.

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 Northern Bleached Softwood Kraft (NBSK) pulp and paper business of Canfor. The business consists of two NBSK pulp mills and one NBSK pulp and paper mill located in Prince George, BC and a marketing group based in Vancouver, BC (the Pulp Business).

At October 25, 2010, the Fund indirectly held a total of 14,254,005 Class A Limited Partnership Units and 21,239,537 Class B Limited Partnership Units, representing 49.8% of the Partnership and Canfor owns the remaining 50.2%. The Partnership is managed, on behalf of the limited partners, by Canfor Pulp Holding Inc., the General Partner. Below is a simplified schematic of the ownership structure.

To view the Ownership Structure diagram, please click on the following link: http://media3.marketwire.com/docs/CFX_image.pdf

The 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 per Q3 Q2 YTD Q3 YTD
unit amounts, unaudited) 2010 2010 2010 2009 2009
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Sales 247.9 247.6 735.0 202.0 593.3
EBITDA (1) 63.6 63.7 171.4 25.1 34.5
Operating income (loss) 52.0 51.6 136.1 12.4 (2.4)
Net income (loss) 54.5 43.1 130.1 18.3 (1.8)
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Per Partnership unit, basic and diluted
Net income (loss) $0.76 $0.60 $1.82 $0.26 $(0.02)
EBITDA $0.89 $0.89 $2.40 $0.35 $ 0.48
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Average exchange rate (US$/Cdn$) (2) 0.962 0.973 0.966 0.912 0.858
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Notes: (1) For calculation of EBITDA, see supplementary financial
information.
(2) Source - Bank of Canada (average noon rate for the period).


EBITDA for the third quarter of 2010 of $63.6 million was essentially unchanged from the second quarter of 2010 and was $38.5 million higher when compared to the third quarter of 2009. The similar results when compared to the second quarter of 2010 are attributable to higher realized prices in Canadian dollar terms for the Partnership's pulp and paper products offset by lower shipments and higher unit manufacturing costs. Realized paper prices in Canadian dollar terms increased 10% when compared to the prior quarter. Realized pulp prices in Canadian dollar terms increased 1% due to a slightly weaker Canadian dollar and a marginal increase in NBSK pulp US dollar list price. Unit manufacturing costs increased when compared to the prior quarter as the impact of lower production volumes and higher fibre costs were partially offset by lower spending on fixed costs. Fibre costs increased 8% when compared to the prior quarter due to an increase in the price of sawmill residual chips.

When compared to the third quarter of 2009, the $38.5 million increase in EBITDA was primarily attributable to a 36% increase in NBSK pulp US dollar list price, higher realized paper prices and higher energy sales, partially offset by a stronger Canadian dollar, lower shipment volumes and higher unit manufacturing costs. Realized pulp prices in Canadian dollar terms increased 31% as a 36% increase in NBSK pulp US dollar list price was partially offset by a 5% strengthening of the Canadian dollar. The increase in unit manufacturing costs when compared to the prior year quarter were due to the impact of lower production volumes, higher fibre costs and higher spending on fixed costs. Fibre costs increased 17% when compared to the third quarter of 2009 due to an increase in the price of sawmill residual chips partially offset by a reduction in the volume of higher cost whole log chips. Freight costs in US dollar terms increased 8% when compared to the third quarter of 2009 primarily due to higher container rates into Asia.

For the nine months ended September 30, 2010, EBITDA of $171.4 million increased by $136.9 million when compared to the same period in 2009. The increase in EBITDA was attributable to higher realized pulp prices in Canadian dollar terms and higher energy sales, partially offset by higher administrative costs. Realized pulp prices in Canadian dollar terms increased 28%, as a 40% increase in NBSK pulp US dollar list price was partially offset by a 13% strengthening of the Canadian dollar when compared to the same period in 2009. Realized paper prices in Canadian dollar terms increased 4% when compared to the same period in 2009. Freight costs in US dollar terms increased 13% when compared to the same period in 2009 primarily due to higher container rates into Asia. The impact of the higher US dollar freight rates was offset by the stronger Canadian dollar.

OPERATING RESULTS BY BUSINESS SEGMENT

Pulp



(millions of dollars unless Q3 Q2 YTD Q3 YTD
otherwise noted, unaudited) 2010 2010 2010 2009 2009
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Sales 212.9 214.8 632.5 170.1 503.1
EBITDA 67.9 67.7 183.5 23.4 28.0
EBITDA margin 32% 32% 29% 14% 6%
Operating income (loss) 57.2 56.4 150.7 11.6 (6.2)
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Average NBSK pulp list price -
(US$ per tonne, delivered to USA) 1,000 993 958 733 684
Average NBSK pulp list price -
(Cdn$ per tonne, delivered to USA) 1,040 1,021 992 804 797
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Production - pulp (000 mt) 253.0 263.8 770.6 264.4 754.9
Shipments - Partnership-produced pulp
(000 mt) 246.0 252.3 766.7 259.5 786.0
Marketed on behalf of HSLP & Canfor
(000 mt) 116.1 144.2 399.0 148.4 395.6
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The third quarter 2010 operating income for the pulp segment of $57.2 million was a $0.8 million improvement when compared to the second quarter of 2010. The similar results are attributable to a marginal increase in realized prices in Canadian dollar terms, partially offset by higher unit manufacturing costs and lower shipment volumes. Realized pulp prices in Canadian dollar terms increased slightly due to a marginal increase in NBSK pulp US dollar list price and a weaker Canadian dollar. Unit manufacturing costs increased 3% when compared to the second quarter of 2010 as the impact of lower production volumes and higher fibre costs were partially offset by lower operating and energy costs. Fibre costs increased 8% when compared to the prior quarter due to an increase in the price of sawmill residual chips. Shipment volumes decreased 2% during the third quarter of 2010 due in part to lower production volumes and reduced demand from Asia.

Operating income of the pulp segment in the third quarter of 2010 increased by $45.6 million when compared to the same period a year ago. The improved results were primarily attributable to a 36% increase in NBSK pulp US dollar list price and higher energy sales, partially offset by a stronger Canadian dollar, lower shipment volumes and higher unit manufacturing costs. Realized pulp prices in Canadian dollar terms increased 31% as a 36% increase in NBSK pulp US dollar list price was partially offset by a 5% strengthening of the Canadian dollar. Unit manufacturing costs increased when compared to the prior year quarter due to the impact of lower production volumes, higher fibre costs and higher spending on maintenance costs. Fibre costs increased 17% when compared to the third quarter of 2009 due to an increase in the price of sawmill residual chips partially offset by a reduction in the volume of higher cost whole log chips.

For the nine month period ended September 30, 2010, operating income of $150.7 million increased $156.9 million when compared to the same period in 2009. The increase in operating results was attributable to higher realized prices in Canadian dollar terms and higher energy sales. Realized pulp prices in Canadian dollar terms increased 28% as a 40% increase in NBSK pulp US dollar list price was partially offset by a 13% strengthening of the Canadian dollar. Unit manufacturing costs remained relatively unchanged as the impact of higher production volumes and lower chemical costs were offset by higher fibre and maintenance costs. Fibre costs increased 4% when compared to the same period of 2009 due to an increase in the price of sawmill residual chips partially offset by a reduction in the volume of higher cost whole log chips.

Operations

NBSK market pulp production during the third quarter was 10,800 tonnes lower than the second quarter of 2010, and 11,400 tonnes lower than the third quarter of 2009. The reduced production when compared to the prior quarters was a result of an extended maintenance outage at the Northwood Pulp Mill and lower production rates in the current period. The maintenance outage at the Northwood Pulp Mill, originally estimated to result in 10,000 tonnes of reduced production was extended for additional inspections and repairs to the recovery boilers. The additional work extended the outage into the fourth quarter of 2010 for a total of 24,000 tonnes of reduced production with approximately 18,000 tonnes in the third quarter and a further 6,000 tonnes in the fourth quarter.

For the nine month period ended September 30, 2010 production of 770,600 tonnes was 15,700 tonnes higher than the same period in 2009. The increase is attributable to the higher production rates in the current period and the impact of the market curtailment in January 2009, partially offset by the extended maintenance outages at the Prince George Pulp and Paper Mill and the Northwood Pulp Mill in 2010.

Markets - Pulp

Bleached softwood pulp markets remained balanced through the third quarter of 2010. Inventories increased as a result of reduced demand from China and the typical seasonal slowdown through the summer months.

Global printing and writing paper demand maintained steady growth through the third quarter of 2010. The printing and writing paper manufacturing sector experienced steady demand through August 2010 (the latest published information available), with demand up 6.4% over August 2009. For August year-to-date, printing and writing paper demand is up 8.4% versus the same period in 2009.

Reduced bleached softwood pulp demand has resulted in an increase in inventory from the very low global pulp inventory levels experienced in the first half of 2010 to current levels that are in a balanced range. At the end of September 2010, World 20(1) producer inventories of bleached softwood pulp was 27 days of supply, an increase of 6 days over June 2010. By comparison, September 2009 inventories were 22 days of supply. Market conditions are generally considered balanced when inventories fall in the 27-30 days of supply range.

The price rally that commenced in 2009 peaked in July 2010 with a modest price decrease in August 2010. Very low global pulp inventory levels through 2009 and the first half of 2010 allowed producers to implement successive price increases. The NBSK pulp list price in North America during September 2009 was US$770 per tonne, peaking at US$1,020 per tonne in July 2010. Modest pressure to decrease prices in the third quarter of 2010 due to rising pulp inventories resulted in a price for September 2010 of US$990 per tonne. In Canadian dollar terms, the price increases through the year have been somewhat mitigated by the strengthening of the Canadian dollar which has appreciated 4% over the past year.

Note: (1) World 20 data is based on twenty producing countries representing 80% of world chemical market pulp capacity and is based on information compiled and prepared by the Pulp and Paper Products Council (PPPC).

Outlook - Pulp

Global softwood inventories held by producers and customers have risen through the third quarter of 2010. Softwood inventory levels are still considered to be balanced in contrast to hardwood inventories which are in an over supplied situation. Two North American bleached softwood producers have restarted which will result in a modest increase in supply. However, seasonal maintenance downtime through October may mitigate this increase in supply in the near term. The North American NBSK pulp list price for October 2010 is announced at US$970 per tonne, a US$20 per tonne reduction from September 2010.

The Northwood Pulp Mill scheduled maintenance outage was completed in early October 2010. The total reduced production was approximately 24,000 tonnes of which 6,000 tonnes will impact the fourth quarter of 2010. There are no further maintenance outages planned for the fourth quarter of 2010.

Paper



(millions of dollars unless Q3 Q2 YTD Q3 YTD
otherwise noted, unaudited) 2010 2010 2010 2009 2009
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Sales 34.7 32.5 101.7 31.9 90.2
EBITDA 1.0 0.3 1.4 4.0 13.0
EBITDA margin 3% 1% 1% 13% 14%
Operating income (loss) 0.2 (0.5) (0.9) 3.2 10.5
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Production - paper (000 mt) 34.7 36.3 102.0 33.6 92.6
Shipments - paper (000 mt) 33.6 34.4 105.7 37.4 96.9
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The third quarter 2010 operating income of the paper segment improved $0.7 million when compared to the second quarter of 2010, and deteriorated $3.0 million when compared to the same period last year. The increase when compared to the second quarter of 2010 was primarily attributable to higher realized paper prices in Canadian dollar terms offset by higher unit manufacturing costs. Realized prices in Canadian dollar terms increased by approximately 10%. Higher unit manufacturing costs were the result of higher costs for slush pulp and the impact of lower production volumes. The slush pulp is transferred to the paper segment at a market price with the increase directly attributable to the increase in the realized pulp price in Canadian dollar terms.

When compared to the third quarter of 2009 the reduction in operating earnings was due to higher unit manufacturing costs, partially offset by a 21% increase in realized prices in Canadian dollar terms. Higher unit manufacturing costs were primarily attributable to a 44% increase in costs for slush pulp partially offset by higher production volumes.

For the nine month period ended September 30, 2010 operating results of the paper segment declined by $11.4 million when compared to the same period in 2009. The reduction in operating earnings is attributable to higher unit manufacturing costs partially offset by a 4% increase of realized paper prices in Canadian dollar terms and higher shipment volumes. Higher paper unit manufacturing costs are attributable to higher costs for slush pulp partially offset by the impact of higher production volumes.

Operations

Paper production for the third quarter of 2010 was 34,700 tonnes, a decrease of 1,600 tonnes when compared to the second quarter of 2010 due to lower overall production rates. When compared to the same period in the prior year, production was 1,100 tonnes higher due to improved overall production rates.

For the nine month period ended September 30, 2010 production of 102,000 tonnes was 9,400 tonnes higher than the same period in 2009. The increase is attributable to the higher production rates in the current period and the impact of the market curtailment in January 2009.

Markets

Kraft paper markets remained solid with strong demand and tight supply through the third quarter of 2010. The American Forest and Paper Association reported that September 2010 year-to-date, US total kraft paper shipments were up 13.4% when compared to the same period in 2009. US total kraft paper shipments during September 2010 increased 2.2% when compared to September 2009, however, decreased 1.5% when compared to August 2010. The Paper Shipping Sack Manufacturing Association shipping sack statistics for September 2010 revealed that the industry paper consumption was up 10.7% over the same month last year and up 14.4% year over year. Prices for export markets were up in most areas during the third quarter of 2010 and the October 2010 European increase was confirmed for new orders.

The Partnership's prime paper shipments were 98% of the total in the third quarter of 2010, similar to the prior quarter and were 2% higher than the third quarter of 2009. Prime bleached shipments averaged 72% of total prime sales, while down 5% from the prior quarter this is 13% higher than the same period last year.

Outlook - Kraft Paper

The favourable kraft paper market conditions are expected to continue through the fourth quarter of 2010. Order backlogs remain very healthy in both bleached and unbleached products through the end of 2010. Further price increases are expected to take effect in the fourth quarter of 2010 for markets outside North America.

Non-Segmented Costs



Q3 Q2 YTD Q3 YTD
(millions of dollars, unaudited) 2010 2010 2010 2009 2009
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Unallocated costs 5.4 4.3 13.7 2.4 6.7
Interest expense, net 2.0 1.9 5.9 2.8 7.9
Foreign exchange loss (gain) on long-term
debt (3.4) 5.0 (1.8) (9.9) (16.7)
Loss (gain) on derivative financial
instruments (2.6) 3.8 0.8 (3.4) 2.0
Foreign exchange loss (gain) on working
capital 1.5 (2.1) 1.2 4.6 6.2
Other income - (0.1) (0.1) - -
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2.9 12.8 19.7 (3.5) 6.1
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Unallocated Costs

Unallocated costs, comprised principally of general and administrative expenses, totalled $5.4 million in the third quarter of 2010 compared to $4.3 million in the second quarter of 2010 and $2.4 million in the third quarter of 2009. The increase in unallocated costs when compared to the second quarter of 2010 and the same period in the prior year were mainly attributable to higher accruals for performance based incentive plans.

For the nine month period ended September 30, 2010 unallocated costs totalled $13.7 million compared to $6.7 million for the same period in 2009. The increase in unallocated costs is attributable to higher accruals for performance based incentive plans, higher consulting costs and expenses in relation to the planned conversion to a corporation on January 1, 2011.

Interest Expense

For the nine month period ended September 30, 2010 the decreased net interest expense in relation to the same period in 2009 was attributable to the reduction in operating line borrowing.

Other Non-segmented Items

The foreign exchange gain on long-term debt of $3.4 million resulted from translating the US$110 million debt at period-end exchange rates, reflecting the stronger Canadian dollar as of September 30, 2010 as compared to June 30, 2010.

The foreign exchange loss on working capital of $1.5 million resulted from translating US dollar balances at period-end exchange rates.

The net gain of $2.6 million on derivative financial instruments recorded in the third quarter of 2010 relates to the revaluation to market of outstanding contracts at the end of the quarter for natural gas swaps and US dollar forward contracts, partially offset by the settlement of maturing contracts during the quarter. The revaluation to market of outstanding derivative instruments recorded in the quarter resulted in a gain of $4.1 million and relates to a revaluation to market of outstanding natural gas swaps and outstanding US dollar forward contracts at the end of the quarter. A loss of $0.9 million on settlement of natural gas swaps was recorded in the third quarter of 2010. The natural gas swaps are used to fix the price on a portion of the Partnership's future natural gas requirements. In the third quarter of 2010 the Partnership recorded a net loss of $0.6 million on settlement of US dollar forward contracts to hedge the impact of currency fluctuations on US dollar working capital.

SUMMARY OF FINANCIAL POSITION

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



(millions of dollars, except for September 30, December 31,
ratios, unaudited) 2010 2009
---------------------------------------------------------------------------
Ratio of current assets to current
liabilities 2.20 2.04
Ratio of net debt to partners' equity (1) 0.16 0.19
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Q3 Q3
2010 YTD 2010 2009 YTD 2009
---------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (12.8) 14.0 25.6 43.5
Comprised of cash flow from (used in):
Operating activities 45.7 130.3 49.1 93.7
Financing activities (45.6) (96.9) (17.3) (35.9)
Investing activities (12.9) (19.4) (6.2) (14.3)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Note: (1) Net debt consists of long-term debt, net of cash and cash
equivalents.


Changes in Financial Position

Cash generated from operating activities was $45.7 million in the third quarter of 2010 compared to $49.1 million in the third quarter of 2009. The reduction in cash generated from operating activities is the result of an increase in cash used for working capital, partially offset by an increase in cash generated from operations. The increase of cash used in working capital during the third quarter of 2010 was primarily the result of an increase in prepaid expenses and other assets as a result of the extended outage at the Northwood Pulp Mill, a reduction in accounts payable due to timing of payments for chips, and an increase in the volume and cost of the Partnership's finished goods inventories. The increase in cash generated from operations was primarily attributable to higher realized pulp prices in Canadian dollar terms, partially offset by lower pulp shipment volumes and higher unit manufacturing costs.

The cash used in financing activities of $45.6 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 $14.0 million relating to capital expenditures partially offset by $1.1 million of funds received for claims under the Canadian federal government's Green Transformation Program (the Program). Included in capital expenditures are reimbursable amounts of $10.8 million relating to approved projects under the Program.

FINANCIAL REQUIREMENTS AND LIQUIDITY

At September 30, 2010 the Partnership had outstanding long-term debt of $113.3 million (December 31, 2009 - $115.1 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.

At September 30, 2010, the Partnership had cash and cash equivalents of $27.5 million. The Partnership has a $40.0 million bank credit facility with a maturity date of November 30, 2011, of which $0.5 million was utilized at September 30, 2010 for a standby letter of credit issued for general business purposes. In addition, the Partnership has a separate facility with a maturity date of November 30, 2011, to cover the $16.0 million standby letter of credit issued to BC Hydro under the Electricity Purchase Agreement. Interest and other costs of the bank credit facility are at market rates.

The Partnership manages cash resources to fund current and future operations through management of its capital structure in conjunction with cash flow forecasting, including anticipated investing and financing activities. As required, the Partnership uses the bank credit facility to meet short-term working capital requirements. The Partnership also reviews on an ongoing basis, the level of distributions, capital expenditures and timing of scheduled major maintenance outages and may adjust these periodically to manage cash resources.

The Partnership also discounts letters of credit on outstanding trade receivables to reduce credit and foreign currency exposure, and to increase short-term liquidity.

The Notes and bank credit agreements each contain similar financial covenants including a maximum allowable debt:EBITDA leverage ratio and minimum required EBITDA:interest coverage ratio. The Partnership remained in compliance with all covenants at September 30, 2010.

On October 9, 2009 the Canadian federal government announced the allocation of credits from the billion dollar Pulp and Paper Green Transformation Program (the Program). The Partnership has been allocated $122.2 million from the Program announced by the Canadian government on June 17, 2009. The Program is designed as a reimbursement of funds to be spent on qualifying energy and environmental capital projects. Credits may be used until the program end date of March 31, 2012. The Partnership has received Program approval to proceed with two projects totaling $15.6 million. The Partnership has submitted a $100.0 million project to upgrade the recovery boiler at the Northwood Pulp Mill for Program approval, and expects to submit further projects over the balance of 2010. The Partnership submits claims for expenditures on approved projects under the Program on a quarterly basis. These projects are expected to provide economic and environmental benefits to the Partnership's operations.

OUTSTANDING UNITS

At October 25, 2010, there were 71,270,025 Limited Partnership Units outstanding, of which 35,493,542 units (consisting of 14,254,005 Class A Limited Partnership Units and 21,239,537 Class B Limited Partnership Units) were owned by the Fund through Canfor Pulp Trust and 35,776,483 Class B Exchangeable Limited Partnership Units were owned indirectly by Canfor.

RELATED PARTY TRANSACTIONS

The Partnership's transactions with related parties are consistent with the transactions described in the December 31, 2009 audited consolidated financial statements and are based on agreed upon amounts, and are summarized in note 9 of the unaudited interim consolidated financial statements.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

During the quarter ending September 30, 2010, there were no changes in the Partnership's internal controls over financial reporting that materially affected, or would be reasonably likely to materially affect, such controls.

RISKS AND UNCERTAINTIES

A comprehensive discussion of risks and uncertainties is included in the Fund's Annual Information Form dated February 18, 2010, which is available on www.sedar.com and www.canforpulp.com.

SELECTED QUARTERLY PARTNERSHIP FINANCIAL INFORMATION



(millions of
dollars
unless
otherwise
noted, Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
unaudited) 2010 2010 2010 2009 2009 2009 2009 2008
---------------------------------------------------------------------------
Sales and
Income
Sales 247.9 247.6 239.5 220.2 202.0 205.0 186.3 186.1
Operating
income
(loss) 52.0 51.6 32.5 14.4 12.4 (5.0) (9.8) (1.0)
EBITDA 63.6 63.7 44.1 27.3 25.1 7.2 2.2 9.8
Net
income
(loss) 54.5 43.1 32.5 15.2 18.3 1.5 (21.6) (26.0)
---------------------------------------------------------------------------
Per Partnership
unit (dollars)
Net
income (loss)
basic and
diluted $ 0.76 $ 0.60 $ 0.46 $ 0.21 $ 0.26 $ 0.02 $ (0.30) $ (0.36)
---------------------------------------------------------------------------
Statistics
Pulp
shipments
(000 mt) 246.0 252.3 268.4 258.6 259.5 286.2 240.3 208.2
Paper
shipments
(000 mt) 33.6 34.4 37.7 38.1 37.4 34.3 25.2 24.4
---------------------------------------------------------------------------

Average
exchange
rate
(US$/
Cdn$)(1) 0.962 0.973 0.961 0.947 0.912 0.858 0.803 0.825
---------------------------------------------------------------------------

Average
NBSK pulp
list price
(US$ per tonne,
delivered to
USA) 1,000 993 880 820 733 645 673 787
---------------------------------------------------------------------------
Per Partnership
unit (dollars)
Adjusted
distributable
cash per
unit(2) $ 0.78 $ 0.88 $ 0.57 $ 0.31 $ 0.16 $ 0.02 $ (0.06) $ 0.02
Distributions
declared
per unit $ 0.69 $ 0.52 $ 0.32 $ 0.14 $ 0.03 $ 0.03 $ 0.06 $ 0.28
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Notes: (1) Source - Bank of Canada (average noon rate for the period).
(2) For further details on the Partnership's adjusted distributable
cash see the Partnership's disclosure.


Sales are primarily influenced by changes in market pulp prices, sales volumes and fluctuations in Canadian dollar exchange rates. Operating income (loss), net income (loss) and EBITDA are primarily impacted by: the level of sales; freight costs; fluctuations of fibre, chemical, and energy prices; level of spending and the timing of scheduled maintenance downtime; and production curtailments. Net income (loss) is also impacted by fluctuations in Canadian dollar exchange rates, the market price of natural gas, the revaluation to the period end rate of US dollar denominated working capital balances and long-term debt, and revaluation of outstanding natural gas swaps and US dollar forward contracts.

CRITICAL ACCOUNTING 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 asset useful lives for amortization, impairment of long-lived assets, pension and other employee future benefit plans and asset retirement obligations, based upon currently available information. While it is reasonably possible that circumstances may arise which cause actual results to differ from these estimates, management does not believe it is likely that any such differences will materially affect the Partnership's financial condition.

CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

Project Update

The Partnership has completed the scoping, planning and detailed assessment phases and is currently progressing through the implementation phase of the conversion. The Partnership's implementation team completed detailed training on IFRS standards and preliminary policy choices and continues to monitor changes in IFRS throughout the implementation process. The table below describes the expected accounting policy changes under conversion to IFRS.

At September 30, 2010, the Partnership could not reasonably determine the full impact that adopting IFRS would have on its financial statements, as the current status of the project reflects the Partnership's most recent assumptions and expectations; circumstances may arise, such as changes in existing IFRS, or changes in the regulatory or economic environment, which could alter these assumptions and/or expectations. These disclosures reflect the Partnership's expectations based on information available at September 30, 2010. Changes in IFRS standards or circumstances relating to the Partnership may cause the Partnership to revise its expectations, its project plan, and its potential IFRS accounting policy choices prior to the conversion date.

No significant changes to systems (including information technology systems) are anticipated. The Partnership will continue to assess the impact on systems as the project progresses.

The Partnership does not expect that the transition to IFRS will have a significant impact on its financial covenants contained in the existing Notes and bank credit facility agreements.

The Partnership expects to complete its analysis of the impacts on the opening balance sheet in 2010 and report the opening balance sheet prepared under IFRS at the date of transition (January 1, 2010) during the first interim reporting period of 2011. Draft financial statements and disclosure information will be prepared for each quarter in 2010 (to be used for comparative purposes in 2011) and reporting under IFRS will commence for interim and annual periods in 2011.

First-time Adoption of International Financial Reporting Standards (IFRS 1)

At adoption of IFRS, an entity is required to apply IFRS 1, which provides guidance for an entity's initial adoption of IFRS. IFRS 1 generally requires an entity to apply all IFRS effective at the end of the first reporting period retrospectively. However, IFRS 1 provides certain mandatory exceptions and permits limited optional exemptions in specified areas of certain standards from this general requirement. The Partnership expects to take the following optional elections provided by IFRS 1. All other available elections are either not applicable or not material to the Partnership. Elections are subject to change as new information becomes available.

- Borrowing costs:

International Accounting Standard (IAS 23), Borrowing Costs, requires the capitalization of borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Under Canadian GAAP, you have an accounting policy choice to expense these costs as incurred or capitalize them. The Partnership expects to elect to apply the requirements of IAS 23 prospectively from January 1, 2010.

- Employee Benefits:

The Partnership expects to elect to recognize all cumulative actuarial gains and losses at the date of transition to IFRS. Actuarial gains and losses would have to be recalculated under IFRS from the inception of each of our defined benefit plans if the exemption is not taken.

- Business combinations:

The Partnership expects to apply the business combinations exemption in IFRS 1. Accordingly, the Partnership will not modify the carrying amounts of assets and liabilities arising on business combinations occurring before the transition date.

Accounting Policies

Below is a summary of expected changes to the Partnership's accounting policies for those standards which are considered significant. Any changes to recognized financial figures may affect non-GAAP and performance measures including but not limited to, EBITDA and distributable cash.



----------------------------------------------------------------------------
Accounting
Policy Area Impact of Policy Adoption
----------------------------------------------------------------------------
Property, Plant Choices: Either a historical cost model or a revaluation
and Equipment model can be used to value property, plant and
equipment.

Policy Selection: The Partnership will value property,
plant and equipment using the historical cost model.
----------------------------------------------------------------------------
Major Maintenance Choices: There are no policy choices available under
IFRS.

Differences from existing Canadian GAAP: For major
maintenance, IAS 16 allows for major inspections
and overhauls to be accounted as a separate component
of PP&E if the component is used for more than one
reporting period. This treatment is only intended
for major expenditures that occur at regular intervals
over the life of the asset as costs of routine repairs
and maintenance will continue to be expensed as
incurred. The regularly scheduled major maintenance
outages required on the Partnership's plant and
equipment would likely qualify for treatment under this
standard with the expenditures being classified as
property, plant and equipment. Currently under Canadian
GAAP, expenditures during the Partnership's major
maintenance outages are classified as prepaid expense
and other assets, and other long-term assets, as
appropriate and amortized over the period between
scheduled major maintenance outages.
----------------------------------------------------------------------------
Employee Benefits Choices: Actuarial gains and losses are permitted under
IAS 19, "Employee Benefits", to be recognized directly
in other comprehensive income rather than through profit
or loss.

Policy Selection: Actuarial gains and losses will be
recognized in other comprehensive income.

Differences from existing Canadian GAAP: IAS 19 requires
the past service cost element of defined benefit plans
to be expensed on an accelerated basis, with vested past
service costs expensed immediately and unvested past
service costs recognized on a straight-line basis until
the benefits become vested. Under Canadian GAAP, past
service costs are generally amortized on a straight-line
basis over the expected average remaining service period
of active employees under the plan.

Under Canadian GAAP, certain gains and losses which were
unrecognized at the time of adopting the current
Canadian accounting standard were permitted to be
amortized over a period under transitional provisions of
the current standard. Under IFRS, those amounts will not
be permitted to remain unrecognized and must be
recognized on transition to IFRS.
----------------------------------------------------------------------------
Impairment of Choices: There are no policy choices available under
assets IFRS.

Differences from existing Canadian GAAP: Canadian GAAP
generally uses a two-step approach to impairment
testing: first comparing asset carrying values with
undiscounted future cash flows to determine whether
impairment exists; and then measuring any impairment by
comparing asset carrying values with fair values.
IAS 36, "Impairment of Assets", uses a one-step
approach for both testing for and measurement of
impairment, with asset carrying values compared directly
with the higher of fair value less costs to sell and
value in use (discounted cash flows). This may
potentially result in more write downs where carrying
values of assets were previously supported under
Canadian GAAP on an undiscounted cash flow basis, but
could not be supported on a discounted cash flow basis.

In addition, the extent of any new write-downs may be
partially offset by the requirement under IAS 36 to
reverse any previous impairments where circumstances
have changed such that the impairments have been
reduced. Canadian GAAP prohibits reversal of impairment
losses.
----------------------------------------------------------------------------
Provisions Choices: There are no policy choices available under
(Including Asset IFRS.
Retirement
Obligations) Differences from existing Canadian GAAP: IAS 37,
"Provisions, Contingent Liabilities and Contingent
Assets", requires a provision to be recognized when
there is a present obligation as a result of a past
transaction or event; it is probable that an outflow of
resources will be required to settle the obligation; and
a reliable estimate can be made of the obligation, where
"probable" in this context, means more likely than not.
The criteria for recognition in the financial statements
under Canadian GAAP, is "likely", which is a higher
threshold than "probable". Therefore, it is possible
that there may be some contingent liabilities which
would meet the recognition criteria under IFRS that were
not recognized under Canadian GAAP. Other differences
between IFRS and Canadian GAAP exist in relation to the
measurement of provisions, such as the methodology for
determining the best estimate where there is a range of
equally possible outcomes (IFRS uses the mid-point of
the range, whereas Canadian GAAP uses the low-end of the
range), and the requirement under IFRS for provisions to
be discounted where material.
----------------------------------------------------------------------------
Borrowing Costs Choices: There are no policy choices available under
IFRS.

Differences from existing Canadian GAAP: Under Canadian
GAAP, an entity can choose whether to expense or
capitalize borrowing costs, whereas IFRS requires
qualifying borrowing costs to be capitalized.
----------------------------------------------------------------------------
Statement of Cash Choices: Either the direct or the indirect method may be
Flows presented. Distributions and interest paid and interest
received can be presented as operating, financing or
investing activities respectively.

Policy selection: The Partnership expects to use the
indirect method. Distributions and interest paid would
be presented as financing activities and interest
received would be presented as an investing activity.

Differences from existing Canadian GAAP: None
----------------------------------------------------------------------------


Post-Implementation

The post-implementation work will involve continuous monitoring of changes in IFRS throughout the implementation process (through to the end of 2011). We note that the standard-setting bodies that determine Canadian GAAP and IFRS have significant ongoing projects that could impact the differences between Canadian GAAP and IFRS and their impact on our financial statements. In particular, we expect that there may be additional new or revised IFRS in relation to consolidation, joint ventures, financial instruments, hedge accounting, discontinued operations, leases and employee benefits. We have processes in place to ensure that potential changes are monitored and evaluated. The impact of any new IFRS will be evaluated as they are drafted and published.

DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

During the quarter ended September 30, 2010, there were no changes in the Company's disclosure controls and internal controls over financial reporting that materially affected, or would be reasonably likely to materially affect, such controls.

CANFOR PULP LIMITED PARTNERSHIP

SUPPLEMENTARY FINANCIAL INFORMATION



Three months ended Nine months ended
(millions of September 30, September 30, September 30, September 30,
dollars, unaudited) 2010 2009 2010 2009
--------------------------------------------------------------------------
--------------------------------------------------------------------------
RECONCILIATION OF NET INCOME
(LOSS) TO EBITDA
Net income (loss) $ 54.5 $ 18.3 $ 130.1 $ (1.8)
Add (deduct):
Amortization 11.9 12.6 35.5 36.8
Net interest expense 2.0 2.8 5.9 7.9
Foreign exchange
gain on long-term
debt (3.4) (9.9) (1.8) (16.7)
Loss (gain) on
derivative financial
instruments (2.6) (3.4) 0.8 2.0
Foreign exchange
loss on working
capital 1.5 4.6 1.2 6.2
Other expense
(income) (0.3) 0.1 (0.3) 0.1
--------------------------------------------------------------------------
EBITDA $ 63.6 $ 25.1 $ 171.4 $ 34.5
--------------------------------------------------------------------------
--------------------------------------------------------------------------
EBITDA per
Partnership unit $ 0.89 $ 0.35 $ 2.40 $ 0.48
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Three months ended Nine months ended
(millions of September 30, September 30, September 30, September 30,
dollars, unaudited) 2010 2009 2010 2009
--------------------------------------------------------------------------
--------------------------------------------------------------------------
CALCULATION OF STANDARDIZED AND
ADJUSTED DISTRIBUTABLE CASH
Cash flow from
operating activities $ 45.7 $ 49.1 $ 130.3 $ 93.7
Deduct: Capital
expenditures - cash
(1) (3.2) (6.2) (8.1) (14.4)
--------------------------------------------------------------------------
Standardized
distributable cash $ 42.5 $ 42.9 $ 122.2 $ 79.3
--------------------------------------------------------------------------
Adjustments to
standardized
distributable cash:
Add (deduct):
Increase (decrease)
in non-cash working
capital 15.1 (30.6) 39.3 (75.6)
Net long-term
deferred maintenance (1.1) - (1.8) 1.1
Capital expenditure
accruals - net (1.2) (0.9) (0.9) 3.4
--------------------------------------------------------------------------
Adjusted
distributable cash $ 55.3 $ 11.4 $ 158.8 $ 8.2
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Standardized
distributable cash
- per Partnership
unit
(in dollars) $ 0.59 $ 0.60 $ 1.71 $ 1.11
Adjusted
distributable cash
- per Partnership
unit (in
dollars) $ 0.78 $ 0.16 $ 2.23 $ 0.12
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cash distributions
declared (paid and
payable) $ 49.2 $ 2.2 $ 109.1 $ 8.6
Cash distributions
declared - per
Partnership unit (in
dollars) $ 0.69 $ 0.03 $ 1.53 $ 0.12
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Note: (1) Presented net of Canadian Federal Government Green Transformation
Program expenditures.


DISTRIBUTABLE CASH AND CASH DISTRIBUTIONS

The Partnership reports standardized distributable cash in accordance with the Canadian Institute of Chartered Accountants July 2007 interpretive release "Standardized Distributable Cash in Income Trusts and other Flow-Through Entities". In summary, for the purposes of the Partnership, standardized distributable cash is defined as the periodic cash flows from operating activities, 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 changes in non-cash working capital and long-term deferred maintenance, asset retirement obligation expenditures and accruals, and after provision for accrued capital expenditures.

The Board determines the level of cash distributions based on the level of cash flow from operations before changes in non-cash working capital and long-term deferred maintenance, asset retirement obligation expenditures and accruals, less capital expenditures. 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.

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

(thousands of
dollars, except
unit and per Three months ended Nine months ended
unit amounts, September 30, September 30, September 30, September 30,
unaudited) 2010 2009 2010 2009
---------------------------------------------------------------------------

Income

Equity income
(loss) in
Canfor Pulp
Limited
Partnership $ 27,124 $ 9,098 $ 64,776 $ (918)
---------------------------------------------------------------------------

Net income
(loss)
before
future
income
tax
recovery 27,124 9,098 64,776 (918)

Future income
tax (recovery)
(note 6) (777) 601 (1,780) (3,081)
---------------------------------------------------------------------------

Net income 27,901 8,497 66,556 2,163

Distributions
declared
(note 4) (24,491) (1,065) (54,305) (4,260)
---------------------------------------------------------------------------

Earnings in
excess of
distributions -
surplus
(deficit) $ 3,410 $ 7,432 $ 12,251 $ (2,097)
---------------------------------------------------------------------------

Net income per
unit, basic
and diluted $ 0.79 $ 0.24 $ 1.88 $ 0.06

Weighted average
number of units 35,493,505 35,493,505 35,493,505 35,493,505
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Net income for
the period $ 27,901 $ 8,497 $ 66,556 $ 2,163

Equity interest
in other
comprehensive
income (loss) of
Canfor Pulp
Limited
Partnership 8 14 32 (15)
---------------------------------------------------------------------------
Comprehensive
income $ 27,909 $ 8,511 $ 66,588 $ 2,148
---------------------------------------------------------------------------


Accumulated
Earnings and
Distributions
---------------------------------------------------------------------------
Balance,
beginning of
period -
distributions
in excess of
earnings $(64,185) $(82,392) $(73,026) $(72,863)

Earnings in
excess of
distributions -
surplus
(deficit),
current period 3,410 7,432 12,251 (2,097)
---------------------------------------------------------------------------
Balance, end of
period -
Accumulated
distributions
in excess of
earnings $(60,775) $(74,960) $(60,775) $(74,960)
---------------------------------------------------------------------------

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 Nine months ended
September September September September
30, 30, 30, 30,
(thousands of dollars, unaudited) 2010 2009 2010 2009
---------------------------------------------------------------------------
Cash generated from (used in)

Operating activities
Net income $ 27,901 $ 8,497 $ 66,556 $ 2,163
Items not affecting cash:
Equity (income) loss in Canfor
Pulp Limited Partnership (27,124) (9,098) (64,776) 918
Future income tax recovery (777) 601 (1,780) (3,081)
Distributions received from Canfor
Pulp Limited Partnership 22,716 1,065 48,271 5,324
---------------------------------------------------------------------------
22,716 1,065 48,271 5,324
---------------------------------------------------------------------------
Financing activities
Distributions paid to unitholders $ (22,716) $ (1,065) $(48,271) $ (5,324)
---------------------------------------------------------------------------
Beginning, change and ending
balance in cash and
cash equivalents $ - $ - $ - $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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


Canfor Pulp Income Fund
Consolidated Balance Sheets

As at As at
September 30, December 31,
(thousands of dollars, unaudited) 2010 2009
---------------------------------------------------------------------------

ASSETS
Current assets
Distributions receivable from Canfor Pulp
Limited Partnership (notes 4,5) $ 8,873 $ 2,839

---------------------------------------------------------------------------
Total current assets 8,873 2,839
---------------------------------------------------------------------------

Equity investment in Canfor Pulp Limited
Partnership (note 3) 274,147 263,644

---------------------------------------------------------------------------
$ 283,020 $ 266,483
---------------------------------------------------------------------------
---------------------------------------------------------------------------

LIABILITIES
Current liabilities
Distributions payable (note 4) $ 8,873 $ 2,839

---------------------------------------------------------------------------
Total current liabilities 8,873 2,839
---------------------------------------------------------------------------

Future income taxes (note 6) 35,507 37,287
---------------------------------------------------------------------------
$ 44,380 $ 40,126
---------------------------------------------------------------------------

UNITHOLDERS' EQUITY
Unitholders' equity -
35,493,505 Fund units outstanding $ 299,351 $ 299,351
Accumulated earnings and distributions (60,775) (73,026)
Accumulated other comprehensive income
(note 7) 64 32
---------------------------------------------------------------------------
Total Unitholders' Equity 238,640 226,357
---------------------------------------------------------------------------
$ 283,020 $ 266,483
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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

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

Approved by the Trustees

"Stan Bracken-Horrocks" "Charles Jago"

Stan Bracken-Horrocks Charles Jago


Canfor Pulp Income Fund

Notes to the Unaudited Interim Consolidated Financial Statements as at September 30, 2010

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, BC, 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.

The Fund expects to convert to a taxable Canadian corporation on or about January 1, 2011, pursuant to a plan of arrangement approved at the annual general meeting on April 27, 2010.

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 2009 Annual Report available at www.canforpulp.com or www.sedar.com. These unaudited interim consolidated financial statements follow the same accounting policies and methods of computation as used in the 2009 audited consolidated financial statements.

3. Equity Investment in Canfor Pulp Limited Partnership

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



Nine months ended Year ended
(thousands of dollars, unaudited) September 30, 2010 December 31, 2009
---------------------------------------------------------------------------
Balance, beginning of period 263,644 266,274
Equity interest in income of
the Partnership 64,776 6,644
Equity interest in other
comprehensive income (loss) of
the Partnership 32 (45)
Distributions from the Partnership (54,305) (9,229)
---------------------------------------------------------------------------
Balance, end of period 274,147 263,644
---------------------------------------------------------------------------
---------------------------------------------------------------------------


4. Distributions

The Fund declared distributions during the first nine months of 2010 as follows:



(thousands of dollars, except per unit amounts, unaudited)

Amount per Fund Unit Amount
Record Date Payable Date $ $
---------------------------------------------------------------------------
January 29, 2010 February 15, 2010 0.08 2,839
February 26, 2010 March 15, 2010 0.12 4,259
March 31, 2010 April 15, 2010 0.12 4,259
April 30, 2010 May 14, 2010 0.12 4,259
May 31, 2010 June 15, 2010 0.20 7,099
June 30, 2010 July 15, 2010 0.20 7,099
July 30, 2010 August 13, 2010 0.22 7,809
August 31, 2010 September 15, 2010 0.22 7,809
September 30, 2010 October 15, 2010 0.25 8,873

---------------------------------------------------------------------------
1.53 54,305
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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.

5. 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 September 30, 2010 were $24.5 million of which $15.6 million was received, with the balance of $8.9 million receivable on September 30, 2010.

6. Future Income Taxes

The following table reconciles the income tax expense calculated using statutory tax rates to the actual income tax expense.



Nine months ended Year ended
(thousands of dollars, unaudited) September 30, 2010 December 31, 2009
---------------------------------------------------------------------------
Expected income tax expense at
statutory tax rate of nil (2009 -
nil) - -

Future income tax recovery on
temporary differences (1,780) (2,422)
---------------------------------------------------------------------------
(1,780) (2,422)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The temporary differences based on the Fund's 49.8% ownership of the Partnership are as follows:



(thousands of dollars, unaudited) September 30, 2010 December 31, 2009
---------------------------------------------------------------------------
Future income tax liability:

Equity investment in the
Partnership 41,343 42,347

Expected reversal of temporary
differences prior to January 1,
2011 (5,836) (5,060)
---------------------------------------------------------------------------
35,507 37,287
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The future income tax liability is based on a current estimate of the balance at the beginning of 2011. The balance relates to the Fund's 49.8% ownership in the Partnership and is based on temporary differences between the accounting and tax basis of the Partnership's assets and liabilities expected to reverse after January 1, 2011.

7. Accumulated Other Comprehensive Income



Nine months ended Year ended
(thousands of dollars, unaudited) September 30, 2010 December 31, 2009
---------------------------------------------------------------------------
Balance, beginning of period 32 77
Other comprehensive income (loss) 32 (45)
---------------------------------------------------------------------------
Balance, end of period 64 32
---------------------------------------------------------------------------
---------------------------------------------------------------------------


8. 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.

9. 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 (Loss), Comprehensive Income (Loss) and
Partners' Equity

(millions of
dollars, except
units and per Three months ended Nine months ended
unit amounts, September 30, September 30, September 30, September 30,
unaudited) 2010 2009 2010 2009
---------------------------------------------------------------------------

Revenue
Sales $ 247.9 $ 202.0 $ 735.0 $ 593.3
Business
interruption
insurance - - - 3.2
---------------------------------------------------------------------------
247.9 202.0 735.0 596.5

Costs and
expenses
Manufacturing
and product
costs 147.9 140.3 452.6 452.4
Freight and
other
distribution
costs 29.5 30.6 90.4 91.5
Amortization 11.9 12.6 35.5 36.8
Selling and
administration
costs 6.6 6.1 20.4 18.2
---------------------------------------------------------------------------
195.9 189.6 598.9 598.9

Operating income
(loss) 52.0 12.4 136.1 (2.4)
Interest expense,
net (2.0) (2.8) (5.9) (7.9)
Foreign exchange
gain on long-term
debt 3.4 9.9 1.8 16.7
Gain (loss) on
derivative
financial
instruments
(note 11) 2.6 3.4 (0.8) (2.0)
Foreign exchange
loss on working
capital (1.5) (4.6) (1.2) (6.2)
Other income - - 0.1 -
---------------------------------------------------------------------------
2.5 5.9 (6.0) 0.6

Net income (loss) 54.5 18.3 130.1 (1.8)
Other
comprehensive
income (loss)
Adjustment for
derivatives
(note 14) - - 0.1 (0.1)
---------------------------------------------------------------------------
Comprehensive
income (loss) $ 54.5 $ 18.3 $ 130.2 $ (1.9)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Net income (loss)
per Partnership
unit (note 10)
Basic and
diluted $ 0.76 $ 0.26 $ 1.82 $ (0.02)

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

Partners' Equity

Balance,
beginning of
period $ 544.9 $ 507.8 $ 529.1 $ 534.4
Net income (loss) 54.5 18.3 130.1 (1.8)
Distributions
declared to
partners
(note 13) (49.2) (2.2) (109.1) (8.6)
Other
comprehensive
income (loss)
(note 14) - - 0.1 (0.1)
---------------------------------------------------------------------------
Balance, end of
period $ 550.2 $ 523.9 $ 550.2 $ 523.9
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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


Canfor Pulp Limited Partnership
Consolidated Statements of Cash Flows

Three months ended Nine months ended
(millions of dollars, September September September September
unaudited) 30, 2010 30, 2009 30, 2010 30, 2009
---------------------------------------------------------------------------

Cash and cash equivalents
generated from (used in)
Operating activities
Net income (loss) $ 54.5 $ 18.3 $ 130.1 $ (1.8)
Items not affecting cash:
Amortization 11.9 12.6 35.5 36.8
Foreign exchange gain on
long-term debt (3.4) (9.9) (1.8) (16.7)
Reduction (increase) in
value of outstanding
derivative instruments
(note 11) (4.1) (4.0) 0.4 (1.2)
Employee future benefits 1.9 1.5 5.8 3.7
Change in long-term
maintenance provision 1.1 0.8 7.6 2.3
Other (0.4) 0.5 (0.3) 0.3
Salary pension plan
contribution (0.7) (0.5) (1.9) (1.9)
Long-term maintenance
expenditure - (0.8) (5.8) (3.4)
---------------------------------------------------------------------------
Cash flow from operations
before working capital
changes 60.8 18.5 169.6 18.1
Changes in non-cash working
capital (note 12) (15.1) 30.6 (39.3) 75.6
---------------------------------------------------------------------------
45.7 49.1 130.3 93.7
---------------------------------------------------------------------------
Financing activities
Distributions paid to
partners (45.6) (2.2) (96.9) (10.7)
Operating loan repayment
(note 7) - (15.1) - (25.2)
---------------------------------------------------------------------------
(45.6) (17.3) (96.9) (35.9)
---------------------------------------------------------------------------
Investing activities
Property, plant and
equipment, net (note 12) (14.0) (6.2) (20.5) (14.4)
Green Transformation
Program reimbursements 1.1 - 1.1 -
Net insurance proceeds - - - 0.1
---------------------------------------------------------------------------
(12.9) (6.2) (19.4) (14.3)
---------------------------------------------------------------------------


---------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (12.8) 25.6 14.0 43.5
Cash and cash equivalents,
beginning of period 40.3 18.3 13.5 0.4
---------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 27.5 $ 43.9 $ 27.5 $ 43.9
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Supplementary cash flow information (note 12).

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


Canfor Pulp Limited Partnership
Consolidated Balance Sheets

As at As at
(millions of dollars, unaudited) September 30, 2010 December 31, 2009
----------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 27.5 $ 13.5
Accounts receivable (note 9)
Trade 122.2 110.5
Other 15.4 8.6
Green Transformation Program (note 15) 20.6 -
Inventories (note 3) 143.2 135.4
Prepaid expenses and other assets 31.7 18.4

----------------------------------------------------------------------------
Total current assets 360.6 286.4
----------------------------------------------------------------------------

Property, plant and equipment (note 4) 507.9 534.1
Other long-term assets (note 5) 14.4 17.1

----------------------------------------------------------------------------
$ 882.9 $ 837.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES
Current liabilities
Accounts payable and accrued
liabilities (note 9) $ 146.3 $ 134.5
Distributions payable (note 13) 17.8 5.7

----------------------------------------------------------------------------
Total current liabilities 164.1 140.2
----------------------------------------------------------------------------

Long-term debt (note 7) 113.3 115.1
Long-term liabilities (note 8) 55.3 53.2
----------------------------------------------------------------------------
$ 332.7 $ 308.5
----------------------------------------------------------------------------


PARTNERS' EQUITY - 14,254,005 Class A
Limited Partnership Units and
57,016,020 Class B Limited
Partnership Units 550.2 529.1
----------------------------------------------------------------------------
$ 882.9 $ 837.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

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

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

"Stan Bracken-Horrocks" "Joe Nemeth"

Stan Bracken-Horrocks Joe Nemeth
Director Director


Canfor Pulp Limited Partnership

Notes to the Unaudited Interim Consolidated Financial Statements as at September 30, 2010

1. Business Description and Basis of Presentation of Financial Statements

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 September 30, 2010, 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 57% (2009 Year - 63%) of its fibre supply as well as to provide certain key business and administrative services as described in the Fund's 2009 Annual Report available at www.canforpulp.com or www.sedar.com. 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. The Partnership's accounting policies are as disclosed in the annual consolidated financial statements of the Partnership included in the Fund's 2009 Annual Report available at www.canforpulp.com or www.sedar.com. These unaudited interim consolidated financial statements follow the same accounting policies and methods of computation as used in the 2009 audited consolidated financial statements.

3. Inventories



(millions of dollars, unaudited) September 30, 2010 December 31, 2009
----------------------------------------------------------------------------
Pulp 60.4 55.2
Paper 13.7 15.9
Wood chips 25.1 21.5
Processing materials and supplies 44.0 42.8
----------------------------------------------------------------------------
143.2 135.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------


4. Property, Plant and Equipment



September 30, 2010
----------------------------------------
(millions of dollars, unaudited) Cost Accumulated amortization Net
----------------------------------------------------------------------------
Land and improvements 5.4 - 5.4
Asset retirement - Landfill 2.3 0.8 1.5
Buildings, machinery and equipment 1,350.7 855.3 495.4
Construction in progress 5.6 - 5.6
----------------------------------------------------------------------------
1,364.0 856.1 507.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------


December 31, 2009
---------------------------------------
(millions of dollars, unaudited) Cost Accumulated amortization Net
---------------------------------------------------------------------------
Land and improvements 5.4 - 5.4
Asset retirement - Landfill 2.3 0.8 1.5
Buildings, machinery and equipment 1,344.1 820.1 524.0
Construction in progress 3.2 - 3.2
---------------------------------------------------------------------------
1,355.0 820.9 534.1
---------------------------------------------------------------------------
---------------------------------------------------------------------------


5. Other Long-term Assets



(millions of dollars, unaudited) September 30, 2010 December 31, 2009
-------------------------------------------------------------------------
Pension benefit plan 10.4 11.3
Maintenance shutdown costs 3.6 5.4
Other 0.4 0.4
-------------------------------------------------------------------------
14.4 17.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------


6. 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 Nine months ended
(millions of dollars, September September September September
unaudited) 30, 2010 30, 2009 30, 2010 30, 2009
--------------------------------------------------------------------------
Pension plans 1.5 1.2 4.5 3.7
Other employee future
benefit plans 1.1 0.9 3.3 2.6
Contributions to
forest industry
union plans 1.8 1.7 5.1 5.0
--------------------------------------------------------------------------
4.4 3.8 12.9 11.3
--------------------------------------------------------------------------
--------------------------------------------------------------------------


7. Credit Facilities and Long-term Debt

At September 30, 2010 the Partnership had outstanding long-term debt of $113.3 million (December 31, 2009 - $115.1 million, US$110.0 million) in the form of unsecured US dollar private placement notes (the Notes). The Notes bear interest at 6.41% and are repayable in full on their maturity date of November 30, 2013.

The Partnership has a $40.0 million bank credit facility with a maturity date of November 30, 2011, of which $0.5 million was utilized at September 30, 2010 for a standby letter of credit issued for general business purposes. In addition, the Partnership has a separate facility with a maturity date of November 30, 2011, to cover the $16.0 million standby letter of credit issued to BC Hydro under the Electricity Purchase Agreement. Interest and other costs of the bank credit facility are at prevailing market rates.

The Notes and bank credit agreements each contain similar financial covenants including a maximum allowable debt:EBITDA leverage ratio and minimum required EBITDA:interest coverage ratio. The Partnership remained in compliance with all covenants at September 30, 2010 and throughout the period.

The fair value of long-term debt at September 30, 2010 was $124.6 million (US$121.0 million).

8. Long-term Liabilities



(millions of dollars, unaudited) September 30, 2010 December 31, 2009
--------------------------------------------------------------------------
Accrued pension obligations 6.5 5.8
Post-employment benefits 45.5 43.2
Derivative financial instruments
(note 11) 0.2 1.2
Asset retirement obligations 3.1 3.0
--------------------------------------------------------------------------
55.3 53.2
--------------------------------------------------------------------------
--------------------------------------------------------------------------


9. Related Party Transactions

The Partnership's transactions with related parties are consistent with the transactions described in the December 31, 2009 audited consolidated financial statements and are based on agreed upon amounts between the parties, and are summarized below:



Three months ended Nine months ended
(millions of dollars, September September September September
unaudited) 30, 2010 30, 2009 30, 2010 30, 2009
--------------------------------------------------------------------------
Transactions
Canfor 28.7 33.7 98.4 88.7
Howe Sound LP - commission
received 0.6 0.7 1.8 1.9
Howe Sound LP - sale of wood
chips - - - 0.1
Lakeland Mills Ltd. - purchase
of wood chips 1.6 0.9 4.3 2.7



September December
30, 2010 31, 2009
--------------------------------------------------------------------------
Balance Sheet
Included in accounts payable
and accrued liabilities:
Canfor 26.9 40.8
Howe Sound LP 19.8 17.6
Lakeland Mills Ltd. 0.4 0.4
Included in trade accounts
receivable:
Product marketed for Canfor 14.3 24.4
Product marketed for Howe
Sound LP 18.5 16.5
--------------------------------------------------------------------------


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

10. Net Income (Loss) per Partnership Unit

Basic net income (loss) 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.

11. Derivative Financial Instruments

The Partnership uses derivative instruments to reduce its exposure to risks associated with fluctuations in foreign exchange rates and natural gas prices.

For the third quarter of 2010 the Partnership recorded a net gain on derivative financial instruments of $2.6 million (third quarter 2009 - gain of $3.4 million) relating to the settlement of maturing contracts during the quarter, and the revaluation to market of outstanding contracts at the end of the quarter, for natural gas swaps and US dollar forward contracts.

The Partnership recorded losses of $0.9 million during the third quarter of 2010 (third quarter 2009 - loss of $2.5 million) relating to settlement of maturing natural gas contracts as a charge to non-operating income. At September 30, 2010 the Partnership had outstanding commodity swaps hedging future natural gas purchases of 0.8 million gigajoules extending to October 2011. At September 30, 2010 the unrealized loss of $3.7 million (September 30, 2009 - loss of $4.3 million) on these outstanding commodity swaps was recorded as a liability in accounts payable and accrued liabilities and in long-term liabilities.

The Partnership recorded a loss of $0.6 million during the third quarter of 2010 (third quarter 2009 - gain of $1.9 million) on settlement of maturing US dollar forward contracts to non-operating income. At September 30, 2010 the Partnership had outstanding US dollar forward contracts of $52.5 million extending to January 2011. At September 30, 2010 the unrealized gain of $0.8 million (September 30, 2009 - gain of $1.0 million) on these outstanding US dollar forward contracts was recorded as an asset in other accounts receivable.

12. Supplementary Cash Flow Information



Three months ended Nine months ended
(millions of dollars, September September September September
unaudited) 30, 2010 30, 2009 30, 2010 30, 2009
---------------------------------------------------------------------------
Decrease (increase) in non-
cash working capital
Accounts receivable - trade
and other 10.1 11.2 (18.7) (21.1)
Insurance receivable - - - 7.3
Inventories (4.8) (6.0) (7.8) 36.8
Prepaid expenses and other
assets (9.9) (0.3) (13.3) 3.0
Accounts payable and accrued
liabilities (10.5) 25.7 0.5 49.6
---------------------------------------------------------------------------
(15.1) 30.6 (39.3) 75.6
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Capital expenditures
Capital expenditures - cash 14.0 6.2 20.5 14.4
Less amount reimbursable -
Green Transformation Program (10.8) - (12.4) -
---------------------------------------------------------------------------
3.2 6.2 8.1 14.4
Proceeds on disposal of fixed
Assets 0.3 - 0.3 -
Capital expenditures accruals -
net accruals 1.2 0.9 0.9 (3.4)
---------------------------------------------------------------------------
4.7 7.1 9.3 11.0
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Net interest paid 0.1 0.5 4.0 5.3
---------------------------------------------------------------------------
---------------------------------------------------------------------------


13. Distributions

The Partnership declared distributions in the first nine months of 2010 as follows:



(millions of dollars, except per unit
amounts, unaudited)
Amount per Partnership Amount
Record Date Payable Date Unit $ $
----------------------------------------------------------------------------
January 29, 2010 February 15, 2010 0.08 5.7
February 26, 2010 March 15, 2010 0.12 8.5
March 31, 2010 April 15, 2010 0.12 8.6
April 30, 2010 May 14, 2010 0.12 8.6
May 31, 2010 June 15, 2010 0.20 14.2
June 30, 2010 July 15, 2010 0.20 14.3
July 30, 2010 August 13, 2010 0.22 15.7
August 31, 2010 September 15, 2010 0.22 15.7
September 30, 2010 October 15, 2010 0.25 17.8
----------------------------------------------------------------------------
1.53 109.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------


14. Accumulated Other Comprehensive Income



Nine
months
ended Year ended
September December
(millions of dollars, unaudited) 30, 2010 31, 2009
---------------------------------------------------------------------------
Balance, beginning of period - 0.1
Adjustment for exchange translation 0.1 (0.2)
Adjustment for derivatives recorded in other
comprehensive income - 0.1
---------------------------------------------------------------------------
Balance, end of period 0.1 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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



(millions of dollars, unaudited) September 30, 2010
-------------------------------------------------------
Cumulative comprehensive income 406.9
Cumulative distributions (444.2)
-------------------------------------------------------
(37.3)
Partners' capital - at July 1, 2006 587.5
-------------------------------------------------------
Partners' equity, end of period 550.2
-------------------------------------------------------
-------------------------------------------------------


15. Green Transformation Program

On October 9, 2009 the Canadian federal government announced the allocation of credits from the billion dollar Pulp and Paper Green Transformation Program (the Program). The Partnership has been allocated $122.2 million from the Program announced by the Canadian government on June 17, 2009. The Program is designed as a reimbursement of funds to be spent on qualifying energy and environmental capital projects. Credits may be used until the program end date of March 31, 2012. The Partnership has received Program approval to proceed with two projects totaling $15.6 million. The Partnership has submitted a $100.0 million project to upgrade the recovery boiler at the Northwood Pulp Mill for Program approval, and expects to submit further projects over the balance of 2010. The Partnership submits claims for expenditures on approved projects under the Program on a quarterly basis. The Partnership received $1.1 million for eligible expenditures under the program in the third quarter of 2010 and as of September 30, 2010 has incurred $21.7 million for qualifying reimbursable expenditures. These projects are expected to provide economic and environmental benefits to the Partnership's operations.

16. Segmented Information (a)



Unallocated
(millions of dollars, unaudited) Pulp Paper Costs Total
---------------------------------------------------------------------------
Three months ended September 30, 2010
---------------------------------------------------------------------------
Sales to external customers (b) 212.9 34.7 0.3 247.9
Sales of pulp to paper segment (c) 23.9 (23.9) - -
Operating income (loss) 57.2 0.2 (5.4) 52.0
Amortization 11.0 0.8 0.1 11.9
Capital expenditures, net 4.3 0.2 0.2 4.7

Three months ended September 30, 2009
---------------------------------------------------------------------------
Sales to external customers (b) 170.1 31.9 - 202.0
Sales of pulp to paper segment (c) 16.2 (16.2) - -
Operating income (loss) 11.6 3.2 (2.4) 12.4
Amortization 11.7 0.8 0.1 12.6
Capital expenditures, net 7.1 - - 7.1

Nine months ended September 30, 2010
---------------------------------------------------------------------------
Sales to external customers (b) 632.5 101.7 0.8 735.0
Sales of pulp to paper segment (c) 66.8 (66.8) - -
Operating income (loss) 150.7 (0.9) (13.7) 136.1
Amortization 33.0 2.3 0.2 35.5
Capital expenditures, net 7.6 1.0 0.7 9.3
Identifiable assets 761.9 64.6 56.4 882.9

Nine months ended September 30, 2009
---------------------------------------------------------------------------
Sales to external customers (b) 503.1 90.2 - 593.3
Sales of pulp to paper segment (c) 42.8 (42.8) - -
Operating income (loss) (6.2) 10.5 (6.7) (2.4)
Amortization 34.1 2.5 0.2 36.8
Capital expenditures, net 10.9 - 0.1 11.0
Identifiable assets 735.0 65.0 61.9 861.9
---------------------------------------------------------------------------

(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 39% (Year 2009 - 36%).
(b) Sales to the largest customer represented approximately 11% of pulp
segment sales (Year 2009 - 7%).
(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.


Contact Information