Canfor Pulp Products Inc.
TSX : CFX

Canfor Pulp Products Inc.

July 21, 2011 21:44 ET

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

VANCOUVER, BRITISH COLUMBIA--(Marketwire - July 21, 2011) - Canfor Pulp Products Inc. (CPPI) (TSX:CFX) today announced its second quarter 2011 results as well as the results of Canfor Pulp Limited Partnership (the Partnership) in which CPPI has a 49.8% ownership.

CPPI reported net income of $17.8 million or $0.50 per share, representing CPPI's share of the Partnership's income less an income tax provision of $6.3 million.

The Partnership reported sales of $242.1 million and net income of $48.2 million or $0.68 per unit, for the quarter ended June 30, 2011. In the quarter the Partnership generated EBITDA of $64.1 million and distributable cash of $53.6 million, or $0.75 per unit.

During the quarter, a stronger Canadian dollar offset some of the impact of higher US dollar list prices, and unit manufacturing costs increased as a result of higher maintenance, fibre and chemical costs. Record daily production rate during the quarter offset the 12,000 tonne impact of scheduled annual maintenance at the Prince George and Intercontinental Pulp Mills. Shipment volumes were reduced to manage inventories in anticipation of the scheduled extended downtime at the Northwood Pulp Mill in the third quarter.

Based on strong first half results of the Partnership and the current pulp market outlook for the balance of the year, CPPI announced a quarterly dividend of $0.40 per share to be paid on August 9, 2011 to shareholders of record at the close of business on August 2, 2011.

Global softwood markets remained balanced through the second quarter led by continued strong demand in China. Steady global demand during the quarter allowed producers to increase NBSK list prices in US dollar terms to record high levels. During the quarter, global softwood producer inventories increased 4 days to 28 days of supply which is considered a balanced market. During the quarter, NBSK pulp list prices increased US$50 per tonne for North America to US$1,040 and US$45 per tonne for Europe to US$1,025. The Partnership's NBSK pulp list price for China increased US$30 per tonne to US$930, driven by continued strong demand from Asia.

The global softwood pulp market is projected to soften through the third quarter of 2011. This is a result of the normal seasonal reduction in global demand in the summer months, combined with the assumption of some destocking in China during the third quarter, as purchases exceeded trend volumes in the second quarter.

The Partnership has received approval under the Canadian Government's Green Transformation Program (the Program) to proceed with four projects totaling $157.4 million, of which $122.2 million will be reimbursed under the Program. Two projects are substantially complete with the major recovery boiler and precipitator upgrade project well underway. All projects are projected to be complete by the Program deadline of March 31, 2012. An extended maintenance outage is planned at the Northwood Pulp Mill during the third quarter to complete the installation of the recovery boiler and precipitator upgrade. This is estimated to reduce pulp production in the quarter by approximately 40,000 tonnes.

Additional Information

A conference call to discuss the second quarter 2011 financial and operating results will be held on Friday, July 22, 2011 at 8:00 a.m. Pacific time.

To participate in the call, please dial 416-695-6616 or Toll-Free 1-800-952-4972. For instant replay access, please dial 905-694-9451 or Toll-Free 1-800-408-3053 and enter participant pass code 1512162. The conference call will be webcast live and will be available at www.canforpulp.com/investors/webcasts.asp.

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

About Canfor Pulp Products Inc.

Canfor Pulp Products Inc. (CPPI) is the successor to the Canfor Pulp Income Fund (the Fund) following the completion of the conversion of the Fund from an income trust structure to a corporate structure by court approved plan of arrangement under the Business Corporations Act (British Columbia) (the BCBCA) on January 1, 2011 (the Conversion). The Conversion involved the exchange, on a one-for-one basis, of all outstanding Fund Units for common shares of CPPI (CPPI Shares). Upon completion of the Conversion, on January 1, 2011, the unitholders of the Fund became the sole shareholders of CPPI which became sole owner of all of the outstanding Fund Units.

Immediately following the conversion, the Fund was wound up, CPPI received all of the assets and assumed all of the liabilities of the Fund and CPPI became the direct holder of the 49.8% interest in the Partnership previously held by the Fund.

Forward-Looking 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 some instances, material assumptions are disclosed elsewhere in this press release in respect of forward-looking statements. Other risks and uncertainties are detailed from time to time in reports filed by CPPI with the securities regulatory authorities in all of the provinces and territories of Canada to which recipients of this press release are referred for additional information concerning CPPI and the Partnership, their prospects and uncertainties relating to CPPI and the Partnership. Although we believe that the expectations reflected by the forward-looking statements presented in this press release are reasonable, these forward-looking statements are based on management's current expectations and beliefs and actual events or results may differ materially. New risk factors may arise from time to time and it is not possible for management to predict all of those risk factors or the extent to which any factor or combination of factors may cause actual events and results, performance and achievements of CPPI and the Partnership to be materially different from those contained in forward-looking statements. The forward-looking statements speak only as of the date on which such statement is made, are based on current information and expectations and CPPI and the Partnership assume no obligation to update such information to reflect later events or developments, except as required by law.

Forward-looking statements in this press release include statements made under:


--  "Critical Accounting Estimates" 
--  "Changes in Accounting Policies" 
--  "Outlook - Pulp"    
--  "Outlook - Kraft Paper"  
--  "Financial Requirements and Liquidity"  
--  "Critical Accounting Estimates"  
--  "Changes in Accounting Policies" 
--  "Distributable Cash and Cash Distributions" 

Material risk factors that could cause actual results to differ materially from the forward-looking statements contained in this press release include: general economic, market and business conditions; product selling prices; raw material and operating costs; exchange rates; changes in law and public policy; and opportunities available to or pursued by CPPI and the Partnership. Additional information concerning these and other factors can be found in CPPI's Annual Information Form dated February 11, 2011, which is available on www.sedar.com.

Canfor Pulp Products Inc. and Canfor Pulp Limited Partnership

Second quarter 2011

The information in this report is as at July 21, 2011.

CANFOR PULP PRODUCTS INC.

CPPI is the successor to the Fund following the completion of the conversion of the Fund from an income trust to a corporate structure by court approved plan of arrangement under the Business Corporations Act (British Columbia) (the "BCBCA") on January 1, 2011 (the "Conversion"). The Conversion involved the exchange, on a one-for-one basis, of all outstanding Fund Units for common shares of CPPI ("CPPI Shares"). Upon completion of the Conversion and the subsequent winding up of the Fund and the Canfor Pulp Trust (the Trust) the unitholders of the Fund became the sole shareholders of CPPI and CPPI became the direct holder of the 49.8% interest in the Partnership.

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 July 21, 2011, there were a total of 35,493,307 CPPI shares issued and outstanding, and CPPI held a total of 35,493,542 units of the Partnership, representing 49.8% of the Partnership. Canadian Forest Products Ltd. (Canfor) held 35,776,483 Class B Exchangeable Limited Partnership Units, representing 50.2% of the Partnership. The Class B Exchangeable Limited Partnership Units are exchangeable for an equivalent number of CPPI shares pursuant to the terms of an amended exchange agreement (Exchange Agreement) dated January 1, 2011 among Canfor, CPPI, the Partnership and the General Partner. The Exchange Agreement contains, among other things, the procedure through which the Class B Exchangeable Limited Partnership Units may be exchanged for CPPI shares.

The shareholders of CPPI will participate pro-rata in any dividends from CPPI. It is the current intention of CPPI to designate any dividends paid on CPPI shares to be eligible dividends to the extent permitted by the Canadian Income Tax Act such that individuals would benefit from the enhanced gross-up and dividend tax credit mechanism under the Canadian Income Tax Act.

SELECTED QUARTERLY FINANCIAL INFORMATION

The information in the table below for 2010 represents the results under International Financial Reporting Standards (IFRS) for the Fund prior to conversion to a corporation. Equity income in Canfor Pulp Limited Partnership represents CPPI's share of the Partnership's net income. In accordance with International Accounting Standard (IAS) 32 the Fund units were classified as a financial liability and measured at amortized cost with changes recorded through net income (see CPPI's disclosures). In addition the Fund's distributions were classified as a financing expense in the statement of comprehensive income (loss). Net income (loss) was also impacted by deferred income tax expense (recovery) which is primarily influenced by changes in substantively enacted tax rates and the difference between the tax basis of CPPI's pro-rata ownership of the Partnership's assets and liabilities and the respective amounts reported in the financial statements.


(thousands of                                                               
 dollars, except              The Fund                                      
 per unit         CPPI              Q4      Q3      Q2       Q1    Q4     Q3
 amounts,           Q2     Q1     2010    2010    2010     2010  2009   2009
 unaudited)       2011   2011       (2)     (2)     (2)      (2)   (3)   (3)
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Equity income in                                                            
 Canfor Pulp                                                                
 Limited                                                                    
 Partnership    24,023  25,227  23,639  27,374 21,681    16,473  7,562 9,098
Net income                                                                  
 (loss)         17,754  40,625 (11,335) 3,239 (71,803) (118,842) 6,903 8,497
Net income                                                                  
 (loss) per                                                                 
 share           $0.50   $1.14  ($0.32)  $0.09 ($2.02)   ($3.34) $0.20 $0.24
Distributions                                                               
 earned from the                                                            
 Partnership    24,490  27,685  37,268  24,491 18,457    11,357  4,969 1,065
Dividends/distri                                                            
 butions                                                                    
 declared per                                                               
 share/unit      $0.40       -   $1.05   $0.69  $0.52     $0.32  $0.14 $0.03
Partnership                                                                 
 distributable                                                              
 cash per                                                                   
 unit(1)         $0.75   $0.77   $0.68   $0.78  $0.88     $0.57  $0.31 $0.16
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Notes: (1) Represents the Partnership's distributable cash on which CPPI is 
dependent to pay its own dividends. For further details on the 
Partnership's distributable cash see the Supplementary Financial
Information.
(2) Fund results for 2010 presented under IFRS. See CPPI's disclosure.
(3) Presented under previous Canadian GAAP. See CPPI's disclosure. 

OPERATING RESULTS AND LIQUIDITY

For the quarter ended June 30, 2011, CPPI had net income of $17.8 million or $0.50 per share. The net income was CPPI's share of the Partnership's net income for the quarter and also includes an income tax expense of $6.3 million. CPPI's equity income in the Partnership decreased by $1.2 million when compared to the prior quarter. CPPI's share of operating earnings of the Partnership decreased $0.4 million as a result of lower shipment volumes and higher unit manufacturing costs partially offset by higher realized prices in Canadian dollar terms. CPPI's share of non-operating items of the Partnership was a net loss of $0.4 million and was primarily the result of interest expense, partially offset by a foreign exchange gain on translation of US dollar denominated long-term debt and a net gain on derivative financial instruments.

At June 30, 2011 CPPI had cash and cash equivalents of $29.9 million of which $14.2 million was committed to pay the quarterly dividend and $10.5 million accumulated for income taxes due in February, 2012. Distributions declared by the Partnership and accruing to CPPI were $24.5 million of which $8.2 million was receivable at June 30, 2011. Cash distributions received from the Partnership are the primary source of liquidity for CPPI. For further information refer to the Partnership's discussion of operating results and liquidity in this press release.

CPPI DIVIDENDS

CPPI is entirely dependent on distributions from the Partnership to make dividend payments to its shareholders. Distributions payable by the Partnership to CPPI and dividends payable by CPPI to its shareholders are recorded when declared. During the second quarter of 2011, CPPI declared and paid a dividend of $0.40 per share or $14.2 million. On July 21, 2011, a dividend of $0.40 per share was declared, payable on August 9, 2011 to shareholders of record on August 2, 2011.

CPPI intends to pay quarterly dividends based on estimates of full year distributions from the Partnership, less a provision for income taxes and administrative expenses.

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

RISKS AND UNCERTAINTIES

CPPI is subject to certain risks and uncertainties related to the nature of its investment in the Partnership, as well as all of the risks and uncertainties related to the business of the Partnership. A comprehensive discussion of these risks and uncertainties is contained in CPPI's Annual Information Form dated February 11, 2011, which is available on www.sedar.com and www.canforpulp.com.

CPPI SHARES

At July 21, 2011, there were a total of 35,493,307 CPPI shares outstanding.

RELATED PARTY TRANSACTIONS

All accounting, treasury, legal and administrative functions for CPPI are performed on its behalf by the Partnership pursuant to a support agreement. The value of these services for the six months ended June 30, 2011 was $1.0 million and included a onetime charge of $0.8 million for costs related to conversion to a corporation on January 1, 2011. These services were included as an administrative expense of CPPI with the balance outstanding recorded in accounts payable to the Partnership at June 30, 2011.

Distributions earned from the Partnership for the three months ended June 30, 2011 were $24.5 million of which $16.3 million was received, with the balance of $8.2 million receivable on June 30, 2011.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the amounts recorded in the financial statements. Management regularly reviews these estimates and assumptions based on currently available information. Significant areas requiring the use of management's estimates are the determination of deferred income taxes, and assessing whether there has been an other than temporary decline in the value of the investment in the Partnership. CPPI accounted for its investment in the Partnership using the equity method. CPPI analyzed the carrying value of its investment in the Partnership by considering the underlying value of the Partnership's business. This assessment included various long-term assumptions related to the Partnership's operations which may not be reflected in the current market value of CPPI. Changes in these estimates could have a material impact on the calculation of the deferred income tax liability or equity investment in the Partnership.

CHANGE IN ACCOUNTING POLICIES

Transition to and Initial Adoption of International Financial Reporting Standards

IFRS became Canadian GAAP for publicly accountable enterprises effective for fiscal years beginning on or after January 1, 2011. The financial statements for the three and six months ended June 30, 2011, have been prepared in accordance with IAS 34 and International Financial Reporting Standard 1 (IFRS 1), using accounting policies consistent with IFRS as issued by the International Accounting Standards Board (IASB) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC). CPPI relies on the resources of the Partnership to ensure compliance with IFRS. Accordingly, CPPI commenced reporting on this basis in its 2011 interim consolidated financial statements. The accounting policies followed in these financial statements are the same as those applied in the interim financial statements for the period ended March 31, 2011.

The accounting policies have been applied consistently to all periods presented in the financial statements. The policies applied in these financial statements are based on IFRS issued and effective as of July 21, 2011, the date the Board of Directors approved the statements. Any subsequent changes to IFRS that are given effect in CPPI's annual consolidated financial statements for the year ending December 31, 2011 could result in restatement of these financial statements, including the transition adjustments recognized on change-over to IFRS.

Impact of Adopting IFRS on the Company's Accounting Policies

CPPI has changed certain accounting policies to be consistent with IFRS. As a result of the conversion to a corporation effective January 1, 2011, the items discussed below do not impact CPPI's Cash, Total Assets, Total Liabilities, Total Shareholders' Equity or Net Income Before Income Taxes for 2011.

The impact of the application of these accounting policies on the comparative 2010 financial statements of the Fund is summarized as follows:

(a) Fund Units

Under the terms of the trust indenture, unitholders had a puttable option, whereby the Fund would have been required to redeem Fund units at the request of the unitholder and required the Fund to distribute all of the taxable income received from the Partnership.

Under Canadian GAAP the Fund units were classified as equity. IAS 32 requires that the Fund units be classified as a financial liability under IFRS prior to conversion to a corporation and the Fund's distributions be classified as a financing expense recorded in the statement of comprehensive income. The financial liability is recorded at amortized cost, with fair value being the best approximation of amortized cost, and changes in amortized cost recorded in the statement of comprehensive income (loss). Upon conversion to a corporation effective January 1, 2011, the Fund units were converted on a one-for-one basis into shares of CPPI and the shares are classified as equity with quarterly dividends treated as an equity distribution.


Impact on Condensed Balance Sheets of the Fund:

(thousands of dollars, except for per                As at             As at
 unit amounts, unaudited)                December 31, 2010     June 30, 2010
----------------------------------------------------------------------------
Increase in fund unit liability                    509,687           510,749
Reduction in equity                                509,687           510,749
Unit market price for valuation                      14.36             14.39
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Impact on Condensed Statements of Comprehensive Income (Loss) of the Fund:

                                        Three months ended  Six months ended
(thousands of dollars, unaudited)            June 30, 2010     June 30, 2010
----------------------------------------------------------------------------
Increase in value of Fund units                                             
 (revaluation loss)                                 75,956           200,182
Reclassification to financing expense                                       
 (distributions declared)                           18,457            29,815
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Reduction in comprehensive income                   94,413           229,997
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(b) Deferred income tax rate

Under Canadian GAAP the Fund recorded temporary tax differences that were projected to reverse after 2010 based on Specified Investment Flow Through (SIFT) entity tax rates. However, International Accounting Standard 12 (IAS 12) requires that companies should use the undistributed rate for recording taxes. Therefore, under IFRS the rate to apply to temporary differences that are projected to reverse after 2010 would be the highest marginal personal tax rate rather than the SIFT rate. The highest marginal personal tax rate is the rate at which tax would be payable by the Fund should distributions not be declared (43.7%). Subsequent to January 1, 2011 as a result of the conversion of the Fund into a corporation, the temporary tax differences are to be measured at the substantively enacted corporate tax rate in effect at the date of reversal of the temporary differences.


Impact on Condensed Balance Sheets of the Fund:

                                                     As at             As at
(thousands of dollars, unaudited)        December 31, 2010     June 30, 2010
----------------------------------------------------------------------------
Increase in deferred tax liability                  17,415            18,154
Reduction in equity                                 17,415            18,154
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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 July 21, 2011, CPPI held a total of 14,254,005 Class A Limited Partnership Units and 21,239,537 Class B Limited Partnership Units, representing 49.8% of the Partnership and Canfor owns the remaining 50.2%. The Partnership is managed, on behalf of the limited partners, by Canfor Pulp Holding Inc., the General Partner.

Ownership Structure

To view the Ownership Structure flow chart, please click the following link: http://media3.marketwire.com/docs/CFXflowchart.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 unit     Q2     Q1    YTD     Q2    YTD
 amounts, unaudited)                        2011   2011   2011   2010   2010
----------------------------------------------------------------------------
Sales                                      242.1  252.3  494.4  247.6  487.1
EBITDA (1)                                  64.1   66.7  130.8   69.4  118.7
Operating income                            49.1   49.9   99.0   52.1   85.1
Net income                                  48.2   50.7   98.9   43.6   76.6
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Per Partnership unit, basic and diluted                                     
  Net income                               $0.68  $0.71  $1.39  $0.61  $1.07
  EBITDA (1)                               $0.90  $0.94  $1.84  $0.97  $1.66
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Average exchange rate (US$/Cdn$) (2)       1.033  1.014  1.024  0.973  0.967
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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).             

Second quarter 2011 EBITDA of $64.1 million decreased by $2.6 million compared to the first quarter of 2011. The decrease was attributable to lower pulp shipment volumes and higher unit manufacturing costs partially offset by higher realized pulp prices in Canadian dollar terms. Pulp shipment volumes were reduced to manage inventories in anticipation of the extended Northwood mill outage in the third quarter. Unit manufacturing costs increased 4% when compared to the prior quarter as a result of reduced production volume from scheduled annual maintenance at the Prince George and Intercontinental mills, higher chemical prices and higher fibre costs. The increase in fibre costs when compared to the prior quarter was due to an increase in the price of sawmill residual chips, which are in part tied to pulp prices. Realized pulp prices in Canadian dollar terms increased 5% as an increase in NBSK US list price was partially offset by the stronger Canadian dollar.

The second quarter 2011 EBITDA decreased by $5.3 million compared to the second quarter of 2010. The decrease was primarily attributable to lower shipments of the Partnership's pulp and paper products and higher unit manufacturing costs partially offset by higher realized paper prices in Canadian dollar terms. Shipments of the Partnership's pulp and paper products decreased by 4% and 5% respectively when compared to the same period in 2010. Higher unit manufacturing costs were the result of higher fibre costs, higher chemical prices and higher spending on fixed costs. Realized pulp prices in Canadian dollar terms increased slightly as a 3% increase in NBSK pulp US dollar list prices and a higher proportion of sales into higher margin business, were partially offset by a strengthening of the Canadian dollar. Realized paper prices in Canadian dollar terms increased by 11% when compared to the first quarter of 2010 as a result of general global price increases and an increase in sales into higher margin regions.

For the six months ended June 30, 2011, EBITDA of $130.8 million increased by $12.1 million when compared to the same period in 2010. The increase in EBITDA was attributable to higher realized pulp and paper prices in Canadian dollar terms and higher energy sales, partially offset by lower shipment volumes of the Partnership's pulp and paper products and higher unit manufacturing costs. Realized pulp prices in Canadian dollar terms increased 4%, as a 7% increase in NBSK pulp US dollar list price and an increase of sales into higher margin regions was partially offset by a 6% strengthening of the Canadian dollar when compared to the same period in 2010. Shipment volumes of pulp and paper products decreased by 3% and 9% respectively when compared to the same period in 2010. Higher unit manufacturing costs were attributable to higher fibre costs, higher spending on fixed costs and higher chemical prices, partially offset by the impact of higher production volumes. Realized paper prices in Canadian dollar terms increased 12% when compared to the same period in 2010, due to the successful implementation of price increases, partially offset by the strengthening Canadian dollar.


OPERATING RESULTS BY BUSINESS SEGMENT 

Pulp 

(millions of dollars unless otherwise      Q2      Q1    YTD      Q2    YTD
 noted, unaudited)                       2011    2011   2011    2010   2010
----------------------------------------------------------------------------
Sales                                   207.5   217.3  424.8   214.8  419.6
EBITDA (1)                               66.1    66.6  132.7    73.3  126.2
EBITDA margin (1)                          32%     31%    31%     34%    30%
Operating income                         52.0    50.8  102.8    56.9   94.4
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Average NBSK pulp list price -                                     
 (US$ per tonne, delivered to USA)      1,025     970    998     993    937
Average NBSK pulp list price -                                    
 (Cdn$ per tonne, delivered to USA)       992     957    975   1,021    969
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Production - pulp (000 mt)              265.7   264.5  530.2   263.8  517.6
Shipments - Partnership-produced pulp                                      
 (000 mt)                               242.0   265.3  507.3   252.3  520.7
Marketed on behalf of HSLP (2)& Canfor                                     
 (000 mt)                                61.7    53.1  114.8   144.2  282.9
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Notes: (1) For calculation of EBITDA, see supplementary financial 
information.
(2) HSLP (Howe Sound Pulp Limited Partnership) sales agency agreement was   
terminated effective October 1, 2010.                                       

The second quarter 2011 operating income for the pulp segment of $52.0 million increased $1.2 million compared to the first quarter of 2011. The increase was attributable to higher realized prices in Canadian dollar terms, partially offset by lower shipment volumes and higher unit manufacturing costs. Realized pulp prices in Canadian dollar terms increased 5% as an increase in NBSK US list price was partially offset by the stronger Canadian dollar. Unit manufacturing costs increased 3% when compared to the prior quarter as a result of higher spending on maintenance costs, higher chemical prices and higher fibre costs, partially offset by lower energy costs. The reduction in energy costs was primarily due to higher seasonal usage in the first quarter, while the higher maintenance costs were attributable to the completion of the scheduled annual maintenance outages at the Partnership's facilities in the second quarter of 2011. The increase in fibre costs when compared to the prior quarter was due to an increase in the price of sawmill residual chips, which are in part tied to pulp prices. Pulp shipment volumes decreased 9% when compared to the prior quarter due to managing inventory levels in preparation for the Partnership's extended scheduled maintenance at the Northwood Pulp Mill in the third quarter of 2011.

The second quarter 2011 operating income of the pulp segment decreased by $4.9 million compared to the second quarter of 2010. The decrease was due to lower shipments and higher unit manufacturing costs. Pulp shipment volumes decreased 4% when compared to the prior quarter. Unit manufacturing costs increased 4% as a result of higher fibre costs, higher maintenance costs related to scheduled outages and higher chemical prices. Fibre costs increased 2% due to higher prices for sawmill residual chips, which are tied to the price of pulp, partially offset by reductions in the cost of whole log chips. Realized pulp prices in Canadian dollar terms increased slightly as a 3% increase in NBSK pulp US dollar list prices and a higher proportion of sales into higher margin business, were partially offset by a strengthening of the Canadian dollar.

For the six month period ended June 30, 2011, operating income of $102.8 million increased $8.4 million when compared to the same period in 2010. The increase in operating results was attributable to higher realized prices in Canadian dollar terms and increased energy sales, partially offset by higher unit manufacturing costs and lower shipment volumes. Realized pulp prices in Canadian dollar terms increased 4% as a 7% increase in NBSK pulp US dollar list price and an increase of sales into higher margin regions was partially offset by a 6% strengthening of the Canadian dollar when compared to the same period in 2010. Higher unit manufacturing costs were attributable to higher fibre costs, higher spending on fixed costs and higher chemical prices, partially offset by the impact of higher production volumes. Shipment volumes were down 3% for the first six months of 2011 when compared to 2010.

Operations

The Partnership's facilities set a record for average daily production rate during the second quarter of 2011 and successfully completed scheduled annual maintenance at the Prince George and Intercontinental Mills. NBSK market pulp production during the second quarter was 1,200 tonnes higher than the first quarter of 2011, and 1,900 tonnes higher than the second quarter of 2010. The improved production when compared to the prior quarter was a result of record production rates in the current period partially offset by reduced production as a result of the maintenance outages in the current quarter. When compared to the same period in the prior year the increased production was primarily attributable to higher production rates in the current quarter.

For the six month period ended June 30, 2011 production of 530,200 tonnes was 12,600 tonnes higher than the same period in 2010. The increase is due to higher operating rates in 2011 and reduced production attributable to an extended maintenance outage at the Prince George Pulp and Paper Mill in the first quarter of 2010.

Markets - Pulp

Global softwood markets remained balanced through the second quarter of 2011 led by continued strong demand in China. According to the World 20(1) report, global bleached softwood shipments for June were 2% higher when compared to the same period in 2010 and for June year-to-date 2011 were 7% higher than the same period in 2010. Pulp and Paper Products Council (PPPC) statistics reported an increase in global demand for printing and writing papers of 1% for May 2011 year-to-date as compared to the same period in 2010.

Global softwood producer inventories remained balanced due to steady global demand and reduced supply as the industry completed annual spring maintenance in the second quarter of 2011. World 20(1) producers bleached softwood pulp inventories increased 4 days during the quarter to 28 days of supply, with a balanced market generally considered to be in the 27-30 day range.

During the quarter, NBSK pulp list prices increased US$50 per tonne for North America to US$1,040 and US$45 per tonne for Europe to US$1,025. The Partnership's NBSK pulp list price for China increased US$30 per tonne to US$930 in the second quarter of 2011, driven by continued strong demand from Asia.

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

Outlook - Pulp

The global softwood pulp market is projected to soften during the third quarter of 2011. Price decreases were announced in July of US$20 per tonne for North America and US$60 per tonne for China. Demand is projected to slightly weaken as may typically occur in North America and Europe during the summer months. China's demand for pulp is projected to slow in the third quarter of 2011 due to higher than normal shipments in the second quarter of 2011 resulting in higher consumer inventories entering the third quarter of 2011.

A maintenance outage is planned at the Northwood Pulp Mill in the third quarter of 2011 which will be extended to complete work and commissioning of the recovery boiler upgrade project funded under the Canadian Federal Government's Green Transformation Program, with an estimated 40,000 tonnes of reduced production. There are no maintenance outages planned for the fourth quarter of 2011.


Paper 

(millions of dollars unless otherwise noted,    Q2     Q1  YTD     Q2   YTD
 unaudited)                                   2011   2011 2011   2010  2010
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Sales                                         34.2   34.0 68.2   32.5  67.0
EBITDA (1)                                     1.6    2.9  4.5    0.4   0.7
EBITDA margin (1)                                5%     9%   7%     1%    1%
Operating income (loss)                        0.7    2.0  2.7   (0.5) (1.0)
----------------------------------------------------------------------------
Production - paper (000 mt)                   31.8   34.5 66.3   36.3  67.3
Shipments - paper (000 mt)                    32.7   32.6 65.3   34.4  72.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note: (1) For calculation of EBITDA, see supplementary financial 
information.

The second quarter 2011 operating income of the paper segment decreased $1.3 million compared to the first quarter of 2011. The decrease was primarily attributable to higher unit manufacturing costs. The increase in unit manufacturing costs was attributable to higher prices for slush pulp, higher spending on maintenance and the impact of lower production on unit costs. 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. The increase in maintenance costs and lower production volumes were attributable to the maintenance outage completed during the second quarter of 2011.

The second quarter 2011 operating income increased $1.2 million compared to the second quarter of 2010. The increase was due to an 11% increase in realized paper prices in Canadian dollar terms, partially offset by higher unit manufacturing costs and lower sales volumes. The increase in paper prices was due to steady demand throughout 2010 and 2011. The paper price increases mitigated part of the impact of the increases in global pulp prices, the major raw material cost. Increased unit manufacturing costs were primarily attributable to higher costs for slush pulp, and the impact of the scheduled maintenance outage during the second quarter of 2011. Sales volumes decreased by 1,700 tonnes when compared to the second quarter of 2010.

For the six month period ended June 30, 2011 operating results of the paper segment improved by $3.7 million when compared to the same period in 2010. The increase in operating earnings is attributable to a 12% increase of realized paper prices in Canadian dollar terms, partially offset by higher unit manufacturing costs and lower shipment volumes. Paper unit manufacturing costs increased 7% as a result of higher costs for slush pulp and the impact of the scheduled maintenance outage completed in the second quarter of 2011. Shipment volumes decreased 6,800 tonnes when compared to the same period in 2010.

Operations

Paper production for the second quarter of 2011 was 31,800 tonnes, 2,700 tonnes lower than the first quarter of 2011 and 4,500 tonnes lower than the second quarter of 2010. A scheduled maintenance outage was completed in the second quarter of 2011 resulting in approximately 3,300 tonnes of reduced production with no scheduled maintenance outages in the prior quarter or the same period in 2010.

For the six month period ended June 30, 2011 production of 66,300 tonnes was 1,000 tonnes lower than the same period in 2010.

Markets - Kraft Paper

Global kraft paper demand was strong, however, US shipments decreased during the second quarter of 2011. American Forest and Paper Association reported that US total Kraft paper shipments for June 2011 increased 3% from May, however, decreased 4% when compared to June 2010. The Paper Shipping Sack Manufacturers' Association shipping sack statistics for June reveal that industry paper consumption was down 12% from June 2010 but unchanged from the previous month. Price increases were announced in June 2011 to take effect on August 1, 2011 for North American markets.

The Partnership's prime paper shipments in the second quarter of 2011 decreased 3% from the first quarter of 2011. Prime bleached shipments increased by 17% when compared to the first quarter of 2011 but declined 4% when compared to the same period in 2010.

Outlook - Kraft Paper

Kraft paper demand is stronger for bleached than unbleached grades heading into the third quarter of 2011. Order files for bleached grades are healthy heading into the third quarter and announced price increases are projected to be fully implemented by the end of the third quarter of 2011. The Partnership's prices in US dollar terms are sensitive to the relative strength of the Canadian dollar in relation to other currencies, primarily the US dollar.


Non-Segmented Costs  
                                                 Q2    Q1   YTD    Q2   YTD
(millions of dollars, unaudited)               2011  2011  2011  2010  2010
----------------------------------------------------------------------------
Unallocated costs                               3.6   2.9   6.5   4.3   8.3
Interest expense, net                           1.9   2.1   4.0   1.9   3.9
Foreign exchange loss (gain) on long-term                                  
 debt                                          (0.8) (2.5) (3.3)  5.0   1.6
Foreign exchange loss (gain) on working                                    
 capital                                        0.7   1.1   1.8  (2.1) (0.3)
Loss (gain) on derivative financial                                        
 instruments                                   (1.0) (1.6) (2.6)  3.8   3.4
Other expense (income)                          0.1   0.1   0.2  (0.1) (0.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                4.5   2.1   6.6  12.8  16.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Unallocated Costs

Unallocated costs, comprised principally of general and administrative expenses, totaled $3.6 million in the second quarter of 2011. For the six month period ended June 30, 2011 unallocated costs totaled $6.5 million compared to $8.3 million for the same period in 2010. The decrease in unallocated costs is attributable to lower accruals for performance based incentive plans, and costs incurred in 2010 in relation to the conversion to a corporation on January 1, 2011.

Interest Expense

For the second quarter of 2011 the net interest expense remained relatively unchanged from the prior quarter.

Other Non-segmented Items

The foreign exchange gain on long-term debt of $0.8 million resulted from translating the US$110 million debt at period-end exchange rates, reflecting the stronger Canadian dollar as of June 30, 2011.

The foreign exchange loss on working capital of $0.7 million resulted from translating US dollar balances at period-end exchange rates.

The net gain of $1.0 million on derivative financial instruments recorded in the second quarter of 2011 results from 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. Of the net gain, $1.0 million is from US dollar forward contracts, with gains offsetting losses on natural gas swaps. The natural gas swaps are used to fix the price on a portion of the Partnership's future natural gas requirements, while the US dollar forward contracts are used 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 ratios,           June 30,     December 31,
 unaudited)                                           2011             2010
----------------------------------------------------------------------------
Ratio of current assets to current                                         
 liabilities                                          2.05             1.90
Ratio of net debt to partners' equity (1)             0.16             0.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                 Q2    YTD       Q2     YTD
                                               2011   2011     2010    2010
----------------------------------------------------------------------------
Increase (decrease) in cash and cash                                       
 equivalents                                  (24.2) (37.7)     5.6    26.8
Comprised of cash flow from (used in):                                     
  Operating activities                         38.4  113.6     54.2   102.0
  Financing activities                        (54.6)(131.2)   (35.1)  (55.2)
  Investing activities                         (8.0) (20.1)   (13.5)  (20.0)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 $38.4 million in the second quarter of 2011 compared to $54.2 million in the second quarter of 2010. The reduction is the result of lower operating earnings and an increase in cash used for working capital. The reduction in cash generated from operations was primarily attributable to higher unit manufacturing costs and lower shipment volumes partially offset by higher realized pulp prices. The increase of cash used for working capital during the second quarter of 2011 was primarily the result of increases in pulp finished goods inventories and a reduction in accounts payable balances, partially offset by a reduction in chip inventories.

The cash used in financing activities of $54.6 million in the quarter represents $51.3 million in distributions paid to the limited partners, namely Canfor and CPPI, and $3.3 million in interest payments on long-term debt.

The cash used in investing activities in the quarter is comprised of $10.3 million in capital expenditures and $20.2 million relating to expenditures under the Canadian Federal Government's Green Transformation Program (the Program), partially offset by $21.6 million of funds received for claims under the Program and $0.9 million in funds received under other grant programs.

FINANCIAL REQUIREMENTS AND LIQUIDITY

At June 30, 2011 the Partnership had outstanding long-term debt of $106.1 million (December 31, 2010 - $109.4 million, US$110.0 million for both 2011 and 2010) in the form of unsecured US dollar private placement notes (the Notes). The Notes bear interest at 6.41% and are repayable in full on their maturity date of November 30, 2013.

At June 30, 2011, the Partnership had cash and cash equivalents of $26.5 million, of which $16.4 million was committed to pay declared distributions on July 15, 2011. The Partnership has a $40.0 million bank credit facility with a maturity date of November 30, 2013, of which $0.5 million was utilized at June 30, 2011 for a standby letter of credit issued for general business purposes. In addition, the Partnership has a separate facility with a maturity date of November 30, 2013, to cover the $13.0 million standby letter of credit issued to BC Hydro under the Electricity Purchase Agreement. The Partnership also has an undrawn $30.0 million bridge loan credit facility with a maturity date of December 31, 2012 to fund timing differences between expenditures and reimbursements for projects funded under the Canadian Federal Government Green Transformation Program. Interest and other costs of the credit facilities are at prevailing market rates.

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

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

The Notes and bank credit agreements each contain similar financial covenants including a maximum allowable debt:EBITDA leverage ratio and minimum required EBITDA:interest coverage ratio. The Partnership remained in compliance with all covenants at June 30, 2011.

The Partnership has been allocated $122.2 million under the Canadian Federal Government Pulp and Paper Green Transformation Program (the Program). The Program is designed as a reimbursement of funds to be spent on qualifying energy and environmental capital projects. Credits may be used until the Program end date of March 31, 2012. The Partnership has received Program approval to proceed with four projects totaling $157.4 million of which $122.2 million will be reimbursed under the Program. As of June 30, 2011 the Partnership has incurred $79.0 million and received reimbursements totaling $51.4 million with the balance of $27.6 million receivable as at June 30, 2011. The Partnership submits claims for expenditures on approved projects under the Program on a monthly basis. These projects are expected to provide economic and environmental benefits to the Partnership's operations.

OUTSTANDING UNITS

At July 21, 2011, there were 71,270,025 Limited Partnership Units outstanding, of which 35,493,542 units (consisting of 14,254,005 Class A Limited Partnership Units and 21,239,537 Class B Limited Partnership Units) were owned by CPPI and 35,776,483 Class B Exchangeable Limited Partnership Units were owned by Canfor.

RELATED PARTY TRANSACTIONS

The Partnership's transactions with related parties are consistent with the transactions described in the December 31, 2010 audited consolidated financial statements and are based on agreed upon amounts, and are summarized in note 10 of the unaudited interim consolidated financial statements of the Partnership.


SELECTED QUARTERLY PARTNERSHIP FINANCIAL INFORMATION  

(millions of dollars unless                                        Q4    Q3
 otherwise noted,             Q2     Q1    Q4    Q3    Q2    Q1  2009  2009
 unaudited)                 2011   2011  2010  2010  2010  2010    (2)   (2)
----------------------------------------------------------------------------
Sales and Income                                                           
Sales                      242.1  252.3 266.1 247.9 247.6 239.5 220.2 202.0
Operating income            49.1   49.9  46.1  52.5  52.1  33.0  14.4  12.4
EBITDA                      64.1   66.7  62.3  68.7  69.4  49.3  27.3  25.1
Net income                  48.2   50.7  47.4  55.0  43.6  33.0  15.2  18.3
----------------------------------------------------------------------------
Per Partnership unit (dollars)                                             
Net income basic and                                                       
 diluted                   $0.68  $0.71 $0.67 $0.77 $0.61 $0.46 $0.21 $0.26
----------------------------------------------------------------------------
Statistics                                                                 
Pulp shipments (000 mt)    242.0  265.3 272.3 246.0 252.3 268.4 258.6 259.5
Paper shipments (000 mt)    32.7   32.6  39.0  33.6  34.4  37.7  38.1  37.4
----------------------------------------------------------------------------
Average exchange rate                                                      
 (US$/Cdn$) (1)            1.033  1.014 0.987 0.962 0.973 0.961 0.947 0.912
----------------------------------------------------------------------------
Average NBSK pulp list                                                     
 price - (US$ per tonne,                                                   
 delivered to USA)         1,025    970   967 1,000   993   880   820   733
----------------------------------------------------------------------------
Per Partnership unit (dollars)                                             
Distributable cash per unit                                                
 (3)                       $0.75  $0.77 $0.68 $0.78 $0.88 $0.57 $0.31 $0.16
Distributions declared per                                                 
 unit                      $0.69  $0.78 $1.05 $0.69 $0.52 $0.32 $0.14 $0.03
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Notes: (1) Source - Bank of Canada (average noon rate for the period).      
(2) Presented under previous Canadian GAAP. See the Partnership's 
disclosure.                                                         
(3) For further details on the Partnership's distributable cash see the
Supplementary Financial Information.

Sales are primarily influenced by changes in market pulp prices, sales volumes and fluctuations in Canadian dollar exchange rates. Operating income, net income and EBITDA are primarily impacted by: sales revenue; freight costs; fluctuations of fibre, chemical, and energy prices; level of spending and the timing of scheduled maintenance downtime; and production curtailments. Net income is also impacted by fluctuations in Canadian dollar exchange rates, the 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.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

During the quarter ending June 30, 2011, there were no changes in the Partnership's internal controls over financial reporting that materially affected, or would be reasonably likely to materially affect, such controls.

RISKS AND UNCERTAINTIES

A comprehensive discussion of risks and uncertainties is included in CPPI's Annual Information Form dated February 11, 2011, which is available on www.sedar.com and www.canforpulp.com.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the amounts recorded in the financial statements. On an ongoing basis, management reviews its estimates, including those related to asset useful lives for amortization, impairment of long-lived assets, pension and other employee future benefit plans and asset retirement obligations, based upon currently available information. While it is reasonably possible that circumstances may arise which cause actual results to differ from these estimates, management does not believe it is likely that any such differences will materially affect the Partnership's financial condition.

CHANGE IN ACCOUNTING POLICIES

Transition to and Initial Adoption of IFRS

IFRS became Canadian GAAP for publicly accountable enterprises effective for fiscal years beginning on or after January 1, 2011. The financial statements for the three and six months ended June 30, 2011, have been prepared in accordance with IAS 34, and IFRS 1, using accounting policies consistent with IFRS as issued by the IASB and IFRIC. Accordingly, the Partnership commenced reporting on this basis in its 2011 interim consolidated financial statements. The accounting policies followed in these financial statements are the same as those applied in the interim financial statements for the period ended March 31, 2011.

The accounting policies have been applied consistently to all periods presented in the financial statements. The policies applied in these financial statements are based on IFRS issued and effective as of July 21, 2011, the date the Board of Directors approved the statements. Any subsequent changes to IFRS that are given effect in the Partnership's annual consolidated financial statements for the year ending December 31, 2011 could result in restatement of these financial statements, including the transition adjustments recognized on change-over to IFRS.

Impact of Adopting IFRS on the Partnership's Accounting Policies

The Partnership has changed certain accounting policies to be consistent with IFRS. The following summarizes the significant changes to the Partnership's accounting policies on adoption of IFRS.

(a) Major Maintenance

IAS 16 requires major inspections and overhauls to be accounted as a separate component of Property, Plant and Equipment (PP&E) if the component is used for more than one reporting period. This treatment is only intended for major expenditures that occur at regular intervals over the life of the asset as costs of routine repairs and maintenance will continue to be expensed as incurred. The regularly scheduled major maintenance outages required on the Partnership's plant and equipment qualify for treatment under this standard with the expenditures being classified as property, plant and equipment.


Impact on Condensed Consolidated Balance Sheets

                                                     As at             As at
(millions of dollars, unaudited)         December 31, 2010     June 30, 2010
----------------------------------------------------------------------------
Increase in property, plant and equipment             13.9              22.3
Reduction in prepaid expenses and other                                     
 assets                                               10.8              17.7
Reduction in other long-term assets                    3.1               4.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Impact on Condensed Consolidated Statements of Comprehensive Income

                                        Three months ended  Six months ended
(millions of dollars, unaudited)             June 30, 2010     June 30, 2010
----------------------------------------------------------------------------
Increase in amortization expense                       5.2               9.9
----------------------------------------------------------------------------
Reduction in manufacturing and product                                      
 costs                                                 5.2               9.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Impact on Condensed Consolidated Statements of Cash Flows

                                        Three months ended  Six months ended
(millions of dollars, unaudited)             June 30, 2010     June 30, 2010
----------------------------------------------------------------------------
Increase in net cash from operations                   9.4              13.5
Reduction in cash from investing                                            
 activities                                            9.4              13.5
----------------------------------------------------------------------------
Net change in cash and cash equivalents                  -                 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(b) Employee Future Benefits

Actuarial gains and losses are permitted under IAS 19, Employee Benefits, to be recognized directly in other comprehensive income rather than through net income. Actuarial gains and losses have been recognized in other comprehensive income.

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

Under Canadian GAAP, certain gains and losses which were unrecognized at the time of adopting the current Canadian accounting standard were permitted to be amortized over a period under transitional provisions of the current standard. Under IFRS the transitional provisions have been recognized on the transition date.


Impact on Condensed Consolidated Balance Sheets

                                                     As at             As at
(millions of dollars, unaudited)         December 31, 2010     June 30, 2010
----------------------------------------------------------------------------
Increase in post employment benefits                                        
 obligation                                           26.8              33.9
Reduction in other long-term assets                   14.0              10.6
----------------------------------------------------------------------------
Reduction in Partners' equity                         40.8              44.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Impact on Condensed Consolidated Statements of Comprehensive Income

                                        Three months ended  Six months ended
(millions of dollars, unaudited)             June 30, 2010     June 30, 2010
----------------------------------------------------------------------------
Decrease in employee benefits expense                  0.5               1.0
Reduction in other comprehensive income                7.9              17.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------

CANFOR PULP LIMITED PARTNERSHIP 

SUPPLEMENTARY FINANCIAL INFORMATION 

                                       Three months ended  Six months ended
                                         June 30, June 30, June 30, June 30,
(millions of dollars, unaudited)            2011     2010     2011     2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO EBITDA                               
Net income                            $     48.2  $  43.6  $  98.9 $   76.6
Add (deduct):                                                        
  Amortization                              15.0     17.2     31.5     33.5
  Net interest expense                       1.9      1.9      4.0      3.9
  Foreign exchange loss (gain)                                       
   on long-term debt                        (0.8)     5.0     (3.3)     1.6
  Loss (gain) on derivative                                          
   financial instruments                    (1.0)     3.8     (2.6)     3.4
  Foreign exchange loss (gain)                                       
   on working capital                        0.7     (2.1)     1.8     (0.3)
  Other expense                              0.1        -      0.5        -
----------------------------------------------------------------------------
EBITDA                                $     64.1  $  69.4 $  130.8 $  118.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
EBITDA per Partnership unit           $     0.90  $  0.97 $   1.84 $   1.66
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                       Three months ended  Six months ended
                                         June 30, June 30, June 30, June 30,
(millions of dollars, unaudited)            2011     2010     2011     2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CALCULATION OF DISTRIBUTABLE CASH                                           
Cash flow from operations before working                                    
 capital changes                        $   62.1 $   71.9 $  128.1 $  121.9
Add (deduct):                                                               
  Capital expenditures - net (1)            (3.0)    (2.3)    (7.9)    (4.6)
  Major maintenance - amortization          (3.6)    (5.2)    (8.0)    (9.9)
  Interest                                  (1.9)    (1.9)    (4.0)    (3.9)
----------------------------------------------------------------------------
Distributable cash                      $   53.6 $   62.5 $  108.2 $  103.5
----------------------------------------------------------------------------
Distributable cash - per Partnership                                        
 unit (in dollars)                      $   0.75 $   0.88 $   1.52 $   1.45
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash distributions declared (paid and                                       
 payable)                               $   49.2 $   37.1 $  104.8 $   59.9
Cash distributions declared - per                                           
 Partnership unit (in dollars)          $   0.69 $   0.52 $   1.47 $   0.84
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note: (1) Presented net of government funded projects, excludes major 
maintenance capital.                   

DISTRIBUTABLE CASH AND CASH DISTRIBUTIONS

The Board of the General Partner determines the level of cash distributions based on the level of cash flow from operations before changes in non-cash working capital, asset retirement obligation expenditures and accruals, less regular capital expenditures, major maintenance amortization and interest expense. During the year distributions are based on estimates of full year cash flow and capital spending; thus distributions may be adjusted as these estimates change. It is projected that normal seasonal fluctuations in working capital will be funded from cash resources or the revolving short-term credit facility.


Canfor Pulp Products Inc. 

Condensed Balance Sheets 

(unaudited) 
                                                       As at          As at
                                                     June 30,   December 31,
(thousands of dollars)                                  2011           2010
----------------------------------------------------------------------------
ASSETS                                                                     
Current assets                                                             
  Cash and cash equivalents                    $      29,892    $         -
  Distributions receivable from Canfor Pulp                                
   Limited Partnership (note 7)                        8,163         19,521
----------------------------------------------------------------------------
Total current assets                                  38,055         19,521
----------------------------------------------------------------------------
Equity investment in Canfor Pulp Limited                                   
 Partnership (note 6)                                236,863        240,425
----------------------------------------------------------------------------
                                               $     274,918   $    259,946
----------------------------------------------------------------------------
LIABILITIES                                                                
Current liabilities                                                        
  Due to Canfor Pulp Limited Partnership                                   
   (note 7)                                    $       1,051   $          -
  Distributions payable                                    -         19,521
  Income taxes payable                                10,512              -
----------------------------------------------------------------------------
Total current liabilities                             11,563         19,521
----------------------------------------------------------------------------
Fund units (note 5)                                        -        509,687
Deferred income tax liability (note 8)                32,098         52,854
----------------------------------------------------------------------------
                                               $      43,661   $    582,062
----------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (DEFICIT)                                             
  Unitholders' deficit (note 5)                $           -   $   (322,116)
  Shareholders' capital (note 5)                     509,687              -
  Retained earnings (deficit)                       (278,430)             -
----------------------------------------------------------------------------
Total Shareholders' equity (deficit)                 231,257       (322,116)
----------------------------------------------------------------------------
                                               $     274,918   $    259,946
----------------------------------------------------------------------------

Subsequent event (note 10)

Canfor Pulp Products Inc. 

Condensed Statements of Comprehensive Income (loss) 

(unaudited) 

(thousands of dollars,         Three months ended          Six months ended 
 except unit and per         June 30,     June 30,     June 30,     June 30,
 unit amounts)                  2011         2010         2011         2010 
----------------------------------------------------------------------------
Income                                                                      
Equity income in Canfor                                                     
 Pulp Limited                                                               
 Partnership             $    24,023  $    21,681  $    49,250  $    38,154 
Interest Income                   69            -           77            - 
----------------------------------------------------------------------------
Total income                  24,092       21,681       49,327       38,154 
Cost and expenses                                                           
Administrative expenses                                                     
 (note 7)                         74            -        1,051            - 
Increase in amortized                                                       
 cost of Fund units                                                         
 (note 5)                          -       75,956            -      200,182 
Financing expense -                                                         
 distributions declared            -       18,457            -       29,815 
----------------------------------------------------------------------------
                                  74       94,413        1,051      229,997 
----------------------------------------------------------------------------
Net income (loss) before                                                    
 income taxes                 24,018      (72,732)      48,276     (191,843)
Income tax expense                                                          
 (recovery) (note 8)           6,264         (928)     (10,103)      (1,198)
----------------------------------------------------------------------------
Net income (loss)        $    17,754  $   (71,804) $    58,379  $  (190,645)
Equity interest in other                                                    
 comprehensive loss                                                         
 related to actuarial                                                       
 losses of Canfor Pulp                                                      
 Limited Partnership            (535)      (3,873)        (636)      (8,596)
Income tax recovery of                                                      
 other comprehensive                                                        
 loss related to                                                            
 actuarial losses of                                                        
 Canfor Pulp Limited                                                        
 Partnership                     140            -          140            - 
Comprehensive income                                                        
 (loss)                  $    17,359  $   (75,677) $    57,883  $  (199,241)
----------------------------------------------------------------------------
Net income (loss) per                                                       
 share/unit, basic and 
 diluted                 $      0.50  $     (2.02) $      1.64  $     (5.37)
Weighted average number                                                     
 of shares/units                                                       
 (note 4)                 35,493,307   35,493,307   35,493,307   35,493,307 
----------------------------------------------------------------------------

Canfor Pulp Products Inc. 

Condensed Statements of Changes in Equity 

(unaudited) 
                                 Three months ended        Six months ended 
                                June 30,    June 30,    June 30,    June 30,
(thousands of dollars)             2011        2010        2011        2010
----------------------------------------------------------------------------
Share capital (unitholders' capital)                                        
Balance beginning of period  $  509,687  $        -  $        -  $        -
Corporate conversion                  -           -     509,687           -
----------------------------------------------------------------------------
Balance at end of period     $  509,687  $        -  $  509,687  $        -
----------------------------------------------------------------------------
Retained earnings (deficit)                                                
Balance beginning of period  $ (281,592) $ (240,176) $ (322,116) $ (116,612)
Net income (loss) for the                                                  
 period                          17,754     (71,804)     58,379    (190,645)
Defined benefit plan actuarial                                             
 losses of the Partnership                                                 
 included in other                                                         
 comprehensive income              (535)     (3,873)       (636)     (8,596)
Income tax recovery in other                                               
 comprehensive loss related 
 to actuarial losses of Canfor                                              
 Pulp Limited Partnership           140           -         140           -
Dividends paid during the                                                  
 period                         (14,197)          -     (14,197)          -
----------------------------------------------------------------------------
Balance at end of period     $ (278,430) $ (315,853) $ (278,430) $ (315,853)
----------------------------------------------------------------------------
Total equity (deficit)       $  231,257  $ (315,853) $  231,257  $ (315,853)
----------------------------------------------------------------------------

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

Canfor Pulp Products Inc. 

Condensed Statements of Cash Flows 

(unaudited) 
                                    Three months ended     Six months ended 
                                   June 30,    June 30,  June 30,   June 30,
(thousands of dollars)                2011        2010      2011       2010
----------------------------------------------------------------------------
Cash generated from (used in)                                              
Operating activities                                                       
Net income (loss) before tax    $   24,018  $ (72,732) $  48,276 $ (191,843)
  Items not affecting cash:                                                
    Equity income in Canfor                                                
     Pulp Limited Partnership      (24,023)   (21,681)   (49,250)   (38,154)
    Increase in amortized cost                                             
     of Fund units                       -     75,956          -    200,182
    Financing expense                                                      
     (distributions declared)            -     18,457          -     29,815
Distributions received from                                                
 Canfor Pulp Limited                                                       
 Partnership                        25,557     15,617     63,533     25,555
----------------------------------------------------------------------------
Cash flow from operations                                                  
 before working capital changes     25,552     15,617     62,559     25,555
----------------------------------------------------------------------------
Due to Canfor Pulp Limited                                                 
 Partnership                            74          -      1,051         -
----------------------------------------------------------------------------
Net cash from operations            25,626     15,617     63,610     25,555
----------------------------------------------------------------------------
Financing activities                                                       
Distributions paid to                                                      
 unitholders                    $        -  $ (15,617) $ (19,521) $ (25,555)
Dividends paid to shareholders     (14,197)         -    (14,197)         -
----------------------------------------------------------------------------
                                   (14,197)   (15,617)   (33,718)   (25,555)
----------------------------------------------------------------------------
Change in cash and cash                                                    
 equivalents                    $   11,429  $       - $   29,892 $        -
----------------------------------------------------------------------------
Beginning balance in cash and                                              
 cash equivalents                   18,463          -          -          -
----------------------------------------------------------------------------
Ending balance in cash and cash                                            
 equivalents                   $    29,892  $       - $   29,892 $        -
----------------------------------------------------------------------------

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

Canfor Pulp Products Inc. 

Notes to the Condensed Financial Statements as at June 30, 2011 

(unaudited) 

1. General information and reporting entity

Canfor Pulp Products Inc. (CPPI) is domiciled in Canada and listed on the Toronto Stock Exchange. The address of CPPI's registered office is 1700 - 666 Burrard Street, Vancouver, British Columbia, Canada V6C 2X8. The unaudited financial statements (the financial statements) include the accounts of CPPI.

CPPI has been established to acquire and hold an interest in Canfor Pulp Limited Partnership (the Partnership). The Partnership produces and sells Northern Bleached Softwood Kraft (NBSK) Pulp and fully bleached, high performance Kraft Paper. The Partnership operations consist of two NBSK pulp mills and one NBSK pulp and paper mill located in Prince George, British Columbia and a marketing group based in Vancouver, British Columbia.

At June 30, 2011, Canadian Forest Products Ltd. (Canfor) owns 50.2% and CPPI owns 49.8% of the issued and outstanding units of the Partnership.

Corporate Conversion Arrangement

CPPI is a company formed on March 16, 2010. On January 1, 2011 Canfor Pulp Income Fund (the Fund) completed a plan of arrangement whereby the Fund unitholders exchanged their Fund units for common shares in CPPI on a one-for-one basis. The unitholders of the Fund became the sole shareholders of CPPI which became the sole owner of all of the outstanding Fund units. Immediately following the conversion, the Fund was wound up, CPPI received all of the assets and assumed all of the liabilities of the Fund and CPPI became the direct holder of the 49.8% interest in the Partnership previously held by the Fund.

The financial statements have been prepared on a continuity of interest basis, which recognizes CPPI as the successor entity to the Fund. As a result, in current and future financial statements and Management's Discussion and Analysis, CPPI will refer to common shares, shareholders and dividends which were formerly referred to as units, unitholders and distributions under the trust structure; comparative amounts will reflect the history of the Fund.

2. Basis of preparation and adoption of IFRS

Statement of Compliance and Conversion to International Financial Reporting Standards

CPPI prepares its financial statements in accordance with Canadian generally accepted accounting principles as set out in the Handbook of the Canadian Institute of Chartered Accountants (CICA Handbook). In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards (IFRS), and require publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011. Accordingly, CPPI has commenced reporting on this basis in its 2011 interim consolidated financial statements. In these financial statements, the term "Canadian GAAP" refers to Canadian GAAP before the adoption of IFRS.

These financial statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting and IFRS 1, using accounting policies consistent with IFRS as issued by the International Accounting Standards Board (IASB) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC). The accounting policies followed in these financial statements are the same as those applied in the interim financial statements for the period ended March 31, 2011.

CPPI has consistently applied the same accounting policies throughout all periods presented, as if these policies had always been in effect. Note 5 discloses the impact of the transition to IFRS on CPPI's equity as at June 30, 2010 and statements of comprehensive income (loss) for the three and six months ended June 30, 2010, including the nature and effect of significant changes in accounting policies from those used in CPPI's financial statements for the year ended December 31, 2010 under Canadian GAAP.

The policies applied in these financial statements are based on IFRS issued and effective as of July 21, 2011, the date the Board of Directors approved the statements. Any subsequent changes to IFRS that are given effect in CPPI's annual financial statements for the year ending December 31, 2011 could result in restatement of these financial statements, including the transition adjustments recognized on change-over to IFRS. The financial statements should be read in conjunction with CPPI's Canadian GAAP annual financial statements for the year ended December 31, 2010 and CPPI's interim consolidated financial statements for the quarter ended March 31, 2011, prepared in accordance with IFRS applicable to interim financial statements.

3. New Accounting Pronouncements

The following IFRS have been issued by the International Accounting Standards Board, and adopted for use in Canada by the Accounting Standards Board, effective for annual periods beginning on or after January 1, 2013. CPPI has not applied these new standards as their use is not yet mandatory:

IFRS 9 - Financial Instruments

IFRS 10 - Consolidated Financial Statements

IFRS 11 - Joint Arrangements

IFRS 12 - Disclosure of Interests in Other Entities

IFRS 13 - Fair Value Measurement

IAS 27 - Separate Financial Statements

Amended IAS 19 - Employee Benefits

Amended IAS 28 - Investments in Associates

These new standards have not yet been adopted and CPPI has not completed assessing the impact that the new and amended standards may have on its financial statements or whether to proceed with early adoption of any of the new requirements.

4. Net Income per Share

Basic net income per Share is based on the weighted average number of Shares outstanding during the year. At June 30, 2011 and December 31, 2010 the Partnership had 35,776,483 Class B Exchangeable Limited Partnership Units outstanding which can be exchanged for Shares of CPPI at the option of the holder Canfor. Any issuance of new Shares as a result of such an exchange would be accompanied by a corresponding increase in CPPI's investment in the Partnership through the acquisition of Class B Exchangeable Limited Partnership Units. As a result, this potential conversion would not result in any dilution of CPPI's net income per share.

5. Reconciliations between IFRS and Canadian GAAP

The following reconciliations provide a quantification of the material impacts of the transition to IFRS on the Fund before the conversion of the Fund into a corporation (Note 1).


Reconciliation of equity at June 30, 2010 
                                                                    June 30,
(thousands of dollars, unaudited)                                      2010
----------------------------------------------------------------------------
Previous Canadian GAAP - Total equity                           $   235,222
Fund units (1)                                                     (510,749)
CPPI share of Partnership IFRS transition adjustments (2)           (14,051)
Deferred income taxes (3)                                           (18,154)
Effect of the increase in equity income from the Partnership               
 under IFRS                                                             501
Effect of the increase in CPPI's share in the Partnership's                
 other comprehensive loss under IFRS                                 (8,622)
----------------------------------------------------------------------------
IFRS - Total equity (deficit)                                   $  (315,853)
----------------------------------------------------------------------------

Reconciliation of comprehensive income (loss) for the three months ended 
June 30, 2010 

                                                                      Three
                                                                     months
                                                                      ended 
                                                                    June 30,
(thousands of dollars, unaudited)                                      2010
----------------------------------------------------------------------------
Comprehensive income previous Canadian GAAP                     $    22,162
Effect of the increase in equity income from the Partnership               
 under IFRS                                                             251
Fund units (1)                                                      (75,956)
Distributions classified as a financing expense (1)                 (18,457)
Deferred income taxes (3)                                               247
Effect of the increase in CPPI's share in the Partnership's                
 other comprehensive loss under IFRS                                 (3,924)
----------------------------------------------------------------------------
Comprehensive loss - IFRS                                       $   (75,677)
----------------------------------------------------------------------------

Reconciliation of comprehensive income (loss) for the six months ended 
June 30, 2010 
                                                                 Six months
                                                                      ended 
                                                                    June 30,
(thousands of dollars, unaudited)                                      2010
----------------------------------------------------------------------------
Comprehensive income previous Canadian GAAP                     $    38,679
Effect of the increase in equity income from the Partnership               
 under IFRS                                                             501
Fund units (1)                                                     (200,182)
Distributions classified as a financing expense (1)                 (29,815)
Deferred income taxes (3)                                               198
Effect of the increase in CPPI's share in the Partnership's                
 other comprehensive loss under IFRS                                 (8,622)
----------------------------------------------------------------------------
Comprehensive loss - IFRS                                       $  (199,241)
----------------------------------------------------------------------------

Notes to the Reconciliations 

1.  IAS 32 Classification - Under Canadian GAAP the Fund units were
    classified as equity. IAS 32 requires that the Fund units be classified
    as a financial liability under IFRS prior to conversion to a
    corporation. Under the terms of the Fund's trust indenture, unitholders
    had a puttable option, whereby the Fund would have been required to
    redeem Fund units at the request of the unitholder and required the Fund
    to distribute all of the taxable income received from the Partnership.
    In addition, the Fund's distributions were classified as a financing
    expense recorded in the statement of comprehensive income. The liability
    was recorded at amortized cost with changes recorded in the statement of
    comprehensive income. Upon conversion to a corporation effective January
    1, 2011, the Fund units were converted on a one-for-one basis into
    shares of CPPI and the shares are classified as equity with dividends
    treated as an equity distribution. 
2.  Canfor Pulp Limited Partnership conversion - As a result of a change in
    accounting policies for the Partnership due to the conversion to IFRS,
    CPPI's equity income, investment and other comprehensive income has been
    restated. For further details on the impact of the transition on the
    Partnership see the Partnership's disclosure. 
3.  IAS 12 tax rate - Under Canadian GAAP the Fund recorded temporary tax
    differences that were projected to reverse after 2010 based on specified
    investment flow through entity (SIFT) tax rates. However, IAS 12
    requires that companies should use the undistributed rate for recording
    taxes. Therefore, under IFRS the rate to apply to temporary differences
    that are projected to reverse after 2010 would be the highest marginal
    personal tax rate (43.7%) rather than the SIFT rate. The highest
    marginal personal tax rate is the rate at which tax would be payable by
    the Fund should distributions not be declared. Subsequent to January 1,
    2011 as a result of the conversion of the Fund into a corporation, the
    temporary tax differences are to be measured at the expected corporate
    tax rate (25.0%) at the time of reversal. 

6. Equity Investment in Canfor Pulp Limited Partnership


CPPI's equity investment in the Partnership is as follows:

                                                      Six months           
                                                           ended Year ended
                                                        June 30,   December
(thousands of dollars, unaudited)                           2011   31, 2010
----------------------------------------------------------------------------
Balance, beginning of period                         $   240,425 $  249,593
Equity interest in income of the Partnership              49,250     89,166
Equity interest in other comprehensive loss of the                         
 Partnership                                                (636)    (6,761)
Distributions from the Partnership                       (52,176)   (91,573)
----------------------------------------------------------------------------
Balance, end of period                               $   236,863 $  240,425
----------------------------------------------------------------------------
----------------------------------------------------------------------------

7. Related Party Transactions

All accounting, treasury, legal and administrative functions for CPPI are performed on its behalf by the Partnership pursuant to a support agreement. The value of these services during the second quarter of 2011 was $74,000 and was included as an administrative expense of CPPI with the balance of $1.1 million outstanding as an accounts payable to the Partnership at June 30, 2011.

Distributions earned from the Partnership for the three months ended June 30, 2011 were $24.5 million of which $16.3 million was received, with the balance of $8.2 million receivable on June 30, 2011.

8. Income Taxes

Immediately prior to converting to a corporation on January 1, 2011, the Fund, as a publicly traded income trust, was to be taxed on income starting in 2011, similarly to rules applying to corporations.


                                    Three months ended     Six months ended
(thousands of dollars,             June 30,    June 30,   June 30,  June 30,
 unaudited)                           2011        2010       2011      2010
----------------------------------------------------------------------------
Current                        $     5,548 $         -  $  10,512 $       -
----------------------------------------------------------------------------
Deferred                               716        (928)   (20,615)   (1,198)
----------------------------------------------------------------------------
Income tax expense (recovery)  $     6,264 $      (928) $ (10,103) $ (1,198)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

                                       Three months ended  Six months ended
(thousands of dollars, unaudited)           June 30, 2011     June 30, 2011 
----------------------------------------------------------------------------
Income tax expense at statutory rate                                       
 2011 - 26.5% (2010 - nil)             $            6,365 $          12,793
Add (deduct):                                                              
Permanent difference from capital gains                                    
 on translation of US denominated debt                                     
 & other non deductible items                        (101)             (270)
Change in SIFT tax rate (note 5)                        -           (22,626)
----------------------------------------------------------------------------
                                       $            6,264 $         (10,103)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

9. Segmented Information

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

10. Subsequent Event

Subsequent to the period end, dividends were declared in the amount of $0.40 per share to be paid on August 9, 2011 to shareholders of record at the close of business on August 2, 2011.


Canfor Pulp Limited Partnership 

Condensed Consolidated Balance Sheets 

(unaudited) 
                                                     As at            As at
                                                   June 30,     December 31,
(millions of dollars)                                 2011             2010
----------------------------------------------------------------------------
ASSETS                                                                     
Current assets                                                             
Cash and cash equivalents                  $          26.5 $           64.2
Accounts receivable (note 10)                                              
Trade                                                122.8            108.0
Other                                                 14.0             14.8
Green Transformation Program (note 13)                27.6             17.9
Inventories (note 7)                                 130.2            123.4
Prepaid expenses and other assets                      5.9             11.0
----------------------------------------------------------------------------
Total current assets                                 327.0            339.3
----------------------------------------------------------------------------
Non-current assets                                                         
Property, plant and equipment (note 5)               496.0            513.5
Other long-term assets                                 0.5              0.5
----------------------------------------------------------------------------
                                           $         823.5 $          853.3
----------------------------------------------------------------------------
LIABILITIES                                                                
Current liabilities                                                        
Accounts payable and accrued liabilities   $         142.8 $          139.3
Distributions payable                                 16.4             39.2
----------------------------------------------------------------------------
Total current liabilities                            159.2            178.5
----------------------------------------------------------------------------
Non-current liabilities                                                    
Long-term debt (note 9)                              106.1            109.4
Post employment benefits (note 8)                     79.7             79.8
Long-term provisions                                   3.2              3.1
----------------------------------------------------------------------------
Total liabilities                          $         348.2 $          370.8
----------------------------------------------------------------------------
PARTNERS' EQUITY                                                           
Partnership units (note 6)                           587.5            587.5
Cumulative distributions in excess of                                      
 income                                             (112.2)          (105.0)
----------------------------------------------------------------------------
Total Partners' equity                               475.3            482.5
----------------------------------------------------------------------------
                                           $         823.5 $          853.3
----------------------------------------------------------------------------

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

Canfor Pulp Limited Partnership 

Condensed Consolidated Statements of Comprehensive Income 

(Unaudited) 

(millions of                                                                
 dollars, except             Three months ended            Six months ended 
 units and per unit       June 30,      June 30,      June 30,      June 30,
 amounts, unaudited)         2011          2010          2011          2010 
----------------------------------------------------------------------------
Revenue                                                                     
 Sales               $      242.1  $      247.6  $      494.4  $      487.1 
----------------------------------------------------------------------------
                            242.1         247.6         494.4         487.1 
Costs and expenses                                                          
 Manufacturing and                                                          
  product costs             142.8         141.1         291.8         293.8 
 Freight and other                                                          
  distribution costs         28.7          29.8          59.4          60.9 
 Amortization                15.0          17.2          31.5          33.5 
 Selling and                                                                
  administration                                                            
  costs                       6.5           7.4          12.7          13.8 
----------------------------------------------------------------------------
                            193.0         195.5         395.4         402.0 
Operating income             49.1          52.1          99.0          85.1 
 Interest expense            (1.9)         (1.9)         (4.0)         (3.9)
 Foreign exchange                                                           
  gain (loss) on                                                            
  long-term debt              0.8          (5.0)          3.3          (1.6)
 Gain (loss) on                                                             
  derivative                                                                
  financial                                                                 
  instruments                 1.0          (3.8)          2.6          (3.4)
 Foreign exchange                                                           
  gain (loss) on                                                            
  working capital            (0.7)          2.1          (1.8)          0.3 
 Other income                                                               
  (expense)                  (0.1)          0.1          (0.2)          0.1 
----------------------------------------------------------------------------
                             (0.9)         (8.5)         (0.1)         (8.5)
Net income                   48.2          43.6          98.9          76.6 
Other comprehensive                                                         
 income                         -           0.1             -           0.1 
Actuarial losses                                                            
 recognized in                                                              
 accumulated                                                                
 distributions in                                                           
 excess of income            (1.1)         (7.9)         (1.3)        (17.3)
----------------------------------------------------------------------------
Total comprehensive                                                         
 income              $       47.1  $       35.8  $       97.6  $       59.4 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income per                                                              
 Partnership unit,                                                          
 basic and diluted   $       0.68  $       0.61  $       1.39  $       1.07 
Weighted average                                                            
 Partnership units                                                          
 outstanding           71,270,025    71,270,025    71,270,025    71,270,025 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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


Canfor Pulp Limited Partnership 

Condensed Consolidated Statements of Changes in Equity 

(Unaudited) 

                                    Three months ended     Six months ended 
                                   June 30,    June 30,   June 30,  June 30,
(millions of dollars)                 2011        2010       2011      2010
----------------------------------------------------------------------------
Partnership units                                                          
Balance at beginning and end of                                            
 period                         $    587.5  $    587.5 $    587.5  $  587.5
----------------------------------------------------------------------------
Cumulative distributions in                                                
 excess of income                                                          
Balance beginning of period     $   (110.1) $    (85.8) $  (105.0) $  (86.6)
Net income for the period             48.2        43.6       98.9      76.6
Defined benefit plan actuarial                                             
 losses                               (1.1)       (7.9)      (1.3)    (17.3)
Other comprehensive income               -         0.1          -       0.1
Distributions declared during                                              
 the period (note 12)                (49.2)      (37.1)    (104.8)    (59.9)
----------------------------------------------------------------------------
Balance at end of period        $   (112.2) $    (87.1) $  (112.2) $  (87.1)
----------------------------------------------------------------------------
Total equity                    $    475.3  $    500.4 $    475.3  $  500.4
----------------------------------------------------------------------------

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

Canfor Pulp Limited Partnership 

Condensed Consolidated Statements of Cash Flows 

(Unaudited) 
                                       Three months ended  Six months ended 
                                        June 30,  June 30, June 30, June 30,
(millions of dollars)                      2011      2010     2011     2010
----------------------------------------------------------------------------
Cash and cash equivalents generated from(used in)                           
Operating activities                                                       
Net income                             $   48.2 $    43.6 $   98.9 $   76.6
  Adjustments for:                                                         
    Amortization                           15.0      17.2     31.5     33.5
    Unrealized foreign exchange loss                                       
     (gain) on long-term debt              (0.8)      5.0     (3.3)     1.6
    Interest expense                        1.9       1.9      4.0      3.9
    Reduction (increase) in value of                                       
     outstanding derivative instruments    (1.4)      3.3     (1.8)     4.5
    Employee future benefits                1.4       1.4      2.7      2.9
    Other                                  (0.1)      0.1      0.2      0.1
Salary pension plan contribution           (2.1)     (0.6)    (4.1)    (1.2)
----------------------------------------------------------------------------
Cash flow from operations before                                           
 working capital changes                   62.1      71.9    128.1    121.9
Decrease (increase) in non-cash working                                    
 capital                                                                   
  Accounts receivable - trade and other   (15.4)    (15.6)   (12.9)   (28.8)
  Inventories                             (13.9)     (9.7)    (6.7)    (3.0)
  Prepaid expenses and other assets         3.3       0.1      5.1     (1.0)
  Accounts payable and accrued                                             
   liabilities                              2.3       7.5       -      12.9
----------------------------------------------------------------------------
Net cash from operations                   38.4      54.2    113.6    102.0
----------------------------------------------------------------------------
Financing activities                                                       
  Distributions paid to partners          (51.3)    (31.4)  (127.6)   (51.3)
  Interest paid                            (3.3)     (3.7)    (3.6)    (3.9)
----------------------------------------------------------------------------
Net cash used in financing                (54.6)    (35.1)  (131.2)   (55.2)
----------------------------------------------------------------------------
Investing activities                                                       
  Property, plant and equipment           (10.3)    (11.9)   (17.1)   (18.4)
  Green Transformation Program                                             
   expenditures                           (20.2)     (1.6)   (36.9)    (1.6)
  Green Transformation Program                                             
   reimbursements                          21.6         -     31.2        -
  Government grants received                0.9         -      2.7        -
----------------------------------------------------------------------------
Net cash used in investing                 (8.0)    (13.5)   (20.1)   (20.0)
----------------------------------------------------------------------------
Increase (decrease) in cash and cash                                       
 equivalents                              (24.2)      5.6    (37.7)    26.8
Cash and cash equivalents, beginning of                                    
 period                                    50.7      34.7     64.2     13.5
----------------------------------------------------------------------------
Cash and cash equivalents, end of                                          
 period                                $   26.5 $    40.3 $   26.5 $   40.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

Canfor Pulp Limited Partnership

Notes to the Condensed Consolidated Financial Statements as at June 30, 2011

(Unaudited, in millions of dollars unless otherwise noted)

1. General information and reporting entity

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 Partnership is domiciled in Canada. The address of the Partnership's registered office is 230-1700 West 75th Avenue, Vancouver, British Columbia, Canada V6P 6G2. The consolidated interim financial statements (the financial statements) include the accounts of the Partnership and its subsidiaries.

The Partnership is a producer of market NBSK Pulp and fully bleached, high performance Kraft Paper. The Partnership consists of two NBSK pulp mills and one NBSK pulp and paper mill located in Prince George, British Columbia and a marketing group based in Vancouver, British Columbia (the Pulp Business).

At June 30, 2011, Canfor owns 50.2% and Canfor Pulp Products Inc. (CPPI) owns 49.8% of the issued and outstanding units of the Partnership.

Economic Dependence

The Partnership depends on Canfor to provide approximately 53% (2010 - 56%) of its fibre supply as well as to provide certain key business and administrative services as described in note 10. As a result of these relationships the Partnership considers its operations to be dependent on its ongoing relationship with Canfor.

2. Basis of preparation and adoption of IFRS

Statement of Compliance and Conversion to International Financial Reporting Standards

The Partnership prepares its financial statements in accordance with Canadian generally accepted accounting principles as set out in the Handbook of the Canadian Institute of Chartered Accountants (CICA Handbook). In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards (IFRS), and requires publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011. Accordingly, the Partnership has commenced reporting on this basis in its 2011 interim consolidated financial statements. In these financial statements, the term Canadian GAAP refers to Canadian GAAP before the adoption of IFRS.

These financial statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting and IFRS 1, using accounting policies consistent with IFRS as issued by the International Accounting Standards Board (IASB) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC). The accounting policies followed in these financial statements are the same as those applied in the interim consolidated financial statements for the period ended March 31, 2011.

The Partnership has consistently applied the same accounting policies throughout all periods presented, as if these policies had always been in effect. Note 4 discloses the impact of the transition to IFRS on the Partnership's equity as at June 30, 2010 and statements of comprehensive income for the three and six months ended June 30, 2010, including the nature and effect of significant changes in accounting policies from those used in the Partnership's consolidated financial statements for the year ended December 31, 2010 under Canadian GAAP.

The policies applied in these financial statements are based on IFRS issued and effective as of July 21, 2011, the date the Board of Directors approved the statements. Any subsequent changes to IFRS that are given effect in the Partnership's annual consolidated financial statements for the year ending December 31, 2011 could result in restatement of these financial statements, including the transition adjustments recognized on change-over to IFRS. The financial statements should be read in conjunction with the Partnership's Canadian GAAP annual financial statements for the year ended December 31, 2010 and the Partnership's interim consolidated financial statements for the quarter ended March 31, 2011 prepared in accordance with IFRS applicable to interim financial statements.

3. New Accounting Pronouncements

The following IFRS have been issued by the International Accounting Standards Board, and adopted for use in Canada by the Accounting Standards Board, effective for annual periods beginning on or after January 1, 2013. The Partnership has not applied these new standards as their use is not yet mandatory:

IFRS 9 - Financial Instruments

IFRS 10 - Consolidated Financial Statements

IFRS 11 - Joint Arrangements

IFRS 12 - Disclosure of Interests in Other Entities

IFRS 13 - Fair Value Measurement

IAS 27 - Separate Financial Statements

Amended IAS 19 - Employee Benefits

Amended IAS 28 - Investments in Associates

These new standards have not yet been adopted and the Partnership has not completed assessing the impact that the new and amended standards may have on its financial statements or whether to proceed with early adoption of any of the new requirements.

4. Reconciliations between IFRS and Canadian GAAP

The following reconciliations provide a quantification of the effect of the transition to IFRS.


Reconciliation of equity at June 30, 2010 

                                                                      As at 
(millions of dollars, unaudited)                              June 30, 2010
----------------------------------------------------------------------------
Previous Canadian GAAP - Total equity                      $          544.9
Recognition of unamortized actuarial losses at date of                     
 transition(1)                                                        (28.2)
Lower pension expense for the six months ended June 30,                    
 2010(1)                                                                1.0
Actuarial losses on defined benefit plans for the six                      
 months ended June 30, 2010(1)                                        (17.3)
----------------------------------------------------------------------------
IFRS - Total equity                                        $          500.4 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Reconciliation of comprehensive income for three months ended June 30, 2010 

                                                         Three months ended
(millions of dollars, unaudited)                              June 30, 2010
----------------------------------------------------------------------------
Comprehensive income - Previous Canadian GAAP           $              43.2 
Lower pension expense for period(1)                                     0.5
----------------------------------------------------------------------------
                                                        $              43.7 
----------------------------------------------------------------------------
Actuarial losses on defined benefit plans during the                       
 period(1)                                              $              (7.9)
----------------------------------------------------------------------------
Comprehensive income IFRS                               $              35.8 
----------------------------------------------------------------------------

Reconciliation of comprehensive income for six months ended June 30, 2010 

                                                           Six months ended
(millions of dollars, unaudited)                              June 30, 2010
----------------------------------------------------------------------------
Comprehensive income - Previous Canadian GAAP           $              75.7
Lower pension expense for period(1)                                     1.0
----------------------------------------------------------------------------
                                                        $              76.7
----------------------------------------------------------------------------
Actuarial losses on defined benefit plans during the                       
 period(1)                                                            (17.3)
----------------------------------------------------------------------------
Comprehensive income IFRS                               $              59.4
----------------------------------------------------------------------------

Notes to the Reconciliations 

1.  Employee Benefits - Under IFRS the Partnership's accounting policy is to
    recognize all actuarial gains and losses immediately in other
    comprehensive income. At the date of transition, all previously
    unrecognized cumulative actuarial gains and losses and unrecognized past
    service costs were recognized in equity. The impact of this policy
    decision was a $28.2 million decrease in equity, an $11.2 million
    decrease in other long-term assets and a $17.0 million increase to long-
    term liabilities.  

    All actuarial gains and losses arising in 2010 were recognized in other 
    comprehensive income. A charge to accumulated earnings and distributions
    of $17.3 million for actuarial losses related to the six months ended 
    June 30, 2010 was recorded (second quarter of 2010 a charge of $7.9 
    million was recorded to accumulated earnings and distributions). As a 
    result of immediate recognition of previously unrecognized cumulative 
    actuarial gains and losses the total pension expense for the six months 
    ended was reduced by $1.0 million under IFRS (second quarter of 2010 
    employee benefits expense was $0.5 million lower than previously 
    reported). This reduced manufacturing costs by $1.0 million for the six 
    months ended June 30, 2010 (reduced manufacturing costs for the second 
    quarter of 2010 by $0.5 million).

2.  Property, plant and equipment (PP&E) - For major maintenance,
    International Accounting Standard (IAS) 16 requires for major
    inspections and overhauls to be accounted as a separate component of
    PP&E. The Partnership has determined that a significant part of its
    major maintenance program qualifies as a separate component of PP&E
    under IFRS. As at January 1, 2010 the resulting impact is a $20.7
    million increase to PP&E, a $15.3 million decrease to prepaid expenses
    and a $5.4 million decrease to other long-term assets. 

    The impact on net income for the six months ended June 30, 2010 was an 
    increase in amortization of $9.9 million with an offsetting decrease to 
    manufacturing costs. The impact on the second quarter of 2010 was an 
    increase in amortization of $5.2 million with an offsetting decrease to 
    manufacturing costs. 

    The change in policy also increased the reported capital expenditures in
    the statements of cash flows by $11.5 million for the six months ended 
    June 30, 2010 and $5.9 million for the quarter ended June 30, 2010 
    restated to conform to IFRS. The long-term maintenance provision and 
    long-term maintenance expenditure line items on the consolidated 
    statements of cash flows are no longer applicable and those amounts are 
    now included in PP&E.

3.  Statement of cash flows (interest received / paid) - Under IFRS an
    accounting policy choice is available as to where interest and
    distributions paid and interest and distributions received are presented
    in the statements of cash flows. The Partnership has elected to present
    distributions paid to partners and interest paid in financing activities
    and interest received in investing activities. Under Canadian GAAP
    interest received and paid were presented within operating activities. 

4.  Reclassification of Employee Future Benefits and Asset Retirement
    Obligations - Under Canadian GAAP employee pension obligations, other
    retirees benefits and asset retirement obligations were included in
    long-term liabilities. Under IFRS, pension and other retirees benefits
    have been classified on the consolidated balance sheets as post
    employment benefits and asset retirement obligations have been included
    in long-term provisions. 

5.  Property, Plant and Equipment 
                                                       June 30, 2011        
                                               -----------------------------
                                                         Accumulated        
(millions of dollars, unaudited)                  Cost  amortization     Net
----------------------------------------------------------------------------
Land and improvements                              5.4             -     5.4
Asset retirement - Landfill                        2.3           0.9     1.4
Buildings, machinery and equipment             1,363.7         889.9   473.8
Major Maintenance                                 34.7          22.7    12.0
Construction in progress                           3.4             -     3.4
----------------------------------------------------------------------------
                                               1,409.5         913.5   496.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                     December 31, 2010      
                                               -----------------------------
                                                         Accumulated        
(millions of dollars, unaudited)                  Cost  amortization     Net
----------------------------------------------------------------------------
Land and improvements                              5.4             -     5.4
Asset retirement - Landfill                        2.3           0.9     1.4
Buildings, machinery and equipment             1,356.1         867.0   489.1
Major Maintenance                                 37.0          23.1    13.9
Construction in progress                           3.7             -     3.7
----------------------------------------------------------------------------
                                               1,404.5         891.0   513.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------

6.  Net Income per Partnership Unit 

    Basic net income per Partnership unit is based on the weighted average 
    number of Limited Partnership units outstanding during the period. All 
    outstanding Partnership units were issued on July 1, 2006, and there was
    no change in the number of outstanding Partnership units during the 
    quarter. 

7. Inventories 

                                                     June 30,   December 31,
(millions of dollars, unaudited)                        2011           2010
----------------------------------------------------------------------------
Pulp                                                    66.8           52.7
Paper                                                   11.3           10.1
Wood chips                                               8.2           16.4
Processing materials and supplies                       43.9           44.2
----------------------------------------------------------------------------
                                                       130.2          123.4
----------------------------------------------------------------------------

8.  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    Six months ended 
                                      June 30,  June 30,  June 30,  June 30,
(millions of dollars, unaudited)         2011      2010      2011      2010
----------------------------------------------------------------------------
Pension plans                             1.0       1.1       2.0       2.1
Other employee future benefit plans       1.2       1.0       2.4       2.1
Contributions to forest industry                                            
 union plans                              1.8       1.7       3.4       3.3
----------------------------------------------------------------------------
                                          4.0       3.8       7.8       7.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------

9.  Credit Facilities and Long-term Debt 

    At June 30, 2011 the Partnership had outstanding long-term debt of 
    $106.1 million (December 31, 2010 - $109.4 million, US$110.0 million)in 
    the form of unsecured US dollar private placement notes (the Notes). 
    The Notes bear interest at 6.41% and are repayable in full on their 
    maturity date of November 30, 2013.

    The Partnership has a $40.0 million bank credit facility with a maturity
    date of November 30, 2013, of which $0.5 million was utilized at June 
    30, 2011 for a standby letter of credit issued for general business 
    purposes. In addition, the Partnership has a separate facility with a 
    maturity date of November 30, 2013, to cover the $13.0 million standby 
    letter of credit issued to BC Hydro under the Electricity Purchase 
    Agreement. The Partnership also has an undrawn $30.0 million bridge 
    loan credit facility with a maturity date of December 31, 2012 to fund 
    timing differences between expenditures and reimbursements for projects 
    funded under the Canadian Federal Government Green Transformation 
    Program. Interest and other costs of the credit facilities are at 
    prevailing market rates. The leverage ratio and interest coverage ratio 
    are consistent with the financial covenants under the Note Agreement.

    The Notes and bank credit agreements each contain similar financial 
    covenants including a maximum allowable debt:EBITDA leverage ratio and 
    minimum required EBITDA:interest coverage ratio. The Partnership 
    remained in compliance with all covenants at June 30, 2011 and 
    throughout the period. 

    The fair value of long-term debt at June 30, 2011 was $114.6 million 
    (US$118.8 million).

10. Related Party Transactions

    The Partnership's transactions with related parties are consistent with 
    the transactions described in the December 31, 2010 audited consolidated
    financial statements and are based on agreed upon amounts between the 
    parties, and are summarized below:

                                      Three months ended   Six months ended 
                                      June 30,  June 30,  June 30,  June 30,
(millions of dollars, unaudited)         2011      2010      2011      2010
----------------------------------------------------------------------------
Transactions                                                                
Canfor - purchase of wood chips and                                         
 other                                   27.2      35.5      56.2      69.7
CPPI administrative cost recovery         0.1         -       1.0         -
Howe Sound LP - commission                  -       0.6         -       1.2
Lakeland Mills Ltd. - purchase of                                           
 wood chips                               2.8       1.5       6.2       2.7
----------------------------------------------------------------------------
                                                                   December
                                                          June 30,       31,
                                                             2011      2010
----------------------------------------------------------------------------
Balance Sheet                                                               
Included in accounts payable and                                            
 accrued liabilities:                                                       
  Canfor                                                     44.1      44.5
  Lakeland Mills Ltd.                                         0.6       0.4
Included in other accounts                                                  
 receivable:                                                                
  CPPI                                                        1.0         -
Included in trade accounts                                                  
 receivable:                                                                
  Product marketed for Canfor                                30.7      23.2
----------------------------------------------------------------------------

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

11. Derivative Financial Instruments 

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

    For the second quarter of 2011 the Partnership recorded a net gain on 
    derivative financial instruments of $1.0 million (second quarter 2010 - 
    net loss of $3.8 million) relating to the settlement of maturing 
    contracts during the quarter, and the revaluation to market value of 
    outstanding contracts at the end of the quarter, for natural gas swaps 
    and US dollar forward contracts. 

    The Partnership recorded losses of $0.6 million during the second 
    quarter of 2011 (second quarter 2010 - $0.8 million) relating to 
    settlement of maturing natural gas contracts as a charge to 
    non-operating income. At June 30, 2011 the Partnership had outstanding 
    commodity swaps hedging future natural gas purchases of 0.2 million 
    gigajoules extending to October 2011. At June 30, 2011 the unrealized 
    loss of $0.8 million (June 30, 2010 - loss of $3.7 million) on these 
    outstanding commodity swaps was recorded as a liability in accounts 
    payable and accrued liabilities and in long-term liabilities.

    The Partnership recorded a gain of $0.2 million during the second 
    quarter of 2011 (second quarter 2010 -$0.3 million) on settlement 
    of maturing US dollar forward contracts as a charge to non-operating 
    income. At June 30, 2011 the Partnership had outstanding US dollar 
    forward contracts of $78.5 million extending to October 2011. At June 
    30, 2011 the unrealized gain of $1.2 million (June 30, 2010 -loss of 
    $3.3 million) on these outstanding US dollar forward contracts was 
    recorded as an asset in other accounts receivable.

12. Distributions 

    The Partnership declared distributions in the first six months of 2011 
    as follows:

(millions of dollars, except per unit amounts, unaudited)                   
                                                 Amount per                 
Record Date         Payable Date         Partnership Unit $         Amount $
----------------------------------------------------------------------------
January 31, 2011    February 15, 2011                  0.26             18.5
February 28, 2011   March 15, 2011                     0.26             18.6
March 31, 2011      April 15, 2011                     0.26             18.5
April 29, 2011      May 13, 2011                       0.23             16.4
May 31, 2011        June 15, 2011                      0.23             16.4
June 30, 2011       July 15, 2011                      0.23             16.4
----------------------------------------------------------------------------
                                                       1.47            104.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------

13. Green Transformation Program 

    The Partnership has been allocated $122.2 million under the Canadian 
    Federal Government Pulp and Paper Green Transformation Program (the 
    Program). The Program is designed as a reimbursement of funds to be 
    spent on qualifying energy and environmental capital projects. Credits 
    may be used until the Program end date of March 31, 2012. The 
    Partnership has received Program approval to proceed with four projects 
    totaling $157.4 million of which $122.2 million will be reimbursed under
    the Program. As of June 30, 2011 the Partnership has incurred $79.0  
    million and received reimbursements totaling $51.4 million with the 
    balance of $27.6 million receivable as at June 30, 2011. The Partnership
    submits claims for expenditures on approved projects under the Program  
    on a monthly basis. These projects are expected to provide economic and 
    environmental benefits to the Partnership's operations.

14. Segmented Information (a) 

    The Partnership is a producer of market NBSK Pulp and fully bleached, 
    high performance Kraft Paper. For management purposes, the Partnership 
    has two reporting segments which operate as separate business units: 
    Pulp and Paper. These divisions are the basis on which the Partnership 
    reports its primary segment information. This segment reporting is 
    consistent with the internal reporting provided to the executive 
    management team, who operate as the Partnership's chief operating 
    decision maker. The executive management team is responsible for 
    allocating resources and assessing performance of the operating 
    segments.

    The accounting policies of the segments are the same as those described 
    in the summary of significant accounting policies.

    The Partnership accounts for intersegment sales and transfers as if the 
    sales or transfers were to third parties, that is, at current market 
    prices. All such sales and transfers are eliminated on consolidation.

(millions of dollars, unaudited)       Pulp     Paper  Unallocated    Total 
----------------------------------------------------------------------------
Three months ended June 30, 2011                                            
----------------------------------------------------------------------------
Sales to external customers (b)       207.5      34.2          0.4    242.1 
Sales of pulp to paper segment (c)     21.6     (21.6)           -        - 
Operating income (loss)                52.0       0.7         (3.6)    49.1 
Amortization                           14.1       0.9           -      15.0 
Capital expenditures, net               7.1       1.0          0.5      8.6 

Three months ended June 30, 2010                                            
----------------------------------------------------------------------------
Sales to external customers (b)       214.8      32.5          0.3    247.6
Sales of pulp to paper segment (c)     24.2     (24.2)           -        -
Operating income (loss)                56.9      (0.5)        (4.3)    52.1
Amortization                           16.3       0.9            -     17.2
Capital expenditures, net               7.5       0.4          0.3      8.2

Six months ended June 30, 2011                                              
----------------------------------------------------------------------------
Sales to external customers (b)       424.8      68.2          1.4    494.4 
Sales of pulp to paper segment (c)     44.1     (44.1)           -        - 
Operating income (loss)               102.8       2.7         (6.5)    99.0 
Amortization                           29.7       1.7          0.1     31.5 
Capital expenditures, net              11.4       1.8          1.1     14.3 
Identifiable assets                   715.7      65.0         42.8    823.5 

Six months ended June 30, 2010                                              
----------------------------------------------------------------------------
Sales to external customers (b)       419.6      67.0          0.5    487.1
Sales of pulp to paper segment (c)     42.9     (42.9)           -        -
Operating income (loss)                94.4      (1.0)        (8.3)    85.1
Amortization                           31.7       1.7          0.1     33.5
Capital expenditures, net              14.8       0.8          0.5     16.1
Identifiable assets                   747.8      64.8         57.1    869.7
----------------------------------------------------------------------------
(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 28% (Year 2010 - 37%).

(b) Sales to the largest customer represented approximately 8% of pulp 
segment sales (Year 2010 - 12%). 

(c) Sales of slush pulp to the paper segment are accounted for at 
approximate market value. The sales are transacted as a cost transfer and 
are not reflected in Pulp sales.

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