KP Tissue Inc. - Audit Report / Information 2020

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KRUGER PRODUCTS L.P.

AUDITED CONSOLIDATED FINANCIAL STATEMENT

FOR THE YEARS ENDED DECEMBER 31, 2020 AND DECEMBER 31, 2019

2 Prologis Blvd., Suite 500, Mississauga, Ontario L5W 0G8

Kruger Products L.P. www.krugerproducts.ca

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Independent auditor’s report

To the Unitholders of Kruger Products L.P.

Our opinion

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Kruger Products L.P. and its subsidiaries (together, the Partnership) as at December 31, 2020 and 2019, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS).

What we have audited

The Partnership’s consolidated financial statements comprise:

the consolidated statements of financial position as at December 31, 2020 and 2019;
the consolidated statements of comprehensive loss for the years then ended;
the consolidated statements of changes in equity for the years then ended;
the consolidated statements of cash flows for the years then ended; and
the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information.

Basis for opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the Partnership in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements.

Other information

Management is responsible for the other information. The other information comprises the KP Tissue Inc. and Kruger Products L.P. Management’s Discussion and Analysis of Results of Operations and Financial Position, which we obtained prior to the date of this auditor’s report and the information, other than the

PricewaterhouseCoopers LLP PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2 T: +1 416 863 1133, F: +1 416 365 8215

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership

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financial statements and our auditor’s report thereon, included in the annual report, which is expected to be made available to us after that date.

Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance.

Responsibilities of management and those charged with governance for the consolidated financial statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Partnership’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Partnership or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Partnership’s financial reporting process.

Auditor’s responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

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As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Partnership’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Partnership to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Partnership to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

/s/PricewaterhouseCoopers LLP

Chartered Professional Accountants, Licensed Public Accountants

Toronto, Ontario March 11, 2021

Kruger Products L.P. Consolidated Statement of Financial Position

(tabular amounts are in thousands of Canadian dollars)

Assets
Current assets
Cash and cash equivalents
Trade and other receivables (note 6)
Receivables from related parties (note 18)
Current portion of advances to partners (note 16)
Inventories (note 7)
Income tax recoverable (note 17)
Prepaid expenses
Non-current assets
Property, plant and equipment (note 8)
Right-of-use assets (note 9)
Other long-term assets
Goodwill (note 10)
Intangible assets (note 10)
Deferred income taxes (note 17)
Total assets
Liabilities
Current liabilities
Trade and other payables (note 12)
Payables to related parties (note 18)
Income tax payable (note 17)
Distributions payable (notes 16 and 18)
Current portion of provisions (note 13)
Current portion of long-term debt (note 14)
Current portion of lease liabilities (note 15)
Non-current liabilities
Long-term debt (note 14)
Lease liabilities (note 15)
Provisions (note 13)
Other long-term liabilities
Pensions (note 11)
Post-retirement benefits (note 11)
Liabilities to non-unitholders
Current portion of Partnership units liability (note 16)
Long-term portion of Partnership units liability (note 16)
Total Partnership units liability
Total liabilities
Equity
Partnership units (note 16)
Deficit
Accumulated other comprehensive income
Total equity
Total equity and liabilities
Commitments and contingencies (note 19)
Subsequent events (notes 14 and 16)
Approved by the Board of Directors
/s/ James Hardy
Director

December 31, 2020
December 31, 2019
$
$
128,739
93,141
88,041
89,236
13
59
5,647
80
215,934
190,686
358
466
8,315
8,341
447,047
382,009
1,194,191
935,010
107,633
97,582
10
1,766
152,021
160,939
26,205
15,317
24,217
30,988
1,951,324
1,623,611
332,072
242,357
9,097
6,809
554
325
11,919
11,393
4,913
759
9,495
4,937
25,341
18,080
393,391
284,660
743,978
586,125
105,634
100,682
9,549
6,148
575
-
161,333
140,674
63,038
57,005
1,477,498
1,175,294
31,244
5,103
154,180
138,412
185,424
143,515
1,662,922
1,318,809
439,571
408,978
(224,503)
(183,188)
73,334
79,012
288,402
304,802
1,951,324
1,623,611
/s/ David Angel
Director

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

Kruger Products L.P. Consolidated Statement of Comprehensive Loss

For the years ended December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars)

Revenue (notes 18 and 26)
Expenses
Cost of sales (notes 18 and 20)
Selling, general and administrative expenses (notes 18 and 20)
Loss on sale of non-financial assets
Impairment charge (note 10)
Restructuring costs, net (note 13)
Operating income
Interest expense (note 14)
Other expense (note 5)
Income before income taxes
Income taxes (note 17)
Net income for the year
Other comprehensive loss
Items that will not be reclassified to net income:
Remeasurements of pensions
Remeasurements of post-retirement benefits
Items that may be subsequently reclassified to net income:
Cumulative translation adjustment
Total other comprehensive loss for the year
Comprehensive loss for the year

2020
2019
$
$
1,515,983
1,434,113
1,264,448
1,256,979
128,062
99,603

1
13

8,918
-

1,275
1,904

113,279
75,614

40,965
45,071
36,353
25,951

35,961
4,592

8,655
2,494

27,306
2,098
(16,977)
(35,422)
(4,871)
(2,121)
(5,678)
(14,027)
(27,526)
(51,570)
(220)
(49,472)

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

Kruger Products L.P. Consolidated Statement of Changes in Equity

For the years ended December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

#	$ 376,274 - - 741 - - - - 31,963 Partnership units	Deficit $
59,571,399 - - - - - - - 3,721,737		(102,502) (11,393) (33,107) (741) (35,422) (2,121) - 2,098 -
63,293,136	408,978	(183,188)
63,293,136 - - - - - - - 2,923,863	408,978 - - (329) - - - - 30,922	(183,188) (11,919) (35,183) 329 (16,977) (4,871) - 27,306 -
66,216,999	439,571	(224,503)

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

Kruger Products L.P. Consolidated Statement of Cash Flows For the years ended December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars)

Cash flows from (used in) operating activities Net income for the year Items not affecting cash Depreciation Amortization (Gain) loss on sale of property, plant and equipment Change in amortized cost of Partnership units liability (notes 4 and 5) Loss on sale of shares (note 5) Foreign exchange gain (note 5) Change in fair value of derivatives (note 5) Interest expense Pension and post-retirement benefits (note 11) Provisions (note 13) Income taxes Loss on sale of non-financial assets Impairment charge (note 10) Total items not affecting cash Net change in non-cash working capital (note 27) Contributions to pension and post-retirement benefit plans (note 11) Provisions paid (note 13) Income tax payments Net cash from operating activities Cash flows from (used in) investing activities Purchases of property, plant and equipment Purchases of property, plant and equipment and software related to the TAD Sherbrooke Project Interest paid on credit facilities related to the TAD Sherbrooke Project Government assistance received Purchases of software (note 10) Purchases of trademarks (note 10) Proceeds on sale of shares (note 5) Proceeds on sale of property, plant and equipment Net cash used in investing activities Cash flows from (used in) financing activities (note 28) Proceeds from long-term debt Repayment of long-term debt Payment of deferred financing fees Payment of lease liabilities Interest paid on long-term debt Distributions and advances paid, net (note 16) Net cash from (used in) financing activities Effect of exchange rate changes on cash and cash equivalents held in foreign currency Increase (decrease) in cash and cash equivalents during the year Cash and cash equivalents - Beginning of year Cash and cash equivalents - End of year	2020 $	2019 $
	27,306 67,129 1,657 909 47,012 - (10,299) (360) 40,965 14,635 6,231 8,655 1 8,918 185,453 60,328 (15,622) (2,194) (1,738) 253,533 (31,581) (263,348) (10,676) 398 (4,974) (4,538) 992 -	2,098 59,113 1,542 (18) 26,991 586 (1,986) 360 45,071 11,064 4,058 2,494 13 -
		149,288 1,487 (15,475) (1,037) (2,741)
		133,620
		(29,942) (139,587) (3,546) 325 (1,935) - 5,724 18
	(313,727)	(168,943)
	262,673 (92,714) (509) (19,283) (25,706) (26,404)	53,933 (35,382) (1,383) (16,978) (29,526) (10,243)
	98,057	(39,579)
	(2,265)	(1,841)
	35,598 93,141	(76,743) 169,884
	128,739	93,141

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

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

1 General information

Kruger Products L.P. (KPLP or the Partnership) is a limited partnership registered in the Province of Quebec, Canada whose partners are Kruger Inc. (ultimate parent), KPGP Inc. (KPGP), and KP Tissue Inc. (KPT). The Partnership manufactures, sells and distributes tissue products for household, industrial and commercial use. The Partnership has plants in New Westminster, British Columbia; Crabtree, Quebec; Sherbrooke, Quebec; Gatineau, Quebec; Scarborough and Trenton, Ontario and Memphis, Tennessee. The Partnership’s headquarters are located in Mississauga, Ontario, Canada.

2 Basis of presentation

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), and with interpretations of the International Financial Reporting Committee which the Canadian Accounting Standards Board has approved for incorporation into Part 1 of the CPA Canada Handbook - Accounting. These consolidated financial statements were approved by the board of directors of KPGP Inc. on March 10, 2021.

The Partnership consolidates all entities that it controls. In addition, the Partnership’s participation in joint arrangements classified as joint operations is accounted for in the consolidated financial statements by reflecting, line by line, the Partnership’s share of the assets held jointly, liabilities incurred jointly, and revenue and expenses arising from the joint operations.

The principal subsidiaries of the Partnership that have been consolidated are as follows:

K.T.G. (USA) Inc. (KTG) Kruger Products (USA) Inc. (KP USA) Grupo Tissue de Mexico S de RL de CV (GTM) (note 5) TAD Luxembourg S.A.R.L TAD Canco Inc. Kruger Products Real Estate Holdings Inc. Kruger Products AFH GP. Inc. Kruger Products AFH L.P. Kruger Products Sherbrooke Inc. (KPSI) Kruger Products SB Inc. (KPSB) KP TAD Holdco Inc. TAD1 Canco I Inc. TAD1 Canco II Inc. TAD1 GP ULC TAD2 GP ULC TAD2 US LP TAD1 US LP

The principal joint operations of the Partnership that have been consolidated are as follows:

Kruger Sherbrooke Water Treatment Inc.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

3 Summary of significant accounting policies

The significant accounting policies used in the preparation of these consolidated financial statements were as follows:

(a) Basis of measurement

The consolidated financial statements have been prepared under the historical cost convention, except for the embedded derivative and the derivative liabilities, which are measured at fair value through profit or loss and accounting for pensions (note 3( s )). The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Partnership’s accounting policies. The areas involving a higher degree of judgment or complexity or areas where assumptions and estimates are significant are disclosed in note 4.

(b) Consolidation

Subsidiaries are all those entities over which the Partnership has the power over the investee, is exposed or has rights to variable returns from its involvement with the investee and has the ability to affect these returns through its power over the investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Partnership and de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealized gains/losses on transactions between group companies are eliminated on consolidation.

The purchase method of accounting is used to account for the acquisition of subsidiaries that are not under common control. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Partnership’s share of the identifiable net assets acquired is recorded as Goodwill.

(c) Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer. The operating segments for the Partnership include Consumer and Away-From-Home (AFH).

(d) Foreign currency translation

(i) Functional and presentation currency

Items included in the consolidated financial statements of each entity of the Partnership are measured using the currency of the primary economic environment in which the entity operates (the functional currency). These consolidated financial statements are presented in Canadian dollars, which is the Partnership’s functional currency.

The Partnership has determined that its foreign operations located in the United States (KTG and KP USA) and TAD Canco Inc., TAD Luxembourg S.A.R.L., TAD1 Canco I Inc., TAD1 GP ULC, TAD1 US LP and TAD1 Canco II Inc. have a functional currency of U.S. dollars. Mexico (GTM) had a functional currency of the Mexican peso (note 5). Consequently, revenue and expenses of these foreign operations are recorded using the rate of exchange in effect at the dates of the transactions and the translation of assets and liabilities use the rates of exchange in effect at the period-end date, with the resulting net unrealized gains and losses arising from the translation of these foreign operations included as part of the currency translation adjustment in Other comprehensive income (loss).

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

(ii) Transactions and balances

Foreign currency transactions are translated into the functional currency using the rate of exchange in effect at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange prevailing at the date of the consolidated statement of financial position. Foreign exchange gains and losses arising from translating monetary foreign currency balances are included in Selling, general and administrative (SG&A) expenses or Other expenses.

(e) Cash and cash equivalents

The Partnership considers all highly liquid investments with a maturity of three months or less to be cash equivalents.

(f) Trade receivables

Trade receivables are amounts due from customers from the sale of products or services rendered in the ordinary course of business. Trade receivables are classified as current assets if payment is due within one year or less. Trade receivables are recognized initially at fair value and subsequently measured at amortized cost, less provision for expected credit losses.

(g) Inventories

Inventories of raw materials and spare parts are valued at the lower of weighted average cost and net realizable value. Finished products and work-in-process are valued at the lower of standard cost and net realizable value and include the cost of raw materials, direct labour and manufacturing overhead expenses. Net realizable value is the estimated selling prices less applicable selling expenses and costs to complete. If the carrying value exceeds the net realizable value, a write-down is recognized.

(h) Borrowing costs

Borrowing costs attributable to the acquisition, construction or production of qualifying assets are added to the cost of these assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are recognized as interest expense in the consolidated statement of comprehensive income (loss) in the period in which they are incurred.

(i) Property, plant and equipment

Property, plant and equipment are stated at cost, less accumulated depreciation, investment tax credits, U.S. State tax credits, government assistance and accumulated impairment loss. Cost includes expenditures that are directly attributable to the acquisition of the asset and an estimate of the asset retirement obligation. The Partnership allocates the amount initially recognized to an item of property, plant and equipment to its segregated parts and depreciates each of these segregated parts separately. The Partnership also capitalizes borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of the asset. Subsequent costs are included in the asset’s carrying value or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Partnership and the cost can be reliably measured. The carrying amount of a replaced asset is derecognized when replaced. Residual values, method of depreciation and useful lives of property, plant and equipment are reviewed annually and adjusted if appropriate.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

Depreciation of property, plant and equipment is generally calculated using the straight-line method to allocate their costs less their residual values over their estimated useful lives as follows:

Buildings	20	to	40	years
Machinery and equipment	5	to	40	years

Assets under construction or development are depreciated from the date the asset is ready for productive use. Land is not depreciated.

Repairs and maintenance costs are charged to the consolidated statement of comprehensive income (loss) during the period in which they are incurred.

Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds with the carrying amount of the asset and are included in SG&A expenses.

(j) Goodwill

Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the Partnership’s interest in fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree. Goodwill is carried at cost less accumulated impairment losses.

For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cashgenerating units (CGUs), or groups of CGUs, that is expected to benefit from the synergies of the combination. Each CGU or group of CGUs to which the goodwill is allocated represents the lowest level within the Partnership at which the goodwill is monitored for internal management purposes.

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of the CGU is compared to the recoverable amount, which is the higher of the value in use and the fair value less costs to sell. Any goodwill impairment is recognized immediately as an expense and is not subsequently reversed.

(k) Intangible assets
(i) Trademarks

Separately acquired trademarks have indefinite useful lives and are carried at cost. The trademarks have indefinite useful lives as the trademarks can be renewed infinitely without substantial cost.

(ii) Software and licences

Costs to purchase non-integral software and licences are capitalized and included as part of Intangible assets on the consolidated statement of financial position. Costs associated with maintaining software programs are recognized as an expense as incurred.

Software and licence costs recognized as assets are amortized over their estimated useful lives, which represent management’s view of the expected period over which the Partnership will receive benefits from the software and licences. The useful life of software and licences is five years.

(l) Impairment of non-financial assets

The carrying values of non-financial assets with finite lives, such as property, plant and equipment and intangible assets with finite useful lives are assessed for impairment whenever events or changes in circumstances indicate

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

their carrying amounts may not be recoverable. Non-financial assets that are not amortized are subject to an annual impairment test. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use (which is the present value of the expected future cash flows of the relevant asset or CGU). An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. Non-financial assets other than goodwill that have suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

(m) Related party transactions

Related party transactions that are in the normal course of operations and have commercial substance are made under competitive terms and conditions or in accordance with the agreements with the related party.

(n) Leases

At inception of a contract, the Partnership assesses whether a contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

The Partnership recognizes a Right-of-use asset and a Lease liability at the lease commencement date. The Rightof-use asset is initially measured based on the initial amount of the Lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received.

The Right-of-use asset is subsequently depreciated to the earlier of the end of their useful life or the lease term using the straight-line method as this most closely reflects the expected pattern of consumption of the future economic benefits as follows:

Land	25 years
Buildings	1 to 34 years
Equipment	1 to 10 years
Motor vehicles	1 to 4 years

The lease term includes periods covered by an option to extend if the Partnership is reasonably certain to exercise that option.

In addition, the Right-of-use asset may be periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the Lease liability.

The Lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Partnership’s incremental borrowing rate. Generally, the Partnership uses its incremental borrowing rate as the discount rate. The weighted-average rate applied is 4.33% at December 31, 2020. Variable lease payments that do not depend on an index or rate are not included in the measurement of the Lease liability.

The Lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Partnership’s estimate of the amount expected to be payable under a residual value guarantee, or if the Partnership changes its assessment of whether it will exercise a purchase, extension or termination option.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

When the Lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the Right-of-use asset, or is recorded in profit or loss if the carrying amount of the Right-of-use asset has been reduced to zero.

The Partnership has elected to present Right-of-use assets separately from Property, plant and equipment and Lease liabilities are presented under Current and Non-current liabilities in the consolidated statement of financial position.

Payments to suppliers includes payments for leases of low-value assets, payments for short-term leases and variable lease payments not included in the measurement of Lease liabilities. Interest paid includes cash payments for the interest portion of Lease liabilities.

(o) Provisions

Provisions include environmental and asset retirement obligations, long-term incentives and restructuring. A provision is recognized when the Partnership has a legal or constructive obligation as a result of a past event and it is probable that settlement of the obligation will require a financial payment or cause a financial loss and a reliable estimate can be made of the amount of the obligation.

If some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement is recorded in the consolidated statement of financial position as a separate asset, but only if it is virtually certain that the reimbursement will be received.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.

(p) Government assistance, investment tax credits and U.S. State tax credits

Government assistance, investment tax credits, and U.S. State tax credits are accounted for using the cost reduction method, whereby such amounts are deducted from the expenditures or assets to which they relate when there is reasonable assurance that the assistance or credit will be received and where the Partnership will comply with the conditions attached to the assistance.

(q) Revenue recognition

The Partnership recognizes revenue when control of the products has transferred, being when the products are delivered to, and accepted by, the customer (based on shipping terms).

Revenue is measured based on the price specified in the sales contract and is net of discounts, rebates and allowances. Reductions to revenue for expected and actual payments to customers for rebates and allowances are based on actual expenses incurred during the period, on estimates of what is due to customers for estimated credits earned during the period and any adjustments for credits based on actual activity. Revenue is only recognized to the extent that it is highly probable that a significant reversal will not occur. As all of the Partnership’s sales contracts have a term of less than one year, the Partnership has elected to use the practical expedient and therefore not capitalize closing contract costs or disclose unfulfilled performance obligations. A contract liability is recognized for expected discounts, rebates and allowances payable to customers in relation to sales made in the reporting period. The contract liability is included in Trade and other payables.

(r) Cost of sales and SG&A expenses

Cost of sales includes cost of finished goods sold, freight, warehousing, handling costs, and inventory write-downs. Marketing, selling, and general and administrative expenses are included in SG&A expenses.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

(s) Pensions and post-retirement benefits

The Partnership accrues its obligation under employee benefit plans and the related costs, net of plan assets. The Partnership has the following policies:

The costs of pensions under defined benefit plans and post-retirement benefits are actuarially determined using the projected unit credit method and management’s best estimate of expected plan investment performance for funded plans, salary escalation, retirement ages of employees and expected health-care costs. Actuarial valuations for defined benefit plans and post-retirement benefits are completed annually. The discount rate applied in arriving at the present value of the pension liability represents the yield on high quality corporate bonds denominated in the currency in which the benefits are to be paid and having terms to maturity approximating the terms of the related pension liability.
Pension assets are valued at fair value.
Past-service costs from plan amendments are recognized immediately to the extent the benefits are vested in net income (loss) and are otherwise amortized on a straight-line basis over the average period until the benefits become vested.
The actuarial gains or losses are recognized in full in the period in which they occur in Other comprehensive income (loss) without recycling to the income statement in subsequent periods. Amounts recognized in Other comprehensive income (loss) are recognized immediately in Retained earnings (Deficit).
The pension expense is split into two components: (i) current service costs and past-service costs have been recognized in Cost of sales and SG&A expenses; and (ii) the interest cost on the benefit obligation offset by the expected return on plan assets is recorded within Interest expense on the consolidated statement of comprehensive income (loss).
The Partnership also participates in a multi-employer pension plan and defined contribution pension plans. The costs of the multi-employer pension plan and defined contribution pension plans are charged to expense as the contributions become payable.

(t) Income taxes

The tax expense for the year comprises current and deferred tax. Tax is recognized in Net income (loss), except to the extent that it relates to items recognized in Other comprehensive income (loss) or directly in Equity. In this case, the tax is also recognized in Other comprehensive income (loss) or directly in Equity, respectively.

The Partnership is not a tax paying entity. The income from the Partnership flows to the partners, Kruger Inc., KPGP and KPT. Accordingly no provision for income taxes has been made for the Partnership’s income. The U.S. entities, KP USA and KTG are subject to tax on the basis of the tax laws enacted in the U.S. where the entities operate and generate taxable income. The remaining entities, TAD Canco Inc., GTM (note 5), TAD Luxembourg S.A.R.L., KP TAD Holdco Inc., TAD1 Canco I Inc., TAD1 Canco II Inc., TAD1 GP ULC, TAD2 GP ULC, and KPSI are subject to tax on the basis of the laws enacted in Canada, Mexico and Luxembourg.

Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. The Partnership establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Current tax is the expected tax payable on the taxable income for the year at closing tax rates enacted or substantively enacted at the end of the reporting period, and any adjustment to tax payable in respect of previous years.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognized if they arise from the initial recognition of goodwill, or from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the consolidated statement of financial position dates and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Deferred income tax assets and liabilities are presented as non-current in the consolidated statement of financial position.

(u) Financial instruments

Financial assets and liabilities are recognized when the Partnership becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Partnership has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled or expired.

Financial assets and liabilities are offset and the net amount is reported in the consolidated statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

(i) Investments and other financial assets

The Partnership accounted for its investments and other financial assets as follows:

Classification

The Partnership classifies its financial assets in the following measurement categories, as disclosed in note 23:

those to be measured subsequently at fair value (either through other comprehensive income (OCI), or through profit or loss), and
those to be measured at amortized cost

The classification depends on the Partnership’s business model for managing the financial assets and the contractual terms of the cash flows.

For assets measured at fair value, gains and losses will either be recorded in profit or loss or OCI. For investments in equity instruments that are not held for trading, this will depend on whether the Partnership has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income (FVOCI).

The Partnership reclassifies debt investments only when its business model for managing those assets changes.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

Measurement

At initial recognition, the Partnership measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss (FVPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVPL are expensed in profit or loss.

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.

Debt instruments

Subsequent measurement of debt instruments depends on the Partnership’s business model for managing the asset and the cash flow characteristics of the asset. There are three measurement categories into which the Partnership classifies its debt instruments:

Amortized cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. Interest income from these financial assets is included in Interest income using the effective interest rate method. Any gain or loss arising on derecognition is recognized directly in profit or loss. Impairment losses are included in SG&A expenses.
FVOCI: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest income and foreign exchange gains and losses which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from deficit to profit or loss and recognized in Other (income) expense. Interest income from these financial assets is included in Interest income using the effective interest rate method. Foreign exchange gains and losses are presented in SG&A expenses in the consolidated statement of comprehensive income (loss).
FVPL : Assets that do not meet the criteria for amortized cost or FVOCI are measured at FVPL. A gain or loss on a debt investment that is subsequently measured at FVPL is recognized in profit or loss and presented net within Other (income) expense in the period in which it arises.

Equity instruments

The Partnership subsequently measures all equity investments at fair value. Where the Partnership’s management has elected to present fair value gains and losses on equity investments in OCI, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividends from such investments continue to be recognized in profit or loss as other income when the Partnership’s right to receive payments is established.

Changes in the fair value of financial assets at FVPL are recognized in Other (income) expense in the consolidated statement of comprehensive income (loss) as applicable. Impairment losses (and reversal of impairment losses) on equity investments measured at FVOCI are not reported separately from other changes in fair value.

Impairment

The Partnership assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortized cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk.

For trade receivables, the Partnership applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognized from initial recognition of the receivables.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

(ii) Financial liabilities at amortized cost

Financial liabilities at amortized cost include trade payables, accrued liabilities, contract liabilities, payables to related parties, distributions payable, long-term debt, lease liabilities and the Partnership units liability. Payables are initially recognized at the amount required to be paid less, when material, a discount to reduce the payables to fair value. Subsequently, trade payables, accrued liabilities, contract liabilities, payables to related parties and distributions payable are measured at amortized cost using the effective interest method. Long-term debt is recognized initially at fair value, net of any transaction costs incurred and subsequently at amortized cost using the effective interest method. Lease liabilities are initially measured at the present value of the lease payments that are not paid at the commencement date and subsequently at amortized cost using the effective interest method. The Partnership units liability is recognized initially at fair value and subsequently at amortized cost. Amortized cost is estimated based on the expected tax distributions to be paid as required by the partnership agreement using a discount rate that reflects current market assessments of the time value of money and the rates specific to the obligation, and a terminal value as the obligation will continue indefinitely.

Financial liabilities are classified as current liabilities if payment is due within 12 months. Otherwise, they are presented as non-current liabilities.

(v) Fair value hierarchy

The Partnership categorizes its financial assets and liabilities measured at fair value into one of three different levels depending on the inputs used in the measurement.

Level 1 - fair value based on unadjusted quoted prices for identical assets and liabilities in active markets that are accessible at the measurement date;
Level 2 - valuations determined using directly or indirectly observable inputs other than quoted prices included within Level 1. Derivative instruments in this category are valued using models or other industry standard valuation techniques derived from observable market inputs; and
Level 3 - valuations based on inputs that are less observable, unavailable or where the observable data does not support a significant portion of the instrument’s fair value.

(w) Derivative financial instruments

From time to time the Partnership uses derivative financial instruments to manage foreign currency risk and interest rate risk. Foreign exchange swaps and foreign exchange forwards are used from time to time to manage U.S. dollar borrowings. Interest rate swaps are used to fix the interest rate under certain long-term debt obligations. As these derivatives do not qualify for hedge accounting, the changes in their fair value are recorded in the consolidated statement of comprehensive income (loss) in Other (income) expense. The derivative liabilities are recorded in the consolidated statement of financial position in Trade and other payables.

(x) Dividend reinvestment plan

Pursuant to the Dividend Re-investment Plan (DRIP), the Partnership is required to issue Partnership units in lieu of cash distributions at the option of the Partners. Upon settlement of the DRIP, the difference between the distributions declared and the fair value of the units issued is charged to Retained earnings (Deficit).

(y) Joint arrangements

In accordance with IFRS 11, “Joint Arrangements”, a joint arrangement is a contractual arrangement wherein two or more parties have joint control. Joint control is the contractually agreed sharing of control of an arrangement when the strategic financial and operating decisions relating to the arrangement require the unanimous consent of

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

the parties sharing control. Investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each party.

The parties to a joint operation have rights to the assets, and obligations for the liabilities, relating to the arrangement whereas joint ventures have rights to the net assets of the arrangement. In accordance with IFRS 11, the Partnership accounts for joint operations by recognizing its share of any assets held jointly and any liabilities incurred jointly, along with its share of the revenue from the sale of the output by the joint operation, and its expenses, including its share of any expenses incurred jointly.

Transactions with joint operations

Where the Partnership contributes or sells assets to a joint operation, the Partnership recognizes only that portion of the gain or loss that is attributable to the interests of the other parties.

Where the Partnership purchases assets from a joint operation, the Partnership does not recognize its share of the profit or loss of the joint operation from the transaction until it resells the assets to an independent party.

The Partnership adjusts joint operation financial statement amounts, if required, to reflect consistent accounting policies.

(z) Accounting standards implemented effective January 1, 2020
(i) IAS 1 and IAS 8, Definition of Material. In October 2018, the IASB issued amendments to the definition of material in IAS 1 and IAS 8 and provide guidance to improve consistency in the application of the concept whenever it is used. The mandatory effective date was for annual periods beginning on or after January 1, 2020. The amended standards had no impact on the consolidated financial statements.
(ii) IFRS 3, Definition of a Business. In October 2018, the IASB issued an amendment that revises the definition of a business. The amendment aims to resolve the difficulties that arise when an entity determines whether it has acquired a business or a group of assets. The mandatory effective date was for annual periods beginning on or after January 1, 2020. The amended standard had no impact on the consolidated financial statements.
(iii) IFRS 9/IAS 39 and IFRS 7, Interest Rate Benchmark Reform (Phase 1). In September 2019, the IASB issued amendments that provide temporary relief from applying specific hedge accounting requirements to hedging relationships directly affected by IBOR reform and require certain related disclosures. The mandatory effective date was for annual periods beginning on or after January 1, 2020. The amended standards had no impact on the consolidated financial statements.
(iv) IFRS 16, COVID-19-Related Rent Concessions. In May 2020, the IASB issued an amendment to provide lessees with an exemption from assessing whether a COVID-19-related rent concession is a lease modification. The mandatory effective date was for annual periods beginning on or after June 1, 2020. The amended standard had no impact on the consolidated financial statements.

(aa) Accounting standards issued but not yet applied

The following revised standards and amendments are effective for annual periods beginning on or after January 1, 2021, with earlier application permitted where indicated. Management continues to assess the impact of these standards and amendments and have determined that the standards and amendments will not be early adopted.

(i) IAS 1, Classification of Liabilities as Current or Non-current. In January 2020, the IASB issued an amendment to IAS 1 to clarify that liabilities are classified as either current or non-current, depending on the rights that exist at the end of the reporting period. The mandatory effective date would be annual periods beginning on or

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

after January 1, 2023, with early adoption permitted. The amended standard is not expected to have an impact on the consolidated financial statements.

(ii) IFRS 3, Reference to Conceptual Framework. In May 2020, the IASB issued an amendment to IFRS 3 to (i) clarify references to the 2018 Conceptual Framework in order to determine what constitutes an asset or liability in a business combination, (ii) add an exception for certain liabilities and contingent liabilities to refer to IAS 37 or IFRIC 21 and (iii) clarify that an acquirer should not recognize contingent assets at the acquisition date. The mandatory effective date would be annual periods beginning on or after January 1, 2022, with early adoption permitted. The amended standard is not expected to have an impact on the consolidated financial statements.
(iii) IAS 37, Onerous Contracts – Cost of Fulfilling a Contract. In May 2020, the IASB issued an amendment to IAS 37 to clarify which costs to include in estimating the cost of fulfilling a contract for the purpose of assessing whether that contract is onerous. The mandatory effective date would be annual periods beginning on or after January 1, 2022, with early adoption permitted. The amended standard is not expected to have an impact on the consolidated financial statements.
(iv) IAS 16, Proceeds before Intended Use. In May 2020, the IASB issued an amendment to IAS 16 to clarify the accounting for the net proceeds from selling any items produced while bringing an item of property, plant and equipment into use. The mandatory effective date would be annual periods beginning on or after January 1, 2022, with early adoption permitted. The amended standard is not expected to have an impact on the consolidated financial statements.
(v) IFRS 9/IAS 39, IFRS 7, IFRS 4 and IFRS 16, Interest Rate Benchmark Reform (Phase 2). In August 2020, the IASB issued amendments that address issues arising from the implementation of interest rate benchmark reform, including the replacement of one benchmark with an alternative one. The mandatory effective date would be annual periods beginning on or after January 1, 2021, with early adoption permitted. The amended standards are not expected to have a significant impact on the consolidated financial statements.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

4 Critical accounting estimates and judgements

The preparation of these consolidated financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities in the consolidated financial statements and the disclosure of contingencies at the dates of the consolidated statements of financial position, and the reported amounts of revenues and expenses during the reporting periods. On a regular basis and with the information available, management reviews its estimates, including those related to pensions and post-retirement benefits obligations, the Partnership units liability, impairment tests, income taxes, leases and COVID-19. Actual results could differ from those estimates. When adjustments become necessary, they are reported in earnings in the period in which they occur. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and the future periods if the revision affects both current and future periods. The following are the estimates and judgments applied by management that most significantly affect the Partnership’s consolidated financial statements.

Pensions and post-retirement benefits obligations

The present value of the pensions and post-retirement benefits obligations is dependent on actuarial calculations, which include a number of assumptions. These assumptions include the discount rate, which is used to calculate the present value of the estimated future cash outflows that will be required to meet the pension obligations. In determining the discount rate to use, the Partnership considers market yields of high quality corporate bonds denominated in Canadian dollars that have terms to maturity approximating the terms of the pension liability.

Other key assumptions for pension obligations are based in part on current market conditions. Additional information is disclosed in note 11.

Partnership units liability

On December 13, 2012, in connection with the issuance of Partnership units to KPT, the Limited Partnership Agreement was amended to require KPLP, subject to compliance with contractual obligations and applicable law, to make distributions to its partners in such amounts as would enable KPT to discharge its obligation to pay federal and provincial income taxes (the Tax Distribution). Each partner is entitled to its share of the Tax Distribution made in respect of any given year. KPLP determined that it was appropriate to reclassify a portion of its equity to Partnership units liability, since the Tax Distribution represents a contractual obligation to deliver cash and, as such, meets the definition of a financial liability for accounting purposes under IFRS.

The liability is based on management’s best estimate of the net present value of expected future Tax Distributions, which are made on a pro rata basis based on taxes payable by KPT, which results from KPT’s taxable income from its partnership interest in KPLP. KPLP updates the net present value of the liability annually and records any resulting change in Other (income) expense. The net present value of the liability is based on a number of assumptions including estimates of taxable income and tax rates, as well as discount rates, growth rates, forecasted Adjusted EBITDA, future commodity prices and foreign exchange rates. Taxable income can differ significantly from accounting income as a result of both timing and permanent tax differences based on enacted tax legislation and therefore changes in the Partnership units obligation are not necessarily indicative of a change in the expected future profitability of KPLP.

As of December 31, 2020, $185.4 million was recorded as a liability in respect of this obligation (December 31, 2019 - $143.5 million). As of December 31, 2020, the valuation utilized a discount rate and terminal growth rate of 9.0% and 2.0% (December 31, 2019 – 9.75% and 2.0%), respectively. An increase/decrease in the discount rate by 0.5% would result in a decrease/increase in the Partnership units liability of approximately $12.0 million and $13.9 million, respectively. The discount rate reflects the risks associated with the business, which operates primarily in Canada.

The Partnership units liability was adjusted during the year ended December 31, 2020 to reflect the current year advances of $5.6 million made to the partners required to allow KPT to make tax installment payments. The loss of $47.0 million

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

recorded during the year ended December 31, 2020 (2019 – loss of $27.0 million) related to the change in amortized cost of Partnership units liability represents the adjustments made to estimate the current year Tax Distribution and the results of the reassessment performed as of December 31, 2020. The Partnership units liability increased by $41.9 million due to the change in the discount rate of $17.3 million, the 2020 Tax Distribution of $17.5 million less the final 2019 Tax Distribution of $5.1 million and the changes in other assumptions of $12.2 million.

Impairment tests

The Partnership performs annual impairment tests for goodwill, as it relates to each of the Consumer Canada and AFH CGU’s, and indefinite lived trademarks.

Management completed the annual impairment test for goodwill related to the Consumer Canada CGU, utilizing future forecasts, including consideration of the impact of COVID-19, and concluded that the recoverable amount exceeded the carrying amount as of December 31, 2020 and no impairment was recorded. As of December 31, 2020, the carrying value of the Canada Consumer CGU's goodwill was $152.0 million.

Management also completed the annual impairment test for goodwill related to the AFH CGU. With respect to the AFH business, travel restrictions and remote working conditions resulting from COVID-19 are having a significant short-term impact on AFH product sales. Although management believes it has implemented a number of strategies to mitigate these uncertainties and recover from the impacts of COVID-19 in the longer-term, the recent historical losses and expected near-term future losses and uncertainties associated with the pandemic have triggered a decline in the value of the AFH CGU’s goodwill, resulting in an impairment charge of $8.9 million. As of December 31, 2020, the carrying value of the AFH CGU's goodwill was nil.

The Partnership completed the annual impairment test for indefinite lived trademarks, including consideration of the impact of COVID-19. Recoverable amounts related to indefinite lived trademarks are determined based on management’s best estimate using a relief from royalty model. The estimates of relief from royalty are based on the royalties that would have to be paid based on market royalty rates and projected sales volumes. Additional assumptions include estimates of the discount rate, growth rates, selling price to customer and foreign exchange rates. Management has concluded that current and projected sales volumes support the recoverable amount of the indefinite lived trademarks. As of December 31, 2020, the value of indefinite lived trademarks was $16.0 million.

Additional information is disclosed in note 10.

Income taxes

The Partnership computes its income taxes in each jurisdiction in which its subsidiaries operate. Estimation of income taxes includes evaluating the recoverability of the deferred tax assets and the income taxes recoverable based on an assessment of the ability to use the underlying tax deductions and credits against future taxable income. The assessment requires an estimate of future taxable income compared to the net operating loss carry forwards and U.S. State tax credits. To the extent estimates differ from the final tax return, earnings would be affected in a subsequent period. During the year ended December 31, 2020, the Partnership assessed its ability to utilize the U.S. State tax credits. There were no reversals recorded as a result of this assessment (December 31, 2019 - $5.1 million).

Leases

A number of critical judgements are required in the application of IFRS 16. These judgements include identifying whether a contract (or part of a contract) includes a lease, determining whether it is reasonably certain that an extension or termination option will be exercised, determining whether variable payments are in-substance fixed, establishing whether there are multiple leases in an arrangement, and determining the stand-alone selling price of lease and non-lease components.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

Key estimates in the application of IFRS 16 include estimating the lease term, determining the appropriate rate to discount lease payments, and assessing whether a Right-of-use asset is impaired.

COVID-19

In March 2020, the World Health Organization characterized the outbreak of the novel strain of coronavirus, specifically identified as “COVID-19”, as a global pandemic. This has resulted in local governments enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses in the United States of America and Canada resulting in an economic slowdown. Equity markets have experienced significant volatility and weakness and the local governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. There is significant uncertainty as to the likely effects of this outbreak. The duration and impact of the COVID-19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions. It is not possible to reliably estimate the length and severity of these developments to quantify the impact this pandemic may have on the financial results and condition of the Partnership in future periods.

Since the Partnership sells products that help consumers with their daily hygiene and cleaning needs, the COVID-19 pandemic has not had a negative impact on the Partnership’s results. In fact, during the year ended December 31, 2020, the Partnership experienced a significant increase in demand and consumption in the Consumer Segment caused in part by changing consumer habits and pantry loading, resulting in increased net sales. In the future, the pandemic may cause reduced demand for the Partnership’s products if it results in a global economic recession. It could also lead to volatility in consumer access to the Partnership’s products due to government actions impacting the Partnership’s ability to produce and ship products or impacting consumers’ movements and access to the Partnership’s products. Management believes that over the long term there will continue to be strong demand for the Partnership’s products. However, the timing and extent of demand recovery in the Partnership’s North American markets, the timing and impact of potential consumer pantry destocking in North American markets, and product demand trends caused by future economic trends are unclear. Accordingly, there may be heightened volatility in net sales and resulting earnings during and subsequent to the duration of the pandemic. The Partnership’s retail customers are also being impacted by the pandemic. Their success in addressing the issues and maintaining their operations could impact consumer access to, and as a result, sales of the Partnership’s products.

During the year ended December 31, 2020, the pandemic has not materially impacted the Partnership’s operations or demand for the Partnership’s products and, as a result, has also not negatively impacted the Partnership’s liquidity position. The Partnership continues to generate operating cash flows to meet the Partnership’s short-term liquidity needs. However, uncertainty resulting from the pandemic could result in an unforeseen disruption to the Partnership’s supply chain (for example a closure of a key manufacturing or distribution facility or the inability of a key supplier or transportation supplier to source and transport materials) that could impact the Partnership’s operations.

During the year ended December 31, 2020, management considered the impact of COVID-19 on the Partnership’s critical accounting estimates and judgments, including the Partnership’s assessment of the assumptions and estimates made in its valuation of the Partnership units liability and pension liability, the assumptions utilized in its assessment of the recoverability of deferred tax assets, the assessment of triggering events with respect to its impairment analysis for non-current assets and the impact on credit risk and liquidity risk. The change in the discount rate relevant to the Partnership’s valuation of its pension liability is disclosed in note 11.

While management has concluded that there was no material change in the assumptions relevant to the valuation of the Partnership units liability or recoverability of deferred tax assets as of December 31, 2020 and that during the year ended December 31, 2020, no triggering event had occurred requiring an impairment test to be performed with respect to property, plant and equipment, the duration and severity of the COVID-19 pandemic could result in future material changes to those assumptions or future impairment charges. Although the Partnership believes that its exposure to credit risk and liquidity risk is generally limited, the risks and uncertainties associated with the COVID-19 pandemic have

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

increased the credit risk and liquidity risk associated with trade receivables and such risks are being closely managed. There was an increase in the provision for expected credit losses to $1.5 million as of December 31, 2020 (December 31, 2019 - $0.1 million) due primarily to the impact of COVID-19 on the AFH business.

5 Other expense

Other expense
Foreign exchange gain Change in amortized cost of Partnership units liability (note 4) Change in fair value of derivatives Loss on sale of shares	2020 $	2019 $
	(10,299) 47,012 (360) -	(1,986) 26,991 360 586
	36,353	25,951

On September 20, 2019, the Partnership sold its share interest in Grupo Tissue de Mexico (GTM) for proceeds of US$5.1 million. The Partnership received partial proceeds of US$4.4 million during the year ended December 31, 2019, and the remainder was received in January 2020. The sale resulted in a loss of $0.6 million, which included a reclassification of cumulative translation adjustment from Accumulated other comprehensive income to Other expense during the year ended December 31, 2019.

6 Trade and other receivables

Trade receivables Other receivables Employee loans Less: Allowance for expected credit losses	December 31, 2020 $	December 31, 2019 $
	85,162 4,350 52 (1,523)	80,838 8,429 21 (52)
	88,041	89,236

The Partnership sells eligible trade receivables owing by certain key customers through a factoring arrangement with the Bank of Nova Scotia, with a facility limit of $50 million. As eligible trade receivables are sold, the Partnership removes the factored receivables from the consolidated statement of financial position, recognizes the proceeds received as consideration for the transfer and records a loss on factoring, which is included in Interest expense in the consolidated statement of comprehensive loss. Cash flows from the factoring arrangement are presented as operating activities in the consolidated statement of cash flows. Additional information is disclosed in note 23.

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

7 Inventories

Inventories
Finished products Work-in-process Raw materials and supplies Spare parts	December 31, 2020 $	December 31, 2019 $
	65,546 30,739 77,415 42,234	76,302 32,319 42,354 39,711
	215,934	190,686

Total inventories recognized as Cost of sales during the year ended December 31, 2020 were $1,073.3 million (2019 – $1,075.5 million). The Partnership wrote-off inventories during the year ended December 31, 2020 totalling $4.1 million (2019 - $3.1 million). Inventory provisions as of December 31, 2020 were $8.2 million (December 31, 2019 - $7.2 million).

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

8 Property, plant and equipment

Land $	Buildings $	Machinery and equipment $
38,006 -	201,684 (91,200)	1,183,635 (582,854)
38,006 - - - - - - - (76)	110,484 - - - (2,265) - 2,003 (5,034) (2,713)	600,781 - - (5) - (325) 32,105 (42,606) (14,889)
37,930	102,475	575,061
37,930 -	196,126 (93,651)	1,192,419 (617,358)
37,930 - - - - 303 - (30)	102,475 - - (39) - 125,157 (5,580) (1,008)	575,061 - - (870) (398) 125,449 (44,931) (4,852)
38,203	221,005	649,459
38,203 -	319,272 (98,267)	1,288,832 (639,373)
38,203	221,005	649,459

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

9 Right-of-use assets

Land $	Buildings $	Equipment $
34,852 (21,953)	122,435 (44,120)	5,062 (2,977)
12,899 3,216 (1,557) -	78,315 8,455 (8,562) (156)	2,085 3,006 (1,201) (8)
14,558	78,052	3,882
38,068 (23,510)	130,522 (52,470)	7,827 (3,945)
14,558 - (1,664) -	78,052 20,749 (11,268) (63)	3,882 4,401 (2,160) (17)
12,894	87,470	6,106
38,068 (25,174)	150,149 (62,679)	9,641 (3,535)
12,894	87,470	6,106

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

10 Goodwill and intangible assets

Trademarks $ 11,825 - 11,825 - -	Software $	Total $
	10,125 (7,026)	21,950 (7,026)
	3,099 1,935 (1,542)	14,924 1,935 (1,542) 15,317
11,825	3,492
11,825 -	12,060 (8,568)	23,885 (8,568)
11,825 4,538 -	3,492 8,007 (1,657)	15,317 12,545 (1,657)
16,363	9,842	26,205
16,363 -	18,936 (9,094)	35,299 (9,094)
16,363	9,842	26,205

The carrying value of goodwill as of December 31, 2020 was $152.0 million (December 31, 2019 - $160.9 million).

The Partnership performs an annual impairment test for goodwill and indefinite lived trademarks. Additional information is disclosed in note 4.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

11 Pensions and post-retirement benefits

The Partnership sponsors a number of defined benefit and defined contribution pension plans, with participation available to substantially all of its employees. Length of service and individual earnings determine the pension and postretirement benefits for all members of the Partnership plans.

The Partnership has five registered defined benefit pension plans with a final average salary component, four of which are registered in the province of Quebec and one of which is registered in the province of Ontario. The pension obligation, net of plan assets for these five plans of $136.1 million as of December 31, 2020 (December 31, 2019 - $118.9 million) is included in Pensions on the consolidated statement of financial position. The solvency deficiency of the defined benefit plan for the Crabtree members is supported by a letter of credit in the amount of $3.6 million (December 31, 2019 - $3.6 million).

The Partnership has a Supplementary Retirement Plan (SRP) for designated employees. The accrued benefit liability, net of plan assets related to the SRP of $18.3 million as of December 31, 2020 (December 31, 2019 - $14.9 million) is included in Pensions on the consolidated statement of financial position, and is supported by irrevocable letters of credit in the amount of $15.7 million (December 31, 2019 - $16.0 million).

The Partnership also sponsors a Term Annuity Arrangement for the Western Manufacturing Division, which provides hourly employees with a bridging supplement commencing at age 61 and payable up to but not including age 65. The Term Annuity Arrangement is unfunded and the pension obligation of $7.0 million as of December 31, 2020 (December 31, 2019 - $6.9 million) is included in Pensions on the consolidated statement of financial position.

The Partnership’s hourly employees at the Western Manufacturing Division are members of an industry multi-employer pension plan to which the Partnership contributes monies. During the year ended December 31, 2020, the Partnership contributed and expensed $2.8 million (2019 - $2.9 million) related to this defined benefit plan. Sufficient information regarding the Partnership’s share of the defined benefit obligation is not available and accordingly the Partnership accounts for the multi-employer plan as a defined contribution plan.

The Partnership sponsors a defined contribution plan which covers substantially all of its salaried employees. During the year ended December 31, 2020, the Partnership recorded an expense of $3.2 million (2019 - $2.8 million) related to this plan.

KTG sponsors a defined contribution plan that covers substantially all of its employees. During the year ended December 31, 2020, the Partnership recorded an expense of $1.6 million (2019 - $0.9 million) related to this plan.

The Partnership provides certain health and other similar benefits for qualifying retirees (post-retirement benefit plans). These plans are not funded.

The measurement date of the pensions and post-retirement benefits plans is December 31 of each year.

By their design, the defined benefit pension plans and the post-retirement benefits plan expose the Partnership to the typical risks faced by such plans such as investment performance (pension plans only), changes to the discount rate used to value the obligations, longevity of plan members and future inflation. Pension and benefit risk is managed by regular monitoring of the plans, applicable regulations and other factors that could impact the expenses and cash flows of the Partnership. As of December 31, 2019, the aggregate solvency deficit of the defined benefit plans was $106.7 million (December 31, 2018 - $89.6 million). The actuarial valuation dates of the plans vary, ranging from December 31, 2020 to December 31, 2021. The funding obligations are dependent on a number of factors, including the assumptions used in the most recent actuarial valuation. Actual contributions that are determined on the basis of future valuation reports may vary significantly from the predictions.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

The cumulative actuarial losses recognized in the deficit as of December 31, 2020 and December 31, 2019 were as follows:

Pensions Post-retirement benefits Total	December 31, 2020 December 31, 2019 $ $ 158,613 141,636 19,771 14,900 178,384 156,536

Information about the Partnership’s defined benefit pension plans and post-retirement benefit plans was as follows:

Change in defined benefit obligation: As of January 1 Current service cost Interest cost Employee contributions Benefits paid Remeasurements: Losses (gains) from changes in experience Losses from changes in economic assumptions Losses from changes in demographic assumptions As of December 31 Change in plan assets at fair value: As of January 1 Expected return on plan assets Remeasurements: Gains on plan assets Administrative costs Employer contributions Employee contributions Benefits paid As of December 31 Accrued benefit liability Funded status - deficit		December 31, 2019 $ 668,465 8,617 22,301 3,862 (36,203) (2,149) 69,338 268 734,499 563,526 18,534 32,035 (601) 12,672 3,862 (36,203) 593,825 140,674 Pensions	Post-retirement benefitplans
	December 31, 2020 $		December 31, 2020 December 31, 2019 $ $ 57,005 54,051 2,043 1,846 1,596 1,790 - - (2,477) (2,803) - 575 4,871 1,131 - 415 63,038 57,005 - - - - - - - - 2,477 2,803 - - (2,477) (2,803) - - 63,038 57,005
	734,499 12,014 20,683 3,865 (36,407) - 60,168 -
	794,822
	593,825 16,448 43,191 (578) 13,145 3,865 (36,407)
	633,489

	161,333

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

Plan assets, which fund the Partnership’s defined benefit plans, were comprised as follows:

Fixed income Public equities Hedge funds Private equity Real assets Total Quoted on an active market Unquoted	December 31, 2020 % 36.3 28.4 20.1 7.2 8.0	December 31, 2019 % 35.0 30.6 20.5 6.6 7.3
	100.0	100.0
	64.7 35.3	65.6 34.4
	100.0	100.0

The following were the significant assumptions for the defined benefit pension plans and other benefit plans as of December 31:

Assumptions Discount rate - accrued benefit obligation Rate of compensation increases		December 31, 2019 December 31, 2020 December 31, 2019 % % % 3.07 2.57 3.07 3.25 - 4.00 Pensions Post-retirement benefit plans	December 31, 2019 December 31, 2020 December 31, 2019 % % % 3.07 2.57 3.07 3.25 - 4.00 Pensions Post-retirement benefit plans
	December 31, 2020 %		December 31, 2019 %
	2.57 3.25 - 4.00		3.07

Except for the discount rate, the assumptions represent management’s best estimates. The discount rate was based on the yield of high quality Canadian corporate fixed income investments with cash flows that match expected benefit payments.

Pensions

Expected fees payable by the plan were deducted from the expected rate of return of plan assets.

The effect of a 1% reduction in the discount rate, a 1% increase in the rate of compensation and one-year change in the life expectancy rate were:

Increase in Pension obligation		Discount rate	Rate of compensation	Rate of compensation	Life expectancy
	December 31, 2020 $	December 31, 2019 $	December 31, 2020 $	December 31, 2019 $	December 31, 2020 December 31, 2019 $ $ 22,535 19,280
	142,016	123,555	9,042	8,481

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

Post-retirement benefit plan

For measurement purposes, the trend factor for all health-care expenses, excluding medication, was assumed to be 3%. The trend factor for medication was assumed to be 4.8% for the first year (2020), decreasing to 4.0% after 20 years.

The sensitivity analysis presented was performed by changing each assumption individually. If an actual change were to occur, it is likely that certain of these assumptions would correlate, which would create a combined impact.

The effect of a 1% increase in the health care cost trend rate, a 1% reduction in the discount rate and a one-year change in the life expectancy rate were:

Increase in Post-retirement benefit obligation		Health care	December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 $ $ $ $ 11,387 10,560 1,753 1,459 Discount rate Life expectancy
	December 31, 2020 $	December 31, 2019 $
	8,854	7,411

Contributions to the defined benefit pension plans for the year ending December 31, 2021 are expected to be $13.6 million.

The net benefit pension plan expense included the following components:

Net benefit plan expense Current service cost Interest cost Expected return on plan assets Administrative cost	December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 $ $ $ $ 12,014 8,617 2,043 1,846 20,683 22,301 1,596 1,790 (16,448) (18,534) - - 578 601 - - 16,827 12,985 3,639 3,636 Pensions Post-retirement benefit plans	December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 $ $ $ $ 12,014 8,617 2,043 1,846 20,683 22,301 1,596 1,790 (16,448) (18,534) - - 578 601 - - 16,827 12,985 3,639 3,636 Pensions Post-retirement benefit plans
		1,846 1,790 - -
		3,636

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

The following amounts are recognized in Other comprehensive loss:

Gains (losses) from changes in experience Losses from changes in economic assumptions Losses from changes in demographic assumptions Gains on plan assets	2020 $ - (60,168) - 43,191	2019 2020 2019 $ $ $ 2,149 - (575) (69,338) (4,871) (1,131) (268) - (415) 32,035 - - (35,422) (4,871) (2,121) Pensions Post-retirement benefit plans
	(16,977)

12 Trade and other payables

Trade payables Accrued liabilities Contract liabilities(a) Derivative liabilities	December 31, 2020 December 31, 2019 $ $ 109,593 102,102 114,776 99,829 107,703 40,020 - 406 332,072 242,357

(a) A contract liability is recognized for expected discounts, rebates and allowances payable in relation to sales made in the reporting period. Contract liabilities increased as of December 31, 2020 primarily due to an increase in sales volume in the Consumer segment.

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

13 Provisions

Provisions as of January 1, 2019 Additional provisions Remeasurement adjustment (note 8) Paid during the year Interest accretion Provisions as of December 31, 2019 Current Non-current Provisions as of January 1, 2020 Additional provisions Paid during the year Interest accretion Provisions as of December 31, 2020 Current Non-current	Environmental and asset retirement obligations(a) $ 4,831 246 (2,265) - 215 3,027 - 3,027 3,027 3,382 - 136 6,545 - 6,545	Long-term incentives, DSUs, PSUs and RSUs(b) $ 859 2,154 - (176) - 2,837 259 2,578 2,837 4,956 (614) - 7,179 4,309 2,870	Restructuring Total $ $ - 5,690 1,904 4,304 - (2,265) (861) (1,037) - 215 1,043 6,907 500 759 543 6,148 1,043 6,907 1,275 9,613 (1,580) (2,194) - 136 738 14,462 604 4,913 134 9,549

(a) Environmental and asset retirement obligations

The Partnership has made a provision for the potential obligation under a land lease at one of its plant locations to demolish the building and restore the land at the end of the lease to its original condition. The current lease ends in March 2028. During the year ended December 31, 2019, the Partnership entered into a new lease agreement that commences in March 2028 and permits the Partnership to secure the site until March 2053. As a result, the Partnership recorded a decrease in the original obligation of $2.3 million in the consolidated statement of financial position as of December 31, 2019, due to changes in the expected timing of settlement. The undiscounted amount to settle this obligation is estimated to be between $13.1 million and $17.3 million. The liability is estimated using a discounted cash flow with a discount rate of 2.12% (December 31, 2019 – 4.395%).

(b) Long-term incentives, DSUs, PSUs and RSUs

Long-term incentives include the Executive Long-Term Incentive Plan (LTIP) for the Partnership. The LTIP uses performance share units (PSUs) and restricted share units (RSUs). Performance results are based primarily on Adjusted EBITDA (note 21) return on capital employed using a three year average, along with other components. The PSUs are paid in cash in May of the year following the three-year period they are earned. The PSU expense is recognized over the same three-year period. The RSUs are expensed and vest one-third each year and are paid in cash each May.

The Partnership has adopted a policy that requires that each director own a minimum of 5,000 common shares and/or share equivalents in the form of deferred share units (DSUs) of KPT. A deferred share unit plan (Plan) has

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

been adopted which allows independent directors to receive all or part of their director retainer fees in the form of DSUs. The Plan allows for the issuance of additional units as dividend equivalents when KPT declares and issues a dividend to shareholders. Upon the individual ceasing to be a director, the DSUs will be paid out in cash. As of December 31, 2020, DSUs of $0.4 million were recorded (December 31, 2019 – $0.2 million).

14 Long-term debt

Maturity	December 31, 2020 $	December 31, 2019 $ 88,257 122,369 206,792 92,421 50,784 26,823 3,616
2023 2025 2023, 2025, 2036, 2037 2028 2029 2026 2026	8,941 122,847 444,933 98,251 53,225 23,024 2,252
	753,473 9,495	591,062 4,937
	743,978	586,125

a) Senior Credit Agreement

The Partnership is a party to a sixth amended and restated credit agreement dated as of April 24, 2018 entered into by the Partnership, as borrower, the lenders party thereto and National Bank of Canada, as administrative agent, as amended by a first supplemental credit agreement dated November 19, 2018 and a second supplemental credit agreement dated September 19, 2019 (the Senior Credit Agreement) pursuant to which a senior secured revolving credit facility in a maximum amount of $250 million (increased from $200 million) with a $75 million accordion feature (the Senior Credit Facility) is made available to the Partnership. The financial covenants were amended by a consent letter dated as of May 27, 2020. The maturity date of the Senior Credit Facility is September 19, 2023. The Senior Credit Facility is to be used by the Partnership to finance general corporate purposes and the ongoing working capital requirements of the Restricted Credit Parties (as defined below), and to finance the cash portion of any permitted acquisition or any investment by any such Restricted Credit Party (as defined below).

The Senior Credit Agreement is guaranteed by each Restricted Credit Party. Under the Senior Credit Agreement, “Restricted Credit Parties” means the Partnership, KPGP, Kruger Products Real Estate Holdings Inc., KP USA, Kruger Products AFH G.P. Inc. and Kruger Products AFH L.P. and their respective subsidiaries involved in the tissue business but excluding the Unrestricted Credit Parties (which include TAD Canco Inc., TAD Luxembourg S.A.R.L., KTG, KPSI, KP TAD Holdco Inc., TAD2 GP ULC, TAD2 US LP, TAD1 Canco I Inc., TAD1 GP ULC, TAD1 US LP and TAD1 Canco II Inc.) and the Non-Material Credit Parties (as such terms are defined in the Senior Credit Agreement). All Restricted Credit Parties granted first ranking security interests and hypothecs over all of their assets, present and future, movable and immovable, corporeal and incorporeal, to secure the obligations under the Senior Credit Agreement including a pledge of 100% of the stock or ownership interest in all credit parties owned by the Partnership and the Restricted Credit Parties.

Borrowings under the Senior Credit Facility bear interest at a base rate of Canadian Prime Rate, U.S. Base Rate, LIBOR, Banker’s Acceptance Stamping Fees or LC Fees, plus a margin varying between 0.20% and 3.50%

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

depending on the Ratio of Total Net Funded Debt to EBITDA (as defined in the Senior Credit Agreement) and the type of advance. Stand-by fees are also payable on the available portion of the Senior Credit Facility at a rate varying between 0.24% and 0.70% depending on the Restricted Credit Parties’ Ratio of Total Net Funded Debt to EBITDA (as defined in the Senior Credit Agreement).

The Partnership may voluntarily cancel or reduce the Senior Credit Facility, in whole or in part, subject to minimum amounts and notice period, with customary restrictions on prepayment of Banker’s Acceptances, Libor Loans and liabilities under Letters of Credit (in each case, as defined in the Senior Credit Agreement).

The Senior Credit Agreement contains customary affirmative covenants, including, but not limited to, delivery of financial and other information to the administrative agent, delivery of notice to the administrative agent upon the occurrence of certain material events, preservation of existence and authorizations, maintenance of insurance, compliance with laws, payment of taxes and other claims, limitation of transactions with affiliates and maintenance of security.

The Senior Credit Agreement requires the Restricted Credit Parties to comply with certain financial covenants. The financial covenants are calculated on an Adjusted Consolidated Basis (as defined in the Senior Credit Agreement) such that the Unrestricted Credit Parties are accounted for as investments but not consolidated. As such, indebtedness under the AgCredit Agreement, IQ Debenture and the Unrestricted Subsidiaries’ EBITDA are not included in such calculations. Pursuant to the second supplemental credit agreement dated September 19, 2019, the Partnership is no longer required to maintain the Ratio of Total Net Funded Debt to EBITDA (as defined in the Senior Credit Agreement) and the requirement for the Ratio of Senior Secured Net Funded Debt to EBITDA (as defined in the Senior Credit Agreement) was updated. Pursuant to a consent letter dated May 27, 2020, the requirement for the Ratio of Senior Secured Net Funded Debt to EBITDA was again updated.

The Partnership shall maintain on an Adjusted Consolidated Basis and quarterly financial basis:

Ratio of Senior Secured Net Funded Debt to EBITDA not greater than:

(i) 3.00 to 1.00 until December 31, 2018, inclusively;
(ii) 3.25 to 1.00 from January 1, 2019 to March 31, 2019;
(iii) 3.75 to 1.00 from April 1, 2019 to September 30, 2019;
(iv) 3.50 to 1.00 from October 1, 2019 to March 31, 2020; and
(v) 3.00 to 1.00 thereafter

Interest Coverage Ratio (as defined in the Senior Credit Agreement) of at least 3.00 to 1.00.

The Senior Credit Agreement contains customary negative covenants of the Partnership, including, but not limited to, (i) restrictions on the ability of the Partnership and the Restricted Credit Parties to, subject to certain exceptions, grant liens, incur indebtedness, merge or consolidate, amend, restate or otherwise modify the Limited Partnership Agreement, make investments and loans, grant guarantees, make acquisitions, declare, set apart and pay distributions (which does not apply to the Tax Distribution (as defined below) to KPT), reduce capital, sell or otherwise dispose of assets, incur capital expenditures or materially change their business, and (ii) restrictions on the indebtedness of TAD Canco Inc., TAD Luxembourg S.A.R.L and KTG and the amendment of the TAD financing documents.

The Senior Credit Agreement contains customary events of default, including, but not limited to, non-payment, misrepresentation, breach of covenants, cross-default and cross-acceleration to other debt above a certain threshold, cross defaults to the Nordea Credit Agreement (matured December 30, 2019) and the Nordea2 Credit Agreement (as defined below), insolvency, change of control of the Partnership or Kruger and enforcement proceedings.

The Senior Credit Facility is guaranteed by each Restricted Credit Party. The Partnership and each Restricted Credit Party granted first ranking security interests and hypothecs over their current and future tangible and intangible

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

assets (subject to permitted liens) to secure the obligations under the Senior Credit Facility, including a pledge of all capital stock or ownership interest in all subsidiaries owned by the Partnership and the Restricted Credit Parties. The guarantees and security are granted on a pari passu basis in favour of the lenders and the administrative agent under the Senior Credit Agreement and the lenders and the administrative agent under the Nordea Credit Agreement (matured December 30, 2019) and the Nordea2 Credit Agreement (as defined below).

b) Senior Unsecured Notes Indenture

On April 24, 2018, the Partnership issued $125 million aggregate principal amount of 6.0% senior unsecured notes due April 24, 2025 (the Notes) by way of private placement in Canada in accordance with applicable Canadian prospectus and registration exemptions. The Notes were issued pursuant to a trust indenture entered into as of April 24, 2018 between the Partnership, the Guarantors and Computershare Trust Company of Canada (the Indenture). Interest on the Notes accrues at 6.0% per year and is payable semi-annually on April 24 and October 24 of each year.

Under the Notes, “Restricted Subsidiaries” means any subsidiary of the Partnership that is not an Unrestricted Subsidiary as defined in the Indenture (which Unrestricted Subsidiaries include TAD Canco, TAD Luxembourg, KTG and Non-Material Subsidiaries as defined in the Indenture).

The Notes are senior unsecured obligations of the Partnership. The Notes rank senior in right of payment to all existing and future subordinated indebtedness of the Partnership and equal in right of payment to all indebtedness of the Partnership that is not subordinated in right of payment to the Notes other than any indebtedness that ranks senior to the Notes by operation of law. The Notes will be effectively subordinated to all existing and future secured indebtedness of the issuer, to the extent of the assets securing such indebtedness.

The Notes are unconditionally guaranteed, jointly and severally, by all existing and future Restricted Subsidiaries (the Guarantors). The guarantees are senior unsecured obligations of each of the Guarantors and will rank senior in right of payment to all existing and future subordinated indebtedness of the Guarantors and equal in right of payment to all indebtedness of such Guarantor that is not subordinated in right of payment to their guarantee, other than indebtedness that ranks senior to the guarantees by operation of law.

At any time prior to April 24, 2021, the Partnership may redeem up to 35.0% of the aggregate principal amount of the Notes at a redemption price of 106% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to the date of redemption, with the net proceeds received by the Partnership from certain equity offerings after the issue date.

At any time prior to April 24, 2021, the Partnership may redeem the Notes, at a redemption price equal to the greater of (a) the Applicable Premium (as defined in the Indenture) and (b) 101% of the aggregate principal amount of the Notes redeemed, plus, in each case, accrued and unpaid interest, if any, to the applicable redemption date.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

On or after April 24, 2021, the Partnership may redeem all or part of the Notes at the following redemption prices, plus accrued and unpaid interest to the applicable redemption date, if redeemed during the 12-month period commencing April 24 of the year set forth below:

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Year Percentage
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	Year	Percentage
	2021	104.5%
	2022	103.0%
	2023	101.5%
2024	and thereafter	100.0%

Upon the occurrence of a Change of Control of the Partnership (as defined in the Indenture), the Partnership will be required to offer to repurchase all or any part of each holder’s Notes for a payment in cash equal to 101% of the aggregate principal amount of Notes repurchased, plus accrued and unpaid interest thereon to the purchase date.

The Indenture contains certain restrictive covenants of the Partnership, including, but not limited to, limitations on making certain restricted payments by the Partnership or its Restricted Subsidiaries, restrictions on incurring certain indebtedness by the Partnership or its Restricted Subsidiaries, restrictions on incurring certain liens by the Partnership or its Restricted Subsidiaries, certain restrictions on transactions with affiliates, limitations on engaging in any line of business other than the businesses in which the Partnership and the Restricted Subsidiaries were engaged on the date of issuance of the Notes, and any business reasonably related, incidental, complementary or ancillary thereto, limitations on creating any contractual restrictions on the ability of the Partnership or its Restricted Subsidiaries to take certain actions, such as the payment of dividends or making of distributions, restrictions on consolidating, amalgamating or merging into any other person and restrictions on selling, transferring, assigning, leasing, conveying or otherwise disposing of all or substantially all of the property of the Partnership and the Restricted Subsidiaries taken as a whole.

The Indenture contains customary events of default such as non-payment, liquidation of assets, change of control, non-payment or acceleration of any indebtedness in an aggregate amount exceeding $25 million, insolvency and enforcement proceedings.

c) AgCredit Agreement

Subsidiaries of the Partnership are party to a credit agreement dated as of November 19, 2018 entered into by, among others, KTG, TAD1 US LP, TAD2 US LP and KPSI, as borrowers, each guarantor from time to time party thereto, as guarantors, each lender from time to time party thereto, as lenders, American AgCredit, FLCA, as administrative agent and National Bank of Canada, as Canadian administrative agent, as amended by the first amendment to the credit agreement executed as of April 20, 2020, dated and effective as of March 23, 2020 (AgCredit Agreement). Pursuant to the AgCredit Agreement, the following credit facilities were made available: (i) US$188 million term loan facility repayable by March 31, 2037 (extended from December 31, 2036) related to amounts drawn on or after March 23, 2020 by quarterly principal instalment payments commencing on June 30, 2026 (extended from March 31, 2026) related to amounts drawn on or after March 23, 2020 and bearing interest at a fixed rate based on the farm credit system cost of funds plus an applicable margin set at the time of each tranche draw, (ii) $111 million term loan repayable by December 31, 2025 by quarterly principal instalment payments commencing on June 30, 2022 (extended from March 31, 2022) and bearing interest at a floating interest rate based on CDOR plus an applicable margin, (iii) revolving loans of US$10 million and $12.5 million with a maturity date of December 31, 2023 with floating interest rates and a renewal option (the facility detailed in items (i) to (iii), collectively the TAD Sherbrooke Project Facility), and (iv) US$147 million term loan repayable by December 31, 2036 by quarterly principal instalment payments commencing on June 30, 2022 (extended from March 31, 2022) and bearing interest at a 7.3% maximum fixed interest rate and repayable after a three-year lock-out period (the KTG Facility).

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

The purpose of the TAD Sherbrooke Project Facility is to partially finance the TAD Sherbrooke Project. The purpose of the KTG Facility was to repay existing indebtedness of KTG and TAD Canco Inc.

The TAD Sherbrooke Project Facility and KTG Facility are each guaranteed by the borrowers and guarantors. The borrowers and guarantors (as such terms are defined in the AgCredit Agreement) granted first ranking security interests over all of their assets, present and future, movable and immovable, corporeal and incorporeal, to secure the obligations under the AgCredit Agreement. The TAD Sherbrooke Project Facility and the KTG Facility are both non-recourse to the Partnership.

The borrowers may voluntarily cancel or reduce the revolving loans, in whole or in part, without premiums or penalty. The borrowers shall have the right at any time to voluntarily prepay the entire amount or any amount outstanding of the term loans subject to minimum amounts and notice period. Prepayment shall be accompanied by the payment of all accrued and unpaid interest with respect to fixed rate advances. If all or any portion of the outstanding balance of a term loan is prepaid, prepayment premiums may apply.

The AgCredit Agreement requires the borrowers to comply with certain financial covenants. The financial covenants are calculated on a Combined Basis (as defined in the AgCredit Agreement). Pursuant to the first amendment to the credit agreement dated March 23, 2020:

On a Combined Basis and quarterly financial basis, the Borrowers shall not:

Permit the Combined Leverage Ratio (as defined in the AgCredit Agreement) as of the end of any fiscal quarter of the borrowers to exceed 60%;

Permit the Combined Fixed Charge Coverage Ratio (as defined in the AgCredit Agreement) as of the end of any fiscal quarter of the borrowers, beginning with the fiscal quarter ending September 30, 2022 (extended from June 30, 2022), to be less than:

(i) 1.10 to 1.00 with respect to the fiscal quarter ending September 30, 2022 (extended from June 30, 2022) through and including the fiscal quarter ending September 30, 2023 (extended from June 30, 2023); and (ii) 1.25 to 1.00 with respect to the fiscal quarter ending December 31, 2023 (extended from September 30, 2023) and each fiscal quarter thereafter.

The first amendment to the credit agreement also extended the Substantial Completion Date (as defined in the AgCredit Agreement) to June 30, 2022 (extended from March 31, 2022).

The AgCredit Agreement contains customary affirmative covenants, including, but not limited to, delivery of financial and other information to the administrative agent, delivery of notice to the administrative agent upon the occurrence of certain material events, preservation of existence and authorizations, maintenance of insurance, compliance with laws, payment of taxes and other claims, limitation of transactions with affiliates and maintenance of security.

The AgCredit Agreement contains customary events of default such as non-payment, misrepresentation, breach of covenants and change of control.

As of December 31, 2020, the following amounts were drawn on the TAD Sherbrooke Project Facility: (i) US$144.9 million on the US$188 million term loan facility (December 31, 2019 – US$10.3 million); (ii) $85.5 million on the $111 million term loan facility (December 31, 2019 – $6.1 million); and (iii) nil on the $12.5 million revolving loan facility (December 31, 2019 – $7.0 million).

As of December 31, 2020, the following amount was drawn on the KTG Facility:

(i) US$147.0 million on the US$147 million term loan facility (December 31, 2019 – US$147.0 million).

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

As of December 31, 2020, unamortized deferred financing fees were $9.6 million (December 31, 2019 – $9.9 million).

Subsequent to December 31, 2020, the following additional amounts were drawn on the TAD Sherbrooke Project Facility:

(i) US$14.4 million on the US$188 million term loan facility; and (ii) $8.5 million on the $111 million term loan facility.

d) IQ Debenture

On November 19, 2018, KPSI issued a 10-year convertible debenture in favour of Investissement Québec (IQ) in the principal amount of $105 million (the IQ Debenture). The IQ Debenture is being used to partially finance the TAD Sherbrooke Project.

Borrowings under the IQ Debenture bear interest at a fixed capitalized interest rate of 3%.

The IQ Debenture is redeemable on a monthly basis commencing 36 months from the date of issuance, which payments KPSI undertakes to cause the Partnership or Kruger Inc. to make, failing which IQ will have a conversion right on terms of conversion that would provide IQ with a 48% equity interest in KPSI if the entirety of the debenture was so converted.

Pursuant to a repayment agreement (the Repayment Agreement) between Kruger Inc., the Partnership, KPSI, and IQ, the Partnership has at its discretion, a priority right to make any required monthly redemption payment to IQ. The party that makes the redemption payment will receive common shares of KPSI as consideration of such payment. Pursuant to the Repayment Agreement, if Kruger Inc. makes all of the redemption payments, it will hold approximately 48% of KPSI.

The IQ Debenture contains covenants including, but not limited to, the delivery of financial statements and other information.

The IQ Debenture contains customary events of default such as failure to convert, misrepresentation and breach of covenants.

The Partnership has recorded the IQ Debenture at its fair value of $87.6 million at the date of issuance. The fair value was estimated by discounting the cash flows using a discount rate of 6.0%. The difference between the proceeds received of $105.0 million and the fair value has been recorded as government assistance and netted against the purchases of the property, plant and equipment for the TAD Sherbrooke Project.

As of December 31, 2020, unamortized deferred financing fees were $0.5 million (December 31, 2019 – $0.5 million).

e) Nordea2 Credit Agreement

The Partnership is party to a credit agreement dated as of November 2, 2018 entered into by the Partnership, as borrower, the lender party thereto and Nordea Bank Abp Filial I Sverige, as administrative agent, as amended by an amendment letter dated November 19, 2018 and an amendment letter dated September 19, 2019 (the Nordea2 Credit Agreement) pursuant to which a senior secured non-revolving loan facility in a maximum amount of US$48.8 million (the Nordea2 Credit Facility) was made available to the Partnership. The Nordea2 Credit Facility is to be used to partially finance the TAD Sherbrooke Project and the fees of the Swedish Export Credits Guarantee Board (EKN) in connection with its guarantee of the Nordea2 Credit Facility. The Nordea2 Credit Facility matures on August 31, 2029.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

Borrowings under the Nordea2 Credit Facility bear interest at a fixed interest rate of 3.74% per annum, comprised of a Swedish state reported interest rate, risk premium and administrative margin.

The Nordea2 Credit Facility is repayable in 17 equal consecutive semi-annual installments of principal together with interest commencing on August 28, 2021. Prepayments are allowed subject to a make-whole payment on account of interest losses.

The covenants, financial covenants and negative covenants provided by the Partnership under the Senior Credit Agreement are incorporated and made part of the Nordea2 Credit Agreement. See Senior Credit Agreement above. The Nordea2 Credit Agreement contains restrictions on amendments to the Senior Credit Agreement and related security and other documents.

The Nordea2 Credit Agreement contains customary events of default such as non-payment, misrepresentation and breach of covenants and also provides for a cross-default to the Senior Credit Agreement and a default related to the termination or loss of the EKN guarantee.

The Nordea2 Credit Agreement provides for pari passu security and guarantees on the assets and undertaking of the Partnership and each Restricted Credit Party, the relationship between the lender and administrative agent under the Nordea Credit Agreement (matured December 30, 2019), the Nordea2 Credit Agreement and the administrative agent and the lenders under the Senior Credit Agreement being governed by a collateral agency and security sharing agreement.

As of December 31, 2020, unamortized deferred financing fees were $3.0 million (December 31, 2019 – $3.6 million).

f) Quebec PM Loan Agreement

The Partnership is a party to a loan agreement dated as of August 9, 2016 entered into by the Partnership, as borrower, and IQ as lender (the Quebec PM Loan Agreement) pursuant to which a secured non-revolving loan in a maximum amount of $39.5 million (the Quebec PM Loan) is made available to the Partnership. The Quebec PM Loan is being used to partially finance the acquisition and relocation of a paper machine to be installed at the Crabtree facility (the PM Project). The Quebec PM Loan Agreement matures ten years after the first loan disbursement, which occurred on September 6, 2016.

Borrowings under the Quebec PM Loan bear interest at a fixed interest rate of 2.5% per annum for a period of seven years from the date of the first loan disbursement. The interest rate thereafter increases to a fixed rate of 3.5% per annum until the eighth anniversary of the first loan disbursement, a fixed rate of 4.5% per annum until the ninth anniversary of the first loan disbursement, and a fixed rate of 5.5% per annum thereafter. Monthly interest payments commence the month following the first loan disbursement.

The Quebec PM Loan had a moratorium on repayment of the principal for the initial 24 months following the date of the first loan disbursement, after which the principal is to be repaid in 96 monthly consecutive payments. The monthly repayments are reduced, in the reverse order of maturity, by repayments to IQ corresponding to the Partnership’s receipt of Government of Quebec electricity tariff rebates.

The Quebec PM Loan Agreement contains covenants including, but not limited to, delivery of financial and other information to IQ, the preservation of existence, maintenance of insurance and maintenance of operations. The Quebec PM Loan Agreement also contains restrictions on the disposition of assets, incurrence of indebtedness and granting of liens, change of control and changes in the PM Project.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

The Quebec PM Loan Agreement contains customary events of default such as non-performance, non-payment, misrepresentation, breach of covenants, cross-default to the Nordea Credit Facility (as defined below) and the Senior Credit Facility, insolvency and enforcement proceedings.

The Quebec PM Loan is secured by the acquired paper machine and the portion of the property on which the paper machine is installed. The security is second ranking immediately after the security granted in favour of the Senior Credit Facility.

g) Ontario Loan Agreement

The Partnership is a party to a conditional loan agreement dated as of July 1, 2015 entered into by the Partnership, as borrower, and the Government of Ontario as lender (the Ontario Loan Agreement) pursuant to which a secured non-revolving loan in a maximum amount of $10.0 million (the Ontario Loan) is made available to the Partnership. The Ontario Loan is being used to partially finance the expansion project at the Trenton facility. The Ontario Loan Agreement matures ten years after the first loan disbursement, which occurred on February 24, 2016.

Borrowings under the Ontario Loan bear interest at a fixed interest rate of 2.4% per annum for a period of five years from March 1, 2021. Annual interest payments commence February 28, 2022.

The Ontario Loan had a moratorium on repayment of the principal for the initial five years following the date of the first loan disbursement. Principal is to be repaid in five equal annual payments together with interest commencing February 28, 2022. A portion of the loan principal was forgivable, subject to prescribed conditions, up to a maximum forgivable portion of $5.0 million. As of December 31, 2020, loan principal of $4.4 million was forgiven.

The Ontario Loan Agreement contains covenants including, but not limited to, delivery of financial and other information to the Government of Ontario, the preservation of existence, maintenance of insurance, compliance with laws, payment of taxes, completion of project and limitations on project procurement. The Ontario Loan Agreement also contains restrictions on the disposition of assets and changing the nature of the business and an undertaking to comply with the negative covenants in the Senior Credit Agreement.

The Ontario Loan Agreement contains customary events of default such as non-performance, non-payment, misrepresentation, breach of covenants and abandonment of the project and also provides for a cross-default to the Senior Credit Agreement.

The Ontario Loan is secured by the assets acquired for the expansion project at the Trenton facility.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

h) Sherbrooke Expansion Project

On February 26, 2021, the Partnership announced a further investment of $240 million to expand the Sherbrooke operation with a new paper machine and two production lines as well as the construction of a new tissue manufacturing facility (the Sherbrooke Expansion Project) over the next three years.

The $240 million project is expected to be financed 100% with debt. IQ has signed a letter of intent to invest $165 million in the project as follows: (i) $118 million, by way of a $75 million convertible debenture and a $43 million subordinated loan to Kruger Products SB Inc. (KPSB), a newly created wholly owned subsidiary of the Partnership which will operate the new facility, and (ii) $47 million by way of a subordinated loan to KPSI, which operates the TAD Sherbrooke facility. The debenture and loans are expected to have a ten year term.

As part of the commitment of the IQ financing, the Partnership will be required to make annual payments of $5.8 million to Kruger Brompton L.P. (KBLP) over a 10 year period in exchange for access to shared infrastructure and services, the transfer of properties to complete the project and KBLP’s facilitation of the capital and financing structure for the project.

The aggregate future principal repayments required on long-term debt are as follows:

Less than 1 year Between 1 and 5 years More than 5 years	$
	9,495 392,312 382,367
	784,174

Interest expense reflected on the consolidated statement of comprehensive loss was as follows:

Interest expense on long-term debt Pension and post-retirement benefits, net Interest expense on lease liabilities Receivables factoring arrangement Interest accreted on provisions	2020 2019 $ $ 28,060 32,460 5,831 5,557 5,732 5,363 1,206 1,476 136 215 40,965 45,071

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

15 Lease liabilities

The Partnership’s leases relate to right-of-use of land, buildings, equipment and motor vehicles. As of December 31, 2020, the contractual undiscounted cash flows for Lease liabilities were as follows:

Less than 1 year Between 1 and 5 years More than 5 years	December 31, 2020 $
	25,341 80,105 67,002
	172,448

Renewal options have been included in the measurement of Lease liabilities when it is reasonably certain that the Partnership will exercise the renewal option.

Interest expense on Lease liabilities, expenses relating to variable payments not included in the measurement of Lease liabilities and expenses relating to low-value leases were as follows:

Interest expense on Lease liabilities(a) Expenses relating to variable payments not included in the measurement of Lease liabilities(b) Expenses relating to low-value leases(b)	2020 $	2019 $
	5,732 4,934 254	5,363 5,272 303
	10,920	10,938

(a) Included in Interest expense in the consolidated statement of comprehensive loss.

(b) Included in Cost of sales and SG&A expenses in the consolidated statement of comprehensive loss.

Expenses relating to variable payments not included in the measurement of lease liabilities include variable lease payments for operating costs, property taxes and insurance.

For the year ended December 31, 2020, expenses relating to short-term leases were not significant.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

16 Distributions and Partnership units liability

As of January 1, 2019 Change in amortized cost of Partnership units liability (note 5) As of December 31, 2019 As of January 1, 2020 Change in amortized cost of Partnership units liability (note 5) Tax Distributions As of December 31, 2020	Partnership units liability $
	116,524 26,991
	143,515
	143,515 47,012 (5,103)
	185,424

The Partnership unit distributions paid, the portion of the distribution reinvested by the partners, the additional Partnership units issued at the unit price, and the gross proceeds were as follows:

Distribution Payment Date				2020
	Partnership unit distributions $	Unit price $	Issuance of Partnership units #	Gross proceeds $ 9,999 10,175 5,352 5,396 30,922 2019
January 15, 2020 April 15, 2020 July 15, 2020 October 15, 2020 Distribution Payment Date	11,393 11,576 11,760 11,847	9.84 9.92 11.16 13.41	1,016,179 1,025,660 479,600 402,424
	46,576		2,923,863

	Partnership unit distributions $	Unit price $	Issuance of Partnership units #	Gross proceeds $ 7,317 7,306 7,423 9,917 31,963
January 15, 2019 April 15, 2019 July 15, 2019 October 15, 2019	10,723 10,880 11,032 11,195	8.36 8.70 8.16 9.04	875,273 839,801 909,630 1,097,033
	43,830		3,721,737

On January 15, 2021, the Partnership paid a distribution of $11.9 million to the partners. Pursuant to the Partnership’s Distribution Reinvestment Plan (DRIP), a portion of the distribution was reinvested by the partners, resulting in the Partnership issuing 507,826 Partnership units at a price of $10.70. During the year ended December 31, 2020, a decrease of $0.3 million was recorded as a fair value adjustment to reflect the market value of the Partnership units issued.

Subsequent to December 31, 2020, the Partnership declared a distribution of $12.0 million, payable on April 15, 2021.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

The Partnership paid (received) Partnership unit distributions, Tax Distributions and advances to its related parties as follows:

Advances paid $	Tax Distributions $	Partnership unit distibutions $	2020 Total $
4,773 - 874	4,322 - 781	10,056 3 5,595	19,151 3 7,250
5,647	5,103	15,654	26,404
			2019
	Advances received $	Partnership unit distibutions $	Total $
	(1,435) - (189)	6,880 3 4,984	5,445 3 4,795
	(1,624)	11,867	10,243

(a) During the years ended December 31, 2020 and December 31, 2019, Partnership unit distributions were paid to Kruger Inc. net of the DRIP reinvestment. During the year ended December 31, 2020, Kruger Inc.’s DRIP reinvestment was $29.6 million (2019 - $30.1 million).

(b) During the years ended December 31, 2020 and December 31, 2019, Partnership unit distributions were paid to KPT net of the DRIP reinvestment. During the year ended December 31, 2020, KPT’s DRIP reinvestment was $1.4 million (2019 - $1.9 million).

Tax Distribution

Pursuant to the Tax Distribution as defined in the Partnership Agreement, on February 28, 2020, the Partnership declared a Tax Distribution of $5.1 million, of which $0.1 million was used to settle the outstanding advance to KPT as of December 31, 2019.

During the year ended December 31, 2020, pursuant to the Tax Distribution as defined in the Partnership Agreement, the Partnership made advances to its partners of $5.6 million, of which $0.9 million was used to pay the monthly tax instalment on behalf of KPT and the remaining was advanced to Kruger Inc. and KPGP. The advances are non-interest bearing and non-recourse in nature and are settled when the Tax Distribution is declared annually. The Partnership declared a Tax Distribution of $17.5 million on February 26, 2021, of which the advances of $5.6 million were offset and the remaining $11.9 million was paid on February 26, 2021.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

17 Income taxes

The Partnership is not a tax paying entity for the years ended December 31, 2020 and December 31, 2019. The income (loss) from the Partnership flows to the partners, Kruger Inc., KPGP, and KPT. However, the Partnership’s subsidiaries KP USA, KTG, TAD Canco Inc., TAD Luxembourg S.A.R.L, KP TAD Holdco Inc., TAD1 Canco I Inc., TAD1 Canco II Inc., TAD1 GP ULC, TAD2 GP ULC, and KPSI are corporate entities and, therefore, are subject to tax.

The consolidated income tax expense for the Partnership of $8.7 million for the year ended December 31, 2020 (2019 - $2.5 million) related to KP USA, KTG, TAD Luxembourg S.A.R.L, KPSI and GTM (note 5).

The components of income taxes were as follows:

Current tax expense Deferred tax expense (recovery)	2020 2019 $ $ 2,387 2,998 6,268 (504) 8,655 2,494

Details of the provision for income taxes and the reconciliation of the consolidated Canadian federal and provincial statutory income tax rates to the effective tax rate on earnings were as follows:

Combined federal and provincial income tax rates after manufacturing and processing credits Income tax in partners' hands Difference in statutory income tax rate of foreign operations U.S. State tax credits not recognized U.S. interest deduction limitation Change in State apportionment Withholding tax Consolidation entries Permanent and other	$ % 9,386 26.1 (3,800) (10.6) (710) (2.0) - - 3,246 9.0 - - 336 0.9 (826) (2.3) 1,023 3.0 8,655 24.1 2020	$ % 1,208 26.3 (2,427) (52.9) 614 13.4 5,095 111.0 - - (3,908) (85.1) 393 8.6 435 9.5 1,084 23.6 2,494 54.4 2019
	9,386 (3,800) (710) - 3,246 - 336 (826) 1,023
	8,655

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

Components of the deferred tax assets were as follows:

Property, plant and equipment Net operating losses Long term debt and deferred financing charges Inventory and accrued liabilities U.S. State tax credits Other	December 31, 2020 December 31, 2019 $ $ (84,426) (61,813) 101,912 71,631 (379) 12,504 1,757 2,618 4,430 5,065 923 983 24,217 30,988

The analysis of the deferred tax assets was as follows:

Deferred tax asset to be recovered within 12 months Deferred tax asset to be recovered after 12 months	December 31, 2020 December 31, 2019 $ $ 1,757 2,618 22,460 28,370 24,217 30,988

In addition to the above, the Partnership has deferred tax assets of $47.9 million related to net operating loss carryforwards and $14.0 million related to U.S. State tax credits which have not been recognized in the consolidated financial statements.

The Partnership had the following net operating loss carry-forwards available as of December 31, 2020:

2004 2005 2006 2009 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020	U.S. Federal $ Expiry date - - - - - 2,213 2024 26 2025 5,644 2026 1,552 2029 609 2031 2,696 2032 56,830 2033 62,505 2034 36,279 2035 29,371 2036 15,875 2037 39,068 36,168 - 288,836	U.S. State Canada $ Expiry date $ Expiry date 5,344 2021 - 134 2022 - 553 2023 - 547 2024 - 56 2026 - 5,257 2027 - 58,213 2028 - 61,721 2029 - 36,733 2030 - 29,942 2031 1,151 2031 13,612 2032 10,849 2032 13,041 2033 22,405 2033 13,028 2034 23,544 2034 1,062 2035 22,769 2035 845 2036 24,487 2036 388 2037 24,221 2037 1,700 2038 25,542 2038 3,745 2039 19,955 2039 - 2040 146,739 2040 245,921 321,662

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

The Partnership had the following U.S. State tax credits available for carry-forward as of December 31, 2020:

	U.S. State
	$ Expiry date
2012	29	2027
2013	13,229	2028
2014	1,727	2029
2015	1,610	2030
2016	1,838	2031
	18,433

These credits are available to reduce future Tennessee excise tax and franchise tax otherwise payable by its subsidiary, KTG.

18 Related party transactions

The Partnership makes sales to and acquires goods and services from Kruger Inc. and its subsidiary companies (related parties) in the normal course of business. These transactions are measured at the exchange amount, which is the amount agreed on by the related parties, and are non-interest bearing.

The Partnership and Kruger Inc. are parties to a Third Amended and Restated Management Services Agreement dated as of November 15, 2019 with effect as of January 1, 2020 (Management Services Agreement) pursuant to which Kruger Inc. provides certain management and support services to the Partnership, including corporate management support and administrative support services; accounting and tax support; corporate financing and treasury support; benefits and human resources support services; corporate insurance; corporate procurement services complementary to KPLP procurement; project development and management services (including in connection with the TAD Sherbrooke Project), corporate development support, environmental support and corporate engineering support services. During the year ended December 31, 2020, management fees of $7.4 million (2019 - $4.4 million) were paid to Kruger Inc. for management services provided to the Partnership.

Kruger Inc. is also providing certain management and support services related to the TAD Sherbrooke Project including project management services, and engineering, construction, accounting and corporate finance support services.

Sales of goods to Kruger Inc. for the year ended December 31, 2020 were $0.2 million (2019 - $0.1 million). Sales of goods to subsidiaries of Kruger Inc. for the year ended December 31, 2020 were $0.1 million (2019 - $0.2 million). Goods are sold based on the price lists in force and terms that would be available to third parties.

Purchases of goods and services from Kruger Inc. for the year ended December 31, 2020 were $9.4 million (2019 - $5.8 million). Purchases of goods and services from subsidiaries of Kruger Inc. for the year ended December 31, 2020 were $53.8 million (2019 - $42.8 million). Goods are purchased from Kruger Inc. and related parties under normal commercial terms and conditions. These purchases of goods and services are included within Cost of sales and SG&A expenses in the consolidated statement of comprehensive loss.

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

Balances due to and from related parties were as follows:

Receivables from Kruger Inc. Receivables from subsidiaries of Kruger Inc. Payables to Kruger Inc. Payables to subsidiaries of Kruger Inc. Payables to KPT	December 31, 2020 $ - 13	December 31, 2019 $
		45 14
	13	59
	5,726 3,350 21 9,097	2,544 4,018 247
		6,809

The receivables from and payables to related parties are based on commercial terms agreed on between the parties, unsecured and non-interest bearing. There were no provisions related to the receivables from related parties as of December 31, 2020 and December 31, 2019. There were no loans outstanding with related parties as of December 31, 2020 and December 31, 2019.

The Partnership declared distributions which are payable to its related parties as follows:

Distribution payable to Kruger Inc. Distribution payable to KPGP Distribution payable to KPT Total distribution payable	December 31, 2020 December 31, 2019 $ $ 10,163 9,659 1 1 1,755 1,733 11,919 11,393

19 Commitments and contingencies

As of December 31, 2020, the Partnership had commitments under service contracts of $5.0 million for 2021, $2.7 million for 2022, and $0.4 million for 2023 and beyond.

As of December 31, 2020, the Partnership had $23.5 million (December 31, 2019 – $151.1 million) commitments related to the TAD Sherbrooke Project.

From time to time, the Partnership is involved in various litigation matters arising in the ordinary course of its business. The Partnership has no reason to believe the disposition of any such current matter could reasonably be expected to have a material adverse impact on the Partnership’s financial position, results of operations or its ability to carry on any of its business activities.

As of December 31, 2020, the Partnership had irrevocable letters of credit outstanding of $28.7 million (December 31, 2019 - $23.9 million), which included letters of credit for the pension plans disclosed in note 11.

As of December 31, 2020, the Partnership had foreign exchange forwards outstanding of nil (December 31, 2019 – $23.7 million).

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

20 Expense by nature

Materials and production costs Labour and related employee benefits Energy costs Depreciation and amortization Freight and warehousing Marketing, selling and administrative expenses	2020 $	2019 $
	677,735 273,851 54,642 68,786 191,109 126,387	720,932 235,805 59,477 60,655 181,520 98,193
	1,392,510	1,356,582

Salaries are included in the expense to which they relate.

Classified in the consolidated statement of comprehensive loss were:

Cost of sales SG&A expenses	2020 2019 $ $ 1,264,448 1,256,979 128,062 99,603 1,392,510 1,356,582

21 Segment information

Reportable segments

Management has determined the operating segments based on the reports reviewed by the Chief Executive Officer who is considered to be the Chief Operating Decision Maker. The Partnership operates in two industry segments: Consumer and AFH.

(a) Consumer

This segment operates using the Partnership’s manufacturing facilities in Canada (New Westminster, British Columbia; Crabtree, Quebec; Sherbrooke, Quebec; Gatineau, Quebec) and in the United States (Memphis, Tennessee). The Consumer segment includes sales of branded tissue products such as Cashmere™, Purex™, White Swan™, Scotties™, Sponge Towels™ and White Cloud™ and private label tissue products.

(b) AFH

This segment operates using the Partnership’s manufacturing facilities in Canada. The AFH business sells tissue products primarily through distributors to businesses involved in property management, health care, food service, manufacturing and lodging and also to public facilities.

Segment operating income is the earnings (loss) for each such segment before (i) interest expense, (ii) income taxes, (iii) depreciation, (iv) amortization, (v) impairment (gain on sale) of non-financial assets, (vi) loss (gain) on disposal of property, plant and equipment, (vii) foreign exchange loss (gain), (viii) costs related to restructuring activities, (ix) changes in amortized cost of Partnership units liability, (x) change in fair value of derivatives, (xi) consulting costs related to operational transformation initiatives, (xii) corporate development related costs and (xiii) loss (gain) on sale of shares. The consolidated financial statements refer to “Adjusted EBITDA”, a measure which does not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similarly titled measures presented

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

by other companies. “Consumer Segment Adjusted EBITDA” and “AFH Segment Adjusted EBITDA” means in each case the Segment operating income for the respective reportable segment of the Partnership.

Corporate and other costs

Corporate and other costs includes certain overhead costs, timing adjustments for certain manufacturing costs included in inventory not allocated to the Consumer and AFH segments and start-up costs related to the TAD Sherbrooke Project.

The Partnership’s assets, operations and employees are located primarily in Canada and the United States. The same long-term assets of the Partnership are used for the Consumer and AFH segments. Accordingly, assets cannot be allocated to these segments.

		2020
Consumer $	AFH Corporate and other costs $ $ 211,384 - (8,990) (16,566)	Total $
1,304,599		1,515,983
		197,835 68,786 40,965 47,012 (360) 909 1 8,918 1,275 (10,299) 4,331 336
		35,961 8,655
		27,306

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

			2019
Consumer $	AFH $	Corporate and other costs $	Total $
1,186,461	247,652	-	1,434,113
	(12,690)	(1,142)	145,037 60,655 45,071 26,991 360 (18) 13 586 1,904 (1,986) 6,015 854
			4,592 2,494
			2,098

Geographic segments

The Partnership has generated revenue in Canada, the United States and Mexico (note 5). Revenue and assets were allocated to geographic segment based on the location of the customer and long-term assets, respectively.

Revenue Property, plant and equipment Goodwill Intangible assets	2020
	Canada US Total $ $ $ 915,898 600,085 1,515,983 865,247 328,944 1,194,191 152,021 - 152,021 26,205 - 26,205

Revenue Property, plant and equipment Goodwill Intangible assets			2019
	Canada $ 840,902 585,588 160,939 15,317	US $ 516,305 349,422 - -	Mexico (note 5) Total $ $ 76,906 1,434,113 - 935,010 - 160,939 - 15,317

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

22 Compensation of key management

Compensation awarded to key management included: Salaries and other employee benefits Post-employment benefits	2020 $	2019 $
	11,920 777	8,734 863
	12,697	9,597

Key management includes the Partnership’s senior executives.

23 Financial instruments

Classification of financial instruments

As of December 31, 2020, the classification of the financial instruments, as well as their carrying amounts and fair values, was as follows:

Cash and cash equivalents
Trade and other receivables
Receivables from related parties
Advances to partners
Embedded derivative
Trade payables
Accrued liabilities
Contract liabilities
Payables to related parties
Distributions payable
Long-term debt
Lease liabilities
Partnership units liability

Classification
Carrying
Fair
amount
value
$
$
financial assets at amortized cost
128,739
128,739

financial assets at amortized cost
88,041
88,041
financial assets at amortized cost
13
13

financial assets at amortized cost
5,647
5,647
embedded derivative at fair value
through profit and loss
10
10
financial liabilities at amortized cost
(109,593)

(109,593)
financial liabilities at amortized cost
(114,776)

(114,776)
financial liabilities at amortized cost
(107,703)
(107,703)
financial liabilities at amortized cost
(9,097)
(9,097)
financial liabilities at amortized cost
(11,919)
(11,919)
financial liabilities at amortized cost
(753,473)
(769,984)
financial liabilities at amortized cost
(130,975)
(130,975)
financial liabilities at amortized cost
(185,424)
(185,424)

The following table details the fair value hierarchy of financial instruments by level as of December 31, 2020:

Embedded derivative Long-term debt Partnership units liability	Level 1 $	Level 2 Level 3 Total $ $ $ 10 - 10 (769,984) - (769,984) - (185,424) (185,424)
	- - -

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

As of December 31, 2019, the classification of the financial instruments, as well as their carrying amounts and fair values, was as follows:

Cash and cash equivalents
Trade and other receivables
Receivables from related parties
Advances to partners
Embedded derivative
Trade payables
Accrued liabilities
Contract liabilities
Derivative liabilities
Payables to related parties
Distributions payable
Long-term debt
Lease liabilities
Partnership units liability

Classification
Carrying
Fair
amount
value
$
$
financial assets at amortized cost
93,141
93,141

financial assets at amortized cost
89,236
89,236

financial assets at amortized cost
59
59

financial assets at amortized cost
80
80

embedded derivative at fair value
through profit and loss
10

10
financial liabilities at amortized cost
(102,102)
(102,102)
financial liabilities at amortized cost
(99,829)
(99,829)
financial liabilities at amortized cost
(40,020)

(40,020)
financial liabilities at fair value
through profit and loss
(406)
(406)
financial liabilities at amortized cost
(6,809)
(6,809)
financial liabilities at amortized cost
(11,393)
(11,393)
financial liabilities at amortized cost
(591,062)
(609,728)
financial liabilities at amortized cost
(118,762)
(118,762)
financial liabilities at amortized cost
(143,515)
(143,515)

The following table details the fair value hierarchy of financial instruments by level as of December 31, 2019:

Embedded derivative Derivative liabilities Long-term debt Partnership units liability	Level 1 $	Level 2 $	Level 3 Total $ $ - 10 - (406) - (609,728) (143,515) (143,515)
	- - - -	10 (406) (609,728) -

Fair value

Cash and cash equivalents, Trade and other receivables, Receivables from related parties, Advances to partners, Embedded derivative, Trade payables, Accrued liabilities, Contract liabilities, Payables to related parties and Distributions payable are short-term financial instruments whose fair value approximates the carrying amount, given they will mature in the near future.

The fair values of the Senior Credit Facility, the Senior Unsecured Notes, the AgCredit Agreement and the Nordea2 Credit Facility approximate the current principal amount outstanding as the interest rate approximates current market interest rates. The fair values of the IQ Debenture, the Quebec PM Loan and the Ontario Loan are recorded on future cash flows discounted using market rates, net of the government grant recorded on the below-market rate of interest.

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

The fair values of Long-term debt and discount rates were as follows:

Senior Credit Facility Senior Unsecured Notes AgCredit Agreement IQ Debenture Nordea2 Credit Facility Quebec PM Loan Ontario Loan	Discount rate	December 31, 2020 $	December 31, 2019 $
	- - - 6.0% - 4.4% 4.4%	10,000 125,000 454,527 98,707 56,229 23,269 2,252	90,000 125,000 216,691 92,967 54,343 27,111 3,616
		769,984	609,728

Amounts are not net of deferred financing fees

Management has estimated the fair value of the Embedded derivative using a probability-weighted interest rate pricing method. The valuation methodology used is categorized as a Level 2 methodology.

The fair value of the Derivative liabilities was based on foreign exchange rates in the active market. The change in the fair value of the Derivative liabilities based on foreign exchange rates was $0.4 million gain during the year ended December 31, 2020 (2019 – $0.4 million loss), which was recorded in the consolidated statement of comprehensive loss in Other expense. The valuation methodology used was categorized as a Level 2 methodology.

Fair value of the Partnership units liability

The Partnership units liability is classified as a financial liability at amortized cost. Management has estimated the fair value of the Partnership units liability using a discounted cash flow model. Significant assumptions include the income tax obligation, discount rate and an industry capitalization rate. Additional information is disclosed in note 4.

Objectives and policies relating to financial risk management

The Partnership’s activities result in exposure to a variety of financial risks, including risks related to credit, currency, liquidity and interest rate risks.

Credit risk

Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Partnership’s financial instruments exposed to credit risk include Cash and cash equivalents, Trade and other receivables, Receivables from related parties and Advances to partners. The Partnership places its cash and cash equivalents with financial institutions of high creditworthiness.

The Partnership sells its products to a variety of customers under certain credit terms and therefore is exposed to credit risks. Normal trade receivables are due within 30 days from the invoice date and amounts in excess of 90 days past the invoice date are considered delinquent. The Partnership routinely assesses the financial strength of its customers and mitigates against identified exposure primarily by lowering credit limits with high-risk accounts. The customers of the Partnership are well established companies and accordingly, the Partnership has experienced limited financial loss with respect to credit risk. As a result, the Partnership believes that its exposure to credit risk is limited.

On November 16, 2018, the Partnership entered into a factoring arrangement with the Bank of Nova Scotia, pursuant to a Receivables Purchase Agreement, as amended by an amendment agreement dated November 12, 2020. As a result, the Partnership sells to the Bank of Nova Scotia eligible trade receivables owing by certain key customers with a facility limit of $50 million. Eligible trade receivables are sold on a non-recourse basis. The Partnership receives 95% of

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

customer invoices sold net of a dilution factor. The dilution factor is an estimate of rebates accrued for each customer in respect of the customer invoice. The Partnership is restricted from selling or pledging these trade receivables. The factoring arrangement bears interest at a floating interest rate based on CDOR plus applicable margin. The Partnership was committed to a two year term, renewable for additional one year periods. On November 12, 2020, the term was renewed for an additional one year period, maturing November 15, 2021. As eligible trade receivables are sold, the Partnership removes the factored receivables from the consolidated statement of financial position, recognizes the proceeds received as consideration for the transfer and records a loss on factoring, which is included in Interest expense in the consolidated statement of comprehensive loss. Cash flows from the factoring arrangement are presented as operating activities in the consolidated statement of cash flows. During the year ended December 31, 2020, the factored receivables sold to the Bank of Nova Scotia were $672.9 million (2019 - $509.9 million). The Partnership sold 95% of these trade receivables, net of a dilution factor, for $671.9 million (2019 - $508.6 million). As of December 31, 2020, the trade receivables sold were $38.9 million (December 31, 2019 - $31.4 million).

Currency risk Trade receivables Less: Expected credit losses Total trade receivables, net Trade receivables, net 0 to 60 days 61 to 90 days Over 90 days Less: Allowance for expected credit losses	December 31, 2020 $	December 31, 2019 $
	85,162 (1,523)	80,838 (52)
	83,639	80,786
	83,788 854 520 (1,523)	78,254 1,333 1,251 (52)
	83,639	80,786

Currency risk is the risk the Partnership’s earnings may fluctuate due to changes in Canadian to U.S. dollar exchange rates. The Partnership sells certain of its products in U.S. dollars at prevailing U.S. dollar prices. The currency exposure is more than offset by U.S. dollar costs and expenses and the U.S. dollar denominated debt.

As of December 31, 2020, the Partnership had net liabilities denominated in U.S. dollars of $223.8 million (December 31, 2019 - $59.7 million). Assuming the Canadian dollar strengthened (weakened) by 5% against the U.S. dollar, with all other variables held constant, the hypothetical result on income before income taxes for the year ended December 31, 2020 would have been an increase/decrease of $11.2 million (2019 - $3.0 million).

From time to time, the Partnership uses derivative financial instruments to manage foreign currency risk. Foreign exchange swaps and foreign exchange forwards are used to manage U.S. dollar borrowings. As of December 31, 2020, the Partnership had no foreign exchange swaps outstanding (December 31, 2019 – nil) and foreign exchange forwards outstanding of nil (December 31, 2019 – $23.7 million).

Liquidity risk

The purpose of liquidity risk management is to maintain sufficient cash and cash equivalents and to ensure the Partnership has sufficient authorized credit facilities to maintain liquidity and meet its future obligations as they come due.

The Partnership had unused lines of credit available of $220.4 million as of December 31, 2020 (December 31, 2019 - $140.0 million). The Partnership prepares projections to ensure it has sufficient funds to fulfill its obligations. The Partnership monitors the covenants on its credit facilities in the normal course of business. As of December 31, 2020,

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

the Partnership was in compliance with all of its financial covenants under all of its outstanding credit facilities. Refinancing risks are minimized by ensuring the Senior Credit Facility will not mature for two years.

The ability to pay its obligations relies on the Partnership collecting its trade receivables in a timely manner and by maintaining sufficient cash and cash equivalents in excess of anticipated needs. The Partnership’s Trade and other payables of $332.1 million (December 31, 2019 - $242.4 million) are all due for payment within twelve months of the dates of the consolidated statements of financial position.

The Partnership’s contractual obligations in respect of its financial instruments comprise the following:

Long-term debt(a) Trade and other payables Payables to related parties Distributions payable Long-term debt(a) Trade and other payables Payables to related parties Distributions payable	Less than 1 year 1 to 5 years $ $ 47,639 554,340 332,072 9,097 11,919	December 31, 2020 Greater than 5 years $
		492,415 December 31, 2019
	Less than 1 year 1 to 5 years $ $ 43,026 494,149 242,357 6,809 11,393	Greater than 5 years $
		344,336

(a) Long-term debt includes principal repayments and an estimate of interest based on current interest rates.

The above table excludes the Partnership units liability. Payments on the Partnership units liability are made upon the declaration of the Tax Distribution, which for 2020 was $17.5 million (2019 - $5.1 million), of which the advances of $5.6 million were offset and the remaining $11.9 million was paid on February 26, 2021. The Partnership units liability is estimated based on expected future Tax Distributions and is an obligation that will continue into perpetuity (note 4).

Interest rate risk

As of December 31, 2020, the Partnership had variable rate debts of $92.3 million related to the Senior Credit Facility and certain credit facilities made available as part of the TAD Sherbrooke Project Facility (December 31, 2019 - $99.4 million). The Senior Credit Facility bears interest at a base rate of Canadian prime rate, U.S. base rate, banker’s acceptance rates or LIBOR plus the applicable margins. The applicable margin on the loans ranges between 0.20% and 3.50%. The $111 million term loan made available as part of the TAD Sherbrooke Project Facility bears interest at a floating interest rate based on CDOR plus an applicable margin. The revolving loans of US$10 million and $12.5 million made available as part of the TAD Sherbrooke Project Facility also bear interest at floating interest rates.

A 1% increase/decrease in the market rate of interest would result in a decrease/increase in income before income taxes of $0.9 million for the year ended December 31, 2020 (2019 - $1.0 million).

As of December 31, 2019, the Partnership held interest rate swaps, contracted to fix the interest rate on a notional amount of $100.0 million. The interest rate swaps matured during the 3-month period ended March 31, 2020.

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

24 Capital management

The Partnership’s policy is to maintain a sufficient capital base in order to maintain a strong statement of financial position and otherwise meet financial tests for the credit facilities.

Capital comprises net debt (Long-term debt less Cash and cash equivalents) and Equity (including the Partnership units classified as a liability). The Partnership monitors externally imposed debt covenants as established pursuant to its credit facility agreements. The requirements include a quarterly Senior Secured Net Funded Debt to EBITDA Ratio and Interest Coverage Ratio (as defined in the Senior Credit Agreement), and a quarterly Combined Leverage Ratio and Combined Fixed Charge Coverage Ratio (as defined in the AgCredit Agreement).

25 Environmental costs

The Partnership is subject to extensive regulation by various federal, provincial and state agencies concerning compliance with environmental control statutes and regulations. These regulations impose limitations on the discharge of materials into the environment and require the Partnership to operate in compliance with the conditions of permits and other governmental authorizations. Future environmental expenditures will depend on the emergence of new regulations and technological developments.

26 Economic dependence

The Partnership manufactures, distributes and sells a wide range of disposable tissue paper and related products primarily in Canada and the U.S.. As of December 31, 2020, the Partnership had two major customers which represented 31.6% (2019 – 32.0%) of total revenues.

A portion of the trade receivables for these two customers are subject to a factoring arrangement with the Bank of Nova Scotia (note 23). The Partnership sells eligible accounts receivable owing by certain key customers through the factoring arrangement up to a facility limit of $50.0 million. As a result, credit risk is partially mitigated.

27 Non-cash working capital

The change in non-cash working capital on the consolidated statement of cash flows comprised the following:

Decrease (increase) in trade and other receivables Decrease in receivables from related parties Decrease (increase) in inventories Decrease (increase) in prepaid expenses Decrease in income taxes Increase (decrease) in trade and other payables Increase in payables to related parties	2020 $	2019 $
	(1,951) 126 (29,119) 1,388 291 87,305 2,288	16,001 113 6,446 (6,229) 418 (16,451) 1,189
	60,328	1,487

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(tabular amounts are in thousands of Canadian dollars, except unit amounts)

28 Cash flows from (used in) financing activities

The change in financing activities on the consolidated statement of cash flows comprised the following:

Advances to partners $ (1,704) - - - - - 1,624 -	Prepaid interest $	Accrued interest $	Distri- butions payable $	Long- term debt $	Partner- ship units $	Partner- ship units liability $	Lease liabilities $ 115,130 - - - (16,978) - - 20,610	Total $
	(404) - - - - (6,561) - 6,604	3,230 - - - - (22,161) - 24,101	10,723 - - - - - (43,830) 44,500	577,894 53,933 (35,382) (1,383) - (804) - (3,196)	376,274 - - - - - 31,963 741	116,524 - - - - - - 26,991		1,197,667 53,933 (35,382) (1,383) (16,978) (29,526) (10,243) 120,351
(80)	(361)	5,170	11,393	591,062	408,978	143,515	118,762	1,278,439
(80) - - - - - (5,647) 80	(361) - - - - (2,154) - 2,504	5,170 - - - - (22,881) - 19,713	11,393 - - - - - (46,576) 47,102	591,062 262,673 (92,714) (509) - (671) - (6,368)	408,978 - - - - - 30,922 (329)	143,515 - - - - - (5,103) 47,012	118,762 - - - (19,283) - - 31,496	1,278,439 262,673 (92,714) (509) (19,283) (25,706) (26,404) 141,210
(5,647)	(11)	2,002	11,919	753,473	439,571	185,424	130,975	1,517,706

AI assistant

KP Tissue Inc. — Audit Report / Information 2020

47076_rns_2021-03-11_b2ce8771-400c-41e7-99ad-11daba032f04.pdf

KRUGER PRODUCTS L.P.

AUDITED CONSOLIDATED FINANCIAL STATEMENT

Independent auditor’s report

Our opinion

What we have audited

Basis for opinion

Independence

Other information

Responsibilities of management and those charged with governance for the consolidated financial statements

Auditor’s responsibilities for the audit of the consolidated financial statements

/s/PricewaterhouseCoopers LLP

Kruger Products L.P. Consolidated Statement of Financial Position

Kruger Products L.P. Consolidated Statement of Comprehensive Loss

For the years ended December 31, 2020 and December 31, 2019

Kruger Products L.P. Consolidated Statement of Changes in Equity

For the years ended December 31, 2020 and December 31, 2019

Kruger Products L.P. Consolidated Statement of Cash Flows For the years ended December 31, 2020 and December 31, 2019

1 General information

2 Basis of presentation

3 Summary of significant accounting policies

(a) Basis of measurement

(b) Consolidation

(c) Segment reporting

(d) Foreign currency translation

(ii) Transactions and balances

(e) Cash and cash equivalents

(f) Trade receivables

(g) Inventories

(h) Borrowing costs

(i) Property, plant and equipment

(m) Related party transactions

(n) Leases

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(t) Income taxes

(i) Investments and other financial assets

Classification

Measurement

Debt instruments

Equity instruments

Impairment

(ii) Financial liabilities at amortized cost

(w) Derivative financial instruments

Transactions with joint operations

(aa) Accounting standards issued but not yet applied

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

4 Critical accounting estimates and judgements

Pensions and post-retirement benefits obligations

Partnership units liability

Impairment tests

Additional information is disclosed in note 10.

Income taxes

Leases

COVID-19

5 Other expense

6 Trade and other receivables

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

7 Inventories

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

8 Property, plant and equipment

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

9 Right-of-use assets

Kruger Products L.P. Notes to Consolidated Financial Statements

10 Goodwill and intangible assets

11 Pensions and post-retirement benefits

Kruger Products L.P. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

Pensions

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

12 Trade and other payables

Kruger Products L.P. Notes to Consolidated Financial Statements

December 31, 2020 and December 31, 2019

13 Provisions

KP Tissue Inc. Audit Report / Information 2020