6-K 1 arauco-6k_0309.htm Unassociated Document
FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934





For the month of March, 2011
 
Commission File Number 33-99720
 
ARAUCO AND CONSTITUTION PULP INC.
(Translation of registrant’s name into English)
El Golf 150
Fourteenth Floor
Santiago, Chile
(Address of principal executive offices)
 
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
 
Form 20-F                      þ           Form 40-F                      ¨
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): __________
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): __________
 
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
 
Yes ¨ No þ
 
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- __________

 
 

 

ARAUCO AND CONSTITUTION PULP INC

TABLE OF CONTENTS


Item
Page

 
1.
Ratio Analysis of the Consolidated Financial Statement
1
 
2.
Unaudited Consolidated Financial Statement
7
 
3.
Unaudited Consolidated Financial Income Statement
9
 
4.
Unaudited Consolidated Statement of Changes in Net Equity
11
 
5.
Unaudited Consolidated Statement of Cash Flow
12
 
6.
Unaudited Notes to the Consolidated Financial Statement
13



 
 

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Ratio Analysis of the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated

 

1.  VALUATION OF ASSETS AND LIABILITIES

The financial statements of Celulosa Arauco y Constitución S.A., a Chilean corporation (the “Company”) and its subsidiaries (the Company, together with its subsidiaries, “Arauco”) have been prepared on the basis of International Financial Reporting Standards (IFRS).  In management’s opinion there is no material difference between the Company’s economic value and the valuation reflected in the Company’s financial statements.

2.  ANALYSIS OF FINANCIAL POSITION

a)
Analysis of the Financial Statement

The principal components of assets and liabilities as of December 31, 2010 and December 31, 2009 are as follows:

Assets
12/31/2010
12/31/2009
 
ThU.S.$
ThU.S.$
Current assets
3,152,116
2,275,313
Non-current assets
9,354,216
9,141,514
Total assets
12,506,332
11,413,827
     
Liabilities and Shareholders’ Equity
12/31/2010
12/31/2009
 
ThU.S.$
ThU.S.$
Current liabilities
1,209,061
951,413
Non-current liabilities
4,456,696
4,079,981
Non –parent participation
108,381
113,840
Net equity attributable to parent company Shareholders’ equity
6,732,194
6,268,593
Total net equity and liabilities
12,506,332
11,413,827

At December 31, 2010, total assets increased by 9.571% or U.S.$ 1,093 million compared to December 31, 2009.  This increase is mainly attributable to an increase in Cash and Cash Equivalents and Trade and Other receivables.

Total liabilities increased by U.S.$ 634 million.  This increase is mainly attributable to an increase in Other Financial Liabilities for Arauco’s Investment Policy in September 2010 and an increase in minimum dividend provisions partially offset by bank loans.

The main financial and operating ratios are as follows:

Liquidity ratios
12/31/2010
12/31/2009
Current ratio
2.61
2.39
Acid ratio
1.72
1.41

Debt indicators
12/31/2010
12/31/2009
Debt to equity ratio
0.83
0.79
Short-term debt to total debt
0.21
0.19
Long-term debt to total debt
0.79
0.81
     
 
12/31/2010
12/31/2009
Financial expenses covered
5.20
2.85


 
1

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated

2.  ANALYSIS OF FINANCIAL POSITION, continued
a)
Analysis of the Balance Sheet, continued
 
Operational ratios
12/31/2010
12/31/2009
Inventory turnover
2.30
2.23
Inventory turnover (excluding biological assets)
3.41
3.28
Inventory permanence-days
156,84
161,21
Inventory permanence (excluding biological assets)
105,55
109,65

The liquidity ratio and the acid test for the current period has increased compared to December 31, 2009.  This is due to an increase in current assets compared to the proportional increase in the variation of current liabilities, which in turn is explained by an increase of Cash and cash equivalents and Trade and Other Receivables.

As of December 31, 2010, the short-term debt represented 21% of total liabilities compared to 19% as of December 31, 2009.

The ratio of financial expenses covered increased from 2,85 in December 31, 2009 to 5.20 in December 31, 2010.  This increase is attributable to higher profits in the current period.

The ratio of inventory turnover does not present significant changes by 2010 as compared to December 31, 2009.

b)
Analysis of the Income Statement

Profit before Income Tax

Profit before Income Tax registers a profit of U.S.$899 million in 2010 compared to U.S.$358 million in 2009, an increase of U.S.$541 million. The change was attributable to the factors described in the following table:
Item
Million
U.S.$
Gross margin
530
Other operatin income
197
Administration cost
(66)
Financial costs
(20)
Foreign currency exchange rate
(34)
Others net
(66)
Net change in income before income tax
541

Gross Margin presents a profit of U.S.$1,490 million in 2010 compared to U.S.$ 530 million in 2009, caused by a proportional increase in revenues due to an increase in sales price.

 
2

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated

2.  ANALYSIS OF FINANCIAL POSITION, continued
 
The decrease in the exchange rate difference is principally due to a strong deppreciation of the U.S. Dollar against the Chilean peso, the Euro and the Real, the currencies in which the Company owns financial investments, tax receivables and other accounts receivable.

The main indicators related to result accounts and the details of revenues and operation costs are as follows:
 
Revenues
12/31/2010
ThU.S$
12/30/2009
ThU.S$
Pulp
1,878,997
1,682,715
Sawn timber
621,453
493,938
Panels
1,109,738
832,170
Forestry
156,269
89,521
Other
21,897
14,701
Total revenues
3,788,354
3,113,045

Sales costs
12/31/2010
ThU.S$
12/31/2009
ThU.S$
Wood
613,536
630,215
Forestry work
470,283
353,183
Depreciation
187,208
190,945
Other costs
1,027,164
978,192
Total sales costs
2,298,191
2,152,535

Profitability index
12/31/2010
12/31/2009
Profitability on equity
10.60
4.92
Profitability on assets
5.86
2.81
Return on operating assets
7.04
3.13

Profitability ratios
12/31/2010
12/31/2009
Income per share (U.S.$) (1)
6.14
2.66
EBITDA
1,405,931
728,725
Income after tax (ThU.S.$) (2)
700,749
304,596
Gross margin (ThU.S.$)
1,490,163
960,510
Financial costs ( ThU.S.$)
(213,912)
(193,872)

 
(1)
 
(2)
Earnings per share refer to the profit to net equity to parent company.
 
Includes interest.
 
 
3.  DIFFERENCE BETWEEN ECONOMIC VALUES AND BOOK ASSETS
 
Assets and liabilities are presented in the Financial Statements according to International Financial Reporting Standards and instructions issued by the Chilean Securities Commission.
 
We believe that there are no substantial differences between the economic value of our assets and the value reflected in these Financial Statements.

 
3

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated

4.  MARKET SITUATION
 
Pulp

The last quarter of 2010 continued with a favorable level of demand and a strong market in general, except for some specific markets with weaker demand mainly caused by the difficulty of trespassing pulp prices to the paper market. World inventory levels increased between the third and fourth quarter of 2010, however, it started to fall again in November. For the beginning and end of the fourth quarter we could see inventory levels of 26 and 25 days for long fiber and 43 to 37 days for short fiber, respectively. These inventory levels are 2 days higher than those of the fourth quarter of 2009 for long fiber and 6 days higher for short fiber.

Again, Asia –particularly China– continues to be the demand’s engine and leads market price changes. After some small price adjustments, during the fourth quarter we see again an upward trend in long fiber prices and price stability for short fiber. This situation also occurred in other markets, where “spot” offers have been disappearing.

China had stability in its prices at the beginning of the fourth quarter and started to have price increases in long fiber towards the end of the quarter caused by a strong demand for recovering a “comfortable” level of inventories for the paper industry. In short fiber, despite having a favorable demand, there was no price increase. The main reason behind this is the supply coming from fiber produced in China and its neighbor Indonesia. Both countries have increased its short fiber supply due to a higher production and environmental limitations for commercializing in other markets, such as Europe.

Other Asian markets must follow the same trend of pulp prices, but its paper markets are suffering an oversupply that has significantly eroded paper margins. This has happened especially in Korea, where possibly paper producers shall lower its production rate. This market faces imports from China and Indonesia, which have new tariff limitations to export to the USA and Europe.

Regarding unbleached long fiber, it also has remained stable at very high price levels. Specialty products, fiber cement and other products that use this kind of pulp grade have been important to cover normal levels of demand in the packaging market that cannot compete with current levels of unbleached long fiber.

Europe follows a very different trend. After having an important recovery in the paper market during second and third quarters, the leveling of inventory levels, paper oversupply, and exchange rate effects start again to erode paper producer’s margins, consequently affecting demand for pulp.

The North American market did not have major changes, with a stable demand in a relatively low level.

Latin America continues with good demand levels. Paper and tissue markets are strong and following world trends of raw materials. In general, markets are stable and smooth.
 
 During the fourth quarter all of our plants had normal production levels except for the line 2 of the Arauco plant, which during that time was still under reparation of the damages caused by the February 27th, 2010 earthquake. In December 2010 this line began with equipment testing and at the end of January 2011 the Arauco line 2 was fully operative.

 
4

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated

4.  MARKET SITUATION, continued
 
Sawn Timber

The real estate and construction sectors in the United States have shown a decline during the fourth quarter of 2010. The housing starts index reached 529,000 units in December. Current construction levels continue very low as compared to the historic 10 year average. During the fourth quarter there is a fall in sales price of moldings and wood compared to the third quarter of this year. This was caused by the inventory excess that most of the distributors had.

During this quarter, demand for wood products continues slowing down until reaching equilibrium levels at the end of the year in almost all markets. This has caused lower sales prices, especially in China, Korea, Mexico and Taiwan.

In the Chilean market sales were above year 2009, especially pushed by requirements derived from the reconstruction efforts after the February 27th, 2010 earthquake.

Panels

We had a favorable balance for year 2010, returning to a growth path we had lost during the 2008-2009 financial crisis, especially in sales prices where we were able to grow an average 33% from December 2009 to December 2010. Despite having a very good year, we experienced high volatility not only in sales process but also in the plant and distribution chain inventory levels caused by the earthquake effects and the world crisis.

Plywood, the most negatively impacted product line in terms of margin erosion during 2009 had an important sale prices recovery during 2010, and in aggregated terms it increased 20% compared to year 2009. This led to important margin increases, recovering almost level seen during year 2008. In terms of markets, Latin America grew very strong in terms of volumes and prices, while Europe and USA also improved returns but had a strong fall in volumes as they are still strongly impacted by low demand due to the financial crisis effects.

Our MDF product line, also had an important recovery in prices –roughly a 20% increase– which consequently brought an increase in margins by around 50%. The demand for MDF panels during 2010 was in general very strong, pushed by a very dynamic Brazilian market, which led the demand for this product in the Latin American region. The rest of the South and Central American markets provided with high growth rates in volume and also contributed with better margin rates.

In the case of MDF moldings to the American market, we were able to increase sales prices roughly 10%, improving margin returns by 7%.

Finally, this was also a very good year for Hard Board, achieving a 15% price increase due to the over demand, which also brought a 35% improvement in margin returns. This product line has a very good outlook in terms of new price increases, given the increasingly limited global supply due to many plant closures, and new product applications that are competing with thin MDF.

 
5

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated

5. ANALYSIS OF CASH FLOW
 
The main components of net cash flow at December 31, 2010 and 2009 are as follows:

 
12/31/2010
MUS$
12/31/2009
MUS$
Positive (negative) Cash flow
   
Cash flow from operating activities
1,137,275
751,025
Cash flow from financing activities:
   
   Loan and bond payments
191,122
435,432
   Dividend payments
(158,781)
(135,175)
   Others
1,511
2,115
 Cash flow from investment activities:    
Purchase and sales of permanent investments
(54,536)
(302,383)
Incorporation and sale of property, plant and equipment
(507,332)
(271,145)
Incorporation and sale of biological assets
(114,720)
(89,817)
Other
7,174
(53,946)
Net cash flow for the period
501,713
336,106

We had a positive operating cash flow of U.S.$1,137 million in the current period compared to a positive balance of U.S.$751 million in 2009. The positive operating cash flow resulted from an increase in client recovery and was partially offset by an increase in payments to suppliers.

Cash flow from financing activities as of December 31, 2010 had a positive balance of U.S.$34 million compared to a positive balance of U.S.$302 million for the same period in 2009.  This change resulted from lower received loans in the year 2010.

The investment cash flow decreased of U.S.S$669 million (U.S.$717 million in period 2009) at the end of the current period, due principally to payments for acquisition of property, plant and equipment and capital contribution from associated parties.

6.  MARKET RISK ANALYSIS

In respect of the economic risks resulting from interest rate variations, the Company maintains, as of December 31, 2010, a ratio of fixed rate debt to total consolidated debt of approximately 92.7%, which it believes is consistent with industry standards.  The Company does not engage in futures or other hedging transactions to hedge against variations in the selling prices of pulp and forest products because it believes that risks resulting from price variations are limited, in large part because the Company maintains one of the lowest cost structures in the industry.

The Company and most of its subsidiaries maintain their accounting records and prepare their financial statements in U.S. dollars.  Both the accounts receivable and most financial liabilities are denominated in U.S. dollars or are covered by an exchange rate swap, as well as most of their revenues.  As a result, exposure to changes in the exchange rate has decreased significantly.

 
6

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated

CONSOLIDATED BALANCE SHEETS

       
 
Note
12/31/2010
12/31/2009
   
ThU.S.$
ThU.S.$
       
Assets
     
Current Assets
     
Cash and cash equivalents
4
1,043,834
534,199
Other financial current assets
23
2,909
8,426
Other current non-financial assets
 
177,140
118,133
Trade and Other receivables-net
23
774,289
558,441
Related party receivables
13
18,074
16,327
Inventories
3
727,535
620,058
Biological assets, current
20
344,096
310,832
Tax receivables
 
50,131
105,897
Total Current Assets other tan assets or disposal groups classified as held for sale or as held for distribution to owners
 
3,138,008
2,272,313
Non-Current Assets or disposal groups clasiffied as held for sale
22
14,108
0
Non-Current Assets or disposal groups classified as held for sale or as held for distribution to owners
 
14,108
0
Total Current Assets
 
3,152,116
2,272,313
Other non-current financial assets
23
65,372
29,078
Other non-current and non-financial assets
 
52,352
35,196
Investment in associates accounted for using equity method
15
498,204
476,101
Intangible assets
19
11,127
11,154
Goodwill
 
66,231
63,776
Property, plant and equipment
7
5,088,745
4,969,753
Biological assets, non-current
20
3,446,862
3,446,696
Deferred tax assets
6
125,323
109,760
Total non-current assets
 
9,354,216
9,141,514
Total Assets
 
12,506,332
11,413,827


 
7

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated

CONSOLIDATED BALANCE SHEETS (continued)

       
 
Note
12/31/2010
12/31/2009
   
ThU.S.$
ThU.S.$
Liabilities
     
Current Liabilities
     
Other financial liabilities, current
23
554,673
535,557
Trade and Other payables
23
362,182
321,892
Related party payables
13
9,209
10,136
Other provisions, current
18
5,842
5,169
Tax liabilities
 
62,887
2,202
Current provision for employee benefits
10
3,312
2,372
Other current financial liabilities
 25
210,956
74,085
Total current liabilities other than liabilities included in disposal groups classified as held for sale
 
1,209,061
951,413
       
Total Current Liabilities
 
1,209,061
951,413
Non-Current Liabilities
     
Other non-current  financial liabilities
 
2,909,429
2,678,010
Other non-current provisions
18
7,609
9,463
Deferred tax liabilities
6
1,369,489
1,256,090
Non-current provision for employee benefits
 10
35,964
25,295
Other non-current  financial liabilities
 
134,205
111,123
Total non-current liabilities
 
4,456,696
4,079,981
Total liabilities
 
5,665,757
5,031,394
Net Equity
     
Issued capital stock
 
353,176
353,176
Accumulated earnings
 
6,320,264
5,893,799
Other reserves
 
58,754
21,618
Net equity attributable to parent company
 
6,732,194
6,268,593
Non-controlling interest
 
108,381
113,840
Total net equity
 
6,840,575
6,382,433
Total net equity and liabilities
 
12,506,332
11,413,827

 
8

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated

CONSOLIDATED STATEMENTS OF INCOME

 
 
Note
 
January-December
2010
ThU.S.$
2009
ThU.S.$
Income Statement
     
Revenue
9
3,788,354
3,113,045
Cost of sales
 
(2,298,191)
(2,152,535)
Gross Income
 
1,490,163
960,510
Other operating income
2
378,188
181,383
Distribution costs
2
(379,579)
(388,535)
Administrative expenses
2
(323,916)
(249,340)
Other operating expenses
2
(50,642)
(59,681)
Other income (loss)
 
292
64,102
Financial income
 
22,154
19,313
Financial costs
2
(213,912)
(193,872)
Participation in (loss) income in associates and joint ventures accounted through equity method
15
(7,693)
6,621
Exchange rate differences
 
(16,288)
17,632
Income before income tax
 
898,767
358,133
Income tax
6
(198,018)
(53,537)
Income from continuing operations
 
700,749
304,596
Net Income
 
700,749
304,596
       
Income attributable to  equity holders
     
Income attributable to parent company
 
694,750
300,898
Income attributable to non-parent company
 
5,999
3,698
Net Income
 
700,749
304,596
       
       
Basic earnings per share
     
Earnings per share from continuing operations
 
0.0061399
0.0026592
Basis earnings per share
 
0.0061399
0.0026592
       
Earnings per diluted shares
     
Earnings per diluted share from continuing operations
 
0.0061399
0.0026592
Basic earnings per diluted share
 
0.0061399
0.0026592


 
9

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated

COMPREHENSIVE INCOME STATEMENTS

 
 Note
January-December
2010
ThU.S.$
2009
ThU.S.$
Net Income
 
700,749
304,596
Other comprehensive income, net of tax
     
Exchange difference on conversion
     
Gain (loss) for exchange differences, before tax
11
47,070
177,480
Cash flow hedges
     
Gain (loss) for cash flow hedges, before tax
 
(11,155)
(5,807)
Participation in Other comprehensive income in associates and joint ventures accounted for using equity method
 
1,247
1,902
Other comprehensive income, net of tax
 
37,162
173,575
Comprehensive income statement
     
Income tax related to Other comprehensive income
     
Income tax related to Cash flow hedges on Other comprehensive income
 
1,896
987
Other comprehensive income
 
39,058
174,562
Total comprehensive income
 
739,807
479,158
 
Comprehensive Income Statement attributable to:
 
Comprehensive income statement attributable to parent company
 
731,886
461,754
Comprehensive income statement attributable to controlling interest
 
7,921
17,404
Total comprehensive income
 
739,807
479,158


 
10

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated

CONSOLIDATED STATEMENTS OF CHANGES IN NET EQUITY

     
Share Capital
 
Conversion Reserves
 
Hedge Reserves
 
 
Other
 Reserves
Other Reserves
Total
Accumulated Earnings
Equity attributable to Parent Company
Non-controlling interest
 
 
Equity Total
     
   
12/31/2010
     
ThU.S.$
ThU.S.$
ThU.S.$
ThU.S.$
ThU.S.$
ThU.S.$
ThU.S.$
ThU.S.$
ThU.S.$
Opening balance at 01/01/2010
353,176
27,551
(4,820)
(1,113)
21,618
5,893,799
6,268,593
113,840
6,382,433
Changes in equity
                 
Comprehensive income statement
                 
Net income
0
0
0
0
0
694,750
694,750
5,999
700,749
Other comprehensive income, net of tax
0
45,148
(9,259)
1,247
37,136
0
37,136
1,922
39,058
 
  Comprehensive income
0
45,148
(9,259)
1,247
37,136
694,750
731,886
7,921
739,807
Dividends
0
0
0
0
0
(268,285)
(268,285)
(13,380)
(281,665)
 
  Total Changes in equity
0
45,148
(9,259)
1,247
37,136
426,465
463,601
(5,459)
458,142
Closing balance at 12/31/2010
353,176
72,699
(14,079)
134
58,754
6,320,264
6,732,194
108,381
6,840,575

     
Share Capital
Conversion Reserves
 
 
Other
 Reserves
Other Reserves
Total
Accumulated Earnings
Equity attributable to Parent Company
Non-controlling interest
 
 
Equity Total
     
Hedge Reserves
   
12/31/2009
 
     
ThU.S.$
ThU.S.$
ThU.S.$
ThU.S.$
ThU.S.$
ThU.S.$
ThU.S.$
ThU.S.$
ThU.S.$
Opening balance at 01/01/2009
353,176
(136,223)
0
(3,015)
(139,238)
5,675,616
5,889,554
117,682
6,007,236
Changes in equity
                 
Comprehensive income statement
                 
Net income
0
0
0
0
0
300,898
300,898
3,698
304,596
Other comprehensive income, net of tax
0
163,774
(4,820)
1,902
160,856
0
160,856
13,706
174,562
 
   Comprehensive income
0
163,774
(4,820)
1,902
160,856
300,898
461,754
17,404
479,158
Dividends
0
0
0
0
0
(82,715)
(82,715)
(21,246)
(103,961)
 
   Total Changes in equity
0
163,774
(4,820)
1,902
160,856
218,183
379,039
(3,842)
375,197
Closing balance at 12/31/2009
353,176
27,551
(4,820)
(1,113)
21,618
5,893,799
6,268,593
113,840
6,382,433

 
 
11

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated

CONSOLIDATED STATEMENTS OF CASH FLOWS-DIRECT METHOD

 
12/31/2010
12/31/2009
 
ThU.S.$
ThU.S.$
Cash Flows from (used in) Operating Activities
   
Classes of cash receipts from operating activities
   
Receipts from sales of goods and rendering of services
3,984,173
3,675,727
Receipts from premiums and claims, annuities and other policy benefits
292,240
0
Other cash receipts from operating activities
172,278
147,533
Classes of cash payments
   
Payments to suppliers for goods and services
(2,877,218)
(2.785.842)
Payments to and behalf of employees
(263,151)
(190,821)
Other cash payments from operating activities
(2,338)
(3,915)
Dividends received
6,353
17,084
Interest paid
(190,351)
(152,343)
Interest received
6,528
18,601
Income taxes refund (paid)
10,964
8,675
Other (outflows) inflows of cash, net
(2,203)
16,326
Net Cash flows from Operating Activities
1,137,275
751,025
 
   
     
Cash flows from (used in) Investing Activities
   
Cash flows from losing control of subsidiaries or other businesses
0
7
Cash flows used to obtain control of subsidiaries or other businesses
(6,977)
(174,111)
Cash flows used to purchase  in associates
(8,000)
0
Other cash payments to acquire equity or debt instruments of other entities
(39,559)
(128,279)
Capital contributions to joint ventures
0
(51,225)
Proceeds from sale of property, plant and equipment
8,669
4,006
Purchase of property, plant and equipment
(516,001)
(275,151)
Purchase of intangible assets
(1,594)
(1,378)
Proceeds from sale of other financial assets
1,471
2,185
Purchase of biological assets
(116,191)
(92,002)
Cash receipts from repayment of advances and loans made to other parties
10,559
0
Other outflows of cash, net
(1,791)
(1,343)
Cash flows used in Investing Activities
(669,414)
(717,291)
 
   
Cash flows from (used in) Financing Activities
   
Long-term Loans
612,403
1,181,963
Short- term
212,865
0
  Total Loans
825,268
1,181,963
Loan repayments
(634,146)
(746,531)
Dividends paid
(158,781)
(135,175)
Other inflows of cash, net
1,511
2,115
Cash flows from (used in) Financing Activities
33,852
302,372
Net increase (decrease) in Cash and Cash Equivalents before effect of exchange rate changes
501,713
336,106
Effect of exchange ratechanges on cash and cash equivalents
7,922
30,785
Net increase (decrease) of Cash and Cash equivalents
509,635
366,891
Cash and cash equivalents, at the beginning of the period
534,199
167,308
Cash and cash equivalents, at the end of the period
1,043,834
534,199


 
12

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


NOTE 1.  PRESENTATION OF FINANCIAL STATEMENTS (IAS 1)
 
Entity Information

Name of Reporting Entity

Celulosa Arauco y Constitución S.A. (Arauco), Tax No. 93,458,000-1, Closed Company, was registered in the Securities Registry (the “Registry”) of the Superintendency of Securities and Insurance (the “Superintendency”) as No. 042 on June 14, 1982. Forestal Cholguán S.A., a subsidiary of Arauco, is also registered on the Registry as No. 030. Arauco is controlled by Empresas Copec S.A., which owns 99.9779% of Arauco, and is registered in the Registry as No. 0028. Each of the above companies is subject to audit by the Superintendency.

The Company’s head office address is El Golf Avenue 150, floor 14, Las Condes, Santiago, Chile.

Celulosa Arauco y Constitución S.A. and subsidiaries (hereinafter “Arauco”) is principally engaged in the production and sale of forestry and wood products. Its main operations are focused on the following business areas: Pulp, Plywood and fiberboard panels, Sawn Timber and Forestry.

The current controllers of the Company are Mrs. Maria Noseda Zambra of Angelini, Mr.Roberto Angelini Rossi and Mrs. Patricia Angelini Rossi through Inversiones Angelini y Cia. Ltda., which owns 63.4015% of the shares of AntarChile S.A., the controller of our parent company Empresas Copec S.A.

Arauco’s consolidated financial statements were prepared on a going concern basis.

Presentation of Financial Statements

The Financial Statements presented by Arauco cover the following periods:

 
-
Consolidated Balance Sheets as of December 31, 2010 and 2009.
 
-
Consolidated Statement of Income for the years ended December 31, 2010, 2009 and 2008.
 
-
Comprehensive Income Statement for the years ended December 31, 2010, 2009 and 2008.
 
-
Consolidated Statement of Changes in Net Equity for the years ended December 31, 2010, 2009 and 2008.
 
-
Consolidated Statement of Cash Flows – Direct Method for the years ended December 31, 2010, 2009 and 2008.
 
-
Disclosure of Explanatory Information (notes).

Date of Approval of Financial Statements

The issuance of these consolidated financial statements was approved by the Board of Directors of the Company (the “Board”) in Extraordinary Session No. 438 of March 04, 2011.

 
13

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


Functional and Reporting Currency

Arauco has defined the U.S. Dollar as its functional currency, as most of the Company’s operations are a result of exports, and its costs to a large extent are related to or index-linked to the U.S. Dollar.

For the pulp segment, most of the sales operations are exports, and the costs are related mainly to plantation costs, which are settled in U.S. Dollars.

For the sawmill and panel segments, although total sales include a mix of domestic sales and exports, the prices for the products are established in U.S. Dollars, as is also the case for the cost structure of the related raw materials.

Although the costs of labor and services are generally billed and paid in local currency, these costs are not as significant as the costs of raw materials and depreciation of equipment, which are driven mainly by global conditions and therefore, influenced mostly by the U.S. Dollar.

The financial information included herein is presented in thousands of U.S. Dollars without decimals.

Additional Information Relevant to the Understanding of the Financial Statements

The company Fondo de Inversión Bío Bío and its subsidiary Forestal Río Grande S.A. qualify as Special Purpose Entities. These entities are consideredto be controlled by Arauco, which is determined, by the fact that they maintain exclusive contracts with Arauco for wood provision, forward purchase of land and forest administration. Consequently, the financial information of these companies is consolidated with the financial information of the Company and is included in these consolidated financial statements of Arauco.

Compliance and Adoption of IFRS

The accompanying consolidated financial statements of Arauco include the balance sheet, statements of income from operations and cash flows in accordance with IFRS.

This presentation is required to give a faithful representation of the effects of transactions, as well as other events and conditions, according to the definitions and criteria established within the conceptual framework of IFRS for the recognition of assets, liabilities, income and expenses.

Information on Objectives, Policies and Processes applied by the Company regarding Capital Management

Arauco’s policies on capital management have the objective of:

 
a)
Guaranteeing business continuity and normal operations in the long term;
 
b)
Providing all financing needs for new investments to achieve sustainable growth over time;
 
c)
Maintenance of an adequate capital structure considering all economic cycles that impact the business and the nature of the industry; and
 
d)
Maximizing the Company’s value, as well as providing an adequate return to shareholders.

 
14

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


Qualitative Information on Objectives, Policies and Processes applied by the Company regarding Capital Management

Arauco determines and manages its capital structure based on its equity at book value plus its financial liabilities (bank borrowings and bonds).

Quantitative Information on Capital Management

Financial guarantees of the Company are as follows:

Instrument
 
Amount at
12/31/2010
(ThU.S. $)
Amount at
12/31/2009
(ThU.S. $)
Interest
Coverage
>= 2.0x
Debt
Level(1)
<= 1.2x
Debt Level(2)
<= 0.75x
Local Bonds
677,362
398,693
N/A
N/A
Forestal Río Grande S.A. Loan
104,144
138,837
(3)
N/A
(3)
Bilateral Bank Loan
240,260
255,304
N/A
Other Loans
53,152
156,639
No Financial Covenants Required
Foreign Bonds
2,374,258
2,252,838
No Financial Covenants Required

N/A: Not applicable for the instrument
 (1)Debt Level (financial debt divided by: equity plus minority interest)
 (2)Debt Level (financial debt divided by: total assets)
 (3)Financial guarantees on credits taken by Forestal Río Grande S.A. only apply to financial statements of that company

Arauco has complied with all financial covenants at December 31, 2010.

Debt instruments ratings at December 31, 2010 are as follows:

Instrument
Standard
& Poor’s
Fitch
Ratings
Moody’s
Feller Rate
Local Bonds
-
AA
-
AA
Foreign Bonds
BBB
BBB+
Baa2
-

Capital requirements are established based on the Company’s financial needs and on maintaining an adequate liquidity level and complying with financial guarantees established in current debt contracts. The company manages its capital structure and makes adjustments based on the prevailing economic conditions in order to mitigate the risks associated with adverse market conditions, and based on opportunities that may arise to improve the Company’s level of liquidity.

Capital (in Thousand of U.S. Dollars) as of December 31, 2010, and 2009 are as follow:

 
In ThU.S.$
12/31/2010
12/31/2009
 
Equity
6,840,575
6,382,433
 
Bank Loans
397,556
550,780
 
Financial Leases
393
608
 
Bonds
3,051,620
2,651,531
 
Capital
10,290,144
9,585,352

The nature of external capital requirements is determined by the obligation to maintain certain financial ratios that ensure compliance with either bank loans or bond payments, which provide guidelines on the capital ranges required for compliance with these requirements.  Arauco has fulfilled all its external requirements.


 
15

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


Arauco considers it unlikely that future uncertainty risks will result in any significant adjustment to the book value of assets and liabilities within the current financial period. In the case of the fair value of biological assets, no risks are foreseen in which the value of forests will change significantly.  Notably, the data used to make the foregoing determination contemplates the long-term realization of such risks, and therefore the estimates provided are also relevant for the long term.

Summary of significant accounting policies

The accompanying consolidated financial statements as of December 31, 2010 were prepared in accordance with current IFRS accounting policies, uniformly applied to all items in these consolidated financial statements.

a)  Basis for Presentation of financial statements

These consolidated financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standard Board ("IASB"), and represent the wholesale adoption, explicitly and without reservation of the mentioned international standards.

The consolidated financial statements have been prepared under the historic cost convention, as modified for the revaluation of biological assets, financial assets and financial liabilities (including derivative instruments) at fair value.

b)  Critical accounting estimates and judgments

The preparation of consolidated financial statements in accordance with IFRS requires management to make subjective estimates and assumptions that affect the amounts reported. Estimates are based on historical experience and various other assumptions that are believed to be reasonable, though actual results and timing could differ from the estimates. Management believes that the accounting policies below take into account those matters that require the exercise of judgment, but acknowledge that different judgments could result in substantially different results.

- Property, Plant and Equipment

Management prepared the corresponding valuations and in doing so considered or relied in part upon a report of a third party expert.

The carrying amounts of fixed assets are reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may be impaired.  The recoverable amount of an asset is estimated as the higher of fair value less the cost to sell and the value in use, with an impairment charge being recognized whenever the carrying amount exceeds the recoverable amount.  The value in use is calculated using a discounted cash flow model, which is most sensitive to the discount rate as well as the expected future cash inflows.

 
16

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


- Fair Value of Financial Instruments

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. Arauco uses its judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at each balance sheet date.

- Biological Assets

The recovery of forest plantations is based on discounted cash flow models which mean that the fair value of biological assets is calculated using cash flows from continuing operations on a discounted basis, on our sustainable forest management plans and the estimated growth of forests. This recovery is performed on the basis of each stand identified and for each type of tree species.

These discounted cash flows require estimates in growth, harvest, sales prices and costs. It is therefore important that management make appropriate estimates of future levels and trends for sales and costs, as well as conduct regular surveys of the forests to establish the volumes of wood available for harvesting and their current growth rates.  The main considerations used to calculate the valuation of forest plantations are presented in Note 20.

- Lawsuits and Contingencies

Arauco and its subsidiaries are subject to certain ongoing lawsuits, which future are estimated by the management of the Company, in collaboration with its legal advisers. Arauco reserved the appropriate contingency estimates in each balance sheet and/or upon each substantial modification to an underlying cause of any such litigation based on the reports of its legal advisors. Detailed lawsuits information is presented in Note 18.

c)  Consolidation

The consolidated financial statements include all entities over which Arauco has the power to govern the financial and operating policies, which usually requires holding shares with more than one half of the voting rights.  Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are de-consolidated from the date that control ceases.

Unrealized earnings from subsidiary operations have been eliminated from the consolidated financial statements and minority shareholder equity is recognized in the equity balance.

Consolidated financial statements for the period ended December 31, 2010 include subsidiary balances shown in Note 13 and balances of the Fondo de Inversión Bío Bío, and its subsidiary Forestal Río Grande S.A., both of which qualify as Special Purpose Entities.

Certain consolidated subsidiaries report statutory financial statements in Brazilian Reales and Chilean Pesos. For consolidation purposes, they have been translated as indicated in Note 11.


 
17

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


d)  Segments

Arauco has defined its operating segments according to its business areas, which are defined by products and services sold to customers. This is consistent with the management, resource allocation and performance assessment made by key personnel responsible for making relevant decisions related to the Company’s operation. The Chief Executive Officer and Corporate Managing Directors of each segment are responsible for these decisions.

Detailed financial information by segment is presented in Note 24.

e)  Functional currency

(i) Functional currency

Arauco’s entities are measured using the currency of the primary economic environment in which the Company operates (the functional currency). The consolidated financial statements are presented in U.S. Dollars, which is the Arauco’s functional currency and presentation currency.

(ii) Foreign Currency Translations – Subsidiaries and Associates

The income statements of subsidiaries, whose functional and presentational currencies are not the U.S. Dollar, are translated into the Arauco reporting currency (U.S. Dollars) using the average monthly exchange rates, whereas the balance sheets of such subsidiaries are translated using the exchange rates at the reporting date. Exchange differences arising from the translation of net investments in foreign entities are recorded directly in shareholders’ equity as Conversion reserves, as shown in the statement of changes in equity. The cumulative translation differences of divestments and liquidations are combined with their gain or loss on disposal.

(iii) Foreign Currency Transactions

Transactions in foreign currencies are recorded at the rate of exchange prevailing on the transaction date.  Gains and losses on foreign currency resulting from the settlement of such transactions and from the conversion at the closing exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except those that match with the deferral in net equity, such as gains and losses derived from cash flow hedges.

f)  Cash and cash equivalents

Cash and cash equivalents include cash-in-hand, deposits held on call at banks and other liquid investments with an original maturity of less than three months.

g)  Financial Instruments

(i)  Financial assets-liabilities at fair value through profit or loss

Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if it was acquired principally for the purpose of selling in the short term.

 
18

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


Derivatives are also classified as acquired for trading unless they are designated as hedges. Assets in this category are classified as current assets and the obligation for these instruments is presented under Other Financial Liabilities within the Financial Statement.

Regular purchases and sales of financial assets are recognized on the trade-date, which is the date on which the Company commits to purchase or sell the asset.

The financial assets and liabilities carried at fair value through profit or loss are initially recognized at fair value and transaction costs are expensed in the income statement.  They are subsequently recorded at fair value with the effect of the change in value recorded in income.

(ii) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months from the balance sheet date, which are classified as non-current assets. Loans and receivables include trade receivables and other receivables.

Loans and receivables are initially recorded at fair value and subsequently at amortized cost according to the effective interest rate method.  A provision of bad debts is recorded to reflect uncollective amounts.

(iii) Financial liabilities valued at amortized cost

Loans, bond obligations and liabilities of a similar nature are recognized initially at fair value, net of transaction costs incurred.  In subsequent periods, they are stated at amortized cost and any difference between proceeds (net of transaction costs), and redemption value is recognized in the income statement over the life of the debt according to the effective interest rate method.

Financial obligations are classified as current liabilities unless the Company has an unconditional right to defer settlement for at least 12 months after the balance sheet date.

(iv) Creditors and other payables

These instruments are initially recorded at fair value and subsequently at amortized cost using the effective interest rate method.

(v) Hedging instruments

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in the Comprehensive Income Statement. The gain or loss relating to the ineffective portion is recognized immediately in the Income Statement within Other Operating Income by activity or Operating Expenses by activity, respectively.

When a hedging instrument expires or is sold, or when it ceases to meet the criteria to be recognized through the hedge accounting treatment, any cumulative gain or loss in equity at that time recognized in the Income Statement. When a possible transaction is no longer

 
19

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


expected to occur, the cumulative gain or loss in equity is immediately transferred to the Income Statement.

h)  Inventories

Inventories are reported at the lower of cost or net realizable value. Cost is determined using the weighted average cost method.

The cost of finished goods and work in progress includes the cost of raw materials, direct labor, other direct costs and general manufacturing expenses, excluding interest expenses.

Initial costs of harvested wood are determined at fair value less cost of sale at the point of harvest.

Biological assets are transferred to inventories when forests are harvested.

Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

When market conditions result in the manufacturing costs of a product exceeding its net realizable value, a valuation allowance is made.  This provision also includes obsolescence amounts resulting from slow moving inventories and technical obsolescence.

i)  Assets held for sale

Non-current assets held for sale are measured at the lower amount between book and fair value, less costs for sale. Assets are classified in this line when the book value may be recovered through a sale transaction, which is highly likely to carry out, and have immediate availability on the condition they are. Management must be committed to a plan to sell the asset and should have initiated an active program to find a buyer and complete the plan, also to be expected that the sale be qualified for full recognition within one year following the date of its classification.

Non-current assets classified as held for sale are not depreciated.

j)  Business Combinations

Business combinations are recognized using the purchase method. This involves recognizing identifiable assets (including previously unrecognized intangible assets) and liabilities (including contingent liabilities and excluding future restructuring) of the acquired business at fair value.

The goodwill acquired in a business combination is initially measured at the cost of the business combination less the interest of the company in the net fair value of identifiable assets, liabilities and contingent liabilities of the acquisition. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For purposes of impairment testing, goodwill acquired in a business combination is allocated as of the acquisition date to the cash generating unit of the group or groups of cash generating units expected to benefit from the synergies of the combination without prejudice to whether other assets or liabilities of Arauco are assigned to those units or groups of units.

 
20

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated

 

If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement oras Other income (loss).

Arauco measures the fair value of the acquired company in the business combination on a step by step basis, recognizing the effects of variation in the income statement or comprehensive income statement in the period in which they occur, depending where the investment was classified.

Accounting policies for subsidiaries will be adjusted if necessary to ensure consistency with the policies adopted by Arauco. Non-controlling participation are presented as a separate component of equity.

k)  Investments in associates

Associates are entities over which Arauco exercises significant influence but not control, generally holding between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method and are initially recognized at cost.  Their book net equity is increased or decreased proportionately in the profit or loss and comprehensive income statement of the period as a result of adjustments of conversion arising from the financial statement conversion into other currencies. Arauco’s investment in associates includes goodwill (net of any accumulated impairment loss).

If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement as Other income (loss).

l)  Intangible assets

(i) Computer Software
 
Computer software programs are capitalized in terms of the costs incurred to make them compatible with specific programs.  These costs are amortized over the estimated useful lives.

(ii) Rights
 
This item includes water-rights, right of way and other acquired rights recognized at historical cost and have an unlimited useful life as the expected cash flow generating period is unpredictable. These rights are not amortized as they are perpetual and will not require renewal, but are subject to annual impairment tests.

m)  Goodwill

The excess of the cost of acquisition over the fair value of the group’s share of the identifiable net assets acquired is recorded as goodwill. Goodwill is not amortized but is tested for impairment on annual basis.

n)  Property, plant and Equipment

Property, plant and equipment are stated at historical cost less depreciation and accumulated impairment losses.  Historical cost includes expenditures that are directly attributable to the acquisition.

 
21

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


Subsequent costs are included in the asset’s carrying amount 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 group and the cost of the item can be measured reliably.

Asset depreciation is calculated by components using the straight-line method, considering any adjustments for impairment.
The useful life of property, plant and equipment is determined according to expected use of the assets.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, on an annual basis.

o)  Leases

Fixed asset leases in which Arauco substantially holds all ownership risks and advantages are classified as Financial Leases. Financial leases are capitalized at the lease’s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments.

Leases in which significant risks and rewards are not transferred to the lessee are classified as operating leases. Payments under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

p)  Biological Assets

IAS 41 requires that biological assets, such as standing trees, are presented in the Balance Sheet at fair value. The forests are thus accounted for at fair value less estimated point-of sale costs at harvest, assuming that the fair value of these assets can be measured reliably.

The valuation of forest plantation assets is based on discounted cash flow models whereby the fair value of the biological assets is calculated using cash flows from continuous operations, which are discounted based on our sustainable forest management plans and the estimated growth of the forests. This valuation is performed on the basis of each identifiable farm block basis and for each type of tree.

Forest plantations shown as current assets are those that will be harvested and sold in the short term.

Biological growth and changes in fair value are recognized in the income statement within Other income by activity.

q)  Deferred income tax

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, the deferred income tax is not recognized if it arises from the 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 income. Deferred income tax is determined using tax rates (and laws) that have

 
22

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


been enacted as of the balance sheet date that are expected to apply when the related deferred income tax asset or the deferred income tax liability is settled.

The deferred income tax assets are recognized to the extent that it is probable that future taxable benefits will be available.

r)  Provisions

Provisions are recognized when the Company has a current legal or constructive obligation as a result of past events; it is probable that an outflow will be required to settle the obligation; and the amount has been reliably estimated. This amount is quantified and recognized with the best possible estimate at the end of each period.

s)  Revenue recognition

Revenues are recognized after Arauco has transferred the risks and rewards of ownership to the buyer and Arauco retains neither a continuing right to dispose of the goods, nor effective control of those goods; this means that generally revenues are recorded upon delivery of goods to customers in accordance with agreed terms of delivery.

Segment revenues mentioned in Note 24 comply with the conditions indicated above.

Revenues from inter-segment sales (which are made at prices that approximate market prices) are eliminated in the consolidated financial statements.

t)  Minimum dividend

Article No. 79 of the Private Limited Companies Law of Chile provides that, unless otherwise unanimously agreed or adopted by the shareholders, a dividend must be distributed annually in cash to shareholders in proportion to their shares or in the proportion established by the statutes for preferred shares, if any, in the amount of at least 30% of net income for the current year, except where necessary to absorb accumulated losses from prior years.

The General Shareholders’ Meeting of Arauco resolved to maintain annual dividends at 40% of net distributable incomet, including a provisional dividend share distribution at year-end. Dividends payable are recognized as a liability in the financial statements in the period they are declared and approved by the Company’s shareholders or when configuring the corresponding obligation on the basis of existing legislation or distribution policies established by the Shareholders' Meeting.

The interim and final dividends are recorded in equity upon their approval by the relevant groups, which include the Company's Board and the shareholders.

The amount of these dividends is presented in this interim consolidated financial statement under Other non-current Financial Liabilities.


 
23

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated

u)  Impairment

Non-financial Assets
The carrying amounts of tangible and intangible assets are subject to impairment tests whenever some event or change in business circumstances indicates that the book value of assets may not be recoverable, whereas goodwill is tested annually. The recoverable amount of an asset is estimated as the higher of net selling price and value in use. An impairment loss is recognized whenever the carrying amount exceeds the recoverable amount.

A previously recognized impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount, however, not to an extent higher than the carrying amount that would have been determined and recognized in prior years. For goodwill, however, a recognized impairment loss is not reversed.

Goodwill is allocated to cash-generating units for the purpose of impairment testing.  The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose.

“Cash-generating units” are the smallest identifiable groups of assets whose use generates continuous funds largely independent of those produced by the use of other assets or groups of assets.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. The distribution is made between cash-generating units or groups of cash generating units expected to benefit from the business combination that resulted in the goodwill.

Financial Assets
At the end of each period, an evaluation is performed in order to measure the existence of any objective evidence that assets or a group of financial assets have been adversely affected. Impairment effects will be recognized in the Consolidated Income Statement only if there is objective evidence that one or more events will occur after initial recognition of financial asset impairment and if these events will affect associated future cash flows.

The provision for doubtful trade receivables is established when there is objective evidence that Arauco will not receive payments under the original terms of sale. Provisions are made when the client is a party to a bankruptcy court agreement or cessation of payments, and are written-off when Arauco has exhausted all levels of recovery of debt in a reasonable time.

The impairment loss is measured as the difference between the book value of assets and the current value of estimated future cash flows. The asset value will be presented net of the loss recognized directly in income. If the impairment loss decreases in later periods, it is reversed either directly or by adjusting the provision for doubtful accounts, with effect in income.

v)  Employee Benefit Costs

The Company has severance payment obligations for voluntary cessation services. These are paid to certain workers that have more than 5 years seniority within the Company in accordance with conditions established within collective or individual contracts.

 
24

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


Actuarial gains and losses are recognized in income in the year they are incurred.

These obligations are treated as post-employment benefits in accordance with current standards.

w)  Employee Vacations

Arauco recognizes the expense for employee vacation on an accrual basis and it is recorded at nominal value.

This obligation is presented in the Consolidated Balance Sheet in the line Trade and Other payables.

x)  Joint Venture Equity

Joint venture equity is recognized using the equity method.

y)  Recent accounting pronouncements

At the date of issuance of these consolidated financial statements, the following accounting pronouncements were issued by the IASB:

a) New rules, amendments and mandatory obligations as of January 1, 2010, which currently are not relevant to the Company (but they could be in the future).

 
Rules and amendments
 
Content
   
IFRIC 17
Distribution of non-cash assets to shareholders
IFRIC 18
Transfer of assets from clients
IFRIC 9
Revaluation of embedded derivatives
IFRIC 16
Hedging in net investment in foreign operations
IAS 1 (modified)
Filing of Financial Statements
IAS 36 (modified)
Impairment assets
IFRS 2 (modified)
Share-based payments
IFRS 5 (modified)
Non-current assets held for sale

b) New rules, interpretations and issued amendments due for fiscal year 2010, for which no advanced decisions have been adopted.

 
Rules and amendments
 
Content
Mandatory
application date
     
IFRS 9
Financial instruments
January 1, 2013
Amendment to IAS 24
Related parties disclosures
January 1, 2011
IFRIC Interpretation 19
Extinguishing financial liabilities with equity instruments
July 1, 2010
Amendment to IAS 32
Classification for emission rights
February 1, 2010
Amendment to IFRIC 14
Pre-payments of a Minimum funding requirement
January 1, 2011
IFRS 7
Disclosure of financial instruments
July 1, 2011
IAS 12
Income tax
January 1, 2012

Arauco believes that the adoption of standards, amendments and interpretations described above will have no significant impact on the financial statements of the Company in the period of initial application.

 
25

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


NOTE 2.  DISCLOSURE OF OTHER INFORMATION

a)  Disclosure of Information on Capital Issued

Subscribed and paid-in Capital amounts to ThU.S. $353,176.

100% of capital corresponds to ordinary shares.
 
 
 
12/31/2010
12/31/2009
Description of  Ordinary Capital Share  Types
100% of Capital corresponds to ordinary shares
Number of Authorized Shares by Type of Capital in Ordinary Shares
113,152,446
Nominal Value of Shares by Type of Capital in Ordinary Shares
ThU.S.$ 0.0031211 per share
Amount of Capital in Shares by Type of Ordinary Shares that Constitute Capital
ThU.S.$353,176
 
Rights, Privileges and Restrictions by Type of Capital in Ordinary Shares
 
Liabilities presented under Other Financial Liabilities current and non-current, have certain financial restrictions the Parent Company must comply with; otherwise, debt under these contracts can become payable.
 
Financial restrictions are the following:
 
i)  Debt ratio must not exceed 1.2
ii) Interest hedging index cannot be less than 2.0
 
At closing date Arauco complied with the totality of these restrictions.
 
 
12/31/2010
12/31/2009
Number of Shares Issued and Completely Paid by Type of Capital in Ordinary Shares
113,152,446

b)  Disclosure of information on Dividends paid to Ordinary Shares

The interim dividend paid is the equivalent to 20% of the distributable net income calculated to the end of September of each year and presented in the Consolidated Statement of Changes in Net Equity.

Dividend paid corresponds to the spread between the 40% of net income distributable at the end of last year and the amount of interim dividend paid at the end of last fiscal year.

Dividends paid at December 31, 2010:

Detail of Dividend Paid, Ordinary Shares
 
Dividend Paid, Ordinary Shares
Final Dividend
Type of Shares for which there is a Dividend Paid, Ordinary Shares
Unlisted Ordinary Shares
Date of Dividend Paid, Ordinary Shares
12-15-2010
Amount of Dividend, Ordinary Shares, Gross
ThU.S.$ 85,515 (1)
Number of Shares for which Dividends are Paid, Ordinary Shares
113,152,446
Dividend per Share, Ordinary Share
U.S.$ 0.7557
 
 
(1)
This interim dividend plus ThU.S.$182,770 recognized in minimum dividend provision, as reported in Note 25, resulted ThU.S.$268,285 presented in the Consolidated Statement of Changes in Net Equity.

 
26

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated



Detail of Dividend Paid, Ordinary Shares
 
Dividend Paid, Ordinary Shares
Final Dividend
Type of Shares for which there is a Dividend Paid, Ordinary Shares
Unlisted Ordinary Shares
Date of Dividend Paid, Ordinary Shares
05-10-2010
Amount of Dividend, Ordinary Shares, Gross
ThU.S.$ 56,758 (2)
Number of Shares for which Dividends are Paid, Ordinary Shares
113,152,446
Dividend per Share, Ordinary Share
U.S.$ 0.50161

Dividends paid during 2009 and the corresponding amount per share:

Detail of Dividend Paid, Ordinary Shares
 
Dividend Paid, Ordinary Shares
Interim Dividend
Type of Shares for which there is a Dividend Paid, Ordinary Shares
Unlisted Ordinary Shares
Date of Dividend Paid, Ordinary Shares
12-16-2009
Amount of Dividend, Ordinary Shares, Gross
ThU.S.$ 25,957 (2)
Number of Shares for which Dividends are Paid, Ordinary Shares
113,152,446
Dividend per Share, Ordinary Share
U.S.$ 0.22940
 
 
(2)
The total amount is ThU.S.$82,715 which corresponds to the interim dividend and discounted in the  Consolidated Statement of Changes in Net Equity at December 31, 2009.


Detail of Dividend Paid, Ordinary Shares
 
Dividend Paid, Ordinary Shares
Final Dividend
Type of Shares for which there is a Dividend Paid, Ordinary Shares
Unlisted Ordinary Shares
Date of Dividend Paid, Ordinary Shares
05-07-09
Amount of Dividend, Ordinary Shares, Gross
ThU.S.$ 88,449
Number of Shares for which Dividends are Paid, Ordinary Shares
113,152,446
Dividend per Share, Ordinary Share
U.S.$ 0.78168

c)  Disclosure of Information on Reserves

Other Reserves

Other reserves consist of Conversion Reserves, Hedge Reserves and Other Reserves.

Arauco does not have restrictions associated with these reserves.

Conversion Reserves

This corresponds to foreign currency translation of those Arauco’s subsidiaries that do not use the U.S. Dollar as their functional currency.

Hedge Reserves

This corresponds to the portion of gains or swap net loss hedging existing at Arauco at the end of each fiscal year.

Other Reserves

This mainly corresponds to the value in Other comprehensive income of investment in associates.
 
27

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


d)  Disclosures of other Information

Below are balances of Other Income by activity, Other Expenses by activity, Financing Costs and Participation in income (loss) of associates and joint venture as of December 31, 2010 and 2009, respectively.

 
January – December
 
2010
2009
 
ThU.S.$
ThU.S.$
Classes of Other Income by activity
   
Other Operating Income, Total
378,188
181,383
Gain from changes in fair value of biological assets
221,501
155,532
Sales revenue from carbon bonds
0
5,836
Revenue from export promotion
6,171
4,568
Earthquake insurance net effect
107,658
0
Leases received
2,707
4,870
Gain on sales of fixed assets
8,303
995
Other operating results
31,848
9,582
     
Classes of Other Expenses by activity
   
Total of other expenses by activity
(50,642)
(59,681)
Depreciations
(1,356)
(2,943)
Contingent provision
(2,351)
(2,699)
Assets provision
(2,348)
(1,703)
Expenses due to downtime of processing plants
(5,174)
(6,038)
Loss of assets
(5,170)
(7,533)
Loss of forest
(8,223)
(2,824)
Other taxes
(4,730)
(5,875)
Services and fees
(2,715)
(9,537)
Other expenses
(18,575)
(20,529)
     
Classes of Financing Costs
   
Financing Costs, Total
(213,912)
(193,872)
Interest costs
(177,337)
(162,312)
Interest on bank loans
(177,337)
(162,312)
Other financing costs
(36,575)
(31,560)
Classes of Participation in Income (Loss) of associates and joint venture accounted through Equity Method
   
Total
(7,693)
6,621
Investments in associates
1,906
4,084
Joint ventures
(9,599)
2,537

Balance of Expenses by nature at December 31, 2010 and 2009:

Distribution expenses
2010
2009
 
ThU.S.$
ThU.S.$
Sale costs
58,453
33,883
Shipping and freight costs
321,126
354,652
Total
379,579
388,535


 
28

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated



Administration expenses
2010
2009
 
ThU.S.$
ThU.S.$
Wage and salaries
141,297
101,356
Insurances
9,182
9,575
Other depreciations
10,880
10,741
Other administration expenses
162,557
127,668
Total
323,916
249,340

Expenses for
Note
2010
2009
   
ThU.S.$
ThU.S.$
Depreciations
7
232,040
205,033
Employee benefits
10
279,813
215,719
Amortization
19
1,615
2,382

 
29

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


NOTE 3.  INVENTORIES (IAS 2)

Components of Inventory
12/31/2010
ThU.S.$
12/31/2009
ThU.S.$
Raw Materials
86,617
85,706
Production Supplies
65,154
64,978
Work in progress
62,612
26,154
Finished goods
426,447
335,234
Parts
86,532
107,384
Other Inventories
173
602
Total Inventories
727,535
620,058

As of December 31, 2010, a cost of sales of inventories amounted to ThU.S.$ 2,249,689 (ThU.S.$2,064,372 as of December 31, 2009).

As of December 31, 2010, a net decrease in the provision for obsolescence effects of ThU.S.$324 was recognized (net increase of ThU.S.$543 as of December 31, 2009); therefore, so the provision balance as of December 31, 2010 amounted to ThU.S.$7,200 (ThU.S.$7,524 as of December 31, 2009).

The inventories write-off amounted to ThU.S.$23,438 as of December 31, 2010 mainly caused by the earthquake and tsunami that occurred in the south-central of Chile on February 27, 2010.

As of the date of the issuance of these financial statements, no inventories have been pledged as collateral or guarantees.

 
30

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


NOTE 4.  CASH FLOW STATEMENT (IAS 7)

Cash and cash equivalents includes cash flow, bank account balances, fixed term deposits, repurchase agreements and mutual funds. They are short-term investments that are readily convertible into cash, and are subject to an immaterial change in value.

The objective of fixed term deposits is to maximize earnings on short-term cash flow surpluses. This instrument is authorized by Arauco’s Investment Policy, which establishes a mandate that allows investments in fixed income securities. In general, these instruments have a maturity period of less than ninety days.

Arauco invests in local mutual funds to maximize the profitability of cash flow surpluses in Chilean Pesos, or in international mutual funds in foreign currencies such as U.S. Dollars or Euros. These instruments are acceptable under Arauco’s Investment Policy.

As of the date of these consolidated financial statements, there are no significant amounts of cash or cash equivalents that are freely available.

 
12/31/2010
12/31/2009
Components of Cash and Cash Equivalents
ThU.S.$
ThU.S.$
Cash on hand
263
244
Banks
69,692
28,756
Short term deposit
705,694
281,873
Mutual funds
267,811
223,326
Other cash and cash equivalents
374
0
Total
1,043,834
534,199
     

The following tables detail the value of the cost of the investment in Dynea Brasil S.A. dated March 15, 2010, Savitar (Forestal Talavera S.A.) dated June 30, 2009 and Arauco do Brasil S.A. (ex-Tafisa Brazil) dated August 26, 2009 (see Note 14), and the net value of assets and liabilities of each acquired entity, discounting both the amount of cash and cash equivalents acquired in order to distinguish those cash flows from those that arise from other operating, investing or financing activities.

2010
Purchase of Investments
ThU.S.$
Acquisition: Dynea Brasil S.A.
 
Cash paid for acquisitions and cash equivalents
15,000
Cash and cash equivalents held by acquired entities
(8,023)
Net cash paid to acquire entities
6,977

 
ThU.S.$
Net  Assets less Cash and Cash equivalents of acquired entity (see Note 14)
22,613

 
31

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated



2009
Purchase of Investments
ThU.S.$
Acquisition: Tafisa Brasil S.A. (currently named Arauco do Brasil S.A.)
 
Cash paid for acquisitions and cash equivalents
166,977
Cash and cash equivalentsheld by acquired entities
(2,891)
Net cash paid to acquire entities
164,086

 
ThU.S.$
Net  Assets less Cash and Cash equivalents of acquired entity (see Note 14)
107,429
 
2009
Purchase of Investments
ThU.S.$
Acquisition: Savitar (Forestal Talavera S.A.)
 
Cash paid for acquisitions and cash equivalents
10,131
Cash and cash equivalentsheld by acquired entities
(106)
Net cash paid to acquire entities
10,025

 
ThU.S.$
Net  Assets less Cash and Cash equivalents of acquired entity (see Note 14)
12,367


 
32

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


NOTE 5.  ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES (IAS 8)

Changes in Accounting Policies

These policies have been designed in accordance with IFRS in effect as of December 31, 2010 and applied uniformly to all items presented in these consolidated financial statements.

Changes in the Treatment of Accounting Policy

The financial statements as of December 31, 2010 do not show changes in accounting policies compared to the same period last year.

For presentation purposes, the financial statements as of December 31, 2009 have some minor reclassifications.

The consolidated financial statements of Arauco as of December 31, 2009 are the Group’s first annual financial statements prepared under International Financial Reporting Standards (IFRS). The Group’s previous financial statements were prepared according to Generally Accepted Accounting Principles in Chile.

 
33

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


NOTE 6.  TAXES (IAS 12)

The tax rate applicable to the major companies in which Arauco participates is 17% in Chile, 35% in Argentina and 34% in Brazil.

Deferred Tax Assets

The following table details deferred tax assets:

Deferred Tax Assets
12/31/2010
ThU.S. $
12/31/2009
ThU.S. $
Deferred Tax Assets related to Provisions
4,658
3,759
Deferred Tax Assets related to accrued liabilities
4,601
6,690
Deferred Tax Assets related to Post-Employment obligations
6,616
4,677
Deferred Tax Assets related to Revaluation of Property, Plant and equipment
2,339
3,065
Deferred Tax Assets related to Financial Instruments Restatements
1,370
1,913
Deferred Tax Assets related to tax losses
56,724
53,292
Valuation of biological assets
8,805
11,424
Valuation of inventory
9,034
1,939
Income provision
2,765
2,571
Trade debtors and receivables
3,940
4,878
Intangible revaluation differences
24,370
10,584
Deferred Tax Assets related to Others
101
4,968
Deferred Tax Assets Total
125,323
109,760

As of the date of the present financial statement some of Arauco’s subsidiaries present tax losses of ThU.S.$260,701 (ThU.S.$241,596 at December 31, 2009) which are mainly due to operational and financial losses.
 
Arauco believes that the projections of future earnings in subsidiaries that have generated tax losses will allow the recovery of these assets.

Deferred Tax Liability

Deferred tax liability corresponds to income tax amounts payable in future periods related to taxable temporary differences.

The following table details deferred tax liabilities:

Deferred Tax Liabilities
12/31/2010
ThU.S. $
12/31/2009
ThU.S. $
Deferred Tax Liabilities related to Revaluated Property, Plant and equipment
 
686,408
 
682,540
Deferred Tax Liabilities related to Financial Instrument restatement
13,751
7,704
Valuation of biological asset
511,401
508,285
Valuation of inventory
12,450
10,001
Valuation of prepaid expenses
Differences in valuation of deferred expenditures
76,539
35,130
0
27,006
Deferred Tax Liabilities related to Others
33,810
20,554
Deferred Tax Liabilities Total
1,369,489
1,256,090

From the deferred tax assets and deferred tax liabilities listed in the above tables, approximately ThU.S.$20,668 and ThU.S.$170,749 respectively, will be used in a period of 12 months.

 
34

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


Arauco does not offset deferred tax assets and deferred tax liabilities, since there is no legally enforceable right to offset amounts recognized in these items and correspond to items that are subject of different fiscal jurisdictions.
Temporary Differences

The following tables summarize current asset and liability timing differences:

 
12/31/2010
12/31/2009
Detail of Classes of Deferred Tax Temporary Differences
Deductible Difference
ThU.S.$
Taxable
Difference
ThU.S.$
Deductible Difference
ThU.S.$
Taxable
Difference
ThU.S.$
Deferred Tax Assets
68,599
0
56,468
0
Tax Loss
56,724
0
53,292
0
Deferred Tax Liabilities
0
1,369,489
0
1,256,090
Total
125,323
1,369,489
109,760
1,256,090

Detail of Temporary Difference Income and Loss Amounts
January-December
 
2010
ThU.S.$
2009
ThU.S.$
2008
ThU.S.$
 
Deferred Tax Assets
7,028
2,037
3,793
 
Tax Loss
1,846
9,400
14,081
 
Deferred Tax Liabilities
(100,189)
(41,438)
(34,042)
 
Total
(91,315)
(30,001)
(16,168)
 

Income Tax Expense (Income)

Income Tax consists of the following:

 
Income tax composition
 
January-December
2010
ThU.S.$
2009
ThU.S.$
Current income tax expense
(112,840)
(32,147)
Tax benefit arising from unrecognized tax assets previously used to reduce tax expense
8,402
6,526
Previous period current tax adjustments
(581)
2,597
Other current tax expenses
(1,684)
(512)
Current Tax Expense, Net
(106,703)
(23,536)
Deferred expense from taxes relative to the creation and reversion of temporary differences
(68,814)
(39,401)
Deferred income from taxes relative to tax rate changes or new fees
(23,904)
0
Tax benefit arising from unrecognized tax assets previously used to reduce expenses due to deferred taxes
1,403
9,400
Total Deferred Tax Expense, Net
(91,315)
(30,001)
Income Tax Expense, Total
(198,018)
(53,537)

The following table details the income tax for foreign and national companies as of December 31, 2010 and 2009, respectively:

 
January-December
2010
ThU.S.$
2009
ThU.S.$
Foreign current tax
(52,567)
(20,350)
National current tax
(54,136)
(3,186)
Current tax, Total
(106,703)
(23,536)
Foreign deferred tax
17,718
1,033
National deferred tax
(109,033)
(31,034)
Deferred tax, Total
(91,315)
(30,001)
Income (expense) due to Income Tax, Total
(198,018)
(53,537)

 
35

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


Income Tax Expense Reconciliation using the Effective Rate method

Income tax expenditure reconciliation is as follows:

 
Reconciliation of Income tax from Statutory Rate to Effective Tax Rate
January-December
2010
ThU.S.$
2009
ThU.S.$
Tax Expense Using Statutory Rate
(152,790)
(60,891)
Tax effect of rates in other jurisdictions
(24,714)
(16,669)
Tax effect of non taxable ordinary income
18,493
27,596
Tax effect of non tax deductible expenses
(22,486)
(14,846)
Tax effect of  tax rates changes
(23,904)
0
Tax effect of excess tax for previous periods
(581)
2,597
Other Increases (Decreases) Legal Taxes
7,964
8,676
Adjustment to Tax Expense  using the Statutory Rate, Total
(45,228)
7,354
Tax Expenses Using the Effective Rate
(198,018)
(53,537)

The deferred taxes related to financial hedging instruments, corresponds to a credit (subscription) to ThU.S.$ 1,896 at December 31, 2010 (ThU.S.$987 at December 31, 2009), which presents net in Hedge reserves in the Statement of Changes in Net Equity.

On July 30, 2010 Law N. 20.455 for national reconstruction financing was published in the Chilean Official Gazette (Diario Oficial de Chile).  One of the most important changes such law introduced was the increase in the First Category Taxes for revenues received and /or accrued during commercial years 2011 and 2012, with rates of 20% and 18.5%, respectively.

The effect on the change in tax rates caused an adjustment to the assets and liabilities accounts for deferred taxes, according to the profile projected for temporary reverse differences, in tax losses benefits and in other events that create differences between book and tax basis of assets and liabilities.


 
36

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


NOTE 7.  PROPERTY, PLANT AND EQUIPMENT (IAS 16)


 
Properties, Plant and Equipment,  Net
12/31/2010
ThU.S.$
12/31/2009
ThU.S.$
 
Construction in progress
 
562,309
 
433,269
Land
821,288
743,950
Buildings
1,417,684
1,353,461
Plant and equipment
2,188,323
2,328,457
Information technology equipment
16,963
18,178
Fixed facilities and accessories
3,657
5,207
Motorized vehicles
10,057
9,791
Others
68,464
77,440
Total Net
5,088,745
4,969,753
 
Properties, plant and equipment, Gross
   
Constructions in progress
562,309
433,269
Land
821,288
743,950
Buildings
2,523,397
2,370,295
Plant and equipment
4,180,142
4,060,145
Information technology equipment
43,614
42,992
Fixed facilities and accessories
17,339
18,675
Motorized vehicles
32,328
31,066
Others
110,076
112,629
Total Gross
8,290,493
7,813,021
 
Accumulated depreciation and impairment
   
Buildings
(1,105,713)
(1,016,834)
Plant and equipment
(1,991,819)
(1,731,688)
Information technology equipment
(26,651)
(24,814)
Fixed facilities and accessories
(13,682)
(13,468)
Motorized vehicles
(22,271)
(21,275)
Others
(41,612)
(35,189)
Total
(3,201,748)
(2,843,268)

Description of Property, Plant and Equipment Pledged as Guarantee

Regarding Forestal Río Grande S.A, an affiliate of Fondo de Inversión Bío Bío, a special purpose entity, we note that in October 2006, first and second degree mortgages were executed in favor of JPMorgan Chase Bank N.A. and Arauco, respectively, which prohibited the sale of any property currently belonging to the aforementioned special purpose entity, in order to ensure fulfillment of payments to Fondo de Inversión Bío Bío.

In September 2007, Forestal Río Grande S.A acquired real estate in Yungay, located in Chile’s Region VIII, for which the company executed a first mortgage with prohibition to sell and encumber in favor of, among others, JPMorgan. Similarly, a second mortgage with prohibition to sell and encumber was executed in favor of Arauco.

 
12/31/2010
12/31/2009
 
ThU.S$
ThU.S$
Collateral amount of property, plant and equipment
56,272
56,799


 
37

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


Commitments for project disbursements or for the acquisition of property, plant and equipment

 
12/31/2010
12/31/2009
 
ThU.S$
ThU.S$
Amount committed for the acquisition of property, plant and equipment
268,391
187,441
 
 
12/31/2010
12/31/2009
 
ThU.S$
ThU.S$
Disbursements for property, plant and equipment under construction
361,598
196,271
 
 
 
38

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated



Movement on Property, Plant and Equipment

The following tables detail the movement of Property, Plant and Equipment as of December 31, 2010 and December 31, 2009:

Movement of Fixed Assets
Construction
in Progress
 
ThU.S.$
Land
 
ThU.S.$
Buildings
 
ThU.S.$
Plant and equipments
 
ThU.S.$
IT
Equipment
 
ThU.S.$
Fixed
Facilities
and
Accessories
ThU.S.$
Motorized Vehicles
 
ThU.S.$
Other
Property,
Plant and Equipment
ThU.S.$
Total
 
ThU.S.$
Opening balance 01/01/2010
433,269
743,950
1,353,461
2,328,457
18,178
5,207
9,791
77,440
4,969,753
Changes
                 
Additions
361,598
81,610
18,463
14,086
186
234
2,265
4,758
483,200
Acquisitions of business
216
660
4,244
21,420
0
0
14
1,137
27,691
Dispositions
(142)
(14,107)
(3,499)
(3,132)
(3)
(1)
(215)
(4,375)
(25,474)
Withdrawals
(1,024)
(6)
(1,020)
(4,315)
(11)
(39)
(2)
(408)
(6,825)
Depreciation costs
0
0
(68,237)
(160,894)
(1,966)
(810)
(1,892)
(1,708)
(235,507)
Impairment loss recognized in the Income Statement (note 17)
0
0
(24,198)
(110,408)
(63)
0
(102)
(9,341)
(144,112)
Exchange rate increase (decrease) of foreign currency
1,394
9,350
3,902
19,986
2
(1,395)
64
824
34,127
Reclassification of assets held for sale (1)
0
(5,003)
(5,877)
(3,228)
0
0
0
0
(14,108)
Other increase/decrease
(233,002)
4,834
140,445
86,351
640
461
134
137
0
Total Changes
129,040
77,338
64,223
(140,134)
(1,215)
(1,550)
266
(8,976)
118,992
Closing balance 12/31/2010
562,309
821,288
1,417,684
2,188,323
16,963
3,657
10,057
68,464
5,088,745

    (1) ThU.S.$3,745 for impairment loss is included in the assets value

Movement of Fixed Assets
Construction
in Progress
 
ThU.S.$
Land
 
ThU.S.$
Buildings
 
ThU.S.$
Plant and equipments
 
ThU.S.$
IT
Equipment
 
ThU.S.$
Fixed
Facilities
and
Accessories
ThU.S.$
Motorized Vehicles
 
ThU.S.$
Other
Property,
Plant and Equipment
ThU.S.$
Total
 
ThU.S.$
Opening balance 01/01/2009
348,417
689,900
1,307,391
2,172,162
18,621
4,755
9,569
65,156
4,615,971
Changes
                 
Additions
196,271
36,550
8,023
19,792
73
16
1,607
5,161
267,493
Acquisitions through business combination
4,951
5,548
44,364
192,216
0
0
458
5,870
253,407
Dispositions
(212)
(181)
(110)
(1,003)
(177)
(114)
(425)
(942)
(3,164)
Discontinuation of consolidation by the formation of joint venture registered under the equity method (note 15-16)
0
(32,014)
0
(27)
0
0
0
0
(32,041)
Withdrawals
(1,520)
(1,265)
(82)
(2,805)
(3)
(55)
(23)
(1,233)
(6,986)
Depreciation costs
0
0
(59,311)
(155,981)
(1,859)
(274)
(2,050)
(1,618)
(221,093)
Impairment loss recognized in the Income Statement
 
0
 
0
 
(1,416)
 
(1,694)
 
0
 
0
 
0
 
0
 
(3,110)
Exchange rate increase (decrease) of foreign currency
 
1,528
 
42,315
 
11,684
 
38,296
 
1
 
0
 
454
 
4,998
 
99,276
Other increase/decrease
(116,166)
3,097
42,918
67,501
1,522
879
201
48
0
Total Changes
84,852
54,050
46,070
156,295
(443)
452
222
12,284
353,782
Closing balance 12/31/2009
433,269
743,950
1,353,461
2,328,457
18,178
5,207
9,791
77,440
4,969,753

 
39

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


The depreciation charged to income as of December 31, 2010 and 2009 is as follows:

 
Depreciation for the period
12/31/2010
ThU.S.$
12/31/2009
ThU.S.$
Cost of sale
187,208
190,945
Administration expenses
10,880
10,741
Other operating expenses(*)
33,952
3,347
Total
232,040
205,033

(*) The balance of the period 2010, it refers to the cost of depreciation of plants detained product of the earthquake.

The useful lives of property, plant and equipment according to expected use of the assets are as follows:

   
Minimum
Maximum
Average
Buildings
Useful Life in Years
16
89
39
Plant and equipment
Useful Life in Years
8
67
29
Information technology equipment
Useful Life in Years
6
18
5
Fixed facilities and accessories
Useful Life in Years
6
12
10
Motorized vehicles
Useful Life in Years
6
26
13
Others properties, plants and equipment
Useful Life in Years
5
27
16

 
40

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


NOTE 8.  LEASES (IAS 17)

When assets are leased under a Financial lease, the current value of lease payments is treated as a receivable. The difference between the gross payment to be charged and the current value of said payment is shown as capital return.

Disclosure of Financial Leases Classified by Type of Asset, Leases

 
12/31/2010
ThU.S.$
12/31/2009
ThU.S.$
Property, Plant & Equipment Financial Leasing
440
608
Plant and Equipment
440
608

 Reconciliation of Financial Lease Minimum Payments, Lessee

 
12/31/2010
 
Minimum lease payments, lease payment obligations
 
Gross
 
Interest
Present
Value
 
ThU.S.$
ThU.S.$
ThU.S.$
Due within one year
354
10
344
Due within one and five years
50
1
49
Due beyond five years
0
0
0
Total
404
11
393

 
12/31/2009
 
Financial Lease
 
Gross
 
Interest
Present
Value
 
ThU.S.$
ThU.S.$
ThU.S.$
Due within one year
381
20
361
Due within one and five years
253
6
247
Due beyond five years
0
0
0
Total
634
26
608

Leasing obligations that accrue interest are presented in the Consolidated Balance Sheet  under Other Financial Liabilities Current and Non-current depending on the maturities stated above.

Reconciliation of Financial Lease Minimum Payments, Lessor

 
12/31/2010
Minimum Financial Lease Payments Receivable, Financial Lease
 
Gross
 
Interest
Present
Value
 
ThU.S.$
ThU.S.$
ThU.S.$
Due within one year
4,767
450
4,317
Due within one and five years
5,957
358
5,599
Due beyond five years
0
0
0
Total
10,724
808
9,916

 
12/31/2009
Minimum Financial Lease Payments Receivable, Financial Lease
 
Gross
 
Interest
Present
Value
 
ThU.S.$
ThU.S.$
ThU.S.$
Due within one year
4,860
545
4,315
Due within one and five years
7,940
490
7,450
Due beyond five years
0
0
0
Total
12,800
1,035
11,765


 
41

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


Accounts receivable in leasing are presented in the Consolidated Balance Sheet under Trade and Other Receivables current and non-current depending on the maturities stated above.

Significant Financial Lease Agreements

Arauco holds financial leases as a lessor and lessee detailed within the previous tables, and therefore, there are no contingent payments or restrictions to note.
 
 
 
 
 
 
 
 
 

 
42

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


NOTE 9.  ORDINARY REVENUE (IAS 18)

(a)    Policy on Revenue recognition from the Sale of Goods

Revenue from the sale of goods is recognized when an Arauco entity has transferred to the buyer the significant risks and rewards of ownership, when the amount of revenue can be reliably measured, when Arauco cannot influence the management of the sold goods and when it is probable that the economic benefits associated with the transaction will flow to the entity.
 
 
Sales are recognized in terms of the arranged price stated in the sales contract, net of volume discounts and estimated refunds at the date of the sale. Volume discounts are evaluated in terms of estimated annual purchases. There is no significant financing component given that receivables for sales are collected within a low average time period, which is in line with market practices.

(b)    Policy on Revenue recognition from Rendering of Services

Arauco mainly has electric power, port and pest control services whose incomes are derived from fixed price service contracts, generally recognized during the period of the service contract on a straight-line basis throughout the duration of the contract.
 
 
Classes of Ordinary Revenue
January-December
 
2010
ThU.S.$
2009
ThU.S.$
 
Sale of goods
3,692,221
3,027,796
 
Service Contracts
96,133
85,249
 
Total
3,788,354
3,113,045

 
 
43

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


NOTE 10.  EMPLOYEE BENEFITS (IAS 19)

This refers to severance payment obligations for years of service due to termination of service contracts that arise from benefits stated in work contracts and/or as severance payments stated in the Labor Law.

This is an estimate of the years of service-based severance payments to be recognized as a future termination payment liability, in accordance with in force work contracts held with workers and pursuant to actuarial valuation criteria for this type of liability.

The main factors considered for calculating the actuarial value of severance payments for years of service are employee turnover, salary increases and life expectancy of the workers included in this benefit.

Classes of Benefits and Expenses by Employee

 
Classes of Benefits Expenses by Employee
January-December
2010
ThU.S.$
2009
ThU.S.$
Personnel Expenses
279,813
215,719
Wages and salaries
264,572
209,687
Compensation for years of service
15,241
6,032

The following tables detail the balances and the movement of payments for years of service provisioned as of December 31, 2010 and December 31, 2009.

 
12/31/2010
ThU.S.$
12/31/2009
ThU.S.$
Current
3,312
2,372
Non-current
35,964
25,295
Total
39,276
27,667

Roll-forward
12/31/2010
ThU.S.$
12/31/2009
ThU.S.$
Opening balance
27,667
20,297
Current service cost
1,851
905
Interest cost
1,798
1,614
Actuarial gains
11,256
3,653
Benefits paid
(5,537)
(4,054)
Increase for currency exchange
2,241
5,252
Closing balance
39,276
27,667


 
44

 
CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statement
December 31, 2010
Amounts in thousands of U.S. dollars, except as indicated


NOTE 11.  EFFECT OF FOREIGN CURRENCY RATE VARIATIONS (IAS 21)

Local and foreign currency

Currency assets and liabilities as of December 31, 2010 and December 31, 2009 are as follows:

 
12-31-2010
ThU.S.$
12-31-2009
ThU.S.$
Liquid Assets
1,046,743
542,625
US Dollar
516,201
185,995
Euro
73,573
66,935
Other currencies
48,511
64,879
$ not adjustable
408,458
224,816
U.F.
0
0
Cash and Cash Equivalents
1,043,834
534,199
US Dollar
513,292
177,569
Euro
73,573
66,935
Other currencies
48,511
64,879
$ not adjustable
408,458
224,816
U.F.
0
0
Other Financial Assets
2,909
8,426
US Dollar
2,909
8,426
Accounts Receivable in short and long term