Weatherford International Ltd.
Annual Report 2016

Plain-text annual report

WEST FRASER ANNUAL REPORT 2016 Including Annual Information Form Dated: February 16, 2017 . d t L . o C r e b m T i r e s a r F t s e W 1 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M . d t L . o C r e b m T i r e s a r F t s e W 2 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M TABLE OF CONTENTS 1. Map of Operations 2. Financial & Operating Highlights 4. Report to Shareholders 6. Corporate Structure 7. ANNUAL INFORMATION FORM 7. Business Overview 8. Corporate Strategy 8. Corporate Structure 8. History and Development of Business 9. Fibre Supply 11. Capital Expenditures and Acquisitions 11. Human Resources 11. Markets 12. Research and Development 12. Lumber 12. Panels 13. Pulp & Paper 13. Newsprint 13. External Factors Affecting West Fraser’s Business in 2016 14. Risk Factors 14. Capital Structure 15 . Ratings 16. Experts 16. Directors and Officers 18. Governance 18. Audit Committee 19. Fees Paid to Auditors 19. Material Contracts 19. Additional Information 20. Schedule 1 — Audit Committee Charter 22. MANAGEMENT’S DISCUSSION & ANALYSIS 23. Annual Results 23. Selected Quarterly Information 23. Adjusted Earnings and Adjusted Basic Earnings Per Share 25. Discussion & Analysis by Product Segment 28. 4th Quarter Results 28. Sales and Earnings Comparison 28. Adjusted Earnings and Adjusted Basic Earnings Per Share 28. Discussion & Analysis of Quarterly Non-operational Items 29. Discussion & Analysis by Product Segment 4th Quarter 31. Capital Expenditures 32. Business Outlook 33. Estimated Earnings Sensitivity to Key Variables 33. Capital Structure and Liquidity 34. Summary of Financial Position 34. Debt Ratings 34. Selected Cash Flow Items 35. Contractual Obligations 35. Significant Management Judgments Affecting Financial Results 36. Accounting Standards Issued But Not Yet Applied 36. Non-IFRS Measures 38. Risks and Uncertainties 42. Disclosure Controls and Internal Controls Over Financial Reporting 43. Responsibility of Management 44. Independent Auditor’s Report 45. Financial Statements 70. Five-year Financial Review 71. Corporate Information 73. Glossary of Industry Terms WEST FRASER ANNUAL REPORT 2016 0 LUMBER Canada 1. Quesnel 2. Williams Lake 3. Smithers 4. Chetwynd 5. Fraser Lake 6. Chasm 7. 100 Mile House 8. Blue Ridge 9. Hinton 10. Edson 11. Sundre 12. High Prairie 13. Manning 0 PULP & PAPER 29. Hinton 30. Quesnel (2) 31. Slave Lake 32. Whitecourt 0 PLYWOOD 33. Edmonton 34. Quesnel 35. Williams Lake 0 MDF 36. Blue Ridge 37. Quesnel 0 VENEER & LVL 38. Rocky Mountain House 39. Slave Lake 0 LUMBER U.S. 14. Joyce 15. Huttig 16. Henderson 17. New Boston 18. Leola 19. Mansfield 20. Russellville 21. Maplesville 22. Opelika 23. McDavid 24. Whitehouse 25. Augusta 26. Newberry 27. Armour 28. Seaboard A L B E R TA 13 12 32 36 8 31 39 EDMONTON 33 10 9 29 38 11 B R I T I S H C O L U M B I A 4 3 5 QUESNEL 37 34 1 30 2 35 7 6 VANCOUVER 19 20 ARKANSAS 18 15 14 17 16 LOUISIANA TEXAS TENNESSEE MEMPHIS 28 NORTH CAROLINA 27 26 SOUTH CAROLINA 25 22 GEORGIA ALABAMA 21 23 24 FLORIDA OPERATIONS West Fraser is a North American wood products company. Its main product is lumber (spruce/pine/fir (“SPF”) and southern yellow pine (“SYP”)), and it also produces panels (plywood, MDF and LVL), pulp (NBSK and BCTMP), newsprint, wood chips and energy. The operations located in western Canada manufacture all of the products described above except SYP lumber. The sawmills located in the southern United States produce SYP lumber and wood chips. B R I T I S H C O L U M B I A 4 3 5 37 QUESNEL 34 1 30 2 35 7 6 VANCOUVER A L B E R TA 13 12 31 39 32 8 EDMONTON 33 36 10 9 29 38 11 . d t L . o C r e b m T i r e s a r F t s e W 1 s n o i t a r e p O 19 20 ARKANSAS 18 15 14 17 16 LOUISIANA TENNESSEE MEMPHIS 21 22 ALABAMA 23 28 NORTH CAROLINA 27 26 SOUTH CAROLINA 25 GEORGIA 24 FLORIDA TEXAS 0 LUMBER Canada 0 PULP & PAPER 29. Hinton 1. Quesnel 30. Quesnel (2) 2. Williams Lake 31. Slave Lake 3. Smithers 4. Chetwynd 5. Fraser Lake 6. Chasm 7. 100 Mile House 8. Blue Ridge 32. Whitecourt 0 PLYWOOD 33. Edmonton 34. Quesnel 35. Williams Lake 9. Hinton 10. Edson 11. Sundre 12. High Prairie 13. Manning 0 MDF 36. Blue Ridge 37. Quesnel 0 VENEER & LVL 38. Rocky Mountain House 39. Slave Lake 0 LUMBER U.S. 14. Joyce 15. Huttig 16. Henderson 17. New Boston 18. Leola 19. Mansfield 20. Russellville 21. Maplesville 22. Opelika 23. McDavid 24. Whitehouse 25. Augusta 26. Newberry 27. Armour 28. Seaboard Financial and Operating Highlights Earnings ($millions) Sales Adjusted EBITDA1 Operating earnings Earnings Cash flow from operating activities Common Share Data (in dollars per share, except shares outstanding) Shares outstanding (thousands) – Weighted average (basic) – Year-end Earnings per share – Basic – Diluted Cash dividends per share Common shareholders’ equity Price range – High (2016 – Jun 27; 2015 – Feb 12) – Low (2016 – Mar 30; 2015 – Oct 2) – Close Financial Position ($millions) Working capital Total assets Long-term debt (includes current portion) Shareholders’ equity Analytical Data Current ratio Capital expenditures ($millions) Net debt to capitalization (%) Return on common shareholders’ equity (%) 2016 2015 4,450 4,100 674 482 326 689 417 249 104 301 80,236 78,163 83,104 82,457 4.06 3.90 0.28 28.67 54.18 35.35 48.01 479 3,600 413 2,241 2.0 273 14 15 1.25 0.89 0.28 26.04 78.55 40.56 52.53 365 3,635 423 2,147 1.6 220 22 5 . d t L . o C r e b m T i r e s a r F t s e W 2 s t h g i l h g i H g n i t a r e p O d n a l a i c n a n i F Lumber Sales ($millions)2 Operating earnings ($millions) SPF (MMfbm) SYP (MMfbm) Panels Sales ($millions)2 Operating earnings ($millions) Plywood (3/8” MMsf) MDF (3/4” MMsf) LVL (Mcf) Pulp & Paper Sales ($millions) Operating earnings ($millions) NBSK (Mtonnes) BCTMP (Mtonnes) Newsprint (Mtonnes) 2016 2015 3,145 362 3,796 3,878 2,139 2,126 529 77 826 826 160 167 2,215 2,226 887 42 527 526 665 653 128 129 2,764 105 3,599 3,614 2,008 2,014 554 82 797 803 220 212 1,627 1,728 900 41 497 499 645 673 133 136 Production Shipments Production Shipments Production Shipments Production Shipments Production Shipments Production Shipments Production Shipments Production Shipments . d t L . o C r e b m T i r e s a r F t s e W 3 s t h g i l h g i H g n i t a r e p O d n a l a i c n a n i F 1. Adjusted EBITDA is described in the section titled “Non-IFRS Measures” of our 2016 Management’s Discussion & Analysis. 2. Includes intracompany fibre sales. Report to Shareholders . d t L . o C r e b m T i r e s a r F t s e W 4 s r e d l o h e r a h S o t t r o p e R Message from our President and Chief Executive Officer For more than 60 years, West Fraser’s business strategy has been plywood, laminated veneer lumber (LVL) and medium density straight-forward and consistently focused on three key drivers: fibreboard (MDF) products were relatively stable compared to 2015 to be the low-cost, high-margin producer in each of our product and our panel business continues to be a meaningful and positive lines and geographic regions; maintaining a conservative balance contributor to our overall financial results. We also improved sheet to manage for the inherent cyclicality of our industry; and production at our Hinton pulp mill in 2016. However, as we have reinvesting in our business assets. We believe these three pillars previously indicated, pulp markets are expected to be challenged are the cornerstones to our success. Through the efforts of our by increases in global pulp capacity over the next few years. 7,800 employees, we have made significant progress on all three fronts in 2016. With our most significant capital spending behind us, we see an opportunity within our 40 mills to materially improve our operating Improving lumber markets in 2016 helped us to achieve stronger results in 2017. We aim to increase lumber production by a further financial performance. We delivered industry-leading margins 250 million feet and are optimistic about continued cost and margin in our core lumber segment this year and improved operational improvement in all three of our business segments. performance in all segments of the business. We strengthened our financial position, reducing our debt to capital ratio from 22% (2015) to 14% (2016) in the same year that we invested $190 million in purchasing our Common shares, a three-year total of $361 million in Common share purchases. Since 2011, we have reinvested in excess of $1.6 billion across the Company to equip our facilities to be the most efficient, modern mills in the industry. Within our comprehensive capital program, we have completed 10 major sawmill rebuilds, upgraded 12 planers, added 28 continuous kilns and built 6 major energy and bio-product projects. What we achieve is important. How we achieve these results is just as critical to sustain and build on our Company culture and our values, and how our people define our success. Employee safety and a safe work environment are priorities at every one of our locations. Our health and safety goal is nothing less than eliminating serious incidents and injuries in our operations with zero tolerance for unsafe behaviour. We are working to improve safety behaviors and activities through continuous attention to education and training to better our performance, risk identification and safety awareness. We are making progress towards our objective and we Despite U.S. housing construction at relatively modest levels will continue to pursue safety performance improvement in 2017. and continuing log cost escalation in the B.C. Interior, our capital program combined with our dedicated and competitive group of employees achieved a record Adjusted EBITDA in 2016 of $674 million. Although we were challenged by difficult weather conditions in the fourth quarter, lumber shipments were 376 million feet higher in 2016 compared to 2015. Markets for our We grew dramatically in 2005 with the acquisition of Weldwood and again in 2007 with the purchase of U.S. sawmills from International Paper. Beyond capital investment, it was equally important to knit together a strong, cohesive organization that demonstrates the West Fraser values and our long-standing culture of competitiveness, teamwork, frugality and humility. Recruiting and developing our people is a major area of focus for us and an area where we are can help to address some of the opportunities in green construction being acknowledged for our efforts. 2017 marks the fourth time we because of their environmental benefits over other materials like have been recognized as one of Canada’s Top 100 Employers and concrete or composites. West Fraser’s lumber products were the first time as one of Canada’s Top Employers for Young People. part of the construction of one of the world’s tallest mass timber We will continue to focus on operational excellence in all facets hybrid structures, an 18-storey student residence at the University of the Company and match it with an equal commitment to the of British Columbia. Projects like these are demonstrating that development of people who are critical to our long-term success. wood is not only the smart choice for single-family homes, but I am proud to be a part of a high-technology industry that produces sustainable products from renewable resources. We are increasingly can be the right fit for multi-dwelling buildings and high-rise towers. innovating in our facilities and have embraced initiatives across Overall, 2016 was a year of investment, improving financial the organization to reduce our energy consumption, to choose performance, and preparation in anticipation of what may lie ahead more energy efficient equipment and, where possible, shift our in 2017. The expiration of the Canada-U.S. Softwood Lumber fuel sources towards carbon-neutral biomass. Today, 85% of Agreement, the addition of significant global pulp capacity, the our mills generate energy from residual woody materials that ongoing mountain pine beetle infestation in western Canada, and are by-products of wood processing. We operate five bioenergy continued volatility in global markets will be challenging. However, generation facilities, including an organic biogas waste-to-energy I am confident that our consistent business approach, diversified plant at Slave Lake Pulp that uses the mill’s effluent and biological operating footprint and the successful capital investments carried organisms to generate the power to operate 4,300 homes for a out by our high-performing employees put us in a strong position to year. We also initiated production at Canada’s first commercial lignin favourably compete in our sector and product markets. recovery plant in 2016, capturing this adaptable material from our pulp process. Lignin has potential as a natural, renewable green alternative for fossil fuel-based compounds and for innovations in renewable chemicals. We are excited to be exploring a wide range of opportunities for this flexible product. With the support, dedication and the efforts of all of our employees, their families, our Board of Directors, our customers and our communities, I am optimistic about the opportunities for our business to thrive in 2017. Our commitment to efficient, modern mill operations, supported by a low-cost culture and strong financial Our commitments to certified, sustainable forest management and position sets us up well to compete in the years ahead. . d t L . o C r e b m T i r e s a r F t s e W 5 s r e d l o h e r a h S o t t r o p e R fibre sourcing practices are entrenched in our operating actions. Strong environmental practices are foundational to our ability to profitably and responsibly manufacture our products, to be a sought after and stable employer, and to support healthy forest Ted Seraphim systems for current and future generations. I believe that we are President and Chief Executive Officer only beginning to realize the opportunities where wood products Corporate Structure . d . d t t L L . . o o C C West Fraser Timber Co. Ltd. West Fraser Mills Ltd. r r e e b b m m T T i i r e s a r F r e s a r F t t s s e e W W 8 6 l i s s y e r u t c a u n r A t S & e t a r o s p s u r o c C s D n o i i s ’ t n e m e g a n a M LUMBER Canada Quesnel Williams Lake Smithers Chetwynd Fraser Lake Chasm 100 Mile House Blue Ridge1 Hinton Edson Sundre2 High Prairie Manning3 U.S. Joyce4 Huttig4 Henderson5 New Boston5 Leola4 Mansfi eld4 Russellville4 Maplesville4 Opelika4 McDavid4 Whitehouse4 Augusta4 Newberry4 Armour4 Seaboard4 PANELS PULP & PAPER Pulp Hinton Quesnel Quesnel (50%)6 Slave Lake Newsprint Whitecourt (50%)7 Plywood Edmonton Quesnel Williams Lake MDF Blue Ridge Quesnel Veneer & LVL Rocky Mountain House2 Slave Lake 1. Owned through Blue Ridge Lumber Inc., a wholly-owned subsidiary. 2. Owned through Sundre Forest Products Inc., a wholly-owned subsidiary. 3. Owned through Manning Forest Products Ltd., a wholly-owned subsidiary. 4. Owned through West Fraser, Inc., a wholly-owned subsidiary. 5. Owned through West Fraser Wood Products Inc., a wholly-owned subsidiary. 6. 50% interest in Cariboo Pulp & Paper Company. 7. 50% interest in Alberta Newsprint Company owned through West Fraser Newsprint Ltd., a wholly-owned subsidiary. Annual Information Form Date This Annual Information Form of West Fraser Timber Co. Ltd. (“West Fraser”, “we”, “us”, “our” or the “Company”) is dated as of February 16, 2017. Except as otherwise indicated, the information contained in it is as of December 31, 2016. Forward-looking Statements This Annual Information Form, and the Annual Report of which it forms a part, contain historical information, descriptions of current circumstances and statements about potential future developments. The latter, which are forward-looking statements, are presented to provide reasonable guidance to the reader but their accuracy depends on a number of assumptions and is subject to various risks and uncertainties. Forward-looking statements are included under the headings “Fibre Supply – Mountain Pine Beetle (the projected outcome of the infestation) and Aboriginal Matters (the potential effect of aboriginal title or rights)” and “Capital Structure – Cash dividends” and “Risks and Uncertainties” in the 2016 Management’s Discussion & Analysis incorporated herein. Actual outcomes and results will depend on a number of factors that could affect the ability of the Company to execute its business plans, including the matters described in these sections and under “Risk Factors”, and may differ materially from those anticipated or projected. Accordingly, readers should exercise caution in relying upon forward-looking statements which reflect management’s estimates, projections and views only as of the date hereof. The Company undertakes no obligation to publicly revise these statements to reflect subsequent events or changes in circumstances except as required by applicable securities laws. Business Overview We are a North American diversified wood products company which produces lumber (SPF and SYP), panels (plywood, MDF and LVL), pulp (NBSK and BCTMP), newsprint, wood chips and energy. We hold rights to timber resources that are sufficient to supply a significant amount of the fibre required by our Canadian operations and have long-term agreements for the supply of a considerable amount of the fibre required by our United States operations. We carry on our operations through subsidiaries and joint operations in British Columbia, Alberta and the southern United States. Our operations located in western Canada manufacture all of the products described above except SYP lumber. Our sawmills located in the southern U.S. produce SYP lumber and wood chips. The annual production capacities of our wholly-owned facilities and our share of the capacities of our 50%-owned operations are as follows: . d t L . o C r e b m T i r e s a r F t s e W 7 m r o F n o i t a m r o f n I l a u n n A Lumber (MMfbm) SPF SYP Total Panels Plywood (MMsf 3/8”) MDF (MMsf 3/4”) LVL (Mcf) Pulp (Mtonnes) BCTMP NBSK Newsprint (Mtonnes) 4,100 2,400 6,500 850 250 3,200 680 570 135 . d t L . o C r e b m T i r e s a r F t s e W 8 m r o F n o i t a m r o f n I l a u n n A Annual Information Form (continued) Corporate Strategy Our goal at West Fraser is to generate strong financial results through the business cycle, relying on our committed work force, the quality of our assets and our well-established corporate culture. This culture emphasizes cost control in all aspects of the business and internal and external competitiveness. In our approach to employee relations, we emphasize employee involvement and favour internal promotions whenever possible. We are a diversified producer of wood products with access to extensive timber resources. Our Canadian lumber, plywood, LVL and veneer operations are directly or indirectly the primary source of raw material for our pulp & paper and MDF operations. Acquisitions and expansions are considered with a view to extending our existing business lines, particularly in lumber operations, and to product and geographic diversification. Our earnings over the business cycle have enabled us to make significant and ongoing capital investments in our facilities with the goal of achieving, maintaining or improving an overall low-cost position. We are committed to operating in a financially conservative and prudent manner. The North American wood products industry is cyclical and periodically faces very difficult market conditions and serious challenges. During such cyclical downturns, we focus on financial discipline, including reduction or deferral of non-essential capital expenditures. As market conditions improve we will typically undertake an expanded capital investment program in order to catch up on expenditures reduced or deferred during the downturn. We believe that maintaining a strong balance sheet provides the ability to react to growth opportunities and is a key tool in managing our operations through a business cycle. Corporate Structure The chart on page 6 shows the relationship of West Fraser to the principal direct and indirect subsidiaries and the joint operations in which we participate and, where less than 100%, the percentage of our direct or indirect ownership. West Fraser assumed its present form in 1966 by the amalgamation of a group of companies under the laws of B.C. The principal operating subsidiary, West Fraser Mills Ltd., assumed its present form on January 1, 2005 by amalgamation under those laws. West Fraser, Inc. and West Fraser Wood Products Inc. are Delaware corporations, while Blue Ridge Lumber Inc., Manning Forest Products Ltd. and Sundre Forest Products Inc. are Alberta corporations. West Fraser Newsprint Ltd. subsists under the laws of Canada. Alberta Newsprint Company (“ANC”) and Cariboo Pulp & Paper Company are unincorporated 50%-owned operations governed, respectively, by the laws of Alberta and B.C. Our executive office is located at 858 Beatty Street, Suite 501, Vancouver, B.C., Canada, V6B 1C1 and our registered office is located at 1500 – 1055 West Georgia Street, Vancouver, B.C., Canada, V6E 4N7. History and Development of Business West Fraser originated in 1955 when three brothers, Pete, Bill and Sam Ketcham, acquired a lumber planing mill located in Quesnel, B.C. (“Quesnel”). From 1955 through 2016 the business expanded through the acquisition of a number of sawmills and related timber harvesting rights and the acquisition or development of lumber, panel and pulp & paper businesses. Major developments for West Fraser during the last five years include the following: 2012 2014 2015 2016 • • • • • • • • • Acquired a sawmill at Edson, Alberta. Completed a biomass electricity turbogeneration project at our 50%-owned Cariboo pulp mill with excess electricity sold under a long-term contract. Acquired two sawmills in Arkansas and one in High Prairie, Alberta. Permanently closed our Houston, B.C., Slave Lake, Alberta and Folkston, Georgia sawmills. Capital investment sets new annual record at $410 million. Acquired a sawmill in Manning, Alberta. Completed co-generation projects at two of our sawmills to generate electricity from wood waste to be sold under long-term contracts. Completed biogas-electricity generation project at our Slave Lake, Alberta pulp mill. First electricity generated January 2016. Terminated power purchase agreements that had provided us with a portion of the electricity generated from two power plants in Alberta at substantially predetermined rates. • MDF facility in Quesnel was closed for repairs following a fire on March 9, 2016. Plant commissioning is expected to commence in the second quarter of 2017. Sales Revenue ($ millions) Year ended December 31 Lumber Panels Pulp & Paper Intracompany fibre sales Total 2016 3,145 529 887 (111 ) 4,450 2015 2,764 554 900 (118 ) 4,100 2014 2,622 526 812 (104 ) 3,856 2013 2,315 467 780 (88 ) 3,474 2012 1,855 448 775 (78 ) 3,000 Fibre Supply Our operations are dependent on the consistent supply of substantial quantities of wood fibre in various forms. The primary manufacturing facilities, which produce lumber, plywood and LVL, consume whole logs while the pulp & paper and MDF facilities mostly consume wood by-products in the form of wood chips, shavings and sawdust resulting from the production of lumber, plywood or LVL. Many facilities also consume hog fuel and wood waste in energy systems. In B.C. and Alberta substantially all timberlands are publicly owned and the right to harvest timber is acquired through provincially-granted licences. Licences grant the holder the right to harvest up to a specified quantity of timber annually and either have a term of 15 to 25 years and are replaceable or renewable or have a shorter term but are not replaceable or renewable. Government objectives in granting licenses include responsible management of timber, soils, wildlife, water and fish resources and the preservation of biodiversity and the protection of cultural values. The objectives also include achieving the fullest possible economic utilization of the forest resources and employment in local communities. We do not own or manage any timberlands in the U.S. Timber tenures in B.C. and Alberta require the payment of a fee, commonly known as stumpage, for timber harvested pursuant to its terms. Currently, stumpage in Alberta is product-price specific and varies with the sales price of the product into which the logs will be converted. Stumpage in B.C. is substantially based on the results of certain publicly-auctioned timber harvesting rights. Timber tenures in B.C. and Alberta require the holder to carry out reforestation to ensure re-establishment of the forest after harvesting. Reforestation projects are planned and supervised by our woodlands staff and are subject to approval by relevant government authorities. Our timber harvesting operations are carried out by independent contractors under the supervision of our woodlands staff. The following table summarizes the timber tenures, as at December 31, 2016, which supply the Canadian mills that we own or in which we have an interest, as well as our AAC for such tenures. Timber Tenures (thousand m3) Location B.C. Alberta Tenure1 Coniferous Long-term Coniferous Short-term Coniferous Long-term Deciduous Long-term Expiry 2022 – 2035 2017 2017 – 2033 2019 – 2033 AAC 5,621 518 7,165 1,222 1. Long-term tenures include TFLs, FMAs, timber quotas and forest licences, which are renewable timber tenures. Short-term tenures include non-replaceable forest licences. Log Supply Annual log requirements for our Canadian sawmills, plywood facilities and LVL plant, all operating at the capacities described herein, would total approximately 16 million m3. Approximately 80% of these requirements can be obtained from the tenures described in the above table and the balance is typically acquired from third parties holding short or long-term timber harvesting rights, including independent logging contractors, aboriginal groups, communities and woodlot owners. We do not necessarily consume the maximum permitted volume of logs that may be harvested from our tenures annually but will adjust between tenure and purchase logs depending on circumstances including the availability of purchase logs. Our U.S. operations, which produce SYP lumber, would consume approximately 10 million tons of logs per year if operating at the capacity described herein. Our U.S. operations as a whole have access to approximately 15% of their log requirements under certain long-term supply contracts, and the balance is purchased on the open market. Mountain Pine Beetle The current mountain pine beetle infestation in the B.C. interior reached a peak a number of years ago in terms of the annual timber mortality rate according to information published by B.C.’s Ministry of Forests, Lands and Natural Resource Operations. To date, the Ministry estimates that 740 million m3 of pine has been attacked and killed and that approximately 55% of the mature pine within the province’s timber harvesting land base (“THLB”) will be killed by 2021. Approximately 40% of B.C.’s standing timber inventory is within the THLB and approximately 29% of this is pine. When only considering the THLB of B.C.’s interior, approximately 37% is pine. The damage to the mature pine forests within our operating areas is significant. . d t L . o C r e b m T i r e s a r F t s e W 9 m r o F n o i t a m r o f n I l a u n n A . d t L . o C r e b m T i r e s a r F t s e W 10 m r o F n o i t a m r o f n I l a u n n A Annual Information Form (continued) We continue to focus on the salvage and processing of dead pine in order to utilize as much of the resource as possible and to ensure that affected sites are promptly reforested. The Province of B.C. increased the AAC on dead pine stands and limited the harvest of non-pine species until the salvage of dead pine stands comes to a conclusion. The AAC will be reduced to reflect lower mature inventories as dead pine stands are harvested or when they are no longer economic to harvest. The Province has reduced the AAC in the central Interior by approximately 21% in the past five years and we expect this process to continue over the next several years. To date, B.C.’s Chief Forester has announced reductions of the AAC in six of our operating areas in the Interior. Additional reductions in two of our interior operating areas are expected in 2017. As the timing of future reductions and the effect on our AACs will depend on a variety of factors, including the amount of non-pine species available for harvest, the full effect on our operations cannot reasonably be determined at this time. In Alberta, the Minister and the forest industry continue to implement aggressive programs of early detection, single tree control and focused harvesting activity. The mountain pine beetle infestation has declined significantly in the southern part of the Province but a significant population remains in the northwest and west-central areas, including some pockets within our tenures. Of particular concern is the growing infestation of mountain pine beetle in Jasper National Park, immediately west of our Hinton FMA. We, along with the Alberta government, are encouraging Parks Canada to develop effective control mechanisms. There is also still a risk of further in-flight of insects from northeastern B.C. We continue to work aggressively to reduce the number of susceptible pine stands and conduct spread control activities across the region in concert with other forest industry participants and the Province of Alberta. Forestry Certification We obtain external certification from a number of accredited standard-setting certification bodies which offer independent verification of the measures that we take to mitigate the effects of our activities on the environment. All of the Canadian woodlands operations directly managed by us are independently certified by the Sustainable Forestry Initiative (“SFI”), an internationally- recognized sustainable forest management certification program. The woodlands are also certified to the International Organization for Standardization (ISO) 14001 Environmental Management System standard. We also subscribe to the chain-of-custody certification Programme for Endorsement of Forest Certification (“PEFC”) standard for our Canadian-produced forest products. PEFC chain-of-custody assures customers that the fibre in the supply chain comes from sources that comply with applicable laws, regulations and sustainable resource standards. The standard also demonstrates avoidance of sourcing fibre from controversial sources. PEFC is a global organization that provides a mutual recognition framework for national certification systems. PEFC recognizes more than 25 national certification systems, including SFI, and assures customers that differing systems provide a consistent level of sustainable forest management. Our pulp operations and MDF mills are registered to the Forest Stewardship Council’s (“FSC”) Standard for Chain-of-Custody Certification and the Standard for Company Evaluation of FSC Controlled Wood. This standard independently verifies that these operations do not source fibre from wood harvested (i) illegally, (ii) in violation of traditional and civil rights, (iii) in forests where high conservation values are threatened by management activities, (iv) in forests being converted to plantations or non-forest use, (v) from forests in which genetically modified trees are planted, or (vi) in violation of any of the ILO Core Conventions, as defined in the ILO Declaration on Fundamental Principles and Rights at Work, 1988. We do not own or manage any forestlands in the United States. However, our U.S. sawmills procure wood from a variety of sources normally within an approximate 70-mile radius of each mill and are certified under the SFI Fiber Sourcing Standard. For more information concerning our sustainable and environmentally sound forest practices see our Responsibility Report at www.westfraser.com. Aboriginal Matters Our continued access to the forest resource in Canada could be adversely affected by right and title (or claims thereto) and treaties involving various aboriginal groups, including First Nations, Métis and others. The obligations of Canadian provincial governments to consult and accommodate aboriginal groups regarding asserted and established rights, as well as their obligations under existing treaties and ongoing treaty negotiations, could affect the issuance, validity, renewal and exercise and terms and conditions of Crown timber rights and authorizations to harvest, or the timeliness of obtaining such rights. If aboriginal title is proven over any of the lands where we have interests or rights, it could result in aboriginal ownership of the resources on title lands. To date there has been only one court case finding aboriginal title in B.C. where aboriginal title was found to be held by the Tsilhqot’in Nation in respect of an area that is less than 0.2% of B.C., but where we do not hold cutting permits. As the jurisprudence and government policies respecting aboriginal title and rights and the consultation process continue to evolve, we cannot at this time predict whether aboriginal claims will have a material adverse effect on our timber harvesting rights or on our ability to exercise, renew or transfer them, or secure other timber harvesting rights. Residual Fibre Supply In Canada substantially all our requirements for wood chips, shavings and sawdust and hog fuel are supplied from our own operations, either directly or indirectly through trades. This reduces our exposure to risks associated with price fluctuations and supply shortages of these products. Our B.C. sawmills and plywood plants produce substantially all of the fibre requirements of our B.C. pulp operations and MDF plant. The Alberta MDF plant obtains its fibre from the adjacent Blue Ridge sawmill and other sawmills in the area. The Hinton pulp mill obtains its fibre from the adjacent Hinton sawmill and other sawmills in the area owned by us. At times we produce whole log chips at the Hinton facility to supplement the supply of residual chips from our various sawmills. The fibre requirements of our newsprint mill are obtained from local sawmills, including our sawmill in Blue Ridge and the Slave Lake veneer operation, through chip purchase agreements and log-for-chip trades using logs harvested from the newsprint mill’s tenures. The Slave Lake deciduous FMA provides most of the fibre requirements of the Slave Lake pulp mill, with the balance being obtained from logs purchased from local suppliers. The majority of the wood chips produced by our U.S. operations are sold to pulp mills at market prices pursuant to long-term contracts. Capital Expenditures and Acquisitions We regularly invest in upgrading and expanding our facilities and operations. However, during periods when earnings are weak, we will reduce capital and other expenditures in order to preserve liquidity. The following table shows the capital expenditures and acquisitions during the past five years. Capital Expenditures and Acquisitions ($ millions) Year ended December 31 Lumber Panels Pulp & Paper Corporate & Other Acquisitions Total 2016 195 25 42 11 273 – 273 2015 172 5 32 11 220 76 296 2014 326 7 71 6 410 208 618 2013 281 5 71 1 358 – 358 2012 114 5 38 2 159 30 189 Human Resources At December 31, 2016, we employed approximately 7,800 individuals, including our share of those in 50%-owned operations. Of these, approximately 5,300 are employed in our lumber segment, 1,320 in our panels segment, 850 in our pulp & paper segment and 330 in our corporate segment. Approximately 33% of our employees are covered by collective agreements. In 2017, collective agreements covering approximately 390 employees will expire. We provide ongoing safety training for our employees to minimize potential risks inherent in forestry-related manufacturing industries. Our Health and Safety Policy and a description of external safety certifications obtained by us are described in our Responsibility Report on our website at www.westfraser.com. Markets The markets for our products are highly competitive. Our products are sold in markets open to a number of companies with similar products and we compete with global producers. Our competitive position is affected by factors such as cost and availability of raw materials, energy and labour, the ability to maintain high operating rates and low per-unit manufacturing costs, and the quality of our final products. Some of our products may also compete with non- fibre based alternatives or with alternative products in certain market segments. Purchasing decisions by customers are generally based on price, quality and service. However, because commodity products such as ours have few distinguishing properties from producer to producer, competition for these products is based primarily on price. Prices and sales volumes are influenced by general economic conditions. The following table shows selected average benchmark prices for the past five years for products of the type we produced, although these prices do not necessarily reflect the prices we obtained. Average Benchmark Prices (In US$ except plywood) SPF #2 & Better 2x4 (per Mfbm)1 SPF #3 Utility 2x4 (per Mfbm)1 SYP #2 West 2x4 (per Mfbm)2 Plywood (per Msf 3/8” basis)3 Cdn$ NBSK (per tonne)4 NBSK – China (per tonne)5 Newsprint (per tonne)6 US$/$Cdn7 2016 305 240 409 432 978 599 560 0.755 2015 278 209 376 430 972 644 538 0.782 2014 349 302 427 429 1,025 732 604 0.905 2013 356 295 414 392 941 700 608 0.971 2012 299 250 348 382 872 667 640 1.000 Sources: (refer to our 2016 Management’s Discussion & Analysis for Canadian dollar equivalent prices of the products described herein) 1. Random Lengths – Net FOB mill. 2. Random Lengths – Net FOB mill Westside. 3. Crow’s Market Report – Delivered Toronto. 4. Resource Information Systems, Inc. – U.S. list price, delivered U.S. 5. Resource Information Systems, Inc. – China list price, delivered China. 6. Resource Information Systems, Inc. – U.S. delivered 48.8 gram newsprint. 7. Bank of Canada. . d t L . o C r e b m T i r e s a r F t s e W 11 m r o F n o i t a m r o f n I l a u n n A Annual Information Form (continued) Research and Development We support industry research and development organizations, and conduct research and development at several plants to improve processes, maximize resource utilization and develop new products and environmental applications. In addition, in the previous five years we have focused on projects in bio- energy generation and bio-products, including alternative uses for lignin recovered during the pulping process. Lumber Capacity and Production (both MMfbm) Capacity (year-end) B.C. Alberta U.S. South Total Capacity Production B.C. Alberta U.S. South Total Production 2016 2,465 1,635 2,400 6,500 2,303 1,493 2,139 5,935 2015 2,400 1,600 2,300 6,300 2,225 1,374 2,008 5,607 2014 2013 2,480 1,420 2,300 6,200 2,282 1,194 1,817 5,293 2,470 1,330 2,000 5,800 2,477 1,094 1,582 5,153 2012 2,600 1,200 2,000 5,800 2,461 1,005 1,488 4,954 Lumber capacity is generally based on our sawmills running on a five-day, two-shift basis with certain exceptions where logs may be available to run a third shift. Operations We operate 28 sawmills and a wood-treating facility at the Sundre sawmill. Sales Lumber produced at our Canadian sawmills and sold to North American customers is marketed and sold from our sales office in Quesnel, while sales to offshore markets are made from our export sales office in Vancouver, B.C. Offshore sales activities are complemented by a customer service office in Japan. Lumber produced at our U.S. sawmills is marketed by our sales group in Memphis, Tennessee. From time to time, we purchase lumber for resale in order to meet requirements of customers. In 2016, sales of lumber from our Canadian and U.S. operations were made to customers in the U.S. and Canada and to customers offshore, predominantly in China and Japan. Most lumber shipments to North American customers by our Canadian operations were made by rail and the balance by truck. Most lumber shipments to North American customers by our U.S. operations were delivered by truck and the balance by rail. Offshore shipments from both Canada and the U.S. were made through various public terminals in bulk or container vessels. . d t L . o C r e b m T i r e s a r F t s e W 12 m r o F n o i t a m r o f n I l a u n n A Panels Capacity and Production Plywood (MMsf 3/8” basis) Capacity (year-end) Production MDF (MMsf 3/4” basis) Capacity (year-end) Production LVL (Mcf) Capacity (year-end) Production 2016 2015 2014 2013 2012 850 826 250 160 3,200 2,215 830 797 250 220 3,200 1,627 830 771 300 206 830 781 300 204 3,200 1,796 3,200 1,848 830 793 300 195 3,200 1,964 Operations Our panel operations include three plywood mills that primarily produce standard softwood sheathing plywood, two MDF mills, each with the flexibility to manufacture varying thicknesses and sizes, an LVL mill, and a veneer mill that produces veneer for use in the Edmonton plywood mill. A fire at our MDF plant in Quesnel on March 9, 2016 resulted in the closure of the plant for the balance of the year while repairs and reconstruction took place. This reduced 2016 MDF production compared to prior years. Sales Plywood, LVL and MDF are marketed from our sales office in Quesnel to retail outlets, wholesale distributors, remanufacturers and treating businesses. MDF is marketed under the names “Ranger”™, “WestPine”™, “Eco-Gold”™ and “Ecopremium”™ both from our sales office and through distributors under the direction of our sales personnel. In 2016 the majority of our sales of plywood were made to customers in Canada and sales of MDF and LVL were to customers in the U.S. and Canada. Shipments were by rail or truck. Pulp & Paper Pulp Capacity and Production (Mtonnes) BCTMP Capacity (year-end) Production NBSK Capacity (year-end) Production1 2016 2015 2014 2013 2012 680 665 570 527 650 645 570 497 650 631 570 455 650 603 590 496 650 620 590 529 1. Reflects West Fraser’s 50% ownership of the Cariboo pulp mill. Operations BCTMP is produced at our Slave Lake pulp mill, primarily from hardwood aspen, and is also produced at our QRP mill, primarily from softwood species. These pulps are used by paper manufacturers to produce paperboard products, printing and writing papers and a variety of other paper grades. NBSK is produced at our Hinton and Cariboo pulp mills and is used by paper manufacturers to produce a variety of paper products, including tissues and printing and writing papers. Sales Pulp is marketed out of our pulp sales office in Vancouver. In 2016, sales of both NBSK and BCTMP were to customers in North America, Asia (predominantly China) and to other offshore customers. Shipments within North America were primarily by rail and those to offshore customers were by rail and truck to Vancouver and then by bulk or container vessels. Newsprint Capacity and Production1 (Mtonnes) Capacity (year-end) Production 1. Reflects West Fraser’s 50% ownership. 2016 135 128 2015 135 133 2014 135 132 2013 135 119 2012 135 128 Operations Our 50%-owned newsprint mill at Whitecourt, Alberta produces standard newsprint in four basis weights: 40, 43, 45 and 48.8 grams per square metre. Sales Newsprint is sold to various publishers and printers in North America and delivered by rail and truck. External Factors Affecting West Fraser’s Business in 2016 Economic Conditions Our earnings are sensitive to changes in world economic conditions, primarily those in North America, Europe and Asia and particularly to the U.S. housing market. Most of our revenues are from sales of commodities for which prices are sensitive to variations in supply and demand. Since most of these sales are in U.S. dollars, exchange fluctuations of the U.S. dollar against the Canadian dollar is a major source of earnings volatility for us. Softwood Lumber Dispute The Canada – U.S. Softwood Lumber Agreement (“SLA”) expired in October 2015 and on the expiry of that agreement a one year moratorium on trade sanctions by the U.S. came into place. The Government of Canada and the U.S. Trade Representative have been unable to reach agreement on a new managed trade agreement. In November of 2016 a coalition of U.S. lumber producers petitioned the U.S. Department of Commerce and the U.S. International Trade Commission to investigate alleged subsidies to Canadian producers and levy countervailing and anti-dumping duties against Canadian imports. The U.S. Department of Commerce has initiated its investigation and is expected to make a preliminary determination regarding countervailing duties in April 2017, and in June 2017 for anti-dumping duties. . d t L . o C r e b m T i r e s a r F t s e W 13 m r o F n o i t a m r o f n I l a u n n A Annual Information Form (continued) A substantial portion of our products that are manufactured in Canada are exported for sale. Our financial results are dependent on continued access to the export markets and tariffs and other trade barriers that restrict or prevent access represent a continuing risk to us. The SLA had provided our Canadian lumber operations with continued access to the U.S. market and the imposition of future trade barriers could impair that access. Energy Our pulp, paper and MDF operations consume substantial amounts of electricity. We have completed several projects to reduce our purchased energy dependence by utilizing woodwaste to produce heat and steam to dry our wood products or to utilize woodwaste or pulp mill by-products or effluent to generate electricity. Such projects include those at our Hinton and Cariboo pulp mills, which have generating facilities which produce electricity to satisfy most of their energy requirements and can contribute to earnings by selling any excess electricity. In addition, our Slave Lake pulp mill produces electricity for its own use from bio-gas. Co-generation projects at our Fraser Lake and Chetwynd, B.C. sawmills produce electricity from woodwaste. The electricity is sold under long-term contracts. In B.C., electricity is purchased from the provincial utility at regulated prices based largely on generation costs. In Alberta, electricity is purchased at market prices through the Alberta power pool. In Alberta, we operate a natural gas-fired peaking power price plant at our 50%-owned newsprint mill which provides a partial hedge for that mill against high prices of electricity and transmission costs. Our exposure to energy costs includes the cost to purchase electricity, natural gas, gasoline, diesel fuels, carbon taxes and fuel surcharges on purchased transportation. Environment Our manufacturing operations are subject to environmental protection laws and regulations. We have developed and apply internal programs and policies to help ensure that our operations are in compliance with applicable laws and standards and to address any instances of non-compliance. We are committed to responsible stewardship of the environment and to the continual improvement of our forest practices and manufacturing procedures so we can optimize the use of resources and minimize the impact of our operations on the environment. We have incurred, and will continue to incur, capital expenditures and operating costs to comply with environmental laws and regulations, which are not expected to have material financial or operational effects on us or our competitive position. We are required to carry out remediation activities, including site decommissioning, under applicable environmental protection laws and regulations. In addition, we are required to carry out reforestation activities under our various timber licenses. We maintain accruals in our financial statements for certain environmental, reforestation and decommissioning obligations. We have adopted and follow an Environmental Policy, a copy of which is available on our website at www.westfraser.com. Additional information is available in our Responsibility Report, also available on our website at www.westfraser.com. Risk Factors A detailed discussion of risk factors is included in “Management’s Discussion & Analysis – Risks and Uncertainties”, which is incorporated herein by reference. Our Management’s Discussion & Analysis is available on SEDAR at www.sedar.com. . d t L . o C r e b m T i r e s a r F t s e W 14 m r o F n o i t a m r o f n I l a u n n A Capital Structure Share Capital Our authorized share capital consists of 430,000,000 shares divided into: (a) 400,000,000 Common shares, (b) 20,000,000 Class B Common shares, and (c) 10,000,000 Preferred shares, issuable in series. The Common shares and Class B Common shares are equal in all respects, including the right to dividends and the right to vote, except that each Class B Common share may at any time be exchanged for one Common share. The Common shares are listed and traded on the Toronto Stock Exchange under the symbol WFT while our Class B Common shares are not. Certain circumstances or corporate transactions may require the approval of the holders of our Common shares and Class B Common shares on a separate class by class basis. As at December 31, 2016, the issued share capital consisted of 75,881,090 Common shares and 2,281,478 Class B Common shares for a total of 78,162,568 shares (as at December 31, 2015 – 82,456,557 shares). Credit Ratings As shown in the table below, West Fraser is rated by three rating agencies. West Fraser pays annual fees to maintain its debt and corporate ratings. The ratings are assigned both on a corporate level and specifically to our US$300 million notes maturing October 2024. The ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by each rating agency. Ratings Agency DBRS1 Moody’s2 Standard & Poor’s3 Rating BBB(low) Baa3 BBB- Outlook Stable Stable Stable 1. DBRS credit ratings for long-term obligations range from AAA to D. A rating of BBB is described by DBRS as “adequate credit quality. The capacity for the payment of financial obligations is considered acceptable. May be vulnerable to future events”. Additional information on the rating is available on DBRS’s website. 2. Moody’s credit ratings for long-term obligations range from Aaa to C. Moody’s describes obligations rated Baa as “subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics”. Additional information on the rating is available on Moody’s website. 3. S&P credit ratings for long-term obligations range from AAA to D. A rating of BBB- is described by S&P as “considered lowest investment grade by market participants”. Additional information on the rating is available on S&P’s website. Market Prices The following table sets forth adjusted market prices and trading volumes of our Common shares on the Toronto Stock Exchange for each month of 2016 and 2015. 2016 2015 January February March April May June July August September October November December Total High ($ ) 52.18 48.31 54.18 53.42 45.65 45.71 46.30 46.41 45.80 46.84 49.57 52.45 Low ($ ) 39.54 38.08 41.46 39.86 38.45 35.35 35.92 40.45 39.44 38.18 43.01 47.26 Close ($) 48.15 41.83 52.11 41.34 44.80 37.77 44.86 44.15 40.43 45.92 47.89 48.01 Volume (000’s ) 4,555 4,355 6,941 5,977 6,067 7,231 7,754 5,816 5,428 6,165 7,517 4,468 72,274 Close ($ ) 72.98 68.06 64.80 62.08 68.58 68.63 57.55 51.23 42.40 46.27 54.82 52.53 Volume (000’s ) 5,867 12,831 6,156 6,399 3,948 4,368 5,658 6,083 5,754 6,836 3,924 3,663 71,487 Source: http://tradingdata.tsx.com Cash dividends The declaration and payment of cash dividends is within the discretion of our Board of Directors. Historically, cash dividends have been declared on a quarterly basis payable after the end of each quarter. On an annual basis, dividends of $0.28 per share were paid in 2016, 2015 and 2014. There can be no assurance that cash dividends will continue to be declared and paid by us in the future, as the discretion of the Board of Directors will be exercised from time to time taking into account our current circumstances. Transfer Agent Our transfer agent and registrar is CST Trust Company, with registers of transfers in Vancouver and Toronto. . d t L . o C r e b m T i r e s a r F t s e W 15 m r o F n o i t a m r o f n I l a u n n A Annual Information Form (continued) Experts Our auditors are PricewaterhouseCoopers LLP (“PwC”), who prepared the Auditor’s Report included with our annual Consolidated Financial Statements for the year ended December 31, 2016. PwC has confirmed that it is independent with respect to us, within the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of B.C., as of February 16, 2017. Directors and Officers Directors The names and municipalities of residence of the directors of the Company, their principal occupations during the past five years and the periods during which they have been directors of the Company are as follows: . d t L . o C r e b m T i r e s a r F t s e W 16 m r o F n o i t a m r o f n I l a u n n A Name and Municipality of Residence Henry H. Ketcham Vancouver, B.C. Clark S. Binkley1, 3 & 4 Portland, Oregon Reid E. Carter1, 3 & 4 West Vancouver, B.C. John N. Floren2,3 & 4 Eastham, Massachusetts J. Duncan Gibson1 & 4 Toronto, Ontario John K. Ketcham3 & 4 Santa Monica, California Harald H. Ludwig2 & 4 West Vancouver, B.C. Gerald J. Miller1, 3 & 4 Lake Country, B.C. Robert L. Phillips2, 4 & 5 West Vancouver, B.C. Janice G. Rennie1, 2 & 4 Edmonton, Alberta Ted Seraphim North Vancouver, B.C. Principal Occupation Chairman Chief Investment Officer, GreenWood Resources, Inc. (a timberland investment management organization) Director Since September 16, 1985 February 1, 1992 President, Brookfield Timberlands Management LP. April 19, 2016 President and Chief Executive Officer, Methanex Corporation April 19, 2016 Investor Real Estate Developer President, Macluan Capital Corporation (diversified private equity investment company) Corporate Director Corporate Director Corporate Director President and Chief Executive Officer April 29, 1997 April 28, 2015 May 2, 1995 April 19, 2012 April 28, 2005 April 28, 2004 April 30, 2013 1. Member of the Audit Committee. 2. Member of the Compensation Committee. 3. Member of the Safety & Environment Committee. 4. Member of the Governance & Nominating Committee. 5. Lead Director. Each director has held the same or a similar principal occupation with the organization indicated or a predecessor thereof for the last five years except for Henry H. Ketcham who before April 19, 2016 was our Executive Chairman, before March 1, 2013 was our Chairman and Chief Executive Officer and before April 19, 2012 was also our President; Clark Binkley who before July 31, 2012 was Managing Director of International Forestry Investment Advisors LLC; John Floren who before January 2013 was Senior Vice-President, Global Marketing and Logistics of Methanex Corporation; and Ted Seraphim who before March 1, 2013 was President and Chief Operating Officer, before April 19, 2012 was Executive Vice-President and Chief Operating Officer. The term of office of each director will expire at the conclusion of the Company’s next annual general meeting. Officers Name and Municipality of Residence Office Held Ted Seraphim North Vancouver, B.C. Raymond W. Ferris Quesnel, B.C. Brian A. Balkwill Quesnel, B.C. Keith D. Carter Quesnel, B.C. Larry E. Gardner Quesnel, B.C. James W. Gorman Victoria, B.C. Larry S. Hughes Vancouver, B.C. Rodger M. Hutchinson West Vancouver, B.C. Christopher D. McIver Quesnel, B.C. Sean P. McLaren Collierville, Tennessee Tom V. Theodorakis Vancouver, B.C. Chuck H. Watkins Memphis, Tennessee President and Chief Executive Officer Executive Vice-President and Chief Operating Officer Vice-President, Canadian Lumber Vice-President, Pulp and Energy Operations Vice-President, Canadian Woodlands Vice-President, Corporate and Government Relations Vice-President, Finance, Chief Financial Officer and Secretary Vice-President, Corporate Controller and Investor Relations Vice-President, Sales and Marketing Vice-President, U.S. Lumber Assistant Secretary Partner, McMillan LLP (lawyers) Vice-President, U.S. Lumber Manufacturing Each officer has held the same or a similar office with the organization indicated or a predecessor thereof for the last five years except for Ted Seraphim (see disclosure under “Directors”); Raymond W. Ferris, who before February 15, 2016 was our Vice-President, Wood Products; Brian A. Balkwill, who before February 15, 2016 was our General Manager, Canadian Lumber, before December 1, 2014 was our General Manager, Engineered Wood and before April 1, 2012 was our General Manager, Sundre sawmill; Keith D. Carter, who before February 15, 2016 was our General Manager, Pulp Operations, before September 1, 2014 was our Operations Manager, Mechanical Pulp and before February 1, 2014 was our General Manager, Quesnel River Pulp; Larry E. Gardner, who before February 16, 2016 was our General Manager, Canadian Woodlands and before December 1, 2014 was our Chief Forester, British Columbia; James W. Gorman, who before May 19, 2015 was President and Chief Executive Officer of the Council of Forest Industries and before September 16, 2013 served in a number of senior leadership roles with the Government of British Columbia; Rodger M. Hutchinson, who before February 13, 2014 was our Vice-President, Corporate Controller; Christopher D. McIver, who before February 16, 2016 was our Vice-President, Lumber Sales and Corporate Development; Sean P. McLaren, who before February 15, 2016 was our Vice-President, U.S. Lumber Operations; and Chuck H. Watkins, who before February 15, 2016 was our General Manager, U.S. Lumber Manufacturing, before August 18, 2015 was our Regional Manager, U.S. Lumber, before December 6, 2013 was our Engineering and Technical Manager, U.S. Lumber and before September 24, 2012 was Director of Operations at Rex Lumber Corporation. . d t L . o C r e b m T i r e s a r F t s e W 17 m r o F n o i t a m r o f n I l a u n n A Annual Information Form (continued) Shareholdings of Directors and Officers The directors and officers of the Company as a group, beneficially owned or controlled or directed, directly or indirectly, the following shares of the Company: Common shares % of total Common shares Class B Common shares % of total Class B Common shares % of all shares outstanding December 31, 2016 1,461,762 2% 78,728 3% 2% December 31, 2015 1,427,164 2% 78,728 3% 2% . d t L . o C r e b m T i r e s a r F t s e W 18 m r o F n o i t a m r o f n I l a u n n A Governance Corporate governance is guided by our Corporate Governance Policy, a copy of which may be viewed on our website: www.westfraser.com. The Board of Directors has established a Governance & Nominating Committee comprised of all non-management directors. The Committee provides support for the stewardship and governance role of the Board in reviewing and making recommendations on the composition of the Board, the functioning of the Board and its committees, succession planning and all other corporate governance matters and practices. On the occasion of each regularly-scheduled meeting of the Board in 2016, the Committee met without management representatives present and reviewed these and other issues. The Corporate Governance Policy includes a Code of Conduct which sets out our policies and requirements relating to, among other categories, legal compliance, safety, environmental stewardship, human rights, anti-corruption and whistleblowing. Additional information is available on our website www.westfraser.com under Corporate Governance. Audit Committee The Audit Committee of our Board of Directors assists the Board in fulfilling its responsibility to oversee our financial reporting and audit process. The full text of the Audit Committee’s Charter is attached as Schedule 1. Members The following identifies each current member of the Audit Committee, and the education and experience of each member that is relevant to the performance of the member’s responsibilities as an Audit Committee member. All members of the Audit Committee are considered “independent” and “financially literate” within the meaning of NI 52-110. Clark S. Binkley Dr. Binkley holds a Bachelor of Arts in Applied Mathematics and a PhD in Forestry and Environmental Studies. He is the Chief Investment Officer of a large private equity timberland investment firm. He has served as a director of public and private forest products companies. Reid E. Carter Mr. Carter holds a combined undergraduate degree in Forestry and Biology and a master’s degree in Forest Services. He is president of a large timberlands investment firm and has been involved with that firm and related firms in various senior roles for the last 13 years. Prior to that he served as National Bank Financial’s Paper and Forest Products Analyst. J. Duncan Gibson Mr. Gibson holds a Bachelor of Commerce and a Masters of Business Administration. His career spanned 27 years with the Toronto-Dominion Bank, including nine years in the Corporate Banking, U.S. Division, and as Vice Chairman with responsibility for the Commercial Banking Division. Gerald J. Miller Mr. Miller, who holds a Bachelor of Commerce, is a Chartered Professional Accountant, Chartered Accountant. He spent 25 years in various roles at West Fraser until his retirement in 2011. While at West Fraser he served in a number of executive positions including Vice-President Finance and Chief Financial Officer. Janice G. Rennie Mrs. Rennie, who holds a Bachelor of Commerce, is a Chartered Professional Accountant, Chartered Accountant. She was elected as Fellow of the Chartered Accountants in 1998. Mrs. Rennie has chaired or been a member of several audit committees of public companies in the past and currently is a member of the audit committees of Methanex Corporation, Major Drilling Group International Inc. and Westjet Airlines Ltd. Pre-Approval Policies and Procedures The Audit Committee has adopted a policy that sets out the pre-approval requirements related to services to be performed by our independent auditors. The policy provides that the Committee will annually review proposed audit, audit-related, tax and other services (to be submitted by the Chief Financial Officer and the independent auditor), and will provide general approval of described services, usually including specific maximum fee amounts. Unless a service has received general pre-approval, it will require specific pre-approval by the Committee. The Committee is permitted to delegate pre- approval authority to any of its members. The Committee reports on the pre-approval process to the full Board of Directors from time to time. Fees Paid to Auditors ($ thousands) Audit Fees1 Audit-Related Fees2 Tax Fees Other 2016 799 160 326 85 2015 847 164 300 60 1. Represents actual and estimated fees related to fiscal year ends. 2. For assurance and related services that are reasonably related to the performance of the audit but are not reported as “Audit Fees”. Material Contracts On October 15, 2014, we issued US$300 million of fixed-rate senior unsecured notes due October 15, 2024 pursuant to a private placement in the U.S. The notes bear interest of 4.35% with semi-annual payments commencing on April 15, 2015 and are redeemable, in whole or in part, at our option at any time. In the event of a change in control in respect of the Company which is followed within 60 days by ratings downgrades to below investment grade in certain circumstances, unless we have exercised the right to redeem all of the notes, each holder will have the right to require us to repurchase all or any part of such holder’s notes at a purchase price in cash equal to 101% of the principal amount of the notes plus any accrued and unpaid interest. Additional Information Additional information, including directors’ and officers’ remuneration and indebtedness, principal holders of our securities and securities authorized for issuance under equity compensation plans, will be contained in the Information Circular for the annual general meeting of the Company to be held on April 19, 2017. Additional financial information is provided in our annual consolidated financial statements and Management’s Discussion & Analysis for the year ended December 31, 2016. Copies of our Annual Report, which will include this Annual Information Form and the documents incorporated by reference herein, our annual consolidated financial statements (including the auditor’s report) for the year ended December 31, 2016 and our Information Circular may be obtained at any time upon request from us once these documents have been published, but we may require the payment of a reasonable charge if the request is made by a person who is not a security holder of the Company. This Annual Information Form, our Annual Report (once published) and additional information concerning the Company may also be obtained on our website www.westfraser.com and on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com. . d t L . o C r e b m T i r e s a r F t s e W 19 m r o F n o i t a m r o f n I l a u n n A Annual Information Form (continued) Schedule 1 The Audit Committee Charter, which is set out below, was approved by the Board on December 8, 2010. General Mandate To assist the Board in fulfilling its responsibility to oversee the Company’s financial reporting and audit processes, its system of internal controls and its process for monitoring compliance with applicable financial reporting and disclosure laws and its own policies. Responsibilities The Committee will carry out the following responsibilities: Financial Statements • Review significant accounting and financial reporting issues, including complex or unusual transactions, significant contingencies and highly judgmental areas, and recent professional and regulatory pronouncements, and understand their impact on the Company’s financial statements • Review interim financial reports (including financial statements, management’s discussion and analysis and related news releases) with management and the auditors, consider whether they are complete and consistent with the information known to Committee members and provide a recommendation to the Board with respect to the approval of the interim financial reports • Understand how management develops interim financial information, and the nature and extent of auditor involvement • Review with management and the auditors the results of the audit, including any difficulties encountered • Review the annual financial statements, the annual management discussion and analysis and related news releases, and consider whether they are complete, consistent with information known to Committee members, and reflect appropriate accounting principles, and provide a recommendation to the Board with respect to the approval of the statements, the management discussion and analysis and the news release • Review with management and the auditors all matters required to be communicated to the Committee under generally accepted auditing standards • Approve, if so delegated by the Board, the interim financial reports and annual financial statements and the filing of the same together with all required documents and information with regulators Internal Control • Require management of the Company to implement and maintain appropriate internal control procedures over annual and interim financial reporting • Review with management and auditors the adequacy and effectiveness of the Company’s internal control over annual and interim financial reporting, including information technology security and control and controls related to the prevention and detection of fraud and improper or illegal transactions or payments, the status of the remediation of any identified control deficiencies, and elicit recommendations for improvements • Understand the scope of the auditors’ review of internal control over financial reporting, and obtain and review reports on significant findings and recommendations, including respecting the Company’s accounting principles or changes to such principles or their application and the treatment of financial information discussed with . d t L . o C r e b m T i r e s a r F t s e W 20 m r o F n o i t a m r o f n I l a u n n A management, together with management’s responses Audit • Review the auditors’ proposed audit scope and approach • Review the performance of the auditors, and provide a recommendation to the Board with respect to the nomination of the auditors for appointment and remuneration • Review and confirm the independence of the auditors by obtaining statements from the auditors on relationships between the auditors and the Company, including non-audit services, and discussing the relationships with the auditors • Periodically evaluate the need for the establishment of an internal audit function and make appropriate recommendations to the Board Compliance • Review the effectiveness of the system for monitoring compliance with financial reporting and disclosure laws and the results of management’s investigation and follow-up (including disciplinary action) of any instances of non-compliance • Review the findings of any examinations by regulatory agencies, and any auditor observations • Obtain regular updates from management and Company legal counsel regarding compliance matters Reporting Requirements • Regularly report to the Board about Committee activities, issues and related recommendations • Provide an open avenue of communication between the auditors and the Board • Review any reports the Company issues that relate to Committee responsibilities Other Responsibilities • Institute and oversee special investigations as needed • Develop and implement a policy for the approval of the provision of non-audit services by the auditors and assessing the independence of the auditors in the context of these engagements • Establish procedures for: (a) the receipt, retention and treatment of complaints received regarding non-compliance with the Company’s Code of Conduct, violations of laws or regulations, or concerns regarding accounting, internal accounting controls or auditing matters; and (b) the confidential, anonymous submission by officers or employees of the Company or by other persons of concerns regarding questionable accounting, auditing or financial reporting and disclosure matters or non- compliance with the Company’s Code of Conduct or other matters that are of a sensitive or “whistleblower” nature • Perform other activities related to this charter as requested by the Board • Review and assess the adequacy of this charter annually, requesting Board approval for proposed changes • Review terms of any Code of Conduct established by the Board and respond to any related compliance issues • Confirm annually to the Board that all responsibilities outlined in this charter have been carried out Qualifications and Procedures • The composition of the Committee will comply with applicable laws including requirements for independence, unrelated to management, financial literacy and audit experience • The Committee will meet at least four times annually, and more frequently as circumstances dictate, and the CFO and a representative of the auditors should be available on request to attend all meetings • The Committee should meet privately in executive session with representatives of each of management and of the auditors to discuss any matters of concern to the Committee or such members, including any post-audit management letter • Minutes of each meeting should be prepared, approved by the Committee and circulated to the full Board . d t L . o C r e b m T i r e s a r F t s e W 21 m r o F n o i t a m r o f n I l a u n n A 2016 Management’s Discussion & Analysis Introduction and Interpretation This discussion and analysis by West Fraser’s management (“MD&A”) of West Fraser’s financial performance during 2016 and the fourth quarter of 2016 should be read in conjunction with the 2016 annual audited consolidated financial statements and accompanying notes (the “Financial Statements”). Dollar amounts are expressed in Canadian currency, unless otherwise indicated. The financial information contained in this MD&A has been prepared in accordance with International Financial Reporting Standards (“IFRS”). This MD&A contains historical information, descriptions of current circumstances and statements about potential future developments and anticipated financial results. The latter, which are forward-looking statements, are presented to provide reasonable guidance to the reader but their accuracy depends on a number of assumptions and is subject to various risks and uncertainties. Forward-looking statements are included under the heading “Capital Expenditures” (expected completion of sawmill rebuild at our Newberry, South Carolina location) and “Business Outlook”. Actual outcomes and results of these statements will depend on a number of factors including those matters described under “Risks and Uncertainties”, and may differ materially from those anticipated or projected. Accordingly, readers should exercise caution in relying upon forward-looking statements and we undertake no obligation to publicly revise them to reflect subsequent events or circumstances except as required by applicable securities laws. Throughout this MD&A reference is made to Adjusted EBITDA, Adjusted earnings and Adjusted earnings per share and net debt to total capital ratio (collectively “these measures”), calculated as shown under the heading “Non-IFRS Measures”. We believe that, in addition to earnings, these measures are useful performance indicators. None of these measures is a generally accepted earnings measure under IFRS and none has a standardized meaning prescribed by IFRS. Investors are cautioned that none of these measures should be considered as an alternative to earnings, earnings per share (“EPS”) or cash flow, as determined in accordance with IFRS. As there is no standardized method of calculating any of these measures, our method of calculating each of them may differ from the methods used by other entities and, accordingly, our use of any of these measures may not be directly comparable to similarly titled measures used by other entities. This MD&A includes references to benchmark prices over selected periods for products of the type produced by West Fraser. These benchmark prices do not necessarily reflect the prices obtained by West Fraser for those products during such period. The information in this MD&A is as at February 16, 2017 unless otherwise indicated. For definitions of various abbreviations and technical terms used in this MD&A please see the Glossary of Industry Terms found in our most recent Annual Report. . d t L . o C r e b m T i r e s a r F t s e W 22 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M Summary Information – Annual Results Financial Comparisons ($millions, except as otherwise indicated) Year ended December 31 Sales by segment Lumber Panels Pulp & Paper Intracompany fibre sales Total Adjusted EBITDA Amortization Equity-based compensation Operating earnings Operating earnings by segment Lumber Panels Pulp & Paper Corporate & Other Total Earnings Basic earnings per share ($) Diluted earnings per share ($) Cash dividends per share ($) Total assets Long-term debt1 Cdn$1.00 converted to US$ – average 1. Includes current portion of long-term debt. Selected Quarterly Information ($millions, except earnings per share (“EPS”) amounts which are in $) Q3-16 1,155 107 1.35 1.35 Sales Earnings Basic EPS Diluted EPS Q4-16 1,107 79 1.01 1.01 2016 2015 2014 3,145 529 887 (111 ) 4,450 674 (197 ) 5 482 362 77 42 1 482 326 4.06 3.90 0.28 3,600 413 0.755 2,764 554 900 (118 ) 4,100 417 (191 ) 23 249 105 82 41 21 249 104 1.25 0.89 0.28 3,635 423 0.782 2,622 526 812 (104 ) 3,856 621 (170 ) (45 ) 406 351 64 42 (51 ) 406 259 3.06 3.06 0.28 3,397 354 0.905 Q2-16 1,111 98 1.22 0.86 Q1-16 1,077 42 0.51 0.50 Q4-15 1,013 (15 ) (0.18 ) (0.18 ) Q3-15 1,044 56 0.67 0.05 Q2-15 1,029 14 0.17 0.17 Q1-15 1,014 49 0.58 0.53 . d t L . o C r e b m T i r e s a r F t s e W 23 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M Adjusted Earnings and Adjusted Basic Earnings Per Share ($millions, except EPS amounts which are in $) Earnings Add: Equity-based compensation Exchange loss (gain) on long-term financing Loss on power agreements Insurance gain on disposal of equipment Write-down of investment Net tax effect on the above adjustments Increase in Alberta provincial tax rate Adjusted earnings Adjusted basic EPS1 1. Adjusted basic EPS is calculated by dividing Adjusted earnings by the basic weighted average shares outstanding. 2016 326 (5 ) (4 ) 27 (8 ) — (6 ) — 330 4.11 2015 104 (23 ) 58 32 — 7 (9 ) 7 176 2.12 2016 Management’s Discussion & Analysis (continued) Earnings in 2016 increased compared to results for 2015. Our results include several significant non-operational items that are identified as adjustments in the above table. After taking into account these adjustments, we generated Adjusted earnings of $330 million compared to $176 million in 2015. For a description of operational results see “Discussion & Analysis by Product Segment” which follows this section. In 2016 a recovery of $5 million was recorded related to equity-based compensation compared to a recovery of $23 million in 2015. An expense is recorded on the issuance of share options or phantom or directors’ deferred share units and an additional expense or recovery is recorded each quarter based primarily on valuation models that consider various factors relating to outstanding options and units. The most significant of these factors is the change in the market value of our shares from the beginning to the end of the particular period. The market value of the Company’s shares decreased by 9%, from $52.53 per share at the end of 2015 to $48.01 per share at the end of 2016. The expense or recovery does not necessarily represent the actual amount that will ultimately be paid by the Company in respect of options and units. Any change in the value of the Canadian dollar relative to the value of the U.S. dollar results in the revaluation of our U.S. dollar-denominated assets and liabilities. The result of these revaluations is included in other income. The Canadian dollar was stronger against the U.S. dollar at the close of 2016 compared to the close of 2015 resulting in a foreign exchange gain of $4 million on long-term financing and a $4 million loss on working capital (2015 – $58 million loss and $28 million gain, respectively). The Canadian dollar strengthened by 3% from the beginning of 2016 compared to the end 2016. For 2015 the Canadian dollar weakened by 16% at the end of the year compared to the beginning of the year. In March 2016 we negotiated the termination of our three-year power strip agreement and Capital Power Corporation gave notice of its intent to terminate its role as buyer of the Sundance C Power Arrangement (“Sundance”). As a result of this termination, our role as a party to the Power Syndicate Agreement also terminated. These agreements had provided us with a portion of the electricity generated from two power plants in Alberta at substantially predetermined prices. In the first quarter of the year we recorded a loss related to the power agreements of $19 million. In the fourth quarter Capital Power settled a dispute with the Government of Alberta related to the termination of Sundance and as a result we recorded an additional loss of $8 million related to our share of the settlement. In 2015 a charge of $32 million was recorded through earnings reflecting the change in the fair value of the agreements. Our WestPine MDF facility experienced a fire during the first quarter of the year resulting in production being suspended until repairs can be completed. Estimated insurance proceeds of $8 million related to replacement of equipment resulted in a gain on disposal being recorded in other income. In addition, business interruption insurance proceeds related to lost operational profit is recorded as a reduction of cost of products sold. The gain on disposal of $8 million is included in adjusted earnings in the above table. A write-down of our $7 million investment in a company developing alternative uses for by-products of the lumber manufacturing process was included in other income in 2015. Note 18 to the Financial Statements includes a reconciliation of income taxes calculated at the statutory rate to the income tax provision. The funded position of our defined benefit pension plans and other retirement benefit plans, whether surplus or deficit, is estimated at the end of each quarter. The funded position, as shown in Note 13 to the Financial Statements, is determined by subtracting plan assets from plan obligations. The after-tax actuarial loss of $7 million included in other comprehensive earnings is due to a decrease in the discount rate of 0.25% at December 31, 2016 compared to December 31, 2015 (decrease to 3.75% compared to 4.00%), substantially offset by investment returns in excess of the actuarially expected returns. . d t L . o C r e b m T i r e s a r F t s e W 24 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M Discussion & Analysis by Product Segment Lumber Segment SPF (MMfbm) Production Shipments SYP (MMfbm) Production Shipments Wood chip production SPF (M ODTs) SYP (M green tons) Sales ($millions) Lumber Wood chips and other residuals Logs and other Adjusted EBITDA ($millions) Amortization ($millions) Operating earnings ($millions) Adjusted EBITDA margin (%) Capital expenditures ($millions) Acquisition ($millions) Benchmark prices (per Mfbm) SPF #2 & Better 2x41 – US$ SPF #3 Utility 2x41 – US$ SYP #2 West 2x42 – US$ SPF #2 & Better 2x4 – Cdn$3 SPF #3 Utility 2x4 – Cdn$3 SYP #2 West 2x4 – Cdn$3 2016 3,796 3,878 2,139 2,126 1,895 2,669 2,731 319 95 3,145 508 (146 ) 362 16 195 — 305 240 409 404 318 542 2015 3,599 3,614 2,008 2,014 1,753 2,557 2,369 298 97 2,764 243 (138 ) 105 9 172 76 278 209 376 355 267 480 1. Source: Random Lengths – Net FOB mill. 2. Source: Random Lengths – Net FOB mill Westside. 3. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price. Production of SPF and SYP lumber increased a combined 328 MMfbm in 2016 over 2015 levels. Through the third quarter of the year we were on target for achieving our goal of increasing production by 400 MMfbm but unusually cold weather in the fourth quarter resulted in reduced production, particularly at some of our U.S. mills. The improved annual production was the result of the completion and start-up of several capital projects in both Canada and the U.S. and the additional output from our Manning, Alberta sawmill which we acquired in the fourth quarter of 2015. Increased wood chip production was the result of the increased lumber production. Our SPF sales continue to be primarily to North American markets with the U.S. market being the most significant destination. The percentage of SPF sales by volume to the U.S. remained similar to 2015 levels although absolute volume has increased slightly as a result of our increased production. New housing in the U.S. continues to increase slowly with single family starts improving in 2016. Single family starts are particularly important to lumber consumption as each start uses approximately three times the lumber as a multi-family start. The percentage of single family starts, at 67% of total starts in 2016, is still low by historical standards but has shown some improvement in 2016. SPF sales to offshore markets decreased slightly from 2015 levels due in part to improving demand in North America. Russia continues to hold the dominant market position in China due in part to the weakening of the Russian ruble in 2014. The table below sets out the proportion of our Canadian lumber by volume sold by destination in each of 2016 and 2015. SPF Sales by Destination U.S. Canada China Other Total MMfbm 2,258 917 466 237 3,878 2016 2015 % 58 24 12 6 MMfbm 2,072 780 530 232 3,614 % 57 22 15 6 . d t L . o C r e b m T i r e s a r F t s e W 25 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M 2016 Management’s Discussion & Analysis (continued) Operating earnings from our lumber segment were significantly higher than 2015. Improved lumber pricing and a weaker Canadian dollar combined with higher shipments drove much of the improved results. In addition, there were no softwood lumber duties applicable in 2016 compared to $29 million in 2015 and cash conversion costs were slightly lower in 2016. Canadian log costs were higher in 2016 but much of the impact on profitability was offset by lower log costs in our U.S. operations. Purchased log costs continued to increase in B.C., reflecting the gradual decrease of available logs in pine beetle-affected areas. Panels Segment Plywood (MMsf 3/8” basis) Production Shipments MDF (MMsf 3/4” basis) Production Shipments LVL (Mcf) Production Shipments Sales ($millions) Finished products Wood chips and other residuals Logs and other Adjusted EBITDA ($millions) Amortization ($millions) Operating earnings ($millions) Adjusted EBITDA margin (%) Capital expenditures ($millions) Benchmark prices Plywood (per Msf 3/8” basis)1 Cdn$ 1. Source: Crow’s Market Report – Delivered Toronto. 2016 2015 826 826 160 167 2,215 2,226 505 18 6 529 89 (12 ) 77 17 25 432 797 803 220 212 1,627 1,728 529 18 7 554 95 (13 ) 82 17 5 430 The panels segment is comprised of our three plywood operations, two MDF operations and one LVL operation. All are located in western Canada. Plywood production was slightly higher than 2015 reflecting strong operational performance. MDF production was reduced due to a fire-related closure of our WestPine mill during March 2016 while LVL production increased as a result of improving market demand. Despite strengthening demand our LVL mill continues to operate on a partially-curtailed basis. Operating earnings from our panels segment decreased slightly compared to 2015 levels. Despite this decline the segment achieved the same adjusted EBITDA margin as in 2015 of 17% as a result of the WestPine business interruption insurance proceeds of $17 million being recorded as a reduction of costs of production with no related sales impact. Operating earnings from our plywood operations decreased slightly from 2015 levels due to the increased cost of peeler logs. The increased log costs were partially offset by higher production and shipments which resulted in lower unit conversion costs. Most of the plywood we produce is sold to customers in Canada where both the new home and renovation and repair markets remained relatively constant through 2016 and 2015. Operating earnings from our MDF and LVL operations were similar to 2015. MDF demand is significantly affected by new home construction which continues to gradually strengthen in the U.S. LVL is used predominantly in single-family home construction which continues to lag construction of multi- family housing units. . d t L . o C r e b m T i r e s a r F t s e W 26 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M Pulp & Paper Segment BCTMP (Mtonnes) Production Shipments NBSK (Mtonnes) Production Shipments Newsprint (Mtonnes) Production Shipments Sales ($millions) Adjusted EBITDA ($millions) Amortization ($millions) Operating earnings ($millions) Adjusted EBITDA margin (%) Capital expenditures ($millions) Benchmark prices (per tonne) NBSK U.S. – US$1,3 NBSK China – US$2,3 Newsprint – US$4 NBSK U.S. – Cdn$5 NBSK China – Cdn$5 Newsprint – Cdn$5 2016 2015 665 653 527 526 128 129 887 79 (37 ) 42 9 42 978 599 560 1,295 793 742 645 673 497 499 133 136 900 80 (39 ) 41 9 32 972 644 538 1,242 823 688 1. Source: Resource Information Systems, Inc. – U.S. list price, delivered U.S. 2. Source: Resource Information Systems, Inc. – China list price, delivered China. 3. The differences between the U.S. and China NBSK list prices are largely attributable to the customary sales practice of applying material discounts from the U.S. list price for North American sales compared to relatively small discounts from the China list price for sales into China. 4. Source: Resource Information Systems, Inc. – U.S. delivered 48.8 gram newsprint. 5. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price. The pulp & paper segment is comprised of our NBSK, BCTMP and newsprint businesses. BCTMP and NBSK pulp production increased in 2016 compared to 2015. BCTMP production increased by 3% from 2015, reflecting a new annual production record at our Slave Lake Pulp mill. NBSK production increased by 6% compared to 2015. Despite some operational issues at our Hinton pulp mill in the fourth quarter, the mill achieved an annual production record in 2016. Major maintenance shutdowns are planned for our Hinton and our jointly owned Cariboo NBSK mills in 2017 of 14 days in the third quarter and 12 days in the second quarter, respectively. Newsprint production was slightly lower in the year compared to 2015. During 2016 and 2015 Alberta power prices were relatively lower and less volatile compared to previous periods resulting in no significant production curtailments at our Slave Lake pulp mill and jointly owned newsprint mill. Operating earnings for the segment were similar to the previous year with improvements in BCTMP and newsprint earnings offset by a decline in NBSK earnings. Pulp prices were lower in 2016 compared to 2015, particularly for NBSK, while there was a significant improvement in newsprint prices. BCTMP unit conversion costs were lower in 2016 compared to 2015 due mainly to lower power costs in Alberta and lower depreciation costs due to assets becoming fully depreciated. NBSK unit conversion costs also were lower in 2016 due to lower furnish and natural gas costs and lower chemical usage. . d t L . o C r e b m T i r e s a r F t s e W 27 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M 2016 Management’s Discussion & Analysis (continued) 4th Quarter Results Sales and Earnings Comparison ($millions, except as otherwise indicated) Sales by Segment Lumber Panels Pulp & Paper Intracompany fibre sales Total Operating Earnings by Segment Lumber Panels Pulp & Paper Corporate & Other Operating earnings Finance expense Other Tax provision Earnings Cdn$1.00 converted to US$ – average Adjusted Earnings and Adjusted Basic Earnings Per Share ($millions except EPS amounts which are in $) Earnings Add: Equity-based compensation Exchange loss on long-term financing Loss on power agreements Insurance gain on disposal of equipment Write-down of investment Net tax effect on the above adjustments Adjusted earnings Adjusted basic EPS . d t L . o C r e b m T i r e s a r F t s e W 28 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M Q4-16 Q3-16 Q4-15 778 124 231 (26 ) 1,107 107 17 20 (17 ) 127 (7 ) (1) (40 ) 79 0.749 Q4-16 79 16 4 8 (3 ) — (3) 101 1.28 814 139 230 (28 ) 1,155 114 30 22 (10 ) 156 (7 ) 1 (43 ) 107 0.767 Q3-16 107 7 2 — — — (1 ) 115 1.45 684 139 220 (30 ) 1,013 17 16 8 (23 ) 18 (6 ) (16 ) (11 ) (15 ) 0.749 Q4-15 (15 ) 22 14 3 — 7 (1 ) 30 0.38 Discussion & Analysis of Quarterly Non-operational Items For a description of our quarterly operational results see “Discussion & Analysis by Product Segment” which follows this section. Our results include several significant non-operational items that are identified as adjustments in the table immediately above this section. After taking into account the adjustments, we generated Adjusted earnings of $100 million in the current quarter compared to Adjusted earnings of $115 million in the previous quarter and Adjusted earnings of $30 million in the fourth quarter of 2015. In the fourth quarter of 2016 an expense of $16 million was recorded related to equity-based compensation compared to an expense of $7 million last quarter and an expense of $22 million in the fourth quarter of 2015. An expense is recorded on the issuance of share options or phantom or directors’ deferred share units and an additional expense or recovery is recorded each quarter based primarily on valuation models that consider various factors relating to outstanding options and units. The most significant of these factors is the change in the market value of our shares from the beginning to the end of the particular period. The market value of the Company’s shares increased by 19% in the fourth quarter, from $40.43 per share at the end of the third quarter to $48.01 per share at the end of 2016. In November we entered into a derivative contract that effectively hedges the impact from changes in value related to 1,000,000 equity units. For the quarter the hedge reduced the expense by $2 million compared to what it otherwise would have been. This contract will reduce volatility going forward. The expense or recovery does not necessarily represent the actual amount that will ultimately be paid by the Company in respect of options and units. For a description of the other key adjustments, see the corresponding section under “Annual Results” in this MD&A. Discussion & Analysis by Product Segment Lumber Segment SPF (MMfbm) Production Shipments SYP (MMfbm) Production Shipments Sales ($millions) Lumber Wood chips and other residuals Logs and other Adjusted EBITDA ($millions) Amortization ($millions) Operating earnings ($millions) Adjusted EBITDA margin (%) Benchmark prices (per Mfbm) SPF #2 & Better 2x41 – US$ SPF #3 Utility 2x41 – US$ SYP #2 West 2x42 – US$ SPF #2 & Better 2x4 – Cdn$3 SPF #3 Utility 2x4 – Cdn$3 SYP #2 West 2x4 – Cdn$3 Q4-16 Q3-16 Q4-15 897 944 499 489 680 74 24 778 144 (37 ) 107 19 315 261 432 420 348 576 954 986 541 546 709 81 24 814 151 (37 ) 114 19 322 245 410 420 320 535 896 946 502 502 578 77 29 684 55 (38 ) 17 8 263 189 395 351 252 527 1. Source: Random Lengths – Net FOB mill. 2. Source: Random Lengths – Net FOB mill Westside. 3. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price. Operating earnings decreased slightly in the quarter compared to the previous quarter. Production and shipments both declined from the previous quarter due to cold weather in many of our operating areas late in the quarter as well as fewer operating days. The negative effect of lower production and shipments was partially offset by higher Canadian-dollar lumber prices. Log costs in our Canadian operations were higher than in the previous quarter which also contributed to the lower operating earnings. Operating earnings were significantly higher in the quarter compared to the fourth quarter of 2015 mainly due to higher lumber prices, particularly for SPF lumber. Production and shipments for the quarter were similar to the fourth quarter of 2015. Higher Canadian log costs in the quarter partially offset the positive effect of higher lumber prices. . d t L . o C r e b m T i r e s a r F t s e W 29 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M 2016 Management’s Discussion & Analysis (continued) Panels Segment Plywood (MMsf 3/8” basis) Production Shipments MDF (MMsf 3/4” basis) Production Shipments LVL (Mcf) Production Shipments Sales ($millions) Finished products Wood chips and other residuals Logs and other Adjusted EBITDA ($millions) Amortization ($millions) Operating earnings ($millions) Adjusted EBITDA margin (%) Benchmark prices Plywood (per Msf 3/8” basis)1 Cdn$ 1. Source: Crow’s Market Report – Delivered Toronto. Q4-16 Q3-16 Q4-15 207 207 35 34 584 556 119 4 1 124 20 (3 ) 17 16 212 212 36 35 548 611 132 5 2 139 33 (3 ) 30 24 197 203 56 53 456 485 131 5 3 139 19 (3 ) 16 14 421 471 410 The decline in operating earnings for our panels segment compared to the previous quarter was primarily the result of lower plywood prices reflecting a seasonal slowdown of the Canadian building industry. Lower log costs in the fourth quarter provided a partial positive offset to the effect of lower prices. Results from our MDF business were also lower in the current quarter due to lower business interruption insurance booked compared to the third quarter of 2016. LVL operating earnings were little changed quarter to quarter. Operating earnings for the current quarter compared to the same quarter of 2015 were also little changed. Plywood earnings were higher in the current quarter due to the combination of higher sales prices, higher shipments and slightly lower unit manufacturing costs. MDF and LVL results were both slightly lower than in the fourth quarter of 2015, offsetting much of the increase in operating earnings provided by the plywood operations. . d t L . o C r e b m T i r e s a r F t s e W 30 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M Pulp & Paper Segment BCTMP (Mtonnes) Production Shipments NBSK (Mtonnes) Production Shipments Newsprint (Mtonnes) Production Shipments Sales ($millions) Adjusted EBITDA ($millions) Amortization ($millions) Operating earnings ($millions) Adjusted EBITDA margin (%) Benchmark prices (per tonne) NBSK U.S. – US$1,3 NBSK China – US$2,3 Newsprint – US$4 NBSK U.S. – Cdn$5 NBSK China – Cdn$5 Newsprint – Cdn$5 Q4-16 Q3-16 Q4-15 172 149 133 139 33 32 231 30 (10 ) 20 13 992 595 575 1,324 794 767 169 181 137 127 31 31 230 31 (9 ) 22 13 998 595 575 1,302 776 750 165 169 128 125 33 38 220 17 (9 ) 8 8 945 600 505 1,262 801 674 1. Source: Resource Information Systems, Inc. – U.S. list price delivered U.S. 2. Source: Resource Information Systems, Inc. – China list price, delivered China. 3. The differences between the U.S. and China NBSK list prices are largely attributable to the customary sales practice of applying material discounts from the U.S. list price for North American sales compared to relatively small discounts from the China list price for sales into China. 4. Source: Resource Information Systems, Inc. – U.S. delivered 48.8 gram newsprint. 5. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. benchmark price. Operating earnings from our pulp & paper operations decreased slightly from the previous quarter. Our NBSK operations were negatively affected by cold weather in December which resulted in higher chemical, natural gas and maintenance costs. These higher costs were only partially offset by the effect of higher shipments compared to the previous quarter. BCTMP realized sales prices increased significantly from the previous quarter due to substantially improved demand from China. The improved prices coupled with some improvement in conversion costs more than offset the negative effect of reduced BCTMP shipments in the quarter. Shipments were lower in the quarter due to transportation delays, mainly as port congestion caused a delay in planned shipments. Operating earnings from our newsprint operations were similar to the last quarter. Operating earnings for the segment were higher than in the fourth quarter of 2015 due to improved BCTMP and newsprint results partially offset by lower NBSK results. The BCTMP and newsprint improvement in operating earnings was substantially due to significantly higher product prices. The higher prices together with some reduction in unit conversion costs more than offset the effect of lower shipments in the quarter compared to the fourth quarter of 2015. Our NBSK business realized lower product prices and higher conversion costs, mainly due to higher maintenance costs, in the quarter compared to the fourth quarter of 2015. Capital Expenditures During the year our capital expenditures totaled $273 million as set out in the following table. ($millions of dollars) Segment Lumber Panels Pulp & Paper Corporate & Other Total Profit Improvement 127 2 16 — 145 Maintenance of Business 68 23 26 11 128 Total 195 25 42 11 273 . d t L . o C r e b m T i r e s a r F t s e W 31 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M . d t L . o C r e b m T i r e s a r F t s e W 32 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M 2016 Management’s Discussion & Analysis (continued) Capital expenditures of $273 million reflect our philosophy of continual reinvestment in our mills with significant investments made in both our Canadian and U.S. operations. In our lumber operations we invested in several continuous kilns and a number of smaller projects to improve grade recovery and output. The single largest project is a sawmill rebuild at our Newberry, South Carolina operation which is expected to be completed in the first quarter of 2017. Maintenance of business expenditures are primarily for safety upgrades, roads, bridges, mobile equipment and major maintenance shutdowns. Business Outlook Operations We expect continuing improved productivity from our lumber segment resulting in an increase in overall lumber production of approximately 250 MMfbm compared to 2016. The increase reflects the completion of several major capital projects and start-ups in the segment through 2016 although production gains will be partially offset by reductions resulting from anticipated capital projects in the segment to be undertaken during 2017. Anticipated production gains assume improving demand and normal access to logs and could be adversely affected by abnormally severe weather conditions in any of our operating areas and faster than anticipated log quality deterioration in the B.C. interior. We expect continuing log cost escalation in the B.C. interior as mountain pine beetle-killed timber reaches the end of commercial viability and overall log supply decreases. In our panels segment our plywood and LVL operations should perform generally consistently with 2016 operations. Our WestPine MDF plant experienced a fire in March, 2016 resulting in its closure for the balance of the year for repairs and reconstruction. Plant commissioning is expected to commence in the second quarter with return to normal operations in the third quarter. Because two of our plywood operations are in the B.C. interior, we expect log costs for those operations to continue to increase in 2017. Both of our NBSK mills will undergo major maintenance shutdowns in 2017 (our jointly owned Cariboo mill in the second quarter and Hinton in the third quarter). Improved productivity at these mills continues to be a key focus for 2017. Our BCTMP mills and our jointly owned newsprint mill continued to operate well in 2016 and we expect generally similar operations in 2017, assuming adequate markets. Markets Our lumber segment’s most important market is the U.S. and particularly residential construction, repair and maintenance. Canadian softwood lumber exports to the U.S. have been the subject of trade disputes and managed trade arrangements for the last several decades. During the period from October 2006 through October 2015 these exports were subject to a trade agreement between the U.S. and Canada and on the expiry of that agreement a one-year moratorium on trade sanctions by the U.S. came into place. That moratorium has expired and a coalition of U.S. lumber producers has petitioned the U.S. Department of Commerce and the U.S. International Trade Commission to impose trade sanctions against Canadian softwood lumber exports to the U.S. It appears likely that some form of protectionist sanctions such as duties will be imposed on Canadian softwood lumber exports to the U.S. until and unless some form of trade agreement can be reached between the U.S. and Canada or a final, binding determination is made as a result of litigation. Unless the additional costs imposed by duties can be passed along to lumber consumers, the duties will increase costs for Canadian producers and, in certain cases, could result in some Canadian production becoming unprofitable. Whether and to what extent duties can be passed along to consumers will largely depend on the strength of demand for softwood lumber, which is significantly influenced by the levels of new residential construction in the U.S. which has been gradually improving over the past several years. If duties can be passed through to consumers in whole or in part the price of Canadian softwood lumber will increase (although the increase will not necessarily be for the benefit of Canadian producers) which in turn could cause the price of SYP lumber, which would not be subject to the duty, to increase as well. U.S. trade laws permit, under certain circumstances, the imposition of duties retroactively for a period of up to 90 days. If this were to occur there would be no ability for Canadian producers to pass along any portion of such duties and they would become entirely an increased cost to the Canadian producer. It is difficult to predict whether such retroactive duties will be imposed. We are anticipating continued improvement in U.S. new residential construction and steady demand from China and Japan for Canadian softwood lumber, but it is currently very difficult to predict how and to what extent duties will be imposed, as well as how such duties will affect lumber prices and the cost structure of our Canadian lumber business. The major component of our panels segment is plywood which is sold mainly in Canada. Although demand for Canadian plywood has been strong over the past several years, we anticipate some downward pressure on plywood prices in 2017 as the pace of Canadian housing construction slows. MDF and LVL demand is heavily influenced by North American new home construction and we are expecting continuing improvement in U.S. residential construction which should help maintain good price levels for these products. We are anticipating that pulp markets will generally be flat to slightly weaker as the market adjusts to announced new production. Pulp demand will be heavily influenced by the pace of Chinese economic activity which may face headwinds as a result of anticipated U.S. protectionist actions although the timing and nature of such actions is uncertain Cash flows We are anticipating levels of cash flows, even taking into account the potential imposition of duties on Canadian softwood lumber exports to the U.S., to support approximately $300 million of capital spending in 2017 as well as to continue to support the current dividend. We have paid a dividend in every quarter since we became a public company in 1986. We expect to maintain our investment grade rating and intend to preserve sufficient liquidity to be able to take advantage of strategic growth opportunities that may arise, although we believe that uncertainty concerning potential future trade sanctions with respect to Canadian lumber exports to the U.S. could inhibit growth activities. We are authorized under our Normal Course Issuer Bid, which expires in September of 2017, to purchase up to 5% of our outstanding shares and we will continue to consider share purchases with excess cash if we are satisfied that this will enhance shareholder value. Estimated Earnings Sensitivity to Key Variables1 (based on 2016 production – $millions) Factor Lumber price Plywood price NBSK price BCTMP price U.S. – Canadian $ exchange rate2 Variation US$10 (per Mfbm) Cdn$10 (per Msf) US$10 (per tonne) US$10 (per tonne) US$0.01 (per Cdn $) Change in pre-tax earnings 80 8 7 9 30 1. Each sensitivity has been calculated on the basis that all other variables remain constant and assumes year-end foreign exchange rates. 2. Excludes exchange impact of translation of U.S. dollar-denominated debt and other monetary items. Reflects the amount of the initial US$0.01 change; additional changes are substantially, but not exactly, linear. Capital Structure and Liquidity The capital structure of the Company consists of Common share equity and long-term debt. In addition, the Company maintains a committed revolving credit facility and lines of credit dedicated to letters of credit. In September 2016 we announced approval for renewal of our normal course issuer bid expiring that month. The renewal allows us to acquire up to 3,834,226 Common shares for cancellation until expiry of the bid on September 18, 2017. From September 19, 2016 to December 31, 2016, under this bid, we repurchased 391,853 Common shares for cancellation at an average price of $50.70. In 2016 we repurchased a total of 4,306,159 Common shares for cancellation at an average price of $44.06 (2015 – 1,078,856 Common shares at an average price of $55.57). Our outstanding Common share equity consists of 75,882,056 Common shares and 2,281,478 Class B Common shares for a total of 78,163,534 shares issued and outstanding as at February 16, 2017. Our Class B Common shares are equal in all respects to our Common shares and are exchangeable on a one-for-one basis for Common shares. Our Common shares are listed for trading on the Toronto Stock Exchange while our Class B Common shares are not. Certain circumstances or corporate transactions may require the approval of the holders of our Common shares and Class B Common shares on a separate class by class basis. As of February 16, 2017 there were 2,119,886 share purchase options outstanding with exercise prices ranging from $12.36 to $73.99 per Common share. In October 2014, we issued US$300 million of fixed-rate senior unsecured notes, bearing interest at 4.35% and due October 2024, pursuant to a private placement in the U.S. The notes are redeemable, in whole or in part, at our option at any time. Our revolving lines of credit consist of a $500 million committed revolving credit facility, a US$25 million demand line to support our U.S. operations, demand lines of credit totalling $59 million (includes US$7 million) dedicated to letters of credit, and an $8 million demand line of credit dedicated to our jointly owned newsprint operation. The revolving credit facility matures on September 30, 2020. At December 31, 2016 there were no amounts outstanding under our revolving credit facility. Letters of credit in the amount of $48 million were supported by our facilities, leaving approximately $553 million of credit available for further use. Our cash requirements, other than for operating purposes, are primarily for interest payments, repayment of debt, additions to property, plant, equipment and timber, acquisitions and payment of dividends. In normal business cycles and in years without a major acquisition or debt repayment, cash on hand and cash provided by operations have been sufficient to meet these requirements. . d t L . o C r e b m T i r e s a r F t s e W 33 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M . d t L . o C r e b m T i r e s a r F t s e W 34 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M 2016 Management’s Discussion & Analysis (continued) Summary of Financial Position ($millions, except as otherwise indicated) As at December 31 Cash1 Current assets Current liabilities Ratio of current assets to current liabilities Net debt2 Shareholders’ equity Net debt to total capital3 1. Cash consists of cash and short-term investments. 2. Total debt less deferred financing costs less cash plus cheques issued in excess of funds on deposit. 3. Non-IFRS measure. See “Non-IFRS Measures” below. 2016 50 938 459 2.0 376 2,241 14% 2015 13 971 606 1.6 617 2,147 22% As shown in the table below, we are rated by three rating agencies. All three agencies maintained our investment grade ratings with a Stable Outlook. Debt Ratings Agency DBRS Moody’s Standard & Poor’s Rating BBB(low) Baa3 BBB- Outlook Stable Stable Stable These ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the rating agencies. Selected Cash Flow Items ($millions) For the year ended December 31 Operating Activities Earnings Amortization Foreign exchange loss (gain) on long-term financing Change in income taxes Changes in non-cash working capital Other Cash provided by operating activities Financing Activities Proceeds from (repayment of) operating loan Finance expense paid Dividends Common share repurchases Other Cash used in financing activities Investing Activities Acquisition Additions to capital assets Other Cash used in investing activities Increase (decrease) in cash 2016 2015 326 197 (4 ) 111 90 (31 ) 689 (181 ) (23 ) (22 ) (190 ) 2 (414 ) — (273 ) 10 (263 ) 12 104 191 58 (15 ) (79 ) 42 301 68 (22 ) (23 ) (60 ) (1 ) (38 ) (76 ) (220 ) 8 (288 ) (25 ) Operating Activities Cash provided by operating activities increased by $388 million from the previous year. The table above shows the main components of cash generation for the year compared to 2015. Increased earnings accounted for $222 million of the increase with income taxes and working capital changes being the other significant factors. The cash generated from income taxes relates to current tax expense being higher than instalment payments in 2016 and the impact of the change in deferred income tax balances. The main component of the working capital change relates to a decrease in inventories as we were able to reduce both our finished product inventories and log inventories from the levels present at the beginning of the year. Financing Activities During the year we repaid $181 million outstanding from our operating lines and acquired 4,306,159 of our Common shares for a total purchase price of $190 million. Investing Activities The cash used for investing activities was related to additions to capital assets of $273 million. Cash used in 2015 included $220 million related to capital additions and an acquisition of a sawmill in Alberta for $76 million. Contractual Obligations as at December 31, 2016 ($millions)1 2018 — 3 — 3 Long-term debt2 Operating leases Asset purchase commitments Total 2017 — 4 33 37 2019 — 2 — 2 2020 — 2 — 2 Thereafter 417 3 — 420 Total 417 14 33 464 . d t L . o C r e b m T i r e s a r F t s e W 35 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M 1. Contractual obligations means an agreement related to debt, leases and enforceable agreements to purchase goods or services on specified terms, but does not include reforestation and decommissioning obligations, energy purchases under various agreements, pension contributions payable, accounts payable in the ordinary course of business or contingent amounts payable. Includes U.S. dollar-denominated debt of US$300 million. 2. Significant Management Judgments Affecting Financial Results The preparation of financial statements requires management to make estimates and assumptions, and to select accounting policies, that affect the amounts reported. The significant accounting policies followed by our Company are disclosed in our Financial Statements. The following judgments are considered the most significant: Fair value of Derivative Contracts Prior to March 24, 2016 we had power contracts in place to reduce financial risk from increasing Alberta power prices. These contracts were adjusted to fair value at each balance sheet date and the change in fair value was recorded through earnings. To assess fair value, we discounted expected cash flows over the life of the agreements. Determining expected future cash flows involves significant estimates including future power prices, and electricity generation and costs of producing electricity from power plants that our contracts were tied to. Recoverability of Long-lived Assets We assess the carrying value of an asset when there are indicators of impairment. The assessment compares the estimated discounted future cash flows of the asset to the carrying value of the asset. If the carrying value of the asset exceeds the estimated discounted future cash flows relating to the asset, the carrying value is written down to the higher of fair value less costs to sell and value-in-use. We review the amortization periods for our manufacturing equipment and machinery to ensure that the periods appropriately reflect anticipated obsolescence and technological change. Current amortization periods for manufacturing equipment range from 6 to 20 years. Timber licences are amortized over 40 years. Goodwill is not amortized. We compare the carrying value of goodwill and related assets, at least once a year, to the estimated discounted cash flows that the assets are expected to generate. If it is determined that the carrying value is more than the estimated discounted cash flows, then a goodwill impairment will be recorded. We tested goodwill for impairment in 2016 and concluded that its carrying value is not impaired. The testing of goodwill for impairment involves significant estimates including future production and sales volumes, product selling prices, foreign currency exchange rates, operating costs, capital expenditures and the appropriate discount rate to apply. In all cases, we have used our best estimates of these projected amounts and values. Given the current global economic uncertainty and the volatility of the markets for our products, it is possible that our estimates will be adjusted in the future and that these adjusted estimates could result in the future impairment of goodwill. We also review the carrying value of deferred income tax assets to ensure that the carrying value is appropriate. The key factors considered are the Company’s history of profitability, future expectations of profitability and the timing of expiry of tax loss carry-forwards. Reforestation and Decommissioning Obligations In Canada, provincial regulations require timber quota holders to carry out reforestation to ensure re-establishment of the forest after harvesting. Reforested areas must be tended for a period sufficient to ensure that they are well-established. The time needed to meet regulatory requirements depends on a variety of factors. In our operating areas, the time to meet reforestation standards usually spans 12 to 15 years from the time of harvest. We record a liability for the estimated cost of the future reforestation activities when the harvesting takes place. This liability is reviewed, at least annually, and adjusted to our current estimate of the costs to complete the remainder of the reforestation activities. In 2016 the review of the reforestation obligation resulted in a decrease to the obligation of $10 million (2015 – increase of $4 million). 2016 Management’s Discussion & Analysis (continued) We record the estimated fair value of a liability for decommissioning obligations, such as landfill closures, in the period when a reasonable estimate of fair value can be made. We review these estimates at least annually, and adjust the obligations as appropriate. In 2016 the review resulted in a decrease to the obligation by $4 million (2015 – increase of $6 million). Defined Benefit Pension Plan (“D.B. Plan”) Assumptions We maintain several D.B. Plans for many of our employees. The annual funding requirements and pension expenses are based on (i) various assumptions that we determine in consultation with our actuaries, (ii) actual investment returns on the pension fund assets, and (iii) changes to the employee groups in the pension plans. Note 13 to the Financial Statements provides the sensitivity of a change in key assumptions to our post-retirement obligations. Accounting Standards Issued But Not Yet Applied The International Accounting Standards Board periodically issues new standards and amendments or interpretations to existing standards. The new pronouncements listed below are ones we consider to be most significant. IFRS 9 – Financial Instruments In November 2009, IFRS 9 was issued and in October 2010 was further amended. IFRS 9 addresses classification and measurement of financial assets and replaces the multiple category and measurement models in International Accounting Standards (“IAS”) 39 - Financial Instruments: Recognition and Measurement for debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments and such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive earnings. This standard is effective for annual periods beginning on or after January 1, 2018. We do not expect this standard to have a significant effect on our consolidated financial statements. IFRS 15 – Revenue from Contracts with Customers In May 2014, IFRS 15 was issued. This standard addresses revenue recognition and establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognized when a customer obtains control of a good or service and thus has the ability to control its use and obtain the benefits from the good or service. The standard replaces IAS 18 – Revenue, IAS 11 – Construction Contracts and the related interpretations. The standard is effective for annual periods beginning on or after January 1, 2018 with earlier application permitted. We do not expect this standard to have a significant effect on our consolidated financial statements. IFRS 16 – Leases In January 2016 IFRS 16 was issued. This standard requires, among other things, lessees to recognize leases traditionally recorded as operating leases in the same manner as financing leases. The standard is effective for annual periods beginning on or after January 1, 2019 with earlier application permitted. We do not expect this standard to have a significant effect on our consolidated financial statements. Non-IFRS Measures The following summarizes the non-IFRS measures we use in this MD&A. None of these measures is a generally accepted measure under IFRS and none has a standardized meaning prescribed by IFRS. Investors are cautioned that none of these measures should be considered as an alternative to earnings, earnings per share or cash flow, as determined in accordance with IFRS. As there is no standardized method of calculating any of these measures, our method of calculating each of them may differ from the methods used by other entities and, accordingly, our use of any of these measures may not be directly comparable to similarly titled measures used by other entities. . d t L . o C r e b m T i r e s a r F t s e W 36 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M Adjusted EBITDA ($millions) Earnings Add: Amortization Finance expense Tax provision EBITDA Add: Equity-based compensation Other Adjusted EBITDA Q4-16 79 Q3-16 107 50 7 40 176 16 1 193 50 7 43 207 7 (1 ) 213 2016 326 197 29 118 670 (5 ) 9 674 Q4-15 (15 ) 50 6 11 52 22 16 90 2015 104 191 29 52 376 (23 ) 64 417 Adjusted EBITDA by Segment ($millions) Lumber Earnings before tax Add: Amortization Finance expense EBITDA Add: Other Adjusted EBITDA Panels Earnings before tax Add: Amortization Finance expense EBITDA Add: Other Adjusted EBITDA Pulp & Paper Earnings before tax Add: Amortization Finance expense EBITDA Add: Other Adjusted EBITDA Corporate & Other Earnings before tax Add: Amortization EBITDA Add: Equity-based compensation Other Adjusted EBITDA Total Adjusted EBITDA Q4-16 Q3-16 2016 Q4-15 2015 104 37 5 146 (2 ) 144 19 3 — 22 (2 ) 20 16 10 2 28 2 30 (20 ) — (20 ) 16 3 (1 ) 193 111 37 4 152 (1 ) 151 29 3 1 33 — 33 21 9 2 32 (1 ) 31 (11 ) 1 (10 ) 7 1 (2 ) 213 Q3-16 107 7 2 — — — (1 ) — 115 1.45 344 146 18 508 — 508 79 12 3 94 (5 ) 89 11 37 8 56 23 79 10 2 12 (5 ) (9 ) (2 ) 674 2016 326 (5 ) (4 ) 27 (8 ) — (6 ) — 330 4.11 8 38 4 50 5 55 15 3 — 18 1 19 8 9 2 19 (2 ) 17 (35 ) — (35 ) 22 12 (1 ) 90 Q4-15 (15 ) 22 14 3 — 7 (1 ) — 30 0.38 . d t L . o C r e b m T i r e s a r F t s e W 37 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M 87 138 18 243 — 243 76 13 3 92 3 95 28 39 8 75 5 80 (35 ) 1 (34 ) (23 ) 56 (1 ) 417 2015 104 (23 ) 58 32 — 7 (9 ) 7 176 2.12 Adjusted Earnings and Adjusted Basic Earnings Per Share Q4-16 ($millions except EPS amounts which are in $) Earnings 79 Add: Equity-based compensation Exchange loss (gain) on long-term financing Loss on power agreements Insurance gain on disposal of equipment Write-down of investment Net tax effect on the above adjustments Increase in Alberta provincial tax rate Adjusted earnings Adjusted basic EPS1 16 4 8 (3 ) — (3 ) — 101 1.28 1. Adjusted basic EPS is calculated by dividing Adjusted earnings by the basic weighted average shares outstanding. 2016 Management’s Discussion & Analysis (continued) Net Debt to Total Capital Ratio ($millions except where indicated) Net debt Cash and short-term investments Deferred financing costs1 Cheques issued in excess of funds on deposit Operating loan Long-term debt Shareholders’ equity Total capital Net debt to total capital December 31, 2016 December 31, 2015 (50 ) (6 ) 15 — 417 376 2,241 2,617 14% (13 ) (7 ) 29 181 427 617 2,147 2,764 22% . d t L . o C r e b m T i r e s a r F t s e W 38 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M 1. For our balance sheet presentation, these costs are applied to reduce the associated debt or, in instances when the operating loan is undrawn, these costs associated with the operating loan are included in other assets. Risks and Uncertainties Product Demand and Price Fluctuations Our revenues and financial results are primarily dependent on the demand for, and selling prices of, our products, which are subject to significant fluctuations. The demand and prices for lumber, panels, pulp, newsprint, wood chips and other wood products are highly volatile and are affected by factors such as global economic conditions including the strength of the U.S. housing market and of Asian markets, particularly China and Japan, changes in industry production capacity, changes in world inventory levels, increased competition from other sources of supply of logs and lumber, particularly from Russia, and other factors beyond our control. In addition, unemployment levels, interest rates and the rate of mortgage foreclosures have a significant effect on residential construction and renovation activity, which in turn influences the demand for, and price of, building materials such as lumber and panel products. Declines in demand, and corresponding reductions in prices, for our products may adversely affect our financial condition and results of operations. We cannot predict with any reasonable accuracy future market conditions, demand or pricing for any of our products due to factors outside our control. Prolonged or severe weakness in the market for any of our principal products would adversely affect our financial condition. Availability of Fibre and Changes in Stumpage Fees Substantially all of our Canadian log requirements are harvested from lands owned by a provincial government (the “Crown”). Provincial governments control the volumes that can be harvested under provincially-granted tenures and otherwise regulate the availability of Crown timber for harvest. Determinations by provincial governments to reduce the volume of timber or the areas that may be harvested under timber tenures, including to protect the environment or endangered species and critical habitat, may reduce our ability to secure log supply and may increase our log purchase costs. In addition, provincial governments prescribe the methodologies that determine the amounts of stumpage fees that are charged in respect of harvesting on Crown lands. Determinations by provincial governments to change stumpage fee methodologies or rates could increase our log costs. We rely on third-party independent contractors to harvest timber in areas over which we hold timber tenures. Increases in rates charged by these independent contractors or the limited availability of these independent contractors may increase our timber harvesting costs. We also rely on the purchase of logs and increased competition for, or shortages of, logs may result in increases in our log purchase costs. We rely on log supply agreements in the United States which are subject to log availability and based on market prices. Approximately 15% of the aggregate log requirements for our U.S. sawmills may be supplied under long-term agreements with the balance purchased on the open market. Changes in the U.S. log market may reduce the supply of logs available to us and may increase the costs of log purchases, each of which could adversely affect our results. Trade Restrictions A substantial portion of our products that are manufactured in Canada are exported for sale. Our financial results are dependent on continued access to the export markets and tariffs and other trade barriers that restrict or prevent access represent a continuing risk to us. Canadian softwood lumber exports to the U.S. have been the subject of trade disputes and managed trade arrangements for the last several decades. During the period from October 2006 through October 2015 these exports were subject to a trade agreement between the U.S. and Canada and on the expiry of that agreement a one-year moratorium on trade sanctions by the U.S. came into place. That moratorium has expired and a group of U.S. lumber producers has petitioned the U.S. Department of Commerce and the U.S. International Trade Commission to impose trade sanctions against Canadian softwood lumber exports to the U.S. It appears likely that some form of protectionist sanctions such as duties will be imposed on Canadian softwood lumber exports to the U.S. until and unless some form of trade agreement can be reached between the U.S. and Canada or a final, binding determination is made as a result of litigation. Unless the additional costs imposed by duties can be passed along to lumber consumers, the duties will increase costs for Canadian producers and, in certain cases, could result in some Canadian production becoming unprofitable. Whether and to what extent duties can be passed along to consumers will largely depend on the strength of demand for softwood lumber, which is significantly influenced by the levels of new residential construction in the U.S. which has been gradually improving over the past several years. If duties can be passed through to consumers in whole or in part the price of Canadian softwood lumber will increase (although the increase will not necessarily be for the benefit of Canadian producers) which in turn could cause the price of SYP lumber, which would not be subject to the duty, to increase as well. The application of U.S. trade laws could, in certain circumstances, create significant burdens on us. We are a mandatory respondent in current investigations being conducted by the U.S. Department of Commerce into alleged subsidies and dumping. If the Department determines that we have failed to fully cooperate with either investigation the Department may apply adverse facts which could result in a higher duty being imposed on our softwood lumber exports to the U.S. In addition, under certain circumstances duties can be charged retroactively on a company by company basis which could adversely affect our competitiveness with other Canadian softwood lumber producers. Natural and Man-Made Disasters Our operations are subject to adverse natural or man-made events such as forest fires, severe weather conditions, climate change, timber diseases and insect infestations including those that may be associated with warmer climate conditions, and earthquake activity. These events could damage or destroy or adversely affect the operations at our physical facilities or our timber supply or our access to timber, and similar events could also affect the facilities of our suppliers or customers. Any such damage or destruction could adversely affect our financial results as a result of decreased production output or increased operating costs. Although we believe we have reasonable insurance arrangements in place to cover certain of such incidents related to damage or destruction, there can be no assurance that these arrangements will be sufficient to fully protect us against such losses. As is common in the industry, we do not insure loss of standing timber for any cause. Mountain Pine Beetle The long-term effect of the mountain pine beetle infestation on our Canadian operations is uncertain. The potential effects include a reduction of future AAC levels to below current and pre-infestation AAC levels. Many of our British Columbia operations are experiencing a diminished grade and volume of lumber recovered from beetle-killed logs and increased production costs, and these effects could spread to our Alberta operations as the mountain pine beetle infestation expands. The timing and extent of the future effect on our timber supply, lumber grade and recovery, and production costs will depend on a variety of factors and at this time cannot be reasonably determined. The effects of the deterioration of beetle-killed logs could include increased costs, reduced operating rates due to shortages of commercially merchantable timber and mill closures. Wood Dust Our operations generate wood dust which has been recognized for many years as a potential health and safety hazard. The potential risks associated with wood dust have been increased in those of our British Columbia and Alberta facilities that have been processing mountain pine beetle-killed logs as the wood dust generated from these logs tends to be drier, lighter and finer than wood dust typically generated. We have adopted a variety of measures to reduce or eliminate the risks posed by the presence of wood dust in our facilities and we continue to work with industry and regulators to develop and adopt best mitigation practices. Adoption of measures to reduce or eliminate risks associated with wood dust as a result of new government regulations and best practices may require additional capital expenditures and increase our operating costs. Any explosion or similar event at any of our facilities or any third-party facility could result in significant loss, increases in expenses and disruption of operations, each of which would have a material adverse effect on our business. Financial Our capital plans will include, from time to time, expansion, productivity improvement, technology upgrades, operating efficiency optimization and repair or replacement of our existing facilities and equipment. In addition, we may undertake the acquisition of facilities or the rebuilding or modernization of existing facilities. If the capital expenditures associated with these capital projects are greater than we have projected or if construction timelines are longer than anticipated, our financial condition, results of operations and cash flows may be adversely affected. In addition, our ability to expand production and improve operational efficiencies will be contingent on our ability to execute on our capital plans. Our capital plans may be adversely affected by availability of, and competition for, qualified workers and contractors, changes in government regulations, unexpected delays and increases in costs of completing capital projects. We believe our capital resources will be adequate to meet our current projected operating needs, capital expenditures and other cash requirements. Factors that could adversely affect our capital resources include prolonged and sustained declines in the demand and prices for our products, unanticipated significant increases in our operating expenses and unanticipated capital expenditures. If for any reason we are unable to provide for our operating needs, capital expenditures and other cash requirements on commercially reasonable terms, we could experience a material adverse effect to our business, financial condition, results of operations and cash flows. . d t L . o C r e b m T i r e s a r F t s e W 39 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M . d t L . o C r e b m T i r e s a r F t s e W 40 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M 2016 Management’s Discussion & Analysis (continued) We rely on long-term borrowings and access to revolving credit in order to finance our ongoing operations. Any change in availability of credit in the market, as could happen during an economic downturn, could affect our ability to access credit markets on commercially reasonable terms. In the future we may need to access public or private debt markets to issue new debt. Deteriorations or volatility in the credit markets could also adversely affect: • our ability to secure financing to proceed with capital expenditures for the repair, replacement or expansion of our existing facilities and equipment; • our ability to comply with covenants under our existing credit or debt agreements; • • our ability to take advantage of growth, expansion or acquisition opportunities. the ability of our customers to purchase our products; and In addition, deteriorations or volatility in the credit market could result in increases in the interest rates that we pay on our outstanding non-fixed rate debt, which would increase our costs of borrowing and adversely affect our operating results. Credit rating agencies rate our debt securities based on factors that include our operating results, actions that we take, their view of the general outlook for our industry and their view of the general outlook for the economy. Actions taken by the rating agencies can include maintaining, upgrading or downgrading the current rating or placing us on a watch list for possible future downgrading. Downgrading the credit rating of our debt securities or placing us on a watch list for possible future downgrading could limit our access to the credit markets, increase our cost of financing and have an adverse effect on our financial condition. We rely heavily on certain raw materials, including logs, wood chips and chemicals, and energy sources, including natural gas and electricity, in our manufacturing processes. Increases in the costs of these raw materials and energy sources will increase our operating costs and will reduce our operating margins. There is no assurance that we will be able to fully offset the effects of higher raw material or energy costs through hedging arrangements, price increases, productivity improvements or cost-reduction programs. Operational Curtailments and Transportation Requirements From time to time, we suspend or curtail operations at one or more of our facilities in response to market conditions, environmental risks, or other operational issues, including, but not limited to scheduled and unscheduled maintenance, temporary periods of high electricity prices, power failures, equipment breakdowns, adverse weather conditions, labour disruptions and fire hazards. In addition, our ability to operate at full capacity may be affected by ongoing capital projects. As a result, our facilities may from time to time operate at less than full capacity. These operational suspensions could have a material adverse effect on our financial condition as a result of decreased revenues and lower operating margins. In Canada, a substantial portion of the wood chip requirements of our Canadian pulp and paper operations are provided by our Canadian sawmills and plywood and LVL plants. If wood chip production is reduced because of production curtailments, improved manufacturing efficiencies or any other reason, our pulp and paper operations may incur additional costs to acquire or produce additional wood chips or be forced to reduce production. Conversely, pulp and paper mill production curtailments may require our sawmills and panel mills to find other ways to dispose of residual wood fibre and may result in curtailment or suspension of lumber, plywood or LVL production and increased costs. Our business depends on our ability to transport a high volume of products from our production facilities to both domestic and international markets. We rely primarily on third-party transportation providers for both the delivery of raw materials to our production facilities and the transportation of our products to market. These third-party transportation providers include truckers, bulk and container shippers and railways. Our ability to obtain transportation services from these transportation service providers is subject to risks which include, without limitation, unavailability due to competition and disruptions due to weather, natural disasters and labour disputes. Transportation costs are also subject to risks that include, without limitation, increased rates due to competition and increased fuel costs. Increases in transportation costs will increase our operating costs. If we are unable to obtain transportation services or if our transportation costs increase, our revenues may decrease due to our inability to deliver products to market and our operating expenses may increase, each of which would adversely affect our results of operations. Labour and Services Our operations rely on both skilled and unskilled workers as well as third-party services such as logging and transportation. Because our operations are generally located away from major urban centres, we often face strong competition for workers, particularly skilled workers, and services from our competitors and other industries such as oil and gas production and mining. Shortages of workers or key services could impair our operations by reducing production or increasing costs. We employ a unionized workforce in a number of our operations. Walkouts or strikes by employees could result in lost production and sales, higher costs and supply constraints that could have a material adverse effect on our business. Also, we depend on a variety of third parties that employ unionized workers to provide critical services to us. Labour disputes experienced by these third parties could lead to disruptions at our facilities. Environment We are subject to regulation by federal, provincial, state, municipal and local environmental authorities, including, among other matters, environmental regulations relating to air emissions and pollutants, wastewater (effluent) discharges, solid and hazardous waste, landfill operations, forestry practices, permitting obligations, site remediation and the protection of threatened or endangered species and critical habitat. We have incurred, and will continue to incur, capital expenditures and operating costs to comply with environmental laws and regulations, including the U.S. Environmental Protection Agency’s Boiler MACT (maximum achievable control technology) regulations. No assurance can be given that changes in these laws and regulations or their application will not have a material adverse effect on our business, operations, financial condition and operational results. Similarly, no assurance can be given that capital expenditures necessary for future compliance with existing and new environmental laws and regulations could be financed from our available cash flow. We may discover currently unknown environmental problems, contamination, or conditions relating to our past or present operations. This or any failure to comply with environmental laws and regulations may require site or other remediation costs or result in governmental or private claims for damage to person, property, natural resources or the environment or governmental sanctions, including fines or the curtailment or suspension of our operations, which could have a material adverse effect on our business, financial condition and operational results. We are currently involved in investigation and remediation activities and maintain accruals for certain environmental matters or obligations, as set out in the notes to our Financial Statements for the year ended December 31, 2016. There can be no assurance that any costs associated with such obligations or other environmental matters will not exceed our accruals. Our Canadian woodland operations, and the harvesting operations of our many key U.S. suppliers, in addition to being subject to various environmental protection laws, are subject to third-party certification as to compliance with internationally recognized, sustainable forest management standards. Demand for our products may be reduced if we are unable to achieve compliance, or are perceived by the public as failing to comply, with these applicable environmental protection laws and sustainable forest management standards, or if our customers require compliance with alternate forest management standards for which our operations are not certified. In addition, changes in sustainable forest management standards or our determination to seek certification for compliance with alternate sustainable forest management standards may increase our costs of operations. Aboriginal Groups Issues relating to aboriginal groups, including First Nations, Métis and others, have the potential for a significant adverse effect on resource companies operating in Canada including West Fraser. Risks include potential delays or effects of governmental decisions relating to Canadian Crown timber harvesting rights (including their grant, renewal or transfer or authorization to harvest) in light of the government’s duty to consult and accommodate aboriginal groups in respect of aboriginal rights or treaty rights, related terms and conditions of authorizations and potential findings of aboriginal title over land. We participate, as requested by government, in the consultation process in support of the government fulfilling its duty to consult. We also seek to develop and maintain good relationships with aboriginal groups that may be affected by our business activities. However, as the jurisprudence and government policies respecting aboriginal rights and title and the consultation process continue to evolve, and as treaty negotiations continue, we cannot assure that aboriginal claims will not in the future have a material adverse effect on our timber harvesting rights or our ability to exercise or renew them or secure other timber harvesting rights. On June 26, 2014 the Supreme Court of Canada (the “SCC”) released its reasons for judgment in Tsilhqot’in Nation v. British Columbia. The SCC declared that the Tsilhqot’in Nation had established aboriginal title over an area of British Columbia comprising approximately 1,750 square kilometres. The SCC also held that the provisions of the Forest Act (British Columbia) dealing with the disposition or harvest of Crown timber, as presently drafted, no longer applied to timber located on those lands, by virtue of the definition of “Crown Timber” in the Forest Act. But the SCC also confirmed that provincial laws can apply on aboriginal title lands but only if the legislature so intends, and if the government can justify any infringement of aboriginal title (according to tests set out in the case law). It also confirmed that the existing Forest Act continues to apply to lands unless and until title is established. We do not have any cutting permits in the area that was the subject of the Tsilhqot’in case. However, claims of aboriginal title have been asserted by many aboriginal groups throughout British Columbia (including lands in which we have interests or rights) and there is a risk that other aboriginal groups may pursue further rights or title claims through litigation, or treaty negotiations with governments. It is difficult to predict how quickly other claims will be litigated or negotiated and in what manner our Crown timber harvesting rights and log supply arrangements will be affected. Regulatory Our operations are subject to extensive general and industry-specific federal, provincial, state, municipal and other local laws and regulations and other requirements, including those governing forestry, exports, taxes, employees, labour standards, occupational health and safety, waste disposal, environmental protection and remediation, protection of endangered and protected species and land use and expropriation. We are required to obtain approvals, permits and licences for our operations, which may require advance consultation with potentially affected stakeholders including aboriginal groups and impose conditions that must be complied with. If we are unable to obtain, maintain, extend or renew, or are delayed in extending or renewing, a material approval, permit or licence, our operations or financial condition could be adversely affected. There is no assurance that these laws, regulations or government requirements, or the administrative interpretation or enforcement of existing laws and regulations, will not change in the future in a manner that may require us to incur significant capital expenditures, pay higher taxes or otherwise could adversely affect our operations or financial condition. Failure to comply with applicable laws or regulations, including approvals, permits and licences, could result in fines, penalties or enforcement actions, including orders suspending or curtailing our operations or requiring corrective measures or remedial actions. . d t L . o C r e b m T i r e s a r F t s e W 41 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M 2016 Management’s Discussion & Analysis (continued) Foreign Currency Exchange Rates We sell the majority of our products at prices denominated in U.S. dollars or based on prevailing U.S. dollar prices. A significant portion of our operational costs and expenses are incurred in Canadian dollars. Therefore, an increase in the value of the Canadian dollar relative to the U.S. dollar reduces the revenue in Canadian dollar terms realized by us from sales made in U.S. dollars, which reduces operating margin and the cash flow available to fund operations. We are also exposed to the risk of exchange rate fluctuations in the period between sale and payment. We also have a substantial amount of long-term debt repayable in U.S. dollars which is valued in Canadian dollars at the end of each reporting period by applying the prevailing exchange rate. Exchange rate fluctuations result in exchange gains or losses. This results in significant earnings sensitivity to changes in the Canadian/U.S. dollar exchange rate. The Canadian/U.S. dollar exchange rate is affected by a broad range of factors which makes future rates difficult to accurately predict. Competition We compete with global producers, some of which may have greater financial resources and lower production costs than we do. Currency devaluations, such as occurred in respect of the Russian ruble in the past few years, can have the effect of reducing our competitors’ costs and making our products less competitive in certain markets. In addition, European lumber producers and South American panel producers may enter the North American market during periods of peak prices. Markets for our products are highly competitive. Our ability to maintain or improve the cost of producing and delivering products to those markets is crucial. Factors such as cost and availability of raw materials, energy and labour, the ability to maintain high operating rates and low per-unit manufacturing costs, and the quality of our final products and our customer service all affect our earnings. Some of our products are also particularly sensitive to other factors including innovation, quality and service, with varying emphasis on these factors depending on the product. To the extent that one or more of our competitors become more successful with respect to any key competitive factor, our ability to attract and retain customers could be materially adversely affected. If we are unable to compete effectively, such failure could have a material adverse effect on our business, financial condition and results of operations. Our products may compete with non-fibre based alternatives or with alternative products in certain market segments. For example, plastic, wood/plastic or composite materials may be used by builders as alternatives to the products produced by our wood products businesses such as lumber, veneer, plywood and MDF products. Changes in prices for oil, chemicals and wood-based fibre can change the competitive position of our products relative to available alternatives and could increase substitution of those products for our products. As the use of these alternatives grows, demand for our products may further decline. Because commodity products have few distinguishing properties from producer to producer, competition for these products is based primarily on price, which is determined by supply relative to demand and competition from substitute products. Prices for our products are affected by many factors outside of our control, and we have no influence over the timing and extent of price changes, which often are volatile. Accordingly, our revenues may be negatively affected by pricing decisions made by our competitors and by decisions of our customers to purchase products from our competitors. Pension Plan Funding We are the sponsor of several defined benefit pension plans which exposes us to market risks related to plan assets. Funding requirements for these plans are based on actuarial assumptions concerning expected return on plan assets, future salary increases, life expectancy and interest rates. If any of these assumptions differs from actual outcomes such that a funding deficiency occurs or increases, we would be required to increase cash funding contributions which would in turn reduce the availability of capital for other purposes. Disclosure Controls and Internal Controls Over Financial Reporting West Fraser’s management, including our President and Chief Executive Officer and our Vice-President, Finance and Chief Financial Officer, acknowledge responsibility for the design and operation of disclosure controls and procedures and internal controls over financial reporting, and the requirement to evaluate the effectiveness of these controls on an annual basis. Management evaluated the effectiveness of these controls at the end of the reporting period and based on this evaluation concluded that our internal controls over financial reporting and the disclosure controls and procedures were effective as at December 31, 2016. No Changes in Internal Controls Over Financial Reporting There has been no change in our internal controls over financial reporting during the year ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. . d t L . o C r e b m T i r e s a r F t s e W 42 s i s y l a n A & n o i s s u c s i D s ’ t n e m e g a n a M Responsibility of Management The management of West Fraser Timber Co. Ltd. (“West Fraser”, “we”, “us” or “our”) is responsible for the preparation, integrity, objectivity and reliability of the consolidated financial statements. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and necessarily include amounts that represent the best estimates and judgments of management. We maintain a system of internal controls over financial reporting that encompasses policies, procedures and controls to provide reasonable assurance that assets are safeguarded against loss or unauthorized use, transactions are executed and recorded with appropriate authorization and financial records are accurate and reliable. Our independent auditor, which is appointed by the shareholders upon the recommendation of the Audit Committee and the Board of Directors, has completed its audit of the consolidated financial statements in accordance with generally accepted auditing standards in Canada and its report follows. The Board of Directors provides oversight to the financial reporting process through its Audit Committee, which is comprised of five Directors, none of whom is an officer or employee of West Fraser. The Audit Committee meets regularly with representatives of management and of the auditor to review the consolidated financial statements and matters relating to the audit. The auditor has full and free access to the Audit Committee. The Audit Committee reports its findings to the Board of Directors for consideration in approving the consolidated financial statements for issuance to the shareholders. Ted Seraphim President and Chief Executive Officer February 16, 2017 Larry Hughes Vice-President, Finance and Chief Financial Officer . d t L . o C r e b m T i r e s a r F t s e W 43 t n e m e g a n a M f o y t i l i b i s n o p s e R Independent Auditor’s Report To the Shareholders of West Fraser Timber Co. Ltd. We have audited the accompanying consolidated financial statements of West Fraser Timber Co. Ltd., which comprise the consolidated balance sheets as at December 31, 2016 and December 31, 2015 and the consolidated statements of earnings and comprehensive earnings, changes in shareholders’ equity and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of West Fraser Timber Co. Ltd. as at December 31, 2016 and December 31, 2015 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. . d t L . o C r e b m T i r e s a r F t s e W 44 t r o p e R s ’ r o t i d u A t n e d n e p e d n I Chartered Professional Accountants Vancouver, British Columbia February 16, 2017 Consolidated Balance Sheets As at December 31, 2016 and 2015 (In millions of Canadian dollars, except where indicated) Assets Current assets Cash and short-term investments Receivables (note 23) Income taxes receivable Inventories (note 5) Prepaid expenses Property, plant and equipment (note 6) Timber licences (note 7) Goodwill and other intangibles (note 8) Other assets (note 9) Deferred income tax assets (note 18) Liabilities Current liabilities Cheques issued in excess of funds on deposit Operating loans (note 12) Payables and accrued liabilities (note 10) Income taxes payable Reforestation and decommissioning obligations (note 11) Long-term debt (note 12) Other liabilities (note 11) Deferred income tax liabilities (note 18) Shareholders’ Equity Share capital (note 14) Accumulated other comprehensive earnings Retained earnings Approved by the Board of Directors Janice G. Rennie Director J. Duncan Gibson Director 2016 2015 50 297 — 581 10 938 1,685 551 371 20 35 3,600 15 — 379 21 44 459 413 272 215 1,359 549 150 1,542 2,241 3,600 $ $ $ $ . d t L . o C r e b m T i r e s a r F t s e W 45 s t e e h S e c n a l a B d e t a d i l o s n o C 13 298 11 631 18 971 1,609 570 369 36 80 3,635 29 178 351 — 48 606 423 269 190 1,488 579 164 1,404 2,147 3,635 $ $ $ $ Consolidated Statements of Earnings and Comprehensive Earnings For the years ended December 31, 2016 and 2015 (In millions of Canadian dollars, except where indicated) Sales Costs and expenses Cost of products sold Freight and other distribution costs Export taxes Amortization Selling, general and administration Equity-based compensation (note 15) Operating earnings Finance expense (note 16) Other (note 17) Earnings before tax Tax provision (note 18) Earnings Earnings per share (dollars) (note 20) Basic Diluted Cash dividends per share (dollars) Comprehensive earnings Earnings Other comprehensive earnings Translation gain (loss) on foreign operations1 Actuarial loss on post-retirement benefits2 Comprehensive earnings 1. Recycled through earnings in the event of a disposal in net investment in foreign operations. 2. Adjusted through retained earnings. Net of tax recovery of $3 million (2015 – $5 million). . d t L . o C r e b m T i r e s a r F t s e W 46 s g n i n r a E e v i s n e h e r p m o C d n a s g n i n r a E f o s t n e m e t a t S d e t a d i l o s n o C 2016 2015 $ 4,450 $ 4,100 2,971 629 — 197 176 (5 ) 3,968 482 (29 ) (9 ) 444 (118 ) 326 4.06 3.90 0.28 $ $ $ $ 326 $ (14 ) (7 ) 305 $ 2,874 627 29 191 153 (23 ) 3,851 249 (29 ) (64 ) 156 (52 ) 104 1.25 0.89 0.28 104 109 (12 ) 201 $ $ $ $ $ $ Consolidated Statements of Changes in Shareholders’ Equity For the years ended December 31, 2016 and 2015 (In millions of Canadian dollars, except where indicated) Share capital Number of shares Amount Translation of foreign operations Retained earnings Total equity Balance – December 31, 2014 83,527,135 $ 587 $ 55 $ 1,387 $ 2,029 Changes in Shareholders’ Equity for 2015 Translation gain on foreign operations Actuarial loss on post-retirement benefits Issuance of Common shares Common share repurchases Earnings for the year Dividends Balance – December 31, 2015 Changes in Shareholders’ Equity for 2016 Translation loss on foreign operations Actuarial loss on post-retirement benefits Issuance of Common shares Common share repurchases Earnings for the year Dividends Balance – December 31, 2016 — — 8,278 (1,078,856 ) — — 82,456,557 — — 12,170 (4,306,159 ) — — 78,162,568 $ — — — ( 8 ) — — 579 — — 1 (31 ) — — 549 $ 109 — — — — — 164 (14 ) — — — — — 150 $ — (12 ) — ( 52 ) 104 ( 23 ) 1,404 — (7 ) — (159 ) 326 (22 ) 1,542 $ 109 (12 ) — (60 ) 104 (23 ) 2,147 (14 ) (7 ) 1 (190 ) 326 (22 ) 2,241 . d t L . o C r e b m T i r e s a r F t s e W 47 y t i u q E ’ s r e d l o h e r a h S n i s e g n a h C f o s t n e m e t a t S d e t a d i l o s n o C Consolidated Statements of Cash Flows For the years ended December 31, 2016 and 2015 (In millions of Canadian dollars, except where indicated) . d t L . o C r e b m T i r e s a r F t s e W 48 s w o l F h s a C f o s t n e m e t a t S d e t a d i l o s n o C Cash provided by operations Earnings Adjustments Amortization Finance expense Foreign exchange loss (gain) on long-term financing Loss on power agreements, net of settlement costs Post-retirement expense Contributions to post-retirement benefit plans Tax provision Income taxes paid Change in reforestation and decommissioning obligations Gain on disposal of capital assets Other Changes in non-cash working capital Receivables Inventories Prepaid expenses Payables and accrued liabilities Cash used for financing Proceeds from (repayment of) operating loans Finance expense paid Dividends Common share repurchases Other Cash used for investing Acquisition (note 4) Additions to capital assets Government assistance (note 22) Other Change in cash Foreign exchange effect on cash Cash – beginning of year Cash – end of year Cash consists of Cash and short-term investments Cheques issued in excess of funds on deposit 2016 2015 $ 326 $ 197 29 (4 ) 11 71 (66 ) 118 (7 ) (11 ) (9 ) (56 ) 4 50 7 29 689 (181 ) (23 ) (22 ) (190 ) 2 (414 ) — (273 ) 8 2 (263 ) 12 39 (16 ) 35 50 (15 ) 35 $ $ $ $ $ $ 104 191 29 58 32 71 (78 ) 52 (67 ) 12 (2 ) (22 ) 1 (16 ) (4 ) (60 ) 301 68 (22 ) (23 ) (60 ) (1 ) (38 ) (76 ) (220 ) 4 4 (288 ) (25 ) 24 (15 ) (16 ) 13 (29 ) (16 ) Index of Notes to Consolidated Financial Statements For the years ended December 31, 2016 and 2015 Description Nature of operations Basis of presentation Accounting standards issued but not yet applied Acquisition Inventories Property, plant and equipment Timber licences Goodwill and other intangibles Other assets Payables and accrued liabilities Other liabilities Long-term debt and operating loans Post-retirement benefits Share capital Equity-based compensation Finance expense Other Tax provision Employee compensation Earnings per share Commitments Government assistance Financial instruments Capital disclosures Segment and geographic information Softwood lumber dispute 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Page 50 50 51 52 52 53 54 54 55 55 56 57 57 60 60 62 62 63 64 64 64 65 65 67 68 69 . d t L . o C r e b m T i r e s a r F t s e W 49 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N f o x e d n I Notes to Consolidated Financial Statements For the years ended December 31, 2016 and 2015 (In millions of Canadian dollars, except where indicated) 1. Nature of operations West Fraser Timber Co. Ltd. (“West Fraser”, “we”, “us” or “our”) is a diversified wood products company producing lumber, LVL, MDF, plywood, pulp, newsprint, wood chips and energy with facilities in western Canada and the southern United States. Our executive office is located at 858 Beatty Street, Suite 501, Vancouver, British Columbia. West Fraser was formed by articles of amalgamation under the Business Corporations Act (British Columbia) and is registered in British Columbia, Canada. Our Common shares are listed for trading on the Toronto Stock Exchange under the symbol WFT. 2. Basis of presentation These consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) and were approved by our Board of Directors on February 16, 2017. Our consolidated financial statements have been prepared under the historical cost basis, except for certain items not carried at historical cost as discussed in the applicable accounting policies. Accounting policies that relate to the consolidated financial statements as a whole are incorporated in this note. Where an accounting policy is applicable to a specific note disclosure, the policy is described within that note. Accounting policies Basis of consolidation These consolidated financial statements include the accounts of West Fraser and its wholly-owned subsidiaries after the elimination of intercompany transactions and balances. Principal operating subsidiaries are West Fraser Mills Ltd., West Fraser, Inc., West Fraser Wood Products Inc., Blue Ridge Lumber Inc., Sundre Forest Products Inc., Manning Forest Products Ltd. and West Fraser Newsprint Ltd. Our 50% owned joint operations, Alberta Newsprint Company and Cariboo Pulp & Paper Company, are accounted for by the proportionate consolidation method. Use of estimates and judgements The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. It also requires management to exercise judgement in the process of applying accounting policies. Significant areas requiring estimates include recoverability of long-lived assets and goodwill, fair value of derivatives, reforestation and decommissioning obligations, employee future benefits, equity-based compensation, income taxes and litigation. Actual amounts could differ materially from these and other estimates, the impact of which would be recorded in future periods. Management uses judgements and assumptions in assessing potential indicators of impairment, determining the appropriate cash generating unit level used in impairment testing and determining the accounting treatment for certain investments where the company owns less than 100% of the entity. Revenue recognition Revenues are derived from product sales and are recognized upon the transfer of significant risks and rewards of ownership, provided collectibility is reasonably assured. . d t L . o C r e b m T i r e s a r F t s e W 50 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N Foreign currency translation Our functional and presentation currency is Canadian dollars. U.S. operations Assets and liabilities of our U.S. operations have a functional currency of U.S. dollars and are translated at the period-end exchange rate. Revenues and expenses are translated at average exchange rates during the reporting period. The resulting unrealized translation gains or losses are included in other comprehensive earnings. Translation of other foreign currency balances and transactions Monetary assets and liabilities denominated in foreign currencies, including long-term debt, are translated at the period-end exchange rate. Income and expense items are translated at the average or transaction date exchange rates during the reporting period. The resulting translation gains or losses are included in other income. Cash and short-term investments Cash and short-term investments consist of cash on deposit and short-term interest-bearing securities maturing within three months of the date of purchase. Impairment of long-lived assets We review property, plant, equipment, timber licences, goodwill and other intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. Goodwill impairment testing is done at least once a year. For the purpose of impairment testing, assets are separated into cash generating units (“CGUs”). We have identified each of our mills as a CGU for impairment testing of property, plant, equipment and other intangibles unless there is economic interdependence of CGUs, in which case they are grouped for impairment testing. Timber licences and goodwill are tested for impairment by combining CGUs within the economic area of the related assets. Recoverability is assessed by comparing the carrying amount of the CGU or grouped CGUs to the discounted estimated net future cash flows the assets are expected to generate. If the carrying amount exceeds the discounted estimated net future cash flows, the assets are written down to the higher of fair value less costs to sell and value-in-use (being the present value of the estimated net future cash flows of the relevant asset or CGU). Goodwill impairment is assessed by comparing the fair value of its CGU to the underlying carrying amount of the CGU’s net assets, including goodwill. When the carrying amount of the CGU exceeds its fair value, the fair value of the CGU’s goodwill is compared with its carrying amount. An impairment loss is recognized for any excess of the carrying value of goodwill over its fair value. Estimated net future cash flows are based on several assumptions concerning future circumstances including selling prices of products, U.S./Canadian dollar exchange rates, production rates, input costs and capital requirements. The estimated net future cash flows are discounted at rates reflective of market risk. Where an impairment loss for long-lived assets other than goodwill subsequently reverses, the carrying amount of the asset or CGU is increased to the lesser of the revised estimate of its recoverable amount and the carrying amount that would have been recorded had no impairment loss been previously recognized. Fair value measurements Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. For financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurement are observable and the significance of the inputs. Our fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are: Level 1 Values based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities. Level 2 Values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3 Values based on prices or valuation techniques that require inputs which are both unobservable and significant to the overall fair value measurement. 3. Accounting standards issued but not yet applied IFRS 9 – Financial Instruments In November 2009, IFRS 9 was issued and in October 2010 was further amended. IFRS 9 addresses classification and measurement of financial assets and replaces the multiple category and measurement models in International Accounting Standards (“IAS”) 39 - Financial Instruments: Recognition and Measurement for debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments and such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive earnings. This standard is effective for annual periods beginning on or after January 1, 2018. We do not expect this standard to have a significant effect on our consolidated financial statements. IFRS 15 – Revenue from Contracts with Customers In May 2014, IFRS 15 was issued. This standard addresses revenue recognition and establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognized when a customer obtains control of a good or service and thus has the ability to control its use and obtain the benefits from the good or service. The standard replaces IAS 18 – Revenue, IAS 11 – Construction Contracts and the related interpretations. The standard is effective for annual periods beginning on or after January 1, 2018 with earlier application permitted. We do not expect this standard to have a significant effect on our consolidated financial statements. IFRS 16 – Leases In January 2016, IFRS 16 was issued. This standard requires, among other things, lessees to recognize leases traditionally recorded as operating leases in the same manner as financing leases. The standard is effective for annual periods beginning on or after January 1, 2019 with earlier application permitted. We do not expect this standard to have a significant effect on our consolidated financial statements. . d t L . o C r e b m T i r e s a r F t s e W 51 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N Notes to Consolidated Financial Statements (continued) There are no other standards or amendments or interpretations to existing standards issued but not yet effective which are expected to have a material impact on our consolidated financial statements. 4. Acquisition During 2015 we made the following acquisition: Location Manning, Alberta Business acquired Lumber manufacturing facility and related timber tenures Date October 29, 2015 Consideration 76 $ We accounted for this transaction as an acquisition of a business and have allocated the purchase price based on the estimated fair value of the assets acquired and the liabilities assumed. The purchase price allocation is as follows: Current assets Current liabilities Property, plant and equipment Timber licences Reforestation obligations Deferred income tax liabilities Consideration 5. Inventories 2015 10 (1 ) 28 59 (2 ) (18 ) 76 $ $ Accounting policies Inventories of logs, other raw materials and manufactured products are valued at the lower of average cost and net realizable value. Processing materials and supplies are valued at the lower of average cost and replacement cost. Supporting information Logs and other raw materials Manufactured products Processing materials and supplies 2016 155 293 133 581 $ $ 2015 215 290 126 631 $ $ Inventories at December 31, 2016 were written down by $5 million (December 31, 2015 – $21 million) to reflect net realizable value being lower than cost. The carrying amount of inventory recorded at net realizable value was $26 million at December 31, 2016 (December 31, 2015 – $55 million), with the remaining inventory recorded at cost. . d t L . o C r e b m T i r e s a r F t s e W 52 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N 6. Property, plant and equipment Accounting policies Property, plant and equipment are stated at historical cost, less accumulated amortization and impairment losses. Expenditures for additions and improvements are capitalized. Borrowing costs are capitalized when the asset construction period exceeds 12 months and the borrowing costs are directly attributable to the asset. Expenditures for maintenance and repairs are charged to earnings. Upon retirement, disposal or destruction of an asset, the cost and related amortization are removed from the accounts and any gain or loss is included in earnings. Property, plant and equipment are amortized on a straight-line basis over their estimated useful lives as follows: Buildings Manufacturing equipment and machinery Fixtures, mobile and other equipment Roads and bridges Major maintenance shutdowns Supporting information As at December 31, 2014 Additions Amortization1 Acquisition Foreign exchange Transfers As at December 31, 2015 As at December 31, 2015 Cost Accumulated amortization Net As at December 31, 2015 Additions Amortization1 Foreign exchange Disposals Transfers As at December 31, 2016 As at December 31, 2016 Cost Accumulated amortization Net Manufacturing plant, $ equipment & machinery 1,146 144 (156 ) 28 73 244 1,479 $ $ $ $ $ $ $ 3,673 (2,194 ) 1,479 1,479 111 (164 ) (14 ) (1 ) 33 1,444 3,772 (2,328 ) 1,444 10 – 30 years 6 – 20 years 3 – 10 years Not exceeding 40 years 12 to 36 months Roads and bridges $ $ $ $ $ $ $ $ 34 17 (15 ) — — 2 38 121 (83 ) 38 38 14 (11 ) — — — 41 128 (87 ) 41 Construction -in-progress 256 $ 45 — — 2 (248 ) 55 $ $ $ $ $ $ $ 55 — 55 55 137 — 1 — (33 ) 160 160 — 160 Other 33 2 — — 2 — 37 44 (7 ) 37 37 3 — — — — 40 47 (7 ) 40 $ $ $ $ $ $ $ $ . d t L . o C r e b m T i r e s a r F t s e W 53 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N Total 1,469 208 (171 ) 28 77 (2 ) 1,609 3,893 (2,284 ) 1,609 1,609 265 (175 ) (13 ) (1 ) — 1,685 4,107 (2,422 ) 1,685 $ $ $ $ $ $ $ $ 1. Amortization of $173 million relates to cost of products sold and $2 million relates to selling, general and administration expense (2015 – $169 million and $2 million, respectively). Notes to Consolidated Financial Statements (continued) 7. Timber licences Accounting policies Timber licences, which are renewable or replaceable, are stated at historical cost, less accumulated amortization and impairment losses. Amortization is provided on a straight-line basis over their estimated useful lives of 40 years. Supporting information As at December 31, 2014 Amortization1 Acquisitions As at December 31, 2015 As at December 31, 2015 Cost Accumulated amortization Net As at December 31, 2015 Amortization1 Additions As at December 31, 2016 As at December 31, 2016 Cost Accumulated amortization Net 1. Amortization relates to cost of products sold. 8. Goodwill and other intangibles Timber licences 530 (19 ) 59 570 798 (228 ) 570 570 (20 ) 1 551 799 (248 ) 551 $ $ $ $ $ $ $ $ Accounting policies Goodwill represents the excess of the purchase price paid for an acquisition over the fair value of the net assets acquired. Goodwill is not amortized, but is subject to an impairment test annually or more frequently if events or circumstances indicate that it may be impaired. Other intangibles are stated at historical cost less accumulated amortization and impairments. Other intangibles include software which is amortized over periods of up to five years and non-replaceable finite term timber rights which are amortized as the related timber is logged. . d t L . o C r e b m T i r e s a r F t s e W 54 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N Supporting information As at December 31, 2014 Additions Amortization1 Transfers Foreign exchange As at December 31, 2015 As at December 31, 2015 Cost Accumulated amortization Net As at December 31, 2015 Additions Amortization1 Foreign exchange As at December 31, 2016 As at December 31, 2016 Cost Accumulated amortization Net Goodwill 344 — — — 15 359 359 — 359 359 — — (3 ) 356 356 — 356 $ $ $ $ $ $ $ $ Other 6 3 (1 ) 2 — 10 32 (22 ) 10 10 7 (2 ) — 15 38 (23 ) 15 $ $ $ $ $ $ $ $ Total 350 3 (1 ) 2 15 369 391 (22 ) 369 369 7 (2 ) (3 ) 371 394 (23 ) 371 $ $ $ $ $ $ $ $ 1. Amortization of $1 million relates to cost of products sold and $1 million relates to selling, general and administration expense (2015 – $1 million relates to selling, general and administration expense). Goodwill We have attributed $218 million of goodwill to a CGU made up of our Canadian lumber operations, $92 million of goodwill to a CGU made up of our U.S. lumber operations and $46 million of goodwill to a CGU made up of our plywood and LVL operations. For the purpose of the 2016 impairment test of goodwill, the fair value of CGUs has been determined based on value-in-use calculations using a discount rate of 8.5%. These calculations use cash flow projections based on the 2017 operating plan, a forecast of 2018 and 2019 and trend level earnings for subsequent years, all approved by management. Assumptions were developed by management based on industry sources, including Forest Economic Advisors, LLC and other industry analysts, taking into account management’s best estimates. 9. Other assets Post-retirement (note 13) Deferred financing costs on lines of credit (note 12) Power agreements (note 17) Other 10. Payables and accrued liabilities Trade accounts Equity-based compensation Compensation Dividends Interest Other 2016 8 2 — 10 20 2016 211 65 68 5 4 26 379 $ $ $ $ 2015 8 — 16 12 36 2015 189 77 51 6 4 24 351 $ $ $ $ . d t L . o C r e b m T i r e s a r F t s e W 55 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N Notes to Consolidated Financial Statements (continued) 11. Other liabilities Post-retirement (note 13) Reforestation Decommissioning Other 2016 162 69 25 16 272 $ $ 2015 142 76 29 22 269 $ $ Reforestation and decommissioning obligations Reforestation and decommissioning obligations relate to our responsibility for reforestation under various timber licences and our obligations related to landfill closures and other site remediation costs. Accounting policies Future reforestation obligations are measured at the present value of the expenditures expected to be required to settle the obligations and are accrued and charged to earnings when timber is harvested. The reforestation obligation is reviewed periodically and changes to estimates are credited or charged to earnings. We record the present value of a liability for decommissioning obligations in the period that a reasonable estimate can be made. The present value of the liability is added to the carrying amount of the associated asset and amortized over its useful life or, if there is no associated asset, it is expensed. Decommissioning obligations are reviewed annually and changes to estimates result in an adjustment of the carrying amount of the associated asset or, where there is no asset, they are credited or charged to earnings. Reforestation and decommissioning obligations are discounted at the risk-free rate at the balance sheet date and accreted over time through periodic charges to earnings. The liabilities are reduced by actual costs of settlement. Supporting information Beginning of year Liabilities recognized Liabilities settled Acquired obligation Change in estimates End of year Less: current portion Reforestation Decommissioning 2016 124 46 (47 ) — (10 ) 113 (44 ) 69 $ $ 2015 111 50 (43 ) 2 4 124 (48 ) 76 $ $ 2016 29 — — — (4 ) 25 — 25 $ $ 2015 23 — — — 6 29 — 29 $ $ The total undiscounted amount of the estimated cash flows required to satisfy these obligations is $148 million (2015 – $159 million). The cash flows have been discounted using interest rates ranging from 0.74% to 1.11% (2015 – 0.48% to 0.73%). The timing of the reforestation payments is based on the estimated period required to attain free to grow status in a given area, which is generally between 12 to 15 years. Payments relating to landfill closures and site remediation are expected to occur over periods ranging up to 30 years. . d t L . o C r e b m T i r e s a r F t s e W 56 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N 12. Long-term debt and operating loans Accounting policies Transaction costs related to debt refinancing are deferred and amortized over the life of the associated debt. When our operating loan is undrawn, the related deferred financing costs are recorded in other assets. Supporting information Long-term debt US$300 million senior notes due October 2024; interest at 4.35% US$8 million note payable due October 2020; interest at 2% Notes payable Deferred financing costs Required principal repayments are disclosed in note 23. 2016 405 10 2 417 (4 ) 413 $ $ 2015 415 10 2 427 (4 ) 423 $ $ Operating loans Our revolving lines of credit consist of a $500 million committed revolving credit facility which matures September 30, 2020, a $34 million (US$25 million) demand line of credit dedicated to our U.S. operations and an $8 million demand line of credit dedicated to our jointly owned newsprint operation. In addition, we have demand lines of credit totalling $59 million dedicated to letters of credit, of which US$7 million is dedicated to our U.S. operations. At December 31, 2016 there were no amounts outstanding under our revolving credit facility, as a result, the associated deferred financing costs of $2 million is reported in other assets. Letters of credit in the amount of $48 million were also supported by our facilities, leaving $553 million of credit available for further use. At December 31, 2015, our revolving credit facility was drawn by $181 million, deferred financing costs were $3 million and our outstanding letters of credit were $54 million. Interest on the facilities is payable at floating rates based on Prime, U.S. base, Bankers’ Acceptances or LIBOR at our option. All debt is unsecured except the $8 million joint operation demand line of credit, which is secured by that joint operation’s current assets. 13. Post-retirement benefits We maintain defined benefit and defined contribution pension plans covering a majority of our employees. The defined benefit plans generally do not require employee contributions and provide a guaranteed level of pension payable for life based either on length of service or on earnings and length of service, and in most cases do not increase after commencement of retirement. The defined benefit pension plans are operated in Canada and the U.S. under broadly similar regulatory frameworks. The majority are funded arrangements where benefit payments are made from plan assets which are held in trust. Responsibility for the governance of the plans, including investment and contribution decisions, resides with our pension committee which reports to the Board of Directors. For the registered defined benefit pension plans, regulations set minimum requirements for contributions for benefit accruals and the funding of deficits. Accounting policies We record a post-retirement asset or liability for our employee defined benefit pension and other retirement benefit plans by netting our plan assets with our plan obligations, on a plan-by-plan basis. The cost of defined benefit pensions and other retirement benefits earned by employees is actuarially determined using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using market yields from high quality Canadian corporate bonds with cash flows that approximate expected benefit payments at the balance sheet date. Plan assets are valued at fair value at each balance sheet date. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive earnings in the period in which they arise. . d t L . o C r e b m T i r e s a r F t s e W 57 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N Past service costs arising from plan amendments are recognized immediately. The finance amount on net post-retirement balances is classified as finance expense. For defined contribution plans, pension expense is the amount of contributions we are required to make in respect of services rendered by employees. Notes to Consolidated Financial Statements (continued) Supporting information The actual return on plan assets for 2016 is a gain of $112 million (2015 – $42 million). The total pension expense for the defined benefit plans is $61 million (2015 – $59 million). In 2016, we made contributions of $50 million (2015 – $61 million). We expect to contribute approximately $66 million to our defined benefit pension plans during 2017. We also provide group life insurance, medical and extended health benefits to certain employee groups, for which we contributed $3 million (2015 – $3 million). The total pension expense and funding contributions for the defined contribution pension plans is $13 million (2015 - $14 million). The status of the defined benefit pension plans and other retirement benefit plans, in aggregate, is as follows: Accrued benefit obligations Benefit obligations – opening Current service cost Finance cost on obligation Benefits paid Actuarial loss (gain) due to change in discount rate Actuarial loss (gain) due to demography/experience Other Benefit obligations – ending Plan assets Fair value – opening Finance income on plan assets Actuarial gain (loss) due to returns on plan assets being higher or lower than finance income Employer contributions Benefits paid Other Fair value – ending Funded status1 Post-retirement assets Impact of minimum funding requirement2 Post-retirement assets (note 9) Post-retirement liabilities (note 11) . d t L . o C r e b m T i r e s a r F t s e W 58 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N Defined benefit pension plans Other retirement benefit plans 2016 2015 2016 2015 $ $ $ $ $ $ 1,482 57 60 (62 ) 62 2 (3 ) 1,598 1,409 56 56 50 (62 ) (2 ) 1,507 21 (13 ) 8 (111 ) (103 ) $ $ $ $ $ $ 1,411 56 57 (56 ) (3 ) 6 11 1,482 1,354 54 (12 ) 61 (56 ) 8 1,409 19 (11 ) 8 (92 ) (84 ) $ $ $ $ $ $ 50 1 2 (3 ) — 1 — 51 — — — 3 (3 ) — — — — — (51 ) (51 ) $ $ $ $ $ $ 53 1 2 (3 ) — (3 ) — 50 — — — 3 (3 ) — — — — — (50 ) (50 ) 1. Plans in a surplus position are classified as assets and plans in a deficit position are shown as liabilities on the consolidated balance sheet. Other retirement benefit plans continue to be unfunded. 2. Some of our plans have a surplus that is not recognized on the basis that future economic benefits may not be available to us in the form of a reduction in future contributions or a cash refund. Expense Current service cost Net finance expense Defined benefit pension plans Other retirement benefit plans 2016 2015 2016 2015 $ $ 57 4 61 $ $ 56 3 59 $ $ 1 2 3 $ $ 1 2 3 Assumptions and sensitivities The weighted average duration of the defined benefit pension obligations is 17 years. The expected maturity analysis of the undiscounted defined benefit pension plans at December 31, 2016 is as follows: Defined benefit pension plans 2017 62 $ 2018 62 2019 to 2021 189 $ $ Thereafter 2,523 $ Total 2,836 $ The estimation of post-retirement benefit obligations involves a high degree of judgment for matters such as discount rate, employee service periods, compensation escalation rates, expected retirement ages of employees, mortality rates, expected health-care costs and other variable factors. These estimates are reviewed annually with independent actuaries. The significant actuarial assumptions used to determine our balance sheet date post- retirement assets and liabilities and our post-retirement benefit plan expenses are as follows: Benefit obligations: Discount rate Future compensation rate increase Benefit expense: Discount rate – beginning of year Future compensation rate increase Defined benefit pension plans Other retirement benefit plans 2016 2015 2016 3.75% 3.50% 4.00% 3.50% 4.00% 3.50% 4.00% 3.50% 3.75% n/a 4.00% n/a 2015 4.00% n/a 4.00% n/a Health-care benefit costs, shown under other retirement benefit plans, are funded on a pay-as-you-go basis. The actuarial assumptions for extended health-care costs are estimated to increase 9.0% per year for one year, grading down 0.5% per year for years two to eight, to 5.0% per year thereafter. The actuarial assumptions for medical service plan costs are estimated to increase by 4.0% per year. The impact of a change in these assumptions on our post-retirement obligations is as follows: Discount rate Decrease in assumption from 3.75% to 3.25% Increase in assumption from 3.75% to 4.25% Rate of increase in future compensation Decrease in assumption from 3.50% to 3.00% Increase in assumption from 3.50% to 4.00% Health-care cost trend rates Increase in assumption by 1.00% Decrease in assumption by 1.00% Obligations $ $ $ $ $ $ 134 (118 ) (24 ) 25 4 (5 ) The sensitivities have been calculated on the basis that all other variables remain constant. When calculating the sensitivity of the defined benefit obligation, the same methodology is applied as was used to generate the financial statement asset/liability. Assets The weighted average asset allocations of the defined benefit plans at December 31, by asset category, are as follows: Canadian equities Foreign equities Fixed income investments Other investments Target Range 1 9% – 25% 12% – 34% 36% – 60% 3% – 31% 2016 18% 25% 47% 10% 100% 2015 18% 26% 50% 6% 100% 1. The target range applies to our open plans comprising the majority of our pension assets. Our closed plans target a more conservative asset mix with a greater percentage of fixed income investments. . d t L . o C r e b m T i r e s a r F t s e W 59 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N . d t L . o C r e b m T i r e s a r F t s e W 60 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N Notes to Consolidated Financial Statements (continued) Risk management practices The defined benefit pension plans’ investments are exposed to various risks. These risks include market risk (including foreign currency risk, interest rate risk and price risk), credit risk and liquidity risk. The pension committee manages these risks in accordance with a Statement of Investment Policies and Procedures for each of the Pension Plans Master Investment Trusts. Separate Master Investment Trusts have been established to invest for longer duration liabilities (Open Plans) and for shorter duration liabilities (Closed Plans). The following are some specific risk management practices employed: • Retaining and monitoring professional advisors including an outsourced chief investment officer (“OCIO”); • Monitoring our OCIO’s adherence to asset allocation guidelines and permitted categories of investments; and • Monitoring investment decisions and performance of the OCIO and asset performance against benchmarks using third-party performance measurement professionals. 14. Share capital Authorized 400,000,000 Common shares, without par value 20,000,000 Class B Common shares, without par value 10,000,000 Preferred shares, issuable in series, without par value Issued Common Class B Common Total Common 2016 2015 Number 75,881,090 2,281,478 78,162,568 Amount 549 — 549 $ $ Number 80,175,079 2,281,478 82,456,557 Amount 579 — 579 $ $ In 2016, we repurchased 4,306,159 Common shares for $190 million and in 2015, we repurchased 1,078,856 Common shares for $60 million. On September 8, 2016, our Board of Directors authorized the renewal of our normal course issuer bid (“NCIB”) program to repurchase for cancellation up to 3,834,226 Common shares or approximately 5% of our issued and outstanding Common shares. The NCIB will expire on September 18, 2017. Rights and restrictions of Common shares Common shares and Class B Common shares are equal in all respects except that each Class B Common share may at any time be exchanged for one Common share. Certain circumstances or corporate transactions may require the approval of the holders of our Common shares and Class B Common shares on a separate class-by-class basis. 15. Equity-based compensation We have share option, phantom share unit (“PSU”) and directors’ deferred share unit (“DSU”) plans, all of which have been partially hedged by an equity derivative contract. The equity-based compensation included in earnings was a recovery of $5 million (2015 – recovery of $23 million). Accounting policies We estimate the fair value of outstanding share options using the Black-Scholes valuation model and the fair value of our PSU plan and directors’ DSU plan using an intrinsic valuation model at each balance sheet date and record the resulting expense or recovery, over the related vesting period, through a charge to earnings. From time to time, we enter into equity derivative contracts to provide a partial offset to our exposure to fluctuations in equity-based compensation from our stock option, PSU and DSU plans. These derivatives are fair valued at each balance sheet date using an intrinsic valuation model and the resulting expense or recovery is offset against the related equity-based compensation. If a share option holder elects to acquire Common shares, both the exercise price and the accrued liability are credited to shareholders’ equity. Supporting information Share option plan Under our share option plan, officers and employees may be granted options to purchase up to 7,295,940 Common shares, of which 776,546 remain available for issuance. The exercise price of a share option is the closing price of a Common share on the trading day immediately preceding the grant date. Our share option plan gives share option holders the right to elect to receive a cash payment in lieu of exercising an option to purchase Common shares. Options vest at the earlier of the date of retirement or death and 20% per year from the grant date, and expire after 10 years. We have recorded a recovery of $6 million (2015 – recovery of $26 million) related to the share option plan. A summary of the activity in the share option plan is presented below: 2016 2015 Outstanding – beginning of year Granted Exercised Outstanding – end of year Exercisable – end of year Number 2,211,951 246,285 (338,350 ) 2,119,886 1,643,900 Weighted average price (dollars ) 27.03 40.97 19.63 29.83 24.57 $ $ $ $ $ The following table summarizes information about the share options outstanding at December 31, 2016: Exercise price range (dollars) $12.36 $16.65 – $19.50 $20.59 – $25.78 $40.82 – $53.96 $73.99 Number of outstanding options (number ) 388,000 335,180 658,492 598,794 139,420 2,119,886 Weighted average remaining contractual life (years ) 2.1 1.1 3.7 7.6 8.1 4.4 Weighted average exercise price (dollars ) 12.36 16.91 24.13 44.39 73.99 29.83 $ $ $ $ $ $ Number 2,240,798 139,420 (168,267 ) 2,211,951 1,664,481 Number of exercisable options (number ) 388,000 335,180 623,768 248,256 48,696 1,643,900 Weighted average price (dollars ) 23.66 73.99 20.95 27.03 20.51 $ $ $ $ $ Weighted average exercise price (dollars ) 12.36 16.91 24.15 45.37 73.99 24.57 $ $ $ $ $ $ The weighted average share price at the date of exercise for share options exercised during the year was $43.13 per share (2015 – $63.89 per share). The accrued liability related to the share option plan is $52 million at December 31, 2016 (December 31, 2015 – $63 million). The weighted average fair value of the options used in the calculation was $23.27 per option at December 31, 2016 (December 31, 2015 – $28.63 per option). The inputs to the option model are as follows: Share price on balance sheet date Weighted average exercise price Expected dividend Expected volatility Weighted average interest rate Weighted average expected remaining life in years 2016 $47.95 $29.83 $0.28 33.17% 0.88% 2.8 2015 $52.12 $27.03 $0.28 32.71% 0.55% 2.9 The expected dividend on our shares was based on the annualized dividend rate at each period-end. Expected volatility was based on five years of historical data. The interest rate for the life of the options was based on the implied yield available on government bonds with an equivalent remaining term at each period-end. Historical data was used to estimate the expected life of the options and forfeiture rates. The intrinsic value of options issued under the share option plan at December 31, 2016 was $43 million (December 31, 2015 – $59 million). The intrinsic value is determined based on the difference between the period-end share price and the exercise price, multiplied by the sum of the related vested options plus unvested options for those holders eligible to retire. Phantom share unit plan Our PSU plan is intended to supplement or, in whole or in part, replace the granting of share options as long-term incentives for officers and employees. The plan provides for two types of units which vest on the third anniversary of the grant date. A restricted share unit pays out based on the Common share price over the 20 trading days immediately preceding its vesting date (the “vesting date value”). A performance share unit pays out at a value between 0% and 200% of its vesting date value contingent upon our performance relative to a peer group of companies over the three-year performance period. Officers and employees granted units under the plan are also entitled to additional units to reflect cash dividends paid on Common shares from the applicable grant date until payout. We have recorded an expense of $3 million (2015 – $3 million) related to the PSU plan. The number of units outstanding as at December 31, 2016 was 182,770 (December 31, 2015 – 173,312), including performance share units totalling 77,674 (December 31, 2015 – 66,210). . d t L . o C r e b m T i r e s a r F t s e W 61 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N . d t L . o C r e b m T i r e s a r F t s e W 62 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N Notes to Consolidated Financial Statements (continued) Directors’ deferred share unit plan We have a DSU plan which provides a structure for non-employee directors to accumulate an equity-like holding in West Fraser. The DSU plan allows directors to participate in the growth of West Fraser by providing a deferred payment based on the value of a Common share at the time of redemption. Each director receives deferred share units (“Units”) in payment of an annual equity retainer until a minimum equity holding is reached and may elect to receive Units in payment of up to 100% of other fees earned. After a minimum equity holding is reached, directors may elect to receive the equity retainer in Units or cash. The Units are issued based on our Common share price at the time of issue. Additional Units are issued to take into account the value of dividends paid on Common shares from the date of issue to the date of redemption. Units are redeemable only after a director retires, resigns or otherwise leaves the board. The redemption value is equal to the Common share price at the date of redemption. A holder of Units may elect to redeem Units in cash or receive Common shares having an equivalent value. The number of Units outstanding as at December 31, 2016 was 155,593 (December 31, 2015 – 139,479). Equity-based compensation hedge During the year, we entered into an equity derivative contract to hedge 1,000,000 units at a $46.02 share price. A recovery of $2 million is included in equity-based compensation related to the contract. 16. Finance expense Interest expense Finance expense on employee future benefits Accretion on long-term liabilities 17. Other Foreign exchange gain (loss) on working capital Foreign exchange gain (loss) on intercompany financing1 Foreign exchange gain (loss) on long-term debt Loss on power agreements Gain on disposal of WestPine equipment Write-down of investment Other 2016 (24 ) (7 ) 2 (29 ) 2016 (4 ) (8 ) 12 (27 ) 8 — 10 (9 ) $ $ $ $ 2015 (24 ) (6 ) 1 (29 ) 2015 28 9 (67 ) (32 ) — (7 ) 5 (64 ) $ $ $ $ 1. Relates to US$200 million of financing provided to our U.S. operations. IAS 21 requires that the exchange gain or loss be recognized through earnings as the financing is not considered part of our permanent investment in our U.S. subsidiaries. The balance sheet amounts and related financing expense are eliminated in these consolidated financial statements. Power agreements In March 2016, the termination of our three-year power strip agreement was negotiated. In addition, Capital Power Corporation gave notice of its intent to terminate its role as buyer of the Sundance C Power Arrangement (“Sundance”) effective March 24, 2016. As a result of this termination, our role as a party to the Power Syndicate Agreement also terminated. These agreements had provided us with a portion of the electricity generated from two power plants in Alberta at substantially predetermined prices. Prior to the termination, we recorded the agreements at fair value with the resulting gains or losses being recorded through other income. In the fourth quarter of 2016, Capital Power Corporation settled a dispute with the Government of Alberta related to the termination of Sundance. As a result, we recorded in other income an additional $8 million loss related to our share of the settlement. Insurance proceeds Our WestPine MDF mill, located in Quesnel, British Columbia, was closed due to a fire on March 9, 2016 and will remain closed until repairs are complete. The mill is insured for property damage and business interruption. The impact on pre-tax earnings is as follows: Business interruption, less policy deductible Gain on disposal of equipment 2016 17 8 25 $ $ Estimated business interruption insurance is recorded as a reduction of cost of products sold. Estimated insurance proceeds to be spent to replace equipment are accounted for as proceeds of disposition, and the resulting gain has been included in other income. The final amount of the insurance claim will be determined after the mill reconstruction is complete and the mill returns to expected production rates. 18. Tax provision Accounting policies The tax expense for the period is comprised of current and deferred tax. Tax is recognized in the consolidated statement of earnings, except to the extent that it relates to items recognized in other comprehensive earnings in which case it is recognized in other comprehensive earnings. Deferred taxes are provided for using the liability method. Under this method, deferred taxes are recognized for temporary differences between the tax and financial statement basis of assets, liabilities and certain carry-forward items. Deferred tax assets are recognized only to the extent that it is probable that they will be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of substantive enactment. Supporting information The major components of income tax included in comprehensive earnings are as follows: Earnings Current tax Deferred tax Tax provision on earnings Other comprehensive earnings Current tax on post-retirement actuarial gains and losses Deferred tax on post-retirement actuarial gains and losses Tax recovery on other comprehensive earnings Tax provision on comprehensive earnings 2016 (47 ) (71 ) (118 ) — 3 3 (115 ) $ $ $ $ $ 2015 (37 ) (15 ) (52 ) 1 4 5 (47 ) $ $ $ $ $ The tax provision differs from the amount that would have resulted from applying the Canadian statutory income tax rates to earnings before tax as follows: Income tax expense at statutory rate of 26% Non-taxable amounts Rate differentials between jurisdictions and on specified activities Unrecognized capital losses Increase in Alberta statutory tax rate Other Tax provision Deferred income taxes are made up of the following components: Property, plant, equipment and intangibles Reforestation and decommissioning obligations Post-retirement benefits Tax loss carry-forwards Other Represented by: Deferred income tax assets Deferred income tax liabilities 2016 (115 ) 6 (8 ) 1 — (2 ) (118 ) 2016 351 (30 ) (39 ) (89 ) (13 ) 180 (35 ) 215 180 $ $ $ $ $ $ 2015 (40 ) (1 ) 5 (9 ) (7 ) — (52 ) 2015 324 (33 ) (36 ) (124 ) (21 ) 110 (80 ) 190 110 $ $ $ $ $ $ . d t L . o C r e b m T i r e s a r F t s e W 63 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N Notes to Consolidated Financial Statements (continued) 19. Employee compensation Our employee compensation expense includes salaries and wages, employee future benefits, termination costs and bonuses. Total compensation expense is $808 million (2015 – $756 million). Key management includes directors and officers. Their compensation expense (recovery) and balance sheet date payables are as follows: Expense Salary and short-term employee benefits Post-retirement benefits Equity-based compensation1 Payables and accrued liabilities Compensation Equity-based compensation1 2016 2015 9 2 (3 ) 8 4 53 57 $ $ $ $ 5 2 (24 ) (17 ) — 64 64 $ $ $ $ 1. The expense or recovery does not necessarily represent the actual value which will ultimately be received. 20. Earnings per share Basic earnings per share is calculated based on earnings available to Common shareholders, as set out below, using the weighted average number of Common shares and Class B Common shares outstanding. Diluted earnings per share is calculated based on earnings available to Common shareholders adjusted to remove the actual share option (recovery) expense charged to earnings and after deducting a notional charge for share option expense assuming the use of the equity settled method, as set out below. The diluted weighted average number of shares is calculated using the treasury stock method. When earnings available to Common shareholders for diluted earnings per share are greater than earnings available to Common shareholders for basic earnings per share, the calculation is anti-dilutive and diluted earnings per share are deemed to be the same as basic earnings per share. Earnings Basic Share option recovery Equity settled share option adjustment Diluted Weighted average number of shares (thousands) Basic Share options Diluted Earnings per share (dollars) Basic Diluted 21. Commitments 2016 2015 $ $ 326 (6 ) (4 ) 316 $ $ 104 (26 ) (3 ) 75 80,236 860 81,096 83,104 1,295 84,399 $ $ 4.06 3.90 $ $ 1.25 0.89 Operating leases We are committed to make payments under certain operating leases for equipment, land, buildings and office space. Operating lease costs expensed during the year were $7 million (2015 – $7 million). The future payments required under operating leases are as follows: 2017 2018 2019 2020 Thereafter $ $ 4 3 2 2 3 14 . d t L . o C r e b m T i r e s a r F t s e W 64 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N Product purchase and sale commitments We have long-term purchase and sale contracts with minimum annual volume commitments. All contracts are at market prices and on normal business terms. Capital commitments Capital commitments at December 31, 2016 are $33 million. 22. Government assistance Accounting policies Government assistance received that relates to the construction of manufacturing assets is applied to reduce the cost of those assets. Government assistance received that relates to operational expenses is applied to reduce the amount charged to earnings for the operating item. Supporting information Government assistance of $8 million (2015 – $4 million) was received for capital projects and recorded as a reduction to property, plant and equipment. Government assistance of $6 million (2015 – $14 million) was recorded as a reduction to cost of products sold. The government assistance related primarily to bioenergy producer credits, research and development and apprentice tax credits. 23. Financial instruments Accounting policies Our financial assets are categorized as loans and receivables, our financial liabilities as other financial liabilities, and our derivatives as held for trading. All financial assets and liabilities, except for derivatives, are initially measured at fair value and subsequently measured at amortized cost using the effective interest rate method. Derivatives are measured at fair value through earnings. Supporting information The following tables provide the carrying and fair values of our financial instruments by category, as well as the associated fair value hierarchy levels as defined in note 2 under “Fair value measurements”: 2016 Loans & Level receivables Held for trading Other financial liabilities Carrying value Fair value Financial assets Cash & short-term investments Receivables 1 3 Financial liabilities Cheques issued in excess of funds on deposit 1 Payables and accrued liabilities1 2 Long-term debt (note 12)2 2 $ $ $ $ 50 297 347 — — — — $ $ $ $ — — — — 2 — 2 $ $ $ $ — — — 15 377 417 809 $ $ $ $ 50 297 347 15 379 417 811 $ $ $ $ 1. Payables and accrued liabilities include our equity derivative payable of $2 million. 2. The fair value of the long-term debt is based on rates available to us at December 31, 2016 for long-term debt with similar terms and remaining maturities. 2015 Financial assets Cash & short-term investments Receivables Power agreement (note 9) Financial liabilities Cheques issued in excess of funds on deposit 1 Operating loans (note 12) 1 2 Payables and accrued liabilities 3 Power agreement Long-term debt (note 12)1 2 Loans & receivables Level Held for trading Other financial liabilities Carrying value 1 3 3 $ $ $ $ 13 298 — 311 — — — — — — $ $ $ $ — — 16 16 — — — 5 — 5 $ $ $ $ — — — — 29 181 351 — 427 988 $ $ $ $ 13 298 16 327 29 181 351 5 427 993 $ $ $ $ 1. The fair value of the long-term debt is based on rates available to us at December 31, 2015 for long-term debt with similar terms and remaining maturities. 50 297 347 15 379 391 785 Fair value 13 298 16 327 29 181 351 5 406 972 . d t L . o C r e b m T i r e s a r F t s e W 65 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N Notes to Consolidated Financial Statements (continued) Financial risk management Our activities result in exposure to a variety of financial risks including risks related to derivative contracts, currency fluctuation, credit, liquidity and interest rates. The sensitivities provided give the effect of possible changes in the relevant prices and rates on earnings. The sensitivities are hypothetical and should not be considered to be predictive of future performance or earnings. Changes in fair values or cash flows based on market variable fluctuations cannot be extrapolated since the relationship between the change in the market variable and the change in fair value or cash flows may not be linear. Derivative contracts From time to time, we use derivatives to manage our exposure to U.S. dollar exchange fluctuations, commodity prices and equity-based compensation. Commodity contracts used by West Fraser include lumber futures and agreements related to Alberta electricity rates. The fair value of our equity derivatives at December 31, 2016 is $2 million. Based on the equity contract as at December 31, 2016 and holding all other variables constant, a $1.00 change in our share price would change its fair value by $1 million, which would partially offset the movement in our equity- based compensation. There were no energy related derivatives outstanding at December 31, 2016. The fair value adjustments and settlement costs recognized in 2016 totalled a loss of $27 million (2015 – loss of $32 million). There were no material lumber futures or foreign exchange contracts outstanding at December 31, 2016 or 2015. Currency fluctuation Most of our products are sold at prices denominated in U.S. dollars or based on prevailing U.S. dollar prices, and significant portions of operational costs and expenses are incurred in Canadian dollars. Therefore, an increase in the value of the Canadian dollar relative to the U.S. dollar reduces the revenue in Canadian dollar terms realized by us from sales made in U.S. dollars, which reduces operating margin and the cash flow available to fund operations. Impact of U.S. dollar currency fluctuation The U.S. dollar foreign currency balance sheet exposure at December 31, 2016 is as follows: Canadian operations Net working capital Intercompany financing1 Long-term debt U.S. operations Net investment 2016 104 200 (300) 4 US$ US$ US$ 614 1. IAS 21 requires that the exchange gain or loss be recognized through earnings as the financing is not considered part of our permanent investment in our U.S. subsidiaries. The balance sheet amounts and related financing expense are eliminated in these consolidated financial statements. Based on these balances, with other variables unchanged, a $0.01 increase (decrease) in the exchange rate for one U.S. dollar into Canadian currency would result in an immaterial change in earnings and an increase (decrease) of $11 million in the translation gain on foreign operations. Credit Credit risk arises from the non-performance by counterparties of contractual financial obligations. Investments in cash and short-term investments are primarily made using major banks and only made with counterparties meeting certain credit-worthiness criteria. Credit risk for trade and other receivables is managed through established credit monitoring activities. Customer credit limits are established and monitored. Ongoing evaluations of key customer financial conditions are performed. In certain market areas, we have undertaken additional measures to reduce credit risk including credit insurance, letters of credit and prepayments. At December 31, 2016, approximately 40% of trade accounts receivable was covered by at least some of these additional measures. We have historically experienced minimal customer defaults and, as a result, consider the credit quality of the trade accounts receivable at December 31, 2016 to be high. There were no bad debts in 2016 or 2015. The aging analysis of trade accounts receivable is presented below: . d t L . o C r e b m T i r e s a r F t s e W 66 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N Trade accounts receivable – gross Current Past due 1 to 30 days Past due 31 to 60 days Past due over 60 days Allowance for doubtful accounts Trade accounts receivable – net Insurance receivable Other Receivables 2016 2015 $ $ 236 5 3 1 245 — 245 26 26 297 $ $ 239 9 3 1 252 — 252 — 46 298 Liquidity We manage liquidity by maintaining adequate cash and short-term investment balances and by having appropriate lines of credit available. In addition, we regularly monitor and review both actual and forecasted cash flows. Refinancing risks are managed by ensuring debt has a balanced maturity schedule where possible. The following table summarizes the aggregate amount of contractual future cash outflows for long-term debt: 2017 — 18 18 Long-term debt (note 12) Interest on long-term debt1,2 2018 — 18 18 2019 — 18 18 $ $ $ $ $ $ $ $ 2020 — 18 18 Thereafter 417 $ 67 484 $ $ $ Total 417 139 556 1. Assumes debt level, foreign exchange rate and interest rates remain at December 31, 2016 levels and rates. 2. At December 31, 2016, our revolving credit facility was undrawn. Interest rates Interest rate risk relates mainly to cash and short-term investments and floating rate debt. Our general practice is to fund long-term capital with debt at fixed rates. In addition, we have revolving lines of credit available that bear interest at floating rates on amounts drawn. At December 31, 2016, with other variables unchanged, a 1% change in interest rates would not have a significant impact on earnings or other comprehensive earnings. 24. Capital disclosures Our business is cyclical and is subject to significant changes in cash flow over the business cycle. In addition, financial performance can be materially influenced by changes in product prices and the relative values of the Canadian and U.S. dollars. Our objective in managing capital is to ensure adequate liquidity and financial flexibility at all times, particularly at the bottom of the business cycle. Our main policy relating to capital management is to maintain a strong balance sheet and otherwise meet financial tests that are commonly applied by rating agencies for investment grade issuers of public debt. Our debt is currently rated as investment grade by three major rating agencies. We monitor and assess our financial performance in order to ensure that net debt levels are prudent taking into account the anticipated direction of the business cycle. When financing acquisitions, we combine debt and equity financing in a proportion that is intended to maintain an investment grade rating for debt throughout the cycle. Debt repayments are arranged, where possible, on a staggered basis that takes into account the uneven nature of anticipated cash flows. We have established committed revolving lines of credit that provide liquidity and flexibility when capital markets are restricted. One key measurement used to monitor our capital position is net debt to total capital, calculated as follows at December 31: Net debt Cash and short-term investments Deferred financing costs1 Cheques issued in excess of funds on deposit Operating loans Long-term debt Shareholders’ equity Total capital Net debt to total capital 2016 (50 ) (6 ) 15 — 417 376 2,241 2,617 14% $ $ 2015 (13 ) (7 ) 29 181 427 617 2,147 2,764 22% $ $ 1. For our balance sheet presentation, these costs are applied to reduce the associated debt or, in instances when the operating loan is undrawn, these costs are included in other assets. . d t L . o C r e b m T i r e s a r F t s e W 67 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N Five-Year Financial Review (In millions of Canadian dollars, except where indicated) Notes to Consolidated Financial Statements (continued) 25. Segment and geographical information The segmentation of manufacturing operations into lumber, panels and pulp and paper is based on a number of factors, including similarities in products, production processes and economic characteristics. Transactions between segments are at market prices and on normal business terms. The segments follow the accounting policies as described in these consolidated financial statement notes, where applicable. Lumber Panels Pulp & Paper Corporate & Other Total 2016 Sales To external customers To other segments Operating earnings before amortization Amortization Operating earnings Finance expense Other Earnings before tax Total assets Total liabilities Capital expenditures 2015 Sales To external customers To other segments Operating earnings before amortization Amortization Operating earnings Finance expense Other Earnings before tax Total assets Total liabilities Capital expenditures Acquisition . d t L . o C r e b m T i r e s a r F t s e W 68 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 3,042 103 3,145 508 (146 ) 362 (18 ) — 344 2,662 393 195 2,654 110 2,764 243 (138 ) 105 (18 ) — 87 2,668 363 172 76 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 521 8 529 89 (12 ) 77 (3 ) 5 79 286 53 25 546 8 554 95 (13 ) 82 (3 ) (3 ) 76 261 51 5 — $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 887 — 887 79 (37 ) 42 (8 ) (23 ) 11 583 110 42 900 — 900 80 (39 ) 41 (8 ) (5 ) 28 622 121 32 — $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ — — — 3 (2 ) 1 — 9 10 69 803 11 — — — 22 (1 ) 21 — (56 ) (35 ) 84 953 11 — $ 4,450 $ $ $ $ $ 679 (197 ) 482 (29 ) (9 ) 444 3,600 1,359 273 $ 4,100 $ $ $ $ $ $ 440 (191 ) 249 (29 ) (64 ) 156 3,635 1,488 220 76 The geographic distribution of non-current assets and external sales is as follows: Canada United States China Other Asia Other Non-current assets Sales by geographic area1 2016 1,987 675 — — — 2,662 $ $ 2015 1,990 674 — — — 2,664 $ $ $ $ 2016 994 2,583 486 317 70 4,450 2015 898 2,249 580 299 74 4,100 $ $ 1. Sales distribution is based on the location of product delivery. 26. Softwood lumber dispute The Canada – U.S. Softwood Lumber Agreement (“SLA”) expired in October 2015 and on the expiry of that agreement a one year moratorium on trade sanctions by the U.S. came into place. The Government of Canada and the U.S. Trade Representative have been unable to reach agreement on a new managed trade agreement. On November 25, 2016 a coalition of U.S. lumber producers petitioned the U.S. Department of Commerce and the U.S. International Trade Commission to investigate alleged subsidies to Canadian producers and levy countervailing and anti-dumping duties against Canadian imports. The U.S. Department of Commerce has initiated its investigation and is expected to make a preliminary determination regarding countervailing duties in April 2017, and in June 2017 for anti-dumping duties. If the U.S. Department of Commerce determines that “critical circumstances” apply, duties could be applied retroactively up to 90 days prior to the preliminary determinations. We have been chosen by the U.S. Department of Commerce as a “mandatory respondent” to both the countervailing and anti-dumping investigations and as a result will receive unique company specific rates. We categorically deny the U.S. allegations of subsidies and dumping and will vigorously defend ourselves and the Canadian industry against the unfounded allegations. . d t L . o C r e b m T i r e s a r F t s e W 69 s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N Five-Year Financial Review (In millions of Canadian dollars, except where indicated) . d t L . o C r e b m T i r e s a r F t s e W 70 w e i v e R l a i c n a n i F r a e Y - e v i F (In millions of Canadian dollars, except where indicated) Earnings Sales Cost of product sold Freight and other distribution costs Export taxes Amortization Selling, general and administration Equity-based compensation Restructuring charges Operating earnings Finance expense Other Tax recovery (provision) Earnings Cash flows from operating activities Capital expenditures & acquisitions Financial position Current assets PPE & timber licences Goodwill & other intangibles Other assets Deferred income tax assets Total assets Current liabilities Long-term debt (including current portion) Other liabilities Deferred income tax liabilities Shareholders’ equity Total liabilities & equity Per common share (dollars)1 Basic EPS Price range – high – low – close Cash dividends per share Shares outstanding at year-end (‘000s) Ratios (before unusual items) Adjusted EBITDA margin2 Return on capital employed Return on common shareholders’ equity Net debt to capitalization Number of employees at year-end 2016 2015 2014 2013 4,450 2,971 629 — 197 176 (5 ) — 482 (29 ) (9 ) (118 ) 326 689 273 938 2,236 371 20 35 3,600 459 413 272 215 2,241 3,600 4.06 54.18 35.35 48.01 0.28 78,163 15% 11% 15% 14% 7,800 4,100 2,874 627 29 191 153 (23 ) — 249 (29 ) (64 ) (52 ) 104 301 296 971 2,179 369 36 80 3,635 606 423 269 190 2,147 3,635 1.25 78.55 40.56 52.53 0.28 82,457 10% 4% 5% 22% 7,900 3,856 2,538 548 — 170 149 45 — 406 (26 ) (5 ) (116 ) 259 475 618 907 1,999 350 79 62 3,397 616 354 244 154 2,029 3,397 3.06 66.80 45.05 66.47 0.28 83,527 16% 10% 13% 19% 7,560 3,474 2,260 491 9 160 131 54 24 345 (29 ) 1 32 349 419 358 971 1,633 321 83 96 3,104 454 328 197 178 1,947 3,104 4.07 52.67 36.25 51.80 0.28 85,672 17% 15% 21% 8% 7,300 Production Lumber (MMfbm) Pulp (Mtonnes) Newsprint (Mtonnes) Plywood (3/8” MMsf) MDF (3/4” MMsf)3 LVL (Mcf) 1. Per share amounts prior to 2014 have been adjusted to take into account the 2014 stock dividend which had the same effect as a two-for-one stock split. 2. Adjusted EBITDA is described in the section titled “Non-IFRS Measures” of our 2016 Management’s Discussion & Analysis. 3. A fire at our MDF plant in Quesnel on March 9, 2016 resulted in the closure of the plant for the balance of the year. 5,293 1,086 132 771 206 1,796 5,935 1,192 128 826 160 2,215 5,607 1,142 133 797 220 1,627 5,153 1,099 119 781 204 1,848 2012 3,000 2,024 477 48 152 115 61 — 123 (28 ) 7 (25 ) 77 204 189 823 1,455 330 24 — 2,632 385 300 327 128 1,492 2,632 0.90 37.62 20.08 35.03 0.28 85,726 11% 4% 5% 12% 7,200 4,954 1,149 128 793 195 1,964 Corporate Information Effective February 16, 2017 DIRECTORS Henry H. Ketcham Clark S. Binkley Reid E. Carter John N. Floren J. Duncan Gibson John K. Ketcham Harald H. Ludwig Gerald J. Miller Robert L. Phillips Janice G. Rennie Ted Seraphim OFFICERS Ted Seraphim Raymond W. Ferris Brian A Balkwill Keith D. Carter Larry E. Gardner James W. Gorman Larry S. Hughes Rodger M. Hutchinson Christopher D. McIver Sean P. McLaren Chuck H. Watkins Tom V. Theodorakis Principal Occupation Chairman of the Board Chief Investment Officer, GreenWood Resources, Inc. (a timberland investment management organization) President, Brookfield Timberlands Management LP President and Chief Executive Officer, Methanex Corporation Investor Real Estate Developer President, Macluan Capital Corporation (diversified private equity investment company) Corporate Director Corporate Director Corporate Director President and Chief Executive Officer Office Held President and Chief Executive Officer Executive Vice-President and Chief Operating Officer Vice-President, Canadian Lumber Vice-President, Pulp and Energy Operations Vice-President, Canadian Woodlands Vice-President, Corporate and Government Relations Vice-President, Finance, Chief Financial Officer and Secretary Vice-President, Corporate Controller and Investor Relations Vice-President, Sales and Marketing Vice-President, U.S. Lumber Vice-President, U.S. Lumber Manufacturing Assistant Secretary Partner, McMillan LLP (lawyers) . d t L . o C r e b m T i r e s a r F t s e W 71 n o i t a m r o f n I e t a r o p r o C Corporate Information Effective February 16, 2017 ANNUAL GENERAL MEETING The Annual General Meeting of the shareholders of the Company will be held on April 19, 2017 at 11:30 a.m. at Quesnel, British Columbia, Canada. AUDITORS PricewaterhouseCoopers LLP Vancouver, British Columbia, Canada LEGAL COUNSEL McMillan LLP Vancouver, British Columbia, Canada TRANSFER AGENT CST Trust Company Vancouver, Calgary, Toronto and Montreal, Canada FILINGS www.sedar.com Shares are listed on the Toronto Stock Exchange under the symbol: WFT INVESTOR CONTACT Rodger Hutchinson Vice-President, Corporate Controller and Investor Relations Tel: (604) 895-2700 Fax: (604) 681-6061 E-mail Address: shareholder@westfraser.com WEBSITE www.westfraser.com CORPORATE OFFICE 858 Beatty Street, Suite 501, Vancouver, British Columbia, Canada, V6B 1C1 Tel: (604) 895-2700 Fax: (604) 681-6061 SALES OFFICES SPF LUMBER PLYWOOD MDF LVL 1250 Brownmiller Road, Quesnel, British Columbia, Canada, V2J 6P5 Tel: (250) 992-9254 Fax: (250) 992-3034 SPF Export Lumber 858 Beatty Street, Suite 501, Vancouver, British Columbia, Canada, V6B 1C1 Tel: (604) 895-2700 Fax: (604) 681-6061 SYP Lumber 1900 Exeter Road, Suite 105, Germantown, Tennessee, USA, 38138 Tel: (901) 620-4200 Fax: (901) 620-4204 Pulp 858 Beatty Street, Suite 501, Vancouver, British Columbia, Canada, V6B 1C1 Tel: (604) 895-2700 Fax: (604) 681-6061 . d t L . o C r e b m T i r e s a r F t s e W 72 n o i t a m r o f n I e t a r o p r o C Newsprint 2900-650 W Georgia Street, Vancouver, British Columbia, Canada, V6B 4N8 Tel: (604) 681-8817 Fax: (604) 681-8861 OPERATIONS LUMBER, PLYWOOD AND LVL Canadian Operations 1250 Brownmiller Road, Quesnel, British Columbia, Canada, V2J 6P5 Tel: (250) 992-9244 Fax: (250) 992-9233 US Operations 1900 Exeter Road, Suite 105, Germantown, Tennessee, USA, 38138 Tel: (901) 620-4200 Fax: (901) 620-4204 MDF WestPine 300 Carradice Road, Quesnel, British Columbia, Canada, V2J 5Z7 Tel: (250) 991-7100 Fax: (250) 991-7115 Ranger Board P.O. Box 6, Blue Ridge, Alberta, Canada, T0E 0B0 Tel: (780) 648-6333 Fax: (780) 648-6397 PULP & PAPER Cariboo Pulp & Paper P.O. Box 7500, 50 North Star Road, Quesnel, British Columbia, Canada, V2J 3J6 Tel: (250) 992-0200 Fax: (250) 992-2164 Quesnel River Pulp 1000 Finning Road, Quesnel, British Columbia, Canada, V2J 6A1 Tel: (250) 992-8919 Fax: (250) 992-2612 Hinton Pulp 760 Switzer Drive, Hinton, Alberta, Canada, T7V 1V7 Tel: (780) 865-2251 Fax: (780) 865-6666 Slave Lake Pulp P.O. Box 1790, Slave Lake, Alberta, Canada, T0G 2A0 Tel: (780) 849-7777 Fax: (780) 849-7725 Alberta Newsprint Company Postal Bag 9000, Whitecourt, Alberta, Canada, T7S 1P9 Tel: (780) 778-7000 Fax: (780) 778-7070 Glossary of Industry Terms Return on Common Shareholders’ Equity Earnings available to common shareholders divided by average shareholders’ equity. SPF Dimension lumber produced from spruce/pine/balsam fir species. SYP Dimension lumber produced from southern yellow pine species. Ton A unit of weight equal to 2,000 pounds, generally known as a U.S. ton Tonne A unit of weight in the metric system equal to one thousand kilograms or approximately 2,204 pounds. Mtonne means one thousand tonnes. AAC Annual Allowable Cut The volume of timber that may be harvested annually from a specific timber tenure. BCTMP Bleached Chemi- thermomechanical Pulp Dimension Lumber Standard commodity lumber ranging in sizes from 1 x 3’s to 4 x 12’s, in various lengths. Mcf One thousand cubic feet. A unit of measure for laminated veneer lumber. MDF Medium Density Fibreboard A composite product made from wood fibre. Mfbm One thousand board feet (equivalent to one thousand square feet of lumber, one inch thick). MMfbm means one million board feet. FMA Forest Management Agreement An FMA is granted by the Alberta government and entitles the holder to establish, grow and harvest timber on specified lands. Msf A unit of measure for MDF and plywood equal to one thousand square feet on a 3/4 inch basis for MDF and on a 3/8 inch basis for plywood. MMsf means one million square feet. LVL Laminated Veneer Lumber Large sheets of veneer bonded together with resin then cut to lumber equivalent sizes. m3 A solid cubic metre, a unit of measure for timber, equal to approximately 35 cubic feet. NBSK Northern Bleached Softwood Kraft Pulp Return on Capital Employed Earnings before after-tax financing expense divided by average assets less average current non-interest-bearing liabilities. . d t L . o C r e b m T i r e s a r F t s e W 73 s m r e T y r t s u d n I f o y r a s s o l G WEST FRASER TIMBER CO. LTD. TEL: 604.895.2700 FAX: 604.681.6061 www.westfraser.com 

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