WEST FRASER
ANNUAL REPORT 2018
Including Annual Information Form
Dated: February 12, 2019
WEST FRASER
A N N U A L R E P O R T 2 0 1 8
OPERATIONS West Fraser is a North American wood products company. Its main product is lumber (spruce/pine/fir (“SPF”)
and southern yellow pine (“SYP”)). 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.
0
PULP & PAPER
35. Hinton
36. Quesnel (2)
37. Slave Lake
38. Whitecourt
0
PLYWOOD
39. Edmonton
40. Quesnel
41. Williams Lake
0
MDF
42. Blue Ridge
43. Quesnel
0
VENEER & LVL
44. Rocky Mountain House
45. Slave Lake
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
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. Perry
25. Lake Butler
26. Maxville
27. Whitehouse
28. Blackshear
29. Fitzgerald
30. Dudley
31. Augusta
32. Newberry
33. Armour
34. Seaboard
A L BE R TA
13
12
38
46
39
43
8
10
9
36
EDMONTON
40
45
11
B RI T I SH
C O L U MB IA
4
3
5
44
QUESNEL
41
1
37
2
42
7
6
VANCOUVER
34
NORTH CAROLINA
TENNESSEE
MEMPHIS
GEORGIA
32
SOUTH
CAROLINA
31
33
19 20
ARKANSAS
18
17
16
TEXAS
15
14
LOUISIANA
21 22
ALABAMA
23
30
29 28
24 25
27
26
FLORIDA
Thank you to our employees on the front cover of this report, from clockwise from left to right: Sarah (Quality Control), Zach (Electrician), Brandon
(Sawfiler) and Dakota (Canter Operator).
- 1 -
TABLE OF CONTENTS
REPORT TO SHAREHOLDERS ........................................................................................................................................ 3
ANNUAL INFORMATION FORM ................................................................................................................................... 5
BUSINESS OVERVIEW ............................................................................................................................................................. 5
CORPORATE STRATEGY .......................................................................................................................................................... 6
CORPORATE STRUCTURE ........................................................................................................................................................ 6
HISTORY AND DEVELOPMENT OF BUSINESS ................................................................................................................................ 7
SALES REVENUE .................................................................................................................................................................... 8
FIBRE SUPPLY ....................................................................................................................................................................... 9
CAPITAL EXPENDITURES AND ACQUISITIONS ............................................................................................................................. 12
HUMAN RESOURCES ........................................................................................................................................................... 12
MARKETS .......................................................................................................................................................................... 12
RESEARCH AND DEVELOPMENT .............................................................................................................................................. 13
LUMBER ............................................................................................................................................................................ 13
PANELS ............................................................................................................................................................................. 14
PULP & PAPER ................................................................................................................................................................... 15
EXTERNAL FACTORS AFFECTING WEST FRASER’S BUSINESS IN 2018 ............................................................................................. 15
RISK FACTORS .................................................................................................................................................................... 18
CAPITAL STRUCTURE ............................................................................................................................................................ 18
TRANSFER AGENT ............................................................................................................................................................... 19
EXPERTS ........................................................................................................................................................................... 19
DIRECTORS AND OFFICERS .................................................................................................................................................... 20
GOVERNANCE .................................................................................................................................................................... 22
AUDIT COMMITTEE ............................................................................................................................................................. 22
MATERIAL CONTRACTS ........................................................................................................................................................ 23
ADDITIONAL INFORMATION .................................................................................................................................................. 24
SCHEDULE 1 – AUDIT COMMITTEE CHARTER ............................................................................................................................ 25
MANAGEMENT’S DISCUSSION & ANALYSIS ............................................................................................................... 28
INTRODUCTION AND INTERPRETATION ..................................................................................................................................... 28
RECENT DEVELOPMENTS ...................................................................................................................................................... 29
ANNUAL RESULTS ............................................................................................................................................................... 29
SELECTED QUARTERLY INFORMATION ..................................................................................................................................... 30
DISCUSSION & ANALYSIS OF ANNUAL NON-OPERATIONAL ITEMS ................................................................................................. 30
DISCUSSION & ANALYSIS OF ANNUAL RESULTS BY PRODUCT SEGMENT ......................................................................................... 32
FOURTH QUARTER RESULTS .................................................................................................................................................. 37
DISCUSSION & ANALYSIS OF FOURTH QUARTER NON-OPERATIONAL ITEMS ................................................................................... 37
DISCUSSION & ANALYSIS OF FOURTH QUARTER RESULTS BY PRODUCT SEGMENT ............................................................................ 39
CAPITAL EXPENDITURES ....................................................................................................................................................... 42
BUSINESS OUTLOOK ............................................................................................................................................................ 42
ESTIMATED EARNINGS SENSITIVITY TO KEY VARIABLES ............................................................................................................... 43
CAPITAL STRUCTURE AND LIQUIDITY ....................................................................................................................................... 43
SUMMARY OF FINANCIAL POSITION ........................................................................................................................................ 45
DEBT RATINGS ................................................................................................................................................................... 45
SELECTED CASH FLOW ITEMS ................................................................................................................................................ 46
CONTRACTUAL OBLIGATIONS ................................................................................................................................................ 47
FINANCIAL INSTRUMENTS ..................................................................................................................................................... 47
SIGNIFICANT MANAGEMENT JUDGMENTS AFFECTING FINANCIAL RESULTS ..................................................................................... 47
ACCOUNTING STANDARDS ISSUED BUT NOT YET APPLIED ........................................................................................................... 49
NEW ACCOUNTING PRONOUNCEMENTS ADOPTED .................................................................................................................... 49
NON-IFRS MEASURES ......................................................................................................................................................... 50
RISKS AND UNCERTAINTIES ................................................................................................................................................... 52
CONTROLS AND PROCEDURES ............................................................................................................................................... 60
- 2 -
ADDITIONAL INFORMATION .................................................................................................................................................. 60
RESPONSIBILITY OF MANAGEMENT .......................................................................................................................... 61
INDEPENDENT AUDITOR’S REPORT ........................................................................................................................... 62
CONSOLIDATED BALANCE SHEETS .......................................................................................................................................... 65
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS ................................................................................ 66
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY ......................................................................................... 67
CONSOLIDATED STATEMENTS OF CASH FLOWS ......................................................................................................................... 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................................................................................................... 69
FIVE YEAR FINANCIAL REVIEW .................................................................................................................................. 98
DIRECTORS AND OFFICERS ...................................................................................................................................... 100
CORPORATE INFORMATION .................................................................................................................................... 101
GLOSSARY OF INDUSTRY TERMS ............................................................................................................................. 103
- 3 -
REPORT TO SHAREHOLDERS
Message from our Chief Executive Officer
For more than 60 years, West Fraser has been guided by a straight forward business strategy, to be the low-cost, high
margin producer in each of our product lines and geographic regions, maintain a conservative financial position to
manage cyclical markets and continuously reinvest in the business. We maintain our conviction in this strategy as the
cornerstone to our success.
The economic factors that drive demand for our solid wood products continue to indicate favorable supply and
demand fundamentals. Employment and wage growth trends are positive for housing, yet housing starts remain at
historically low levels in the U.S. Spending on repairs, renovation and remodeling activities has continued to grow
steadily and now represents a larger portion of lumber consumption than new home construction. Offshore lumber
markets that have been developed by western Canadian lumber producers remain important to West Fraser. With the
exception of the U.S. South, growth in most of the key lumber producing regions in North America may be constrained
due to declining timber availability. Due to higher steel and other construction costs, sawmill capacity additions have
become costlier and, in many cases, delayed. Pulp markets were particularly strong in recent years. We expect that
new pulp capacity will have an impact on the global supply-demand balance, but we continue to be positive about the
long-term growth prospects from China and other Asian markets.
In 2018 we experienced significant volatility in our business, most notably in our lumber markets. Transportation
challenges early in the year, coupled with adverse weather conditions in our operating areas in the U.S. led to a
significant backlog of inventory at our mills and a surge in product pricing. We managed to work through the inventory
backlog through the middle half of the year and restore more normal inventory levels. However, the variability in
shipments, coupled with a slight softening of housing construction markets led to a significant decline in lumber prices
in the second half of the year. Coupled with high log prices and fibre availability challenges in British Columbia from
mountain pine beetle and record hectares of forests burned in 2017 and 2018, we made the difficult decision to
permanently reduce production at two of our mills in the B.C. interior.
We continued to invest in our operating platform with the completion of projects across all our segments. We added
new continuous dry kilns in western Canada, modernized our sawmill in High Prairie, Alberta and completed major
infrastructure upgrades at two of our pulp mills. Notably, we invested significantly in the construction of a new sawmill
on the site of our existing Opelika, Alabama facility. This new facility incorporates the latest safety and technology
available and includes significant advancements in operator ergonomics designed to address challenges in labour
availability and retention that exist in the U.S. South. As we start 2019, just over 45% of our production capacity is now
based in the U.S. South and we expect it to grow as we continue to invest in our mills.
I am proud of the achievements we have made with our focus on people as a cornerstone of our organization and what
I believe sets us apart. Our progress on improving safety fell short of expectations as our safety performance
plateaued in 2018, after a number of years of significant improvement. We remain focused on further improvements
in 2019 through investments in our facilities along with training and development activities. At West Fraser we work
hard to create a positive work environment in all our facilities and have been recognized again in 2018 with several
awards, being named as one of Canada’s Top 100 Employers, one of BC’s Top Employers, and one of Canada’s Top
Employers for Young People. In addition, West Fraser was recognized once again for having one of Canada’s Most
Admired Corporate Cultures.
We focus our charitable efforts to enhance the communities where we operate. The majority of our operations in
Canada and the U.S. are in rural communities and in many of these places, we are the largest employer. Over the last
several years our operations and corporate charitable gifts have added up to more than four million dollars across 39
communities. We offer a number of scholarships, donate wood products and contribute to hundreds of charitable,
sport, education and service organizations in the communities where we have facilities.
Despite a second year of record results, we recognize we still have much work to do. In 2019 we will be focused on
bringing our new Opelika mill to full operating rate and on realizing the benefits of the capital we ha0ve spent over the
- 4 -
past several years modernizing our operating platform. We have an ambitious capital plan for 2019. Most importantly
we need to continue our relentless focus on operational excellence, improving safety and developing our people.
We recorded the highest Adjusted EBITDA in Company history, growing Adjusted EBITDA by $378 million and 33% over
2017. Our teams continued to execute well on significant capital projects that will benefit us in 2019 and years to
come. We raised our dividend which is now $0.80 per share on an annual basis and over the past five years have
repurchased $1.1 billion of shares. We ended the year in a strong financial position with net debt to capital of 17% and
total available liquidity of $491 million.
While 2018 was a record year for the Company in Adjusted EBITDA, we remain convinced of the untapped potential for
further improvement in all our operations. Our consistent business approach, geographically diversified operating
footprint, focus on reinvesting in our business and development of high-performance teams puts us in a strong position
to compete in our sector and product markets.
With the support, dedication and effort of all our employees, their families, our Board of Directors, our customers and
communities, I am optimistic about the opportunities for continued success in 2019. Our strong financial position
backs our commitment to safe, modern, efficient operations driven by a low-cost culture which positions us well for
the years ahead.
On July 1, Ray Ferris will succeed me as Chief Executive Officer. I know that I speak for our directors, management and
our employees when I say how delighted we are that Ray will lead the Company going forward.
Ted Seraphim
Chief Executive Officer
- 5 -
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 12, 2019. Except as otherwise indicated, the information contained in it is as of December 31,
2018.
All financial information in this Annual Information Form is presented in Canadian dollars, unless otherwise indicated.
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 are subject to various risks and uncertainties. Forward-looking statements are
included herein under the headings “Fibre Supply – Mountain Pine Beetle and B.C. Wildfires” (the timing of AAC
reductions and the effect on our AACs), “Fibre Supply – Caribou Recovery Planning” (impact on our access to timber
supply), “Fibre Supply – Aboriginal Matters” (the potential effect of aboriginal title or rights) and “Capital Structure –
Cash dividends”, and are included in our 2018 Management’s Discussion & Analysis incorporated herein under the
heading “Risks and Uncertainties” and “Introduction and Interpretation”. 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 other residuals 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 portion of the fibre required by our United States operations. We carry
on our operations through subsidiaries and joint operations in British Columbia (“B.C.”), 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, wood chips and other residuals.
The annual production capacities of our wholly-owned facilities and our share of the capacities of our 50%-owned
operations, after giving effect to the announced production curtailments at Fraser Lake and Quesnel, British Columbia,
are as follows:
- 6 -
Lumber (MMfbm)
SPF
SYP
Total
Panels
Plywood (MMsf 3/8”)
MDF (MMsf 3/4")
LVL (Mcf)
Pulp (Mtonnes)
BCTMP
NBSK
Newsprint (Mtonnes)
Corporate Strategy
3,870
3,200
7,070
860
250
2,600
690
570
135
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 people and operating 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,
MDF and energy operations.
We are committed to operating in a financially conservative and prudent manner. The North American wood products
industry is cyclical and periodically faces difficult market conditions and serious challenges. Maintaining a strong
balance sheet and liquidity profile, along with our investment grade debt rating enables us to execute a balanced
capital allocation strategy. Our goal is to continually reinvest in our operations, across all market cycles to maintain a
leading cost position and prudently return capital to shareholders. We believe that maintaining a strong balance sheet
also provides the financial flexibility to capitalize on growth opportunities and is a key tool in managing our business
over the long term.
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.
Corporate Structure
West Fraser is organized under the Business Corporations Act (British Columbia) and assumed its present form in 1966
by the amalgamation of a group of companies under the laws of B.C. West Fraser owns West Fraser Mills Ltd., who in
turn owns directly or indirectly, wholly or partially, our operating facilities, subsidiaries and jointly-owned operations.
West Fraser Mills Ltd. assumed its present form on January 1, 2005 by amalgamation under those laws. West Fraser,
Inc., West Fraser Wood Products Inc. and West Fraser Southeast, 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.
The following chart 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.
- 7 -
West Fraser Timber Co. Ltd.
West Fraser Mills Ltd.
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
Mansfield4
Russellville4
Maplesville4
Opelika4
McDavid4
Perry6
Lake Butler6
Whitehouse
Maxville6
Blackshear6
Fitzgerald6
Dudley6
Augusta4
Newberry4
Armour4
Seaboard4
SPECIALTY LUMBER PRODUCTS
Sundre2
PULP & PAPER
Pulp
Hinton
Quesnel
Quesnel (50%)7
Slave Lake
Newsprint
Whitecourt (50%)8
PANELS
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. Owned through West Fraser Southeast, Inc., a wholly-owned subsidiary.
7.
8.
50% interest in Cariboo Pulp & Paper Company.
50% interest in Alberta Newsprint Company owned through West Fraser Newsprint Ltd., a wholly-owned subsidiary.
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. From 1955 through 2018 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:
2014
2015
2016
- 8 -
• 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.
Completed six continuous kilns, two planer projects and four major sawmill
upgrades.
Completed a low consistency refiner project at our BCTMP mill in Quesnel.
•
•
•
• Acquired a sawmill in Manning, Alberta.
•
Completed co-generation projects at two of our B.C. 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.
Completed three continuous kilns, two planer projects and one major sawmill
upgrade.
•
•
•
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.
• A coalition of U.S. lumber producers petitioned the U.S. Department of
Commerce (“USDOC”) and the U.S. International Trade Commission (“USITC”) to
investigate alleged subsidies to Canadian lumber producers and levy duties
against Canadian imports.
Completed three continuous kilns.
•
2017
• MDF facility in Quesnel damaged by fire in 2016 was repaired and began
producing board on April 29.
• Acquired six sawmills and a finger-joint (specialty lumber) mill in Florida and
Georgia as well as an administrative office in St. Marys, Georgia (the “Gilman
Acquisition”).
• On December 4 the USDOC determined final duty rates for West Fraser of
23.56%.
Completed four continuous kilns and two major sawmill upgrades.
•
• Rebuild of sawmill in High Prairie, Alberta.
•
Commissioned an entirely new sawmill in Opelika, Alabama on the site of the
existing sawmill.
Completed five continuous kilns across Western Canada.
Completed planer mill upgrades at facilities in Fraser Lake, B.C. Smithers, B.C.
and Sundre, Alberta.
Implemented upgraded refining technology at our Quesnel River Pulp mill and
installed an additional concentrator at our Cariboo Pulp mill.
2018
•
•
•
Sales Revenue
($ millions)
Year ended December 31
Lumber
Panels
Pulp & Paper
Intracompany fibre sales
2018
4,456
676
1,163
(177)
6,118
2017
3,671
600
988
(125)
5,134
2016
3,145
529
887
(111)
4,450
2015
2,764
554
900
(118)
4,100
2014
2,622
526
812
(104)
3,856
Fibre Supply
- 9 -
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 (including from whole-log chipping
operations), 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 have a shorter term but are not replaceable.
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.
Timber tenures in B.C. and Alberta require the payment of a fee, commonly known as stumpage, for timber harvested
pursuant to its terms. 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, 2018, 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
2019
2019 - 2033
2019 - 2033
AAC
5,604
200
6,380
1,319
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.
We do not own or manage any timberlands in the U.S.
Log Supply
Annual log requirements for our Canadian sawmills, plywood facilities and LVL plant, all operating at the capacities
described herein, would total approximately 15 million m3. Recently, we have been accessing approximately 65% of
these requirements from the quota-based 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 and our ability to secure approvals to harvest in
economically viable stands.
Our U.S. operations, which produce SYP lumber, would consume approximately 14 million tons of logs per year if
operating at the capacity described herein. Our U.S. operations as a whole have access to approximately 18% of their
log requirements under certain long-term supply contracts, and the balance is purchased on the open market. Open
- 10 -
market purchases come from timber real estate investment trusts, timberland investment management organizations
and private land owners.
Mountain Pine Beetle and B.C. Wildfires
The mountain pine beetle infestation in the B.C. interior reached a peak, in terms of the annual timber mortality rate,
more than 13 years ago. The damage to the mature pine forests within our operating areas is significant.
We continue to salvage and process 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. previously increased the AAC on dead pine stands and
limited the harvest of non-pine species until the salvage of dead pine stands concludes. The AAC has been or 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 B.C.’s central interior by approximately 36% 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.
Wildfires in B.C. burned over two million hectares of forest land in 2017 and 2018. Our Cariboo region operating areas
were significantly impacted. Salvage of fire damaged trees has begun and is expected to continue for 2-4 years.
As the timing of future AAC reductions and the effect on our AACs will depend on a variety of factors, including the
impact of wildfires and 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 mountain pine
beetle detection, single tree control and focussed harvesting activity. The mountain pine beetle infestation
significantly expanded from Jasper National Park into our Hinton forest management area (“FMA”) in 2017 and again in
2018. 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.
Caribou Recovery Planning
Draft woodland caribou recovery plans were released by the Alberta government in December 2017. We have been
working with the Province to develop strategies that support caribou recovery while maintaining our access to the
forest resource. The AAC impact from these plans will depend on the final location of potential conservation areas and
the forest harvest regimes that are implemented. We anticipate this work will continue in 2019.
B.C. continues to engage with Canada on the development of a conservation agreement for all Southern Mountain
Caribou ranges in the Province. The current focus is on the Central Group, which is comprised of three herds in the
South Peace area. We understand the conservation agreement will have multiple annexes, including linked partnership
agreements with indigenous communities. Initial indications from the draft partnership agreement for the Central
Group are a potential for new protected areas and increased conservation. We expect this will have some impact on
our access to timber supply, but we are unable to predict or quantify the impact at this draft stage in the conservation
agreement process.
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.
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.
- 11 -
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. All of our U.S. mills except those
purchased with the Gilman Acquisition are certified under the SFI Fiber Sourcing Standard.
For more information concerning our sustainable and environmentally sound forest practices see below under the
heading “External Factors Affecting West Fraser’s Business in 2018 – Environment” and 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, 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
- 12 -
We regularly invest in upgrading and expanding our facilities and operations. However, during periods when earnings
are weak, we may 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
Human Resources
2018
284
16
60
10
370
-
370
2017
247
22
58
9
336
526
862
2016
195
25
42
11
273
-
273
2015
172
5
32
11
220
76
296
2014
326
7
71
6
410
208
618
At December 31, 2018, we employed approximately 8,570 individuals, including our share of those in 50%-owned
operations. Of these, approximately 6,030 are employed in our lumber segment, 1,300 in our panels segment, 850 in
our pulp & paper segment and 390 in our corporate segment. Approximately 37% of our employees are covered by
collective agreements. In 2019, collective agreements covering approximately 242 employees will expire. Contracts
covering approximately 1,340 of our employees expired in 2018 and have not yet been renewed as negotiations remain
ongoing.
The safety of our employees is a core value and business priority and our safety goal is to eliminate serious incidents
and injuries. We provide ongoing safety training for our employees to minimize potential risks inherent in forestry-
related manufacturing industries. Our Health and Safety Policy and objectives 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 the primary products of the type we produced, although these prices do
not necessarily reflect the prices we obtained.
Average Benchmark Prices
(In US$ except plywood)
- 13 -
2018
480
372
501
548
1,337
878
692
0.772
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 – U.S. (per tonne)4
NBSK – China (per tonne)5
Newsprint (per tonne)6
US$/CAD$7
Sources: refer to our 2018 Management’s Discussion & Analysis for Canadian dollar equivalent prices of the products described herein
1.
2.
3.
4.
5.
6.
7.
Random Lengths – Net FOB mill.
Random Lengths – Net FOB mill Westside.
Crow’s Market Report – Delivered Toronto.
Resource Information Systems, Inc. – U.S. list price, delivered U.S.
Resource Information Systems, Inc. – China list price, delivered China.
Resource Information Systems, Inc. – U.S. delivered 48.8 gram newsprint.
Bank of Canada annual average exchange rate.
2015
278
209
376
430
972
644
538
0.782
2016
305
240
409
432
978
599
560
0.755
2017
401
323
433
509
1,105
712
584
0.771
2014
349
302
427
429
1,025
732
604
0.905
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
(MMfbm)
Capacity (year-end)
B.C.
Alberta
U.S. South
Production
B.C.
Alberta
U.S. South
2018
2017
2016
2015
2014
2,170
1,700
3,200
7,070
2,236
1,556
2,817
6,609
2,460
1,690
3,050
7,200
2,257
1,552
2,424
6,233
2,465
1,635
2,400
6,500
2,303
1,493
2,139
5,935
2,400
1,600
2,300
6,300
2,225
1,374
2,008
5,607
2,480
1,420
2,300
6,200
2,282
1,194
1,817
5,293
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. The capacity figures above for 2018 give effect to the announced permanent
shift reductions at our Fraser Lake and Quesnel, B.C. sawmills that take will affect in the first quarter of 2019.
Operations
We operate 34 sawmills and a wood treating facility at the Sundre sawmill. Our Canadian sawmills, of which 7 are in
B.C. and 6 are in Alberta, produce spruce, pine, fir lumber of various grades and dimensions. Our 21 U.S. sawmills
produce southern yellow pine lumber of various grades and dimensions.
Sales
- 14 -
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 and sold by our sales group in Memphis, Tennessee and St. Marys, Georgia. From time to time, we purchase
lumber for resale in order to meet requirements of customers.
In 2018, 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.
Sales of our lumber products can be impacted by seasonal influences. Shipments from our Western Canadian mills can
be affected by winter weather that affects rail and other transportation services. In the summer months, during fire
season, logging, manufacturing and transportation can all be affected by wildfire activity or by evacuation alerts or
orders in regions where we operate. U.S. new home construction activity, which significantly influences the demand
for our lumber products, has historically been higher in the first half of the year and experiences a seasonal slow down
late in the third quarter. A significant portion of our SYP products are used in treated wood applications and demand
for these products is often highest in anticipation of spring and summer construction activity.
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
Operations
2018
2017
2016
2015
2014
860
833
250
224
860
838
250
191
850
826
250
160
830
797
250
220
830
771
300
206
2,600
2,251
3,200
2,676
3,200
2,215
3,200
1,627
3,200
1,796
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 our Edmonton plywood mill. A fire at our MDF plant in Quesnel on March 9, 2016 resulted
in the closure of the plant while repairs and reconstruction took place. The rebuilt plant began producing board on
April 29, 2017 and returned to normal production levels by the end of 2017. This reduced 2016 and 2017 MDF
production compared to prior years. In September 2018, we reduced the operating schedule at our LVL mill to more
closely match market conditions which resulted in reduced capacity.
Sales
Plywood, LVL and MDF are marketed and sold 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.
In 2018 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. Plywood sales is also seasonal, with the strongest
demand being centred in September and October in Canada.
- 15 -
Pulp & Paper
Pulp
Capacity and Production
(Mtonnes)
2018
2017
2016
2015
2014
BCTMP
Capacity (year-end)
Production
NBSK
Capacity (year-end)
Production1
1.
570
499
Reflects West Fraser's 50% ownership of the Cariboo pulp mill.
690
652
690
674
570
498
680
665
570
527
650
645
570
497
650
631
570
455
Operations
BCTMP is produced at our Slave Lake pulp mill, primarily from hardwood aspen, and our Quesnel River Pulp 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 and sold out of our pulp sales office in Vancouver. In 2018, 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.
Operations
2018
135
119
2017
135
122
2016
135
128
2015
135
133
2014
135
132
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 2018
Economic Conditions
Our earnings are sensitive to changes in world economic conditions, primarily those in North America, Asia and Europe
and particularly to the U.S. housing market for both new construction and repair and renovation spending. Most of our
revenues are from sales of commodities for which prices are sensitive to variations in supply and demand. Since most
- 16 -
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 USDOC and the USITC to investigate alleged
subsidies to Canadian producers and levy countervailing and antidumping duties against Canadian imports. The USDOC
made its preliminary determination regarding countervailing duties in April 2017, and in June 2017 for antidumping
duties. In December of 2017 final countervailing and antidumping rates for West Fraser of 17.99% and 5.57%
respectively were confirmed by the USITC.
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 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 sawmill residuals, waste biomass and pulp mill effluent
streams to produce heat and steam to dry our wood products as well as 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 in some cases sell excess electricity to the provincial utility. In addition, our Slave Lake
pulp mill produces electricity for its own use from bio-gas reclaimed from effluent treatment.
Co-generation projects at our Fraser Lake and Chetwynd, B.C. sawmills produce electricity from residuals and waste
biomass. 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 power plant at our 50%-owned newsprint mill which provides a partial hedge
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
West Fraser is committed to utilizing resources responsibly and taking meaningful ongoing steps to reduce its impact
on the environment. This includes reducing greenhouse gas emissions and chemicals, monitoring energy and material
consumption, recycling oil products and other materials as well as sustainable, responsible forest management. We
are proud of our excellent reforestation record, and we continue explore new ways improve our reforestation and
silviculture practices. Our goal is to move beyond mere regulatory compliance to focus on conducting our business in
an environmentally, socially and economically responsible manner.
Regulatory Requirements
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 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
- 17 -
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.
Responsible Management of Energy, Woodlands, and Natural Resources
We are committed to consciously managing our energy use, reducing our consumption and developing sustainable
energy solutions. Currently two-thirds (over 60%) of our energy needs are generated with renewable, carbon-neutral
biomass fuel sources co-located with our mills. From 2000 to 2017, our energy initiatives have resulted in a decrease in
the intensity of purchased energy by approximately 41% for our sawmill and panel operations and approximately 19%
for our pulp and newsprint operations. Additional information on our energy initiatives is included herein under the
heading “External Factors Affecting West Fraser’s Business in 2018 – Energy” and in our Responsibility Report on our
website at www.westfraser.com.
Most of Canada’s forest land (93%) is publicly owned and the right to harvest timber is only allowed through
government granted licenses. West Fraser follows strict forest management requirements to be able to maintain and
renew government-granted harvesting rights in Canada. We engage in sustainable forest management and our
harvesting practices are designed to harvest timber safely and efficiently while minimizing environmental impacts. We
replant the trees we harvest and, since 1955, West Fraser has planted more than 1.7 billion trees to ensure the forests
where we operate are constantly renewed. In addition, all of our Canadian woodlands operations directly managed by
West Fraser are independently certified by SFI and we subscribe to the PEFC chain-of-custody standard. Our pulp and
MDF mills are registered to the FSC Standard for Chain of Custody Certification and the Standard for Company
Evaluation of FSC Controlled Wood. Forest certification is a voluntary tool that demonstrates West Fraser’s wood
products are sourced from sustainably managed forests. Third party independent auditors verify that we have met
high standards for a number of key criteria, including the sustainable growing and harvesting of trees with the
protection of habitat, wildlife, plants, water and soil quality, and a wide range of other conservation goals. Additional
information on our sustainable timber harvesting operations and certifications is included herein under the heading
“Fibre Supply” and in our Responsibility Report on our website at www.westfraser.com.
Over the last decade, West Fraser has made significant investments in upgrading our operations to improve the air
quality coming from our operations and significantly reduce greenhouse gas emissions. Fossil fuels are one of the
largest contributors to greenhouse gas emissions. Since 2000, West Fraser has significantly reduced our greenhouse
gas emissions (GHG) by more than 181,000 tonnes annually. In 2016, we signed on to the “30 by 30” Climate Change
Challenge, pledging to contribute to an industry-wide effort to help Canada move to a low-carbon economy by
removing 30 megatonnes (MT) of CO2 per year by 2030 — more than 13% of the Canadian government’s emissions
target.
We treat water as an important and protected resource throughout our operations. We specifically address, manage
and monitor stream and watercourse protection as part of our sustainable forest management activities. Our pulp
operations use and treat large volumes of water and we have invested considerably in improvements to water systems
aimed at improving the effluent, including an overall downward trend in key effluent measurements such as total
suspended solids (TSS) and biochemical oxygen demand (BOD).
Community and Stakeholder Engagement
Stakeholder engagement and consultation is a crucial part of our success as a business. Stakeholder engagement and
consultation is embedded in our forest management planning process through our sustainable forest management and
fibre sourcing certifications. Identification and consultation with stakeholders is also required by Canadian law to meet
the standards and provincial regulations governing the permitting and approval of harvesting and forest management
planning on public lands.
Our mills and forest operations often work in partnership with Indigenous Peoples in the regions where we operate.
Through our Aboriginal Community Engagement Framework, we seek to build respectful, long-term, mutually
beneficial working relationships with the Indigenous communities located near the areas in which we operate. In
- 18 -
Canada within our forest planning, engagement and consultation processes as well as separate outreach, we work with
more than 100 Indigenous communities and organizations in the regions where we harvest timber and manage public
forest land under government licences.
Oversight and Further Information
Our Board, particularly the Environmental, Health & Safety Committee, together with our executive and our senior
leadership teams, set the policy and practice of our environmental, social and governance activities within our business
and are responsible for monitoring our safety and environmental performance.
We are committed to providing comprehensive and transparent information regarding our environmental, social and
governance (ESG) matters, and have available on the Responsibility part of our website (at www.westfraser.com)
additional information including our Responsibility Report prepared under the Global Reporting Initiative (GRI), a global
standard for reporting on a range of economic, environmental and social impacts.
Risk Factors
A detailed discussion of risk factors is included under the heading “Risks and Uncertainties” in Management's
Discussion & Analysis for the year ended December 31, 2018, which is incorporated herein by reference. Our
Management’s Discussion & Analysis is available on SEDAR at www.sedar.com and on our website at
www.westfraser.com.
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, rights upon
dissolution or winding up 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, 2018, the issued share capital consisted of 67,537,360 Common shares and 2,281,478 Class B
Common shares for a total of 69,818,838 shares (as at December 31, 2017 –77,946,036 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$300 million
notes maturing October 2024. The ratings are not a recommendation to buy, sell or hold securities and may be subject
to revision or withdrawal at any time by each rating agency.
Ratings
- 19 -
Agency
DBRS1
Moody’s2
Standard & Poor’s3
1.
Outlook
Positive
Stable
Stable
DBRS credit ratings for long-term obligations range from AAA to D. A rating of BBB is described by DBRS as “adequate credit quality. The
capacity for the payment of financial obligations is considered acceptable. May be vulnerable to future events”. Additional information on the
rating is available on DBRS’s website.
Rating
BBB (low)
Baa3
BBB-
2. Moody’s credit ratings for long-term obligations range from Aaa to C. Moody’s describes obligations rated Baa as “subject to moderate credit
risk. They are considered medium-grade and as such may possess certain speculative characteristics”. Additional information on the rating is
available on Moody’s website.
S&P credit ratings for long-term obligations range from AAA to D. A rating of BBB- is described by S&P as “considered lowest investment grade
by market participants”. Additional information on the rating is available on S&P’s website.
3.
Market Prices
The following table sets forth adjusted market prices and trading volumes of our Common shares on the Toronto Stock
Exchange for each month of 2018 and 2017.
High
($)
88.98
94.64
92.69
95.10
96.03
97.99
95.85
93.13
89.52
75.30
75.90
73.45
January
February
March
April
May
June
July
August
September
October
November
December
Total
Source: http://tradingdata.tsx.com
Cash dividends
Low
($)
76.57
78.52
81.44
82.00
85.88
82.83
76.81
79.77
72.31
60.44
63.51
61.59
2018
2017
Close
($)
86.06
89.38
85.61
86.97
94.23
90.49
80.80
86.57
73.51
66.14
69.35
67.44
Volume
(000’s)
5,048
5,966
7,030
5,334
9,196
10,283
12,100
11,056
10,576
20,129
10,141
8,130
114,989
Close
($)
44.44
55.13
55.62
61.34
58.81
61.38
66.25
64.79
72.00
78.47
81.54
77.57
Volume
(000’s)
4,907
6,456
7,633
7,656
5,411
4,309
5,294
5,152
7,500
5,904
5,276
4,469
69,967
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 $0.70 per share were declared in 2018, $0.36 per share were declared in 2017 and $0.28 per share were declared in
2016 and 2015. There can be no assurance that 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 AST Trust Company (Canada), with registers of transfers in Vancouver and Toronto.
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, 2018. 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 12, 2019.
Directors and Officers
Directors
- 20 -
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:
Name and Municipality
of Residence
Henry H. Ketcham
Vancouver, B.C.
Reid E. Carter1 & 4
West Vancouver, B.C.
John N. Floren2, 3 & 4
Eastham, Massachusetts
Brian G. Kenning2 & 4
Vancouver, B.C.
John K. Ketcham3 & 4
Santa Monica, California
Gerald J. Miller1, 3 & 4
Kelowna, 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
Director Since
Chairman
September 16, 1985
Corporate Director
April 19, 2016
President and Chief Executive Officer, Methanex
Corporation
April 19, 2016
Corporate Director
April 19, 2017
Real Estate Developer
April 28, 2015
Corporate Director
April 19, 2012
Corporate Director
April 28, 2005
Corporate Director
April 28, 2004
Chief Executive Officer
April 30, 2013
Corporate Director
Gillian D. Winckler1, 3 & 4
Vancouver, B.C.
1. Member of the Audit Committee.
2. Member of the Human Resources & Compensation Committee.
3. Member of the Health, Safety & Environment Committee.
4. Member of the Governance & Nominating Committee.
5.
Lead Director.
April 19, 2017
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, and
before March 1, 2013 was our Chairman and Chief Executive Officer; John Floren who before January 2013 was Senior
Vice President, Global Marketing and Logistics of Methanex Corporation; Ted Seraphim who before April 19, 2018 was
President and Chief Executive Officer, and before March 1, 2013 was President and Chief Operating Officer;
Gillian Winckler who before June 2015 was Chief Executive Officer and President, as well as Chief Financial Officer for a
brief period of Coalspur Limited; Reid Carter who before December 31, 2018 was President, Brookfield Timberlands
Management LP. 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
Ted Seraphim
North Vancouver, B.C.
Raymond W. Ferris
Vancouver, 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.
Christopher D. McIver
North Vancouver, B.C.
Sean P. McLaren
Collierville, Tennessee
Tom V. Theodorakis
Vancouver, B.C.
Christopher A. Virostek
North Vancouver, B.C.
Chuck H. Watkins
Memphis, Tennessee
- 21 -
Office Held
Chief Executive Officer
President and Chief Operating Officer
Vice-President, Canadian Wood Products
Vice-President, Pulp and Energy Operations
Vice-President, Canadian Woodlands
Vice-President, Corporate and Government Relations
Vice-President, Sales and Marketing
Vice-President, U.S. Lumber
Secretary
Partner, McMillan LLP (lawyers)
Vice-President, Finance and Chief Financial Officer
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 April 19, 2018
was our Executive Vice-President and Chief Operating Officer and before February 15, 2016 was our Vice-President,
Wood Products; Brian A. Balkwill, who before July 1, 2018 was our Vice-President, Canadian Lumber, before
February 15, 2016 was our General Manager, Canadian Lumber, and before December 1, 2014 was our General
Manager, Engineered Wood; 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, B.C.; 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 B.C.; 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; Christopher A. Virostek, who before April 1, 2017
was the Senior Vice-President of Strategy and Corporate Development of Masonite International Corporation; 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 and before December 6, 2013 was our Engineering and
Technical Manager, U.S. Lumber.
Shareholdings of Directors and Officers
- 22 -
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, 2018
1,414,601
2%
78,728
3%
2%
December 31, 2017
1,395,821
2%
78,728
3%
2%
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
Christopher Virostek, our Vice President, Finance and Chief Financial Officer, was a director of Masonite (Africa) Limited
(“MAL”), a majority owned subsidiary of Masonite International Corporation (“Masonite”), when MAL commenced
voluntary business rescue proceedings in South Africa in December 2015. Mr. Virostek served as a director of MAL in
connection with his duties as an employee of Masonite. The business rescue plan of MAL was substantially
implemented as provided under its terms and the business rescue proceedings ended in August 2016, at which time
Mr. Virostek resigned as a director.
Governance
Corporate governance is guided by our Corporate Governance Policy, a copy of which may be viewed on our web site:
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 2018, 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.
Reid E. Carter
Mr. Carter holds a combined undergraduate degree in Forestry and Biology and a master’s degree in Forest Soils. He
was president of a large timberlands investment firm and has been involved with that firm and related firms in various
senior roles for the last 14 years. Prior to that he served as National Bank Financial’s Paper and Forest Products
Analyst.
Gerald J. Miller
- 23 -
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. Mr. Miller is currently the Chair of
the audit committee of Granite Real Estate Investment Trust.
Janice G. Rennie
Ms. 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. Ms. Rennie has chaired or been a member of several
audit committees of public companies in the past and currently is the Chairman of EPCOR Utilities Inc. and a member of
the audit committees of Methanex Corporation, Major Drilling Group International Inc. and WestJet Airlines Ltd.
Gillian D. Winckler
Ms. Winckler, who holds a Bachelor of Science and Bachelor of Commerce obtained in South Africa, is a Chartered
Accountant (South Africa). Ms. Winckler worked in the audit profession for five years, in corporate finance for five
years, and in a number of executive positions with Coalspur Limited and BHP Billiton. Ms. Winckler is currently a
member of the audit committee of Pan American Silver Corporation.
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 Vice-President, Finance and 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)
2018
878
96
323
80
2017
854
162
548
50
Audit Fees1
Audit-Related Fees2
Tax Fees
All Other Fees3
1.
2.
3.
Represents actual and estimated fees related to fiscal year ends.
For assurance and related services that are reasonably related to the performance of the audit but are not reported as “Audit Fees.”
Includes fees in connection with financial and tax due diligence assignments and various other compliance reporting matters.
Material Contracts
On October 15, 2014, we issued US$300 million of fixed-rate senior unsecured notes due October 15, 2024
1.
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.
On August 25, 2017, we replaced our existing 2007 Credit Agreement with a new 2017 Credit Agreement. The
2.
new credit agreement is comprised of a CDN$500 million committed revolving credit facility and a US$200 million
- 24 -
five-year non-revolving term acquisition facility which expires on August 25, 2022. The committed revolving credit
facility provides for floating rates of interest based on Prime, Base Rate Advances, Bankers’ Acceptances or LIBOR
Advances at our option. The five-year non-revolving term facility provides for floating rates of interest based on Base
Rate Advances or LIBOR Advances at our option. On August 28, 2017 we borrowed US$200 million under the
non-revolving term facility to fund part of the Gilman Acquisition. These borrowings are repayable at any time, in
whole or in part, at our option and without penalty but cannot be redrawn after payment.
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 23, 2019. Additional financial information
is provided in our annual audited consolidated financial statements and Management’s Discussion & Analysis for the
year ended December 31, 2018, both of which may be found on our website at www.westfraser.com and on the
System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com.
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, 2018 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 SEDAR at www.sedar.com.
Schedule 1 – Audit Committee Charter
- 25 -
The Audit Committee Charter, which is set out below, was approved by the Board on September 12, 2017.
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 the 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 either provide a recommendation to the Board with
respect to the approval of the interim financial reports or, if so delegated by the Board, approve the interim
financial reports and the filing of the same together with all required documents and information with regulators.
• 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.
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
management, together with management’s responses.
- 26 -
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 with management the adequacy and effectiveness of the Company’s systems for monitoring compliance
with financial reporting and disclosure laws, including the Company’s disclosure controls and procedures, 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.
• Assist the Board with its responsibility to, with the advice of management, identify the principal financial and audit
risks of the Company and establish systems and procedures to ensure these principal financial and audit risks are
monitored, and to make recommendations to the Board.
• Annually review the expenses of the Chief Executive Officer.
•
Perform other activities related to this charter as requested by the Board.
- 27 -
• 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 Chair of the Committee will be designated by the Board.
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.
The Committee may retain any outside advisor at the expense of the Company, without the Board’s approval, at
any time and has the authority to determine any such advisor’s fees and other retention terms.
• Minutes of each meeting should be prepared, approved by the Committee and circulated to the full Board.
- 28 -
MANAGEMENT’S DISCUSSION & ANALYSIS
Introduction and Interpretation
This discussion and analysis by West Fraser’s management (“MD&A”) of West Fraser’s financial performance for the
year and three months ending December 31, 2018 should be read in conjunction with our 2018 annual audited
consolidated financial statements and accompanying notes (the “Financial Statements”) and our unaudited condensed
consolidated interim financial statements and accompanying notes. Dollar amounts are expressed in Canadian
currency, unless otherwise indicated and references to US$ are to the United States.
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 headings “Recent Developments –
Production Curtailments” (production curtailment estimate); “Adjusted Earnings and Adjusted Basic Earnings Per
Share” (administrative review commencement and adjustment of export duty rates); “Discussion & Analysis of Annual
Results by Product Segment - Lumber Segment - Softwood Lumber Dispute” (administrative review commencement
and adjustment of export duty rates); “Discussion & Analysis of Annual Results by Product Segment – Pulp & Paper
Segment – Operating Earnings” (refund of collected duty deposits); “Business Outlook;” “Estimated Earnings Sensitivity
to Key Variables;” “Selected Cash Flow Items – Operating Activities" (estimated tax payments for February 2019);
“Significant Management Judgments Affecting Financial Results – Softwood Lumber Dispute” (administrative review
commencement and adjustment of export duty rates); and “Contractual Obligations”. By their nature, forward-looking
statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, which
contribute to the possibility that the predictions, forecasts and other forward-looking statements will not occur. 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. This list of important factors
affecting forward-looking statements is not exhaustive and reference should be made to the other factors discussed in
public filings with securities regulatory authorities. Accordingly, readers should exercise caution in relying upon
forward-looking- statements and we undertake no obligation to publicly update or revise any forward-looking
statements, whether written or oral, to reflect subsequent events or circumstances except as required by applicable
securities laws.
Throughout this MD&A reference is made to Adjusted EBITDA, Adjusted EBITDA margin, 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. These measures are not generally accepted earnings measures under IFRS and do not have
standardized meanings 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 are for specific products, dimensions or grades and do not necessarily reflect the
prices obtained by West Fraser during those periods as we produce and sell a wide offering of dimensions, grades and
species. The information in this MD&A is as at February 12, 2019 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.
Recent Developments
Production Curtailments
- 29 -
On November 13, 2018, we announced the permanent curtailment of approximately 300 million board feet of
combined annual lumber production at our Fraser Lake and Quesnel sawmills. The curtailment will be realized through
the elimination of the third shift at each mill over the next six months. This decision was made as a result of log supply
constraints and high log costs due to impacts from the mountain pine beetle infestation and forest fires in British
Columbia.
On November 30, 2018, we announced a temporary production curtailment of approximately 25 million board feet
over the holiday period. On January 14, 2019, we announced additional temporary curtailments of approximately
three weeks of production throughout the first quarter of 2019 at each of three British Columbia sawmills: Chasm, 100
Mile and Chetwynd. The decision to temporarily reduce production at Chasm, 100 Mile and Chetwynd sawmills was a
result of price declines in markets, high log costs and log supply constraints. In addition, the Williams Lake sawmill will
be shut down for approximately one week to complete certain capital upgrades.
Canadian Tax Reform
In November 2018, the Canadian government announced and then tabled the Notice of Ways and Means Motion to
amend the Canadian Income Tax Act and the Income Tax Regulations. The proposal introduced an Accelerated
Investment Incentive to allow businesses in Canada to accelerate the tax depreciation deduction of eligible capital
property acquired after November 20, 2018. This includes a full expensing provision for manufacturing and processing
machinery equipment in the year of purchase. The proposal includes a phase-out period over the years 2023 to 2028.
The proposal has not been substantively enacted as of February 12, 2019, therefore no adjustment has been made to
our deferred taxes or current tax provision at December 31, 2018.
Annual Results
Summary Information - Annual Results
($ millions, except as otherwise indicated)
Sales
6,118
5,134
4,450
2018
2017
2016
Adjusted EBITDA
Export duties
Equity-based compensation
Amortization
Operating earnings
Finance expense
Other
Tax provision
Earnings
Basic earnings per share ($)
Diluted earnings per share ($)
Cash dividends declared per share ($)
Total assets
Long-term debt
Cdn$1.00 converted to US$ – average
1,538
(202)
(7)
(257)
1,072
(37)
37
(262)
810
10.88
10.62
0.70
4,791
692
0.772
1,160
(48)
(32)
(210)
870
(31)
7
(250)
596
7.63
7.63
0.36
4,517
636
0.771
674
-
5
(197)
482
(29)
(9)
(118)
326
4.06
3.90
0.28
3,600
413
0.755
- 30 -
Selected Quarterly Information
($ millions, except earnings per share (“EPS”) amounts which are in $)
Q4-18
1,274
29
0.42
0.29
Sales
Earnings
Basic EPS
Diluted EPS
Q2-18
1,834
346
4.52
4.52
Q3-18
1,646
238
3.25
2.99
Q1-18
1,364
197
2.53
2.53
Discussion & Analysis of Annual Non-Operational Items
Adjusted Earnings and Adjusted Basic Earnings Per Share
($ millions, except EPS amounts which are in $)
Earnings
Add (deduct):
Export duties
Interest recognized on export duty deposits receivable
Equity-based compensation
Exchange gain on long-term financing
Exchange gain on export duty deposits receivable
Insurance gain on disposal of equipment
Net tax effect on the above adjustments
Re-measurement of deferred income tax assets and liabilities
Q4-17
1,376
207
2.66
2.66
Q3-17
1,247
120
1.53
1.53
Q2-17
1,322
146
1.86
1.86
Q1-17
1,189
123
1.58
1.58
2018
810
202
(2)
7
(10)
(5)
-
(57)
-
945
12.70
2017
596
48
-
32
(10)
(1)
(7)
(5)
6
659
8.44
Adjusted earnings
Adjusted basic EPS1
1.
Adjusted basic EPS is calculated by dividing Adjusted earnings by the basic weighted average shares outstanding.
Export duties of $202 million were expensed in 2018 related to SPF lumber compared to $48 million in 2017. 2018 also
includes interest income of $2 million related to the duty deposit receivable based on interest rates posted by the U.S.
government. We were required to pay duties for all of 2018 as compared to 2017 when duties were in effect for only
part of the year. Duties were also impacted in 2018 by the relatively higher product prices through much of 2018 as
compared to 2017. The administrative review of duties for the first period of review is expected to commence in 2019
and continue into 2020 and likely 2021. In the absence of a softwood lumber agreement with the U.S., it is difficult to
anticipate when any duties may be returned to us. We believe that the U.S. allegations related to softwood lumber
subsidies and dumping are unwarranted and that the rates applied will be adjusted upon review. See “Softwood
Lumber Dispute” under the heading “Lumber Segment” and “Significant Management Judgments Affecting Financial
Results” in this MD&A for further information.
Our equity-based compensation includes our share purchase option, phantom share unit, and directors’ deferred share
unit plans (collectively, the “Plans”), all of which have been partially hedged by an equity derivative contract. The Plans
and equity derivative contract are fair valued each quarter and the resulting expense or recovery is recorded over the
vesting period. Our fair valuation models consider various factors with the most significant being the change in the
market value of our shares from the beginning to the end of the relevant period. The expense or recovery does not
necessarily represent the actual value which will ultimately be received by the holders 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 revaluation of our Canadian operation’s U.S. dollar balances is
included in other income in earnings while the revaluation of our U.S. operation’s assets and liabilities is included in
other comprehensive earnings. The values in the table above incorporate the exchange gains recorded on our U.S.
dollar denominated long-term financing and our long-term duty deposit receivable during the periods presented.
Exchange gains or losses realized on the working capital balances of our Canadian operations are identified under
“Other Non-Operational Items” below.
- 31 -
An insurance gain of $7 million related to involuntary disposal of equipment was recorded in 2017 related to
equipment at our jointly-owned NBSK plant in Quesnel.
U.S. Tax Reform legislation and an increase in the province of British Columbia tax rate from 11% to 12% were
substantively enacted in 2017 resulting in a one-time increase to deferred income tax expense of $6 million associated
with the re-measurement of deferred income tax assets and liabilities.
Other Non-Operational Items
Other income includes an exchange gain on working capital of $13 million in 2018 compared to a loss of $11 million in
2017.
The results of the current year include a provision for income tax of $262 million compared to $250 million in 2017.
The effective tax rate was 24% in the current year compared to 30% in 2017. The 2018 effective tax rate is lower than
the rate in 2017 primarily due to the U.S. federal income tax rate reduction from 34% to 21%. Note 19 to the Financial
Statements provides a reconciliation of income taxes calculated at the British Columbia statutory rate to the income tax
expense.
The funded position of our defined benefit pension plans and other retirement benefit plans is estimated at the end of
each period. The funded position, as shown in Note 14 to our Financial Statements, is determined by subtracting the
value of the plan assets from the plan obligations. In 2018, we recorded in other comprehensive earnings an after-tax
actuarial gain of $24 million, compared to an after-tax loss of $26 million in 2017. The current year gain reflected an
increase in the discount rate used to calculate plan liabilities, partially offset by an actual rate of return on assets that
was lower than the expected return.
Discussion & Analysis of Annual Results by Product Segment
- 32 -
Lumber Segment
SPF (MMfbm)
Production
Shipments
SYP (MMfbm)
Production
Shipments
Wood chip production
SPF (M ODTs)
SYP (M green tons)
Sales ($ millions)
Lumber
Wood chips and other residuals
Logs and other
2018
3,792
3,790
2,817
2,792
1,784
3,785
3,888
456
112
4,456
2017
3,809
3,714
2,424
2,387
1,765
3,113
3,219
344
108
3,671
1,156
(202)
(196)
758
26
284
-
Adjusted EBITDA ($ millions)
Export duties ($ 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
Source: Random Lengths – Net FOB mill.
Source: Random Lengths – Net FOB mill Westside.
Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price.
480
372
501
622
482
649
1.
2.
3.
884
(48)
(155)
681
24
247
526
401
323
433
521
419
562
Gilman Acquisition
On August 31, 2017, we completed the acquisition of six sawmills and a finger-joint mill (the “Gilman Acquisition”). A
full year of production, shipments and operating results of the Gilman Acquisition is included in our 2018 results
compared to four months post-acquisition in 2017. In comparison to our other SYP mills, the Gilman Acquisition mills
generally purchase smaller logs, produce proportionately more SYP 2x4, and operate with a lower lumber recovery
which has led to an increase in our wood chip production.
In December 2018, we ceased operations at the finger-joint mill that was acquired as part of the Gilman Acquisition.
Operating Earnings
Operating earnings were higher compared to last year due to higher lumber and chip prices and the inclusion of the
results of the mills from the Gilman Acquisition for a full year compared to four months in 2017. Canadian lumber also
recognized $4 million of insurance claim proceeds in 2018 as final settlement for the 2017 temporary suspension of the
100 Mile, Chasm and Williams Lake operations due to British Columbia forest fires. These positive factors were
partially offset by higher export duties, increased freight costs and higher Canadian log costs.
- 33 -
The sale price for lumber was very volatile in 2018 with the benchmark SPF #2 & Better 2x4 price hitting a high of
US$655 per MFBM in June and a low of US$298 per MFBM in October. SYP followed a similar trend to SPF and in
addition, there was significant volatility in the price differential between narrow and wide dimensions of SYP within the
year. We believe the high prices in the first half of 2018 were due to an industry SPF supply shortfall which arose in the
first quarter as a result of Canadian transportation issues as discussed under “Shipments” below. The prices declined in
the second half of 2018 as industry inventory backlogs were cleared and there was a slight softening of U.S. housing
markets.
Export duties were in effect for all of 2018 and were applicable on 2018’s higher SPF lumber prices. Export duties for
2017 were applicable intermittently in 2017 as discussed under “Softwood Lumber Dispute” below.
Our Canadian log costs were higher by approximately 20% in 2018 compared to 2017 as a result of increased market-
based stumpage rates in British Columbia and Alberta as well as higher prices for purchased logs in British Columbia
due to increased competition for a shrinking timber supply. U.S. log costs remained stable in most of our operating
areas compared to 2017.
Production
SPF production was slightly lower than 2017 as multiple factors impacted our operations. Our High Prairie, Alberta mill
was in start-up after a significant capital rebuild and we took market related curtailments in the fourth quarter of 2018
in several British Columbia sawmills. We were not able to fully recapture the 55 MMfbm of production that was lost in
2017 due to wildfire related curtailments as wildfires in 2018 once again impacted operations albeit less significantly
than in 2017.
SYP production increased by 393 MMfbm due primarily to the Gilman Acquisition, partially offset by temporary
shutdowns at a number of mills due to hurricanes, and log supply constraints as a result of wet weather in some
operating areas in the last four months of 2018. In addition, production was affected by the start-up of the new
Opelika sawmill on August 2, 2018. The old Opelika sawmill ran until July 27, 2018 and is in the process of being
dismantled.
Shipments
It was a volatile shipping year for SPF in 2018, even though on an annual basis we were able to ship production. First
quarter 2018 shipments were negatively impacted by weather related shortages of truck and rail resources resulting in
an inventory build of 112 MMfbm. Canadian transportation services recovered in the second quarter of 2018 allowing
us to catch up on shipments in the second and third quarter.
Increased shipments of SYP lumber and chip production were primarily the result of the Gilman Acquisition.
Our SPF sales are 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 2017 levels. Housing related demand in the U.S.
from both new housing and repair and renovation continues to slowly increase, with single family starts annual average
improving by 4% in 2018 compared to 2017. SPF sales by volume to offshore markets also remained similar to 2017
levels. The table below sets out the proportion of our Canadian lumber by volume sold by destination in each of 2018
and 2017.
SPF Sales by Destination
U.S.
Canada
China
Other
Total
2018
2017
MMfbm
2,249
871
473
197
3,790
%
59
23
13
5
MMfbm
2,161
895
457
201
3,714
%
58
24
12
6
Softwood Lumber Dispute
- 34 -
On November 25, 2016, a coalition of U.S. lumber producers petitioned the U.S. Department of Commerce (“USDOC”)
and the U.S. International Trade Commission (“USITC”) to investigate alleged subsidies to Canadian softwood lumber
producers and levy countervailing and antidumping duties against Canadian softwood lumber imports. We were
chosen by the USDOC as a “mandatory respondent” to both the countervailing and antidumping investigations and as a
result, we have received unique company specific rates.
On April 24, 2017, the USDOC issued its preliminary determination in the countervailing duty (“CVD”) investigation and
imposed a company specific preliminary rate of 24.12% to be posted by cash deposits on the exports from Canada of
softwood lumber to the U.S. on or after April 28, 2017. On June 26, 2017, the USDOC issued its preliminary
determination in the antidumping duty (“ADD”) investigation and imposed a company specific preliminary rate of
6.76% to be posted by cash deposits on the exports from Canada of softwood lumber to the U.S. on or after June 30,
2017. The requirement that we deposit CVD was suspended on August 24, 2017 until final determination was
published by the USITC. On December 4, 2017, the USDOC amended our CVD rate to 17.99% and our ADD rate to
5.57%. Effective December 28, 2017, we began posting cash deposits for CVD and effective December 4, 2017, we
began posting cash deposits for ADD at the revised rates. The CVD and ADD rates are subject to further adjustment
through administrative reviews to be completed by the USDOC. The administrative reviews for each of CVD and ADD
are expected to commence in the spring of 2019 and cover the periods from April 28, 2017 to December 31, 2018 for
CVD and June 30, 2017 to December 31, 2018 for ADD. The reviews may not be finalized until mid-2020 and the results
are subject to appeals.
Duties of $202 million have been expensed for 2018 compared to $48 million in 2017. We have posted cash deposits
for CVD at 17.99% and for ADD at a 5.57% rate. We have recalculated the ADD rate for the current period of review
using our reported results and the calculation methodology prescribed by the USDOC. Based on our current data, we
determined that the expected ADD rate will be 1.46 % which is lower than the current ADD deposit rate of 5.57%. We
have recorded a long-term duty deposit receivable related to the CVD and ADD of $75 million ($38 million from 2018
and $37 million from 2017). Details can be found in Note 27 to our Financial Statements.
We, together with other Canadian forest product companies and the Canadian federal and provincial governments (the
“Canadian Interests”) categorically deny the allegations by the coalition of U.S. lumber producers and disagree with the
countervailing and antidumping determinations by the USDOC and the USITC. The Canadian Interests continue to
aggressively defend the Canadian industry in this trade dispute and have appealed the decisions to North America Free
Trade Agreement panels and the World Trade Organization.
The duty rates are subject to change based on administrative reviews and appeals available to us. Notwithstanding the
deposit rates assigned under the investigations, our final liability for the assessment of CVD and ADD will not be
determined until each annual administrative review process is complete and related appeal processes are concluded.
Panels Segment
Plywood (MMsf 3/8” basis)
Production
Shipments
MDF (MMsf 3/4” basis)
Production
Shipments
LVL (Mcf)
Production
Shipments
Sales ($ 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$
Source: Crow’s Market Report – Delivered Toronto.
1.
- 35 -
2018
2017
833
837
224
224
2,251
2,155
648
22
6
676
127
(15)
112
19
16
548
838
826
191
182
2,676
2,601
575
17
8
600
113
(13)
100
19
22
509
The panels segment is comprised of our plywood, MDF and LVL operations.
Operating earnings
Operating earnings increased compared to 2017 due primarily to higher plywood and chip prices. This was partially
offset by higher log and residual costs, and higher MDF freight costs. MDF freight costs increased as we were required
to use higher cost alternative transportation methods to mitigate the first quarter transportation issues. Lastly, the
panel segment recognized $3 million of insurance claim proceeds in 2018 as final settlement for the 2017 temporary
suspension of the Williams Lake plywood operation due to British Columbia forest fires.
The sale price for plywood was volatile in 2018 with the benchmark price hitting a high of $670 per Msf in June and a
low of $432 per Msf in October. The increase in price, year-over-year, was due to the combination of first quarter
transportation issues, tariffs implemented by the Canadian government on plywood imports from the U.S. in June of
2018, and a strong new housing market in Canada.
Production
Plywood production was consistent with the prior year. In 2017, 15 MSF of production was lost due to wildfire related
curtailments. MDF production increased as WestPine ran for the full year in 2018 compared to 8 months in 2017 as it
recommenced production April 29, 2017 after a thirteen-month fire-related closure. LVL production was curtailed in
September 2018 to match product demand.
Shipments
Shipments for plywood and MDF were consistent with production despite the first quarter transportation disruptions.
LVL shipments were lower compared to 2017 due to reduced production. Demand for our plywood products is
influenced by Canadian new home construction while MDF and LVL demand is influenced by both Canada and U.S. new
home construction.
Pulp & Paper Segment
BCTMP (Mtonnes)
Production
Shipments
NBSK (Mtonnes)
Production
Shipments
Newsprint (Mtonnes)
Production
Shipments
Sales ($ millions)
- 36 -
2018
2017
652
642
499
496
119
117
1,163
674
670
498
497
122
123
988
172
(40)
132
17
58
258
(44)
214
22
60
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
Source: Resource Information Systems, Inc. – U.S. list price, delivered U.S.
Source: Resource Information Systems, Inc. – China list price, delivered China.
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.
Source: Resource Information Systems, Inc. – delivered U.S. 48.8 gram.
Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price.
1,337
878
692
1,732
1,138
897
1,105
712
584
1,433
923
757
1.
2.
3.
4.
5.
The pulp & paper segment is comprised of our NBSK, BCTMP and newsprint operations.
Operating Earnings
Operating earnings were higher compared to 2017 primarily due to higher pulp and newsprint prices. This was partially
offset by increased chip costs, higher power costs at our Alberta operations, and higher maintenance costs at our
Hinton NBSK pulp and Quesnel BCTMP pulp mills.
Pulp prices increased throughout the first half of 2018 due to strong demand fundamentals combined with several pulp
supply shocks. Supply shocks included, but were not limited to, unplanned downtime at two Western Canadian pulp
mills, a fibre shortage in Europe due to wet winter weather and a trucking strike in Brazil. Trade tensions between
China and the U.S., including tariffs imposed on Chinese imports, began to impact pulp demand in the second half of
2018 leading to increased inventory levels and lower prices. Pulp products are frequently used in the packaging for
products shipped to the U.S.
During the first quarter of 2018, the USDOC and USITC completed a preliminary investigation and assigned our
jointly-owned newsprint mill a CVD rate of 6.53% and an ADD rate of 22.16%. In September 2018, the USITC reversed
the USDOC decision to charge Canadian newsprint producers CVD and ADD on the basis that U.S. producers were not
materially injured or threatened with material injury. It is expected that the full amount of duty deposits collected will
be refunded. As a result, a $5 million receivable was recorded on our balance sheets.
Production
- 37 -
The Hinton pulp mill continued to have intermittent reliability issues in 2018 which negatively affected production.
Despite no major maintenance shutdowns in 2018 we were not able to generate any additional production volume for
NBSK.
Our Quesnel BCTMP pulp mill’s production was lower compared to 2017 due to 2018 having planned and unplanned
maintenance and capital shutdowns, outages due to a natural gas supply disruption and various operational issues.
This resulted in lower BCTMP production compared to 2017.
Shipments
NBSK and newsprint shipment volumes were in-line with production volumes in 2018 while BCTMP shipments were
negatively affected by a missed vessel sailing whereby 16,000 tonnes of pulp sales were delayed into January 2019.
Fourth Quarter Results
Summary Information – Quarterly Results
($ millions, except as otherwise indicated)
Sales
Adjusted EBITDA
Export duties
Equity-based compensation
Amortization
Operating earnings
Finance expense
Other
Tax recovery (provision)
Earnings
Q4-18
Q3-18
Q4-17
1,274
1,646
1,376
120
(37)
1
(69)
15
(9)
22
1
29
446
(54)
-
(64)
328
(10)
(4)
(76)
238
341
17
(6)
(59)
293
(8)
10
(88)
207
Cdn$1.00 converted to US$ – average
0.758
0.765
0.787
Discussion & Analysis of Fourth Quarter Non-Operational Items
Adjusted Earnings and Adjusted Basic Earnings Per Share
($ millions except EPS amounts which are in $)
Earnings
Add (deduct):
Export duties
Interest recognized on export duty deposits receivable
Equity-based compensation
Exchange loss (gain) on long-term financing
Exchange loss (gain) on export duty deposits receivable
Insurance gain on disposal of equipment
Net tax effect on the above adjustments
Re-measurement of deferred income tax assets and liabilities
Adjusted earnings
Adjusted basic EPS
Q4-18
Q3-18
Q4-17
29
37
(1)
(1)
(6)
(4)
-
(11)
-
43
0.63
238
54
(1)
-
2
1
-
(19)
-
275
3.77
207
(17)
-
6
(1)
(1)
(7)
7
6
200
2.57
- 38 -
Export duties of $37 million were expensed in the quarter related to SPF lumber compared to $54 million in the
previous quarter and a recovery of $17 million in the fourth quarter of 2017. During the fourth quarter of 2017 duty
deposits of $20 million were made on account of CVD and ADD and a long-term export duty deposit receivable of $37
million was recorded. The receivable reflects the reduction in the CVD rate from the preliminary rate of 24.12% to a
final rate of 17.99% and an adjustment to reflect ADD at our estimated rate based on applying the USDOC
methodology to our actual financial results. The combination of the receivable less the deposits resulted in a recovery
of $17 million being recorded through income in the fourth quarter of 2017. In the fourth quarter of 2018, lower prices
resulted in a slightly higher expected ADD rate. See “Softwood Lumber Dispute” under the section “Discussion &
Analysis of Annual Results by Product Segment – Lumber Segment” and “Significant Management Judgments Affecting
Financial Results” in this MD&A for further information.
The current quarter also includes interest income of $1 million compared to $1 million in the previous quarter related
to the duty deposit receivable. In addition, we recorded a $4 million exchange gain on export duty deposits receivable
compared to a loss of $1 million in the previous quarter and a gain of $1 million in the fourth quarter of 2017.
For a description of the other adjustments in the above table, see the corresponding section under “Discussion &
Analysis of Annual Non-Operational Items” in this MD&A.
Other Non-Operational Items
Other income includes an exchange gain on working capital of $9 million compared to loss of $5 million in the previous
quarter and a gain of $1 million in the fourth quarter of 2017. Amid financial market volatility, the Canadian dollar
weakened from 0.773 to 0.733 from the end of the third quarter 2018 to the end of the fourth quarter.
The results of the current quarter include an income tax recovery of $1 million compared to a provision for income tax
of $76 million in the previous quarter and a provision of $88 million in the fourth quarter of 2017. Note 6 to the fourth
quarter unaudited condensed consolidated interim financial statements provides a reconciliation of income taxes
calculated at the British Columbia statutory rate to the income tax expense.
The funded position of our defined benefit pension plans and other retirement benefit plans is estimated at the end of
each period. The funded position is determined by subtracting the value of plan assets from the value of plan
obligations. We recorded in other comprehensive earnings an after-tax actuarial loss of $28 million in the fourth
quarter of 2018 compared to a gain of $45 million in the previous quarter and a loss of $32 million in the fourth quarter
of 2017. The current quarter loss was due to the actual rate of return on assets being lower than the expected return.
Discussion & Analysis of Fourth Quarter Results by Product Segment
- 39 -
Lumber Segment
SPF (MMfbm)
Production
Shipments
SYP (MMfbm)
Production
Shipments
Sales ($ millions)
Lumber
Wood chips and other residuals
Logs and other
Q4-18
Q3-18
Q4-17
907
943
652
626
757
111
30
898
948
1,027
694
722
1,068
116
27
1,211
68
(37)
(53)
(22)
8
Adjusted EBITDA ($ millions)
Export duties ($ 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
Source: Random Lengths – Net FOB mill.
Source: Random Lengths – Net FOB mill Westside.
Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price.
339
(58)
(48)
233
28
327
268
419
432
354
553
482
388
469
630
507
613
1.
2.
3.
903
904
707
694
876
97
27
1,000
258
17
(43)
232
26
462
346
438
587
440
557
Operating Earnings
Operating earnings were significantly lower compared to the previous quarter and the fourth quarter of 2017 primarily
due to the decline in lumber prices and lower combined lumber production and shipment volumes. This was further
exacerbated in the U.S. market where the selling price for SYP 2x6 through 2x12 declined more significantly than the
SYP 2x4 price over the same comparative periods. Our SYP mills produce the full complement of narrow and wide
products. Log and lumber inventory write-downs to market value also affected operating earnings in the quarter.
Inventory write-downs were $3 million higher than the third quarter of 2018 and $12 million higher than the fourth
quarter of 2017 because of the sales price declines and high log costs.
Compared to the fourth quarter of 2017, operating earnings were also negatively impacted by higher Canadian log
costs and export duties. Our Canadian log costs increased by approximately 20% as a result of higher market-based
stumpage rates in British Columbia and Alberta as well as higher prices for purchased logs in British Columbia resulting
from increased competition for a shrinking timber supply. Export duties increased by $54 million as the fourth quarter
of 2017 included an adjustment related to updating the CVD rate to the final rate and the ADD rate to the estimated
rate, resulting in a recovery of $17 million. This is discussed in detail under the section “Discussion & Analysis of
Annual Results by Product Segment – Lumber Segment – Softwood Lumber Dispute” above.
Production
SPF production was reduced by 25 MMfbm in December of 2018 as we temporarily curtailed four mills in British
Columbia. This decision was made in response to log supply constraints, high log costs and the decline in SPF prices.
- 40 -
SYP production was lower compared to the previous quarter due to fewer operating days, the Opelika start-up,
weather-related log shortages and downtime for scheduled maintenance. Similar issues affected production as
compared to the fourth quarter of 2017.
Shipments
SPF shipments in the second and third quarter of 2018 continued to clear the inventory backlog created by the first
quarter 2018 weather related transportation delays and were more in-line with production in the fourth quarter of
2018. SYP shipments declined compared to the previous quarter and fourth quarter of 2017 due in part to lower
production but mostly due to lower demand as persistently wet weather in the fourth quarter of 2018 affected the
pace of construction.
Panels Segment
Plywood (MMsf 3/8” basis)
Production
Shipments
MDF (MMsf 3/4” basis)
Production
Shipments
LVL (Mcf)
Production
Shipments
Sales ($ 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$
Source: Crow’s Market Report – Delivered Toronto.
1.
Q4-18
Q3-18
Q4-17
205
212
55
52
430
482
144
5
2
151
9
(5)
4
6
204
206
58
56
558
497
163
6
1
170
34
(3)
31
20
209
209
55
51
657
626
147
4
4
155
24
(4)
20
15
465
528
474
Operating Earnings
Operating earnings declined compared to the previous quarter and the fourth quarter of 2017 primarily due to lower
plywood prices, partially offset by higher MDF prices. Plywood prices typically decline in November and December of
each year reflecting softer winter demand in the Canadian building industry.
Compared to the fourth quarter of 2017, operating earnings were also negatively impacted by higher Canadian log and
residual costs as was discussed under the lumber segment above.
Production and Shipments
Plywood production and shipments were similar to both the previous quarter and fourth quarter of 2017. One shift of
LVL production was curtailed in September 2018 to match expected demand which affected LVL shipment volumes.
Pulp & Paper Segment
BCTMP(Mtonnes)
Production
Shipments
NBSK (Mtonnes)
Production
Shipments
Newsprint (Mtonnes)
Production
Shipments
Sales ($ millions)
- 41 -
Q4-18
Q3-18
Q4-17
157
139
121
118
32
30
268
171
176
139
128
30
29
312
171
167
122
107
30
31
253
73
4
(12)
65
23
60
-
(12)
48
24
47
-
(11)
36
18
Adjusted EBITDA ($ millions)
Export duties
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
Source: Resource Information Systems, Inc. – U.S. list price delivered U.S.
Source: Resource Information Systems, Inc. – China list price, delivered China.
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.
Source: Resource Information Systems, Inc. – delivered 48.8 gram newsprint.
Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. benchmark price.
1,428
805
715
1,886
1,063
944
1,377
887
715
1,800
1,159
935
1,183
863
610
1,503
1,097
775
1.
2.
3.
4.
5.
Operating Earnings
Operating earnings declined compared to the previous quarter primarily due to operational issues at our Hinton NBSK
pulp mill and a planned shutdown at our Quesnel BCTMP pulp mill all of which resulted in higher manufacturing costs
per unit. Lower shipment volumes also negatively affected operating earnings.
Operating earnings declined compared to the fourth quarter of 2017 despite the increased sale prices for most of our
products due to higher chip costs and higher maintenance costs at our Hinton NBSK and Quesnel BCTMP pulp mills.
Production
BCTMP production was lower compared to the previous quarter and fourth quarter of 2017 due to our Quesnel pulp
mill which had a planned maintenance and capital shutdown and a two-day unplanned outage caused by the natural
gas pipeline supply disruption and various operating issues. All of these disruptions reduced the current quarter’s
production by approximately 19,000 tonnes.
NBSK production was similar to the fourth quarter of 2017 but lower than the previous quarter primarily due to
intermittent reliability at our Hinton pulp mill.
Shipments
Shipments of NBSK reflect the changes in production volumes. BCTMP, on the other hand, was negatively affected by a
missed vessel sailing whereby 16,000 tonnes of pulp sales were delayed into January 2019.
- 42 -
Capital Expenditures
($ millions)
Segment
Lumber
Panels
Pulp & Paper
Corporate
Total
Profit
Improvement
204
3
29
-
236
Maintenance of
Business
69
9
29
10
117
Safety
11
4
2
-
17
Total
284
16
60
10
370
Capital expenditures of $370 million reflect our philosophy of continual reinvestment in our mills with significant
investments made in both our Canadian and U.S. operations. The two largest projects are the completion of the
Opelika, Alabama and High Prairie, Alberta sawmills. Our lumber segment also invested in five continuous kilns, three
planer upgrades and a number of other projects to improve grade, recovery and output. In our pulp and paper
segment, our Quesnel BCTMP mill upgraded their refining technology and at our jointly-owned Cariboo NBSK mill we
installed a second concentrator.
Maintenance of business expenditures are primarily for roads, bridges, mobile equipment and major maintenance
shutdowns.
Business Outlook
Operations
We expect production in 2019 to be slightly below 2018 levels, comprised of a 300 million board foot reduction in SPF
production and a 200 million board foot increase in SYP production. We anticipate the impact of reduced shifts at our
Fraser Lake and Quesnel sawmills will be partially offset by High Prairie sawmill completing ramp up to capacity and
minor productivity improvements across our mill network coinciding with capital projects that are fully operationalized.
Anticipated production gains assume improving demand, normal access to logs and transportation resources, no
further temporary curtailments and a resolution of outstanding labor contracts. Results could be adversely affected by
delays in accessing salvage timber from the fire affected regions, adverse weather conditions in any of our operating
areas and continuing intense competition for logs 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 the loss of timber from
fires in 2017 and 2018 both negatively affect overall log supply. We expect log cost inflation in the U.S. South to be
limited.
In our panels segment, our plywood operations are expected to continue to operate at full capacity. Two of our
plywood operations are in the B.C. interior, and we expect log costs for those operations to continue to increase in
2019.
We did not have any major maintenance shutdowns at either of our NBSK mills in 2018. In 2019, we will undertake
maintenance shutdowns at our Hinton pulp mill and at our jointly-owned Cariboo mill in March and May respectively.
Improved productivity at these mills continues to be a key focus for us. Our BCTMP production is expected to grow by
approximately 25 thousand tonnes over 2018.
Markets
Our lumber segment’s most important market is the U.S., particularly residential construction and repair and
remodelling. Canadian softwood lumber exports to the U.S. have been the subject of trade disputes and managed
trade arrangements for the last several decades. Countervailing and antidumping duties have been in place since April
of 2017 and we were required to make deposits in respect of these duties. Whether and to what extent we can realize
a selling price to fully recover the impact of duties payable 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. While residential
construction has been gradually improving over the past several years, the pace of improvement slowed in the second
half of 2018. If duties can be passed through to consumers in whole or in part the price of Canadian softwood lumber
- 43 -
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. Regardless of the
commodity price, export duties on SPF shipments to the U.S. remain a cost to our Company.
We are anticipating 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 affect lumber prices and the cost structure of our Canadian
lumber business over the long term.
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 measures implemented by various
governments across Canada to moderate housing markets may dampen demand. MDF and LVL demand is heavily
influenced by North American new home construction and we are expecting modest improvement in U.S. residential
construction which should help maintain price levels for these products.
We are anticipating that pulp markets will generally be flat to slightly weaker, influenced by trade tensions, a slowing
Chinese economy and growing channel inventory levels.
Cash Flows
We are anticipating levels of cash flows, taking into account duties on Canadian softwood lumber exports to the U.S.,
to support between $350 and $450 million of capital spending in 2019 as well as to continue to support dividend
payments. 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. We are authorized under our normal course issuer bid, which expires in
September of 2019, to purchase up to 10% of the public float of our Common shares and we will continue to consider
share repurchases with excess cash if we are satisfied that this will enhance shareholder value and does not
compromise our financial flexibility.
Estimated Earnings Sensitivity to Key Variables1
(based on 2019 production - $ millions)
Factor
Lumber price
Plywood price
NBSK price
BCTMP price
U.S. – Canadian $ exchange rate2
1.
2.
Variation
US$10 (per Mfbm)
Cdn$10 (per Msf)
US$10 (per tonne)
US$10 (per tonne)
US$0.01 (per Cdn $)
Each sensitivity has been calculated on the basis that all other variables remain constant and assumes year-end foreign exchange rates.
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.
Change in pre-tax earnings
90
8
7
9
29
Capital Structure and Liquidity
Our capital structure consists of Common share equity and long-term debt. In addition, we maintain a committed
revolving credit facility and lines of credit dedicated to letters of credit.
Our operating facilities include a $500 million committed revolving credit facility, 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 $70 million dedicated to letters of credit of
which US$15 million is committed to our U.S. operations. These facilities are available to meet our funding
requirements.
All debt is unsecured except the $8 million joint newsprint operation demand line of credit, which is secured by that
joint operation’s current assets.
- 44 -
At December 31, 2018 $63 million was outstanding under our revolving credit facility and letters of credit in the
amount of $58 million were supported by our facilities, leaving approximately $491 million of credit available for
further use.
On September 17, 2018 we renewed our NCIB with the new NCIB bid allowing us to acquire an additional 5,524,048
Common shares for cancellation until the expiry of the bid on September 18, 2019. The following table shows our
purchases under various NCIB programs, including a summary of all purchases since the program was started in 2013.
Share Buybacks
(number of common shares and price per share)
NCIB period
September 17, 2017 to September 18, 2018
September 19 to December 31, 2017
January 1 to September 18, 2018
September 19, 2018 to September 18, 2019
September 19 to December 31, 2018
January 1 to February 11, 2019
September 17, 2013 to February 11, 2019
Common Shares
Average Price
85,094
5,905,360
2,230,436
434,500
16,482,964
$68.52
$88.06
$70.05
$73.16
$66.08
Our outstanding Common share equity consists of 67,103,683 Common shares and 2,281,478 Class B Common shares
for a total of 69,385,161 shares issued and outstanding as at February 11, 2019.
Our Class B Common shares are equal in all respects to our Common shares, including the right to dividends and the
right to vote, 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 11, 2019 there were 1,202,448 share purchase options outstanding with exercise prices ranging from
$12.36 to $85.40 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.
In August 2017, we were advanced a US$200 million 5-year term loan that matures on August 25, 2022 to fund the
Gilman Acquisition. Interest is payable at floating rates based on Base Rate Advances or LIBOR Advances at our option.
This loan is repayable at any time, in whole or in part, at our option and without penalty but cannot be redrawn after
payment.
Our cash requirements, other than for operating purposes, are primarily for interest payments, repayment of debt,
additions to property, plant, equipment and timber, acquisitions and payment of dividends. In normal business cycles
and in years without a major acquisition or debt repayment, cash on hand and cash provided by operations have
normally been sufficient to meet these requirements.
- 45 -
Summary of Financial Position
($ 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.
2.
3. Non-IFRS measure. See “Non-IFRS Measures” below.
Cash consists of cash and short-term investments.
Total debt less deferred financing costs less cash plus cheques issued in excess of funds on deposit.
2018
160
1,345
595
2.3
606
2,896
17%
2017
258
1,291
583
2.2
376
2,726
12%
We are rated by three rating agencies and their ratings as of December 31, 2018 are shown in the table below. All
three ratings are considered investment grade. On July 10, 2018, Dominion Bond Rating Service (“DBRS”) changed our
outlook from stable to positive.
Debt Ratings
Agency
DBRS
Moody’s
Standard & Poor’s
Rating
BBB (low)
Baa3
BBB-
Outlook
Positive
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.
- 46 -
Selected Cash Flow Items
($ millions – cash provided by (used in))
For the year ended December 31
Operating Activities
Earnings
Amortization
Export duty deposits
Post-retirement expense
Contributions to post-retirement plans
Tax Provision
Income taxes paid
Changes in non-cash working capital
Other
Financing Activities
Proceeds from long-term debt
Proceeds from operating loan
Finance expense paid
Dividends
Repurchases of Common shares
Other
Investing Activities
Acquisition
Additions to capital assets
Other
Increase (decrease) in cash
Operating Activities
2018
2017
810
257
(31)
84
(103)
262
(316)
(74)
20
909
-
63
(32)
(37)
(675)
-
(681)
-
(370)
16
(354)
(126)
596
210
(36)
82
(69)
250
(73)
(62)
4
902
250
-
(23)
(28)
(17)
(1)
181
(526)
(336)
8
(854)
229
Cash provided by operating activities in 2018 was $909 million. The table above shows the main components of cash
flow from operations for 2018 compared to 2017. The significant factors affecting the comparison were increased
earnings offset by higher ending log inventory balances, income tax payments and contributions to post-retirement
benefit plans.
Inventory increased $105 million primarily due to higher Canadian log volumes and log costs at December 31, 2018
compared to December 31, 2017. Log inventory volumes on hand at the end of 2017 were below targeted levels due
to a number of factors in particular, the 2017 wildfire season.
We made tax payments of $316 million during the year compared to $73 million in 2017. Cash payments in 2018
included the final Canadian income tax payment of approximately $104 million on account of 2017 income. We
estimate that we have approximately $34 million due in February of 2019 on account of fiscal 2018. U.S. income tax
instalments were paid quarterly based on forecasted taxable earnings.
Certain defined benefit pension plan contributions in the amount of $17 million that ordinarily would have been made
in 2017 were deferred into 2018 as a result of regulatory reform initiatives in B.C. and Alberta.
In 2018, we entered into annuity purchase agreements to settle approximately $480 million of our defined benefit
pension obligations by purchasing annuities using our plan assets. These agreements transferred the pension
obligations of retired employees under certain pension plans to financial institutions. As part of the annuity purchase,
we contributed an additional $5 million to these plans which was included in the $103 million contributions to post-
retirement plans disclosed on the cash flow statement.
Financing Activities
- 47 -
We continue to purchase Common shares under our NCIB program. In 2018, we repurchased 8,135,796 Common
shares for $675 million (2017 - $17 million). In addition, we increased our dividend from $0.11 to $0.15 in the first
quarter and then again to $0.20 per share in the third quarter resulting in an annual dividend declared of $0.70 per
share compared to $0.36 per share in 2017. The dividend declared on December 11, 2018 was not paid until
January 10, 2019, resulting in a difference between cash dividends paid per our condensed consolidated statement of
cash flows and cash dividends declared per our condensed consolidated statement of changes in shareholders’ equity.
During 2017 we borrowed $250 million (US$200 million) to partially finance the Gilman Acquisition. This contributed to
the increase in finance expense paid in 2018 compared to 2017.
Investing Activities
2018 additions to capital assets include $284 million for the lumber segment, $16 million for the panels segment, $60
million for the pulp & paper segment and $10 million for our corporate segment. Additional details are found under
the section “Capital Expenditures” above.
The 2017 acquisition of $526 million was the Gilman Acquisition.
Contractual Obligations1
(at December 31, 2018 in $ millions)
Long-term debt2
Interest on long-term debt
Operating loan
Operating leases
Contributions to defined benefit
pension plans3
Asset purchase commitments
Total
1.
2019
-
31
63
5
69
108
276
2020
10
30
-
4
64
-
108
2021
-
30
-
4
65
-
99
2022
273
26
-
3
-
-
302
Thereafter
413
32
-
3
-
-
448
Total
696
149
63
19
198
108
1,233
Contractual obligations mean an agreement related to debt, leases and enforceable agreements to purchase goods or services on specified
terms, but does not include payroll obligations, reforestation and decommissioning obligations, energy purchases under various agreements,
non-defined benefit post-retirement contributions payable, equity-based compensation including equity hedges, accounts payable in the
ordinary course of business or contingent amounts payable.
Includes U.S. dollar-denominated debt of US$508 million.
Contributions to the defined benefit pension plans are based on the most recent actuarial valuation. Future contributions will be determined at
the next actuarial valuation date.
2.
3.
Financial Instruments
Details of our financial instruments can be found in note 24 to our Financial Statements.
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:
Softwood Lumber Dispute
The current softwood lumber dispute is the fifth such dispute since 1982. In the case of previous disputes, the
preliminary duties were reduced in the periods following the initial application.
On April 24, 2017, the USDOC issued its preliminary determination in the CVD investigation and imposed a Company
specific rate of 24.12% to be posted by cash deposits on the exports from Canada of softwood lumber to the U.S. on or
after April 28, 2017. The requirement that we deposit CVD was suspended on August 24, 2017. On December 4, 2017,
- 48 -
the USDOC amended our CVD rate to 17.99% and effective December 28, 2017 we began posting cash deposits at the
new rate. In the absence of additional information, we have expensed CVD deposits at the 17.99% final rate. The
difference between deposits paid at 24.12% and the 17.99% final rate has been recorded as a long-term asset. The
administrative review for CVD by the USDOC, covering the period April 28, 2017 to December 31, 2018, is expected to
be completed sometime between spring of 2019 and mid-2020.
On June 26, 2017, the USDOC issued its preliminary determination in the ADD investigation and imposed a company
specific rate of 6.76% to be posted by cash deposits on the exports from Canada of softwood lumber to the U.S. on or
after June 30, 2017. On December 4, 2017 the USDOC amended our ADD rate to 5.57% and we began posting cash
deposits at the new rate. The ADD rate determined by the USDOC was based on their preliminary investigation
covering the period October 1, 2015 to September 30, 2016. This preliminary rate is expected to remain in place until
our actual data under the review period covering June 30, 2017 to December 31, 2018 is examined by the USDOC. We
have prepared an estimate of our ADD rate for the review period using our actual data and the methodology expected
to be used by the USDOC and determined our best estimate of our rate to be 1.46%. In the absence of additional
information, we have expensed ADD deposits at our estimated 1.46% rate. The difference between deposits paid at
5.57% and our estimated 1.46% rate has been recorded as a long-term asset. The administrative review by the USDOC,
covering the period June 30, 2017 to December 31, 2018, is expected to be completed sometime between spring of
2019 and mid-2020.
The duty rates are subject to change based on administrative reviews and appeals available to us. In addition, we will
update our ADD rate at each reporting date considering our actual results for each period of review. Changes to
estimated rates may be material and any changes will be reflected through current results in the period of the change.
Recoverability of Long-lived Assets
We assess the carrying value of an asset when there are indicators of impairment. The assessment compares the
asset’s estimated discounted future cash flows to the carrying value of the asset. If the carrying value of the asset
exceeds the asset’s estimated discounted future cash flows, 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 2018 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, U.S. dollar
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 our history of profitability, future expectations of profitability, the expected reversal of
temporary differences and the timing of expiry of tax loss carry-forwards and limitations on their use.
Reforestation and Decommissioning Obligations
In Canada, provincial regulations require timber quota holders to carry out reforestation to ensure reestablishment 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.
- 49 -
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 is updated to our current estimate of the costs to complete the remainder of
the reforestation activities. In 2018, the review of the reforestation obligation resulted in an increase to the obligation
of $7 million (2017 – decrease of $7 million).
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 2018 the review resulted in an increase to the obligation of $4 million (2017 – no
change).
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 14 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 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. We will apply the modified
retrospective transition method upon application of the new standard on January 1, 2019. We do not expect this
standard to have a significant effect on our consolidated financial statements.
New Accounting Pronouncements Adopted
IFRS 9 – Financial Instruments
We have adopted IFRS 9 effective January 1, 2018 using the full retrospective method. The new standard for financial
instruments, IFRS 9, replaces IAS 39 ‘Financial Instruments: Recognition and Measurement’. It makes changes to the
previous guidance on the classification and measurement of financial assets and introduces an ‘expected credit loss’
model for the impairment of financial assets. IFRS 9 also contains new requirements on the application of hedge
accounting.
The adoption of this standard had no significant impact on our consolidated financial statements and no retrospective
adjustments were necessary.
IFRS 15 – Revenue from Contracts with Customers
We have adopted IFRS 15 effective January 1, 2018 using the full retrospective method. The new revenue standard,
IFRS 15, replaces IAS 18 – Revenue, IAS 11 – Construction Contracts and the related interpretations. This standard
addressed 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. IFRS 15 requires that
revenue is recognised at the ‘transaction price’ when certain contractual obligations are met but with any ‘variable
consideration’ elements of the price recognised when it is ‘highly probable’ that there will be no reversal of that
revenue.
The adoption of this standard had no significant impact on our consolidated financial statements and no retrospective
adjustments were necessary.
Non-IFRS Measures
- 50 -
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.
Adjusted EBITDA
($ millions)
Earnings
Add:
Amortization
Finance expense
Tax provision (recovery)
EBITDA
Add:
Equity-based compensation
Export duties
Other
Adjusted EBITDA
Q4-18
29
Q3-18
238
69
9
(1)
106
(1)
37
(22)
120
64
10
76
388
-
54
4
446
2018
810
257
37
262
1,366
7
202
(37)
1,538
Q4-17
207
59
8
88
362
6
(17)
(10)
341
2017
596
210
31
250
1,087
32
48
(7)
1,160
Adjusted EBITDA by Segment
($ millions)
- 51 -
Q4-18
Q3-18
2018
Q4-17
2017
Lumber
Earnings before tax
Add:
Amortization
Finance expense
EBITDA
Add:
Export duties
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:
Export duties
Other
Adjusted EBITDA
Corporate and Other
Earnings before tax
Add:
Amortization
Finance expense
EBITDA
Add:
Equity-based compensation
Other
Adjusted EBITDA
(18)
53
6
41
37
(10)
68
4
5
-
9
-
9
40
11
3
54
-
(7)
47
2
-
-
2
(1)
(5)
(4)
228
48
7
283
58
(2)
339
30
3
1
34
-
34
61
12
3
76
(4)
1
73
(5)
1
(1)
(5)
-
5
-
753
196
25
974
202
(20)
1,156
110
15
2
127
-
127
215
44
10
269
-
(11)
258
(6)
2
-
(4)
7
(6)
(3)
228
43
6
277
(17)
(2)
258
20
4
-
24
-
24
53
12
2
67
-
(7)
60
(6)
-
-
(6)
6
(1)
(1)
660
155
20
835
48
1
884
97
13
3
113
-
113
126
40
8
174
-
(2)
172
(37)
2
-
(35)
32
(6)
(9)
Total Adjusted EBITDA
120
446
1,538
341
1,160
Adjusted Earnings and Adjusted Basic Earnings Per Share
($ millions except EPS amounts which are in $)
- 52 -
Earnings
Add:
Export duties
Interest recognized on export duty
deposits receivable
Equity-based compensation
Exchange (gain) loss on long-term
financing
Exchange (gain) loss on export duty
deposits receivable
Insurance gain on disposal of
equipment
Net tax effect on the above
adjustments
Re-measurement of deferred income
tax assets and liabilities
Adjusted earnings
Adjusted basic EPS1
1.
Net Debt to Total Capital Ratio
($ millions except where indicated)
Net debt
Cash and short-term investments
Deferred financing costs1
Cheques issued in excess of funds on deposit
Operating loans
Long-term debt
Shareholders’ equity
Total capital
Net debt to total capital
1.
Q4-18
29
Q3-18
238
37
(1)
(1)
(6)
(4)
-
54
(1)
-
2
1
-
2018
810
202
(2)
7
(10)
(5)
-
(11)
(19)
(57)
Q4-17
207
(17)
-
6
(1)
(1)
(7)
7
-
43
0.63
-
275
3.77
-
945
12.70
6
200
2.57
2017
596
48
-
32
(10)
(1)
(7)
(5)
6
659
8.44
December 31,
2018
December 31,
2017
(160)
(6)
13
63
696
606
2,896
3,502
17%
(258)
(7)
-
-
641
376
2,726
3,102
12%
Adjusted basic EPS is calculated by dividing Adjusted earnings by the basic weighted average shares outstanding.
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
Our business is subject to a number of risks and uncertainties that can significantly affect our operations, financial
condition and future performance. We have a comprehensive process to identify, manage, and mitigate risk, wherever
possible. The risks and uncertainties described below are not necessarily the only risks we face. Additional risks and
uncertainties that are presently unknown to us or deemed immaterial by us may adversely affect our business.
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: (1) global economic conditions
including the strength of the U.S., Canadian, Chinese, Japanese and other international economies, particularly U.S. and
Canadian housing markets and their the mix of single and multifamily construction, repair, renovation and remodeling
spending; (2) alternative products to lumber; (3) changes in industry production capacity; (4) changes in world
- 53 -
inventory levels; (5) increased competition from other consumers of logs and producers of lumber; and (6) other
factors beyond our control. In addition, unemployment levels, interest rates, the availability of mortgage credit 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, the areas that may be harvested under timber tenures or to regulate the processing of timber or
use of harvesting contractors, including to protect the environment or endangered species and critical habitat or as a
result of forest fires or in response to jurisprudence or government policies respecting aboriginal rights and title or to
restrict log processing to local or appurtenant saw mills or to mandate amounts of work to be provided or rates to be
paid to harvesting contractors, 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 or new regulations on the work to be provided and rates to be paid to these contractors may increase our
timber harvesting costs.
We also rely on the purchase of logs and increased competition for logs, or shortages of logs may result in increases in
our log purchase costs.
We rely on log supply agreements in the U.S. which are subject to log availability and based on market prices.
Approximately 18% 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. Open market purchases come from timber real estate
investment trusts, timberland investment management organizations and private land owners. Changes in the log
markets in which we operate 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
in November 2016 a group of U.S. lumber producers petitioned the USDOC and the USITC to impose trade sanctions
against Canadian softwood lumber exports to the U.S. In 2017 duties were imposed on Canadian softwood lumber
exports to the U.S. The duties are likely to remain in place 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
- 54 -
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 USDOC into alleged subsidies and dumping of
Canadian softwood lumber. In addition, the current trade dispute between the U.S. and China could negatively impact
either or both the U.S. and Chinese economies which could have an adverse effect on the demand for our products and
could adversely affect our financial results.
Natural and Man-Made Disasters and Climate Change
Our operations are subject to adverse natural or man-made events such as forest fires, flooding, hurricanes and other
severe weather conditions, climate change, timber diseases and insect infestations including those that may be
associated with warmer climate conditions, and earthquake activity. Over the past several years, changing weather
patterns and climatic conditions due to natural and man-made causes have added to the unpredictability and
frequency of natural events such as severe weather, hurricanes, flooding, hailstorms, wildfires, snow, ice storms, and
the spread of disease and insect infestations. These events could damage or destroy or adversely affect the operations
at our physical facilities or our timber supply or our access to or availability of 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 the reduced availability of timber, decreased production output, increased operating costs or the
reduced availability of transportation. 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 and British Columbia Wildfires
The long-term effect of the mountain pine beetle infestation and the 2017 and 2018 wildfire outbreaks in British
Columbia on our Canadian operations is uncertain. The potential effects include a reduction of future Annual
Allowable Cut (“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 and fire damaged logs as well
as increased production costs. These effects are also present in some of our Alberta operations where the mountain
pine beetle infestation has expanded. 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 and fire damaged 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
and operational issue. 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 and fire damaged 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 and operational challenges 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. 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
Capital Plans
- 55 -
Our capital plans will include, from time to time, expansion, productivity improvement, technology upgrades, operating
efficiency optimization and maintenance, 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, or if we fail to achieve the intended efficiencies, 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 and our ability to execute
on such plans may be adversely affected by availability of, and competition for, qualified workers and contractors,
machinery and equipment lead times, changes in government regulations, unexpected delays and increases in costs of
completing capital projects including due to increased materials, machinery and equipment costs resulting from trade
disputes and increased tariffs and duties.
Capital Resources
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.
Availability of Credit
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;
the ability of our customers to purchase our products; and
our ability to take advantage of growth, expansion or acquisition opportunities.
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 results.
Credit Ratings
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.
Costs of Materials and Energy
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
- 56 -
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
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, fire hazards, and the availability or cost of raw materials including logs and wood chips.
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.
Transportation Requirements
Our business depends on our ability to transport a high volume of products and raw materials to and from our
production facilities and on 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, availability of equipment and operators, disruptions due to weather, natural
disasters and labour disputes. Transportation services may also be impacted by seasonal factors, which could impact
the timely delivery of raw materials and distribution of products to customers. As a result of rail capacity constraints,
access to adequate transportation capacity has at times been strained and could affect our ability to transport lumber
and pulp to markets and could result in increased product inventories. 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 and services for our capital projects. Because our operations are generally located away from major
urban centres, we often face strong competition from our industry and others such as oil and gas production and
mining for labour and services, particularly skilled trades. Shortages of key services or shortages of labour, including
those caused by a failure to attract and retain a sufficient number of qualified employees and other personnel or high
employee turnover could impair our operations by reducing production or increasing costs or the ability to execute on
our capital projects including timing and 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
- 57 -
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. In addition,
changes in the regulatory environment respecting climate change have and may lead governments and regulatory
bodies to enact additional or more stringent laws and regulations and impose operational restrictions or incremental
levies and taxes applicable to our Company.
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, 2018.
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. log 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, Metis 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. The requirement to consult with aboriginal groups has also increased in recent years.
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.
In addition, the Canadian federal government and the provincial governments in Alberta and British Columbia have
made commitments to renew their relationships with aboriginal groups and have expressed their support for the
- 58 -
United Nations Declaration on the Rights of Indigenous Peoples (“UNDRIP”) and their intent to adopt and implement
UNDRIP. At this time, it is unclear whether or how UNDRIP will be adopted into Canadian law and its impact on the
Crown’s duty to consult with and accommodate aboriginal groups. At this time, we are unable to assess the effect, if
any, that the adoption and implementation of UNDRIP by federal and provincial governments may have on land claims
or consultation requirements or on our business, but the impact may be material.
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 (including, but
not limited to, income, sales and carbon 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.
Foreign Currency Exchange Rates
Our Canadian operations sell the majority of its products at prices denominated in U.S. dollars or based on prevailing
U.S. dollar prices. A significant portion of its 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 our Canadian operations from sales made in U.S. dollars, which reduces operating margin and
the cash flow available to fund operations. Canadian operations are also exposed to the risk of exchange rate
fluctuations in the period between sale and payment. To mitigate the exposure of Canadian operations to currency
fluctuations, we have 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. The translation gains or losses for our Canadian operations
are reported in earnings in the Financial Statements.
Our U.S. operations transact and report in U.S. dollars, but their results are translated into Canadian dollars for
Financial Statement purposes with the resulting translation gains or losses being reported in other comprehensive
earnings.
- 59 -
Exchange rate fluctuations result in exchange gains or losses and changes in other comprehensive earnings. 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 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, steel, engineered wood products, 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, 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. We are also subject to regulatory changes regarding
these plans which may increase the funding requirements which would in turn reduce the availability of capital for
other purposes.
Information Technology
We are reliant on our information and operations technology systems to operate our manufacturing facilities, access
fibre, communicate internally and with suppliers and customers, to sell our products and to process payments and
payroll as well as for other corporate purposes and financial reporting. An interruption or failure or unsuccessful
implementation and integration of our information and operations technology systems could result in a material
adverse effect on our operations, business, financial condition and results of operations.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, proprietary
business and confidential financial information and identifiable personal information of our employees. We rely on
industry accepted security measures and technology to protect our information systems and confidential and
proprietary information.
- 60 -
However, our information and operations technology systems, including process control systems, are still subject to
cyber security risks and are vulnerable to natural disasters, fires, power outages, vandalism, attacks by hackers or
others or breaches due to employee error or other disruptions. Any such attack on or breach of our systems including
through exposure to potential computer viruses or malware could compromise our systems and stored information
may be accessed, publicly disclosed, lost or compromised, which could result in legal claims or proceedings, liability
under laws that protect the privacy of personal information, regulatory penalties, disruptions to our operations,
decreased performance and production, increased costs, and damage to our reputation, which could have a material
adverse effect on our business, financial condition and results of operations. As cyber security threats continue to
evolve, we may be required to expend additional resources to continue to modify or enhance protective measures or
to investigate and remediate any security vulnerabilities. However, our exposure to these risks cannot be fully
mitigated due to the nature of these threats.
Controls and Procedures
Disclosure Controls and Procedures
West Fraser’s management is responsible for establishing and maintaining a system of disclosure controls and
procedures to provide reasonable assurance that all material information relating to West Fraser is gathered and
reported to senior management, including the Chief Executive Officer and the Vice-President, Finance and Chief
Financial Officer, on a timely basis so that appropriate decisions can be made regarding public disclosure.
Internal Control over Financial Reporting
West Fraser’s management is also responsible for establishing and maintaining adequate internal control over financial
reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
consolidated financial statements for external reporting purposes in accordance with IFRS.
There has been no change in the design of West Fraser’s internal control over financial reporting during the year ended
December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Evaluation of Effectiveness of Internal Controls
As required by National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109),
West Fraser’s management, under the supervision of the Chief Executive Officer and the Vice-President, Finance and
Chief Financial Officer, has caused the effectiveness of the disclosure controls and procedures and internal control over
financial reporting to be evaluated as of December 31, 2018. Based on that evaluation, the Chief Executive Officer and
the Vice-President, Finance and Chief Financial Officer have concluded that West Fraser’s disclosure controls and
procedures and internal control over financial reporting were effective as of December 31, 2018.
Additional Information
Additional information relating to West Fraser, including our Annual Information Form, can be found on SEDAR at
www.sedar.com.
RESPONSIBILITY OF MANAGEMENT
- 61 -
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 four 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
Chief Executive Officer
February 12, 2019
Chris Virostek
Vice-President, Finance
and Chief Financial Officer
- 62 -
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of West Fraser Timber Co. Ltd.
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial
position of West Fraser Timber Co. Ltd. and its subsidiaries (together, the Company) as at December 31, 2018 and
2017, and its financial performance and its cash flows for the years then ended in accordance with International
Financial Reporting Standards (IFRS).
What we have audited
The Company’s consolidated financial statements comprise:
•
•
•
•
•
the consolidated balance sheets as at December 31, 2018 and 2017;
the consolidated statements of earnings and comprehensive earnings for the years then ended;
the consolidated statements of changes in shareholders’ equity for the years then ended;
the consolidated statements of cash flows for the years then ended; and
the notes to the consolidated financial statements, which include a summary of significant accounting policies.
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities
under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial
statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the
consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with
these requirements.
Other information
Management is responsible for the other information. The other information comprises the Management’s Discussion
and Analysis, which we obtained prior to the date of this auditor’s report and the information, other than the
consolidated financial statements and our auditor’s report thereon, included in the annual report, which is expected to
be made available to us after that date.
Our opinion on the consolidated financial statements does not cover the other information and we do not and will not
express an opinion or any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the other information is materially inconsistent with
the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially
misstated.
If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s
report, we conclude that there is a material misstatement of this other information, we are required to report that fact.
- 63 -
We have nothing to report in this regard. When we read the information, other than the consolidated financial
statements and our auditor’s report thereon, included in the annual report, if we conclude that there is a material
misstatement therein, we are required to communicate the matter to those charged with governance.
Responsibilities of management and those charged with governance for the consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in
accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation
of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern
basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no
realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are
free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our
opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it
exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these
consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional
judgment and maintain professional skepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due
to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence
that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion,
forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control.
•
•
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and
related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on
the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may
cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the
consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future
events or conditions may cause the Company to cease to continue as a going concern.
•
Evaluate the overall presentation, structure and content of the consolidated financial statements, including
the disclosures, and whether the consolidated financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
- 64 -
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business
activities within the Company to express an opinion on the consolidated financial statements. We are
responsible for the direction, supervision and performance of the group audit. We remain solely responsible
for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing
of the audit and significant audit findings, including any significant deficiencies in internal control that we identify
during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is John Bunting.
Chartered Professional Accountants
Vancouver, British Columbia
February 12, 2019
- 65 -
West Fraser Timber Co. Ltd.
Consolidated Balance Sheets
As at December 31, 2018 and 2017
(in millions of Canadian dollars, except where indicated)
Assets
Current assets
Cash and short-term investments
Receivables (note 24)
Income taxes receivable
Inventories (note 6)
Prepaid expenses
Property, plant and equipment (note 7)
Timber licences (note 8)
Goodwill and other intangibles (note 9)
Export duty deposits (note 27)
Other assets (note 10)
Deferred income tax assets (note 19)
Liabilities
Current liabilities
Cheques issued in excess of funds on deposit
Operating loans (note 13)
Payables and accrued liabilities (note 11)
Income taxes payable
Reforestation and decommissioning obligations (note 12)
Long-term debt (note 13)
Other liabilities (note 12)
Deferred income tax liabilities (note 19)
Shareholders’ Equity
Share capital (note 15)
Accumulated other comprehensive earnings
Retained earnings
Approved by the Board of Directors
Reid Carter
Director
Robert L. Phillips
Lead Director
2018
2017
$
$
$
$
160
332
48
791
14
1,345
2,056
513
767
75
32
3
4,791
13
61
448
34
39
595
692
316
292
1,895
491
170
2,235
2,896
4,791
$
$
$
$
258
352
-
670
11
1,291
1,892
533
731
37
27
6
4,517
-
-
441
104
38
583
636
347
225
1,791
549
108
2,069
2,726
4,517
- 66 -
West Fraser Timber Co. Ltd.
Consolidated Statements of Earnings and Comprehensive Earnings
For the years ended December 31, 2018 and 2017
(in millions of Canadian dollars, except where indicated)
Sales
Costs and expenses
Cost of products sold
Freight and other distribution costs
Export duties (note 27)
Amortization
Selling, general and administration
Equity-based compensation (note 16)
Operating earnings
Finance expense (note 17)
Other (note 18)
Earnings before tax
Tax provision (note 19)
Earnings
Earnings per share (dollars) (note 21)
Basic
Diluted
Comprehensive earnings
Earnings
Other comprehensive earnings
Translation gain (loss) on foreign operations1
Actuarial gain (loss) on post-retirement benefits2
Comprehensive earnings
1.
2.
Recycled through earnings in the event of a disposal in net investment in foreign operations.
Adjusted through retained earnings. Net of tax provision of $9 million (2017 - $7 million recovery).
2018
2017
$
6,118
$
5,134
3,617
732
202
257
231
7
5,046
1,072
(37)
37
1,072
(262)
810
10.88
10.62
810
62
24
896
$
$
$
$
$
3,124
633
48
210
217
32
4,264
870
(31)
7
846
(250)
596
7.63
7.63
596
(42)
(26)
528
$
$
$
$
$
- 67 -
West Fraser Timber Co. Ltd.
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2018 and 2017
(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, 2016
78,162,568 $
549
$
150
$
1,542
$
2,241
Changes in Shareholders’ Equity for 2017
Translation loss on foreign operations
Actuarial loss on post-retirement
benefits
Issuance of Common shares
Repurchase of Common shares
Earnings for the year
Dividends1
Balance - December 31, 2017
Changes in Shareholders’ Equity for 2018
Translation gain on foreign operations
Actuarial gain on post-retirement
benefits
Issuance of Common shares
Repurchase of Common shares
Earnings for the year
Dividends1
Balance - December 31, 2018
1.
-
-
(42)
-
(42)
-
29,113
(245,645)
-
-
77,946,036 $
-
2
(2)
-
-
549
-
-
-
8,598
(8,135,796)
-
-
69,818,838 $
-
1
(59)
-
-
491
$
$
-
-
-
-
-
108
62
-
-
-
-
-
170
(26)
-
(15)
596
(28)
2,069
(26)
2
(17)
596
(28)
2,726
$
-
62
24
-
(617)
810
(51)
2,235
24
1
(676)
810
(51)
2,896
$
$
$
Represents dividends declared of $0.70 per share for 2018 and $0.36 per share for 2017.
- 68 -
West Fraser Timber Co. Ltd.
Consolidated Statements of Cash Flows
For the years ended December 31, 2018 and 2017
(in millions of Canadian dollars, except where indicated)
Cash provided by operations
Earnings
Adjustments
Amortization
Finance expense
Foreign exchange gain on long-term financing
Foreign exchange gain on long-term duty deposits
Export duty deposits (note 27)
Post-retirement expense
Contributions to post-retirement benefit plans
Tax provision
Income taxes paid
Other
Changes in non-cash working capital
Receivables
Inventories
Prepaid expenses
Payables and accrued liabilities
Cash provided by (used for) financing
Proceeds from long-term debt
Proceeds from operating loans
Finance expense paid
Dividends
Repurchase of Common shares
Other
Cash used for investing
Acquisition (note 5)
Additions to capital assets
Government assistance (note 23)
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
2018
2017
$
810
$
596
257
37
(10)
(5)
(31)
84
(103)
262
(316)
(2)
39
(105)
(3)
(5)
909
-
63
(32)
(37)
(675)
-
(681)
-
(370)
6
10
(354)
(126)
15
258
147
160
(13)
147
$
$
$
210
31
(10)
(1)
(36)
82
(69)
250
(73)
(16)
(34)
(64)
(1)
37
902
250
-
(23)
(28)
(17)
(1)
181
(526)
(336)
3
5
(854)
229
(6)
35
258
258
-
258
$
$
$
- 69 -
West Fraser Timber Co. Ltd.
Notes to Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(figures are 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 12, 2019.
Our consolidated financial statements have been prepared under the historical cost basis, except for certain items
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 the respective
note.
We have reclassified certain prior-year amounts to conform to current-year’s presentation.
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., West Fraser Southeast, 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 judgments
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 judgment in the process of applying accounting policies. Significant areas
requiring estimates include recoverability of long-lived assets and goodwill, duty deposits related to the softwood
lumber dispute, 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 judgments 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 we own
less than 100% of the entity.
Revenue recognition
- 70 -
Revenue is derived primarily from product sales and is recognized when a customer obtains control over the
goods. For most of our sales, control is obtained when the product is loaded on a common carrier at our mill.
Some of our revenue is recognized when the product is delivered to the customer or when it is loaded on an ocean
carrier. The amount of revenue recognized is net of our estimate for early payment discounts and volume rebates.
Revenue includes charges for freight, handling, countervailing and antidumping duties. The costs related to these
revenues are recorded in freight and other distribution costs and export duties.
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 financing, 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. 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. We
perform an annual test for goodwill impairment.
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.
- 71 -
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. Goodwill impairment
losses cannot be reversed.
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.
Changes in accounting standards
IFRS 9 - Financial Instruments
We have adopted IFRS 9 effective January 1, 2018 using the full retrospective method. The new standard for
financial instruments, IFRS 9, replaces IAS 39 - Financial Instruments: Recognition and Measurement. It makes
changes to the previous guidance on the classification and measurement of financial assets and introduces an
‘expected credit loss’ model for the impairment of financial assets. IFRS 9 also contains new requirements on the
application of hedge accounting.
The adoption of this standard had no significant impact on our consolidated financial statements and no
retrospective adjustments were necessary.
IFRS 15 - Revenue from Contracts with Customers
We have adopted IFRS 15 effective January 1, 2018 using the full retrospective method. The new revenue
standard, IFRS 15, replaces IAS 18 - Revenue, IAS 11 - Construction Contracts and the related interpretations. This
standard addresses revenue recognition and establishes principles for reporting information about the nature,
- 72 -
amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.
IFRS 15 requires that revenue is recognized at the ‘transaction price’ when certain contractual obligations are met
but with any ‘variable consideration’ elements of the price recognized when it is ‘highly probable’ that there will be
no reversal of that revenue.
The adoption of this standard had no significant impact on our consolidated financial statements and no
retrospective adjustments were necessary.
4.
Accounting standards, amendments and interpretations issued but not yet applied
IFRS 16 - Leases
IFRS 16 was issued in January 2016. This standard is effective for annual periods beginning on or after January 1,
2019 with earlier application permitted. The new standard replaces IAS 17 - Leases and the related
interpretations.
IFRS 16 eliminates the classification of leases as either operating leases or finance leases for a lessee. This
standard establishes a single, on-balance sheet accounting model for all leases which will result in the recognition
of a right-of-use asset and a lease obligation. The nature of expenses related to those leases will change as IFRS 16
replaces the straight-line operating lease expense, currently reported under cost of products sold on our
consolidated statements of earnings, with a depreciation charge for the right-of-use asset and an interest expense
on the lease liability which will be reported under finance expense. Although the depreciation charge is typically
even, the interest expense reduces over the life of the lease as lease payments are made. This results in a reducing
total expense as an individual lease matures.
IFRS 16 allows two exemptions for short-term and low-value leases for which the payments will be recognized as
an expense, typically on a straight-line basis over the lease term.
We will apply IFRS 16 initially on January 1, 2019, using the modified retrospective approach. Under this method,
the right-of-use asset is recognized at the date of the initial application at an amount equal to the lease liability,
using the company’s incremental borrowing rate. Comparative figures are not restated.
We completed the assessment for the potential impact on our consolidated financial statements and anticipate
that IFRS 16 will not have a significant impact our consolidated financial statements. The most significant impact
identified is that we will recognize approximatively $17 million in right-of-use assets under property, plant and
equipment on our consolidated balance sheets and approximatively $17 million long-term liabilities for the leases
related to some of our office spaces and vehicles with minimal impact on our consolidated statements of earnings.
IAS 19 - Amendments, Employee Benefits
In February 2018, IAS 19 was amended. The amendments specify how companies should calculate pension
expenses when changes to a defined benefit pension plan occur. The standard requires updated actuarial
assumptions after a plan amendment, curtailment or settlement. The amendments also require a company to
recognize through earnings any reduction in a surplus, even if that surplus was not previously recognized due to an
asset ceiling limitation.
The amendments to IAS 19 must be applied prospectively to plan amendments, curtailments or settlements
occurring on or after January 1, 2019. We do not expect these amendments to have a significant effect on our
consolidated financial statements.
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.
5.
Acquisition
- 73 -
On August 31, 2017, we completed the acquisition of six sawmills that produce southern yellow pine lumber and a
finger-joint mill in Florida and Georgia as well as an administrative office in Georgia (the “Gilman Acquisition”).
The consideration paid, net of cash acquired, was $526 million (US$419 million) and the transaction was an
acquisition of shares. The acquisition was financed with cash on hand, borrowings on our revolving credit facility
and a $250 million (US$200 million) term loan. In December 2018, we ceased operations at the finger-joint mill.
The transaction has been accounted for as an acquisition of a business and the purchase price has been allocated
over the estimated fair value of the assets purchased and liabilities assumed. We have allocated the purchase
price as follows:
Net assets acquired
Less: cash acquired
Net non-cash assets acquired
Allocation:
Current assets
Current liabilities
Property, plant and equipment
Goodwill
Employee future benefits
Deferred income tax asset, net
December 31, 2017
$
$
607
(81)
526
58
(12)
91
355
(11)
45
526
Factors contributing to goodwill include the Gilman workforce, assets that are geographically complementary to
our existing facilities and offer close access to large markets, the available timber basket and multiple markets for
residuals. This transaction strengthens our core lumber business and gives us increased scale and geographic
diversification. This was a rare opportunity to acquire a U.S. lumber producer with meaningful capacity, high
quality facilities and a culture similar to our own. The goodwill of $355 million is not deductible for tax purposes.
6.
Inventories
Accounting policies
Inventories of manufactured products, logs and other raw materials 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
Manufactured products
Logs and other raw materials
Processing materials and supplies
2018
421
218
152
791
$
$
2017
358
167
145
670
$
$
Inventories at December 31, 2018 were written down by $30 million (December 31, 2017 - $9 million) to reflect
net realizable value being lower than cost.
The carrying amount of inventory recorded at net realizable value was $149 million at December 31, 2018
(December 31, 2017 - $33 million), with the remaining inventory recorded at cost.
- 74 -
7.
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
10 - 30 years
6 - 20 years
3 - 10 years
Not exceeding 40 years
12 to 36 months
- 75 -
Supporting Information
Manufacturing
plant,
equipment &
machinery
1,444
164
85
(175)
(35)
(1)
128
1,610
4,047
(2,437)
1,610
1,610
168
(218)
54
(5)
169
1,778
Construction-
in-progress
160
165
3
-
(2)
-
(131)
195
195
-
195
195
151
-
10
-
(169)
187
$
$
$
$
$
$
Roads
&
bridges
41
17
-
(14)
-
-
1
45
138
(93)
45
45
17
(15)
-
-
-
47
$
$
$
$
$
$
As at December 31, 2016
Additions
Acquisition
Amortization1
Foreign exchange
Disposals
Transfers
As at December 31, 2017
As at December 31, 2017
Cost
Accumulated amortization
Net
As at December 31, 2017
Additions
Amortization1
Foreign exchange
Disposals
Transfers
As at December 31, 2018
$
$
$
$
$
$
$
$
$
$
$
Other
$
Total
1,685
347
91
(189)
(39)
(1)
(2)
1,892
4,429
(2,537)
1,892
1,892
337
(233)
65
(5)
-
2,056
$
$
$
$
$
$
40
1
3
-
(2)
-
-
42
49
(7)
42
42
1
-
1
-
-
44
As at December 31, 2018
4,830
Cost
(2,774)
Accumulated amortization
2,056
$
Net
1. Amortization of $230 million relates to cost of products sold and $3 million relates to selling, general and administration expense (2017 -
4,444
(2,666)
1,778
148
(101)
47
187
-
187
51
(7)
44
$
$
$
$
$
$
$
$
$
$186 million and $3 million, respectively).
8.
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.
- 76 -
Supporting information
As at December 31, 2016
Amortization1
Acquisition
As at December 31, 2017
As at December 31, 2017
Cost
Accumulated amortization
Net
As at December 31, 2017
Amortization1
As at December 31, 2018
As at December 31, 2018
Cost
Accumulated amortization
Net
1.
Amortization relates to cost of products sold.
9.
Goodwill and other intangibles
Accounting policies
Timber
licences
551
(19)
1
533
800
(267)
533
533
(20)
513
800
(287)
513
$
$
$
$
$
$
$
$
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 annual impairment test. An additional impairment test is
conducted if events or circumstances indicate that goodwill 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 10 years and non-replaceable finite term timber rights
which are amortized as the related timber is logged.
Supporting information
As at December 31, 2016
Additions
Acquisition
Transfers
Amortization1
Foreign exchange
As at December 31, 2017
As at December 31, 2017
Cost
Accumulated amortization
Net
As at December 31, 2017
Additions
Amortization1
Foreign exchange
Disposals
As at December 31, 2018
As at December 31, 2018
Cost
Accumulated amortization
Net
1.
- 77 -
Goodwill
356
-
355
-
-
(6)
705
705
-
705
705
-
-
38
-
743
743
-
743
$
$
$
$
$
$
$
$
Other
15
11
-
2
(2)
-
26
47
(21)
26
26
6
(4)
-
(4)
24
48
(24)
24
$
$
$
$
$
$
$
$
Total
371
11
355
2
(2)
(6)
731
752
(21)
731
731
6
(4)
38
(4)
767
791
(24)
767
$
$
$
$
$
$
$
$
Amortization of $2 million relates to cost of products sold and $2 million relates to selling, general and administration expense (2017 - $1
million and $1 million, respectively).
Goodwill
We have attributed $218 million of goodwill to a CGU made up of our Canadian lumber operations, $479 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 2018 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 are approved by management and use
cash flow projections based on the 2019 operating plan, a forecast of 2020 and 2021 and trend level earnings for
subsequent years. Assumptions were developed by management based on industry sources after taking into
account management’s best estimates. No impairment on goodwill has been recognized.
10.
Other assets
Post-retirement (note 14)
Deferred financing costs on lines of credit (note 13)
Other
2018
12
-
20
32
$
$
2017
13
2
12
27
$
$
11.
Payables and accrued liabilities
- 78 -
Trade accounts
Equity-based compensation
Compensation
Export duties
Dividends
Interest
Other
12.
Other liabilities
Post-retirement (note 14)
Reforestation
Decommissioning
Other
2018
260
51
78
17
14
5
23
448
2018
189
76
29
22
316
$
$
$
$
2017
244
79
74
8
8
5
23
441
2017
231
70
25
21
347
$
$
$
$
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
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
Change in estimates
End of year
Less: current portion
Reforestation
2018
108
46
(46)
7
115
(39)
76
2017
113
47
(45)
(7)
108
(38)
70
$
$
$
$
$
$
$
Decommissioning
2018
25
-
-
4
29
-
29
2017
25
-
-
-
25
-
25
$
- 79 -
The total undiscounted amount of the estimated cash flows required to satisfy these obligations is $158 million
(2017 - $147 million). The cash flows have been discounted using interest rates ranging from 1.86% to 1.88%
(2017 - 1.68% to 1.86%).
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 47 years.
13.
Long-term debt and operating loans
Accounting policies
Transaction costs related to debt financing or 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$200 million term loan due August 2022; floating interest rate
US$8 million note payable due October 2020; interest at 2%
Notes payable
Deferred financing costs
Required principal repayments are disclosed in note 24.
Operating loans
2018
409
273
10
4
696
(4)
692
$
$
2017
376
251
10
4
641
(5)
636
$
$
Our revolving lines of credit consist of a $500 million committed revolving credit facility which matures August 25,
2022, 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 $70 million dedicated to letters of credit, of which US$15 million is dedicated to our U.S.
operations.
At December 31, 2018, $61 million (net of deferred financing costs of $2 million) was drawn under our revolving
credit facility. Letters of credit in the amount of $58 million were also supported by our facilities, leaving $491
million of credit available for further use. At December 31, 2017, our revolving credit facility was undrawn,
deferred financing costs of $2 million were recorded in other assets and our outstanding letters of credit were $47
million.
Interest on the facilities is payable at floating rates based on Prime, Base Rate Advances, Bankers’ Acceptances or
LIBOR Advances 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.
14.
Post-retirement benefits
- 80 -
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 Retirement Committees which report to the Human Resources & Compensation Committee of 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 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.
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.
Supporting information
The actual return on plan assets for 2018 is a loss of $4 million (2017 - $123 million gain). The total pension
expense for the defined benefit plans is $73 million (2017 - $72 million). In 2018, we made contributions of $86
million (2017 - $52 million). We expect to contribute approximately $69 million to our defined benefit pension
plans during 2019 based on the most recent valuation report for each pension plan. We also provide group life
insurance, medical and extended health benefits to certain employee groups, for which we contributed $2 million
in 2018 (2017 - $3 million).
The total pension expense and funding contributions for the defined contribution pension plans is $15 million
(2017 - $14 million).
In 2018, we entered into annuity purchase agreements to settle approximately $480 million of our defined benefit
obligations by purchasing annuities using our plan assets. These agreements transferred the pension obligations of
retired employees under certain pension plans to financial institutions. The difference between the cost of the
annuity purchase and the liabilities held for these pension plans is reflected as a settlement cost. As part of the
annuity purchase, we contributed $5 million to these plans.
The status of the defined benefit pension plans and other retirement benefit plans, in aggregate, is as follows:
- 81 -
Accrued benefit obligations
Benefit obligations – opening
Acquisition
Service cost
Finance cost on obligation
Benefits paid
Actuarial loss (gain) due to change in financial
assumptions
Actuarial loss (gain) due to
demography/experience
Settlement
Other
Benefit obligations - ending
Plan assets
Fair value - opening
Acquisition
Finance income on plan assets
Actuarial gain (loss) on plan assets
Employer contributions
Benefits paid
Settlement
Other
Fair value - ending
Funded status1
Post-retirement assets
Impact of minimum funding requirement 2
Post-retirement assets (note 10)
Post-retirement liabilities (note 12)
Defined benefit
pension plans
Other retirement benefit
plans
2018
2017
2018
2017
$
$
$
$
$
$
1,821
-
66
61
(66)
(83)
16
(480)
12
1,347
1,658
-
54
(58)
86
(66)
(479)
9
1,204
12
-
12
(155)
(143)
$
$
$
$
$
$
1,598
68
67
61
(66)
73
36
(10)
(6)
1,821
1,507
57
56
67
52
(66)
(11)
(4)
1,658
25
(12)
13
(188)
(175)
$
$
$
$
$
$
43
-
3
2
(2)
(5)
(7)
-
-
34
-
-
-
-
2
(2)
-
-
-
-
-
-
(34)
(34)
$
$
$
$
$
$
51
-
1
2
(3)
(8)
-
-
-
43
-
-
-
-
3
(3)
-
-
-
-
-
-
(43)
(43)
1.
2.
Plans in a surplus position are classified as assets and plans in a deficit position are shown as liabilities on the consolidated balance sheets.
Other retirement benefit plans continue to be unfunded.
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
Service cost
Net finance expense
Defined benefit
pension plans
Other retirement benefit
plans
2018
2017
2018
2017
$
$
66
7
73
$
$
67
5
72
$
$
3
2
5
$
$
1
2
3
Assumptions and sensitivities
- 82 -
The weighted average duration of the defined benefit pension obligations is 19 years, which increased by
approximatively two years compared to 2017. The projected future benefit payments for the defined benefit
pension plans at December 31, 2018 are as follows:
2019
2020
2021 to
2023
Thereafter
Total
Defined benefit pension
plans
$
34
$
38
$
139
$
2,457
$
2,668
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
2018
2017
2018
2017
3.75%
3.50%
3.50%
3.50%
3.50%
3.50%
3.75%
3.50%
3.75%
n/a
3.50%
n/a
3.50%
n/a
3.75%
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 7.0% in year one, grading down
0.25% per year for years two to ten, to 4.5% per year thereafter.
The impact of a change in these assumptions on our post-retirement obligations as at December 31, 2018 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
$
$
$
$
$
$
125
(106)
(20)
20
1
(2)
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
- 83 -
The assets of the pension plans are invested predominantly in a diversified range of equities and bonds. The
weighted average asset allocations of the defined benefit plans at December 31, by asset category, are as follows:
Target range1
Canadian equities
Foreign equities
Fixed income investments
Other investments
2017
14%
27%
48%
11%
100%
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.
9% - 25%
12% - 52%
35% - 45%
5% - 32%
2018
10%
24%
44%
22%
100%
1.
Risk management practices
We are exposed to various risks related to our defined benefit pension and other post-retirement benefit plans:
• Uncertainty in benefit payments: The value of the liability for post-retirement benefits will ultimately
depend on the amount of benefits paid and this in turn will depend on the level of future compensation
increase and how long individuals live.
• Volatility in asset value: We are exposed to changes in the market value of pension plan investments
which are required to fund future benefit payments.
• Uncertainty in cash funding: Movement in the value of the assets and obligations may result in increased
levels of cash funding, although changes in the level of cash funding required can be spread over a
number of years. We are also exposed to changes in pension regulation and legislation.
Our retirement committees manage these risks in accordance with a Statement of Investment Policies and
Procedures for each pension plan or group of plans administered under master trust agreements. 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.
- 84 -
15.
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
2018
Number
67,537,360 $
2,281,478
69,818,838 $
Amount
491
-
491
2017
Number
75,664,558 $
2,281,478
77,946,036 $
Amount
549
-
549
In 2018 we repurchased 8,135,796 Common shares for $676 million and in 2017 we repurchased 245,645 Common
shares for $17 million.
On September 17, 2018, our Board of Directors authorized the renewal of our normal course issuer bid (“NCIB”)
program to repurchase for cancellation up to 5,524,048 Common shares or approximately 10% of the public float
as at September 11, 2018. The NCIB will expire on September 18, 2019 and our previous NCIB expired on
September 18, 2018.
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.
16.
Equity-based compensation
We have share option, phantom share unit (“PSU”) and directors’ deferred share unit (“DSU”) plans. We have
partially hedged our exposure under these plans with an equity derivative contract. The equity-based
compensation expense included in the consolidated statement of earnings is $7 million (2017 - $32 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. We 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.
- 85 -
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 483,705 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 $9 million (2017 - expense of $52 million) related
to the share option plan.
A summary of the activity in the share option plan is presented below:
Outstanding - beginning of year
Granted
Exercised
Expired / Cancelled
Outstanding - end of year
Exercisable - end of year
2018
2017
Number
1,435,938
112,715
(335,306)
(8,899)
1,204,448
809,740
Weighted
average
price
(dollars)
37.19
85.40
25.16
51.88
44.94
37.37
$
$
$
$
$
$
Number
2,119,886
192,255
(872,973)
(3,230)
1,435,938
978,341
Weighted
average
price
(dollars)
29.83
53.11
22.77
55.13
37.19
30.68
$
$
$
$
$
$
The following table summarizes information about the share options outstanding and exercisable at December 31,
2018:
Exercise price range
(dollars)
$12.36
$23.65 - $25.75
$40.82 - $55.62
$73.99 - $85.40
Weighted
average
remaining
contractual
life
(years)
0.1
2.7
6.4
7.6
5.2
Number of
outstanding
options
(number)
128,500
235,466
615,128
225,354
1,204,448
Weighted
average
exercise price
(dollars)
12.36
24.62
46.79
79.66
44.94
Number of
exercisable
options
(number)
128,500
235,466
360,413
85,361
809,740
$
$
$
$
$
$
$
$
$
$
Weighted
average
exercise
price
(dollars)
12.36
24.62
45.74
74.82
37.37
The weighted average share price at the date of exercise for share options exercised during the year was $83.43
per share (2017 - $67.80 per share).
The accrued liability related to the share option plan based on a Black-Scholes valuation model is $36 million at
December 31, 2018 (December 31, 2017 - $63 million). The weighted average fair value of the options used in the
calculation was $30.15 per option at December 31, 2018 (December 31, 2017 - $43.79 per option).
- 86 -
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
2018
$67.30
$44.93
$0.80
35.19%
1.87%
3.4
2017
$77.33
$37.19
$0.44
33.34%
1.76%
3.5
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, 2018 was $29 million
(December 31, 2017 - $56 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, in whole or in part, or 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 $5 million (2017 - $6 million) related to the PSU plan. The number of units
outstanding as at December 31, 2018 was 155,595 (December 31, 2017 - 109,414), including performance share
units totalling 84,966 (December 31, 2017 - 48,268).
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.
We have recorded an expense of nil (2017 - $4 million) related to the DSU plan. The number of Units outstanding
as at December 31, 2018 was 52,930 (December 31, 2017 - 102,757).
Equity-based compensation hedge
- 87 -
During this year, we terminated our equity derivative contract under which we hedged 1,000,000 Common share
equivalent units at a $46.02 share price. The contract was closed at a $66.46 per share. At the same time, a new
equity derivative contract to hedge 1,000,000 Common share equivalent units at a $66.46 per share was initiated.
An expense of $10 million (2017 - recovery of $30 million) is included in equity-based compensation related to
these contracts.
17.
Finance expense, net
Interest expense
Interest income on short-term investments
Interest income on long-term duty deposits receivable (note 27)
Finance expense on employee future benefits
Accretion on long-term liabilities
18.
Other
Foreign exchange gain (loss) on working capital
Foreign exchange gain (loss) on intercompany financing1
Foreign exchange gain (loss) on long-term debt (note 27)
Insurance gain on disposal of equipment2
Foreign exchange gain on export duty deposits receivable (note 27)
Other3
2018
(34)
5
2
(9)
(1)
(37)
2018
13
65
(55)
-
5
9
37
$
$
$
$
2017
(25)
1
-
(7)
-
(31)
2017
(11)
(15)
25
7
1
-
7
$
$
$
$
1.
2.
Relates to US$600 million from January to mid-December and US$550 million thereafter (2017 - US$600 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.
Represents the insurance gain of $7 million recognized in 2017 related to equipment damaged at our jointly-owned NBSK plant in
Quesnel. Estimated insurance proceeds for equipment replacement are accounted for as proceeds on disposition, and the resulting gain
is included in other income.
3. Other includes gain on disposal of intangible assets and gain on sale of lumber futures.
19.
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.
- 88 -
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
Deferred tax (expense) recovery on post-retirement actuarial losses
Tax provision on comprehensive earnings
1.
Includes the impact of the 2017 statutory changes for British Columbia and the United States.
2018
(207)
(55)
(262)
(9)
(271)
20171
(158)
(92)
(250)
7
(243)
$
$
$
$
$
$
$
$
The tax provision differs from the amount that would have resulted from applying the British Columbia statutory
income tax rate to earnings before tax is as follows:
Income tax expense at statutory rate of 27% (2017 - 26%)
Non-taxable amounts
Rate differentials between jurisdictions and on specified activities
Unrecognized capital losses
Impact of statutory tax changes1
Other
Tax provision
1.
2017
(220)
(6)
(20)
1
(6)
1
(250)
Represents the re-measurement of deferred income tax assets and liabilities for the British Columbia tax rate change from 11% to 12%
and the impact of United States tax reform, both of which were substantively enacted as at December 31, 2017.
2018
(289)
2
20
1
-
4
(262)
$
$
$
$
Deferred income taxes are made up of the following components:
Property, plant, equipment and intangibles
Reforestation and decommissioning obligations
Employee future benefits
Tax loss carry-forwards1
Other
Represented by:
Deferred income tax assets
Deferred income tax liabilities
2018
402
(33)
(50)
(38)
8
289
(3)
292
289
$
$
$
$
2017
371
(30)
(61)
(58)
(3)
219
(6)
225
219
$
$
$
$
1.
Includes federal net operating loss (“NOL”) carry-forwards of $116 million expiring from 2025 to 2030. A portion of these NOL’s are
subject to restrictions on use.
20.
Employee compensation
Our employee compensation expense includes salaries and wages, employee future benefits, termination costs
and bonuses. Total compensation expense is $933 million (2017 - $872 million).
- 89 -
Key management includes directors and officers and their compensation expense 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
2018
2017
$
$
$
$
10
1
(3)
8
4
42
46
$
$
$
$
10
1
48
59
4
64
68
1.
Amounts do not necessarily represent the actual value which will ultimately be paid.
21.
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 expense (recovery)
Equity settled share option adjustment
Diluted
Weighted average number of shares (thousands)
Basic
Share options
Diluted
Earnings per share (dollars)
Basic
Diluted
2018
2017
$
$
810
(9)
(3)
798
$
$
596
52
(4)
644
74,451
652
75,103
78,097
858
78,955
$
$
10.88
10.62
$
$
7.63
7.63
- 90 -
22.
Commitments
Operating leases
We are committed to make payments under certain operating leases for equipment, land, building and office
space. Operating lease costs expensed during the year were $6 million (2017 - $6 million). The future payments
required under operating leases are as follows:
2019
2020
2021
2022
Thereafter
$
$
5
4
4
3
3
19
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, 2018 are $108 million.
23.
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 $16 million (2017 - $3 million) was recorded as a reduction to property, plant and
equipment. The majority of this relates to a grant for an energy reduction project.
Government assistance of $5 million (2017 - $14 million) was recorded as a reduction to cost of products sold. The
government assistance related primarily to research and development and apprentice tax credits
24.
Financial instruments
Accounting policies
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 profit or loss (“FVTPL”).
Supporting information
- 91 -
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”:
2018
Financial assets
Cash and short-term investments
Receivables1
Export duty deposits (note 27)
Financial liabilities
Cheques issued in excess of funds on
deposit
Operating loans (note 13)
Payables and accrued liabilities
Long-term debt (note 13)
2
Amortized
cost
Level
FVTPL
Other
financial
liabilities
Carrying
value
Fair value
1
3
3
1
1
2
2
$
$
$
$
160
331
75
566
-
-
-
-
-
$
$
$
$
-
1
-
1
-
-
-
-
-
$
$
$
$
-
-
-
-
13
63
448
696
1,220
$
$
$
$
160
332
75
567
13
63
448
696
1,220
$
$
$
$
160
332
75
567
13
63
448
689
1,213
1.
2.
Receivables include our equity derivative receivable of $1 million.
The fair value of the long-term debt is based on rates available to us at December 31, 2018 for long-term debt with similar terms and
remaining maturities.
2017
Financial assets
Cash and short-term investments
Receivables1
Export duty deposits (note 27)
Financial liabilities
Payables and accrued liabilities
Long-term debt (note 13)
2
Amortized
cost
Level
FVTPL
Other
financial
liabilities Carrying value Fair value
1
3
3
2
2
$
$
$
$
258
351
37
646
-
-
-
$
$
$
$
-
1
-
1
-
-
-
$
$
$
$
-
-
-
-
441
641
1,082
$
$
$
$
258
352
37
647
441
641
1,082
$
$
$
$
258
352
37
647
441
634
1,075
1.
2.
Receivables include our equity derivative receivable of $1 million.
The fair value of the long-term debt is based on rates available to us at December 31, 2017 for long-term debt with similar terms and
remaining maturities.
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.
- 92 -
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
energy related agreements.
Based on the equity contract as at December 31, 2018 and holding all other variables constant, a $1.00 change in
our share price would change its fair value by $1 million, which would partially offset the movement in our
equity-based compensation.
No energy related derivatives were outstanding at December 31, 2018 or 2017.
No material lumber futures or foreign exchange contracts were outstanding at December 31, 2018 or 2017.
Currency fluctuation
Our Canadian operations sell most of their products at prices denominated in U.S. dollars or based on prevailing
U.S. dollar prices. A significant portion of their operational costs and expenses are incurred in Canadian dollars.
Therefore, an increase in the value of the Canadian dollar relative to the U.S. dollar reduces the revenue in
Canadian dollar terms realized by our Canadian operations from sales made in U.S. dollars, which reduces
operating margin and the cash flow available to fund operations.
Our U.S. operations transact and report in U.S. dollars, but their results are translated into Canadian dollars for
financial statement purposes with the resulting translation gains or losses being reported in other comprehensive
earnings.
Impact of U.S. dollar currency fluctuation
The U.S. dollar foreign currency balance sheet exposure at December 31, 2018 is as follows:
Canadian operations
Net working capital
Export duty deposits
Intercompany financing1
Long-term debt
US$
US$
2018
83
55
550
(500)
188
U.S. operations
Net investment
1.
2018
1,164
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.
US$
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 a $3 million decrease (increase) in earnings and an increase
(decrease) of $21 million in the translation gain on foreign operations included in other comprehensive earnings.
Credit
- 93 -
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 such as:
•
Customer credit limits are established and monitored;
• Ongoing evaluations of key customer financial conditions are performed; and
•
In certain market areas, we have undertaken additional measures to reduce credit risk including credit
insurance, letters of credit and prepayments. At December 31, 2018, approximately 45% of trade
accounts receivable was covered by at least some of these additional measures.
Given our credit monitoring activities, the low percentage of overdue accounts and our low customer defaults with
no bad debts in 2018 or 2017, we have recorded minimal expected credit losses. We consider the credit quality of
the trade accounts receivable at December 31, 2018 to be high. The aging analysis of trade accounts receivable is
presented below:
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
Government assistance
Other
Receivables
Liquidity
2018
2017
$
$
260
7
1
-
268
-
268
14
10
40
332
$
$
290
3
2
1
296
-
296
20
-
36
352
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:
Long-term debt (note 13)
Interest on long-debt1,2
2019
-
31
31
$
$
2020
10
30
40
$
$
2021
-
30
30
$
$
2022
273
26
299
$
$
$
$
Thereafter
413
32
445
$
$
Total
696
149
845
1.
2.
Assumes debt level, foreign exchange rate and interest rates remain at December 31, 2018 levels and rates.
At December 31, 2018, we had drawn $63 million under our revolving credit facility. The potential interest payable on this loan has not
been included in the above table.
Interest rates
Interest rate risk relates mainly to floating rate debt.
- 94 -
At December 31, 2018, a 100 basis point increase (decrease) in interest rates on floating rate debt would result in a
$2 million decrease (increase) in earnings. This analysis assumes that all other variables remain constant.
25.
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
1.
2018
2017
$
$
(160)
(6)
13
63
696
606
2,896
3,502
17%
$
$
(258)
(7)
-
-
641
376
2,726
3,102
12%
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.
26.
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.
- 95 -
Lumber
Panels
Pulp &
Paper
Corporate &
Other
Total
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4,291
165
4,456
954
(196)
758
(25)
20
753
3,739
701
284
$
$
$
$
$
$
$
664
12
676
127
(15)
112
(2)
-
110
320
62
16
Lumber
Panels
3,554
117
3,671
836
(155)
681
(20)
(1)
660
3,404
467
247
526
$
$
$
$
$
$
$
$
592
8
600
113
(13)
100
(3)
-
97
314
57
22
-
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,163
-
1,163
258
(44)
214
(10)
11
215
659
156
60
Pulp &
Paper
988
-
988
172
(40)
132
(8)
2
126
627
156
58
-
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
-
-
-
(10)
(2)
(12)
-
6
(6)
73
976
10
Corporate &
Other
-
-
-
(41)
(2)
(43)
-
6
(37)
172
1,111
9
-
$
6,118
$
$
$
$
$
1,329
(257)
1,072
(37)
37
1,072
4,791
1,895
370
Total
$
5,134
$
$
$
$
$
$
1,080
(210)
870
(31)
7
846
4,517
1,791
336
526
2018
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
2017
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
- 96 -
The geographic distribution of non-current assets and external sales is as follows:
Canada
United States
China
Other Asia
Other
Non-current assets
2018
2,121
1,325
-
-
-
3,446
$
$
2017
2,096
1,130
-
-
-
3,226
$
$
$
$
1.
Sales distribution is based on the location of product delivery.
27.
Countervailing (“CVD”) and antidumping (“ADD”) duty dispute
$
Sales by geographic area1
2018
2017
1,239
1,129
3,661
2,973
734
627
442
357
42
48
6,118
5,134
$
On November 25, 2016, a coalition of U.S. lumber producers petitioned the U.S. Department of Commerce
(“USDOC”) and the U.S. International Trade Commission (“USITC”) to investigate alleged subsidies to Canadian
softwood lumber producers and levy countervailing and antidumping duties against Canadian softwood lumber
imports. We were chosen by the USDOC as a “mandatory respondent” to both the countervailing and
antidumping investigations and as a result have received unique company specific rates.
On April 24, 2017, the USDOC issued its preliminary determination in the countervailing duty (“CVD”) investigation
and imposed a company specific preliminary rate of 24.12% to be posted by cash deposits on the exports from
Canada of softwood lumber to the U.S. on or after April 28, 2017. On June 26, 2017, the USDOC issued its
preliminary determination in the antidumping duty (“ADD”) investigation and imposed a company specific
preliminary rate of 6.76% to be posted by cash deposits on the exports from Canada of softwood lumber to the
U.S. on or after June 30, 2017. The requirement that we deposit CVD was suspended on August 24, 2017 until final
determination was published by the USITC. On December 4, 2017, the USDOC amended our CVD rate to 17.99%
and our ADD rate to 5.57%. Effective December 28, 2017, we began posting cash deposits for CVD and effective
December 4, 2017, we began posting cash deposits for ADD at the revised rates. The CVD and ADD rates are
subject to further adjustment through administrative reviews to be completed by the USDOC. The administrative
reviews for each of CVD and ADD are expected to commence in the spring of 2019 and cover the periods
from April 28, 2017 to December 31, 2018 for CVD and June 30, 2017 to December 31, 2018 for ADD. The reviews
may not be finalized until mid-2020 and the results are subject to appeals.
During the year ended December 31, 2018, our lumber segment posted cash deposits for CVD at a 17.99% rate and
for ADD at a 5.57% rate. We recalculate the ADD rate for the current period of review using our reported results
and the same calculation methodology as the USDOC. Based on our current data, we determined that the
expected ADD rate will be 1.46% which is lower than the ADD deposit rate of 5.57%.
For the year ended December 31, 2018 we incurred duty deposits of $178 million related to CVD (2017 - $52
million) and $55 million related to ADD (2017 - $32 million) as follows:
Export duties incurred in the period
Export duties recognized as expense in consolidated statements of earnings $
Export duties recognized as long-term duty deposits receivable in
consolidated balance sheets
Total
$
2018
202
31
233
$
$
2017
48
36
84
We have recorded long-term duty deposits receivable related to CVD of $11 million representing the excess of
deposits made at the preliminary rate of 24.12% compared to the final rate of 17.99%. In addition, we have
recorded long-term duty deposits receivable related to ADD of $62 million for the difference between the 5.57%
- 97 -
deposit rate and our 1.46% estimated rate. Lastly, we have recognized interest of $2 million on the long-term duty
deposits receivable related to both CVD and ADD. The details are as follows:
Export duty deposits receivable
Beginning of year
Export duties recognized as long-term duty deposits receivable in
consolidated balance sheets
Interest recognized on the long-term duty deposits receivable
Foreign exchange on the long-term duty deposits
End of year
$
$
2018
37
31
2
5
75
$
$
2017
-
36
-
1
37
As at December 31, 2018, duties paid and payable that are on deposit with the USDOC total US$244 million.
The duty rates are subject to change based on administrative reviews and appeals available to us. In addition, we
will update our ADD rate at each reporting date considering our actual results for each period of review. Changes
to estimated rates may be material and any changes will be reflected through earnings in the period of the change.
Notwithstanding the deposit rates assigned under the investigations, our final liability for the assessment of CVD
and ADD will not be determined until each annual administrative review process is complete and related appeal
processes are concluded.
- 98 -
FIVE YEAR FINANCIAL REVIEW
(in millions of Canadian dollars, except where indicated)
Earnings
Sales
Cost of product sold
Freight and other distribution costs 1
Export duties or taxes
Amortization
Selling, general and administration1
Equity-based compensation
Restructuring charges
Operating earnings
Finance expense
Other
Tax provision
Earnings
Cash flows from operating activities
Capital expenditures & acquisitions
Financial position
Current assets
PPE & timber licenses
Goodwill & other intangibles
Export duty deposits
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
2018
2017 1
2016 1
2015 1
2014 1
6,118
3,617
732
202
257
231
7
-
1,072
(37)
37
(262)
810
909
370
1,345
2,569
767
75
32
3
4,791
595
692
316
292
2,896
4,791
5,134
3,124
633
48
210
217
32
-
870
(31)
7
(250)
596
902
862
1,291
2,425
731
37
27
6
4,517
583
636
347
225
2,726
4,517
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
4,100
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
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
- 99 -
2018
2017 1
2016 1
2015 1
2014 1
10.88
7.63
4.06
1.25
3.06
60.44
97.99
67.44
0.70
69,819
83.50
42.98
77.57
0.36
77,946
54.18
35.35
48.01
0.28
78,163
78.55
40.56
52.53
0.28
82,457
66.80
45.05
66.47
0.28
83,527
25%
20%
28%
17%
23%
17%
24%
12%
15%
11%
15%
14%
10%
4%
5%
22%
16%
10%
13%
19%
Per common share (dollars)
Basic EPS
Price range:
High
Low
Close
Dividends declared per share
Shares outstanding at year-end ('000s)
Ratios
Adjusted EBITDA margin2
Return on capital employed
Return on common shareholders' equity
Net debt to capitalization
Number of employees at year-end
8,570
8,600
7,800
7,900
7,560
Production
Lumber (MMfbm)
Pulp (Mtonnes)
Newsprint (Mtonnes)
Plywood (3/8" MMsf)
MDF (3/4" MMsf)3
LVL (Mcf)
1. For 2017, we have reclassified approximately $20 million from freight and other distribution costs to selling, general and
administration to conform to 2018 presentation. Figures prior to 2017 have not been restated for this reclassification.
2. Adjusted EBITDA is described in the section titled “Non IFRS Measures” of our 2018 Management’s Discussion & Analysis.
3. A fire at our MDF plant in Quesnel on March 9, 2016 resulted in the closure of the plant until April 29, 2017.
5,607
1,142
133
797
220
1,627
6,233
1,172
122
838
191
2,676
6,609
1,151
119
833
224
2,251
5,935
1,192
128
826
160
2,215
5,293
1,086
132
771
206
1,796
DIRECTORS AND OFFICERS
Effective February 12, 2019
Directors
Henry H. Ketcham
Reid E. Carter
John N. Floren
Brian G. Kenning
John K. Ketcham
Gerald J. Miller
Robert L. Phillips
Janice G. Rennie
Ted Seraphim
Gillian D. Winckler
Officers
Ted Seraphim
Raymond W. Ferris
Brian A. Balkwill
Keith D. Carter
Larry E. Gardner
James W. Gorman
Christopher D. McIver
Sean P. McLaren
Tom V. Theodorakis
Christopher A. Virostek
Chuck H. Watkins
- 100 -
Principal Occupation
Chairman of the Board
Corporate Director
President and Chief Executive Officer, Methanex Corporation
Corporate Director
Real Estate Developer
Corporate Director
Corporate Director
Corporate Director
Chief Executive Officer
Corporate Director
Office Held
Chief Executive Officer
President and Chief Operating Officer
Vice-President, Canadian Wood Products
Vice-President, Pulp and Energy Operations
Vice-President, Canadian Woodlands
Vice-President, Corporate and Government Relations
Vice-President, Sales and Marketing
Vice-President, U.S. Lumber
Secretary
Partner, McMillan LLP (lawyers)
Vice-President, Finance and Chief Financial Officer
Vice-President, U.S. Lumber Manufacturing
CORPORATE INFORMATION
Effective February 12, 2019
ANNUAL GENERAL MEETING
The Annual General Meeting of
the shareholders of the
Company will be held on
April 23, 2019 at 11:30 a.m. in
Quesnel, British Columbia,
Canada.
AUDITORS
PricewaterhouseCoopers LLP
Vancouver, British Columbia,
Canada
LEGAL COUNSEL
McMillan LLP
Vancouver, British Columbia,
Canada
TRANSFER AGENT
AST Trust Company (Canada)
Vancouver, Calgary, Toronto,
and Montreal, Canada
FILINGS
www.sedar.com
Shares are listed on the Toronto
Stock Exchange under the
symbol: WFT
INVESTOR CONTACT
Chris Virostek
Vice-President, Finance
and Chief Financial Officer
Tel: (604) 895-2700
Fax: (604) 681-6061
E-mail Address
shareholder@westfraser.com
WEBSITE
www.westfraser.com
- 101 -
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) 895-2976
SYP Lumber
1900 Exeter Road, Suite 105
Germantown, Tennessee
USA 38138
Tel: (901) 620-4200
Fax: (901) 620-4204
2500 Saint Marys Road
St. Marys, Georgia
USA 31558
Tel: (912) 576-0300
Fax: (912) 576-0322
Pulp
858 Beatty Street, Suite 501
Vancouver, British Columbia
Canada V6B 1C1
Tel: (604) 895-2700
E: pulpsales@westfraser.com
Newsprint
2900-650 W Georgia Street
Vancouver, British Columbia
Canada V6B 4N8
Tel: (604) 681-8817
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 MDF
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
- 102 -
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
Tonne A unit of weight in the
metric system equal to one
thousand kilograms or
approximately 2,204 pounds.
Mtonne means one
thousand tonnes.
GLOSSARY OF INDUSTRY TERMS
AAC Annual Allowable Cut
The volume of timber that
may be harvested annually
from a specific timber
tenure.
BCTMP Bleached
Chemithermomechanical
Pulp
Dimension Lumber Standard
commodity lumber ranging
in sizes from 1 x 3’s to 4 x
12’s, in various lengths.
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.
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.
Mcf One thousand cubic
feet. A unit of measure for
laminated veneer lumber.
MDF Medium Density
Fibreboard A composite
product made from wood
fibre.
- 103 -
Mfbm One thousand board
feet (equivalent to one
thousand square feet of
lumber, one inch thick).
MMfbm means one million
board feet.
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.
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.
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.
West Fraser Timber Co. Ltd.
Tel: 604.895.2700
Fax: 604.681.6061
www.westfraser.com