Western Forest Products Inc.
2010 Annual Report
Financial Highlights
(millions of dollars except where noted)
Sales
Year ended December 31,
2010
2009
2008
$
667.9
$
580.5
$
814.8
Net income (loss) and comprehensive income (loss)
$
27.7
$
(75.3)
$
(85.6)
Cash flow from continuing operations
$
28.5
$
63.2
$
(50.7)
Weighted average common and non-voting shares outstanding ('000)
467,571
452,431
204,414
Basic and diluted net income (loss) per share (dollars)
$
0.06
$
(0.17)
$
(0.42)
EBITDA (1)
Working capital
Total assets
(2)
Net debt
Net debt to capitalization (3)
Total liquidity
(4)
$
47.7
$
(34.8)
$
(42.4)
$
118.3
$
37.4
$
44.6
$
587.1
$
576.0
$
726.0
$
99.8
$
126.9
$
233.0
0.25
0.31
0.43
$
84.6
$
37.3
$
22.3
(1) Non-GAAP measure - see page 4 for discussion on EBITDA.
(2) Net debt is defined as the sum of long-term debt, current portion of long-term debt, revolving credit
facility, less cash and cash equivalents.
(3) Capitalization comprises net debt and shareholders' equity.
(4) Total liquidity comprises cash and cash equivalents and available credit under the Company’s
revolving credit facility and revolving term loan.
1
Letter to Shareholders
Dear Shareholders,
2010 was a significant year for Western, marking a step change in the financial performance of the
Company and its outlook. Western generated its first year of positive earnings since 2006, improved
its safety performance record, and took significant initiatives to position itself for the future. The
improved performance is largely due to reorganization within the business, moderately improved
market conditions, and higher utilization of the Company’s financial and operational assets.
2010 A Positive Year
Western has worked hard over the last two years to reduce fibre and sawmill conversion costs,
increase utilization of our operational assets, and increase by-product revenues. Our entire workforce
has been instrumental in these initiatives and is engaged in our drive for continuous improvement.
The result of all of this effort shows in our financial results which were vastly improved from a year
ago:
increase in net income of $103 million
•
• EBITDA of $48 million is an $83 million increase over 2009
•
•
free cash flow of $24 million represents a $79 million improvement from 2009.
liquidity finished at $85 million, compared to $37 million at the end of 2009
Liquidity preservation was a key management focus item, resulting in a measured alignment between
market demand and our production, in order to maintain inventories at their lowest market effective
levels.
Three Western sawmills, Somass, Ladysmith and Nanaimo, which were idle in 2009, were safely
restarted in 2010, increasing our operating capacity by 20%. Their start-ups are a result of
improvement in worldwide lumber demand, particularly in China. Additionally, we negotiated new
long-term contracts with our two major union partners throughout our operations.
The improved financials did not come at the expense of our safety program. In fact, our twelve month
rolling average medical incident rate (the number of incidents per 100 employees per year) improved
to a historical low of 1.7 from 3.4 in 2009. We also achieved third party safety certification in both our
timberland and manufacturing operations. The safety of our employees remains one of our core
values and we will continue to work our systems and processes to actively ensure all of our
employees get home safely each day.
The progress that we made in 2010 was clearly demonstrated by the increase in our share price. Our
share price opened the year at $0.20 and finished the year at $0.80, an increase of 300%. This
increase represents one the most significant improvements in the forest products sector. We believe
our share price is still under valued.
Promising Outlook
The unique attributes of the diverse coastal fibre basket continue to provide Western with the
opportunity to participate in lumber markets around the world. We have the manufacturing, worldwide
marketing, and distribution infrastructure along with the critical mass to successfully utilize our 7.2
million cubic metres of annual allowable cut. In 2010, close to 60% of our production was sold outside
of North America.
We continue to be cautious about the prospects for 2011. We believe that both lumber and log
demand will be slightly improved from 2010, largely driven by increased demand in Asia. It is our
expectation that a recovery in selling prices back to trend levels will not occur until at least 2012.
In 2010 we continued to participate in the rapid growth of China as a log and lumber destination and
2011 shows no signs of that growth slowing. While the demand for wood products in China has been
2
primarily generated by concrete forming needs, new approvals for wood home construction resulting
from the rapid growth in urbanization are expected to increase demand for higher value wood
products. From a volume perspective, we expect China to be our largest market in 2011.
Japan began its recovery from the impact of the economic crisis; housing starts in Japan were up 3%
in 2010, however our sales into this high value market grew by 27%. Forecasters are expecting this
trend in housing to continue.
Niche markets, such as Australia and Europe, stabilized in 2010. These markets remain good
consumers of the higher quality component of our fibre basket. As their economies improve we
expect to see increased sales volumes in 2011.
The housing market in North America is improving, but we believe that it will take several more years
before it returns. With the high unemployment and significant foreclosure rates, 2011 housing starts in
the United States are not expected to improve much from 2010 levels. For the commodity segment of
our business we are prepared to re-enter the US market when price levels become competitive with
other world market levels.
Improved Balance Sheet
Through the year the Company continued to improve its balance sheet by shedding a number of non-
core assets, using the proceeds to pay down our long term debt. Net debt was reduced by $27 million
during the year, decreasing our total net debt to $100 million by the end of the year. As a result, our
net debt to capitalization ratio improved to 25%, our lowest ratio ever. The recent sale of our southern
private timberlands will further reduce our debt on a pro forma basis to 20%.
Our balance sheet is solid. With the strengthening of our balance sheet, we are now implementing
our strategic plans, which were put on hold by the severe global recession. I believe the worst is
over. It is with renewed vigour that we will carry out these plans, knowing that our financial house is
in order.
To further prepare ourselves for the inevitable increase in demand, we are embarking on a three to
four year $200 million investment program. Of the $200 million, $125 million will be strategic re-
investment to increase kiln capacity, further develop small log capacity, and reduce operating costs.
The timing of such investments will be determined by the pace of recovery of our markets and
security of our fibre supply.
The strategic and sustaining capital projects will be funded from operating cash flow, leaving
headroom on our balance sheet for further investment opportunities. Our investment program
demonstrates our commitment to cementing our position as the forest product leader on the coast of
British Columbia.
In short, we are well positioned, and well capitalized to participate in the market recovery.
On behalf of Western, we would like to thank our shareholders for their continued support, and our
employees, contractors, suppliers and communities for their patience and dedication in building a
successful coastal forest products business.
Dominic Gammiero
Chairman and Chief Executive Officer
Lee Doney
Vice Chairman
3
Management’s Discussion & Analysis
The following discussion and analysis reports and comments on the financial condition and results of
operations of Western Forest Products Inc. (“Company”, “Western”, “us”, “we”, or “our”), on a
consolidated basis, for the year ended December 31, 2010 to help security holders and other readers
understand our Company and the key factors underlying our financial results. This discussion and
analysis should be read in conjunction with the audited annual consolidated financial statements and
related notes thereto, for the years ended December 31, 2010 and 2009.
The Company has prepared the financial information contained in this discussion and analysis in
accordance with Canadian generally accepted accounting principles (“GAAP”). Reference is also
made to EBITDA1. EBITDA is defined as operating income (loss) plus amortization of property, plant
and equipment and the write-down of property, plant and equipment and operating restructuring costs
added back. Western uses EBITDA as a benchmark measurement of our own operating results and
as a benchmark relative to our competitors. We consider EBITDA to be a meaningful supplement to
operating income as a performance measure primarily because amortization expense and property
write-downs are not cash costs, and vary widely from company to company in a manner that we
consider largely independent of the underlying cost efficiency of their operating facilities. Further,
operating restructuring costs are not expected to occur on a regular basis and may make
comparisons of our operating results between periods more difficult. We also believe EBITDA is
commonly used by securities analysts, investors and other interested parties to evaluate our financial
performance.
EBITDA does not represent cash generated from operations as defined by Canadian GAAP and it is
not necessarily indicative of cash available to fund cash needs. Furthermore, EBITDA does not
reflect the impact of a number of items that affect our net income (loss). EBITDA is not a measure of
financial performance under GAAP, and should not be considered as an alternative to measures of
performance under GAAP. Moreover, because all companies do not calculate EBITDA in the same
manner, EBITDA as calculated by Western may differ from EBITDA as calculated by other
companies.
This management’s discussion and analysis contains statements which constitute forward-looking
statements and forward-looking information within the meaning of applicable securities laws. Those
statements and information appear in a number of places in this document and include statements
and information regarding our current intent, belief or expectations primarily with respect to market
and general economic conditions, future costs, expenditures, available harvest levels and our future
operating performance, objectives and strategies. Such statements and information may be
indicated by words such as “estimate”, “expect”, “anticipate”, “plan”, “intend”, “believe”, “should”,
“may” and similar words and phrases. Readers are cautioned that it would be unreasonable to rely
on any such forward-looking statements and information as creating any legal rights, and that the
statements and information are not guarantees and may involve known and unknown risks and
uncertainties, and that actual results and objectives and strategies may differ or change from those
expressed or implied in the forward-looking statements or information as a result of various factors.
Such risks and uncertainties include, among others: general economic conditions, competition and
selling prices, changes in foreign currency exchange rates, labour disruptions, natural disasters,
relations with First Nations groups, changes in laws, regulations or public policy, misjudgments in the
course of preparing forward-looking statements or information, changes in opportunities and other
factors referenced under the “Risk Factors” section in our MD&A in this annual report. All written and
oral forward-looking statements or information attributable to us or persons acting on our behalf are
expressly qualified in their entirety by the foregoing cautionary statements. Except as required by
law, Western does not expect to update forward-looking statements or information as conditions
change.
Unless otherwise noted, the information in this discussion and analysis is updated to February 23,
2011. Certain prior period comparative figures may have been reclassified to conform to the current
period’s presentation. All financial references are in millions of Canadian dollars unless otherwise
noted.
1 Earnings Before Interest, Tax, Depreciation and Amortization
4
Overview
Our operating results in 2010 were improved over the results of the previous three years as the
impact of the global recession which started in 2008 began to ease off in 2010. The Company also
took further steps to improve financial results by reducing operating costs, matching working capital to
demand, and seeking out new markets for its products. Demand for our log and lumber products
showed modest increases in 2010 compared to 2009, with demand from China and Japan driving the
majority of the growth. As a result, the Company was able to restart idled sawmill facilities at Somass,
Nanaimo, and Ladysmith, and certain of our timberland operations, thereby contributing margin
against the fixed costs of our previously idled operations. The effects of our increased production,
combined with Western’s dedicated focus on cost cutting measures has led to significantly reduced
unit operating costs in 2010 compared to 2009. Pricing of lumber products increased in 2010 as
excess worldwide inventories were absorbed, but remains well below trend levels. However, the
Canadian dollar strengthened against the US dollar during the year reducing the Company’s
Canadian dollar revenues from sales made in most foreign currencies. Despite the improvement in
operating results, management believes that modest global economic recovery and limited worldwide
lumber inventories will lead to market volatility over the next few years.
Western’s sales in 2010 amounted to $667.9 million, representing an increase of $87.4 million, or
15.1%, from the prior year. The increase in sales in 2010 was the result of higher shipment volumes
for lumber, logs and by-products which was partially offset by marginally lower average prices
realized for lumber and logs sold. Average lumber prices realized were lower in 2010 than 2009
despite US dollar denominated product prices increasing because of the negative impact of exchange
rates.
Our net income of $27.7 million in 2010 was an improvement of $103.0 million from the loss of $75.3
million incurred in 2009. The increase in income was primarily attributable to increased shipments of
both logs and lumber in 2010 combined with reduced cost of goods sold. Selling and administration
costs were similar over the two years but interest costs were higher in 2010 due to higher average
interest rates. Significantly higher non-recurring gains were realized on asset sales in 2010 compared
to 2009.
As a result of our improved operating results in 2010, the financial position of the Company improved
over the course of the year. Liquidity increased from $37.3 million at the close of 2009 to $84.6
million as at December 31, 2010. This improvement was driven by a combination of improved cash
generation and increased availability on the revolving credit line due to a higher asset borrowing
base. There was no balance outstanding on the revolving credit facility at December 31, 2010
compared to $15.3 million at December 31, 2009.
On August 23, 2010 the Company announced the ratification of an agreement with the United
Steelworkers Union (“USW”) who represent approximately 1,600 of Western’s 1,700 hourly
employees. Key provisions of the agreement include a four year term expiring on June 15, 2014 with
annual wage increases of 0%, 0%, 2% and 2% respectively. The Company’s last contract with the
USW, the Coast Master Agreement, expired on June 15, 2010.
In September, 2010 the Ladysmith sawmill was re-started after having been idled since April 2008
due to poor market conditions. The operation currently now employs approximately 30 workers
operating on a one shift basis, and is producing lumber to service the market in China. In conjunction
with the Ladysmith start-up, Western also announced the ratification of a new labour agreement with
Local 8 of the Pulp and Paper Workers of Canada Union (“PPWC”), which represents the hourly
employees at the Ladysmith sawmill.
Western re-started its previously idled Nanaimo sawmill in November 2010. The operation employs
approximately 30 workers and is servicing the lumber markets in Japan, China and North America.
During 2010, Western completed the sales of a number of non-core assets realizing proceeds of
$16.1 million compared to $7.0 million in 2009. The majority of these proceeds were used to repay
long term debt. The most significant of these transactions in 2010 was the sale of certain non-core
properties to the Capital Regional District, British Columbia (“CRD”) for a purchase price of $14.3
million which was recognized in the third quarter of 2010 (for more details on this transaction see
Other income – Page 8). In addition to these property sales, the Company recognized a gain of $8.9
5
million relating to the receipt in January 2010 of the balance of the contingent proceeds following the
establishment of a jointly-owned entity in October 2009 with Brookfield Properties Limited (“BPL”), a
company related to Brookfield Asset Management Inc. (“BAM”).
As economic and other circumstances allow, Western will continue to pursue opportunities to sell
non-core assets or private timberlands. Should any such sales be completed, proceeds will initially be
directed towards retirement of the Company’s long-term debt.
In December 2010, the Company received a compensation payment of $5.2 million from the Province
of British Columbia for outstanding Bill 28 (Forestry Revitalization Act), or “FRA”, impacts which had
resulted from deletions from our forest tenures. This amount was compensation for improvements,
engineering and strategic inventory information associated with FRA withdrawals of the external
timber licences in 2004 and 2005.
In December 2010, the Company amended its term loans, extending the maturity date of its $75.0
million revolving term loan and $31.2 million non-revolving term loan to June 14, 2013 and December
14, 2012, respectively. In addition, pricing for the term loans has improved. All other terms and
conditions of the term loans remained substantially unchanged. In December 2010, the Company
also amended its revolving credit facility, extending the maturity date to December 14, 2015.
Selected Annual Information (1)
(millions of dollars except where noted)
Sales
EBITDA (2)
EBITDA as % of sales
Operating income (loss)
Net income (loss) from continuing operations
Net income (loss) and comprehensive income (loss)
Basic and diluted net income (loss) per share (dollars)
Total assets
Net debt (3)
Year ended December 31,
2010
2009
2008
$ 667.9
47.7
$ 580.5
(34.8)
$ 814.8
(42.4)
7.1%
(6.0)%
(5.2)%
17.3
29.2
(69.8)
(73.3)
(82.4)
(80.4)
27.7
(75.3)
(85.6)
$
0.06
$
(0.17)
$
(0.42)
$
587.1
$
576.0
$
726.0
99.8
126.9
233.0
(1) Included in Appendix A is a table of selected results for the last eight quarters and a reconciliation of
EBITDA to net income (loss).
(2) Non-GAAP measure - see page 3 for discussion on EBITDA.
(3) Net debt is defined as the sum of long-term debt, current portion of long-term debt and the revolving credit
facility, less cash and cash equivalents.
Continuing Operations
Net income (loss) from continuing operations
Net income from continuing operations in 2010 increased by $102.5 million from the prior year loss.
Sales totaled $667.9 million, which was an increase of $87.4 million over 2009, or 15.1%. The
improvement in net income from continuing operations primarily comprised a turnaround in operating
income of $87.1 million and an increase in other income of $16.9 million.
6
EBITDA
EBITDA improved by $82.5 million from 2009, primarily due to a significant reduction in the cost of
lumber and logs sold, and an increase in the volume of sales, particularly of logs. The reduction in
cost of lumber sold was driven by lower unit costs as a result of higher production levels and the
associated efficiencies. In particular, fixed costs incurred at curtailed operations were significantly
less than the previous year. Fibre costs for the year were also lower than in 2009, mainly because of
lower stumpage rates and reduced operating costs. Provincial stumpage rates are calculated from
formulas that consider historic Vancouver log market prices, harvesting costs and log market bidding
activity. Rates established by the Province of British Columbia dropped in 2009, but the effects of the
lower rates were not fully realized in 2009 as the Company worked through opening inventories which
contained logs at higher stumpage rates. In 2010, the full benefit of the lower rates was realized.
During 2010, the Company took significantly less downtime in both its timberland and manufacturing
operations. Total log harvest of 4.6 million cubic meters was 47% higher than the 2009 harvest levels,
while lumber production was 23% more than during 2009. Our sawmills operated at 63% of total
capacity in 2010 compared to 48% of capacity in 2009. This increase primarily reflects the fact that
our Somass sawmill ran for most of 2010 but for only a small part of 2009, and the Nanaimo and
Ladysmith sawmills started up in the latter part of 2010, having been down for all of 2009.
Unavoidable fixed costs of $24.8 million associated with curtailed operations were directly expensed
to the income statement in 2010, which is $7.6 million less than the amount expensed in 2009.
While much of the year over year improvement in Western’s EBITDA is the result of higher utilization
of our operations, the benefits of Western’s ongoing cost reduction initiatives, albeit to a lesser
degree, also contributed to the reduced cost of sales. The cost reductions took the form of reduced
headcount, salary reductions, decreased spending, and deferred road spending. In conjunction with
reduced costs, operations focused on margin positive programs and worked to increase the volume
of such programs. The lumber sales and marketing group refocused the business on four key market
categories – commodity, niche, cedar, and Japanese programs, each with unique attributes and
strategies.
Selling and administration expenses in 2010 were $24.5 million (2009 - $24.7 million). These
expenditures have stabilized following two years of significant reductions, as the Company
restructured its organizational needs to adapt to a new operating environment.
Operating income (loss)
In addition to the EBITDA improvements described above, the Company recorded a restructuring
expense of $1.6 million, $3.9 million lower than the equivalent expense of $5.5 million in 2009. The
restructuring charges in 2010 primarily relate to severance costs incurred in Western’s Japanese
sales organization, the Mid-Island Remanufacturing operation, Andy’s Bay logging facility, and the
Ladysmith sawmill. In 2009, severance costs were mostly related to timberlands operations.
Sales
(millions of dollars)
Lumber
Logs
By-products
Total sales
Year ended December
31,
2010
2009
$
$
475.1
139.0
53.8
667.9
438.2
99.6
42.7
580.5
$
$
Lumber sales in 2010 were $36.9 million or 8.4% higher than in the prior year. Western shipped 669
million board feet in 2010, which was up 10.0% from the 608 million board feet sold in 2009 while
average prices realized for lumber decreased 1.5%. The average annual Canadian dollar to US dollar
exchange rate was 9.6% stronger for 2010 compared to 2009, which more than offset the increase in
US dollar denominated lumber pricing year over year.
7
The majority of our lumber volume increase was attributable to higher shipments to Japan and China,
as well as a marginal increase in domestic sales. Partially offsetting this were lower shipments to the
US and Europe in 2010 as markets there continue to be relatively depressed, driven largely by their
respective weak economic conditions. Housing starts in the US continue to be near historically low
levels and existing home inventory levels remain high.
There was no clear pattern with respect to a year-on-year comparison of our lumber product pricing,
with variability depending upon product grade and market. Overall, our lumber prices increased in
2010, most noticeably on our shipments to Japan and China. However, our overall average prices
achieved per board foot sold in 2010 were slightly lower than 2009. This reflects the negative impact
on revenues of the stronger Canadian dollar as the majority of sales are denominated in US dollars,
and also the higher proportion of relatively lower price commodity lumber produced in 2010 for the
China market. Partly offsetting these was the positive impact of increased sales to the Japanese
market, and also the benefits resulting from the relative strength of the Japanese Yen to the
Canadian dollar in 2010 compared to 2009.
Total lumber freight and duty costs for 2010 on a per unit of sold production basis were not
significantly different from the previous year. Increased availability of traditional ocean break-bulk
vessels meant we were able to ship approximately 10% more break-bulk this year and
correspondingly less by higher cost container. The savings associated with this increased use of
break-bulk were offset by the higher freight costs of the increased level of shipments to our China and
Japan markets in 2010. Both truck and rail freight rates remained unchanged for much of 2010,
although increased diesel prices have resulted in increased surcharges.
Log sales in 2010 increased $39.4 million or 39.6% compared to the prior year. The increase was
primarily due to the quantity of logs shipped being 46.9% higher in 2010 as a result of increased
demand for logs both domestically and internationally. Demand and prices were particularly strong in
export markets such as Korea, China, and Japan. While log prices were higher for most log sorts in
2010, average prices realized were 4.8% lower when compared to 2009 as a result of a change in the
mix of sales. Proportionately increased sales of the lower priced hemlock and pulp logs and less of
the higher value cedar logs occurred in 2010.
Sales of by-products in 2010 were $11.1 million, or 26.0%, higher than in 2009 which is mostly the
result of a 25% increase in chip prices received in 2010 compared to 2009. Chip prices are tied by a
formula to the price of pulp which increased in 2010 compared to 2009, thus driving chip prices
higher. Western has various obligations under long-term chip supply contracts which require us to
either purchase quantities of chips on the open market or use whole log chipping programs at certain
sawmills and third party chipping facilities, if insufficient chips are produced from our own mills. In
addition, approximately $1.5 million higher revenue was received from sawdust and hog fuel sales in
2010 due to increased sawmill production volumes during the year.
Net interest expense
The interest expense for 2010 of $12.4 million was $1.6 million more than the expense of $10.8
million incurred in 2009. The increase was primarily caused by higher average interest rates in 2010
compared to 2009, which more than offset the impact of lower overall average debt levels in 2010.
Interest rates increased following the extension of the expiry date of the non-revolving term loan from
September 9, 2009 to September 9, 2010. Concurrent with this extension, the interest rate margin
charged increased by 3%, and became, at the Company’s option, either Canadian prime rate plus 5%
or bankers’ acceptance rate plus 6%. In addition, the interest rate margin increased by a further
0.25% at the end of each calendar quarter commencing December 31, 2009. New financing terms will
apply in 2011 following the refinancing completed in December 2010.
Other income
Other income increased from $7.4 million in 2009 to $24.3 million in 2010 and was comprised of
gains on the disposal of non-core assets of $8.6 million; a gain of $8.9 million (net of costs of $0.5
million) related to the establishment of a jointly-owned entity with BPL in October 2009 (see “Financial
Instruments, Off-Balance Sheet Arrangements, Foreign Exchange and Related Party Transaction”
section for further details); a further receipt of $5.2 million from the Province of British Columbia
relating to compensation with respect to Bill 28 timber take-back areas; and other miscellaneous
8
items aggregating to $1.6 million. $16.1 million of the proceeds received from the sales of non-core
assets in 2010 was used to pay down long-term debt (2009 - $6.4 million).
The most significant property transaction was the sale to CRD of land located in the southern part of
Vancouver Island for proceeds of $14.3 million, which closed in August 2010. As part of this
transaction, the Company also agreed to sell a further two parcels of land for proceeds of $4.5 million
which, as a condition of sale, require the Company to secure a Certificate of Compliance on an
environmental remediation project currently under way. The Company has until August 15, 2012 to
secure that certificate, and until the certificate is obtained this element of the sale will not be recorded.
At December 31, 2010, $9.7 million of the proceeds had been received with $3.3 million due on
August 12, 2011 and a further $5.8 million on August 15, 2012, assuming that the aforementioned
certificate is obtained. The transaction generated an accounting gain of $7.1 million.
Other income of $7.4 million received in 2009 relates to gains on non-core asset sales and also to
compensation payments received from the Province of British Columbia for the reimbursement of
infrastructure costs incurred in certain expropriated timber tenures following the creation of new
Conservancies in the Central Coast region.
Income taxes
There was no income tax expense incurred in 2010, and a minimal amount was recorded in 2009.
The 2009 expense relates primarily to the Company’s Japanese subsidiary.
At December 31, 2010, the Company and its subsidiaries have unused non-capital tax losses carried
forward totaling approximately $420.0 million, which expire between 2015 and 2030, and can be used
to reduce taxable income. In addition, the Company has capital losses of approximately $22.5 million,
which are available indefinitely, but can only be utilized against capital gains. The ability of the
Company to utilize the losses carried forward and capital losses is not considered “more likely than
not” and therefore, a valuation allowance has been provided against the tax assets.
Discontinued Operations
Operations of the site of the former Squamish pulp mill were discontinued in 2006. Since that date,
the Company has expensed costs as incurred for supervision, security, property taxes and
environmental remediation and will continue to do so until the site is sold. In 2010, the Company
incurred costs of $1.5 million with respect to the site which is less than the $2.0 million expensed in
2009. Less remediation work was undertaken on the site during 2010 compared to 2009. The
Company continues to investigate opportunities to reduce operating costs of the site, including the
sale of energy generated from its hydro electrical generating plant when required permits are in place.
The Company has the property listed for sale and will pursue opportunities for sale as economic and
other circumstances allow.
9
Financial Position and Liquidity
(millions of dollars except where noted)
Cash provided (used) by operating activities
Cash provided (used) by investing activities
Cash provided (used) by financing activities
Cash used to construct capital logging roads
Cash used to acquire other property, plant, and equipment
Total liquidity(1)
Net debt (2)
Financial ratios:
Current assets to current liabilities
Net debt to capitalization(3)
Year ended December 31,
2010
2009
$
28.5
3.7
(33.7)
(7.8)
(3.8)
$
63.2
(1.9)
(53.6)
(3.5)
(5.4)
84.6
99.8
2.49
0.25
37.3
126.9
1.31
0.31
(1) Total liquidity comprises cash and cash equivalents and available credit under the Company’s
revolving credit facility and revolving term loan.
(2) Net debt defined as the sum of long-term debt, current portion of long-term debt, revolving credit
facility, less cash and cash equivalents. Capitalization comprises net debt and shareholders' equity.
(3) Capitalization comprises net debt and shareholders' equity
Cash provided by operating activities in 2010 amounted to $28.5 million, which is less than the $63.2
million provided in 2009. Although cash generated by operating activities before working capital
changes improved by $101.9 million during 2010, the Company generated $136.6 million less from
working capital in 2010. The Company significantly reduced funds invested in working capital in 2009
and generated cash of $114.0 million. The most significant element of the reduction was the $121.2
million generated from lower inventories at December 31, 2009 compared to the end of 2008. During
2010, Western increased working capital by a net $22.6 million, mainly because of increased levels
accounts receivables and inventories, which reflects the building level of sales activity during 2010.
Investing activities generated cash of $3.7 million, which compares to cash used by investing
activities of $1.9 million in 2009. The difference primarily relates to the increased level of cash
received from non-core asset sales in 2010 compared to 2009. In addition, expenditures on property,
plant and equipment of $11.6 million in 2010 were $2.7 million more than was spent in 2009. Capital
expenditures continued to be monitored closely in 2010, primarily limited to road construction that
was essential to the log harvesting program, maintenance and safety projects, and some smaller high
return projects.
Financing activities in 2010 used cash of $33.7 million compared to $53.6 million in 2009. Western’s
improved operating cash flow generated in 2010 enabled it to clear the balance of $15.3 million
outstanding on its revolving credit facility. In addition, debt repayments of $16.1 million were made
during 2010 on the non-revolving term loan from the proceeds of non-core asset sales (2009 - $6.4
million). In 2009, the Company closed a rights offering to all shareholders which realized net
proceeds of $49.6 million. These funds, together with the proceeds from the reduction in working
capital during 2009, enabled the Company to reduce the balance outstanding on its revolving credit
facility by $93.6 million to $15.3 million at December 31, 2009.
At December 31, 2010, Western’s total liquidity had increased to $84.6 million from $37.3 million at
the end of 2009. Liquidity is comprised of cash of $5.1 million and unused availability under the
secured revolving credit line of $79.5 million. The increase is a function of increased availability
under the amended financing agreements, the fact that improved cash generated from operations
meant less was drawn down on the revolving credit facility, and a higher borrowing base due to
increased balances of eligible inventories and receivables at the end of 2010.
Any net proceeds realized from the sale of non-core assets will be utilized to repay the term loan.
10
Based on its current forecasts the Company expects sufficient liquidity will be available to meet its
obligations in 2011.
Fourth Quarter Results
(millions of dollars except where noted)
Sales
EBITDA
EBITDA as % of sales
Net income (loss) from continuing operations
Net income (loss) and comprehensive income (loss)
Basic and diluted net income (loss) per share (dollars)
Three months ended
December 31,
2010
2009
$
$
172.6
7.1
4.1%
4.3
4.0
0.01
139.3
2.3
1.7%
(2.7)
(3.1)
(0.01)
$
$
Our net income of $4.0 million reported in the fourth quarter of 2010 was a $7.1 million improvement
over the loss of $3.1 million incurred in the same quarter of 2009. The improvement was driven
primarily by a $4.8 million increase in EBITDA and an improvement of $1.6 million in non-operating
items. The improvement in EBITDA in the fourth quarter of 2010 was the result of increased
shipments in 2010 with lumber and log sales volumes being 20.0% and 22.3% higher than the fourth
quarter of 2009 respectively. The overall average selling price realised for lumber sales in the current
quarter was 2.2% higher than the fourth quarter of 2009, as the combined benefit of slightly higher
prices more than compensated for the negative impact on revenues of a 4.1% strengthening of the
Canadian dollar relative to the US dollar over the same period. In order to meet improved demand our
mills operated at 76% of capacity in the fourth quarter of 2010, compared to 48% in the same period
of 2009, which resulted in fixed shutdown costs incurred in 2010 being $3.7 million less than those
incurred in 2009. Also contributing to the improved result in 2010 were higher volumes and prices for
chip sales compared to the fourth quarter of 2009.
Selling and administration expenses in the fourth quarter of 2010 were $2.0 million more than the
same period last year mainly as a result of increased employee costs due to salaries being reinstated
after a 10% reduction the previous year, and increases in stock based compensation. The
improvement in non-operating items primarily relates to other income in the fourth quarter of 2010
being $0.8 million higher than that reported in the fourth quarter of 2009, and interest charges being
lower in the fourth quarter of 2010 by $0.6 million compared to the fourth quarter of 2009, primarily as
a result of lower average debt levels in the current quarter.
Outlook and Strategy
The restructuring efforts that Western commenced in 2009 have started to show up in the stronger
financial results of the Company in 2010. During the course of 2010, the Company improved its
operating results, strengthened its balance sheet and secured long term financing. The Company
expects to build on these positive results in 2011 and beyond. With these improved financial results,
particularly the improved liquidity situation, management is beginning to focus more on longer term
strategic goals. These longer term key strategic objectives include:
• Growing market share in traditional and developing export markets
• Operating all our mills at capacity, realizing full economies of scale, while fully utilizing our
annual allowable cut
• Generating substantial free cash flow that justifies re-investment
A key aspect of this strategy is diversifying our sales across four major market categories (western
red cedar; Japan; niche; and commodity) and scaling our production to that demand.
Growth in the cedar market will be heavily dependent on the US housing market recovery. Despite
signs that US housing starts will increase in 2011, we continue to be concerned over the high levels
of US unemployment, limited access to credit and the continuing high level of foreclosures in the
housing market. We expect the recovery of the US housing market will be gradual and unpredictable.
11
Our commodity programs are currently focused on delivering product to China. China continues to be
an important growth story for Western, driving the startup of idled mills in the fourth quarter of 2010.
While the demand for wood products in China has been primarily generated by concrete forming
needs, new approvals for wood home construction are expected to increase demand for higher value
wood products. We expect China to be our highest volume market in 2011.
We will also continue to monitor the opportunity to re-enter the commodity market in the US. We
expect there will be short lived price spikes in commodity products but that sustainable price
increases are unlikely until housing starts return to historical trend levels in the US.
We are expecting housing in Japan to continue its steady rebound, providing opportunities for our
Douglas fir and hemlock lumber products. This market continues to be very competitive, with many
international suppliers and a government supported domestic industry.
Niche lumber programs are directed at small, high value global markets, with demand being driven by
regional economic conditions. The timber segment presents a good growth opportunity and we will
also look to expand our appearance quality custom cut programs. Europe’s uncertain economic
situation will hamper niche sales growth in that region, but as a high value market it continues to be
attractive and we will continue to pursue market share gains.
Another key aspect of our strategic focus will be continuing to grow the business, including
investment in our capital assets to position them to be competitive in the future. Over the next four
years, the Company plans to embark on a $125 million strategic capital program. The program,
largely targeted at our sawmill facilities, will increase kiln capacity, add small log capabilities, and
generally reduce operating costs.
As we continue to grow the business, it is imperative that we effectively manage the capital
employed. Western continues to be focused on balancing its log and lumber production with demand.
Incremental increases in production are judged on the sustainability of any increased demand from
markets. The Company remains cautious about the short term strength of the global economic
recovery, particularly in light of the ongoing economic challenges facing the United States and
European countries. However, we have a greater capacity to weather another crisis having
strengthened our liquidity position and solidified our balance sheet.
On February 11, 2011, the Company completed the sale of certain non-core properties to
TimberWest Forest Corp. at the purchase price of $21.9 million. The sale includes properties located
in the southern portion of Vancouver Island, near Jordan River. These properties, which encompass
approximately 7,678 hectares, are situated in the land districts of Renfrew and Malahat. The net
proceeds from the sale will be used to pay down the Company’s debt in accordance with its lending
agreements.
The Company will also continue to pursue further opportunities that may arise to sell non-core or
other land assets as appropriate. Proceeds from such sales will first be directed to reduce or
eliminate long-term debt with any surplus being used to provide additional liquidity.
Summary of Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2010 and our payments
due for each of the next five years and thereafter:
2010
(millions of dollars)
Total
2011
2012
2013
2014
2015 Thereafter
Revolving term loan
Non-revolving term loan
Operating leases
Reforestation liability
Defined benefit pensions
- funding obligations
Total
75.0
31.2
16.7
26.1
12.4
161.4
$
-
-
3.4
11.4
2.9
17.7
75.0
-
1.5
2.7
2.2
81.4
-
-
1.3
1.7
2.2
5.2
-
-
1.3
1.2
2.2
4.7
-
-
6.9
4.5
-
11.4
-
31.2
2.3
4.6
2.9
41.0
12
Critical Accounting Estimates
Reforestation Liabilities
We accrue our reforestation liabilities based on estimates of future costs at the time the timber is
harvested. The estimate of future reforestation costs is based on a detailed analysis for all areas that
have been logged and includes estimates for the extent of planting seedlings versus natural
regeneration, the cost of planting including the cost of seedlings, the extent and cost of site
preparation, brushing, weeding, thinning and replanting and the cost of conducting silviculture
surveys. Our registered professional foresters conduct the analysis that is used to estimate these
costs. However, these costs are difficult to estimate and can be affected by weather patterns, forest
fires and wildlife issues that could impact the actual future costs incurred and thus result in material
adjustments.
Valuation of Inventory
We value our log and lumber inventories at the lower of cost and net realizable value. We estimate
net realizable value by reviewing current market prices for the specific inventory items based on
recent sales prices and current sales orders. If the net realizable value is less than the cost amount,
we will record a write-down. The determination of net realizable value at a point in time is generally
both objective and verifiable. However, changes in commodity prices can occur suddenly, which
could result in a material write-down in inventories in future periods.
Valuation of Accounts Receivable
We record an allowance for the doubtful collection of accounts receivable based on our best estimate
of potentially uncollectible amounts. The best estimate considers past experience with our customer
base and a review of current economic conditions and specific customer issues. The Company’s
general practice is to insure substantially all lumber receivables, both export and domestic, for 90% of
value with the Export Development Corporation or Coface Canada, respectively, or sell on a cash
basis, which significantly reduces the Company’s exposure to bad debts.
Pension and Other Post Retirement Benefits
Western has various defined benefit and defined contribution plans that provide pension benefits to
most of its salaried employees and certain hourly employees not covered by forest industry union
plans. The Company also provides other post retirement benefits and pension bridging benefits to
eligible retired employees. With respect to the defined benefit plans, we retain independent actuarial
consultants to perform actuarial valuations of plan obligations and asset values, and advise on the
amounts to be recorded in the financial statements. Actuarial valuations include certain assumptions
that directly affect the fair value of the assets and obligations and expenses recorded in the financial
statements. These assumptions include the discount rate used to determine the net present value of
obligations, the return on plan assets used to estimate the increase in the plan assets available to
fund obligations and the increase in future compensation amounts and medical and health care costs
used to estimate obligations. Actual experience can vary materially from the estimates and impact
the cost of our pension and post retirement medical and health plans and future cash flow
requirements.
Environment
We disclose environmental obligations when known and accrue costs associated with the obligations
when they are known and can be reasonably estimated. The Company owns a number of
manufacturing sites that have been in existence for significant periods of time and, as a result, we
may have unknown environmental obligations. However, until the sites are decommissioned and the
plant and equipment are removed, a complete environmental review cannot be undertaken.
Contingencies
Provisions for liabilities relating to legal actions and claims require judgments using management’s
best estimates regarding projected outcomes and the range of loss, based on such factors as
13
historical experience and recommendations of legal counsel. Actual results may vary from estimates
and the differences are recorded when known.
Changes in Accounting Policies
Inventories
On January 1, 2010, the Company changed its accounting policy for the costing of lumber inventories
from the distributed cost method to the average cost of production method. Under the new policy,
costs of lumber produced will carry an average cost of production based on the species and facility
where they were produced, determined by actual lumber production costs divided by production
volumes. This compares to the former policy, which allocated costs based on the estimated fair value
of the lumber products manufactured. Costs for logs produced will continue to be allocated based on
the estimated fair value of the logs produced. Management believes that this change in accounting
policy provides more reliable and relevant information to the users of the financial statements as it is
more consistent with industry accounting practices, aligns with the Company’s new profit centre
strategy, and also results in a more conservative carrying value relative to the previous method used.
This change in accounting policy, which was implemented effective January 1, 2010 on a
retrospective basis without restatement of prior periods, resulted in inventory reducing by $2.4 million
to $105.2 million from $107.6 million and the deficit increasing to $327.2 million from $324.8 million as
at January 1, 2010. Prior periods have not been restated as the detailed information required to
implement the new policy on a retrospective basis is not available.
Future Changes in Accounting Policies
International Financial Reporting Standards (“IFRS”)
International Financial Reporting Standards (IFRS) will replace Canadian generally accepted
accounting principles (CGAAP) for publicly accountable enterprises for financial periods beginning on
or after January 1, 2011. Accordingly, the conversion from CGAAP to IFRS will be applicable to the
Company’s reporting for the first quarter of 2011 for which current and comparative information will be
prepared under IFRS.
IFRS Transition Plan
The tables below describe the key elements of Western’s IFRS changeover plan, significant
milestones and progress to date or expected completion.
Financial Reporting
Milestones
Initial impact assessment and scoping
Assessment of key accounting and reporting differences
Identification, evaluation, selection and approval of IFRS
accounting polices and IFRS 1 elections
Development of IFRS financial statement format, including disclosures
(Q1 2011 interim statements will be prepared such that they will largely
comply with anticipated annual disclosures given the enhanced
disclosures in transition year)
Preparation and review of Canadian GAAP / IFRS reconciliation
of financial results for 2010 (required to be included in transitional
statements)
MD&A disclosure quantifying the effects of conversion on the
2010 comparative period
Progress to Date/Expected
Completion
Completed all key areas.
Completed – as reported in the
2009 Annual MD&A report.
IFRS accounting policies and IFRS
1 elections selected by senior
management and approved by the
Audit Committee.
Drafted a preliminary set of Q1
2011 pro-forma interim statements
– in process of being reviewed by
senior management and Audit
Committee.
Partially completed. Balance of
reconciliations to be completed in
the first quarter of 2011.
Completed in first quarter of 2011.
14
Training and Communication
Milestones
Training key finance and operational staff directly engaged in the
changeover
Provide education and communicate progress of IFRS conversion
to executive management and Audit Committee
Information Technology, Systems and Processes
Milestones
Identify, implement and test changes to systems and processes
(i.e. changes to chart of accounts)
Prepare statement of opening financial position under IFRS and compile
dual reporting records during 2010
Implement financial planning and forecasting under IFRS
Progress to Date/Expected
Completion
Ongoing with planned completion
during the first quarter of 2011.
Technical updates provided to
Audit Committee and management
throughout the implementation.
Progress to Date/Expected
Completion
Identification – completed during
second quarter of 2010.
Implementation – new fixed asset
coding to facilitate tracking of
impairment/amortization
completed. Implementation and
testing – to be completed during
the first quarter of 2011.
Review of opening financial
position under IFRS in progress.
Key items currently being reviewed
by our external auditors.
Dual accounting reconciliation in
effect for 2010 comparatives.
Completed in the fourth quarter of
2010.
Contractual Arrangements and Compensation
Milestones
Assess impact on contractual arrangements and covenants and
Implement changes as necessary
Progress to Date/Expected
Completion
No material impact on contractual
arrangements identified.
Control Environment and Internal Control over Financial Reporting
Milestones
Approval of initial IFRS 1 elections and accounting policy choices
Testing of controls for 2010 comparatives
15
Progress to Date/Expected
Completion
IFRS accounting policies and IFRS
1 elections reviewed by senior
management and discussed with
the Audit Committee and
subsequently approved. Ongoing –
periodic review of implementation
progress, impacts of outstanding
IFRS exposure drafts, and IFRS
policy decisions.
Planned for completion during the
first quarter of 2011.
Update CEO/CFO certification process to respond to new IFRS reporting
requirements
Upon completion of required
process changes, testing
procedures and documentation will
be updated as necessary.
Disclosure Controls and Procedures
Milestones
Review and approval by senior management of annual IFRS disclosures
Review and approval by senior management of expected
conversion effects and associated disclosures on fiscal 2010
Progress to Date/Expected
Completion
Draft set of Q1 2011 interim
financial statements, including
notes - in the process of being
reviewed by senior management
and Audit Committee.
Complete.
Prepare first quarter 2011 financial results with 2010
comparatives in accordance with IFRS; Provide MD&A disclosure
of final changeover impacts
Planned for completion in the first
quarter of 2011 with appropriate
reviews/sign-offs.
Impact of Adoption of IFRS
IFRS are premised on a conceptual framework which is similar to CGAAP. However, significant
differences exist in certain matters of recognition, measurement and disclosure. The following
paragraphs outline the significant accounting policies, which are required or are currently expected to
be applied by the Company upon its adoption of IFRS, which will be significantly different than its
current CGAAP accounting policies.
These paragraphs also outline the material expected adjustments to the balance sheet as a result of
these significant accounting policy choices and IFRS1 elections. While the adoption of IFRS is not
expected to have a material impact on the reported cash flows of the Company, it is expected to have
a material impact on the Company’s consolidated balance sheet and statement of operations,
comprehensive income (loss) and deficit. The overall impact of these estimated adjustments is a net
increase to Western’s shareholder’s equity in the range of $10 million to $30 million.
Presentation
The balance sheet presentation of assets currently disclosed under CGAAP within the single
heading of Property, Plant and Equipment will now be required to be shown as three separate
balance sheet categories of asset:
Intangible assets (crown tenures)
a.
b. Biological assets (the timber component of privately owned timberlands)
c. Property, plant and equipment (all other property, plant and equipment excluding
a. and b.)
Property, Plant and Equipment
Under International Accounting Standard (IAS) 16, Property, Plant and Equipment, an entity is
required to choose, for each class of property, plant and equipment, to account for each class
using either the cost model or the revaluation model. The cost model is generally consistent with
CGAAP where an item of property, plant and equipment is carried at its cost less any
accumulated depreciation and any accumulated impairment losses. Under the revaluation model,
an item of property, plant and equipment is carried at its revalued amount, being its fair value at
the date of the revaluation less any accumulated depreciation and accumulated impairment
losses. The Company expects to use the cost model to account for all classes of property, plant
and equipment, except for land, for which the revaluation model is proposed to be elected. As a
result the Company will be required to revalue its land asset each period with any gains or losses
taken directly to revaluation reserve or profit and loss.
16
As a result of the proposed election choice to use the revaluation model to value land on
transition date, a net increase of approximately $20 million to the currently reported CGAAP net
book values is expected to be reflected in the asset category of property, plant and equipment,
with a corresponding amount to be reported in the revaluation reserve component of other
comprehensive income.
IFRS1 provides first time adopters of IFRS with the option to elect to measure an item of property,
plant and equipment at its fair value at the transition date, which is considered to be its deemed
cost thereafter.
The Company proposes to adopt this exemption for certain components of assets within the
category property, plant and equipment. The net overall impact of adopting this election is not
expected to have a material impact.
Intangible Assets
Under IFRS, crown tenures are expected to be considered an intangible asset with a finite useful
life, and hence subject to IAS 38, Intangible Assets. The Company expects that the initial
measurement of the tenures under IFRS will be at historic cost, less accumulated amortization
and accumulated impairment charges. Such intangible assets are required to be presented as a
separate line item in the balance sheet, and will be amortized over the expected useful life of the
asset.
Impairments
Under CGAAP, assets other than financial assets are generally tested for impairment using a
two-step approach: first comparing asset carrying values with undiscounted future cash flows to
determine whether impairment exists; and then measuring any impairment by comparing asset
carrying values with fair values. Under IFRS, IAS 36, Impairment of Assets, a one-step approach
is used for both testing for and measurement of impairment, with asset carrying values compared
directly with the higher of fair value less costs to sell, and value in use. This may potentially result
in more write-downs where carrying values of assets were not previously impaired under CGAAP
when compared to undiscounted cash flows, but could be impaired under IFRS when compared
to fair value or value in use. However, the extent of any new write-downs may be partially offset
by the requirement under IAS 36 to reverse any previous impairment losses where circumstances
have changed such that the impairments have been reduced. CGAAP prohibits the reversal of
impairment losses.
As a result of applying IAS 36 to its finite-lived intangible assets on the transition date (the crown
tenures), Western currently expects to recognize an impairment to these assets of approximately
$50 million. As a result, it is expected that the Intangible Asset category will be reduced by this
amount with a corresponding charge taken directly to retained earnings.
In addition, Western currently expects to recognize an impairment to property plant and
equipment in respect of sawmill buildings and equipment, of approximately $15 million with a
corresponding charge to retained earnings.
.
Biological Assets (Standing Timber)
Unlike CGAAP, biological assets are specifically addressed under IFRS (IAS 41 – Agricultural
Assets). The timber component of the Company’s private timberlands will qualify as a biological
asset under the scope of IAS 41. This timber would be reclassified and shown as a separate line
item on the Company’s balance sheet. The fair value of biological assets for Western would be
measured by discounting expected cash flows from the sale of standing timber at a current
market determined rate. This value would include not only the harvest value but also would
include a value for potential future growth. All gains and losses from changes in fair value are
recognized in profit and loss. The agricultural produce (logs) from the biological asset are
measured at fair value less costs to sell, which becomes the deemed cost for the purpose of
subsequent accounting under the IAS 2, Inventories standard.
Western currently expects an increase to this asset category of approximately $70 million at
January 1, 2010 with a corresponding increase taken directly to retained earnings. Future
17
changes in fair value of these biological assets will be recognized in the Company’s profit and
loss going forward.
Provisions, including asset retirement obligations
IAS 37, Provisions, Contingent Liabilities and Contingent Assets, has a lower recognition
threshold for provisions and measurement differences when compared to CGAAP. These
measurement differences include the requirement to reflect the risks associated with asset
retirement obligations, such as silviculture obligations, in either the cash flows or in the discount
rate used. The silviculture asset retirement obligations will be discounted using the risk free rate
rather than the Company’s credit adjusted risk free rate.
As a result, Western expects an increase to the silviculture liability as calculated under CGAAP at
the transition date of approximately $2 million with a corresponding reduction to retained
earnings.
Employee Benefits
Under CGAAP, the accrued pension benefit obligations in excess of plan assets for defined
benefit pension plans is required to be disclosed within the notes to the consolidated financial
statements. Under IFRS, IAS 19, Employee Benefits, requires the obligation in excess of plan
assets to be recorded as a liability on the balance sheet. The adoption of IAS 19 is not expected
to have a material impact on the financial results or balance sheet of the Company.
Share-Based Payments
The Company issues stock-based awards in the form of stock options that vest evenly over a
five-year period. Under CGAAP, Western recognizes the fair value of the award, determined at
the time of the grant, on a straight-line basis over the five-year vesting period. Under IFRS 2,
Share-Based Payments, the fair value of each tranche of the award is considered to be a
separate grant based on the vesting period with the fair value of each tranche determined
separately and recognized as compensation expense over the term of its respective vesting
period. Accordingly, this will result in a higher amount of each grant being recognized in income
at a faster rate than under CGAAP. The adoption of IFRS 2 is not expected to have a material
impact on the financial results or balance sheet of the Company.
Financial Instruments, Off-Balance Sheet Arrangements, Foreign Exchange and
Related Party Transactions
Consequent to the acquisition of Cascadia Forest Products Ltd. in May 2006, the Company
indemnified an entity related to BAM for a guarantee provided by the entity to a third party. As
security for performance under this indemnity, the Company issued a debenture in favour of the
related entity in the maximum amount of $100 million secured over all of the Company’s real property
and all of the Company’s personal property as at May 2006 and such property acquired thereafter. In
the absence of any claims, the guarantee terminates on May 30, 2011 and if there is no liability
accruing to the guarantor thereunder at that time, the Company will request that the debenture be
discharged.
Except for the debenture discussed above, the Company does not have any financial instruments not
recognized in the financial statements. Recognized financial instruments, consisting primarily of debt
instruments, are discussed elsewhere in this discussion and analysis.
In the fourth quarter of 2008 the Company commenced a program to reduce the impact of volatile
foreign exchange rates on Western’s net income. The Company utilizes derivative financial
instruments in the normal course of its operations as a means to manage its foreign exchange risk.
Therefore, Western may purchase foreign exchange forward contracts or similar instruments to
hedge anticipated sales to customers in the United States and Japan. The Company will not utilize
derivative financial instruments for trading or speculative purposes. Western will consider whether to
apply hedge accounting on a case by case basis and if the instrument is not designated as a hedge,
the instrument will be fair valued and marked to market each accounting period.
To further assist in mitigating this foreign exchange risk, the Company entered into an agreement
dated March 31, 2009 with BAM to provide a foreign exchange facility (“Facility”) to the Company.
18
The Facility, which is for a notional amount of up to US$80.0 million, matures on March 31, 2011, and
allows for forward transactions with a maximum term for each transaction of up to one year. The
maturity date is subject to automatic annual renewal subject to BAM notifying the Company of its
intention to cancel the facility at least 30 days prior to the anniversary date and to certain change of
control provisions being invoked. The Facility is unsecured and is subject to a fee of 0.10% of the
notional amount per annum. The Company does not consider the credit risk associated with this
Facility to be significant. During 2010, the Company entered into contracts under the Facility to sell
US dollars and Japanese Yen (JPY) forward in order to mitigate a portion of this foreign currency risk.
At December 31, 2010, the Company had forward contracts in place to sell US$2.1 million and JPY
2,250 million (2009 – nil). A net gain of $1.1 million was recognized on contracts which matured in the
year (2009 - $3.4 million), which is included in sales in the Consolidated Statement of Operations,
Comprehensive Income (Loss) and Deficit.
Other than the debenture discussed above and operating leases for vehicles, equipment and
machinery, the Company does not have any off-balance sheet financial arrangements as at
December 31, 2010.
In October 2009, the Company sold certain higher-and-better-use properties in central and northern
Vancouver Island (the "HBU Properties") to WFP Forest Products Ltd. (“WFPFPL”), a jointly-owned
entity of the Company and BPL. The HBU Properties were formerly part of the group of properties
included in the Company's non-core asset sales program. In connection with the reorganization of
WFPFPL as a jointly-owned entity and the sale of those HBU Properties, Western received total cash
proceeds of $12.4 million, of which $3.0 million was received in October, 2009 with the balance of
$9.4 million being received on January 4, 2010. As part of the arrangements, WFPFPL had a right of
first offer to purchase for possible future development approximately 255 hectares (630 acres) of
additional higher-and-better-use properties of the Company in central and northern Vancouver Island.
These properties represent non-core assets of the Company that were being held for sale. BPL is the
manager of WFPFPL, which also holds Carma Developers LP, a limited partnership that carries on a
land development business across Western Canada. Western’s interest in WFPFPL, which was less
than 5%, was accounted for using the cost method. Under the terms of the arrangement Western had
the option to sell its interest in that entity to BPL for its fair market value at any time on or after
January 1, 2011. On January 4, 2011, the Company exercised this option and sold its equity interest
in WFPFPL to BPL for $2.4 million, and the aforementioned right of first offer was extinguished.
Since BPL is a related party of Brookfield Special Situations Management Limited (“BSSML”), which
is Western’s largest shareholder, the transaction constituted a related party transaction under
Multilateral Instrument 61-101.
In addition to the related party transactions identified elsewhere in this MD&A, the Company has or
had certain arrangements with entities related to BAM to provide financing, acquire and sell logs,
lease certain facilities, provide access to roads and other areas, and acquire services including
insurance, all in the normal course and at market rates or at cost. The following table summarizes
these transactions during the year ended December 31:
2010
2009
$
8.1
4.8
$
10.2
3.7
$
12.9
$
13.9
$
$
$
$
3.3
9.4
12.7
0.4
0.3
0.7
Costs incurred for:
Log purchases
Other
Income received for:
Log sales
Other
19
Risks and Uncertainties
The following risks and uncertainties may have a material adverse effect on our operations:
Liquidity and Capital Resources
Western has reported net income for the last four quarters and positive EBITDA for the last five
quarters ended December 31, 2010, significantly increasing its available liquidity. Since December
31, 2009, the Company has generated cash flow from operations of $28.5 million, reduced its
revolving credit facility and long term debt by $31.4 million and re-negotiated and extended its
revolving credit facility and term loans. The Company has forecasted financial results and cash flows
for 2011, and as a result expects it will be able to continue as a going concern for the foreseeable
future. These forecasts are based on management’s best estimates of operating conditions, revenues
and expenses in the context of the current economic climate, including the continued relatively
challenging state of the forest products industry. Some of the major assumptions in this forecast
relate to sales volumes and product mix, lumber prices, log and chip prices and the US dollar and
Japanese Yen exchange rates. Other significant assumptions include production rates, the useful life
of the assets, stumpage rates and the amount of the export tax on lumber shipped to the US.
Variable Operating Performance, Product Pricing and Demand Levels
A key factor affecting Western’s operating and financial performance is the price received for lumber,
logs and other products. Prices for these products are highly cyclical and have fluctuated significantly
in the past and may fluctuate significantly in the future. The markets for our products are also highly
cyclical and are characterized by periods of excess product supply due to many factors, including:
• Additions/curtailments to industry capacity and production;
• periods of insufficient demand due to weak general economic activity or other causes
including weather factors;
•
•
customers experiencing reduced access to credit; and
inventory de-stocking by customers.
Product demand is influenced to a significant degree by economic activity at the global level.
Additionally, although costs may increase, customers may not accept related price increases for
those products. We are not able to predict with certainty market conditions and prices for these
products. Western’s results of operations depend upon the prices we receive for lumber, logs and
chips, and deterioration in prices of, or demand for, these products could have a material adverse
effect on our financial condition or results of operations. We cannot provide any assurance or
prediction as to the timing and extent of any price changes. On an annualized basis and based on
current operating metrics, we estimate that operating earnings would increase or decrease by
approximately $7 million for each incremental price increase or decrease, respectively, of $10 per
thousand board feet of lumber. Each incremental price swing greater than $10 per thousand board
feet of lumber is expected to have an impact on operating earnings of slightly less than $7 million per
increment due to the likely related change in stumpage fees.
Western’s financial performance is also dependent on the rate at which production capacity is utilized.
In times of challenging conditions in any of our major markets the Company maintains inventory
control by aligning log supply and lumber production with anticipated sales volumes. When capacity
utilization is reduced in response to weak demand for products, the cost per unit of production may
increase and profitability decrease.
From time to time and in accordance with market influences, the Company will reduce production with
temporary logging and/or sawmilling curtailments. In extreme cases, such curtailments may become
permanent closures. When Western undertakes significant market related curtailments of sawmills,
the volume of chips produced is reduced and accordingly there is greater risk that the Company may
not meet minimum contractual obligations under long-term chip supply agreements without incurring
additional cost.
20
International Business and Risks of Exchange Rate Fluctuations
Western’s products are sold in international markets. Economic conditions in those markets,
especially the United States, Japan and China, the strength of the housing markets in the United
States and Japan, fluctuations in foreign exchange rates and international sensitivity to interest rates,
can all have a significant effect on our financial condition and results of operations. In general, our
sales are subject to the risks of international business, including:
•
•
•
•
•
fluctuations in foreign currencies;
changes in the economic strength of the countries in which we conduct business;
trade disputes;
changes in regulatory requirements;
tariffs and other barriers;
• quotas, duties, taxes and other charges or restrictions upon exports or imports;
•
•
transportation costs and the availability of carriers of any kind including those by land or sea;
and
strikes or labour disputes in the transportation industry or related dock or container service
industries.
Depending on product mix, destination and exchange rates, between 35% and 45% of our total
product sales are denominated in US dollars and between 13% and 18% in Japanese Yen, while
most operating costs and expenses are incurred in Canadian dollars, with small portions in US dollars
and Japanese Yen. The Company’s functional currency is the Canadian dollar and results of
operations are reported in Canadian dollars. Significant variations in relative currency values,
particularly significant changes in the value of the Canadian dollar relative to the US dollar, have had,
and in the future could have, a material impact on our operating earnings and cash flows. We
estimate that an increase or decrease of 1% in the value of the Canadian dollar compared to the US
dollar and Japanese Yen would decrease or increase annual operating earnings by approximately
$2.6 million to $3.0 million, and $0.8 million to $1.0 million, respectively.
The Softwood Lumber Agreement (SLA) with the United States was implemented on October 12,
2006. The agreement has a term of seven years, extendable for up to two years, and may be
terminated after 18 months by either the Canadian or United States government with not less than six
months notice. We are unable to predict whether the agreement will be terminated prior to expiration
or the consequences upon termination, should it occur. In addition, the agreement provides that if the
monthly volume of exports from the British Columbia coastal region exceeds a certain “Trigger
Volume” as defined in the agreement, a “surge” mechanism will apply to increase the rate of the
export tax for that month by 50% (for example, a 15% export tax rate would become 22.5% for that
month). The surge mechanism can be triggered by any or all companies in the region over-shipping,
causing total exports to exceed the trigger volume. We are unable to predict if or when the surge
mechanism will apply to any of our future lumber shipments into the United States.
On October 8, 2010, the United States Trade Representative wrote to Canada’s International Trade
Minister to request consultations under the SLA with respect to allegations of under-pricing of timber
in the British Columbia interior and circumvention of export measures provided for in the SLA. On
January 18, 2011, the United States triggered the arbitration provision of the SLA by delivering a
Request for Arbitration. As the arbitration is a state-to-state international dispute under the SLA,
Canada is preparing a defence to the claim with the assistance of the Province of British Columbia
and the British Columbia forestry industry. As the claim is specifically directed at British Columbia
interior practices, it is not possible at this time to predict any potential direct or indirect impact it may
have on Western, which operates predominantly on the coast of British Columbia.
21
Employees and Labour Relations
Hourly paid employees at our manufacturing facilities, timber harvesting operations and a small group
of clerical workers are unionized. Currently we negotiate and administer six collective agreements.
Our unionized employees are represented by the United Steel Workers (USW) or the Pulp, Paper and
Woodworkers of Canada (PPWC). The collective agreement covering the majority of Western’s
unionized employees (Coast Master Agreement with the USW), was renewed in 2010 and expires on
June 14, 2014. An agreement that covers employees at the Company’s Ladysmith Sawmill
Operation was also renewed in 2010 and now expires on December 31, 2014, and an agreement
covering employees at the Value Added Remanufacturing operation was renewed until October 14,
2016. Two other agreements expire in 2012.
Should the Company be unable to negotiate an acceptable contract after any of these collective
agreements expire with any of the unions, a strike or work stoppage could occur. Furthermore, a
negotiated settlement could result in unplanned increases in wages or benefits payable to union
members. Therefore, a strike or other work stoppage could involve significant disruption of
operations and/or a material adverse impact on our financial condition or results of operations. In
addition, the Company relies on certain third parties, such as logging contractors, stevedores or major
railways, whose workforces are unionized, to provide us with services needed to operate our
business. If those workers engage in strike or other work stoppages, our operations could be
disrupted.
Long-Term Competition
The markets for our products are highly competitive on a domestic and international level, with a large
number of major companies competing in each market. Many of our competitors have both
substantially greater financial resources and less debt than Western. Some of these competitors are
not subject to fluctuations in the relative value of the Canadian dollar to the same extent as Western.
We also compete indirectly with firms that manufacture substitutes for solid wood products, including
non-wood and engineered wood products. While the principal basis for competition is price, we also
compete to a lesser extent on the basis of quality and customer service. Changes in the level of
competition, industry capacity and the global economy have had, and are expected to continue to
have, a significant impact on the selling prices and overall profitability of the Company. Our
competitive position will be influenced by factors including the availability, quality and cost of fibre,
energy and labour, and plant efficiencies and productivity in relation to our competitors. Our
competitive position could be affected by fluctuations in the value of the Canadian dollar relative to
the US dollar and/or the Japanese Yen, and by the export tax on softwood lumber shipments to the
US.
Forest Resource Risk and Natural Catastrophes
Our timber tenures are subject to the risks associated with standing forests, in particular, forest fires,
wind storms, insect infestations and disease. Procedures and controls are in place to mitigate such
risk through prevention and early detection. Most of the timber that we harvest comes from Crown
tenures and insurance coverage is maintained only for loss of logs due to fire and other occurrences
following harvesting. However, this coverage does not extend to standing timber, and there is no
assurance that this coverage would be adequate to provide protection against all eventualities,
including natural catastrophes. Western has entered into a cost-sharing agreement with the Crown for
our private timberlands to reduce individual incident costs of mobilizing helicopters and aerial water
tankers in the event of a fire on those lands. In 2010 the British Columbia coast experienced normal
summer conditions which resulted in only a few wildfires within our tenures.
In addition, our operations may be adversely affected by severe weather including wind, snow and
rain that may result in our operations being unable to harvest or transport logs to our manufacturing
facilities for extended periods of time. Although we anticipate and factor in a certain period of down-
time due to weather, extended periods of severe or unusual weather may adversely impact our
financial results due to higher costs and missed sales opportunities arising from fibre shortages or the
deterioration of logs remaining on the ground or in the water for extended periods of time. In 2010, a
series of very large storms through the month of September resulted in frequent shutdowns and
damaged infrastructure at our northern Vancouver Island and central coast logging operations
reducing log production.
22
All of our business operations are located on the British Columbia coast, which is geologically active
and considered to be at risk from earthquakes.
Climate change over time is predicted to lead to changes in the frequency of storm events as well as
their severity. We also expect to see changes in the occurrence of wildfires and forest pest
outbreaks. Long-term climatic models are predicting that the optimum ranges of many species,
including those of our major tree species, will shift over time. We are unable to predict the impact of
all of these factors on our tenures or on forest practices.
While the Company maintains insurance coverage to the extent deemed prudent by us, we cannot
predict that all potential insurable risks have been foreseen or that adequate coverage is maintained
against known risks. With respect to the storm damage noted earlier, an insurance claim is being
prepared and the Company is working with its insurers to quantify the amount of damage resulting
from this event.
Impact of Mountain Pine Beetle Infestation
The north-central interior forests of British Columbia have been, and continue to be, seriously
damaged by North America’s largest recorded mountain pine beetle infestation. Western does not
operate in the affected area and lodgepole pine, the species most at risk from the infestation, is not a
key source of timber in the coastal forests. This natural disaster is causing widespread mortality of
lodgepole pine. Increases in harvest levels have resulted in higher lumber production volumes and
therefore more supply in the marketplace, potentially decreasing prices, primarily in the structural
dimension market in the United States. There is growing evidence that, as the dead trees decay,
they become more difficult and costly to manufacture into lumber and that the quality of the residual
wood chips may diminish. There may also be access issues over time as developing second growth
forests grow to a size that precludes entry into pine beetle damaged stands.
The mountain pine beetle has crossed into Alberta, and timber harvesting of lodgepole and jackpine
in Alberta may see an increase in allowable annual cut (“AAC”) to promote salvage before decay,
potentially adding to downward price pressures as the lumber supply may increase. The Company is
unable to predict when and if the mountain pine beetle infestation will be halted or its impact on future
lumber, chip and log prices.
Pulp and Paper Market Variability
The selling price in Canadian dollars of our residual wood chips on some of our fibre contracts is tied
by formula to the net pulp realizations in US dollars obtained by our wood chip customers.
Fluctuations in pulp prices and foreign currencies will accordingly impact the selling price of our
residual wood chips. The price and demand for the pulp logs and other logs sold to pulp and paper
companies is also dependent on the market conditions for pulp and paper. If contraction in the
coastal pulp and paper industry were to occur, we may need to find alternative customers for the pulp
logs and residual chips from our sawmills.
Dependency on Fibre Obtained from Government Timber Tenures
Currently, substantially all of the timberlands in which we operate are owned by the Province of
British Columbia and, until October 2010 were administered by the Ministry of Forests and Range.
Government restructuring of resource Ministries has resulted in timberlands being administered by
the Ministry of Forests, Mines and Lands as well as the Ministry of Natural Resource Operations. The
Forest Act (British Columbia) (“Forest Act”) empowers the Ministry of Forests, Mines and Lands to
grant timber tenures, including Tree farm Licences (“TFLs”), Forest Licences (“FLs”) and Timber
Licences (“TLs”), to producers, although no new TLs can be issued and the availability of extensions
to expiring TLs cannot be assured. The Provincial Chief Forester must conduct a review of the AAC
for each Timber Supply Area and each TFL in the Province on a periodic basis, which is at least once
every ten years. This review is then used to determine the AAC for licences issued by the Province
under the Forest Act. Many factors affect the AAC such as timber inventory, the amount of operable
forest land, growth estimates of young forests, regulation changes and environmental and social
changes. Such assessments have in the past resulted and may in the future result in reductions or
increases to the AAC attributable to licences held by British Columbia forest companies (without
compensation), including the licences that we hold. In addition, our AAC can be temporarily reduced
23
(without compensation for the first four years) in areas where logging has been suspended under Part
13 of the Forest Act pending further consideration in land use planning. Land use planning and new
harvesting regulations can constrain access to timber and new parks can permanently remove land
from the timber harvesting land base. There can be no assurance that the amounts of such future
reductions on our licences, if any, will not be material or the amounts of compensation, if any, for
such reductions will be fair and adequate.
Forest Policy Changes in British Columbia
In October 2010 the Province implemented sweeping changes in how Crown land natural resource
rights are administratively managed. Former sector specific Ministries (Forests, Mines, Environment,
etc.) retained a policy development role but the administration of most tenure rights formerly
managed by these Ministries was assigned to a single new Ministry, the Ministry of Natural Resource
Operations. While the Province’s intention was to make resource administration more effective and
efficient, it remains to be seen if the desired improvements are realized.
First Nations Land Claims
First Nations groups have made claims of rights and title to substantial portions of land in British
Columbia, including areas where our timber tenures and operations are situated, creating uncertainty
as to the status of competing property rights and of legislation and Crown decisions that adversely
affect such asserted rights and title. The Supreme Court of Canada has held that aboriginal groups
may have a spectrum of constitutionally recognized and affirmed aboriginal rights and title in lands
that have been traditionally used or occupied by their ancestors; however, such rights or title are not
absolute and may be infringed by government in furtherance of a valid legislative objective, including
forestry, subject to meeting a justification test. The effect on any particular lands will not be
determinable until the nature of historical use, occupancy and rights in any particular piece of property
have been clarified. The Supreme Court of Canada has also held that even before claims of rights
and title are proven, the Crown has a legal duty to consult with First Nations, which can become a
duty to seek possible accommodations, when the Crown has knowledge, real or constructive, of the
potential existence of an aboriginal right or title and contemplates conduct that might adversely
impact it. During the period before asserted claims are proven, the Crown is required to consult in
good faith with the intention of substantially addressing First Nation concerns, but First Nations
agreement is not required in these consultations.
First Nations are seeking compensation from governments (and in some instances from forest tenure
holders) with respect to these claims, and the effect of these claims on timber tenure rights, including
our timber tenures, cannot be estimated at this time. The Federal and Provincial Governments have
been seeking to negotiate treaty settlements with aboriginal groups in British Columbia in order to
resolve these claims. On April 1, 2011 the first modern day treaty affecting the Company’s tenures is
expected to come into force. The Maa’nulth Treaty will extinguish the Company’s tenure rights on
Maa’nulth Treaty Settlement lands within TFL 44 and will permanently reduce the tenure’s AAC. The
Company is in discussions with the Province on the magnitude of the treaty impacts on AAC,
improvements, soft cost investments and downstream business. As these discussions are ongoing,
any settlement or the amounts of compensation that we would receive for this or future takings from
our tenures as a result of this process cannot be estimated at this time and none has been recorded
as a receivable. Other treaty processes involving the Nam’gis, Sliammon and K’omox First Nations
are also well advanced and may lead to agreements in principle in 2011.
Current Provincial Government policy requires that forest management and operating plans take into
account and not unreasonably infringe on aboriginal rights and title, proven or unproven, and provide
for consultation with First Nations. This policy is reflected in the terms of our timber tenures, which
provide that the Ministry of Forests, Mines and Lands may vary or refuse to issue cutting permits in
respect of a timber tenure if it is determined by a court that the forestry operation would unreasonably
interfere with aboriginal rights or title. First Nations have, at times, sought to restrict the Provincial
Government from granting or replacing forest tenures and other operating authorizations or from
approving forest management plans on Crown lands without full consultation and accommodation or
their consent if these decisions could affect lands claimed by them. There can be no assurance that
denial of required approvals for, or changes to the terms of our timber tenures, other operating
authorizations or forest management plans as a consequence of such consultation or action will not
have an adverse effect on our financial condition or results of operations.
24
An unfavourable result in any of the First Nations litigation in which the Company is a party or which
involves assets of the Company could have a material adverse effect on our financial condition or
results of operations. See also “Legal Proceedings”.
Stumpage Fees
Stumpage is the fee that the Province charges forest companies for timber harvested from Crown
land in British Columbia. In January 2004, the Provincial Government announced the move to a more
open and competitive market pricing system for timber and logs for the coastal region. Previously,
the amount of stumpage paid for each cubic metre of wood harvested from the coastal region was
based on a target rate set by the Province. Since February 29, 2004, stumpage for the coastal region
is being set using the Coast version of the Market Pricing System (“MPS”), which uses the results
from British Columbia Timber Sales (“BCTS”) auctions to establish the value of Crown timber
harvested under long-term tenures. Changes to the Coastal stumpage system effective April 1, 2011
have been announced but the details are not yet confirmed. The changes are expected to involve an
update to the MPS calculation, and the supporting BCTS database is being updated to include 2009
and 2010 sales, which is expected to result in higher stumpage than the 2009 equivalent calculation.
The Company is currently assessing the methodology with which the new equation will be
implemented. There can be no assurance that future changes to the stumpage system or the
Province’s administrative policy will not have a material impact on stumpage fees payable and
consequently affect our financial condition and results of operations.
Long-term Fibre Supply Agreements
The Company has a number of long-term commitments to supply chip fibre and pulplogs to third
parties. Certain of these fibre supply agreements have minimum volume requirements. A failure to
supply the minimum volumes may result in additional costs or deferred obligations. In one case the
failure to supply the minimum volume could result in the loss of a TFL, but with a concurrent reduction
in the future fibre supply commitment under that agreement. Negotiations are currently in progress
with respect to amending certain of these agreements.
Safety
Western is subject to workplace safety laws and regulations. Failure to comply with these laws and
regulations can result in monetary penalties and work stoppages. The laws and regulations change
over time and may involve new methodologies and additional costs necessary to bring the Company
into compliance.
Environmental Regulation
We are subject to extensive environmental laws and regulations. These laws and regulations impose
stringent standards on our operations and impose liability to remedy problems for which we are
legally responsible regarding, among other things:
• air emissions;
•
land and water discharges;
• operations or activities affecting watercourses or the natural environment;
• operations or activities affecting species at risk;
• use and handling of hazardous materials;
• use, handling, and disposal of waste; and
•
remediation of environmental contamination.
We may incur substantial costs to comply with current or future requirements, to respond to orders or
directions made, to remedy or to compensate others for the cost to remedy problems for which we
are legally responsible or to comply with new environmental laws that may be adopted from time to
time. In addition, we may discover currently unknown environmental problems or conditions affecting
our operations or activities or for which we are otherwise legally responsible. Western has closed
25
certain operations and although we have engaged specialists to advise us of environmental problems
and conditions, normal site clean-up may identify additional problems or conditions. Any such event
could have a material adverse effect on our financial condition and results of operations.
Regulatory Risks
Our forestry and sawmill operations are subject to extensive federal, provincial, state, municipal and
other local laws and regulations, including those governing forestry, exports, taxes, labour standards,
occupational health, safety, waste disposal, building structures/systems, environmental protection
and remediation, protection of endangered and protected species and land use and expropriation.
Under certain laws and regulations, we are also required to obtain permits, licences and other
authorizations to conduct our operations, which permits, licences and authorizations may impose
additional conditions that must be satisfied. Although we budget for expenditures to maintain
compliance with such laws and permits, there can be no assurance that these laws and regulations or
government policy will not change in the future in a manner that could have an adverse effect on our
financial condition or results of operations or the manner in which we operate. Nor can there be any
assurance that administrative interpretation of existing laws and regulation will not change or more
stringent enforcement of existing laws will not occur, in response to changes in the political or social
environment in which we operate or otherwise, in a manner that could have an adverse effect on our
financial condition or results of operations or the manner in which we operate.
Our timber operations are subject to Federal and Provincial restrictions that may require them to
decrease planned export of logs. Currently, in British Columbia logs from most Crown lands are
subject to Provincial log export restrictions and logs from most private timberlands are subject to
federal export regulations. As a result, all export logs must be advertised for local consumption and
may be exported only if there is a surplus of domestic supply as indicated by the absence of fair
market value offers (based on current domestic prices) from domestic lumber mills. Accordingly, an
increase in domestic demand could result in our timber operations being required to decrease their
planned export of logs. The Provincial Government in British Columbia is currently reviewing its log
export policy, and may recommend that the federal government impose a policy that may further
restrict the export of logs from private lands in British Columbia. As export market pricing is generally
at a premium to the domestic market pricing, any reduction in log exports could have an adverse
effect on our timber operations.
Legal Proceedings
In January 2008 the Ditidaht First Nation commenced litigation in the B.C. Supreme Court against the
Province of British Columbia, Canada, certain other First Nations and two forestry companies,
including the Company, seeking amongst other things declarations of aboriginal title and rights in
areas of Vancouver Island that include areas covered by timber tenures held by the Company and
declarations that provincial forestry legislation and the Company's timber tenures are of no force or
effect on the claimed aboriginal title lands. This proceeding is in the early stages and no trial date
has been set.
In April 2008 the Kwakiutl First Nation commenced litigation in the B.C. Supreme Court against the
Province of British Columbia, Western and the Federal Government of Canada seeking, amongst
other things, orders to set aside the Province’s decision to remove Western’s private lands from a
TFL and the Province’s approval of the Company’s Forest Stewardship Plan on the Crown lands
within their area of interest, based on alleged infringements of their treaty rights and unextinguished
aboriginal title and rights. A preliminary application by the Province to restrict the scope of this
litigation had been scheduled for January, 2010 but was adjourned at the request of the Kwakiutl First
Nation. No new hearing dates have been set for that application and the matter is in abeyance.
In 2005 the Hupacasath First Nation obtained an order of the B.C. Supreme Court requiring the
Province of British Columbia to consult with them regarding certain Crown decisions, including a 2004
decision of the Minister of Forests, Mines and Lands to remove private lands from TFL 44, a TFL
subsequently acquired by the Company. In the third quarter of 2008 the Court ordered that a
mediator be appointed to address appropriate accommodation for the effects of the Minister’s 2004
private land decision upon the asserted aboriginal rights of the Hupacasath First Nation on their
claimed territory, both with respect to the private lands that are now outside the TFL and the Crown
lands that remain within the Company’s TFL. The scope of this mediation is to include, among other
26
things, consideration of possible accommodation from resources on the Crown lands remaining in the
TFL now held by the Company. No result of this mediation has been announced.
The Company is currently unable to predict the outcome of these First Nation legal proceedings on
Western’s ongoing operations or on any sale of its non-core assets and private forestry lands.
In August 2009, the British Columbia Court of Appeal upheld an earlier Forest Appeals Commission
decision that had confirmed the Company was entitled to calculate stumpage at one of its operations
in a manner that would result in a rebate to the Company of stumpage previously paid. The Province
application for leave to appeal this decision to the Supreme Court of Canada was denied on March
11, 2010. The Company is now entitled to a rebate of stumpage previously paid in this matter. Other
pending stumpage appeals, held in abeyance pending the outcome of these legal proceedings, are
now proceeding to hearing before the British Columbia Forest Appeals Commission and the potential
stumpage rebate is not possible to ascertain at this time
In addition, Western is subject to routine litigation incidental to our business, the outcome of which we
do not anticipate will have a material adverse affect on our financial condition and results of
operations.
Reliance on Directors, Management and Other Key Personnel
Western relies upon the experience and expertise of our personnel. No assurance can be given that
we will be able to retain our current personnel and attract additional personnel as necessary for the
development and operation of our business. Loss of or failure to attract and retain key personnel
could have a material adverse effect on Western’s business.
Change of Control of Western
BSSML currently holds 49% of the outstanding Common Shares of Western and its additional equity
interest in Western through Non-Voting Shares. If a change of control of Western were to occur, there
could be significant adverse consequences to Western. If it is determined that there has been an
acquisition of control for Canadian tax purposes we may lose the benefit of historical tax losses,
which may limit our ability to shelter future operating income from tax. In addition, if BSSML or any
person were to acquire sufficient Common Shares to constitute a change or acquisition of control of
Western, and the Minister of Forests, Mines and Lands were to be satisfied the change or acquisition
of control unduly restricted competition in standing timber, log or wood chip markets, the Minister
could make a determination to cancel all or a part of our Forest Act tenures. If this were to occur, we
may have to obtain the fibre to run the combined business facilities from external sources, perhaps at
a higher cost. A significant increase in our costs could have a material adverse effect on the financial
condition and results of operations of the combined business.
Certain Voting Rights of the Non-Voting Shares
The holders of Non-Voting Shares are generally not entitled to vote at meetings of our shareholders.
They are, however, entitled to one vote per share on any vote relating to our liquidation, dissolution or
winding-up, or the sale, lease or exchange of all or substantially all of our property and as otherwise
provided by law or any amendment that would add, change or remove attributes of the Non-Voting
Shares or any class of share adversely affecting the Non-Voting Shares either separately or in
relation to the Common Shares. As such, holders of Non-Voting Shares will be able to vote on, and
potentially affect the outcome of, certain transactions, such as our liquidation or winding-up or the
sale of substantially all of our assets.
Evaluation of Disclosure Controls and Procedures
As required by Multilateral Instrument 52-109 issued by the Canadian Securities Administrators,
Western carried out an evaluation of the design and effectiveness of the Company’s disclosure
controls and procedures and internal controls over financial reporting as of December 31, 2010. The
evaluation was carried out under the supervision and with the participation of the Chief Executive
Officer (“CEO”) and the Chief Financial Officer (“CFO”). Based on the evaluation, Western’s CEO and
CFO concluded that the Company’s disclosure controls and procedures are effective in providing
reasonable assurance that material information relating to Western and its consolidated subsidiaries
27
is made known to them by others within those entities, particularly during the period in which the
annual filings are being prepared. In addition, Western’s CEO and CFO concluded that the
Company’s internal controls over financial reporting are effective in providing reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for Western
and its consolidated subsidiaries for the period in which the annual filings are being prepared.
The CEO and CFO confirm that there were no changes in the controls which materially affected, or
are reasonably likely to materially affect, the Company’s internal control over financial reporting
during the last quarter of 2010.
Outstanding Share Data
As of February 23, 2011 there were 128,625,623 Common Shares and 338,945,860 Non-Voting
Shares issued and outstanding. BSSML controls and directs 49% of the Company’s Common Shares
and 100% of the Non-Voting Shares. The Company may convert the Non-Voting Shares into
Common Shares on a one-for-one basis, in whole or in part, at any time in its sole discretion,
provided that the Board of Directors is at that time of the opinion that to do so would not have a
material adverse effect on the Company’s business, financial condition or business prospects.
Western has reserved 10,000,000 Common Shares for issuance upon the exercise of options granted
under the Company’s incentive stock option plan. During 2010, 4,000,000 options were granted,
4,324,000 options were cancelled and no options were exercised. As of February 23, 2011,
4,741,795 options were outstanding under the Company’s incentive stock option plan.
28
Management’s Discussion and Analysis – Appendix A
Summary of Selected Results for the Last Eight Quarters
(millions of dollars except per share amounts
and where noted)
Year
4th
3rd
2nd
1st
Year
4th
2010
2009
3rd
2nd
1st
Average Exchange Rate – Cdn $ to
purchase one US $
1.030x
1.013x
1.039x
1.029x
1.040x
1.140x
1.056x
1.098x
1.167x
1.244x
Sales
Lumber
Logs
By-products
Total sales
Lumber
Shipments – millions of board feet
Price – per thousand board feet
Logs
Shipments – thousands of cubic meters
Price – per cubic metre
Selling and administration
EBITDA
Amortization of capital assets
Operating restructuring items
Net interest expense
Other income (expense)
Income taxes
Net income (loss) from continuing
operations
Net loss from discontinued
operations
Net income (loss)
475.1
139.0
53.8
667.9
669
710
2,342
59
24.5
47.7
(28.8)
(1.6)
(12.4)
24.3
-
29.2
(1.5)
27.7
118.1
38.8
15.7
172.6
123.7
39.1
12.7
175.5
131.1
36.6
13.8
181.5
102.2
24.5
11.6
138.3
147
695
414
59
5.4
8.0
(7.4)
-
(3.1)
10.6
(0.2)
168
703
646
60
7.6
7.1
(6.6)
(0.1)
(2.6)
5.9
0.6
4.3
(0.3)
4.0
165
750
642
61
189
694
640
57
5.8
5.7
11.7
20.9
(6.7)
(0.6)
(3.4)
6.3
(0.1)
7.2
(0.3)
6.9
(8.1)
(0.9)
(3.3)
1.5
(0.3)
9.8
(0.3)
9.5
438.2
99.6
42.7
580.5
608
721
1,594
62
24.7
(34.8)
(29.5)
(5.5)
(10.8)
7.4
(0.1)
96.3
32.5
10.5
139.3
111.8
25.5
12.6
149.9
101.9
25.3
11.5
138.7
128.2
16.3
8.1
152.6
140
688
528
62
5.6
2.3
(7.2)
0.3
(3.2)
5.1
-
157
712
413
62
145
703
406
62
166
772
247
66
5.8
5.9
7.4
(5.2)
(16.0)
(15.9)
(7.3)
(2.3)
(2.9)
1.7
(0.1)
(8.2)
(3.5)
(2.3)
0.5
-
(6.8)
-
(2.4)
0.1
-
7.9
(73.3)
(2.7)
(16.1)
(29.5)
(25.0)
(0.6)
7.3
(2.0)
(75.3)
(0.4)
(3.1)
(0.5)
(0.6)
(0.5)
(16.6)
(30.1)
(25.5)
EBITDA as % of sales
7.1%
4.1%
6.7%
11.5%
5.8%
(6.0)%
1.7% (3.5)% (11.5)% (10.4)%
Earnings per share:
Net income (loss) basic and diluted
Net income (loss) from continuing
operations basic and diluted
0.06
0.01
0.01
0.02
0.02
(0.17)
(0.01)
(0.04)
(0.06)
(0.06)
0.06
0.01
0.02
0.02
0.02
(0.16)
(0.01)
(0.04)
(0.06)
(0.06)
In a normal operating year there is some seasonality to the Company’s operations with higher lumber
sales in the second and third quarters when construction activity, particularly in the United States, has
historically tended to be higher. However, in 2009 the unusual economic circumstances caused this
pattern to be overridden. Logging activity may also vary depending on weather conditions such as
rain, snow and ice in the winter and the threat of forest fires in the summer.
The category of “Other income (expense)” comprises net gains on the sale of various assets and
other receipts which can be unpredictable in their timing. More material transactions of this nature
occurred in the fourth quarter of 2009 and in the first, third and fourth quarters of 2010. Throughout
2009, in particular, results suffered from the significant downturn in the forest products industry,
bringing associated production curtailments. The second and third quarters of 2009 and the second,
third and fourth quarter of 2010 included charges for restructuring.
29
Western Forest Products Inc.
Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended December 31, 2010 and 2009
30
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL
STATEMENTS
The management of Western Forest Products Inc. (“Western” or the “Company”) is responsible for the
accompanying Consolidated Financial Statements and all other information in the Management’s
Discussion and Analysis. The financial statements have been prepared by Management in accordance
with Canadian generally accepted accounting principles and, where necessary, reflect Management’s best
estimates and judgments at this time. The financial information presented throughout the Management’s
Discussion and Analysis and the Company’s press release dated February 23, 2011 is consistent with that
contained in the Consolidated Financial Statements.
Western maintains systems of internal accounting controls, policies and procedures to provide reasonable
assurances as to the reliability of the financial records and the safeguarding of its assets. Management
meets the objectives of internal accounting control on a cost-effective basis through the prudent selection
and training of personnel, adoption and communication of appropriate policies, and employment of an
internal audit program.
The Board of Directors reviews through oversight Management’s responsibilities with respect to the
Consolidated Financial Statements primarily through the activities of its Audit Committee, which is
composed solely of independent directors of the Company. This Committee meets with Management and
the Company’s independent auditors KPMG LLP to review the Consolidated Financial Statements and
recommend their approval by the Board of Directors. The Audit Committee is also responsible for making
recommendations with respect to the appointment, remuneration and the terms of engagement of the
Company’s auditors. The Audit Committee also meets with the auditors, without the presence of
Management, to discuss the results of the audit, related findings and their suggestions.
The Consolidated Financial Statements have been audited by KPMG LLP, who were appointed by the
shareholders at the annual shareholders’ meeting. The auditors’ report follows.
Dominic Gammiero
Chairman & Chief Executive Officer
Brian Cairo
Chief Financial Officer
February 23, 2011
31
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Western Forest Products Inc.
We have audited the accompanying consolidated financial statements of Western Forest Products
Inc. ("the Company"), which comprise the consolidated balance sheets as at December 31, 2010 and
2009 and the consolidated statements of operations, comprehensive income (loss) and deficit, and
cash flows for the years then ended, and notes, comprising a summary of significant accounting
policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with Canadian generally accepted accounting principles, and for such
internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted auditing standards.
Those standards require that we comply with ethical requirements and plan and perform an audit to
obtain reasonable assurance about whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the consolidated financial statements. The procedures selected depend on our judgment, including
the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, we consider internal control relevant
to the Company's preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity's internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to
provide a basis for our audit opinions.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
consolidated financial position of Western Forest Products Inc. as at December 31, 2010 and 2009,
and the results of its consolidated operations and its consolidated cash flows for the years then ended
in accordance with Canadian generally accepted accounting principles.
Chartered Accountants
Vancouver, Canada
February 23, 2011
32
Western Forest Products Inc.
Consolidated Balance Sheets
(Expressed in millions of Canadian dollars)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable
Inventory (Note 4)
Prepaid expenses and other assets
Property, plant and equipment (Note 5)
Other assets (Note 6)
Liabilities and Shareholders’ Equity
Current liabilities:
Revolving credit facility (Note 7)
Accounts payable and accrued liabilities
Current portion of long-term debt (Note 8)
Discontinued operations (Note 21)
Long-term debt (Note 8)
Other liabilities (Note 10)
Deferred revenue (Notes 2(g ) and 14(d) )
Shareholders’ equity:
Common shares (Note 12)
Non-voting shares (Note 12)
Contributed surplus
Deficit
Commitments and contingencies (Note 14)
Subsequent events (Notes 14(a) a nd 23)
See accompanying notes to these consolidated financial statements
Approved on behalf of the Board:
As at December 31,
2009
2010
$
5.1
$
8.1
58.7
128.9
4.8
197.5
375.8
13.8
39.7
107.6
3.8
159.2
405.9
10.9
$
587.1
$
576.0
-
$
73.0
-
$
15.3
55.2
45.2
6.2
79.2
104.9
29.5
70.4
284.0
412.3
187.5
2.8
(299.5)
303.1
6.1
121.8
74.5
29.8
72.4
298.5
412.3
187.5
2.5
(324.8)
277.5
$
587.1
$
576.0
_________________________
"Dominic Gammiero"
Dominic Gammiero, Chairman & CEO
Chairman and Chief
Executive Officer
_____________________
"Lee Doney"
Vice Chairman
Lee Doney, Vice Chairman
33
Western Forest Products Inc.
Consolidated Statements of Operations, Comprehensive Income
(Loss) and Deficit
(Expressed in millions of Canadian dollars except for share and per share amounts)
Sales
Cost and expenses:
Cost of goods sold
Export tax
Freight
Selling and administration
Operating income (loss) before operating restructuring items
Operating restructuring items ( Note18)
Operating income (loss)
Net interest expense (Note 19)
Other income (No te 20)
Income (loss) before income taxes
Income tax expense (Note 9 )
Net income (loss) from continuing operations
Net income (loss) from discontinued operations (Note 21)
Net income (loss) and comprehensive income (loss)
Deficit, beginning of year
Change in accounting policy (Note 3)
Deficit, beginning of year as adjusted
Year ended December 31,
2010
2009
$
667.9
$
580.5
554.4
3.9
66.2
24.5
649.0
18.9
(1.6)
17.3
(12.4)
24.3
29.2
-
29.2
(1.5)
27.7
(324.8)
(2.4)
(327.2)
555.1
6.0
59.0
24.7
644.8
(64.3)
(5.5)
(69.8)
(10.8)
7.4
(73.2)
(0.1)
(73.3)
(2.0)
(75.3)
(249.5)
-
(249.5)
Deficit, end of year
$
(299.5)
$
(324.8)
Income (loss) per share (in dollars): (No te 12(e))
Basic and diluted income (loss) per share
Basic and diluted income (loss) per share
from continuing operations
Weighted average number of shares outstanding (thousands)
Basic
Diluted
See accompanying notes to these consolidated financial statements
$ 0.06
$ (0.17)
$ 0.06
$ (0.16)
467,571
474,778
452,431
452,431
34
Western Forest Products Inc.
Consolidated Statements of Cash Flows
(Expressed in millions of Canadian dollars)
Cash provided by (used in):
Operating activities:
Net income (loss) from continuing operations
Items not involving cash:
Amortization of capital assets (Note 5)
Gain on disposal of property, plant and equipment
Other
Changes in non-cash working capital items:
Accounts receivable
Inventory
Prepaid expenses
Accounts payable and accrued liabilities
Investing activities:
Additions to property, plant and equipment
Proceeds from disposal of property, plant and equipment
Financing activities:
Changes in revolving credit facility
Proceeds from Rights Offering, net of costs (Note 12)
Repayment of long-term debt
Refinancing fees
Cash provided by (used in) continuing operations
Cash used in discontinued operations (Note 21)
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplementary information:
Cash interest paid
Cash income taxes paid
See accompanying notes to these consolidated financial statements
35
Year ended December 31,
2009
2010
$
29.2
$
(73.3)
28.8
(7.2)
0.3
51.1
(15.7)
(23.7)
(1.0)
17.8
28.5
(11.6)
15.3
3.7
(15.3)
-
(16.1)
(2.3)
(33.7)
29.5
(3.5)
(3.5)
(50.8)
5.9
121.2
4.4
(17.5)
63.2
(8.9)
7.0
(1.9)
(93.6)
49.6
(6.4)
(3.2)
(53.6)
(1.5)
(1.5)
(3.0)
8.1
5.1
$
7.7
(3.1)
4.6
3.5
8.1
$
$
$
9.6
0.2
$
$
9.2
0.3
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
1. Nature of Operations:
The business of Western Forest Products Inc. (the “Company” or “Western”) is timber harvesting and lumber
manufacturing for worldwide markets. Western’s operations are located in the Coastal region of British
Columbia.
2. Significant accounting policies:
The significant accounting policies are summarized below:
(a) Basis of presentation:
These consolidated financial statements have been prepared on a going concern basis in accordance
with Canadian generally accepted accounting principles (“GAAP”). The going concern basis of
presentation assumes the Company will continue in operation for the foreseeable future and be able to
realize its assets and discharge its liabilities and commitments in the normal course of business. Since
December 31, 2009, the Company has generated cash flow from operations of $28.5 million, reduced
its obligations under the revolving credit facility and long term debt by $31.4 million and renegotiated
and extended its revolving credit facility and long-term debt (Notes 7 and 8). The Company has
forecasted financial results and cash flows for 2011. These forecasts are based on Management’s best
estimates of operating conditions, revenues and expenses in the context of the current economic
climate, including the continued relatively challenging state of the forest products industry. Some of the
major assumptions in the Company’s forecast relate to sales volumes and product mix, lumber prices,
log and chip prices and the US dollar and Japanese Yen exchange rates. Other significant assumptions
include production rates, the useful life of the assets, stumpage rates and the amount of the export tax
on lumber shipped to the US Based on its financial position at December 31, 2010 and its current
forecasts, the Company expects it will be able to continue to operate as a going concern for the
foreseeable future.
(b) Principles of consolidation:
These consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries since their respective acquisition dates. The principal wholly-owned operating subsidiaries
of the Company at December 31, 2010 are Western Lumber Sales Limited (which sells into the United
States), MacMillan Bloedel KK (which sells into Japan), and WFP Quatsino Navigation Limited (the
beneficial owner of a number of the Company’s non-core assets). All intercompany balances and
transactions have been eliminated on consolidation.
(c) Use of estimates:
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the consolidated financial statements.
Significant areas requiring the use of management estimates include inventory valuations, amortization
rates, outcome of arbitrations and legal proceedings, restructuring, reforestation liabilities, asset
retirement obligations, employee future benefits, and asset impairment provisions. Actual results may
differ materially from those estimates.
36
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
2. Significant accounting policies (continued):
(d) Cash and cash equivalents:
Cash and cash equivalents include cash in bank accounts and highly liquid money market instruments
with maturities of 90 days or less from the date of acquisition, and are carried at fair value.
(e) Inventory:
Inventory, other than supplies which are valued at specific cost, are valued at the lower of cost and net
realizable value (“NRV”) as described below.
(i) Lumber by species and grade (hemlock and balsam, douglas fir and cedar);
(ii) Logs by gross sort.
On January 1, 2010, the Company changed its accounting policy for the costing of lumber inventories
from the distributed cost method to the average cost of production method (Note 3). Under the new
policy, costs of lumber produced carry an average cost of production based on the species and facility
where they were produced, determined by actual lumber production costs divided by production
volumes. This compares to the former policy, which allocated costs based on the estimated fair value of
the lumber products manufactured. Management believes that this change in accounting policy provides
more reliable and relevant information to the users of the financial statements as it is more consistent
with industry accounting practices, aligns with the Company’s new profit centre strategy, and also
results in a more conservative carrying value relative to the previous method used.
Costs for logs produced are allocated to logs based on their estimated fair value of the logs produced,
except for pulp logs that are carried at market due to the significant difference between the market value
of pulp logs compared to production costs. The NRV for logs designated for lumber production is
determined on the basis of the logs being converted to lumber with the NRV for the remaining logs
based on market log prices.
(f) Property, plant and equipment:
Property, plant and equipment is initially recorded at cost and is subsequently amortized on a straight
line basis over the expected useful life of the underlying asset (5 to 20 years). Logging roads are
amortized over their expected useful life or over the volume anticipated to be accessed by the road.
The cost of major forest tenures is capitalized and subsequently amortized on a straight-line basis over
40 years. The cost of private timberlands is capitalized and is not amortized, as the Company manages
its private timberlands on a sustainable yield basis.
(g) Deferred revenue:
Deferred revenue is the result of the contractual obligations incurred upon the acquisition of the
Englewood Logging Operation and calls for Western to deliver a specified volume of fibre (chips and
pulp logs) over the term of the contract. Accordingly, the deferred revenue is amortized into income on a
straight-line basis over 40 years, being the term of the related fibre supply contract.
37
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
2. Significant accounting policies (continued):
(h) Impairment of property, plant and equipment:
The Company conducts reviews for the impairment of property, plant and equipment, including logging
roads, and timberlands, whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable.
An impairment loss would be recognized when estimates of future undiscounted cash flows expected to
result from the use of an asset and its eventual disposition are less than its carrying amount. An
impairment loss would be measured based on the difference between the carrying amount and fair
value of the impaired assets.
Due to continued concern about the current global economic situation and the uncertainties with respect
to the US lumber market the Company conducted an impairment review of its long-lived assets as at
December 31, 2010. Key assumptions in performing this review include sales volumes and product mix,
lumber prices, log and chip prices and the US dollar and Japanese Yen exchange rates. Other
significant assumptions include production rates, the useful life of the assets, stumpage rates and the
amount of the export tax on lumber shipped to the US In determining the appropriate assumptions the
Company has analyzed external data and sought advice from external advisors. Based on the key
assumptions used, the projected undiscounted cash flows from operations exceed the carrying value of
the Company’s long-lived assets.
(i) Foreign currency translation:
Transactions denominated in foreign currencies have been translated into Canadian dollars at the rate
of exchange prevailing at the time of the transaction. Monetary assets and liabilities have been
translated into Canadian dollars at the period-end exchange rates. Non-monetary assets and liabilities
are translated at the exchange rates in effect when the assets were acquired or the liabilities incurred.
All exchange gains and losses are included directly in income.
(j) Asset retirement obligation:
The Company recognizes asset retirement obligations at fair value in the period in which the legal
obligation is incurred, with the fair value of the liability determined with reference to the present value of
estimated future cash flows. In periods subsequent to the initial measurement, changes in the liability
resulting from the passage of time and revisions to estimated future cost are recognized in the
statement of operations as they occur. The Company’s asset retirement obligations relate to the
obligation for reforestation on Crown land and certain environmental remediation. Reforestation
obligations arise as timber is harvested with the related expenses recognized in the statement of
operations as they occur. Reforestation on private timberlands is expensed as incurred.
(k) Revenue recognition:
Sales are recognized when the significant risks and rewards of ownership are passed to the customer.
Lumber and by-product sales are recorded at the time product is shipped and the collection of the
amounts is reasonably assured. Consistent with industry practice, log sales are recorded when the
38
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
2. Significant accounting policies (continued):
customer’s order is firm, the logs have been delivered to the transfer location and the collectability of the
amount is reasonably assured.
Amounts charged to customers for shipping and handling are recognized as revenue and shipping and
handling costs, lumber duties, and export taxes incurred by the Company are recorded in costs and
expenses.
(l) Stock-based compensation:
The Company has established a stock-based compensation plan for eligible directors, officers and
employees and accounts for it using the fair value method.
Under this method, the fair value of the options is determined using either the Black-Scholes or the Hull-
White option pricing models which take into account, as of the grant date, the exercise price, the
expected life of the options, the current price of the underlying stock and its expected volatility, expected
dividends on the stock, and the risk-free interest rate over the expected life of the option. In the case of
options issued in 2010 and 2009 the options are only exercisable when the share price exceeds a
barrier price of $0.70 for 60 consecutive days on a volume weighted average price basis. With this
additional requirement for the share price to exceed a minimum level before the options become
exercisable, it is necessary to utilize the Hull-White model as the Black-Scholes model used for valuing
earlier granted options is no longer applicable. All options which were previously granted and do not
contain the minimum price requirement, continue to be valued using the Black-Scholes model. Inherent
in all option pricing models is the use of highly subjective estimates, including expected volatility of the
underlying stock. The Company bases its estimates of volatility on historical stock prices of the
Company itself as well as those of comparable companies with longer trading histories. Cash
consideration received from employees when they exercise the options is credited to share capital.
(m) Income taxes:
The Company uses the asset and liability method of accounting for future income taxes. Under the
asset and liability method, future income tax assets and liabilities are determined based on temporary
differences (differences between the accounting bases and the tax bases of existing assets and
liabilities), and are measured using the currently enacted, or substantively enacted, tax rates and laws
expected to apply when these differences reverse. A valuation allowance is recorded against any future
income tax asset if it is more likely than not that the asset will not be realized.
(n) Employee future benefits:
The Company has various defined benefit and defined contribution plans that provide pension benefits
to most of its salaried employees and certain hourly employees not covered by forest industry union
plans. The Company also provides other post retirement benefits and pension bridging benefits to
eligible retired employees.
The Company accrues the costs and related obligations of the defined benefit pension and other
retirement benefit plans using the projected benefit actuarial method prorated on service and
management’s best estimates of expected plan investment performance, salary escalation, and other
39
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
2. Significant accounting policies (continued):
relevant factors. For the purpose of calculating the expected return on plan assets, the fair value of
plan assets is used. Actuarial gains (losses) arise from the difference between the actual and expected
long-term rates of return on plan assets for a period or from changes in actuarial assumptions used to
determine the accrued benefit obligation. The excess of the net accumulated actuarial gain or loss over
10% of the greater of the accrued benefit obligation and the fair value of plan assets is amortized over
the average remaining service period of the active employees, which ranges between 13 and 16 years
for both pension and other benefit plans. Past service costs arising from plan amendments are deferred
and amortized on a straight-line basis over the average remaining service period of employees
expected to receive benefits under the plan.
For hourly employees covered by forest industry union defined benefit pension plans, income is
charged with the Company’s contribution as required under the collective agreements.
The Company accrues the costs and related obligations for defined contribution plans based on the
required Company contributions in the period.
(o) Derivative financial instruments:
The Company may enter into derivative financial instruments (foreign currency forward contracts) in
order to mitigate its exposure to foreign exchange risk. The Company’s policy is not to use derivative
financial instruments for trading or speculative purposes. These instruments have not been designated
as hedges for accounting purposes, and they are carried on the balance sheet at fair value with
changes in the (realized and unrealized) fair value being recognized as gains or losses within sales in
the Company’s Consolidated Statement of Operations (Note 17).
3. Changes to accounting policies
Adopted in 2010
In 2010, the Company changed its accounting policy for the costing of its lumber inventories (Note 2(e)).
This change in accounting policy, which was implemented effective January 1, 2010 on a retrospective
basis without restatement of prior periods, resulted in inventory reducing by $2.4 million to $105.2
million from $107.6 million and the deficit increasing to $327.2 million from $324.8 million as at January
1, 2010. Prior periods have not been restated as the detailed information required to implement the new
policy on a retrospective basis is not available.
Future Changes:
International Financial Reporting Standards (“IFRS”):
In February 2008, the Canadian Accounting Standards Board confirmed that GAAP will be converged
with International Financial Reporting Standards (“IFRS”) and IFRS will become the new primary source
of GAAP for fiscal years commencing January 1, 2011. The transition to IFRS will be applicable for the
Company for the first quarter of 2011 when the Company will prepare both the current and comparative
40
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
3. Changes to accounting policies (continued):
financial information using IFRS. While IFRS uses a conceptual framework similar to GAAP, there are
significant differences on recognition, measurement, and disclosures.
Western has identified those areas which will be impacted by changes in accounting policy and made
policy elections where they are required to be made either specifically at the transition date or on a
prospective basis. The areas that are most impacted for Western are: property, plant, and equipment;
impairment of assets; intangible assets; private timberlands; and employee future benefits.
Management is finalizing the determination of the impact of the application of IFRS on the financial
statements and having these impacts audited.
4.
Inventory:
The following table summarizes the value of inventory on hand:
Log inventory
Lumber inventory
Supplies and other inventories
Provision for write downs
Total inventory
2010
$
79.2
43.6
10.7
(4.6)
2009
$
67.3
31.7
10.2
(1.6)
$
128.9
$
107.6
The Company’s eligible inventory is pledged as security against the revolving credit facility and long-term
debt. At December 31, 2010 $22.4 million (2009 - $19.3 million) of the $128.9 million (2009 - $107.6 million)
of total inventory was carried at net realizable value. During 2010, $554.4 million (2009 - $555.1 million) of
inventory was charged to cost of sales which includes an increase to the provision for write-down to net
realizable value of $3.0 million.
41
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
5. Property, plant and equipment:
2010
Land
Timberlands
Logging Roads
Buildings and equipment
2009
Land
Timberlands
Logging Roads
Buildings and equipment
Amortization of property, plant and equipment
Amortization of buildings and equipment
Amortization of timberlands and logging roads
Cost
Accumulated Net book
Amortization
value
$
$
27.2
276.3
115.1
145.6
564.2
-
$
26.4
76.9
85.1
188.4
$
$
$
Cost
Accumulated Net book
Amortization
value
$
$
31.6
283.2
107.6
144.1
566.5
-
$
21.7
67.0
71.9
160.6
$
$
$
27.2
249.9
38.2
60.5
375.8
31.6
261.5
40.6
72.2
405.9
2010
2009
$
$
$
$
13.9
14.9
28.8
15.4
14.1
29.5
Included within Timberlands is $13.6 million of private timberlands that is not subject to depletion.
6. Other assets:
2010
2009
Investments
Discontinued operations (Equipment)
Other
7. Revolving credit facility:
$
$
7.4
2.3
4.1
13.8
7.1
2.2
1.6
10.9
$
$
On December 14, 2010, the Company completed amendments to its revolving credit facility, improving
overall availability and extending the maturity date to December 14, 2015, subject to any future refinancing
requirements of its revolving and non-revolving term loans. The facility also provides for successive one year
extension periods of the maturity date, subject to lender approval.
The facility provides for a maximum borrowing amount of $125.0 million, subject to a borrowing base which
is primarily based on eligible accounts receivable and inventory balances. The facility bears interest, at
Canadian prime plus 0.50% (if availability exceeds $40.0 million) or 0.75% (if availability is less than $40.0
42
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
7. Revolving credit facility (continued):
million) or at the Company’s option, at rates for Bankers’ Acceptances or LIBOR based loans plus 2.25% or
2.50%, dependent on the same availability criteria. The facility is secured by a first lien interest over
accounts receivable and inventory and includes customary financial covenants (Note 13). The Company
was in compliance with its covenants at December 31, 2010. Transaction costs of $1.0 million were incurred
with respect to the refinancing of this facility. These costs are deferred and included in Other Assets in the
balance sheet and are being amortized into interest expense over the term of the facility.
At December 31, 2010, $nil was outstanding under this facility (December 31, 2009 - $15.3 million) and
$79.5 million was unused and available to the Company.
8. Long-term debt:
Canadian dollar debt
Revolving term loan
Non-revolving term loan
Associated transaction costs
Less current portion
2010
2009
$
$
75.0
31.2
106.2
(1.3)
211.1
104.9
-
104.9
$
$
75.0
47.3
122.3
(2.6)
242.0
119.7
45.2
74.5
$
$
On December 14, 2010, the Company completed amendments to its term loans, extending the maturity date
of its $75.0 million revolving term loan and $31.2 million non-revolving term loan to June 14, 2013 and
December 14, 2012, respectively. All other terms and conditions of the term loans remained substantially
unchanged. During 2010 the non-revolving term loan had been paid down by $16.1 million, largely from the
proceeds of non-core asset sales (2009 - $6.4 million).
The term loans bear interest at margins based on a leverage ratio, calculated as the ratio of total debt to the
last twelve month’s EBITDA. The Company has the option to base the interest rate at Canadian prime plus a
grid-based margin, ranging from 2.75% to 5.0% depending on the leverage ratio, or at rates for Bankers’
Acceptances based loans plus a grid-based margin ranging from 3.75% to 6.0% also dependent on the
leverage ratio. The term loans are secured by a first lien interest over all of the Company’s properties and
assets except the Englewood Logging Division, over which it has second lien interest, and excluding all
accounts receivable and inventory, and include financial covenants (Note 13) and repayment requirements
from the proceeds of asset sales and other non-operating cash inflows. The Company was in compliance
with its covenants at December 31, 2010. The interest rates for the revolving and non-revolving term loans
were 6.03% and 6.75%, respectively, at December 31, 2010.
The $1.3 million of transaction costs relate to the new financing arrangements. These costs are deferred and
are being amortized into interest expense over the term of the term loan using the effective interest rate
method. Deferred transaction costs associated with the previous facilities have been fully expensed.
43
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
9. Income Taxes:
Income tax expense differs from the amount that would be computed by applying the Company’s combined
Federal and Provincial statutory rate as follows:
2010
Tax rate
2009
Tax rate
Income (loss) before income taxes
$
29.2
$
(73.2)
Expected income tax (expense) recovery
$
(8.3)
(28.5)%
$
22.0
30.0%
Tax effect of:
Change in valuation allowance
Reorganization of WFP Forest Products
Ltd.("WFPFPL")(Note 22)
Future tax rate changes
Change in prior year estimated values
Other permanent differences
Income tax expense per financial statements
4.4
15.1%
142.2
194.3%
-
1.5
(1.6)
4.0
$
-
-
5.1%
(5.5)%
13.7%
-
(163.7)
(6.7)
2.6
3.5
(0.1)
$
(223.6)%
(9.2)%
3.6%
4.8%
(0.1)%
Future tax assets:
Losses carried forward
Reforestation and other accruals not deductible
for tax until paid
Valuation allowance
Future tax liabilities:
Property, plant and equipment due to differences
in net book value and unamortized capital cost
Net future tax liability
2010
2009
$
107.8
$
109.1
10.7
118.5
(92.4)
26.1
10.5
119.6
(96.8)
22.8
(26.1)
$
-
(22.8)
$
-
At December 31, 2010, the Company and its subsidiaries have unused tax losses carried forward estimated
at $420.0 million (2009 - $434.3 million), that expire between 2015 and 2030, available to reduce taxable
income and capital losses of $22.5 million (2009 - $4.0 million) available to be utilized against capital gains.
The ability of the Company to utilize the losses carried forward and capital losses is not considered “more
likely than not” and therefore, a valuation allowance has been provided against the tax assets.
44
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
10. Other liabilities:
2010
2009
Pension liability (No te 16)
Environmental accruals
Long-term portion of reforestation liability (Note 11)
Other
$
$
12.6
1.5
14.7
0.7
29.5
13.5
1.5
14.4
0.4
29.8
$
$
11. Reforestation liability:
The Company has a responsibility to reforest timber harvested under various timber rights. Changes in the
reforestation liability are as follows:
2010
2009
Reforestation liability, beginning of period
Reforestation provision charged
Reforestation work payments
Consisting of:
Long-term portion included in other liabilities
Current portion included in accounts payable and accrued liabilities
$
$
24.7
10.9
(9.5)
26.1
26.8
7.0
(9.1)
24.7
$
$
$
$
14.7
11.4
26.1
$
$
14.4
10.3
24.7
The total undiscounted amount of the estimated future expenditures required to settle the reforestation
obligation at December 31, 2010 is $29.9 million (2009 - $28.2 million). The reforestation expenditures are
expected to occur over the next one to ten years and have been discounted at the Company’s credit-
adjusted risk-free rates of 3.7% to 6.2%. Reforestation expense incurred on current production and accretion
expense are included in production costs for the year.
12. Share capital:
(a) Authorized and issued share capital:
The Company’s authorized capital consists of an unlimited number of common shares (“the Common
Shares”), an unlimited number of non-voting shares (“the Non-Voting Shares”) and an unlimited number
of preferred shares. The Common Shares entitle the holders thereof to one vote per share. The Non-
45
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
12. Share capital (continued):
(a) Authorized and issued share capital (continued):
Voting Shares do not entitle the holders to any votes at meetings of the Company’s shareholders except
that they will be entitled to one vote per share relating to certain matters including liquidation, dissolution
and winding-up. The Common Shares and Non-Voting Shares rank equally as to participation in a
distribution of the assets of the Company on a liquidation, dissolution or winding-up of the Company and
as to the entitlement to dividends.
The holders of the Non-Voting Shares have certain registration rights that enable them to require the
Company to assist them with a public offering of the Non-Voting Shares or Common Shares for which
the Non-Voting Shares may be exchanged, subject to certain limitations.
Issued and outstanding Common and Non-Voting Shares are as follows:
Number of
Common Shares
Amount
Number of
Non-Voting Shares
Amount
December 31, 2010 and 2009
128,625,623
$
412.3
338,945,860
$
187.5
(b) Rights offering:
On January 22, 2009, the Company raised a total of $50.0 million before expenses through a rights
offering to all shareholders pursuant to a final short-form prospectus dated December 10, 2008.
Western used the $49.6 million net proceeds of the Rights Offering to reduce indebtedness under its
revolving line of credit, thereby providing additional liquidity. Under the terms of the rights offering,
common and non-voting shareholders received one right for each Common Share or Non-Voting Share
that enabled them to subscribe for 1.28737 Common Shares of the Company at a price of $0.19 per
Common share. The rights were listed for trading on the Toronto Stock Exchange (“TSX”) and were
exercisable until January 20, 2009.
Brookfield Special Situations Management Limited (“BSSML”) subscribed for Common Shares under
both the basic subscription privilege and the additional subscription privilege. In accordance with the
terms of a prior agreement, the Company only permitted the exercise of that portion of the rights owned
by BSSML that resulted in BSSML beneficially owning, or exercising control or direction over, not more
than 49% of the Common Shares outstanding. Accordingly, the Company only allowed the conversion
of rights for the issuance of 4,303,788 Common Shares to BSSML with the remaining rights converted
into 254,374,654 Non-Voting Shares. As a result, BSSML holds 63,026,544 Common Shares, or 49% of
the Company’s 128,625,623 Common Shares and 100% of the 338,945,860 Non-Voting Shares now
issued and outstanding.
46
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
12. Share capital (continued):
(c) Stock-based compensation plan:
The Company has an incentive stock option plan (the “Option Plan”), which permits the granting of
options to eligible participants to purchase up to an aggregate of 10,000,000 Common Shares. During
2010, the Company recorded compensation expense of $0.3 million (2009 - $0.3 million) which has
been credited to contributed surplus. Each option is exercisable, subject to vesting terms of 20% per
year and immediately upon a change in control of the Company, into one Common Share, subject to
adjustments, at a price of not less than the closing price of the Common Shares on the TSX on the day
immediately preceding the grant date. Options granted under the Option Plan expire, generally, a
maximum of ten years from the date of the grant.
During the year, the Company granted 4,000,000 options with a fair value of $0.4 million as determined
by the Hull-White option pricing model using the assumptions of a weighted average exercise price of
$0.22, risk free interest rate of 3.42%, volatility of 41% and an expected life of 10 years. These options
are only exercisable when the share price exceeds $0.70 for 60 consecutive days on a volume
weighted average price basis. With the additional requirement for the share price to exceed a certain
level before the options become exercisable it was necessary to utilize the Hull-White model as the
Black-Scholes model used for valuing earlier granted options was no longer applicable. All other options
outstanding that were previously granted do not contain the minimum price requirement and continue to
be valued under the Black-Scholes model. Also during the year, 4,324,000 options were cancelled.
The following table summarizes the change in the options outstanding during the years ending
December 31, 2010 and 2009:
Outstanding, beginning of year
Granted
Cancelled
Outstanding, end of year
2010
2009
Number of
options
5,065,795
4,000,000
(4,324,000)
4,741,795
Weighted
average
exercise price
$0.76
0.22
0.34
$0.68
Number of
options
4,288,060
3,500,000
(2,722,265)
5,065,795
Weighted
average
exercise price
$2.10
0.25
2.21
$0.76
Details of options outstanding under the share option plan at December 31, 2010 are as follows:
Exercise price
$
$
$
$
$
0.22
1.20
1.75
2.18
12.10
Number
outstanding
December 31,
2010
3,500,000
315,000
436,000
466,000
24,795
4,741,795
W eighted average
remaining option life
(years)
W eighted average
exercise price
Number
exercisable
December 31,
2010
Weighted average
exercise price
$
$
$
$
$
$
0.22
1.20
1.75
2.18
12.10
0.68
-
152,400
368,000
302,000
24,795
847,195
$
$
$
$
$
$
0.22
1.20
1.75
2.18
12.10
2.11
9.2
7.4
5.5
6.7
3.6
8.5
47
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
12. Share capital (continued):
(d) Class C Warrants:
During 2009, the Company had 2,847,262 Class C non-transferrable Warrants outstanding with
exercise prices ranging from $14.11 to $29.32 per warrant. On July 28, 2009 these warrants expired
with all but 23 of the 2,847,262 outstanding warrants being unexercised. Due to their contingent nature,
the warrants had no value allocated to them for accounting purposes.
(e) Income (loss) per share:
Basic income (loss) per share was calculated by dividing the net income (loss) by the weighted average
number of shares issued and outstanding over the period. Diluted net income (loss) per share was
calculated by reference to the fully diluted weighted average number of shares outstanding as
determined using the treasury stock method and considering the dilutive effect, if any, of employee
stock options (Note 12(c)) and Class C Warrants (Note 12(d)). For the year ending December 31, 2009
these options and warrants were anti-dilutive.
13. Capital requirements:
The Company’s strategy for managing capital is to maintain a capital position that provides financial
flexibility and achieves growth with the objective of maximizing long-term shareholder value. Western’s
capital requirements typically include major new investments designed to increase net income and
disbursements for other new equipment and ongoing enhancements, efficiency improvements, safety, and
protection or extension of the life of equipment. Finally, significant expenditures are also required to fund
new capital roads allowing access to timber stands for harvesting purposes. During 2010, significant capital
expenditures have again been curtailed because of the current economic climate and expenditures have
been limited to only essential road and bridge construction.
The Company seeks to achieve a balance between the higher returns that may arise with higher levels of
borrowing and the advantages and security provided by a sound capital position. The Company monitors the
ratio of net debt to capitalization, targeting a ratio in the range of 30% to 45%. Net debt is defined as long-
term debt plus amounts drawn on the revolving credit facility, less cash and cash equivalents. Capitalization
comprises net debt and shareholders’ equity.
Changes to the capital structure may be made as strategic opportunities arise. In order to maintain or adjust
the capital structure, the Company may issue new shares, source new debt, or sell assets to reduce debt.
The Company has internal controls to ensure changes to the capital structure are properly reviewed and
approved.
Since originally refinancing its term debt in March of 2008, the Company has repaid a total of $68.8 million of
the term loans substantially from the cash proceeds of disposition of non-core assets (Note 20). Pursuant to
the re-financing agreement completed on December 14, 2010 (Note 8), term debt repayments will continue
as non-core asset sales are realized.
48
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
13. Capital requirements (continued):
Under the current financing agreements, the Company is subject to financial covenants.
The revolving credit
facility contains two financial covenants: minimum consolidated adjusted shareholders’ equity of $200.0
million and, should availability fall below $10.0 million or in the event of default, minimum fixed charge
coverage ratio of 1.1:1.0. The term loans contains three financial covenants: (i) maximum capital
expenditures of $55.0 million, measured each fiscal year, to the extent the total term loans outstanding
exceed $75.0 million; (ii) maximum loan to value ratio of 50% (Loans are defined as the total term loans
outstanding and value is defined as the appraised value of our crown tenures and private timberlands. This
financial covenant is measured on the last day of each fiscal year and at the time of consummation of a sale
or disposition of assets, with certain exceptions); and (iii) maximum funded debt to capitalization of 0.45 to
1.0, measured on a quarterly basis. As at December 31, 2010, the Company is in compliance with all
financial covenants, and expects to be in compliance for the next 12 months.
The Company is not subject to any statutory capital requirements. Under the Company’s stock-based
compensation plan, commitments exist to issue common shares.
There were no changes to the Company’s approach to managing capital during the year.
14. Commitments and contingencies:
(a) Lumber duties and export tax:
Under the softwood lumber agreement (“SLA”) between Canada and the United States, the Company’s
exports to the United States are assessed an export tax by the Canadian Government. The SLA, which
became effective October 12, 2006, has a term of seven years with provision for an extension of two
years and for early termination by either Government after two years. The export tax rate varies
according to the price of lumber based on the “Random Lengths Framing Lumber Composite Index”
(“Index”) and ranges from zero percent when the Index is above US$355 per thousand board feet to
15% when the Index is under US$315 per thousand board feet.
The export tax only applies to the first US$500 per thousand board feet for any product sales. In
addition, if the monthly volume of exports from the British Columbia coastal region exceeds a certain
“Trigger Volume” as defined in the SLA, a “surge” mechanism will apply to increase the rate of the
export tax for that month by 50% (for example, the 15% export tax rate would become 22.5% for that
month). For the year to December 31, 2010 Company recorded an expense of $3.9 million (2009 - $6.0
million) which reflects the fact that throughout 2009 the export tax rate was at the maximum rate
whereas in 2010 the rate was at a reduced level during May, June and July, 2010 as the result of a
spike in the price of lumber.
On October 8, 2010, the United States Trade Representative wrote to Canada’s International Trade
Minister to request consultations under the SLA with respect to allegations of under-pricing of timber in
the British Columbia interior and circumvention of export measures provided for in the SLA. On January
18, 2011, the United States triggered the arbitration provision of the SLA by delivering a Request for
49
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
14. Commitments and contingencies (continued):
Arbitration. As the arbitration is a state-to-state international dispute under the SLA, Canada is
preparing a defence to the claim with the assistance of British Columbia provincial government and the
British Columbia lumber industry. As the claim is specifically directed at British Columbia interior
practices, it is not possible at this time to predict any potential direct or indirect impact it may have on
Western, which operates predominantly on the coast of British Columbia.
(b) Litigation and claims:
In the normal course of its business activities, the Company may be subject to a number of claims and
legal actions that may be made by customers, unions, suppliers and others in respect of which either
provision has been made or for which no material liability is expected. The Company has a number of
claims filed against it from logging contractors and unions with respect to various operating issues.
Certain of the claims are pending mediation or arbitration, while others have not yet reached this formal
stage. Where the Company is not able to determine the outcome of these disputes no amounts have
been accrued in these financial statements.
(c)
Indemnity agreement:
As a result of the amalgamation of the Company with Cascadia Forest Products Ltd. (“Cascadia”) in
2006, the Company has assumed Cascadia's obligation to indemnify an entity related to Brookfield
Asset Management (“BAM”) if that entity incurs liabilities under a guarantee (the “Guarantee”) provided
by it to a third party relating to the obligations of Cascadia arising out of the purchase by Cascadia of
certain of its assets from the third party prior to the acquisition of Cascadia by the Company. The
Guarantee is limited to $100.0 million. As security for its performance under this indemnity and as a
result of the amalgamation, the Company has issued a debenture in favour of the related entity in the
amount of $100.0 million which results in a charge over all of the Company’s real property and all of the
Company’s present and after-acquired personal property. In the absence of any claims, the Guarantee
terminates on May 30, 2011 and if there is no liability accruing to the guarantor thereunder at that time,
the Company may request that the debenture be discharged.
(d) Long-term fibre supply agreements:
The Company has a number of long-term commitments to supply fibre to third parties including a 40
year agreement, entered into on March 17, 2006 (“40 Year Agreement”). As consideration for entering
into the 40 Year Agreement the Company received a price premium of $80.0 million that will be earned
as wood chips are delivered under the agreement. Upon execution, a non-refundable prepayment of
the price premium of $35.0 million was received with the balance of $45.0 million set-off against the
consideration due by the Company on its acquisition of the Englewood Logging Division from the same
party to the fibre supply agreement. The Company recorded the price premium as deferred revenue
(Note 2(g)) and has granted a first charge over the acquired assets (including a tree farm license with
an allowable annual cut of 844,000 cubic metres, 4,771 hectares of private timberlands and other
capital improvements and equipment) to secure certain of these obligations.
In addition, certain of the fibre supply agreements have minimum volume requirements and may, in the
case of a failure to supply the minimum volume, require the Company to source the deficiency from
50
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
14. Commitments and contingencies (continued):
third parties at additional cost to the Company or pay the party to the fibre supply agreement a penalty
calculated based on the provisions contained in the relevant agreement. As Western takes significant
market related curtailments in its sawmills, the volume of chips produced is reduced and accordingly
there is greater risk that the Company may not meet contractual obligations without incurring additional
cost. The Company has not delivered the annual minimum chip volume for 2010 as required under the
40 Year Agreement and is in discussions with the party to amend the contract, including the minimum
chip volumes. At this time the Company is unable to determine if the amendment will be executed, or
whether the party to the contract will act on its security.
(e) Operating leases:
Future minimum lease payments at December 31, 2010 under operating leases were as follows:
2011
2012
2013
2014
2015
Thereafter
(f) Allowable annual cut reductions:
$
3.4
2.3
1.5
1.3
1.3
6.9
16.7
$
During 2010 the allowable annual cut ("AAC") of several of the Company's timber tenures was adjusted
by the Province of British Columbia ("Province"). The AAC of the Company's Tree Farm Licence
(“TFL”) 19 was permanently reduced from 833,795 m3 to 717,848 m3 as a result of a periodic timber
supply review by the Province's Chief Forester. In addition, a number of the Company’s other timber
tenures which previously had their AAC temporarily reduced by orders made under Part 13 of the
Forestry Revitalization Act (British Columbia) to ensure that harvest rates remained at a sustainable
level until land use planning was completed in the affected areas saw those reductions either expire
or made permanent. In Haida Gwaii a temporary AAC reduction of 293,000 m3 for TFL 39 (now TFL
60) expired on December 31, 2010. In the Central Coast the combined AACs of Forest Licences (“FL”)
A16845 and A16847, which had been temporarily reduced by 74,546 m3 under Part 13 orders, saw the
Part 13 reduction expire and the combined AACs of these FLs were permanently reduced by 55,245
m3. Similarly, the combined temporary Part 13 AAC reductions of 3,228 m3 in place for FLs A19231 and
A19244 expired, but a permanent reduction of 2,536 m3 was imposed for FL 19244. In the case of TFL
44, where a Part 13 designation had been in place without an AAC reduction, the AAC was temporarily
reduced by 88,700 m3 and made retroactive to 2007. For Part 13 orders that extend for more than four
years from the date of issuance or when the Province’s land use planning process results in these
reductions becoming permanent, the Company has the ability to seek compensation from the Province
for the reduced cutting rights thereafter, subject to certain statutory deductions. Western intends to
pursue mitigation or compensation from the Province for the temporary AAC reductions that have now
been made permanent.
51
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
14. Commitments and contingencies (continued):
(g) The Forest Revitalization Plan:
In January 2005, pursuant to terms of a settlement framework agreement negotiated in late 2004, the
Company received $16.5 million in compensation from the Province for the loss of 685,216 cubic
meters of AAC and 827 hectares of timber licences. During 2010, the Company received an additional
compensation payment from the Province for improvements not previously reimbursed of $5.2 million
(2009 - $ 2.7 million) (Note 20).
(h) Storm damage:
In late September, 2010, heavy rains and strong winds on the northwest of Vancouver Island triggered
power outages, mudslides, road washouts and flooding. Certain logging areas were impacted by these
severe storms with bridge and culvert damage, logging road washouts and slides in reforested areas.
Work has commenced to repair the damage with expenditures of $1.0 million incurred and recognized
in the Consolidated Statement of Operations to December 31, 2010. Some areas remain inaccessible,
making a reasonable estimate of total damages uncertain. The impact on capitalized roads and bridges
and other infrastructure is not expected to be significant. The Company is working with its insurers to
quantify the amount of damage resulting from this event.
(i) Pension funding commitments:
The Company is committed to making estimated annual payments in relation to its salaried pension
plans of $2.9 million for each of the next two years and $2.2 million for each of the following three years,
or until such time as a new funding valuation may lead to a change in the amount of payments required.
15. Segmented information:
The Company is an integrated Canadian forest products company operating in one industry segment
comprised of timber harvesting, log sales and lumber sales and manufacturing for world-wide markets.
The Company’s sales, based on the known origin of the customer, were as follows:
Canada
United States
Asia
Europe
Other
$
2010
281.1
70.9
269.4
32.1
14.4
667.9
$
$
2009
236.9
79.2
217.2
34.5
12.7
580.5
$
Substantially all of the Company’s property, plant and equipment is located in British Columbia, Canada.
52
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
16. Employee future benefits:
The Company has several funded and unfunded defined benefit plans, a defined contribution pension plan
and a group RRSP that provide retirement benefits to substantially all salaried employees and certain hourly
employees. In addition, the Company provides other unfunded retirement and post employment benefits to
certain former salaried and hourly employees. The funded and unfunded defined benefit pension plans
were closed to new entrants effective June 30, 2006, and effective December 31, 2010 no further benefits
accrue under these plans, and members became eligible to participate in the defined contribution plan. All
new salaried employees are now provided with pension benefits through a defined contribution plan. The
defined benefit plans are based on years of service to December 31, 2010, and final average earnings. The
Company’s other post-employment benefit plans are non-contributory and include a range of health care
and other benefits. Total cash payments for employee future benefits for the year ended December 31, 2010
were $10.5 million (2009 - $10.7 million), consisting of cash contributed by the Company to its funded
pension plans, cash payments directly to beneficiaries for its unfunded other benefit plans, and cash
contributed to the forest industry union defined benefit plans. In relation to defined benefit plans, the
Company measures the fair value of plan assets and the accrued benefit obligations for accounting
purposes as at December 31 of each year. The most recent actuarial valuations of the funded defined
benefit pension plans were at December 31, 2007. The next actuarial valuation for both funded defined
benefit plans is being prepared for December 31, 2010, but is not yet available.
Information about the Company's defined benefit salaried pension plans and other non-pension benefits, in
aggregate, is as follows:
Year ended December 31, 2010
Non-pension
plans
Salaried
pension plans
Year ended December 31, 2009
Non-pension
plans
Salaried
pension plans
Plan assets:
Fair value, beginning of year
Company contributions
Benefits paid
Actual return on assets
$
98.3
2.3
(8.5)
10.0
-
$
0.5
(0.5)
-
$
89.8
3.1
(9.1)
14.5
-
$
0.5
(0.5)
-
Fair value, end of year
$
102.1
$
-
$
98.3
$
-
Accrued benefit obligation:
Balance, beginning of year
Current service cost
Benefits paid
Interest cost
Curtailment gain
Actuarial loss (gain)
$
105.1
1.4
(8.5)
6.4
-
11.4
$
6.9
-
(0.5)
0.4
-
0.5
$
98.2
1.7
(9.1)
6.8
(3.1)
10.6
$
6.0
-
(0.5)
0.4
-
1.0
Balance, end of year
$
115.8
$
7.3
$
105.1
$
6.9
Funded status (end of year):
Funded status deficit
Unamortized past service costs
Unamortized net actuarial loss (gain)
$
(13.7)
-
9.9
$
(7.3)
-
(1.5)
$
(6.8)
-
2.3
$
(6.9)
-
(2.1)
Balance sheet liability
$
(3.8)
$
(8.8)
$
(4.5)
$
(9.0)
53
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
16. Employee future benefits (continued):
Included in the above accrued benefit obligations and plan assets for salaried pension plans are accrued
benefit obligations of $115.8 million (2009 - $21.7 million) and plan assets of $102.1 million (2009 - $13.9
million) in respect of plans with accrued benefit obligations in excess of plan assets.
The following is a breakdown of the pension plan assets into their major investment categories:
Equity securities
Debt securities
Other
2010
62%
37%
1%
100%
2009
62%
37%
1%
100%
The significant actuarial assumptions adopted in measuring the Company's accrued benefit obligations are
as follows:
2010
2009
Discount rate at beginning of year for:
Non-pension 6.10% 7.30%
7.40%
Pension plans
6.24%
Discount rate at end of year for:
Non-pension plans
5.30%
6.10%
Pension plans 5.36% 6.24%
Expected long-term return on assets of
pension plans
Rate of compensation increase for
all plans
Health care cost trend rate
6.50%
3.68%
7.00%
3.50%
7.0% for 2011 reducing
to 4.5% in 2024
7.4% for 2010 reducing
to 4.5% in 2022
The following table illustrates the sensitivity of the results for the non-pension plan to a ± 1% change in the
assumed health care cost trend rate assumption:
Company service cost for 2010
Interest cost for 2010
Accrued benefit obligation as at December 31, 2010
1%
decrease
$ -
$0.4
$6.7
base cost
$ -
$0.4
$7.3
1%
increase
$ -
$0.5
$8.1
54
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
16. Employee future benefits (continued):
The Company's salaried pension and non-pension benefits expense is as follows:
Defined benefit plans:
Current service cost
Interest cost
Actual return on assets
Actuarial loss
Curtailment gain
Difference between actual and
expected results:
Return on plan assets
Actuarial loss
Plan amendments
Total for defined benefit plans
Defined contribution plans
Year ended December 31, 2010
Non-pension
plans
Salaried
pension plans
Year ended December 31, 2009
Non-pension
plans
Salaried
pension plans
$
1.4
6.4
(10.0)
11.4
-
-
$
0.4
-
0.5
-
$
1.7
6.8
(14.5)
10.6
(3.1)
-
$
0.4
-
1.0
-
3.8
(11.4)
-
1.6
1.5
-
(0.5)
-
0.4
-
8.3
(8.4)
0.3
1.7
1.7
-
(1.2)
-
0.2
-
Net periodic pension expense
$
3.1
$
0.4
$
3.4
$
0.2
During the year ended December 31, 2009, workforce reductions resulted in curtailment accounting for
certain of the Company’s defined benefit pension plans. The curtailment resulted in a reduction of the
accrued benefit obligation of $3.1 million. This reduction in the obligation was partially offset by the
recognition of previously unrecognized actuarial losses and past service costs of $2.5 million, resulting in a
reduction to net periodic pension expense of $0.6 million.
In addition, unionized employees are members of industry-wide pension plans to which the Company
contributes a predetermined amount per hour worked by an employee. The pension expense for these plans
is equal to the Company’s contributions and for 2010 amounted to $6.2 million (2009 - $5.4 million).
17. Financial instruments:
All financial instruments and derivatives are measured at fair value on initial recognition. CICA Handbook
Section 3862 Financial Instruments – Disclosures requires classification of financial instruments measured
at fair value within a hierarchy that prioritizes the inputs to fair value measurement. The three levels of the
fair value hierarchy are:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either directly or
indirectly; and
Level 3 – Inputs that are not based on observable market data.
Cash and cash equivalents are classified as held-for-trading and measured at fair value based on level 1
inputs. Accounts receivable are classified as loans and receivables and are measured at amortized cost
55
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
17. Financial instruments (continued):
using the effective interest rate method, which approximates the fair value due to the short term to maturity
of these instruments.
The Company’s financial liabilities comprise accounts payable and accrued liabilities and long-term debt. All
financial instrument liabilities are classified as other financial liabilities and are measured at amortized cost
using the effective interest rate method.
The carrying value of accounts payable and accrued liabilities included on the Consolidated Balance Sheets
approximate their fair value due to the short term to maturity of these instruments.
The carrying value of accrued liabilities for reforestation costs included on the Consolidated Balance Sheets
approximates their fair value, as this is determined based on the present value of future cash flows
associated with these liabilities.
The Company does not have any financial instruments classified as available-for-sale.
Long-term debt is recorded at the principal amount less the net value of the associated financing fees.
Financing fees are deferred and amortized over the life of the debt using the effective interest rate method.
The carrying value of drawings on the long-term debt included on the Consolidated Balance Sheets
approximate their fair value based on level 2 inputs as they bear floating interest rates that approximate
market rates. The Company does not consider the credit risk associated with the counterparty of the long-
term debt to be significant.
The Company utilizes financial instruments in the normal course of business and takes action to mitigate the
associated risks. Certain of the Company’s sales transactions are denominated in foreign currencies,
principally, the US dollar and Japanese Yen (“JPY”), and accordingly the Company is exposed to currency
risk associated with changes in foreign exchange rates. To assist in mitigating this exchange risk, the
Company has entered into an agreement dated March 31, 2009 with BAM to provide a foreign exchange
facility (“Facility”) to the Company. The Facility, which is for a notional amount of up to US $80.0 million,
matures on March 31, 2011, and allows for forward transactions with a maximum term for each transaction
of up to one year. The maturity date is subject to automatic annual renewal subject to BAM notifying the
Company of its intention to cancel the facility at least 30 days prior to the anniversary date and to certain
change of control provisions being invoked. The Facility is unsecured and is subject to a fee of 0.10% of the
notional amount per annum. The Company does not consider the credit risk associated with this Facility to
be significant.
During 2010, the Company entered into contracts under the facility to sell US dollars and JPY forward in
order to mitigate a portion of this foreign currency risk. At December 31, 2010, the Company had
outstanding obligations to sell an aggregate US $2.1 million at an average exchange rate of CAD $1.0554
per US dollar with maturities through February 28, 2011, and to sell an aggregate JPY 2,250 million at an
average rate of JPY 79.55 per CAD with maturities through June 30, 2011.
All foreign currency gains and losses to December 31, 2010 have been recognized in sales in the
Consolidated Statement of Operations and the fair value of these instruments at December 31, 2010 was a
net asset of $0.8 million which is included in accounts receivable on the Consolidated Balance Sheet (there
56
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
17. Financial instruments (continued):
were no forward contracts in place at December 31, 2009). A net gain of $1.1 million was recognized on
contracts which matured during 2010 (2009 - $3.4 million), which is included in sales in the Consolidated
Statement of Operations. An increase (decrease) of 1% in the value of the Canadian dollar as compared to
the JPY would result in a gain (loss) of approximately $0.2 million in relation to the JPY foreign exchange
forward contracts held at year end. An increase (decrease) of 1% in the value of the Canadian dollar as
compared to the US dollar would have an immaterial impact on US dollar foreign exchange forward
contracts held at year end.
The use of financial instruments exposes the Company to credit risk, liquidity risk, and market risk. Other
than as described below, management does not consider the risks to be significant to the Company.
The Board of Directors has oversight responsibility for the Company’s risk management framework. The
Company identifies, analyzes and actively manages the financial market risks associated with changes in
foreign exchange rates, interest rates and commodity prices. Western has established risk management
policies and controls to identify and analyze the risks faced by the Company, to set appropriate risk limits
and to monitor risks and adherence to limits. Currently, the Company is only engaged in foreign exchange
hedging activities.
The Company is exposed to credit risk in connection with its receivables from customers. The carrying
amount of the Company’s accounts receivable represents the maximum credit exposure. The Company is
also exposed to currency risk in connection with its foreign currency denominated receivables from
customers, mainly in US dollars and to a lesser extent in Japanese yen, Australian dollars, and the Euro.
Sales transactions are made through the extension of credit to customers and are recorded at the point in
time the sale is recognized. Accordingly, fluctuations in collectability may affect the carrying value of the
underlying accounts receivable. Management balances the credit risk through rigorously and continually
reviewing customer credit profiles. The Company has established policies and controls to review the
creditworthiness of new customers, including review of credit ratings. Most lumber sales are conducted
under standard industry terms and conditions and most export sales are insured by the Export Development
Corporation. The Company regularly reviews the collectability of accounts receivable and makes provisions
where the collectability is uncertain. Historically the Company’s bad debts have been minimal and as at
December 31, 2010, the Company had an allowance for doubtful customer accounts of $0.5 million (2009 -
$0.4 million).
As previously disclosed, certain sales transactions are denominated in foreign currencies, principally, the US
dollar. Accordingly, fluctuations in foreign exchange rates may affect the carrying value of the underlying
accounts receivable. As of December 31, 2010, the Company’s accounts receivable denominated in US
dollars totaled $24.8 million. An increase (decrease) in the value of the Canadian dollar by US$0.01 would
result in a decrease (increase) in US dollar denominated accounts receivable at year end of approximately
$0.2 million. In addition, as at December 31, 2010, the Company had a total of $6.8 million in US dollar
denominated cash and cash equivalents. An increase (decrease) in the value of the Canadian dollar by
US$0.01 would result in immaterial change to US dollar denominated cash and cash equivalents at year
end.
57
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
17. Financial instruments (continued):
The Company is exposed to interest rate risk through its current financial assets and financial obligations
bearing variable interest rates. The Company’s cash and cash equivalents include bank accounts and
highly liquid money market instruments with maturities of 90 days or less from the date of acquisition.
Management mitigates the interest rate risk associated with the long term debt through the utilization of
floating interest rates. Based on the Company’s debt structure at December 31, 2010, a change of 1% in
interest rates would have increased or decreased annual net income by approximately $1.0 million. The
Company does not currently use derivative instruments to reduce its exposure to interest rate risk.
From time to time the Company may recognize liabilities for the settlement of certain obligations. The
amount recognized in the financial statements is based on management’s best estimate given the facts
available at the time the obligation was incurred. Accordingly, fluctuations in pricing and interest rates will
affect the ultimate cost to settle a given obligation. Management mitigates the associated pricing risk through
regularly reviewing the assumptions used in the generation of the estimate.
The Company does not enter into commodity contracts other than to meet the Company’s expected usage
and sale requirements and such contracts are not settled net.
Liabilities for ongoing operations are recorded in the financial statements at cost accrued to that point in
time. Management mitigates any liquidity risk associated with the subsequent payment of these liabilities
through the continual monitoring of expenditures and forecasting of liquidity resources. The Company
maintains a revolving credit facility that can be drawn down to meet short-term financing and liquidity needs.
As at December 31, 2010, the Company’s total available and unused liquidity was $84.6 million (2009 -
$37.3 million). The Company’s estimated cash payments with respect to contractual and legal obligations
for each of the next five years and thereafter are as follows:
(millions of dollars)
Total
2011
2012
2013
2014
2015 Thereafter
Accounts payable and -
accrued liabilities
Discontinued operations
Revolving term loan
Non-revolving term loan
Operating leases
Reforestation liability
Other long-term liabilities
Defined benefit pensions
- funding obligations
Total
$
61.6
6.2
75.0
31.2
16.7
26.1
2.2
12.4
231.4
$
18. Operating restructuring items:
61.6
6.2
-
-
3.4
11.4
-
2.9
85.5
-
-
-
31.2
2.3
4.6
-
2.9
41.0
-
-
75.0
-
1.5
2.7
-
2.2
81.4
-
-
-
-
1.3
1.7
-
2.2
5.2
-
-
-
-
1.3
1.2
-
2.2
4.7
-
-
-
-
6.9
4.5
2.2
-
13.6
Operating restructuring items for 2010 of $1.6 million (2009 - $5.5 million) primarily relate to severance costs
associated with a number of the Company’s operating divisions. In 2010 this relates primarily to severance
obligations incurred as a result of restructuring the Company’s Japanese sales organization, the closures of
our Mid-Island Remanufacturing operation and Andy’s Bay logging facility, and the re-organization of our
Ladysmith sawmill. In 2009 the severance costs were primarily associated with the restructuring of the
Company’s timberlands operations.
58
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
19. Net interest expense:
Revolving credit facility
Long-term debt
Amortization of deferred financing costs
20. Other income:
2010
2009
$
$
0.9
8.7
2.8
12.4
2.0
7.1
1.7
10.8
$
$
Other income of $24.3 million in 2010 comprises: gains on the disposal of non-core assets of $8.6 million; a
gain of $8.9 million (net of costs of $0.5 million) related to the establishment of a jointly-owned entity in
October 2009, with Brookfield Properties Limited (“Brookfield”), a company related to BAM (Note 22); a
further receipt of $5.2 million from the Province of British Columbia relating to reimbursement of costs
incurred by Western with respect to Bill 28 timber take-back areas (Note 14 (g)); and sundry other
miscellaneous items aggregating to $1.6 million. The most significant non-core asset sale reported in 2010
was the sale of land located in the southern part of Vancouver Island for proceeds of $14.3 million to the
Capital Regional District of Victoria, British Columbia, which closed in August 2010. As part of this
transaction the Company also agreed to sell a further two parcels of land for proceeds of $4.5 million which,
as a condition of sale, require the Company to secure a Certificate of Compliance on an environmental
remediation project under way. The Company has until August 15, 2012 to secure that certificate, and until
the certification is obtained this element of the sale will not be recorded. At December 31, 2010 $9.7 million
of the proceeds had been received with a further $3.3 million due on August 12, 2011 and $5.8 million on
August 15, 2012, assuming that the aforementioned certification is obtained. The transaction generated an
accounting gain of $7.1 million. $16.1 million of the proceeds received from the sales of non-core assets in
2010 was used to pay down long-term debt (2009 - $6.4 million).
Other income of $7.4 million received in 2009 related to gains on non-core asset sales and also to
compensation payments received from the Province of British Columbia for the reimbursement of costs
incurred by Western with respect to Bill 28 related timber take-back areas and for infrastructure costs
incurred in certain expropriated timber tenures following the creation of new Conservancies in the Central
Coast region.
21. Discontinued operations:
In March 2006, the Company closed its Squamish mill located on 213 acres on the mainland coast of British
Columbia and exited the pulp business. Subsequent to the closure, the Company sold substantially all of the
manufacturing assets of the mill. Ongoing costs including supervision, security and property taxes continue
to be expensed as incurred. The real property is one of the Company’s portfolio of non-core assets and
while site remediation is ongoing, the Company has listed the property for sale.
59
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
21. Discontinued operations (continued):
The following table provides additional information with respect to the discontinued operations:
Net loss from discontinued operations
Cash used by discontinued operations
Assets of discontinued operations
Liabilities of discontinued operations
22. Related party transactions:
2010
2009
$
(1.5)
$
(2.0)
$
(1.5)
$
(3.1)
$
2.3
$
2.2
$
6.2
$
6.1
In addition to the related party transactions identified elsewhere in these consolidated financial statements,
the Company has certain arrangements with entities related to BAM to provide financing, acquire and sell
logs, lease certain facilities, provide access to roads and other areas, and acquire services including
insurance, all in the normal course and at market rates or at cost. The following table summarizes these
transactions during the year ended December 31, 2010:
Costs incurred for:
Log purchases
Other
Income received for:
Log sales
Other
2010
2009
$
8.1
4.8
$
10.2
3.7
$
12.9
$
13.9
$
$
$
$
3.3
9.4
12.7
0.4
0.3
0.7
In October 2009 the Company sold certain higher-and-better-use properties in central and northern
Vancouver Island (the "HBU Properties") to WFP Forest Products Ltd, (“WFPFPL”), a jointly-owned entity of
the Company and Brookfield Properties Limited (“BPL”), a wholly-owned subsidiary of Brookfield Properties
Corporation (TSX: BPO.TO), which is in turn related to BAM. The HBU Properties were formerly part of the
group of properties that were included in the Company's non-core asset sales program. In connection with
the reorganization of WFPFPL as a jointly-owned entity and the sale of those HBU Properties, Western
received cash proceeds of $12.4 million, $3.0 million in October 2009 and the balance of $9.4 million on
January 4, 2010. As part of the arrangements, WFPFPL had a right of first offer to purchase for possible
future development approximately 255 hectares (630 acres) of additional higher-and-better-use properties of
the Company in central and northern Vancouver Island. These properties also represent non-core assets of
the Company. Western held less than 5% of the equity of WFPFPL and had a right to sell its interest in
WFPFPL to BPL for its fair market value at any time on or after January 1, 2011 (Note 23). Brookfield is the
manager of WFPFPL, which also holds Carma Developers LP, a limited partnership that carries on a land
development business across Western Canada.
60
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
22. Related party transactions (continued):
Because BPL is a related party of BSSML, which is Western’s largest shareholder, the transaction
constituted a related party transaction.
23. Subsequent events:
On January 4, 2011, the Company exercised the option to sell its equity interest in WFPFPL, the entity that
holds a joint venture established in 2009 between the Company and BPL (Note 22). Western received $2.4
million as consideration for the sale of its interest, and the right of first offer was extinguished.
On February 11, 2011, the Company completed the sale of certain non-core properties to TimberWest
Forest Corp. at the purchase price of $21.9 million. The sale includes properties located in the southern
portion of Vancouver Island, near Jordan River. These properties, which encompass approximately 7,678
hectares, are situated in the land districts of Renfrew and Malahat. The net proceeds from the sale will be
used to pay down the Company’s debt in accordance with its lending agreements.
61
Western Forest Products Inc.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars, except per share amounts)
Years ended December 31, 2010 and 2009
Western Forest Products Inc.
Suite 510-700 West Georgia Street
TD Tower: PO BOX 10032
Vancouver, B.C., Canada
V7Y 1A1
(604) 665–6200
www.westernforest.com
info@westernforest.com
Trading on the TSX as “WEF”
62