Western Forest Products Inc.
2013 Annual Report
Financial Highlights
(millions of Canadian dollars except ratios, per share and share amounts)
Revenue
Net income
Cash flow from operating activities
Basic net income per share
Diluted net income per share
Adjusted EBITDA (1)
Adjusted EBITDA as % of revenue
Weighted average shares outstanding - Basic ('000's)
Weighted average shares outstanding - Diluted ('000's)
Working capital
Total assets
Net debt (2)
Net debt to capitalization (3)
Total liquidity (4)
Year ended December 31,
2013
2012 (5)
2011 (6)
977.5
125.4
110.7
925.4
28.2
57.7
853.7
14.3
43.7
$
0.29
$
0.06
$
0.03
$
0.28
$
0.06
$
0.03
128.8
13.2%
438,547
443,254
124.5
670.5
82.9
0.18
125.9
51.0
5.5%
467,945
470,459
120.0
606.3
15.0
0.04
185.1
61.6
7.2%
468,051
475,868
123.7
608.3
52.1
0.13
112.1
(1)
(2)
(3)
(4)
(5)
(6)
See page 4 for definition of Adjusted EBITDA. A quantitative reconciliation between net income and Adjusted EBITDA
can be found in Appendix A to the Management's Discussion and Analysis.
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.
Capitalization comprises net debt and shareholders' equity.
Total liquidity comprises cash and cash equivalents and available credit under the Company’s revolving credit facility
and revolving term loan.
Restated to reflect implementation of revised IAS 19 - Employee Benefits.
Not restated under IFRS for the amended IAS 19 - Employee Benefits.
1
Letter to Shareholders
To Our Shareholders,
I am pleased to report that our record financial results in 2013 enabled us to deliver superior
returns to our shareholders while achieving a B.C. industry-leading Medical Incident Rate of 1.36.
We capitalized on improving markets, growing our EBITDA margins by 140%, realizing a record $128.8
million of adjusted EBITDA. We continued the implementation of our balanced approach to capital
allocation by using $110.7 million generated from operations to build our business, investing $59.0 million
in capital improvements while distributing more than $15 million in dividends to our shareholders. In
addition, we paid down $45.0 million of long term debt and used our strong balance sheet to repurchase
$100.3 million of our shares.
In the past year, our ownership was transformed through three secondary share offerings. New
shareholders now comprise more than 40% of the ownership of the Company. I would like to take this
opportunity to welcome these new shareholders and emphasize our on-going commitment to delivering
superior long term returns.
Western’s 2013 financial highlights included:
• Adjusted EBITDA for the year of $128.8 million, the highest in company history
• Shareholder returns of 47%
• Liquidity remained strong at $125.9 million
In addition to these positive financial results, Western realized several operational achievements in 2013
including:
• B.C. industry-leading Medical Incident Rate of 1.36, the lowest in company history
• Margin improvement program delivered a further $14.2 million in annualized benefits
• Sawmill production was 5% higher and productivity per shift improved by 2%
I am pleased to announce that our Board of Directors has appointed Lee Doney as Chairman of
Western’s Board. Mr. Doney joined the Board in July 2004, and has served as our Vice-Chair since
November 2008. During this time, he helped lead the successful execution of our business strategy and
provided valuable strategic guidance and oversight to management.
Dominic Gammiero will step down from our Board after serving as Chairman since 2009, as a Director
since 2006 and a member of the senior executive team since 2008. I want to recognize and thank
Dominic for his extraordinary vision and innovative leadership, which resulted in the transformation of
Western into one of Canada’s leading forest products companies. Indeed, Dominic is credited with
restructuring our operations, redefining our business and guiding our organization to deliver significant
and sustained value to our shareholders.
Our outlook continues to be very positive. The recovery in the U.S. new home segment is well
underway and is underpinning rising global demand for lumber and logs. U.S. housing starts increased
more than 18% in 2013 and are projected to grow a further 22% this year. Improving lumber demand in
the U.S. will drive pricing for our commodity and Cedar product lines. Our revenues will further benefit
from the weakening Canadian dollar.
2
Growth in China is expected to continue. Forest product demand in China is being supported by large
scale government investments in infrastructure and housing. With both China and the U.S. competing for
a constrained supply of lumber and logs, we can expect prices to rise further in 2014.
We also expect to see increased demand and higher pricing for specific products in Japan. As the
U.S. market improves, we anticipate U.S. Pacific Northwest suppliers will redirect some volume back to
their home market which will create opportunity for Western. Our improved cost structure, resulting from
our capital investments, will allow us to increase volume into this market.
Our 2014 business plan is focused on leveraging improved markets to deliver even better financial
results. We will fully utilize our log markets and flexible lumber manufacturing base to refine our product
mix to drive margins higher. We are well positioned to capitalize on the spring building season with an
improved log inventory compared to last year.
We are pursuing growth by accessing additional log supply. Internally, we will increase the
availability of logs from our own tenures by recovering more sawable fibre from low value pulp logs.
Externally, we will access more volume by building upon our mutually beneficial partnerships with First
Nations and by increasing purchases. Our ability to attract external log volume is made possible by our
capital investments, which have delivered a more competitive operating platform.
Growth will also come from our strategic capital investments which are performing above
expectations. In 2014, we will benefit from the first phase of our Saltair sawmill project, the autograder at
our Alberni Pacific sawmill, and the upgraded planer at Cowichan Bay. Encouraged by the initial returns
from these projects, which will surpass 30%, we anticipate investing a further $40 million in targeted high
return strategic capital projects in 2014.
As we grow the business, we will remain an industry leader with respect to safety. We are proud of
the progress we have made in safety and remain resolute in our commitment to further improve the safety
of our operations by identifying and managing hazards while implementing improved standards. Along
with industry peers, we are developing a best-in-class suite of solutions to manage the hazards of sawmill
dust. In 2014, we will continue to invest our resources in training, particularly for new workers joining the
industry.
We are confident we will continue to improve our financial results. We continue to build a strong
management team that is committed to delivering improved results and shareholder value. Coupled with
our strong balance sheet and margin-focused growth strategy, we are well positioned to capitalize on
increased demand for our log and lumber products.
I would like to thank our shareholders, customers, employees and communities for their continued
support of Western Forest Products.
Don Demens
President and CEO
3
Management’s Discussion & Analysis
The following Management’s Discussion and Analysis (“MD&A”) 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, 2013 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,
2013 and 2012, which can be found on SEDAR at www.sedar.com.
The Company has prepared the financial information contained in this discussion and analysis in accordance with
International Financial Reporting Standards (“IFRSs”), as issued by the International Accounting Standards Board.
Reference is made in this MD&A to adjusted EBITDA1. Adjusted EBITDA is defined as operating income prior to
operating restructuring items and other income (expenses), plus amortization of property, plant, equipment and
intangible assets, impairment adjustments, and changes in fair value of biological assets. Western uses adjusted
EBITDA as a benchmark measurement of our own operating results and as a benchmark relative to our competitors.
We consider adjusted EBITDA to be a meaningful supplement to operating income as a performance measure
primarily because amortization expense, impairment adjustments and changes in the fair value of biological assets
are non-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, the inclusion of operating restructuring items which
are unpredictable in nature and timing may make comparisons of our operating results between periods more difficult.
We also believe adjusted EBITDA is commonly used by securities analysts, investors and other interested parties to
evaluate our financial performance.
Adjusted EBITDA does not represent cash generated from operations as defined by IFRSs and it is not necessarily
indicative of cash available to fund cash needs. Furthermore, adjusted EBITDA does not reflect the impact of a
number of items that affect our net income. Adjusted EBITDA is not a measure of financial performance under
IFRSs, and should not be considered as an alternative to measures of performance under IFRSs. Moreover,
because all companies do not calculate adjusted EBITDA in the same manner, adjusted EBITDA as calculated by
Western may differ from EBITDA as calculated by other companies. A reconciliation between the Company’s net
income as reported in accordance with IFRSs and adjusted EBITDA is included in Appendix A to this report.
Also in this MD&A, management uses key performance indicators such as net debt, net debt to capitalization and
current assets to current liabilities. Net debt is defined as long-term debt less cash and cash equivalents. Net debt to
capitalization is a ratio defined as net debt divided by capitalization, with capitalization being the sum of net debt and
shareholder’s equity. Current assets to current liabilities is defined as total current assets divided by total current
liabilities. These key Performance indicators are non-GAAP financial measures that do not have a standardized
meaning and may not be comparable to similar measures used by other issuers. They are not recognized by IFRSs,
however, they are meaningful in that they indicate the Company’s ability to meet their obligations on an ongoing
basis, and indicate whether the Company is more or less leveraged than the prior year.
This MD&A 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 20, 2014. Certain
prior period comparative figures 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
Western reported strong financial results for 2013, reflecting continued growth of the Company. Total
revenue of $977.5 million was 6% higher than one year ago, while adjusted EBITDA margins increased to
13.2% from 5.5% in 2012. Adjusted EBITDA for the year was $128.8 million, the best annual adjusted
EBITDA result in our history, and an increase of $77.8 million over the comparable figure for 2012. Our
improved adjusted EBITDA result was driven by stronger product demand leading to improved pricing, for
both our lumber and log sales, as well as continued execution on the part of our operations. Average
realized prices during 2013 for lumber and logs were higher by 8% and 21%, respectively, over last year.
Improved demand for our lumber and logs was driven by increased housing starts in the United States
(“US”) and Japan, and increased government investment in infrastructure and housing in China. 2013
housing starts in the US were 923,400 units, which was 18% higher than in 2012. North American
benchmark Western Spruce/Pine/Fir 2x4 #2&Btr (“SPF”) prices were on average 19% higher during 2013
compared to 2012. Western Red Cedar (“WRC”), whitewood specialty lumber and commodity lumber
prices were all significantly higher this year. Log markets in 2013 continued to reflect strong demand with
prices for domestic sawlogs and export logs higher than in 2012.
In anticipation of more robust markets, our operations group moved log volume quickly through our
supply chain, supplying logs to our mills to optimize production levels, and also delivering a higher value
log mix to external markets. We increased our sawlog availability through purchases in the open market
and with more aggressive log sorting. Our log harvest volume was at normal levels in 2013, but 12%
lower when compared to 2012. In 2012, we accelerated harvesting in order to capture undercut volumes
from previous years.
Net income of $125.4 million in 2013 was an increase of $97.2 million over our 2012 net income of $28.2
million. In addition to the $77.8 million increase in adjusted EBITDA generated in 2013, we recognized a
deferred income tax asset of $26.5 million associated with our available tax losses.
Our liquidity position remains strong. At December 31, 2013, we had total liquidity of $125.9 million,
compared to $185.1 million at the end of 2012. During 2013, we utilized $100.3 million of liquidity to
finance a share repurchase, and also repaid $45.0 million of debt from surplus cash generated by
operations.
Our strategic capital plan continues to progress well. We completed the first phase of our Saltair sawmill
project during 2013. Construction will commence on the next phase of this project, which involves the
installation of a new log in-feed, during the second quarter of 2014. We expect the full benefits from the
project to commence by the fourth quarter of 2014. The Alberni Pacific sawmill autograder was installed
at the end of 2013 and is operating as expected. Our Cowichan Bay capital upgrade consists of two
phases. The first phase, a planer upgrade, was completed in late 2013, and the second phase, a log
auto-rotation project, will be installed early in the third quarter of 2014.
During 2013, our non-capital margin improvement plan program contributed $14.2 million in annualized
margin enhancements. These benefits mainly relate to manufacturing throughput improvements, along
with timberlands, logistics and procurement initiatives.
On August 16, 2013, the Company closed a substantial issuer bid, repurchasing 76,923,076 outstanding
shares for a purchase price of $1.30 per share, for gross aggregate consideration of $100.0 million
excluding transaction costs, which was financed from funds drawn on our revolving term loan facility.
These shares represented approximately 16% of the total number of shares issued and outstanding as of
August 16, 2013. 76,914,830 of the shares were repurchased from Brookfield Special Situations
Management Limited (“BSSML”) for consideration of approximately $100.0 million. Immediately following
the repurchase, the Company converted 36,800,000 Non-Voting Shares held by BSSML, on a one-for-
one basis, into Common Shares of the Company.
On October 9, 2013 and January 31, 2014 the Company closed two secondary offerings of the
Company’s shares by BSSML. As a result, all of the remaining 85,050,597 Non-Voting Shares of the
Company were converted, on a one-for-one basis, into Common Shares of the Company. Following
these transactions BSSML held no Non-Voting Shares and 163,012,474 Common Shares, representing
approximately 42% of the issued and outstanding Common Shares on a non-diluted basis.
5
The substantial issuer bid and the BSSML secondary offerings have both been positive for Western’s
shareholders, and have led to a significant increase in the public float of our Common Shares from
approximately $80 million in December 2012 to $540 million in January 2014. In addition, the average
daily trading volume of our shares increased by approximately five times over the same period.
During 2013, we initiated a quarterly dividend program and paid our first two dividends of $0.02 per share
in each of September and December 2013.
On January 28, 2013, we entered into a conditional sale agreement for the sale of our former Woodfibre
Pulp Mill site for net proceeds of approximately $18.0 million. Closing of the sale is subject to certain
conditions, and we are responsible for the satisfactory remediation of the property to applicable
environmental standards prior to closing the sale. The remediation plan is in progress, and we anticipate
achieving the required environmental certification early in 2015. As economic and other circumstances
allow, we will continue to pursue opportunities to sell other non-core assets.
Selected Annual Information (1)
(millions of dollars except per share amount)
2013
Year ended
December 31,
2012
Restated(2)
2011
(3)
Revenue
Adjusted EBITDA(2)
Adjusted EBITDA as % of revenue
Operating income prior to restructuring items and other income (expense)
Net income from continuing operations
Net income for the period
Basic earnings per share (in dollars)
Diluted earnings per share (in dollars)
$
$
$
977.5
128.8
13.2%
105.5
125.9
125.4
0.29
0.28
925.4
51.0
5.5%
37.7
29.3
28.2
0.06
0.06
853.7
61.6
7.2%
35.0
24.9
23.8
0.05
0.05
$
$
$
$
$
$
Total Assets
Net Debt (4)
$
670.5
$
606.3
$
608.3
$
82.9
$
15.0
$
52.1
(1) Included in Appendix A is a table of selected results for the last eight quarters.
(2) Restated to reflect implementation of revised IAS 19 - Employee Benefits as described on page 15.
(3) Not restated under IFRS for the amended IAS 19 - Employee Benefits.
(4) 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 (show as nil if net cash).
Operating Results
(millions of dollars)
Revenues
Lumber
Logs
By-products
Total revenues
Adjusted EBITDA
Adjusted EBITDA as % of revenues
Year ended
December 31,
2013
2012
$
677.2
243.8
56.5
977.5
$
624.4
246.3
54.7
925.4
128.8
13.2%
51.0
5.5%
Adjusted EBITDA for 2013 was $128.8 million, which is an increase of $77.8 million over the $51.0 million
earned in 2012. The higher adjusted EBITDA primarily reflects improved prices for our products in 2013
due to improving demand for lumber and logs. The stronger markets in 2013 have allowed us to
maximize margins by improving product mix. Our results in 2013 also benefited from reduced lumber
freight costs and export taxes, as well as the beneficial impact on our revenues of the relative weakening
of the Canadian dollar against the US dollar, which was, on average, 3% lower during 2013. Partially
offsetting these positive improvements to adjusted EBITDA were the impacts of lower log harvest levels
and the resulting lower shipment volumes of logs, higher unit log costs, and the negative impact of the
weakening Japanese yen against the Canadian dollar.
6
Lumber revenue in 2013 was $677.2 million, 8% higher than in 2012. This increase was driven principally
by increased prices, as we shipped 895 million board feet (“mmfbm”) of lumber in 2013, similar to the
volume shipped last year. Our average realized price for lumber during 2013 was $58 per thousand
board feet, or 8%, higher than in 2012. The increase in housing starts in the US during 2013 supported
stronger lumber demand. WRC, whitewood specialty lumber and commodity lumber prices were all
higher this year compared to 2012. There was also a geographic mix change year-over-year, as our
shipments to China increased by 32% over 2012 levels. China shipments represented 34% of our total
shipments compared to 24% last year. Our lumber sales volumes to Canada and Japan fell by 20% and
12%, respectively, in 2013 as compared to 2012.
Log revenues in 2013 declined by $2.5 million, or 1%, from 2012. The benefits of increased log pricing
and a favourable product mix change in 2013 over 2012 were offset by the impact of a decline in the
volume of log shipments this year. Log sales volumes declined by 661,000 cubic metres, or 19%, in 2013
compared to 2012. The reduction in our volumes sold is mainly the result of our reduced harvest levels in
2013 compared to 2012, although this impact was partially mitigated by increased log purchases. Log
market demand was stronger in 2013 compared to 2012, and, combined with the continued tight log
supply on the coast, prices were driven higher. The overall average price of logs sold in 2013 was $15
per cubic metre, or 21%, higher than in 2012. In addition to higher log prices, our overall average price
realized further increased because of a favourable change in the mix of our sales. As markets improved
during 2013, we were successful in directing lower valued logs into higher value end uses, which has
contributed to enhancing our adjusted EBITDA.
Sales of by-products in 2013 were $56.5 million, or $1.8 million higher than in 2012. Average chip prices
realized were 6% higher in 2013 compared to 2012, the benefit of which was partially offset by 3% lower
volume sold in 2013. Contributing to the price increase was the beneficial mix impact of selling
proportionately higher volumes of more expensive hemlock/balsam chips. In general, chip prices are tied
by a formula to the market price of pulp, and for 2013 these pulp prices were higher than 2012 (northern
bleached softwood kraft prices delivered to China were 5% higher in 2013 than in 2012).
Total freight costs in 2013 were $82.0 million, which is $6.2 million less than those incurred for 2012. Our
freight costs for lumber were reduced by $7.7 million, which was partly offset by an increase in log freight
costs of $1.5 million. Our shipment volumes of lumber were almost identical year-over-year, with the cost
reduction resulting from a change in the geographic mix of our shipments. In 2013, we shipped 59% of
our lumber within the North American market compared to 54% in 2012, with a corresponding reduction in
direct shipment levels to the Asian market, which incur higher freight costs. The increase in log freight
costs was the result of more shipments being made during 2013 with terms under which Western was
responsible for the freight costs compared to 2012.
Primary saw mill production for 2013 was 772 mmfbm, 5% higher than during 2012. The increased
production level was achieved by operating 3% more shifts this year. In addition, our mill productivity,
measured on a production per shift basis, increased by 2% over 2012, even though our production per
shift in 2013 was negatively impacted by downtime taken at our Saltair sawmill to install new equipment.
Through 2013, we faced the challenge of a constrained log supply on the coast, but addressed the issue
by running a broader species and quality mix. Despite running this broader mix, productivity and lumber
recoveries both showed improvement year-over-year.
The total log harvest for 2013 was 5.4 million cubic metres, which was 11% lower than the 2012 harvest
level of 6.1 million cubic metres. The decline in 2013 reflects accelerated harvesting undertaken in 2012
in order to capture previous year’s undercut volumes. This volume reduction led to an increase in our
fixed per unit costs of harvest production, and to meet our operational needs in 2013 we increased our
log purchase program. We increased log purchases on the open market, entered various standing timber
purchase agreements, and established joint venture arrangements with third parties, including First
Nations, to gain access to additional logs. Our overall harvest costs were higher in 2013 as a result of
increased spur road construction costs and additional engineering costs. Partially offsetting these
increased costs were proportionately lower volumes of high cost heli-logging this year compared to last
year, lower levels of fixed rate contract harvest volume in 2013, and increased use of our own crews for
harvesting.
Selling and administration expenses in 2013 were $33.0 million (2012: $28.6 million). The $4.4 million
increase is largely because of increases in performance related employee compensation. As a
7
percentage of revenues our selling and administration costs were 3.4% for 2013, an increase from the
3.1% reported in 2012.
Reversal of impairments
During 2013, Western recorded a reversal of previously recognized impairments of $8.2 million on its
Crown timber tenures (2012: $12.9 million). This resulted from an annual value-in-use assessment
performed in December 2013 on the carrying amount of the Crown tenures. The reversal was the result
of increases to the net present values of projected cash flows generated from the Crown tenures,
primarily due to the beneficial impact of improved markets for our products.
Operating restructuring items
In 2013, Western recorded restructuring expenses of $0.7 million, all of which related to severance costs.
This compares to an equivalent expense of $4.8 million in 2012, the majority of which related to $4.0
million incurred to restructure harvesting operations in TFL 44 in order to improve operating performance
in the future. The balance of $0.8 million related to severance costs incurred with respect to departmental
reorganizations.
Finance costs
Finance costs of $5.4 million for 2013 were $0.9 million less than the $6.3 million incurred in 2012. The
decrease was primarily the result of the lower interest expense on our revolving term loan facility, which
resulted from lower average interest rates in 2013, and lower average outstanding debt levels during
2013 compared to 2012. During 2013, Western repaid $45.0 million on the revolving term loan from
surplus cash primarily generated from operations, and in June 2013, drew $100.0 million on the extended
revolving term loan to finance the share repurchase. Also, fewer deferred financing costs were amortized
in 2013 compared to last year.
Other income
Other income of $0.3 million was reported in 2013, a decrease of $2.5 million from the income of $2.8
million earned in 2012. The most significant items that comprised the other income of $0.3 million in 2013
were net gains on non-core property sales of $1.5 million, mostly offset by building demolition costs
incurred during the year. In 2012, other income was comprised of net gains on non-core asset disposals
in the year of $1.1 million, proceeds of $1.1 million received as final compensation from the Province of
British Columbia resulting from the creation of new protective areas in our Haida Gwaii and Central Coast
operating areas, and other miscellaneous items aggregating to $0.6 million.
Income taxes
At December 31, 2013, the Company and its subsidiaries had non-capital tax losses carried forward
totaling approximately $308.2 million, which expire between 2027 and 2033, and can be used to reduce
taxable income. In addition, the Company has capital losses of approximately $121.7 million, which are
available indefinitely, but can only be utilized to offset future tax based capital gains. During 2013, the
Company recognized a deferred income tax asset of $26.5 million with respect to part of its non-capital
tax losses, as management has concluded that it is probable that future taxable profits will be available
against which this tax asset can be utilized. While the Company anticipates realizing the additional
benefit of the remaining unrecognized loss carry forwards and other deferred income tax assets, the
timing of such recognition will depend on on-going assessments of economic conditions, and that the
likelihood of the Company’s ability to utilize the losses is probable.
Net income from continuing operations
Net income from continuing operations in 2013 increased from the prior year figure by $96.6 million to
$125.9 million. This increase is primarily driven by the $77.8 million increase in adjusted EBITDA in 2013
as discussed above. In addition, the 2013 net income includes the recognition of a deferred income tax
asset and associated income tax recovery of $26.5 million as described above, whereas none was
8
recognized in 2012. Other positive variances include lower restructuring costs by $4.1 million in the
current year and lower finance costs by $0.9 million.
Discontinued Operations
Operations on the site of the former Squamish pulp mill were discontinued in 2006. Since that date, the
Company has expensed costs for supervision, security, property taxes and environmental remediation. In
2013, the Company incurred a net expense of $0.5 million with respect to the site, compared to $1.1
million in 2012. The reduction in the net expense in the current year is primarily attributable to revenue
from selling hydro-electric power generated at the site, which commenced in the second half of 2013.
In January 2013, Western entered into a conditional agreement for the sale of the site for a gross
purchase price of $25.5 million. Closing of the sale is subject to certain conditions, and Western is
responsible for the satisfactory remediation of the property to applicable environmental standards. After
incurring the estimated required remediation costs, Western anticipates receiving net proceeds from the
sale and remediation of approximately $18.0 million. As economic and other circumstances allow,
Western will continue to pursue opportunities to sell non-core assets.
Financial Position and Liquidity
(millions of dollars except where noted)
Cash provided by operating activities
Cash used in investing activities
Cash used in financing activities
Cash used to construct capitalized logging roads
Cash used to acquire property, plant and equipment
Total liquidity(1)
Net debt (2)
Financial ratios:
Current assets to current liabilities
Net debt to capitalization(3)
(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 is defined as the sum of long-term debt, current portion of long-term debt, revolving
credit facility, less cash and cash equivalents (show as nil if net cash).
(3) Capitalization comprises net debt and shareholders equity
Year ended
December 31,
2013
2012
$
110.7
(55.7)
(65.0)
(15.4)
(43.6)
$
57.7
(15.1)
(38.0)
(11.1)
(20.9)
December 31,
2013
December 31,
2012
$
125.9
82.9
$
185.1
15.0
2.34
0.18
2.30
0.04
Cash provided by operating activities in 2013 amounted to $110.7 million, an increase of $53.0 million
over the $57.7 million provided in 2012. Cash generated by operating activities before working capital
changes was $123.9 million, which was $81.9 million more than in 2012, primarily reflecting the increased
adjusted EBITDA earned in the current year. Partially offsetting this increase was a reduction of $28.9
million in cash generated from working capital changes over the respective years. This is largely driven
by a significant reduction in inventory levels at the end of 2012 compared to those at the end of 2011 and
2013. Inventories of logs, in particular, were lower at the end of 2012, primarily as a result of unusually
high shipments in the latter part of the fourth quarter of 2012. We have been successful in building
sawlog inventory at the end of 2013, in anticipation of strong markets in 2014.
Cash of $55.7 million was used in investing activities in 2013, compared to $15.1 million invested in 2012.
The increase is mostly the result of an increase in our capital expenditure levels in 2013 compared to
2012, and less cash received from non-core asset sales this year. Our capital expenditures in 2013
increased to $59.0 million, reflecting increases in both our strategic and maintenance capital investments.
In 2013, our strategic capital investments increased to $21.5 million, and spending on capital roads and
other maintenance projects increased over 2012 levels to $22.1 million and $15.4 million, respectively.
The majority of the strategic capital invested related to our Saltair sawmill upgrade and Alberni Pacific
9
sawmill auto-grading project. The strategic capital program is discussed more fully in the “Strategy and
Outlook” section.
Financing activities in 2013 used cash of $65.0 million compared to $38.0 million in 2012. During 2013,
Western paid $100.3 million to repurchase 49,862,642 Non-Voting and 27,060,434 voting Common
Shares, utilizing cash of $100.0 million drawn on its revolving term facility. During the third and fourth
quarters of 2013, we paid two quarterly dividends to shareholders, each at $0.02 per share, totaling $15.6
million, and repaid $45.0 million on the revolving term loan facility with surplus cash generated from
operations. Interest paid in 2013 was $3.5 million compared to $4.0 million paid in 2012, mainly as a
result of a lower average interest rate on the revolving term facility, and lower average debt levels
outstanding over the course of 2013 compared to 2012.
At December 31, 2013, we had total liquidity of $125.9 million, compared to $185.1 million at the end of
2012. During 2013, we utilized $100.3 million of liquidity to finance a share repurchase, and we repaid
$45.0 million of debt from surplus cash generated by operations. Liquidity is comprised of cash of $5.6
million, unused availability under the secured revolving credit line of $100.1 million, and $20.2 million
under the revolving term loan. Based on our current forecasts, we expect sufficient liquidity will be
available to meet our obligations in 2014.
Fourth Quarter Results
(millions of dollars except per share amount)
Revenue
Adjusted EBITDA(2)
Adjusted EBITDA as % of revenue
Operating income prior to restructuring items and other income (expense)
Net income from continuing operations
Net income for the period
Basic earnings per share (in dollars)
Diluted earnings per share (in dollars)
(1) Included in Appendix A is a table of selected results for the last eight quarters.
(2) Restated to reflect implementation of revised IAS 19 - Employee Benefits as described on page 15.
Three months ended
December 31,
2013
2012
Restated(2)
$
$
242.0
24.4
10.1%
24.9
49.9
49.9
0.13
0.13
231.2
14.3
6.2%
21.0
14.5
14.3
0.03
0.03
$
$
$
$
We saw an overall improvement in market conditions in the fourth quarter of 2013 relative to the fourth
quarter of 2012. Historically, lumber prices decrease in the fourth quarter as seasonal demand declines.
However, as in 2012, North American commodity lumber prices increased during the quarter, along with
WRC, and other higher grade lumber. Log prices were also higher in the fourth quarter of 2013
compared to 2012.
We reported adjusted EBITDA of $24.4 million in the fourth quarter of 2013, an increase of $10.1 million
over the fourth quarter of 2012. The increase in adjusted EBITDA resulted from higher average realized
prices on log and lumber sales, partially offset by lower volumes of log sales and increased costs in our
timberlands operations. Revenues were higher by $10.8 million, or 5%, in the fourth quarter of 2013
compared to the fourth quarter of 2012. Lumber and by-products revenues were higher with a small
decline in log revenues.
Lumber shipment volumes were the same in both quarters at 222 million board feet, but average realized
prices were 8% higher this quarter with WRC, hemlock and Douglas fir price realizations all being higher,
driven by strengthening demand.
Log revenue in the fourth quarter of 2013 was $3.2 million lower than the same quarter in 2012.
Shipment volumes were 138,000 cubic metres, or 17%, less in fourth quarter of 2013 compared to the
same quarter in 2012. However, offsetting the impact of lower volumes was the benefit of higher average
prices and a more favourable mix of products sold. Fourth quarter 2013 realized prices were higher, on
average, by 15% over the fourth quarter of 2012 with increases for export logs, hemlock sawlogs, and
peeler logs. Operations were also able to improve the mix of our sales by diverting pulp logs into
hemlock sawlog sorts. By-product revenues were $2.0 million higher this quarter compared to the fourth
10
quarter of 2012, principally as a result of average chip prices being 17% higher this quarter compared to
2012, which reflects improvements in global pulp prices.
Sawmill production in the fourth quarter of 2013 was 13% higher than the fourth quarter 2012, mainly due
to being able to run extra shifts in the fourth quarter this year, in part due to greater log availability. In
addition, mill productivity as measured on a production per shift basis, was 3% higher this quarter
compared to the fourth quarter of 2012.
Our timberlands harvest volume for the fourth quarter of 2013 was 1,314,000 cubic metres, which was
8% lower than our harvest in the same quarter of 2012. In 2013, our harvest costs were higher by
approximately $7 per cubic metre than in the fourth quarter of 2012, which was partially reflective of the
increased logging activity in higher cost locations, and increased helicopter logging this quarter.
Spending on spur road construction increased as we built more roads in the fourth quarter of 2013
compared to last year. We also increased log purchases in the current quarter relative to 2012 in order to
supply more volume to meet our manufacturing needs.
In the fourth quarter of 2013, the Canadian dollar weakened against the US dollar by approximately 6%,
but was 14% stronger relative to the Japanese Yen, compared to the rates for the fourth quarter of 2012.
The strengthening US dollar had a positive impact on our results, whereas the weakening Yen had a
negative effect in the current quarter compared to the same quarter in 2012.
Selling and administration expenses in the fourth quarter of 2013 were $8.8 million, which was $2.0
million higher than the fourth quarter of 2012. This increase is mostly attributable to performance related
employee compensation costs incurred in the current quarter.
Net income of $49.9 million reported in the fourth quarter of 2013 was an increase of $35.6 million over
the income of $14.3 million reported for the same quarter of 2012. The improvement was primarily due to
the higher adjusted EBITDA earned in the current quarter, combined with the deferred income tax
recovery of $26.5 million recognized in the fourth quarter of 2013. Operating restructuring items were
$4.1 million lower in the fourth quarter of 2013 compared to the fourth quarter of 2012, as that year
included $4.0 million expensed as a result of restructuring harvesting operations in TFL 44 in order to
improve its operating performance in the future.
Other expenses in the fourth quarter of 2013 of $0.1 million compared to other expenses of $0.9 million in
the fourth quarter of 2012. Included in the fourth quarter of 2012 was a net loss on non-core asset sales
of $1.5 million, partially offset by income of $0.9 million received from the Province of British Columbia for
costs incurred by Western relating to the Sliammon First Nations Treaty.
Finance costs in the fourth quarter of 2013 were $1.7 million which was $0.3 million higher than the same
quarter of 2012, primarily as a result of higher average debt levels in the current quarter. This was partly
offset by lower finance costs associated with our deferred pension plan in the fourth quarter of this year.
Following impairment assessments made on our crown tenures in the fourth quarters of both 2013 and
2012, we recognized impairment reversals of $8.2 million and $12.9 million, respectively, as described
earlier in this report in the “Operating Results” section.
Strategy and Outlook
We continued to make progress on our margin focused growth strategy in 2013. Our strong balance
sheet and free cash flows allowed us to complete a $100.0 million share repurchase in the third quarter of
2013, and initiate a regular quarterly dividend. At the same time, we continued with the implementation of
our strategic capital investment plan. We will continue to implement our margin focused growth strategy
by maximizing product margins and increasing our sales volumes in an improving global market for our
products. Our long term strategic goals for the Company remain:
• Fully utilizing our Allowable Annual Cut and ensuring the highest margin end use for our fibre
resources;
• Optimizing utilization of our sawmill assets, realizing full economies of scale;
• Growing market share in traditional and developing markets; and
• Generating substantial free cash flow that justifies reinvestment and further growth.
11
Western’s business plan for 2014 is focused on prudently growing the business to meet rising demand.
The improved log and lumber markets are creating an opportunity for Western to increase margins as we
utilize our flexible manufacturing base to refine our product mix. As demand improves, we will direct our
sale volumes to the best margin opportunities.
Market Outlook
The steady recovery of the US new home construction segment and continued growth in demand for
forest products in China is expected to drive increased consumption in 2014. Constrained supply from
traditional sources such as BC’s mountain pine beetle impacted regions and reduced allowable cut levels
from eastern Canada will lead to improved pricing and higher degrees of volatility.
An improving US home construction segment has increased demand for our WRC product line,
particularly in the repair and renovation sector. Sales volumes and values of WRC, which typically
decline in the fourth quarter, have remained strong. Heading into the 2014 building season, the
combination of increased seasonal demand and tight inventories is expected to support improved prices
for WRC. Improved demand in the US for all lumber products is expected to reduce the likelihood of
export taxes being applied to all shipments to the US, including WRC, in 2014.
Home construction in Japan accelerated in 2013, driven by government stimulus and an increase in
consumption tax. Well balanced inventories should support the market through the first part of 2014. We
expect our improved cost structure to allow us to increase volumes into the market in 2014.
Improving demand in North America will create greater opportunity for specialty industrial and
appearance products. The increased demand is expected to drive prices higher, increasing market
opportunities. Volumes are also expected to increase from 2013 levels.
Our commodity lumber segment benefited from increased demand from both North America and China in
2013. Our realized pricing improved by more than 30% compared to the 19% increase in the North
American benchmark SPF commodity price. We expect demand to continue to improve in 2014 for our
commodity products as growth in the US housing market is reviving product demand in that market.
Demand in China is expected to remain strong due to additional government infrastructure and urban
housing investments.
Strong demand in both export and domestic log markets is expected to continue through 2014. Growth in
China, in particular, will drive increased demand for export logs. Log sales volumes are expected to
increase in 2014 along with our aggressive procurement strategy. Market fundamentals for pulp logs
have improved marginally, and we will continue to maximize sawlog production from pulp log sorts to
increase our margins.
Strategic Capital Plan Update
We previously announced a $125.0 million strategic plan focused on reducing costs, increasing
efficiencies, and improving product flexibility. To date, we have initiated $50.0 million of these
investments and expect to announce a further $25.0 million in additional investments in 2014.
We completed the first phase of our $38.0 million Saltair sawmill project during 2013. To date,
approximately $27.0 million of our planned improvements have been invested. This phase was focused
on the back end of the mill and included a new sorter, trimmer and edgers. The installation was
completed safely and on budget, and performance continues to improve towards target levels. The next
phase of the project will involve the installation of a new log in-feed, with installation commencing in the
second quarter of 2014. Once complete, our Saltair sawmill will become the largest single line sawmill on
the BC coast.
Installation of the Alberni Pacific sawmill autograder took place in November 2013, completing the first
phase of this project. It is expected to deliver higher man-day productivity through increases in operating
speeds and lumber recoveries, as well as improve the accuracy of lumber grading. To date, we have
invested $3.8 million of the $6.7 million project. The second phase will incorporate a new lumber trimmer
with completion targeted for the fourth quarter of 2014. We will look to implement the new autograding
technology at other mills.
12
Our Cowichan Bay planer upgrade was completed in December 2013, and is performing well, setting a
production record in the first week of operation. A log auto-rotation project is also planned for this mill
and will be installed in the late second or early third quarter of 2014.
Non-Core Assets Update
In January 2013, Western announced that it had entered into a conditional agreement for the sale of its
former Woodfibre Pulp Mill site for a gross purchase price of $25.5 million. The site, consisting of 212
acres of industrial waterfront land, is located on Howe Sound, southwest of Squamish, BC. Closing is
subject to certain conditions, and Western will be responsible for the satisfactory remediation of the
property to applicable environmental standards prior to closing the sale. During 2013, both parties
agreed to a specific remediation plan, and a deposit of $5.5 million was placed in trust by the purchaser
which is non-refundable provided that Western completes the remediation in accordance with the terms of
the sale agreement. The remediation program is well underway and is anticipated to be complete in early
2015. After incurring the estimated required remediation costs, Western anticipates receiving net
proceeds from the sale and remediation of approximately $18 million.
We will continue to pursue the sale of additional non-core 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, 2013 and our payments due
for each of the next five years and thereafter:
(millions of Canadian dollars)
Accounts payable and
accrued liabilities
Discontinued operations
Revolving term loan
Operating leases
Silviculture provision
Other long-term liabilities
Defined benefit pension
plan funding obligation
Total
2014
2015
2016
2017
2018
Thereafter
$
79.8
0.6
89.8
15.9
31.7
1.4
$
79.8
0.6
-
3.6
12.3
1.1
$
-
-
-
2.9
5.2
0.1
$
-
-
-
2.0
3.2
0.1
$
-
-
89.8
1.3
2.1
0.1
$
-
-
-
1.2
1.7
-
$
-
-
-
4.9
7.2
-
12.7
231.9
$
2.3
99.7
$
2.3
10.5
$
0.8
6.1
$
0.8
94.1
$
0.8
3.7
$
5.7
17.8
$
Critical Accounting Estimates
Silviculture Provision
Under BC law, we are responsible for reforesting areas that we log. These obligations are referred to
throughout this MD&A as silviculture liabilities. We accrue our silviculture liabilities based on estimates of
future costs at the time the timber is harvested. The estimate of future silviculture 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 product prices can occur suddenly, which could result in a material write-
down in inventories in future periods.
13
Valuation of Accounts Receivable
We record an allowance for the collection of doubtful 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 North American lumber receivables for 90% of value with the Export
Development Corporation or Coface Canada, while all export sales are sold on either a cash basis or with
secured instruments, which 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. While our defined benefit plans were closed to new entrants in June, 2006 and no further
benefits accrue under the plans effective December 31, 2010, 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.
Environmental Provisions
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 historical
experience and recommendations of legal counsel. Actual results may vary from estimates and the
differences are recorded when known.
Valuation of Land
On adoption of IFRSs, we elected to measure land at fair value at each annual reporting date, or more
frequently in the event of a material change in circumstances. This requires an assessment of the fair
value of all land holdings using a combination of independent third party valuations, recent comparable
land sales, discounted cash flow analysis as well as considering other publicly available information such
as recent market transactions on arm’s length terms between willing buyers and sellers, and BC property
assessments.
Valuation of Biological Assets
The Company values its biological assets at fair value less costs to sell. An annual valuation is
performed by an independent third party based on recent comparatives of standing timber sales, direct
and indirect costs of sustainable forest management, net present value of future cash flows for standing
timber and log pricing assumptions. Significant assumptions are used in the preparation of the valuation
and actual results may vary materially from estimates.
14
Impairments
Assets that are subject to amortization are tested for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. Impairment losses are
recognized in net income for the period for the amount by which the asset’s carrying amount exceeds its
recoverable amount. An impairment analysis requires the use of significant assumptions, including
management and independent third party input.
Deferred Income Taxes
The recognition of deferred income tax assets requires an assessment of the availability of future taxable
profit against which carry forward tax losses can be used. We estimate future income based on forecasts
which includes a number of variables that can be unpredictable and cyclical in nature. Changes in
product prices, in particular, can occur quite suddenly.
New accounting policies
Changes in accounting policies
Western has adopted the following new standards and amendments to standards, including any
consequential amendments to other standards with a date of initial application of January 1, 2013:
• Amendments to IAS 19 Employee Benefits
The Company has adopted the amendments to IAS 19 Employee Benefits effective January 1,
2013, with retrospective application. The amendments to IAS 19 require any remeasurement
gains or losses, including actuarial gains and losses to be recognized immediately and presented
in other comprehensive income (loss), eliminating the option to recognize these amounts through
net income (loss).
The amendments to IAS 19 also require one discount rate be applied to the net defined benefit
asset or liability for the purposes of determining the interest element of the defined benefit cost
and require the recognition of unvested past service cost awards into earnings immediately.
Under IAS 19, Western determines the net interest expense (income) on the defined benefit
liability for the period by applying the discount rate used to measure the defined benefit obligation
at the beginning of the annual period to the then-net defined benefit liability, taking into account
any changes to the net defined liability during the period as a result of contributions and benefit
payments. Consequently, the net interest on the net defined benefit liability now comprises:
interest cost on the defined benefit obligation, interest income on plan assets, and interest on the
effect of the asset ceiling. Previously, interest income on the plan assets was determined based
on long term expected rate of return, and recognized the net interest cost in net income through
selling and administration expenses. The quantitative impact of the change is described in Note
17 to the 2013 Audited Financial Statements.
•
IFRS 13 Fair Value Measurement
IFRS 13 establishes a single framework for measuring fair value and making disclosures about
fair values measurements when such measurements are required or permitted by other IFRSs. It
unifies the definition of fair values as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date.
It replaces and expands the disclosure requirements about fair value measurements in other
IFRSs, including IFRS 7. As a result Western has included additional disclosure in this regard in
its consolidated financial statements (see Notes 5, 6 and 18 to the 2013 Audited Financial
Statements).
In accordance with the transitional provisions of IFRS 13, Western has applied the new fair value
measurement guidance prospectively and has not provided any comparative information for new
disclosures. Notwithstanding the above, the change had no significant impact on the
measurement of Western’s assets and liabilities.
15
New standards and interpretations not yet adopted
The following amended IFRS standards are not yet effective for the year ended December 31, 2013 and
have not been applied in preparing these consolidated financial statements:
•
IFRS 9, Financial Instruments (2009 and 2010)
IFRS 9 Financial Instruments (2009 and 2010) (“IFRS 9 (2009)” and “IFRS 9 (2010)”) will replace
IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”). IFRS 9 (2009) uses a
single approach to determine whether a financial asset is measured at amortized cost or fair
value, replacing the multiple rules in IAS 39. The approach in IFRS 9 (2009) is based on how an
entity manages its financial instruments in the context of its business model and the contractual
cash flow characteristics of the financial assets. The new standard also requires a single
impairment method to be used, replacing the multiple impairment methods in IAS 39. IFRS 9
(2010) added guidance to IFRS 9 (2009) on the classification and measurement of financial
liabilities.
IFRS 9 (2009) and IFRS 9 (2010) are effective for annual periods beginning on or after January 1,
2015, with early adoption permitted. The impact of the adoption of this standard is still being
assessed.
•
IAS 32, Offsetting Financial Assets and Liabilities
The amendments to IAS 32 which are effective for years commencing on or after January 1,
2014, clarify the guidance as to when an entity has a legally enforceable right to set off financial
assets and financial liabilities, and, clarify when a settlement mechanism provides for net
settlement. The Company intends to adopt the amendments to IAS 32 in its consolidated
financial statements for the year commencing January 1, 2014. The Company does not expect
the amendments to have a material impact on the consolidated financial statements.
The following new or amended IFRSs became effective on January 1, 2013. However, they did not have
a material impact on the annual consolidated financial statements of the Company:
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint Arrangements
IFRS 12 Disclosure of Interests in Other Entities
Amendments to IAS 28 Investments in Associates and Joint Ventures
Financial Instruments, Off-Balance Sheet Arrangements, Foreign Exchange and Related
Party Transactions
Financial instruments, which for Western consist primarily of debt instruments, are discussed elsewhere
in this discussion and analysis.
Western has a program in place to reduce the impact of volatile foreign exchange rates on its 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 US and Japan. The
Company does 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 is be fair valued and marked to market each accounting period,
with changes recorded in net income.
To further assist in mitigating this foreign exchange risk, the Company entered into an agreement in
March 2009 with Brookfield Asset Management Inc. (“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, 2014, 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
16
the notional amount per annum. The Company does not consider the credit risk associated with this
Facility to be significant. During 2013, 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, 2013, the Company had forward contracts in place to sell US$11.0 million and JPY 100
million (2012 – US$42.0 million; JPY 400 million). A net loss of $0.5 million was recognized on contracts
which matured in the year (2012 - $1.0 million), which is included in sales in the consolidated statement of
comprehensive income.
Other than operating leases for vehicles, equipment and machinery, the Company does not have any off-
balance sheet arrangements as at December 31, 2013.
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 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 purchases made and revenues received
relating to these transactions:
Year ended December 31,
2013
2012
Costs incurred for:
Log purchases
Other
Income received for:
Log sales
$
$
$
$
15.8
8.8
24.6
11.5
6.5
18.0
$
$
14.8
14.8
$
$
7.9
7.9
Related party liabilities at December 31, 2013 were $1.2 million (December 31, 2012: $0.1 million).
Key personnel of the Company include the executive management team and members of the Board of
Directors. The compensation paid or payable to key personnel is shown below:
Year ended December 31,
2012
2013
Salaries and directors' fees
Post-employment benefits
Share-based payments
Risks and Uncertainties
$
$
2.9
0.3
2.3
5.5
2.7
0.2
0.9
3.8
$
$
The following risks and uncertainties may have a material adverse effect on our operations or our
financial condition:
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.
17
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 our 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 $9 million with a price increase or decrease,
respectively, of $10 per thousand board feet of lumber. Each additional incremental price increase or
decrease of $10 per thousand board feet of lumber sold 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.
International Business and Risks of Exchange Rate Fluctuations
Western’s products are sold in international markets. Economic conditions in those markets, the strength
of the housing markets in the US 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 10% and 15% in JPY, while most operating costs and
expenses are incurred in Canadian dollars, with small portions in US dollars and JPY. The Company’s
functional currency is the Canadian dollar and financial results 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 $4.5 million, and $0.8 million, respectively.
The Softwood Lumber Agreement (“SLA”) with the US 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 US government with not less than six months’ notice. On January 23,
18
2012, Canada and the US agreed on a two year extension of the SLA, which will now terminate in
October, 2015. 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 US.
Employees and Labour Relations
Hourly paid employees at our manufacturing facilities, timber harvesting operations and a small group of
clerical employees 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”) or the Canadian Merchant Service Guild (“Guild”). The collective
agreement covering the majority of Western’s unionized employees was renewed with the USW in 2010
and expires on June 14, 2014. Other collective agreements negotiated in 2010 include employees
the Company’s Ladysmith Sawmill Operation and Value Added
affiliated with
Remanufacturing operation, South Island Remanufacturing operation and a Quatsino Dry Land Sort tug
boat Captain who is affiliated with the Guild. These agreements expire on December 31, 2014, October
14, 2016, May 22, 2017 and September 30, 2015, respectively. A collective agreement covering USW
clerical employees expired on December 31, 2013. The Company is currently in negotiations with USW
over the renewal of the clerical employees’ collective agreement.
the PPWC at
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 lockout could occur. A strike or lockout could
involve significant disruption of operations and/or an adverse material impact on our financial condition.
Furthermore, a negotiated settlement could result in unplanned increases in wages or benefits payable to
unionized employees. In addition, the Company relies on certain third parties, such as logging
contractors, stevedores or major railways, whose workforces are unionized, to provide the Company with
services necessary to operate the business. If those workers/employers engage in a strike or lockout, 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, some of which have substantially greater financial
resources than 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. In
addition, market acceptance of the environmental sustainability of our products as compared with
substitutes could be a challenge in the future. 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 of the Company’s products and the 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 JPY, 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 try and 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 following harvesting due to fire and other
occurrences. 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
19
timberlands to reduce individual incident costs of mobilizing helicopters and aerial water tankers in the
event of a fire on those lands.
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.
Other than two sales offices in Japan, all of our business operations are located on the BC 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
guarantee that all potential insurable risks have been foreseen or that adequate coverage is maintained
against known risks.
Impact of Mountain Pine Beetle Infestation
The north-central interior forests of BC and western parts of Alberta 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. 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
efficient entry into remote 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 or 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 is tied by formula to published indices
that reflect the US dollar selling price of NBSK pulp. 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 there is a contraction in the coastal pulp and paper industry, 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 and are
currently administered by the Ministry of Forests, Lands and Natural Resource Operations (the
“MFLNRO”). The Forest Act (British Columbia) (the “Forest Act”) empowers the MFLNRO 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 is not
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, 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
20
and may in the future result in reductions or increases to the AAC attributable to licences held by BC
forest companies (without compensation), including the licences that we hold. In addition, our AAC can
be temporarily reduced (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, including critical habitat designations as well as 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
There have been significant legislative reforms in the BC Forest Industry over the last 40 years. One of
the more significant examples of this was seen in 2003 when the Province took back approximately 20%
of the AAC from major license holders, including Western, and provided monetary compensation in
return. There can be no assurance that the Province will not implement further policy changes, or that
such changes will not have a material adverse effect on our operations or our financial position.
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 treaty affecting the Company’s tenures was brought into force.
The Maa’nulth Treaty extinguished the Company’s tenure rights on Maa’nulth Treaty Settlement lands
within TFL 44 and permanently reduced the tenure’s AAC by 95,200 cubic metres. A treaty measure
which created a new Protected Area inside of TFL 44 permanently reduced the AAC by another 8,800
cubic metres. 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
reductions of 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, Ditidaht, K’omox and
Wuikinuxv First Nations are also well advanced and may lead to agreements impacting Western in 2014.
It is expected that through these and other treaty-related processes the Provincial Government will want
to remove areas out of the Company’s various forest tenures.
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 MFLNRO 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
21
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.
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
BC. More than 95% of the timber we harvest is from Crown land. In response to US Softwood Lumber
dispute, the Provincial Government adopted a new market pricing system for timber from the Coastal
region. Since February 29, 2004, stumpage is being set using the Coast version of the Market Pricing
System (“MPS”). MPS uses the winning bids and stand characteristics of timber sold through British
Columbia Timber Sales (“BCTS”) auctions to develop regression equations that predict the market (i.e.
auction) value of Crown timber harvested under long-term tenures. The auction value is then adjusted to
reflect costs that tenure holders incur that BCTS expends on behalf of bidders. These costs, like forest
planning and administration and silviculture, are referred to as Tenure Obligation Adjustments. Coastal
MPS is updated on a routine basis to reflect recent sales data and costs. The most recent update
occurred on January 1, 2014. Stumpage rates are also adjusted quarterly to reflect changes in log prices.
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 the stumpage fees payable by us 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, saw logs and pulp logs 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.
Safety
The Company’s safety policy reflects its values and commitment to providing a healthy and safe
workplace for its people, while at the same time ensuring compliance with our regulatory requirements
under WorkSafeBC. Workplace safety 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 federal and provincial 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.
22
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 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.
Western is one of five founding members of the Coast Forest Conservation Initiative (the “CFCI”). CFCI
is a collaborative effort amongst forest companies working in BC's Central and North Coast. Its purpose
is to define and support the development of an ecosystem-based management (“EBM”) as part of 2003
Land and Resource Management Plan recommendations. In March 2006, interim legal objectives for
EBM were enacted. These objectives were further amended in March 2009 with final implementation
deferred for 5 years while the concept, intended to be unique to this region, was fully defined. The CFCI
Companies, along with major environmental groups have delivered a suite of recommendations for
consideration by the Province and the 27 First Nations who live in the region. How final resolution of
EBM will impact Western’s timber supply is not known at this time. Further amendment of legal objectives
is expected to take place in 2014.
Regulatory Risks
Our forestry and sawmill operations are subject to extensive federal, provincial, 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.
Log exports from our timber operations are subject to federal and provincial regulations. An export permit
from the Canadian Federal government must be obtained to export any logs harvested in BC and
generally the logs must be surplus to the supply required for domestic manufacturers. Logs from private
timberlands which were granted by the Crown prior to March 12, 1906 are subject to the Federal surplus
test and logs from private land granted after that date are subject to the Provincial surplus test. Logs
harvested from Crown land in BC are subject to the Provincial surplus test. The regulations also restrict
the species and grade permitted for export.
Under both the federal and provincial surplus tests, the logs must be advertised for local consumption.
Logs are declared surplus and may be exported if there are no offers on the advertised logs by domestic
manufacturers. In practice, domestic offers on export volume can satisfied with replacement volume to
minimize operational impacts. However, a substantial increase in domestic demand may adversely
impact timber operations as export pricing is generally at a premium to domestic pricing. In July 2013, the
Ehattesaht First Nation filed a petition with the BC Supreme Court against the Province of British
Columbia regarding a decision of the Crown on the amount of un-harvested volume in TFL 19 from the
2007 to 2011 cut control period, which may subsequently be directly awarded to the Ehattesaht. The
Ehattesaht claim the Crown did not adequately consult them about the decision and that additional
volume must be made available to them based upon their asserted territory, rights, and economic
interests. The Company has joined the proceedings as a party respondent as any decisions regarding
the disposition of un-harvested volume arising from cut control performance directly impacts our interest
within the TFL. A court date is tentatively set for February 2014.
23
In January 2008, the Ditidaht First Nation commenced litigation in the BC Supreme Court against the
Province of British Columbia, Canada, certain other First Nations and two forestry companies, including
Western, 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. In March 2013, the Ditidaht and BC Government entered an Interim Treaty Agreement (the
“ITA”) which included Ditidaht agreement not to initiate or proceed with litigation against the Crown for
land dispositions and land use authorizations during the term of the ITA. Consequently, unless the ITA is
terminated in accordance with the provisions for termination in the ITA, this litigation will not be pursued
further by Ditidaht.
In April 2008, the Kwakiutl First Nation commenced litigation in the BC Supreme Court against the
Province of British Columbia, Western and the federal government 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 (“FSP”) on the Crown lands within their area of
interest, based on alleged infringements of their treaty rights and extinguished aboriginal title and rights.
This case was decided in June 2013, with the court upholding the Private Land withdrawal from TFL 6
and also the decision to extend the term of our FSP. The Crown was found to have an ongoing duty to
consult the Kwakiult in good faith and to seek accommodations regarding their claim of extinguished
Aboriginal rights, titles and interests in respect of the Kwakiutl traditional territory. The Crown has
subsequently filed an appeal of the decision pertaining to their ongoing duty to consult with the Kwakiutl.
In 2005, the Hupacasath First Nation obtained an order of the BC Supreme Court requiring the Province
of BC 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 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. In July 2012, the
Hupacasath and BC Government executed a mediated agreement which included the following
accommodations within TFL 44 as a result of the 2004 decision to remove private land from TFL 44: a
Government Action Regulation Order for protection of a spiritual area at Thunder Mountain, 400 hectares
of new Old Growth Management Areas around Great Central Lake, a 20,000 cubic metre non replaceable
forest licence in the vicinity of Great Central Lake and a First Nations Woodland Licence also at Great
Central Lake as per the previous Forestry Revitalization Act timber volume allocation to the Hupacasath.
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 addition, Western is subject to routine litigation incidental to our business, the outcome of which we do
not anticipate will have a materially adverse effect 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
If a change of control, defined as an acquisition of greater than 50% of the outstanding Voting Shares, 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
the MFLNRO were to be satisfied that any 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
24
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.
As of the date of this report there were no Non-Voting Shares issued and outstanding.
Evaluation of Disclosure Controls and Procedures
As required by Multilateral Instrument 52-109 issued by the Canadian Securities Administrators, Western
conducted an evaluation of the effectiveness of the disclosure controls and procedures and the system of
internal control over financial reporting based on the 1992 framework: “Internal Control – Integrated
Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this evaluation, management concluded that the Company’s system of internal control over financial
reporting was effective as at December 31, 2013. 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 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 2013.
Outstanding Share Data
As of February 20, 2014, there were 391,128,407 Common Shares issued and outstanding. BSSML
controls and directs 40.1% of the Company’s Common Shares. There were no Non-Voting Shares
issued and outstanding at February 20, 2014.
Western has reserved 20,000,000 Common Shares for issuance upon the exercise of options granted
under the Company’s incentive stock option plan. During 2013, 3,500,000 options were granted. As of
February 20, 2014, 13,016,795 options were outstanding under the Company’s incentive stock option
plan.
25
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
2013
3rd
2nd
1st
Year
4th
2012
3rd
2nd
1st
Average Exchange Rate – Cdn $ to
purchase one US $
1.030
1.049
1.039
1.023
1.008
1.000
0.991
0.996
1.010
1.001
Revenues
Lumber
Logs
By-products
Total revenues
Lum ber
Shipments – millions of board feet
Price – per thousand board feet
Logs
Shipments – thousands of cubic metres
Price – per cubic metre(1)
Selling and adm inistration (2)
Adjusted EBITDA (2)
Amortization
Changes in fair value of biological assets
Reversal of impairment
Operating restructuring items
Finance costs (2)
Other income (expenses)
Deferred income tax recovery
Current income tax recovery (expense)
Net incom e from continuing
operations (2)
Net loss from discontinued
operations
Net incom e (2)
677.2
243.8
56.5
977.5
895
757
2,769
85
33.0
128.8
(29.2)
(2.3)
8.2
(0.7)
(5.4)
0.3
26.5
(0.3)
125.9
(0.5)
125.4
222
758
697
84
8.8
24.4
(7.0)
(0.7)
8.2
(0.1)
(1.7)
(0.1)
26.5
0.4
49.9
-
49.9
168.1
59.7
14.2
242.0
171.7
53.9
13.8
239.4
180.4
67.0
14.9
262.3
157.0
63.2
13.6
233.8
228
752
615
83
8.2
27.6
(7.5)
(0.3)
-
(0.3)
(1.7)
(0.4)
-
(0.2)
231
782
765
84
8.0
44.9
(7.9)
(0.8)
-
(0.1)
(0.8)
0.7
-
214
733
692
89
8.0
31.9
(6.8)
(0.5)
-
(0.2)
(1.2)
0.1
-
(0.3)
(0.2)
624.4
246.3
54.7
925.4
894
699
3,430
70
28.6
51.0
(25.8)
(0.4)
12.9
(4.8)
(6.3)
2.8
-
(0.1)
156.1
62.9
12.2
231.2
147.3
58.5
13.6
219.4
222
703
835
73
6.8
14.3
(5.9)
(0.3)
12.9
(4.2)
(1.4)
(0.9)
-
-
218
676
876
65
6.8
8.5
(6.2)
0.4
-
(0.2)
(1.4)
1.1
-
(0.1)
163.8
73.0
14.6
251.4
234
700
1,020
69
7.3
18.8
(6.9)
(0.4)
-
(0.4)
(1.9)
1.6
-
-
157.2
51.9
14.3
223.4
220
716
699
72
7.7
9.4
(6.8)
(0.1)
-
-
(1.6)
1.0
-
-
17.2
35.7
23.1
29.3
14.5
2.1
10.8
1.9
-
17.2
(0.2)
35.5
(0.3)
22.8
(1.1)
28.2
(0.2)
14.3
(0.3)
1.8
(0.4)
10.4
(0.2)
1.7
Adjusted EBITDA as % of revenues
13.2%
10.1%
11.5%
17.1%
13.6%
5.5%
6.2%
3.9%
7.5%
4.2%
Earnings per share:
Net income, basic
Net income, diluted
Net income from continuing
operations, basic
Net income from continuing
operations, diluted
0.29
0.28
0.13
0.13
0.04
0.04
0.08
0.07
0.05
0.05
0.06
0.06
0.03
0.03
0.29
0.13
0.04
0.08
0.05
0.06
0.03
0.28
0.13
0.04
0.07
0.05
0.06
0.03
-
-
-
-
0.02
0.02
0.02
0.02
-
-
-
-
(1)
(2)
The log revenue used to determine average price per cubic metre has been reduced by the associated shipping costs arranged in the respective periods to
enable comparability of unit prices.
Adjusted EBITDA, Selling and administration expenses, Finance costs, Net income from continuing operations and Net income have been restated to reflect
the adoption of changes to IAS 19 - Employee Benefits as described commencing on Page 15 of the MD&A.
In a normal operating year there is seasonality to the Company’s operations with higher lumber sales in the second
and third quarters when construction activity, particularly in the US, has historically tended to be higher. 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 (expenses)” comprises net gains on the sale of various assets and other receipts
which can be unpredictable in their timing. The fourth quarters of 2013 and 2012 include reversals of an impairment
of $8.2 million and $12.9 million, respectively that had previously been taken on the Company’s timber licenses
(intangible assets) which were unusual adjustments. The fourth quarter of 2012 included a more significant charge
for restructuring as a result of Western incurring a cost of $4.0 million to reorganize harvesting operations in TFL 44
in order to improve operating performance in the future. In the fourth quarter of 2013 Western recognized a deferred
income tax asset of $26.5 million with respect to unutilized operating tax losses as described earlier (see Income
taxes under the Operating Results section).
26
Western Forest Products Inc.
Consolidated Financial Statements
Years ended December 31, 2013 and 2012
27
Western Forest Products Inc.
CONSOLIDATED FINANCIAL STATEMENTS
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 Consolidated Financial Statements have been prepared by Management in accordance with
International Financial Reporting Standards as issued by the International Accounting Standards Board and,
where necessary, reflect Management’s best estimates and judgments at this time. The financial information
presented throughout the Management’s Discussion and Analysis dated February 20, 2014 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.
Don Demens
President and Chief Executive Officer
Brian Cairo
Chief Financial Officer
February 20, 2014
28
KPMG LLP
Chartered Accountants
PO Box 10426 777 Dunsmuir Street
Vancouver BC V7Y 1K3
Canada
Telephone (604) 691-3000
(604) 691-3031
Fax
www.kpmg.ca
Internet
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Western Forest Products Inc.
We have audited the accompanying consolidated financial statements of Western Forest Products Inc.,
which comprise the consolidated statements of financial position as at December 31, 2013 and December
31, 2012, the consolidated statements of comprehensive income, changes in shareholders’ equity 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 International Financial Reporting Standards as issued by the International
Accounting Standards Board, 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.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted auditing standards.
Those standards require that we comply with ethical requirements and plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on 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 entity’s
preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide
a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
consolidated financial position of Western Forest Products Inc. as at December 31, 2013 and December
31, 2012, and its consolidated financial performance and its consolidated cash flows for the years then
ended in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board.
February 20, 2014
Vancouver, Canada
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity.
KPMG Canada provides services to KPMG LLP
29
Western Forest Products Inc.
Consolidated Statements of Financial Position
(Expressed in millions of Canadian dollars)
Assets
Current assets:
Cash and cash equivalents
Trade and other receivables
Inventory (Note 4)
Prepaid expenses and other assets
Non-current assets:
Property, plant and equipment (Note 5)
Intangible assets (Note 5)
Biological assets (Note 6)
Other assets (Note 7)
Deferred income tax assets (Note 10)
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities
Silviculture provision (Note 12)
Discontinued operations (Note 22)
Non-current liabilities:
Long-term debt (Note 9)
Silviculture provision (Note 12)
Other liabilities (Note 11)
Deferred revenue
Discontinued operations (Note 22)
Shareholders’ equity:
Share capital - voting shares (Note 13)
Share capital - non-voting shares (Note 13)
Contributed surplus
Revaluation reserve
Deficit
December 31,
December 31,
2013
2012
$
5.6
69.0
132.5
10.1
217.2
$
18.8
69.5
116.6
7.6
212.5
226.0
130.5
58.4
11.9
26.5
194.2
126.1
60.8
12.7
-
$
670.5
$
606.3
$
79.8
12.3
0.6
92.7
$
74.0
13.4
5.1
92.5
88.5
17.7
20.3
64.4
4.5
288.1
486.6
13.1
6.5
22.3
(146.1)
382.4
33.8
17.6
35.6
66.4
2.7
248.6
479.7
120.3
4.2
22.3
(268.8)
357.7
$
670.5
$
606.3
Commitments and Contingencies (Note 15) and Subsequent Event (Note 25)
See accompanying notes to these consolidated financial statements
Approved on behalf of the Board:
Dominic Gammiero, Chairman
Lee Doney, Vice Chairman
30
Western Forest Products Inc.
Consolidated Statements of Comprehensive Income
(Expressed in millions of Canadian dollars except for share and per share amounts)
Revenue
Cost and expenses:
Cost of goods sold
Export tax
Freight
Selling and administration
Reversal of impairments (Note 5)
Operating income prior to restructuring items and other income
Operating restructuring items (Note 19)
Other income (Note 21)
Operating income
Finance costs (Note 20)
Income before income taxes
Deferred income tax recovery (Note 10)
Current income tax expense (Note 10)
Net income from continuing operations
Net loss from discontinued operations (Note 22)
Net income for the period
Other comprehensive income
Items that will not be reclassified to profit or loss:
Change in revaluation reserve
Defined benefit plan actuarial gain (loss)
Total comprehensive income for the period
Net income per share (in dollars):
Basic earnings per share
Diluted earnings per share
Basic earnings per share - continuing operations
Diluted earnings per share - continuing operations
Weighted average number of shares outstanding (thousands)
Basic
Diluted
See accompanying notes to these consolidated financial statements
31
Year ended
December 31,
2013
2012
[Restated -
Note 17]
$
977.5
$
925.4
764.3
0.9
82.0
33.0
(8.2)
872.0
105.5
(0.7)
0.3
105.1
(5.4)
99.7
26.5
(0.3)
125.9
(0.5)
125.4
777.8
6.0
88.2
28.6
(12.9)
887.7
37.7
(4.8)
2.8
35.7
(6.3)
29.4
-
(0.1)
29.3
(1.1)
28.2
-
12.9
138.3
$
(1.6)
(7.0)
19.6
$
$
$
$
$
0.29
0.28
0.29
0.28
$
$
$
$
0.06
0.06
0.06
0.06
438,547
443,254
467,945
470,459
Western Forest Products Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(Expressed in millions of Canadian dollars)
Balance at December 31, 2011
Net income
Other comprehensive loss:
Change in revaluation reserve
Defined benefit plan actuarial loss recognized
Total comprehensive income
Share-based payment transactions
recognized in equity
Exercise of stock options
Total transactions with owners, recorded directly
in equity
Balance at December 31, 2012
Balance at December 31, 2012
Net income
Other comprehensive income:
Defined benefit plan actuarial gain recognized
Total comprehensive income
Share-based payment transactions
recognized in equity
Repurchase of shares (Note 13)
Dividends
Total transactions with owners, recorded directly
in equity
Share
Capital
Contributed
Surplus
Revaluation
Reserve
Deficit
[Restated -
Note 17]
Total
equity
$
599.8
$
3.4
$
23.9
$
(290.0)
$
337.1
-
-
-
-
-
0.2
0.2
-
-
-
-
0.9
(0.1)
0.8
-
28.2
28.2
(1.6)
-
(1.6)
-
(7.0)
21.2
-
-
-
-
-
-
(1.6)
(7.0)
19.6
0.9
0.1
1.0
$
600.0
$
4.2
$
22.3
$
(268.8)
$
357.7
$
600.0
$
4.2
$
22.3
$
(268.8)
$
357.7
-
-
-
-
(100.3)
-
(100.3)
-
-
-
2.3
-
-
2.3
-
-
-
-
-
-
-
125.4
125.4
12.9
138.3
12.9
138.3
-
-
(15.6)
2.3
(100.3)
(15.6)
(15.6)
(113.6)
Balance at December 31, 2013
$
499.7
$
6.5
$
22.3
$
(146.1)
$
382.4
See accompanying notes to these consolidated financial statements
32
Western Forest Products Inc.
Consolidated Statements of Cash Flows
(Expressed in millions of Canadian dollars)
Cash provided by (used in):
Operating activities:
Net income from continuing operations
Items not involving cash:
Amortization of property, plant and equipment (Note 5)
Amortization of intangible assets (Note 5)
Loss (gain) on disposal of assets
Change in fair value of biological assets (Note 6)
Net finance costs
Reversal of impairments on intangible assets (Note 5)
Deferred income tax recovery (Note 10)
Other
Changes in non-cash working capital items:
Trade and other receivables
Inventory
Prepaid expenses and other assets
Silviculture provision
Accounts payable and accrued liabilities
Investing activities:
Additions to property, plant and equipment (Note 5)
Proceeds on disposals of assets
Financing activities:
Changes in revolving credit facility
Interest paid
Repayment of long-term debt
Draw down of long-term debt
Refinancing fees
Repurchase of shares (Note 13)
Dividends
Proceeds from exercise of stock options
Cash provided by (used in) continuing operations
Cash used in discontinued operations (Note 22)
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See accompanying notes to these consolidated financial statements
33
Year ended
December 31,
2013
2012
[Restated -
Note 17]
$
125.9
$
29.3
25.5
3.7
(1.5)
2.3
5.4
(8.2)
(26.5)
(2.7)
123.9
0.5
(15.9)
(2.5)
(1.1)
5.8
(13.2)
110.7
(59.0)
3.3
(55.7)
-
(3.5)
(45.0)
100.0
(0.6)
(100.3)
(15.6)
-
(65.0)
(10.0)
(3.2)
(13.2)
18.8
22.4
3.4
(1.7)
1.6
6.3
(12.9)
-
(6.4)
42.0
(6.6)
16.0
(1.1)
0.1
7.3
15.7
57.7
(32.0)
16.9
(15.1)
(8.9)
(4.0)
(28.0)
3.7
(1.0)
-
-
0.2
(38.0)
4.6
(1.1)
3.5
15.3
$
5.6
$
18.8
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
1.
Reporting entity
Western Forest Products Inc. (“Western” or the “Company”) is a major integrated softwood forest
products company, incorporated and domiciled in Canada, operating in the coastal region of British
Columbia. The address of the Company’s registered office is Suite 510 – 700 West Georgia Street,
Vancouver, British Columbia, Canada. The consolidated financial statements as at and for the years
ended December 31, 2013 and 2012 comprise the Company and its subsidiaries. The Company’s
primary business includes timber harvesting, reforestation, forest management, sawmilling logs into
lumber, wood chips, and value-added lumber remanufacturing. Western’s lumber products are
currently sold in over 30 countries worldwide. The Company is listed on the Toronto Stock Exchange,
under the symbol WEF.
2.
Basis of preparation
(a) Statement of compliance
The consolidated financial statements of the Company have been prepared in accordance with
International Financial Reporting Standards (“IFRSs”), as issued by the International Accounting
Standards Board. Certain comparative figures have been reclassified to conform with the current
year’s presentation. The consolidated financial statements are available on www.sedar.com. The
consolidated financial statements were authorized for issue by the Board of Directors on February
20, 2014.
(b) Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis except for
the following material items in the statement of financial position:
• Biological assets are measured at fair value less costs to sell;
• Land within property, plant and equipment is measured at fair value;
• Liabilities for cash-settled share-based payment transactions are measured at fair value at
each reporting period;
• Equity-settled share-based payments are measured at fair value at grant date;
• Derivative financial instruments are measured at fair value;
• The defined benefit pension liability is recognized as the net total of the plan assets, less the
present value of the defined benefit obligation; and
• Reforestation obligations are measured at the discounted value of expected future cash flows
(c) Functional and presentation currency
These consolidated financial statements are presented in the Canadian dollar which is the
Company’s functional currency. All amounts are presented in millions of Canadian dollars, unless
otherwise indicated.
(d) Use of estimates and judgements
The preparation of the consolidated financial statements in conformity with IFRSs requires
Management to make judgements, estimates and assumptions that affect the application of
accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual
results may differ from these estimates. Estimates and assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognized in the period in which the estimates are
revised and in any future periods affected.
(i) Judgements
Information about judgements made in applying accounting policies that have the most
significant effect on the amounts recognized in the consolidated financial statements are
included within the following note:
Note 5 – determination of appropriate cash generating units
34
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
(ii) Assumptions and estimation uncertainties
Information about assumption and estimation uncertainties that have a significant risk of
resulting in a material adjustment within the next financial year is included in the following notes:
Note 4 – measurement of net realizable value of inventories
Note 5 – measurement of the fair value of land, key assumptions used in discounted cash flows
Note 6 – measurement of fair value less costs to sell of standing timber
Note 10 – recognition of deferred income tax assets: availability of future taxable profit against
which carry forward tax losses can be used
Notes 12 and 15 – recognition and measurement of provisions and contingencies: key
assumptions about the likelihood and magnitude of an outflow of resources
Note 13 – measurement of share-based payment transactions
Note 17 – measurement of defined benefit obligations, key actuarial assumptions
Note 18 – measurement of foreign exchange forward contract derivatives
Measurement of fair values – a number of Western’s accounting policies and disclosures require
the measurement of fair values for both financial and non-financial assets and liabilities. An
established framework is in place with respect to the measurement of fair values, including
Level 3 fair values. Significant unobservable inputs and valuation adjustments are reviewed
regularly. If third party information is used to measure fair values, Management assesses the
evidence obtained from the third parties to support the conclusion that such valuations meet the
requirements of IFRS, including the level in the fair value hierarchy in which such valuations
would be classified.
When measuring the fair value of an asset or liability, Western uses market observable data as
far as is possible. Fair values are categorized into different levels in a fair value hierarchy based
on the inputs used in the valuation techniques as follows:
•
•
•
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2: inputs other than quoted prices included in Level 1 that are observable for the
assets or liability, either directly or indirectly
Level 3: inputs for the asset or liability that are not based on observable market data
If the inputs to measure the fair value of the asset or liability might be categorized in different
levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in
the same level of the hierarchy as the lowest level input that is significant to the entire
measurement. Transfers between levels of the fair value hierarchy are recognized at the end of
the period in which the change occurred.
3.
Significant accounting policies
(a) Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by Western. Western controls an entity when it is exposed
to, or has rights to, variable returns from its investment with the entity and has the ability to
affect those returns through its power over the entity. The financial statements of subsidiaries
are included in the consolidated financial statements from the date on which control commences
until the date on which it ceases.
The principal wholly-owned operating subsidiaries of the Company at December 31, 2013 are
Western Lumber Sales Limited (which sells into the United States), Western Forest Products
Japan Ltd. (which sells into Japan), and WFP Quatsino Navigation Limited (the beneficial owner
of a number of the Company’s non-core assets).
35
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
(ii) Interests in equity-accounted investees
Western’s interests in equity-accounted investees comprise interests in joint ventures. A joint
venture is an arrangement in which Western has joint control, whereby it has the rights to the
nets assets of the arrangement, rather than rights to its assets and obligations for its liabilities.
Interests in the joint venture are accounted for using the equity method. They are recognized
initially at cost, including transaction costs. Subsequent to initial recognition, the consolidated
financial statements include Western’s share of the profit and loss and OCI of equity accounted
investees, until the date on which significant influence or joint control ceases.
(i) Transactions eliminated on consolidation
Inter-company balances and transaction, and any unrealized income and expenses arising from
inter-company transactions, are eliminated. Unrealized gains arising from transactions with
equity accounted investees are eliminated against the investment to the extent that Western’s
interest in the investee. Unrealized losses are eliminated in the same way, except to the extent
that there is evidence of impairment.
(ii) Discontinued operations
A discontinued operation is a component of Western’s business, the operations and cash flows
of which can be clearly distinguished from the rest of Western and which:
• Represents a separate major line of business or geographical area of operations;
•
•
Is part of a single coordinated plan to dispose of a separate major line of business or
geographical area of operations; or
Is a subsidiary acquired exclusively with a view to re-sale.
Classification as a discontinued operation occurs at the earlier of disposal or when the operation
meets the criteria to be classified as held for sale.
(b) New accounting policies
(i) Changes in accounting policies
Western has adopted the following new standards and amendments to standards, including any
consequential amendments to other standards with a date of initial application of January 1,
2013:
• Amendments to IAS 19, Employee Benefits
The Company has adopted the amendments to IAS 19 Employee Benefits effective
January 1, 2013, with retrospective application. The amendments to IAS 19 require any
remeasurement gains or losses, including actuarial gains and losses to be recognized
immediately and presented in other comprehensive income (loss), eliminating the option
to recognize these amounts through net income (loss).
The amendments to IAS 19 also require one discount rate be applied to the net defined
benefit asset or liability for the purposes of determining the interest element of the defined
benefit cost and require the recognition of unvested past service cost awards into
earnings immediately. Under IAS 19, Western determines the net interest expense
(income) on the defined benefit liability for the period by applying the discount rate used
to measure the defined benefit obligation at the beginning of the annual period to the net
defined benefit liability at the beginning of the annual period, taking into account any
changes to the net defined liability during the period as a result of contributions and
benefit payments. Consequently, the net interest on the net defined benefit liability, now
recognized in finance costs, comprises:
•
•
interest cost on the defined benefit obligation; and
interest income on plan assets.
Previously, the Company determined interest income on the plan assets based on their
long term expected rate of return, and recognized the net interest cost in net income
36
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
through selling and administration expenses. The quantitative impact of the change is
described in Note 17.
•
IFRS 13, Fair Value Measurement
IFRS 13 establishes a single framework for measuring fair value and making disclosures
about fair values measurements when such measurements are required or permitted by
other IFRSs. It unifies the definition of fair values as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. It replaces and expands the disclosure
requirements about fair value measurements in other IFRSs, including IFRS 7. As a
result, Western has included additional disclosure in this regard (see Notes 5, 6 and 18).
In accordance with the transitional provisions of IFRS 13, Western has applied the new
fair value measurement guidance prospectively and has not provided any comparative
information for new disclosures. Notwithstanding the above, the change had no
significant impact on the measurement of Western’s assets and liabilities.
(ii) New standards and interpretations not yet adopted
The following amended IFRS standards are not yet effective for the year ended December 31,
2013 and have not been applied in preparing these consolidated financial statements:
IFRS 9, Financial Instruments (2009 and 2010)
IFRS 9 Financial Instruments (2009 and 2010) (“IFRS 9 (2009)” and “IFRS 9 (2010)”) will
replace IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”). IFRS 9 (2009)
uses a single approach to determine whether a financial asset is measured at amortized cost or
fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 (2009) is based on
how an entity manages its financial instruments in the context of its business model and the
contractual cash flow characteristics of the financial assets. The new standard also requires a
single impairment method to be used, replacing the multiple impairment methods in IAS 39.
IFRS 9 (2010) added guidance to IFRS 9 (2009) on the classification and measurement of
financial liabilities.
IFRS 9 (2009) and IFRS 9 (2010) are effective for annual periods beginning on or after January
1, 2015, with early adoption permitted. The impact of the adoption of this standard is still being
assessed.
IAS 32, Offsetting Financial Assets and Liabilities
The amendments to IAS 32 which are effective for years commencing on or after January 1,
2014, clarify the guidance as to when an entity has a legally enforceable right to set off financial
assets and financial liabilities, and, clarify when a settlement mechanism provides for net
settlement. The Company intends to adopt the amendments to IAS 32 in its consolidated
financial statements for the year commencing January 1, 2014. The Company does not expect
the amendments to have a material impact on the consolidated financial statements.
(iii) The following new or amended IFRSs became effective on January 1, 2013. However, they did
not have a material impact on the annual consolidated financial statements of the Company:
IFRS 10, Consolidated Financial Statements
IFRS 11, Joint Arrangements
IFRS 12, Disclosure of Interests in Other Entities
Amendments to IAS 28, Investments in Associates and Joint Ventures
(c) Operating segments
A business segment is a group of assets and operations engaged in providing products or
services that are subject to risks and returns that are different from those of other business
segments. The Company is an integrated Canadian forest products company operating in one
business segment comprised of timber harvesting, log sales and lumber manufacturing and sales
in world-wide markets.
37
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
A geographical segment is engaged in providing products or services within a particular economic
environment that is subject to risks and returns that are different from those of segments operating
in other economic environments. Western’s log and lumber products are currently sold in over 30
countries worldwide, with sales to customers in Canada, the United States, Asia and Europe
representing over 95% of the Company’s sales. Substantially all of Western’s property, plant and
equipment, biological assets and intangible assets are located in British Columbia, Canada.
(d) Foreign currency translation
Foreign currency transactions are translated into Canadian dollars using the exchange rates
prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign
currencies at the reporting date are translated into Canadian dollars at the exchange rate on that
date. Foreign currency differences arising on translation are recognized in net income for the
period. Non-monetary assets and liabilities that are measured in terms of historical cost in a
foreign currency are translated using the exchange rate at the date of the transaction. Non-
monetary assets and liabilities denominated in foreign currencies that are stated at fair value are
translated into Canadian dollars at foreign exchange rates at the date the fair value was
determined.
(e) Property, plant and equipment
All items of property, plant and equipment are measured at cost, less accumulated depreciation
and accumulated impairment losses, except for land, which is measured at fair value at each
reporting date.
Cost includes expenditures that are directly attributable to the acquisition of the asset.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset,
as appropriate, only when it is probable that future economic benefits associated with the item will
flow to the Company and the cost of the item can be measured reliably. When parts of an item of
property, plant and equipment have different useful lives, they are accounted for as separate items
(major components) of property, plant and equipment. The cost of replacing a component of an
item of property, plant and equipment is recognized in the carrying amount of the item if it is
probable that the future economic benefits embodied within the component will flow to the
Company, and its cost can be measured reliably. The carrying amount of the replaced component
is derecognized. All other repairs and maintenance are recognized in net income for the period as
incurred.
Fair value increases in the carrying amount of land are credited to other comprehensive income
and included within the revaluation reserve in shareholders’ equity. Fair value decreases that
offset previous increases of the same item of land are recognized in other comprehensive income.
All other decreases are recognized immediately in net income for the period.
Depreciation is based on the depreciable amount of an item of property, plant and equipment,
which is the cost of an item, less its residual value. Depreciation is calculated using the straight-
line method and is recognized in net income over the estimated useful life of each component of
an item of property, plant and equipment. Land is not depreciated. The estimated useful lives for
the current and comparative periods are as follows:
• Buildings and equipment 5 – 20 years
•
Logging roads 9 – 20 years
Residual values, depreciation methods and useful lives are reviewed, and adjusted if appropriate,
at the end of each reporting period.
Gains and losses on disposals are determined by comparing proceeds from disposal with the
carrying amount of the item of property, plant and equipment and are recognized in net income for
the period in which the disposal occurs.
(f) Biological assets
Standing timber on privately held forest land that is managed for timber production is
characterized as a biological asset. Accordingly, at each reporting date, the biological asset is
valued at its fair value less costs to sell with any change therein, including the impact of growth
and harvest, recognized in net income for the period. Costs to sell include all costs that would be
38
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
necessary to sell the assets. Standing timber is transferred to inventory at its fair value less costs
to sell at the date the logs are removed from the forest. Land under the standing timber is
measured at fair value at each balance sheet date and included in property, plant and equipment.
(g) Intangible assets
Crown timber tenures are the contractual arrangements between the Company and the Provincial
Government whereby the Company gains the right to harvest timber. All of the Company’s timber
licenses are accounted for as acquired finite lived intangible assets. Accordingly, these are valued
at their acquired cost less accumulated amortization and any accumulated impairment losses.
Amortization is recognized on a straight-line basis over 40 years, the estimated useful life of these
crown timber tenures. Amortization methods, useful lives and residual values are reviewed, and
adjusted if appropriate, at each reporting date.
(h) Impairment of non-financial assets
Assets that are subject to amortization are tested for impairment whenever events or changes in
circumstance indicate that the carrying amount may not be recoverable. An impairment loss is
recognized in net income for the period for the amount by which the asset’s carrying amount
exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value
less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped
into cash generating units (“CGU”) which are the lowest levels for which there are separately
identifiable cash flows.
Impairment losses recognized in prior periods are assessed at each reporting date for any
indication that the loss has decreased or no longer exists. An impairment loss is reversed if there
has been a change in the estimates used to determine the recoverable amount. An impairment
loss is reversed only to the extent that the assets’ adjusted carrying amount does not exceed the
carrying amount that would have been determined, net of depreciation, if no impairment loss had
been recognized.
(i)
Inventories
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 (hemlock and balsam, Douglas fir and cedar) and facility;
(ii) Logs by sort by end use (saw logs and pulp logs).
The cost of inventories includes expenditure incurred in acquiring the inventories, production or
conversion costs and other costs incurred in bringing them to their existing location and condition.
The costs of lumber produced carry an average cost of production based on the species and
facility where they were produced. The costs of logs produced carry an average cost of
production based on the operation where the logs are produced, determined by actual log
production costs divided by production volumes.
NRV is the estimated selling price in the ordinary course of business, less the estimated costs of
completion and selling expenses. The NRV for logs designated for lumber production is
determined on the basis of the logs being converted to lumber, and for the remaining logs it is
based on market log prices.
The cost of logs transferred from biological assets (standing timber) is its fair value less costs to
sell at the date of harvest.
(j) 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.
(k) 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. Common Shares, Non-Voting Shares and preferred shares
39
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
are classified as equity. Incremental costs directly attributable to the issue of new shares or
options are shown in equity as a deduction from the proceeds, net of any tax effects.
(l) Long-term debt
Long-term debt is recognized initially at fair value, net of transaction costs incurred. Long-term
debt is subsequently carried at amortized cost; any difference between the proceeds and the
redemption value is recognized in net income for the period over the term of the long-term debt
using the effective interest method.
(m) Employee benefits
(i) Employee post-employment benefits
The Company has various defined benefit and defined contribution plans that provide pension or
other retirement benefits to most of its salaried employees and certain hourly employees not
covered by forest industry union plans. The Company also provides other post-employment
benefits and pension bridging benefits to eligible retired employees. A defined benefit plan is a
pension plan that defines an amount of pension benefit that an employee will receive on
retirement, usually dependent on one or more factors such as age, years of service and
compensation. A defined contribution plan is a retirement plan under which the Company pays
fixed contributions into a separate entity.
The Company’s net obligation in respect of its defined benefit plans is calculated separately for
each plan by estimating the amount of future benefit that employees have earned in return for
their service in the current and prior periods; that benefit is discounted to determine its present
value, and the fair value of the plan assets is deducted in arriving at the obligation. The
calculation is performed annually by a qualified actuary using the projected benefit actuarial
method.
When the calculation results in a benefit to the Company, the recognized asset is limited to the
present value of economic benefits available in the form of any future refunds from the defined
benefit plan or reductions in future contributions to the defined benefit plan. In order to calculate
the present value of economic benefits, consideration is given to any minimum funding
requirements that apply to any defined benefit plan.
Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses,
the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding
interest), are recognized immediately in other comprehensive income. The Company
determines the net interest expense (income) on the net defined liability for the period by
applying the discount rate used to measure the defined benefit obligation at the beginning of the
annual period to the then-net defined liability, taking into account any changes in the net defined
benefit liability during the period as a result of contributions and benefit payments. Net interest
expense and other expenses related to defined benefit plans are recognized in net income.
When the benefits of a plan are changed or when a plan is curtailed, the resulting change in
benefit that relates to past service or the gain or loss on curtailment is recognized immediately in
net income. The Company recognizes gains and losses on settlement of a defined benefit plan
when the settlement occurs.
For hourly employees covered by forest industry union defined benefit pension plans, the
Company’s contributions as required under the collective agreements are charged to net income
for the period.
For Western’s defined contribution plan, the Company makes contributions (currently, 7% of
employee earnings) to privately administered investment funds on behalf of the plan members.
The Company has no further payment obligations once the contributions have been paid. The
contributions are recognized as employee benefit expense in net income for the period during
which services are rendered by employees. Prepaid contributions are recognized as an asset to
the extent that a cash refund or a reduction in the future payments is available.
(ii) Termination benefits
Termination benefits are payable when employment is terminated before the normal retirement
date, or when an employee accepts voluntary redundancy in exchange for these benefits. The
40
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
Company recognizes termination benefits in net income for the period when it is demonstrably
committed to either: terminating the employment of current employees according to a detailed
formal plan without possibility of withdrawal; or providing termination benefits as a result of an
offer made to encourage voluntary redundancy. If the benefits are payable more than 12
months after the balance sheet date then they are discounted to their present value.
(iii) Short-term employee benefits
Short-term employee benefit obligations, including bonus plans, are measured on an
undiscounted basis and are expensed as the related service is provided. A liability is
recognized for the amount expected to be paid if the Company has a present legal or
constructive obligation to pay this amount as a result of past service provided by the employee
and the obligation can be estimated reliably.
(iv) Share-based payment transactions
The Company has established share-based payment plans for eligible directors, officers and
employees and accounts for these plans using the fair value method. The grant-date fair value
of options is recognized as an employee expense, with a corresponding increase in equity, over
the period that the individual becomes unconditionally entitled to the awards. 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
shares, and the risk-free interest rate over the expected life of the option. In the case of options
issued since 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 shares. The Company bases its
estimates of volatility on historical share 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, as is the previously
calculated fair value included in contributed surplus.
The grant-date fair value of the amount payable to eligible directors, officers and employees in
respect of deferred share units (“DSUs”), which are cash-settled, is recognized as an employee
expense with a corresponding increase in liabilities, over the period that the individuals become
unconditionally entitled to payment. The liabilities are re-measured at fair value at each
reporting date and at settlement date. Any changes in the fair value of the liabilities are
recognized in employee expenses in net income for the period.
(n) Silviculture provision
The Company’s provision for silviculture relates to the obligation for reforestation on Crown land
and arises as timber is harvested. Reforestation on private timberlands is expensed as incurred.
The Company recognizes a provision for silviculture at fair value in the period in which the legal
obligation is incurred, with the fair value of the liability at the reporting date determined with
reference to the present value of estimated future cash flows. The pre-tax discount rate used to
determine the present value reflects current market assessments of the time value of money and
the risks specific to the liability. The actual discount rate used reflects the current risk-free rate
given that risks are incorporated into the future cash flow estimates. In periods subsequent to the
initial measurement, changes in the liability resulting from revisions to estimated future cost are
recognized in cost of sales within net income for the period as they occur. The unwinding of the
discount associated with the provision to reflect the passage of time is included in finance costs
within net income for the period.
(o) Revenue recognition
Revenue from the sale of goods is measured at the fair value of the consideration received or
receivable, net of rebates and discounts, and after eliminating intercompany sales. Revenue is
41
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
recognized as soon as the substantial risks and rewards of ownership transfer from the Company
to the customer. The timing of the transfers of risks and rewards varies depending on the
individual terms of the contract of sale. 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 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.
(p) Deferred revenue
Deferred revenue is the result of the contractual obligations incurred upon the acquisition of the
Englewood Logging Operation in March 2006, 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 net income for the period on a straight-line basis over 40 years, being the term of
the related fibre supply contract.
(q) Leases
Leases where the lessor retains substantially all the risks and rewards of ownership are classified
as operating leases and payments made under operating leases are recognized in net income for
the period on a straight line basis over the period of the lease.
(r) Finance costs
Finance costs comprise interest expense on long-term debt and the revolving credit facility,
amortization of deferred financing costs, unwinding of the discount on the silviculture provision,
changes in the fair value of investments recognized immediately through net income and net
interest on the net defined benefit plan obligation. All finance costs are recognized in net income
during the period using the effective interest method with the exception of the net interest on the
net defined benefit obligation which is recognized as described in Note 3(b)(i).
(s) Financial instruments
(i) Non-derivative financial assets
The Company classifies its financial assets in the following categories: at fair value through
profit and loss, loans and receivables, held-to-maturity and available-for-sale. The classification
depends on the purpose for which the financial assets were acquired. Management determines
the classification of its financial assets at initial recognition.
The Company initially recognizes loans and receivables on the date that they are originated. All
other financial assets are recognized initially on the trade date at which the Company becomes
a party to the contractual provisions of the instrument.
The Company derecognizes a financial asset when the contractual cash flows from the asset
expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a
transaction in which substantially all the risks and rewards of ownership of the financial asset
are transferred. Any interest in transferred financial assets that is created or retained by the
Company is recognized as a separate asset or liability.
A financial asset is classified at fair value through profit or loss if it is classified as held for
trading or is designated as such upon initial recognition. Financial assets are designated at fair
value through profit or loss if it eliminates or significantly reduces an accounting mismatch, the
Company manages such investments or makes purchase and sale decisions based on their fair
value in accordance with the Company’s documented risk management or investment strategy
or the financial asset contains one or more embedded derivatives. Upon initial recognition,
attributable transaction costs are recognized in profit or loss as incurred. Financial assets at fair
value through profit or loss are measured at fair value, and changes therein are recognized in
net income. Financial assets at fair value through profit or loss are comprised of certain
investments and forward exchange contracts.
42
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
Loans and receivables are financial assets with fixed or determinable payments that are not
quoted in an active market. Such assets are initially recognized at fair value plus any directly
attributable transaction costs. Subsequent to initial recognition, loans and receivables are
measured at amortized cost using the effective interest method, less any impairment losses.
Loans and receivables comprise cash and cash equivalents, trade and other receivables. Cash
and cash equivalents comprises cash balances and short-term investments with original
maturities of 90 days or less.
Held-to-maturity financial assets are debt securities for which the Company has the positive
intent and ability to hold to maturity. Held-to-maturity financial assets are recognized initially at
fair value plus any directly attributable transaction costs. Subsequent to initial recognition, held-
to-maturity financial assets are measured at amortized cost using the effective interest method,
less any impairment losses. Held-to-maturity financial assets include certain investments held
by the Company.
Available-for-sale financial assets are non-derivative financial assets that are designated as
available-for-sale and that are not classified in any of the previous categories. Available-for-sale
financial assets are measured at fair value and changes therein, other than impairment losses
and foreign currency differences on available-for-sale debt instruments, are recognized in other
comprehensive income and presented within equity in the fair value reserve. When an
investment is derecognized, the cumulative gain or loss in other comprehensive income is
transferred to net income. The Company does not have any financial assets classified as
available-for-sale.
A financial asset not carried at fair value through profit or loss is assessed at each reporting
date to determine whether there is objective evidence that it is impaired. A financial asset is
impaired if objective evidence indicates that a loss event has occurred after the initial
recognition of the asset, and that the loss event had a negative effect on the estimated future
cash flows of that asset that can be estimated reliably.
The Company considers evidence of impairment for receivables and held-to-maturity financial
assets at both a specific asset and collective level. All individually significant receivables and
held-to-maturity financial assets are assessed for specific impairment. All individually significant
receivables and held-to-maturity financial assets found not to be specifically impaired are then
collectively assessed for any impairment that has been incurred but not yet identified.
Receivables and held-to-maturity financial assets that are not individually significant are
collectively assessed for impairment by grouping together receivables and held-to-maturity
financial assets with similar risk characteristics.
In assessing for impairment at the collective level, the Company uses historical trends of the
probability of default, timing of recoveries and the amount of loss incurred, adjusted for
Management’s judgement for current economic and credit conditions.
An impairment loss is calculated as the difference between an asset’s carrying amount and the
present value of the estimated future cash flows discounted at the asset’s original effective
interest rate. Losses are recognized in net income for the period and reflected in an allowance
against receivables. Interest on impaired assets continues to be recognized through the
unwinding of the discount. When a subsequent event causes the amount of impairment loss to
decrease, the decrease in impairment loss is reversed through net income.
Impairment losses on available-for-sale financial assets are recognized by transferring the
cumulative loss that has been recognized in other comprehensive income, and presented in
unrealized gains/losses on available-for-sale financial assets in equity, to net income. The
cumulative loss that is removed from other comprehensive income and recognized in net
income is the difference between the acquisition cost, net of any principal repayment and
amortization, and the current fair value, less any impairment loss previously recognized in net
income. Changes in impairment provisions attributable to time value are reflected as a
component of interest income.
(ii) Non-derivative financial liabilities
The Company classifies its financial liabilities as fair value through profit or loss or other financial
liabilities.
43
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
The Company initially recognizes debt issued on the date that it is originated. The Company
derecognizes a financial liability when its contractual obligations are discharged, cancelled, or
expire. The Company’s non-derivative financial liabilities consist of long-term debt, the revolving
credit facility as well as accounts payable and accrued liabilities. These financial liabilities are
classified as other financial liabilities and are recognized initially at fair value less any directly
attributable transaction costs. Subsequent to initial recognition, these financial liabilities are
measured at amortized cost using the effective interest method.
(iii) 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 statement of financial position at fair value with changes in value being recognized as
gains or losses within sales in net income for the period.
Embedded derivatives are separated from the host contract and accounted for separately if (a)
the economic characteristics and risks of the host contract and the embedded derivative are not
closely related, (b) a separate instrument with the same terms as the embedded derivative
would meet the definition of a derivative, and (c) the combined instrument is not measured at
fair value through profit or loss. Changes in the fair value of separable embedded derivatives
are recognized immediately in net income.
Financial assets and liabilities are offset and the net amount presented in the statement of
financial position when, and only when, the Company has a legal right to offset the amounts and
intends either to settle on a net basis or to realize the asset and settle the liability
simultaneously.
(t)
Income tax
Income tax expense comprises current and deferred income tax. It is recognized in profit or loss
for the period except to the extent that it relates to items recognized either in other comprehensive
income or directly in equity, in which case it is recognized in other comprehensive income or
equity respectively.
(i) Current tax
Current tax comprises the expected tax payable or receivable on the taxable income or loss for
the year and any adjustment to tax payable or receivable in respect of the previous years. It is
measured using tax rates enacted or substantively enacted at the reporting date.
(ii) Deferred income tax
Deferred income tax recognized in respect of temporary differences arising between the tax
bases of assets and liabilities and their carrying amounts in the consolidated financial
statements. Deferred income tax is not recognized if it arises from initial recognition of an asset
or liability in a transaction, other than a business combination, that at the time of the transaction
affects neither accounting profit nor taxable profit.
Deferred income tax assets are recognized for unused tax losses, unused tax credits and
deductible temporary differences to the extent that it is probable that future taxable profits will be
available against which they can be used. Deferred income tax assets are reviewed at each
reporting date and are reduced to the extent that it is no longer probable that the related tax
benefit will be realized.
Deferred income tax is measured at the rates that are expected to be applied to temporary
differences when they reverse, using rates enacted or substantively enacted at the reporting
date.
Deferred income tax assets and liabilities are offset only if certain criteria are met.
(u) Earnings per share
The Company presents basic and diluted earnings per share (“EPS”) data for its Common Shares
and other Non-Voting Shares. Basic EPS is calculated by dividing the net income attributable to
44
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
Common and Non-Voting shareholders of the Company by the weighted average number of
shares outstanding during the period. Diluted EPS is determined by adjusting the net income
attributable to the shareholders and the weighted average number of shares outstanding, for the
effects of all dilutive potential shares, which comprise share options granted to employees and
directors.
4.
Inventory
Logs
Lumber
Supplies and other inventories
Provision for write downs
Total value of inventories
December 31,
2013
December 31,
2012
$
$
95.8
34.0
11.6
(8.9)
132.5
78.9
38.0
10.5
(10.8)
116.6
$
$
Inventory carried at net realizable value
$
30.5
$
34.6
The Company’s logs and lumber inventory is pledged as security against the revolving credit facility.
During 2013, $764.3 million (2012: $777.8 million) of inventory was charged to cost of sales which
includes a decrease to the provision for write-down to net realizable value of $1.9 million.
5.
Property, plant and equipment and intangible assets
Cost
Balance at January 1, 2012
Additions
Disposals
Balance at December 31, 2012
Additions
Disposals
Balance at December 31, 2013
Accumulated amortization and impairments
Balance at January 1, 2012
Amortization
Disposals
Reversal of impairments
Balance at December 31, 2012
Amortization
Disposals
Reversal of impairments
Balance at December 31, 2013
Carrying amounts
At December 31, 2012
At December 31, 2013
(a) Intangible assets
Buildings &
equipment
128.1
$
20.9
(0.8)
148.2
43.6
(1.3)
190.5
$
$
Logging
roads
Land
$
$
$
$
111.5
11.1
(0.2)
122.4
15.4
-
110.7
0.6
(6.1)
105.2
-
(1.4)
103.8
$
$
137.8
Total
property,
plant &
equipment
350.3
$
32.6
(7.1)
375.8
59.0
(2.7)
432.1
$
$
Intangible
assets
$
171.1
-
-
$
171.1
-
(0.2)
170.9
$
$
$
$
$
80.1
10.5
(0.7)
-
89.9
11.7
(1.0)
-
79.9
11.9
(0.1)
-
91.7
13.8
-
-
-
$
-
-
-
-
$
-
-
-
$
-
$
160.0
22.4
(0.8)
-
$
181.6
25.5
(1.0)
-
$
206.1
$
$
54.5
3.4
-
(12.9)
45.0
3.7
(0.1)
(8.2)
40.4
$
$
100.6
$
105.5
$
58.3
$
30.7
$
105.2
$
194.2
$
126.1
$
89.9
$
32.3
$
103.8
$
226.0
$
130.5
Intangible assets are comprised entirely of the Company’s Crown timber tenures and are considered to
be finite lived intangible assets with an estimated useful life of 40 years.
Due to the global economic situation and the potential impact on lumber demand and prices in the
market, Management determined that a review of the recoverable amount of the Company’s Crown
timber tenures was appropriate at December 31, 2013 and 2012.
Management considers that the aggregate of all its Crown timber tenures constitute a CGU and so
tested the recoverable amount of the CGU, which was based on value in use, with the assistance of an
independent valuator.
45
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
5.
Property, plant and equipment and intangible assets (continued)
Value in use was determined by discounting the future cash flows expected to be generated from the
continuing use of the CGU. Unless indicated otherwise, value in use in 2013 was determined similarly
as in 2012. The calculation of the value in use was determined based on the following key
assumptions:
• Cash flows were projected based on historical and forecasted logging activity levels as estimated
by Management while working within the constraints of the annual allowable cut levels imposed by
the Chief Forester of British Columbia. Management has assumed a 25 year forecast period given
the renewability of the licences and the long term nature of the business.
• Log price assumptions used in the projections were based upon consideration of historical actual
log prices and long term trend pricing analysis for the Vancouver log market and export log market
as published by third party analysts and independent valuators. In the December 31, 2013
estimate of value in use, log prices were expected to increase by 1% for the first 10 years and at
1.5% thereafter; an average inflation cost increase of 2.0% was assumed for the first 10 years,
reducing to 1% for the next 10 years, and to 0% for the remaining 5 years. Similar overall
assumptions were used in the forecast prepared for December 31, 2012.
• Cash flows for operating costs associated with the crown timber tenures were assumed to be
consistent with past experience, actual operating results and are assumed to grow in line with
increases in log pricing.
• A pre-tax discount rate of 9.0% (2012: 10.5%) was used in determining the recoverable amount of
the CGU.
• A terminal value was determined by assuming a perpetual series of cash flows discounted at a
pre-tax discount rate of 10.0% (2012: 10.5%).
As a result of the value in use assessment performed for the CGU as at December 31, 2013, a
reversal of $8.2 million of the impairment loss recorded in previous periods was recognized in profit
and loss for the year ended December 31, 2013 (2012: $12.9 million). The reversal was the result of
increases to forecast cash flow margins generated from the Crown timber tenures, due primarily to a
stronger worldwide market for logs and the resultant improved pricing assumptions in 2013 compared
to 2012.
(b) Land
As described in Note 3(e), the Company has elected to measure land at fair value at each reporting
date. The fair value measurement for the Company’s land holdings of $103.8 million has been
categorized as a Level 3 fair value based on the inputs to the valuation technique used, which is a
market comparison technique. The assumptions used in the valuation were based on consideration of
the market price per hectare of comparable land sales. The estimated fair value of the land would
increase (decrease) by $1.0 million if the estimated average pricing were higher (lower) by 1%.
As a result of the fair value assessment of the land holdings at December 31, 2013 and 2012, no fair
value adjustments were identified as the carrying value did not differ materially from the estimated fair
value.
If land was stated on an historical cost basis, the carrying value would be as follows:
Cost
December 31,
2013
December 31,
2012
$
79.6
$
80.2
46
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
6.
Biological assets
(a) Reconciliation of carrying amount
Carrying value, beginning of year
Acquisition of biological assets in the year
Disposition of biological assets in the year
Change in fair value less costs to sell
Change in fair value resulting from growth and pricing
Harvested timber transferred to inventory during the year
Carrying value, end of year
Year ended December 31,
2013
2012
$
60.8
-
(0.1)
-
2.7
(5.0)
$
59.4
(2.6)
5.6
(1.2)
1.6
(2.0)
$
58.4
$
60.8
Under IAS 41, Agriculture, the Company’s private timberlands are classified as a growing forest, with
the standing timber recorded as a biological asset at fair value less costs to sell at each reporting date.
The land underlying the standing timber is considered a component of property, plant and equipment,
which the Company has elected to record at fair value at each reporting date (Note 5).
At December 31, 2013, private timberlands comprised an area of approximately 23,293 hectares
(December 31, 2012: 23,493 hectares) of land owned by the Company; standing timber on these
timberlands ranged from newly planted cut-blocks to old-growth forests. During the year ended
December 31, 2013, the Company harvested and scaled approximately 265,500 cubic metres of logs
from its private timberlands, which had a fair value less costs to sell of $23.6 million at the date of
harvest (2012: 201,700 cubic metres and $15.9 million, respectively).
(b) Measurement of fair values
The fair value measurements for the Company’s standing timber of $58.4 million has been categorized
as Level 3 fair value based on the inputs to the valuation technique used as discussed below. The
table above shows a reconciliation from the opening balances to the closing balances for Level 3 fair
values. The change in fair value resulting from price and growth is reflected in cost of goods sold.
The valuation technique used in measuring fair value and the significant unobservable inputs used are
described below:
• Valuation technique
Discounted cash flows – the valuation model considers the present value of the net cash flows
expected to be generated from the standing timber. The cash flow projections include specific
estimates for 25 years. The expected cash flows are discounted using a risk-adjusted discount
rate.
Market comparison technique – in addition to the discounted cash flow technique, the valuation
considers the market price of comparable standing timber sales.
• Significant unobservable inputs
Estimated future log prices – future log price assumptions used in the valuation model consider
the Company’s historical actual log prices as well as consideration of forecast pricing trends
published by third party analysts and an independent valuator. Estimated future log prices range
from $95 - $117/cubic metre (weighted average of $108/cubic metre). The estimated fair value of
standing timber would increase (decrease) by $14.7 million if the estimated future log prices were
higher (lower) by 1%.
Estimated harvest costs – future harvest costs were assumed to be consistent with the Company’s
past experience and actual operating results. Estimated harvest costs range from $60-$86/cubic
metre (weighted average of $78/cubic metre). The estimated fair value of standing timber would
increase (decrease) by $9.8 million if the estimated harvest costs were lower (higher) by 1%.
Risk-adjusted discount rate – a risk-adjusted discount rate of 8% has been applied to the
estimated future cash flows in arriving at the net present value of the standing timber at December
31, 2013 (2012: 5.9%). This discount rate has been determined by an independent valuator with
reference to the Company’s market determined discount rate for this asset type. The estimated
47
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
6.
Biological assets (continued)
fair value of standing timber would increase by $5.1 million if the discount rate was lower by 1%,
and decrease by $4.3 million if the rate were higher by 1%.
Harvest volume – harvest volumes range from 101,000-202,000 cubic metres per year (weighted
average of 145,000 cubic metres) and they represent the estimated future volume and current
standing volume to be harvested over the sustainable life of the private timberlands. The
estimated fair value of standing timber would increase (decrease) by $0.5 million if the estimated
harvest volume increased (decreased) by 1% per year.
(c) Risk management strategies related to biological assets
Western is exposed to the following risks relating to its private timberlands:
• The Company is exposed to risks arising from fluctuations in log prices and sales volumes. When
possible, Western aligns its harvest volumes to market supply and demand, and performs regular
industry trend analyses for projected harvest volumes and pricing in order to manage tis risk.
• The standing timber is exposed to risk of damage as a result of severe weather conditions, forest
fires, insect infestation and disease. Western has processes and procedures in place to monitor
and mitigate these risks, including fire management strategies and regular inspection for pest
infestation.
7.
Other assets
Investments
Discontinued operations (equipment) (Note 22)
Other
8.
Revolving credit facility
December 31,
2013
December 31,
2012
$
$
8.2
2.8
0.9
11.9
7.9
2.2
2.6
12.7
$
$
The Company’s revolving credit facility (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 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 interest rate for the Facility was 3.50% at December 31, 2013 (December 31,
2012: 3.50%).
The Facility is secured by a first lien interest over accounts receivable and inventory and includes
financial covenants (see Note 14). At December 31, 2013, the Facility was unused (December 31,
2012: nil) and $100.1 million of the facility was available to the Company.
The Facility matures on December 14, 2015, subject to any future refinancing requirements of its
revolving term loan.
9.
Long-term debt
On June 28, 2013, the Company extended the maturity date of its existing $110.0 million revolving
term loan facility (the “Term Loan”) from June 28, 2016 to June 29, 2017. Under the terms of the new
arrangement, certain financial covenants have been amended to allow the Company to make
distributions to its shareholders, not to exceed $150.0 million in aggregate, available until June 30,
2014 (see Note 13). Interest rate terms remain unchanged as a result of the amendment to the Term
Loan. The amendment with respect to the Term Loan provides that if Brookfield Corporation or its
affiliates cease to own at least 30% of the issued shares, any undrawn portion of the Term Loan will
cease to be available and the revolving loan will convert to a term loan amortized over a 10 year period
repayable in equal quarterly instalments.
The Term Loan bears interest at an index rate, determined as the higher of (i) the Canadian Prime
rate, and (ii) the 30 day Banker’s Acceptance (“BA”) rate plus 1.35%, plus the applicable index rate
48
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
9.
Long-term debt (continued)
margin which ranges from 1.75% to 3.25%, or at the Company’s election, the applicable BA rate, plus
the applicable BA rate margin which ranges from 2.75% to 4.25%. The applicable margin is grid-
based, determined quarterly, and based on a leverage ratio calculated as the ratio of total debt to
EBITDA for the trailing twelve months ending on the date of determination. The interest rate for the
Term Loan was 3.97% at December 31, 2013 (December 31, 2012: 4.75%).
The Term Loan is secured by a first lien interest over all of the Company’s properties and assets,
excluding those of the Englewood Logging Division and all accounts receivable and inventory, over
which it has second lien interests, and includes financial covenants (see Note 14).
December 31,
2013
December 31,
2012
Revolving term loan
Less transaction costs
$
$
$
$
89.8
(1.3)
88.5
34.8
(1.0)
33.8
The transaction costs at December 31, 2013 relate to the new financing arrangements completed in
the second quarter of 2012 and the amendment made to the Term Loan on June 28, 2013. These
costs are deferred and being amortized to finance costs over the term of the amended revolving Term
Loan using the effective interest rate method.
10.
Income taxes
Current tax expense
Current period
Adjustment for prior periods
Deferred income tax recovery
Origination and reversal of temporary differences
Difference in tax rates
Recognition of previously unrecognized tax losses
Change in unrecognized deductible temporary differences
Year ended December 31,
2013
2012
[Restated - Note 17]
$
$
$
$
0.1
-
0.1
$
$
$
3.3
-
-
(3.3)
$
-
0.3
-
0.3
30.9
(4.2)
(26.5)
(26.7)
(26.5)
Total income tax (recovery) expense
$
(26.2)
$
0.1
Income tax (recovery) expense differs from the amount that would be computed by applying the
Company’s combined Federal and Provincial statutory rate as follows:
Income before income taxes, continuing operations
Tax using the Company's domestic tax rate
Difference in tax rates
Over (under) provided for in prior periods
Other permanent differences
Recognition of previously unrecognized
tax losses
Change in unrecognized deductible temporary
differences
Year ended December 31, 2013
25.75%
(4.21%)
(0.10%)
5.62%
$
99.7
25.7
(4.2)
(0.1)
5.6
Year ended December 31, 2012
[Restated - Note 17]
25.00%
0.68%
1.02%
(15.31%)
$
29.4
7.4
0.2
0.3
(4.5)
(26.58%)
(26.5)
0.00%
-
(26.78%)
(26.31%)
$
(26.7)
(26.2)
(11.22%)
0.17%
$
(3.3)
0.1
49
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
10.
Income taxes (continued)
The components of deferred income tax are as follows:
For the Year ended December 31, 2013
Deferred income tax assets
Tax loss carry-forwards
Provisions
Property, plant and equipment
Deferred income tax liabilities
Intangible assets
Biological assets
Opening
Balance
Recognized in
profit or loss
Ending Balance
$
18.1
10.3
5.5
33.9
$
31.7
(0.5)
1.0
32.2
$
49.8
9.8
6.5
66.1
(27.0)
(6.9)
(33.9)
(4.7)
(1.0)
(5.7)
(31.7)
(7.9)
(39.6)
Total
$
-
$
26.5
$
26.5
For the Year ended December 31, 2012
Deferred income tax assets
Tax loss carry-forwards
Provisions
Property, plant and equipment
Deferred income tax liabilities
Intangible assets
Biological assets
$
16.3
9.8
7.2
33.3
$
1.8
0.5
(1.7)
0.6
$
18.1
10.3
5.5
33.9
(25.9)
(7.4)
(33.3)
(1.1)
0.5
(0.6)
(27.0)
(6.9)
(33.9)
Total
$
-
$
-
$
-
The Company has recognized and unrecognized deferred income tax assets in relation to unused tax
losses that are available to carry forward against future taxable income. At December 31, 2013, the
Company and its subsidiaries have unused non-capital tax losses carried forward of approximately
$308.2 million (2012: $393.4 million), which expire between 2027 and 2033, available to reduce
taxable income, and capital losses of approximately $121.7 million (2012: $124.4 million) available to
be utilized against capital gains.
During 2013, the Company recognized a deferred income tax asset on non-capital losses that are
probable to be utilized. Although the Company anticipates realizing the full benefit of the loss carry-
forwards and other deferred income tax assets that remain unrecognized, the timing of recognition of
these remaining deferred tax assets in excess of its deferred tax liabilities will depend on on-going
assessments of economic conditions, and that the likelihood of utilizing the loss carry forwards is
probable. Deferred income tax assets have not been recognized in respect of the following loss carry-
forwards and other deductible temporary differences:
Non-Capital Loss Carry Forwards
Capital Loss Carry Forwards
Employee post-retirement benefits obligation
December 31,
2013
$
116.6
December 31,
2012
$
321.0
121.7
18.3
124.4
33.2
$
256.6
$
478.6
50
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
11.
Other liabilities
December 31,
2013
December 31,
2012
Employee post-retirement benefits obligation (Note 17)
Environmental accruals, excluding non-continuing operations
Other
$
$
18.3
1.5
0.5
20.3
33.2
1.5
0.9
35.6
$
$
12.
Silviculture provision
The Company has a responsibility to reforest timber harvested under various timber rights. Changes
in the silviculture provision are as follows:
Year ended December 31,
2013
2012
Silviculture provision, beginning of year
Silviculture provision charged
Silviculture work payments
Disposition of intangible assets
Unwind of discount
Silviculture provision, end of year
Less current portion
$
$
31.0
10.4
(11.7)
-
0.3
30.0
12.3
17.7
30.9
11.9
(10.7)
(1.4)
0.3
31.0
13.4
17.6
$
$
The silviculture expenditures are expected to occur over the next one to ten years and have been
discounted at risk-free rates of 1.00% to 2.76%. The total undiscounted amount of the estimated
future expenditures required to settle the silviculture obligation at December 31, 2013 is $31.7 million
(December 31, 2012: $32.2 million). Reforestation expense incurred on current production is included
in production costs and the unwinding of discount, or accretion cost, is included in finance costs for the
year.
13.
Share capital
(a) Authorized and issued share capital:
The Company’s authorized capital consists of an unlimited number of Common Shares, an unlimited
number of Non-Voting Shares and an unlimited number of preferred shares. The Common Shares
entitle the holders thereof to one vote per share. The Non-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:
Balance at January 1, 2012
Exercise of stock options
Conversion of non-voting shares to common shares
Balance at December 31, 2012
Repurchase of shares
Conversion of non-voting shares to common shares
Balance at December 31, 2013
Number of
Common Shares
128,625,623
480,000
122,112,801
251,218,424
(27,060,434)
127,919,820
352,077,810
Amount
$
412.3
0.2
67.2
479.7
(35.3)
42.2
486.6
$
$
Number of
Non-Voting Shares
338,945,860
-
(122,112,801)
216,833,059
(49,862,642)
(127,919,820)
39,050,597
Amount
$
187.5
-
(67.2)
120.3
(65.0)
(42.2)
13.1
$
$
On August 16, 2013, the Company closed a substantial issuer bid, repurchasing a total of 76,923,076
Shares for a purchase price of $1.30 per share, for aggregate consideration of $100.3 million, paid in
51
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
13.
Share capital (continued)
cash from funds drawn on its Term Loan. These shares represented approximately 16% of the total
number of Shares issued and outstanding as of August 16, 2013. 76,914,830 of the Shares were
repurchased from Brookfield Special Situations Management Limited (“BSSML”) for consideration of
approximately $100.0 million, excluding transaction costs. Immediately following the repurchase, the
Company converted 36,800,000 Non-Voting Shares held by BSSML, on a one-for-one basis, into
Common Shares of the Company.
On October 9, 2013, on closing of a secondary offering of the Company’s shares by BSSML,
46,000,000 Non-Voting Shares were converted, on a one-for-one basis, into Common Shares of the
Company. Immediately following completion of the secondary offering, 45,119,820 of the remaining
Non-Voting Shares held by BSSML were converted on a one-for-one basis into Common Shares of the
Company.
As at December 31, 2013, BSSML beneficially held 172,506,977 Common Shares, representing 49%
of the 352,077,810 issued and outstanding Common Shares of Western, and 100% of the 39,050,597
Non-Voting Shares issued and outstanding (see Note 25).
(b) 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 20,000,000 Common Shares. During
2013, the Company recorded compensation expense of $2.3 million (2012: $0.9 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, a maximum of
ten years from the date of the grant.
During the year, the Company granted 3,500,000 options with a fair value of $3.1 million as
determined by the Hull-White option pricing model using the assumptions of a weighted average
exercise price of $1.27, risk free interest rate of 3.4%, a volatility rate of 60.0%, and an expected life of
ten 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. 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.
At December 31, 2013, 13,016,795 options were outstanding under the Company’s Option Plan with a
weighted average exercise price of $0.97 per Common Share.
The following table summarizes the change in the options outstanding during the years ending
December 31, 2013 and 2012:
Outstanding, beginning of year
Granted
Exercised
Expired
Forfeited
Outstanding, end of year
Year ended December 31, 2013
Year ended December 31, 2012
Number of Options
9,516,795
3,500,000
-
-
-
13,016,795
Weighted average
exercise price
$
0.86
1.27
$
$
-
$
-
$
-
$
0.97
Number of Options
6,441,795
4,700,000
(480,000)
(155,000)
(990,000)
9,516,795
Weighted average
exercise price
$
$
$
$
$
$
0.70
0.96
(0.31)
(1.72)
(0.49)
0.86
52
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
13.
Share capital (continued)
Details of options outstanding under the Option Plan at December 31, 2013 are as follows:
Exercise
price
$
$
$
$
$
$
$
$
$
0.22
0.77
0.95
0.96
1.20
1.27
1.75
2.20
12.10
Number outstanding
December 31, 2013
2,500,000
1,300,000
1,800,000
2,900,000
190,000
3,500,000
436,000
366,000
24,795
13,016,795
(c) Deferred share unit plan:
Weighted average
remaining option life
(years)
6.2
7.2
8.2
8.6
4.4
9.1
2.5
3.7
0.6
7.7
Weighted average
exercise price
$
$
$
$
$
$
$
$
$
$
0.22
0.77
0.95
0.96
1.20
1.27
1.75
2.20
12.10
0.97
Number exercisable
December 31, 2013
1,500,000
520,000
360,000
580,000
190,000
-
436,000
366,000
24,795
3,976,795
Weighted average
exercise price
$
0.22
$
0.77
$
0.95
$
0.96
$
1.20
$
-
$
1.75
$
2.20
$
12.10
$
0.94
The Company has a Deferred Share Unit (“DSU”) Plan for directors and designated executive officers.
Directors may elect to take a portion of their fees in the form of DSUs and executive officers may elect
to take a portion of their annual incentive bonus in the form of DSUs. All DSU holders are entitled to
DSU dividends, equivalent to the dividend they would have received if they held their DSUs as shares.
For directors, the number of DSUs allotted is determined by dividing the dollar portion of the quarterly
fees a director elects to take in DSUs by the share price value on the fifth day following each quarter
end. For executive officers, the number of DSUs allotted is determined by dividing the dollar portion of
the bonus that an executive elects to take in DSUs by the weighted average price of the Company’s
Common Shares for the five business days prior to the issue notification date. For dividends, the
number of DSUs allotted is determined by dividing the total dollar value of the dividend each DSU
holder would have received, by the average share price for the five days leading up to the dividend
date of record.
During 2013, designated executive officers were allotted 121,691 DSUs at a weighted average price of
$1.33 per DSU. A further 69,153 DSUs were issued to a director at a weighted average price of $1.43
per DSU, and 219,745 DSUs were redeemed. The cumulative number of DSUs outstanding at
December 31, 2013 was 951,290 (December 31, 2012: 980,191). In 2013, the Company recorded
compensation expense for these DSUs of $0.6 million (2012: $0.6 million), with a corresponding
increase to accounts payable and accrued liabilities.
(d) Warrants
On October 9, 2013, the Company issued 46,000,000 warrants in connection with the completion of
the secondary offering of 46,000,000 of the Company’s shares by BSSML on that date. Each warrant
entitles the holder thereof to purchase one Common Share of the Company owned by BSSML at a
price of $1.60 until July 31, 2014. Pursuant to an agreement between the Company, BSSML and
Computershare Trust Company of Canada, BSSML is required to deliver from its holdings all of the
Common Shares issuable upon exercise of the warrants. As a result, no Common Shares will be
issued by Western to satisfy the exercise of the warrants and Western will not receive any proceeds on
exercise of the warrants. As at December 31, 2013, 46,000,000 warrants were outstanding.
(e) Earnings per share:
Basic earnings per share is calculated by dividing the net income by the weighted average number of
Common Shares and Non-Voting Shares issued and outstanding over the period. Diluted net earnings
per share is 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 13(b)).
14.
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
53
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
14.
Capital requirements (continued)
income and disbursements for other new equipment and ongoing enhancements, efficiency
improvements, safety, and protection or extension of the life of equipment. Significant expenditures
are also required to fund new capital roads allowing access to timber stands for harvesting purposes.
During 2013, capital expenditures continued to be monitored closely because of the uncertain
economic climate, but spending on certain strategic capital projects has commenced because of
Western’s stronger financial position and growing confidence in the lumber markets.
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. Under the current market conditions the Company has
increased its debt position and has a net capitalization to debt ratio of 18% as at December 31, 2013
(December 31, 2012: 4%). 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 buy back shares, 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.
During 2013, the Company initiated a quarterly dividend program which is being paid from operating
cash flows, and is at the discretion of the Company’s Board of Directors.
Since originally refinancing its term debt in March of 2008, the Company has repaid a total of $185.2
million of the term loans, substantially from the cash proceeds of disposition of non-core assets.
Pursuant to the extension of the Term Loan agreement completed on June 28, 2013 (Note 9), term
debt repayments will continue as non-core asset sales are realized or if surplus cash generated from
operations is available.
Under the current financing agreements, the Company is subject to financial covenants. The Facility
contains two financial covenants: (i) minimum consolidated adjusted shareholders’ equity of $200.0
million: and (ii) 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 Loan contains two financial covenants: (i) 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 (ii) maximum funded debt to capitalization of 0.45 to 1.0, measured on a
quarterly basis. As at December 31, 2013, the Company is in compliance with all financial covenants,
and expects to be in compliance for the next 12 months.
The Term Loan provides that if Brookfield Corporation or its affiliates cease to own at least 30% of the
issued shares, any undrawn portion of the Term Loan will cease to be available and the revolving loan
will convert to a term loan amortized over a 10 year period repayable in equal quarterly instalments.
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.
15.
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. On January 23,
2012 the agreement was extended by two years and now terminates in October, 2015. 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.
54
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
15.
Commitments and contingencies (continued)
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). During 2013, the Company recorded an expense of $0.9 million (2012: $6.0 million). While
shipment volumes to the US were relatively unchanged for 2013 compared to 2012, export taxes were
lower as prices were higher on average in 2013, leading to a lower export tax rate being applicable for
certain periods.
(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 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) 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 3(p)) 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 Company’s long term fibre supply agreements with third parties have
minimum volume requirements and may, in the case of a failure to produce the minimum volume,
require the Company to conduct whole log chipping, source the deficiency from 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. Should Western take 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 its contractual obligations.
The Company has satisfied its annual fibre commitments for 2013.
(d) Operating leases
Future minimum lease payments at December 31, 2013 under operating leases were as follows:
2014
2015
2016
2017
2018
$
$
3.0
2.4
1.7
1.2
1.1
9.4
(e) Allowable annual cut reductions
During 2012, adjustments were made to the Annual Allowable Cuts (“AAC”) of three tree farm licences
(“TFL”s). On February 10, 2012 the total AAC of TFL 6 was reduced from 1,255,535 cubic metres to
1,160,000 cubic metres as a result of a periodic determination by the provincial Chief Forester. Of this
total volume, 1,148,422 cubic metres is held by Western and 11,578 cubic metres by the Crown. On
March 15, 2012, the AAC attributable to Western for TFL 19 was reduced by 1,163 cubic metres to
reflect the removal of three small parcels of Crown land as a result of a private land exchange. On
May 28, 2012 a portion of TFL 39 Block 1 was deleted by the Crown in order to provide a forest tenure
55
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
15.
Commitments and contingencies (continued)
opportunity to a local First Nation. This deletion reduced the total TFL AAC by 22,000 cubic metres
but did not affect Western’s AAC rights within the tenure, as this AAC was already held by the Crown.
Also in 2012, the Company sold TFL 60 to Taan Forest Limited Partnership (“Taan”). The AAC for the
tenure at the time of transfer was 802,868 cubic metres. There were no changes to the AAC during
2013.
(f) Pension funding commitments
The Company is committed to making estimated annual special payments in relation to its salaried
pension plans of $2.3 million a year for 2013 to 2015 and $0.8 million per year for 2016 to 2025, or
until such time as a new funding valuation may lead to a change in the amount of payments required.
16.
Segmented information
The Company manages its business as a single operating segment. The Company purchases and
harvests logs which are then manufactured into lumber products at the Company’s sawmills, or sold.
Substantially all of the Company’s operations and property, plant and equipment are located in British
Columbia, Canada.
The Company’s sales, based on the known origin of the customer, were as follows:
Year ended December 31,
2013
2012
Canada
Japan
China
United States
Europe
Other
17.
Employee future benefits
$
$
429.8
184.0
156.2
122.0
38.7
46.8
977.5
402.9
207.3
130.3
116.4
35.6
32.9
925.4
$
$
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 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 as 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, 2013 were $14.0
million (December 31, 2012: $14.2 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, 2010. The next actuarial valuation for both the funded
and unfunded defined benefit plans and other unfunded post-employment benefit plans will be
prepared for December 31, 2013.
Impact of adoption of IAS 19R
The Company adopted IAS 19R on January 1, 2013 as described in Note 3(b)(i). As required by the
standard, the new policy was adopted retrospectively. The effect of adoption on the year ended
December 31, 2012 was a reduction to net income of $0.9 million. This comprised an increase to
finance costs for the year ended December 31, 2012 of $1.3 million, and a decrease to selling and
administration costs of $0.4 million. There was a corresponding reduction in the defined benefit plan
56
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
17.
Employee future benefits (continued)
actuarial losses recognized in other comprehensive income for the year ended December 31, 2012 of
$0.9 million. The revision had no impact on net assets at December 31, 2012. The impact on
earnings per share for the 12 months ended December 31, 2012 was not material.
Information about the Company's defined benefit salaried pension plans and other non-pension
benefits, in aggregate, is as follows:
December 31, 2013
December 31, 2012
[Restated]
Salaried
Pension Plans
Non-pension
Plans
Salaried
Pension Plans
Non-pension
Plans
Plan assets:
Fair value, beginning of year
Company contributions
Benefits and administrative expenses paid
Actual return on assets
Fair value, end of year
Accrued benefit obligation:
Balance, beginning of year
Current service costs and administrative expenses
Benefits and administrative expenses paid
Interest cost
Actuarial (gain) loss
Balance, end of year
Deficit recognized in Statement of
Financial Position (Note 11)
Cumulative actuarial gains (losses), beginning of year
Actuarial gains (losses) recognized directly in OCI
Cumulative actuarial gains (losses), end of year
Experience gains (losses):
Experience gains (losses) on plan assets:
Amount
Percentage of plan assets
Experience gains (losses) on plan liabilities:
$
$
-
$
0.4
(0.4)
-
$
-
-
$
0.4
(0.4)
-
$
-
$
$
$
$
$
$
101.6
3.2
(7.8)
8.9
105.9
126.7
0.2
(7.8)
5.1
(5.5)
118.7
(25.1)
10.4
(14.7)
97.0
3.7
(8.2)
9.1
101.6
118.2
0.3
(8.2)
5.6
10.8
126.7
(18.7)
(6.4)
(25.1)
8.1
-
(0.4)
0.3
(2.5)
5.5
(1.4)
2.5
1.1
$
$
$
$
$
(12.8)
$
(5.5)
$
(25.1)
$
(8.1)
$
$
$
$
$
$
$
$
$
4.9
4.58%
n/a
n/a
$
4.4
4.36%
n/a
n/a
7.6
-
(0.4)
0.4
0.5
8.1
(0.8)
(0.6)
(1.4)
Amount
Percentage of plan assets
$
0.2
0.17%
$
2.4
43.18%
$
(0.3)
(0.25)%
$
-
0.34%
Included in the above accrued benefit obligations and plan assets for salaried pension plans are
accrued benefit obligations of $111.7 million at December 31, 2013 (December 31, 2012: $118.9
million) in respect of plans that are wholly or partly funded.
The following is a breakdown of the pension plan assets into their major investment categories:
Equity securities
Debt securities
Other
December 31,
2013
December 31,
2012
32%
67%
1%
100%
46%
52%
2%
100%
57
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
17.
Employee future benefits (continued)
The significant actuarial assumptions adopted in measuring the Company's accrued benefit obligations
(expressed as weighted averages) are as follows:
Discount rate, beginning of year for:
Pension plans
Non-pension plans
Discount rate, end of year for:
Pension plans
Non-pension plans
Rate of compensation increase for all plans
Health care cost trend rate
December 31,
2013
December 31,
2012
December 31, 2013
Increase (Decrease) of Accrued Benefit
Obligation w ith Change in Assumption
1% Decrease
1% Increase
n/a
n/a
n/a
n/a
12,443,500
448,100
(15,129,500)
(516,900)
4.97%
4.90%
4.19%
4.10%
3.38%
(2,455,600)
2,186,900
4.19%
4.10%
4.56%
4.30%
3.38%
5.90% in 2014
5.90% in 2013
grading to 4.35% grading to 4.30%
in 2026
in 2023
(360,900)
340,600
The Company's salaried pension and non-pension benefits expense is as follows:
December 31, 2013
December 31, 2012
[Restated]
Salaried
Pension Plans
Non-pension
Plans
Salaried
Pension Plans
Non-pension
Plans
Defined benefit plans:
Current service costs and administrative expenses
Net interest costs
Cost of defined benefit plans
Cost of defined contribution plans
Total cost of employee post-retirement benefits
$
$
0.2
1.0
1.2
2.7
3.9
$
-
0.3
0.3
-
0.3
$
0.3
0.9
1.2
2.5
3.7
$
-
0.4
0.4
-
0.4
$
$
$
The Company expects to make funding contributions to its defined benefit plans of $2.3 million during
2014.
The Company’s unionized employees are members of industry-wide pension plans to which the
Company contributes a predetermined amount per hour worked by an employee. The Company’s
liability is limited to its contributions. The pension expense for these plans is equal to the Company’s
contributions and for 2013 amounted to $8.0 million (2012: $7.6 million).
18.
Financial instruments – fair values and risk management
(a) Accounting classifications and fair values
The following table shows the carrying amounts and fair values of financial assets and financial
liabilities, including their levels in the fair valuation hierarchy. It does not include fair value information
for financial assets not measured at fair value if the carrying amount is a reasonable approximation of
fair value.
58
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
18.
Financial instruments – fair values and risk management (continued)
Carrying Amount
Fair Value
December 31, 2013
Financial assets measured at fair value
Investments
Other
financial
Held to Designated Loans and
maturity at fair value receivables liabilities
Total
Level Level Level
2
3
1
Total
$
$
5.0
5.0
$
-
$
-
$
-
$
-
$
-
$
-
$
$
5.0
5.0
-
5.0
-
5.0$
Financial assets not measured at fair value
Cash and cash equivalents
Trade and other receivables
-
$
-
$
-
$
-
-
$
-
$
$
5.6
69.0
74.6
$
-
-
$
-
$
5.6
69.0
74.6
$
Financial liabilities measured at fair value
Accounts payable and accrued liabilities
Long-term debt (Note 9)
-
$
-
$
-
$
-
-
$
-
$
-
-
$
-
$
79.8
88.5
168.3
$
$
79.8
88.5
168.3
$
December 31, 2012
Financial assets measured at fair value
Investments
$
$
4.8
4.8
$
-
$
-
$
-
$
-
$
-
$
-
$
$
4.8
4.8
-
4.8
-
4.8$
Financial assets not measured at fair value
Cash and cash equivalents
Trade and other receivables
$
-
-
$
-
-
$
-
$
-
$
$
18.8
69.5
88.3
-
$
-
$
-
$
$
18.8
69.5
88.3
Financial liabilities measured at fair value
Foreign currency forward contracts (Note 18(iii))
-
$
$
-
$
$
0.1
0.1
$
-
$
-
$
-
$
-
$
$
0.1
0.1
-
0.1
-
0.1$
Financial liabilities measured at fair value
Accounts payable and accrued liabilities
Long-term debt (Note 9)
$
-
-
$
-
$
-
-
$
-
$
-
-
$
-
(b) Financial risk management
$
74.0
33.8
107.8
$
$
74.0
33.8
107.8
$
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 forward contract activities.
(i) Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial
instrument fails to meet is contractual obligations and arises principally from the Company’s
receivable from customers, and cash and cash equivalents. The carrying amount of the Company’s
financial assets represents the maximum credit exposure.
The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each
customer. However, Management also considers the demographics of the Company’s customer
base, including the default risk of the industry and country in which customers operate, as these
factors may have an influence on credit risk. The Company has determined that there is no
concentration of credit risk either geographically or by counterparty.
59
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
18.
Financial instruments – fair values and risk management (continued)
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. The
Company’s general practice is to insure substantially all North American lumber receivables for 90%
of value with the Export Development Corporation or Coface Canada, while all export sales are sold
on either a cash basis or with secured instruments, which reduces the Company’s exposure to bad
debts.
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, 2013, the Company had no allowance for doubtful customer accounts
(December 31, 2012: $0.4 million).
The aging of trade and other receivables at the reporting date that were not impaired was as follows:
December 31, 2013
December 31, 2012
Gross value
Impairment
Gross value
Impairment
Not past due
Past due, 0 - 30 days
Past due, 31 - 120 days
More than 1 year
$
$
61.7
7.2
0.1
-
69.0
-
$
-
-
-
$
-
65.4
2.9
1.6
-
69.9
-
$
-
(0.4)
-
(0.4)
$
$
$
The Company held cash and cash equivalents of $5.6 million at December 31, 2013 (December 31,
2012: $18.8 million), which represents its maximum credit exposure on these assets. The cash and
cash equivalents are held at highly rated financial institutions and as such, the Company does not
believe that these are exposed to significant credit risk.
(ii) Interest rate risk
The Company is exposed to interest rate risk through its current financial assets and financial
obligations bearing variable interest rates. Based on the Company’s debt structure at December 31,
2013, a change of 1% in interest rates would have increased or decreased annual net income by
approximately $0.5 million. The Company does not currently use derivative instruments to reduce its
exposure to interest rate risk.
(iii) Currency risk
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 Brookfield Asset Management
(“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, 2014, 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 2013, 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, 2013, the
Company had outstanding obligations to sell an aggregate US$11.0 million at an average exchange
rate of CAD$1.0619 per US dollar with maturities through February 27, 2014, and to sell JPY 100
million at a rate of JPY 94.62 per CAD dollar with a maturity date of January 31, 2014.
All foreign currency gains and losses to December 31, 2013 have been recognized in sales in the
consolidated statement of comprehensive income and the fair value of these instruments at
December 31, 2013 was a net liability of $nil which is included in accounts payable and accrued
liabilities on the consolidated statement of financial position (December 31, 2012: $0.1
60
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
18.
Financial instruments – fair values and risk management (continued)
million). A net loss of $0.1 million (2012: net gain of $2.7 million) was recognized in sales in the
consolidated statement of comprehensive income on the change in fair values of the foreign
exchange contracts. An increase (decrease) of 1% in the value of the Canadian dollar as compared
to the JPY would have an immaterial impact on 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 result in a gain (loss) of approximately $0.1 million in relation to the US dollar foreign
exchange contracts held at December 31, 2013.
Certain receivable balances at December 31, 2013 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, 2013, the Company’s accounts
receivable denominated in US dollars totaled $28.7 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 $0.3 million. In addition, as at December 31,
2013, the Company had a total of $7.6 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 an immaterial
change to US dollar denominated cash and cash equivalents at year end.
(iv) Commodity price risk
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.
(v) Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations
associated with its financial liabilities that are settled by delivering cash or another financial asset.
Management mitigates any liquidity risk associated with the subsequent payment of 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, 2013, the Company had $120.3 million (December 31, 2012: $166.3 million)
available under its credit facility and revolving term loan. The following are the contractual maturities
of financial liabilities, including estimated interest payments:
Accounts payable and accrued liabilities
Revolving term loan
19.
Operating restructuring items
Carrying
amount
$
79.8
88.5
168.3
$
Contractual
cash flows
$
79.8
101.5
181.3
$
6 months
or less
$
79.8
1.8
81.6
$
6 - 12
months
$
-
1.8
1.8
$
2 - 3 years
$
-
7.3
7.3
$
4 - 5 years
$
-
90.6
90.6
$
More than 5
years
$
-
-
$
-
Operating restructuring items for 2013 of $0.7 million related to severance costs associated with
restructuring activities. Operating restructuring items for 2012 of $4.8 million primarily related to $4.0
million expensed as a result of reorganizing harvesting operations in TFL 44 in order to improve future
operating performance. The balance of $0.8 million related to severance costs incurred with respect to
departmental reorganizations.
20.
Finance costs
Long-term debt
Net interest - defined benefit plan obligation
Revolving credit facility
Amortization of deferred financing costs
Unwind of discount on provisions
Other
61
Year ended December 31,
2013
2012
$
$
[Restated - Note 17]
3.0
$
1.3
0.8
1.0
0.3
(0.1)
6.3
$
2.5
1.3
0.8
0.5
0.3
-
5.4
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
21.
Other income
Other income of $0.3 million earned in 2013 was comprised of net gains on disposal of non-core
assets of $1.5 million, offset by demolition costs of $1.6 million incurred during the year, and
miscellaneous other income of $0.4 million.
The significant items comprising other income of $2.8 million in 2012 were: net gains on non-core
asset disposals in the year of $1.1 million; proceeds of $1.1 million received as final compensation
from the Province of British Columbia resulting from the creation of new protective areas in our Haida
Gwaii and Central Coast operating areas; $0.9 million received as reimbursement for engineering and
other infrastructure costs associated with an area that was deleted from TFL 39 in order to provide the
Sliammon First Nation with a treaty related forest tenure opportunity; and $0.3 million related to other
miscellaneous expenses.
22.
Discontinued operations
In March 2006, the Company closed its Squamish pulp mill located on 212 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. In January 2013, Western announced that it
had entered into a conditional agreement for the sale of its former Woodfibre Pulp Mill site for a gross
purchase price of $25.5 million. Closing is subject to certain conditions, and Western will be
responsible for the satisfactory remediation of the property to applicable environmental standards prior
to closing the sale. During 2013, both parties agreed to a specific remediation plan, and a deposit of
$5.5 million was placed in trust by the purchaser and is non-refundable provided that Western
completes the remediation in accordance with the terms of the sale agreement. After incurring the
estimated required remediation costs, Western now anticipates receiving net proceeds from the sale
and remediation of approximately $18 million.
The following table provides additional information with respect to the discontinued operations:
Net loss from discontinued operations
Cash used in discontinued operations
Assets of discontinued operations
Liabilities of discontinued operations
23.
Related parties
(a) Related party transactions
Year ended December 31,
2013
2012
$
(0.5)
$
(1.1)
$
(3.2)
$
(1.1)
December 31,
2013
December 31,
2012
$
.
$
2.8
5.1
$
2.2
$
7.8
As at December 31, 2013, BSSML controls and directs 49% of the Company’s Common Shares and
100% of the Non-Voting Shares. BSSML is a wholly owned subsidiary of BAM.
In addition to the related party transactions identified elsewhere in these consolidated financial
statements, the Company has certain arrangements with entities related to BSSML and 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.
62
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
23.
Related parties (continued)
The following table summarizes these transactions:
Year ended December 31,
2013
2012
Costs incurred for:
Log purchases
Other
Income received for:
Log sales
$
$
$
$
15.8
8.8
24.6
11.5
6.5
18.0
$
$
14.8
14.8
$
$
7.9
7.9
At December 31, 2013, $1.2 million of the costs incurred with related parties for the year then ended
were included in accounts payable and accrued liabilities (December 31, 2012: $0.1 million) and $0.5
million of the income received from related parties for the year then ended were included in accounts
receivable (December 31, 2012: $0.1 million).
(b) Compensation of key management personnel
The key management personnel of the Company include the executive management team and
members of the Board of Directors. Key management personnel compensation comprised:
Year ended December 31,
2012
2013
Salaries and directors' fees
Post-employment benefits
Share-based payments
$
$
2.9
0.3
2.3
5.5
2.7
0.2
0.9
3.8
$
$
At December 31, 2013, $1.2 million of the key management compensation costs incurred for the year
then ended were included in accounts payable and accrued liabilities (December 31, 2012: $0.5
million).
24.
Expense categorization
Expenses by function:
Administration
Distribution expenses
Cost of goods sold
Costs by nature:
Compensation costs
Amortization in cost of goods sold
Amortization in selling and administration
63
Year ended December 31,
2013
2012
$
$
24.4
91.5
764.3
880.2
[Restated - Note 17]
19.1
$
103.7
777.8
900.6
$
Year ended December 31,
2013
2012
$
$
210.0
28.3
0.9
239.2
[Restated - Note 17]
$
191.8
24.6
1.2
217.6
$
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
25.
Subsequent event
On January 31, 2014, on closing of a secondary offering of the Company’s shares by BSSML, the
remaining 39,050,597 Non-Voting Shares of the Company were converted, on a one-for-one basis,
into Common Shares of the Company. As a result of the secondary offering and further share sales by
BSSML since December 31, 2013 until the date of this report, BSSML holds 156,803,374 Common
Shares, representing 40.1% of the current issued and outstanding Common Shares of Western.
64
Western Forest Products Inc.
Suite 510
700 West Georgia Street
T D Tower, PO Box 10032
Vancouver, British Columbia
Canada V7Y 1A1
Telephone: 604 665 6200
www.westernforest.com
info@westernforest.com
Trading on the TSX as “WEF”