Western Forest Products Inc.
2016 Annual Report
Financial Highlights
(millions of Canadian dollars except ratios, per share and share amounts)
Revenue
Net income
Cash flow from operating activities
Basic earnings per share
Diluted earnings per share
Price range per share
High
Low
Net book value per share
Adjusted EBITDA (1)
Adjusted EBITDA margin
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)
Years ended December 31,
2016
2015
1,187.3
1,081.9
94.2
127.9
0.24
0.24
2.40
1.77
1.32
148.2
12.5%
395,395
399,054
177.7
777.2
15.4
0.03
218.1
73.7
99.1
0.19
0.18
2.80
1.57
1.15
117.1
10.8%
395,066
398,740
141.8
743.4
53.8
0.11
177.9
(1)
(2)
(3)
(4)
See page 5 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.
1
Letter to Shareholders
To Our Shareholders,
We delivered record annual adjusted EBITDA in 2016 by growing log purchase volumes to support
increased lumber production and capitalize on improved markets for our products.
In 2016, Western capitalized on growing demand for our specialty products and improved global commodity
lumber markets to achieve a 27% increase in adjusted EBITDA as compared to last year. Our successful
log purchase strategy increased the supply of logs to our mills which contributed to increased lumber
production and shipments. On the strength of our operating cash flows, we continued our balanced
approach to capital allocation, distributing $31.6 million in dividends to our shareholders and reinvesting
$56.1 million in our asset base. In addition, we reduced net debt by $38.4 million to $15.4 million.
2016 financial highlights:
• Drove annual revenue to $1.2 billion, a 10% increase from the year prior
• Delivered a 27% increase in adjusted EBITDA for an annual record of $148.2 million
• Achieved a record average annual lumber sales price of $928 per thousand board feet
• Negotiated compensation of $14.1 million from the Province of British Columbia in a settlement for the
April 2011 partial tenure extinguishment in our Tree Farm Licence 44, providing value of $135 per cubic
metre of annual allowable cut
2016 operational achievements:
• Increased sawlog purchase volumes by 36% over the prior year to 1.5 million cubic metres
• Grew lumber production by 6% through improved mill utilization and capital investments
• Increased lumber sales volume by 8%, including an 11% increase in Western Red Cedar (“WRC”)
shipments
• Continued to grow annual log volumes sourced through our joint ventures, limited partnerships and
supply agreements with coastal First Nations
Market outlook
We expect near-term pricing volatility caused by uncertainty over the Canada – United States (“US”)
softwood lumber trade dispute. However, we remain confident that over the mid to long term, growth in the
US new home construction market as well as increasing demand from China, combined with reduced
supply from the BC Interior due to the impacts of the Mountain Pine Beetle, will deliver an improved pricing
environment. We will continue to utilize our newly capitalized, flexible operating platform to target the
products and markets that offer the highest margin.
Limited log supply due to adverse harvest conditions in late 2016 and early 2017, coupled with growing
demand, will support improved pricing of our WRC products ahead of the potential imposition of US duties.
The same operating conditions are expected to support the sales of our Niche product lines in 2017.
We expect lumber demand in Japan to remain strong in the first half of 2017, and we continue to see
opportunity over the medium term to capture a greater share of North American imports as US producers
increasingly focus on supplying their domestic market. While the market remains competitive, we believe
that our increased market share will lead to pricing leverage over the mid term.
2
We expect our commodity business to continue to benefit from increased demand from a more active US
new home construction segment and greater demand from China. Our flexible product offerings are well
suited to the Chinese market where the use of softwood lumber is expanding into a wider array of end uses
including furniture, door and window components.
Limited supply due to adverse late fall and winter harvest conditions as well as stable demand will support
pricing in the domestic sawlog market, while strong demand from China and Korea will support export log
price realizations. The pulp log market is expected to improve as challenging harvest conditions have
brought pulp log inventories into balance.
We will maintain a strong balance sheet and leverage our diverse geographic sales distribution as we await
the outcome of the Softwood Lumber trade dispute. The Canada-US Softwood Lumber Agreement expired
in October 2015 and to date, the Government of Canada and US trade representatives have been unable
to reach agreement on a new managed trade system. In November 2016, a US coalition, predominately
made up of US lumber producers and US timberlands owners, petitioned the US Department of Commerce
(“DoC”) and the US International Trade Commission (“ITC”) to investigate alleged subsidies to Canadian
lumber producers for the purpose of initiating countervailing and anti-dumping duties. Preliminary findings
of the investigations are expected in April 2017 with respect to countervailing duties, and in the second
quarter of 2017 for anti-dumping duties. Western continues to petition the DoC and ITC to exempt high-
value products including WRC from the proceedings.
Western’s capital and growth initiatives
In 2016, we continued to reinvest in and consolidate our operating base to position our mills as the most
cost competitive facilities on the coast of BC. Key strategic capital investment milestones included:
• Completion of the latest phase of our Duke Point sawmill modernization, involving the installation of an
enhanced timber deck;
• Completion of phase 1 of our Duke Point planer modernization;
• Completion of the single line conversion at our Ladysmith sawmill and the new timber deck at our
Chemainus sawmill; and
• Substantial completion of our timberlands standing inventory mapping initiative using LiDAR.
Capital improvements to the Duke Point planer operation enabled us to consolidate volumes from our South
Island Remanufacturing facility for which a permanent curtailment was announced in January 2017.
Evaluation of the timberlands LiDAR data is ongoing and expected to deliver lower engineering, road
building and harvest planning costs.
We have recently approved a further $4.2 million capital investment for our Chemainus sawmill to improve
the handling of WRC timbers and reduce production bottlenecks. We expect the project to be completed in
the third quarter of 2017 and make Chemainus the leading WRC timber mill on the BC coast. We continue
to evaluate additional strategic capital projects that will position Western as the only company on the coast
of BC capable of manufacturing the complete profile of the coastal forest and producing a diverse product
mix.
We are evaluating all opportunities to grow our margin focused business. Our ongoing reinvestment in and
consolidation of our coastal operating base, steady improvements in our operating performance and a
strong balance sheet have positioned Western to pursue external growth opportunities. Accordingly, we
are upgrading our management information systems to support such future investments. In February 2017,
we incorporated Western Forest Products US Inc. to facilitate our activities in the US. As we evaluate
opportunities to leverage capital and management expertise to drive further shareholder value, our focus
has expanded beyond reinvestment in our existing core business.
3
First Nations partnerships
Western continues to achieve success in our relationship with coastal First Nations. During 2016, the
Danyas Limited Partnership commenced harvesting in an area of TFL 37 that was previously unavailable
due to treaty negotiations. Our Danyas Limited Partnership and our joint interests and relationships with
the Quatsino, Heiltsuk, Kitasoo, and Nanwakolas First Nations delivered incremental log volume necessary
to grow specialty lumber production at Western’s manufacturing operations. We continue to explore
opportunities for long-term, mutually beneficial relationships with coastal First Nations.
Safety performance
Our 2016 safety performance was the best annual result in company history, with an annual Medical
Incident Rate of 1.04. Western continues to implement strategies designed to further improve safety
awareness amongst our employees, including extensive training designed to allow our people to accurately
assess hazards before they become risks. In addition, we have launched a new safety leadership program
that will ensure consistent application of our procedures and standards. We believe that safety is everyone’s
responsibility and that by working together we can deliver a zero incident workplace. Safety remains the
key operating priority for our company.
I would like to thank our shareholders, customers, employees and the communities where we work for your
continued support of Western Forest Products.
Sincerely,
Don Demens
President and CEO
4
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. (the “Company”, “Western”, “us”, “we”, or “our”), on a consolidated basis, for the
three months and year ended December 31, 2016 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 our audited annual
consolidated financial statements and notes thereto for the years ended December 31, 2016 and 2015, which can be found on
SEDAR at www.sedar.com.
The Company has prepared the consolidated financial statements for the years ended December 31, 2016 and 2015 in
accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards
Board. Amounts discussed herein are based on our audited annual consolidated financial statements and are presented in
millions of Canadian dollars unless otherwise noted. Certain prior period comparative figures have been reclassified to conform
to the current period’s presentation.
Reference is made in this MD&A to adjusted EBITDA1 and adjusted EBITDA margin2. Adjusted EBITDA is defined as operating
income prior to operating restructuring items and other income (expenses), plus amortization of property, plant, and equipment
and intangible assets, impairment adjustments, and changes in fair value of biological assets. Adjusted EBITDA margin is
adjusted EBITDA as a proportion of revenue. Western uses adjusted EBITDA and adjusted EBITDA margin as benchmark
measurements of our own operating results and as benchmarks 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 and adjusted EBITDA margin are
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 IFRS 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 and adjusted EBITDA margin are not measures of financial performance under IFRSs, and
should not be considered as alternatives to measures of performance under IFRS. Moreover, because all companies do not
calculate adjusted EBITDA in the same manner, adjusted EBITDA and adjusted EBITDA margin calculated by Western may
differ from similar measures 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 IFRS; 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 in prior
periods.
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, misjudgements in the course of preparing forward-looking
statements or information, changes in opportunities and other factors referenced under the “Risk Factors” section herein. 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 16, 2017.
1 Earnings Before Interest, Tax, Depreciation and Amortization
2 Adjusted EBITDA as a proportion of Revenue
5
Selected Annual Information (1)
(millions of dollars except per share amount and where otherwise noted)
2016
2015
2014
As at and for the years ended
December 31,
Revenue
Adjusted EBITDA
Adjusted EBITDA margin
Operating income prior to restructuring items and other income
Net income from continuing operations
Net income for the period
Basic earnings per share (in dollars)
Diluted earnings per share (in dollars)
Basic and diluted earnings per share (in dollars) - discontinued operations
$
1,187.3
148.2
12.5%
110.2
94.2
94.2
0.24
$
$
0.24
$
-
$
1,081.9
117.1
10.8%
83.0
64.6
73.7
0.19
0.18
0.02
$
$
$
$
1,036.9
108.5
10.5%
80.3
68.4
68.4
0.17
$
$
0.17
$
-
Total Assets
Net Debt (2)
$
777.2
$
743.4
$
694.2
15.4
53.8
77.9
(1) Included in Appendix A is a table of selected results for the last eight quarters.
(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.
Overview
Western achieved record adjusted EBITDA of $148.2 million in 2016, a 27% improvement over 2015. Our
successful log purchase strategy drove increased specialty lumber sales and we adjusted operating rates
to capitalize on improved commodity markets in the United States and China.
Revenue grew to a record $1,187.3 million in 2016, a 10% improvement as compared to 2015. Increased
lumber shipments, a favourable specialty log and lumber sales mix, and rising prices for our targeted
products more than offset the impact of reduced log sales volumes. A significant increase in log purchases
and higher mill utilization drove increased lumber production and facilitated increased sales volumes of WRC
and commodity lumber products. Revenues also benefited from a weaker average Canadian dollar (“CAD”),
which declined by 4% and 16% against the United States dollar (“USD”) and Japanese Yen, respectively.
We produced 943 million board feet in 2016, a 6% increase as compared to 2015. This was primarily
achieved by increasing mill operating hours to meet demand from improving markets, and through realizing
early returns from recent strategic capital investments. We achieved revenue growth in 2016 as a result of
increases in specialty lumber production and shipments which was only partly offset by reduced lumber
recovery and higher conversion costs associated with specialty lumber production.
Timberlands production volume was 4.4 million cubic metres, compared to 5.1 million cubic metres in 2015.
A contractor rate dispute limited log harvest volumes from Tree Farm Licence (“TFL”) 44, and all timberlands
operations were impacted by adverse coastal weather conditions late in the year. These operating
challenges, increased stumpage costs, and increased helicopter logging volumes contributed to higher log
production costs in 2016. To overcome a reduced harvest, we supplemented mill log supply by increasing
sawlog purchase volumes by 36% and internalizing certain log sorts that would have been sold in past years.
Net income increased to $94.2 million in 2016, from $73.7 million in 2015, primarily driven by higher realized
margins and a significant increase in other income. Included in other income in 2016 was $14.1 million of
compensation from the Province of British Columbia (“BC”) in settlement for an April 2011 partial tenure
extinguishment in TFL 44 from the Maa’nulth First Nations Final Agreement Act.
Strong operating cash flows in 2016 were used to repay $29.0 million of debt, fund $56.1 million of strategic
and maintenance capital, and return $31.6 million to shareholders in the form of regular, quarterly dividends.
In December 2016, we extended the expiry of our existing credit facilities by one year to December 2017. In
2016, our year-end liquidity position had improved to $218.1 million, from $177.9 million at the end of 2015.
6
Annual Operating Results
(millions of dollars)
Revenue
Lumber
Logs
By-products
Total revenue
Net income
Adjusted EBITDA
Adjusted EBITDA margin
Years ended
December 31,
2016
2015
$
883.5
235.6
68.2
1,187.3
94.2
$
770.0
243.1
68.8
1,081.9
73.7
148.2
12.5%
117.1
10.8%
Western achieved record annual revenue and adjusted EBITDA in 2016, and increased adjusted EBITDA
margin to 12.5% as compared to 10.8% in 2015. By executing our log purchase strategy and leveraging our
recapitalized manufacturing platform, we maintained our specialty product mix while growing lumber
shipments.
Lumber revenue in 2016 was $883.5 million, a 15% increase compared to 2015. We increased lumber
shipments by 8% to 952 million board feet and achieved higher price realizations. Strong specialty and
improved commodity lumber markets delivered an average annual realized lumber price of $928 per
thousand board feet, an increase of 6% from 2015. Targeted log purchases facilitated an 11% increase in
WRC sales volumes, and higher mill utilization delivered increased production and a 7% increase in
commodity lumber shipments. Specialty products represented 56% of total lumber shipments in 2016,
consistent with 2015.
Log revenue was $235.6 million, a 3% decrease compared to 2015. Strong demand for our logs drove an
18% increase in average realized log price, as compared to 2015, and largely offset the impact of a 19%
decrease in log shipments. We directed a greater proportion of log inventories internally to our mills, in part
due to improved mill competitiveness. Pulp log pricing and sales volumes were depressed due to reduced
pulp log demand on the BC coast.
By-product revenue in 2016 was $68.2 million, compared to $68.8 million in 2015. Incremental revenue from
increased chip sales volumes was offset primarily by a 3% decrease in average realized chip prices.
We increased lumber production to 943 million board feet in 2016, from 891 million board feet in 2015. This
was achieved by increasing operating hours at our primary mills and through realizing production efficiencies
as a result of recent strategic capital investments. We also accessed significant additional log volumes on
the open market to support increased lumber production, including a 13% increase in WRC production.
Revenue growth from increased WRC shipments was partly offset by reduced lumber recovery and higher
conversion costs associated with specialty production.
Total timberlands production volume was 4.4 million cubic metres, compared to 5.1 million cubic metres in
2015. The partial resolution to a contractor rate dispute in the third quarter of 2016 provided minimal harvest
volumes in TFL 44; and all timberlands operations were impacted by late 2016 adverse coastal weather
conditions, which have carried into the first quarter of 2017. An incremental $0.9 million expense was
recognized in the fourth quarter of 2016 to repair timberlands infrastructure damaged as a result of sequential
storm events. In addition, log production costs were impacted by higher stumpage costs and a greater
proportion of helicopter logging in 2016 as compared to 2015.
To overcome a reduced harvest, we supplemented mill log supply by increasing sawlog purchase volumes
by 36% and internalizing certain log sorts that would have been sold in past years.
Freight costs, which are predominantly denominated in USD, increased by 10% in 2016 to $96.8 million.
Increased freight costs were primarily due to the 8% increase in lumber shipments, a weaker CAD, and a
relative increase in lumber shipments direct to China.
Selling and administration expenses in 2016 were $27.5 million, compared to $22.2 million in 2015.
Significantly improved financial performance resulted in higher performance-based compensation expense
in 2016, while incremental consulting expenses were incurred for information technology improvements, to
facilitate growth, and to address certain legal and professional service requirements. Movement in the
7
Company’s common share price, greater outstanding share unit balances, and prior year option forfeitures
resulted in a relative increase of $0.8 million in mark-to-market and share-based compensation expenses
over those periods. As a percentage of revenues our selling and administration costs were 2.3% for 2016,
an increase from the 2.0% reported in 2015.
Operating Restructuring Items
In 2016, Western recorded restructuring expenses of $3.4 million, including $2.2 million of expense related
to the closure of the Nanaimo sawmill and other severance costs. This compares to restructuring expenses
of $4.3 million in 2015 of which $0.8 million related to the closure of the Nanaimo sawmill, with the remainder
reflecting severance costs arising from the consolidation of the Company’s Central Island timberlands
operations, and the termination of certain sales agent agreements.
Other Income (Expense)
Other income of $24.2 million was reported in 2016, an increase from the prior year expense of $1.1 million.
The significant increase in other income was largely the result of settlement compensation for an April 2011
partial tenure extinguishment, a gain on revaluation of biological assets, and a gain resulting from
amendments to the Company’s legacy defined benefit pension plans. Other expense of $1.1 million reported
in 2015 was the result of asset impairments and remediation provisions offset by net gains on non-core
property dispositions.
In October 2016, we received $14.1 million in settlement proceeds from the Province of BC for the April
2011 partial tenure extinguishment in TFL 44, reflecting value of approximately $135 per cubic metre of
annual allowable cut eliminated. Settlement proceedings are ongoing in respect of compensation for
improvements in the area removed from TFL 44 in 2011.
At December 31, 2016, we realized an $8.0 million increase in the fair value less costs to sell of our biological
assets, primarily driven by log market price increases.
The Company’s legacy defined benefit plans were amended to eliminate any further benefit accruals
effective December 31, 2016. These plan amendments resulted in a $3.8 million past service credit relating
to a reduction in future benefit payments.
Finance Costs
Finance costs decreased by $0.6 million from $5.0 million incurred in 2015 to $4.4 million in 2016, primarily
due to reduced interest expense. Net debt decreased by $38.4 million, reducing average outstanding debt
in 2016 by $16.7 million as compared to 2015.
Income Taxes
In 2016, deferred income tax expense of $32.2 million was recognized through net income, primarily relating
to operating earnings. In 2015, a lower deferred income tax expense of $7.8 million was recognized through
net income reflecting the offset of previously unrecognized deferred income tax assets.
In 2016, deferred income tax expense of $0.8 million was recognized through other comprehensive income
and was the result of actuarial gains in the Company’s legacy defined benefit pension plans. In 2015,
deferred income tax recovery of $9.1 million was recognized through other comprehensive income in relation
to previously unrecognized deferred income tax assets attributed to those same legacy pension plans.
At December 31, 2016, the Company and its subsidiaries had unused non-capital tax losses carried forward
totaling approximately $119.0 million, which expire between 2030 and 2035, and can be used to reduce
taxable income. Deferred income tax assets related to the unused non-capital losses carried forward have
been fully recognized in 2016, as it is probable that future taxable profits will be available against which they
can be utilized.
In addition, the Company has unused capital losses of approximately $101.9 million, which are available
indefinitely. Western has unrecorded deferred income tax assets related to the unused capital losses as
they can only be applied against the taxable portion of capital gains, if any, arising in future years.
8
Net Income from Continuing Operations
Net income from continuing operations in 2016 was $94.2 million, an increase from the prior year figure of
$64.6 million. The significant increase was due primarily to a 69% increase in operating income partly offset
by a related increase in deferred income tax expense.
Discontinued Operations
The Company had no discontinued operations during 2016. In 2015, the Company reported net income from
discontinued operations of $9.1 million on the sale of the former Squamish pulp mill site and related assets
for cash proceeds of $21.8 million, which were used to pay down debt and further its strategic capital
programs.
As economic and other circumstances allow, Western will continue to pursue opportunities to monetize non-
core assets.
Financial Position and Liquidity
(millions of dollars except where noted)
Cash provided by operating activities, excluding non-cash working capital
Cash provided by operating activities
Cash used in investing activities
Cash used in financing activities
Cash used in capital 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)
Years ended
December 31,
2016
2015
$
154.2
127.9
(55.6)
(62.7)
(13.1)
(43.0)
$
105.5
99.1
(62.0)
(50.4)
(13.6)
(48.5)
December 31,
2016
December 31,
2015
$
218.1
15.4
$
177.9
53.8
2.58
0.03
2.30
0.11
(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.
(3) Capitalization comprises net debt and shareholders equity.
Cash provided by operating activities in 2016 grew by 29% to $127.9 million, as a result of record operating
results discussed previously. Excluding the impacts of non-cash working capital, cash provided by operating
activities in 2016 increased by $48.7 million from the prior year.
Cash used in investing activities was $55.6 million in 2016, as compared to $62.0 million invested in 2015.
The completion of major capital projects in late 2015, including the Saltair sawmill recapitalization and the
first two phases of the Duke Point sawmill, in part shifted the focus of our dedicated capital projects team to
assisting in the ramp-up of those projects in 2016. Recent capital announcements have emphasized high-
return, lower cost capital projects as we await clarity in the Softwood Lumber trade dispute. These factors
contributed to a $14.0 million decrease in strategic capital expenditures in 2016 as compared to 2015. The
strategic capital program is discussed in more detail in the “Strategy and Outlook” section.
Cash used in financing activities increased to $62.7 million in 2016, as compared to $50.4 million in 2015.
We returned $31.6 million to our shareholders by way of regular quarterly dividends, consistent with the prior
year, and used strong cash from operations to accelerate the repayment of debt.
Total liquidity increased to $218.1 million at December 31, 2016 from $177.9 million at the end of 2015. Key
drivers for this increase were significantly increased operating cash flows, compensation received for the
partial tenure extinguishment in TFL 44, and increased borrowing base availability.
9
Liquidity is comprised of cash and cash equivalents of $19.0 million, unused availability under the secured
revolving credit facility of $124.1 million, and $75.0 million available under the revolving term loan facility.
Based on our current forecasts, we expect sufficient liquidity will be available to meet our obligations in 2017.
Fourth Quarter Results
(millions of dollars except per share amount and where otherwise noted)
Revenue
Adjusted EBITDA
Adjusted EBITDA margin
Operating income prior to restructuring items and other income
Net income from continuing operations
Net income for the period
Basic earnings per share (in dollars)
Diluted earnings per share (in dollars)
Three months ended
December 31,
2016
2015
$
$
293.0
33.8
11.5%
24.0
36.2
36.2
0.09
0.09
265.6
29.6
11.1%
20.5
9.9
9.9
0.03
0.02
$
$
$
$
We generated fourth quarter adjusted EBITDA of $33.8 million, an increase of 14% from the same quarter
in 2015. Targeted log purchases facilitated increased lumber shipments and improved lumber markets drove
higher lumber price realizations. These factors largely offset the normal seasonal decline in fourth quarter
adjusted EBITDA.
We increased fourth quarter lumber revenue to $220.7 million in 2016, growth of 14% from the same quarter
of 2015. Targeted log purchases drove higher production and facilitated a 4% lumber sales volume increase
to 236 million board feet. WRC shipments increased 19%, improving the fourth quarter lumber sales mix,
and market demand for our products drove an 8% improvement in quarterly average lumber price realization.
Fourth quarter log revenue was $55.1 million in 2016, an increase of $1.5 million from the same period in
2015. A strong specialty log sales mix, continued strength in domestic sawlog markets and improved export
demand delivered a 9% increase in average log price realizations. These factors more than offset a 9%
reduction in sawlog sales volumes as a result of lower harvest levels in the fourth quarter of 2016.
By-products revenue was $17.2 million in the fourth quarter of 2016, as compared to $17.6 million in the
same period in 2015. By-product revenue declined as a result of lower realized pricing.
Lumber production was 242 million board feet, an increase of 3% from the prior year fourth quarter.
Increased operating hours and the benefits of recent strategic capital investments drove a 7% increase in
lumber production from the Company’s seven primary sawmills.
Timberlands production decreased by 0.2 million cubic metres as compared to the same quarter of 2015,
primarily due to adverse coastal weather conditions. Heavy rain and wind were followed by snow and ice
late in the fourth quarter, preventing access to certain harvest areas and resulting in more than $0.9 million
in incremental road repairs and other expenses. In combination with a 19% increase in helicopter logging
volumes and increased stumpage costs, average fourth quarter log harvest cost rose by 10% as compared
to the same period in 2015. Reduced harvest volumes were partially mitigated by a 13% increase in sawlog
purchases over the same period of 2015.
Higher lumber sales volumes coupled with a relative increase in rail shipments drove a $4.1 million increase
in fourth quarter freight costs as compared to the same period of 2015.
Selling and administration expense of $6.7 million in the fourth quarter of 2016 increased by $0.1 million
from the fourth quarter of 2015. Significantly improved adjusted EBITDA drove higher fourth quarter
performance-based compensation, which was offset by the mark-to-market reversal of share-based
compensation expense.
Fourth quarter other income of $26.0 million in 2016, was a significant increase from other expense of $0.9
million in the same period of 2015. This increase reflects settlement compensation for an April 2011 partial
tenure extinguishment, a gain on revaluation of biological assets, and a gain resulting from amendments to
the Company’s legacy defined benefit pension plans.
10
Fourth quarter finance costs of $1.0 million were $0.1 lower than the same quarter of 2015 as a result of
lower average outstanding debt in the period.
Operating income in the fourth quarter of 2016 grew by $29.8 million over 2015, and led to higher net income
as compared to the same quarter of 2015. Significantly increased other income was partly offset by
increased income tax expense. Higher fourth quarter deferred income tax expense of $11.5 million was
incurred 2016, as compared to $7.9 million in the same period of 2015, mainly as a result of earnings growth.
The funded position of our defined benefit and other retirement benefit plans is estimated at the end of each
quarter. A net, after-tax actuarial gain of $5.7 million was realized through other comprehensive income in
the fourth quarter of 2016, primarily as a result of the influence of an interest rate increase on the discount
rate used to calculate benefit plan liabilities.
11
Strategy and Outlook
Western’s long-term business objective is to create superior value for shareholders by building a margin-
focused log and lumber business of scale to compete successfully in global softwood markets. We believe
this will be achieved by maximizing utilization of our forest tenures, to operate efficient, low-cost converting
facilities and to produce and sell high-value softwood lumber and logs to global markets. We seek to manage
our business with a focus on operating cash flow and maximizing the value of our fibre resource through the
production cycle, from the planning of our logging operations to the production, marketing and sale of our
log and lumber products.
The following strategic initiatives will continue to guide our focus:
Strengthen the Foundation
We have developed a track-record for consistently delivering positive operating income and reporting
minimal net debt.
We have implemented or announced $101.9 million of strategic capital to strengthen our operating
platform and position Western as the only company on the coast of BC capable of consuming the profile
of the coastal forest and competitively manufacturing a diverse product mix. Recent capital reinvestment
information is presented below under Strategic Capital Program Update.
Strategic capital investment completed and activated within the last 18 months have facilitated the
consolidation of our manufacturing operations. By advancing the recapitalization and consolidation of our
coastal operating base, we have improved the financial performance and stability of our business.
We continue to invest in people and systems to create a platform for growth in our existing operations and
to facilitate the acceleration of our pursuit of margin-focused growth opportunities.
Grow the Base
We have grown annual revenue to $1,187.3 million in 2016, more than double the revenue reported in
2009.
We continue to optimize our operations and invest in our mills and timberlands to improve margins and
grow our business through increased production.
The success of our business relationships with First Nations continues to drive incremental log volume
and has enabled Western to grow specialty lumber production. We continue to pursue opportunities for
long-term, mutually beneficial relationships with coastal First Nations.
We have implemented a non-capital margin improvement program to optimize our supply chain and
further consolidate our business.
From a product marketing perspective, we are delivering on a strategy that drives the production and sale
of targeted, high-margin products of scale to selected customers that value our product offerings.
Explore Opportunities
We are evaluating all opportunities to grow our margin-focused business and drive shareholder value.
Our ongoing reinvestment in and consolidation of our coastal operating base, steady improvements in our
operating performance and a strong balance sheet have positioned Western to actively pursue external
growth opportunities.
Market Outlook
We expect near-term pricing volatility caused by uncertainty over the Canada – US softwood lumber trade
dispute. However, we remain confident that over the mid to long term, growth in the US new home
construction market as well as increasing demand from China, combined with reduced supply from the BC
Interior due to the impacts of the Mountain Pine Beetle, will deliver an improved pricing environment. We
will continue to utilize our newly capitalized, flexible operating platform to target the products and markets
that offer the highest margin.
12
Limited log supply due to adverse harvest conditions in late 2016 and early 2017, coupled with growing
demand, will support improved pricing of our WRC products ahead of the potential imposition of US duties.
The same operating conditions are expected to support the sales of our Niche product lines in 2017.
We expect lumber demand in Japan to remain strong in the first half of 2017, and we continue to see
opportunity over the medium term to capture a greater share of North American imports as US producers
increasingly focus on supplying their domestic market. While the market remains competitive, we believe
that our increased market share will lead to pricing leverage over the mid term.
We expect our commodity business to continue to benefit from increased demand from a more active US
new home construction segment and greater demand from China. Our flexible product offerings are well
suited to the Chinese market where the use of softwood lumber is expanding into a wider array of end uses
including furniture, door and window components.
Limited supply due to adverse late fall and winter harvest conditions as well as stable demand will support
pricing in the domestic sawlog market, while strong demand from China and Korea will support export log
price realizations. The pulp log market is expected to improve as challenging harvest conditions have
brought pulp log inventories into balance.
Updated on Softwood Lumber Dispute
The twelve-month standstill period of the Softwood Lumber Agreement, which precluded trade action by the
US, expired October 12, 2016. In November 2016, a coalition of US lumber producers petitioned the US
DOC and ITC to investigate alleged subsidies to Canadian lumber producers and initiate countervailing and
anti-dumping duties. Preliminary findings of that investigation are expected regarding countervailing duties
in April 2017 and in the second quarter of 2017 for anti-dumping duties. We intend to maintain our strong
balance sheet and diversified product and geographic mix as we await the outcome of the trade discussions.
See also “Softwood Lumber Dispute” in the Risks and Uncertainties section below.
Strategic Capital Program Update
We continue to implement a strategic capital program that is designed to position Western as the only
company on the coast of BC capable of sustainably consuming the complete profile of the coastal forest and
competitively manufacturing a diverse product mix for global markets.
Our strategic capital program is focused on the installation of proven technology that will deliver top quartile
performance and improve our ability to manufacture the products that yield the best margin. In addition to
investments in our manufacturing assets, we also allocate capital to strategic, high-return projects involving
our information systems, timberlands assets, and forest inventories.
We have recently approved a further $4.2 million capital investment for our Chemainus sawmill to improve
the handling of WRC timbers and reduce production bottlenecks. We expect the project to be completed in
the third quarter of 2017 and make Chemainus the leading WRC timber mill on the BC coast. With this
project, we have announced plans for $101.9 million of our $125.0 million strategic capital program. Through
the end of 2016, we have implemented and capitalized $89.1 million under that program.
In the fourth quarter of 2016, we continued to advance the Duke Point planer modernization and timberlands
standing inventory mapping initiative. The Duke Point planer modernization is ongoing with completion
scheduled for 2017. Results of the timberlands LiDAR mapping initiative are being evaluated with the
remaining data to be gathered as weather permits, and we continue to progress through our information
technology upgrades.
Uncertainty arising from the Softwood Lumber trade dispute has caused us to defer the commencement of
additional potentially significant capital projects plans, however a number of high-return, low-cost strategic
capital projects are in the late stages of planning or ready for implementation.
13
Non-Core Assets Update
There have been no disposals of non-core assets during 2016. On February 6, 2015, Western announced
the completion of the sale of its former pulp mill site and related assets in Squamish, BC at a purchase price
of $21.8 million. The Company used the proceeds of sale to pay down outstanding debt and to further its
strategic capital programs.
We continue to evaluate the timing of sale of non-core assets and expect to accelerate the marketing and
disposition of certain non-core assets.
Summary of Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2016 and our payments due
for each of the next five years and thereafter, including estimated interest payments:
(millions of Canadian dollars)
Accounts payable and
accrued liabilities
Long-term debt
Operating leases
Silviculture provision
Defined benefit pension
plan funding obligation
Total
2017
2018
2019
2020
2021
Thereafter
$
102.6
38.2
20.7
29.6
$
102.6
1.3
4.3
9.7
$
-
1.3
3.6
5.3
$
-
35.6
3.5
3.3
$
-
-
2.3
2.2
$
-
-
1.7
1.7
$
-
-
5.3
7.4
20.2
211.3
$
2.2
120.1
$
2.2
12.4
$
1.9
44.3
$
1.9
6.4
$
1.9
5.3
$
10.1
22.8
$
Critical Accounting Estimates
Silviculture Provision
Under BC law, we are responsible for reforesting areas that we harvest. These obligations are referred to
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 reforestation 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.
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.
14
Pension and Other Post Retirement Benefits
Western has various defined benefit and defined contribution plans, and a group RRSP that provide
retirement benefits to most of its salaried employees. A group RRSP is provided to 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. Our defined benefit plans were closed to new
entrants effective June 30, 2006. No further benefits accrue under these plans for years of service after
December 31, 2010, and no further benefits accrue under these plans for compensation increases effective
December 31, 2016. 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 judgements 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 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.
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.
15
New accounting policies: standards and interpretations not yet adopted
The following amended IFRS standards are not yet effective for the year ended December 31, 2016 and
have not been applied in preparing these consolidated financial statements:
•
IFRS 9, Financial Instruments (“IFRS 9”) is effective for years commencing on or after January 1, 2018,
and will replace IAS 39, Financial Instruments: Recognition and Measurement. Under IFRS 9, financial
assets will be classified and measured based on the business model in which they are held and the
characteristics of the associated contractual cash flows. IFRS 9 also includes a new general hedge
accounting standard which will better align hedge accounting with risk management. The Company
intends to adopt IFRS 9 in it consolidated financial statements for the year commencing January 1, 2018.
The extent of the impact of adoption of the standard, based on the Company’s preliminary evaluation,
is not expected to be material to the financial statements.
•
•
IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) is effective for years commencing on or
after January 1, 2018, and will replace IAS 18, Revenue, IAS 11, Construction Contracts, and a number
of revenue related interpretations. IFRS 15 provides a single, principles based five-step model to be
applied to all contracts with customers, except insurance contracts, financial instruments, and lease
contracts, which fall in the scope of other IFRSs. The Company intends to adopt IFRS 15 in its
consolidated financial statements for the year commencing January 1, 2018. The extent of the impact
of adoption of the standard, based on the Company’s preliminary evaluation, is not expected to be
material to the financial statements.
IFRS 16, Leases (“IFRS 16”) is effective for years commencing on or after January 1, 2019, and will
replace IAS 17, Leases (“IAS 17”). IFRS 16 provides a single lessee accounting model, requiring the
recognition of assets and liabilities for all leases, unless the lease term is 12 months or less or the
underlying asset has a low value, while lessor accounting remains largely unchanged from IAS 17 and
the distinction between operating and finance leases is retained. The Company intends to adopt IFRS
16 in its consolidated financial statements for the year commencing January 1, 2019. The extent of the
impact of adoption of the standard has not yet been determined.
Financial Instruments
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 adjusted to fair value and marked to market each accounting period, with changes recorded in
net income
During 2016, the Company entered into foreign exchange futures contracts to sell forward USD and
Japanese Yen (“JPY”) in order to partially mitigate its foreign currency risk. At December 31, 2016, the
Company had forward contracts in place to sell an aggregate USD 48.0 million and JPY 750.0 million (2015:
USD 20.0 million; JPY 775.0 million). A net loss of $0.3 million was recognized on contracts which matured
in the year (2015: $7.1 million), which is included in sales in the consolidated statement of comprehensive
income.
Other financial instruments, which for Western consist primarily of debt instruments, are discussed
elsewhere in this discussion and analysis.
Off-Balance Sheet Arrangements
Other than operating leases for vehicles, equipment and machinery, the Company does not have any off-
balance sheet arrangements as at December 31, 2016.
16
Related Party Transactions
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:
Years ended December 31,
2015
2016
Salaries, directors' fees and short-term benefits
Post-employment benefits
Share-based payments
Risks and Uncertainties
$
$
5.8
0.3
2.0
8.1
5.5
0.2
2.1
7.8
$
$
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 economic activity or other causes including weather;
• Customers experiencing reduced access to credit; and
•
Inventory de-stocking by customers.
Product demand is influenced to a significant degree by economic activity at the global level. Additionally,
although costs may increase, customers may not accept related price increases for those products. We are
not able to predict with certainty market conditions and prices for 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 $10 million for each incremental price increase or decrease,
respectively, of $10 per thousand board feet of lumber.
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.
17
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, the rate of development in China, 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;
•
•
• quotas, duties, taxes and other charges or restrictions upon exports or imports;
tariffs and other barriers;
•
•
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 40% and 50% of our total product
sales are denominated in USD and between 5% and 10% in JPY, while most operating costs and expenses
are incurred in CAD, with small portions in USD and JPY. The Company’s functional currency is the CAD
and financial results are reported in CAD. Significant variations in relative currency values, particularly
significant changes in the value of the CAD relative to the USD, 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 CAD compared to the USD and JPY would decrease or increase annual operating
earnings by approximately $4.6 million, and $0.6 million, respectively.
Softwood Lumber Dispute
Under the softwood lumber agreement (“SLA”) between Canada and the US, the Company’s exports to the
US could be assessed an export tax by the Canadian Government. The SLA expired on October 12, 2015,
eliminating export tax measures on Canadian softwood lumber shipments to the US.
The twelve-month standstill period of the SLA, which precluded the United States from bringing trade action
against Canadian softwood lumber producers, expired October 12, 2016. On November 25, 2016, the US
Lumber Coalition petitioned the DoC and the ITC seeking Countervailing (“CVD”) and Anti-dumping duties
(“AD”) on Canadian softwood lumber shipments to the US.
On January 6, 2017, the ITC concluded that there was “reasonable indication” that softwood lumber products
from Canada materially injured US producers; and, as a result, the DoC continued its ongoing CVD and AD
investigations on these products.
The DoC is expected to release its CVD investigation findings in the second quarter of 2017, with AD
investigation findings to be released approximately 60 days thereafter. These preliminary findings could
force the payment of cash deposits to the US Treasury on Canadian softwood lumber shipments to the US
occurring on or after the DoC ruling. If the DoC finds that “critical circumstances” apply, CVD and AD could
also be applied retroactively up to 90 days prior to those preliminary determinations. At this time, it is not
expected that any potential retroactive payments would give rise to a liability as at December 31, 2016.
Employees and Labour Relations
Hourly paid employees at our manufacturing facilities, timber harvesting operations and a small group of
clerical employees are unionized. The majority of the unionized employees are represented by the United
Steel Workers (“USW”), which holds two collective agreements with the Company. Approximately 1,400
Western employees represented by the USW are covered by a five-year collective agreement, expiring June
15, 2019. An agreement with the office clerical employees (3 employees) expired on December 31, 2016
and is under negotiation. The Pulp, Paper & Woodworkers of Canada (“PPWC”) represents the remaining
unionized employees. The PPWC collective agreement for the Ladysmith Sawmill (74 employees), expires
on December 31, 2019. A new five-year collective agreement for the Value-Added Remanufacturing
Operation (67 employees) expiring on October 14, 2021 was ratified by a majority of union members in
18
January 2017. The Company also has one employee represented by the Canadian Merchant Service Guild.
This collective agreement expires on September 30, 2020.
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,
trucking companies and 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
CAD relative to the USD and/or the JPY, and by changes in the treatment of softwood lumber shipments to
the US subsequent to the expiry of the SLA.
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 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 the sales office 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.
19
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 CAD of our residual wood chips is tied by formula to published indices that reflect the
USD 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
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
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 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.
20
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 may 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 and/or other settlements with aboriginal groups in British Columbia in order to
resolve these claims.
In June 2014, the Supreme Court of Canada (the “Court”) released its decision on the Aboriginal title claim
by the Tsilqhot’in First Nation of British Columbia, regarding land outside their traditional reserve area. The
Court recognized Tsilqhot’in title to the area in dispute, including rights to decide how the land will be used,
occupancy and economic benefits of the land. The Court held that while the provincial government had the
constitutional authority to regulate forest activity on Aboriginal title lands, it had not adequately consulted
with the Tsilqhot’in. While the decision does not directly impact Western’s business as we do not have tenure
in this dispute area, we do operate on Crown tenures elsewhere that are subject to claims of Aboriginal title.
The potential impact on Western’s tenure holdings is not ascertainable at this time.
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 concluded discussions with the Province on the magnitude of the treaty impacts on AAC, soft
cost investments and downstream business in 2016. On October 21, 2016, the Company announced that
the Province of BC had agreed to compensate Western in the amount of $14.0 million for the partial tenure
extinguishment.
Other treaty and government-to-government processes involving the ‘Namgis, Ditidaht, Snuneymuxw,
Heiltsuk, Hupacasath, K’ómoks, Wuikinuxv and shíshálh First Nations are well advanced and may lead to
agreements impacting Western in 2017. It is expected that through these and other treaty-related processes
the Provincial Government will want to remove areas from the Company’s various forest tenures.
In January 2017, the Nuchatlaht First Nation filed a Notice of Civil Claim with the BC Supreme Court against
the Province of British Columbia and the Company. This claim seeks, amongst other things, a declaration
of Aboriginal title to a claim area that encompasses the northern half of Nootka Island, off the west coast of
Vancouver Island. The claim area encompasses the Company’s Forest Licence A19231 and certain timber
licences held by the Company. The Nuchatlaht First Nation has not yet filed a formal application for an
interlocutory injunction against the Company. The Company is in the process of preparing a response to the
claim.
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 unharvested volume in TFL 19 from
the 2007 to 2011 cut control period. The Ehattesaht claimed 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. In 2014, the court ruled in favor of the Ehattesaht requiring further
consultation on unharvested volume. In 2016, the Province advised Western that it would be awarding the
21
unharvested volume, through separate forest licencse, to the Ehattesaht and Mowachaht/Muchalaht First
Nations. In order to minimize the potential impact of these new licences on its ongoing operations in TFL 19,
Western will seek to engage with the Ehattesaht and Mowachaht/Muchalaht First Nations to find mutually-
beneficial solutions.
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, Ditidaht and the BC Government entered an Incremental Treaty Agreement (the “ITA”) which
included Ditidaht agreement to not initiate or proceed with litigation against the Crown for land dispositions
and land use authorizations during the term of the ITA, subject to the provincial government complying with
consultation processes established under existing provincial policies and procedures. Consequently, unless
the ITA is terminated in accordance with its provisions, this litigation will not be further pursued by Ditidaht.
In April 2008, the Kwakiutl First Nation commenced litigation in the BC Supreme Court against the Province
of British Columbia, Western and Canada, seeking, amongst other things, orders to set aside the Province’s
decision to remove Western’s private lands from TFL 6 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 unextinguished 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 Kwakiutl in good faith and to seek
accommodations regarding their claim of unextinguished Aboriginal rights, title and interests in respect of
the Kwakiutl traditional territory. In 2015, the BC Court of Appeal ruled on the Crown’s appeal of the decision,
finding that the Province breached its duty to consult and owed Kwakiutl a meaningful consultation process
respecting its treaty rights and claims to Aboriginal rights and title.
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 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.
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 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 consultation or 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”.
22
Stumpage Fees
Stumpage is the fee that the Province charges forest companies for timber harvested from Crown land in
British Columbia. Approximately 95% of the timber we harvest is from Crown land. Stumpage is 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 has been updated every two to three years to reflect recent
sale data and costs. The most recent update occurred on March 1, 2016. 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, sawlogs 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 and other applicable regulations. 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.
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
23
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, known as the Great Bear Rainforest (“GBR”),
was fully defined. The CFCI Companies, along with major environmental groups delivered a suite of
recommendations for consideration by the Province and the First Nations who live in the region. On January
28, 2016 the Province enacted, by Order in Council, the GBR Order. On May 19, 2016, the GBR (Forest
Management) Act received Royal Assent in the BC legislature and this Act was subsequently brought into
force on December 20, 2016 with an Order in Council (number 974). As a result of the GBR related legislation
the Company’s AAC in the GBR area was reduced from 522,774 m3 per year to 427,005 m3 per year,
effective January 1, 2017. Further, Forest Licence A19244 was subdivided by the Province into two forest
licences to ensure timber harvest attributed to the GBR area is wholly contained in licences that only include
forest operations in the GBR area.
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 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.
Information Technology Security
Western relies on information technology systems to facilitate harvesting, log purchasing and silviculture
activities, operation of our manufacturing facilities, interactions with vendors, customers and employees and
reporting on our business. Interruption or failure of these systems could be due to a variety of causes, such
as cyber-based attacks, vandalism, power or service outages, corruption, fire or natural disaster, and could
result in operational disruption or the misappropriation of sensitive or proprietary data. Such events could
have a negative impact on Western’s reputation or subject the Company to potential liability, proceedings
by affected parties, civil or criminal penalties. Interruption or failure of these systems could result in material
adverse effect on Western’s business.
While the Company believes current security measures and disaster recovery plans to be adequate, we
continue to develop and enhance internal controls, policies and procedures designed to protect information
technology systems from attack, damage or unauthorized access.
24
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.
Continuation of the Dividend Program
We declared and paid total quarterly cash dividends of $0.08 per outstanding common share during the four
quarters ended December 31, 2016. Any decision to declare and pay dividends in the future will be made at
the discretion of our Board of Directors, after taking into account our operating results, financial condition,
cash requirements, financing agreement restrictions and other factors our Board may deem relevant. We
may be unable or may elect not to continue to declare and pay dividends, even if necessary financial
conditions are met and sufficient cash is available for distribution.
Evaluation of Disclosure Controls and Procedures
As required by National 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 “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, 2016. 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 2016.
Outstanding Share Data
As of February 17, 2016, there were 395,447,663 Common Shares issued and outstanding.
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 2016, 215,000 previously granted options were exercised,
1,330,918 options were granted, and 39,000 options were forfeited. As of February 17, 2016, 11,235,585
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
3rd
2nd
1st
Year
4th
3rd
2nd
1st
2016
2015
Average Exchange Rate – USD to CAD
1.325
1.334
1.305
1.288
1.372
1.279
1.335
1.309
1.229
1.241
Revenue
Lumber
Logs
By-products
Total revenue
Lum ber
Production – millions of board feet
Shipments – millions of board feet
Price – per thousand board feet
Logs
Net Production - thousands of cubic metres (3)
Saw log purchases – thousands of cubic metres
Shipments – thousands of cubic metres
Price – per cubic metre (4)
Selling and adm inistration
Adjusted EBITDA
Amortization
Changes in fair value of biological assets, net
Operating restructuring items
Finance costs
Other income (expenses) (5)
883.5
235.6
68.2
1,187.3
220.7
55.1
17.2
293.0
943
952
928
4,420
1,517
2,103
105
27.5
148.2
(33.8)
3.9
(3.4)
(4.4)
16.2
242
236
935
919
337
493
104
6.7
33.8
(8.7)
6.9
(1.3)
(1.0)
18.0
Deferred income tax recovery (expense)
(32.2)
(11.5)
Current income tax recovery (expense)
Net incom e from continuing operations
Net income from discontinued operations
(0.2)
94.2
-
-
235.6
70.0
17.1
322.7
248
257
917
1,153
415
651
100
6.4
35.7
(8.8)
(0.7)
(0.6)
(1.2)
(1.4)
(6.1)
(0.1)
221.0
64.2
16.6
301.8
232
234
944
1,321
497
521
112
7.6
43.0
(8.8)
(0.4)
(0.8)
(1.1)
(0.2)
(7.8)
-
206.2
46.3
17.3
269.8
221
225
916
1,027
268
438
100
6.8
35.7
(7.5)
(1.9)
(0.7)
(1.1)
(0.3)
(6.8)
(0.1)
Net incom e
94.2
36.2
16.8
23.9
17.3
36.2
16.8
23.9
17.3
-
-
-
-
770.0
243.1
68.8
1,081.9
891
883
872
5,135
1,115
2,599
89
22.2
117.1
(30.9)
(3.2)
(4.3)
(5.0)
(1.1)
(7.8)
(0.2)
64.6
9.1
73.7
194.4
53.6
17.6
265.6
234
226
862
1,081
299
540
95
6.6
29.6
(8.2)
(0.9)
(0.7)
(1.1)
(0.9)
(7.9)
-
9.9
-
9.9
203.8
57.3
17.4
278.5
212
227
899
1,180
209
610
89
4.7
28.7
(7.3)
-
(2.9)
(1.3)
(0.2)
0.1
-
200.0
71.0
18.2
289.2
236
228
879
1,402
327
749
90
6.1
29.2
(7.6)
(0.6)
(0.4)
(1.3)
(0.1)
(0.1)
-
17.1
19.1
-
-
17.1
19.1
171.8
61.2
15.6
248.6
209
202
849
1,472
280
700
83
4.7
29.6
(7.8)
(1.7)
(0.3)
(1.3)
0.1
0.1
(0.2)
18.5
9.1
27.6
Adjusted EBITDA margin
12.5% 11.5% 11.1% 14.2% 13.2%
10.8% 11.1% 10.3% 10.1% 11.9%
Earnings per share:
Net income, basic
Net income, diluted
0.24
0.24
0.09
0.09
0.04
0.04
0.06
0.06
0.04
0.04
0.19
0.18
0.03
0.02
0.04
0.04
0.05
0.05
0.07
0.07
(1) Figures in this table may not equal or sum to figures presented elsew here due to rounding.
(2) Certain comparative figures have been reclassified to conform to the current year’s presentation, including a reclassification of certain
selling and administration expenses to cost of goods sold.
(3) Net Production is sorted log production, net of residuals and w aste.
(4) 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.
(5) Other income (expense), net of fair market value less cost to sell changes in biological assets.
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 fire in the summer.
Certain categories of transactions are presented separately above due to their unpredictable timing and to allow for greater
comparability of our operating results between periods. In the fourth quarter of 2016, the Company recognized $14.1 million
into other income for the 2011 partial tenure extinguishment in TFL 44 from the Maa’nulth First Nations Final Agreement Act.
The fourth quarter of 2016 also included an $8.0 million increase in fair value less costs to sell of the Company’s biological
assets, and a $3.8 million past service credit as a result of a pension plan amendment to reduce future benefit payments. In
the fourth quarter of 2015, the Company recognized changes in deferred tax balances with respect to unutilized operating tax
losses and actuarial gains and losses on its defined benefit plans, resulting in a $7.8 million deferred income tax expense
through net income, and a deferred income tax recovery of $9.1 million through other comprehensive income. The third quarter
of 2015 included a $2.9 million restructuring charge primarily related to the consolidation of the Company’s Central Island
timberlands operations. In the first quarter of 2015, the Company recognized $9.1 million of net income from discontinued
operations relating to its former Squamish pulp mill site that was sold on February 6, 2015.
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 judgements at this time. The financial information
presented throughout the Management’s Discussion and Analysis dated February 16, 2017 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 of 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 & Chief Executive Officer
Stephen Williams
Senior Vice President & Chief Financial Officer
February 16, 2017
27
KPMG LLP
PO Box 10426 777 Dunsmuir Street
Vancouver BC V7Y 1K3
Canada
Telephone (604) 691-3000
(604) 691-3031
Fax
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, 2016 and December
31, 2015, 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, 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 audits 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, 2016 and December 31, 2015, and
its consolidated financial performance and its consolidated cash flows for the years then ended in
accordance with International Financial Reporting Standards.
Chartered Professional Accountants
February 16, 2017
Vancouver, Canada
28
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 6)
Biological assets (Note 7)
Other assets (Note 8)
Deferred income tax assets (Note 11)
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities
Silviculture provision (Note 13)
Non-current liabilities:
Long-term debt (Note 10)
Silviculture provision (Note 13)
Deferred income tax liabilities (Note 11)
Other liabilities (Note 12)
Deferred revenue (Note 18)
Shareholders’ equity:
Share capital (Note 14)
Contributed surplus
Retained earnings (deficit)
December 31,
December 31,
2016
2015
$
19.0
107.0
149.8
14.2
290.0
$
9.4
75.0
148.5
17.8
250.7
297.2
121.2
57.6
11.0
0.2
271.3
125.2
53.7
11.2
31.3
$
777.2
$
743.4
$
102.6
9.7
112.3
$
97.7
11.2
108.9
34.4
19.2
2.0
28.4
58.4
254.7
506.0
8.6
7.9
522.5
63.2
19.6
-
35.4
60.4
287.5
505.5
7.6
(57.2)
455.9
$
777.2
$
743.4
Commitments and Contingencies (Note 18)
See accompanying notes to these consolidated financial statements
Approved on behalf of the Board:
Lee Doney, Chairman
James Arthurs, Director
29
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
Operating income prior to restructuring items and other income
Operating restructuring items (Note 23)
Other income (expense)(Note 24)
Operating income
Finance costs (Note 22)
Income before income taxes
Current income tax expense (Note 11)
Deferred income tax expense (Note 11)
Net income from continuing operations
Net income from discontinued operations (Note 25)
Net income
Other comprehensive income (loss)
Items that will not be reclassified to profit or loss:
Defined benefit plan actuarial gain (loss) (Note 20)
Income tax on other comprehensive gain (loss) (Note 11)
Total items that will not be reclassified to profit or loss
Other comprehensive income for the period
Total comprehensive income
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
Basic and diluted earnings per share - discontinued operations
Weighted average number of common shares outstanding (thousands)
Basic
Diluted
See accompanying notes to these consolidated financial statements
Years ended
December 31,
2016
2015
$
1,187.3
$
1,081.9
952.8
-
96.8
27.5
1,077.1
110.2
(3.4)
24.2
131.0
(4.4)
126.6
(0.2)
(32.2)
94.2
-
94.2
3.3
(0.8)
2.5
2.5
884.7
3.6
88.4
22.2
998.9
83.0
(4.3)
(1.1)
77.6
(5.0)
72.6
(0.2)
(7.8)
64.6
9.1
73.7
(5.1)
9.1
4.0
4.0
$
96.7
$
77.7
0.24
$
0.24
$
0.24
$
$
0.24
$
-
$
$
$
$
$
0.19
0.18
0.17
0.16
0.02
395,395
399,054
395,066
398,740
30
Western Forest Products Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(Expressed in millions of Canadian dollars)
Balance at December 31, 2014
Net income
Other comprehensive loss:
Defined benefit plan actuarial loss recognized
Income tax recovery on other comprehensive loss
Total comprehensive loss
Share-based payment transactions recognized in equity
Exercise of stock options
Dividends
Total transactions with owners, recorded directly in equity
Share
Capital
Contributed
Surplus
Retained
Earnings
(Deficit)
Total
Equity
$
504.4
$
7.0
$
(103.3)
$
408.1
-
-
-
-
-
1.1
-
1.1
-
-
-
-
0.9
(0.3)
-
0.6
73.7
73.7
(5.1)
9.1
77.7
-
-
(31.6)
(31.6)
(5.1)
9.1
77.7
0.9
0.8
(31.6)
(29.9)
Balance at December 31, 2015
$
505.5
$
7.6
$
(57.2)
$
455.9
Balance at December 31, 2015
Net income
Other comprehensive income:
Defined benefit plan actuarial gain recognized
Income tax on other comprehensive income
Total comprehensive income
Share-based payment transactions recognized in equity
Exercise of stock options
Dividends
Total transactions with owners, recorded directly in equity
Balance at December 31, 2016
$
505.5
$
7.6
$
(57.2)
$
455.9
-
-
-
-
-
0.5
-
-
94.2
94.2
-
-
-
1.2
(0.2)
-
3.3
(0.8)
96.7
-
-
(31.6)
3.3
(0.8)
96.7
1.2
0.3
(31.6)
0.5
506.0
$
1.0
8.6
$
(31.6)
7.9
$
(30.1)
522.5
$
See accompanying notes to these consolidated financial statements
31
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 6)
Gain on disposal of assets
Change in fair value of biological assets (Note 7)
Net finance costs
Deferred income tax expense (Note 11)
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 disposal of assets
Financing activities:
Interest received
Interest paid
Drawings under revolving credit facility (Note 9)
Repayment of revolving credit facility (Note 9)
Repayment of long-term debt
Dividends
Proceeds from exercise of stock options
Cash provided by (used in) continuing operations
Proceeds on disposal of assets
Other
Cash provided by discontinued operations (Note 25)
Increase 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
Years ended
December 31,
2016
2015
$
94.2
$
64.6
29.8
4.0
(0.1)
(3.9)
4.4
32.2
(6.4)
154.2
(32.0)
(1.3)
3.6
(1.3)
4.7
(26.3)
127.9
(56.1)
0.5
(55.6)
0.1
(2.5)
-
-
(29.0)
(31.6)
0.3
(62.7)
9.6
-
-
-
9.6
26.8
4.1
-
3.2
5.0
7.8
(6.0)
105.5
(9.4)
(9.1)
(9.0)
0.5
20.6
(6.4)
99.1
(62.1)
0.1
(62.0)
-
(2.9)
2.5
(9.2)
(10.0)
(31.6)
0.8
(50.4)
(13.3)
21.8
(0.9)
20.9
7.6
9.4
19.0
$
1.8
9.4
$
32
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(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 an integrated softwood forest products
company, incorporated and domiciled in Canada, operating in the coastal region of British Columbia. The
address of the Company’s head office is Suite 800 – 1055 West Georgia Street, Vancouver, British Columbia,
Canada. The Company’s primary business includes timber harvesting, reforestation, forest management,
sawmilling logs into lumber and wood chips, and value-added lumber remanufacturing. 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 (“IFRS”), as issued by the International Accounting
Standards Board. Certain comparative figures have been reclassified to conform to the current year’s
presentation including the reclassification of certain selling and administration expenses to cost of goods
sold.
The consolidated financial statements were authorized for issue by the Board of Directors on February
16, 2017.
(b) Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis except for the
following material items in the statements of financial position:
• Biological assets are measured at fair value less costs to sell;
• 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 at each reporting date;
• The defined benefit pension liability is recognized as the net total of the fair value 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 Canadian dollars which is the Company’s
functional currency. All amounts are presented in millions of Canadian dollars, unless otherwise
indicated.
(d) 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, 2016 are
Western Lumber Sales Limited, which sells into the United States and Western Forest Products
Japan Ltd., which sells into Japan.
(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 net
assets of the arrangement, rather than rights to all of its assets and obligations for all of its liabilities.
33
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
2. Basis of preparation (continued)
(d) Basis of consolidation (continued)
(ii) Interests in equity-accounted investees (continued)
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 other comprehensive income of equity
accounted investees, until the date on which significant influence or joint control ceases.
(iii) Transactions eliminated on consolidation
Inter-company balances and transactions, 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 of Western’s interest in the
investee. Unrealized losses are eliminated in the same way, except to the extent that there is
evidence of impairment.
(e) 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.
(f) Use of estimates and judgements
The preparation of the consolidated financial statements in conformity with IFRS 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 estimates are
recognized prospectively.
(i) Judgements
The determination of appropriate cash generating units as described in Note 3(c) is a judgement
made in applying accounting policy that has a significant effect on the amounts recognized in the
consolidated financial statements.
(ii) Assumptions and estimation uncertainties
Information about assumptions 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
Note 7
Note 11
Note 13
Note 15
Note 18
Note 20
Measurement of net realizable value of inventories
Measurement of fair value less costs to sell of standing timber
Recognition of deferred income tax assets: availability of future taxable profit
against which carry forward tax losses can be used
Measurement of the present value of silviculture provisions: key assumptions
about the likelihood and magnitude of an outflow of resources
Measurement of share-based payment transactions
Recognition and measurement of provisions and contingencies: key
assumptions about the likelihood and magnitude of an outflow of resources
Measurement of defined benefit obligations, key actuarial assumptions,
recognition of termination benefits
34
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
2. Basis of preparation (continued)
(f) Use of estimates and judgements (continued)
(ii) Assumptions and estimation uncertainties (continued)
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, on which 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. Refer to Note 21 for more details.
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.
(g) Accounting standards not yet adopted
The following amended IFRS standards are not yet effective for the year ended December 31, 2016 and
have not been applied in preparing these consolidated financial statements.
IFRS 9, Financial Instruments
IFRS 9 is effective for years commencing on or after January 1, 2018, and will replace IAS 39, Financial
Instruments: Recognition and Measurement. Under IFRS 9, financial assets will be classified and
measured based on the business model in which they are held and the characteristics of the associated
contractual cash flows. IFRS 9 also includes a new general hedge accounting standard which will better
align hedge accounting with risk management. The Company intends to adopt IFRS 9 in it consolidated
financial statements for the year commencing January 1, 2018. The extent of the impact of adoption of
the standard, based on the Company’s preliminary evaluation, is not expected to be material to the
financial statements.
IFRS 15, Revenue from Contracts with Customers
IFRS 15 is effective for years commencing on or after January 1, 2018, and will replace IAS 18, Revenue,
IAS 11, Construction Contracts, and a number of revenue related interpretations. IFRS 15 provides a
single, principles based five-step model to be applied to all contracts with customers, except insurance
contracts, financial instruments, and lease contracts, which fall in the scope of other IFRSs. The
Company intends to adopt IFRS 15 in its consolidated financial statements for the year commencing
January 1, 2018. The extent of the impact of adoption of the standard, based on the Company’s
preliminary evaluation, is not expected to be material to the financial statements.
IFRS 16, Leases
IFRS 16 is effective for years commencing on or after January 1, 2019, and will replace IAS 17, Leases
(“IAS 17”). IFRS 16 provides a single lessee accounting model, requiring the recognition of assets and
liabilities for all leases, unless the lease term is 12 months or less or the underlying asset has a low
value, while lessor accounting remains largely unchanged from IAS 17 and the distinction between
operating and finance leases is retained. The Company intends to adopt IFRS 16 in its consolidated
financial statements for the year commencing January 1, 2019. The extent of the impact of adoption of
the standard has not yet been determined.
35
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
3. Significant accounting policies
Significant accounting policies not described elsewhere in these consolidated financial statements include:
(a) 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.
(b) 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 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
amount 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.
(c) Impairment of non-financial assets
At each reporting date, the Company reviews the carrying amounts of its non-financial assets (other than
biological assets, inventories, and deferred income tax assets) to determine whether there is any
indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated.
For impairment testing, assets are grouped together into the smallest group of assets that generates
cash inflows from continuing use that are largely independent of the cash inflows of other assets or cash
generating units (“CGUs”). The recoverable amount of an asset or CGU is the greater of its value in use
and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted
to their present value using a pre-tax discount rate that reflects current market assessments of the time
value of money and the risks specific to the asset or CGU.
Impairment losses are recognized in net income. They are allocated first to reduce the carrying amount
of goodwill (if any) to the CGU, and then to reduce the carrying amounts of the other assets in the CGU
on a pro-rata basis. An impairment loss in respect of goodwill is not reversed. For other assets, an
impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the
carrying amount that would have been determined, net of depreciation or amortization, if no impairment
loss had been recognized.
4.
Inventory
Accounting policy
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 yellow and western red cedar) and facility;
(ii) Logs by sort by end use (saw logs and pulp logs).
The cost of inventories includes expenditures 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 cost of logs produced carry an average cost of production based on the operation
where the logs are produced, determined by log production costs divided by production volumes.
36
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
4.
Inventory (continued)
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.
Supporting information
Logs
Lumber
Supplies and other inventory
Provision for write downs
Total value of inventory
December 31,
2016
December 31,
2015
$
$
93.0
57.2
13.6
(14.0)
149.8
102.0
50.7
12.0
(16.2)
148.5
$
$
The carrying amount of inventory recorded at net realizable value was $55.7 million at December 31, 2016
(2015: $49.2 million), with the remaining inventory recorded at cost.
During 2016, $952.8 million (2015: $884.7 million) of inventory was charged to cost of sales which includes
a $2.2 million decrease (2015: $4.0 million increase) to the provision relating to inventory value write-downs.
The Company’s logs and lumber inventory is pledged as security against the revolving credit facility.
5. Property, plant and equipment
Accounting policy
All items of property, plant and equipment are measured at cost, less accumulated depreciation and any
accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition
of the asset. 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. 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.
Depreciation is based on the depreciable amount of an item of property, plant and equipment, which is the
cost of an item, less its estimated 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 measured at cost and is not depreciated. The estimated useful lives for the
current and comparative periods are as follows:
• Buildings and equipment
• Logging roads
5 - 20 years
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.
37
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
5. Property, plant and equipment (continued)
Supporting information
Cost
Balance at January 1, 2015
Additions
Disposals
Balance at December 31, 2015
Additions
Disposals
Balance at December 31, 2016
Accumulated amortization and impairments
Balance at January 1, 2015
Amortization
Disposals
Balance at December 31, 2015
Amortization
Disposals
Balance at December 31, 2016
Carrying amounts
At December 31, 2015
At December 31, 2016
6.
Intangible assets
Accounting policy
Buildings &
equipment
$
$
$
Logging roads
151.3
$
13.6
-
164.9
13.1
-
$
178.0
Land
$
103.7
-
(13.1)
90.6
-
-
90.6
$
$
118.8
12.9
-
131.7
12.7
-
$
144.4
-
$
-
-
-
-
-
$
-
214.4
48.5
(1.3)
261.6
43.0
(1.4)
303.2
101.3
13.9
(1.1)
114.1
17.1
(1.0)
130.2
Total property,
plant &
equipment
$
$
$
469.4
62.1
(14.4)
517.1
56.1
(1.4)
571.8
220.1
26.8
(1.1)
245.8
29.8
(1.0)
274.6
$
$
$
147.5
$
33.2
$
90.6
$
271.3
$
173.0
$
33.6
$
90.6
$
297.2
Crown timber tenures are the contractual arrangements between the Company and the British Columbia
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.
Supporting information
Cost
Balance at December 31, 2015
Balance at December 31, 2016
Accumulated amortization and impairments
Balance at January 1, 2015
Amortization
Balance at December 31, 2015
Amortization
Balance at December 31, 2016
Carrying amounts
At December 31, 2015
At December 31, 2016
$
$
170.7
170.7
$
41.4
4.1
$
45.5
4.0
49.5
$
$
125.2
$
121.2
There were no indicators of impairment identified in the year ended December 31, 2016, and accordingly,
no impairment adjustments were required during the year ended December 31, 2016.
38
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
7. Biological assets
Accounting policy
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 necessary to sell the assets. Land under the standing
timber is measured at cost and included in property, plant and equipment.
Supporting information
(a) Reconciliation of carrying amount
Carrying value, beginning of year
Change in fair value less costs to sell (Note 24)
Change in fair value due to growth and pricing
Harvested timber transferred to inventory
Carrying value, end of year
Years ended December 31,
2016
2015
$
53.7
8.0
4.5
(8.6)
$
56.9
-
3.2
(6.4)
$
57.6
$
53.7
At December 31, 2016, private timberlands comprised an area of approximately 23,293 hectares
(December 31, 2015: 23,293 hectares) of land owned by the Company; standing timber on these
timberlands ranged from newly planted cut-blocks to mature forests available for harvest. During the
year ended December 31, 2016, the Company harvested and scaled approximately 284,928 cubic
metres (“m3”) of logs from its private timberlands, which had a fair value less costs to sell of $109 per m3
at the date of harvest (2015: 288,052 m3 and $98 per m3, respectively).
(b) Measurement of fair values
The table above reconciles 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 fair value
measurements for the Company’s standing timber of $57.6 million has been categorized as Level 3 fair
value based on the inputs to the valuation technique used as discussed below.
Valuation technique
Significant unobservable inputs
Inter-relationship between key
unobservable inputs and fair value
measurement
Discounted cash flows: The valuation model
considers the present value of the net cash
flows expected to be generated by the
individual private timberlands utilizing a
harvest optimization approach. The cash
flow projections include specific estimates
for 25 years. The expected net cash flows
are discounted using a
risk-adjusted
discount rate.
•
•
•
•
Estimated future log prices per m3 ($74
- $152, weighted average $96).
Estimated harvest costs per m3 ($59 -
$81, weighted average $64).
Estimated harvest annual volume
- 108,000 m3, weighted
(11,000
average 88,000 m3).
Risk-adjusted discount rate (2016: 7.0
- 7.5%, weighted average 7.0%; 2015:
7.1%).
The estimated fair value would increase
(decrease) if:
•
•
•
•
The estimated log prices per m3
were higher (lower);
The estimated harvest costs per m3
were lower (higher);
The estimated harvest volumes
were higher (lower); or
The risk-adjusted discount rates
were lower (higher).
(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 this 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.
39
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
8. Other assets
Investments
Other
9. Revolving credit facility
Available
Outstanding letters of credit
Unused portion of Facility
December 31,
2016
December 31,
2015
$
$
$
$
10.9
0.1
11.0
11.1
0.1
11.2
December 31,
2016
December 31,
2015
$
$
$
$
125.0
0.9
124.1
125.0
2.5
122.5
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 rate (if availability exceeds 35% of the borrowing
base) or at the Canadian Prime rate plus 0.25% (if availability is less than 35% of the borrowing base) or at
the Company’s option, at rates for Bankers’ Acceptances (“BA”) or London Interbank Offered Rate based
loans plus 1.25% or 1.50%, dependent on the same availability criteria. The interest rate for the Facility was
2.70% at December 31, 2016 (December 31, 2015: 2.70%).
On December 9, 2016, the maturity date of the Facility was extended by one year to December 14, 2017.
Other terms and conditions remain unchanged.
The Facility is secured by a first lien interest over accounts receivable and inventory and includes financial
covenants (see Note 17). At December 31, 2016, the Facility was unutilized (December 31, 2015: unutilized)
and $124.1 million of the facility was available to the Company (December 31, 2015: $122.5 million). The
Company was in compliance with its financial covenants at December 31, 2016.
10. Long-term debt
Accounting policy
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 over the term of the long-term debt using the effective interest method.
Transaction costs are deferred and amortized to finance costs over the term of the long-term debt using the
effective interest rate method.
Supporting information
The Company’s revolving term loan facility (the “Term Loan”) provides for a maximum borrowing amount of
$110.0 million and has a maturity date of June 29, 2019. The Term Loan bears interest at an index rate,
determined as the higher of (i) the Canadian Prime rate plus 0.15%, and (ii) the 30 day BA rate plus 1.65%,
or at the election of the Company, the applicable BA rate plus 1.65%. The interest rate for the Term Loan
was 2.60% at December 31, 2016 (December 31, 2015: 2.57%).
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 accounts receivable and inventory, over which it has second
lien interests, and includes financial covenants (see Note 17).
The Company was in compliance with its financial covenants at December 31, 2016. Transaction costs are
deferred and amortized to finance costs over the term of the Term Loan using the effective interest rate
method.
40
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
10. Long-term debt (continued)
December 31,
2016
December 31,
2015
Long-term debt
Less transaction costs
11. Income taxes
Accounting policy
$
$
$
$
35.0
(0.6)
34.4
64.0
(0.8)
63.2
Income tax expense comprises current and deferred income tax. It is recognized in net income 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.
(a) 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.
Current income tax assets and liabilities are offset only if certain criteria are met.
(b) Deferred income tax
Deferred income tax is 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
recognized to the extent that it is probable that the related tax benefit will be realized. Unrecognized
deferred income tax assets are reassessed at each reporting date and recognized to the extent that it is
probable that future taxable profits will be available against which they can be used.
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.
Supporting information
Current tax expense
Current period
Deferred income tax expense
Origination and reversal of temporary differences
Recognition of previously unrecognized tax losses
Change in unrecognized deductible temporary differences
Years ended December 31,
2016
2015
$
$
0.2
0.2
$
$
0.2
0.2
$
$
32.8
-
(0.6)
32.2
36.2
(9.9)
(18.5)
7.8
$
$
Total income tax expense (recovery)
$
32.4
$
8.0
Income tax expense (recovery) differs from the amount that would be computed by applying the Company’s
combined Federal and Provincial statutory rate as follows:
41
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
11. Income taxes (continued)
(b) Deferred income tax (continued)
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
Temporary differences recorded to OCI
Recognition of previously unrecognized
tax losses
Change in unrecognized deductible temporary
differences
Year ended December 31, 2016
Year ended December 31, 2015
26.00%
(0.39%)
(0.08%)
0.39%
0.00%
0.00%
$
126.6
32.9
(0.5)
(0.1)
0.5
-
26.00%
0.41%
(0.69%)
0.00%
10.74%
$
72.6
18.9
0.3
(0.5)
-
7.8
-
(13.64%)
(9.9)
(0.32%)
25.60%
$
(0.4)
32.4
(11.85%)
11.01%
$
(8.6)
8.0
The components of recognized deferred income tax assets and liabilities are as follows:
For the Year ended December 31, 2016
Deferred income tax assets
Tax loss carry-forwards
Employee future benefits obligation
Provisions and other
Deferred income tax liabilities
Intangible assets
Biological assets
Property, plant and equipment
For the Year ended December 31, 2015
Deferred income tax assets
Tax loss carry-forwards
Employee future benefits obligation
Provisions
Deferred income tax liabilities
Intangible assets
Biological assets
Property, plant and equipment
Opening
Balance
Recognized in
Profit or Loss
Recognized in
OCI
Ending
Balance
$
53.0
8.5
12.1
73.6
$
(22.1)
(1.3)
0.6
(22.8)
-
$
(0.8)
-
(0.8)
$
30.9
6.3
12.7
49.9
(31.0)
(7.3)
(4.0)
(42.3)
(0.5)
(0.6)
(8.3)
(9.4)
-
-
-
-
(31.5)
(7.9)
(12.3)
(51.7)
$
31.3
$
(32.2)
$
(0.8)
$
(1.8)
$
53.8
-
13.9
67.7
$
(0.8)
(0.6)
(1.9)
(3.3)
-
$
9.1
-
9.1
$
53.0
8.5
12.1
73.6
(31.7)
(7.8)
1.7
(37.8)
0.7
0.5
(5.7)
(4.5)
-
-
-
-
(31.0)
(7.3)
(4.0)
(42.3)
Total
$
29.9
$
(7.8)
$
9.1
$
31.3
The Company has recorded deferred income tax assets arising in foreign jurisdictions of $0.2 million (2015:
$0.2 million) in relation to provisions for employee future benefits in Western Forest Products Japan Ltd.
The Company has recognized deferred income tax assets in relation to unused tax losses that are available
to carry forward against future taxable income. At December 31, 2016, the Company and its subsidiaries
have unused non-capital tax losses carried forward of approximately $119.0 million (2015: $200.8 million),
which expire between 2030 and 2035, available to reduce taxable income. The Company has unrecognized
capital losses of approximately $101.9 million (2015: $102.5 million) available to be utilized against capital
gains.
Deferred income tax assets have not been recognized in respect of the following loss carry-forwards and
other deductible temporary differences:
42
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
11. Income taxes (continued)
(b) Deferred income tax (continued)
Temporary deductible differences
Capital loss carry-forwards
12. Other liabilities
Employee future benefits obligation (Note 20)
Environmental accruals
Performance share unit plan liabilities (Note 15)
Other
13. Silviculture provision
Accounting policy
December 31,
2015
December 31,
2015
14.2
101.9
18.1
102.5
$
116.1
$
120.6
December 31,
2016
December 31,
2015
$
$
23.1
2.5
1.5
1.3
28.4
32.7
2.0
0.4
0.3
35.4
$
$
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.
Supporting information
The Company has a responsibility to reforest timber harvested under various timber rights. Changes in the
silviculture provision are as follows:
Years ended December 31,
2016
2015
Silviculture provision, beginning of year
Silviculture provision charged
Silviculture work payments
Unwind of discount
Silviculture provision, end of year
Less current portion
$
$
30.8
7.5
(9.6)
0.2
28.9
9.7
19.2
29.7
9.9
(9.0)
0.2
30.8
11.2
19.6
$
$
The silviculture expenditures are expected to occur over the next one to ten years and have been discounted
at risk-free rates of 0.63% to 1.72% (2015: 0.48% to 1.39%). The total undiscounted amount of the estimated
future expenditures required to settle the silviculture obligation at December 31, 2016 is $29.6 million
(December 31, 2015: $31.7 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.
43
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
14. Share capital
Accounting policy
The Company’s authorized capital consists of an unlimited number of common shares (“the Common
Shares”) and an unlimited number of preferred shares. Common Shares and preferred shares 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.
Supporting information
The Company has no outstanding preferred shares. The Common Shares entitle the holders thereof to one
vote per share.
Issued and outstanding Common Shares are as follows:
Balance at January 1, 2015
Exercise of stock options
Balance at December 31, 2015
Exercise of stock options
Balance at December 31, 2016
Number of
Common Shares
394,799,407
446,000
395,245,407
202,256
395,447,663
Amount
$
504.4
1.1
505.5
0.5
506.0
$
$
During the year ended December 31, 2016, cash dividends of $0.02 per Common Share were paid for each
of the quarters ended March 31, 2016, June 30, 2016, September 30, 2016 and December 31, 2016. An
aggregate of $31.6 million (2015: $31.6 million) in dividends was paid to shareholders in 2016.
15. Share-based compensation plans
Accounting policy
Stock options
The Company has established an incentive stock option plan (the “Option Plan”) 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 contributed surplus, over the period
that the individual becomes unconditionally entitled to the awards. When stock options are exercised, the
cash consideration received from employees is credited to share capital, as is the previously calculated fair
value included in contributed surplus.
Determining the fair value of share-based compensation awards at the grant date requires judgement. 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. 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.
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 this model takes into account the barrier price factor. All options
which were granted prior to 2009 and do not contain the minimum price requirement continue to be valued
using the Black-Scholes model.
44
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
15. Share-based compensation plans (continued)
Deferred share units and performance share units
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 grant-date fair value of the amount payable to eligible officers and employees in respect of Performance
Share Units (“PSUs”), which are cash-settled, is recognized as an employee expense with a corresponding
increase in liabilities, over a three year performance period.
The liabilities under the DSU and PSU Plans are re-measured at fair value at each reporting date and at
settlement date. For the PSU Plan, this includes re-measurement as the Company’s performance tracks
against the performance vesting targets. Any changes in the fair value of the liabilities are recognized in
employee expenses in net income.
Supporting information
(a) Stock-option plan
The Option Plan permits the granting of options to eligible participants to purchase up to an aggregate
of 20,000,000 Common Shares. During 2016, the Company recorded compensation expense of $1.2
million (2015: $0.9 million) which has been credited to contributed surplus. Each option is exercisable,
subject to vesting terms of 20% at the end of each of the first five years after grant 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 grant date. Options granted under the Option Plan expire a
maximum of ten years from the date of the grant.
During the year ended December 31, 2016, the Company granted 1,330,918 options with a fair value of
$0.7 million. Weighted average assumptions applied in the option pricing model included exercise price
of $1.97, risk-free interest rate of 0.75% volatility rates of 41% and an expected life of seven years.
The following table summarizes the change in the options outstanding during the years ending
December 31, 2016 and 2015:
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
Year ended December 31, 2016
Year ended December 31, 2015
Number of Options
10,158,667
1,330,918
(215,000)
(39,000)
11,235,585
Weighted average
exercise price
$
$
$
$
$
1.44
1.97
1.48
2.61
1.50
Number of Options
10,431,000
1,607,667
(446,000)
(1,434,000)
10,158,667
Weighted average
exercise price
$
$
$
$
$
1.35
2.20
1.65
1.57
1.44
Details of options outstanding under the Option Plan at December 31, 2016 are as follows:
Exercise
price
$
$
$
$
$
$
$
$
$
$
0.22
0.77
0.95
0.96
1.27
1.97
2.17
2.20
2.34
2.61
Number outstanding
December 31, 2016
1,000,000
500,000
1,030,000
2,000,000
1,920,000
1,330,918
116,000
1,451,667
300,000
1,587,000
11,235,585
Weighted average
remaining option life
(years)
3.2
4.2
5.1
5.6
6.1
9.1
8.9
7.8
7.8
7.1
6.4
Weighted average
exercise price
$
$
$
$
$
$
$
$
$
$
$
0.22
0.77
0.95
0.96
1.27
1.97
2.17
2.20
2.34
2.61
1.50
Number exercisable
December 31, 2016
1,000,000
500,000
824,000
1,600,000
1,152,000
-
23,200
354,333
120,000
634,800
6,208,333
Weighted average
exercise price
$
$
$
$
$
$
$
$
$
$
$
0.22
0.77
0.95
0.96
1.27
1.97
2.17
2.20
2.34
2.61
1.15
45
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
15. Share-based compensation plans (continued)
(b) Deferred share unit plan
The Company has a DSU Plan for directors and designated executive officers. Directors may elect to
take a portion of their fees in the form of DSUs. Prior to January 1, 2015 when the DSU Plan was closed
to executive officers, executive officers could 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 common 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 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 closing share price on the dividend payment date.
Effective January 1, 2015, DSUs are only granted to non-executive directors per the amended DSU
Plan.
Outstanding, beginning of year
Granted
Redeemed
Outstanding, end of year
Year ended December 31, 2016
Year ended December 31, 2015
Number of DSU
981,495
168,033
(49,455)
1,100,073
Average unit value
$
0.86
$
2.07
$
2.32
$
0.98
Number of DSU
926,689
98,068
(43,262)
981,495
Average unit value
$
0.82
$
1.98
$
2.57
$
0.86
In 2016, the Company recorded compensation recovery for these DSUs of $0.2 million (2015: recovery
of $0.3 million), with a corresponding decrease to accounts payable and accrued liabilities.
(c) Performance share unit plan
The Company has established a PSU Plan for designated officers and employees of the Company.
Under the terms of the PSU Plan, participants are granted a number of PSUs based on a target award
divided by the value of the Company’s Common Shares at the effective date of grant. All PSU holders
are entitled to PSU dividends, equivalent to the dividend they would have received if they held their
PSUs as common shares.
Performance targets are set by the Management Resource & Compensation Committee of the
Company’s Board of Directors. The number of PSUs which will ultimately vest will be the original number
of PSUs granted plus PSUs equal to the value of accrued notional dividends over the performance
period. For dividends, the number of PSUs allotted is determined by dividing the total dollar value of the
dividend each PSU holder would have received, by the closing share price on the trading day
immediately after the dividend date of record. The redemption value of vested PSUs will be in a range
from 0% to 200% based on return on capital employed over a three year performance period.
Outstanding, beginning of year
Granted
Forfeited
Outstanding, end of year
Years ended December 31,
2016
2015
434,115
553,044
(34,923)
952,236
-
434,115
-
434,115
In 2016, the Company recorded PSU expense of $1.1 million (2015: expense of $0.4 million), with a
corresponding increase to accounts payable and accrued liabilities.
16. Earnings per share
The Company presents basic and diluted earnings per share (“EPS”) data for its Common Shares. Basic
EPS is calculated by dividing the net income attributable to Common 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.
46
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
17. Capital requirements
The Company’s strategy for managing capital is to maintain a capital position that provides financial flexibility
and achieves growth with the objective of maximizing long-term shareholder value. Western’s capital
requirements typically include major new investments designed to increase net income and disbursements
for other new equipment and ongoing enhancements, efficiency improvements, safety, and protection or
extension of the life of equipment. Significant expenditures are also required to fund new capital roads
allowing access to timber stands for harvesting purposes. During 2016, capital expenditures continued to be
monitored closely because of the changing economic climate, but spending on planned strategic capital
projects has continued because of Western’s stronger financial position and continued 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 decreased its debt
position and has a net capitalization to debt ratio of 3% as at December 31, 2016 (December 31, 2015: 11%).
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.
Beginning in 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.
Under the current financing agreements, the Company is subject to financial covenants. The Facility has a
minimum fixed charge coverage ratio of 1.1:1.0 should availability fall below 12.5% of the borrowing base or
in the event of default. The Term Loan contains a maximum loan to value ratio financial covenant of 45%.
Loans for this covenant 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.
As at December 31, 2016, the Company is in compliance with all financial covenants, and expects to be in
compliance for the next 12 months.
The Company is not subject to any statutory capital requirements. Under the Company’s Option Plan,
commitments exist to issue common shares.
There were no changes to the Company’s approach to managing capital during the year.
18. Commitments and contingencies
(a) Lumber duties and export tax
Under the softwood lumber agreement between Canada and the United States, the Company’s exports
to the US were assessed an export tax by the Canadian Government. The SLA expired on October 12,
2015, eliminating export tax measures on Canadian softwood lumber shipments to the US.
The twelve-month standstill period of the SLA, which precluded the United States from bringing trade
action against Canadian softwood lumber producers, expired on October 12, 2016. On November 25,
2016, the US Lumber Coalition petitioned the US Department of Commerce and the US International
Trade Commission seeking Countervailing and Anti-dumping duties on Canadian softwood lumber
shipments to the US.
On January 6, 2017, the ITC concluded that there was “reasonable indication” that softwood lumber
products from Canada materially injured US producers; and, as a result, the DoC continued its ongoing
CVD and AD investigations on these products.
47
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
18. Commitments and contingencies (continued)
(a) Lumber duties and export tax (continued)
The DoC is expected to release its CVD investigation findings in the second quarter of 2017, with AD
investigation findings to be released approximately 60 days thereafter. These preliminary findings could
force the payment of cash deposits to the US Treasury on Canadian softwood lumber shipments to the
US occurring on or after the DoC ruling. If the DoC finds that “critical circumstances” apply, CVD and
AD could also be applied retroactively up to 90 days prior to those preliminary determinations. At this
time, it is not expected that any potential retroactive payments would give rise to a liability as at
December 31, 2016.
(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
Accounting policy
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.
Supporting information
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 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 2016.
(d) Operating leases
Accounting policy
Leases of property, plant and equipment that transfer to the Company substantially all of the risks and
rewards of ownership are classified as finance leases. The leased assets are measured initially at an
amount equal to the lower of their fair value and the present value of the minimum lease payments.
Subsequent to initial recognition, the assets are accounted for in accordance with the accounting policy
applicable to that asset.
48
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
18. Commitments and contingencies (continued)
(d) Operating leases (continued)
Assets held under other leases are classified as operating leases and are not recognized in the
Company’s statement of financial position.
Payments made under operating leases are recognized in profit or loss on a straight-line basis over the
term of the lease. Lease incentives received are recognized as an integral part of the total lease expense,
over the term of the lease.
Minimum lease payments made under finance leases are apportioned between the finance expense and
the reduction of the outstanding liability. The finance expense is allocated to each period during the
lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
Supporting information
Future minimum lease payments at December 31, 2016 under operating leases were as follows:
2017
2018
2019
2020
2021
Thereafter
$
$
$
$
$
$
$
4.3
3.6
3.5
2.3
1.7
5.3
20.7
(e) Pension funding commitments
The Company is committed to making estimated annual special payments in relation to its salaried
pension plans of $2.2 million for 2017 and approximately $1.6 million per year on average for 2018 to
2028, or until such time as a new funding valuation may lead to a change in the amount of payments
required.
19. Segmented information
Accounting policy
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.
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 sold worldwide. Substantially all of
Western’s property, plant and equipment, biological assets and intangible assets are located in British
Columbia, Canada. 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.
49
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
19. Segmented information (continued)
Supporting information
The Company’s sales, based on the known origin of the customer, were as follows:
Years ended December 31,
2016
2015
Canada
United States
Japan
China
Other
Europe
20. Employee benefits
Accounting policy
(a) Termination benefits
$
$
421.8
288.6
170.3
191.4
77.9
37.3
1,187.3
473.0
231.7
161.3
126.5
51.8
37.6
1,081.9
$
$
Termination benefits are expensed at the earlier of when the Company can no longer withdraw the offer
of those benefits and when the Company recognizes costs for a restructuring. If benefits are not
expected to be settled wholly within twelve months of the reporting date, then they are discounted.
(b) 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.
(c) Employee future 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. 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 actuarial cost projected unit credit method.
When the calculation results in a potential asset 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.
50
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
20. Employee benefits (continued)
(c) Employee future benefits (continued)
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. A defined contribution plan is a retirement plan under which the Company pays fixed
contributions into a separate entity. 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.
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.
Supporting information
Information about the Company's defined benefit salaried pension plans and other non-pension benefits, in
aggregate, is as follows:
December 31, 2016
December 31, 2015
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 loss
Plan Amendment (Note 24)
Balance, end of year
Deficit recognized in Statement of
Financial Position (Note 12)
Cumulative actuarial gains (losses), beginning of year
Actuarial (gains) losses recognized directly in OCI
Cumulative actuarial gains (losses), end of year
$
$
-
$
0.4
(0.4)
-
$
-
110.0
4.3
(8.5)
0.8
106.6
-
$
0.4
(0.4)
-
$
-
$
$
$
$
$
$
134.8
0.3
(8.5)
5.0
1.8
-
$
133.4
5.9
-
(0.4)
0.3
-
-
5.8
0.4
-
0.4
$
$
$
$
(17.3)
$
(5.8)
$
(26.8)
$
(5.9)
$
$
$
$
$
$
$
$
(30.5)
(5.1)
(35.6)
6.1
-
(0.4)
0.2
-
-
5.9
0.4
-
0.4
106.6
3.7
(9.0)
7.9
109.2
133.4
0.3
(9.0)
4.8
0.8
(3.8)
126.5
(35.6)
3.3
(32.3)
Experience gains (losses):
Experience gains (losses) on plan assets:
Amount
Percentage of plan assets
Experience gains (losses) on plan liabilities:
Amount
Percentage of plan assets
December 31, 2016
December 31, 2015
Salaried
Pension Plans
Non-pension
Plans
Salaried
Pension Plans
Non-pension
Plans
$
4.1
3.74%
n/a
n/a
$
(3.4)
(3.18)%
n/a
n/a
-
$
0.07%
-
$
0.00%
$
-
(0.02)%
-
$
0.00%
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
51
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
20. Employee benefits (continued)
salaried and hourly employees. The funded and unfunded defined benefit pension plans were closed to new
entrants effective June 30, 2006. No further benefits accrue under these plans for years of service after
December 31, 2010, and no further benefits accrue under these plans for compensation increases effective
December 31, 2016. All salaried employees are now provided with pension benefits through a defined
contribution plan. 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, 2016 were $19.3 million
(December 31, 2015: $18.1 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 performed at December 31, 2013. 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, 2016. Included in the accrued benefit
obligations and plan assets for salaried pension plans, presented above, are accrued benefit obligations of
$120.0 million at December 31, 2016 (December 31, 2015: $126.6 million) in respect of plans that are wholly
or partially funded.
The following is a breakdown of the defined benefit pension plan assets into their major investment
categories:
Equity securities
Debt securities
Other
December 31,
2016
December 31,
2015
33%
63%
4%
100%
33%
64%
3%
100%
The significant actuarial assumptions adopted in measuring the Company's accrued benefit obligations
(expressed as weighted averages) are as follows:
December 31,
2016
December 31,
2015
December 31, 2016
Increase (Decrease) of Accrued Benefit
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
3.73%
3.60%
3.67%
3.55%
3.48%
3.83%
3.65%
3.73%
3.60%
3.49%
5.52% in 2017
5.65% in 2016
grading to 4.35% grading to 4.35%
in 2026
in 2026
Obligation w ith Change in Assumption
1% Decrease
1% Increase
n/a
n/a
n/a
n/a
13,327,000
504,900
(16,188,000)
(586,500)
(53,100)
49,200
(397,400)
372,200
Medical cost trend rate
Future mortality
n/a
n/a
n/a
n/a
(397,400)
372,200
301,300
(351,800)
52
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
20. Employee benefits (continued)
The Company's salaried employees’ pension and non-pension benefits expense is as follows:
December 31, 2016
December 31, 2015
Salaried
Pension Plans
Non-pension
Plans
Salaried
Pension Plans
Non-pension
Plans
Defined benefit plans:
Current service costs and administrative expenses
Net interest costs
Plan Amendment (Note 24)
Cost of defined benefit plans
Cost of defined contribution plans
Total cost of employee post-retirement benefits
$
$
0.3
0.9
(3.8)
(2.6)
3.2
0.6
-
$
0.2
-
0.2
-
0.2
$
0.3
0.9
-
1.2
3.0
4.2
-
$
0.2
-
0.2
-
0.2
$
$
$
The Company is committed to make funding contributions to its defined benefit plans of $2.2 million during
2017.
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 2016
amounted to $11.3 million (2015: $10.6 million).
21. Financial instruments – fair values and risk management
Accounting policy
(a) Non-derivative financial assets
The Company classifies its non-derivative 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.
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. Upon initial recognition, directly attributable transaction costs
are recognized in net income 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.
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.
53
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
21. Financial instruments – fair values and risk management (continued)
(a) Non-derivative financial assets (continued)
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.
(b) Non-derivative financial liabilities
The Company classifies its financial liabilities as other financial liabilities.
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 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.
(c) 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.
54
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
21. Financial instruments – fair values and risk management (continued)
(c) Derivative financial instruments (continued)
Embedded derivatives are separated from the host contract and accounted for separately if (i) the
economic characteristics and risks of the host contract and the embedded derivative are not closely
related, (ii) a separate instrument with the same terms as the embedded derivative would meet the
definition of a derivative, and (iii) 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.
Supporting information
(d) 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.
Carrying Amount
Fair Value
December 31, 2016
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
1
3
Total
$
$
4.9
4.9
$
-
$
-
$
-
$
-
-
$
$
-
$
$
4.9
4.9
-
4.9
-
$
4.9
Financial assets not measured at fair value
Cash and cash equivalents
Trade and other receivables
-
$
-
$
-
-
$
-
$
-
$
19.0
107.0
126.0
-
$
-
$
-
$
19.0
107.0
126.0
$
$
Financial liabilities measured at fair value
Foreign currency forward contracts
-
$
$
-
$
$
0.3
0.3
$
-
$
-
-
$
$
-
$
$
0.3
0.3
-
0.3
-
$
0.3
Financial liabilities not measured at fair value
Accounts payable and accrued liabilities
Long-term debt (Note 10)
$
-
-
$
-
$
-
-
$
-
$
-
-
$
-
$
$
102.3
34.4
136.7
$
$
102.3
34.4
136.7
December 31, 2015
Financial assets measured at fair value
Investments
$
$
5.1
5.1
$
-
$
-
$
-
$
-
$
-
$
-
$
$
5.1
5.1
-
5.1
-
$
5.1
Financial assets not measured at fair value
Cash and cash equivalents
Trade and other receivables
-
$
-
$
-
-
$
-
$
-
$
$
9.4
75.0
84.4
-
$
-
$
-
$
9.4
75.0
84.4
$
Financial liabilities measured at fair value
Foreign currency forward contracts
-
$
$
-
$
$
0.3
0.3
$
-
$
-
-
$
$
-
$
$
0.3
0.3
-
0.3
-
$
0.3
Financial liabilities not measured at fair value
Accounts payable and accrued liabilities
Long-term debt (Note 10)
-
$
-
$
-
-
$
-
$
-
-
$
-
$
-
$
97.4
63.2
160.6
$
$
97.4
63.2
160.6
$
55
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
21. Financial instruments – fair values and risk management (continued)
(e) Financial risk management
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.
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 substantially all sales
outside of North America 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, 2016, the Company had an allowance for doubtful customer accounts of nil
(December 31, 2015: nil).
The aging of trade and other receivables at the reporting date that were not impaired was as follows:
December 31, 2016
December 31, 2015
Gross value
Impairment
Gross value
Impairment
Not past due
Past due, 0 - 30 days
Past due, 31 - 120 days
$
$
$
$
98.3
6.9
1.8
107.0
-
$
-
-
$
-
$
$
71.0
3.9
0.1
75.0
-
$
-
-
$
-
The Company held cash and cash equivalents of $19.0 million at December 31, 2016 (December
31, 2015: $9.4 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,
2016, a change of 1% in interest rates would have increased or decreased annual net income by
approximately $0.4 million (2015: $0.8 million). The Company does not currently use derivative
instruments to reduce its exposure to interest rate risk.
56
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
21. Financial instruments – fair values and risk management (continued)
(e) Financial risk management (continued)
(iii) Currency risk
Certain of the Company’s sales transactions are denominated in foreign currencies, principally, the
USD and Japanese Yen, and accordingly the Company is exposed to currency risk associated with
changes in foreign exchange rates. To assist in managing this exchange risk, the Company sells
forward contracts with a maximum term for each transaction of up to one year. The Company does
not consider the credit risk associated with the counterparty risk to be significant.
During 2016, the Company entered into forward contracts to sell USD and JPY in order to mitigate
a portion of the foreign currency risk. At December 31, 2016, the Company had outstanding
obligations to sell an aggregate USD$48.0 million at an average exchange rate of CAD$1.33 per
USD with maturities through January 31, 2017, and to sell JPY 750.0 million at a rate of JPY 84.64
per CAD with maturities through February 21, 2017.
All foreign currency gains and losses on forward contracts to December 31, 2016 have been
recognized in sales in the consolidated statement of comprehensive income and the fair value of
these instruments at December 31, 2016 was a net liability of $0.3 million which is included in
accounts payable and accrued liabilities on the consolidated statement of financial position
(December 31, 2015: $0.3 million). A net loss of $0.3 million (2015: net loss of $7.1 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 CAD as
compared to the JPY would result in a gain (loss) of approximately $0.1 million in relation to the JPY
Yen/CAD foreign exchange contracts held at December 31, 2016. An increase (decrease) of 1% in
the value of the CAD as compared to the USD would result in a gain (loss) of approximately $0.6
million in relation to the USD foreign exchange contracts held at December 31, 2016.
Certain receivable balances at December 31, 2016 are denominated in foreign currencies,
principally, the USD. Accordingly, fluctuations in foreign exchange rates may affect the carrying
value of the underlying accounts receivable. As of December 31, 2016, the Company’s accounts
receivable denominated in USD totaled USD$40.3 million. An increase (decrease) in the value of
the Canadian dollar by USD$0.01 would result in a decrease (increase) in USD denominated
accounts receivable at year end of approximately $0.4 million. In addition, as at December 31, 2016,
the Company had a total of USD$8.3 million in USD denominated cash and cash equivalents. An
increase (decrease) in the value of the Canadian dollar by USD$0.01 would result in an immaterial
change to USD 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, 2016, the Company had $199.1 million (December 31, 2015: $168.5 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 credit facility
Revolving term loan
Carrying
amount
$
102.6
-
34.4
137.0
$
Contractual
cash flows
$
102.6
0.6
38.1
141.3
$
6 months
or less
$
102.6
0.3
0.6
103.5
$
6 - 12
months
$
-
$
0.3
$
0.6
$
0.9
2 - 3 years
$
-
$
-
$
36.9
$
36.9
4 - 5 years
$
-
-
$
-
$
$
-
More than 5
years
$
-
-
$
-
$
$
-
57
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
22. Finance Costs
Accounting policy
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 20.
Supporting information
Long-term debt
Net interest - defined benefit plan obligation
Revolving credit facility
Amortization of deferred financing costs
Unwind of discount on provisions
Other
23. Operating restructuring items
Years ended December 31,
2016
2015
$
$
1.7
1.4
0.7
0.4
0.2
-
4.4
2.1
1.3
0.9
0.4
0.2
0.1
5.0
$
$
Operating restructuring expenses in 2016 were $3.4 million (2015: $4.3 million) incurred primarily in relation
to additional ongoing costs associated with the closure of the Company’s former Nanaimo sawmill and the
consolidation of the Central Island forest operations. Expenses incurred in 2015 related to the arbitrated
settlement of a union grievance relating to the 2011 curtailment of the Duke Point and Nanaimo sawmills,
and other unrelated severance costs.
24. Other Income
Settlement on tenure extinguishment
Change in fair value of biological assets (Note 7)
Employee benefits - plan amendment (Note 24)
Other
Years ended December 31,
2016
2015
$
$
14.1
8.0
3.8
(1.7)
24.2
-
$
-
-
(1.1)
(1.1)
$
On October 21, 2016, the Company received compensation of $14.1 million, inclusive of $0.1 million post-
judgement interest, from the Province of British Columbia in settlement for the partial tenure extinguishment
from the Maa’nulth First Nations Final Agreement Act (the “Treaty”). The creation of Treaty Settlement Lands
and associated protected area tied to the Treaty on April 1, 2011 resulted in the permanent harvesting rights
reduction of 104,000 cubic metres in Tree Farm Licence 44.
58
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
25. Discontinued operations
Accounting policy
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.
Supporting information
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
were expensed as incurred.
In January 2013, Western announced that it had entered into a conditional agreement for the sale of its
former Squamish pulp mill site. Closing was subject to certain conditions and Western was responsible for
the satisfactory remediation of the property to applicable environmental standards prior to closing the sale.
In 2014, the Company completed its remediation plan in accordance with the terms of the agreement.
On February 6, 2015, the Company completed the sale of its former Squamish pulp mill site for proceeds of
$21.8 million and recognized a gain on disposition of $5.4 million during the first quarter of 2015.
26. Related parties
Accounting policy
Key management personnel are the Company’s directors and executive officers as disclosed in its 2016 and
2015 Annual Reports as applicable.
Supporting information
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:
Years ended December 31,
2015
2016
Salaries, directors' fees and short-term benefits
Post-employment benefits
Share-based payments
$
$
5.8
0.3
2.0
8.1
5.5
0.2
2.1
7.8
$
$
At December 31, 2016, $6.2 million of key management compensation costs were included in accounts
payable and accrued liabilities (December 31, 2015: $4.1 million).
59
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
27. 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
Years ended December 31,
2016
2015
$
$
$
$
Years ended December 31,
2016
2015
$
$
$
$
18.3
106.0
952.8
1,077.1
232.9
33.5
0.3
266.7
14.4
99.8
884.7
998.9
219.9
30.7
0.2
250.8
Compensation costs are included in cost of goods sold and selling and administration.
60
Suite 800
1055 West Georgia Street
Royal Centre, PO Box 11122
Vancouver, British Columbia
Canada V6E 3P3
Telephone: 604 648 4500
www.westernforest.com
info@westernforest.com
Trading on the TSX as “WEF”