Western Forest Products Inc.
TSX : WEF

Western Forest Products Inc.

November 13, 2007 22:58 ET

Western Forest Products Third Quarter Results Impacted By Strike-Records Net Loss of $37.7 Million

DUNCAN, BRITISH COLUMBIA--(Marketwire - Nov. 13, 2007) - Western Forest Products Inc. (TSX:WEF) ("Western") today announced its results for the third quarter of 2007. The Company reported a net loss of $37.7 million ($0.18 per share) and EBITDA of negative $29.8 million in the third quarter of 2007.

Q3 Highlights

- Strike by United Steelworkers that began on July 21, 2007 ended on October 21, 2007.

- Non-core asset sales progressed with a sales agreement negotiated for the former New Westminster sawmill site for $42.6 million. Subsequent to the quarter end, also negotiated a highly conditional sales agreement for the southern Vancouver Island higher and better use private lands.

- Cedar markets remain firm and, along with sales mix, helped increase average sales realizations by approximately 6% to $814 per thousand board feet.

- Cash and credit availability at September 30, 2007 of $12.1 million and $108.0 million, respectively.

Third Quarter Results

The Company reported a net loss of $37.7 million ($0.18 per share) in the third quarter of 2007 compared to net income of $17.6 million ($0.09 per share) in the second quarter of 2007 and a loss of $12.2 million ($0.06 per share) in the third quarter of 2006. EBITDA decreased to negative $29.8 million in the third quarter compared to positive $21.1 million in the second quarter. These results are primarily attributable to the impact of the strike, which resulted in lower production and sales and the expensing of fixed and other costs that would typically have been inventoried.

FINANCIAL SUMMARY



--------------------------------------------------------------------------
Three Three Three Nine Nine
(millions of Months Months Months Months Months
dollars except Ended Ended Ended Ended Ended
per share September June 30, September September September
amounts) 30, 2007 2007 30, 2006 30, 2007 30, 2006
--------------------------------------------------------------------------
EBITDA $ (29.8) $ 21.1 $ 10.2 $ 14.6 $ 17.8
Net income (loss)
from continuing
operations $ (37.2) $ 13.8 $ (11.4) $ (15.2) $ (65.4)
Net income (loss)
from discontinued
operations $ (0.5) $ 3.8 $ (0.8) $ 2.3 $ (9.8)
Net income
(loss) $ (37.7) $ 17.6 $ (12.2) $ (12.9) $ (75.2)
--------------------------------------------------------------------------
Per share -
basic and
diluted:
Net income (loss)
from continuing
operations $ (0.18) $ 0.07 $ (0.06) $ (0.07) $ (0.52)
Net income
(loss) $ (0.18) $ 0.09 $ (0.06) $ (0.06) $ (0.60)
--------------------------------------------------------------------------

--------------------------------------------------------------------------
Reference is made above to EBITDA, a non-GAAP measure defined as operating
income (loss) plus amortization of property, plant and equipment and the
write-down of property, plant and equipment and operating restructuring
costs. The Company uses EBITDA as a benchmark measurement of its own
operating results and as a benchmark relative to competitors.


Lumber sales in the quarter decreased to 174 million board feet from 273 million board feet in the second quarter of 2007 as a result of lower production related to the strike. The average realized lumber price increased to $814 per thousand board feet in the third quarter of 2007, compared to $769 per thousand board feet in the second quarter of 2007. A higher value mix of products sold and increases in the price of cedar were the main factors driving the increase. The price increase was offset somewhat by the strengthening of the Canadian dollar. The average realized log price decreased to $73 per cubic metre from $77 per cubic metre in the second quarter of 2007 due to changes in product mix.

Reynold Hert, President and CEO, commenting on the Company's performance noted, "The strike has obviously had a significant negative impact on our results and has interrupted our progress in moving the Company forward. Unfortunately, over the period of the strike, weaker U.S. and Japanese markets and the strengthening Canadian dollar have made our financial prospects in the near-term considerably more challenging. We plan to take advantage of our operational and market flexibility as we work to minimize the impact of these factors."

Operations

Lumber production decreased to 107 million board feet in the quarter from 277 million board feet in the second quarter of 2007 as a result of the strike action. Similarly, logs harvested decreased to 607,000 cubic metres in the quarter from 2,016,000 cubic metres in the second quarter. Limited production continued during the strike period at a number of non-union contract timberlands operations, manufacturing operations not represented by the United Steelworkers Union and the value added/remanufacturing plants, which have separate United Steelworkers contracts.

Markets and Outlook

Market conditions for the Company's products were significantly more difficult over the last quarter. The Canadian dollar, which strengthened by approximately 5% during the third quarter to an average of $1.0446 to the U.S. dollar, continued its upward trend against the U.S. dollar after the quarter end.

The U.S. structural dimension lumber market continues to be under significant pressure with excess housing stock and a significant decrease in housing starts and is not expected to show any significant improvement over the rest of the year and through 2008.

The Japanese market also weakened during the quarter. The increase in the supply of product to Japan from European and U.S. producers as an alternative to the weak U.S. market helped depress prices. In addition, confusion around new building code requirements and their administration further reduced demand as the Japanese construction industry delayed starting new projects.

The markets for the Company's cedar products are showing resilience and are expected to remain strong over the balance of the year as a result of shortages in the market due to the impact of the strike.

Given these market conditions, depending on the Company's ability to take advantage of its high quality fibre base and diversified markets, it is possible that some operations may be required to take market related down-time until conditions improve.

Following the settlement of the new contract with the United Steelworkers the Company resumed production at its operations with a focus on ensuring a safe start-up. The late start of fall timber harvesting may have an impact on the total availability of logs depending on the onset of winter weather conditions.

The Company is continuing to work on selling its non-core assets which have an estimated value of between $150.0 million and $180.0 million. During the quarter, the Company entered into an agreement to sell the site of its former New Westminster sawmill for $42.6 million cash, payable on closing. The sale, which will generate a gain of approximately $11.0 million, is subject to the Company providing the purchaser a Certificate of Compliance following the remediation of the site and is expected to close in the first quarter of 2008. Subsequent to the quarter end, the Company also entered into an agreement to sell approximately 2,550 hectares of its higher and better use private timberlands located on southern Vancouver Island. The sale agreement is highly conditional and subject to the purchaser being satisfied with the results of its due diligence and accordingly there can be no certainty that the agreement will close. Proceeds from non-core asset sales are expected to be primarily applied against the Company's outstanding long-term debt.

TELECONFERENCE CALL NOTIFICATION: Thursday, November 15, 2007 at 10:00 a.m. PST/1:00 p.m. EST

On Thursday, November 15, 2007, Western Forest Products Inc. will host a teleconference call at 10:00 a.m. PST (1:00 p.m. EST). To participate in the teleconference please dial 1-800-731-5319 in Canada and the U.S. (toll free) and in Toronto or Internationally, 416-644-3423 before 10:00 a.m. PST (1:00 p.m. EST). This call will be taped, available one hour after the teleconference, and on replay until November 29, 2007. To hear a complete replay, please call 1-877-289-8525 in Canada and the U.S. (toll free), Passcode 21253084# or in Toronto and Internationally, 416-640-1917, Passcode 21253084#. This call will also be webcast from Western's website at www.westernforest.com.

Western Forest Products

Western is an integrated Canadian forest products company and the largest coastal British Columbia woodland operator and lumber producer with an annual available harvest of approximately 7.5 million cubic metres of timber of which 7.3 million cubic metres is from Crown lands and 0.2 million cubic metres from private timberlands and lumber capacity in excess of 1.5 billion board feet from eight sawmills and four remanufacturing plants. Principal activities conducted by the Company and its subsidiaries include timber harvesting, reforestation, sawmilling logs into lumber and wood chips, and value-added remanufacturing. Substantially all of Western's operations, employees and corporate facilities are located in the coastal region of British Columbia while its products are sold in over 20 countries worldwide.

Forward Looking Statements and Information

This press release contains forward-looking statements and forward-looking information within the meaning of applicable securities law. Those statements and information include statements or information regarding the intent, belief or current expectations of Western. Such statements or information may be indicated by words such as "approximately", "achieving", "estimated", "expect", "anticipate", "plan", "intend", "believe", "will", "should", "may" and similar words and phrases. Readers are cautioned that any such forward-looking statements or information are not guarantees and may involve known and unknown risks and uncertainties, and that the actual results may differ from those expressed or implied in the forward-looking statements or information as a result of various factors including, changes in government regulation, and misjudgments in the course of preparing forward-looking statements or information. The information contained under the "Risk Factors" section of Western's Annual Information Form and under the "Risks and Uncertainties" section of Western's Management's Discussion and Analysis identifies important factors that could cause such differences. All written and oral forward-looking statements or information attributable to Western or persons acting on behalf of Western are expressly qualified in their entirety by the foregoing cautionary statements. Western does not expect to update forward-looking statements or information as conditions change.

Western Forest Products Inc.

2007 Third Quarter Report

Management's Discussion & Analysis

The following discussion and analysis reports and comments on the financial condition and results of operations of Western Forest Products Inc. (the "Company", "Western", "us", "we", or "our"), on a consolidated basis, for our third quarter ended September 30, 2007 to help security holders and other readers understand our Company and the key factors underlying our financial results. You should read this discussion and analysis in conjunction with our unaudited interim consolidated financial statements and related notes thereto for the quarter ended September 30, 2007, and our audited annual consolidated financial statements and management's discussion and analysis ("MD&A") for the year ended December 31, 2006 (the "2006 Annual Report"), all of which can be found on the System for Electronic Document Analysis and Retrieval (SEDAR), at http://www.sedar.com.

We have prepared the financial information contained in this discussion and analysis in accordance with Canadian generally accepted accounting principles ("GAAP"). Reference is also made to EBITDA. EBITDA is defined as operating income (loss) plus amortization of property, plant and equipment and the write-down of property, plant and equipment and operating restructuring costs. We use EBITDA as a benchmark measurement of our own operating results, and as a benchmark relative to our competitors. We consider EBITDA to be a meaningful supplement to operating income as a performance measure primarily because amortization expense and property write-downs are not cash costs, and vary widely from company to company in a manner that we consider largely independent of the underlying cost efficiency of their operating facilities. Further, operating restructuring costs are not expected to occur on a regular basis and may make comparisons of our operating results between periods more difficult. We also believe EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.

EBITDA does not represent cash generated from operations as defined by Canadian GAAP and it is not necessarily indicative of cash available to fund cash needs. Furthermore, EBITDA does not reflect the impact of a number of items that affect our net income (loss). EBITDA is not a measure of financial performance under GAAP, and should not be considered as an alternative to measures of performance under GAAP. Moreover, because all companies do not calculate EBITDA in the same manner, EBITDA as calculated by us may differ from EBITDA as calculated by other companies.

This management's discussion and analysis contains statements which constitute forward-looking statements and forward-looking information within the meaning of applicable securities laws. Those statements and information appear in a number of places in this document and include statements and information regarding our intent, belief or current expectations primarily with respect to market and general economic conditions, future costs, expenditures, available harvest levels and our future operating performance. Such statements and information may be indicated by words such as "estimate", "expect", "anticipates", "plan", "intend", "believe", "will", "should", "may" and similar words and phrases. Readers are cautioned that any such forward-looking statements and information are not guarantees and may involve known and unknown risks and uncertainties, and that actual results may differ from those expressed or implied in the forward-looking statements or information as a result of various factors, including general economic and business conditions, product selling prices, raw material and operating costs, changes in foreign currency exchange rates, changes in government regulation, fluctuations in demand and supply for our products, industry production levels, our ability to execute our business plan and misjudgments in the course of preparing forward-looking statements or information. The information contained under the "Risk Factors" section in our Annual Information Form and under the "Risks and Uncertainties" section of our Management's Discussion and Analysis identifies important factors that could cause such differences. 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.

Unless otherwise noted, the information in this discussion and analysis is updated to November 9, 2007. All financial references are in millions of Canadian dollars unless otherwise noted.

Summary of Selected Quarterly Results



Three Three Three Nine Nine
(millions of Months Months Months Months Months
dollars Ended Ended Ended Ended Ended
except per September June 30, September September September
share amounts) 30, 2007 2007 30, 2006 30, 2007 30, 2006
--------------------------------------------------------------------------
Sales $ 176.5 $ 301.1 $ 279.5 $ 753.9 $ 617.7
Export tax and
lumber duties
expensed $ (4.3) $ (5.0) $ (6.3) $ (13.7) $ (15.9)
EBITDA $ (29.8) $ 21.1 $ 10.2 $ 14.6 $ 17.8
EBITDA margin (16.9)% 7.0% 3.6% 1.9% 2.9%
Operating
income (loss) $ (36.6) $ 12.9 $ (0.8) $ (10.3) $ (14.8)
Interest
expense $ (6.0) $ (5.9) $ (10.9) $ (18.7) $ (31.9)
Foreign
exchange gain
(loss) on
long-term
debt $ 5.6 $ 6.3 $ (0.3) $ 12.6 $ 8.5
Premium and
unamortized
discount
on bond
redemption $ - $ - $ - $ - $ (27.9)
Net income
(loss) from
continuing
operations $ (37.2) $ 13.8 $ (11.4) $ (15.2) $ (65.4)
Net income
(loss) from
discontinued
operations $ (0.5) $ 3.8 $ (0.8) $ 2.3 $ (9.8)
Net income
(loss) $ (37.7) $ 17.6 $ (12.2) $ (12.9) $ (75.2)
--------------------------------------------------------------------------
Per share -
basic and
diluted:
--------------------------------------------------------------------------
Net income
(loss) from
continuing
operations $ (0.18) $ 0.07 $ (0.06) $ (0.07) $ (0.52)
Net income
(loss) $ (0.18) $ 0.09 $ (0.06) $ (0.06) $ (0.60)
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Cash provided
(used) by
continuing
operations $ (18.0) $ (11.1) $ 5.3 $ (0.3) $ (36.1)
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Overview

The results of operations for the nine months ended September 30, 2007 include the legacy Cascadia operations which were acquired on May 1, 2006 and accordingly, are not directly comparable to the nine month period ended September 30, 2006. The results are also not directly comparable as the Company changed its accounting policy for the costing of log and lumber inventories effective January 1, 2007 on a retroactive basis without restatement of prior periods as the detailed information required to restate was not available.

The Company recorded a net loss from continuing operations of $37.2 million ($0.18 per share) in the third quarter of 2007 compared to income of $13.8 million ($0.07 per share) in the second quarter of 2007, and a loss of $11.4 million ($0.06 per share) in the third quarter of 2006. EBITDA of negative $29.8 million in the third quarter of 2007 compares to positive $21.1 million in the second quarter of 2007 and positive $10.2 million in the third quarter of 2006.

Results for the third quarter of 2007 were negatively impacted by the strike action taken on July 20, 2007 by the United Steelworkers Union, which represents the majority of the Company's hourly employees. The strike lasted until October 21, 2007 when a new agreement was ratified by Union members. The strike affected most of the Company's timberlands and manufacturing operations during this period and as a result, sales and production volumes were significantly lower than in previous quarters.

With respect to the operations that were on strike, the Company directly expensed their fixed costs and certain other costs such as engineering, and road building that typically would have been inventoried to the production in the period. In addition, for the timberlands units that were still operating, costs in excess of typical unit costs when operating at normal production levels were directly expensed. Other significant factors impacting results for the quarter include:

- Lower lumber production as a result of the strike significantly reduced the Company's production of wood chips that are residual to the manufacturing process and sold under long-term chip supply agreements. As a result, by-product revenues decreased by $9.8 million from the second quarter of 2007 and $12.3 million from the third quarter of 2006.

- The Canadian dollar strengthened by approximately 5 cents during the quarter averaging $1.0446 to the U.S. dollar compared to $1.0983 in the second quarter and $1.1178 in the third quarter of 2006. A one-cent change in the value of the Canadian dollar compared to the U.S. dollar impacts EBITDA by approximately $4.0-$6.0 million on an annualized basis depending on the proportion of sales denominated in U.S. dollars.

- Prices for the Company's cedar products increased in the third quarter of 2007 compared to both the second quarter of 2007 and the third quarter of 2006 as a result of strong demand and continuing shortages in the marketplace.

Much of the Company's focus during the third quarter has been on preserving liquidity during the labour disruption. In particular, discretionary operating or capital expenditures were curtailed or deferred to the extent possible without seriously impacting future capabilities. We were also able to sell a certain amount of product from inventories-on-hand and liquidate receivables in the normal course. This generated sufficient cash to cover our cash expenditures without drawing on our revolving credit line to any significant extent. However, now that the strike is over it is anticipated that the Company will be required to draw on its revolving credit facility as working capital needs return to normal operating levels.

Continuing Operations



Three Three Three Nine Nine
Months Months Months Months Months
(millions of Ended Ended Ended Ended Ended
dollars except September June 30, September September September
where noted) 30, 2007 2007 30, 2006 30, 2007 30, 2006
--------------------------------------------------------------------------
Lumber sales $ 141.6 $ 210.0 $ 214.0 $ 556.8 $ 459.3
Log sales 26.5 72.9 44.8 155.0 117.5
By-product
sales 8.4 18.2 20.7 42.1 40.9
-----------------------------------------------------------
$ 176.5 $ 301.1 $ 279.5 $ 753.9 $ 617.7
-----------------------------------------------------------
Lumber
production -
millions
of board feet 107 277 326 635 729
Lumber sales -
millions of
board feet 174 273 291 698 698

Log production -
thousands of
cubic metres 607 2,016 1,617 4,224 4,177
Log purchases -
thousands of
cubic metres 203 359 169 757 972
Log sales -
thousands of
cubic metres 364 943 592 1,957 1,460
Internal log
consumption
thousands of
cubic metres 470 1,176 1,350 2,727 3,032

Average lumber
sales revenue
per thousand
board feet $ 814 $ 769 $ 739 $ 798 $ 658
Average log
sales revenue
per cubic
metre $ 73 $ 77 $ 76 $ 79 $ 80


As previously noted, the majority of the Company's operations were impacted by the strike during the quarter. However, a number of our non-unionized timberlands operations and manufacturing operations not represented by the United Steelworkers Union were able to continue producing logs and lumber during the strike depending on the availability of fibre.

Lumber sales volumes decreased by 36% compared to the second quarter of 2007 and 40% compared to the third quarter of 2006 as a result of lower production volumes during the strike. The average net lumber price realized in the third quarter increased to $814/mfbm from $769/mfbm in the second quarter and $739/mfbm in the third quarter of 2006. The increase compared to the second quarter is primarily attributable to the sale of a higher-value product mix of cedar and custom cut lumber during the quarter and price increases in all higher grade cedar products due to continued supply shortages which increased due to the coastal strike.

The US structural dimension market continues to be under pressure as the number of housing starts has decreased as a result of high levels of unsold housing inventory, a situation that has been exacerbated by market volatility in sectors relating to U.S. residential housing. The "Random Lengths Framing Lumber Composite Index" (Index) fell from US $311/mfbm in July 2007 to US $280/mfbm towards the end of the third quarter of 2007 and as a result the Company continued to pay the Export tax at the rate of 15%. The Export tax rate varies according to the price of lumber based on the "Random Lengths Framing Lumber Composite Index", with a 15% tax applicable when the index is below US $315/mfbm.

The Japanese market also weakened during the quarter. An increase in the supply of product to Japan from European and U.S. producers depressed prices. In addition, confusion around new building code requirements and their administration further reduced demand as the Japanese construction industry delayed starting new projects.

Log production decreased to 607,000 cubic metres in the third quarter of 2007, as operations were adversely affected by the strike. Limited non-union contract logging operations continued with a focus on extracting higher quality logs, particularly cedar in preparation for the spring market. This logging was in areas that typically cannot be harvested later in the year due to snow conditions at higher elevations. These operations incurred higher unit cost as a result of an increase in the percentage of helicopter logging required compared to conventional logging. Certain timberlands operations that were shut-down by the strike continued to undertake strategic initiatives including engineering, storm damage repairs, and wind-firming of cut-block edges to meet site plan prescriptions to winter winds. The cost of these activities was directly expensed.

As a consequence of the decreased log production, log sales volumes also decreased to 364,000 cubic metres at an average selling price of $73 per cubic metre in the third quarter compared to 943,000 cubic metres at $77 per cubic metre in the second quarter of 2007. The decrease in selling price was primarily due to the mix of logs sold, as low value pulp logs accounted for 54% of total log sales, an increase of 15% from the previous quarter. The 203,000 m3 of purchased logs in the quarter primarily comprised pulp logs that were subsequently re-sold to pulp and paper companies, to assist in fulfilling our commitments under our long-term fibre supply agreements.

Discontinued Operations

The net loss from discontinued operations during the third quarter of 2007 was $0.5 million, compared to net income of $3.8 million in the second quarter of 2007 and a loss of $0.8 million in the third quarter of 2006. The second quarter income reflects the sale of the majority of the former Squamish pulp mill equipment and spare parts for $5.5 million that resulted in a gain of $5.2 million. The third quarter loss of $0.5 million represents costs associated with ongoing supervision, security and property taxes of the Squamish site. Such costs will continue to be incurred until the property is sold. The Company is currently focused on site remediation with a view to marketing the property in 2008.

Other Corporate Items

Selling and administration expense of $9.8 million in the third quarter compares to $10.5 million in the second quarter of 2007, and $11.4 million in the third quarter of 2006. The decrease from the second quarter is primarily due to lower legal and consulting expenses.

Interest expense of $6.0 million in the third quarter of 2007, unchanged from the second quarter of 2007, compares to $10.9 million in the third quarter of 2006. The decrease from the third quarter of 2006 is attributable to a reduction in the Company's long-term debt outstanding during the fourth quarter of 2006 and the first quarter of 2007 as well as a reduction in the interest rate on the portion of the debt payable in U.S. dollars effective in the first quarter of 2007.

The $5.6 million non-cash gain in the quarter on translation of the U.S. dollar-denominated portion of the Company's long-term debt compares to a gain of $6.3 million in the second quarter of 2007 and a loss of $0.3 million in the third quarter of 2006 and reflects changes in the principal amount of debt outstanding and changes in the period end exchange rate.

Changes in Financial Position and Liquidity



Three Three Three Nine Nine
Months Months Months Months Months
(millions of Ended Ended Ended Ended Ended
dollars except September June 30, September September September
where noted) 30, 2007 2007 30, 2006 30, 2007 30, 2006
--------------------------------------------------------------------------
Cash provided
(used) by
continuing
operations $ (18.0) $ (11.1) $ 5.3 $ (0.3) $ (36.1)
Cash provided
(used) by
investing
activities $ (2.8) $ (1.0) $ (4.6) $ 4.9 $ (198.9)
Cash provided
(used) by
financing
activities $ 1.9 $ (1.0) $ - $ (30.6) $ 242.1
Additions to
property, plant
and equipment $ (2.5) $ (3.9) $ (7.6) $ (10.5) $ (15.3)
Additions to
capitalized
roads $ (2.5) $ (4.3) $ (5.1) $ (9.9) $ (12.1)
Change in
revolving
credit
facility $ 0.9 $ - $ - $ (2.7) $ (80.0)
Total
liquidity(1) $ 120.1 $ 175.0 $ 129.2 $ 120.1 $ 129.2
Financial
ratios:
Current assets
to current
liabilities 1.72 1.74 2.62 1.72 2.62
Net debt to
shareholders
equity 0.36 0.30 1.66 0.36 1.66
Net debt to
market
capitalization 0.38 0.32 1.62 0.38 1.62

(1) Total liquidity comprises cash and cash equivalents and available
credit under the Company's revolving credit facility.


Cash flow from continuing operations in the third quarter of 2007 was negative $18.0 million compared to negative $11.1 million in the second quarter of 2007 and positive $5.3 million in the third quarter of 2006. Cash flow from continuing operations before the change in non-cash working capital items was negative $37.6 million in the third quarter of 2007 compared to positive $16.3 million in the second quarter of 2007, and positive $2.7 million in the third quarter of 2006. The decrease in cash flow is primarily attributable to the impact of the strike. Changes in non-cash working capital contributed $19.6 million to cash from continuing operations in the third quarter as a result of drawing down inventory and receivables, and reduced expenditures during the strike period.

Capital spending on property, plant and equipment decreased to $2.5 million in the quarter as discretionary spending was deferred where possible during the strike, and compares to $3.9 million in the second quarter of 2007 and $7.6 million in the third quarter of 2006. The third quarter of 2006 included the capital programs for the upgrades to the Company's Cowichan Bay and Duke Point sawmills designed to increase productivity as well as various timberlands equipment purchases. Capitalized road spending of $2.5 million in the third quarter of 2007, compares to $4.3 million in the second quarter of 2007, and $5.1 million in the third quarter of last year. Road spending decreased due to the Company's inability to carry out road building activities during the strike.

Proceeds from asset sales were $0.3 million in the quarter, compared to $8.2 million in the previous quarter and $0.9 million during the third quarter of 2006. The second quarter of 2007, included the sale of the Company's former log merchandiser site. Investing activities in the third quarter of 2006 includes the receipt of $6.6 million related to adjustments to the purchase price of Cascadia Forest Products Ltd, which was acquired in the second quarter of 2006, for forestry liabilities assumed.

At September 30, 2007 the Company had cash of $12.1 million and availability under its secured revolving credit facility of $108.0 million. The $34.4 million reduction in availability under the Company's secured revolving credit facility during the quarter is attributable to the decrease in accounts receivable and inventories that form the security for the facility. The Company anticipates that it will be required to draw on its revolving credit line as operations recommence following the end of the strike as cash is consumed to rebuild inventory and receivable balances to normal operating levels.

The $101.8 million Canadian dollar denominated portion of the Company's long-term debt matures in March, 2008. The Company has been working with advisors on re-financing strategies although these efforts have been delayed as a result of the uncertainty caused by the labour disruption. This will be a Management focus for the balance of 2007 and early 2008.

Selected Quarterly Information

To assist shareholders and other readers in understanding our business, we have included as Appendix A to the MD&A a table of the financial results and operating data for the Company for the last eight quarters.

In a normal operating year, there is some seasonality to the Company's operations with higher lumber sales in the second and third quarters as construction activity, particularly in the U.S., has historically tended to be higher. Logging activity may also vary depending on weather conditions due to rain, snow and ice in the winter and the threat of forest fires in the summer.

Changes in Accounting Policies

Inventories

On January 1, 2007 the Company changed its accounting policy for the costing of log and lumber inventories to better reflect its new management operating philosophy. Under the new policy, costs of production for products produced jointly as a result of the same production process are allocated according to the value of those products. This compares to the former policy which allocated costs based on volumes produced. Given the variety of products produced by the Company from similar raw materials and processes, the new approach better recognizes the contribution to the Company's earnings of the underlying products produced.

Under the new policy, log production costs are allocated to logs produced based on their relative market values, except for pulp logs that will continue to be carried at market due to the significant difference between the market value of pulp logs compared to production costs. Previously, the Company carried all saw logs at the same actual unit production cost which was based on the total costs of production divided by the total volume of production. Under the new policy, lumber production costs will now also be allocated to production units based on their relative market values. Lumber was previously carried at an average cost of production which was determined by actual production costs divided by production volumes. For both logs and lumber, inventories are valued at the lower of cost determined under the new policy and net realizable value, which is consistent with the previous policy.

This new accounting policy was implemented effective January 1, 2007 on a retrospective basis without restatement of prior periods and resulted in inventory increasing by $11.9 million to $227.6 million from $215.7 million and the deficit decreasing to $100.1 million from $112.0 million as at December 31, 2006. Prior periods have not been restated as the detailed information required to implement the new policy on a retrospective basis is not available. The change in policy has increased inventory carrying amounts as higher value cedar and to a lesser extent cypress lumber and log inventories are now carried at higher amounts than they would have been under the previous policy. Conversely, hemlock lumber and log inventories are carried at relatively similar amounts compared to what they were carried at under the previous policy as they were generally already written down to market values.

Financial instruments

During the quarter the Company adopted the following new recommendations of the Canadian Institute of Chartered Accountants ("CICA"):

- Section 1530 - Comprehensive Income

- Section 3251 - Equity

- Section 3855 - Financial instruments - Recognition and Measurement

- Section 3861 - Financial instruments - Disclosure and Presentation; and

- Section 3865 - Hedges

Section 3855 provides guidance on costs incurred upon issuance of financial liabilities. Transaction costs are now deducted from the financial liability and amortized using the effective interest method over the expected life of the related liability. Accordingly, $4.8 million of unamortized financing costs at December 31, 2006 have been reclassified against long-term debt, reducing other assets to $9.0 million from $13.8 million and reducing long-term debt to $205.7 million from $210.5 million. The remaining CICA handbook sections adopted have not had a material impact on the Company's consolidated financial statements.

Internal Control over Financial Reporting

In 2006, following the acquisitions of Cascadia and Englewood, the Company initiated projects to consolidate and standardize its business systems and processes including its log, lumber, payroll and general ledger accounting systems. The implementation of the log and payroll systems was substantially completed during 2006. The new general ledger accounting system was implemented on January 1, 2007 and replaces three general ledger systems previously used by the Company. In addition to the new general ledger system the Company implemented a new accounting policy with respect to the costing of its inventories and a new chart of accounts covering all of its operations. These system implementations have been accompanied by new processes and procedures. The implementation of the new lumber systems is ongoing.

The Company identified weaknesses in internal controls during the first quarter relating to the implementation of the new systems and related accounting processes and procedures. Management has implemented additional manual procedures to compensate for the weaknesses and corrective actions are now being implemented to provide reasonable assurance that the controls operate effectively in future periods. Other than these system and process changes, 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.

Risks and Uncertainties

Our business is subject to a number of risks and uncertainties, including those described in our 2006 Annual Report and Annual Information Form, all of which can be found on the System for Electronic Document Analysis and Retrieval (SEDAR), at http://www.sedar.com. Any of the risks and uncertainties described in the above-noted documents could have a material adverse affect on our operations and financial condition and cash flow and, accordingly, should be carefully considered in evaluating our business.

Proposed Regulatory and First Nations Land Claims Developments

On May 24, 2007 the Forest Minister for British Columbia stated in a press interview that policy changes to improve the competitiveness of the Coastal British Columbia forest industry would be announced. On October 29, 2007 the Forest Minister released the proposed policy changes. The Company continues to analyze the impact of the proposed policy changes on its operations. Preliminary indications are the changes may be slightly positive in helping to reduce our operating costs.

On May 31, 2007 the government of British Columbia announced that it had initialed a draft Strategic Land Use Agreement ("SLUA") with the Council of the Haida Nation dealing with land use and resource management issues in the Haida Gwaii or Queen Charlotte Islands. Amongst other things, the draft agreement recommends permanent protection for approximately 225,000 hectares of land on the Islands for natural, cultural, spiritual and recreational values and a timber harvest of at least 800,000 cubic metres annually. The SLUA is the result of ongoing negotiations between the Province and the Haida Nation. The provincial government and the Haida Nation held public meetings during the summer. In addition, the province engaged to a limited degree with the forest sector. As previously disclosed, the Company currently has an Allowable Annual Cut in the Queen Charlotte Islands of 510,000 cubic metres, having been temporarily reduced from 803,000 cubic metres by the provincial Chief Forester. The Company is not able to determine the nature or extent of the final recommendations, whether they will be ratified and the impact on the Company. (See - Risk Factors - First Nations Land Claims in Western's 2006 Annual Information Form for further information on the risk of First Nations Land Claims).

The U.S. government has referred a number of disputes with the Canadian government relating to the interpretation of the Softwood Lumber Agreement to binding arbitration as provided for by the agreement. Included in the disputes referred to arbitration is a U.S. interpretation that the agreement provides for the application of the "surge look-back mechanism" to the B.C. interior and coastal regions based on comparing the actual U.S. consumption for the period to the expected U.S. consumption used to forecast the surge limits. If the arbitrator finds in favour of the U.S. position, while there would be no retroactive effect on the coastal region to date as the coast has not shipped in excess of the limits, it could result in changes to the volume of lumber the Company is able to ship in the future and increased exposure to the possibility of higher export taxes through the surge mechanism.

Outlook and Strategy

Market conditions for the Company's products have become significantly more difficult over the last quarter. The Canadian dollar, which strengthened during the third quarter, continued its upward trend against the U.S. dollar after the quarter end. The U.S. structural dimension lumber market continues to be under significant pressure with excess housing stock and a significant decrease in housing starts and is not expected to show any significant improvement over the rest of the year and through 2008. The Japanese market also weakened due to an easing in housing starts, delays in construction caused by new building code regulations that are not well understood and an influx of logs and lumber redirected from the U.S. market. The markets for the Company's cedar products are, however, showing resilience and are expected to remain strong over the balance of the year as a result of shortages in the market due to the impact of the strike. Given these overall market conditions, depending on the Company's ability to take advantage of its high quality fibre base and diversified markets, it is possible that some operations may be required to take market related down-time until conditions improve.

Following the settlement of the new contract with the United Steelworkers the Company has been resuming production at its operations with a focus on ensuring a safe start-up. The late start of fall timber harvesting may have an impact on the total availability of logs depending on the onset of winter weather conditions. The key provisions of the new agreement with the United Steelworkers Union include: a three-year term expiring June 14, 2010 with wage increases of 2%, 3% and 2%, respectively; the continuation of flexible shifting provided it is based on a bona fide business rationale; a new provision for severance pay for permanent closures of the principle processing and production operations of a site, even if minor parts of the site stay running; and a renewal of the Return on Capital Employed profit sharing provision. The Company believes the new agreement provides an appropriate balance between retaining skilled workers in a competitive labour market and business flexibility in the current challenging lumber market conditions.

The Company is continuing to work on selling its non-core assets which have an estimated value of between $150.0 million and $180.0 million. During the quarter, the Company entered into an agreement to sell the site of its former New Westminster sawmill for $42.6 million cash, payable on closing, resulting in a gain of approximately $11.0 million. The sale is subject to the Company providing the purchaser a Certificate of Compliance following the remediation of the site and is expected to close in the first quarter of 2008. Subsequent to the quarter end, the Company also entered into an agreement to sell approximately 2,550 hectares of its higher and better use private timberlands located on southern Vancouver Island. The sale agreement is highly conditional and subject to the purchaser being satisfied with the results of its due diligence and accordingly there can be no certainty that the agreement will close. Proceeds from non-core asset sales are expected to be primarily applied against the Company's outstanding long-term debt.

Outstanding Share Data

As of November 9, 2007, there are 119,842,359 Common Shares and 84,571,206 Non-Voting Shares issued and outstanding.

In addition, the Company has 569,373 Tranche 1 Class C Warrants, 854,146 Tranche 2 Class C Warrants, and 1,423,743 Tranche 3 Class C Warrants (collectively, the "Class C Warrants") outstanding. The Company has reserved up to 2,847,262 Common Shares for issuance upon the exercise of the Class C Warrants. It has also reserved 10,000,000 Common Shares for issuance upon the exercise of options granted under the Company's incentive stock option plan. As of November 9, 2007, 3,933,060 options have been granted under the Company's incentive stock option plan.

Other Matters

As a result of the rights offering of subscription receipts to all shareholders and their subsequent conversion to Common Shares and Non-Voting Shares, Tricap Management Limited ("Tricap") owns 49% of the Company's Common Shares and 100% of the Non-Voting Shares. By virtue of the Brookfield Asset Management Inc. ("BAM") voting arrangements with Tricap, BAM is related to the Company. In addition to the transactions identified elsewhere in this report, the Company has certain arrangements with entities related to BAM to acquire and sell logs, lease certain facilities, provide access to roads and other areas, and acquire other services including insurance, all in the normal course and at market rates or at cost. During the third quarter of 2007, the Company paid and charged entities related to BAM $5.3 million and received $1.5 million in connection with these arrangements.

On behalf of the Board of Directors

John MacIntyre, Chairman

Reynold Hert, President and Chief Executive Officer

Duncan, BC

November 9, 2007



Management's Discussion and Analysis - Appendix A
Summary of Selected Results for the Last Eight Quarters (Unaudited)

(millions of
dollars except 2007 2006 2005
per share ---------------------------------------------------------
amounts and 3rd 2nd 1st 4th 3rd 2nd 1st 4th
where noted) ---------------------------------------------------------

---------------------------------------------------------
Average
Exchange
Rate - Cdn $
to purchase
one U.S. $ $ 1.0446 1.0983 1.1725 1.1277 1.1178 1.1292 1.1462 1.1703
Sales
Lumber $ 141.6 210.0 205.2 217.8 214.0 158.1 87.2 91.3
Logs 26.5 72.9 55.6 44.6 44.8 49.0 23.7 25.5
By-Products 8.4 18.2 15.5 16.7 20.7 12.9 7.3 3.6
---------------------------------------------------------
$ 176.5 301.1 276.3 279.1 279.5 220.0 118.2 120.4
---------------------------------------------------------
---------------------------------------------------------

Lumber
Production -
millions of
board feet 107 277 251 271 326 250 153 127
Sales -
millions of
board feet 174 273 251 278 291 243 164 166
Logging
Production -
m3 (000's) 607 2,016 1,601 1,585 1,617 1,898 662 822
Purchases -
m3 (000's) 203 359 194 242 169 143 100 87
Sales -
m3 (000's) 364 943 650 625 592 605 262 212
Internal
consumption -
m3 (000's) 470 1,176 1,081 1,138 1,350 1,031 650 590
Sales prices
Lumber - per
thousand board
feet $ 814 769 818 782 739 648 533 549
Logs - per
cubic metre $ 73 77 86 71 76 81 90 120

Net income
(loss) from
continuing $ (37.2) 13.8 8.2 109.3 (11.4) (7.5) (46.5) (10.5)
operations

Discontinued
pulp operations
Sales $ - - - - - (0.1) 20 40.6
Income (loss) $ (0.5) 3.8 (1.0) (1.0) (0.8) (1.9) (7.1) (74.1)
Pulp
production -
tonnes
(000's) - - - - - - 18 71
Pulp sales -
tonnes (000's) - - - - - - 34 69
Pulp sales price
per tonne $ - - - - - - 586 582

Net income
(loss) $ (37.7) 17.6 7.2 108.3 (12.2) (9.4) (53.6) (84.6)

Net income
(loss) per
share from
continuing
operations $ (0.18) 0.07 0.04 0.53 (0.06) (0.05) (1.81) (0.41)
Net income
(loss) per
share - basic)
and diluted $ (0.18) 0.09 0.04 0.53 (0.06) (0.06) (2.09) (3.30)

Reconciliation
of EBITDA to net
income (loss)
from continuing
operations:
EBITDA before
lumber duty
refund $ (29.8) 21.1 23.3 10.1 10.2 7.7 (0.1) (5.3)
Lumber duty refund - - - 110.3 - - - -
---------------------------------------------------------
EBITDA (29.8) 21.1 23.3 120.4 10.2 7.7 (0.1) (5.3)
Amortization of
property, plant
& equipment (6.8) (10.8) (9.9) (9.7) (10.3) (10.8) (5.9) (5.9)
Restructuring &
other items - 2.6 - (2.4) (0.7) (4.9) - 0.6
Interest expense (6.0) (5.9) (6.8) (9.2) (10.9) (9.9) (11.1) (11.5)
F/X on long-term
debt 5.6 6.3 0.7 (6.0) (0.3) 9.7 (0.9) (0.1)
Premium &
unamortized
discount - - - - - - (27.9) -
Interest and
other income
(expense) (0.1) 0.5 1.2 16.7 0.9 0.5 (0.4) 1.1
Income taxes (0.1) - (0.3) (0.5) (0.3) 0.2 (0.2) 10.6
---------------------------------------------------------
Net income
(loss) from
continuing
operations $ (37.2) 13.8 8.2 109.3 (11.4) (7.5) (46.5) (10.5)
---------------------------------------------------------
---------------------------------------------------------


Consolidated Balance Sheets (Unaudited)
(Expressed in millions of Canadian dollars)
--------------------------------------------------------------------------
September 30, 2007 December 31, 2006
--------------------------------------
(Restated-note 2)
Assets
Current assets:
Cash and cash equivalents $ 12.1 $ 41.6
Accounts receivable 62.5 102.4
Inventory 213.1 227.6
Prepaid expenses and other assets 10.0 12.4
--------------------------------------
297.7 384.0

Property, plant and equipment 486.6 505.4
Other assets 9.1 9.0
--------------------------------------

$ 793.4 $ 898.4
--------------------------------------
--------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Revolving credit facility (note 3) $ 0.9 $ 3.6
Accounts payable and accrued
liabilities 68.2 110.8
Current portion of long-term debt
(note 4) 100.4 -
Discontinued operations (note 11) 4.0 6.4
--------------------------------------
173.5 120.8
Long-term debt (note 4) 69.6 205.7
Other liabilities 35.0 42.6
Deferred revenue 76.9 78.4
--------------------------------------
355.0 447.5
Shareholders' equity
Common shares 410.6 410.6
Non-voting shares 139.6 139.6
Contributed surplus 1.2 0.8
Deficit (113.0) (100.1)
--------------------------------------
438.4 450.9
--------------------------------------

$ 793.4 $ 898.4
--------------------------------------
--------------------------------------


Commitments and contingencies (note 6)
Subsequent events (note 10)

See accompanying notes to consolidated financial statements

Approved on behalf of the Board:

"Reynold Hert" Director

"John MacIntyre" Director


Consolidated Statements of Operations, Deficit and Comprehensive Loss
(Unaudited)
(Expressed in millions of Canadian dollars except for share and per share
amounts)
--------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
------------------------------------------

Sales $ 176.5 $ 279.5 $ 753.9 $ 617.7

Cost and expenses
Cost of goods sold 180.5 230.7 645.8 505.5
Export tax 4.3 - 13.7 -
Anti-dumping and
countervailing duties - 6.3 - 15.9
Freight expenses 11.7 20.9 48.7 50.5
Selling and administration 9.8 11.4 31.1 28.0
Amortization of property,
plant and equipment 6.8 10.3 27.5 27.0
------------------------------------------
213.1 279.6 766.8 626.9
------------------------------------------

Operating loss before operating
restructuring income (costs) (36.6) (0.1) (12.9) (9.2)

Operating restructuring
income (costs) (note 9) - (0.7) 2.6 (5.6)
------------------------------------------

Operating loss (36.6) (0.8) (10.3) (14.8)

Interest expense (6.0) (10.9) (18.7) (31.9)
Foreign exchange gain
on long-term debt 5.6 (0.3) 12.6 8.5
Premium and unamortized
discount on bond redemption - - - (27.9)
Interest and other income (0.1) 0.9 1.6 1.0
------------------------------------------

Loss before income taxes (37.1) (11.1) (14.8) (65.1)
Income tax expense (0.1) (0.3) (0.4) (0.3)
------------------------------------------

Net loss from
continuing operations (37.2) (11.4) (15.2) (65.4)
Net income (loss) from
discontinued operations
(note 11) (0.5) (0.8) 2.3 (9.8)
------------------------------------------

Net loss and comprehensive loss (37.7) (12.2) (12.9) (75.2)

Deficit, beginning of period
as previously reported (75.3) (208.1) (112.0) (145.1)
Change in accounting policy for
costing of inventories (note 2) - - 11.9 -
------------------------------------------

Deficit, beginning of
period as restated (75.3) (208.1) (100.1) (145.1)
------------------------------------------

Deficit, end of period $ (113.0) $ (220.3) $ (113.0) $ (220.3)
------------------------------------------
------------------------------------------

Net income (loss) per share -
basic and diluted:
From continuing operations $ (0.18) $ (0.06) $ (0.07) $ (0.52)
From discontinued operations (0.00) (0.00) 0.01 (0.08)
------------------------------------------

Net loss $ (0.18) $ (0.06) $ (0.06) $ (0.60)
------------------------------------------
------------------------------------------

Weighted average number of
shares outstanding
(thousands of shares) 204,413 204,413 204,413 124,957

See accompanying notes to the consolidated financial statements


Consolidated Statements of Cash Flows (Unaudited)
(Expressed in millions of Canadian dollars)
--------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
------------------------------------------
Cash provided by (used in):
Operating activities:
Net loss from continuing
operations $ (37.2) $ (11.4) $ (15.2) $ (65.4)
Items not involving cash:
Amortization of property,
plant and equipment 6.8 10.3 27.5 27.0
Write-down of property,
plant and equipment - 0.7 - 0.7
Foreign exchange (gain)
loss on long-term debt (5.6) 0.3 (12.6) (8.5)
Premium and unamortized
discount on bond redemption - - - 27.9
Other (1.6) 2.8 (2.5) 3.5
------------------------------------------
(37.6) 2.7 (2.8) (14.8)
------------------------------------------
Changes in non-cash
working capital items:
Accounts receivable 36.1 8.7 31.1 34.7
Inventory 39.3 2.2 14.1 (11.2)
Prepaid expenses (1.1) (0.2) (0.1) (1.7)
Accounts payable and
accrued liabilities (54.7) (8.1) (42.6) (43.1)
------------------------------------------
19.6 2.6 2.5 (21.3)
------------------------------------------
Cash provided (used) by
continuing operations (18.0) 5.3 (0.3) (36.1)
------------------------------------------
Investing activities:
Additions to property,
plant and equipment (2.5) (7.6) (10.5) (15.3)
Additions to capitalized roads (2.5) (5.1) (9.9) (12.1)
Proceeds on disposals of
property, plant and equipment 0.3 0.9 10.3 1.1
Acquisition of Cascadia,
net of cash acquired - 6.6 12.5 (209.7)
Acquisition of
Englewood Logging Division - - - (3.4)
Price premium prepayment on
long-term fibre agreement - - - 35.0
Other 1.9 0.6 2.5 5.5
------------------------------------------
(2.8) (4.6) 4.9 (198.9)
------------------------------------------
Financing activities:
Proceeds from (repayment of)
revolving credit facility 0.9 - (2.7) (80.0)
Redemption of 15% Secured Bonds - - - (275.9)
Proceeds from term loans - - - 307.8
Repayment of term loans - - (25.5) (4.7)
Proceeds from share issuance - - - 294.9
Other 1.0 - (2.4) -
------------------------------------------
1.9 - (30.6) 242.1
------------------------------------------
Cash used by discontinued
operations (note 11) (1.6) (3.1) (3.5) (6.8)
------------------------------------------
Increase (decrease) in
cash and cash equivalents (20.5) (2.4) (29.5) 0.3
Cash and cash equivalents,
beginning of period 32.6 32.3 41.6 29.6
------------------------------------------
Cash and cash equivalents,
end of period $ 12.1 $ 29.9 $ 12.1 $ 29.9
------------------------------------------
------------------------------------------

Supplementary information:
Non-cash item - Acquisition of
Englewood Logging Division $ - $ - $ - $ 45.0

See accompanying notes to the consolidated financial statements


WESTERN FOREST PRODUCTS INC.

2007 THIRD QUARTER REPORT

Notes to Unaudited Interim Consolidated Financial Statements

(Tabular amounts expressed in millions of Canadian dollars)

The business of Western Forest Products Inc. (the Company or Western) is timber harvesting and lumber manufacturing for worldwide markets. Western's operations are located in the coastal region of British Columbia.

1. Significant Accounting Policies

These interim consolidated financial statements do not include all disclosures required by Canadian generally accepted accounting principles for annual financial statements and, accordingly, should be read in conjunction with the Company's most recent audited annual consolidated financial statements. These interim consolidated financial statements follow the same accounting policies and methods of application used in the Company's consolidated financial statements as at December 31, 2006 and for the year then ended except that the Company has adopted new accounting policies with respect to financial instruments and inventory costing as described below.

2. Adoption of New Accounting Policies

(a) Financial Instruments

Effective January 1, 2007 the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants ("CICA") Handbook Sections 1530, Comprehensive Income, Section 3251, Equity, Section 3855, Financial Instruments - Recognition and Measurement, Section 3861 Financial Instruments - Disclosure and Presentation, and Section 3865, Hedges. Other than the reclassification of transaction costs discussed below, the adoption of these new recommendations has not impacted the Company's financial statements.

Section 1530, Comprehensive Income, requires that changes in equity from transactions and other events and circumstances from non-owner sources be recorded and reported in the statement of comprehensive income. Comprehensive income is comprised of the traditional concept of 'net income' as well as the income effect of derivative instruments ('other comprehensive income'). Section 3251, Equity, requires that the accumulation of other comprehensive income be presented as a component of the equity section. Section 3855, Financial Instruments - Recognition and Measurement and Section 3861, Financial Instruments - Disclosure and Presentation requires that all financial instruments be recognized on the balance sheet using the appropriate measurement model and disclosed in the notes to the financial statements. Section 3865, Hedges, requires that all financial assets and liabilities be presented in accordance with the recommendations of the financial instruments recommendations except where the derivative instrument has been designated as a hedge by management.

Section 3855 provides guidance on costs incurred upon issuance of financial liabilities. Transaction costs are now deducted from the financial liability and amortized using the effective interest method over the expected life of the related liability. Accordingly, $4.8 million of unamortized financing costs at December 31, 2006 have been reclassified against long-term debt reducing other assets to $9.0 million from $13.8 million and reducing long-term debt to $205.7 million from $210.5 million.

(b) Inventory Costing

On January 1, 2007 the Company changed its accounting policy for the costing of log and lumber inventories to better reflect its new management operating philosophy. Under the new policy, costs of production for products produced jointly as a result of the same production process are allocated according to the value of those products. This compares to the former policy which allocated costs based on volumes produced.

Under the new policy, log production costs are allocated to logs produced based on their relative market values, except for pulp logs that will continue to be carried at market due to the significant difference between the market value of pulp logs compared to production costs. Previously, the Company carried all saw logs at the same actual unit production cost which was based on the total costs of production divided by the total volume of production. Under the new policy, lumber production costs will now also be allocated to production units based on their relative market values. Lumber was previously carried at an average cost of production, which was determined by actual production costs divided by production volumes. For both logs and lumber, inventories are valued at the lower of cost determined under the new policy and net realizable value, which is consistent with the previous policy.

This new accounting policy was implemented effective January 1, 2007 on a retroactive basis without restatement of prior periods and results in inventory increasing by $11.9 million to $227.6 million from $215.7 million and the deficit decreasing to $100.1 million from $112.0 million as at December 31, 2006. Prior periods have not been restated as the detailed information required to implement the new policy on a retroactive basis is not available.

3. Revolving Credit Facility

The Company has a three-year revolving credit facility, secured by receivables and inventory and bearing interest at prime plus 0.5% that expires on July 12, 2009. The size of this asset-backed facility is determined by the level of outstanding receivables and inventory, but cannot exceed $150.0 million with provision for further extensions up to $200.0 million, subject to lender approval. At September 30, 2007 of the $111.1 million of the credit facility available to the Company, $0.9 million was drawn, $2.2 million used to support standby letters of credit, leaving a balance of $108.0 million available for future use.

4. Long-Term Debt



--------------------------------------------------------------------------
As at September 30, As at December 31,
(millions of dollars) 2007 2006
-------------------------------------------------------------------------
Current portion of long-term debt:
Canadian facility $ 101.8 $ -
Associated transaction costs (1.4) -
--------------------------------------

$ 100.4 $ -
--------------------------------------
--------------------------------------
Long-term portion of long-term debt:
U.S. facility (U.S. $73.5 million;
2006 U.S. $95.3 million) $ 73.1 $ 111.0
Canadian facility - 99.5
--------------------------------------

73.1 210.5
Associated transaction costs (3.5) (4.8)
--------------------------------------
$ 69.6 $ 205.7
--------------------------------------
--------------------------------------


On March 8, 2007, the Company renegotiated its U.S. dollar denominated term-debt with the Brookfield Bridge Lending Fund ("BBLF"), paying down U.S. $21.6 million to reduce the principal outstanding from U.S. $95.3 million to U.S. $73.7 million and reducing the interest rate from floating one-month LIBOR plus 8.15% to floating one-month LIBOR plus 3%. On March 29, 2007 a further U.S. $0.2 million was paid against the outstanding principal.

On March 10, 2007, the Company also exercised its option to extend the maturity date of the Canadian term-debt with BBLF to March 10, 2008 on payment of an extension fee of $2.0 million. The Company began paying cash interest on $45.0 million of the Canadian term-debt effective March 1, 2007 and on the total Canadian term-debt effective April 1, 2007. Previously interest was being deferred and added to the principal outstanding as permitted by the agreement.

BBLF is related to the Company by virtue of a common relationship with Brookfield Asset Management ("BAM").

5. Stock-Based Compensation Plan

On August 28, 2007 1,645,000 options with an exercise price of $2.18 per Common Share, being the trading price of the shares at the date of the grant, were granted resulting in 3,933,060 options being outstanding at September 30, 2007 with a weighted average exercise price of $2.54 per Common Share.

6. Commitments and Contingencies

(a) 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, suppliers and others in respect of which either provision has been made or for which no material liability is expected.

The Company has a number of claims filed against it from logging contractors with respect to various operating issues. Certain of the claims are pending arbitration, mediation or appeal, 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.

(b) Indemnity Agreement

The Company has an obligation to indemnify an entity related to BAM if that entity incurs liability under a guarantee (the Guarantee) provided by it to a third party relating to the purchase by the Company of certain assets from that third party. The Guarantee is limited to $100 million. As security for its performance under this indemnity the Company has issued a debenture in favour of the related entity in the amount of $100 million which results in a charge over all of the Company's real property and all of the Company's present and after-acquired personal property. In the absence of any claims, the Guarantee terminates on May 30, 2011 and if there is no liability accruing to the guarantor there under at that time, the Company may require that the debenture be discharged.

(c) Long-Term Fibre Supply Agreements

The Company has a number of long-term commitments to supply fibre to third parties. Certain of these agreements have minimum periodic volume requirements and may, in the case of a failure to supply the minimum volume, require the Company to 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 agreements.

(d) Allowable Annual Cut Reductions

Allowable annual cuts continue to be revised pursuant to earlier announced provincial orders-in-council that temporarily put various coastal areas off-limits to forest development through Part 13 of the Forest Act. The AAC reductions were made to ensure that harvest rates remain at a sustainable level until land use planning is completed in the areas affected by the Part 13 orders.

The Company has considered the Part 13 orders and the temporary AAC reductions and has factored them into the Company's short-term harvesting and mill production plans. If the Part 13 orders extend for more than four years from the date of issue or the Province's land use planning process results in these reductions becoming permanent, then the Company will have the ability to seek compensation from the Province for the reduced cutting rights thereafter.

(e) The Forest Revitalization Plan

In January 2005, pursuant to terms of a settlement framework agreement negotiated in late 2004, the Company received $16.5 million in compensation for the loss of 685,216 cubic meters of AAC and 827 hectares of timber licenses. Under this agreement, the Company also received an advance payment of $5.0 million towards compensation for improvements the Company and its predecessor made to Crown land in the take-back areas. Negotiations are continuing to finalize compensation payments for improvements.

7. Pension Expense

The Company has defined benefit and defined contribution pension plans that cover substantially all salaried and certain hourly employees. The Company also contributes to hourly paid employee union pension plans and has health care plans covering certain hourly and retired salaried employees. In the three and nine month periods ended September 30, 2007 the Company recorded pension expense with respect to continuing operations of $2.0 million (2006 - $ 3.9 million) and $9.3 million (2006 - $9.8 million), respectively.

8. Segmented Information

The Company is an integrated Canadian forest products company operating in one industry segment comprising the Company's timber harvesting, reforestation, sawmilling, value-added lumber remanufacturing and lumber marketing operations. Until January 26, 2006 the Company also operated in the pulp segment that comprised the Company's NBSK pulp manufacturing and sales operations (note 11 - discontinued operations).

9. Operating Restructuring Income (Costs)

Operating restructuring income (costs) for 2007 comprises the gain on the sale of the Company's log merchandiser facility offset by timberlands restructuring costs. For 2006 it comprises severance and other costs associated with the closure of the Company's log merchandiser facility, severance costs and the restructuring of certain timberlands operations.

10. Non-Core Asset Sale

The Company entered into an agreement to sell the site of its former New Westminster sawmill for $42.6 million, payable in cash on closing, resulting in a gain of approximately $11.0 million. The sale is subject to the Company providing the purchaser a Certificate of Compliance following the remediation of the site and is expected to close in the first quarter of 2008.

11. Discontinued Operations

On December 15, 2005 the Company announced the closure of its Squamish pulp mill and its exit from the pulp business. On January 26, 2006 production at the pulp mill ceased and on March 9, 2006 the majority of the workforce completed their employment with the Company. The Company continues to incur ongoing costs for supervision, security, property taxes and other costs. These costs will be expensed as incurred.

The following table provides additional information with respect to the discontinued operations:



Three months ended Nine months ended
September 30 September 30
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(millions of dollars) 2007 2006 2007 2006
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Sales $ - $ - $ - $ 19.9
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Net income (loss) from
discontinued operations
before income taxes (0.5) (0.8) 2.3 (9.8)
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Net income (loss) from
discontinued operations $ (0.5) $ (0.8) $ 2.3 $ (9.8)
------------------------------------------
------------------------------------------

Cash provided (used) by:
Operating activities $ (1.8) $ (3.1) $ (4.9) $ (6.8)
Investing activities 0.2 - 1.4 -
------------------------------------------
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Cash used by
discontinued operations $ (1.6) $ (3.1) $ (3.5) $ (6.8)
------------------------------------------
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During the first quarter of 2007, the Company negotiated the sale of the majority of the pulp mill equipment and certain spare parts for proceeds of $5.5 million resulting in a gain of $5.2 million. Included in the net loss from discontinued operations for the nine months ended September 30, 2006 is $4.5 million with respect to the cost to terminate certain long-term contracts.



Head Office
435 Trunk Road
Duncan, British Columbia
Canada V9L 2P9
(250) 748-3711
Fax: (250) 748-6045
E-mail: info@westernforest.com

Financial Statements on the Internet
www.westernforest.com
www.sedar.com

Contact Information

  • Western Forest Products Inc.
    Reynold Hert
    President & CEO
    (250) 715-2207
    or
    Western Forest Products Inc.
    Paul Ireland
    CFO
    (250) 715-2209
    Website: www.westernforest.com