Western Forest Products Inc.
TSX : WEF

Western Forest Products Inc.

July 27, 2009 22:55 ET

Western Reports Second Quarter 2009 Results

DUNCAN, BRITISH COLUMBIA--(Marketwire - July 27, 2009) - Western Forest Products Inc. (TSX:WEF) ("Western" or "the Company") today announced results for the second quarter ended June 30, 2009.

The Company reported a net loss for the second quarter of 2009 amounting to $30.1 million ($0.06 per share), on sales of $134.6 million. The Company's operating results continue to be impacted by a global economy that is experiencing one of the worst downturns in decades. Depressed pricing on most of the Company's products as a result of weak demand and product oversupply have negatively impacted the Company's results. The Second Interim Report for 2009 is available on SEDAR and the Company's website at www.westernforest.com.

Forward Looking Statements and Information

This press release contains statements which constitute forward-looking statements and forward-looking information within the meaning of applicable securities laws. Those statements and information appear in a number of places in this document and include statements and information regarding our current intent, belief or expectations primarily with respect to market and general economic conditions, future costs, expenditures, available harvest levels and our future operating performance, objectives and strategies. Such statements and information may be indicated by words such as "estimate", "expect", "anticipate", "plan", "intend", "believe", "should", "may" and similar words and phrases. Readers are cautioned that it would be unreasonable to rely on any such forward-looking statements and information as creating any legal rights, and that the statements and information are not guarantees and may involve known and unknown risks and uncertainties, and that actual results and objectives and strategies may differ or change from those expressed or implied in the forward-looking statements or information as a result of various factors. Such risks and uncertainties include, among others: general economic conditions, competition and selling prices, changes in foreign currency exchange rates, labour disruptions, natural disasters, relations with First Nations groups, changes in laws, regulations or public policy, misjudgments in the course of preparing forward-looking statements or information, changes in opportunities and other factors referenced under the "Risk Factors" section in our Annual Information Form dated February 25, 2009 and under the "Risks and Uncertainties" section of our MD&A in our 2008 Annual Report of the same date. 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.

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 7.4 million cubic metres of timber of which approximately 7.1 million cubic metres is from Crown lands and lumber capacity in excess of 1.6 billion board feet from eight sawmills and four remanufacturing plants. Principal activities conducted by the Company 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 30 countries worldwide.

Western Forest Products Inc.

2009 Second 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. ("Company", "Western", "us", "we", or "our"), on a consolidated basis, for the second interim period ended June 30, 2009 to help security holders and other readers understand our Company and the key factors underlying our financial results. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements for the period and with the audited annual consolidated financial statements and management's discussion and analysis ("MD&A") for the year ended December 31, 2008 (the "2008 Annual Report"), all of which can be found on the System for Electronic Document Analysis and Retrieval ("SEDAR"), at http://www.sedar.com.

The Company has prepared the financial information contained in this discussion and analysis in accordance with Canadian generally accepted accounting principles ("GAAP"). Reference is also made to EBITDA(1). EBITDA is defined as operating income (loss) plus amortization of property, plant and equipment and the write-down of property, plant and equipment and operating restructuring costs added back. Western uses EBITDA as a benchmark measurement of our own operating results and as a benchmark relative to our competitors. We consider EBITDA to be a meaningful supplement to operating income as a performance measure primarily because amortization expense and property write-downs are not cash costs, and vary widely from company to company in a manner that we consider largely independent of the underlying cost efficiency of their operating facilities. Further, operating restructuring costs are not expected to occur on a regular basis and may make comparisons of our operating results between periods more difficult. We also believe EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.

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

This management's discussion and analysis contains statements which constitute forward-looking statements and forward-looking information within the meaning of applicable securities laws. Those statements and information appear in a number of places in this document and include statements and information regarding our current intent, belief or expectations primarily with respect to market and general economic conditions, future costs, expenditures, available harvest levels and our future operating performance, objectives and strategies. Such statements and information may be indicated by words such as "estimate", "expect", "anticipate", "plan", "intend", "believe", "should", "may" and similar words and phrases. Readers are cautioned that it would be unreasonable to rely on any such forward-looking statements and information as creating any legal rights, and that the statements and information are not guarantees and may involve known and unknown risks and uncertainties, and that actual results and objectives and strategies may differ or change from those expressed or implied in the forward-looking statements or information as a result of various factors. Such risks and uncertainties include, among others: general economic conditions, competition and selling prices, changes in foreign currency exchange rates, labour disruptions, natural disasters, relations with First Nations groups, changes in laws, regulations or public policy, misjudgments in the course of preparing forward-looking statements or information, changes in opportunities and other factors referenced under the "Risk Factors" section in our Annual Information Form dated February 25, 2009, under the "Risks and Uncertainties" section of our MD&A in our 2008 Annual Report and those referenced in the MD&A in this quarterly report. All written and oral forward-looking statements or information attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. Except as required by law, Western does not expect to update forward-looking statements or information as conditions change.

Unless otherwise noted, the information in this discussion and analysis is updated to July 27, 2009. Certain prior period comparative figures may have been reclassified to conform to the current period's presentation. All financial references are in millions of Canadian dollars unless otherwise noted.

(1) Earnings Before Interest, Tax, Depreciation and Amortization



Summary of Selected Quarterly Results (1)

Three months ended Six months ended
(millions of dollars except June 30, June 30,
where noted) 2009 2008 2009 2008
--------------------- ------------------
(Restated 2)
Sales $ 134.6 $ 239.2 $ 287.2 $ 442.5
EBITDA (16.0) (6.8) (31.9) (22.7)
EBITDA as % of sales (11.9)% (2.8)% (11.1)% (5.1)%
Operating loss (27.7) (15.7) (50.4) (39.4)
Net loss from continuing
operations (29.5) (12.4) (54.5) (34.2)
Net loss and comprehensive
loss (30.1) (13.7) (55.6) (36.3)
Basic and diluted net loss
per share (dollars) $ (0.06) $ (0.07) $ (0.13) $ (0.18)

(1) Included in Appendix A is a table of selected results for the last
eight quarters.
(2) Results for 2008 have been restated for the change in the Company's
accounting policy for timberlands shutdown costs. See "Changes in
Accounting Policies - Timberlands Shutdown Costs".


Overview

Second quarter, 2009

The Company's operating results continue to be impacted by a global economy that is experiencing one of the worst downturns in decades. Depressed pricing on most of the Company's products as a result of weak demand and product oversupply, particularly in the U.S., have negatively impacted sales price realizations and closing inventory valuations. Although Western and the forest products industry in general have taken significant production curtailments in recent months, our product demand remained weak as credit availability continues to constrain many customers.

The net loss for the second quarter of 2009 was $30.1 million which compares to the first quarter loss of $25.5 million, and a loss of $13.7 million reported in the same quarter of 2008. The 2008 loss benefited from the inclusion of a $6.9 million gain of which $2.3 million related to the sale of a parcel of land on Southern Vancouver Island, British Columbia, and $3.2 million related to the proceeds received as compensation from the Province of British Columbia associated with a timber take-back. In addition, the second quarter of 2009 net loss includes one time restructuring costs of $3.5 million. Excluding the impact of these items, the net loss for the second quarter of 2009 was $6.0 million more than that reported in the same period of 2008. This decline is mainly the result of poor demand and prices for lumber and logs.

The Company's 2008 second quarter results have been restated for a change in accounting policy to directly expense timberlands shutdown costs (see Changes in Accounting Policies - Timberlands Shutdown Costs). This change decreased the net loss for the three months ended June 30, 2008 from that previously reported by $5.6 million.

The operating loss increased from $15.7 million in the second quarter of 2008 to $27.7 in the second quarter of 2009 and EBITDA for the comparable periods declined from negative $6.8 million a year ago to negative $16.0 million in the current quarter.

Year to date, June 30, 2009

The net loss for the first six months of 2009 was $55.6 million which is $19.3 million higher than the loss of $36.3 million reported for the same period in 2008. The 2008 results benefited from the inclusion of both the $6.9 million of income mentioned above, and a further $9.8 million gain on the sale of the former New Westminster sawmill site. Interest charges for the six month period were $7.3 million higher in 2008 compared to 2009 because of the lower interest rates negotiated on the refinancing that occurred at the end of the first quarter of 2008 and lower overall debt levels in 2009.

On January 22, 2009, the Company closed a rights offering and issued 8,783,241 Common Shares and 254,374,654 Non-Voting Shares that raised gross proceeds of $50.0 million. On a per share basis, the basic net loss of $0.13 per share in the first six months of 2009 compared to a net loss of $0.18 per share in the comparable period of 2008. The lower loss per share results from the increase in the weighted average number of shares outstanding to 437.0 million shares compared to 204.4 million a year earlier, partially offset by the higher losses in the first six months of 2009.

In an effort to preserve liquidity and balance inventory levels with market demand, the Company took significant downtime in its manufacturing and timberlands operations over the first six months of 2009. As a result, inventories declined by $82.3 million as the Company made sales from existing inventory. Cash provided by operating activities improved to $39.1 million from negative $21.5 million in the first six months of 2008 as the Company actively managed down its log and lumber inventories. This, combined with the $49.6 million net proceeds from the rights offering in the first quarter of 2009, enabled the Company to pay down its line of credit by $79.3 million and increase total liquidity to $41.8 million at June 30, 2009 from $22.3 million at the end of 2008.

Operating Results

Second quarter, 2009

The operating loss of $27.7 million for the second quarter of 2009 worsened from the loss of $15.7 million reported in the second quarter of 2008. 2009 results were negatively impacted by weaker realized prices for the majority of the Company's lumber, log and chip products and lower volumes sold. Operating results were also negatively impacted by an increase in operational costs directly charged to expense, as a result of increased market related downtime in 2009 compared to 2008. As mentioned earlier, the second quarter 2009 operating loss includes one time restructuring related costs of $3.5 million.

In response to lower product prices and volumes, the Company took additional action in the quarter to further reduce operating and overhead costs where possible, including, but not limited to, additional staff reductions and salary rollbacks. The Company has benefited from lower fibre costs due to reduced stumpage rates paid to the provincial government, improvements in recovery, and shifting production from higher cost operations.



Sales Three months ended Six months ended
June 30, June 30,
(millions of dollars) 2009 2008 2009 2008
-------------------- --------------------

Lumber $ 97.8 $ 181.5 $ 226.0 $ 334.0
Logs 25.3 43.4 41.6 77.9
By-products 11.5 14.3 19.6 30.6
-------------------- --------------------
Total sales $ 134.6 $ 239.2 $ 287.2 $ 442.5
-------------------- --------------------
-------------------- --------------------


Total sales decreased by 44% in the second quarter of 2009 compared to the same quarter in 2008 largely due to reduced shipments of lumber products, and lower prices. Lumber revenues decreased by 46% in the quarter when compared to the second quarter of 2008 as lumber shipments decreased by 33% to 145 million board feet and average lumber prices realized decreased by 20% to $674 per thousand board feet. The decrease in lumber selling price is attributable to weak demand and the impact of selling lower value lumber. The reduced lumber prices more than offset the positive impact of the weaker Canadian dollar.

Log sales revenues decreased by 42% during the quarter largely due to a 35% decrease in the volume of logs sold. The decrease in volume of logs sold is directly attributable to weak demand and reduced log production in 2009, as Timberland operations were scaled back to balance log inventories. Average log prices realized of $62 dollars per cubic metre were $8 per cubic metre lower than a year ago reflecting reduced pulplog prices and low demand for cedar logs.

As a consequence of increased mill curtailments and falling chip prices in the second quarter of 2009, by-product revenue decreased by 20% when compared to the second quarter of 2008. The decrease in chip pricing from the second quarter of 2008 is a result of lower pulp mill net realizations, which ultimately drive the chip pricing formula.

Total freight costs declined in the second quarter of 2009 compared to the second quarter of 2008 by $6.7 million as a result of lower shipments. Actual freight rates remain virtually unchanged from the previous quarter and are expected to remain stable over the next quarter.

Selling and administration cost decreased by 30% to $5.9 million in the quarter. The Company has continued to reduce corporate costs through a variety of means including reduced corporate staffing levels and limiting the use of external consultants.

Year to date, June 30, 2009

Total sales for the year-to-date in 2009 were 35% lower than the same period a year ago. The decrease is largely attributable to a 32% decrease in lumber sales, as weak markets, particularly for dimension and cedar lumber products, drove down realized sales prices in 2009 for these and similar products. Year to date log sales were 47% lower than the same period last year, primarily due to total log production being 41% lower in 2009 than 2008. By-product revenue in 2009 was 36% lower than 2008 largely a result of reduced internal chip production due to sawmill production in 2009 being 37% lower than the comparable period in 2008.

Non-operating income and costs

Interest expense for the second quarter of 2009 decreased by $1.3 million from $3.6 million to $2.3 million compared to the same quarter in 2008, and for the six months to June 2009 decreased to $4.7 million from $12.0 million a year earlier. The decrease is attributable to lower interest rates negotiated on the refinancing of the Company's long-term debt on March 14, 2008, as well as a $46.3 million reduction of the non-revolving term facility balance outstanding during 2008, including $40 million paid down at the end of the first quarter of 2008. In addition, interest expense in the first quarter of 2008 included $3.0 million with respect to the write-off of the balance of the deferred financing costs associated with the previous long-term debt facilities.

On June 16, 2009, an agreement was reached with the Company's lenders to extend the expiry date of the non-revolving term facility from September 9, 2009 to September 9, 2010. Concurrent with this extension, the Company's debt-to-capitalization covenant increased by 5% from 40% to 45%, and the interest rate margin charged increased 3%, and is now, at the Company's option, either Canadian prime rate plus 5% or bankers' acceptance rate plus 6%. In addition, the margin will increase by a further 0.25% at the end of each calendar quarter that any portion of the non-revolving term loan remains outstanding, commencing December 31, 2009.

Other income of $0.5 million was reported for the current quarter and $0.6 million for the year-to date that relates to some minor property sales, which compares to income of $6.9 million and $16.7 million for the comparable periods in 2008. The income reported in 2008 in the first quarter relates to the gain on the sale of the New Westminster sawmill site, and in the second quarter to the sale of a parcel of land on Southern Vancouver Island, British Columbia, and the compensation from the province of British Columbia associated with a previously reported timber take-back.



Financial Position and Liquidity
Three months ended Six months ended
(millions of dollars except June 30, June 30,
where noted) 2009 2008 2009 2008
----------------- --------------------
Cash provided (used) by operating
activities $ 5.5 $ (23.3) $ 39.1 $ (21.5)
Cash provided (used) by investing
activities (2.6) 5.9 (4.5) 41.1
Cash provided (used) by financing
activities (1.6) 14.0 (31.8) (18.1)
Cash (used) to acquire property,
plant, and equipment (2.2) (1.0) (4.2) (2.5)
Cash (used) to construct capital
logging roads (1.2) (2.4) (1.4) (5.5)

---------------------------------------------------------------------------
December
June 30 31
2009 2008
--------------------
Total liquidity (1) $ 41.8 $ 22.3
Net debt 151.1 233.0

Financial ratios:
Current assets to current
liabilities 2.00 1.18
Net debt to capitalization (2) 0.34 0.43

(1) Total liquidity comprises cash and cash equivalents and available
credit under the Company's revolving credit line and revolving term
facility.
(2) Net debt defined as the sum of long-term debt, current portion of
long-term debt, revolving credit line, less cash and cash equivalents.
Capitalization comprises net debt and shareholders' equity.


Second quarter, 2009

Cash flow from continuing operations in the quarter was positive $5.5 million which compares to the negative cash flow of $23.3 million in the second quarter of 2008. This improvement arose despite the increased losses in the quarter because of the continuing active management of working capital, as accounts receivable and inventories were reduced by $28.2 million in the current quarter. The Company took further downtime at its operations in the quarter to manage inventories lower to improve cash flow. Cash used in operations before the change in non-cash working capital for the second quarter increased by $10.0 million compared to the second quarter of 2008 primarily because of the increased operating losses, as discussed above.

Cash used in investing activities increased by $8.5 million in the quarter compared to the same quarter in 2008 primarily because the 2008 quarter included the proceeds received from property sales and a Province of British Columbia take-back final compensation settlement, which aggregated $6.9 million, as previously noted. Expenditures on property, plant and equipment continued to be monitored closely in the quarter and were restricted to necessary road construction, essential maintenance or safety items.

Year to date, June 30, 2009

Year to date cash flow from continuing operations was positive $39.1 million compared to cash used of $21.5 million for the same period in 2008, an improvement of $60.6 million. The improvement was primarily the result of the $82.3 million decrease in inventories since December 31, 2008. As mentioned, the Company took significant operational downtime over the first half of 2009 to match inventories with current demand levels and improve cash flows.

For the six months to June 2009, Western used cash for investing activities of $4.5 million which compares to the cash generated figure of $41.1 million in the same period of 2008. The decrease in generated cash in 2009 primarily reflects the $39.8 million proceeds received from the sale of the site of the Company's former New Westminster sawmill in 2008.

As previously disclosed the Company closed its rights offering to all shareholders in January 2009 and realized net proceeds of $49.6 million. The rights offering was backstopped by Tricap Management Limited ("Tricap"), the Company's largest shareholder. These funds, together with the proceeds from the reduction in working capital, enabled the Company to reduce the balance outstanding on its revolving credit line by $79.3 million to $29.6 million at June 30, 2009. As a result the Company's total liquidity increased to $41.8 million at June 30, 2009 compared to $22.3 million at the end of 2008. The increase in total liquidity does not fully reflect the decrease in the balance outstanding on the Company's line of credit, as the availability thereunder is calculated based on the level of eligible receivables and inventories, which decreased during the period. Financing activities in the first six months of 2008 include the refinancing of the Company's long-term debt with $175.0 million of new facilities and the subsequent repayment of $43.0 million of long-term debt primarily from the proceeds of the New Westminster asset sale.

The Company has forecasted financial results and cash flows for the balance of 2009 and into 2010. These forecasts are based on management's best estimates of operating conditions in the context of the current economic climate, today's difficult capital market conditions and the depressed state of the forest products industry.

Based on its forecasts, including the assumptions in the preceding paragraph and considering its total liquidity, the Company currently expects sufficient liquidity will be available to meet its obligations in 2009. However, if business conditions do not improve in 2010 or if the Company is unable to satisfactorily implement certain business strategies to improve profitability it is possible that the Company may not generate sufficient liquidity to be able to meet all of its commitments in 2010, and may also potentially breach its debt-to-capitalization bank covenant. If the Company is unsuccessful in selling non-core assets, or if there is any significant strengthening of the Canadian dollar, further declines in the U.S. housing or other key markets, timber tenure take backs without timely and adequate compensation, or increases in costs including stumpage rates, this would adversely impact the Company's liquidity in the short to mid-term, and may cause the Company to be non-compliant with the debt-to-capitalization covenant. In the event the Company is in violation of certain of its loan covenants its debt could become immediately due and payable or it may not be able to access funds under its revolving credit line. Under an amendment to the long-term debt agreement, which was signed on June 16, 2009 the debt-to-capitalization requirement was changed in the current quarter to 45% from 40%.

Changes in Accounting Policies

Timberlands Shutdown Costs

Effective January 1, 2009 the Company changed its accounting policy with respect to the treatment of its timberlands shutdown costs to directly expense the costs in the period incurred. The Company's previous accounting policy was to defer shutdown costs at the end of each interim period in accordance with CICA Handbook Section 1751, Interim Financial Statements, to account for planned volume or capacity cost variances that were expected to be absorbed by the end of the fiscal year. Under this previous accounting policy, these deferred costs were amortized into the statement of operations using a unit rate, based on budgeted production volume and cost for the fiscal year. In recent quarters, the Company has had to significantly alter its log production schedule from budget, making it difficult to determine if such costs would be fully absorbed by the end of the year using a budgeted rate, as prescribed by the previous policy. As such, the Company believes the new policy eliminates this issue by conservatively expensing such costs in the period incurred. The change in policy has been applied retroactively with restatement of prior periods and resulted in a decrease in inventory and an increase in the net loss and comprehensive loss for the first quarter of 2008 of $5.6 million and a decrease in the net loss and comprehensive loss in the second quarter of 2008, also of $5.6 million, all as compared to amounts as previously reported. As a result, basic and diluted loss per share increased by $0.03 per share in the first quarter of 2008 and decreased by $0.03 per share in the second quarter of 2008. The change in accounting policy did not have a material impact on the net loss for six months ended June 30, 2008 or in any other quarter.

Goodwill and Intangible assets

Effective January 1, 2009, the Company adopted the new recommendations of the CICA Handbook Section 3064, Goodwill and Intangible Assets. The new standard provides guidance on the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The adoption of this standard had no material impact on the Company's financial statements.

Future Changes in Accounting Policies

International Financial Reporting Standards

In January 2006, the Canadian Accounting Standards Board announced its decision requiring all publicly accountable entities to report under IFRS. These standards are effective for interim and annual financial statements beginning on or after January 1, 2011. The Company is currently evaluating the impact of these new standards and will be developing its changeover plan during 2009 for its adoption of IFRS on January 1, 2011. Western's largest shareholder, Tricap Management Limited, which is related to Brookfield Asset Management ("BAM"), will adopt IFRS effective January 1, 2010, with a transition date of January 1, 2009. Upon the request of BAM, Western has provided certain financial information in accordance with BAM's accounting policies and decisions to assist BAM with its adoption of IFRS. However, this information may not be consistent with the accounting policies and decisions that will be made by Western at the time of its own adoption of IFRS.

Evaluation of Disclosure Controls and Procedures

As required by National Instrument 52-109 issued by the Canadian Securities Administrators, Western carried out an evaluation of the design and effectiveness of the Company's disclosure controls and procedures and internal controls over financial reporting as of December 31, 2008. 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 interim 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 interim filings are being prepared.

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 first six months of 2009.

Risks and Uncertainties

The business of the Company is subject to a number of risks and uncertainties, including those described in the 2008 Annual Report and the Annual Information Form dated February 25, 2009, both of which can be found on the 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 Western's business. The Company has the following additional comments as at the date of this report.

As discussed in the Company's Annual Information Form dated February 25, 2009, under "Variable Operating Performance, Product Pricing and Demand Levels", the Company has been in negotiations with the other party to a 40 year fibre supply agreement ("Agreement") to address a shortfall in the delivery by the Company of the minimum volume of wood chips required by the Agreement for the three year period ended December 31, 2008.

Amendments to the Agreement and a related agreement between the Company and the other party were made effective July 3, 2009 which provided for, amongst other things, a waiver of any default resulting from the 2008 chip shortfall, an increase in the annual minimum chip supply obligations in each of the years 2010 to 2012, a change to the related agreement to provide for a possible extension of the date by which the first charge security over the Company's Englewood Logging Division (the "Security") could otherwise be released and an extension of the annual and three year minimum chip supply obligations until the year ending before the Security is released if the Security is not released in the eleventh year of the term of the Agreement.

CIT Business Credit Canada Inc. ("CITBCC") is the agent and the lender holding the largest commitment ($100 million) of the Company's $150 million ABL Credit Facility. CITBCC is jointly owned by Canadian Imperial Bank of Commerce ("CIBC") and CIT Group, Inc. ("CIT"). CIT is reported to be experiencing significant liquidity issues and has stated it is reviewing available alternatives however, the Company has been informed by CITBCC that it has separate and adequate funding.

Outlook and Strategy

The global financial crisis has had a significant impact on the amount of lumber consumed worldwide, especially in the United States. Weak demand for products has exerted significant pressure on prices and adversely affected Western's financial results. Despite production curtailments by Western and other lumber producers, lumber markets are not expected to materially recover over the remainder of 2009. Increased demand and price recovery are not expected to exist until homebuilders worldwide work down new home inventories. Against this backdrop, Western's management is taking aggressive steps to maintain sufficient liquidity through this downturn. In addition, they are positioning the Company to thrive once the marketplace recovers.

The immediate focus of management is to preserve the liquidity of the company through a combination of non-core asset sales, and generating positive cash flow from the base business. To generate positive cash flow the Company is actively managing working capital to the lowest possible levels and focusing on those customers and products that will quickly return cash to the Company. Management is also implementing projects to reduce operating costs and will maintain strict controls over capital spending.

The Company is continuing to pursue opportunities to sell non-core assets if offers are deemed to be at reasonable values. Any proceeds will first be directed to reduce or eliminate long term debt with any surplus used to provide additional liquidity. The Company has also reached an agreement with it's lenders to extend the expiry date of the non-revolving term facility from September 9, 2009 to September 9, 2010. The extension provides management with some increased flexibility with respect to the sales of non-core assets and provides a larger window to extract the maximum value for these assets.

Based on its forecasts, including the assumptions in the preceding paragraph and considering its total liquidity, the Company currently expects sufficient liquidity will be available to meet its obligations in 2009. However, if business conditions do not improve in 2010 or if the Company is unable to satisfactorily implement certain business strategies to improve profitability it is possible that the Company may not generate sufficient liquidity to be able to meet all of its commitments in 2010, and may also potentially breach its debt-to-capitalization bank covenant. If the Company is unsuccessful in selling non-core assets, or if there is any significant strengthening of the Canadian dollar, further declines in the U.S. housing or other key markets, timber tenure take backs without timely and adequate compensation, or increases in costs including stumpage rates, this would adversely impact the Company's liquidity in the short to mid-term, and may cause the Company to be non-compliant with the debt-to-capitalization covenant.

Outstanding Share Data

On January 22, 2009, the Company closed a rights offering of 8,783,241 Common Shares and 254,374,654 Non-Voting Shares that raised gross proceeds of $50.0 million. As a result, as of July 27, 2009 there were 128,625,600 Common Shares and 338,945,860 Non-Voting Shares issued and outstanding. Tricap controls and directs 49% of the Company's Common Shares and 100% of the Non-Voting Shares. The Company may convert the Non-Voting Shares into Common Shares on a one-for-one basis, in whole or in part, at any time in its sole discretion, provided that the Board of Directors is at that time of the opinion that to do so would not have a material adverse effect on the Company's business, financial condition or business prospects.

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, all of which expire on July 27, 2009. Western has also reserved 10,000,000 Common Shares for issuance upon the exercise of options granted under the Company's incentive stock option plan. During the first half of 2009, 3,500,000 options were issued, 2,163,465 options were cancelled and no options were exercised. As of July 27, 2009, 5,624,595 options were outstanding under the Company's incentive stock option plan.

Tricap Management Limited ("Tricap") controls and directs 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. Western 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 and the provision of a foreign exchange facility, all in the normal course and at market rates or at cost. During the second quarter of 2009, the Company paid entities related to BAM $4.3 million in connection with these arrangements.

Public Securities Filings

Readers may access other information about the Company, including the Annual Information Form and additional disclosure documents, reports, statements and other information that are filed with the Canadian securities regulatory authorities, on SEDAR at www.sedar.com.

On behalf of the Board of Directors

Dominic Gammiero, Chairman

Stephen Frasher, President and Chief Executive Officer

Duncan, BC,

July 27, 2009



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


(millions of
dollars
except
per share
amounts 2009 2008(1) 2007
and where -------------- ----------------------------- -------------
noted) 2nd 1st 4th 3rd 2nd 1st 4th 3rd
-------------- ----------------------------- -------------

Average
Exchange
Rate
- Cdn $
to pur-
chase
one US $ $1.167 1.244 1.211 1.041 1.010 1.005 0.981 1.045

Sales
Lumber $ 97.8 128.2 136.6 153.3 181.5 152.5 93.3 141.6
Logs 25.3 16.3 26.6 29.1 43.4 34.5 29.6 26.5
By-products 11.5 8.1 12.1 14.6 14.3 16.3 13.7 8.4
-------------- ----------------------------- -------------
Total sales $134.6 152.6 175.3 197.0 239.2 203.3 136.6 176.5
-------------- ----------------------------- -------------
-------------- ----------------------------- -------------

Lumber
Shipments
- millions
of board
feet 145 166 171 192 216 188 131 174
Price - per
thousand
board
feet $ 674 772 799 798 840 811 712 814
-------------- ----------------------------- -------------

Logs
Shipments
- thousands
of cubic
meters 406 247 483 517 622 455 412 364
Price - per
cubic
metre $ 62 66 55 56 70 76 72 73
-------------- ----------------------------- -------------

Selling and
adminis-
tration $ 5.9 7.4 6.8 8.6 8.5 8.9 9.2 10.2
-------------- ----------------------------- -------------

EBITDA as
previously
reported $(16.0) (15.9) (9.7) (10.0) (12.4) (10.3) (28.4) (29.8)
Change in
accounting
policy (1) - - - - 5.6 (5.6) - -
-------------- ----------------------------- -------------
EBITDA as
restated (16.0) (15.9) (9.7) (10.0) (6.8) (15.9) (28.4) (29.8)
Amortization
of capital
assets (8.2) (6.8) (8.2) (8.8) (8.9) (7.8) (7.9) (6.8)
Operating
restruct-
uring loss (3.5) - (6.3) - - - - -
Net interest
expense (2.3) (2.4) (4.0) (3.7) (3.6) (8.4) (5.9) (6.0)
Foreign
exchange
gain on
debt - - - - - 0.6 0.1 5.6
Other income
(expense) 0.5 0.1 4.7 (0.1) 6.9 9.8 0.9 (0.1)
Income taxes - - - (0.1) - (0.1) (0.7) (0.1)
-------------- ----------------------------- -------------
Net loss from
continuing
operations (29.5) (25.0) (23.5) (22.7) (12.4) (21.8) (41.9) (37.2)

Net loss from
discontinued
operations (0.6) (0.5) (0.8) (2.3) (1.3) (0.8) (1.0) (0.5)
-------------- ----------------------------- -------------
Net loss $(30.1) (25.5) (24.3) (25.0) (13.7) (22.6) (42.9) (37.7)
-------------- ----------------------------- -------------
-------------- ----------------------------- -------------

EBITDA as %
of sales (11.9)% (10.4)% (5.5)% (5.1)% (2.8)% (7.8)% (20.8)% (16.9)%

Earnings per
share:
Net loss
basic and
diluted $(0.06) (0.06) (0.12) (0.12) (0.07) (0.11) (0.21) (0.18)
Net loss
from
continuing
operations
basic and
diluted $(0.06) (0.06) (0.11) (0.11) (0.06) (0.11) (0.20) (0.18)

(1) Results for 2008 have been restated for the change in the Company's
accounting policy for timberlands shutdown costs. See "Changes in
Accounting Policies - Timberlands Shutdown Costs".


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

The following were unusual events that influenced results other than for seasonal reasons. In the third and fourth quarters of 2007, sales and net income were influenced by strike action taken by the United Steelworkers Union, which represents the majority of the Company's hourly workers. Other gains on the sale of various assets and other receipts are included in other income in the first, second and fourth quarters of 2008. Throughout 2008 and 2009, results suffered from the significant downturn in the forest products industry, bringing associated production curtailments. The fourth quarter of 2008 and the second quarter of 2009 included a charge for restructuring.



Western Forest Products Inc.
--------------------------------------------------------------------------
Unaudited Consolidated Financial Statements

For the three and six months ended June 30, 2009

Consolidated Balance Sheets
(Expressed in millions of Canadian dollars)

June 30 December 31
2009 2008
--------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 4.4 $ 3.5
Accounts receivable 41.9 45.6
Inventory (Note 3) 146.5 228.8
Prepaid expenses and other assets 6.1 8.2
--------------------------
198.9 286.1
Property, plant and equipment 420.0 429.8
Other assets 10.5 10.1
--------------------------
$ 629.4 $ 726.0
--------------------------
--------------------------

Liabilities and Shareholders' Equity
Current liabilities:
Revolving credit line (Note 4) $ 29.6 $ 108.9
Accounts payable and accrued liabilities 63.5 72.7
Current portion of long-term debt (Note 5) - 53.5
Discontinued operations (Note 12) 6.2 6.4
--------------------------
99.3 241.5
Long-term debt (Note 5) 125.9 74.1
Other liabilities 33.8 33.1
Deferred revenue 73.4 74.4
332.4 423.1

Shareholders' equity:
Common shares (Note 7) 412.3 410.6
Non-voting shares (Note 7) 187.5 139.6
Contributed surplus 2.3 2.2
Deficit (305.1) (249.5)
--------------------------
297.0 302.9

Commitments and contingencies (Note 9)
Subsequent events (Note 9)
$ 629.4 $ 726.0
--------------------------
--------------------------

See accompanying notes to these unaudited consolidated financial statements

Approved on behalf of the Board:

"Stephen Frasher" "Dominic Gammiero"
President and Chief Executive Officer Chairman


Unaudited Consolidated Statements of Operations, Comprehensive Loss and
Deficit

(Expressed in millions of Canadian dollars except for share and per share
amounts)

Three months ended Six months ended
June 30, June 30,
2009 2008 2009 2008
----------------------- --------------------
(Restated
Note 1(a))
Sales $ 134.6 $ 239.2 $ 287.2 $ 442.5
Cost and expenses:
Cost of goods sold 136.8 221.6 285.8 422.1
Export tax 1.6 3.6 3.8 6.6
Freight 14.5 21.2 31.2 35.8
Selling and administration 5.9 8.5 13.3 17.4
----------------------- --------------------
158.8 254.9 334.1 481.9
----------------------- --------------------

Operating loss before
restructuring items (24.2) (15.7) (46.9) (39.4)

Operating restructuring
items (Note 15) (3.5) - (3.5) -
----------------------- --------------------

Operating loss (27.7) (15.7) (50.4) (39.4)
Net interest expense (2.3) (3.6) (4.7) (12.0)
Foreign exchange gain
on translation of debt - - - 0.6
Other income (Note 11) 0.5 6.9 0.6 16.7
----------------------- --------------------

Loss before income
taxes (29.5) (12.4) (54.5) (34.1)
Income tax expense - - - (0.1)

Net loss from
continuing operations (29.5) (12.4) (54.5) (34.2)
Net loss from
discontinued operations
(Note 12) (0.6) (1.3) (1.1) (2.1)
----------------------- --------------------

Net loss and
comprehensive loss (30.1) (13.7) (55.6) (36.3)

Deficit, beginning of
period (275.0) (186.5) (249.5) (163.9)
----------------------- --------------------
Deficit, end of period $ (305.1) $ (200.2) $ (305.1) $ (200.2)
----------------------- --------------------
----------------------- --------------------

Loss per share (in
dollars):
Basic and diluted loss
per share $ (0.06) $ (0.07) $ (0.13) $ (0.18)
Basic and diluted loss
per share
from continuing
operations $ (0.06) $ (0.06) $ (0.12) $ (0.17)
----------------------- --------------------
----------------------- --------------------

Weighted average number
of shares outstanding
(thousands) 467,571 204,414 437,039 204,414

See accompanying notes to these unaudited consolidated financial statements


Unaudited Consolidated Statements of Cash Flows
(Expressed in millions of Canadian dollars)

Three months ended Six months ended
June 30, June 30,
2009 2008 2009 2008
------------------- -----------------
(Restated
Note 1(a))
Cash provided by (used in):
Operating activities:
Net loss from continuing
operations $ (29.5) $ (12.4) $ (54.5) $ (34.2)
Items not involving cash:
Amortization of capital assets 8.2 8.9 15.0 16.7
Foreign exchange gain on
translation of debt - - - (0.6)
Gain on disposal of property,
plant and equipment (0.6) (3.3) (0.6) (13.1)
Other (1.0) (6.1) 0.3 (2.9)
------------------- -----------------
(22.9) (12.9) (39.8) (34.1)
Changes in non-cash working
capital items:
Accounts receivable 13.0 (3.8) 3.7 (9.9)
Inventory 15.2 (5.2) 82.3 2.9
Prepaid expenses 0.3 (5.9) 2.1 (6.5)
Accounts payable and accrued
liabilities (0.1) 4.5 (9.2) 26.1
------------------- -----------------
5.5 (23.3) 39.1 (21.5)
------------------- -----------------

Investing activities:
Additions to property, plant
and equipment (3.4) (3.4) (5.6) (8.0)
Proceeds from disposal of
assets and other receipts 0.8 9.3 1.1 49.1
------------------- -----------------
(2.6) 5.9 (4.5) 41.1
------------------- -----------------

Financing activities:
Changes in revolving credit
line 0.5 15.2 (79.3) 24.1
Proceeds from rights offering,
net of costs - - 49.6 -
Proceeds from refinancing of
debt - - - 175.0
Repayment of term debt (0.5) (3.0) (0.5) (43.0)
Refinancing fees (1.6) - (1.6) -
Repayment of pre-existing debt - - - (174.3)
Other - 1.8 - 0.1
------------------- -----------------
(1.6) 14.0 (31.8) (18.1)
------------------- -----------------

Cash provided (used) by
continuing operations 1.3 (3.4) 2.8 1.5
Cash used by discontinued
operations (Note 12) (0.9) (1.0) (1.9) (1.9)
------------------- -----------------
Increase (decrease) in cash
and cash equivalents 0.4 (4.4) 0.9 (0.4)
Cash and cash equivalents,
beginning of period 4.0 8.9 3.5 4.9
------------------- -----------------
Cash and cash equivalents,
end of period $ 4.4 $ 4.5 $ 4.4 $ 4.5
------------------- -----------------
------------------- -----------------

Supplementary information:
Cash interest paid $ 1.5 $ 1.9 $ 4.3 $ 7.2
Cash income taxes paid $ - $ - $ - $ -

See accompanying notes to these unaudited consolidated financial statements.


Notes to unaudited Consolidated Financial Statements

(Tabular amounts expressed in millions of Canadian dollars)

Western Forest Products Inc.'s (the "Company" or "Western") business 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 quarterly 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 quarterly consolidated financial statements follow the same accounting policies and methods of application used in the Company's consolidated financial statements as at December 31, 2008 and for the year then ended except for the following changes:

(a) Timberlands Shutdown Costs

Effective January 1, 2009, the Company changed its accounting policy with respect to the treatment of its timberlands shutdown costs to directly expense the costs in the period incurred. The Company's previous accounting policy was to defer shutdown costs at the end of each interim period in accordance with CICA handbook Section 1751, Interim Financial Statements, to account for planned volume or capacity cost variances that were expected to be absorbed by the end of the fiscal year. Under this previous accounting policy, these deferred costs were amortized into the statement of operations using a unit rate, based on budgeted production volume and cost for the fiscal year. In recent quarters, the Company has had to significantly alter its log production schedule from budget, making it difficult to determine if such costs would be fully absorbed by the end of the year using a budgeted rate, as prescribed by the previous policy. As such, the Company believes the new policy eliminates this issue by conservatively expensing such costs in the period incurred. The change in policy has been applied retroactively with restatement of prior periods and results in a decrease in inventory and an increase in the net loss and comprehensive loss for the first quarter of 2008 of $5.6 million and a decrease in the net loss and comprehensive loss in the second quarter of 2008, also of $5.6 million, all as compared to amounts previously reported. As a result, basic and diluted loss per share increased by $0.03 per share in the first quarter of 2008 and decreased by $0.03 per share in the second quarter of 2008. The change in accounting policy did not have a material impact in any other quarter.

(b) Goodwill and Intangible Assets

Effective January 1, 2009, the Company adopted the new recommendations of the CICA Handbook Section 3064, Goodwill and Intangible Assets. The new standard provides guidance on the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The adoption of this standard had no impact on the Company's consolidated financial statements.

(c) Derivative Financial Instruments

In the second quarter of 2009, the Company entered into derivative financial instruments in order to manage its exposure to foreign exchange risk. The Company's policy is not to use derivative financial instruments for trading or speculative purposes. These instruments have not been designated as hedges for accounting purposes, and they are carried on the balance sheet at fair value with changes in the (realized and unrealized) fair value being recognized as gains or losses in the Company's Consolidated Statement of Operations (Note 8).

2. Going Concern

The Company has forecast financial results and cash flows for the balance of 2009 and into 2010. These forecasts are based on management's best estimates of operating conditions in the context of the current economic climate, today's difficult capital market conditions and the depressed state of the forest products industry.

Based on its current forecasts, the Company expects sufficient liquidity will be available to meet its obligations in 2009. However, if business conditions do not improve in 2010 or if the Company is unable to satisfactorily implement certain business strategies to improve profitability it is possible that the Company may not generate sufficient liquidity to be able to meet all of its commitments in 2010, and may also potentially breach its debt-to-capitalization bank covenant. If the Company is unsuccessful in selling non-core assets, or if there is any significant strengthening of the Canadian dollar, further declines in the U.S. housing or other key markets, timber tenure take backs without timely and adequate compensation, or increases in costs including stumpage rates, this would adversely impact the Company's liquidity in the short-to mid-term, and may cause the Company to be non-compliant with the debt-to-capitalization covenant. In the event the Company is in violation of certain of its loan covenants its debt could become immediately due and payable or it may not be able to access funds under its revolving credit line. As indicated in Note 5 the debt-to-capitalization was changed in the current quarter to 45% from 40%.

CIT Business Credit Canada Inc. ("CITBCC") is the agent and the lender holding the largest commitment ($100 million) of the Company's $150 million revolving credit line (Note 4). CITBCC is jointly owned by Canadian Imperial Bank of Commerce ("CIBC") and CIT Group, Inc. ("CIT"). CIT is reported to be experiencing significant liquidity issues and has stated it is reviewing available alternatives however, the Company has been informed by CITBCC that it has separate and adequate funding.

These consolidated financial statements have been prepared assuming the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

3. Inventory

The following table summarizes the value of inventory on hand:



June 30 December 31
2009 2008
------- -----------
Log inventory $ 93.3 $ 138.0
Lumber inventory 51.4 88.0
Supplies and other inventories 11.0 12.1
Provision for write downs (9.2) (9.3)
----------------------
Total inventory $ 146.5 $ 228.8
----------------------
----------------------


The Company's inventory is pledged as security against the revolving credit line and long-term debt. At June 30, 2009 $58.7 million (December 31, 2008 - $42.5 million) of the $146.5 million (2008 - $228.8 million) of total inventory was carried at net realizable value.

4. Revolving Credit Line

The revolving credit line provides for a maximum borrowing amount of $150.0 million with provision for an extension up to $200.0 million, subject to lender approval. The borrowing amount available is based on eligible accounts receivable and inventory balances and is secured by these balances. At June 30, 2009, $37.4 million of the facility was unused and available to the Company. The interest rate on the line is Canadian prime plus 0.50% and the expiry date is March 13, 2011. At June 30, 2009, $13.5 million ($US 11.6 million) of the revolving credit line is denominated in US dollars (December 31, 2008 - nil).

5. Long-Term Debt



June 30 December 31
2009 2008
------- -----------
Canadian dollar debt $ 128.1 $ 128.7
Associated transaction costs (2.2) (1.1)
----------------------
$ 125.9 $ 127.6
Less current portion - 53.5
----------------------
$ 125.9 $ 74.1
----------------------
----------------------


Long-term debt comprises two secured term facilities: a $75.0 million revolving term facility and a $100.0 million non-revolving term facility subsequently paid down by $46.3 million during 2008, and a further $0.6 million in the current quarter. The revolving term facility expires March 13, 2011. On June 16, 2009 an agreement was reached with the Company's lenders to extend the expiry date of the non-revolving term facility from September 9, 2009 to September 9, 2010.

Concurrent with this extension, the Company's debt-to-capitalization covenant changed by 5% from 40% to 45%, and the margin increased 3%, and is now, at the Company's option, either Canadian prime rate plus 5% or bankers' acceptance rate plus 6%. In addition, the margin will increase by a further 0.25% at the end of each calendar quarter that any portion of the non-revolving term loan remains outstanding, commencing December 31, 2009. The obligations under the facilities are secured by liens against all of the Company's properties and assets and include customary covenants including repayment of the facilities from the proceeds of asset sales and other non-operating cash inflows, with certain exceptions.

6. Segmented Information

The Company is an integrated Canadian forest products company operating in one industry segment involving timber harvesting and lumber production for marketing and distribution to worldwide markets.

7. Share Capital

On January 22, 2009, the Company closed a rights offering of 8,783,241 Common Shares and 254,374,654 Non-Voting Shares that raised gross proceeds of $50.0 million. The Company used the net proceeds of the rights offering to reduce indebtedness under its revolving line of credit, thereby providing additional liquidity. The amounts repaid under this facility will be available to be redrawn for general corporate purposes. Under the terms of the rights offering, common and non-voting shareholders received one right for each Common Share or Non-Voting Share that enabled them to subscribe for 1.28737 Common Shares of the Company at a price of $0.19 per Common Share. The rights were listed for trading on the Toronto Stock Exchange and were exercisable until January 20, 2009.

Tricap Management Limited ("Tricap"), the Company's largest shareholder, subscribed for Common Shares under both the basic subscription privilege and the additional subscription privilege. In accordance with the terms of a prior agreement, the Company only permitted the exercise of that portion of the rights owned by Tricap that resulted in Tricap beneficially owning, or exercising control or direction over, not more than 49% of the Common Shares outstanding. Accordingly, the Company only allowed the conversion of rights for the issuance of 4,303,788 Common Shares to Tricap with the remaining rights converted into 254,374,654 Non-Voting Shares. As a result, Tricap holds 63,026,544 Common Shares, or 49% of the Company's 128,625,600 Common Shares and 100% of the 338,945,860 Non-Voting Shares now issued and outstanding.

In the first six months of 2009, 3,500,000 options were granted at an exercise price of $0.70 per share exercisable for a period of 10 years, 2,163,465 options were cancelled and no options were exercised. At June 30, 2009, 5,624,595 options were outstanding under the Company's incentive stock option plan with a weighted average exercise price of $1.13 per Common Share.

8. Financial Instruments

Certain of the Company's sales transactions are denominated in foreign currencies, principally, the US dollar, and accordingly the Company is exposed to currency risk associated with changes in foreign currency exchange rates. To assist in mitigating this exchange risk, the Company has entered into an agreement dated March 31, 2009 with Brookfield Asset Management Inc. ("BAM") (Note 13) to provide a foreign exchange facility ("Facility") to the Company. The Facility, which is for a notional amount of up to US$80.0 million, matures on March 31, 2010, and allows for forward transactions with a maximum term for each transaction of up to one year. The maturity date is subject to automatic annual renewal subject to BAM notifying the Company of its intention to cancel the facility at least 30 days prior to the anniversary date and to certain change of control provisions being invoked. The Facility is unsecured and is subject to a fee of 0.10% of the notional amount per annum. The Company does not consider the credit risk associated with this Facility to be significant.

In the second quarter of 2009 the Company entered into contracts under the facility to sell US dollars forward in order to mitigate a portion of this foreign currency risk. At June 30, 2009, the Company had forward contracts in place to sell an aggregate of US$38.0 million at rates ranging between $1.1091 and $1.1565 per US dollar, with maturities through to November 2009. The fair value of these instruments at June 30, 2009 was a liability of $1.4 million which is included in accounts payable and accrued liabilities. A gain of $2.1 million was also recognized on contracts which matured in the quarter, resulting in a net gain of $0.7 million which is included in sales in the Consolidated Statement of Operations.

An increase (decrease) in the value of the Canadian dollar by US$0.01 as at June 30, 2009 would result in a pre-tax gain (loss) of $0.2 million on the translation of the Company's US dollar receivables, US dollar payables and borrowings and settlement of the outstanding forward foreign exchange contracts.

9. Commitments and Contingencies

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 ("Agreement"). As consideration for entering into the Agreement, the Company received a price premium of $80.0 million that is being earned as wood chips are delivered over the term of 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 Agreement. The Company recorded the price premium as deferred revenue and has granted a first charge (the "Security") over the acquired assets (including a tree farm license with an allowable annual cut of 826,000 cubic metres, 6,800 hectares of private timberlands within that tree farm licence and other capital improvements and equipment) to secure certain of these obligations.

In addition, certain of the fibre supply agreements have minimum volume requirements and may, in the case of a failure to supply the minimum volume, require the Company to source the deficiency from third parties at additional cost to the Company or pay the party to the fibre supply agreement a penalty calculated based on the provisions contained in the relevant agreement. As Western takes significant market related curtailments in its sawmills, the volume of chips produced is reduced and accordingly there is greater risk that the Company may not meet contractual obligations without incurring additional cost. For the three year period ended December 31, 2008 the Company had a shortfall in the delivery of the minimum volume of wood chips required by the Agreement, and the other party to the Agreement had ninety days from January 30, 2009 ("Remedy Enforcement Period") to commence enforcement of its remedies which, if available would include commencing enforcement of the Security. The Company agreed to extend the Remedy Enforcement Period to include the period between July 15 and July 30, 2009 (inclusive) to enable the other party to the Agreement time to obtain necessary third party approvals for a proposal that would amend the Agreement.

Amendments to the Agreement and a related agreement between the Company and the other party were made effective July 3, 2009 which provided for, amongst other things, a waiver of any default resulting from the 2008 chip shortfall, an increase in the annual minimum chip supply obligations in each of the years 2010 to 2012, a change to the related agreement to provide for a possible extension of the date by which the first charge security over the Company's Englewood Logging Division (the "Security") could otherwise be released and an extension of the annual and three year minimum chip supply obligations until the year ending before the Security is released if the Security is not released in the eleventh year of the term of the Agreement.

10. Pension Expense

The Company has defined benefit and defined contribution pension plans and other pension arrangements 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. During the three and six months ended June 30, 2009, the Company expensed costs of $3.2 million and $5.8 million, respectively (2008 - $3.0 million and $6.7 million) with respect to these plans.

11. Other Income

Other income of $0.5 million in the second quarter of 2009 relates to gains on minor asset sales. Other income of $16.7 million in the first half of 2008 mainly comprises gains on the disposal of non-core land and compensation payments received from the Province of British Columbia. The most significant disposal was the sale of the site of the Company's former New Westminster sawmill in the first quarter of 2008. Proceeds, less commission and other fees, totaled $39.8 million, generating a gain of $9.8 million. During the second quarter of 2008 the Company recorded a net gain of $6.9 million from the sale for cash of a parcel of land on southern Vancouver Island, British Columbia, the compensation from the Province of British Columbia associated with a timber tenure take-back and a number of smaller asset sales.

12. Discontinued Operations

In March 2006, the Company closed its Squamish pulp mill located on 213 acres on the mainland coast of British Columbia and exited the pulp business. Subsequent to the closure, the Company sold substantially all of the manufacturing assets of the mill. Ongoing costs including supervision, security and property taxes continue to be expensed as incurred. The real property is one of the Company's portfolio of non-core assets and while site remediation is ongoing, the Company has listed the property for sale.

13. Related Party Transactions

Tricap controls and directs 49% of the Company's Common Shares and 100% of the Non-Voting Shares. By virtue of the BAM voting arrangements with Tricap, BAM is related to the Company. Western 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 and the provision of a foreign exchange facility, all in the normal course of business and at market rates or at cost. In addition to the related party transactions disclosed in Note 7 and 8 of these financials, the Company had the following transactions under these arrangements:



Three months ended Six months ended
June 30, June 30,
2009 2008 2009 2008
-------------------- --------------------
Costs incurred for:
Log purchases $ 3.4 $ 4.9 $ 5.7 $ 9.4
Interest on long-term debt - - - 3.2
Other 0.9 1.5 1.4 1.9
-------------------- --------------------
$ 4.3 $ 6.4 $ 7.1 $ 14.5
-------------------- --------------------
-------------------- --------------------
Income received for:
Sundry sales $ - 0.4 $ - 0.5
-------------------- --------------------
$ - $ 0.4 $ - $ 0.5
-------------------- --------------------
-------------------- --------------------


14. Seasonality of Operations

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

15. Operating restructuring items

Restructuring items for the current quarter of $3.5 million relate to severance payments incurred.

Contact Information

  • Western Forest Products Inc.
    Stephen Frasher
    President & CEO
    (250) 715-2207
    or
    Western Forest Products Inc.
    Brian Cairo
    Sr. Vice President, Finance
    (250) 715-2258
    www.westernforest.com