2012 Annual Report
Transcription
2012 Annual Report
WEST FRASER ANNUAL REPORT 2012 Including Annual Information Form dated April 2, 2013 WEST FRASER Including Annual Information Form dated April 2, 2013 ANNUAL REPORT 2012 Table of Contents 1. Map of Operations 13.Panels 2. Financial & Operating Highlights 14. Pulp & Paper 4. Report to Shareholders 14. External Factors Affecting West Fraser’s Business in 2012 7. Corporate Structure 15. Risk Factors 8. Annual Information Form 15. Capital Structure 8. Business Overview 17.Experts 8. Corporate Strategy 17. Directors and Officers 9.History 19.Governance 9. Fibre Supply 19. Audit Committee 11. Capital Expenditures and Acquisitions 20. Material Contracts 11. Human Resources 20. Additional Information 11.Markets 20. Schedule 1 — Audit Committee Charter 12. Research and Development 23. Management’s Discussion 12.Lumber & Analysis 24. Annual Results 25. Annual Earnings Adjustments for Certain Non-Operational Items 26. Lumber Segment 27. Panels Segment 28. Pulp & Paper Segment 30. 4th Quarter Results 31. Quarterly Earnings Adjustments for Certain Non-operational Items 31. Discussion & Analysis of Quarterly Non-operational Items 31. Discussion & Analysis by Product Segment 33. Business Outlook 34. Earnings Sensitivity to Key Variables 34. Capital Structure and Liquidity 36. Significant Management Judgments Affecting Financial Results 37. Accounting Standards Issued But Not Yet Applied 38. Risks and Uncertainties 40. Disclosure Controls and Internal Controls Over Financial Reporting 41. Responsibility of Management 42. Auditor’s Report 43. Financial Statements 66. Five-year Financial Review 67. Corporate Information 69. Glossary of Industry Terms 4 3 36 10 28 33 9 29 30 7 12 5 11 26 EDMONTON 31 QUESNEL 35 ALBERTA 34 27 1 2 32 13 8 6 NORTH 21 CAROLINA TENNESSEE SOUTH MEMPHIS ARKANSAS CAROLINA 22 23 18 ALABAMAGEORGIA 17 15 24 20 19 16 14 25 TEXAS LOUISIANA FLORIDA WEST FRASER TIMBER CO. LTD. VANCOUVER OPERATIONS West Fraser is a North American wood LUMBER products company. Its main product is Canada 1.Quesnel lumber (spruce/pine/fir (“SPF”) and southern 2. Williams Lake yellow pine (“SYP”)), and it also produces 3.Smithers 4.Chetwynd panels (plywood, MDF and LVL), pulp (NBSK 5. Fraser Lake and BCTMP), newsprint and wood chips. 6.Chasm 7.Houston The operations located in western Canada 8. 100 Mile House manufacture all of the products described 9. Blue Ridge 10. Slave Lake above except SYP lumber. The sawmills 11.Hinton located in the southern United States produce 12.Edson 13.Sundre SYP lumber and wood chips. 1 U.S. 14.Joyce 15.Huttig 16.Henderson 17. New Boston 18.Leola 19.Maplesville 20.Opelika 21.Seaboard 22.Armour 23.Newberry 24.Augusta 25.Whitehouse PULP & PAPER MDF 33. Blue Ridge 26.Hinton 27. Quesnel (2) 28. Slave Lake 29.Whitecourt PLYWOOD 34.Quesnel VENEER & LVL 35.Rocky Mountain House 36. Slave Lake 30.Edmonton 31.Quesnel 32. Williams Lake LEGEND Lumber Pulp & Paper Plywood MDF LVL OPERATIONS BRITISH COLUMBIA FINANCIAL & OPERATING HIGHLIGHTS Earnings ($ millions) 2012 2011 Sales 3,000 2,762 EBITDA 279 226 Operating earnings 127 58 Earnings from continuing operations 87 27 Earnings after discontinued operations 87 73 Cash flow from operating activities 195 85 WEST FRASER TIMBER CO. LTD. Common Share Data (in dollars per share, except shares outstanding) Shares outstanding (thousands) — Weighted average (basic) 42,857 42,840 — Year-end 42,863 42,846 Earnings per share — Basic from continuing operations 2.02 0.63 — Diluted from continuing operations 2.02 0.41 — Basic after discontinued operations 2.02 1.70 — Diluted after discontinued operations 2.02 1.47 Cash dividends per share 0.56 0.56 Common shareholders’ equity 34.81 34.61 Price range — High (2012 — Dec 21; 2011 — Apr 4) 75.23 62.86 — Low (2012 — Apr 25; 2011 — Oct 4) 40.16 34.90 — Close 70.05 41.40 FINAnCIAL AND Operating Highlights 2 Financial Position ($ millions) Working capital 438 Total assets 2,618 Long-term debt 300 Shareholders’ equity 1,492 430 2,518 306 1,483 Analytical Data Current ratio 2.1 2.4 Capital expenditures and acquisition ($ millions) 180 213 Net debt to capitalization (%) 12 14 Return on common shareholders’ equity (%) 6.0 4.7 FINANCIAL & OPERATING HIG 378 (7) 780 778 186 192 1,634 1,596 Pulp & Paper Sales ($ millions) 775 Operating earnings ($ millions) 61 NBSK (Mtonnes)Production 529 Shipments 531 BCTMP (Mtonnes) Production 620 Shipments 626 Newsprint (Mtonnes) Production 128 Shipments 127 813 83 509 489 623 642 122 122 1 Includes intercompany fibre sales GHLIGHTS 3 FINAnCIAL AND Operating Highlights Panels Sales ($ millions)1 448 Operating earnings ($ millions) 39 Plywood (3/8” MMsf)Production 793 Shipments 798 MDF (3/4” MMsf)Production 195 Shipments 193 LVL (Mcf) Production 1,964 Shipments 1,888 WEST FRASER TIMBER CO. LTD. 2012 2011 Lumber Sales ($ millions)1 1,855 1,670 Operating earnings ($ millions) 94 (20) SPF (MMfbm) Production 3,466 3,408 Shipments 3,453 3,389 SYP (MMfbm)Production 1,488 1,503 Shipments 1,485 1,471 Report TO SHAREHOLDERS After a five year depression in the U.S. During the year, we continued our aggressive capital spending program. housing market, the fundamentals We substantially completed major modernization projects at several of our for a sustained improvement in sawmills in Canada and the U.S. In addition, we invested heavily in energy that sector appear to be taking reduction, environmental improvement and safety and dust control projects. hold. Since the beginning of 2012, U.S. housing starts have increased by 37% driven by continuing low interest rates, rising home prices and a declining inventory of new and existing homes for sale. The We are encouraged by the improvement in safety metrics in the Company as a result of the continued strengthening of the safety culture throughout the organization. We remain focused on our goal of eliminating serious and debilitating injuries at West Fraser. Expenditures on environmental and energy projects during the year resulted upswing in the housing market, combined with continuing strong demand in an overall improvement in our environmental footprint by increasing our from Japan and China, has driven a steady increase in lumber and panel production of bio-energy and reducing our reliance on fossil fuels. Today, markets throughout the year. Lumber and plywood prices have strengthened 60% of our energy needs are internally generated from biomass. by 46% and 37% respectively since the beginning of the year. We continue to focus our efforts on environmental performance both in our Pulp prices, on the other hand, declined by 10% from the previous year’s mills and in the forests we manage. We have a strong group of people level due to continued weak paper demand in North America, Europe and dedicated to energy conservation and to bio-energy and bio-products Japan as well as the addition of significant new pulp capacity in South development and innovation throughout our organization. In addition, all WEST FRASER TIMBER CO. LTD. America. Newsprint prices were flat during the year. REPORT TO SHAREHOLDERS 4 Our lumber and panels businesses accounted for 74% of our annual sales in 2012 so the strong rebound in pricing for these products more than offset the weaker results in our pulp & paper business resulting in adjusted earnings1 of our woodlands operations are certified to the independent Sustainable Forestry Initiative standard and West Fraser continues to play a leading role in working collaboratively with many environmental organizations on the Canadian Boreal Accord initiative. for the year of $138 million compared to $23 million in 2011. After capital spending, acquisitions and dividend expenditures of over $200 million, we ended the year with a debt to capital ratio of 12% and one of the strongest balance sheets in the industry. REPORT TO SHAREHOLDERS 1 Refer to the table titled “Annual Earnings Adjustments for Certain Non-operational Items” in Management’s Discussion and Analysis of our 2012 results for details of adjustments. The devastating effects of the mountain pine beetle continue to affect We continue to invest in our U.S. sawmills to bring them, as a group, into production and profitability at many of our British Columbia sawmills. the lower cost quartiles in the south. By the end of 2013 we will be about Productivity, lumber recovery and grade outturn are all negatively affected half way through our major modernization program which we expect to be by the declining quality of timber we are harvesting from the beetle-infested substantially complete within three years. Our U.S. division contributed forests. We have made significant investments in many of our mills but significantly to our profits in 2012 and we expect improving results in the these modifications and improvements do not fully offset the effects of the deteriorating timber quality. Over the next few years lumber capacity throughout the interior of British Columbia may be reduced by up to 35% due to the reduced availability of economically accessible timber. West Fraser will continue to work diligently to mitigate the impact of reduced harvests on our operations and our communities. future as we work through our capital upgrade program. In 2012 West Fraser was North America’s largest lumber producer with half of our production coming from our mills in Alberta and the U.S. Over the past decade we have substantially expanded our geographic base outside of British Columbia which has reduced our concentration risk and greatly improved our access to new timber baskets. A further benefit of this growth In West Fraser’s case, the declining harvest levels in British Columbia will has been the many new and talented employees who have joined us and be partially offset by our growing capacity in Alberta and the United States. who will help us continue to improve and build on our solid manufacturing While the mountain pine beetle is also an issue in some parts of Alberta, we base. This is particularly important to our future development given the are hopeful that existing efforts by government and industry to control its fact that 35% of our employees are over the age of fifty and 20% of our spread will prove more successful than in British Columbia. employees are currently eligible to retire. These are typical demographics acquisition for West Fraser as Sundance has a strong timber position that will for us to attract, develop and retain talented young workers who will build their careers with us. integrate well with our existing operations. Following an extensive renovation of the mill this year, we expect our new Edson mill will be a highly efficient and low-cost facility that will be a positive addition to our asset base in Alberta. A further benefit of this growth has been the many new and talented employees who have joined us and who will help us continue to improve and build on our solid manufacturing base. WEST FRASER TIMBER CO. LTD. from Sundance Forest Industries in Edson, Alberta. This is a very strategic for the North American manufacturing sector and point to the crucial need 5 REPORT TO SHAREHOLDERS In October 2012, West Fraser acquired a sawmill and related timber rights REPORT TO SHAREHOLDERS (CONTINUED) Skills training and management development are key areas of focus for our On March 1, 2013 Ted Seraphim was appointed our new President and CEO. Company today. Over the past couple of years we have invested a significant Ted had been our President and Chief Operating Officer for the past year. At amount of resources in all facets of training throughout the Company. We will the same time I assumed the role of Executive Chairman and will work closely be even more intensely focused on identifying and developing future leaders with Ted and his very capable management team as we continue to build for our Company in the years ahead as we are intent on maintaining and West Fraser into one of North America’s premier forest companies. increasing the competitive advantage our talented and committed work force has given us over the years. Today we look to the future with a great deal of optimism. We have emerged West Fraser is fortunate to have an experienced, active and engaged Board of Directors. Their advice and guidance have been an invaluable element in our continuing growth and development. I want to thank them and our Director from the worst industry downturn in 70 years as a larger and stronger Emeritus, Bill Ketcham, for their ongoing support. company. We’re in the early stages of a housing rebound which should support rising prices for our lumber and panel products. In addition, following three years of significant capital investment, we believe we have positioned our pulp & paper business as a low-cost producer in North America. This business should now be profitable throughout the cycle. In 2012, West Fraser achieved a total shareholder return of 71%. This is one of the best returns in the industry and is a reflection not only on the strengthening markets for our products but also on our many great employees who work hard every day to keep West Fraser at the forefront of our industry. I thank them for their continuing support and dedication to our Company. Most importantly, the forest industry in North America is increasingly being recognized as a “green” industry where sustainably managed and independently certified forests are providing building products and bio- WEST FRASER TIMBER CO. LTD. products that are better for the environment than available alternatives. This REPORT TO SHAREHOLDERS 6 is a fundamental change that will make our industry a more relevant and Henry H. Ketcham sought-after career destination for our next generation of leaders. West Executive Chairman Fraser is proud of the leadership role we have played in enhancing the environmental reputation of our industry. Today we look to the future with a great deal of optimism. We have emerged from the worst industry downturn in 70 years as a larger and stronger company. We’re in the early stages of a housing rebound which should support rising prices for our lumber and panel products. WEST FRASER TIMBER CO. LTD. WEST FRASER MILLS LTD. LUMBER PANELS PULP & PAPER Canada U.S.3 Plywood Pulp QuesnelJoyce EdmontonHinton Williams Lake Huttig Quesnel Quesnel Smithers Henderson Williams Lake Quesnel (50%)4 Chetwynd New Boston Slave Lake Fraser Lake Leola MDF Chasm Maplesville Blue RidgeNewsprint Houston Opelika Quesnel Whitecourt (50%)5 100 Mile House McDavid Blue Ridge1Seaboard Veneer & LVL Slave Lake Armour Rocky Mountain House2 Hinton Newberry Slave Lake Sundre2Augusta EDSON Folkston Whitehouse 1. 2. 3. 4. 5. Owned through Blue Ridge Lumber Inc., a wholly-owned subsidiary. Owned through Sundre Forest Products Inc., a wholly-owned subsidiary. Owned through West Fraser, Inc., a wholly-owned subsidiary. Joint venture interest in Cariboo Pulp & Paper Company. Joint venture interest in Alberta Newsprint Company owned through West Fraser Newsprint Ltd., a wholly-owned subsidiary. CORPORATE STRUCTURE 7 CORPORATE STRUCTURE WEST FRASER TIMBER CO. LTD. CORPORATE STRUCTURE ANNUAL INFORMATION FORM Date This Annual Information Form of West Fraser Timber Co. Ltd. (“West Fraser” or the “Company”) is dated as of April 2, 2013. Except as otherwise indicated, the information contained in it is as of December 31, 2012. Business Overview West Fraser is a North American integrated wood products company which produces lumber (spruce/pine/fir (“SPF”) and southern yellow pine (“SYP”)), panels (plywood, MDF and LVL), pulp (NBSK and BCTMP), newsprint and wood chips. The operations located in western Canada manufacture all of the products described above except SYP lumber. The sawmills located in the southern U.S. produce SYP lumber and wood chips. The annual production capacities of our wholly-owned facilities and our share of the capacities of our joint venture facilities are as follows: Lumber (MMfbm) SPF 3,800 SYP 2,000 Total 5,800 Panels Plywood (MMsf 3/8”)830 MDF (MMsf 3/4”)300 LVL (Mcf)3,200 WEST WEST FRASER FRASER TIMBER TIMBER CO. CO. LTD. LTD. Pulp (Mtonnes) BCTMP NBSK Annual Information Form 8 650 590 Newsprint (Mtonnes)135 Corporate Strategy Our goal at West Fraser is to generate strong financial results through the business cycle, relying on our committed work force, the quality of our assets, and our well-established corporate culture. This culture emphasizes cost control in all aspects of the business and on competitiveness, both internally and externally. In our approach to employee relations, we emphasize employee involvement and favour internal promotions whenever possible. West Fraser is an integrated and diversified producer of wood products with access to extensive timber resources. Acquisitions and expansions are considered with a view to extending our existing business lines, particularly in lumber operations, and to product and geographic diversification. Our earnings over the business cycle have enabled us to make significant and ongoing capital investments in our facilities to maintain and improve our overall low-cost position. We are committed to operating in a financially conservative and prudent manner. The North American wood products industry is cyclical, and over the last several years has faced very difficult market conditions and serious challenges. During such cyclical downturns, we focus on financial discipline, including reduction or deferral of non-essential capital expenditures. We believe that maintaining a strong balance sheet provides the ability to react to growth opportunities. Corporate Structure The chart on page 7 shows the relationship of West Fraser to the principal direct and indirect subsidiaries and the joint ventures in which we participate and, where less than 100%, the percentage of our direct or indirect ownership. Forward-looking Statements This Annual Information Form, and the Annual Report of which it forms a part, contain historical information, descriptions of current circumstances and statements about potential future developments. The latter, which are forward-looking statements, are presented to provide reasonable guidance to the reader but their accuracy depends on a number of assumptions and is subject to various risks and uncertainties. Forward-looking statements are included under the headings “Fibre Supply – First Nations Issues” and “Capital Structure – Dividends” and in parts of the Management’s Discussion & Analysis incorporated herein. Actual outcomes and results will depend on a number of factors that could affect the ability of the Company to execute its business plans, including the matters described in these sections and under “Risk Factors”, and may differ materially from those anticipated or projected. Accordingly, readers should exercise caution in relying upon forward-looking statements which reflect management’s estimates, projections and views only as of the date hereof. The Company undertakes no obligation to publicly revise these statements to reflect subsequent events or changes in circumstances except as required by applicable securities laws. West Fraser assumed its present form in 1966 by the amalgamation of a group of companies under the laws of B.C. The principal operating subsidiary, West Fraser Mills Ltd., assumed its present form on January 1, 2005 by amalgamation under those laws. West Fraser, Inc. is a Delaware corporation, while Blue Ridge Lumber Inc. and Sundre Forest Products Inc. are Alberta corporations. West Fraser Newsprint Ltd. subsists under the laws of Canada. Alberta Newsprint Company (“ANC”) and Cariboo Pulp & Paper Company are unincorporated joint ventures governed, respectively, by the laws of Alberta and B.C. Our executive office is located at 858 Beatty Street, Suite 501, Vancouver, B.C., Canada, V6B 1C1 and our registered office is located at 1500 – 1055 West Georgia Street, Vancouver, B.C., Canada, V6E 4N7. History and Development of Business West Fraser originated in 1955 when three brothers, Pete, Bill and Sam Ketcham, acquired a lumber planing mill located in Quesnel, B.C. (“Quesnel”). From 1955 through 2012 the business expanded in western Canada through the acquisition of a number of sawmills and related timber harvesting rights and the acquisition or development of lumber, panel and pulp & paper businesses. Expansion into the southern U.S. began in 2000, with the acquisition of two sawmills. An additional 13 sawmills located in the southern U.S. were acquired in 2007. Major developments for West Fraser during the last five years include the following: 2010 Closure of linerboard and kraft paper mill at Kitimat, B.C. in January 2010. 2011 Sale of Kitimat industrial site, deep-sea wharf and Terrace sawmill. 2012 Purchase of sawmill at Edson, Alberta. Sales Revenue1 ($ millions) Year ended December 31 2012 2011 2010 2009 Lumber 1,783 1,579 1,622 1,285 Panels 442 370 401 391 Pulp & Paper 775 813 863 677 Total 3,000 2,762 2,886 2,353 2008 1,645 428 789 2,862 Log Supply Our U.S. operations, which produce SYP lumber, consume approximately 8 million tons of logs per year operating at capacities described in this Annual Information Form. These operations obtain approximately 26% of their log requirements under certain long-term supply contracts, with the balance being purchased on the open market. In B.C. and Alberta substantially all timberlands are publicly owned and the right to harvest timber is acquired through provincially-granted licences. Licences grant the holder the right to harvest up to a specified quantity of timber annually and either have a term of 15 to 25 years and are replaceable or renewable or have a shorter term but are not replaceable or renewable. The following table summarizes the timber tenures, as at December 31, 2012, which supply the Canadian mills that we own or in which we have an interest, as well as our Annual Allowable Cut (“AAC”) for such tenures. Timber Tenures (thousand m3) Location Tenure1 Expiry B.C. Coniferous Long-term 2021 – 2035 Coniferous Short-term 2013 – 2017 Alberta Coniferous Long-term 2018 – 2029 Deciduous Long-term 2021 – 2029 AAC 5,493 520 6,018 1,165 1. Long-term tenures include TFLs, FMAs, timber quotas and forest licences, which are renewable timber tenures. Short-term tenures include non-replaceable forest licences. Annual log requirements for our Canadian sawmills, plywood facilities and LVL plant, all operating at the capacities described in this Annual Information Form, total approximately 14 million m3. Approximately 75% of these requirements can be obtained from the tenures described in the above table and the balance is acquired from third parties holding short or long-term timber harvesting rights, including independent logging contractors, First Nations, communities and woodlot owners. Timber tenures in B.C. and Alberta require the payment of a fee, commonly known as stumpage, for timber harvested under it. Currently, stumpage in Alberta is product-price specific and varies with the sales price of the product into which the logs will be converted. Stumpage in B.C. is substantially based on the results of certain publicly-auctioned timber harvesting rights. 9 Annual Information Form Fibre Supply Our operations are dependent on the consistent supply of substantial quantities of wood fibre in various forms. The primary manufacturing facilities, which produce lumber, plywood and LVL, consume whole logs while the pulp & paper and MDF facilities mostly consume wood by-products in the form of wood chips, shavings and sawdust resulting from the production of lumber, plywood or LVL. Many facilities also consume hog fuel and wood waste in energy systems. WEST FRASER TIMBER CO. LTD. 1. From continuing operations and excludes intercompany fibre sales. ANNUAL INFORMATION FORM (CONTINUED) Timber tenures in B.C. and Alberta require the holder to carry out reforestation to ensure re-establishment of the forest after harvesting. Reforestation requirements depend on climate, terrain, species and other factors affecting regeneration. Reforestation projects are planned and supervised by our woodlands staff and are subject to approval by relevant government authorities. Our timber harvesting operations are carried out by independent contractors under the supervision of our woodlands staff. Mountain Pine Beetle The current mountain pine beetle infestation in the B.C. interior reached a peak in terms of the annual timber mortality rate in 2004. To date, B.C.’s Ministry of Forests, Lands and Natural Resource Operations estimates that 710 million m3 of pine has been attacked and killed and that approximately 58% of the mature pine within the province’s timber harvesting land base will be killed by 2017. Although the ultimate effect of the infestation is less severe than originally forecasted, the damage to the mature pine forests within our operating areas is significant. WEST WEST FRASER FRASER TIMBER TIMBER CO. CO. LTD. LTD. We continue to focus on the salvage and processing of dead pine in order to utilize as much of the resource as possible and to ensure that affected sites are promptly reforested. The Province of B.C. has also limited the harvest of non-pine species until the salvage of dead pine stands comes to a conclusion. The AAC will be reduced to reflect lower mature inventories as dead pine stands are harvested or when they are no longer economic to harvest. The Province has reduced the AAC in the central Interior by approximately 8% in the past two years and we expect this process to continue over the next several years. To date, B.C.’s Chief Forester has announced reductions of the AAC in three of our operating areas in the Interior. As the timing of future reductions and the effect on our AACs will depend on a variety of factors, including the amount of non-pine species available for harvest, the full effect on our operations cannot reasonably be determined at this time. Annual Information Form 10 In Alberta, the Ministry of Environment and Sustainable Resource Development and the forest industry continue to implement aggressive programs of early detection, single tree control and focussed harvesting activity. Beetles have declined significantly in the southern part of the province but a significant population remains in the northwest and west-central areas, including some pockets within our tenures. There is still risk of further in-flight of insects from northwestern B.C. We continue to work aggressively to reduce the number of susceptible pine stands and conduct spread control activities across the region in concert with other forest industry participants and the Province of Alberta. Certification Our Canadian woodlands operations, in addition to being subject to various environmental protection laws, are third-party certified to internationallyrecognized, sustainable forest management standards. For more information concerning our sustainable and environmentally sound forest practices see our Sustainability Report and our Environmental Report at www.westfraser.com. First Nations Issues Issues relating to Canada’s aboriginal people (“First Nations”) have the potential to have a significant effect on resource industries in Canada, including wood products. The main First Nations issues that are relevant to our operations relate to aboriginal rights and title, and consultation. The potential existence of aboriginal title and rights over substantial portions of B.C., including areas where our timber tenures are located, has created uncertainty with respect to property rights and natural resource development in the province. The Supreme Court of Canada (the “SCC”) determined in 1997 that First Nations may possess rights in respect of land used or occupied by their ancestors where treaties have not been concluded to deal with those rights. Very few areas of B.C. are the subject of such treaties, although all of Alberta is covered by treaties. This uncertainty in B.C. may be alleviated by the negotiation of treaties with First Nations and further judgments of the courts. In 2004, the SCC confirmed that the Crown must consult with First Nations before authorizing activity that might infringe on their interests in certain circumstances and, when appropriate to do so, seek to accommodate those interests by minimizing interference with them. In 2005 the SCC determined that this Crown duty of consultation applies to treaty lands as well as non-treaty lands, so the duty of consultation applies to all of the lands in B.C. and Alberta where our timber tenures are located. Authorizations requiring consultation may include approval of cutting permits and required ministerial action relating to the transfer or renewal of Crown timber tenures. The process of consultation and, when appropriate, accommodation is currently not clearly defined, creating some uncertainty with respect to Crown timber harvesting rights held by wood products companies, including West Fraser. We participate as requested by the Crown in the consultation process, but rely on provincial governments to adequately discharge obligations to First Nations in order to preserve the validity of actions dealing with public rights, including the granting of Crown timber harvesting rights. We also seek to develop good relationships with the First Nations that may be affected by our business activities. However, as the jurisprudence and government policies respecting aboriginal title and rights and the consultation process continue to evolve, we cannot at this time predict whether First Nations claims will have a material adverse effect on our timber harvesting rights or on our ability to exercise or renew them, or secure other timber harvesting rights. Residual Fibre Supply In Canada substantially all our requirements for wood chips, shavings and sawdust and hog fuel are supplied from our own operations, either directly or indirectly through trades. This reduces our exposure to risks associated with price fluctuations and supply shortages. Our B.C. sawmills and plywood plants fulfill substantially all of the fibre requirements of our B.C. pulp operations and MDF plant. The Alberta MDF plant obtains its fibre from the adjacent Blue Ridge sawmill and other sawmills in the area. The Hinton pulp mill obtains its fibre from the adjacent Hinton sawmill and other sawmills in the area, including those owned by us. At times we produce whole log chips to supplement the supply of residual chips from our various sawmills. Almost all of the fibre requirements of ANC are obtained from local sawmills, including the Slave Lake sawmill and veneer operation, through log-for-chip trades using logs harvested from ANC’s tenures. The balance is obtained from direct fibre purchases. The Slave Lake deciduous FMA provides most of the fibre requirements of the Slave Lake pulp mill, with the balance being obtained from logs purchased from local suppliers. The majority of the wood chips produced by our U.S. operations are sold to pulp mills at market prices pursuant to long-term contracts. 1. Includes reimbursable expenditures under the Pulp and Paper Green Transformation Program. 2. Amounts for years prior to 2010 have not been restated under IFRS and are prepared under previous Canadian generally accepted accounting principles. Human Resources At December 31, 2012, we employed approximately 7,200 individuals, including our share of those in joint venture operations. Approximately 39% of our employees are covered by collective agreements. Certain agreements covering approximately 425 employees expired in 2012 and remain unresolved. In 2013, collective agreements covering approximately 1,600 employees will expire. Markets Our products are sold in markets open to a number of companies with similar products. Purchasing decisions by customers are generally based on price, quality and service. Prices and sales volumes are influenced by general economic conditions. The following table shows selected average benchmark prices for the past five years for products of the type we produced, although these prices do not necessarily reflect the prices we obtained. Average Benchmark Prices (In US$ except plywood) Year ended December 31 2012 2011 2010 2009 SPF 2x4 random length (per Mfbm)1 299 255 256 182 2 SYP #2 West 2x4 (per Mfbm) 348 279 304 242 Plywood (per Msf 3/8” basis)3 Cdn$ 382 308 334 329 MDF (per Msf 3/4” basis)4 566 546 536 489 Newsprint (per tonne)5 640 640 607 560 6 NBSK (per tonne) 872 977 960 718 Sources: 1. Random Lengths – 2x4, #2 & Better – Net FOB mill. 2. Random Lengths – 2x4 – Net FOB mill Westside. 3. Crow’s Market Report – Delivered Toronto. 4. Resource Information Systems, Inc. – MDF Western U.S. – Net FOB mill. 5. Resource Information Systems, Inc. – U.S. delivered 48.8 gram newsprint. 6. Resource Information Systems, Inc. – U.S. list price, delivered U.S. 2008 221 297 337 530 695 856 11 Annual Information Form Capital Expenditures and Acquisitions ($ millions) Year ended December 31 2012 2011 2010 2009220082 Lumber 109 108 47 10 27 Panels 4 5 2 1 1 Pulp & Paper1 35 99 39 7 17 Corporate & Other 2 1 1 1 2 150 213 89 19 47 Acquisition 30 — — — — Total 180 213 89 19 47 WEST FRASER TIMBER CO. LTD. Capital Expenditures and Acquisitions We regularly invest in upgrading and expanding our facilities and operations. However, during periods when earnings are weak, we will reduce capital and other expenditures in order to preserve liquidity. The following table shows the capital expenditures and acquisitions during the past five years. ANNUAL INFORMATION FORM (CONTINUED) Research and Development We support industry research and development organizations, and conduct research and development at several plants to improve processes, maximize resource utilization and develop new products and environmental applications. LUMBER WEST FRASER FRASER TIMBER TIMBER CO. CO. LTD. LTD. WEST Capacity and Production (both MMfbm) 2012 2011 2010 2009 Capacity – year-end 5,800 5,700 5,500 5,500 Annual Information Form 12 Production: B.C. Sawmills (SPF) Quesnel 590 582 Williams Lake 244 248 Smithers 269 277 Chetwynd 242 252 Fraser Lake 373 400 Chasm 250 244 Houston 249 261 100 Mile House 244 233 Other 1 — — 2,461 2,497 Alberta Sawmills (SPF) Blue Ridge 392 360 Slave Lake 18 16 Hinton 306 272 Sundre 277 263 Edson3 12 — 1,005 911 U.S. Sawmills (SYP) Joyce, LA 177 201 Huttig, AR 132 137 Henderson, TX 118 134 New Boston, TX 153 165 Leola, AR 138 121 Maplesville, AL 100 88 Opelika, AL 87 71 McDavid, FL2 — — Seaboard, NC 128 112 Armour, NC 158 174 Newberry, SC 126 123 Augusta, GA 116 108 2 Folkston, GA — — Whitehouse, FL 55 69 Other1 — — 1,488 1,503 Total Production 4,954 4,911 2008 6,000 529 262 276 272 376 230 257 195 — 2,397 485 225 263 240 364 155 173 129 — 2,034 474 255 246 262 369 282 265 233 163 2,549 378 12 257 274 — 921 357 20 204 268 — 849 342 28 209 261 — 840 194 125 116 139 115 71 57 — 104 177 105 106 — 56 — 1,365 4,683 190 116 115 129 85 63 56 — 112 170 95 100 — 38 — 1,269 4,152 194 149 120 138 78 84 64 76 107 160 110 100 71 63 56 1,570 4,959 1. Includes production from mills shut or sold. 2. Indefinitely curtailed. 3. Purchased October 31, 2012. Lumber capacity by region and species is approximately 66% SPF (68% B.C. and 32% Alberta) and 34% SYP (all U.S.). Operations We own 27 sawmills of which 2 are currently indefinitely curtailed. We also have a wood-treating facility at the Sundre sawmill. Sales Lumber produced at our Canadian sawmills and sold to North American customers is marketed and sold from our sales office in Quesnel, while sales to offshore markets are made from our export sales office in Vancouver, B.C. Offshore sales activities are complemented by customer service offices in Japan and China. Lumber produced at our U.S. sawmills is marketed by the sales group in Memphis, Tennessee. From time to time, we purchase lumber for resale in order to meet requirements of customers. In 2012 sales of lumber from Canadian and U.S. operations were made to customers in the U.S. and Canada and to customers offshore, predominantly in China and Japan. Most lumber shipments to North American customers by the Canadian operations were made by rail and the rest by truck. Most lumber shipments to North American customers by the U.S. operations were delivered by truck and the rest by rail. Offshore shipments from both Canada and the U.S. were through various public terminals, mostly in container vessels and the rest by breakbulk carriers. Panels 2008 820 299 267 248 814 112 112 224 3,200 1,264 Operations Our panel operations include three plywood mills that primarily produce standard softwood sheathing plywood, two MDF mills, each with the flexibility to manufacture varying thicknesses and sizes, an LVL mill, and a veneer mill that produces veneer for use in the Edmonton plywood mill. Sales Plywood and LVL are marketed from our sales office in Quesnel to retail outlets, wholesale distributors, remanufacturers and treating businesses. MDF is marketed under the names “Ranger”™, “WestPine”™, “Eco-Gold”™ and “Ecopremium”™ from our Edmonton, Alberta sales office and through distributors under the direction of our sales personnel. In 2012 sales of plywood were made to customers in Canada, sales of MDF were to customers in the U.S., Canada and other areas and sales of LVL were to customers in the U.S. and Canada. Shipments to North America were by rail or truck and offshore shipments were by bulk and container vessels. WEST FRASER TIMBER CO. LTD. 300 13 Annual Information Form Capacity and Production 2012 2011 2010 2009 3 Plywood (MMsf /8” basis) Capacity – year-end 830 830 830 830 Production: Alberta Plywood 296 293 301 290 Williams Lake 250 250 250 237 Quesnel 247 237 240 218 Total Production 793 780 791 745 MDF (MMsf 3/4” basis) Capacity – year-end 300 300 300 300 Production: Ranger Board 112 110 120 110 WestPine 83 76 72 85 Total Production 195 186 192 195 LVL (Mcf) Capacity – year-end 3,200 3,200 3,200 3,200 Production 1,964 1,634 1,918 1,643 ANNUAL INFORMATION FORM (CONTINUED) Pulp & Paper Pulp Capacity and Production (Mtonnes) 2012 2011 2010 2009 BCTMP Capacity – year-end 650 640 620 580 Production: QRP 398 392 367 298 Slave Lake Pulp 222 231 249 203 Total Production 620 623 616 501 NBSK Capacity – year-end 590 590 530 530 Production: Hinton 370 337 354 361 1 Cariboo 159 172 171 162 Total Production 529 509 525 523 2008 580 354 205 559 510 325 158 483 WEST FRASER TIMBER CO. LTD. 1. Reflects West Fraser’s 50% share of ownership. Annual Information Form 14 Operations BCTMP is produced, primarily from hardwood aspen, at our Slave Lake pulp mill and also produced, primarily from softwood, at our Quesnel River pulp mill (“QRP”). These pulps are used by paper manufacturers to produce paperboard products, printing and writing papers and a variety of other paper grades. NBSK is produced at our Hinton and Cariboo pulp mills and is used by paper manufacturers to produce a variety of paper products, including tissues and printing and writing papers. Sales Pulp is marketed out of our pulp sales office in Vancouver. In 2012, sales of both NBSK and BCTMP were to customers in North America, Asia, predominantly China, and to other offshore customers. Shipments within North America were primarily by rail and those to offshore customers were by rail to Vancouver and then by bulk or container vessels. Newsprint Capacity and Production1 (Mtonnes) 2012 2011 2010 2009 Capacity – year-end 135 135 135 135 Production 128 122 131 111 2008 135 125 1. Reflects West Fraser’s 50% share of ownership. Operations The ANC mill at Whitecourt, Alberta produces standard newsprint in two basis weights: 45 and 48.8 grams per square metre. Sales Newsprint is sold to various publishers in North America through a partnership owned indirectly by the ANC owners. In 2012, sales were to customers in the U.S. and Canada. Shipments were by rail and truck. External Factors Affecting West Fraser’s Business in 2012 Economic Conditions Our earnings are sensitive to changes in world economic conditions, primarily those in North America, Europe and Asia and particularly to the U.S. housing market. Most of our revenues are from sales of commodities for which prices are sensitive to variations in supply and demand. Since most of these sales are in foreign currencies, mainly U.S. dollars, currency exchange fluctuations against the Canadian dollar are a major source of earnings volatility for us. Softwood Lumber Agreement Effective October 12, 2006 a Softwood Lumber Agreement between Canada and the U.S. (the “SLA 2006”) came into force. The SLA 2006 originally had a term of seven years, but in January 2012 was extended and now expires in October 2015. Under the SLA 2006 we are required to pay a tax to Canada on softwood lumber we export into the U.S. The basic tax may range up to 15% of the value of the lumber for producers in B.C. and Alberta, and will vary depending on a reference lumber price. Subject to U.S. lumber consumption and the volume of lumber shipments to the U.S. from either province, an additional 50% surcharge on the applicable basic tax may be levied. In certain circumstances, exporters may be entitled to a refund of up to one-third of taxes paid. Energy Our pulp, paper and MDF operations consume substantial amounts of energy. The Hinton and Cariboo pulp mills have generating facilities which produce electricity to satisfy much of their energy requirements. In B.C., electricity is purchased from the provincial utility at regulated prices based largely on generation costs. In Alberta, electricity is purchased at market prices through the Alberta power pool. In Alberta, we are hedged against electricity market price fluctuations for a substantial volume of our electricity consumption through a long-term power purchase agreement that provides electricity at prices based largely on generation costs and inflation. Our exposure to energy costs includes the cost to purchase electricity, natural gas, gasoline, diesel fuels and fuel surcharges on purchased transportation. Risk Factors A detailed discussion of risk factors is included in “Management’s Discussion & Analysis – Risks and Uncertainties”, which is incorporated herein by reference. Our Management’s Discussion & Analysis is available on SEDAR at www.sedar.com. Capital Structure Share Capital Our authorized share capital consists of 230,000,000 shares divided into: (a) 200,000,000 Common shares, (b) 20,000,000 Class B Common shares, and WEST FRASER TIMBER CO. LTD. Environment Our manufacturing operations are subject to environmental protection laws and regulations. We have developed internal programs to ensure that our operations are in compliance with applicable laws and standards and to address any instances of non-compliance. We are committed to responsible stewardship of the environment and the continual improvement of our forest practices and manufacturing procedures to optimize the use of resources and minimize the impact of our operations on the environment. We have adopted an Environmental Policy, a copy of which is available on our website at www.westfraser.com. 15 The Common shares and Class B Common shares are equal in all respects, including the right to dividends and the right to vote, except that each Class B Common share may at any time be exchanged for one Common share. The Common shares are listed and traded on the Toronto Stock Exchange under the symbol WFT while our Class B Common shares are not. Certain circumstances or corporate transactions may require the approval of the holders of our Common shares and Class B Common shares on a separate class by class basis. As at December 31, 2012, the issued share capital consisted of 40,281,242 Common shares and 2,581,478 Class B Common shares for a total of 42,862,720 shares (December 31, 2011 – 42,846,113 shares). Credit Ratings As shown in the table below, West Fraser is rated by three rating agencies. West Fraser pays annual fees to maintain its debt and corporate ratings. No rating changes occurred during 2012 but Standard & Poor’s changed its Outlook from Positive to Stable in October and Dominion Bond Rating Service changed its Outlook from Stable to Positive in November. The ratings are assigned both on a corporate level and specifically to the US$300 million 144A debentures maturing October 2014. At below investment grade levels, Moody’s assigns a corporate as well as debt-specific rating but at investment grade levels, ratings apply to specific debt issues. During February 2013, Moody’s changed its Ba1 rating, a below investment grade rating, to Baa3, an investment grade rating, and this rating specifically applies to our US$300 million 144A. The ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by each rating agency. Annual Information Form (c) 10,000,000 Preferred shares, issuable in series. ANNUAL INFORMATION FORM (CONTINUED) Ratings Agency Dominion Bond Rating Service1 Moody’s2 Standard & Poor’s3 WEST FRASER TIMBER CO. LTD. 1. 2. 3. Annual Information Form 16 Rating BB(high) Baa3 BB+ Outlook Positive Stable Stable DBRS credit ratings for long-term obligations range from AAA to D. A rating of BB is described by DBRS as “Speculative, non-investment grade credit quality. The capacity for the payment of financial obligations is uncertain. Vulnerable to future events.” Additional information on the rating is available on DBRS’s website. Moody’s credit ratings for long-term obligations range from Aaa to C. Moody’s describes obligations rated Baa as “subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics”. Additional information on the rating is available on Moody’s website. S&P credit ratings for long-term obligations range from AAA to D. A rating of BB is described by S&P as “less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions”. Additional information on the rating is available on S&P’s website. Market Prices The following table sets forth market prices and trading volumes of our Common shares on the Toronto Stock Exchange for each month of 2012 and 2011. 2012 2011 High Low Close Volume Close Volume ($) ($) ($) (000’s) ($) (000’s) January 49.99 41.53 48.31 1,077 50.46 1,202 February 50.32 45.34 47.92 1,456 46.50 1,061 March 51.50 45.12 46.11 1,213 60.43 2,021 April 46.54 40.16 43.43 1,075 53.80 1,815 May 47.70 41.86 46.89 1,136 49.95 1,202 June 51.83 44.47 51.36 1,194 52.57 1,732 July 53.90 50.38 53.10 999 45.71 2,149 August 56.74 51.94 55.59 1,385 42.51 2,011 September 58.30 55.16 55.94 2,227 39.85 1,163 October 63.21 55.39 60.49 1,618 43.00 1,748 November 69.67 60.77 69.67 2,389 46.76 1,199 December 75.23 68.25 70.05 3,132 41.40 1,249 Total 18,901 18,552 Source: http://tradingdata.tsx.com Dividends The declaration and payment of dividends is within the discretion of our Board of Directors. Historically, dividends have been declared on a quarterly basis payable after the end of each quarter. On an annual basis, dividends of $0.56 per share were paid in both 2012 and 2011 while in 2010 the dividend per share was $0.18. There can be no assurance that dividends will continue to be declared and paid by us in the future, as the discretion of the Board of Directors will be exercised from time to time taking into account our current circumstances. Transfer Agent Our transfer agent and registrar is CIBC Mellon Trust Company, with registers of transfers in Vancouver and Toronto. Experts Our auditors are PricewaterhouseCoopers LLP (“PwC”), who prepared the Auditor’s Report included with our Consolidated Financial Statements for the year ended December 31, 2012. PwC has confirmed that it is independent with respect to us, within the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of B.C., as of February 14, 2013. Directors and Officers Principal Occupation Executive Chairman Director Since September 16, 1985 Clark S. Binkley1, 3 & 4 Portland, Oregon Managing Director, International Forestry Investment Advisors (advisory services) February 13, 1992 J. Duncan Gibson1, 3 & 4 Toronto, Ontario Investor April 29, 1997 Samuel W. Ketcham3 & 4 Seattle, Washington Investor April 27, 2010 Harald H. Ludwig2 & 4 West Vancouver, B.C. President, Macluan Capital Corporation (diversified private equity investments) May 2, 1995 Gerald J. Miller3 Lake Country, B.C. Corporate Director April 19, 2012 Robert L. Phillips2, 4 & 5 Vancouver, B.C. Corporate Director April 28, 2005 Janice G. Rennie1, 2 & 4 Corporate Director April 28, 2004 Edmonton, Alberta 1. 2. 3. 4. 5. Member of the Audit Committee. Member of the Compensation Committee. Member of the Safety & Environment Committee. Member of the Governance & Nominating Committee. Lead Director. Each director has held the same or a similar principal occupation with the organization indicated or a predecessor thereof for the last five years except for Henry H. Ketcham who before March 1, 2013 was our Chairman and Chief Executive Officer and before April 19, 2012 was also our President; and Gerald J. Miller who before July 31, 2011, was our Executive Vice-President, Finance and Chief Financial Officer and before January 1, 2009 was our Executive Vice-President, Operations. The term of office of each director will expire at the conclusion of the Company’s next annual general meeting. 17 Annual Information Form Name and Municipality of Residence Henry H. Ketcham Vancouver, B.C. WEST FRASER TIMBER CO. LTD. Directors The names and municipalities of residence of the directors of the Company, their principal occupations during the past five years and the periods during which they have been directors of the Company are as follows: ANNUAL INFORMATION FORM (CONTINUED) WEST FRASER TIMBER CO. LTD. Officers Name and Municipality of Residence Henry H. Ketcham Vancouver, B.C. Annual Information Form 18 Office Held Executive Chairman Ted Seraphim North Vancouver, B.C. President and Chief Executive Officer Raymond W. Ferris Quesnel, B.C. Vice-President, Wood Products Larry S. Hughes Vancouver, B.C. Vice-President, Finance and Chief Financial Officer Secretary Rodger M. Hutchinson West Vancouver, B.C. Vice-President, Corporate Controller Maureen F. Kuper Burnaby, B.C. Treasurer David P. Lehane Quesnel, B.C. Vice-President, Woodlands Christopher D. McIver Quesnel, B.C. Vice-President, Lumber Sales and Corporate Development Sean P. McLaren Collierville, Tennessee Vice-President, U.S. Lumber Operations Peter A. Rippon Vice-President, Pulp and Energy Quesnel, B.C. Each officer has held the same or a similar office with the organization indicated or a predecessor thereof for the last five years except for Henry H. Ketcham (see disclosure under “Directors”); Ted Seraphim, who before March 1, 2013 was our President and Chief Operating Officer, before April 19, 2012 was our Executive Vice-President and Chief Operating Officer and before June 18, 2010 was our Vice-President, Pulp & Paper; Raymond W. Ferris, who before January 1, 2009 was our Vice-President, Lumber Operations; Larry S. Hughes, who before August 1, 2011 was our Senior Vice-President and Secretary; David P. Lehane, who before April 19, 2012 was Vice-President, Canadian Woodlands; Christopher D. McIver, who before October 1, 2010 was our Vice-President, Lumber Sales; Sean P. McLaren, who before October 1, 2010 was our General Manager, Wood Products for the U.S. operations and before August 11, 2010 was our Manufacturing Manager for the U.S. operations; and Peter A. Rippon, who before October 1, 2010 was our Operations Manager, Mechanical Pulp and Energy and before May 14, 2008 was our Operations Manager, Mechanical Pulp. Shareholdings of Directors and Officers The directors and executive officers of the Company as a group, beneficially owned or controlled or directed, directly or indirectly, the following shares of the Company: Common shares % of total Common shares Class B Common shares % of total Class B Common shares % of all shares outstanding December 31, 2012 December 31, 2011 982,462 2,716,763 2%7% 78,728911,794 3% 33% 2% 8% Governance Corporate governance is guided by our Corporate Governance Policy, a copy of which may be viewed on our website: www.westfraser.com. The Board of Directors has established a Governance & Nominating Committee comprised of all non-management directors. The Committee provides support for the stewardship and governance role of the Board in reviewing and making recommendations on the composition of the Board, the functioning of the Board and its committees, succession planning and all other corporate governance matters and practices. On the occasion of each regularly-scheduled meeting of the Board in 2012, the Committee met without management representatives present and reviewed these and other issues. Audit Committee The Audit Committee of our Board of Directors assists the Board in fulfilling its responsibility to oversee our financial reporting and audit process. The full text of the Audit Committee’s Charter is attached as Schedule 1. Clark S. Binkley Dr. Binkley holds a Bachelor of Arts in Applied Mathematics and a PhD in Forestry and Environmental Studies. He was recently the Chief Investment Officer of the world’s largest private equity timberland investment firm. He has served as a director of public and private forest products companies. J. Duncan Gibson Mr. Gibson holds a Bachelor of Commerce and a Masters of Business Administration. His career spanned 27 years with the Toronto-Dominion Bank, including nine years in the Corporate Banking, U.S. Division, and as Vice Chairman with responsibility for the Commercial Banking Division. Pre-Approval Policies and Procedures The Audit Committee has adopted a policy that sets out the pre-approval requirements related to services to be performed by our independent auditors. The policy provides that the Committee will annually review proposed audit, audit-related, tax and other services (to be submitted by the Chief Financial Officer and the independent auditor), and will provide general approval of described services, usually including specific maximum fee amounts. Unless a service has received general pre-approval, it will require specific pre-approval by the Committee. The Committee is permitted to delegate preapproval authority to any of its members. The Committee reports on the pre-approval process to the full Board of Directors from time to time. 19 Annual Information Form Janice G. Rennie Mrs. Rennie, who holds a Bachelor of Commerce, is a Chartered Accountant. She was elected as Fellow of the Chartered Accountants in 1998. Mrs. Rennie has chaired or been a member of several audit committees of public companies, including Teck Resources Limited, Nova Chemicals Inc., Weldwood of Canada Limited, Canadian Hotel Income Properties REIT, Capital Power Corporation, Methanex Corporation, Major Drilling Group International Inc. and Matrikon Inc. WEST FRASER TIMBER CO. LTD. Members The following identifies each current member of the Audit Committee, and the education and experience of each member that is relevant to the performance of the member’s responsibilities as an Audit Committee member. All members of the Audit Committee are considered “independent” and “financially literate” within the meaning of MI 52-110. ANNUAL INFORMATION FORM (CONTINUED) Fees Paid to Auditors ($ thousands) 2012 1 Audit Fees 920 Audit-Related Fees2 209 Tax Fees 529 2011 909 276 107 1. Represents actual and estimated fees related to fiscal year ends. 2. For assurance and related services that are reasonably related to the performance of the audit but are not reported as “Audit Fees”. Material Contracts On March 30, 2007, we entered into a committed revolving $600 million operating facility with an original maturity date of 2012. The facility has been amended from time to time to extend the maturity date, to reflect certain covenant adjustments and for the granting of security. On December 13, 2010 we reduced the facility from $600 million to $500 million and on September 30, 2011, we extended the maturity date to September 2016. The facility continues to include general floating security over our assets and, where required under applicable U.S. laws, mortgages on certain real properties in the U.S. WEST WEST FRASER FRASER TIMBER TIMBER CO. CO. LTD. LTD. Additional Information Additional information, including directors’ and officers’ remuneration and indebtedness, principal holders of our securities and securities authorized for issuance under equity compensation plans, is contained in the Information Circular for the annual general meeting of the Company to be held on April 30, 2013. Additional financial information is provided in our comparative consolidated financial statements and Management’s Discussion & Analysis for the year ended December 31, 2012. Annual Information Form 20 Copies of our Annual Report, which includes this Annual Information Form and the documents incorporated by reference herein, our comparative consolidated financial statements (including the auditor’s report) for the year ended December 31, 2012, as well as each consolidated interim financial statement prepared for a period after December 31, 2012, and our Information Circular may be obtained at any time upon request from us, but we may require the payment of a reasonable charge if the request is made by a person who is not a security holder of the Company. This Annual Information Form, our Annual Report and additional information concerning the Company may also be obtained on the website www.westfraser.com and on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com. Schedule 1 The Audit Committee Charter, which is set out below, was approved by the Board on December 8, 2010. General Mandate To assist the Board in fulfilling its responsibility to oversee the Company’s financial reporting and audit processes, its system of internal controls and its process for monitoring compliance with applicable financial reporting and disclosure laws and its own policies. Responsibilities The Committee will carry out the following responsibilities: Financial Statements • Review significant accounting and financial reporting issues, including complex or unusual transactions, significant contingencies and highly judgmental areas, and recent professional and regulatory pronouncements, and understand their impact on the Company’s financial statements • Review interim financial reports (including financial statements, management’s discussion and analysis and related news releases) with management and the auditors, consider whether they are complete and consistent with the information known to Committee members and provide a recommendation to the Board with respect to the approval of the interim financial reports • Understand how management develops interim financial information, and the nature and extent of auditor involvement • Review with management and the auditors the results of the audit, including any difficulties encountered • Review the annual financial statements, the annual management discussion and analysis and related news releases, and consider whether they are complete, consistent with information known to Committee members, and reflect appropriate accounting principles, and provide a recommendation to the Board with respect to the approval of the statements, the management discussion and analysis and the news release • Review with management and the auditors all matters required to be communicated to the Committee under generally accepted auditing standards • Approve, if so delegated by the Board, the interim financial reports and annual financial statements and the filing of the same together with all required documents and information with regulators • Understand the scope of the auditors’ review of internal control over financial reporting, and obtain and review reports on significant findings and recommendations, including respecting the Company’s accounting principles or changes to such principles or their application and the treatment of financial information discussed with management, together with management’s responses Audit • Review the auditors’ proposed audit scope and approach • Review the performance of the auditors, and provide a recommendation to the Board with respect to the nomination of the auditors for appointment and remuneration • Review and confirm the independence of the auditors by obtaining statements from the auditors on relationships between the auditors and the Company, including non-audit services, and discussing the relationships with the auditors • Periodically evaluate the need for the establishment of an internal audit function and make appropriate recommendations to the Board Compliance • Review the effectiveness of the system for monitoring compliance with financial reporting and disclosure laws and the results of management’s investigation and follow-up (including disciplinary action) of any instances of non-compliance • Review the findings of any examinations by regulatory agencies, and any auditor observations • Obtain regular updates from management and Company legal counsel regarding compliance matters Reporting Requirements • Regularly report to the Board about Committee activities, issues and related recommendations • Provide an open avenue of communication between the auditors and the Board 21 Annual Information Form • Review with management and auditors the adequacy and effectiveness of the Company’s internal control over annual and interim financial reporting, including information technology security and control and controls related to the prevention and detection of fraud and improper or illegal transactions or payments, the status of the remediation of any identified control deficiencies, and elicit recommendations for improvements WEST FRASER TIMBER CO. LTD. Internal Control • Require management of the Company to implement and maintain appropriate internal control procedures over annual and interim financial reporting ANNUAL INFORMATION FORM (CONTINUED) • Review any reports the Company issues that relate to Committee responsibilities Other Responsibilities • Institute and oversee special investigations as needed • Develop and implement a policy for the approval of the provision of non-audit services by the auditors and assessing the independence of the auditors in the context of these engagements • Establish procedures for: (a) the receipt, retention and treatment of complaints received regarding non-compliance with the Company’s Code of Conduct, violations of laws or regulations, or concerns regarding accounting, internal accounting controls or auditing matters; and (b) the confidential, anonymous submission by officers or employees of the Company or by other persons of concerns regarding questionable accounting, auditing or financial reporting and disclosure matters or non-compliance with the Company’s Code of Conduct or other matters that are of a sensitive or “whistleblower” nature • Perform other activities related to this charter as requested by the Board • Review and assess the adequacy of this charter annually, requesting Board approval for proposed changes • Review terms of any Code of Conduct established by the Board and respond to any related compliance issues WEST FRASER TIMBER CO. LTD. • Confirm annually to the Board that all responsibilities outlined in this charter have been carried out Annual Information Form 22 Qualifications and Procedures • The composition of the Committee will comply with applicable laws including requirements for independence, unrelated to management, financial literacy and audit experience • The Committee will meet at least four times annually, and more frequently as circumstances dictate, and the CFO and a representative of the auditors should be available on request to attend all meetings • The Committee should meet privately in executive session with representatives of each of management and of the auditors to discuss any matters of concern to the Committee or such members, including any post-audit management letter • Minutes of each meeting should be prepared, approved by the Committee and circulated to the full Board 2012 MANAGEMENT’S DISCUSSION & ANALYSIS This discussion and analysis by West Fraser’s management (“MD&A”) of West Fraser’s financial performance during 2012 and the fourth quarter of 2012 should be read in conjunction with the 2012 annual audited consolidated financial statements and accompanying notes. Dollar amounts are expressed in Canadian currency, unless otherwise indicated. The financial information contained in this MD&A has been prepared in accordance with International Financial Reporting Standards (“IFRS”), which as of January 1, 2011 is the required reporting framework for Canadian publicly accountable enterprises. Prior period comparative financial information for 2010 has been restated, and is shown in accordance with IFRS. This MD&A includes references to benchmark prices over selected periods for products of the type produced by West Fraser. These benchmark prices do not necessarily reflect the prices obtained by West Fraser for those products during such period. The information in this MD&A is as at February 14, 2013 unless otherwise indicated. For definitions of various abbreviations and technical terms used in this MD&A please see the Glossary of Industry Terms found in our Annual Report. 23 MANAGEMENT’S DISCUSSION & ANALYSIS Throughout this MD&A reference is made to EBITDA (defined as operating earnings plus amortization). We believe that, in addition to earnings, EBITDA is a useful performance indicator and is a useful measure of cash available prior to debt service, capital expenditures and income taxes. Reference is also made to Adjusted earnings (loss) from continuing operations and Adjusted basic EPS from continuing operations calculated as set out in the table titled “Annual Earnings Adjustments for Certain Non-operational Items” (collectively, with EBITDA, “these measures”). None of these measures is a generally accepted earnings measure under IFRS and none has a standardized meaning prescribed by IFRS. Investors are cautioned that none of these measures should be considered as an alternative to earnings, earnings per share or cash flow, as determined in accordance with IFRS. As there is no standardized method of calculating any of these measures, our method of calculating each of them may differ from the methods used by other entities and, accordingly, our use of any of these measures may not be directly comparable to similarly titled measures used by other entities. WEST FRASER TIMBER CO. LTD. This MD&A contains historical information, descriptions of current circumstances and statements about potential future developments and anticipated financial results. The latter, which are forward-looking statements, are presented to provide reasonable guidance to the reader but their accuracy depends on a number of assumptions and is subject to various risks and uncertainties. Forward-looking statements are included under the headings “Annual Results – Discussion & Analysis by Product Segment – Pulp & Paper Segment” concerning expected reduction in energy consumption and costs and “Business Outlook”. As well, the table titled “Earnings Sensitivity to Key Variables” and descriptions of announced but not implemented actions such as projected capital expenditures should be considered as forward-looking statements. Actual outcomes and results of these statements will depend on a number of factors including those which are described under the heading “Risks and Uncertainties”; and may differ materially from those anticipated or projected. Accordingly, readers should exercise caution in relying upon forward-looking statements and we undertake no obligation to publicly revise them to reflect subsequent events or circumstances except as required by applicable securities laws. MANAGEMENT’S DISCUSSION & ANALYSIS (CONTINUED) Ann ual R e s ult s Sales and Earnings Comparison ($ millions, except as otherwise indicated) Year ended December 31 2012 2011 Sales by Segment Lumber1 1,783 1,579 Panels1 442 370 Pulp & Paper 775 813 Total 3,000 2,762 1,622 401 863 2,886 279 226 460 (152)(168 )(185) 127 58 275 EBITDA Amortization Operating earnings WEST WEST FRASER FRASER TIMBER TIMBER CO. CO. LTD. LTD. Operating Earnings by Segment Lumber 94 Panels 39 Pulp & Paper 61 Corporate and Other (67) Total 127 Earnings – continuing operations Earnings – after discontinued operations2 Diluted earnings per share – continuing operations ($) Diluted earnings per share – after discontinued operations2 ($) Cash dividends per share ($) Total assets Long-term debt Cdn$1.00 converted to US$ – average 24 1. Excludes intercompany fibre sales. 2. The Company’s linerboard and kraft paper mill located in Kitimat, B.C. ceased operations in the first quarter of 2010. MANAGEMENT’S DISCUSSION & ANALYSIS 2010 (20) (7) 83 2 58 87 87 2.02 2.02 0.56 2,618 300 1.000 27 73 0.41 1.47 0.56 2,518 306 1.011 138 40 133 (36) 275 182 186 4.24 4.35 0.18 2,610 300 0.971 Selected Quarterly Information ($ millions, except earnings per share (“EPS”) amounts which are in $) Sales1 Earnings (loss)1 Earnings after discontinued operations Basic EPS1 Diluted EPS1 Basic EPS after discontinued operations Diluted EPS after discontinued operations 1. From continuing operations. Q4-12 773 22 Q3-12 772 55 Q2-12 774 27 Q1-12 681 (17) Q4-11 650 (11) Q3-11 705 6 Q2-11 720 11 Q1-11 687 21 22 0.51 0.51 55 1.27 1.27 27 0.63 0.63 (17) (0.39) (0.39) 6 (0.25) (0.25) 37 0.14 (0.29) 10 0.27 (0.07) 20 0.46 0.46 0.51 1.27 0.63 (0.39) 0.14 0.87 0.24 0.44 0.51 1.27 0.63 (0.39) 0.14 0.44 (0.09) 0.44 Annual Earnings Adjustments for Certain Non-operational Items ($ millions except EPS amounts which are in $) 2012 2011 Earnings from continuing operations 8727 Adjustments to earnings from continuing operations Equity-based compensation 61 (3) U.S. dollar-denominated long-term debt (7)7 Sale of Terrace sawmill — (8) Net tax effect on the above adjustments (3)— Net effect of above items 51(4 ) Adjusted earnings from continuing operations Adjusted basic EPS from continuing operations 13823 3.220.54 Discussion & Analysis of Annual Non-operational Items Earnings from continuing operations in 2012 improved significantly compared to results for 2011. For a description of operational results see “Discussion & Analysis by Product Segment” which follows this section. Our results include several significant non-operational items that are identified as adjustments in the table immediately above this section. After taking into account these adjustments, we generated adjusted earnings from continuing operations of $138 million compared to $23 million in 2011. In 2011 we completed the sale of the Terrace sawmill and the related Crown timber tenures and recorded an $8 million gain to other income. Also during 2011, we sold the remaining assets that had been part of our linerboard and kraft paper mill located at Kitimat, B.C. and included a gain of $49 million in discontinued operations on the sale of these assets. The difference between our statutory income tax rate and our effective rate is explained in note 19 to the accompanying annual consolidated financial statements. The funded position of our defined benefit pension plans and other post retirement plans, whether surplus or deficit, is estimated at the end of each quarter. The funded position, as shown in note 14 to the accompanying annual consolidated financial statements, is determined by subtracting plan assets from plan obligations. The decrease in the discount rate from the beginning of the year, partially offset by asset returns being greater than those anticipated during the year, resulted in a net actuarial loss that increased net liabilities accrued on our balance sheet at December 31, 2012 by $69 million. The actuarial loss for the year, net of taxes, of $52 million was charged to other comprehensive earnings. 25 MANAGEMENT’S DISCUSSION & ANALYSIS Any change in the value of the Canadian dollar relative to the value of the U.S. dollar results in the revaluation of certain U.S. dollar-denominated liabilities and assets. A $7 million gain on U.S. dollar-denominated long-term debt for 2012 reflects a modest strengthening of the Canadian dollar at the close of 2012 compared to the close of 2011. The $7 million loss in 2011 reflected a similar weakening of the Canadian dollar by the end of that year. Included in other income is a translation loss on current monetary items of $5 million, compared to a gain of $3 million in 2011. WEST FRASER TIMBER CO. LTD. In 2012 an expense of $61 million was recorded related to equity-based compensation compared to a recovery of $3 million in 2011. An expense is recorded on the issuance of share options or phantom or directors’ deferred share units and an additional expense or recovery is recorded each quarter based primarily on valuation models that consider various factors relating to outstanding options and units. The most significant of these factors is the change in the market value of our shares from the beginning to the end of the particular period. The market value of the Company’s shares increased over 69% from $41.40 per share at the end of 2011 to $70.05 per share at the end of 2012. The expense or recovery does not necessarily represent the actual amount that will ultimately be paid by the Company in respect of options and units. MANAGEMENT’S DISCUSSION & ANALYSIS (CONTINUED) Discussion & Analysis by Product Segment Lumber Segment ($ millions, except as otherwise indicated) 20122011 Production (MMfbm) SPF 3,466 3,408 SYP 1,4881,503 Shipments (MMfbm) SPF 3,4533,389 SYP 1,485 1,471 Wood chip production SPF (M ODTs) 1,710 1,676 SYP (M green tons) 1,927 1,939 WEST FRASER TIMBER CO. LTD. Sales MANAGEMENT’S DISCUSSION & ANALYSIS 26 1,855 1,670 EBITDA 180 65 Amortization (86)(85) Operating earnings 94 (20) EBITDA margin (%) 10 4 Capital expenditures 109 108 Acquisition 30 — Benchmark prices (per Mfbm) SPF #2 & Better 2x41 – US$ 299 255 SPF #3 Utility1 - US$ 250217 SYP #2 West 2x42 – US$ 348279 SPF #2 & Better 2x4 – Cdn$3 299 252 3 SPF #3 Utility - Cdn$ 250 215 SYP #2 West 2x4 – Cdn$3 348 276 1. 2. 3. Source: Random Lengths – 2x4, #2 & Better – Net FOB mill. Source: Random Lengths – 2x4 – Net FOB mill Westside. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price. The lumber segment’s operating earnings were adversely affected early in the year by very weak low-grade SPF lumber pricing due to oversupplied Chinese markets and by declining chip prices resulting from weakening pulp prices. As reflected in the graph below, by the second quarter, low-grade SPF lumber pricing had improved to reach a more normal relationship with pricing for higher grades (2&Better) and the markets for both SPF and SYP lumber achieved better balance. This reflected a gradual improvement in U.S. housing-related construction as well as continued steady Asian demand. Benchmark lumber prices strengthened sufficiently to trigger a duty reduction under the Softwood Lumber Agreement (“SLA”) for June of 2012. These duties are reduced as a reference composite lumber benchmark unit price reaches prescribed levels above US$315 and are eliminated at levels above US$355. In the second half of the year lumber prices continued to strengthen reflecting continuing gradual improvement in U.S. housing-related construction and lower duty rates prevailed as a result. Stronger pricing, lower duties and a slight increase in shipments, partially offset by higher log costs in Canada, resulted in a $114 million improvement in operating earnings for the segment in 2012 compared to 2011. )LUJOTHYR3\TILY7YPJLZ $450 SPF-2&Btr $400 SYP W-#2 W US$/Mfbm $350 SPF-#3 Util $300 $250 $200 $150 Q1-11 Q2-11 2011 Q3-11 Q4-11 Q1-12 Q2-12 Q3-12 2012 Q4-12 Source: Random Lengths Early in 2012 the Canadian and U.S. governments agreed to extend the term of the SLA to October 2015. A dispute initiated by the U.S. under the SLA concerning Grade 4 logs in British Columbia was dismissed by an arbitration panel in July 2012. As noted above, with the increase in lumber prices during 2012, SLA duty rates declined and our duty costs were reduced by nearly $10 million compared to 2011. In 2011 we completed the sale of our sawmill located in Terrace, B.C. and related Crown timber tenures resulting in an $8 million gain included in other income in that year. At the end of the third quarter of 2012 we completed the acquisition of a sawmill and remanufacturing facility located at Edson, Alberta and related Crown timber tenures. The facilities have an operational capacity of approximately 150 million board feet and the annual allowable harvest is approximately 795,000 m3 of coniferous and 53,000 m3 of deciduous timber, including a temporary uplift of approximately 375,000 m3 until 2017. The purchase price, including working capital, was $30 million. In addition to the lumber segment’s planned capital investment program, approximately $7 million was spent on wood dust control measures in response to a heightened focus by regulators and industry on the safety hazard represented by wood dust. Panels Segment WEST FRASER TIMBER CO. LTD. Our Canadian sawmills continued to run at or near capacity with some production affected by ongoing capital projects in the first quarter of the year. Our U.S. sawmills operated at approximately 75% of capacity, including two sawmills that continue to be indefinitely curtailed, with some production affected by weather and ongoing capital projects. Sales 448 378 EBITDA 55 8 Amortization (16)(15) Operating earnings 39(7) EBITDA margin (%) 122 Capital expenditures 45 Benchmark prices Plywood (per Msf 3/8” basis)1 Cdn$ 382308 MDF (per Msf 3/4” basis)2 US$ 566546 MDF (per Msf 3/4” basis) Cdn$3 566540 1. Source: Crow’s Market Report – Delivered Toronto. 2. Source: Resource Information Systems, Inc. – MDF Western U.S. – Net FOB mill. 3. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price. MANAGEMENT’S DISCUSSION & ANALYSIS ($ millions, except as otherwise indicated) 20122011 Plywood (MMsf 3/8” basis) Production 793 780 Shipments 798 778 3 MDF (MMsf /4” basis) 27 Production 195 186 Shipments 193 192 LVL (Mcf) Production 1,9641,634 Shipments 1,888 1,596 MANAGEMENT’S DISCUSSION & ANALYSIS (CONTINUED) The panels segment is comprised of our three plywood operations, two MDF operations and one LVL operation. All are located in western Canada. Virtually all of the plywood we produce is sold to customers in Canada. Because the Canadian housing market did not suffer a collapse similar to the U.S. experience, our plywood business remained fairly strong throughout the 2006 to 2010 period. In the second half of 2010 the stronger Canadian dollar against the U.S. dollar and continuing weak U.S. housing-related construction resulted in some U.S. plywood producers selling their product into Canada. This resulted in significantly lower plywood prices in late 2010 and throughout 2011. In 2012 Canadian plywood prices rose steadily through the first three quarters as the benchmark unit price reached a high of $450 before settling in the fourth quarter at an average of $390 – (see graph below). The strength of Canadian plywood prices in 2012 appears to reflect very tight supply-chain inventories as well as a decline in U.S. plywood imports in the first half of the year. As plywood prices rose in the second half of 2012 U.S. plywood imports increased. Improved operating earnings from plywood in 2012 compared to 2011 also reflected lower shipments in 2011. Our plywood segment’s 2012 operating earnings were adversely affected by higher log costs, particularly in B.C. )LUJOTHYR7S`^VVK7YPJL $450 28 Cdn$ (per Msf 3/8” basis) Deliv. Tor. WEST FRASER TIMBER CO. LTD. $400 $350 $300 $250 Q1-11 Q2-11 2011 Q3-11 Q4-11 Q1-12 Q2-12 2012 Q3-12 Q4-12 Source: Crow’s Market Report Operating earnings from our MDF operations also improved with prices rising in the second half of the year. MDF demand is significantly affected by new home construction which has been gradually strengthening in the U.S. Our LVL operation struggled with increased log costs and continuing weak markets and continues to operate on a partially curtailed basis. Pulp & Paper Segment MANAGEMENT’S DISCUSSION & ANALYSIS ($ millions, except as otherwise indicated) (From continuing operations) Sales EBITDA Amortization Operating earnings EBITDA margin (%) Capital expenditures1 1. Includes reimbursable expenditures under the Pulp and Paper Green Transformation Program. The pulp & paper segment is comprised of our NBSK, BCTMP and newsprint businesses. 2012 775 2011 813 109 148 (48)(65) 61 83 14 18 35 99 Pulp1 Production – NBSK (Mtonnes) Shipments – NBSK (Mtonnes) Production – BCTMP (Mtonnes) Shipments – BCTMP (Mtonnes) Benchmark price – NBSK (per tonne)2 US$ Benchmark price – NBSK (per tonne) Cdn$3 2012 529 531 620 626 872 872 2011 509 489 623 642 977 966 1. For Cariboo Pulp & Paper Company, represents West Fraser’s 50% share. 2. Source: Resource Information Systems, Inc. – U.S. list price, delivered U.S. 3. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price. An extended strong NBSK market came to an end in the second half of 2011, mainly as a result of new capacity coming into production. BCTMP markets had declined several quarters earlier, again as a result of new capacity starting up. NBSK prices declined in 2012 with the Canadian dollar unit benchmark averaging $872 for the year, down from $966 in 2011 and $989 in 2010. BCTMP prices appeared to reach a floor in 2012 remaining relatively flat compared with prices in 2011. The decline in NBSK prices was partially offset by improved NBSK production and shipments as well as lower fibre costs in 2012. Production at our Hinton pulp mill was lower in 2011 due to a scheduled maintenance shutdown which was followed by a series of operational disruptions. Depreciation expense for the segment was 26% lower in 2012 compared to 2011 mainly as a result of certain assets becoming fully amortized. 2012 128 127 640 640 2011 122 122 640 633 1. Represents West Fraser’s 50% share of ANC. 2. Source: Resource Information Systems, Inc. – delivered U.S. 48.8 gram. 3. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price. Newsprint operating earnings improved in 2012 compared to 2011, largely as a result of increased shipments made possible by increased production. The production increase resulted from fewer curtailments related to high electricity prices as electricity prices were less volatile during 2012. This reduced volatility lowered returns associated with the sale of electricity under ANC’s power purchase arrangements. 29 MANAGEMENT’S DISCUSSION & ANALYSIS Newsprint1 Production (Mtonnes) Shipments (Mtonnes) Benchmark price – (per tonne)2 US$ Benchmark price – (per tonne) Cdn$3 WEST FRASER TIMBER CO. LTD. In 2012 we completed the final projects that had qualified for the Canadian federal government’s Pulp and Paper Green Transformation Program and we were reimbursed for the balance of the $88 million for which we received credits under the Program. The projects are expected to significantly reduce future energy consumption and costs at our pulp facilities. MANAGEMENT’S DISCUSSION & ANALYSIS (CONTINUED) WEST FRASER TIMBER CO. LTD. 4th Quart er R e s u lt s Q4 – 2012 Production Lumber (MMfbm) SPF 857 SYP 366 1,223 Plywood (MMsf 3/8” basis) 184 MDF (MMsf 3/4” basis) 51 LVL (Mcf) 498 BCTMP (Mtonnes) 150 NBSK (Mtonnes) 132 Newsprint (Mtonnes) 31 MANAGEMENT’S DISCUSSION & ANALYSIS 30 Shipments Lumber (MMfbm) SPF 891 SYP 355 1,246 Plywood (MMsf 3/8” basis) 189 3 MDF (MMsf /4” basis) 48 LVL (Mcf) 446 BCTMP (Mtonnes) 154 NBSK (Mtonnes) 132 Newsprint (Mtonnes) 30 Sales and Earnings Comparison ($ millions, except as otherwise indicated) Sales by Segment Lumber1 477 Panels1 109 Pulp & Paper 187 Total 773 Q3 – 2012 Q4 – 2011 842 377 1,219 203 46 445 155 129 31 802 359 1,161 191 42 426 155 100 29 882 392 1,274 193 45 513 147 126 31 829 339 1,168 198 42 366 160 103 29 473 118 181 772 370 93 187 650 1. Excludes intercompany fibre sales. Operating Earnings by Segment Lumber 52 37 (30) Panels 7 22 — Pulp & Paper 13 17 13 Corporate & Other (35) (10) (5) Operating earnings 37 66 (22) Finance expense (5)(4 )(5 ) Exchange gain (loss) on long-term debt (3) 10 9 Other income (expense) 2 (3) 1 Recovery of (provision for) income taxes (9) (14) 6 Earnings (loss) from continuing operations 22 55 (11) Earnings from discontinued operations — — 17 Earnings 22 55 6 Cdn$1.00 converted to US$ – average 1.0087 1.0046 0.9775 Quarterly Earnings Adjustments for Certain Non-operational Items ($ millions except EPS amounts which are in $) Earnings (loss) from continuing operations Adjustments to earnings from continuing operations Equity-based compensation U.S. dollar-denominated long-term debt Net tax effect on the above adjustments Net effect of above items Adjusted earnings (loss) from continuing operations Adjusted basic EPS from continuing operations Q4 – 2012 22 30 3 (2) 31 Q3 – 2012 55 10 (10) — — 4 (9) 1 (4) 53 1.25 55 1.27 (15) (0.35) Q4 – 2011 (11) Discussion & Analysis of Quarterly Non-operational Items For a description of our operational results see “Discussion & Analysis by Product Segment” which follows this section. Our results include several significant non-operational items that are identified as adjustments in the table immediately above this section. After taking into account the adjustments, we generated adjusted earnings from continuing operations of $53 million in the current quarter compared to adjusted earnings of $55 million in the previous quarter and an adjusted loss of $15 million in the fourth quarter of 2011. For a description of the key adjustments, see the corresponding section under “Annual Results” in this MD&A. Discussion & Analysis by Product Segment Q4 – 2012 Q3 – 2012 Q4 – 2011 495 491 392 75 58 (8) (23)(21 )(22) 52 37 (30) 15 12 — 335 281 398 332 279 395 300 257 351 299 256 349 238 165 282 243 169 288 1. Source: Random Lengths – Net FOB mill. 2. Source: Random Lengths – Net FOB mill Westside. 3. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price. Improved operating earnings reflect higher lumber prices which have increased as demand from the U.S. grows while Asian demand remains relatively strong. Traditionally U.S. demand for lumber weakens late in the year as winter weather reduces building activities and distributors seek to manage inventory levels but in the fourth quarter of 2012 demand strengthened lifting benchmark prices. Milder winter weather in the northern U.S. and tighter inventory levels in the distribution system likely contributed to this unusual price momentum. Shipments of SPF lumber increased over the previous quarter while shipments of SYP lumber declined compared to strong shipments in the third quarter of 2012. Log costs in the U.S. increased slightly compared to the previous quarter. The substantial improvement in operating earnings compared to the same quarter of 2011 mainly reflects price improvements and lower export duties partially offset by increased log costs. 31 MANAGEMENT’S DISCUSSION & ANALYSIS Sales EBITDA Amortization Operating earnings EBITDA margin (%) Benchmark prices (per Mfbm) SPF #2 & Better 2x41 – US$ SPF #3 Utility1 – US$ SYP #2 West 2x42 – US$ SPF #2 & Better 2x4 – Cdn$3 SPF #3 Utility – Cdn$3 SYP #2 West 2x4 – Cdn$3 WEST FRASER TIMBER CO. LTD. Lumber Segment ($ millions, except as otherwise indicated) MANAGEMENT’S DISCUSSION & ANALYSIS (CONTINUED) Panels Segment Q4 – 2012 Q3 – 2012 Q4 – 2011 Sales 110 119 95 EBITDA 12 25 4 Amortization (5)(3 )(4) Operating earnings 7 22 — EBITDA margin (%) 11 21 4 Benchmark prices Plywood (Cdn$ per Msf 3/8” basis)1 390 436 314 MDF (US$ per Msf 3/4” basis)2 579 576 549 MDF (Cdn$ per Msf 3/4” basis)3 574 573 562 ($ millions, except as otherwise indicated) 1. Source: Crow’s Market Report – Delivered Toronto. 2. Source: Resource Information Systems, Inc. – MDF Western U.S. – Net FOB mill. 3. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price. WEST FRASER TIMBER CO. LTD. The decline in operating earnings for the panels segment compared to the previous quarter was largely the result of plywood prices which weakened after peaking in the third quarter. Plywood prices had made a significant recovery during 2012 but demand typically weakens in the fourth quarter as Canadian construction is affected by winter conditions. Plywood production was lower in the current quarter as a result of downtime due to holidays. Plywood shipments were only slightly off. MANAGEMENT’S DISCUSSION & ANALYSIS 32 We saw operating earnings for MDF improve in the current quarter compared to the previous quarter as prices strengthened with improved U.S. new home construction. Costs for our MDF operations were down compared to the previous quarter due to fewer power-related curtailments at our Alberta facility. Our LVL operation continues to run on a curtailed basis because of weak markets. The improvement in operating earnings for the current quarter compared to the same quarter of 2011 reflects higher plywood and MDF prices only partially offset by lower chip revenues and higher log costs for our plywood and LVL operations. Pulp & Paper Segment ($ millions, except as otherwise indicated) Q4 – 2012 Q3 – 2012 Q4 – 2011 Sales 187 181 187 EBITDA 24 28 26 Amortization (11)(11 )(13 ) Operating earnings 13 17 13 EBITDA margin (%) 13 15 14 Benchmark prices NBSK (US$ per tonne)1 863 853 920 Newsprint (US$ per tonne)2 640 640 640 NBSK (Cdn$ per tonne)3 856 849 941 3 Newsprint (Cdn$ per tonne) 634 637 655 1. Source: Resource Information Systems, Inc. – U.S. list price delivered U.S. 2. Source: Resource Information Systems, Inc. – delivered 48.8 gram newsprint. 3. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. benchmark price. Operating earnings for our NBSK operations improved compared to the previous quarter as energy revenues contributed to sales and costs were lower as a result of lower chip prices and maintenance expenses. However, this improvement was offset by reduced operating earnings for our BCTMP and newsprint operations. BCTMP prices declined in the fourth quarter and net power costs increased. BCTMP operating earnings in the third quarter benefitted from the receipt of certain tax credits. Newsprint operating earnings were adversely affected by higher net power costs in the current quarter. Operating earnings for the segment as a whole were substantially the same as the fourth quarter of 2011 despite lower Canadian dollar product prices and chip costs as production interruptions at the Hinton pulp mill adversely affected fourth quarter 2011 results. B us ines s Out look In 2012 we continued to focus on maintaining a strong balance sheet, reinvesting in our operations, taking advantage of strategic growth opportunities and generating competitive returns for our shareholders. We expect to do the same in 2013. Despite some promising signs of economic recovery, particularly in U.S. new home construction, there are still significant uncertainties relating to the health of the broader global economy. Our products are sold mainly within North America and Asia, particularly China and Japan, and the success of our businesses in 2013 will depend on the economic well-being of those regions. At the end of the third quarter of 2012 we expressed guarded optimism concerning the recovery of U.S. housing construction and repair and renovation activities. We continue to believe that this critical sector of the North American economy is on a positive trajectory although the strength and nature of the recovery is still uncertain. Because of the severity and length of the U.S. housing collapse the supply chain for building products, from logging and transportation through the distribution system, has contracted and will take time to respond to increased demand. This is likely to create temporary shortages of product and create price fluctuations while the supply chain is rebuilt. In addition, the pace of the improvement in U.S. housing-related construction may be uneven. As a result we expect to see volatility in the prices of lumber and other building products including MDF and LVL as U.S. housing recovers to more traditional levels. <:/V\ZPUN:[HY[Z 950 900 Thousands 850 800 750 700 650 600 550 Q1-11 Q2-11 2011 Q3-11 Q4-11 Q1-12 Q2-12 2012 Q3-12 Q4-12 If U.S housing continues to recover and Canadian and Asian demand for lumber and panels remains steady we expect that resulting product price increases will be coupled with upward pressure on key costs, particularly log costs, which will adversely affect our lumber, plywood and LVL operating earnings. The results of our B.C. lumber operations are likely to reflect the continuing deterioration of the pine forest as the mountain pine beetle infestation moves to its late stages. We expect operating earnings from our pulp & paper operations in 2013 to be similar to 2012 as the current excess supply of pulp is likely to persist. We do not expect a material improvement in pulp markets in 2013. In 2012 we began to receive revenues from the sale of electricity generated by our Cariboo joint venture pulp mill biomass turbogenerator and we expect that Cariboo’s results will benefit from that revenue stream in 2013 and beyond. We expect to continue an aggressive capital expenditure program in 2013 which will include significant investments in previously-announced energy projects including two biomass electricity and heat generation projects at our Chetwynd and Fraser Lake sawmills, a natural gas electricity generation project at our Alberta Newsprint joint venture and a biomethanation project at our Slave Lake pulp mill. We are also planning to rebuild the recently-acquired Edson sawmill during 2013. Upon completion of the rebuild in late 2013 the mill will have a lumber manufacturing capacity of approximately 180 MMfbm per year. 33 MANAGEMENT’S DISCUSSION & ANALYSIS As the U.S. housing market improves we expect that less U.S. plywood will be sold into Canada. However certain portions of the Canadian housing market have slowed down, partly in response to government measures to restrict housing-related credit, and this trend may continue in 2013 which could put downward pressure on plywood operating earnings. WEST FRASER TIMBER CO. LTD. Source: U.S. Census Bureau MANAGEMENT’S DISCUSSION & ANALYSIS (CONTINUED) Earnings Sens it i v i t y t o K e y Vari able s (based on year-end capacities1 – $ millions, except as otherwise indicated) Factor Variation Change in Earnings Lumber price2,3US$10 (per Mfbm)49 Plywood price2,3Cdn$50 (per Msf)31 MDF price3US$50 (per Msf) 11 NBSK price3US$50 (per tonne) 21 BCTMP price3US$50 (per tonne)23 Newsprint price US$50 (per tonne)5 4 U.S. – Canadian $ exchange rate US$0.01 (per Cdn $)14 Sawlog cost Cdn$1 (per m3) 19 1. 2. 3. 4. Assumes exchange rate of Cdn$1.00 per US$1.00 and an income tax rate of 25.0%. Change does not include any potential change in log costs. Change does not include any potential change in wood chip prices. Excludes exchange impact on translation of U.S. dollar-denominated debt and other monetary items; assumes no change in commodity prices. WEST FRASER TIMBER CO. LTD. C ap ital S t r uc t ure and L i q u i d i t y The capital structure of the Company consists of Common share equity and long-term debt. In addition, the Company maintains a committed revolving credit facility that is available to meet additional funding requirements. MANAGEMENT’S DISCUSSION & ANALYSIS 34 The outstanding Common share equity consists of 40,281,818 Common shares and 2,581,478 Class B Common shares for a total of 42,863,296 shares issued and outstanding as at February 14, 2013. Class B Common shares are equal in all respects to Common shares and are exchangeable on a one-for-one basis for Common shares. Common shares are listed for trading on the Toronto Stock Exchange while Class B Common shares are not. Certain circumstances or corporate transactions may require the approval of the holders of our Common shares and Class B Common shares on a separate class by class basis. In addition, as of February 14, 2013 there were 1,473,892 share purchase options outstanding with exercise prices ranging from $24.71 to $51.56 per Common share. In June and September 2011, West Fraser amended its $500 million committed revolving credit facility to, among other things, extend its maturity date to September 2016. The facility allows for additional borrowings of up to $150 million, subject to sourcing new lenders for this additional amount. To date the Company has not sought to access this additional facility. Security pledged to the banks and other lenders in early 2010 remains in place for as long as the Company’s credit ratings by Standard & Poor’s and Moody’s remain below BBB- and Baa3 respectively. In May 2011, West Fraser entered into an uncommitted $25 million line of credit for the purpose of establishing letters of credit. Security was also pledged to the lending bank of this facility on equal terms to the committed revolving facility. Copies of the committed facility and the June and September 2011 amendments are available at www.sedar.com. On December 31, 2012 there was no balance owing under the credit facilities (2011 – nil). Letters of credit in the amount of $45 million were supported by both facilities, leaving approximately $485 million of credit available for further use. West Fraser’s cash requirements, other than for operating purposes, are primarily for interest payments, repayment of debt, additions to property, plant, equipment and timber, acquisitions and payment of dividends. In normal business cycles and in years without a major acquisition or debt repayment, cash on hand and cash provided by operations have been sufficient to meet these requirements. Summary of Financial Position ($ millions, except as otherwise indicated) As at December 31 Cash1 Current assets Current liabilities Ratio of current assets to current liabilities Net debt2 Shareholders’ equity Net debt to capitalization3 2012 2011 102 68 823 745 385 315 2.1 2.4 194 232 1,4921,483 12%14 % 1. Cash consists of cash and short-term investments less cheques issued in excess of funds on deposit. 2. Total debt less deferred financing costs less cash. 3. Net debt divided by net debt plus shareholders’ equity. As shown in the table below, West Fraser is rated by three leading rating agencies. There were no rating changes during 2012 but Standard & Poor’s changed its Outlook from Positive to Stable while Dominion Bond Rating Service changed its Outlook from Stable to Positive. Debt Ratings Agency Dominion Bond Rating Service Moody’s Standard & Poor’s Rating BB(high) Ba1 BB+ Outlook Positive Positive Stable Change in cash 34 Contractual Obligations as at December 31, 2012 ($ millions)1 2013 2014 2015 2016 2017 Thereafter Long-term debt — 2992 — — — 2 Operating leases 2 2 2 1 1 5 Asset purchase commitments 90 — — — — — Total 92 301 2 1 1 7 (93) Total 301 13 91 405 1. Contractual obligations means an agreement related to debt, leases and enforceable agreements to purchase goods or services on specified terms, but does not include asset retirement obligations, energy purchases under various agreements, pension contributions payable, accounts payable in the ordinary course of business or contingent amounts payable. 2. Represents U.S. dollar-denominated debt of US$300 million. MANAGEMENT’S DISCUSSION & ANALYSIS WEST FRASER TIMBER CO. LTD. Selected Cash Flow Items ($ millions) For the year ended December 31 2012 2011 Operating Activities Earnings from continuing operations 87 27 Amortization 152 168 Change in income taxes 30 (57) Contributions to benefit plans in excess of expense (26) (58) Other (48)5 Cash provided by operating activities 19585 Financing Activities Debt and operating loans — (15) Finance expense paid (18) (20) Dividends (24)(24) Cash used in financing activities (42)(59) 35 Investing Activities Acquisition (30)— Additions to capital assets (150) (213) Other 6149 Cash used in investing activities (119) (164) Change in cash from continuing operations 34 (138) Change in cash from discontinued operations — 45 MANAGEMENT’S DISCUSSION & ANALYSIS (CONTINUED) Sign if icant Managemen t Ju dgmen t s A ffec t i ng Fi nanc i al Results The preparation of financial statements requires management to make estimates and assumptions, and to select accounting policies, that affect the amounts reported. The significant accounting policies followed by our Company are disclosed in note 3 to the audited consolidated financial statements. The following judgments are considered the most significant: Recoverability of Long-lived Assets As required by IFRS, we assess the carrying value of an asset when there are indicators of impairment. The assessment compares the estimated discounted future cash flows of the asset to the carrying value of the asset. If the carrying value of the asset exceeds the estimated discounted future cash flows relating to the asset, the carrying value is written down to the higher of fair value less costs to sell and value in use. No impairments were recorded in 2011 or 2012. WEST FRASER TIMBER CO. LTD. We review the amortization periods for our manufacturing equipment and machinery to ensure that the periods appropriately reflect anticipated obsolescence and technological change. Current amortization periods for manufacturing equipment range from 6 to 20 years with sawmill equipment amortized over a maximum of 15 years. Timber rights are amortized over 40 years. MANAGEMENT’S DISCUSSION & ANALYSIS 36 Goodwill is not amortized. We compare the carrying value of goodwill and related assets, at least once a year, to the estimated discounted cash flows that the assets are expected to generate. If it is determined that the carrying value is more than the estimated discounted cash flows, then a goodwill impairment will be recorded. We tested goodwill for impairment in 2012 and concluded that its carrying value is not impaired. The testing of goodwill for impairment involves significant estimates including future production and sales volumes, product selling prices, foreign currency exchange rates, operating costs, capital expenditures and the appropriate discount rate to apply. In all cases, we have used our best estimates of these projected amounts and values. Given the current global economic uncertainty and the volatility of the markets for our products, it is possible that our estimates will be adjusted in the future and that these adjusted estimates could result in the future impairment of goodwill. We also review the carrying value of deferred income tax assets to ensure that the carrying value is appropriate. The key factors considered are the Company’s history of profitability, future expectations of profitability and the timing of expiry of tax loss carry-forwards. Reforestation and Decommissioning Obligations In Canada, provincial regulations require timber quota holders to carry out reforestation to ensure re-establishment of the forest after harvesting. Reforested areas must be tended for a period sufficient to ensure that they are well-established. The time needed to meet regulatory requirements depends on a variety of factors. In our operating areas, the time to meet reforestation standards usually spans 12 to 15 years from the time of harvest. We record a liability for the estimated cost of the future reforestation activities when the harvesting takes place. This liability is reviewed, at least annually, and adjusted to our current estimate of the costs to complete the remainder of the reforestation activities. In 2012 the review of the reforestation obligation resulted in an increase to the obligation of $1 million (2011 – increase of $2 million). We record the estimated fair value of a liability for decommissioning obligations, such as landfill closures, in the period when a reasonable estimate of fair value can be made. We review these estimates at least annually, and adjust the obligations as appropriate. In 2012 the review resulted in an increase of the obligation by $1 million (2011 – reduction of $11 million). Defined Benefit Pension Plan (“D.B. Plan”) Assumptions We maintain several D.B. Plans for many of our employees. The annual funding requirements and pension expenses are based on various assumptions that we determine in consultation with our actuaries, as well as on actual investment returns on the pension fund assets and changes to the employee groups in the pension plans. D.B. Plan Obligation Assumptions 2012 2011 Discount rate 4.5% 5.0% Rate of increase in future compensation 3.5%3.5% Impact on D.B. Plan Obligations of a Change in Key Assumptions ($ millions) Discount rate Decrease in assumption from 4.5% to 4.0% Increase in assumption from 4.5% to 5.0% Rate of increase in future compensation Decrease in assumption from 3.5% to 3.0% Increase in assumption from 3.5% to 4.0% Obligation 90 (83) (18) 18 Accoun t ing S tandards I s s u ed B u t N o t Yet Appli ed The International Accounting Standards Board periodically issues new standards and amendments or interpretations to existing standards. The new pronouncements listed below are those that we consider most significant. They are not intended to be a complete list of new pronouncements that may affect the consolidated financial statements. IFRS 11 - Joint Arrangements In May 2011 IFRS 11 was issued which provides guidance for determining if a joint arrangement is a joint venture or joint operation. The standard requires that joint ventures be accounted for by the equity method as opposed to the choice, presently available under IAS 31 - Interests in Joint Ventures, of applying the equity method or proportionate consolidation. Joint operations are required to be accounted for using the proportionate consolidation method. IFRS 11 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. We do not expect this standard to have a significant effect on our consolidated financial statements. IFRS 12 - Disclosure of Interests in Other Entities In May 2011 IFRS 12 was issued which sets out the required disclosures for companies that have adopted IFRS 10 and 11 described above. It requires disclosure of information that helps users to evaluate the nature, risks and financial effects associated with a company’s interests in subsidiaries, associates and joint arrangements. IFRS 12 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. We do not expect this standard to have a significant effect on our consolidated financial statements. IFRS 13 - Fair Value Measurement In May 2011 IFRS 13 was issued which defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. Prior to the introduction of the standard there was no single source of guidance on fair value measurement. IFRS 13 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. We do not expect this standard to have a significant effect on our consolidated financial statements. 37 MANAGEMENT’S DISCUSSION & ANALYSIS IFRS 10 - Consolidated Financial Statements In May 2011 IFRS 10 was issued which provides a single model to be applied in the control analysis for all investees and supersedes IAS 27 - Consolidated and Separate Financial Statements and Standing Interpretations Committee -12 Consolidation - Special Purpose Entities. IFRS 10 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. We do not expect this standard to have a significant effect on our consolidated financial statements. WEST FRASER TIMBER CO. LTD. IFRS 9 - Financial Instruments In November 2009 IFRS 9 was issued and in October 2010 was further amended. IFRS 9 addresses classification and measurement of financial assets and replaces the multiple category and measurement models in International Accounting Standards (“IAS”) 39 - Financial Instruments: Recognition and Measurement for debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments and such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive earnings. In December 2009 IFRS 9 was deferred and is now effective for annual periods beginning on or after January 1, 2015 with earlier application permitted. We do not expect this standard to have a significant effect on our consolidated financial statements. MANAGEMENT’S DISCUSSION & ANALYSIS (CONTINUED) IAS 19 - Amendment, Employee Benefits In June 2011 IAS 19 was amended. The amendment will result in significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, the most significant being the replacement of finance cost and expected plan return on plan assets with a net finance amount that is calculated by applying the discount rate to the net liability (asset). Under the standard, the net finance amount can be classified with finance expense or pension and benefit expense. The amendment is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. In applying this standard it is our intent to classify the net finance amount related to pension and other benefit plans as finance expense with a corresponding reduction to pension and benefit expense currently included in cost of products sold and selling, general and administrative expense. The effect of adopting of this amended standard on January 1, 2013 on our consolidated financial statements for the year ended December 31, 2012 will be as follows: Pension and benefit expense increase $ Finance expense increase Tax provision decrease Decrease in earnings $ Decrease in actuarial loss on employee future benefits $ 4 9 (3) 10 (10) There is no impact on balance sheet amounts or cash flows resulting from the amended standard. WEST FRASER TIMBER CO. LTD. R isk s and Uncerta i n t i e s MANAGEMENT’S DISCUSSION & ANALYSIS 38 Product Demand and Price Fluctuations Our financial results are primarily dependent on the demand for, and selling prices of, our products, which are subject to significant fluctuations. The demand and prices for lumber, panels, pulp, newsprint, wood chips and other wood products are highly volatile and are affected by factors such as global economic conditions including the strength of the U.S. housing market and of Asian markets, particularly China and Japan, changes in industry production capacity, changes in world inventory levels and other factors beyond our control. In addition, unemployment levels, interest rates and the rate of mortgage foreclosures have a significant effect on residential construction and renovation activity, which in turn influences the demand for, and price of, building materials such as lumber and panel products. We cannot predict future market conditions, demand or pricing for any of our products due to factors outside our control. Prolonged or severe weakness in the market for any of our principal products would adversely affect our financial condition. Our earnings sensitivity to changes in certain product prices is set out in the table titled “Earnings Sensitivity to Key Variables”. Operations Availability of Fibre and Changes in Stumpage Fees Substantially all of our Canadian log requirements are harvested from Crown lands. Provincial governments prescribe the methodologies that determine the amounts of stumpage fees that are charged in respect of harvesting on Crown lands and changes to the methodologies or rates may adversely affect our results. We rely on log supply agreements in the U.S. which are subject to log availability and based on market prices. Based on year-end capacity, approximately 26% of the aggregate log requirements for our U.S. sawmills are supplied under long-term agreements with the balance purchased on the open market. Changes in market conditions for these logs may adversely affect our results. Natural Disasters Our operations are subject to adverse natural events such as forest fires, severe weather conditions, timber disease and insect infestation, and earthquake activity. These events could damage or destroy our physical facilities or our timber supply and similar events could also affect the facilities of our suppliers or customers. Any such damage or destruction could adversely affect our financial results. Although we believe we have reasonable insurance arrangements in place to cover certain of such incidents, there can be no assurance that these arrangements will be sufficient to fully protect us against such losses. As is common in the industry, we do not insure loss of standing timber for any cause. Mountain Pine Beetle The long-term effect of the mountain pine beetle infestation on our Canadian operations is uncertain. The potential effects include a reduction of future AAC levels to below current and pre-infestation AAC levels. Many of our B.C. operations are experiencing a diminished grade and volume of lumber recovered from beetle-killed logs and increased production costs and these effects could spread to our Alberta operations as the mountain pine beetle infestation expands. The timing and extent of the future effect on our timber supply, lumber grade and recovery, and production costs will depend on a variety of factors and at this time cannot be reasonably determined. The effects of the deterioration of beetle-killed logs could include increased costs, reduced operating rates due to shortages of commercially merchantable timber and mill closures. Operational Curtailments and Transportation Limitations From time to time, we suspend operations at one or more of our facilities in response to market conditions, environmental risks, or other operational issues, including, but not limited to, power failures, equipment breakdowns, adverse weather conditions, labour disruptions and fire hazards. These unscheduled operational suspensions could have a material adverse effect on our financial condition. If wood chip production is reduced because of production curtailments, improved manufacturing efficiencies or any other reason, pulp and paper operations may incur additional costs to acquire or produce additional wood chips or be forced to reduce production. Conversely, pulp and paper mill production curtailments may require sawmills and panel mills to find other ways to dispose of residual wood fibre and may result in curtailment or suspension of lumber and panel production. We rely primarily on third parties for the delivery of raw materials and the transportation of our products. From time to time, we must also respond to rail car and truck shortages that limit raw material deliveries to us and product deliveries to our customers, which may have a material adverse effect on our business. Labour and Services Our operations rely on both skilled and unskilled workers as well as third-party services such as logging and transportation. Because our operations are generally located away from major urban centres, we often face strong competition for workers, particularly skilled workers, and services from our competitors and other industries such as oil and gas production and mining. Shortages of workers or key services could impair our operations by reducing production or increasing costs. We have in place internal programs under which all our forestry and manufacturing operations are audited for compliance with laws and accepted standards and with our management systems. Our woodlands operations in Canada, and the harvesting operations of many of our key U.S. suppliers, are third-party certified to internationally-recognized sustainable forest management standards. Our operations and our ability to sell our products could be adversely affected if those operations did not, or were perceived by the public as failing to, comply with applicable laws and standards, including responsible environmental and sustainable forestry standards. First Nations Claims Issues relating to First Nations groups have the potential for a significant adverse effect on Canadian forest products companies including West Fraser. The main First Nations’ issues that are relevant to West Fraser relate to aboriginal rights and title, and consultation. We participate as requested by government in the consultation process, but rely on provincial governments to adequately discharge obligations to First Nations groups in order to preserve the validity of actions dealing with public rights, including the granting or transfer of Crown timber harvesting rights. As the jurisprudence and government policies respecting aboriginal rights and title and the consultation process continue to evolve, we cannot assure that First Nations claims will not in the future have a material adverse effect on our timber harvesting rights or our ability to exercise or renew them or secure other timber harvesting rights. Regulatory Our operations are subject to extensive general and industry-specific federal, provincial, state, municipal and other local laws and regulations, including those governing forestry, exports, taxes, employees, labour standards, occupational health and safety, waste disposal, environmental protection and remediation, protection of endangered and protected species and land use and expropriation. We are required to obtain approvals, permits and licences for our operations, which may impose conditions that must be complied with. If we are unable to extend or renew, or are delayed in extending or renewing, a material approval, permit or licence, our operations or financial condition could be adversely affected. There is no assurance that these laws, regulations 39 MANAGEMENT’S DISCUSSION & ANALYSIS Environment Our operations are subject to regulation by federal, provincial, state and local environmental authorities, including industry-specific environmental regulations relating to air emissions and pollutants, wastewater (effluent) discharges, solid waste, landfill operations, forestry practices, site remediation and the protection of endangered species and critical habitat. We have incurred, and will continue to incur, capital expenditures and operating costs to comply with environmental laws and regulations. No assurance can be given that changes in these laws and regulations or their application will not have a material adverse effect on our business, operations, financial condition and operational results. Similarly, no assurance can be given that capital expenditures necessary for future compliance with existing and new environmental laws and regulations could be financed from our available cash flow. We may discover currently unknown environmental problems, contamination, or conditions relating to our past or present operations. This may require site or other remediation costs to maintain compliance or correct violations or result in governmental or private claims for damage to person, property or the environment, which could have a material adverse effect on our business, financial condition and operational results. WEST FRASER TIMBER CO. LTD. We employ a unionized workforce in a number of our operations. Walkouts or strikes by employees could result in lost production and sales, higher costs and supply constraints that could have a material adverse effect on our business. Also, we depend on a variety of third parties that employ unionized workers to provide critical services to us. Labour disputes experienced by these third parties could lead to disruptions at our facilities. MANAGEMENT’S DISCUSSION & ANALYSIS (CONTINUED) or government policy, or the administrative interpretation or enforcement of existing laws and regulations, will not change in the future in a manner that may require us to incur significant capital expenditures, pay higher taxes or otherwise could adversely affect our operations or financial condition. Failure to comply with applicable laws or regulations, including approvals, permits and licences, could result in fines, penalties or enforcement actions, including orders suspending or curtailing our operations or requiring corrective measures or remedial actions. Foreign Currency Exchange Rates We sell the majority of our products at prices denominated in U.S. dollars or based on prevailing U.S. dollar prices. A significant portion of our operational costs and expenses are incurred in Canadian dollars. Therefore, an increase in the value of the Canadian dollar relative to the U.S. dollar reduces the revenue in Canadian dollar terms realized by us from sales made in U.S. dollars, which reduces operating margin and the cash flow available to fund operations. We are also exposed to the risk of exchange rate fluctuations in the period between sale and payment. We also have a substantial amount of long-term debt repayable in U.S. dollars which is valued in Canadian dollars at the end of each reporting period by applying the prevailing exchange rate. Exchange rate fluctuations result in exchange gains or losses. This results in significant earnings sensitivity to changes in the Canadian/U.S. dollar exchange rate as disclosed in the table titled “Earnings Sensitivity to Key Variables”. The Canadian/U.S. dollar exchange rate is affected by a broad range of factors which makes future rates difficult to accurately predict. WEST FRASER TIMBER CO. LTD. Competition Markets for our products are highly competitive. Our ability to maintain or improve the cost of producing and delivering products to those markets is crucial. Factors such as cost and availability of raw materials, energy and labour, the ability to maintain high operating rates and low per-unit manufacturing costs, and the quality of our final products and our customer service all affect our earnings. MANAGEMENT’S DISCUSSION & ANALYSIS 40 Trade Restrictions A substantial portion of our products that are manufactured in Canada are exported for sale. Our financial results are dependent on continued access to the export markets and tariffs and other trade barriers that restrict or prevent access represent a continuing risk to us. Our Canadian softwood lumber exports to the U.S. are currently subject to export duties imposed under the SLA which is currently scheduled to expire in October 2015. National economic protectionist measures more commonly arise during periods of broad economic downturn and so a deterioration of global economic conditions could result in the adoption of additional trade barriers. Financial We rely on long-term borrowings and access to revolving credit in order to finance our ongoing operations. Any change in availability of credit in the market, as would happen during an economic downturn, could affect our ability to access credit markets on commercially reasonable terms. Although we have no immediate needs for new credit, in the future we may need to access public or private debt markets to issue new debt to replace or partially replace current borrowings. Pension Plan Funding We are the sponsor of several defined benefit pension plans which exposes us to market risks on plan assets. Funding requirements for these plans are based on actuarial assumptions concerning expected return on plan assets, future salary increases, life expectancy and interest rates. If any of these assumptions differ from actual outcomes such that a funding deficiency occurs or increases we would be required to increase cash funding contributions which would in turn reduce the availability of capital for other purposes. D isclos ure C ont rol s and Int ernal C ont rols Over Fi nanci al Reporti ng West Fraser’s management, including the Chairman and Chief Executive Officer and the Vice-President, Finance and Chief Financial Officer, acknowledge responsibility for the design and operation of disclosure controls and procedures and internal controls over financial reporting, and the requirement to evaluate the effectiveness of these controls on an annual basis. Management evaluated the effectiveness of these controls at the end of the reporting period and based on this evaluation concluded that our internal controls over financial reporting and the disclosure controls and procedures were effective as at December 31, 2012. No Changes in Internal Controls Over Financial Reporting There has been no change in our internal controls over financial reporting during the year ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. RESPONSIBILITY OF MANAGEMENT The management of West Fraser Timber Co. Ltd. is responsible for the preparation, integrity and objectivity of the consolidated financial statements. The consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards and necessarily include amounts that represent the best estimates and judgments of management. Management maintains a system of internal controls over financial reporting that encompasses policies, procedures and controls to provide reasonable assurance that assets are safeguarded against loss or unauthorized use, transactions are executed and recorded in accordance with management’s authorization and financial records are accurate and reliable. West Fraser’s independent auditors, who are appointed by the shareholders upon the recommendation of the Audit Committee and the Board of Directors, have completed their audit of the consolidated financial statements in accordance with approved auditing standards in Canada and their report follows. February 14, 2013 Larry Hughes Vice-President, Finance and Chief Financial Officer 41 RESPONSIBILITY OF MANAGEMENT Henry H. Ketcham Chairman and Chief Executive Officer WEST FRASER TIMBER CO. LTD. The Board of Directors provides oversight to the financial reporting process through its Audit Committee, comprised of three Directors, none of whom is an officer or employee of West Fraser. The Audit Committee meets regularly with management and the auditors to review the consolidated financial statements and matters relating to the audit. The auditors have full and free access to the Audit Committee. The Audit Committee reports its findings to the Board of Directors for consideration in approving the consolidated financial statements for issuance to the shareholders. INDEPENDENT AUDITOR’S REPORT To the Shareholders of West Fraser Timber Co. Ltd. We have audited the accompanying consolidated financial statements of West Fraser Timber Co. Ltd., which comprise the consolidated balance sheets as at December 31, 2012 and December 31, 2011 and the consolidated statements of earnings and comprehensive earnings, changes in shareholders’ equity and cash flows for the years ended December 31, 2012 and December 31, 2011, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. WEST FRASER TIMBER CO. LTD. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of West Fraser Timber Co. Ltd. as at December 31, 2012 and December 31, 2011 and its financial performance and its cash flows for the years ended December 31, 2012 and December 31, 2011 in accordance with International Financial Reporting Standards. INDEPENDENT AUDITOR’S REPORT 42 Chartered Accountants February 14, 2013 Consolidated Balance Sheets As at December 31, 2012 and 2011 (in millions of Canadian dollars, except where indicated) Approved by the Board of Directors Janice G. Rennie J. Duncan Gibson DirectorDirector 43 CONSOLIDATED BALANCE SHEETS Long-term debt (note 12) 300 306 Other liabilities (note 13) 313 270 Deferred income taxes (note 19) 128 144 1,126 1,035 Shareholders’ Equity Share capital (note 15) 602 601 Accumulated other comprehensive earnings (9) (6) Retained earnings 899 888 1,4921,483 $2,618 $ 2,518 WEST FRASER TIMBER CO. LTD. 2012 2011 Assets Current assets Cash and short-term investments $102 $ 68 Receivables (note 25) 251 266 Income taxes receivable — 4 Inventories (note 7) 459 398 Prepaid expenses 11 9 823 745 Property, plant and equipment (note 8) 959 936 Timber licences (note 9) 496 490 Goodwill and other intangibles (note 10) 330 336 Other assets 10 11 $2,618 $2,518 Liabilities Current liabilities Payables and accrued liabilities (note 11) $ 322 $ 274 Income taxes payable 20 — Reforestation and decommissioning obligations (note 13) 43 41 385 315 Consolidated Statements of Earnings & Comprehensive Earnings For the years ended December 31, 2012 and 2011 (in millions of Canadian dollars, except where indicated) 2012 2011 Sales $ 3,000 $ 2,762 Costs and expenses Cost of products sold 2,020 1,917 Freight and other distribution costs 477 460 Export taxes 48 58 Amortization 152168 Selling, general and administration 115 104 Equity-based compensation 61 (3 ) 2,873 2,704 WEST FRASER TIMBER CO. LTD. Operating earnings 127 58 CONSOLIDATED STATEMENTS OF EARNINGS & COMPREHENSIVE EARNINGS 44 Finance expense (note 17) (19) (20) Exchange gain (loss) on long-term debt 7 (7) Other income (note 18) — 14 Earnings from continuing operations before tax provision 115 45 Tax provision (note 19) (28) (18) Earnings from continuing operations 87 27 Earnings from discontinued operations (note 21) — 46 Earnings $87 $ 73 Earnings per share (dollars) (note 22) Basic from continuing operations $2.02 Diluted from continuing operations $2.02 Basic after discontinued operations $2.02 Diluted after discontinued operations $2.02 $ $ $ $ 0.63 0.41 1.70 1.47 Cash dividends per share $ 0.56 $0.56 Comprehensive earnings Earnings $87 $ 73 Other comprehensive earnings Translation gain (loss) on foreign operations1 (3) 4 2 Actuarial loss on employee future benefits (52)(104 ) Comprehensive earnings $32 $ (27 ) 1. Recycled through earnings in the event of a reduction in net investment in foreign operations. 2. Adjusted through retained earnings. Net of income tax recovery of $17 million (2011 — $34 million). Consolidated STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED December 31, 2012 and 2011 (in millions of Canadian dollars, EXCEPT WHERE INDICATED) SHARE capital Translation Numberof foreign Retained Total of shares Amountoperationsearningsequity $ 601 $ (10) $ 943 $ Changes in equity for 2011 Translation gain on foreign operations — — 4 Actuarial loss on employee future benefits — — — Issuance of Common shares 11,201 — — Earnings for the year — — — Dividends — — — — (104) — 73 (24) Balance – December 31, 2011 (6) 888 Changes in equity for 2012 Translation loss on foreign operations — — (3) Actuarial loss on employee future benefits — — — Issuance of Common shares 16,607 1 — Earnings for the year — — — Dividends — — — — (52) — 87 (24) Balance – December 31, 2012 899 42,846,113 42,862,720 $ 601 602 $ (9) $ $ 1,534 4 (104) — 73 (24) 1,483 (3) (52) 1 87 (24) 1,492 WEST FRASER TIMBER CO. LTD. 42,834,912 45 CONSOLIDATED STATEMENTS FOF CHANGES IN SHAREHOLDERS’ EQUITY Balance – December 31, 2010 Consolidated Statements of CASH FLOWS For the years ended December 31, 2012 and 2011 (in millions of Canadian dollars, except where indicated) 2012 2011 WEST FRASER TIMBER CO. LTD. Operating activities Earnings from continuing operations $87 $ 27 Adjustments Amortization 152168 Finance expense 19 20 Exchange loss (gain) on long-term debt (7) 7 Tax provision 28 18 Income taxes received (paid) 2 (75) Reforestation and decommissioning obligations (2) 6 Employee future benefits expense 38 35 Contributions to employee future benefit plans (64) (93) Other (8) (9) Changes in non-cash working capital Receivables (22) 8 Inventories (58) (24) Prepaid expenses (2) (1) Payables and accrued liabilities 32 (2) Cash flows from operating activities 195 85 CONSOLIDATED STATEMENTS OF CASH FLOWS 46 Financing activities Repayment of operating loans — (15) Finance expense paid (18) (20) Dividends (24) (24) Cash flows from financing activities (42) (59) Investing activities Acquisition (note 5) (30) — Additions to capital assets (150) (213) Proceeds from Green Transformation Program (note 24) 49 37 Proceeds from disposal of capital assets 9 10 Other 3 2 Cash flows from investing activities (119)(164 ) Change in cash from continuing operations 34 (138) Change in cash from discontinued operations (note 21) — 45 Cash — beginning of year 68 161 Cash — end of year $102 $ 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED December 31, 2012 and 2011 (in millions of Canadian dollars, EXCEPT WHERE INDICATED) 1. Nature of operations West Fraser Timber Co. Ltd. (“West Fraser”, “we”, “us” or “our”) is an integrated wood products company producing lumber, wood chips, LVL, MDF, plywood, pulp and newsprint with facilities in western Canada and the southern United States. Our executive office is located at 858 Beatty Street, Suite 501, Vancouver, British Columbia. West Fraser was formed by articles of amalgamation under the Business Corporations Act (British Columbia) and is registered in British Columbia, Canada. We are listed on the Toronto Stock Exchange under the symbol WFT. 2. Statement of compliance These consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and were authorized for publication by our Board of Directors on February 14, 2013. 3. Significant accounting policies Basis of measurement Our consolidated financial statements have been prepared on the historical cost basis, except for the following significant items: • Derivative financial instruments which are measured at fair value; • Share option liability which is measured using the Black-Scholes valuation model; Basis of consolidation These consolidated financial statements include the accounts of West Fraser and its wholly-owned subsidiaries after elimination of intercompany transactions and balances. Principal operating subsidiaries are West Fraser Mills Ltd., West Fraser, Inc., Blue Ridge Lumber Inc., Sundre Forest Products Inc. and West Fraser Newsprint Ltd.. Our joint ventures, Alberta Newsprint Company and Cariboo Pulp & Paper Company, are accounted for by the proportionate consolidation method. Financial instruments Our financial assets are categorized as Loans and Receivables and our financial liabilities are categorized as Other Financial Liabilities. All financial assets and liabilities are initially measured at fair value and subsequently measured at amortized cost using the effective interest rate method except for derivatives. Derivatives are measured at fair value through earnings with changes reflected in other income. A list of our financial assets and liabilities is included in note 25. Debt is shown net of deferred financing charges which are amortized over the life of the debt. Use of estimates The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant areas requiring estimates include recoverability of long-lived assets and goodwill, reforestation and decommissioning obligations, employee future benefits, equity-based compensation, income taxes and litigation. Actual amounts could differ materially from these and other estimates, the impact of which would be recorded in future periods. Revenue recognition Revenues are derived from product sales and are recognized upon the transfer of significant risks and rewards of ownership, provided collectibility is reasonably assured. Foreign currency translation West Fraser’s functional and presentation currency is Canadian dollars. U.S. operations Assets and liabilities of our U.S. operations have a functional currency of U.S. dollars and are translated at the period-end exchange rate. Revenues and expenses are translated at average exchange rates during the reporting period. The resulting unrealized gains or losses are included in other comprehensive earnings. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS • Post-retirement liabilities which are actuarially determined with the plan assets measured at fair value and the accrued benefit obligations measured using the projected unit credit method. WEST FRASER TIMBER CO. LTD. • Reforestation and decommissioning obligations which are measured at the present value of expected future cash flows; and NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in millions of Canadian dollars, EXCEPT WHERE INDICATED) Translation of other foreign currency balances and transactions Monetary assets and liabilities denominated in foreign currencies, including long-term debt, are translated at the period-end exchange rate. Income and expense items are translated at the average or transaction date exchange rates during the reporting period. The resulting gains or losses are included in other income. Cash and short-term investments Cash and short-term investments consist of cash on deposit and short-term interest-bearing securities maturing within three months of the date of purchase. Inventories Inventories of logs, other raw materials and manufactured products are valued at the lower of average cost and net realizable value. Processing materials and supplies are valued at the lower of average cost and replacement cost. WEST FRASER TIMBER CO. LTD. Property, plant and equipment Property, plant and equipment are stated at historical cost, less accumulated amortization and impairment losses. Expenditures for additions and improvements are capitalized. Borrowing costs are capitalized when the asset construction period exceeds 12 months and the borrowing costs are directly attributable to the asset. Expenditures for maintenance and repairs are charged to earnings. Upon retirement, disposal or destruction of an asset, the cost and related amortization are removed from the accounts and any gain or loss is included in earnings. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 48 Property, plant and equipment are amortized on a straight-line basis over their estimated useful lives as follows: Buildings 10 – 30 years Manufacturing equipment and machinery 6 – 20 years Fixtures, mobile and other equipment 3 – 10 years Roads Not exceeding 40 years Major maintenance shutdowns 12 to 36 months Timber licences and other intangibles Timber licences and other intangible assets are stated at historical cost, less accumulated amortization and impairment losses, and are amortized on a straight-line basis over their estimated useful lives as follows: Timber licences 40 years Power purchase agreement Over the life of the agreement Software 3 – 5 years Non-replaceable timber rights As timber is logged Impairment of property, plant, equipment, timber licences and other intangibles We review property, plant, equipment, timber licences and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. For the purpose of impairment testing, property, plant, equipment, timber licences and other intangible assets are separated into cash generating units (“CGU”). We have identified each of our mills as a CGU for impairment testing of property, plant, equipment and other intangibles. Timber licences are tested for impairment by combining CGUs within the economic area of the related licence. Recoverability is assessed by comparing the CGU carrying amount to the discounted estimated net future cash flows the assets are expected to generate. If the carrying amount exceeds the discounted estimated net future cash flows, the assets of the CGU are written down to the higher of fair value less costs to sell and value-in-use (being the present value of the estimated net future cash flows of the relevant asset or CGU). Estimated net future cash flows are based on several assumptions concerning future circumstances including selling prices of products, U.S./Canadian dollar exchange rates, production rates, input costs and capital requirements. The estimated net future cash flows are discounted at rates reflective of market risk. Where an impairment loss subsequently reverses, the carrying amount of the asset or CGU is increased to the lesser of the revised estimate of its recoverable amount and the carrying amount that would have been recorded had no impairment loss been previously recognized. Goodwill Goodwill represents the excess of the purchase price paid for an acquisition over the fair value of the net assets acquired. Goodwill is not amortized, but is subject to an impairment test annually or more frequently if events or circumstances indicate that it may be impaired. Goodwill impairment is assessed by comparing the fair value of its CGU to the underlying carrying amount of the CGU’s net assets, including goodwill. When the carrying amount of the CGU exceeds its fair value, the fair value of the CGU’s goodwill is compared with its carrying amount to measure the amount of impairment loss, if any. Reforestation and decommissioning obligations Timber is harvested under various timber licences that require us to conduct reforestation. Future reforestation obligations are measured at the present value of the expenditures expected to be required to settle the obligations and are accrued and charged to earnings when timber is harvested. The reforestation obligation is reviewed periodically and changes to estimates are credited or charged to earnings. We record the present value of a liability for decommissioning obligations in the period that a reasonable estimate of present value can be made. The present value of the liability is added to the carrying amount of the associated asset and amortized over its useful life or, if there is no associated asset, it is expensed. Decommissioning obligations are reviewed annually and changes to estimates result in an adjustment of the carrying amount of the associated asset or, where there is no asset, they are credited or charged to earnings. Reforestation and decommissioning obligations are discounted at the risk-free rate at the balance sheet date and accreted over time through periodic charges to earnings. The liabilities are reduced by actual costs of settlement. Government assistance Government assistance received that relates to the construction of manufacturing assets is applied to reduce the cost of those assets. Government assistance received that relates to operational expenses is applied to reduce the amount charged to earnings for the operating item. Employee future benefits We accrue for our obligations under employee pension and non-pension benefit plans and the related costs net of plan assets. The following policies have been adopted: • The measurement date used for accounting purposes is December 31. • The cost of pensions and other retirement benefits earned by employees is determined using the projected unit credit method, pro-rated for estimated service periods where appropriate, and management’s estimate of expected plan investment performance, discount rate, salary escalation, retirement ages of employees, expected heath-care costs and other relevant factors. • For the purpose of calculating the expected return, plan assets are valued at fair value. • Past service costs arising from plan amendments are recognized immediately to the extent the benefits are vested, and otherwise are amortized on a straight-line basis over the average period until the benefits become vested. • Actuarial gains or losses arise from the difference between the actual rate of return on plan assets for a period and the expected rate of return on plan assets for that period, or from changes in actuarial assumptions used to determine the accrued benefit obligation. Net actuarial gains or losses are reported as part of other comprehensive earnings in the period incurred. Pension and other post-retirement benefit expense includes management’s best estimate of the cost of benefits provided, finance cost of projected benefits and expected return on plan assets. For defined contribution plans, pension expense is the amount of contributions we are required to make in respect of services rendered by employees. Income taxes The tax expense for the period is comprised of current and deferred tax. Tax is recognized in the statement of earnings, except to the extent that it relates to items recognized in other comprehensive earnings in which case it is recognized in other comprehensive earnings. Deferred taxes are provided for using the liability method. Under this method, deferred taxes are recognized for temporary differences between the tax and financial statement basis of assets, liabilities and certain carry-forward items. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS If an option holder elects to purchase Common shares, both the exercise price and the accrued liability are credited to shareholders’ equity. WEST FRASER TIMBER CO. LTD. Equity-based compensation West Fraser’s share option plan gives share option holders the right to elect to receive a cash payment in lieu of exercising an option to purchase Common shares. We estimate the fair value of outstanding options using a Black-Scholes option pricing model at each balance sheet date and record the resulting expense or recovery, over the vesting period, through a charge to earnings. The vesting period over which the expense or recovery is charged is the lesser of five years from the date the option was granted and the time period until the option holder reaches the holder’s eligible retirement age. If the option holder is eligible to retire, the expense or recovery is charged to earnings immediately. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in millions of Canadian dollars, EXCEPT WHERE INDICATED) Deferred tax assets are recognized only to the extent that it is probable that they will be realized. Current and deferred income taxes relating to items recognized directly in equity are also recognized directly in equity. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of substantive enactment. 4. Accounting standards issued but not yet applied The IASB periodically issues new standards and amendments or interpretations to existing standards. The new pronouncements listed below are those that we consider most significant. They are not intended to be a complete list of new pronouncements that may affect the consolidated financial statements. WEST FRASER TIMBER CO. LTD. IFRS 9 – Financial Instruments In November 2009 IFRS 9 was issued and in October 2010 was further amended. IFRS 9 addresses classification and measurement of financial assets and replaces the multiple category and measurement models in International Accounting Standards (“IAS”) 39 – Financial Instruments: Recognition and Measurement for debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments and such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive earnings. In December 2009 IFRS 9 was deferred and is now effective for annual periods beginning on or after January 1, 2015 with earlier application permitted. We do not expect this standard to have a significant effect on our consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 50 IFRS 10 – Consolidated Financial Statements In May 2011 IFRS 10 was issued which provides a single model to be applied in the control analysis for all investees and supersedes IAS 27 – Consolidated and Separate Financial Statements and Standing Interpretations Committee – 12 Consolidation – Special Purpose Entities. IFRS 10 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. We do not expect this standard to have a significant effect on our consolidated financial statements. IFRS 11 – Joint Arrangements In May 2011 IFRS 11 was issued which provides guidance for determining if a joint arrangement is a joint venture or joint operation. The standard requires that joint ventures be accounted for by the equity method as opposed to the choice, presently available under IAS 31 – Interests in Joint Ventures, of applying the equity method or proportionate consolidation. Joint operations are required to be accounted for using the proportionate consolidation method. IFRS 11 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. We do not expect this standard to have a significant effect on our consolidated financial statements. IFRS 12 – Disclosure of Interests in Other Entities In May 2011 IFRS 12 was issued which sets out the required disclosures for companies that have adopted IFRS 10 and 11 described above. It requires disclosure of information that helps users to evaluate the nature, risks and financial effects associated with a company’s interests in subsidiaries, associates and joint arrangements. IFRS 12 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. We do not expect this standard to have a significant effect on our consolidated financial statements. IFRS 13 – Fair Value Measurement In May 2011 IFRS 13 was issued which defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. Prior to the introduction of the standard there was no single source of guidance on fair value measurement. IFRS 13 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. We do not expect this standard to have a significant effect on our consolidated financial statements. IAS 19 - Amendment, Employee Benefits In June 2011 IAS 19 was amended. The amendment will result in significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, the most significant being the replacement of finance cost and expected plan return on plan assets with a net finance amount that is calculated by applying the discount rate to the net liability (asset). Under the standard, the net finance amount can be classified with finance expense or pension and benefit expense. The amendment is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. In applying this standard it is our intent to classify the net finance amount related to pension and other benefit plans as finance expense with a corresponding reduction to pension and benefit expense currently included in cost of products sold and selling, general and administrative expense. The effect of adopting of this amended standard on January 1, 2013 on our consolidated financial statements for the year ended December 31, 2012 will be as follows: Pension and benefit expense increase $4 Finance expense increase 9 Tax provision decrease (3) Decrease in earnings $10 Decrease in actuarial loss on employee future benefits $(10) There is no impact on balance sheet amounts or cash flows resulting from the amended standard. 5.Acquisition On October 31, 2012 West Fraser acquired a sawmill and the associated timber licenses located in Alberta for $30 million. We accounted for the transaction as an acquisition of a business and have allocated the purchase price based on the estimated fair value of the assets acquired and the liabilities assumed. No goodwill arose on this transaction. The purchase price allocation is as follows: Sales $203 $ 214 Costs and expenses (178)(174) Earnings before income taxes $25 $ 40 Cash flows from operating activities Cash flows from investing activities $36 $ 48 $ (10)$ (15 ) 7.Inventories 2012 Logs and other raw materials $131 $ Manufactured products 235 Processing materials and supplies 93 $459 $ 2011 105 203 90 398 Inventories at December 31, 2012 were written down by $3 million (December 31, 2011 – $15 million) to reflect net realizable value being lower than cost. The carrying amount of inventory recorded at net realizable value was $22 million at December 31, 2012 (December 31, 2011 – $65 million), with the remaining inventory recorded at cost. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Investments in joint ventures Our joint ventures are Alberta Newsprint Company (50%) and Cariboo Pulp & Paper Company (50%). The combined proportionate share of the joint ventures is as follows: 2012 2011 Current assets $73 $ 74 Non-current assets 98 98 Current liabilities (24) (23) Non-current liabilities (31) (25) Equity $116 $ 124 WEST FRASER TIMBER CO. LTD. Current assets $8 Current liabilities (4) Property, plant and equipment 8 Timber licences 22 Long-term liabilities (4) Cash consideration $30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in millions of Canadian dollars, EXCEPT WHERE INDICATED) 8. Property, plant and equipment WEST FRASER TIMBER CO. LTD. Manufacturing plant, equipment Construction- Roads and & machineryin-progressbridges NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 52 Other As at December 31, 2010 Cost $ 2,525 $ 13 $ 126 $ Accumulated amortization (1,678) — (91) Net $ 847 $ 13 $ 35 $ As at December 31, 2010 $ 847 $ 13 $ 35 $ Additions 101 44 8 Disposals — — — 1 Amortization (134 ) — (8 ) Foreign exchange 2 — — Transfers 11 (12) — As at December 31, 2011 $ 827 $ 45 $ 35 $ As at December 31, 2011 Cost $ 2,582 $ 45 $ 89 $ Accumulated amortization (1,755) — (54) Net $ 827 $ 45 $ 35 $ As at December 31, 2011 $ 827 $ 45 $ 35 $ Additions 79 60 11 Acquisition 8 — — Disposals — — — 1 Amortization (119) — (8) Foreign exchange (3) — — Transfers 44 (44) — As at December 31, 2012 $ 836 $ 61 $ 38 $ As at December 31, 2012 Cost $ 2,679 $ 61 $ 97 $ Accumulated amortization (1,843)— (59) Net $ 836 $ 61 $ 38 $ Total 36 $ 2,700 (6) (1,775) 30 $ 925 30 $ 925 — 153 (2) (2) —(142 ) — 2 1 — 29 $ 936 35 $ (6) 29 $ 29 $ — — (4) (1) — — 24 $ 2,751 (1,815) 936 936 150 8 (4) (128) (3) — 959 31 $ (7) 24 $ 2,868 (1,909) 959 1. Amortization of $126 million is included in cost of products sold and $2 million is included in selling, general and administration expense (2011 – $140 million and $2 million, respectively). 9. Timber licences Timber licences As at December 31, 2010 Cost $ 662 Accumulated amortization (152) Net $ 510 As at December 31, 2010 $510 Amortization1 (17) Adjustment (3) As at December 31, 2011 $ 490 As at December 31, 2011 Cost $ 651 Accumulated amortization (161) Net $ 490 As at December 31, 2011 $ 490 Acquisition 22 Amortization1 (16) As at December 31, 2012 $496 As at December 31, 2012 Cost $673 Accumulated amortization (177) Net$ 496 1. Amortization is included in cost of products sold. As at December 31,2010 Cost $ 264 $ 115 $ Accumulated amortization — (42) Net $ 264 $ 73 $ Other Total 23 $ (15) 8 $ 402 (57) 345 73 $ (7) 66 $ 8 $ (2) 6 $ 345 (9) 336 As at December 31, 2011 Cost $ 264 $ 115 $ Accumulated amortization — (49) Net $ 264 $ 66 $ 23 $ (17) 6 $ 402 (66) 336 As at December 31, 2010 $ Amortization1 As at December 31, 2011 $ 264 $ — 264 $ As at December 31, 2011 $ 264 $ 66 $ 6 $ 336 Additions — — 2 2 Amortization1 — (7) (1) (8) As at December 31, 2012 $ 264 $ 59 $ 7 $ 330 As at December 31, 2012 Cost $ 264 $ 115 $ Accumulated amortization — (56) Net $ 264 $ 59 $ 25 $ (18) 7 $ 1. Amortization of $7 million is included in cost of products sold and $1 million is included in selling, general and administration expense (2011 – $7 million and $2 million, respectively). 404 (74) 330 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Power purchase Goodwillagreement WEST FRASER TIMBER CO. LTD. 10. Goodwill and other intangibles NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in millions of Canadian dollars, EXCEPT WHERE INDICATED) Goodwill We have attributed $218 million of goodwill to a CGU made up of our Canadian lumber operations and $46 million of goodwill to a CGU made up of our plywood and LVL operations. For the purpose of the annual impairment test of goodwill, the fair value of CGUs has been determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on the 2013 operating plan, a forecast of 2014 and 2015 and trend level earnings for subsequent years, all approved by management. Assumptions were developed by management based on industry sources, including Forest Economic Advisors, LLC, Resource Information Systems, Inc., and other industry analysts, taking into account management’s best estimates. WEST FRASER TIMBER CO. LTD. Power purchase agreement West Fraser has an interest in a power purchase agreement to acquire a portion of the electricity generated from a power plant in Alberta at substantially predetermined prices. Our share of electricity capacity to 2020 is expected to be approximately 115 megawatts per year. We sell the electricity acquired at prevailing market prices at the same time as our Alberta operations purchase electricity at prevailing market prices. The cost of the power purchase agreement is amortized over its term. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 54 11. Payables and accrued liabilities 2012 2011 Trade accounts $163 $ 167 Accrued compensation 47 38 Accrued equity-based compensation 80 36 Dividends — 6 Interest 4 4 Other 28 23 $322 $ 274 12. Long-term debt and operating loans Long-term debt 2012 2011 US$300 million senior notes due October 2014; interest at 5.2% $299 $ 305 Note payable due in instalments to 2020; interest at 5.5% 2 2 301 307 Deferred financing costs (1) (1) $300 $ 306 Required principal repayments are disclosed in note 25. Operating loans We have $530 million in revolving lines of credit which were undrawn as at December 31, 2012 (December 31, 2011 - undrawn). Deferred financing costs of $4 million are included in other assets at December 31, 2012 (December 31, 2011 – $6 million). Our revolving lines of credit include a $500 million revolving credit facility which matures September 30, 2016, a $25 million demand line of credit dedicated to letters of credit and a $5 million demand line of credit dedicated to a jointly owned newsprint operation. Interest on the three facilities is payable at floating rates based on Prime, U.S. base, Bankers’ Acceptances or LIBOR at our option. As at December 31, 2012, letters of credit in the amount of $45 million have been issued under these facilities. The $500 million revolving credit facility, the $25 million demand line of credit and the US$300 million senior notes are secured by West Fraser’s assets. 13. Other liabilities 2012 2011 Post-retirement (note 14) $201 $ 159 Reforestation 69 70 Decommissioning 16 15 Other 27 26 $313 $ 270 The total undiscounted amount of the estimated cash flows required to satisfy these obligations is $136 million (2011 – $132 million). The cash flows have been discounted using interest rates ranging from 1.14% to 1.38% (2011 – 0.95% to 1.27%). The timing of the reforestation payments is based on the estimated period required to attain free to grow status in a given area, which is generally between 12 to 15 years. Payments relating to landfill closures and site remediation are expected to occur over periods ranging up to 35 years. 14. Employee future benefits We maintain defined benefit and defined contribution pension plans covering a majority of our employees. The defined benefit plans provide pension benefits based either on length of service or on earnings and length of service. The total pension expense for the defined benefit plans is $33 million (2011 – $30 million) with total funding contributions of $59 million (2011 – $89 million). We also provide group life insurance, medical and extended health benefits to certain employee groups for which we contributed $3 million (2011 – $3 million). The total pension expense and funding contributions for the defined contribution pension plans is $2 million (2011 – $2 million). Approximately $94 million is expected to be contributed by West Fraser to pension and other benefit plans during 2013. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Changes in reforestation and decommissioning obligations are as follows: Reforestation Decommissioning 2012 2011 2012 2011 Beginning of year $111 $ 106 $15 $ 26 Liabilities recognized 42 41 — — Liabilities settled (46) (39 ) — — Acquired obligation 4 — — — Accretion expense — 1 — — Change in estimates 1 2 1 (11) End of year $112 $ 111$ 16 $ 15 Less: current portion (43) (41 ) — — $69 $ 70 $ 16 $ 15 WEST FRASER TIMBER CO. LTD. Reforestation and decommissioning obligations Reforestation and decommissioning obligations relate to our responsibility for reforestation under various timber licences, landfill closures and other site remediation costs. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in millions of Canadian dollars, EXCEPT WHERE INDICATED) WEST FRASER TIMBER CO. LTD. The status of the defined benefit pension plans and other benefit plans, in aggregate, is as follows: Pension plans Other benefit plans 2012 2011 2012 2011 Accrued benefit obligations Projected benefit obligations – opening $1,049 $ 937 $49 $ 46 Current service cost 38 34 1 1 Finance cost 53 52 2 2 Benefits paid (52) (45 ) (3) (3) Actuarial loss 80 70 2 3 Other — 1 — — Projected benefit obligations – ending $1,168 $ 1,049 $ 51 $ 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 56 Plan assets Fair value – opening $939 $ 904 $— $ Expected return on plan assets 58 56 — Actuarial investment gain (loss) 13 (66 ) — Employer contributions 59 89 3 Benefits paid (52) (45 ) (3) Other 1 1 — Fair value – ending $1,018 $ 939 $— $ — — — 3 (3) — — Unfunded obligation Post-retirement liabilities (note 13) $150 $ 110 $51 $ 49 Pension plans Other benefit plans 2012 2011 20122011 Expense Current service cost $38 $ 34 $1 $ 1 Finance cost 53 52 2 2 Expected return on plan assets1 (58) (56 ) — — $33 $ 30 $3 $ 3 1. The actual return on plan assets is a gain of $71 million for the year ended December 31, 2012 (2011 – loss of $10 million). The cumulative actuarial losses recognized in other comprehensive earnings are as follows: 2012 Cumulative actuarial losses $284 $ 2011 215 The significant actuarial assumptions used to determine the period-ending benefit obligation and the annual benefit plan expense are as follows: Pension plans Other benefit plans 2012 2011 2012 2011 Benefit obligations: Discount rate 4.5% 5.0% 4.5% 5.0% Future compensation rate increase 3.5%3.5% n/a n/a Benefit expense: Discount rate – beginning of year 5.0% 5.5% 5.0% 5.5% Expected rate of return on plan assets 6.5% 6.5% n/a n/a Future compensation rate increase 3.5% 3.5% n/a n/a The discount rate assumption used in determining the obligations for pension and other benefit plans reflects the market yields from high quality Canadian corporate bonds with cash flows that approximate expected benefit payments at the balance sheet date. The expected rate of return on plan assets is reviewed annually by management, in conjunction with our actuaries. The assumption is based on expected returns for the various asset classes, weighted by the portfolio allocation. Health care benefit costs, shown under other benefit plans, are funded on a pay-as-you-go basis. The actuarial assumptions for extended health care costs are estimated to increase 10% per year for three years, grading down 0.5% per year for years four to thirteen, to 5% per year thereafter. The actuarial assumptions for medical service plan costs are estimated to increase by 4% per year. A 1% increase or decrease in the assumed health care cost trend rates would have the following effects for 2012: Increase Decrease Total of service and interest cost $ — $ — Accrued benefit obligations $ 3 $ (3) Assets The weighted average asset allocations of the defined benefit plans at the measurement date, by asset category, are as follows: 2012 2011 Equity investments 60% 57% Fixed income investments 40%42% Other investments — 1% 100% 100% Issued 20122011 Number Amount Number Amount Common 40,281,242 $ 60240,064,635 $ 601 Class B Common 2,581,478 — 2,781,478 — Total Common 42,862,720 $ 602 42,846,113 $ 601 During 2012, 200,000 Class B Common shares were exchanged for Common shares. Rights and restrictions of Common shares Common shares and Class B Common shares are equal in all respects except that each Class B Common share may at any time be exchanged for one Common share. Certain circumstances or corporate transactions may require the approval of the holders of our Common shares and Class B Common shares on a separate class by class basis. 16. Equity-based compensation West Fraser has a share option plan, a phantom share unit plan and a directors’ deferred share unit plan which are described below. The compensation cost included in earnings for these plans in 2012 was a charge of $61 million (2011 – recovery of $3 million). Share option plan West Fraser has a share option plan for its directors, officers and employees under which options may be granted to purchase up to 5,005,506 Common shares of which 387,023 remain available for issuance. Directors ceased to participate under the share option plan in 2004. The exercise price of a share option is the closing price of a Common share on the trading day immediately preceding the grant date. Options vest at the earlier of the date of retirement or death and 20% per year from the grant date, and expire after 10 years. We have recorded an expense of $45 million (2011 – recovery of $6 million) related to the share option plan. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Authorized 200,000,000 Common shares, without par value 20,000,000 Class B Common shares, without par value 10,000,000 Preferred shares, issuable in series, without par value WEST FRASER TIMBER CO. LTD. 15. Share capital NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in millions of Canadian dollars, EXCEPT WHERE INDICATED) A summary of the activity in the share option plan is presented below: 20122011 Number Amount Number Amount Outstanding – beginning of year 1,956,967 $ 37.92 2,319,372 $ 37.49 Granted 168,470 47.35 163,450 51.50 Exercised (628,285) 37.20 (522,855 )40.15 Expired/cancelled — — (3,000 )51.56 Outstanding – end of year 1,497,152 $ 39.29 1,956,967 $ 37.92 Exercisable – end of year 1,051,286 $ 38.64 1,423,336 $ 38.62 The following table summarizes information about the share options outstanding at December 31, 2012: WEST FRASER TIMBER CO. LTD. Weighted average Weighted Weighted Number of remaining averageNumber of average outstanding contractual exerciseexercisable exercise Exercise price range options life price options price (dollars) (number) (years) (dollars) (number) (dollars) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 58 $24.71 324,500 $33.30 – $33.47 291,552 $37.65 – $41.19 188,900 $45.20 – $47.35 398,570 $51.50 – $51.56 293,630 1,497,152 6.1 5.0 2.9 6.2 5.5 5.4 $ $ $ $ $ $ 24.71 207,500 33.30 240,428 40.14 188,900 46.11 230,100 51.53 184,358 39.291,051,286 $ $ $ $ $ $ 24.71 33.30 40.14 45.20 51.54 38.64 The weighted average share price at the date of exercise for share options exercised during the year was $64.93 per share (2011 – $53.41 per share). The accrued liability related to the share option plan, determined by applying the Black-Scholes valuation model, is $51 million at December 31, 2012 (December 31, 2011 – $23 million). The weighted average fair value of the options using the Black-Scholes valuation model was $33.90 per option at December 31, 2012 (December 31, 2011 – $11.69 per option). The inputs to the model are as follows: 2012 2011 Share price on balance sheet date $70.58 $41.66 Weighted average exercise price $39.29 $37.92 Expected dividend $0.56 $ 0.56 Expected volatility 38.22%37.91% Weighted average interest rate 1.24% 1.06% Expected life of options in years 3.7 3.5 The expected dividend on our shares was based on the annualized dividend rate at each period end. Expected volatility was based on five years of historical data. The interest rate for the life of the options was based on the implied yield available on government bonds with an equivalent remaining term at each period end. Historical data was used to estimate the expected life of the options and forfeiture rates. The intrinsic value of options issued under the share option plan at December 31, 2012 was $46 million (December 31, 2011 – $12 million). The intrinsic value is determined based on the difference between the period-end share price and the exercise price (for options in the money), multiplied by the sum of the related vested options plus unvested options for those holders eligible to retire. Phantom share unit plan Our phantom share unit plan is intended to supplement or, in whole or in part, replace the granting of share options as long-term incentives for officers and employees. The plan provides for two types of units which vest on the third anniversary of the grant date. A restricted share unit pays out based on the Common share price over the 20 trading days immediately preceding its vesting date (the “vesting date value”). A performance share unit pays out at a value between 0% and 200% of its vesting date value contingent upon West Fraser’s performance relative to a peer group of companies over the three-year performance period. Officers and employees granted units under the plan are also entitled to additional units to reflect cash dividends paid on Common shares from the applicable grant date until payout. We record an expense or recovery through earnings over the vesting period based on the quoted market price of our Common shares at each balance sheet date. The period over which the expense or recovery is charged is the lesser of three years from the issuance date and the time period until the unit holder reaches eligible retirement age. If the unit holder is eligible to retire, the expense or recovery is charged to earnings immediately. We have recorded an expense of $14 million (2011 – $4 million) related to the phantom share unit plan. The number of units outstanding as at December 31, 2012 was 337,765 (December 31, 2011 – 266,965), including performance share units totalling 72,390 (December 31, 2011 – 61,190). 18. Other income 2012 2011 Foreign exchange gain (loss) – net $ (5)$ 3 Gain on asset sales 4 9 Other – net 1 2 $ — $ 14 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. Finance expense 2012 2011 Interest expense $ (20) $ (21) Interest income 1 2 Accretion on long-term liabilities — (1) $ (19)$ (20) WEST FRASER TIMBER CO. LTD. Directors’ deferred share unit plan We have a deferred share unit plan (“DSU Plan”) which provides a structure for non-employee directors to accumulate an equity-like holding in West Fraser. The DSU Plan allows directors to participate in the growth of West Fraser by providing a deferred payment based on the value of a Common share at the time of redemption. Each director receives deferred share units (“Units”) in payment of an annual equity retainer and may elect to receive Units in payment of up to 100% of other fees earned. The Units are issued based on our Common share price at the time of issue. Additional Units are issued to take into account the value of dividends paid on Common shares from the date of issue to the date of redemption. Units are redeemable only after a director retires, resigns or otherwise leaves the board. The redemption value is equal to the Common share price at the date of redemption. A holder of Units may elect to redeem Units in cash or receive Common shares having an equivalent value. The number of Units outstanding as at December 31, 2012 was 71,156 (December 31, 2011 – 59,224). 19. Tax provision The major components of income tax included in comprehensive earnings are as follows: 2012 2011 Current tax for the year $ (27) $ (8) Current tax for previous periods — (2) Deferred tax for the year — (8) Deferred tax for previous periods (1) — Tax provision on continuing operations (28) (18 ) Current tax on discontinued operations — (3) Deferred tax on discontinued operations — (8) Tax provision on discontinued operations — (11) Deferred tax on employee future benefits included in other comprehensive earnings 17 34 Tax recovery (provision) on comprehensive earnings $ (11)$ 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in millions of Canadian dollars, EXCEPT WHERE INDICATED) The tax provision differs from the amount that would have resulted from applying the Canadian statutory income tax rates to earnings before income taxes as follows: 2012 2011 Income tax expense at statutory rate of 25% (2011 – 26.5%)1 $ (29) $ (12) Non-taxable amounts (9) 2 Rate differentials between jurisdictions and on specified activities (1) 6 Recognized (unrecognized) tax assets 11 (12) Other — (2) Tax provision $ (28)$ (18) 1. The statutory tax rate decreased by 1.5% from December 31, 2011 due to a federal corporate tax rate reduction. WEST FRASER TIMBER CO. LTD. Changes in the deferred income tax components are adjusted through deferred tax expense except for $17 million (2011 – $34 million) for employee future benefits which is adjusted through other comprehensive earnings. Of the following components of deferred income taxes payable, $12 million of the deferred tax assets and $15 million of the deferred tax liabilities are expected to be recovered within 12 months: 2012 2011 Property, plant, equipment and intangibles $210 $ 217 Reforestation and decommissioning obligations (28) (28) Employee future benefits (55) (48) Other 1 3 $128 $ 144 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 60 We have loss carry-forwards of $335 million not recognized for accounting purposes that expire in various amounts in the years 2023 to 2031. 20. Employee compensation Our employee compensation expense includes salaries and wages, employee future benefits, termination costs and bonuses, where applicable. Total compensation expense is $595 million (2011 – $570 million). Salaries, benefits and incentive compensation expense for key management (directors and officers) is $6 million (2011 – $5 million). In addition, various equity-based compensation plans are offered to key management. See note 16 for additional details. 21. Discontinued operations We permanently closed our linerboard and kraft paper mill, located in Kitimat, B.C. in January 2010. The results of the discontinued operation are as follows: 2011 Earnings before tax provision $ 57 Tax provision (11) Earnings $46 Cash flows from operating activities $ Cash flows from investing activities Increase in cash $ (5) 50 45 During 2011, the remaining assets associated with the Kitimat mill were sold for proceeds of $50 million resulting in a gain of $49 million. 22. Earnings per share Basic earnings per share is calculated based on earnings available to Common shareholders, as set out below, using the weighted average number of Common shares and Class B Common shares outstanding. Diluted earnings per share is calculated based on earnings available to Common shareholders adjusted to remove the actual share option expense (recovery) charged to earnings and after deducting a notional charge for share option expense assuming the use of the equity settled method, as set out below. The diluted weighted average number of shares is calculated using the treasury stock method. When earnings available to Common shareholders for diluted earnings per share are greater than earnings available to Common shareholders for basic earnings per share, the calculation is anti-dilutive and diluted earnings per share are deemed to be the same as basic earnings per share. 2012 2011 From After From After continuing discontinued continuing discontinued operations operations operations operations Earnings Basic $ 87 $ 87$ 27$ 73 Share option expense (recovery) 45 45 (6 ) (6 ) Equity settled share option adjustment (3) (3) (3 ) (3 ) Diluted $ 129 $ 129$ 18$ 64 Weighted average number of shares (thousands) Basic 42,857 42,857 42,840 42,840 Share options 555 555 434 434 Diluted 43,412 43,412 43,274 43,274 Earnings per share (dollars) Basic $ 2.02 $ 2.02 $ 0.63 $ 1.70 Diluted $ 2.02 $ 2.02$ 0.41$ 1.47 23.Commitments Product purchase and sale commitments We have long-term purchase and sale contracts with minimum annual volume commitments. All contracts are at market prices and on normal business terms. Capital expenditures Capital commitments at December 31, 2012 are $90 million. 24. Government assistance Construction of manufacturing assets In 2009 the Government of Canada confirmed an allocation of credits totalling $88 million to West Fraser under the Pulp and Paper Green Transformation Program (the “GT Program”). The GT Program provides funding for capital projects that improve the energy efficiency or environmental performance of Canadian pulp and paper mills. As at December 31, 2012, we have fully utilized the granted credits. Operational expenses Government assistance of $14 million (2011 – $9 million) was recorded as a reduction to cost of products sold. The government assistance related primarily to research and development, bioenergy producer credits and apprentice tax credits. 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2013 $2 20142 20152 20161 20171 Thereafter5 $13 WEST FRASER TIMBER CO. LTD. Operating leases We are committed to make payments under certain operating leases for equipment, land, buildings and office space. Operating lease costs expensed during the year were $4 million (2011 – $3 million). The future payments required under operating leases are as follows: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in millions of Canadian dollars, EXCEPT WHERE INDICATED) 25. Financial instruments a) Carrying and fair value of financial instruments by category Other Loans & financial Carrying 2012receivables liabilities value Fair value Financial assets Cash and short-term investments $ 102 $ — $ 102 $ 102 Receivables 251 — 251 251 $ 353 $ — $ 353 $ 353 Financial liabilities Payables and accrued liabilities $ — $ 322 $ Long-term debt (note 12)1 — 301 $ — $ 623 $ 322 $ 301 623 $ 322 313 635 Other financial Carrying liabilities value Fair value 1. The fair value of the long-term debt is based on rates available to us at December 31, 2012 for long-term debt with similar terms and remaining maturities. WEST FRASER TIMBER CO. LTD. Loans & 2011receivables NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 62 Financial assets Cash and short-term investments $ 68 $ — $ Receivables 266 — $ 334 $ — $ 68 $ 266 334 $ 68 266 334 Financial liabilities Payables and accrued liabilities $ — $ 274 $ 1 Long-term debt (note 12) — 307 $ — $ 581 $ 274 $ 307 581 $ 274 308 582 1. The fair value of the long-term debt is based on rates available to us at December 31, 2011 for long-term debt with similar terms and remaining maturities. b) Financial risk management Our activities result in exposure to a variety of financial risks including risks related to commodity prices, currency fluctuation, credit, liquidity and interest rates. Commodity prices Our financial performance is principally dependent on the demand for, and selling prices of, our products. Both are subject to significant fluctuations. The markets for lumber, wood chips, LVL, MDF, plywood, pulp and newsprint are highly volatile and are affected by factors such as global economic conditions including the strength of the U.S. housing market, changes in industry production capacity, changes in world inventory levels and other factors beyond our control. Currency fluctuation Most of our products are sold at prices denominated in U.S. dollars or based on prevailing U.S. dollar prices, and a significant portion of operational costs and expenses are incurred in Canadian dollars. Therefore, an increase in the value of the Canadian dollar relative to the U.S. dollar reduces the revenue in Canadian dollar terms realized by us from sales made in U.S. dollars, which reduces operating margin and the cash flow available to fund operations. U.S. dollar-denominated debt and operations in the U.S. provide a partial offset to exchange exposure. From time to time, we use derivatives to manage our exposure to U.S. dollar exchange fluctuations and commodity prices. We do not utilize derivative financial instruments for trading or speculative purposes. Impact of U.S. dollar currency fluctuation on financial instruments The U.S. dollar balance sheet exposure at December 31, 2012 was as follows: Canadian operations 2012 Net working capital US$200 Long-term debt (300) US$(100) U.S. operations Net investment US$266 Liquidity We manage liquidity by maintaining adequate cash and short-term investment balances and by having appropriate lines of credit available. In addition, we regularly monitor and review both actual and forecasted cash flows. Refinancing risks are managed by ensuring long-term debt has a balanced maturity schedule where possible. The following table summarizes the aggregate amount of contractual future cash outflows for long-term debt: Long-term debt (note 12)$ Interest on debt 1 $ 2013 2014 2015 2016 — $ 16 16 $ 299 $ 12 311 $ — $ — — $ — $ — — $ 2017 Thereafter — $ — — $ 2 $ — 2 $ Total 301 28 329 1. Assumes debt level, foreign exchange rate and floating interest rates remain at December 31, 2012 levels and rates. Interest rates Interest rate risk relates mainly to cash and short-term investments and floating rate debt. Our general practice is to fund long-term capital with debt at fixed rates and various maturities. In addition, we have revolving lines of credit available that bear interest at floating rates on amounts drawn. At December 31, 2012, with other variables unchanged, a 1% change in interest rates would not have a significant impact on earnings or other comprehensive earnings. 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Credit Credit risk arises from the non-performance by counterparties of contractual financial obligations. Investments in cash and short-term investments and derivative contracts are primarily made using major banks and only made with counterparties meeting certain credit worthiness criteria. Credit risk for trade and other receivables is managed through established credit monitoring activities. Customer credit limits are established and monitored. Ongoing evaluations of key customer financial conditions are performed. In certain market areas we have undertaken additional measures to reduce credit risk including credit insurance, letters of credit and prepayments. At December 31, 2012 approximately 62% of trade accounts receivable were covered by at least some of these additional measures. We have historically experienced minimal customer defaults and, as a result, consider the credit quality of the trade accounts receivable at December 31, 2012 to be high. Bad debt expense of $2 million (2011 – $nil) was recorded for the year. The aging analysis of trade accounts receivable is presented below: 2012 2011 Trade accounts receivable – gross Current $171 $ 149 Past due 1 to 30 days 31 38 Past due 31 to 60 days 1 2 Past due over 60 days — 4 203 193 Allowance for doubtful accounts (1) (1) Trade accounts receivable – net 202 192 Green Transformation Program 1 40 Other 48 34 Receivables $251 $ 266 WEST FRASER TIMBER CO. LTD. Based on these balances, with other variables unchanged, a $0.01 increase in the exchange rate for one U.S. dollar into Canadian currency would have resulted in a $1 million increase in earnings and an increase of $3 million in the translation loss on foreign operations. A $0.01 decrease in this rate would have resulted in a $1 million decrease in earnings and a decrease of $3 million in the translation loss on foreign operations. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in millions of Canadian dollars, EXCEPT WHERE INDICATED) 26. Capital disclosures Our business is cyclical and is subject to significant changes in cash flow over the business cycle. In addition, financial performance can be materially influenced by changes in product prices and the relative values of the Canadian and U.S. dollar. Our objective in managing capital is to ensure adequate liquidity and financial flexibility at all times, particularly at the bottom of the business cycle and in a strong Canadian dollar environment. Our main policy relating to capital management is to maintain a strong balance sheet and otherwise meet financial tests that are commonly applied by rating agencies for investment grade issuers of public debt. Our debt is currently rated at below investment grade by major rating agencies primarily due to the poor economic fundamentals of the North American forest products industry over the last few years. We believe that the goal of returning to an investment grade rating is an appropriately conservative approach in the context of the cyclical nature of our business. WEST FRASER TIMBER CO. LTD. We monitor and assess our financial performance in order to ensure that net debt levels are prudent taking into account the anticipated direction of the business cycle. When financing acquisitions, we combine debt and equity financing in a proportion that is intended to maintain an investment grade rating for debt throughout the cycle. Long-term debt repayments are arranged, where possible, on a staggered basis that takes into account the uneven nature of anticipated cash flows. We have also established committed revolving lines of credit that provide liquidity and flexibility when capital markets are restricted. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 64 One key measurement used to monitor our capital position is net debt to total capital, calculated as follows at December 31: 2012 2011 Net debt Cash and short-term investments $ (102) $ (68) Deferred financing fees (4) (6) 300 306 Long-term debt 1 194 232 Shareholders’ equity 1,492 1,483 Total capital $1,686 $ 1,715 Net debt to total capital 12% 14% 1. Balance sheet presentation is net of deferred financing fees, where applicable. 27. Segment and geographical information The segmentation of manufacturing operations into lumber, panels and pulp and paper is based on a number of factors, including similarities in products, production processes and economic characteristics. Transactions between segments are at market prices and on normal business terms. The accounting policies of each segment are those described in note 3. 2012 Lumber Panels Pulp & Paper Corporate & Other Total Sales at market prices To external customers $ 1,783 $ 442 $ 775 $ To other segments 72 6 — $ 1,855 $ 448 $ 775 $ — — — $ 180 $ 55 $ 109 $ EBITDA1 Amortization (86) (16) (48) Operating earnings 94 39 61 Finance expense (10) (3) (6) Exchange gain on long-term debt — — — Other income (expense) (4) — 1 Earnings from continuing operations before tax provision $ 80 $ 36 $ 56 $ (65) $ (2) (67) — 7 3 (57) $ $ 1,572 $ 270 $ 520 $ Capital employed1 Total liabilities $ 279 $ 46 $ 110 $ Assets before goodwill $ 1,473 $ 247 $ 584 $ Goodwill 218 46 — Total assets $ 1,691 $ 293 $ 584 $ Capital expenditures $ 109 $ 4 $ 35 $ Acquisition $ 30 $ — $ — $ (86) $ 691 $ 50 $ — 50 $ 2 $ — $ 1. Non-IFRS measures: a) EBITDA is defined as operating earnings plus amortization. b) Capital employed is defined as total assets less current non-interest bearing liabilities at year-end. $3,000 279 (152) 127 (19) 7 — 115 2,276 1,126 2,354 264 2,618 150 30 2011 Lumber Panels Pulp & Paper Corporate & Other Sales at market prices To external customers $ 1,579 $ 370 $ 813 $ To other segments 91 8 — $ 1,670 $ 378 $ 813 $ EBITDA1 $ 65 $ 8 $ 148 $ Amortization (85) (15) (65) Operating earnings (20 ) (7 ) 83 Finance expense (11) (3) (6) Exchange loss on long-term debt — — — Other income 10 — 3 Earnings from continuing operations before tax provision $ (21) $ (10) $ 80 $ Capital employed1 $ Total liabilities $ Assets before goodwill $ Goodwill Total assets $ Capital expenditures $ 1,400 $ 271 $ 1,302 $ 218 1,520 $ 108 $ 277 $ 47 $ 252 $ 46 298 $ 5 $ 576 $ 112 $ 648 $ — 648 $ 99 $ — — — Total $ 2,762 5 $ 226 (3) (168) 2 58 — (20) (7) (7) 1 14 (4) $ 45 (9) $ 605 $ 52 $ — 52 $ 1 $ 2,244 1,035 2,254 264 2,518 213 1. Non-IFRS measures: a) EBITDA is defined as operating earnings plus amortization. b) Capital employed is defined as total assets less current non-interest bearing liabilities at year-end. Non-current assets 2012 Canada $1,633 $ United States 162 China — Other Asia — Other — $1,795 $ 1. Sales distribution is based on the location of product delivery. Sales by geographic area1 2011 2012 2011 1,627 $747 $ 652 146 1,435 1,303 — 513 456 — 201 229 — 104 122 1,773 $3,000 $ 2,762 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WEST FRASER TIMBER CO. LTD. The geographic distribution of non-current assets and external sales is as follows: FIVE-YEAR FINANCIAL REVIEW (in millions of Canadian dollars, except where indicated) 2012 2011 2010 WEST FRASER TIMBER CO. LTD. Earnings Sales 3,000 2,762 2,886 Cost of product sold 2,020 1,917 1,787 Freight and other distribution costs 477 460 441 Export taxes 48 58 60 Amortization 152 168 185 Selling, general and administration 115 104 107 Equity-based compensation 61 (3) 31 Asset impairments & restructuring charges — — — Operating earnings 127 58 275 Finance expense (19) (20) (28) Exchange gain (loss) on long-term debt 7 (7) 17 Other income (expense) — 14 (9) Income tax recovery (expense) (28) (18) (74) Earnings from continuing operations 87 27 181 Earnings from discontinued operations — 46 5 Earnings 87 73 186 FIVE-YEAR FINANCIAL REVIEW 66 1 200912008 2,353 1,725 396 47 245 95 3 22 (180) (27) 50 (4) (33) (194) (147) (341) 2,863 2,117 477 54 254 104 (2) — (141) (34) (68) 28 82 (133) (4) (137) Cash flows from operating activities 195 85 421 96 186 Capital expenditures & acquisitions 180 213 89 18 42 Financial position Current assets 823 745 789 PPE & timber licenses 1,455 1,426 1,434 Goodwill & other intangibles 330 336 345 Other assets 10 11 42 Total assets 2,618 2,518 2,610 Current liabilities 385 315 388 Long-term debt 300 306 300 Other liabilities 313 270 226 Deferred income taxes 128 144 162 Shareholders’ equity 1,492 1,483 1,534 Total liabilities & equity 2,618 2,518 2,610 704 1,624 350 135 2,813 495 316 167 217 1,618 2,813 841 2,041 361 83 3,326 483 465 168 180 2,030 3,326 Per common share (dollars) Basic EPS from continuing operations 2.02 0.63 4.24 Basic EPS after discontinued operations 2.02 1.70 4.35 Price range — high 75.23 62.86 48.96 — low 40.16 34.90 31.52 — close 70.05 41.40 46.84 Cash dividends per share 0.56 0.56 0.18 Shares outstanding at year-end (‘000s) 42,863 42,846 42,835 (4.54) (7.96) 34.50 19.91 33.00 0.23 42,816 (3.12) (3.20) 39.84 25.00 31.80 0.56 42,805 Ratios (before unusual items) EBITDA margin 9.3% 8.2% 15.9% Return on capital employed 4.4% 3.9% 9.1% Return on common shareholders’ equity 6.0% 4.7% 12.5% Net debt to capitalization 12.0% 14.0% 9.0% 3.4% -11.4% -18.7% 24.0% 4.0% -3.6% -6.7% 24.0% 6,740 7,300 8,500 Production Lumber (MMfbm) 4,954 4,911 4,683 Pulp (Mtonnes) 1,149 1,132 1,141 Newsprint (Mtonnes) 128 122 131 Plywood (3/8” MMsf) 793 780 791 MDF (3/4” MMsf) 195 186 192 LVL (Mcf) 1,964 1,634 1,918 4,152 1,024 111 745 195 1,643 4,959 1,042 125 814 224 1,264 Number of employees at year-end2 7,200 6,850 1 Amounts for years prior to 2010 have not been restated under IFRS and are prepared under previous Canadian generally accepted accounting principles. 2 2008-2009 includes discontinued operation employees. CORPORATE INFORMATION Effective March 1, 2013 D IR E C T ORS P R I N C I PA L O C C UPATION Henry H. Ketcham Executive Chairman Clark S. Binkley Managing Director, International Forestry Investment Advisors (advisory services) J. Duncan Gibson Investor Samuel W. KetchamInvestor Harald H. Ludwig President, Macluan Capital Corporation (diversified private equity investments) Gerald J. Miller Corporate Director Robert L. Phillips Corporate Director Janice G. Rennie Corporate Director OFFIC E RS O F F I C E H EL D Henry H. Ketcham Executive Chairman Ted Seraphim President and Chief Executive Officer Raymond W. Ferris Vice-President, Wood Products Vice-President, Corporate Controller Maureen F. KuperTreasurer David P. Lehane Vice-President, Woodlands Christopher D. McIver Vice-President, Lumber Sales and Corporate Development Sean P. McLaren Vice-President, U.S. Lumber Operations Peter A. Rippon Vice-President, Pulp and Energy 67 CORPORATE INFORMATION Rodger M. Hutchinson WEST FRASER TIMBER CO. LTD. Larry S. Hughes Vice-President, Finance and Chief Financial Officer Secretary CORPORATE INFORMATION ANNUAL GENERAL MEETING The Annual General Meeting of the shareholders of the Company will be held on April 30, 2013 at 11:30 a.m. at Quesnel, British Columbia, Canada. C O R P O R AT E O FFI C E 858 Beatty Street, Suite 501, Vancouver, British Columbia, Canada, V6B 1C1 Tel: (604) 895-2700 Fax: (604) 681-6061 Pulp & Paper 858 Beatty Street, Suite 501, Vancouver, British Columbia, Canada, V6B 1C1 Tel: (604) 895-2700 Fax: (604) 681-6061 AUD IT OR S PricewaterhouseCoopers LLP Vancouver, British Columbia, Canada SALES SPF Lumber 1250 Brownmiller Road, Quesnel, British Columbia, Canada, V2J 6P5 Tel: (250) 992-9254 Fax: (250) 992-3034 Newsprint 2900-650 W Georgia Street, Vancouver, British Columbia, Canada, V6B 4N8 Tel: (604) 681-8817 Fax: (604) 681-8861 WEST FRASER TIMBER CO. LTD. LEGAL C OU NS E L McMillan LLP Vancouver, British Columbia, Canada CORPORATE INFORMATION 68 TRA NSFE R AGE NT CIBC Mellon Trust Company Vancouver, Calgary, Regina, Winnipeg, Toronto, Montreal and Halifax, Canada FILINGS www.sedar.com Shares are listed on the Toronto Stock Exchange under the symbol: WFT IN VE STOR C ONTACTS Larry S. Hughes Vice-President, Finance and Chief Financial Officer Rodger M. Hutchinson Vice-President, Corporate Controller Tel: (604) 895-2700 Fax: (604) 681-6061 Email Address [email protected] WEBSIT E www.westfraser.com SPF Export Lumber 858 Beatty Street, Suite 501, Vancouver, British Columbia, Canada, V6B 1C1 Tel: (604) 895-2700 Fax: (604) 681-6061 SYP Lumber 1900 Exeter Road, Suite 105, Germantown, Tennessee, USA, 38138 Tel: (901) 419-3800 Fax: (901) 419-0950 Laminated Veneer Lumber 1250 Brownmiller Road, Quesnel, British Columbia, Canada, V2J 6P5 Tel: (250) 992-9254 Fax: (250) 992-3034 MDF 9919 65 Avenue, Edmonton, Alberta, Canada, T6E 0L1 Tel: (780) 413-8900 Fax: (780) 413-8910 Plywood 1250 Brownmiller Road, Quesnel, British Columbia, Canada, V2J 6P5 Tel: (250) 992-9254 Fax: (250) 992-3034 Pulp & Paper Cariboo Pulp & Paper P.O. Box 7500, 50 North Star Road, Quesnel, British Columbia, Canada, V2J 3J6 Tel: (250) 992-0200 Fax: (250) 992-2164 OPERATION S Lumber, Plywood and LVL Quesnel River Pulp 1000 Finning Road, Quesnel, British Columbia, Canada, V2J 6A1 Tel: (250) 992-8919 Fax: (250) 992-2612 Canadian Operations 1250 Brownmiller Road, Quesnel, British Columbia, Canada, V2J 6P5 Tel: (250) 992-9244 Fax: (250) 992-9233 Hinton Pulp 760 Switzer Drive, Hinton, Alberta, Canada, T7V 1V7 Tel: (780) 865-2251 Fax: (780) 865-6666 US Operations 1900 Exeter Road, Suite 105, Germantown, Tennessee, USA, 38138 Tel: (901) 419-3800 Fax: (901) 419-0950 Slave Lake Pulp P.O. Box 1790, Slave Lake, Alberta, Canada, T0G 2A0 Tel: (780) 849-7777 Fax: (780) 849-7725 MDF Alberta Newsprint Company Postal Bag 9000, Whitecourt, Alberta, Canada, T7S 1P9 Tel: (780) 778-7000 Fax: (780) 778-7070 WestPine 300 Carradice Road, Quesnel, British Columbia, Canada, V2J 5Z7 Tel: (250) 991-7100 Fax: (250) 991-7115 Ranger Board Box 2000, Whitecourt, Alberta, Canada, T7S 1P9 Tel: (780) 648-6333 Fax: (780) 648-6397 Mfbm One thousand board feet (equivalent to one thousand square feet of lumber, one inch thick). MMfbm means one million board feet. Msf A unit of measure for MDF and plywood equal to one thousand square feet on a 3/4 inch basis for MDF and on a 3/8 inch basis for plywood. MMsf means one million square feet. 69 GLOSSARY OF INDUSTRY TERMS AAC Annual Allowable Cut Net Debt to Capitalization The volume of timber that may be harvested annually Net debt (total debt less cash and short-term investments from a specific timber tenure. and less deferred financing costs) divided by net debt plus shareholders’ equity. BCTMP Bleached Chemithermomechanical Pulp NBSK Northern Bleached Softwood Kraft Pulp Dimension Lumber Standard commodity lumber ranging in sizes from 1 x Return on Capital Employed 3’s to 2 x 12’s, in various lengths. Earnings before after-tax financing expense divided by average assets less average current non-interest EBITDA bearing liabilities. Refers to operating earnings plus amortization and asset impairment charges. Return on Common Shareholders’ Equity Earnings available to common shareholders divided by FMA Forest Management Agreement average shareholders’ equity. An FMA is granted by the Alberta government and entitles the holder to establish, grow and harvest timber SPF on specified lands. Dimension lumber produced from spruce/pine/balsam fir species. LVL Laminated Veneer Lumber Large sheets of veneer bonded together with resin then SYP cut to lumber equivalent sizes. Dimension lumber produced from southern yellow pine species. m3 A solid cubic metre, a unit of measure for timber, equal Ton to approximately 35 cubic feet. A unit of weight equal to 2,000 pounds, generally known as a U.S. ton. Mcf One thousand cubic feet. A unit of measure for laminated Tonne veneer lumber. A unit of weight in the metric system equal to one thousand kilograms or approximately 2,204 pounds. MDF Medium Density Fibreboard Mtonne means one thousand tonnes. A composite product made from wood fibre. WEST FRASER TIMBER CO. LTD. GLOSSARY OF INDUSTRY TERMS West Fraser Timber Co. Ltd. Tel: 604.895.2700 Fax: 604.681.6061 www.westfraser.com