TimberWest announces 2009 third quarter results and bank covenant amendments

VANCOUVER, Oct. 22 /CNW/ - TimberWest generated modestly better earnings and distributable cash this quarter as compared to last quarter despite extremely weak business conditions. While log prices are not showing any improvement yet, and log sales realizations are under pressure with a strengthening Canadian dollar, we have begun to see stability in prices with log sales volumes firming up for the first time in many quarters. Real estate sales were also higher this quarter at $7.9 million at values averaging $4,060 per acre.

The Company generated a distributable cash loss for the quarter of $3.8 million, or $0.05 per Stapled Unit. That compares to a distributable cash loss of $5.4 million, or $0.07 per Stapled Unit for last quarter and a loss of $6.3 million, or $0.08 per Stapled Unit in Q3 2008. Year to date, the distributable cash loss was $24.5 million, or $0.32 per Stapled Unit, including $9.0 million of financing costs, compared to a distributable cash loss of $13.4 million, or $0.17 per Stapled Unit, for the first three quarters of 2008.

"While there were small increases in US housing starts during Q3, 2009, they are at significantly lower than historical levels with housing starts in Japan up slightly from historic lows. Asian log markets and hence our sales volumes continued to perform better than both the US and domestic markets during the quarter," said Paul McElligott, President and Chief Executive Officer, TimberWest. "In spite of the slight improvement in volumes, we have not experienced any improvement in underlying prices."

Couverdon had a strong quarter for the sale of non-core higher and better use lands. Total real estate revenues for the quarter were $7.9 million, bringing year-to-date revenues to $14.8 million. On a per acre basis for the quarter, sales averaged $4,060 per acre and year-to-date we have averaged $3,755 per acre.

As previously disclosed, the Company advised it may breach its EBITDA bank covenant as currently constructed in 2010 and that it has been working with its lenders to modify the credit agreement. We are pleased to report that we have reached agreement with the lenders today which will waive the EBITDA covenant for the remaining term of the loan through 2010 and 2011. The maximum availability under the line is set at $220 million for 2010 and $215 million for 2011. So long as the Company generates cumulative minimum EBITDA of $325,000 for Q1, 2011; $650,000 for Q2, 2011; $975,000 for Q3, 2011 and $1.3 million for Q4, 2011 then the maximum availability under the line will be increased to $230 million for 2011.

This credit amendment provides TimberWest with a more durable solution to its financing needs throughout this extended economic downturn.

While there is not a specific EBITDA test for bank covenant purposes for the third quarter, EBITDA per this calculation was $2.0 million for Q3 and on a year to date basis EBITDA was $0.8 million. The next and last minimum EBITDA test that the Company is required to satisfy is for the calendar year ending December 31, 2009. This test is set at negative $16.0 million. The key difference between EBITDA for financial reporting purposes and for the bank covenant calculation is in the treatment of real estate sales. The covenant calculation includes the net proceeds from real estate sales rather than the margin on those sales.

"Our outlook for the remainder of the year remains weak as we expect the very difficult economic and business conditions to continue," added McElligott. "As a result, the Company will continue to defer private land harvests, conserve cash, and protect its balance sheet. We are also doing everything we can to manage costs and are aggressively pursuing real estate sales opportunities." As previously announced, the Company is deferring the quarterly cash distributions on the Stapled Units and has elected to pay interest on the convertible debentures in kind by the issuance of additional convertible debentures. "We continue to have a very positive view of the mid- and long-term potential for both our timberland and real estate businesses. The fact we own outstanding assets located in one of the most attractive locations in the world means that TimberWest's prospects are strong as economic conditions improve."

QUARTERLY CONFERENCE CALL

TimberWest will hold a conference call at 9:00 am PT (12:00 pm ET) on Friday, October 23, 2009, to discuss results of the third quarter. To access the conference call, listeners should dial 1-800-918-9476. For those unable to participate in the live call, a recording of the call will be available until November 6, 2009, and can be accessed at 1-800-558-5253 using code 21438755. The conference call will also be broadcast live over the internet via TimberWest's website home page at http://www.timberwest.com. The webcast will be archived and available for an additional 90 days.

TO OUR UNITHOLDERS

TimberWest generated modestly better earnings and distributable cash this quarter as compared to last quarter despite extremely weak business conditions. While log prices are not showing any improvement yet, and log sales realizations are under pressure with a strengthening Canadian dollar, we have begun to see stability in prices with log sales volumes firming up for the first time in many quarters. Real estate sales were also higher this quarter at $7.9 million at values averaging $4,060 per acre.

The Company generated a distributable cash loss for the quarter of $3.8 million, or $0.05 per Stapled Unit. That compares to a distributable cash loss of $5.4 million, or $0.07 per Stapled Unit for last quarter and a loss of $6.3 million, or $0.08 per Stapled Unit in Q3 2008. Year to date, the distributable cash loss was $24.5 million, or $0.32 per Stapled Unit, including $9.0 million of financing costs, compared to a distributable cash loss of $13.4 million, or $0.17 per Stapled Unit, for the first three quarters of 2008.

As previously disclosed, the Company advised it may breach its EBITDA bank covenant as currently constructed in 2010 and that it has been working with its lenders to modify the credit agreement. We are pleased to report that we have reached agreement with the lenders today which will waive the EBITDA covenant for the remaining term of the loan through 2010 and 2011. The maximum availability under the line is set at $220 million for 2010 and $215 million for 2011. So long as the Company generates cumulative minimum EBITDA of $325,000 for Q1, 2011; $650,000 for Q2, 2011; $975,000 for Q3, 2011 and $1.3 million for Q4, 2011 then the maximum availability under the line will be increased to $230 million for 2011.

This credit amendment provides TimberWest with a more durable solution to its financing needs throughout this extended economic downturn.

While there is not a specific EBITDA test for bank covenant purposes for the third quarter, EBITDA per this calculation was $2.0 million for Q3 and on a year to date basis EBITDA was $0.8 million. The next and last minimum EBITDA test that the Company is required to satisfy is for the calendar year ending December 31, 2009. This test is set at negative $16.0 million. The key difference between EBITDA for financial reporting purposes and for the bank covenant calculation is in the treatment of real estate sales. The covenant calculation includes the net proceeds from real estate sales rather than the margin on those sales.

Timberland Operational Results

While there were small increases in US housing starts during Q3, 2009, they are at significantly lower than historical levels. In Asia we are experiencing stronger economies in Korea and China with Japan stable. Also affecting Asia is a reduction in Russian log supply. Asian log markets and hence our sales volumes continued to perform better than both the US and domestic markets during the quarter. In spite of the slight improvement in volumes, we have not experienced any improvement in underlying prices. Total sales volumes for the quarter were 381,000 m(3) at average sales realizations of $69 per m(3). 186,000 m(3) went into export markets.

Log production volumes on both private and public lands were 333,578 m(3) for the quarter and 908,329 m(3) year-to-date. Private land volumes were adversely affected this quarter by a protracted fire season. We did however shift production to our northern public land operations, where weather was not an impediment and to take advantage of better hembal markets in Asia. Despite very competitive contract costs, unit production costs remain high because of the absorption of fixed costs over lower harvest volumes.

Our safety record continues to show improvement. The MIR in our timberlands division for its production contractors was 0.44 for the year to date Q3, 2009, based on reportable incidents per 100,000 m(3) of production. This compares to an outcome of 0.65 for the comparable period in 2008.

Couverdon Results

Couverdon had a strong quarter for the sale of non-core higher and better use lands. Total real estate revenues for the quarter were $7.9 million, bringing year-to-date revenues to $14.8 million. On a per acre basis for the quarter, sales averaged $4,060 per acre and year-to-date we have averaged $3,755 per acre.

Couverdon was also successful in getting regulatory approval in principle subdivision on some properties in the Comox and Strathcona Regional Districts during the quarter. This has allowed for the creation of 30 large acreage lots that Couverdon will begin to market as early as Q4 2009. Couverdon is in the process of identifying additional such opportunities for potential sale in 2010 while it continues planning for entitlement changes on its portfolio of core development nodes.

Other Third Quarter 2009 Updates

During the quarter, TimberWest announced its intention to explore a potential sale of selected timberland assets on Vancouver Island. These included lands in the area of the Beauforts, China Creek, Parksville and Trent properties, which comprise a total area of approximately 46,487 acres (or 18,813 hectares) and have a combined timber inventory of over 4.0 million cubic meters. These four properties represent small, isolated parcels of timberlands, most of which are not contiguous with TimberWest's core timberland operations in either the north or the south of Vancouver Island. Effective today, the Company's Board of Directors has decided to withdraw these properties from the market. While proposals were received at the conclusion of Phase One, pricing was inadequate and reflected the poor general state of North American timberland markets at this time. As RISI reported in its October, 2009 Timberlands Markets Report, "For the first time ever, more U.S. land sales failed this year than are projected to close." This downturn has also negatively impacted the Canadian timberland market.

TimberWest also appeared in the Supreme Court of B.C. on September 8th and 9th as part of its challenge to the City of Campbell River's new tax increase bylaw. The hearing concluded after two days and the Judge indicated that a decision would be forthcoming later in the fall. TimberWest continues to believe that the City's Tax Bylaw and Financial Plan are punitive, unreasonable, and discriminatory as they relate to TimberWest's managed forest lands and that they conflict with the Private Managed Forest Land Act.

Finally, TimberWest continues to evaluate its long term harvest level and expects this work to be completed no later than end of the first quarter of 2010.

Outlook

Our outlook for the remainder of the year remains weak as we expect the very difficult economic and business conditions to continue.

As a result, the Company will continue to defer private land harvests, conserve cash, and protect its balance sheet. As previously announced, the Company is deferring the quarterly cash distributions on the Stapled Units and has elected to pay interest on the convertible debentures in kind by the issuance of additional convertible debentures. We are also doing everything we can to manage costs and are aggressively pursuing real estate sales opportunities.

We continue to have a very positive view of the mid- and long-term potential for both our timberland and real estate businesses. The fact we own outstanding assets located in one of the most attractive locations in the world means that TimberWest's prospects are strong as economic conditions improve.

Thank you again to all of our unitholders for your ongoing support.

    
    On behalf of the Board of Directors,

    (signed)

    Paul McElligott
    President and Chief Executive Officer
    Vancouver, British Columbia
    October 22, 2009
    

MANAGEMENT'S DISCUSSION & ANALYSIS

For the three and nine months ended September 30, 2009 and 2008

Management's Discussion and Analysis supplements, but does not form part of, the unaudited interim consolidated financial statements of TimberWest Forest Corp. ("TimberWest" or "the Company") and the notes thereto for the third quarter of 2009 ("third quarter" or "Q3"). This discussion and analysis provides an overview of significant developments that have affected TimberWest's performance during the third quarter of 2009 relative to the third quarter of 2008, and that have affected the Company's financial position as at September 30, 2009, relative to December 31, 2008.

Factors that could affect future operations are also discussed. These factors may be affected by known and unknown risks and uncertainties that may cause the actual future results of the Company to be materially different than those expressed or implied in this discussion. These risks and uncertainties are described herein and in the Management's Discussion and Analysis contained in the Company's 2008 Annual Report.

TimberWest's unaudited interim consolidated financial statements and the accompanying notes included within this interim report include the accounts of TimberWest Forest Corp. and its subsidiaries. The unaudited interim consolidated financial statements and the accompanying notes are prepared in accordance with Canadian generally accepted accounting principles (GAAP) and are expressed in Canadian dollars.

This Management's Discussion and Analysis has been prepared based on information available as at October 22, 2009.

Additional information relating to TimberWest, including the Company's most recent Annual Information Form and other statutory reports, can be found on the System for Electronic Document Analysis and Retrieval (SEDAR) at http://www.sedar.com.

Forward Looking Statements

The statements which are not historical facts contained in this report are forward-looking statements that involve risks and uncertainties. TimberWest's actual results could differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to general economic conditions, variations in TimberWest's product prices and changes in commodity prices generally, changes in market conditions, variations in harvest levels, changes in log transportation costs, actions of competitors, interest rate and foreign currency fluctuations, regulatory, harvesting fee and trade policy changes and other actions by governmental authorities including real estate zoning approvals, the ability to implement business strategies and pursue business opportunities, labour relations, weather conditions, forest fires, insect infestation, disease and other natural phenomena and other risks and uncertainties described in TimberWest's public filings with securities regulatory authorities.

    
    1. Financial Highlights

    Selected financial information

    (in millions of dollars        Three months ended      Nine months ended
     except where otherwise           September 30            September 30
     noted)                         2009        2008        2009        2008
    -------------------------------------------------------------------------
    Sales                      $    37.5   $    38.8   $   105.9   $   127.8
    Operating loss from
     continuing operations          (2.2)       (6.4)       (9.9)       (6.3)
    Operating loss from
     continuing operations
     - % of sales                     (6)%       (17)%        (9)%       (5)%
    Net loss from continuing
     operations                    (25.9)      (29.8)      (63.7)      (71.6)
    EBITDA from continuing
     operations(1)                  (0.4)       (5.9)       (5.9)       (3.1)
    EBITDA(1)                       (0.5)       (5.7)       (6.2)      (10.8)
    EBITDA for covenant
     purposes(1)                     2.0        (1.1)        0.8         4.8
    Distributable cash from
     continuing operations(1)       (3.7)       (6.5)      (24.2)       (5.7)
    Distributable cash(1)           (3.8)       (6.3)      (24.5)      (13.4)
    -------------------------------------------------------------------------
    Per Stapled Units - basic
     and diluted (in dollars)
      EBITDA from continuing
       operations(1)               (0.01)      (0.07)      (0.08)      (0.04)
      EBITDA(1)                    (0.01)      (0.07)      (0.08)      (0.14)
      Distributable cash from
       continuing operations(1)    (0.05)      (0.08)      (0.31)      (0.07)
      Distributable cash(1)        (0.05)      (0.08)      (0.32)      (0.17)
    -------------------------------------------------------------------------
    Timberlands sales               29.6        35.0        91.1       116.2
    Real estate sales                7.9         3.8        14.8        11.6
    -------------------------------------------------------------------------
    Stapled Units (thousands)
      At period-end               77,777      77,765      77,777      77,765
      Basic weighted average      77,777      77,765      77,771      77,757
      Diluted weighted average    78,074      77,799      77,923      77,791
    -------------------------------------------------------------------------

    (1) Distributable cash and earnings before interest, tax, depreciation
        and amortization ("EBITDA") do not have a standardized meaning
        prescribed by Canadian generally accepted accounting principles and
        may not be comparable to similar measures presented by other
        companies. The Company's definition of EBITDA is provided on page 6
        and distributable cash on page 7 of this report. Management believes
        that the presentation of these measures will enhance an investor's
        understanding of the Company's operating performance. EBITDA for
        covenant purposes differs from financial reporting EBITDA in its
        treatment of real estate sales and other items. For additional
        information the credit facility agreement can be found on the System
        for Electronic Document Analysis and Retrieval (SEDAR) at
        http://www.sedar.com.
    

Sales decreased $1.3 million or 3% in the third quarter of 2009 compared to Q3, 2008, and decreased by $21.9 million or 17% year to date over the prior year. The decrease is primarily due to a decrease in log sales realizations and decreased log sales volumes due to poor markets partially offset by increased real estate proceeds. The Company's fixed operating costs are approximately $35 million per annum comprised of $20 million for timberlands and $15 million for corporate and real estate overhead.

    
    Reconciliation of net loss from continuing operations to EBITDA

                                   Three months ended      Nine months ended
                                      September 30            September 30
    (in millions of dollars)        2009        2008        2009        2008
    -------------------------------------------------------------------------
    Net loss from continuing
     operations                $   (25.9)  $   (29.8)  $   (63.7)  $   (71.6)
    Add (deduct):
      Interest on Series A
       Subordinate Notes owned
       by unitholders                3.6        21.0        10.5        63.0
      Interest on convertible
       debentures                    3.4           -         8.5           -
      Interest on long-term
       bank debt                     2.5         1.7         7.2         6.1
      Interest on short-term
       bank debt                       -         0.8         0.5         1.5
      Income tax recovery           (0.8)       (0.6)       (9.1)       (5.8)
      Depreciation, depletion
       and amortization              1.2         0.9         3.0         3.4
      Amortization of deferred
       financing costs               0.4         0.1         1.3         0.3
      Change in fair value of
       financial instruments
       held for trading             13.1           -        24.7           -
      Change in fair value of
       Stapled Unit option plan      0.4           -         0.8           -
      Financing transaction
       costs                           -           -         5.5           -
      Accretion on Series A
       Subordinate Notes             1.7           -         4.9           -
    -------------------------------------------------------------------------
    EBITDA from continuing
     operations(1)                  (0.4)       (5.9)       (5.9)       (3.1)
    EBITDA from discontinued
     operations(1,2)                (0.1)        0.2        (0.3)       (7.7)
    -------------------------------------------------------------------------
    EBITDA(1)                  $    (0.5)  $    (5.7)  $    (6.2)  $   (10.8)
    -------------------------------------------------------------------------

    (1) EBITDA does not have a standardized meaning prescribed by Canadian
        generally accepted accounting principles and may not be comparable to
        similar measures presented by other companies. Management believes
        that the presentation of this measure will enhance an investor's
        understanding of the Company's operating performance.
    (2) The Company permanently closed its Elk Falls sawmill operations on
        May 9, 2008.


    2. Distributable Cash

    Reconciliation of net loss from continuing operations to distributable
    cash

                                   Three months ended      Nine months ended
                                      September 30            September 30
    (in millions of dollars)        2009        2008        2009        2008
    -------------------------------------------------------------------------
    Net loss from continuing
     operations                $   (25.9)  $   (29.8)  $   (63.7)  $   (71.6)
    Interest on Series A
     Subordinate Notes owned
     by unitholders                  3.6        21.0        10.5        63.0
    -------------------------------------------------------------------------
    Loss from continuing
     operations available for
     distribution                  (22.3)       (8.8)      (53.2)       (8.6)
    Accretion on Series A
     Subordinate Notes               1.7           -         4.9           -
    Change in fair value of
     financial instruments
     held for trading               13.1           -        24.7           -
    Income tax recovery             (0.8)       (0.6)       (9.1)       (5.8)
    -------------------------------------------------------------------------
    Loss from continuing
     operations available for
     distribution before
     accretion, changes in
     fair value of financial
     instruments held for
     trading, and provision
     for future income taxes        (8.3)       (9.4)      (32.7)      (14.4)
    Add (deduct):
    Depreciation, depletion
     and amortization                1.6         1.0         4.3         3.7
    Proceeds from sale of
     property, plant & equipment     6.4         3.7        12.5        10.7
    Gain on sale of property,
     plant and equipment            (3.9)       (1.4)       (5.5)       (5.2)
    Additions to property,
     plant and equipment            (0.3)       (0.9)       (0.7)       (1.7)
    Financing transaction costs        -           -        (3.5)          -
    Other non-cash items             0.8         0.5         1.4         1.2
    -------------------------------------------------------------------------
                                     4.6         2.9         8.5         8.7
    -------------------------------------------------------------------------
    Distributable cash from
     continuing operations          (3.7)       (6.5)      (24.2)       (5.7)
    -------------------------------------------------------------------------
    Distributable cash from
     discontinued operations(1)     (0.1)        0.2        (0.3)       (7.7)
    -------------------------------------------------------------------------
    Distributable cash         $    (3.8)  $    (6.3)  $   (24.5)  $   (13.4)
    -------------------------------------------------------------------------

    (1) The Company permanently closed its Elk Falls sawmill operations on
        May 9, 2008.


    Calculation of distributable cash per Stapled Unit

    Per Stapled Units -            Three months ended      Nine months ended
     basic and diluted                September 30            September 30
    (in dollars)                    2009        2008        2009        2008
    -------------------------------------------------------------------------
    Loss from continuing
     operations available for
     distribution before
     accretion, changes in
     fair value of financial
     instruments held for
     trading, and provision
     for future income taxes   $   (0.11)  $   (0.12)  $   (0.42)  $   (0.19)

    Distributable cash from
     continuing operations         (0.05)      (0.08)      (0.31)      (0.07)
    Distributable cash from
     discontinued operations(1)        -           -       (0.01)      (0.10)
    -------------------------------------------------------------------------
    Distributable cash             (0.05)      (0.08)      (0.32)      (0.17)
    Cash distributions paid    $       -   $    0.27   $       -   $    0.81
    -------------------------------------------------------------------------

    (1) The Company permanently closed its Elk Falls sawmill operations on
        May 9, 2008.


    Reconciliation of operating cash flow from operations to distributable
    cash

                                   Three months ended      Nine months ended
                                      September 30            September 30
    (in millions of dollars)        2009        2008        2009        2008
    -------------------------------------------------------------------------
    Cash provided by (used in)
     continuing operations     $   (11.0)  $   (29.4)  $   (30.3)  $   (64.0)
    Add (deduct):
      Change in non-cash working
       capital                       1.2        (0.9)       (2.6)      (13.5)
      Interest on Series A
       Subordinate Notes owned
       by unitholders                3.6        21.0        10.5        63.0
      Proceeds from sale of
       property, plant and
       equipment                     6.4         3.7        12.5        10.7
      Additions to property,
       plant and equipment          (0.3)       (0.9)       (0.7)       (1.7)
      Financing transaction
       costs                           -           -        (3.5)          -
      Change in deferred
       distribution payable         (3.6)          -       (10.5)          -
      Other non-cash items             -           -         0.4        (0.2)
    -------------------------------------------------------------------------
                                     7.3        22.9         6.1        58.3
    -------------------------------------------------------------------------
    Distributable cash from
     continuing operations          (3.7)       (6.5)      (24.2)       (5.7)
    Distributable cash from
     discontinued operations(1)     (0.1)        0.2        (0.3)       (7.7)
    -------------------------------------------------------------------------
    Distributable cash         $    (3.8)  $    (6.3)  $   (24.5)  $   (13.4)
    -------------------------------------------------------------------------

    (1) The Company permanently closed its Elk Falls sawmill operations on
        May 9, 2008.
    

Distributable cash includes consolidated net earnings (loss), plus interest expensed on Series A Subordinate Notes owned by unitholders, plus non-cash items including income taxes, changes in fair values and accretion expense, plus depreciation, depletion and amortization, plus proceeds from the sale of property, plant and equipment net of their gain (loss) on sale, less additions to property, plant and equipment, less financing costs and, from time to time, adjustments for other items deemed appropriate by the Board of Directors. Earnings from continuing operations available for distribution is comprised of consolidated net earnings (loss) from continuing operations plus interest expensed on Series A Subordinate Notes. The Series A Subordinate Notes are owned by the unitholders and interest thereon is paid to the unitholders, therefore, earnings from continuing operations available for distribution to unitholders reflects earnings before this interest charge.

Earnings from continuing operations available for distribution and distributable cash are measures that do not have a standardized meaning prescribed by Canadian GAAP and may not be comparable to similar measures presented by other companies. Management believes that the presentation of these measures will enhance an investor's understanding of the Company's operating performance. Reconciliations of net earnings (loss) and cash flow from continuing operations before changes in working capital, as determined in accordance with Canadian GAAP, and earnings from continuing operations available for distribution and distributable cash are provided in the preceding tables.

The following tables present a quarterly comparison of distributable cash generated over the past five years, in total and on a per Stapled Unit basis:

    
                           2009     2008     2007     2006     2005     2004
    -------------------------------------------------------------------------
    (in millions of
     dollars)
    First quarter       $ (15.3) $  (3.9) $  26.9  $  31.5  $  23.9  $  27.7
    Second quarter         (5.4)    (3.2)    13.6     35.5     15.4     43.5
    Third quarter          (3.8)    (6.3)    (5.6)     9.3     (1.7)    35.9
    Fourth quarter                 (11.4)    55.4     27.5     29.7     18.1
    -------------------------------------------------------------------------
                        $ (24.5) $ (24.8) $  90.3  $ 103.8  $  67.3  $ 125.2
    -------------------------------------------------------------------------
    Per Stapled Unit(1)
     (in dollars)
    First quarter       $ (0.20) $ (0.05) $  0.35  $  0.41  $  0.31  $  0.36
    Second quarter        (0.07)   (0.04)    0.17     0.46     0.20     0.57
    Third quarter         (0.05)   (0.08)   (0.07)    0.12    (0.02)    0.47
    Fourth quarter                 (0.15)    0.71     0.35     0.38     0.24
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                        $ (0.32) $ (0.32) $  1.16  $  1.34  $  0.87  $  1.64
    -------------------------------------------------------------------------

    (1) Per Stapled Unit amounts by quarter do not necessarily add to the
        total of the year and year-to-date due to changes in the weighted
        average number of Stapled Units outstanding during the year.
    

3. Highlights and Significant Transactions

Amendments to the bank loan covenants

Subsequent to the end of the third quarter 2009, on October 22, 2009, the Company completed amendments to the bank loan agreement with its syndicate of banks. The key amendments to the revolving credit agreement, which matures on February 10, 2012, include:

    
    -   A waiver of the minimum EBITDA tests for both 2010 and 2011, with the
        maximum availability under the line set at $220 million for 2010 and
        $215 million for 2011. So long as the Company generates cumulative
        minimum EBITDA of $325,000 for Q1, 2011; $650,000 for Q2, 2011;
        $975,000 for Q3, 2011 and $1.3 million for Q4, 2011 then the maximum
        availability under the line will be increased to $230 million for
        2011.

    -   A permanent repayment provision which specifies that once cumulative
        real estate proceeds exceed $50 million, 50% of additional proceeds
        will be applied to permanently reduce the facility size. The
        remaining 50% can be used by the Company to improve its liquidity.
        Current cumulative real estate proceeds are $24.5 million.

    -   On a best efforts basis, the Company will seek the required approvals
        necessary to allow it to pay the 9% interest obligation on its
        convertible debentures in kind beyond the initial four quarters
        already announced through to maturity of the credit facility.
    

All other terms of the revolving credit agreement remain unchanged from the original credit agreement which was filed on SEDAR in February 2009.

Interest payment on the convertible debentures

As announced on July 23, 2009, the October 15, 2009 interest payment will be paid in kind, by issuance of additional convertible debentures. As a result, additional convertible debentures with a face value of $3.4 million were issued on October 15, 2009.

Preferred share conversions

On May 7, 2009, the Company's preferred shares were converted into common shares and consolidated in order to simplify TimberWest's capital structure and eliminate administrative burdens and related expenses associated with maintaining the preferred shares. Each TimberWest Stapled Unit contains one Series A Subordinate Note and one common share. The conversion and consolidation should have no adverse tax consequences for unitholders, provided that they meet the requirements described in the Information Circular dated March 30, 2009 under the heading "Particulars of Other Matters to be Acted Upon - Certain Canadian Federal Income Tax Consequences". The conversion and consolidation was approved by unitholders on May 6, 2009 and were approved by the Toronto Stock Exchange ("TSX").

Property taxes

During Q2, 2009 the City of Campbell River increased its tax rate on Class 7 managed forest lands. TimberWest filed a petition with the B.C. Supreme Court on June 9, 2009 to challenge this tax increase and a court hearing was held in September. A ruling on this matter is anticipated later this year. TimberWest has paid the full assessed taxes. For the nine months ending September 30, 2009 the Company expensed $0.9 million in relation to the tax increase with the remaining capitalized on the Consolidated Balance Sheets which will be expensed over the remainder of the year. Any recovery based on the decision from the Courts would be recorded as a property tax recovery on the Consolidated Statements of Operations and Comprehensive Income at that time.

Financing and liquidity

On February 11, 2009, the Company completed a refinancing package by raising $150 million by way of a 9% five-year convertible debenture issue and finalized a $250 million, three-year revolving loan agreement with a syndicate of banks.

The $150 million of convertible debentures was raised through a $100 million private placement with two wholly-owned subsidiaries of British Columbia Investment Management Corporation (the "bcIMC Investors") and through a $50 million rights offering to unitholders. These are five year debentures and are convertible into Stapled Units at $3.50. Upon conversion, the bcIMC Investors would own 23.7% of the outstanding Stapled Units. The convertible debentures pay interest quarterly at 9%.

The net proceeds of the rights offering and private placement permanently repaid $75 million of indebtedness under the Company's existing bank credit facilities, with the remainder reducing indebtedness under its revolving credit facilities. The new $250 million three-year revolving credit agreement has been filed on SEDAR and the key terms are summarized below:

    
    -   Pricing is 600 bps over BA rates,
    -   The facility is secured,
    -   The financial covenants include minimum EBITDA tests, and
    -   The other financial covenants include a tangible net worth test and a
        loan to book and market value test.
    

The 2009 costs related to this refinancing were $9.0 million (2008 - $1.1 million). In 2009, $5.5 million was expensed against income as it relates to the convertible debentures, which have been designated as held for trading and $3.5 million was deferred and capitalized on the balance sheet as these costs relate to debt refinancing held at amortized cost. All $9.0 million was deducted from distributable cash.

Cash distribution on the Stapled Units

As announced in November, 2008, the January 15, 2009 distribution payment was deferred for up to 27 months pursuant to the terms of the note indenture and all 2009 distribution payments are deferred for 18 months.

4. Operating Highlights

    
    Timberlands

    (in millions of dollars        Three months ended      Nine months ended
     except where otherwise           September 30            September 30
     noted)                         2009        2008        2009        2008
    -------------------------------------------------------------------------
    Log sales
      Domestic                 $    10.9   $    14.3   $    34.7   $    53.7
      Export - Asia                 14.7        16.8        46.0        50.9
      Export - USA                   0.7         2.7         4.9         7.9
    -------------------------------------------------------------------------
      Total log sales          $    26.3   $    33.8   $    85.6   $   112.5
    -------------------------------------------------------------------------
    Log sales realizations
     ($/m(3))
      Domestic                 $      56   $      64   $      55   $      67
      Export - Asia                   86          94          94          94
      Export - USA                    45          59          60          61
    -------------------------------------------------------------------------
      Total log sales
       realizations            $      69   $      76   $      71   $      76
    -------------------------------------------------------------------------
    Log sales volume
     (thousand m(3))
      Domestic                     194.8       223.3       627.8       804.5
      Export - Asia                170.6       178.8       489.8       541.1
      Export - USA                  16.0        44.9        82.8       129.3
    -------------------------------------------------------------------------
      Total log sales volume       381.4       447.0     1,200.4     1,474.9
    -------------------------------------------------------------------------
    Log sales mix (thousand m(3))
      Fir                          214.0       263.5       753.6       969.3
      Hembal                       127.2       125.8       308.9       336.5
      Cedar                         15.0        30.5        59.7        85.5
      Other                         25.2        27.2        78.2        83.6
    -------------------------------------------------------------------------
      Total log sales mix          381.4       447.0     1,200.4     1,474.9
    -------------------------------------------------------------------------
    Log production volume
     (thousand m(3))
      Public tenures               164.3        35.5       199.9       230.3
      Private timberlands          169.3       363.4       708.4     1,154.8
    -------------------------------------------------------------------------
      Total production volume      333.6       398.9       908.3     1,385.1
    -------------------------------------------------------------------------
    Log production costs
     ($/m(3))                  $      78   $      69   $      75   $      66
    -------------------------------------------------------------------------
    Timberland cost of sales
     ($/m(3))                         77          76          74          70
    -------------------------------------------------------------------------
    Timberland operating
     margin (% of log sales)         (14)%        (2)%        (6)%         4%
    -------------------------------------------------------------------------
    

Log sales revenues for the three months ended September 30, 2009 were down 22% from the same quarter last year due to a 15% decrease in the sales volumes and a $7 per m(3) decrease in average log sales realizations. Log sales revenues for the nine months ended September 30, 2009 were down 24% from the same period last year due to a 19% decrease in the sales volumes and a $5 per m(3) decrease in average log sales realizations.

Real estate

    
    (in millions of dollars        Three months ended      Nine months ended
     except where otherwise           September 30            September 30
     noted)                         2009        2008        2009        2008
    -------------------------------------------------------------------------
    Sales                      $     7.9   $     3.8   $    14.8   $    11.5
    Price per acre ($/acre)        4,058       5,819       3,754      10,008
    Net proceeds                     6.4         3.6        12.5        10.6
    -------------------------------------------------------------------------
    

The Company has established a real estate division which sells non-core landholdings, pursues entitlements and markets properties. The real estate division was formally branded during Q1, 2009 when the Company named the division "Couverdon."

During Q3, 2009 the real estate division sold two properties for $6.6 million or $4,058 per acre compared to Q3, 2008 when the division sold four properties for $3.8 million or $5,819 per acre. Included in sales for the three month period ending September 30, 2009 is $1.3 million relating to a right-of-way agreement entered into during the quarter.

During the nine months ended September 30, 2009 the real estate division sold seven properties for $13.0 million or $3,754 per acre compared to the same period in 2008 when the division sold nine properties for $11.4 million or $10,008 per acre. Included in sales for the nine month period ending September 30, 2009 is $1.8 million relating to two right-of-way agreements entered into during the year.

The reduction in per acre values compared to the prior year is attributable to the lower value mix of properties sold and to a much lesser extent, an overall reduction in the real estate market.

Discontinued Operations

    
    (in millions of dollars        Three months ended      Nine months ended
     except where otherwise           September 30            September 30
     noted)                         2009        2008        2009        2008
    -------------------------------------------------------------------------
    Sales                      $       -   $     7.0   $       -   $    42.4
    Net earnings (loss)             (0.1)        0.2        (0.3)       (7.7)
    -------------------------------------------------------------------------
    

On May 9, 2008, the Elk Falls sawmill and planer mill in Campbell River, B.C. was permanently closed, including the associated shipping operations at Stuart Channel Wharves located in Crofton, B.C. Subsequent to the closure, TimberWest disposed of substantially all of the assets of the sawmill and dismantled the sawmill. Ongoing costs such as property taxes and insurance continue to be expensed as incurred. The Company is assessing alternatives for the former sawmill site.

5. Financial condition

The following table highlights the significant changes between the consolidated balance sheets as at September 30, 2009 and December 31, 2008:

    
    (in millions   September    December    Increase
     of dollars)    30, 2009    31, 2008  /(decrease)
    -------------------------------------------------------------------------
    Cash and cash  $     1.1   $    30.8   $   (29.7) The decrease in cash is
     equivalents                                      primarily the result of
                                                      paying down the
                                                      revolving credit
                                                      facility. Refer to
                                                      section 6 "Liquidity
                                                      and capital resources"
                                                      for greater detail.
    -------------------------------------------------------------------------
    Current assets,     33.4        40.3        (6.9) The decrease is
     excluding cash                                   primarily due to a
     and cash                                         decrease in inventory,
     equivalents                                      offset by increased
                                                      accounts receivable.
    -------------------------------------------------------------------------
    Property, plant  1,213.9     1,222.0        (8.1) The decrease is due to
     and equipment                                    the sale of seven real
                                                      estate properties and
                                                      depreciation recorded
                                                      in the period, offset
                                                      by the reclassification
                                                      of real estate
                                                      development costs
                                                      incurred prior to 2009
                                                      from prepaids and other
                                                      assets of $1.3 million.
    -------------------------------------------------------------------------
    Other assets         8.0         7.1         0.9  The increase in other
                                                      assets is due to the
                                                      capitalization of
                                                      financing costs
                                                      associated with the
                                                      restructuring of the
                                                      Company's credit
                                                      facilities and offset
                                                      by the change in fair
                                                      value of the financial
                                                      instruments.
    -------------------------------------------------------------------------
    Current             22.2       133.7      (111.5) The decrease is due to
     liabilities                                      the restructuring of
                                                      the Company's credit
                                                      facilities and a
                                                      decline in the
                                                      Company's accounts
                                                      payable and accrued
                                                      liabilities. At
                                                      December 31, 2008,
                                                      $108.3 million of the
                                                      Company's term credit
                                                      facility was classified
                                                      as current. Under the
                                                      amended credit
                                                      agreement, the term
                                                      credit facility was
                                                      repaid and replaced
                                                      with an amended $250
                                                      million revolving
                                                      credit facility
                                                      classified as
                                                      long-term.
    -------------------------------------------------------------------------
    Revolving credit   143.0       189.8       (46.8) The decrease is due to
     facilities                                       funds received from the
                                                      convertible debenture
                                                      issuance enabling the
                                                      Company to pay down its
                                                      credit facility.
    -------------------------------------------------------------------------
    Convertible        172.8           -       172.8  The increase is due to
     debentures                                       the issuance of
                                                      convertible debentures
                                                      in Q1 2009, with a face
                                                      value of $150.0
                                                      million. The
                                                      convertible debentures
                                                      are recorded at fair
                                                      value, $172.8 million
                                                      at September 30, 2009.
    -------------------------------------------------------------------------
    Other long-term    293.2       292.6         0.6  The increase is due to
     liabilities                                      an increase in the
                                                      deferred distribution
                                                      payable on the Series A
                                                      Subordinate Notes
                                                      offset by a decrease in
                                                      the future income tax
                                                      liability.
    -------------------------------------------------------------------------
    Series A           245.4       240.4         5.0  The increase is due to
     Subordinate                                      the recognition of
     Notes owned by                                   accretion and Stapled
     unitholders                                      Units issued during the
                                                      period.
    -------------------------------------------------------------------------
    Unitholders'   $   379.8   $   443.7   $   (63.9) The decrease is due to
     Equity                                           the net loss for the
                                                      period.
    -------------------------------------------------------------------------
    

6. Liquidity and capital resources

Selected financial information

    
    (in millions of dollars        Three months ended      Nine months ended
     except where otherwise           September 30            September 30
     noted)                         2009        2008        2009        2008
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating activities from
     continuing operations:
      Cash used in operations
       before changes in
       non-cash working
       capital                 $    (9.8)  $   (30.3)  $   (32.9)  $   (77.5)
      Changes in non-cash
       working capital              (1.2)        0.9         2.6        13.5
    -------------------------------------------------------------------------
                                   (11.0)      (29.4)      (30.3)      (64.0)
    Financing activities:
      Issuance of Stapled Units
       on exercise of options          -           -           -         0.1
      Credit facilities              5.5        23.4      (155.1)       47.8
      Convertible debentures           -           -       150.0           -
      Financing transaction costs      -           -        (3.5)          -
    -------------------------------------------------------------------------
                                     5.5        23.4        (8.6)       47.9
    Investing activities:
      Proceeds from sale
       of property, plant
       and equipment                 6.4         3.7        12.5        10.7
      Additions to property,
       plant and equipment          (0.3)       (0.9)       (0.7)       (1.7)
      Other assets                     -        (0.1)       (1.2)        0.1
    -------------------------------------------------------------------------
                                     6.1         2.7        10.6         9.1
    Cash provided by
     (used in) discontinued
     operations                     (0.5)        4.2        (1.4)        6.7
    -------------------------------------------------------------------------
    Increase (decrease) in
     cash and cash
     equivalents               $     0.1   $     0.9   $   (29.7)  $    (0.3)
    -------------------------------------------------------------------------
    Consolidated debt-to-total
     capitalization ratio(1)       15:85       22:78       15:85       22:78
    -------------------------------------------------------------------------

    (1) The consolidated debt-to-total capitalization ratio does not have a
        standardized meaning prescribed by GAAP and may not be comparable to
        similar measures presented by other companies. Debt includes the
        senior debt held by a syndicate of banks. Management believes that
        the presentation of these measures will enhance an investor's
        understanding of the Company's operating performance.
    

The Company's primary cash requirements during the industry downturn are to fund operations, capital expenditures and interest payments on the Company's debt and equity instruments. The Company took steps to improve its competitiveness by permanently closing its last remaining sawmill in May 2008, decreasing the number of employees from 385 at the end of 2007 to 88 at the end of 2008, restructuring its contractor arrangements, changing to a variable interest rate on the Series A Subordinate Notes and deferring interest payments on these notes for the foreseeable future. During Q1, 2009 the Company issued convertible debentures of $150.0 million and amended its revolving credit facility. The Company elected to pay interest on the convertible debentures in kind by issuance of additional convertible debentures commencing on October 15, 2009. These changes will help conserve liquidity during the downturn.

The Company's consolidated debt-to-total capitalization ratio as at September 30, 2009 was 15:85 compared to 30:70 at December 31, 2008. The net proceeds of the convertible debentures were used by the Company to permanently repay $75 million of indebtedness under its bank credit facilities, with the remainder being used to reduce indebtedness under the Company's revolving credit facilities. The Company also had cash on hand of $1.1 million at September 30, 2009 compared to $30.8 million at December 31, 2008.

Financing activities

Cash provided from financing activities in Q3, 2009 was $5.5 million, compared to cash provided of $23.4 million in Q3, 2008.

For the nine months ending September 30, 2009 cash used from financing activities was $8.6 million, compared to cash provided of $47.9 million for the same nine month period in 2008. The Company issued $150.0 million of convertible debentures in Q1, 2009 of which $75.0 million was used to permanently pay down the credit facility, with the remainder reducing indebtedness under the revolving credit facility and to fund company operations. 2009 transaction costs associated with the refinancing were $9.0 million; $5.5 million was expensed against income as it relates to the convertible debentures, which have been designated as held for trading and $3.5 million was deferred and capitalized on the balance sheet as these costs relate to debt refinancing held at amortized cost.

There were no Stapled Units issued on the exercise of options in Q3, 2009 (2008, Q3 - nil). For the nine months ending September 30, 2009 there were no Stapled Units issued on the exercise of options (2008 - 15,297 Stapled Units issued on exercise of options for net proceeds of $0.1 million).

As at October 22, 2009, the Company had 2,689,050 granted and outstanding Stapled Unit option awards and 77,776,574 issued and outstanding Stapled Units.

Investing activities

Cash provided from investing activities in Q3, 2009 was $6.1 million, compared to cash provided of $2.7 million in Q3, 2008. The increase of $3.4 million was due to increased proceeds from the sale of property, plant and equipment, namely real estate, in Q3, 2009 compared to Q3, 2008.

For the nine months ended September 30, 2009, cash provided from investing activities was $10.6 million compared to cash provided of $9.1 million for the same period in 2008. The increase of $1.5 million was due to increased proceeds from the sale of property, plant and equipment, namely real estate during the nine months ended September 30, 2009 compared to the same period in 2008.

Capital resources

The Company's capital resources at September 30, 2009 include amounts available under the revolving credit facility and the convertible debentures. These sources of borrowing, coupled with cash from operations, are expected to be sufficient to support the Company's working capital requirements and to finance planned capital expenditures during the year. Credit ratings for the Company have been confirmed by Dominion Bond Rating service at BBB as at December 31, 2008.

Available capital resources and total liquidity at period-end is summarized in the following table:

    
                                    2009        2009        2009        2008
    (in millions of dollars)          Q3          Q2          Q1          Q4
    -------------------------------------------------------------------------

    Borrowing base
      Revolving credit facility
       (due February 11, 2012) $   250.0   $   250.0   $   250.0   $       -
      Convertible debentures
      (due February 11, 2014)      150.0       150.0       150.0           -
      Tranche A credit facility        -           -           -       216.7
      Tranche B credit facility        -           -           -       108.3
      Demand bank facilities           -           -           -           -
    -------------------------------------------------------------------------
    Total borrowing base           400.0       400.0       400.0       325.0
    Letters of credit               16.4        16.4        16.6        16.8
    Amount drawn, net              293.0       287.5       294.0       298.1
    -------------------------------------------------------------------------
    Available to be drawn           90.6        96.1        89.4        10.1
    Cash on hand                     1.1         1.0         0.5        30.8
    -------------------------------------------------------------------------
    Total liquidity            $    91.7   $    97.1   $    89.9   $    40.9
    -------------------------------------------------------------------------
    

As of September 30, 2009, the Company had $91.7 million of available liquidity, comprised of $1.1 million of cash on hand and $90.6 million available to be drawn on its $250.0 million revolving credit facility. Compared to December 31, 2008 the Company's total liquidity increased by $50.8 million, primarily due to the issuance of the convertible debentures and restructuring of the Company's credit facilities.

Debt

At September 30, 2009, the total debt calculated for financial reporting purposes was $315.8 million. The following table outlines the changes in the Company's long-term debt for the quarter ended September 30, 2009:

    
    Issue                                       June      Net      September
                                                  30,   increase          30,
    (in millions of dollars)                    2009   (decrease)       2009
    -------------------------------------------------------------------------
    Secured revolving credit facility
     of up to $250.0 million due
     February 11, 2012 with interest
     based on Canadian or U.S.
     Prime rates + 5%, or
     Canadian BA rates + 6%                $   137.5   $     5.5   $   143.0
    Convertible debentures with a face
     value of $150.0 million
     due February 11, 2014                     160.7        12.1(1)    172.8
    -------------------------------------------------------------------------
    Total long-term debt                   $   298.2   $    17.6   $   315.8
    Less current portion                           -           -           -
    -------------------------------------------------------------------------
                                           $   298.2   $    17.6   $   315.8
    -------------------------------------------------------------------------

    (1) The convertible debentures are designated as "held-for-trading" for
        accounting purposes and as such are valued at fair value. The
        increase in Q3, 2009 over Q2, 2009 is the result of a fair value
        adjustment of $12.1 million.
    

Refer to the Company's Interim Consolidated Financial Statements for the three months ended September 30, 2009, Note 11 for details related to covenant compliance.

The Company expects to meet its future cash requirements through a combination of cash generated from its logging operations and real estate sales, existing cash balances and credit facilities, and the refinancing arrangements completed.

Subsequent to the end of the third quarter 2009, on October 22, 2009, the Company completed amendments to the bank loan agreement with its syndicate of banks. The key amendments to the revolving credit agreement, which matures on February 10, 2012, include:

    
    -   A waiver of the minimum EBITDA tests for both 2010 and 2011, with the
        maximum availability under the line set at $220 million for 2010 and
        $215 million for 2011. So long as the Company generates cumulative
        minimum EBITDA of $325,000 for Q1, 2011; $650,000 for Q2, 2011;
        $975,000 for Q3, 2011 and $1.3 million for Q4, 2011 then the maximum
        availability under the line will be increased to $230 million for
        2011.

    -   A permanent repayment provision which specifies that once cumulative
        real estate proceeds exceed $50 million, 50% of additional proceeds
        will be applied to permanently reduce the facility size. The
        remaining 50% can be used by the Company to improve its liquidity.
        Current cumulative real estate proceeds are $24.5 million.

    -   On a best efforts basis, the Company will seek the required approvals
        necessary to allow it to pay the 9% interest obligation on its
        convertible debentures in kind beyond the initial four quarters
        already announced through to maturity of the credit facility.
    

All other terms of the revolving credit agreement remain unchanged from the original credit agreement which was filed on SEDAR in February 2009.

The Company's continuation as a going concern is ultimately dependent upon its future financial performance, which will be affected by general economic, competitive and other factors, many of which are beyond the Company's control. In the short term, any significant strengthening of the Canadian dollar, or further decline in U.S. housing and Vancouver Island real estate markets which affects demand or other unexpected adverse developments could adversely impact the Company's liquidity.

7. Impact of accounting pronouncements affecting future periods

On February 13, 2008, the Canadian Accounting Standards Board ("AcSB") confirmed the use of International Financial Reporting Standards ("IFRS") to commence in 2011 for publicly accountable profit-oriented enterprises. IFRS will replace Canada's Generally Accepted Accounting Principles ("GAAP") and the official changeover date is for interim and annual financial statements relating to fiscal periods beginning on or after January 1, 2011.

TimberWest will adopt IFRS according to requirements outlined by the AcSB, and is in the process of preparing for the adoption of IFRS, including qualitative disclosure throughout 2009 and 2010, on January 1, 2011.

The Company is in the process of identifying the significant differences between Canadian GAAP and IFRS as it relates to TimberWest and has identified the following areas as having a significant accounting impact on the Company's financial statements and disclosures when IFRS is adopted:

Private timberlands - the Company's private timberlands will be accounted for as a biological asset under IAS 41. In essence, the standing timber on the private timberlands will be valued at fair value at each reporting date. Any changes in fair value, as a result of growth, harvest, and changes in valuation assumptions will be recognized as a gain or loss on the face of the income statement. The land component of the private timberlands will be accounted for as property, plant and equipment.

Upon harvesting, timber from private timberlands will be considered agricultural produce and will be accounted for at fair market value less the estimated costs to sell. This value will be the cost ascribed to the logs as they enter inventory.

Higher and better use lands - the treatment of the Company's HBU lands with respect to IFRS is currently under review.

The Company is examining these and other issues and is developing tools and training for the Company's key users in order to ensure compliance with IFRS requirements.

8. Disclosure controls and internal control over financial reporting

During the quarter ended September 30, 2009, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect the Company's internal control over financial reporting.

    
    CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

    Unaudited                      Three months ended      Nine months ended
    (in millions of dollars,          September 30            September 30
     except per share amounts)      2009        2008        2009        2008
    -------------------------------------------------------------------------
    Sales                      $    37.5   $    38.8   $   105.9   $   127.8
    Operating costs and expenses:
      Cost of sales                 35.8        41.3       104.4       121.4
      Selling, administrative
       and other                     2.7         3.0         8.4         9.3
      Depreciation, depletion
       and amortization              1.2         0.9         3.0         3.4
    -------------------------------------------------------------------------
                                    39.7        45.2       115.8       134.1
    -------------------------------------------------------------------------
    Operating loss from
     continuing operations          (2.2)       (6.4)       (9.9)       (6.3)
    Interest expense:
      Series A Subordinate Notes
       owned by unitholders          5.3        21.0        15.4        63.0
      Convertible debentures         3.4           -         8.5           -
      Long-term bank debt            2.5         1.7         7.2         6.1
      Short-term bank debt             -         0.8         0.5         1.5
    -------------------------------------------------------------------------
                                    11.2        23.5        31.6        70.6
    Financing transaction costs        -           -         5.5           -
    Amortization of deferred
     financing costs                 0.4         0.1         1.3         0.3
    Change in fair value of
     financial instruments held
     for trading (notes 10 and 12)  13.1           -        24.7           -
    Other expense (income)          (0.2)        0.4        (0.2)        0.2
    -------------------------------------------------------------------------
                                    24.5        24.0        62.9        71.1
    -------------------------------------------------------------------------
    Loss before income taxes
     from continuing operations    (26.7)      (30.4)      (72.8)      (77.4)
    Income tax expense (recovery)
     (note 6)                       (0.8)       (0.6)       (9.1)       (5.8)
    -------------------------------------------------------------------------
    Net loss and comprehensive
     loss from continuing
     operations                    (25.9)      (29.8)      (63.7)      (71.6)
    Net loss and comprehensive
     loss from discontinued
     operations (note 5)            (0.1)        0.2        (0.3)       (7.7)
    -------------------------------------------------------------------------
    Net loss and comprehensive
     loss                      $   (26.0)  $   (29.6)  $   (64.0)  $   (79.3)
    -------------------------------------------------------------------------
    Basic and diluted loss from
     continuing operations per
     share (note 7)                (0.33)      (0.38)      (0.82)      (0.92)
    Basic and diluted loss from
     discontinued operations per
     share (note 7)                    -           -           -       (0.10)
    Basic and diluted loss per
     share (note 7)                (0.33)      (0.38)      (0.82)      (1.02)
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)

                                   Three months ended      Nine months ended
    Unaudited                         September 30            September 30
    (in millions of dollars)        2009        2008        2009        2008
    -------------------------------------------------------------------------
    Retained earnings,
     beginning of period       $   212.8   $   (34.2)  $   250.8   $    15.5
    Net loss and comprehensive
     loss for the period           (26.0)      (29.6)      (64.0)      (79.3)
    -------------------------------------------------------------------------
    Retained earnings
     (deficit), end of period  $   186.8   $   (63.8)  $   186.8   $   (63.8)
    -------------------------------------------------------------------------

    See accompanying notes to the unaudited interim consolidated financial
    statements.



    CONSOLIDATED BALANCE SHEETS
                                                       September    December
                                                        30, 2009    31, 2008
    (in millions of dollars)                           Unaudited
    -------------------------------------------------------------------------
    Assets
      Current assets:
      Cash                                             $     1.1   $    30.8
      Accounts receivable                                    7.2         4.1
      Inventories (note 8)                                  20.1        29.1
      Prepaid expenses and other current assets              4.5         3.7
      Future income taxes                                    1.6         3.3
      Discontinued operations                                  -         0.1
    -------------------------------------------------------------------------
                                                            34.5        71.1
    Property, plant and equipment (note 9)               1,213.9     1,222.0
    Other assets (note 10)                                   8.0         7.1
    -------------------------------------------------------------------------
                                                       $ 1,256.4   $ 1,300.2
    -------------------------------------------------------------------------
    Liabilities and Unitholders' Equity
    Current liabilities:
      Term credit facilities (note 11)                 $       -   $   108.3
      Accounts payable and accrued liabilities              22.0        23.9
      Discontinued operations                                0.2         1.5
    -------------------------------------------------------------------------
                                                            22.2       133.7
    Revolving credit facilities (note 11)                  143.0       189.8
    Convertible debentures (note 12)                       172.8           -
    Long-term silviculture liability                         2.8         3.2
    Employee future benefits (note 13)                      37.1        36.7
    Deferred distribution payable (note 14)                 28.4        17.8
    Stapled Unit option plan  (note 16)                      0.8           -
    Future income taxes                                    224.1       234.9
    -------------------------------------------------------------------------
                                                           631.2       616.1
    Series A Subordinate Notes owned by unitholders
     (note 15)                                             245.4       240.4
    -------------------------------------------------------------------------
                                                           876.6       856.5
    -------------------------------------------------------------------------
    Unitholders' equity
      Share capital, consisting of common shares (note 15) 191.0       191.0
      Contributed surplus                                    2.0         1.9
      Retained earnings                                    186.8       250.8
    -------------------------------------------------------------------------
                                                           379.8       443.7
    -------------------------------------------------------------------------
                                                       $ 1,256.4   $ 1,300.2
    -------------------------------------------------------------------------

    Subsequent event (notes 2 and 11)

    See accompanying notes to the unaudited interim consolidated financial
    statements.

    On behalf of the Board of Directors:

    Paul J. McElligott             V. Edward Daughney
    Director                       Director


    CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   Three months ended      Nine months ended
    Unaudited                         September 30            September 30
    (in millions of dollars)        2009        2008        2009        2008
    -------------------------------------------------------------------------

    Cash provided by (used in):
    Operating activities:
      Net loss from continuing
       operations              $   (25.9)  $   (29.8)  $   (63.7)  $   (71.6)

      Items not involving cash:
        Depreciation, depletion
         and amortization            1.6         1.0         4.3         3.7
        Accretion on Series A
         Subordinate Notes           1.7           -         4.9           -
        Gain on sale of
         property, plant and
         equipment                  (3.9)       (1.4)       (5.5)       (5.2)
        Future income tax
         expense (recovery)         (0.8)       (0.6)       (9.1)       (5.8)
        Change in deferred
         distribution payable        3.6           -        10.5           -
        Change in fair value of
         financial instruments
         held for trading           13.1           -        24.7           -
        Other non-cash items         0.8         0.5         1.0         1.4
    -------------------------------------------------------------------------
                                    (9.8)      (30.3)      (32.9)      (77.5)
      Changes in non-cash
       working capital:
        Accounts receivable         (3.1)        6.1        (3.1)        1.3
        Inventories                  1.5        (0.1)        9.0         7.0
        Prepaid expenses and
         other working capital      (1.2)        0.5        (0.8)        0.9
        Accounts payable and
         accrued liabilities         1.6        (5.6)       (2.5)        4.3
    -------------------------------------------------------------------------
                                    (1.2)        0.9         2.6        13.5
    -------------------------------------------------------------------------
                                   (11.0)      (29.4)      (30.3)      (64.0)
    -------------------------------------------------------------------------
    Financing activities:
      Issuance of Stapled Units
       on exercise of options
        Series A Subordinate Notes     -           -           -         0.1
    -------------------------------------------------------------------------
                                       -           -           -         0.1
      Convertible debentures           -           -       150.0           -
      Revolving credit facilities    5.5       (84.9)      (46.8)      (60.5)
      Term credit facilities           -       108.3      (108.3)      108.3
      Financing transaction costs      -           -        (3.5)          -
    -------------------------------------------------------------------------
                                     5.5        23.4        (8.6)       47.9
    -------------------------------------------------------------------------
    Investing activities:
      Proceeds from sale of
       property, plant and
       equipment                     6.4         3.7        12.5        10.7
      Additions to property,
       plant and equipment          (0.3)       (0.9)       (0.7)       (1.7)
      Other assets                     -        (0.1)       (1.2)        0.1
    -------------------------------------------------------------------------
                                     6.1         2.7        10.6         9.1
    -------------------------------------------------------------------------
    Cash provided by (used in)
     continuing operations           0.6        (3.3)      (28.3)       (7.0)
    Cash provided by (used in)
     discontinued operations
     (note 5)                       (0.5)        4.2        (1.4)        6.7
    -------------------------------------------------------------------------
    Increase (decrease) in cash
     and cash equivalents            0.1         0.9       (29.7)       (0.3)
    Cash and cash equivalents,
     beginning of period             1.0           -        30.8         1.2
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period             $     1.1         0.9   $     1.1   $     0.9
    -------------------------------------------------------------------------
    Supplemental information:
      Interest on Series A
       Subordinate Notes paid
       to unitholders          $       -   $    21.0   $       -   $    63.0
      Interest on the
       convertible debentures
       paid                    $     3.4   $       -   $     5.2   $       -
      Other interest paid      $     2.5   $     1.7   $     8.7   $     6.8
      Financing costs paid     $       -   $       -   $     9.0   $       -
    -------------------------------------------------------------------------

    See accompanying notes to the unaudited interim consolidated financial
    statements.



    CONSOLIDATED BUSINESS SEGMENTS

    Unaudited                          Three months ended September 30, 2009

    (in millions                                Real
     of dollars)             Timberlands      Estate       Other       Total
    -------------------------------------------------------------------------
    Sales                      $    29.6   $     7.9   $       -   $    37.5
    Operating earnings (loss)       (3.5)        4.5        (3.2)       (2.2)
    Total assets                   978.3       263.9        14.2     1,256.4
    Additions to property,
     plant and equipment               -         0.2         0.1         0.3
    -------------------------------------------------------------------------


    Unaudited                           Nine months ended September 30, 2009

    (in millions                                Real
     of dollars)             Timberlands      Estate       Other       Total
    -------------------------------------------------------------------------
    Sales                      $    91.1   $    14.8   $       -   $   105.9
    Operating earnings (loss)       (5.0)        5.0        (9.9)       (9.9)
    Total assets                   978.3       263.9        14.2     1,256.4
    Additions to property,
     plant and equipment             0.2         0.4         0.1         0.7
    -------------------------------------------------------------------------
    

In 2009, the Company commenced reporting its operating results on a segmented basis in order to disclose the results of its two significant operating segments, timberlands and real estate. Prior to 2009, the Company operated in one operating segment, timberlands, and any real estate sales were incidental to the timberland operations. Effective January 1, 2009, the Company has formed a real estate division and the activities of this division are managed separately from the timberlands operation. Sales and operating earnings reflect the income and expenses of each segment. Private land of approximately 134,000 acres identified as having a higher and better use is reported as real estate assets at its carrying value. All other assets have been reported under the segment in which they are managed. The 'other' segment reflects those costs and assets that are allocated for general corporate purposes.

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

    
    For the three and nine months ended September 30, 2009 and 2008

    (Unaudited and in millions of dollars, except per common share amounts)

    1.  Significant accounting policies

    The accompanying unaudited interim consolidated financial statements
    include the accounts of TimberWest Forest Corp. and its subsidiaries
    ("the Company"), have been prepared in accordance with Canadian Generally
    Accepted Accounting Principles and are expressed in Canadian dollars. Not
    all disclosures required by Canadian Generally Accepted Accounting
    Principles ("GAAP") for annual financial statements are presented and,
    accordingly, these interim consolidated financial statements should be
    read in conjunction with the Company's most recent annual consolidated
    financial statements. These interim consolidated financial statements
    follow the same accounting policies and methods of application used in
    the Company's audited annual consolidated financial statements of
    December 31, 2008, except for the adoption of new accounting policies as
    described in note 3.

    2.  Going concern

    The current economic environment for the global forest products industry
    is challenging with substantially lower than average prices and high
    input costs due to low production. TimberWest responded to these
    conditions by reducing logging production, permanently closing its last
    sawmill operation, reducing overhead costs, restructuring labour and
    contractor agreements, and reducing its working capital investment.

    The Company has forecasted its financial results and cash flows for 2009
    using its best estimates of market and operating conditions. These
    forecasts consider the modification of the interest rate on the Series A
    Subordinate Notes, with interest deferred for a period of time (note 14),
    and the refinancing package (note 11) which includes credit amendments to
    the bank facilities, a $100 million private placement with British
    Columbia Investment Management Corporation of 9% convertible debentures,
    and a $50 million 9% convertible debenture rights offering that was
    completed on February 11, 2009. The Company expects to meet its future
    cash requirements through a combination of cash generated from its
    logging operations and real estate sales, existing cash balances and
    credit facilities, and the refinancing arrangements completed.

    Subsequent to the end of the third quarter 2009, on October 22, 2009, the
    Company completed amendments to the bank loan agreement with its
    syndicate of banks. The key amendments to the revolving credit agreement,
    which matures on February 10, 2012, include:

    -   A waiver of the minimum EBITDA tests for both 2010 and 2011, with the
        maximum availability under the line set at $220 million for 2010 and
        $215 million for 2011. So long as the Company generates cumulative
        minimum EBITDA of $325,000 for Q1, 2011; $650,000 for Q2, 2011;
        $975,000 for Q3, 2011 and $1.3 million for Q4, 2011 then the maximum
        availability under the line will be increased to $230 million for
        2011.

    -   A permanent repayment provision which specifies that once cumulative
        real estate proceeds exceed $50 million, 50% of additional proceeds
        will be applied to permanently reduce the facility size. The
        remaining 50% can be used by the Company to improve its liquidity.
        Current cumulative real estate proceeds are $24.5 million.

    -   On a best efforts basis, the Company will seek the required approvals
        necessary to allow it to pay the 9% interest obligation on its
        convertible debentures in kind beyond the initial four quarters
        already announced through to maturity of the credit facility.

    All other terms of the revolving credit agreement remain unchanged from
    the original credit agreement which was filed on SEDAR in February 2009.

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

    The Company's continuation as a going concern is ultimately dependent
    upon its future financial performance, which will be affected by general
    economic, competitive and other factors, many of which are beyond the
    Company's control. In the short term, any significant strengthening of
    the Canadian dollar, or further decline in U.S. housing and Vancouver
    Island real estate markets which affects demand or other unexpected
    adverse developments could adversely impact the Company's liquidity.

    3.  Adoption of new accounting policies

    Goodwill and intangible assets, Section 3064

    Effective January 1, 2009, the Company adopted the new Canadian Institute
    of Chartered Accountants ("CICA") Handbook Section 3064, Goodwill and
    Intangible Assets.  This section replaces CICA Handbook Section 3062,
    Goodwill and Intangible Assets, and establishes revised standards for the
    recognition, measurement, presentation and disclosure of goodwill and
    intangible assets. The new standard also provides guidance for the
    treatment of various pre-production and start-up costs and requires that
    these costs be expensed as incurred, with the concurrent withdrawal of
    CICA Emerging Issues Committee Abstract 27 ("EIC 27"). The adoption of
    this section had no impact on the Company's accounting on a retrospective
    basis.

    4.  Segmented information

    Commencing in 2009, the Company identified two reporting segments:

    Timberlands - The timberland division maximizes value by harvesting logs
    in a cost-effective manner consistent with sound safety, environmental
    and sustainable forestry practices and selling these products to targeted
    customers in both the domestic and higher value export markets

    Real Estate - Couverdon, the real estate division of TimberWest, has
    developed a long range strategic plan to realize value from land that has
    a higher and better use than timberlands.

    The segments are managed separately. During the first quarter of 2009,
    the Company branded its real estate division "Couverdon Real Estate."

    5.  Discontinued operations

    On May 9, 2008, the Elk Falls sawmill and planer mill in Campbell River,
    B.C. was permanently closed including the associated shipping operations
    at Stuart Channel Wharves located in Crofton, B.C. Subsequent to the
    closure, TimberWest disposed of all the sawmill assets and dismantled the
    sawmill. Ongoing costs such as property taxes continue to be expensed as
    incurred.  The Company is assessing alternatives for the former sawmill
    site.

    -------------------------------------------------------------------------
                                   Three months ended      Nine months ended
                                      September 30            September 30
                                    2009        2008        2009        2008
    -------------------------------------------------------------------------
    Sales                      $       -   $     7.0   $       -   $    42.4
    Earnings (loss) before
     income taxes              $    (0.1)  $     0.2   $    (0.3)  $    (7.7)
    Net loss                   $    (0.1)  $     0.2   $    (0.3)  $    (7.7)
    -------------------------------------------------------------------------

    Sales from the logging operations to the sawmill operations have been
    recorded at fair value in accordance with the Company's internal
    policies. There were no inter-divisional sales for the three and nine
    months ended September 30, 2009 (2008 - nil and $13.0 million).

    -------------------------------------------------------------------------
                                   Three months ended      Nine months ended
                                      September 30            September 30
                                    2009        2008        2009        2008
    -------------------------------------------------------------------------
    Cash flow from operating
     activities                $    (0.5)  $     3.8   $    (1.4)  $     6.2
    Cash flow from financing
     activities                        -           -           -           -
    Cash flow from investing
     activities                        -         0.4           -         0.5
    -------------------------------------------------------------------------
    Cash provided by
     operations                $    (0.5)  $     4.2   $    (1.4)  $     6.7
    -------------------------------------------------------------------------

    Cash used in operating activities for Q3 and the nine months ended
    September 30, 2009 includes the payment of previously accrued liabilities
    due to the closure of the sawmill.

    6.  Income taxes

    -------------------------------------------------------------------------
                                   Three months ended      Nine months ended
                                      September 30            September 30
                                    2009        2008        2009        2008
    -------------------------------------------------------------------------
    Current income tax         $       -   $       -   $       -   $       -
    Future income tax recovery      (0.8)       (0.6)       (9.1)       (5.8)
    -------------------------------------------------------------------------
                               $    (0.8)  $    (0.6)  $    (9.1)  $    (5.8)
    -------------------------------------------------------------------------

    In the first quarter of 2009, British Columbia provincial tax legislation
    was substantively enacted, resulting in the reduction of the provincial
    corporate tax rate to 10.5% for the year ending December 31, 2010 and 10%
    thereafter. This tax rate change resulted in a future income tax recovery
    of $6.2 million and is included in the future income tax recovery for the
    nine months ended September 30, 2009.

    In the first quarter of 2008, British Columbia provincial tax legislation
    was substantively enacted, resulting in the reduction of the provincial
    corporate tax rate to 11% as of July 1, 2008. This tax rate change
    resulted in a future income tax recovery of $4.3 million for the nine
    months ended September 30, 2008.

    7.  Earnings (loss) per share

    -------------------------------------------------------------------------
                                   Three months ended      Nine months ended
                                      September 30            September 30
                                    2009        2008        2009        2008
    -------------------------------------------------------------------------
    Net loss from continuing
     operations                $   (25.9)  $   (29.8)  $   (63.7)  $   (71.6)
    -------------------------------------------------------------------------
    Net loss                       (26.0)      (29.6)      (64.0)      (79.3)
    -------------------------------------------------------------------------
    Basic weighted average
     number of common shares  77,776,574  77,765,440  77,770,620  77,757,020
    Incremental common shares
     from potential exercise
     of options                  297,447      33,244     152,320      33,673
    -------------------------------------------------------------------------
    Diluted weighted average
     number of common shares  78,074,021  77,798,684  77,922,940  77,790,693
    -------------------------------------------------------------------------
    Basic and diluted net
     loss from continuing
     operations per common
     share                         (0.33)      (0.38)      (0.82)      (0.92)
    Basic and diluted net
     loss from discontinued
     operations per common
     share                             -           -           -       (0.10)
    -------------------------------------------------------------------------
    Basic and diluted net
     loss per common share         (0.33)      (0.38)      (0.82)      (1.02)
    -------------------------------------------------------------------------

    The convertible debentures issued during Q1, 2009 have been considered in
    the computation of diluted earnings per share and were determined to have
    been anti-dilutive.

    8.  Inventories

    -------------------------------------------------------------------------
                                                       September    December
                                                        30, 2009    31, 2008
    -------------------------------------------------------------------------
    Logs                                               $    20.1   $    29.1
    -------------------------------------------------------------------------

    The $9.0 million decrease in log inventory from December 31, 2008 is
    primarily due to lower inventory volumes at the end of September 30,
    2009.

    For the three months ended September 30, 2009, log inventory was written
    up by $0.2 million which was offset against cost of sales for the period
    (2008 - log inventories were written down by $0.9 million and expensed
    against cost of sales).

    For the nine months ended September 30, 2009, log inventory was written
    up by $0.6 million which was offset against cost of sales for the period
    (2008 - log inventories were written down by $1.2 million and expensed
    against cost of sales).

    9.  Property, plant and equipment

    Property, plant and equipment at September 30, 2009, includes private
    lands with a carrying value of $1,165.5 million (December 31, 2008 -
    $1,170.9 million). This amount includes a valuation increase adjustment
    of $373.7 million resulting from the adoption of Section 3465 - Income
    Taxes of the CICA Handbook, which was mandatory for fiscal years ending
    on or after January 1, 2000.

    10. Other assets

    -------------------------------------------------------------------------
                                                       September    December
                                                        30, 2009    31, 2008
    -------------------------------------------------------------------------
    Deferred financing costs                           $     3.6   $     1.4
    Financial instruments                                    3.4         4.7
    Other                                                    1.0         1.0
    -------------------------------------------------------------------------
                                                       $     8.0   $     7.1
    -------------------------------------------------------------------------

    Financial instruments of $3.4 million include the value of two embedded
    derivatives as outlined below.

    The Company has the option to defer the distributions payable to its
    unitholders for a period of up to 18 months in length while the
    distribution rate is set at 2% (note 15). This option constitutes an
    embedded derivative and is measured at its fair value. As the Company
    has elected to defer distributions for the immediate future, the value of
    this option is $2.8 million (2008 - $4.1 million).

    The embedded derivative arising from the option to extend the maturity of
    the Series A Subordinate Notes for a further 10-year period from 2038 to
    2048 is measured at its fair value of $0.6 million (2008 - $0.6 million).

    11. Credit facilities

    The Company's credit facilities are as follows:

    -------------------------------------------------------------------------
                                                       September    December
                                                        30, 2009    31, 2008
    -------------------------------------------------------------------------
    Secured revolving credit facility of up to
     $250.0 million due February 11, 2012 with
     interest based on Canadian or U.S. Prime rates
     + 5%, or Canadian BA rates + 6%                   $   143.0   $       -
    Unsecured long-term revolving facility
     (Tranche A) of up to $216.7 million due
     September 24, 2012 with interest based on
     Canadian Prime/BA or U.S. LIBOR rates + 0.9%(1)           -       189.8
    Unsecured term facility (Tranche B) of up to
     $108.3 million due September 24, 2009 with
     interest based on Prime rates(1)                          -       108.3
    -------------------------------------------------------------------------
    Total long-term debt                               $   143.0   $   298.1
    Less current portion                                       -      (108.3)
    -------------------------------------------------------------------------
                                                       $   143.0   $   189.8
    -------------------------------------------------------------------------
    (1) The long-term revolving facility of $216.7 million and the term
        facility of $108.3 million were effectively extinguished with the
        amended and restated credit facility.

    On February 11, 2009 the Company raised $150 million by way of a 9% five-
    year convertible debenture issue (note 12). The net proceeds of the
    convertible debentures were used by the Company to permanently repay $75
    million of indebtedness under its bank credit facilities, with the
    remainder being used to reduce indebtedness under the Company's revolving
    credit facilities. The Company and its lenders completed a new $250
    million three-year secured revolving credit refinancing arrangement as
    described in detail below.

    Under this facility, funds are available to the Company in Canadian and
    US dollars by way of adjusted Canadian bankers' acceptances plus 6%, or
    Canadian or U.S. prime rates plus 5% loans and letters of credit. This
    facility has been underwritten by a syndicate of banks and is due on
    February 11, 2012.

    The facility includes financial covenants to maintain:

        -  minimum bank EBITDA for the period January 1, 2009 to June 30,
           2009 to negative $16.0 million;

        -  minimum bank EBITDA for the period January 1, 2009 to December 31,
           2009 to negative $16.0 million;

        -  minimum bank EBITDA per quarter for the eight quarters of 2010 and
           2011 of $8.3 million, $16.2 million, $24.1 million, $32.0 million,
           $40.7 million, $49.4 million, $58.1 million and $66.8 million,
           respectively;

        -  consolidated tangible net worth at the end of each quarter in
           excess of $700 million;

        -  consolidated debt is less than 40% of capitalization;

        -  consolidated debt is less than 40% of the market value of the
           Company's private timberlands and higher use properties.

    Bank EBITDA calculations include proceeds of real estate sales and other
    items. At September 30, 2009 the Company is in compliance with the terms
    of its credit facility.

    The 2009 transaction costs related to this refinancing were $3.5 million
    (2008 - $1.1 million) and have been deferred and capitalized on the
    balance sheet as they relate to debt refinancing held at amortized cost.

    Subsequent to the end of the third quarter 2009, on October 22, 2009, the
    Company completed amendments to the bank loan agreement with its
    syndicate of banks. The key amendments to the revolving credit agreement,
    which matures on February 10, 2012, include:

    -   A waiver of the minimum EBITDA tests for both 2010 and 2011, with the
        maximum availability under the line set at $220 million for 2010 and
        $215 million for 2011. So long as the Company generates cumulative
        minimum EBITDA of $325,000 for Q1, 2011; $650,000 for Q2, 2011;
        $975,000 for Q3, 2011 and $1.3 million for Q4, 2011 then the maximum
        availability under the line will be increased to $230 million for
        2011.

    -   A permanent repayment provision which specifies that once cumulative
        real estate proceeds exceed $50 million, 50% of additional proceeds
        will be applied to permanently reduce the facility size. The
        remaining 50% can be used by the Company to improve its liquidity.
        Current cumulative real estate proceeds are $24.5 million.

    -   On a best efforts basis, the Company will seek the required approvals
        necessary to allow it to pay the 9% interest obligation on its
        convertible debentures in kind beyond the initial four quarters
        already announced through to maturity of the credit facility.

    All other terms of the revolving credit agreement remain unchanged from
    the original credit agreement which was filed on SEDAR in February 2009.

    12.  Convertible debentures

    On February 11, 2009, the Company raised $150 million by way of a 9%
    five-year convertible debenture issue. The $150 million of convertible
    debentures was raised through a $100 million private placement with two
    wholly-owned subsidiaries of British Columbia Investment Management
    Corporation and through a $50 million rights offering to unitholders. The
    convertible debentures mature on February 11, 2014 and are convertible
    into Stapled Units at $3.50. The convertible debentures pay interest
    quarterly at 9% with the first interest payment made on April 15, 2009.
    For the three months ended September 30, 2009 the Company recorded
    interest expense of $3.4 million. Interest was paid 'in-kind' on October
    15, 2009 by issuing convertible debentures with a face value of $3.4
    million. For the nine months ended September 30, 2009 the Company
    recorded interest expense of $8.5 million.

    The Company has elected to designate this obligation as 'held-for-
    trading' and it is to be revalued at fair value at each reporting date.
    Changes in fair value from one period to the next are recognized against
    net income in the period. Transaction costs of $5.5 million were incurred
    and expensed to the statement of operations in 2009.

    No debentures were converted in Q3, 2009. For the nine months ended
    September 30, 2009 debentures with a face value of $38,500 were converted
    into 11,134 Stapled Units.

    In Q3 2009, a $0.5 million fair value loss was recognized against net
    income with respect to the convertible debentures paid in kind.

    13. Employee future benefits

    -------------------------------------------------------------------------
                                                       September    December
                                                        30, 2009    31, 2008
    -------------------------------------------------------------------------
    Pension benefits                                   $     9.4   $     9.4
    Non-pension benefits                                    27.7        27.3
    -------------------------------------------------------------------------
                                                       $    37.1   $    36.7
    -------------------------------------------------------------------------

    The Company, through its subsidiaries, maintains pension plans that
    include defined benefit and defined contribution segments available to
    all salaried employees and a small number of hourly retirees not covered
    by union pension plans. For the three months ended September 30, 2009,
    the Company recorded an expense of $0.4 million for pension benefit costs
    (2008 - $0.5 million) and made cash payments of $0.3 million to fund
    current service costs (2008 - $0.3 million). For the nine months ended
    September 30, 2009, the Company recorded an expense of $1.2 million for
    pension benefit costs (2008 - $1.5 million) and made cash payments of
    $1.2 million to fund current service costs (2008 - $1.3 million).

    The Company also provides non-pension benefits consisting of group life
    insurance and medical benefits to eligible retired employees, which the
    Company funds on an as-incurred basis. For the three months ended
    September 30, 2009, the Company recorded an expense of $0.6 million for
    non-pension benefit costs (2008 - $0.8 million) and made cash payments of
    $0.2 million to fund current benefit costs (2008 - $0.4 million). For the
    nine months ended September 30, 2009, the Company recorded an expense of
    $1.9 million for non-pension benefit costs (2008 - $2.5 million) and made
    cash payments of $1.4 million to fund current benefit costs (2008 - $1.5
    million).

    14.  Deferred distribution payable

    -------------------------------------------------------------------------
                                                       September    December
                                                        30, 2009    31, 2008
    -------------------------------------------------------------------------
    October 15, 2009 distribution (2%) with a face
     value of $3.5 million due by April 15, 2011       $     3.1   $       -
    July 15, 2009 distribution (2%) with a face
     value of $3.5 million due by January 15, 2011           3.2           -
    April 15, 2009 distribution (2%) with a face
     value of $3.5 million due by October 15, 2010           3.3           -
    January 15, 2009 distribution (12%) with a face
     value of $21.0 million due by April 15, 2011           18.8        17.8
    -------------------------------------------------------------------------
                                                       $    28.4   $    17.8
    -------------------------------------------------------------------------

    The Company can defer distributions on its Series A Subordinate Notes
    after December 31, 2008 for up to 18 months while the distribution rate
    is set at 2% (note 15) and defer the January 15, 2009 distribution for up
    to 27 months. As a result of these deferrals, the deferred distribution
    payable is accounted for at its fair value and the obligation is revalued
    at each reporting date.

    15. Stapled units

    -------------------------------------------------------------------------
                                                 Stapled Unit Components
                                           ----------------------------------
                                            Series A
                                             Subord-
                                               inate   Preferred      Common
                                  Number       Notes      Shares      Shares
    -------------------------------------------------------------------------

    Nine months ended
     September 30, 2008:
      Balance, December 31,
       2007                   77,750,143    $  698.1    $  190.1    $   31.4
        Issuance of Stapled
         Units on exercise of
         options                  15,297         0.1           -           -
    -------------------------------------------------------------------------
    Balance, September 30,
     2008                     77,765,440    $  698.2    $  190.1    $   31.4
    -------------------------------------------------------------------------
    Nine months ended
     September 30, 2009:
      Balance, December 31,
       2008                   77,765,440    $  240.4    $  190.1    $   31.4
        Issuance of Stapled
         Units on conversion
         of debentures            11,134         0.1           -           -
        Issuance of Stapled
         Units on exercise of
          options                      -           -           -           -
        Accretion on Series A
         Subordinate Notes             -         4.9           -           -
        Conversion of preferred
         shares into common
         shares                        -           -      (190.1)      190.1
    -------------------------------------------------------------------------
    Balance, September 30,
     2009                     77,776,574    $  245.4    $      -   $   221.5
    -------------------------------------------------------------------------


    -------------------------------------------------------------
                                       Stapled Unit Components
                                  -------------------------------
                                               Total       Total
                                   Issue       Share     Stapled
                                   Costs     Capital       Units
    -------------------------------------------------------------
    Nine months ended
     September 30, 2008:
      Balance, December 31,
       2007                     $  (30.5)   $  191.0    $  889.1
        Issuance of Stapled
         Units on exercise of
         options                       -           -         0.1
    --------------------------------------------------------------
    Balance, September 30,
     2008                       $  (30.5)   $  191.0    $  889.2
    --------------------------------------------------------------
    Nine months ended
     September 30, 2009:
      Balance, December 31,
       2008                     $  (30.5)   $  191.0    $  431.4
        Issuance of Stapled
         Units on conversion
         of debentures                 -           -         0.1
        Issuance of Stapled
         Units on exercise of
          options                      -           -           -
        Accretion on Series A
         Subordinate Notes             -           -         4.9
        Conversion of preferred
         shares into common
         shares                        -           -           -
    -------------------------------------------------------------
    Balance, September 30,
     2009                       $  (30.5)   $  191.0    $  436.4
    -------------------------------------------------------------

    The Company issues equity by way of Stapled Units, each Stapled Unit
    consisting of approximately $8.98 face amount of Series A Subordinate
    Notes and one common share. The securities comprising a Stapled Unit
    trade together as Stapled Units and cannot be transferred except with
    each other as part of a Stapled Unit until the date of maturity of the
    Series A Subordinate Notes or the payment of the principal amount of the
    Series A Subordinate Notes following an event of default and expiration
    of a remedies blockage period.

    On December 19, 2008 the holders of the Stapled Units approved a series
    of note amendments that came into effect on December 31, 2008. The note
    amendments are as follows: (i) the rate of interest on the Series A
    Subordinate Notes payable was changed from a fixed 12% per annum to a
    variable rate between 2% and 12% per annum to be set from time to time
    based on the Company's distributable cash; (ii) the period over which the
    Company can defer payments of interest on the notes was reduced from 27
    months to 18 months, and the Company may only exercise this deferral
    right in respect of interest payments for periods where the applicable
    interest rate on the subordinate notes is 2%; and (iii) replaces the
    Company's right to elect to pay interest on the subordinate notes by
    delivering common shares or preferred shares of the Company with the
    right to elect to pay interest on the notes by delivering Stapled Units.

    Each Series A Subordinate Note has been issued with a face amount of
    $8.978806569, entitling the holder to an interest payment per unit of
    between $0.179576131 and $1.077456788 per annum (2-12%). The Series A
    Subordinate Notes are unsecured and subordinate to all credit facilities
    (see note 11) and convertible debentures (note 12). The principal amount
    of the Series A Subordinate Notes plus accrued and unpaid interest
    thereon are due on August 31, 2038, unless such date is extended by the
    Company at the time of the issuance of additional subordinate notes to a
    date not later than the earlier of: (i) the date of maturity of such
    additional subordinate notes; and (ii) August 31, 2048, and will be
    payable by cash or, at the option of the Company, by delivery of common
    shares to the Subordinate Note Trustee for the benefit of the holders of
    the subordinate notes.

    In accordance with Canadian GAAP, the note amendments had the effect of
    extinguishing the previous debt associated with the Series A Subordinate
    Notes and triggered a revaluation of debt on the extinguishment date at
    December 31, 2008. As a result of this revaluation the Company recorded a
    'Gain on modification of Series A Subordinate Notes' of $461.6 million on
    the Consolidated Statement of Operation and Comprehensive Income (loss)
    with a corresponding write-down to the Series A Subordinate Notes on
    December 31, 2008. The write-down had no tax consequence to the holders
    of the notes.

    The revalued Series A Subordinate Notes have been measured by the Company
    under Canadian GAAP at amortized cost under CICA Section 3855 'Financial
    Instruments.' As such, the balance of the Series A Subordinate Notes will
    be accreted using the effective interest rate method to face value of
    $698.2 million on maturity. For the three and nine months ending
    September 30, 2009, accretion recognized in the statement of operations
    was $1.7 million and $4.9 million respectively. For the three and nine
    months ending September 30, 2009, interest accrued and payable to the
    holders of the Series A Subordinate Notes was $3.6 million and $10.5
    million respectively, for total interest expense of $5.3 million and
    $15.4 million.

    At December 31, 2008, transaction costs of $0.9 million had been deferred
    and offset against the Series A Subordinate Notes and are being amortized
    using the effective rate method over the life of the Series A Subordinate
    Notes until maturity.

    On May 7, 2009 the Company's preferred shares were converted into common
    shares and consolidated in order to simplify TimberWest's capital
    structure and eliminate administrative burdens and related expenses
    associated with maintaining the preferred shares. Each TimberWest Stapled
    Unit contains one Series A Subordinate Note and one common share. The
    conversion and consolidation was approved by the unitholders on May 6,
    2009 and were approved by the Toronto Stock Exchange ("TSX").

    The option to defer interest distributions to the holders of the Stapled
    Units for up to 18 months is an embedded derivative under Canadian GAAP
    and is revalued at each reporting date. As at September 30, 2009 the fair
    value of this option is $2.8 million (December 31, 2008 - $4.1 million)
    and is accounted for as Other Assets (note 10).

    The option to extend the maturity date on the Series A Subordinate Notes
    from August 31, 2038 to August 31, 2048 is an embedded derivative under
    Canadian GAAP and is revalued at each reporting date. As at September 30,
    2009 the fair value of this option is $0.6 million (December 31, 2008 -
    $0.6 million) and is accounted for as Other Assets (note 10).

    16. Stapled Unit option plan

    Under the Company's Stapled Unit Option Plan, the Company may grant
    options for the purchase of Stapled Units to directors, officers or
    employees who are in active service or employment of the Company or of
    any of its subsidiaries. During the quarter ended September 30, 2009,
    22,500 Stapled Unit options granted at an average exercise price of $3.71
    (Q3, 2008 - no Stapled Unit options were granted). For the nine months
    ended September 30, 2009, there were 1,719,327 Stapled Unit options
    granted at an average exercise price of $3.01 (2008 - no Stapled Unit
    options were granted in the first nine months of the year).

    The option to acquire a Stapled Unit effectively provides the option
    holder with an option on the Series A Subordinated Note component and an
    option on the equity component of the Stapled Unit. An option to acquire
    a debt instrument is accounted for under the intrinsic value method
    whereby the compensation cost is determined each period based on the fair
    value of the debt instrument compared to the exercise price of the option
    to acquire the debt instrument. The fair value of the equity component is
    based on the fair value of the option as determined using an option
    pricing model. Historically, the Company has determined that the
    intrinsic value of the option to acquire the Series A Subordinate Notes
    has not been material and the fair value of the option has been recorded
    in equity as contributed surplus based on the fair value as determined by
    the Black Scholes option pricing model.

    With the recent changes to the Series A Subordinate Note terms including
    modifying the interest rate to a variable rate from 2% to 12% which is
    ultimately based on distributable cash levels and the current market
    value of the Stapled Unit which is below the face value of the Series A
    Subordinate Note, the Company has determined that the value of the
    Stapled Unit option is now in the debt component and that the equity
    option value is immaterial. As a result, the accounting for the options
    issued in the period has been done using the intrinsic value method.

    On this basis the compensation cost for the 1,719,327 Stapled Unit
    options granted between January 1, 2009 and September 30, 2009, based on
    an intrinsic value method of accounting, for the three and nine months
    ended September 30, 2009 was $0.4 million and $0.8 million respectively.
    A corresponding amount was expensed in the period with a corresponding
    credit to the Stapled Unit option plan liability (2008 - no Stapled Unit
    options were granted in the first nine months of the year).

    Under the Company's Distribution Equivalent Plan, the Company awards
    Stapled Unit option holders an amount equal to actual distributions paid
    on the Company's Stapled Units. Awards granted under the Distribution
    Equivalent Plan vest under the same terms that apply to the corresponding
    options and can only be exercised at the time of exercise of the
    corresponding options.

    Awards are accrued on a basis equal to actual distributions paid on the
    Company's issued and outstanding Stapled Units and are charged to
    earnings as the underlying Stapled Unit options vest. For the three and
    nine months ended September 30, 2009, no amount was accrued as no
    distributions were paid (2008 - $0.2 million and $0.8 million,
    respectively). For the three and nine months ended September 30, 2009,
    nil and $0.1 million, respectively has been amortized against earnings
    (2008 - $0.3 million and $0.9 million, respectively).

    During the three months ended September 30, 2009, no Stapled Unit options
    were exercised, no Stapled Unit options were cancelled, and no Stapled
    Unit options expired (2008 - 14,760 Stapled Unit options with an average
    exercise price of $15.22 expired, and no Stapled Unit options were
    exercised or cancelled).

    During the nine months ended September 30, 2009, no Stapled Unit options
    were exercised, 47,500 Stapled Unit options with an average exercise
    price of $12.72 were cancelled, and 223,103 Stapled Unit options with an
    average exercise price of $13.08 expired (2008 - 15,297 Stapled Unit
    options with an average exercise price of $12.15 were exercised and 9,678
    Stapled Unit options with an average price of $15.94 were cancelled and
    14,760 Stapled Unit options with an average exercise price of $15.22
    expired).

    17. Financial instruments

    Accounting for financial instruments

    These interim consolidated financial statements follow the same
    accounting policies and methods of application used in the Company's
    audited annual consolidated financial statements of December 31, 2008.

    On February 11, 2009, the Company issued convertible debentures (note
    12). The Company has designated these as held-for-trading and the
    carrying values are accounted for at fair value. The convertible
    debentures are revalued at fair value at each reporting date and changes
    in fair value from one period to the next are recognized against net
    income in the period. Transaction costs of nil and $5.5 million were
    incurred and expensed to the statement of operations in the period three
    and nine months ending September 30, 2009, respectively.

    18. Contingencies and commitments

    During Q2, 2009 the City of Campbell River increased its tax rate on
    Class 7 managed forest lands. TimberWest filed a petition with the B.C.
    Supreme Court on June 9, 2009 to challenge this tax increase and a court
    hearing date was held in September. A ruling on this matter is
    anticipated later this year. TimberWest has paid the full assessed taxes.
    For the nine months ending September 30, 2009 the Company expensed $0.9
    million in relation to the tax increase with the remaining capitalized on
    the Consolidated Balance Sheets which will be expensed over the remainder
    of the year. Any recovery based on the decision from the Courts would be
    recorded as a property tax recovery on the Consolidated Statements of
    Operations and Comprehensive Income at that time.

    19. Comparative figures

    Certain comparative figures have been reclassified to conform to the
    current year presentation.
    

About TimberWest

TimberWest Forest Corp. is uniquely positioned as western Canada's largest private timber and land management company. The Company owns in fee simple approximately 322,000 hectares or 796,000 acres of private land and is in the business of selling timber products and real estate.

Stapled Units of TimberWest Forest Corp. are traded on the Toronto Stock Exchange under the symbol: TWF.UN

%SEDAR: 00009326E

SOURCE TIMBERWEST FOREST CORP.

For further information: For further information: Investor Relations Contact, Bev Park, Executive Vice President and Chief Financial Officer, Telephone: (604) 654-4600, Facsimile: (604) 654-4662, Email: invest@timberwest.com

Organization Profile

TIMBERWEST FOREST CORP.

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