Western Forest Products Reports 2006 Fourth Quarter Net Income Of $108.3 Million, Including Receipt Of Softwood Duty Refund



    EBITDA Before Duty Refund Of $10.1 million

    TSX: WEF

    DUNCAN, BC, March 28, 2007 /CNW/ - Western Forest Products Inc.
(TSX: WEF) ("Western") today announced its results for the fourth quarter and
year ended December 31, 2006. The Company reported net income from continuing
operations of $109.3 million ($0.53 per share) in the fourth quarter and
$43.9 million ($0.30 per share) for the full year. These results include the
softwood duty refund plus interest of $124.4 million received in the quarter
and also reflects progress in integrating the operations of two major
acquisitions during the year, offset by severe weather conditions in the
fourth quarter.

    
                                Q4 Highlights

    -------------------------------------------------------------------------

    -   Average prices realized on lumber products increased to $782 per
        thousand board feet in the fourth quarter, compared to $739 per
        thousand board feet in the third quarter, primarily the result of a
        higher-value mix of products sold and a weaker Canadian dollar.
    -   Redirected lower-value, commodity grade products away from the U.S.
        to other markets to mitigate the impact of the export tax introduced
        as part of the new softwood lumber agreement.
    -   Applied US$88.0 million of the softwood lumber duty refund received
        to reduce the Company's long-term debt.
    -   Enhanced flexibility of timberlands operations with removal of
        approximately 28,000 hectares of private timberlands from Tree Farm
        Licences.

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                              FINANCIAL SUMMARY

    -------------------------------------------------------------------------
                                         Quarter ended            Year ended
                                         -------------            ----------
                                           December 31           December 31
                                           -----------           -----------
                                       2006       2005       2006       2005
    -------------------------------------------------------------------------

    EBITDA                        $   120.4       (5.3)     138.2      (11.6)
    EBITDA excluding duty refund  $    10.1       (5.3)      27.9      (11.6)
    Softwood Duty refund plus
     interest                     $   124.4          -      124.4          -
    Net income (loss) from
     continuing operations        $   109.3      (10.5)      43.9      (60.5)
    Net loss from discontinued
     operations                   $    (1.0)     (74.1)     (10.8)     (79.1)
    Net income (loss)             $   108.3      (84.6)      33.1     (139.6)
    Net loss before softwood
     duty refund                  $   (16.1)     (84.6)     (91.3)    (139.6)
    Per share:
    Net income (loss) from
     continuing operations        $    0.53      (0.41)      0.30      (2.36)
    Net income (loss)             $    0.53      (3.30)      0.23      (5.45)

    -------------------------------------------------------------------------

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


    Fourth Quarter Results

    The Company reported net income of $108.3 million ($0.53 per share) in
the fourth quarter compared to a loss of $84.6 million ($3.30 per share) in
the fourth quarter of 2005. The per-share amounts in 2006 reflect the issuance
of shares following the Company's rights offering on May 1, 2006. These
results include the receipt of the softwood lumber duty refund of
$124.4 million (US$109.6 million), of which US$88.0 million was applied
against Western's U.S. dollar denominated term-debt. Excluding the softwood
duty refund, the Company would have reported a net loss in the quarter of
$16.1 million and $91.3 million for the year.
    The Company achieved EBITDA of $10.1 million in the fourth quarter of
2006, excluding the softwood duty refund. This compares to $10.2 million in
the third quarter and negative $5.3 million in the fourth quarter of 2005. The
results are not directly comparable to 2005 as a result of the acquisitions of
the Englewood logging division in March 2006 and Cascadia in May 2006. The
fourth quarter benefited from a higher value mix of lumber sales, a weaker
Canadian dollar, and lower freight and lumber duties/export tax. These
improvements were offset by higher logging and conversion costs as a result of
the severe storms during the quarter.
    Commenting on the results for the quarter, Reynold Hert, President and
CEO noted, "We are pleased that in spite of the difficulties our operations
experienced during the quarter as a result of the harsh weather, we were still
able to maintain our progress and improve our year-on-year results."

    Full Year Results

    Net income from continuing operations for the year totalled $43.9 million
($0.30 per share) compared to a loss of $60.5 million ($2.36 per share) in
2005.
    Excluding the softwood duty refund, EBITDA for the year totalled
$27.9 million, compared to negative $11.6 million in 2005. The $39.5 million
improvement resulted from higher cedar prices, increases in by-product selling
prices, reduced duties into the U.S. and the impact of synergies on the
combined operations.

    Operations

    Log production of 1,585,000 cubic metres in the quarter was lower than
planned by approximately 500,000 cubic metres as a result of the severe
weather during the quarter. Lumber production was similarly impacted, with a
decrease in production in the fourth quarter of 17% to 271 million board feet
compared to 326 million board feet in the third quarter. The Company took
additional down-time at several of its sawmills as a result of log shortages,
and closed its Cowichan Bay sawmill for the month of December to complete the
installation of new equipment. Lumber sales volume decreased by approximately
4% in the fourth quarter of 2006 to 278 million board feet, compared to
291 million board feet in the third quarter of 2006.
    During the quarter, we announced the permanent closure of the New
Westminster sawmill and the re-opening of the Saltair sawmill, both effective
February 2007. This move will allow us to remove the excess capacity in mills
that handle the small to midsize logs and capitalize on the Saltair sawmill's
lower unit costs, additional sorting, and longer lumber-length capabilities.
    Subsequent to year-end, the Company received approval to remove
approximately 28,000 hectares of its private timberlands from its Tree Farm
Licences 6, 19 and 25. As a result, the Company will explore the sale of the
higher and better-use component of the lands and review the land best suited
for ongoing timberlands operations to determine their highest-value
contribution.

    Markets

    Markets for cedar, non-dimension hemlock and fir, as well as Japanese and
other overseas exports, which represent the majority of the Company's lumber
sales, should remain attractive through at least the first half of 2007. The
Japanese lumber market has been quite stable and has been helped by the
decrease in supply from European lumber producers. The recently-announced
increase in the Russian log export tax is also expected to help maintain
demand and prices for our lumber in Japan.
    The United States structural dimension lumber market, which accounts for
approximately 25% of the Company's lumber sales by volume (13% by value), is
expected to remain weak in 2007 due to the anticipated lower number of housing
starts as a result of the existing high inventory levels of unsold homes.

    Outlook

    Western made progress in 2006 integrating the acquisitions of Cascadia
and Englewood. Initiatives included the realignment of log and lumber flows,
the merger of sales offices and certain timber harvesting operations, staff
reductions, and the implementation of new business systems. For 2007, Western
has established the following strategic priorities:

    
    -   Drive the margin focus of the business and achieve the Company's
        synergy targets
    -   Invest in a number of high-pay-back manufacturing improvements to
        strengthen operations and enhance the Company's global
        competitiveness
    -   Continue to identify opportunities for rationalization
    -   Reduce and refinance long-term debt at lower interest rates
    -   Sell non-core assets
    

    "As we look ahead to the balance of 2007 and beyond, we remain committed
to achieving our objective of building a globally competitive, margin focused
softwood lumber business." concluded Mr. Hert.

    TELECONFERENCE CALL NOTIFICATION: Friday, March 30, 2007 at
    -----------------------------------------------------------
    10:00 a.m. PST/1:00 p.m. EST
    ----------------------------

    On Friday, March 30, 2007, Western Forest Products Inc. will host a
teleconference call at 10:00 a.m. PST (1:00 p.m. EST). To participate in the
teleconference please dial 1-800-591-7539 in Canada and the U.S. (toll free)
and in Toronto or Internationally, 416-644-3423 before 10:00 a.m. PST
(1:00 p.m. EST). This call will be taped, available one hour after the
teleconference, and on replay until April 15, 2007. To hear a complete replay,
please call 1-877-289-8525 in Canada and the U.S. (toll free), Passcode
21220367 followed by the number sign or in Toronto and Internationally,
416-640-1917, Passcode 21220367 followed by the number sign. This call will
also be webcast from Western's website at www.westernforest.com.

    Western Forest Products
    Western is an integrated Canadian forest products company and the largest
coastal British Columbia woodland operator and lumber producer with an
Allowable Annual Cut of approximately 7.7 million cubic meters of timber
(before temporary AAC reductions and reductions with respect to the removal of
certain private timberlands from Tree Farm Licences) and lumber capacity in
excess of 1.5 billion board feet from eight sawmills and four remanufacturing
plants. Principal activities conducted by the Company and its subsidiaries
include timber harvesting, reforestation, sawmilling logs into lumber and wood
chips, and value-added remanufacturing. Western's logging is conducted
primarily on government owned timberlands in British Columbia. Substantially
all of Western's operations, employees and corporate facilities are located in
the coastal region of British Columbia while its products are sold in over 20
countries worldwide.

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


    Western Forest Products Inc.  - 2006 Fourth Quarter Report

    Management's Discussion & Analysis

    The following discussion and analysis reports and comments on the
financial condition and results of operations of Western Forest Products Inc.
(the "Company", "Western", "us", "we", or "our"), on a consolidated basis, for
our fourth quarter and year ended December 31, 2006 to help security holders
and other readers understand our Company and the key factors underlying our
financial results. You should read this discussion and analysis in conjunction
with our unaudited interim consolidated financial statements and related notes
thereto for the quarter and year ended December 31, 2006, and our audited
annual consolidated financial statements and management's discussion and
analysis ("MD&A") for the year ended December 31, 2005 (the "2005 Annual
Report"), all of which can be found on the System for Electronic Document
Analysis and Retrieval (SEDAR), at http://www.sedar.com. Unless otherwise
noted, the information in this discussion and analysis is updated to March 23,
2007. All financial references are in Canadian dollars unless otherwise noted.

    
    Summary of Selected Quarterly Results

                           Three      Three      Three     Twelve     Twelve
                          Months     Months     Months     Months     Months
                           Ended      Ended      Ended      Ended      Ended
    (millions of        December  September   December   December   December
     dollars except           31,        30,        31,        31,        31,
     per share amounts)     2006       2006     2005(1)      2006     2005(1)
    -------------------------------------------------------------------------
    Sales              $   279.1  $   279.5  $   120.4  $   896.8  $   499.8
    Lumber duties
     and export tax
     expensed          $    (3.6) $    (6.3) $    (6.0) $   (19.5) $   (36.4)
    EBITDA(2)          $   120.4  $    10.2  $    (5.3) $   138.2  $   (11.6)
    EBITDA before
     lumber duty
     refund            $    10.1  $    10.2  $    (5.3) $    27.9  $   (11.6)
    EBITDA margin
     (before lumber
     duty refund)            3.6%       3.6%      (4.4)%      3.1%     (2.3)%
    Lumber duty refund $   110.3  $       -  $       -  $   110.3  $       -
    Operating income
     (loss)            $   108.3  $    (0.8) $   (10.6) $    93.5  $   (39.2)
    Interest expense   $    (9.2) $   (10.9) $   (11.5) $   (41.1) $   (46.0)
    Foreign exchange
     gain (loss) on
     long-term debt    $    (6.0) $    (0.3) $    (0.1) $     2.5  $     8.3
    Premium and
     unamortized
     discount on
     bond redemption   $       -  $       -  $       -  $   (27.9) $       -
    Interest income
     on lumber duty
     refund            $    14.1  $       -  $       -  $    14.1  $       -
    Net income (loss)
     from continuing
     operations        $   109.3  $   (11.4) $   (10.5) $    43.9  $   (60.5)
    Net loss from
     discontinued
     operations        $    (1.0) $    (0.8) $   (74.1) $   (10.8) $   (79.1)
    Net income (loss)  $   108.3  $   (12.2) $   (84.6) $    33.1  $  (139.6)
    -------------------------------------------------------------------------
    Per share:
    Basic and diluted
     net income (loss)
     from continuing
     operations        $    0.53  $   (0.06) $   (0.41) $    0.30  $   (2.36)
    Basic and diluted
     net income (loss) $    0.53  $   (0.06) $   (3.30) $    0.23  $   (5.45)
    -------------------------------------------------------------------------
    Cash flow from
     continuing
     operations        $   101.1  $     5.3  $    (5.5) $    70.1  $    13.4
    -------------------------------------------------------------------------
    (1) Restated to treat the pulp segment as discontinued operations.
    (2) Non-GAAP measure - see page 6 for a discussion of EBITDA.
    


    Overview

    The results of operations for the quarter and year ended December 31,
2006 include the legacy Cascadia and Englewood operations from May 1, 2006 and
March 17, 2006, respectively and accordingly, the results are not directly
comparable to the prior periods.
    Western recorded net income from continuing operations of $109.3 million
($0.53 per share) in the fourth quarter of 2006 compared to a loss of
$11.4 million ($0.06 per share) in the third quarter of 2006, and a loss of
$10.5 million ($0.41 per share) in the fourth quarter of 2005. For the full
year net income from continuing operations was $43.9 million ($0.30 per share)
compared to a loss of $60.5 million ($2.36 per share) in 2005.
    The fourth quarter and year benefited from the settlement of the softwood
lumber dispute with the United States with the implementation of a new
Softwood Lumber Agreement ("SLA") between Canada and the United States
effective October 12, 2006. The SLA provides that approximately 82% of the
anti-dumping duties ("ADD") and countervailing duties ("CVD") collected by the
United States, together with accumulated interest, be refunded to Canadian
lumber producers. The remaining 18%, representing U.S.$1 billion, is to be
paid to various United States interest groups. During the fourth quarter of
2006 the Company received $124.4 million (U.S.$109.6 million) representing its
total ADD and CVD refund plus interest. Operating income includes
$110.3 million with respect to the lumber duty refund and interest and other
income includes $14.1 million with respect to the interest on the duty refund.
    Excluding the lumber duty refund, EBITDA was $10.1 million for the fourth
quarter of 2006 and compares to $10.2 million in the third quarter of 2006 and
negative $5.3 million in the fourth quarter of 2005. Compared to the third
quarter, the fourth quarter benefited from a higher value mix of lumber sales,
a weaker Canadian dollar, and lower freight and lumber duties/export tax.
During the fourth quarter, the Company paid the new export tax at the 15% rate
on its shipments into the United States (see note 7(a)) for a description of
the calculation of the export tax). Although this rate is higher than the
combined ADD and CVD rate previously paid of 10.8%, because the export tax
only applies to the first U.S.$500 of sales value per thousand board feet
whereas the ADD and CVD rate applied to the total sales value the effective
rate was actually lower at approximately 6.0% due to the high value profile of
the Company's products. These benefits were offset by higher unit logging and
manufacturing conversion costs caused by fourth quarter weather related
production decreases.
    Operating income from continuing operations for the fourth quarter of
2006 increased to $108.3 million compared to an operating loss of $0.8 million
recorded in the third quarter of 2006 and an operating loss of $10.6 million
in the fourth quarter of 2005. Excluding the lumber duty refund of
$110.3 million included in operating income and the write-down of property,
plant and equipment and other restructuring items there was operating income
in the fourth quarter of 2006 of $0.4 million compared to a loss of
$0.1 million in the third quarter and a loss of $11.2 million in the fourth
quarter of 2005.

    
    Continuing Operations

                           Three      Three      Three     Twelve     Twelve
                          Months     Months     Months     Months     Months
    (millions of           Ended      Ended      Ended      Ended      Ended
     dollars except     December  September   December   December   December
     where noted)       31, 2006   30, 2006   31, 2005   31, 2006   31, 2005
    -------------------------------------------------------------------------
    Lumber sales       $   217.8  $   214.0  $    91.3  $   677.1  $   384.3
    Log sales               44.6       44.8       25.5      162.1       91.9
    By-product sales        16.7       20.7        3.6       57.6       23.6
                      -------------------------------------------------------
                       $   279.1  $   279.5  $   120.4  $   896.8  $   499.8
                      -------------------------------------------------------
                      -------------------------------------------------------

    Lumber production
     - millions of
     board feet              271        326        127      1,000        648
    Lumber sales -
     millions of
     board feet              278        291        166        976        669

    Log production
     - thousands of
     cubic metres          1,585      1,617        822      5,762      2,933
    Log purchases
     - thousands of
     cubic metres            242        169         87        634        626
    Log sales -
     thousands of
     cubic metres            625        592        212      2,085        763
    Internal Log
     consumption
     - thousands of
     cubic metres          1,138      1,350        590      4,170      3,028

    Average lumber
     sales revenue
     per thousand
     board feet        $     782  $     739  $     549  $     694  $     574
    Average log sales
     revenue per
     cubic metre       $      71  $      76  $     120  $      78  $     120
    


    The Company's operations were negatively impacted by a series of storms
with unusually high rainfall and winds that affected the BC Coastal region in
the fourth quarter. Log production of 1,585,000 cubic metres in the quarter
was approximately 500,000 cubic metres lower than planned as a result and
compares to 1,617,000 cubic metres produced in the third quarter of 2006. Log
production in the third quarter was also lower than planned as logging was
curtailed for extended periods due to forest fire hazards. Lumber production
was similarly impacted with production in the fourth quarter decreasing by 17%
to 271 million board feet compared to 326 million board feet in the third
quarter as the Company took additional down-time at several of its sawmills as
a result of the log shortages and closed its Cowichan Bay sawmill for the
month of December to complete the installation of new equipment. A $13 million
Cowichan Bay sawmill project to install new production line equipment is both
on time and on budget and the sawmill re-started operations in January, 2007.
Both logging and manufacturing unit costs increased in the fourth quarter as a
result of the production shortfalls.
    Lumber sales decreased by approximately 4% in the fourth quarter of 2006
to 278 million board feet compared to 291 million board feet in the third
quarter of 2006. Lumber sales were impacted to a lesser extent by the weather
as the Company managed to sell from inventory on-hand. The average lumber
price realized in the fourth quarter increased to $782 per thousand board feet
compared to $739 per thousand board feet in the third quarter primarily due to
the sale of a higher value mix of products and a weakening of the Canadian
dollar to $1.1277 in the fourth quarter compared to $1.1178 in the third
quarter.
    By-product revenues for the quarter decreased to $16.7 million from
$20.7 million in the third quarter due to lower volumes sold primarily as a
result of the decreased lumber production. Wood chip prices increased again in
the fourth quarter as NBSK Pulp prices, which ultimately set the pricing of
by-product wood chips to the Company's customers, increased in the quarter.
    Log sales to third parties of 625,000 cubic metres in the fourth quarter
of 2006 compared to 592,000 cubic metres in the third quarter of 2006. Log
sales were higher despite the lower log production in the quarter due to the
sale of the logs that would otherwise have been consumed by the Cowichan Bay
sawmill that was closed for the month of December as noted above. The overall
log price achieved on external log sales decreased to $71 per cubic metre in
the fourth quarter compared to $76 per cubic metre in the third quarter of
2006 and $120 per cubic metre in the fourth quarter of 2005. The decrease
compared to both prior periods is due to the increase in the relative mix of
lower priced pulp logs sold compared to saw logs. During the fourth quarter of
2006, 36% of the logs sold were pulp logs compared to 2% in the fourth quarter
of 2005 when they were consumed by the Company's Squamish pulp mill.
    As announced in the fourth quarter, the Company closed its New
Westminster sawmill and its associated remanufacturing facility on February 7,
2007 and transferred the majority of its production programs to the Saltair
sawmill, which re-opened on February 12, 2007. The re-alignment is expected to
result in lower unit operating costs and greater production flexibility. The
estimated $16.5 million cost for severance and site remediation was accrued in
the fourth quarter and, since the New Westminster mill was acquired as part of
the Cascadia operations, has been added to the cost of acquiring Cascadia.

    Discontinued Operations

    The loss from discontinued operations during the fourth quarter of 2006
of $1.0 million represents the cost of maintaining the site of the Squamish
pulp mill that ceased operations in January, 2006. The loss compares to a loss
of $0.8 million in the third quarter of 2006 and to a loss of $74.1 million in
the fourth quarter of 2005 when the pulp mill was still operating. The loss in
the fourth quarter of 2005 included a $71.4 million write-down of property,
plant and equipment and operating restructuring items related to the closure
of the pulp mill. The Company will incur ongoing costs for supervision,
security, property taxes and other costs in future years depending on the
Company's plans for the site. These costs will be expensed as incurred.
    The Company is continuing to negotiate the sale of the equipment at the
site and to work with parties interested in acquiring the site itself.

    Other Corporate Items

    Selling and administration expense of $12.0 million in the fourth quarter
of 2006 compares to $11.4 million in the third quarter of 2006 and
$5.8 million in the fourth quarter of 2005.
    Interest expense decreased by $1.7 million to $9.2 million in the fourth
quarter of 2006 compared to $10.9 million in the third quarter of 2006 and
$11.5 million in the fourth quarter of 2005 as a result of the repayment of
U.S.$88.0 million of the U.S. term-debt during the quarter following receipt
of the lumber duty refund.
    There was a loss on translation of the United States dollar denominated
portion of the Company's long-term debt of $6.0 million in the quarter as a
result of the weakening of the Canadian dollar. This compares to a loss of
$0.3 million in the third quarter of 2006 and $0.1 million in the fourth
quarter of 2005.
    Income tax expense in the fourth quarter of 2006 relates to current
income taxes of $0.5 million payable with respect to the Company's Japanese
subsidiary and compares to $0.3 million in the third quarter. The recovery of
income taxes in the fourth quarter of 2005 relates to the draw down of
deferred income taxes of a subsidiary.

    
    Changes in Financial Position and Liquidity

                           Three      Three      Three     Twelve     Twelve
                          Months     Months     Months     Months     Months
                           Ended      Ended      Ended      Ended      Ended
    (millions of        December  September   December   December   December
     dollars except           31,        30,        31,        31,        31,
     where noted)           2006       2006     2005(1)      2006     2005(1)
    -------------------------------------------------------------------------
    Cash flow from
     continuing
     operations        $   100.6  $     5.3  $    (5.5) $    69.6  $    13.4
    Cash provided
     (used) by
     investing
     activities        $     7.3  $    (4.6) $    37.4  $  (191.6) $    25.3
    Cash provided
     (used) by
     financing
     activities        $   (96.2) $       -  $    (0.7) $   140.8  $    (6.7)
    Additions to
     property, plant
     and equipment     $    (6.3) $    (7.6) $    (2.1) $   (21.6) $    (8.9)
    Additions to
     capitalized roads $    (3.8) $    (5.1) $     2.1  $   (15.9) $    (9.1)
    Change in
     revolving credit
     facility          $     3.6  $       -  $    (0.7) $   (76.5) $    (6.7)
    Total liquidity(1) $   143.7  $   129.2  $    54.5  $   143.7  $    54.5
    Financial ratios:
    Current assets
     to current
     liabilities            3.08       3.00       1.30       3.08       1.30
    Debt to
     shareholders
     equity                 0.48       0.91       2.24       0.48       2.24
    Debt to market
     capitalization         0.54       0.90       5.29       0.54       5.29

    (1) Total liquidity comprises cash and cash equivalents, restricted cash
        in working capital reserves and available credit under the Company's
        revolving credit facility.
    


    Cash flow from continuing operations in the fourth quarter of 2006 of
$100.6 million compares to cash flow of $5.3 million in the third quarter of
2006 and negative $5.5 million in the fourth quarter of 2005. Cash flow in the
fourth quarter of 2006 benefited from the receipt of the lumber duty refund
and interest thereon of $124.4 million. U.S.$88.0 million (CAD$99.8 million)
of the refund was applied against the Company's long-term debt with the
balance of U.S.$21.6 million (CAD$24.6 million) retained for working capital
purposes. Following the repayment, at December 31, 2006 the Company had
long-term debt outstanding of $210.5 million.
    On March 8, 2007, as part of the terms amending the U.S. facility, a
further U.S.$21.6 million was paid down, resulting in a balance outstanding
under the U.S. facility of U.S.$73.7 million. The amendment also reduced the
interest rate charged on the U.S. facility to one month LIBOR plus 3% from one
month LIBOR plus 8.15% and eliminated annual fees of 0.75% of the balance then
outstanding. Interest on the Canadian facility is charged at CIBC Prime plus
5.25% and from March 1, 2007 will be paid in cash on $45.0 million of the
balance outstanding with interest on the remainder continuing to be deferred.
    Cash flow from continuing operations before the changes in non-cash
working capital items and before the lumber duty refund was $7.4 million in
the fourth quarter of 2006 and compares to $2.7 million in the third quarter
of 2006 and negative $16.4 million in the fourth quarter of 2005.
    Additions to property, plant and equipment of $6.3 million in the fourth
quarter primarily relate to improvements to the Company's Cowichan Bay and
Duke Point sawmills designed to increase productivity and various timberlands
equipment replacement purchases. During the quarter the Company received the
proceeds from the sale of its former Silvertree sawmill site in the amount of
$13.1 million, recording a gain of $1.1 million.
    At December 31, 2006 the Company had cash of $41.6 million and
availability under its revolving credit facility of $101.9 million.

    Selected Quarterly Information

    To assist shareholders and other readers in understanding our business,
we have included as Appendix A to the MD&A a table of the financial results
and operating data for the Company for the last eight quarters.
    In a normal operating year, there is some seasonality to the Company's
operations with higher lumber sales in the second and third quarters as
construction activity, particularly in the U.S., has historically tended to be
higher. Logging activity may also vary depending on weather conditions due to
rain, snow and ice in the winter and the threat of forest fires in the summer.

    Risks and Uncertainties

    Our business is subject to a number of risks and uncertainties, including
those described in our 2005 Annual Report and Annual Information Form, all of
which can be found on the System for Electronic Document Analysis and
Retrieval (SEDAR), at http://www.sedar.com. Any of the risks and uncertainties
described in the above-noted documents could have a material adverse affect on
our operations and financial conditions and cash flow and accordingly should
be carefully considered in evaluating our business.

    Outlook and Strategy

    Western made progress in 2006 integrating the acquisitions of Cascadia
and Englewood. Initiatives included the realignment of log and lumber flows,
the merger of sales offices and certain timber harvesting operations, staff
reductions, and the implementation of new business systems. For 2007, the
Company has established the following strategic priorities:

    
    -   Drive the margin focus of the business and achieve the Company's
        synergy targets
    -   Invest in a number of high-pay-back manufacturing improvements to
        strengthen operations and enhance the Company's global
        competitiveness
    -   Continue to identify opportunities for rationalization
    -   Reduce and refinance long-term debt at lower interest rates
    -   Sell non-core assets
    

    Subsequent to year-end, the Company received approval to remove
approximately 28,000 hectares of its private timberlands from its Tree Farm
Licences 6, 19 and 25. As a result, the Company will explore the sale of the
higher and better-use component of the lands and review the land best suited
for ongoing timberlands operations to determine their highest-value
contribution.
    Markets for cedar, non-dimension hemlock and fir, as well as Japanese and
other overseas exports, which represent the majority of the Company's lumber
sales, should remain attractive through at least the first half of 2007. The
Japanese lumber market has been quite stable and has been helped by the
decrease in supply from European lumber producers. The recently-announced
increase in the Russian log export tax is also expected to help maintain
demand and prices for our lumber in Japan.
    The United States structural dimension lumber market, which is expected
to account for approximately 25% of the Company's lumber sales by volume (13%
by value), is expected to remain weak in 2007 due to the anticipated lower
number of housing starts as a result of the existing high inventory levels of
unsold homes.

    Outstanding Share Data

    As of March 23, 2007, there are 119,842,359 Common Shares and 84,571,206
Non-Voting Shares issued and outstanding.
    In addition, the Company has 569,373 Tranche 1 Class C Warrants, 854,146
Tranche 2 Class C Warrants, and 1,423,743 Tranche 3 Class C Warrants
(collectively, the "Class C Warrants") outstanding. The Company has reserved
up to 2,847,262 Common Shares for issuance upon the exercise of the Class C
Warrants. It has also reserved 2,500,000 Common Shares for issuance upon the
exercise of options granted under the Company's incentive stock option plan.
As of March 23, 2007, 2,288,060 options have been granted under the Company's
incentive stock option plan.

    Other Matters

    As a result of the rights offering of subscription receipts to all
shareholders and their subsequent conversion to Common Shares and Non-Voting
Shares (see note 6 (a) to the Unaudited Interim Consolidated Financial
Statements) Tricap Management Limited ("Tricap") owns 49% of the Company's
Common Shares and 100% of the Non-Voting Shares. By virtue of the Brookfield
Asset Management Inc. ("BAM") voting arrangements with Tricap, BAM is related
to the Company. In addition to the transactions identified elsewhere in this
report, the Company has certain arrangements with entities related to BAM to
acquire and sell logs, lease certain facilities, provide access to roads and
other areas, and acquire other services including insurance, all in the normal
course and at market rates or at cost. During the period from September 30,
2006 to December 31, 2006, the Company paid entities related to BAM
$6.6 million and charged $3.0 million in connection with these arrangements.
    Other than as described in this quarterly report, there has been no
change to the information provided in our MD&A for the year ended December 31,
2005, dated March 27, 2006 ("2005 Annual MD&A") in respect of the following
items: Contractual Obligations (other than ordinary course), Financial
Instruments, Off-balance Sheet Arrangements, Transactions with Related
Parties, Critical Accounting Estimates, Changes in Accounting Policy, and
Risks and Uncertainties. Please see our 2005 Annual MD&A for information on
these items.
    Additional information about the Company, including our Annual
Information Form, is available at www.sedar.com under the Company name,
Western Forest Products Inc.


    On behalf of the Board of Directors

    John MacIntyre                    Reynold Hert
    Chairman                          President and Chief Executive Officer

    Duncan, BC
    March 23, 2007

    Note:

    We have prepared the financial information contained in this discussion
and analysis in accordance with Canadian generally accepted accounting
principles ("GAAP"). Reference is also made to EBITDA. EBITDA is defined as
operating income (loss) plus amortization of property, plant and equipment and
the write-down of property, plant and equipment and operating restructuring
costs. We use EBITDA as a benchmark measurement of our own operating results,
and as a benchmark relative to our competitors. We consider EBITDA to be a
meaningful supplement to operating income as a performance measure primarily
because amortization expense and property write-downs are not actual cash
costs, and vary widely from company to company in a manner that we consider
largely independent of the underlying cost efficiency of their operating
facilities. Further, operating restructuring costs are not expected to occur
on a regular basis and may make comparisons of our operating results between
periods more difficult. We also believe EBITDA is commonly used by securities
analysts, investors and other interested parties to evaluate our financial
performance.
    EBITDA does not represent cash generated from operations as defined by
Canadian GAAP and it is not necessarily indicative of cash available to fund
cash needs. Furthermore, EBITDA does not reflect the impact of a number of
items that affect our net income (loss). EBITDA is not a measure of financial
performance under GAAP, and should not be considered as an alternative to
measures of performance under GAAP. Moreover, because all companies do not
calculate EBITDA in the same manner, EBITDA as calculated by us may differ
from EBITDA as calculated by other companies.

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


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

                                                      2006
                                  -------------------------------------------
                                      4th        3rd        2nd        1st
                                  -------------------------------------------

                                  -------------------------------------------
    Average Exchange Rate - Cdn$
     to purchase one U.S.$        $  1.1277     1.1178     1.1292     1.1462
    Sales
      Lumber                      $   217.8      214.0      158.1       87.2
      Logs                             44.6       44.8       49.0       23.7
      By-Products                      16.7       20.7       12.9        7.3
                                  -------------------------------------------
                                  $   279.1      279.5      220.0      118.2
                                  -------------------------------------------
                                  -------------------------------------------

    Lumber
      Production - millions of
       board feet                       271        326        250        153
      Sales - millions of board
       feet                             278        291        243        164
    Logging
      Production -  m3 (000's)        1,585      1,617      1,898        662
      Purchases - m3 (000's)            242        169        143        100
      Sales -  m3 (000's)               625        592        605        262
      Internal consumption -
       m3 (000's)                     1,138      1,350      1,031        650
    Sales prices
      Lumber - per thousand
       board feet                 $     782        739        648        533
      Logs - per cubic metre      $      71         76         81         90

    Net income (loss) from
     continuing operations        $   109.3      (11.4)      (7.5)     (46.5)

    Discontinued pulp operations
      Sales                       $       -          -       (0.1)      20.0
      Income (loss)               $    (1.0)      (0.8)      (1.9)      (7.1)
      Pulp production - tonnes
       (000's)                            -          -          -         18
      Pulp sales - tonnes (000's)         -          -          -         34
      Pulp sales price per tonne  $       -          -          -        586

    Net income (loss)             $   108.3      (12.2)      (9.4)     (53.6)

    Net income (loss) per share
     from continuing operations   $    0.53      (0.06)     (0.05)     (1.81)
    Net income (loss) per share
     - basic and diluted          $    0.53      (0.06)     (0.06)     (2.09)

    Reconciliation of EBITDA to
     net income (loss) from
     continuing operations:
    EBITDA before lumber duty
     refund                       $    10.1       10.2        7.7       (0.1)
    Lumber duty refund                110.3          -          -          -
                                  -------------------------------------------
    EBITDA                            120.4       10.2        7.7       (0.1)
    Amortization of property,
     plant & equipment                 (9.7)     (10.3)     (10.8)      (5.9)
    Restructuring & other items        (2.4)      (0.7)      (4.9)         -
    Interest expense                   (9.2)     (10.9)      (9.9)     (11.1)
    F/X on long-term debt              (6.0)      (0.3)       9.7       (0.9)
    Premium & unamortized
     discount                             -          -          -      (27.9)
    Interest and other income
     (expense)                         16.7        0.9        0.5       (0.4)
    Financial restructuring               -          -          -          -
    Income taxes                       (0.5)      (0.3)       0.2       (0.2)
                                  -------------------------------------------
    Net income (loss) from
     continuing operations        $   109.3      (11.4)      (7.5)     (46.5)
                                  -------------------------------------------
                                  -------------------------------------------


                                                      2005
                                  -------------------------------------------
                                      4th        3rd        2nd        1st
                                  -------------------------------------------

                                  -------------------------------------------
    Average Exchange Rate - Cdn$
     to purchase one U.S.$           1.1703     1.2122     1.2411     1.2259
    Sales
      Lumber                           91.3       88.2      107.5       97.3
      Logs                             25.5       22.2       26.0       18.2
      By-Products                       3.6        5.9        7.0        7.1
                                  -------------------------------------------
                                      120.4      116.3      140.5      122.6
                                  -------------------------------------------
                                  -------------------------------------------

    Lumber
      Production - millions of
       board feet                       127        150        186        185
      Sales - millions of board
       feet                             166        165        176        162
    Logging
      Production -  m3 (000's)          822        465      1,148        498
      Purchases - m3 (000's)             87        147        192        200
      Sales -  m3 (000's)               212        172        213        166
      Internal consumption -
       m3 (000's)                       590        719        844        875
    Sales prices
      Lumber - per thousand
       board feet                       549        535        612        599
      Logs - per cubic metre            120        129        122        110

    Net income (loss) from
     continuing operations            (10.5)      (8.2)     (35.5)      (6.3)

    Discontinued pulp operations
      Sales                            40.6       40.4       45.9       40.1
      Income (loss)                   (74.1)      (4.3)      (1.7)       1.0
      Pulp production - tonnes
       (000's)                           71         69         72         67
      Pulp sales - tonnes (000's)        69         71         73         62
      Pulp sales price per tonne        582        573        624        651

    Net income (loss)                 (84.6)     (12.5)     (37.2)      (5.3)

    Net income (loss) per share
     from continuing operations       (0.41)     (0.32)     (1.38)     (0.25)
    Net income (loss) per share
     - basic and diluted              (3.30)     (0.49)     (1.45)     (0.21)

    Reconciliation of EBITDA to
     net income (loss) from
     continuing operations:
    EBITDA before lumber duty
     refund                            (5.3)     (11.5)      (1.6)       6.8
    Lumber duty refund                    -          -          -          -
                                  -------------------------------------------
    EBITDA                             (5.3)     (11.5)      (1.6)       6.8
    Amortization of property,
     plant & equipment                 (5.9)      (4.5)      (9.6)      (5.6)
    Restructuring & other items         0.6        5.9       (8.5)         -
    Interest expense                  (11.5)     (11.2)     (11.8)     (11.5)
    F/X on long-term debt              (0.1)      13.3       (3.3)      (1.6)
    Premium & unamortized
     discount                             -          -          -          -
    Interest and other income
     (expense)                          1.1          -       (0.5)       5.8
    Financial restructuring               -          -          -          -
    Income taxes                       10.6       (0.2)      (0.2)      (0.2)
                                  -------------------------------------------
    Net income (loss) from
     continuing operations            (10.5)      (8.2)     (35.5)      (6.3)
                                  -------------------------------------------
                                  -------------------------------------------

    (1) EBITDA restated to exclude pulp segment now classified as
        discontinued operations.


    Consolidated Balance Sheets (Unaudited)
    (Expressed in millions of Canadian dollars)
    -------------------------------------------------------------------------
                                                   December 31,  December 31,
                                                          2006          2005
                                                   --------------------------
                                                                   (Restated-
                                                                     note 12)
    Assets
    Current assets:
    Cash and cash equivalents                       $    41.6      $    29.6
    Accounts receivable (note 2)                        102.4           50.7
    Inventory                                           215.7          112.3
    Prepaid expenses and other assets (note 2)           11.7           12.7
    Discontinued operations (note 12)                     0.7           36.4
                                                    -------------------------
                                                        372.1          241.7

    Property, plant and equipment                       505.4          319.7
    Other assets                                         13.8           10.4
                                                    -------------------------

                                                    $   891.3      $   571.8
                                                    -------------------------
                                                    -------------------------
    Liabilities and Shareholders' Equity
    Current liabilities:
    Revolving credit facility (note 4)              $     3.6      $    71.4
    Accounts payable and accrued liabilities            110.8           75.9
    Discontinued operations (note 12)                     6.4           38.1
                                                    -------------------------
                                                        120.8          185.4
    Long-term debt (note 5)                             210.5          247.9
    Other liabilities                                    42.6           28.0
    Deferred revenue (notes 1 and 3)                     78.4              -
                                                    -------------------------
                                                        452.3          461.3
    Shareholders' equity (note 6)
    Common shares                                       410.6          255.2
    Non-voting shares                                   139.6              -
    Contributed surplus                                   0.8            0.4
    Deficit                                            (112.0)        (145.1)
                                                    -------------------------
                                                        439.0          110.5
                                                    -------------------------

                                                    $   891.3      $   571.8
                                                    -------------------------
                                                    -------------------------
    Commitments and contingencies (note 7)
    Subsequent events (notes 2, 3, 4, 5 and 13)

    See accompanying notes to consolidated financial statements

    Approved on behalf of the Board:

    "Reynold Hert" Director

    "John MacIntyre" Director



    Consolidated Statements of Operations (Unaudited)
    (Expressed in millions of Canadian dollars
     except for share and per share amounts)
    -------------------------------------------------------------------------
                                    Three months ended   Twelve months ended
                                       December 31           December 31
                                       2006       2005       2006       2005
                                  -------------------------------------------
                                             (Restated-            (Restated-
                                               note 12)              note 12)

    Sales                         $   279.1  $   120.4  $   896.8  $   499.8

    Cost and expenses
    Cost of goods sold                235.3      102.3      740.8      409.6
    Anti-dumping and
     countervailing duties
     (note 7(a))                        0.4        6.0       16.3       36.4
    Export tax (note 7(a))              3.2          -        3.2          -
    Freight expenses                   18.1       11.6       68.6       44.1
    Selling and administration         12.0        5.8       40.0       21.3
    Amortization of property,
     plant and equipment                9.7        5.9       36.7       25.6
                                  -------------------------------------------
                                      278.7      131.6      905.6      537.0
                                  -------------------------------------------

    Operating loss before
     write-down of property, plant
     and equipment and operating
     restructuring costs, and
     anti-dumping and
     countervailing duty refund         0.4      (11.2)      (8.8)     (37.2)

    Anti-dumping and
     countervailing duty refund
     (note 7(a))                      110.3          -      110.3          -
    Write-down of property, plant
     and equipment and operating
     restructuring costs (note 11)     (2.4)       0.6       (8.0)      (2.0)
                                  -------------------------------------------

    Operating income (loss)           108.3      (10.6)      93.5      (39.2)

    Interest expense                   (9.2)     (11.5)     (41.1)     (46.0)
    Foreign exchange gain (loss)
     on long-term debt                 (6.0)      (0.1)       2.5        8.3
    Premium and unamortized
     discount on bond redemption          -          -      (27.9)         -
    Interest and other income
     (note 7(a))                       16.7        1.2       17.7        6.5
                                  -------------------------------------------

    Income (loss) before income
     taxes                            109.8      (21.0)      44.7      (70.4)
    Income tax recovery (expense)      (0.5)      10.5       (0.8)       9.9
                                  -------------------------------------------

    Net income (loss) from
     continuing operations            109.3      (10.5)      43.9      (60.5)
    Net loss from discontinued
     operations (note 12)              (1.0)     (74.1)     (10.8)     (79.1)
                                  -------------------------------------------

    Net income (loss)                 108.3      (84.6)      33.1     (139.6)

    Deficit, beginning of period     (220.3)     (60.5)    (145.1)      (5.5)
                                  -------------------------------------------

    Deficit, end of period        $  (112.0) $  (145.1) $  (112.0) $  (145.1)
                                  -------------------------------------------
                                  -------------------------------------------

    Income (loss) per share:
    Net income (loss) from
     continuing operations -
     basic and diluted            $    0.53  $   (0.41) $    0.30  $   (2.36)
    Net income (loss) from
     discontinued operations -
     basic and diluted            $       -  $   (2.89) $   (0.07) $   (3.09)
    Net income (loss) - basic
     and diluted                  $    0.53  $   (3.30) $    0.23  $   (5.45)
    Weighted average number of
     shares outstanding
     (thousands of shares)
     (note 6)                       204,414    25, 636    145,637     25,632


    See accompanying notes to the consolidated financial statements



    Consolidated Statements of Cash Flows (Unaudited)
    (Expressed in millions of Canadian dollars)
    -------------------------------------------------------------------------
                                    Three months ended   Twelve months ended
                                       December 31           December 31
                                       2006       2005       2006       2005
                                  -------------------------------------------
                                             (Restated-            (Restated-
    Cash provided by (used in):                note 12)              note 12)

    Operating activities:
    Net income (loss) from
     continuing operations        $   109.3  $   (10.5) $    43.9  $   (60.5)
    Items not involving cash:
    Amortization of property,
     plant and equipment                9.7        5.9       36.7       25.6
    Write-down of property,
     plant and equipment                1.9          -        2.6        8.5
    Foreign exchange (gain) loss
     on long-term debt                  6.0        0.1       (2.5)      (8.3)
    Premium and unamortized
     discount on bond redemption          -          -       27.9          -
    (Gain) loss on disposal of
     property, plant and equipment     (1.7)       0.1       (1.7)     (12.7)
    Interest deferred on
     long-term debt                     2.8          -       (0.8)      10.3
    Future income tax recovery            -      (10.5)         -      (10.5)
    Other                               3.8       (1.5)       5.7        1.4
                                  -------------------------------------------
                                      131.8      (16.4)     111.8      (46.2)
                                  -------------------------------------------
    Changes in non-cash working
     capital items:
    Accounts receivable               (16.9)     (11.4)      17.8        6.6
    Inventory                          (6.8)      14.5      (18.0)      41.6
    Prepaid expenses                    4.8        2.0        3.1        0.1
    Accounts payable and
     accrued liabilities              (12.3)       5.8      (45.1)      11.3
                                  -------------------------------------------
                                      (31.2)      10.9      (42.2)      59.6
                                  -------------------------------------------
    Cash provided (used) by
     continuing operations            100.6       (5.5)      69.6       13.4
                                  -------------------------------------------

    Financing activities:
    Proceeds from (repayment of)
     revolving credit facility          3.6       (0.7)     (76.5)      (6.7)
    Redemption of 15% Secured
     Bonds (note 5)                       -          -     (275.9)         -
    Proceeds from term loans
     (note 5)                             -          -      307.8          -
    Repayment of term loans           (99.8)         -     (104.5)         -
    Proceeds from share issuance
     (note 6(a))                          -          -      295.0          -
    Other                                 -          -       (5.1)         -
                                  -------------------------------------------
                                      (96.2)      (0.7)     140.8       (6.7)
                                  -------------------------------------------

    Investing activities:
    Additions to property, plant
     and equipment                     (6.3)      (2.1)     (21.6)      (8.9)
    Additions to capitalized roads     (3.8)       2.1      (15.9)      (9.1)
    Proceeds on disposals of
     property, plant and equipment     13.4       (0.3)      14.5       29.4
    Restricted cash                     1.8       39.6       12.0       (6.0)
    Acquisition of Cascadia
     Forest Products Ltd., net
     of cash acquired (note 2)            -          -     (214.7)         -
    Acquisition of Englewood
     Logging Division (note 3)            -          -       (3.4)         -
    Price premium prepayment on
     long-term fibre agreement
     (note 3)                             -          -       35.0          -
    Bill 28 take back proceeds
     and infrastructure advance           -          -          -       21.5
    Other                               2.2       (1.9)       2.5       (1.6)
                                  -------------------------------------------
                                        7.3       37.4     (191.6)      25.3
                                  -------------------------------------------
    Cash used in discontinued
     operations (note 12)                 -       (5.5)      (6.8)      (7.4)
                                  -------------------------------------------
    Increase in cash and cash
     equivalents                       11.7       25.7       12.0       24.6
    Cash and cash equivalents,
     beginning of period               29.9        3.9       29.6        5.0
                                  -------------------------------------------
    Cash and cash equivalents,
     end of period                $    41.6  $    29.6  $    41.6  $    29.6
                                  -------------------------------------------
                                  -------------------------------------------

    Supplementary information:
    Non-cash item - Acquisition
     of Englewood Logging
     Division (note 3)            $       -  $       -  $   45.0   $       -

    See accompanying notes to the consolidated financial statements



    Notes to Unaudited Interim Consolidated Financial Statements
    (Tabular amounts expressed in millions of Canadian dollars)

        The business of Western Forest Products Inc.'s (the Company or
        Western) is timber harvesting and lumber manufacturing for worldwide
        markets.

    1.  Significant Accounting Policies

        These interim consolidated financial statements do not include all
        disclosures required by Canadian generally accepted accounting
        principles for annual financial statements and, accordingly, should
        be read in conjunction with the Company's most recent audited annual
        consolidated financial statements. These interim consolidated
        financial statements follow the same accounting policies and methods
        of application used in the Company's consolidated financial
        statements as at December 31, 2005 and for the year then ended except
        that the Company has adopted a new accounting policy with respect to
        a new balance sheet caption "deferred revenue" that arose on entering
        into a long-term fibre supply agreement (note 3). Deferred revenue
        will be amortized into income on a straight-line basis over the
        term of the agreement. In addition, certain comparative figures have
        been restated to reflect the current period's presentation.

    2.  Acquisition of Cascadia Forest Products Ltd.

        On May 1, 2006 the Company closed its acquisition of all of the
        issued and outstanding common shares of Cascadia Forest Products Ltd.
        (Cascadia) from a wholly-owned subsidiary of Brookfield Asset
        Management Inc. (BAM), for approximately $220.1 million paid in cash
        on closing. BAM is related to the Company by virtue of its voting
        arrangements with Tricap Management Limited (Tricap). Tricap owns 49%
        of the Company's Common Shares and all of the Company's Non-Voting
        Shares. The consideration paid includes certain amounts based on
        closing date estimates including an estimate of Cascadia's working
        capital on closing of $98.2 million. The Company received
        $6.6 million from BAM during the third quarter and a further
        $12.5 million together with interest of $0.7 million subsequent to
        the year-end with respect to the finalization of the actual amounts.
        These amounts were included in accounts receivable at December 31,
        2006.

        Also on May 1, 2006, Cascadia along with one of its wholly-owned
        subsidiaries, Mid-Island Reman Inc., amalgamated with the Company and
        one of its wholly-owned subsidiaries, WFP Western Lumber Ltd. The
        amalgamated company continued as Western Forest Products Inc.

        The acquisition has been accounted for by the purchase method,
        whereby the purchase consideration has been allocated to the assets
        and liabilities acquired based on their fair values on May 1, 2006.
        The following fair value allocation is based on management's best
        estimates and information known at the time of preparing these
        unaudited interim consolidated financial statements. Any subsequent
        revisions to the fair value allocation may be material.

        (millions of dollars)
        ---------------------------------------------------------------------
        Net assets acquired at fair values:
        Current assets                                              $  153.0
        Land                                                            39.2
        Timberlands                                                     83.8
        Logging roads                                                   19.3
        Buildings, plant and equipment                                  13.9
        Other assets                                                     0.7
                                                                    ---------
                                                                       309.9
                                                                    ---------
        Current liabilities                                            (99.8)
        Long-term liabilities                                           (7.9)
                                                                    ---------
                                                                      (107.7)
                                                                    ---------
                                                                    $  202.2
                                                                    ---------
                                                                    ---------
        Consideration paid:
        Cash paid on closing, net of cash acquired of $3.8 million
         and forestry liabilities adjustments                       $  209.7
        Adjustment to purchase price for actual closing working
         capital                                                       (12.5)
        Transaction costs                                                5.0
                                                                    ---------
                                                                    $  202.2
                                                                    ---------
                                                                    ---------

        The allocation above includes estimated severance and other costs
        associated with the acquired Cascadia operations of $7.7 million and
        estimated severance and other costs totaling $16.5 million with
        respect to the closure of the New Westminster sawmill that was
        included in the acquired assets. The sawmill was closed effective
        February 7, 2007. The actual amounts incurred in relation to these
        activities may differ from these estimates and any such difference
        will be factored into the final allocation.

        The allocation includes amounts due from entities related to BAM of
        $7.1 million which was received in the third quarter. The allocation
        also includes $6.4 million of cash held in escrow that may only be
        used to pay for silviculture and forestry liabilities, of which
        $3.2 million was remaining at December 31, 2006 and included in
        prepaid expenses and other assets.

    3.  Acquisition of Englewood Logging Division and New Long-Term Fibre
        Supply Agreement

        On March 17, 2006, the Company closed its acquisition of the assets
        of the Englewood Logging Division, from a partnership between
        Canadian Forest Products Ltd. and Oji Paper Canada Ltd. (the
        Partnership), for $45.0 million plus closing adjustments and other
        costs of approximately $3.4 million. The acquisition comprises Tree
        Farm Licence 37 which currently has an allowable annual timber cut of
        approximately 844,000 cubic meters, having been reduced on October 1,
        2006 from 945,000 cubic metres as part of the British Columbia
        Ministry of Forest and Range five year timber supply review. The
        acquisition also includes approximately 6,800 hectares of fee simple
        lands, existing capital improvements, equipment and railway rolling
        stock. The fee simple lands within Tree Farm Licence 37 were
        transferred to the Company subsequent to the year-end and until that
        time the Company harvested timber on those lands under contract with
        the former landowner. The Company has assumed certain contracts and
        offered employment to all of the employees but has not assumed any
        other material pre-closing liabilities relating to the assets. On
        March 17, 2006, the Company also executed a 40 year fibre supply
        agreement with the Partnership. As consideration for entering into
        the fibre supply agreement, the Company will receive a price premium
        that will be earned as wood chips are delivered under the agreement.
        A non-refundable prepayment of the price premium of $35.0 million was
        received on March 17, 2006 and applied to reduce the amount drawn
        under the Company's revolving line of credit. A further $45.0 million
        price premium will be set-off against the consideration due on the
        acquisition of the Englewood Logging Division. The Company has
        recorded the price premium as deferred revenue. The Company has
        granted a first charge over the acquired assets to secure certain of
        its obligations to the Partnership.

    4.  Revolving Credit Facility

        On July 27, 2004, the Company established a three-year revolving
        credit facility, secured by receivables and inventory and bearing
        interest at prime plus 0.75%. The size of this asset-backed facility
        was determined by the level of outstanding receivables and inventory,
        but could not exceed $100.0 million. On July 13, 2006, the revolving
        credit facility was amended to: increase the maximum amount that can
        be borrowed to $150.0 million with provision for further extensions
        up to $200.0 million, subject to lender approval; reduce the interest
        rate to prime plus 0.50%; extend the term until July 12, 2009; and
        effect certain other amendments. At December 31, 2006, of the
        $126.7 million of the facility that was available to the Company,
        $3.6 million was drawn and $21.2 million was used to support standby
        letters of credit, leaving a balance of $101.9 million available for
        future use. Subsequent to the year-end, $11.6 million of the amount
        that had been used to support standby letters of credit was released.

    5.  Long-Term Debt

        On July 27, 2004, the Company issued U.S.$221.0 million of 15%
        Secured Bonds due in 2009 for proceeds of U.S.$210.0 million.  On
        March 10, 2006, the Company redeemed the Secured Bonds in full
        together with all accrued interest from the proceeds of two new term
        facilities obtained from Tricap and its designated lender, the
        Brookfield Bridge Lending Fund (BBLF). The Company is related to
        BBLF by virtue of BBLF's relationship to BAM.

        The new debt financing consists of two secured term facilities, a
        four-year U.S.$187.5 million facility (CAD$217.8 million), and a one-
        year Canadian $90.0 million facility, which has been extended for a
        second year. The secured loan is non-amortizing and is pre-payable,
        in whole or in part, at any time. Interest on amounts drawn under the
        U.S. facility were charged at the floating U.S. one-month LIBOR plus
        8.15%. On March 8, 2007, the terms of the U.S. facility were amended
        to reduce the interest rate to floating U.S. one-month LIBOR plus 3%.
        Interest on the Canadian facility will be charged at the floating
        Canadian prime rate plus 5.25% and is being deferred and added to the
        principal amount outstanding in accordance with the terms of the
        facility. During the first quarter of 2006 the Company paid BBLF
        U.S.$1.575 million in commitment fees with respect to the U.S. term
        facility. A further Canadian $0.9 million commitment fee with respect
        to the Canadian facility was deferred and added to the principal
        amount outstanding.

        The obligations under the facilities are secured by liens against
        all of the Company's properties and assets and include customary
        covenants including repayment of the facilities from the proceeds of
        asset sales and other non-operating cash inflows, with certain
        exceptions. The Company is able to deposit the proceeds of asset
        sales, new security issues and any softwood duty settlements into a
        working capital reserve in the amount of up to $25 million annually.

        The Company paid down U.S.$4.2 million of the U.S. dollar term loan
        as required under the loan agreement following receipt of the rights
        offering proceeds (see note 6(a)) and paid down a further
        U.S.$88.0 million on November 24, 2006, reducing the amount
        outstanding at December 31, 2006, to U.S.$95.3 million
        (CAD$111.0 million). On March 8, 2007, as part of the terms amending
        the U.S. facility, a further U.S.$21.6 million was paid down
        resulting in a balance outstanding of U.S.$73.7 million. At
        December 31, 2006 the principal outstanding under the Canadian term
        loan was $99.5 million.

    6.  Shareholders Equity

        (a)  Rights Offering

        During 2006, the Company raised a total of $295.0 million through a
        rights offering of 178.8 million subscription receipts pursuant to a
        final prospectus dated January 31, 2006. The proceeds were used to
        provide financing for the acquisition of Cascadia (see note 2) and to
        provide funding for some of the structural changes that need to be
        made to the combined business and provide additional liquidity. Under
        the terms of the rights offering, shareholders received in respect of
        each Common Share a right entitling the holder to subscribe for 6.975
        subscription receipts of the Company with each subscription receipt
        representing the right to receive one Common Share at a price of
        $1.65 per subscription receipt. The rights were listed for trading on
        the Toronto Stock Exchange and were exercisable until March 9, 2006.

        Pursuant to the terms of a standby agreement with the Company, Tricap
        purchased at a price of $1.65 per subscription receipt, 51 million
        subscription receipts that had not been purchased by other rights
        holders under the rights offering following which it held a total of
        138.2 million subscription receipts.

        In accordance with the terms of the Subscription Receipts Agreement,
        on May 1, 2006, the Company permitted only 94.2 million of the
        178.8 million subscription receipts outstanding to be exchanged for
        94.2 million Common Shares. As a result, Tricap was permitted to
        exchange 53.6 million subscription receipts for Common Shares
        resulting in Tricap holding 58.7 million (49%) of the Company's
        119.8 million Common Shares now issued and outstanding. The remaining
        84.6 million subscription receipts held by Tricap were converted to
        84.6 million Non-Voting Shares following the creation of this new
        class of shares at the Company's Annual and Special Meeting on
        June 16, 2006. The holders of the Non-Voting Shares have certain
        registration rights, exercisable after May 1, 2009, that enable them
        to require the Company to assist them with a public offering of the
        Non-Voting Shares or Common Shares for which the Non-Voting Shares
        may be exchanged, subject to certain limitations.

        The $295.0 million funds received on the rights offering were held in
        escrow and were not available to the Company until certain conditions
        were met, the principal one being the closing of the acquisition of
        Cascadia. Accordingly, for financial statement purposes the funds
        were not shown on the balance sheet until May 1, 2006, the date that
        the acquisition of Cascadia closed (see note 2).

        (b)  Stock-based Compensation Plan

        During the year ended December 31, 2006, 1,905,000 options with an
        exercise price of $1.75 per Common Share, being the trading price of
        the shares at the date of grant, were granted and 16,530 options with
        an exercise price of $12.10 were cancelled as a result of two
        Directors not standing for re-election resulting in 2,288,060 options
        being outstanding at December 31, 2006 with a weighted average
        exercise price of $2.79 per Common Share.

        (c)  Class C Warrants

        The Company has outstanding 569,373 Tranche 1 Class C Warrants,
        854,146 Tranche 2 Class C Warrants and 1,423,743 Tranche 3 Class C
        Warrants (collectively, the Class C Warrants) that were issued as of
        July 27, 2004. In accordance with the terms of the Class C Warrant
        Indenture, following the completion of the rights offering to all
        shareholders, effective April 5, 2006 the Class C Warrants were re-
        priced so that each Class C Warrant now entitles the holder to
        purchase one Common Share (subject to certain adjustments) at the
        following exercise price: $14.72 (previously $16.28) for Tranche 1
        Class C Warrants, $23.54 (previously $26.03) for Tranche 2 Class C
        Warrants, and $30.60 (previously $33.83) for Tranche 3 Class C
        Warrants. The Class C Warrants are non-transferable and have a five-
        year term, subject to early termination provisions. For accounting
        purposes, no value has been allocated to these warrants due to their
        contingent nature.

    7.  Commitments and Contingencies

        (a)  Lumber Duties and Export Tax

        Effective October 12, 2006, the Canadian and United States
        Governments implemented a softwood lumber agreement (SLA) that
        replaces the United States imposed anti-dumping duty (ADD) and
        countervailing duty (CVD) regime with an export tax, payable to the
        Canadian Federal Government. The SLA provides that approximately 82%
        of the ADD and CVD duties collected by the U.S., together with
        accumulated interest, be refunded to Canadian lumber producers. The
        remaining 18%, representing U.S.$1 billion, is to be paid to various
        U.S. interest groups. During the fourth quarter of 2006, the Company
        received $124.4 million (U.S.$109.6 million) representing its total
        ADD and CVD refund. Operating income includes $110.3 million with
        respect to the refund and interest and other income includes
        $14.1 million with respect to the interest on the duty refund.

        The SLA has a term of seven years with provision for an extension of
        two years and for early termination by either Government after two
        years. British Columbia's coastal region, the area in which the
        Company operates, has elected to be subject to the new export tax
        only and not the quota alternative. The export tax rate varies
        according to the price of lumber based on the "Random Lengths Framing
        Lumber Composite Index" (Index) and ranges from zero percent when the
        Index is above U.S.$355 per thousand board feet to 15% when the Index
        is under U.S.$315 per thousand board feet. The export tax only
        applies to the first U.S.$500 per thousand board feet for any product
        sales. In addition, if the monthly volume of exports from the British
        Columbia coastal region exceeds a certain "Trigger Volume" as defined
        in the SLA, a "surge" mechanism will apply to increase the rate of
        the export tax for that month by 50% (for example the 15% export tax
        rate would become 22.5% for that month). During the fourth quarter of
        2006, the Company was subject to a 15% export tax and has recorded an
        expense of $3.2 million, in this respect.

        (b)  Litigation and Claims

        In the normal course of its business activities, the Company may be
        subject to a number of claims and legal actions that may be made by
        customers, suppliers and others in respect of which either provision
        has been made or for which no material liability is expected.

        The Company has a number of claims filed against it from logging
        contractors with respect to various operating issues. Certain of the
        claims are pending arbitration, mediation or appeal, while others
        have not yet reached this formal stage. Where the Company is not able
        to determine the outcome of these disputes no amounts have been
        accrued in these financial statements.

        (c)  Indemnity Agreement

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

        (d)  Long-Term Fibre Supply Agreements

        The Company has a number of long-term commitments to supply fibre to
        third parties. Certain of these agreements have minimum periodic
        volume requirements and may, in the case of a failure to supply the
        minimum volume, require the Company to source the deficiency from
        third parties at additional cost to the Company or pay the party to
        the fibre supply agreement a penalty calculated based on the
        provisions contained in the agreements. Based on chip and pulp log
        volumes supplied for the year-to-date, the Company anticipates
        satisfying these annual fibre commitments for 2007.

        (e)  Allowable Annual Cut Reductions

        During the year a number of the Company's tenures were affected by
        reductions to the allowable annual cut (AAC). While apportionment of
        the temporary AAC reductions to specific licensees is outstanding, it
        is anticipated that the Company's tenures on the Haida Gwaii / Queen
        Charlotte Islands and the Central Coast will see a total AAC
        reduction of approximately 450,000 cubic meters. This volume is
        equivalent to approximately 6% of the Company's annual timber harvest
        rights.

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

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

        (f)  The Forest Revitalization Plan

        In January 2005, pursuant to terms of a settlement framework
        agreement negotiated in late 2004, the Company received $16.5 million
        in compensation for the loss of 685,216 cubic meters of AAC and 827
        hectares of timber licences. Under this agreement, the Company also
        received an advance payment of $5.0 million towards compensation for
        improvements the Company and its predecessor made to Crown land in
        the take-back areas ($4.0 million was recorded as a reduction in
        capitalized roads and $1.0 million was recorded in accounts payable
        for future site obligations). Negotiations are continuing to finalise
        compensation payments for improvements.


    8.  Pension Expense

        The Company has defined benefit and defined contribution pension
        plans that cover substantially all salaried and certain hourly
        employees. The defined benefit plans provide pensions based on length
        of service and final average earnings. The funded and unfunded
        defined benefit pension plans were closed to new entrants effective
        July 1, 2006. All new salaried employees are now provided with
        pension benefits through a defined contribution plan. The Company
        also contributes to hourly paid employee union pension plans and has
        health care plans covering certain hourly and retired salaried
        employees. In the three months ended December 31, 2006 the Company
        recorded expense with respect to continuing operations of
        $6.1 million (2005 - $2.7 million) and $nil million (2005 -
        $0.4 million) with respect to discontinued operations with respect to
        these benefit plans.

    9.  Financial Instruments

        The Company has significant exposure to individual customers
        including one customer which represented 9% (2005 - 12%) of the
        Company's sales for the year ended December 31, 2006. The accounts
        receivable balance from the same customer represented 14% of the
        Company's outstanding accounts receivable at December 31, 2006; and
        was insured through the Export Development Corporation as to
        approximately 90% of the balance outstanding. The Company's general
        practice is to make sales on a cash basis, without credit terms, or
        to insure them for 90% of their sales value with the Export
        Development Corporation.

    10. Segmented Information

        The Company is an integrated Canadian forest products company
        operating in one industry segment comprising the Company's timber
        harvesting, reforestation, sawmilling, value-added lumber
        remanufacturing and lumber marketing operations. Until January 26,
        2006 the Company also operated in the Pulp Segment that comprised the
        Company's NBSK pulp manufacturing and sales operations (note 12 -
        discontinued operations).

    11. Write-Down of Property, Plant and Equipment and Operating
        Restructuring Costs

        The write-down of property, plant and equipment and operating
        restructuring costs for the year ended December 31, 2006 comprises
        severance and other costs associated with the closure of the
        Company's log merchandiser facility, the write-off of assets no
        longer being used in the Company's operations, the write-down of
        surplus land sold in the fourth quarter, severance costs and the
        restructuring of certain timberlands operations. For the year ended
        December 31, 2005 the balance comprises the write-down of property,
        plant and equipment and severance costs associated with the closure
        of the Company's Silvertree sawmill totaling $15.1 million partly
        offset by the $13.1 million gain recorded on the termination of a
        fibre supply agreement.

    12. Discontinued Operations

        On December 15, 2005 the Company announced the closure of its
        Squamish pulp mill and its exit from the pulp business. On
        January 26, 2006 production at the pulp mill ceased and on March 9,
        2006 the majority of the workforce completed their employment with
        the Company. The Company is reviewing alternative uses for the site.
        The Company will incur ongoing costs for supervision, security,
        property taxes and other costs (including demolition costs less any
        recoveries for asset sales, if the Company decides to remove certain
        plant and equipment) in future years depending on the Company's plans
        for the plant site. These costs will be expensed as incurred.

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

                                    Three months ended   Twelve months ended
                                          Dec. 31               Dec. 31
        ---------------------------------------------------------------------
        (millions of dollars)         2006       2005       2006       2005
        ---------------------------------------------------------------------
        Sales                      $      -   $   40.6   $   19.9   $  167.0
                                   ------------------------------------------
                                   ------------------------------------------
        Net loss from discontinued
         operations before income
         taxes                     $   (1.0)  $  (74.1)  $  (10.8)  $  (79.1)
        Income taxes                      -          -          -          -
                                   ------------------------------------------
        Net loss from discontinued
         operations                $   (1.0)  $  (74.1)  $  (10.8)  $  (79.1)
                                   ------------------------------------------
                                   ------------------------------------------

        Cash used in:
        Operating activities       $   (1.1)  $   (5.5)  $   (7.9)  $   (7.2)
        Investing activities              -          -          -       (0.2)
                                   ------------------------------------------
        Cash used by
         discontinued operations   $   (1.1)  $   (5.5)  $   (7.9)  $   (7.4)
                                   ------------------------------------------
                                   ------------------------------------------

        Included in the net loss from discontinued operations for the year
        ended December 31, 2006 is $4.5 million with respect to the cost to
        terminate certain long-term contracts.

    13. Subsequent Event

        On January 31, 2007, the Company received approval from the British
        Columbia Minister of Forests and Range to remove approximately 28,000
        hectares of its private lands from its Tree Farm Licences 6, 19 and
        25. The approval was subject to a number of conditions including the
        grant by the Company of right-of-way access on a number of the
        properties and the Company's agreement to continue for a three-year
        period its current practice of not exporting logs from these private
        lands. This change has no immediate effect on the financial
        statements.


              Head Office
            435 Trunk Road
        Duncan, British Columbia         Financial Statements on the Internet
            Canada V9L 2P9                      www.westernforest.com
       Telephone: (250) 748-3711                    www.sedar.com
          Fax: (250) 748-6045
    E-mail: info@westernforest.com
    




For further information:

For further information: Reynold Hert, President & CEO, (250) 715-2207;
Paul Ireland, CFO, (250) 715-2209

Organization Profile

WESTERN FOREST PRODUCTS INC.

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