Western Forest Products Reports 2007 First Quarter Net Income of $7.2 million



    TSX: WEF

    DUNCAN, BC, June 5 /CNW/ - Western Forest Products Inc. (TSX: WEF)
("Western") today announced its results for the first quarter of 2007. The
Company reported net income of $7.2 million ($0.04 per share) and EBITDA of
$23.3 million in the first quarter of 2007.

    
                                Q1 Highlights
    -------------------------------------------------------------------------

    -   Average realized lumber and log prices increased from the fourth
        quarter of 2006.
    -   Received government approval to remove 28,000 hectares of private
        lands from tree farm licences.
    -   Identified $150 million to $180 million of non-core assets to be
        sold.
    -   Net debt at March 31, 2007 decreased to $134.6 million from
        $167.7 million at December 31, 2006 and interest cost on U.S. dollar
        debt was substantially reduced.
    -   Permanently closed the New Westminster sawmill and re-started the
        Saltair sawmill enhancing capacity utilization and production
        flexibility.

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

    First Quarter Results

    The Company reported net income of $7.2 million ($0.04 per share) in the
first quarter of 2007 compared to $108.3 million ($0.53 per share) in the
fourth quarter of 2006 and a loss of $53.6 million ($1.81 per share) in the
first quarter of 2006. The results for the fourth quarter of 2006 include the
receipt of the softwood lumber duty refund of $124.4 million
(US$109.6 million). Excluding the softwood duty refund, the Company would have
reported a net loss of $16.1 million in the fourth quarter and $91.3 million
for the 2006 year.

    
                              FINANCIAL SUMMARY

                                        Three         Three         Three
                                        Months        Months        Months
                                        Ended         Ended         Ended
    (millions of dollars               March 31,   December 31,    March 31,
     except per share amounts)           2007          2006          2006
    -------------------------------------------------------------------------
    EBITDA                            $     23.3    $    120.4    $     (0.1)
    EBITDA before lumber duty refund  $     23.3    $     10.1          (0.1)
    Lumber duty refund                $        -    $    110.3    $        -
    Net income (loss) from
     continuing operations            $      8.2    $    109.3    $    (46.5)
    Net loss from discontinued
     operations                       $     (1.0)   $     (1.0)   $     (7.1)
    Net income (loss)                 $      7.2    $    108.3    $    (53.6)
    -------------------------------------------------------------------------
    Per share - basic and diluted:
    Net income (loss) from
     continuing operations            $     0.04    $     0.53    $    (1.81)
    Net income (loss)                 $     0.04    $     0.53    $    (2.09)
    -------------------------------------------------------------------------

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

    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.
    


    EBITDA increased to $23.3 million in the first quarter of 2007 compared
to $10.1 million in the fourth quarter of 2006, excluding the softwood duty
refund, and negative $0.1 million in the first quarter of 2006. The first
quarter of 2007 benefited from a weaker Canadian dollar, higher realized
lumber and log prices, and continued operational improvements. Average
realized lumber price increased to $818 per thousand board feet in the first
quarter of 2007, compared to $782 per thousand board feet in the fourth
quarter of 2006, primarily the result of a weaker Canadian dollar and a
higher-value mix of products produced and sold. Average realized log price
increased to $86 per cubic metre from $71 per cubic metre in the fourth
quarter of 2006 due to strong prices and product mix.
    Commenting on the results, Reynold Hert, President and CEO stated, "We
are pleased with the improvement in our EBITDA and the generation of net
income and positive cash flow from operations. The improvement has been driven
by both internal and external factors. We have been increasingly successful in
managing our operations to take advantage of market opportunities as they
arise notwithstanding the weak U.S. dimension market." Adding a note of
caution, Hert further stated, "Our first quarter results benefited from the
weaker Canadian dollar, which has since strengthened significantly."

    Change in Accounting Policy for Costing Inventories

    On January 1, 2007 the Company changed its accounting policy for the
costing of log and lumber inventories to better reflect its new management
operating philosophy. Under the new policy, costs of production for products
produced jointly as a result of the same production process are allocated
according to the value of those products. This compares to the former policy
which allocated costs based on volumes produced. Given the variety of products
produced by the Company from similar raw materials and processes, the new
approach better recognizes the contribution to the Company's earnings of the
underlying products produced.
    This new accounting policy was implemented effective January 1, 2007 on a
retrospective basis without restatement of prior periods and results in
inventory increasing by $11.9 million to $227.6 million from $215.7 million
and the deficit decreasing to $100.1 million from $112.0 million as at
December 31, 2006. Prior periods have not been restated as the detailed
information required to implement the new policy on a retrospective basis is
not available.

    Operations

    Lumber production in the first quarter decreased to 251 million board
feet from 271 million board feet in the fourth quarter of 2006. Lumber
production was impacted by the shortage of logs resulting from the continuing
impact of the severe weather in the fourth quarter of 2006. The Company was
able to harvest its planned log production of 1.6 million cubic metres in the
first quarter of 2007, but snow pack at higher elevations prevented access to
certain logging areas and resulted in harvesting being directed to less
desirable small-diameter logs. As a consequence, production of certain of the
Company's higher value lumber products was negatively impacted.

    Markets

    Markets for cedar, higher value hemlock and fir, and certain other
overseas exports, which together represent a significant portion of the
Company's lumber sales, should remain attractive through 2007. The Japanese
lumber market has been relatively stable partly due to 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 for our lumber in
Japan through the second quarter although there are recent indications of a
softening in demand. Western's ability to take advantage of these markets will
be determined by our log harvest levels and the availability of the necessary
logs for purchase. Indications are that log supply will remain fairly tight
for these log sorts through the second quarter.
    The United States structural dimension lumber market is expected to
remain weak in 2007 due to the anticipated lower number of housing starts.
    The recent strengthening of the Canadian dollar relative to the U.S.
dollar is expected to impact the Company's cash flows. Approximately 55%-65%
of the Company's lumber sales are denominated in U.S. dollars and a one-cent
change in the value of the Canadian dollar relative to the U.S. dollar impacts
annual operating earnings by approximately $6.0 million.

    Outlook

    Western's results for the first quarter of 2007 reflect continuing
improvement in its ability to adapt its operations to changing market
conditions. Western's ability to respond to market dynamics should continue to
improve as our new business systems and operating metrics become further
integrated into management and decision-making processes.
    The Company recently completed a review of non-core assets expected to be
sold over a two-year period and believes it can generate proceeds of
approximately $150 million to $180 million for such assets. Non-core assets
comprise 4,000 hectares of higher and better use lands (within the private
timberlands), the Squamish pulp mill site, the New Westminster sawmill site,
the former log merchandiser site, a gravel pit royalty interest and other
sites. The estimated proceeds are based on recently obtained valuations on the
HBU properties and mill sites, offers to acquire sites, and Company estimates.
These non-core assets do not include, and the anticipated proceeds do not
reflect, potential proceeds from 24,000 hectares of private timberlands, which
continue to be assessed for future best use. The Company believes its current
balance sheet, improving results and non-core asset values should enable it to
significantly reduce indebtedness.
    The contract with the United Steelworkers union, which represents the
majority of the Company's hourly workforce and those of its contractors,
expires on June 14, 2007. Forest Industrial Relations Limited, which
represents the Company and certain other forest products companies in the
coastal region of British Columbia, has been in negotiations with the union
for several months. We are unable to determine whether a new contract will be
negotiated on a timely basis without labour disruption or the impact of the
final agreement on the Company's operations.

    TELECONFERENCE CALL NOTIFICATION: Thursday, June 7, 2007 at
    -----------------------------------------------------------
    10:00 a.m. PST/1:00 p.m. EST
    ----------------------------

    On Thursday, June 7, 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 1-800-595-8550 in Canada and the U.S. (toll free)
and in Toronto or Internationally, 416-644-3419 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 June 21, 2007. To hear a complete replay,
please call 1-877-289-8525 in Canada and the U.S. (toll free), Passcode
21235316 followed by the number sign or in Toronto and Internationally,
416-640-1917, Passcode 21235316 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 annual
available harvest of approximately 7.5 million cubic metres of timber of which
7.3 million cubic metres is from Crown lands and 0.2 million cubic metres from
private timberlands and lumber capacity in excess of 1.5 billion board feet
from eight sawmills and four remanufacturing plants. Principal activities
conducted by the Company and its subsidiaries include timber harvesting,
reforestation, sawmilling logs into lumber and wood chips, and value-added
remanufacturing. Substantially all of Western's operations, employees and
corporate facilities are located in the coastal region of British Columbia
while its products are sold in over 20 countries worldwide.

    Forward-Looking Statements and Information

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


    WESTERN FOREST PRODUCTS INC.
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    2007 FIRST 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 first quarter ended March 31, 2007 to help security holders and other
readers understand our Company and the key factors underlying our financial
results. You should read this discussion and analysis in conjunction with our
unaudited interim consolidated financial statements and related notes thereto
for the quarter ended March 31, 2007, and our audited annual consolidated
financial statements and management's discussion and analysis ("MD&A") for the
year ended December 31, 2006 (the "2006 Annual Report"), all of which can be
found on the System for Electronic Document Analysis and Retrieval (SEDAR), at
http://www.sedar.com.
    We have prepared the financial information contained in this discussion
and analysis in accordance with Canadian generally accepted accounting
principles ("GAAP"). Reference is also made to EBITDA. EBITDA is defined as
operating income (loss) plus amortization of property, plant and equipment and
the write-down of property, plant and equipment and operating restructuring
costs. We use EBITDA as a benchmark measurement of our own operating results,
and as a benchmark relative to our competitors. We consider EBITDA to be a
meaningful supplement to operating income as a performance measure primarily
because amortization expense and property write-downs are not 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.

    This management's discussion and analysis contains statements which
constitute forward-looking statements and forward-looking information within
the meaning of applicable securities laws. Those statements and information
appear in a number of places in this document and include statements and
information regarding our intent, belief or current expectations primarily
with respect to market and general economic conditions, future costs,
expenditures, available harvest levels and our future operating performance.
Such statements and information may be indicated by words such as "estimate",
"expect", "anticipates", "plan", "intend", "believe", "will", "should", "may"
and similar words and phrases. Readers are cautioned that any such
forward-looking statements and information are not guarantees and may involve
known and unknown risks and uncertainties, and that actual results may differ
from those expressed or implied in the forward-looking statements or
information as a result of various factors, including general economic and
business conditions, product selling prices, raw material and operating costs,
changes in foreign currency exchange rates, changes in government regulation,
fluctuations in demand and supply for our products, industry production
levels, our ability to execute our business plan and misjudgments in the
course of preparing forward-looking statements or information. The information
contained under the "Risk Factors" section in our Annual Information Form and
under the "Risks and Uncertainties" section of our Management's Discussion and
Analysis identifies important factors that could cause such differences. All
written and oral forward-looking statements or information attributable to us
or persons acting on our behalf are expressly qualified in their entirety by
the foregoing cautionary statements.
    Unless otherwise noted, the information in this discussion and analysis
is updated to June 5, 2007. All financial references are in millions of
Canadian dollars unless otherwise noted.

    
    Summary of Selected Quarterly Results

                                          Three         Three        Three
                                          Months        Months       Months
                                          Ended         Ended        Ended
    (millions of dollars                 March 31,   December 31,   March 31,
     except per share amounts)             2007          2006         2006
    -------------------------------------------------------------------------
    Sales                             $    276.3    $    279.1    $    118.2
    Export tax and lumber duties
     expensed                         $     (4.4)   $     (3.6)   $     (4.0)
    EBITDA                            $     23.3    $    120.4    $     (0.1)
    EBITDA before lumber duty refund  $     23.3    $     10.1          (0.1)
    EBITDA margin (before lumber duty
     refund)                                8.4%          3.6%        (0.1)%
    Lumber duty refund                $        -    $    110.3    $        -
    Operating income (loss)           $     13.4    $    108.3    $     (6.0)
    Interest expense                  $     (6.8)   $     (9.2)   $    (11.1)
    Foreign exchange gain (loss) on
     long-term debt                   $      0.7    $     (6.0)   $     (0.9)
    Premium and unamortized discount
     on bond redemption               $        -    $        -    $    (27.9)
    Interest income on lumber duty
     refund                           $        -    $     14.1    $        -
    Net income (loss) from continuing
     operations                       $      8.2    $    109.3    $    (46.5)
    Net income (loss) from
     discontinued operations          $     (1.0)   $     (1.0)   $     (7.1)
    Net income (loss)                 $      7.2    $    108.3    $    (53.6)
    -------------------------------------------------------------------------
    Per share - basic and diluted:
    Net income (loss) from continuing
     operations                       $     0.04    $     0.53    $    (1.81)
    Net income (loss)                 $     0.04    $     0.53    $    (2.09)
    -------------------------------------------------------------------------
    Cash flow from continuing
     operations                       $     28.8    $    101.1    $    (10.5)
    -------------------------------------------------------------------------
    

    Overview

    The results of operations for the quarter ended March 31, 2007, include
the legacy Cascadia and Englewood operations which were acquired on May 1,
2006 and March 17, 2006, respectively, and accordingly, are not directly
comparable to the comparative quarter ended March 31, 2006.
    The Company recorded net income from continuing operations of
$8.2 million ($0.04 per share) in the first quarter of 2007 compared to
$109.3 million ($0.53 per share) in the fourth quarter of 2006, and a loss of
$46.5 million ($1.81 per share) in the first quarter of 2006. The fourth
quarter of 2006 benefited from the inclusion of $124.4 million with respect to
the softwood lumber duty refund including interest. EBITDA increased to
$23.3 million in the first quarter of 2007, compared to $10.1 million
(excluding the lumber duty refund) in the fourth quarter of 2006 and negative
$0.1 million in the first quarter of 2006.
    The improvement in the Company's results can be attributed to the
following key factors:

    
    -   Higher overall realized lumber prices - a weaker average Canadian
        dollar, firm cedar and Japanese market prices and a higher-value mix
        of products produced and sold has resulted in an increase in average
        realized lumber prices to $818 per thousand board feet compared to
        $782 in the fourth quarter.

    -   Higher realized log prices - market shortages for certain saw logs,
        strong log prices and a higher-value product mix have resulted in
        average realized log prices increasing to $86 per cubic metre from
        $71 per cubic metre in the fourth quarter.

    -   Lower pulp log production in the first quarter compared to the fourth
        quarter of 2006 - pulp logs generally have a lower value than saw
        logs and are written down to market as they are produced.
    

    These improvements in EBITDA more than offset the impact of the decrease
in lumber sales volumes.
    During the quarter, the Company received approval from the BC Minister of
Forests and Range to remove approximately 28,000 hectares of its private land
from its Tree Farm Licenses 6, 19, and 25. The removal affords the Company
both the opportunity to sell the approximately 4,000 hectares of higher and
better use component of the lands, and greater flexibility in operating the
remaining 24,000 hectares of private timberlands.

    
    Continuing Operations

                                          Three         Three        Three
                                          Months        Months       Months
                                          Ended         Ended        Ended
    (millions of dollars                 March 31,   December 31,   March 31,
     except where noted)                   2007          2006         2006
    -------------------------------------------------------------------------
    Lumber sales                      $    205.2    $    217.8    $     87.2
    Log sales                               55.6          44.6          23.7
    By-product sales                        15.5          16.7           7.3
                                     ----------------------------------------
                                      $    276.3    $    279.1    $    118.2
                                     ----------------------------------------

    Lumber production - millions of
     board feet                              251           271           153
    Lumber sales - millions of board
     feet                                    251           278           164

    Log production - thousands of
     cubic metres                          1,601         1,585           662
    Log purchases - thousands of
     cubic metres                            168           242           100
    Log sales - thousands of cubic
     metres                                  650           625           262
    Internal log consumption -
     thousands of cubic metres             1,101         1,138           650

    Average lumber sales revenue per
     thousand board feet              $      818    $      782    $      533

    Average log sales revenue per
     cubic metre                      $       86    $       71    $       90
    

    Lumber production and sales in the first quarter of 2007 were lower than
in the fourth quarter of 2006 primarily due to continuing shortages of logs.
The storms that occurred during the fourth quarter of 2006 resulted in low log
inventories at the start of the year.
    As previously noted, the average net lumber price realized in the first
quarter increased to $818 per thousand board feet. Average lumber prices
realized have increased in each of the past three consecutive quarters
following the acquisition of Cascadia in May, 2006. The increase is partly a
result of changes in the exchange rate for the Canadian dollar compared to the
U.S. dollar as well as firm lumber prices for certain products. In addition,
the Company has been able to take advantage of its increased operating
flexibility following the acquisition of Cascadia to increase production of
higher-value, higher-margin, lumber products and reduce production of
lower-value products, particularly structural dimension lumber destined for
the U.S. market. Certain products that would have been shipped to the U.S.
have either been shipped to other markets, such as China, or not produced at
all with the logs being sold for chipping into wood chips to satisfy the high
demand, and prices, from pulp mills.
    Demand and pricing continued to be firm in the cedar and Japanese markets
during the quarter. The U.S. structural dimension market continued to be weak.
    Log production of 1,601,000 cubic metres during the quarter compares to
1,585,000 cubic metres in the fourth quarter of 2006. Snow accumulations at
higher elevations restricted access to these harvest areas, which
predominantly contain larger-diameter logs. As a result, we produced a higher
percentage of smaller-diameter logs, falling short of the planned production
of larger-diameter, high-quality hemlock/balsam and cedar logs, which reduced
our lumber production for the cedar and Japanese markets. We were unable to
make up this shortfall through log purchases on the Vancouver log market, as
other operators also began the year with low inventories and demand exceeded
supply throughout the British Columbia Coastal region during the quarter.
    Log sales increased to 650,000 cubic metres at an average selling price
of $86 per cubic metre in the first quarter compared to 625,000 cubic metres
at $71 per cubic metre in the fourth quarter of 2006. The increase in average
sales price reflects the change in the mix of logs sold, with a higher
percentage of higher-value cedar shingle logs and a lower percentage of pulp
logs, as well as higher log prices for both compared to the fourth quarter.
    As previously announced, the New Westminster sawmill and associated
remanufacturing facility was closed on February 7, 2007 and the majority of
its production programs were transferred to the recently upgraded Saltair
sawmill, which re-opened on February 12, 2007. Of the $16.5 million accrued in
the fourth quarter for severances and site remediation related to the
shutdown, $11.7 million of severance payments were made in the first quarter
of 2007. The balance of the accrual primarily relates to the estimated cost
for site remediation.

    Discontinued Operations

    The loss from discontinued operations during the first quarter of 2007 of
$1.0 million represents the cost of maintaining the site of the Squamish pulp
mill that ceased operations in January of 2006. The loss compares to a loss of
$1.0 million in the fourth quarter of 2006 and to a loss of $7.1 million in
the first quarter of 2006. 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.
    Subsequent to the quarter-end, the Company negotiated the sale of the
majority of the pulp mill equipment for proceeds of $5.5 million that will be
received over the course of the year as the equipment is removed from the
site. The sale will result in a gain of $5.5 million as the equipment had been
fully written down. The Company continues to work with various parties
interested in acquiring the site itself.

    Other Corporate Items

    Selling and administration expense decreased to $10.8 million in the
first quarter compared to $12.0 million in the fourth quarter of 2006
primarily due to the inclusion in the fourth quarter of costs associated with
the integration of Western and Cascadia.
    Interest expense decreased to $6.8 million in the first quarter of 2007
compared to $9.2 million in the fourth quarter of 2006, as a result of the
repayment of U.S. $88.0 million of the U.S. term-debt during the fourth
quarter of 2006 and a further U.S. $21.6 million in March of 2007.
    There was a gain on translation of the United States dollar-denominated
portion of the Company's long-term debt of $0.7 million in the quarter as a
result of the strengthening of the Canadian dollar at the quarter-end. This
compares to a loss of $6.0 million in the fourth quarter of 2006.
    Income tax expense in the first quarter of 2007 relates to current income
taxes of $0.3 million payable with respect to the Company's Japanese
subsidiary and compares to $0.5 million in the fourth quarter of 2006.

    
    Changes in Financial Position and Liquidity

                                          Three         Three        Three
                                          Months        Months       Months
                                          Ended         Ended        Ended
    (millions of dollars                 March 31,   December 31,   March 31,
     except where noted)                   2007          2006         2006
    -------------------------------------------------------------------------
    Cash flow from continuing
     operations                       $     28.8    $    100.6    $    (10.5)
    Cash provided (used) by investing
     activities                       $      8.7    $      7.3    $     33.1
    Cash provided (used) by financing
     activities                       $    (31.5)   $    (96.2)   $    (39.5)
    Additions to property, plant and
     equipment                        $     (4.1)   $     (6.3)   $     (1.4)
    Additions to capitalized roads    $     (3.1)   $     (3.8)   $     (2.2)
    Change in revolving credit
     facility                         $     (3.6)   $      3.6    $    (71.4)
    Total liquidity(1)                $    158.5    $    143.7    $     68.7
    Financial ratios:
    Current assets to current
     liabilities                            1.67          3.17          2.25
    Net debt to shareholders equity         0.29          0.37          5.23
    Net debt to market capitalization       0.32          0.43          5.30

    (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 first quarter of 2007 was
$28.8 million compared to $100.6 million in the fourth quarter of 2006. The
fourth quarter of 2006 benefited from the inclusion of the softwood lumber
refund plus interest of $124.4 million. Cash flow from continuing operations
before the change in non-cash working capital items was $18.5 million in the
first quarter of 2007 compared to $7.4 million in the fourth quarter of 2006
before the softwood lumber duty refund. The first-quarter cash flow benefited
from the same factors that resulted in increased EBITDA including higher
overall realized lumber and log prices.
    On March 8, 2007, as part of the terms amending the U.S. term-debt, U.S.
$21.6 million (Cdn$25.3 million) was paid against the debt, reducing the
balance outstanding under the U.S. debt to U.S. $73.7 million. The amendment
also reduced the interest rate charged on the U.S. debt to one month LIBOR
plus 3% from one month LIBOR plus 8.15% and eliminated the 0.75% annual fees
due on the balance then outstanding. On March 29, 2007 a further U.S.
$0.2 million was paid against the outstanding principal resulting in a balance
outstanding at March 31, 2007 of U.S. $73.5 million.
    Interest on the Canadian term-debt continues to be charged at CIBC Prime
plus 5.25% and, until March 1, 2007, was being deferred and added to the
principal. From March 1, 2007 interest was paid in cash on $45.0 million of
the balance outstanding, with interest on the remainder continuing to be
deferred. Commencing April 1, 2007 interest is being paid in cash on the total
Canadian term-debt. At March 31, 2007 the balance outstanding under the
Canadian term-debt was $101.8 million.
    Additions to property, plant and equipment of $4.1 million in the first
quarter of 2007 primarily relate to upgrades at the Cowichan Bay and Saltair
sawmills. The $13 million Cowichan Bay sawmill upgrade was initiated in 2006
to increase lumber capacity and productivity. The modifications to the Saltair
sawmill were made to accommodate the lumber programs transferred to it as a
result of the closure of the New Westminster sawmill in February, 2007. The
capital additions of $6.3 million in the fourth quarter of 2006 primarily
relate to improvements to the Company's Cowichan Bay and Duke Point sawmills.
    Investing activities includes $12.5 million that was received from
Brookfield Asset Management Inc. during the first quarter of 2007 with respect
to the finalization of the working capital adjustment on the acquisition of
Cascadia. A further $0.7 million was received on account of interest accrued
on the working capital adjustment from the May 1, 2006 acquisition date.
    Cash flow from investing activities for the first quarter of 2006
included the $35 million non-refundable prepayment of the price premium
received as consideration for entering into the 40-year fibre supply
agreement. The payment was applied to reduce the amount drawn under the
Company's revolving line of credit.
    Cash flow from financing activities in the first quarter of 2006 includes
$275.9 million with respect to the redemption of the Company's Secured Bonds
and the $307.8 million proceeds of the term loans obtained from the Brookfield
Bridge Lending Fund that were used to fund the redemption. The redemption of
the Secured Bonds also resulted in the release of the $8.9 million of
restricted cash held in the Working Capital Reserve.

    Selected Quarterly Information

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

    Changes in Accounting Policies

    Inventories

    On January 1, 2007 the Company changed its accounting policy for the
costing of log and lumber inventories to better reflect its new management
operating philosophy. Under the new policy, costs of production for products
produced jointly as a result of the same production process are allocated
according to the value of those products. This compares to the former policy
which allocated costs based on volumes produced. Given the variety of products
produced by the Company from similar raw materials and processes, the new
approach better recognizes the contribution to the Company's earnings of the
underlying products produced.
    Under the new policy, log production costs are allocated to logs produced
based on their relative market values, except for pulp logs that will continue
to be carried at market due to the significant difference between the market
value of pulp logs compared to production costs. Previously, the Company
carried all saw logs at the same actual unit production cost which was based
on the total costs of production divided by the total volume of production.
Under the new policy, lumber production costs will now also be allocated to
production units based on their relative market values. Lumber was previously
carried at an average cost of production which was determined by actual
production costs divided by production volumes. For both logs and lumber,
inventories are valued at the lower of cost determined under the new policy
and net realizable value, which is consistent with the previous policy.
    This new accounting policy was implemented effective January 1, 2007 on a
retrospective basis without restatement of prior periods and results in
inventory increasing by $11.9 million to $227.6 million from $215.7 million
and the deficit decreasing to $100.1 million from $112.0 million as at
December 31, 2006. Prior periods have not been restated as the detailed
information required to implement the new policy on a retrospective basis is
not available. The change in policy has increased inventory carrying amounts
as higher value cedar and to a lesser extent cypress lumber and log
inventories are now carried at higher amounts than they would have been under
the previous policy. Conversely, hemlock lumber and log inventories are
carried at relatively similar amounts compared to what they were carried at
under the previous policy as they were generally already written down to
market values.

    Financial instruments

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

    
    -   Section 1530 - Comprehensive Income

    -   Section 3251 - Equity

    -   Section 3855 - Financial instruments - Recognition and Measurement

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

    -   Section 3865 - Hedges
    

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

    Internal Control over Financial Reporting

    In 2006, following the acquisitions of Cascadia and Englewood, the
Company initiated projects to consolidate and standardize its business systems
and processes including its log, lumber, payroll and general ledger accounting
systems. This process was largely completed with respect to the log and
payroll systems during 2006. The new general ledger accounting system was
implemented on January 1, 2007 and replaces three general ledger systems
previously used by the Company. In addition to the new general ledger system
the Company implemented a new accounting policy with respect to the costing of
its inventories and a new chart of accounts covering all of its operations.
These system implementations have been accompanied by new processes and
procedures. The process is ongoing with respect to the new lumber systems. The
Company identified weaknesses in internal controls during the quarter relating
to the implementation of the new systems and related accounting processes and
procedures. Management has implemented additional manual procedures to
compensate for the weaknesses and corrective actions are now being implemented
to ensure controls operate effectively for future periods. Other than these
system and process changes, the CEO and CFO confirm that there were no changes
in the controls which materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.

    Risks and Uncertainties

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

    Proposed Regulatory and First Nations Land Claims Developments

    On May 24, 2007 the Forest Minister for British Columbia stated in a
press interview that policy changes to improve the competitiveness of the
Coastal British Columbia forest industry would be announced within the next
few weeks. Amongst the potential policies stated were a faster shift to second
growth logging from old growth logging including more intensive management of
second growth stands, additional restrictions on exporting old growth logs
from public lands, and possible changes to export policies affecting private
land logs. The Company is not in a position to analyze the impact of the
proposed policy changes on its operations until they are announced.
    On May 31, 2007 the government of British Columbia announced that it had
initialed a draft Strategic Land Use Agreement ("SLUA") with the Council of
the Haida Nation dealing with land use and resource management issues in the
Haida Gwaii or Queen Charlotte Islands. Amongst other things, the draft
agreement recommends permanent protection for approximately 225,000 hectares
of land on the Islands for natural, cultural, spiritual and recreational
values and a timber harvest of at least 800,000 cubic metres annually. The
SLUA is the result of ongoing negotiations between the Province and the Haida
Nation. The provincial government and the Haida intend to hold public meetings
and consultations before assembling final recommendations for ratification. As
previously disclosed, the Company currently has an Allowable Annual Cut in the
Queen Charlotte Islands of 510,000 cubic metres, having been temporarily
reduced from 803,000 cubic metres by the provincial Chief Forester. The
Company is not able to determine the nature or extent of the final
recommendations, whether they will be ratified and the impact on the Company.
(See - Risk Factors - First Nations Land Claims in Western's 2006 Annual
Information Form for further information on the risk of First Nations Land
Claims).

    Outlook and Strategy

    Western's results for the first quarter of 2007 reflect continuing
improvement in its ability to adapt its operations to changing market
conditions. Western's ability to respond to market dynamics should continue to
improve as our new business systems and operating metrics become further
integrated into management and decision-making processes.
    The Company recently completed a review of non-core assets expected to be
sold over a two-year period and believes it can generate proceeds of
approximately $150 million to $180 million for such assets. Non-core assets
comprise 4,000 hectares of higher and better use lands (within the private
timberlands), the Squamish pulp mill site, the New Westminster sawmill site,
the former log merchandiser site, a gravel pit royalty interest and other
sites. The estimated proceeds are based on recently obtained valuations on the
HBU properties and mill sites, offers to acquire sites, and Company estimates.
These non-core assets do not include, and the anticipated proceeds do not
reflect, potential proceeds from 24,000 hectares of private timberlands, which
continue to be assessed for future best use. The Company believes its current
balance sheet, improving results and non-core asset values should enable it to
significantly reduce indebtedness.
    Markets for cedar, higher value hemlock and fir, and certain other
overseas exports, which together represent a significant portion of the
Company's lumber sales, should remain attractive through 2007. The Japanese
lumber market has been relatively stable partly due to 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 for our lumber in
Japan through the second quarter although there are recent indications of a
softening in demand. Western's ability to take advantage of these markets will
be determined by our log harvest levels and the availability of the necessary
logs for purchase. Indications are that log supply will remain fairly tight
for these log sorts through the second quarter. The United States structural
dimension lumber market has been weak and is expected to remain weak through
the remainder of the year.
    The recent strengthening of the Canadian dollar relative to the U.S.
dollar is expected to impact the Company's cash flows. Approximately 55%-65%
of the Company's lumber sales are denominated in U.S. dollars and a one-cent
change in the value of the Canadian dollar relative to the U.S. dollar impacts
annual operating earnings by approximately $6.0 million.
    The contract with the United Steelworkers union, which represents the
majority of the Company's hourly workforce and those of its contractors,
expires on June 14, 2007. Forest Industrial Relations Limited, which
represents the Company and certain other forest products companies in the
coastal region of British Columbia, has been in negotiations with the union
for several months. We are unable to determine whether a new contract will be
negotiated on a timely basis without labour disruption or the impact of the
final agreement on the Company's operations.

    Outstanding Share Data

    As of June 5, 2007, there are 119,842,359 Common Shares and 84,571,206
Non-Voting Shares issued and outstanding.
    In addition, the Company has 569,373 Tranche 1 Class C Warrants, 854,146
Tranche 2 Class C Warrants, and 1,423,743 Tranche 3 Class C Warrants
(collectively, the "Class C Warrants") outstanding. The Company has reserved
up to 2,847,262 Common Shares for issuance upon the exercise of the Class C
Warrants. It has also reserved 10,000,000 Common Shares for issuance upon the
exercise of options granted under the Company's incentive stock option plan.
As of June 5, 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, 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 December 31,
2006 to March 31, 2007, the Company paid and charged entities related to BAM
$3.1 million in connection with these arrangements.

    
                     On behalf of the Board of Directors

    John MacIntyre                    Reynold Hert
    Chairman                          President and Chief Executive Officer

    Duncan, BC
    June 5, 2007



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

                               2007                     2006
                            -------------------------------------------------
    (millions of
     dollars except
     per share amounts
     and where noted)           1st       4th       3rd       2nd       1st
                            -------------------------------------------------
    Average Exchange
     Rate - Cdn $ to
     purchase one U.S. $     $1.1725    1.1277    1.1178    1.1292    1.1462
    Sales
      Lumber                 $ 205.2     217.8     214.0     158.1      87.2
      Logs                      55.6      44.6      44.8      49.0      23.7
      By-Products               15.5      16.7      20.7      12.9       7.3
                            -------------------------------------------------
                             $ 276.3     279.1     279.5     220.0     118.2
                            -------------------------------------------------
                            -------------------------------------------------

    Lumber
      Production - millions
       of board feet             251       271       326       250       153
      Sales - millions
       of board feet             251       278       291       243       164
    Logging
      Production - m3 (000's)  1,601     1,585     1,617     1,898       662
      Purchases - m3 (000's)     168       242       169       143       100
      Sales -  m3 (000's)        650       625       592       605       262
      Internal consumption -
       m3 (000's)              1,101     1,138     1,350     1,031       650
    Sales prices
      Lumber - per thousand
       board feet            $   818       782       739       648       533
      Logs - per cubic metre $    86        71        76        81        90

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

    Discontinued pulp
     operations
      Sales                  $     -         -         -      (0.1)     20.0
      Loss                   $  (1.0)     (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)        $   7.2     108.3     (12.2)     (9.4)    (53.6)

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

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


                                         2005
                            -----------------------------
    (millions of
     dollars except
     per share amounts
     and where noted)           4th       3rd       2nd
                            -----------------------------
    Average Exchange
     Rate - Cdn $ to
     purchase one U.S. $      1.1703    1.2122    1.2411
    Sales
      Lumber                    91.3      88.2     107.5
      Logs                      25.5      22.2      26.0
      By-Products                3.6       5.9       7.0
                            -----------------------------
                               120.4     116.3     140.5
                            -----------------------------
                            -----------------------------

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

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

    Discontinued pulp
     operations
      Sales                     40.6      40.4      45.9
      Loss                     (74.1)     (4.3)     (1.7)
      Pulp production -
       tonnes (000's)             71        69        72
      Pulp sales -
       tonnes (000's)             69        71        73
      Pulp sales price
       per tonne                 582       573       624

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

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

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



    Consolidated Balance Sheets (Unaudited)
    (Expressed in millions of Canadian dollars)
    -------------------------------------------------------------------------
                                                    March 31,    December 31,
                                                        2007            2006
                                              -------------------------------
                                                                   (Restated
                                                                    - note 2)
    Assets
    Current assets:
    Cash and cash equivalents                     $     45.1      $     41.6
    Accounts receivable                                 91.2           102.4
    Inventory                                          225.3           227.6
    Prepaid expenses and other assets                   10.1            12.4
                                              -------------------------------
                                                       371.7           384.0

    Property, plant and equipment                      500.4           505.4
    Other assets                                         8.7             9.0
                                              -------------------------------

                                                  $    880.8      $    898.4
                                              -------------------------------
                                              -------------------------------
    Liabilities and Shareholders' Equity
    Current liabilities:
    Revolving credit facility (note 3)            $        -      $      3.6
    Accounts payable and accrued liabilities           118.6           110.8
    Current portion of long-term debt (note 4)          99.8               -
    Discontinued operations (note 8)                     4.8             6.4
                                              -------------------------------
                                                       223.2           120.8
    Long-term debt (note 4)                             79.9           205.7
    Other liabilities                                   41.6            42.6
    Deferred revenue                                    77.9            78.4
                                              -------------------------------
                                                       422.6           447.5
    Shareholders' equity
    Common shares                                      410.6           410.6
    Non-voting shares                                  139.6           139.6
    Contributed surplus                                  0.9             0.8
    Deficit                                            (92.9)         (100.1)
                                              -------------------------------
                                                       458.2           450.9
                                              -------------------------------

                                                  $    880.8      $    898.4
                                              -------------------------------
                                              -------------------------------
    Commitments and contingencies (note 5)

    See accompanying notes to consolidated financial statements

    Approved on behalf of the Board:

    "Reynold Hert" Director

    "John MacIntyre" Director



    Consolidated Statements of Operations, Deficit and Comprehensive Income
    for the Three Months Ended March 31 (Unaudited)
    (Expressed in millions of Canadian dollars except for share and
     per share amounts)
    -------------------------------------------------------------------------
                                                        2007            2006
                                              -------------------------------

    Sales                                         $    276.3      $    118.2

    Cost and expenses
    Cost of goods sold                                 219.9            95.3
    Export tax                                           4.4               -
    Anti-dumping and countervailing duties                 -             4.0
    Freight expenses                                    17.9            12.7
    Selling and administration                          10.8             6.3
    Amortization of property, plant
     and equipment                                       9.9             5.9
                                              -------------------------------
                                                       262.9           124.2
                                              -------------------------------

    Operating income (loss)                             13.4            (6.0)

    Interest expense                                    (6.8)          (11.1)
    Foreign exchange gain (loss) on
     long-term debt                                      0.7            (0.9)
    Premium and unamortized discount on
     bond redemption                                       -           (27.9)
    Interest and other income (expense)                  1.2            (0.4)
                                              -------------------------------

    Income (loss) before income taxes                    8.5           (46.3)
    Income tax expense                                  (0.3)           (0.2)
                                              -------------------------------

    Net income (loss) from continuing
     operations                                          8.2           (46.5)
    Net loss from discontinued operations
     (note 8)                                           (1.0)           (7.1)
                                              -------------------------------
    Net income (loss) and comprehensive
     income (loss)                                       7.2           (53.6)

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

    Deficit, beginning of year as restated            (100.1)         (145.1)
                                              -------------------------------

    Deficit, end of period                        $    (92.9)     $   (198.7)
                                              -------------------------------
                                              -------------------------------

    Net income (loss) per share -
     basic and diluted:
    From continuing operations                    $     0.04      $    (1.81)
    From discontinued operations                  $     0.00      $    (0.28)
                                              -------------------------------

    Net income (loss)                             $     0.04      $    (2.09)
                                              -------------------------------
                                              -------------------------------

    Weighted average number of shares
     outstanding (thousands of shares)               204,414          25,632


    See accompanying notes to the consolidated financial statements



    Consolidated Statements of Cash Flows for the Three Months Ended
    March 31 (Unaudited)
    (Expressed in millions of Canadian dollars)
    -------------------------------------------------------------------------
                                                        2007            2006
                                              -------------------------------

    Cash provided by (used in):

    Operating activities:
    Net income (loss) from continuing
     operations                                   $      8.2      $    (46.5)
    Items not involving cash:
    Amortization of property, plant
     and equipment                                       9.9             5.9
    Foreign exchange (gain) loss on
     long-term debt                                     (0.7)            0.9
    Interest deferred (repaid) on
     long-term debt                                      2.3            (9.8)
    Premium and unamortized discount on
     bond redemption                                       -            27.9
    Other                                               (1.2)           (0.4)
                                              -------------------------------
                                                        18.5           (22.0)
                                              -------------------------------
    Changes in non-cash working capital items:
    Accounts receivable                                 (0.6)            5.2
    Inventory                                            2.3            19.3
    Prepaid expenses                                     1.5            (0.3)
    Accounts payable and accrued liabilities             7.1           (12.7)
                                              -------------------------------
                                                        10.3            11.5
                                              -------------------------------
    Cash provided (used) by continuing
     operations                                         28.8           (10.5)
                                              -------------------------------

    Investing activities:
    Additions to property, plant and equipment          (4.1)           (1.4)
    Additions to capitalized roads                      (3.1)           (2.2)
    Disposals of property, plant and equipment           1.8               -
    Receipt of working capital adjustment
     to purchase price paid for                            -               -
      Cascadia Forest Products                          12.5               -
    Restricted cash                                      0.6             8.9
    Englewood Logging Division                             -            (3.0)
    Price premium prepayment on long-term
     fibre agreement                                       -            35.0
    Other                                                1.0            (4.2)
                                              -------------------------------
                                                         8.7            33.1
                                              -------------------------------
    Financing activities:
    Revolving credit facility                           (3.6)          (71.4)
    Redemption of 15% Secured Bonds                        -          (275.9)
    Proceeds from term loans                               -           307.8
    Repayment of term loans                            (25.5)              -
    Other                                               (2.4)              -
                                              -------------------------------
                                                       (31.5)          (39.5)
                                              -------------------------------

    Cash used by discontinued operations
     (note 8)                                           (2.5)           (0.9)
                                              -------------------------------

    Increase (decrease) in cash and cash
     equivalents                                         3.5           (17.8)
    Cash and cash equivalents, beginning
     of period                                          41.6            29.6
                                              -------------------------------
    Cash and cash equivalents, end of period      $     45.1      $     11.8
                                              -------------------------------
                                              -------------------------------

    Supplementary information:
    Non-Cash item - Acquisition of
     Englewood Logging Division                   $        -      $     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. (the Company or Western)
        is timber harvesting and lumber manufacturing for worldwide markets.
        Western's operations are located in the coastal region of British
        Columbia.

    1.  Significant Accounting Policies

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

    2.  Adoption of New Accounting Policies

        (a)   Financial Instruments

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

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

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

        (b)   Inventory Costing

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

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

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

    3.  Revolving Credit Facility

        The Company has a three-year revolving credit facility, secured by
        receivables and inventory and bearing interest at prime plus 0.5%
        that expires on July 12, 2009. The size of this asset-backed facility
        is determined by the level of outstanding receivables and inventory,
        but cannot exceed $150.0 million with provision for further
        extensions up to $200.0 million, subject to lender approval. At
        March 31, 2007, of the $123.1 million of the facility that was
        available to the Company, $9.7 million was used to support standby
        letters of credit, leaving a balance of $113.4 million available for
        future use.

    4.  Long-Term Debt

        ---------------------------------------------------------------------
                                                       As at           As at
                                                    March 31,    December 31,
        (millions of dollars)                           2007            2006
        ---------------------------------------------------------------------
        Current portion of long-term debt:
        Canadian facility                        $     101.8    $          -
        Associated transaction costs                    (2.0)              -
                                                -----------------------------

                                                 $      99.8    $          -
                                                -----------------------------
                                                -----------------------------
        Long-term portion of long-term debt:
        U.S. facility (U.S. $73.5 million;
         2006 U.S. $95.3 million)                $      84.8    $      111.0
        Canadian facility                                  -            99.5
                                                -----------------------------

                                                        84.8           210.5
        Associated transaction costs                    (4.9)           (4.8)
                                                -----------------------------
                                                 $      79.9    $      205.7
                                                -----------------------------
                                                -----------------------------

        On March 7, 2007, the Company renegotiated its U.S. dollar
        denominated term-debt with the Brookfield Bridge Lending Fund
        ("BBLF"), paying down U.S. $21.6 million to reduce the principal
        outstanding from U.S. $95.3 million to U.S. $73.7 million and
        reducing the interest rate from floating one-month LIBOR plus 8.15%
        to floating one-month LIBOR plus 3%. On March 29, 2007 a further
        U.S. $0.2 million was paid against the outstanding principal
        resulting in a balance outstanding at March 31, 2007 of
        U.S. $73.5 million.

        The Company also exercised its option to extend the maturity date of
        the Canadian term-debt with BBLF to March 10, 2008 on payment of an
        extension fee of $2.0 million. The Company began paying cash interest
        on $45.0 million of the Canadian term-debt effective March 1, 2007
        and on the total Canadian term-debt effective April 1, 2007.
        Previously interest was being deferred and added to the principal
        outstanding as permitted by the agreement. At March 31, 2007 the
        principal outstanding under the Canadian term-debt was
        $101.8 million.

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

    5.  Commitments and Contingencies

        (a)   Litigation and Claims

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

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

        (b)   Indemnity Agreement

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

        (c)   Long-Term Fibre Supply Agreements

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

        (d)   Allowable Annual Cut Reductions

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

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

        (e)   The Forest Revitalization Plan

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

    6.  Pension Expense

        The Company has defined benefit and defined contribution pension
        plans and other pension arrangements that cover substantially all
        salaried and certain hourly employees. The Company also contributes
        to hourly paid employee union pension plans and has health care plans
        covering certain hourly and retired salaried employees. In the three
        months ended March 31, 2007 the Company recorded pension expense with
        respect to continuing operations of $6.4 million (2006 -
        $ 2.5 million) and nil (2006 - $0.3 million) with respect to
        discontinued operations with respect to these benefit plans.

    7.  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 8 -
        discontinued operations).

    8.  Discontinued Operations

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

        Subsequent to the quarter end, the Company negotiated the sale of the
        majority of the pulp mill equipment for proceeds of $5.5 million that
        will be realised over the course of the year as the equipment is
        removed from the site. The sale will result in gain of $5.5 million
        as the equipment had been fully written down. The Company continues
        to work with parties interested in acquiring the site itself. The
        following table provides additional information with respect to the
        discontinued operations:

                                                 Three months ended March 31
        ---------------------------------------------------------------------
        (millions of dollars)                           2007            2006
        ---------------------------------------------------------------------
        Sales                                    $         -    $       20.0
                                                -----------------------------

        Net loss from discontinued operations
         before
        Income taxes                             $      (1.0)   $       (7.1)
                                                -----------------------------
        Income taxes                                       -               -
                                                -----------------------------
        Net loss from discontinued operations    $      (1.0)   $       (7.1)
                                                -----------------------------
                                                -----------------------------

        Cash used in:
        Operating activities                     $      (2.5)   $       (0.9)
        Investing activities                               -               -
                                                -----------------------------
        Cash used by discontinued operations     $      (2.5)   $       (0.9)
                                                -----------------------------
                                                -----------------------------

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

    9.  Private Lands

        On January 31, 2007, the Company received approval from the BC
        Minister of Forests and Range to remove approximately 28,000 hectares
        of its private lands from its Tree Farm Licenses ("TFL's") 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. On May 9, 2007 the AAC for TFL's 6, 19 and 25 was reduced
        by 202,100 cubic metres to account for the removal of the private
        lands from the TFL's. This volume is now harvestable separately from
        the TFL's.
    





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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