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Executives

John Hobbs – Director, Investor Relations

Rick R. Holley - President and Chief Executive Officer

David Lambert – Senior Vice President, Chief Financial Officer

Analysts

George Staphos – Bank of America Securities

Gail Glazerman - UBS

Chip Dillon - Credit Suisse

Mark Weintraub - Buckingham Research

Claudia Hueston - J.P. Morgan

Peter Ruschmeier – Barclays Capital

Steven Chercover - D.A. Davidson & Co.

Christopher Chun - Deutsche Bank Securities

Plum Creek Timber Company, Inc. (PCL) Q3 2009 Earnings Call October 26, 2009 5:00 PM ET

Operator

Good afternoon. My name is Michelle and I’ll be your conference operator today. At this time I would like to welcome everyone to the Plum Creek third quarter earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions)

Mr. Hobbs, you may begin your conference.

John Hobbs

Thank you, Michelle. Good afternoon ladies and welcome and welcome to the third quarter 2009 conference call for Plum Creek. I’m John Hobbs, Director of Investor Relations for the company.

Today we have on the line Rick R. Holley, President and CEO and David Lambert, Senior Vice President and CFO. This call is open to all investors and members of the media; however, the Q&A portion of the call is intended for the professional investment community only. We ask that all other participants please follow up with any questions by calling me at 1-800-858-5347.

I encourage you to visit our website www.plumcreek.com. There you will find our press release and supplemental financial statements for the third quarter of 2009.

Before we begin, I’d like to take this time to remind everyone that certain of our statements today will be forward-looking involving known and unknown risks, uncertainties, and other factors that may cause actual results or performance to differ from those expressed or implied.

These risks and factors are routinely detailed in our filings with the Securities and Exchange Commission. Following today’s prepared remarks we’ll open up the call to your questions.

Now I'll turn the call over to Mr. Holley.

Rick R. Holley

Good afternoon. Business conditions appear to have stabilized during the past quarter in many of our markets and we are beginning to realize the $13 million annualized SG&A savings we have secured through our cost management efforts. The contractions in demand and pricing that followed the onset of the housing and financial crisis have halted. In some cases we saw some modest recovery from the lows set earlier in the year.

As we mentioned on our last call, Northwest sawlog markets found a bottom in April. While the absolute pricing level for sawlogs in the Pacific Northwest remains unattractive, the market slide has been arrested and prices have trended upwards for the past six months.

Southern saw mill customers remain very cautious and disciplined. We are seeing fewer new curtailment announcements and fairly stable pricing in most areas. Pulpwood markets remained attractive across our operating areas and continue to be reasonably good by historic standards.

Within rural land markets, activity levels were on a par with the second quarter about 30% below the peak we experienced in 2007. We’ve noted an increase in the pace of inquiries and interest from both individuals and families. That is an encouraging development.

Overall, customers are cautiously optimistic about their business prospects for 2010 and are hopeful that a recovery would begin to take hold in the coming year. Near term, they are keeping a close eye on their cash, inventories, and indicators of in use demand.

David Lambert

We reported third quarter earnings of $0.12 per share, a bit better than our guidance for the quarter. Overall performance in our operating segments was much as we anticipated. Corporate expenses were lower than typical, due in part to a reduction in share based compensation expense of $3.5 million.

In the northern resources segment, we posted an operating profit of $3 million, an improvement from the second quarter’s $7 million loss. Harvest volumes increased from the seasonally low levels of the second quarter when spring thaw limits harvesting activity across the northern tier states.

Prices for both sawlogs and pulpwood were much as we expected with a recovery in sawlog prices from the very low second quarter levels and stable pulpwood prices. Northern sawlog prices increased $6 per ton during the quarter, a little more than we originally anticipated. The increase was primarily the result of a 13% recovery in the Pacific Northwest sawlog prices from second quarter averages.

That said, prices remained low by historic standards and as a result we maintained sawlog harvests at the low end of our guidance range. Looking forward, we expect northern sawlog prices to hold steady during the fourth quarter. We expect the fourth quarter sawlog harvest to be slightly lower than the third quarter level based on our expectation that many saw mills will take extended holiday downtime during the quarter.

Northern pulpwood prices held steady at $38 per ton and we harvested more than our initial plan, shifting some production to the third quarter from the fourth as customer demand was good and prices remained attractive. We do not expect much change in the fourth quarter for northern pulpwood markets. We expect our average pulpwood price to be down $1 per ton as hardwood pulpwood prices have softened slightly in the northeast. We plan to harvest between 450,000 and 550,000 tons of pulpwood during the quarter. In aggregate, we expect lower harvest volumes and fairly stable log prices to result in a modest operating loss for the segment during the fourth quarter.

In our southern resources segment, our third quarter operating profit was $21 million, down $2 million from the second quarter level. Prices for sawlogs and pulpwood were stable during the quarter while we increased our pulpwood harvest from the second quarter level. Seasonally higher road maintenance expenses increased costs sequentially and are expected to decline seasonally in the fourth quarter.

Our sawlog harvest of 1.25 million tons was similar to the second quarter level and was in line with our expectations. Sawlog customers remained disciplined, matching their lumber and plywood production to seasonally higher demand for those products. Sawlog prices held steady in this environment.

During the quarter, southern pulpwood markets remained attractive. Pulpwood demand increased as pulp and paper mills increased production during the third quarter. Residual chip supplies remained constrained and mills had difficulty maintaining adequate pulpwood inventories due to extremely wet weather in most regions of the south.

We increased our pulpwood harvest to 165,000 tons of 9% compared to the second quarter. This harvest level was above our initial plans and is simply a shift in the timing of our harvest. We moved some volume into the third quarter from the fourth to capture attractive spot market opportunities.

Our average pulpwood prices held steady at about $9 per ton. In some areas of the south, we’ve seen a deluge of more than 30 inches of rain in the past four weeks. This unseasonably wet weather is impacting current log inventories in many markets. The situation may become more difficult for mills during the typically wet first quarter when many mills are attempting to build their log inventories.

During the fourth quarter we expect the wet weather will have a modest impact on our sawlog markets. We expect to see some attractive spot market prices but overall we believe poor lumber markets and holiday production curtailments will limit widespread price increases.

We expect to harvest less than 1.1 million tons of sawlogs during the fourth quarter. We expect sawlog prices to be stable during the quarter. However, the composition of our sawlog harvest will shift temporarily towards lower price smaller sawlogs. As a result of this weaker mix, we expect our average fourth quarter sawlog price realization to be $1 to $2 per ton lower in the fourth quarter.

We expect to harvest about 1.6 million tons of pulpwood during the fourth quarter. The sequential decline of roughly 0.5 million tons in the pulpwood harvest is a function of limited timberland accessibility and the movement of some pulpwood into the third quarter. Low pulpwood inventories, limited supplies of saw mill residual chips, and weather constraints on pulpwood supply will combine to keep pressure on pulpwood markets.

We expect average pulpwood prices to move up during the fourth quarter to average $10 per ton. As always, we continue to adjust our harvest plans in response to market conditions, deferring harvest in weaker markets to protect value and temporarily increasing harvests in attractive markets to capture value.

The real estate segment recorded revenue of $73 million and operating profit of $20 million. As mentioned in the press release, we completed the non-cash land exchange with the Washington State Department of Natural Resources valued at $25 million. This transaction was not included in our third quarter revenue guidance as it was a non-cash exchange and had no impact on the company’s earnings or cash flow but the value of the exchange is reflected in the segment’s revenue for the quarter.

Excluding this exchange, our segment revenues were $48 million, slightly below the low end of our initial expectations of $50 million to $70 million for the quarter. Third quarter operating margins were lower than typical for this segment, the result of lower margins realized on Maine conservation land sales. This reflects the relatively lower value per acre of these conservation lands.

We have not noted any significant changes to our rural land markets since the last quarter's call. In general, rural land values were off approximately 25% in higher value regions such as Florida, portions of Georgia, and Montana. Rural land sales in lower priced markets such as Mississippi and Northern Wisconsin remain fairly active. Prices in these markets have been more resilient and appear to be off 15% or less from their peaks.

During the third quarter we completed the sale of roughly 5,500 acres of small, non strategic lands at an average price of just under $1,000 per acre. These lands were primarily smaller, lower productivity properties scattered throughout our ownership in the Lake States and the Gulf South regions. We also sold nearly 10,500 acres of recreation in higher and better use lands at an average price of $2,100 per acre.

Over 75% of the acres sold during the quarter came from lower value regions of the Gulf South and the Lake States. By comparison, for the full year of 2008, sales from these two regions made up less than 40% of the acres sold during the year in the higher and better use category.

As noted in the press release, the $15 million of conservation sales were in Maine. Approximately 29,000 acres were purchased by the Appalachian Mountain Club as a result of the final approval of the company's concept plan for the Moosehead Lake area. The Nature Conservancy acquired a 15,000 acre tract known as Number 5 Bog in a separate transaction. As the Bog name implies, this is a property with diverse ecological value but relatively low timber value. We expect fourth quarter real estate revenues to be between $60 million and $75 million. Profits will improve as we estimate land basis will be approximately 25% of revenue.

The manufacturing segment reported a $1 million operating loss during the quarter. Improved performance in each of the product lines was offset by a one-time pension settlement charge, the $4 million associated with personnel reduction from downsizing our manufacturing operations.

Lumber sales volumes declined as a result of the second quarter mill closures. However, profitability within the lumber operations improved significantly as the lumber sales mix shifted to one inch boards and away from commodity stud lumber. Profitability of both the plywood and medium density fiber cord operations improved modestly with average prices for plywood up about 2% and steady MDF prices compared to the second quarter.

Sales volumes were slightly higher for both products. Plywood sales were up about 2% and MDF sales increased 4% compared to the second quarter. We expect sales volumes to decline seasonally for lumber, plywood and MDF during the fourth quarter and we expect prices to hold fairly stable. As a result we expect the segment to report breakeven results for the fourth quarter.

We continue to look for attractive capital allocation alternatives. During the fourth quarter we will use our low-cost line of credit to retire at a modest premium to par, an estimated $62 million of relatively high coupon private notes that mature in two years. The average coupon on the notes retired is about 7.7%. This retirement will save about $4 million in interest expense annually for the next two years. This transaction will result in a fourth quarter debt extinguishment charge of $2.5 million. The effect of this transaction is incorporated into our earnings guidance.

We expect third-party interest expense for the quarter to be approximately $20 million resulting in full-year interest expense of just under $90 million. We expect to record a fourth quarter tax benefit in the $3 million range.

In all, we expect fourth quarter earnings to be between $0.12 and $0.17 per share. Capital expenditures for the year should be about $65 million. Overall we have increased our earnings expectations for the year and expect to report earnings for 2009 between $1.39 and $1.44 per share.

Now I'll turn the call over to Rick.

Rick R. Holley

Thank you, David. During the third quarter a unanimous decision of the Maine Land Use Regulatory Commission approved our concept plan for the Moosehead Lake region in Maine, a testament to the value of collaborative and thoughtful land use planning. This approval is an important step in realizing a coordinated long-term vision for this beautiful region.

The plan provides for conservation outcome of more than 400,000 acres, the second largest in US history and rezones 16,900 acres for long-term development. As expected, some environmental groups who have opposed the plan since its inception have appealed the approval. We are confident in the process and expect the Commission's decision to be upheld.

The communities of the Moosehead Lake region will benefit from knowing what the future holds for this area. And Plum Creek will benefit from the ability to manage our assets in Maine with predictability.

For our investors, Plum Creek will continue to own and operate as Main's timberlands as healthy productive working force now with a long-term development opportunity. As many of you know, Plum Creek has been working to serve a growing renewable energy customer base. The opportunity to provide a portion of our annual harvest to customers who value it for its energy content is attractive.

We've grown our deliveries of biomass, the tops and limbs of trees that we harvest, to about 650,000 tons this year which will add $3 million to our earnings and cash flow. This is volume that used to be left on the forest floor.

As we've grown this business we've developed expertise in managing this emerging supply chain. In early May, President Obama issued a directive to the US Department of Agriculture to aggressively accelerate the implementation of a component of the 2008 Farm Bill.

This component, known as the Biomass Crop Assistance Program, or BCAP, is a two-year program designed to assist agriculture and forest land owners, the development of an efficient and effective supply chain for biomass used in the production of renewable energy. Under the program biomass suppliers will be eligible to receive as much as $22.50 per green ton sold to qualifying biomass energy producers.

Several investors have asked us what impact the implementation of the BCAP program will have on the industry and Plum Creek. While the Farm Bill legislation provides a broad outline to the program, the draft rules have not yet been published. Many questions have yet to be answered and we expect the rules to be finalized late in the fourth quarter.

Given our large, diverse timberland ownership and the knowledge of the energy and biomass markets [inaudible] we would expect to see some tangible benefits from this program for Plum Creek and we'll keep you posted on that.

So far this year we've generated more than $490 million in cash flow from operating activities, well in excess of the $276 million required to fund our annual dividend. While a consistent and reliable dividend is one way to deliver value to our shareholders, it is not the only tool we have used.

We continue to focus our attention on assuring we make the best capital allocation decisions possible with the goal of maximizing the per share value of Plum Creek. Those who know us well understand that we are active managers of a portfolio, a portfolio of timberland assets.

Since the end of 2001 the company has acquired over 1.5 million acres of timberland. Over the same period we've sold about 2.1 million acres of land. However, we believe the portfolio we own today has superior long-term risk and return characteristics than the portfolio we owned at the end of 2001.

We are constantly analyzing the value of each asset within the portfolio. We analyze both its value to us and its value to others. When we find opportunities to capture an exceptional value we move to monetize lands and employ that capital.

When we find opportunities to acquire new assets at a price that allows us to generate excess returns, we acquire those lands. If repurchasing the stock, our stock, at a discount to its intrinsic value proves to be a superior outcome, we repurchase our stock.

Over the last 24 months the company has sold about 850,000 acres of timberlands in a handful of large transactions. These sales have generated roughly $1.3 billion in cash that we have recycled to benefit shareholders. We retired more than $460 million of debt, reducing our annual interest expense by $40 million.

We increased our cash balance by nearly $200 million, enhancing our liquidity and financial flexibility. We repurchased more than $350 million or 5.5% of our common stock. This is a reduced cash require to pay our annual dividend by $17 million and this is part of the total of $814 million of our stock or 12% of our total outstanding that we've repurchased over the last three years. We acquired nearly $200 million of productive timberlands in Georgia, Oregon and Vermont.

As we prepare to enter 2010 we are financially healthy and well positioned to weather a continued difficult business environment and take advantage of opportunities that may present themselves. We will continue to make effective disciplined capital allocation our top priority.

I will be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of George Staphos -

Bank of America Securities.

George Staphos - Bank of America Securities

Maybe a quick question to start regarding the balance sheet - can you remind us what the maturity schedule looks like over the next couple years? I remember roughly speaking in 2011 you've got about $400 million coming due and then in '12 about $600 million. And then I had a question on Montana Phase III. I remember that that will likely close in the fourth quarter of 2010. Can you do something similar to what you did this year which is obviously something to the major conservancy, maybe pull forward that cash flow to the beginning of the year, guys?

David Lambert

Let me address the balance sheet first, George. In 2010 we have about $56 million due. In 2011 at the end of the quarter we had $376 million due of senior notes. We've already prepaid $62 million of that that I alluded to earlier. We're down to just about $300 million in 2011. So we continue to have a runway that looks quite reasonable as far as how we approach our upcoming debt maturities. Credit markets have improved dramatically over the past quarter.

Our public bonds that we're trading at a significant discount to par when things were being disrupted are now trading at well over par at very low yields. And so we feel pretty comfortable about the upcoming opportunities to refinance our debt.

George Staphos - Bank of America Securities

And on Montana Phase III, is that a fourth quarter closing, from what I recall? Can you pull that forward by any chance?

Rick R. Holley

Yes, George, this is Rick Holley. I think that at least we're still planning at this time for it to be a fourth quarter closing. And I presume that the Nature Conservancy is in the process of still funding that because that portion of the transaction is funded with private individuals. So we've not heard anything different but my guess it'll be an early fourth quarter call.

George Staphos - Bank of America Securities

All right, two last ones and I'll turn it over. If we look at the last two quarters worth of real estate sales and what you're projecting for this coming quarter, the run rate's been relatively consistent over the last three quarters. I realize real estate sales are kind of hard to project, but is there any reason that you can see right now where that run rate shouldn't continue for the foreseeable future, ex again, the timing on Montana?

And then from what I recall from the last call you had been hoping for prices to be up - this is not Northern sawlog. You had a nice uptick there but prices to be up $1, $2 per ton in the other markets yet they were flat. And yet it seemed like you increased the harvest levels because you said the markets were attractive. If you could provide maybe a little bit more color in terms of why you raised the harvest levels there.

David Lambert

Well, I think we had indicated with respect to Southern sawlogs the prices would be flat in the third quarter compared to the second. And that's really exactly where it came out.

And then in the northern segment we told you that sawlog prices might advance $3 or $4 and we actually got $6 a ton increase. So generally the markets were as we expected. We had a seasonally higher harvest in the northern segment due just to the spring thaw. In the south we did harvest a little bit more primarily in pulpwood as those markets continued to be attractive. But it really came out much as we expected, George.

Rick R. Holley

Regarding the real estate segment, George, you asked in the run rate character that even though we're not giving guidance for 2010 yet as we're in the process of doing our budget, we've seen improvement in the rural land business throughout this year. Each quarter we've seen the transaction count up and certainly the interest level amongst investors or buyers up as well.

So we would expect if you take out the Wisconsin transaction from the second quarter and the Montana transaction from the first quarter this year, the balance of those sales in the real estate segment that in 2010 it will be higher than that. So we see a steady improvement.

Again, as we've indicated to investors in the past, once markets settle down when the economy improves, that real estate segment's kind of a $300, $1 million a year plus revenue kind of run rate business. So we would expect slowly to get back to that level without these large one-time transactions.

Operator

Your next question comes from Gail Glazerman - UBS.

Gail Glazerman - UBS

Rick, going back to your last formal comments about managing your portfolio, can you give some color on industrial timberland markets and kind of where you see yourself in that position between selling, buying or buying back shares?

Rick R. Holley

Well, clearly, there's not a lot of transactions at least of any size in the marketplace. The market's been pretty slow. What transactions have been announced have been at prices, have held up pretty well. But it's always hard to say when somebody's selling 10,000 or 20,000 or 30,000 acres and they sell them for $1,900 to $2,000 an acre. That seems like a pretty good price but such a small transaction's really hard to say.

But values seem to be holding up pretty well and our expectation is if we see some weakness in the market and we talked about a number of catalysts that are going to come to the marketplace in the future with improvement in the housing market, the Canadian situation which we've spoken about, clearly this energy thing, should be some catalysts for cash flow growth. And if we see the right kind of values for timberlands we'll be a buyer again for sure. But currently we're kind of still in more of a seller versus buyer mode.

And the value of our stock price vis a vi timberlands that we could sell today we would be - with the dollar disposable capital we'd buy our stock back today versus timberlands. But that could change as we look into next year.

Gail Glazerman - UBS

And you touched on the BCAP program. I was just wondering if you could maybe give us some broader comments on energy policy in Washington and what your view is on like us getting renewable energy standards in this year and how important that is for your business plan kind of in 2010, 2011.

Rick R. Holley

Well, clearly it's going to be important to our business plan that it happens because you need the energy policy to be put in place and enacted by Congress and signed by the president so things start to happen.

In anticipation of that bill getting passed clearly there's a number of large utilities in the southern United States in particular that are trying to negotiate long-term supply deals to kind of control their supply chain. So even though it's not signed yet, things are starting to happen in the marketplace. And as all of you know, there's a number of pellet plants that have been built in anticipation of an energy outcome.

Clearly this BCAP thing could accelerate some of the energy focus in a quicker timeframe once the rules come out. There's a number of customers that we have in the south that have already applied for BCAP and got their approvals. So that could happen and much quicker. And, again, Plum Creek is well positioned to take advantage of that as well.

As far as the energy policy, I think that the attention is still, I mean, it's been on healthcare. Energy's taken a back seat. My guess the energy bill in Congress will get split in two and renewable energy will probably get passed if not this year, in the first part of 2010.

Gail Glazerman - UBS

Just one last question in terms of operations. We’ve had a couple of paper companies report and talk about the wood shortages. I’m just wondering I guess from your perception does that mean looking into the first quarter next year volume is going to be strong as customers are still scrambling to increase their inventories or do you think weather is drying out and that should clear up kind of during the fourth quarter?

Rick R. Holley

In Arkansas they’ve had 70 inches of rain this year and a normal year is 40 to 50 and it’s going to start raining again next week there. This is really at least in the [spot] market we’re seeing some remarkable prices for pulpwood. Now to the extent the wet weather continues and normally the first quarter is wetter than this time of year, that can be very positive for pulpwood prices and we can do better than we expect at this point in time. There are a number of large paper companies who are scrambling for wood right now to feed their mills so from a landowners perspective this is a good thing.

Operator

Your next question comes from Chip Dillon - Credit Suisse.

Chip Dillon - Credit Suisse

First question is, Dave, could you just review for us the $750 million revolver? You mentioned you borrowed the $62 million. What’s the total outstanding on that?

David Lambert

At the end of the quarter we had $264 million drawn so we’d use another $62 million or so to repay the notes that we just did.

Chip Dillon - Credit Suisse

I’m sorry, you said $264 million?

David Lambert

$264 million plus $62 million so a little bit over $325 million.

Chip Dillon - Credit Suisse

Okay and looking at the BCAP, I seem to remember in the past, Rick, you had mentioned that you guys cut anywhere from, roughly talking, 16 million to 20 million tons a year and that you leave behind something like 5 million tons of biomass that otherwise wouldn’t capture value or didn’t in the past, how much of that now are you selling, first of all, correct my numbers, and secondly, how much of that biomass do you think could be eligible, what sort of a range could we think about for next year?

Rick R. Holley

We talked about generating about 5 million tons of biomass and we thought, at least before the BCAP program, that we’d only recover about 3 million tons of it and we will do 650,000 tons or have thus far this year and generated about $3 million of cash flow. The other thing to remember about BCAP, it’s not just – it’s biomass but if you have pulpwood and you cut down pulpwood and basically run it through a machine and make chips out of it and it gets burned for energy, that qualifies too, and as you know we generate several million tons of pulpwood annually which technically could qualify as long as it goes directly to an energy outcome, to a qualified producer of energy. So we’re looking at both the pulpwood opportunity as well as the biomass opportunity, biomass just being the limbs and tops of the trees.

Chip Dillon - Credit Suisse

Right, so a way to think about it, you said you only processed I think you said 650,000 tons, you got about $5 a ton this year, is that what you said?

Rick R. Holley

That’s correct.

Chip Dillon - Credit Suisse

Okay, so if you were getting 22, that would all be incremental. And on the pulpwood side, I guess the issue, if you could just clarify, the way you described I think is if only the part of the tree or if the tree went for direct energy production but isn’t it also true that other companies that have pulp mills are also trying to get black liquor qualified as well?

Rick R. Holley

Yes and I don’t know how that’s going to come out. I do know that if we cut down a tree and then we just chip it in the woods, and there’s a lot of that going on today, and those chips all go to a pellet plant or they go to someone who’s just going to burn it for energy, then 100% of that would qualify under BCAP. But if you take a pulpwood log and you take it to a paper mill and they use a portion of it to make paper only a certain amount of that would potentially qualify, the part that’s not made into paper, because obviously if they make it into paper then you have the black liquor credit and you’d be double counting.

Chip Dillon - Credit Suisse

Is it too early to sort of give us a view as to what you think the harvest plans next year might look like or how they might vary from what they were this year?

Rick R. Holley

This year we’re going to be about 15 million tons or so and if we see markets improve, we’ll bring some of the volume back that we’ve withheld over the last couple years so if one were to say the markets will be better next year than they are this year, I think they will be then the volume could be a little higher next year than this year and we’ll give you guys insights on that on the year end call.

Operator

Your next question comes from Mark Weintraub - Buckingham Research.

Mark Weintraub - Buckingham Research

Rick, just two clarifications. One, and related to the BCAP program. One on the wood going to pulping facilities, is it your expectation that would qualify for BCAP or that is totally unclear at this juncture?

Rick R. Holley

I think it’s unclear but I think what, at least from what we’ve looked at this, and there’s not a lot of information out, at least the portion of the log that would go into the paper production, which is obviously not the bark and the other parts would not qualify. Obviously the bark from the log, if you burn it for energy, I guess that technically could qualify.

Mark Weintraub - Buckingham Research

The middle ground as to the black liquor? Okay, understood. Then just to clarify too, I believe it’s up to 22.50 or 45 per dry ton. So presumably if you’re selling the biomass and it’s at a lower price, you don’t get the 22.50, you get up to whatever the price --

David Lambert

You get a credit of up to the delivered value, the price of what you’re delivering.

Mark Weintraub - Buckingham Research

Is that the numbers that you’ve been planning, were those delivered values or were those --

David Lambert

Those are stumpage values so a $5 a ton stumpage could easily have $16 of log and haul associated with it so you’re kind of in that hunting range of the $22.

Operator

Your next question comes from Claudia Hueston - J.P. Morgan.

Claudia Hueston - J.P. Morgan

Most of my questions were asked, I just have a couple of little ones. One, I was just wondering if you could comment on what sort of a normalized land basis would be, it’s been sort of jumping around quite a bit and just how to think about that on maybe a more normal basis.

Rick R. Holley

For next quarter we’re expecting 25% and that’s a lot closer to what normal is. This quarter the land base was extremely high reflective of the sales. That 25% to 35% is much closer to what our historical experience has been.

Claudia Hueston - J.P. Morgan

Okay, great, that’s helpful, and then, just in terms of the mix in your lumber business shifting, do you expect that to continue as we go forward?

David Lambert

At least for now. We have one stud mill that’s curtailed and idle and as the commodity lumber prices come back and we see value in running that mill then our sales mix would shift and we’d have one board mill going and one stud mill. But for the foreseeable future we’re just going to be running the board mill this year and into early next year.

Claudia Hueston - J.P. Morgan

I know it’s early but do you have any thoughts on Cap Ex for 2010?

Rick R. Holley

Not at this point. We’ll give you those at the end of the year when we give our operating outlook for the year.

Operator

Your next question comes from Peter Ruschmeier – Barclays Capital.

Peter Ruschmeier – Barclays Capital

With an approximate 15 million ton harvest today, I was curious Rick with the changes in your portfolio, looking out a couple years, what is the normalized number now? Is it back to 18 million or 19 million or 20 million tons and then I guess on a related note, it looks like you’re probably going to be somewhere around 40% or 44% harvest saw timber this year. What would you expect a more normalized mix, again looking out a couple years?

Rick R. Holley

More normalized would be 50-50 sawlogs and pulpwood and I think you’re going to continue to see the harvest trend up over the next 15 years to get over 20 million tons and we’ve held back a lot of volume here the last two years so if we see markets come back strong, we could clearly get back in the 17 million ton range, maybe a bit higher.

Peter Ruschmeier – Barclays Capital

Rick, back in late July we saw one of your competitors sold some land, basically what they called a timber deed, and I’m curious if you care to comment on the structure. It would seem that with a portfolio as large as yours you might be able to consider using something similar.

Rick R. Holley

Clearly we, as you did, looked at that with great interest to see exactly what the makeup was and I’m not sure it works exactly as well for us but we’re always looking at different ways to capture value out of our land and timber base and if something like that we thought made sense for shareholders, we would do something like that.

Peter Ruschmeier – Barclays Capital

Just lastly, any update you have, the quarter or the trailing 12 months, mineral rights and hunting fees, how much that’s been contributing, and whether you have a different outlook as you look at those opportunities going forward.

David Lambert

Things are as we expected. Hunting fees are running about $23 million a year annually and on the mineral side we have seen some lower natural gas prices this year. That’s still kind of an $18 million to $20 million a year segment as far as operating income.

Rick R. Holley

On the mineral side over the next two or three years we should start to see that even with lower gas prices improve with construction materials becoming a larger contributor. There’s two or three different sites that are in the process of being permitted now and once those permits are in place, they’ll start to be a greater contributor.

Operator

Your next question comes from Steven Chercover - D.A. Davidson & Co.

Steven Chercover - D.A. Davidson & Co.

If I’ve heard you correctly you said that rural land values in the better markets were down 25% and 15% in the less prime regions, is that correct?

Rick R. Holley

Correct.

Steven Chercover - D.A. Davidson & Co.

I’m just wondering… I know we haven’t seen a lot of transactions so far this year but certainly a near term DCF would suggest that maybe some land values for core lands might also be under pressure. Are you starting to see that or is it simply because you’re not [inaudible] a lot of core lands that no one’s really seeing a mark to market so to speak?

Rick R. Holley

We haven’t seen it, the last transaction we did was in second quarter in Wisconsin and we thought we got very good values for what was the quality of that timberland on a returns. As I mentioned earlier on this call, the transaction we’ve seen in the marketplace values seem to be holding up well but most of the buyers which are still [teemos] even though the transaction size is kind of a $50 million size today, they’ve all I think increased their discount rates probably 100 basis points which affect prices 10% so my guess is you’ve seen prices around 10%, 15%, maybe 20% in some markets. The only large transaction clearly was the warehouse or Campbell Group sale and giving the quality of those lands, it’s really hard to say whether that was or how far off the market that may or may not have been.

Steven Chercover - D.A. Davidson & Co.

I agree with that. Sounds like some of the [teemos] are actually reloading their quiver so have you seen more expressions of interest for land?

Rick R. Holley

They always have lots of expression of interest but I don’t know that the quivers are too full yet because again a lot of their investors are pension funds and endowments who are still recovering from the financial free fall that we all felt so my guess is there’s still a strong interest among investors to own timberlands and so what I think is going to happen and you guys have heard me mention it, you could see values come off the market a bit here and in 5 years I think they’ll be higher than they were at the peak because there’s still a strong interest among institutional investors in this asset class.

Steven Chercover - D.A. Davidson & Co.

And with the US dollar now at what, $1.50 to the Euro, are you seeing any interest or have you maybe solicited interest from Europeans?

Rick R. Holley

I think some of these [teemos] have European money that they’re putting to use today and clearly over time, we talked a number of European investors who have an interest in buying timberland. I think with the exchange rate the way it is today, although there are long term investors, but I think they’ll still look at it as being more attractive than it might have otherwise.

Operator

Your next question comes from Christopher Chun - Deutsche Bank Securities.

Christopher Chun - Deutsche Bank Securities

Just wanted to follow up a bit more on the BCAP issue. I was wondering if you guys have been in touch with any of your pulpwood customers about the process that they need to go through in terms of being qualified under that program?

David Lambert

Yes we have, as you might expect. We’ve talked to them and we’ve talked to some that are qualified and have already applied for and gotten the qualifications.

Christopher Chun - Deutsche Bank Securities

Are you hearing any of them running into any particular resistance or anything or do you think that the typical pulp mill will be qualified?

Rick R. Holley

I don’t think they’ve run into any resistance. Clearly there will be an audit process in place where the government comes out and makes sure that you’re using the materials that you’re buying to qualify under the plan for the purpose they’re meant to serve and that is to provide renewable energy. All these big pulp mills have huge energy appetites and so they burn a lot of fuel. So to the extent that they’re burning less fuel and more wood in their boilers, that’s a good thing and that’s what the qualification is for. The process seems reasonably straightforward. They’re all asking themselves as we are, what are the final rules and for instance… It’s a two year program but how much money is in the program? Nobody even knows that. Everybody knows it’s 22.50 a green ton but no one knows exactly is it $100 million or is it $ 1 billion? Nobody knows that.

David Lambert

So the pulp mills aren’t having a problem getting qualified. The question that will remain is what portion of a log sold to them ultimately will qualify for the BCAP credit. Until the rules are finalized and we get some better clarity, that’s the uncertainty.

Christopher Chun - Deutsche Bank Securities

Right. Given the fact that they have to go through this process of qualification and the payments are presumably going to you guys, the timberland owners --

Rick R. Holley

That’s correct.

Christopher Chun - Deutsche Bank Securities

Have you given thought to what extent if any you’re going to have to share this credit with your customers in some form? Maybe in the form of lower prices or something like that?

Rick R. Holley

Clearly if you look at the supply chain you have the landowner, you have the contractor, you have the user and to make this work effectively for everyone, my guess is all three should get some value out of this. We haven’t sat down with a customer yet and said, “Okay, how much will we need to change pulpwood or biomass prices so that we can participate with you in this program?” but clearly all three are going to be important, including the contractor in this whole process.

David Lambert

It hasn’t been onerous for our customers to sign up and qualify for the program.

Christopher Chun - Deutsche Bank Securities

My final question has to do with Moosehead Lake. I think if I heard you right that 16.9 thousand acres are designated for development?

David Lambert

That’s correct.

Christopher Chun - Deutsche Bank Securities

Can you give us an idea of how many lots would be involved in that number?

Rick R. Holley

There’s actually 975 residential lots and there’s two resorts which have additional 1200 lots associated with them, obviously smaller lots, but another 1200.

Operator

There are no further questions at this time. I’m turning the call back over to you.

Rick R. Holley

Thank you everybody and we’ll talk to you next quarter. Have a good holiday.

Operator

This does conclude today’s conference call. You may now disconnect.

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Source: Plum Creek Timber Company, Inc. Q3 2009 Earnings Call Transcript
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