Rick R. Holley - Chief Executive Officer and Executive Director
Thomas M. Lindquist - President and Chief Operating Officer
Russell S. Hagen - Senior Vice President of Business Development
Larry D. Neilson - Senior Vice President of Resources and Operations Support
James A. Kilberg - Senior Vice President of Real Estate, Energy and Natural Resources
David W. Lambert - Chief Financial Officer and Senior Vice President
George L. Staphos - BofA Merrill Lynch, Research Division
John Charles Tumazos - John Tumazos Very Independent Research, LLC
Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division
Gail S. Glazerman - UBS Investment Bank, Research Division
Mark A. Weintraub - The Buckingham Research Group Incorporated
Plum Creek Timber Company, Inc. (PCL) 2013 Investor Day Conference October 1, 2013 8:00 AM ET
Rick R. Holley
Good morning, ladies and gentlemen, and I want to welcome you to Plum Creek's 2013 Investor Day. And I think we have a good program for you today and we certainly look forward to the interaction, your questions at the conclusion of our presentation, and the management team will still be here after the presentation today should you have anything you want to talk about one on one. So feel free to stick around and spend time with us as your time warrants.
To start off, I want to make some introductions here. Presenters: Tom Lindquist is our President and Chief Operating Officer; and next to Tom is Jim Kilberg, our Senior Vice President, and Jim has responsibility for our Real Estate business and, now, our Natural Resource business as well; David Lambert, who most of you know, is our Chief Financial Officer; Russell Hagen is our Senior Vice President, he's in charge of our business development opportunities and has been spending a lot of time on biomass, he's going to talk to you about that today; and Larry Neilson, the Senior Vice President, is responsible for our timber operations and also manufacturing.
As we visit with you today, at Plum Creek -- we at Plum Creek are more excited about the prospects for this company and the industry today than ever before. And even though we're only kind of in the early stages of a recovery, this company, through the assets that we own, the strategic execution that we've made over the last few years in the recession, how we positioned the company, today puts us in a unique position to reap the benefits of a recovering economy and higher values for our core timber assets and cash flows from that. The rural land business that we'd positioned so well, we've taken a lot of those lands out of the market over time, that's recovering. We have some lands that we think have significant value upside in the future, and we'd positioned those with entitlements that we put in place over the last couple of years through the recession when it was easier to do that. And then lastly, the non-timber resource business that we have, kind of the subsurface assets that we've been working on our own lands with some acquisitions that we've made over last year, also puts us in an excellent position to grow the cash flow and the value of this business going forward. So we at Plum Creek are very excited about the future prospects and we're going to share all this information with you today.
When you think about innovation, you never think about forest products or pulp and paper companies and certainly timber companies, but Plum Creek has been a first mover. We have been somewhat innovative. The first pure timber play. The first timber REIT. The first company ever to get of all the lands certified in the Sustainable Forest Initiative. And even serving these emerging energy markets that we've seen kind of recurring over the last 2 or 3 years, and we're kind of seeing the opportunities manifest themselves in the marketplace today. And for Plum Creek, it's looking for that next opportunity, that next innovation. Even the work that we've done on natural resource assets, these 2 acquisition that we've made in the last year. I think innovative is a way for Plum Creek to grow the value and the cash flow of this business as we go forward.
At the heart of everything we do is managing these lands sustainably. As I mentioned, we were the first in the industry to have 100% of our lands certified on the Sustainable Forestry Initiative in 1999. And this is important to investors, it's important to customers, it's important to all of our stakeholders. Now even though we own these lands on your behalf, we're really stewards of these lands for the public in general. So taking care of these lands is a very important part or aspect of what we do.
You think about conservation. We've been the largest purveyor of conservation in the history of this country, over 1.4 million acres in different conservation outcomes. And at the same time, Habitat Conservation Plans on endangered species across the landscape, over 1 million acres. And what this does is it gives Plum Creek predictability and certainty so that we can manage these lands long-term, at the same time, protect those various species and watersheds in the lands that we have.
You look at all these 4 key strategies, these same ones we've been sharing to you for the last 10 or 15 years. They're very simple. They're very straightforward. They're clearly understood across this company, and they're the strategies that we continue to execute. And at the core of everything we do is this map, and it's one I show you each and every year. And I think this whole presentation come down to this one slide, this map of the United States showing our 6.3 million acres in 19 different states. Maybe not the largest, one of the largest timberland owners in the country today, but certainly the most diversified.
We talk today to you in this presentation, the large -- the footprint we have, the diversification we have of all timberland ownership and these different businesses, be it our core timber business, the rural land business and subsurface rights, are really the cornerstone of our value creation focus.
So starting with here, how we recognize value is a job that each and every member of the Plum Creek family to maximize the value of each and every one of those 6.3 million acres. And it really starts with the timber, timber is our core business. Timber is where we're going to grow, harvest, sustainably manage these assets over a long period of time. And we're going to reinvest in those assets, as we have, throughout the recession. We spent about $500 million in the last 10 years to make sure these lands were highly productive, and you're going to see in Larry's presentation today the results of those investments.
With respect to our land assets, even though timber is our core business, we have lands that have much higher values than just managed for timber long-term. And it's a matter of identifying and then capturing the value of those land assets. And also looking at lands, as I mentioned, that have higher values, kind of the plums in Plum Creek, and getting entitlements in place on those lands to, again, create additional layers of value. And Plum Creek is not going to get into the development business, but we're going to work with developers where, after we get entitlements in place, we'll come in and help us realize those higher-value attributes of those landholders.
And then non-timber resources. It's not just the land, it's not just the trees, but the subsurface rights. And we have oil and gas assets, we have construction material assets, we have a wind assets on our land. And again, the job is how do we maximize the value of those acres where those assets exist today. And then over time, those assets will be turned back into core timber properties.
Think about our core timber business. Scale is important. At Plum Creek, we're not trying to be the biggest, but we're trying to be the most valuable. And when we think about value, we buy and we sell lands every day. We buy lands where we think we can create value, and we sell lands that are nonstrategic to us. So we're a buyer and seller. So we're not trying to be the largest, but we're trying to be the most valuable.
It's this investment I mentioned, $500 million over the last 10 years. Throughout the recession, we did not take investment away from the productivity of these land assets that we own. And we also spent a lot of time, as you'll hear about today in the bioenergy segment of the presentation, attracting new investment in those marketplaces. We always talk to you about this 150-mile circle. And within that circle, we have lands, and whoever is in that circle are going to be customers. And you're going to have the best timberlands in the planet, but if there's no one in the circle, then those lands aren't worth a whole lot. So we spend a lot of time making sure we attract investment in our markets.
As you'll hear about today and as you probably already know about, there's been 2 or 3 Canadian companies, large lumber manufacturers, who have moved in the United States and made investments here. And we spent time with all of those and we try to attract them into our markets because they're going to recapitalize old plants, they're going to increase the productivity of those plants and, therefore, the productive capacity, which puts pressure on sawlogs in that marketplace which benefits Plum Creek.
And as I mentioned, we actively manage this portfolio. We buy, we sell. In the future, you may see us joint venture with other timber landowners where we can create value by managing timber for others and look for other ways to create value for Plum Creek.
Land values, surface, subsurface rights, it's really all about understanding the value of every acre that we own. And we could show you at Plum Creek, you can come visit us in Seattle or down at Athens, Georgia, we can show you that any acre that we own, anywhere in the country, we have a value opinion on that acre. We study it. We understand the productivity the lands those trees are on. We understand the stocking levels. We understand the limit of trees to be harvested. We understand the value of those trees that are going to be harvested. And we also understand the rural land values based on where the lands are located and comparables in the area. So we need to understand and we do every single acre.
At Plum Creek, it's all about net present value and best NPV wins. And everybody understands that, whether they're timber managers, whether they're real estate managers, whether they're working at our subsurface rights opportunities, whether they work in the corporate staff, best NPV wins at Plum Creek. And this national footprint gives us the expertise and the understanding of all the different markets. And I mentioned the diversity our assets. What's great about that is, throughout the recession, our northeastern lands, the value has held up very well, prices held up well for all the hardwood assets. And we had ebbs and flows in the Pacific Northwest and the South, sometimes market was up due to weather, sometimes it was down. Sometimes the Chinese were in the market and values were up, and allowing Plum Creek to defer value when prices were down and to capture value when prices were up.
And the capital allocation, we spent a lot of time talking about that. As we mentioned in every earnings press release, because it's job one at Plum Creek. We spend a lot of time thinking about capital allocation. Already mentioned a couple of times, we're somewhat ambivalent about whether we buy or sell as long as it creates value.
In the recession, we bought back $900 million worth of our stock. We sold some noncore assets and took the proceeds and bought back stock at an average price of $36 a share, an excellent value opportunity for Plum Creek and for shareholders. We also bought in $400 million worth of debt and reduced our interest expense, again, by selling noncore assets. And throughout the recession, you'll see in the next slide, we've continued to look for opportunities that create value by buying lands that, first and foremost, are accretive to cash flow and also return north of our cost of capital. So you can be rest assured any acquisition that Plum Creek makes will meet those 2 criteria.
I mentioned reforestation, the productivity of our lands, fully invested throughout the recession in that. We've also made some timber acquisitions over the last couple of years, $185 million for 118,000 acres, virtually all in the Southeastern United States. Very attractive timberlands, in most cases, the next door lands we already own. Synergistically, they kind of fit what we were doing and didn't have to add overhead to manage those properties. We also did some timber deeds. We, in essence, bought some sawlogs in the South at what we thought was a very low price. And as we see a recovery in sawlog prices, we're going to reap the benefit of that. We spent over $120 million on timber deeds.
And as Jim Kilberg will talk about in a few minutes, we've made some very attractive investments in the aggregate business. Last week, we announced another -- a second transaction with Vulcan Materials where we bought some assets in the state of Georgia, near Atlanta, very attractive quarries. That first 254 million tons of rock that comes out of that ground, we're going to get a royalty based on the finished product price when Vulcan moves that to the marketplace. Very attractive cash-on-cash returns, higher than anything else we've seen in timber and anything else in our business today. So a very attractive investment that we're buying on the bottom of the market.
And the dividend. We did increase the dividend last year. And as we've told you over the last several years, is we see the cash flow from our core businesses, our recurring businesses grow, and we've seen it. Between 2012 and 2013, last year, it went up $44 million. And the guidance we've given you for 2013, has gone up another $50 million. As we see this recovery, and you'll see some sides of this presentation day, the cash flow from our core businesses grow, we will continue to grow the dividend. It's a very, very important part of total shareholder value delivery in this company. Tom?
Thomas M. Lindquist
Thanks, Rick, and good morning. Well, I'm here this morning to talk about sawlogs, lumber production and the price direction for sawlogs. Just to tell you right now, the price direction is up. That's the summary of my presentation. It's a good thing. Prices are going up in sawlogs because demand is back in the marketplace. Certainly, we've seen the movement in Northwest. And we think over the next 12 months, Southern markets are going to move as we get to next level of incremental demand. And that's a good thing for us. Sawlog prices have been really tough for us over the recession, but sawlog price improvement drops right to our bottom line. It's a big driver for cash flow for us. So we're pretty excited about the market condition that we see coming our way. When we see sawlog improvement along with our pulpwood markets, which are advancing, we've got a pretty good story for our shareholders over the next 2 or 3 years.
So why are we confident? Why do we think sawlog prices are going to go up? Well, this is the really important slide right here. There are 3 major drivers here on this slide, which are going to set sawlog volume and sawlog prices. And they're all coming from changes in lumber production, what's going to happen in the marketplace from a demand standpoint and a supply standpoint.
This first element that's highlighted here, or at least oversized on this first slide which I'll talk about, is resurgent or recovering North American demand. This is a big deal. I'm going to show you the demographics behind this, but this is going to happen. And this would be considered a typical or normal recovery. The factors that are behind us would have put us in historical terms, in position to enjoy strong lumber production and strong sawlog prices. This alone would solve our sawlog price problem and the give us the kind of prices that we like and enjoy. That's not the whole story.
This demand story, coming from the North American demand, has been augmented, we think, permanently by strong offshore demand. This strong offshore demand is going to do 2 things: It's going to raise overall demand long-term, driving up production requirements for lumber and really pushing against capacity, requiring more capacity production; and it's going to make the recovery in our business happen faster. That's a big point and we've been missing that in the marketplace miscommunications. So we have more total demand coming and it's going to happen faster. I'm going to show you that.
The third thing is constrained Canadian supply. We talked a lot about this, and I'll show you the details again. But what does this mean? This means, as this market recovers with these 2 demand factors, it's got to be produced. Historical production capacity is not going to be there. These first 2 demand factors are going to drive us well past 90% production and capacity ratios, up to the 95% zone and more. But that original supply position, that Canadian production, is not going to be there and it's going to U.S. markets. Some in the West and a lot in the South, and that's a good thing. When production shows up in log markets, more logs are required and price is driven up, we've got the stats for you.
First, our North American demand. Why is it going to recover? Well, it's going to recover really on the backbone of demographics. We have looked at every possible demographic data there is in this country. And it seems, from a conservative standpoint, that we can rely on the fact that the American demographics are going to produce about 1.5 million housing starts probably for the next decade. Now certainly, that's been a reticent demand level as the recession has made people wary of major purchases. But we think 2, and maybe 3, factors are going to start driving North American demand up.
One is, we already see key parts of lumber demand, which rely on the improvement marketplace, in the industrial marketplace already in position at prerecession levels and advancing. That's a good thing. This final driver, housing starts, we believe is on its way. This year, we'll have about 1 million housing starts and we predict that, next year, we'll see 1.2 million housing starts. That may be enough actually, in and of itself, to drive recovery in our markets. I'll explain that a little bit here. But we think we will see 1.2 going to 1.5 by 2015, no later than 2016. That will give us a recovered marketplace based upon just historical factors.
Part of our reason for confidence is that, not only have we looked at analyst reports, but we believe household formations, which has been kind of the lagging key inside of all of these demographics, we believe those are on their way back. We see job confidence growing. These are people that have jobs, they're confident in their jobs. The retail numbers are up, we think major purchases are next. So just a little bit of modest job growth combined with job confidence, it should get us more housing starts.
So what happens to our marketplace if we can get to 1.5 million housing starts, well, a lot of good things. This is a great graph, look at this tight correlation here. 1.5 million housing starts gets us to 64 billion board feet of lumber production required in the marketplace. This is historical research position. This is an important point. This is a recovered marketplace at 1.5 million housing starts. And what we mean by that is, everything is in position. We have supply and demand balanced historically, prices are good historically. We expect $35 to $37 a ton for Southern sawlogs at least in a traditional recovery like this. So we're going to go from 1 million housing starts to 1.5 million housing starts. Lumber production is going to go up from 54 billion board feet to 64 billion board feet, starting the challenge practical capacity in the marketplace. A good outcome for our marketplace.
And here's what happens when lumber production goes up. This is a really cool graph. This is a graph of 20-year analysis in the South. And this says specifically, as lumber production advances, in this case, as the South gets its fair share of the normal recovery, prices will advance, too. So right now, we're in that 14 billion board foot range or in that $25 a ton saw timber range. As we advance to maybe a 17 billion board foot level, which is kind of a traditional Southern share of the marketplace, historically, we'll be in that $35 to $37 a ton range, a nice tight correlation.
It just so happened the Northwest markets, coastal markets, behave the same way within the same research. And it makes sense, right, from mill economic standpoint, too. If mills can advance their production, they can spread direct, indirect overhead costs over more production, freeing up more margin for the timber supply chain. So we have traditionally enjoyed higher prices with high production, and this graph right here proves it.
So in total, if we get the kind of demographically driven response to a marketplace, we're going to have a 1.5 million start marketplace with 64 billion board feet of production, a nice tight stronger marketplace from a supply and demand standpoint, we're going to see sawlog prices drive up. And in this case, for example, if the South gets its fair share, we'll be at least at 17 billion board feet with traditional numbers in the $35 to $37 a ton price. Remember this graph. It's a really good graph. But remember this graph because the South is going to go beyond traditional levels and move way to the right. Prices are going higher than traditional levels.
So why are we confident that we're going to see a recovery? Well, I showed you that demographics, here's another reason we're confident. This is offshore demand. This is Chinese demand. This demand is advancing the marketplace timing and levels. Traditional exports for North America have produced about 3 billion board feet of volume and demand requirements. China, however, has come into the marketplace over the last 3 years, including 2013, not on this graph, has required 3 to 3.5 billion board feet of lumber. In addition, not shown on the graph, log exports in lumber equivalent terms have been about 2 billion board feet. So 5 billion to 5.5 billion board feet of demand. We think conservatively, moving forward, this demand level will be at least 3 billion board feet permanently. A new change in the marketplace, which does this. It produces a new high: 67 billion board feet of demand coming our way in the marketplace, 64 based upon demographics at 1.5 million starts, and 3 billion board feet coming from Chinese demand. It's new, incremental and permanent.
This is a big deal. There's 2 things. It drives overall demand, so capacity is going to have to respond. That's a good thing for additional log volume and log prices. Remember, more production, prices go up. It's also been an important point especially -- actually improved -- its actually delivered some important points to us in terms of our underwriting in the marketplace. We like the test drive this Chinese demand coming in to the Northwest markets. We saw how new demand come in the market, raise prices, really shield them in less than 12 months. We think that same kind of impact is going to come to Southern markets as demand rises. There's a lot of supply friction out there. So when this demand comes in, Southern markets are also going to go up in price dramatically.
The other thing about this is that that's my math on 1.5 million starts. 3 billion board feet of Chinese demand, which is already in the marketplace, is equal to 200,000 housing starts. If we take that math and say it's already in the marketplace, in order to get to a healthy, balanced market, we only need 1.3 million housing starts to have full recovery, to improve prerecession levels and balance supply and demand conditions. So if the Chinese demand stays in the marketplace, which we say is going to, and housing rises to 1.2 or 1.3, even next year in 2014, we're going to be in full recovery. In Northwest, we'll get some initial price improvement. In the South, we'll get a lot of price improvement in the logs. It's a big deal. That's why we're so confident, in the next 12 to 18 months, price recovery is going to be here. In 2014, we're going to see some movement. 2015, we're going to have prerecession pricing and then beyond.
The third key driver is constrained Canadian supply. The reason this is important is as follows. I'm going to go through the facts of reduced Canadian supply and production positions. As we move with this demand, it gets 67 billion board feet of demand, has to be produced some place. Canada is not going to be able to do what it used to do in terms of production and lumber supply. It's got to go some place. It's going to go to the U.S. West and the U.S. South. And when it does that, it's going to great additional supply dynamics and drive more log demand to more log price. Remember that graph. Core lumber production in your geography equals higher log prices.
Canada. It's unfortunate, but you've seen these facts before. In British Columbia, the beetle kill has killed 40 million acres of timber. This is knocking out, as we speak, 4 billion board feet of production, or at least 5% of North American lumber supply. It's a big deal and it's happening as we speak.
In Eastern Canada, we've already lost 4 billion board feet of production. We just haven't felt it yet because the demand hasn't been there to push against supply constraints, but it's gone. And when demand comes back, it's going to push against available supply positions and drive up price. Anyways, in Eastern Canada, the 4 billion board feet is gone, it's not coming back. There have been harvest reductions, and the mill economics for sawmills there are just too tough. It lost paper customers, and don't have ship markets. And as a result, and in part, at higher log and haul costs. So this is going to be a permanent down-position for Eastern Canada. So the South and the West, the U.S., have to make up that production in an advancing production marketplace.
In fact, long-term opportunity for new supply wasn't enough of an incentive, this is. Look on the far side of the graph here at the U.S. South position here. The U.S. South is positioned with the best cost position in North America right now. And some of this happened during the reshuffling of the recession. Some has to do with currency parity. But the reality is, it's there. If you're going to open a mill, you're going to advance production, you're going to do it in the U.S. South. And this is a big deal. Because you could say, "Okay, we got this production opportunity, when are we going to do it, when is the South going to see it? Well, you're going to see the South take on this production opportunity tomorrow, because they have the most competitive cost position and can win on the next round of volume and requirements from demand. So this is an incentive that not only get in the South and create capacity, and an incentive to create a lot of capacity in the South. This is good news for Plum Creek markets, in particular, in that Southern sawlog.
Here's the payoff pitch. Here's where all 3 of these key factors come together. This is my best slide, studied this one closely. What this says is, with 67 billion board feet of demand coming our way, and again working against a very limited capacity position, we're going to be well over 90% here. Here's who's going to respond, this bracketed or circled box, the U.S. West, which is already in pretty decent position today, is going to go from 13 or 14 billion board feet, working up a little bit in 2013, to 17 billion board feet of production. That's a 30% change in capacity position. And the U.S. South, at 14 billion board feet a day, is going to blow past 17 billion board feet, which has been a traditional production position, to 21 billion board feet, a 50% increase in capacity.
Again, for our logs, for Southern logs, when this capacity locates right next to it, it's a good story. Remember that graph. More production, higher price. This is a big-time story, it's happening today. We're going to see it start in 2013, 2014, 2015. It's all coming.
What's going to happen to price, I say they're going to go up. In the West, they've already come up with the original sort of surge of Asian demand. We think there's room for another 10% for sure in these sawlog prices as production advances from 13 billion board feet from 17 billion board feet. In the South, we're not the only ones who are studying this and seeing this story. In the South, these 5 customers have announced $1 billion of investment to refresh idle capacity and to expand existing capacity. This is a big deal and this is happening as we speak. These are important players in the marketplace.
They see what we see. The South has got to respond to this new level of demand that's coming and that's going to be good for us. Southern sawlog prices are going up. Did I say they're going up? They're definitely going up. Right now, they're $25 a ton, which is not very good price. We think $35 a ton, given this potential marketplace position, is easy, and we think we're going to get $40 a ton. Prices have gone up 10% this year. All you need is 15% over the next 3 years and you're in this range. It's very reasonable and it's going to happen. Now I'm going to go ahead and address the sawlog price cynics in the South who are going to tell there's a big inventory overhang out in the field, therefore, it's going to be depress prices. I mean, I know some of your going to try and ask that question later and I'm going to stop you right now.
Look, there is more inventory out there than there was a few years ago, maybe up 5%. But timber inventory in the field is in a similar position to what it was in early 2000 when we had a stable market with stable prices. So it's not much of a different position in that marketplace. So at the very minimum, we're kind of comfortable that prices are going to be fine. But here's the kicker. Because even if the inventories are up 5% in the marketplace, supply chain is down 10% or 20%. So field inventory and practical delivered inventory are 2 different things. You're not going to get field inventory to these mills over the next 3 or 4 years until supply chain recovers. That's a constraint. And by the time 3 or 4 years have passed, it won't matter because development of additional capacities are going to blow past 17 billion board feet on the way to 21 billion board feet. And by that time, production is going to require the logs and the price curve will be well beyond any concern. So we think we're going to see immediate price recovery in the South and we're going to see prices advance well beyond those levels going forward.
This is a super big deal for Plum Creek. $35 a ton, prices going -- price for sawlog, like I said, drops to the bottom line, it produces $100 million of cash flow improvement to our company without any additional effort. It's just a margin improvement. If we get to $40 a ton, that's $150 million of cash flow improvement per year.
So we're pretty excited about this. We believe in all 3 of these key factors: resurgent North American demand, stable and ongoing Chinese demand at a certain conservative level, and we believe that the relocation of Canadian capacity to our markets is going to have a profound impact on sawlog volume and prices. So what are we doing about it? Well, we're about getting -- making -- getting our operations together. We're going to make sure that we're ready to deliver logs over the next 2 to 3 years to these new capacity positions and we're going to enjoy these margins, and our shareholders are going to enjoy the cash flow. So we're pretty excited about it.
That's the sawlog market and I'm going to turn it over to Russell to talk to you about pulpwood markets and timberland markets.
Russell S. Hagen
I'm going to spend time walking you through the pulpwood markets and the impacts that really bioenergy are going to have on this market. Now Tom is very convincing as far as the increase and the improvement in the sawlog markets, but the pulpwood markets are going to have a little different dynamic. Well, we have the base pulp, pulp and paper capacity. What we have emerging now is a new customer and it's really renewable energy. And it's driven primarily by the Europeans.
The European Union have established energy requirements -- renewable energy requirements that are in place and operating today. Right now, the EU requires a 20% reduction in greenhouse gases, 20% of their energy baseload from renewable energy and 20% increase in renewable -- in energy efficiency. 10 years ago, if you would ask probably anyone in this room, how is the European renewable energy demand is going to Southern pulpwood pricing, I doubt anybody would think it was significant. But what we're seeing is really a significant impact on the demand requirements. And what's happening is the Europeans are looking to the South, in particular, to manufacture pellets for replacement of coal in their power production.
And the U.K. is the earliest adopter of this, and they have committed to decarbonizing their power sector. They put in incentives to allow coal fuel producers or coal power producers to convert their facilities to burn pellets, and they've also put in penalties, like the carbon tax. If you look at this carbon tax, $11 a ton or 11 pounds per ton, that's a 20% increase in coal feedstocks for their power production. And in 2015, that goes up to 40 pounds per ton, which is a 70% increase in the coal feedstocks. A lot of the power capacity that is reliant on coal in the U.K. is going to be uneconomic.
So what is the impact on Southern pulpwood demand? Right now, we're projecting that in the next 5 years, you'll see increased demand of about 20 million tons in Southern pulpwood, so about 15%. And if you look at what the U.K. is shooting for, they're expecting that 10% of their power will come from bioenergy. 10% of that power will require 15 million tons of pellets annually. It takes 2 tons of green fiber to make 1 ton of pellet. So we're looking at 100 million tons of green fiber to cover 10% of the U.K.'s energy production. And granted, that's going to come from all sources throughout the world. But this 20 million tons only really addresses the demand increase for pellets, it doesn't address the emerging biofuel markets which, granted, they have to overcome some technical challenges, but we believe ultimately will come to market. And once those biofuels come to market, we'll see additional demand for pulpwood.
So why the U.S. South? Well, the reason they come to the U.S. South is because we're very cost competitive. On a bone-dry unit of wood, our cost are half the cost of the European supplier. Some people have asked, "How do you take a chip, take it from the woods, manufacture them into a pellet, ship it across the sea to the U.K. to burn its power cost effectively?" Well, this graph shows you why. We can deliver, including the transportation of pellets to the U.K. that is still less expensive that what can be produced in the European Union at about 90% of the cost. And a lot of the manufacturers of the pallets, and particularly those in Europe, have figured this out. And so they're coming to the United States and they're making investments in pellet facilities in the Southeast of the U.S.
Right now, this represents 5 companies that are actively developing projects. It's about $1.4 billion of capital that represents 10 mills and about 6 million tons of pellets, so 12 million tons of green feedstocks. And these mills are active. And if you look where they're locating, you'll see -- as Rick mentioned, this is our favorite graph because it shows our ownership. If you look where they're locating, it sits within a lot of our ownership. And granted, we have a diversed ownership in the Southeast. But we're also trying to fill some key requirements that the pellet manufacturers have. The first one is fiber availability. The second is logistics. So as the companies come into the United States, we have worked with them to make sure that we can locate these mills, primarily in our wood baskets.
And our strategy has been pretty straightforward. We, over the last 3 to 4 years, had a concerted effort to work with the companies that are building facilities in the United States to attract capital investment into our lead baskets. And we figured out pretty early that pellet manufacturers really are not interested in timberland. And they would come to us because we're the largest landowner. And they would see the same map that I just showed you and they'd say, "Where should we locate?" And we'd spend time, we do fiber studies with them. We work with them on logistics and locate -- primarily try to locate in our wood baskets. But the other thing that we bring to the table is, we're willing to enter into long-term contracts to provide them with a baseload fiber, and that's a very important as they go out to get financing and secure investments in these mills.
The other thing we're doing is recognizing that they really don't want to deal with all the supply chain issues because we've gone and started working with them to procure third-party fiber also. So our goal is to provide them with a turnkey solution for their fiber needs. And when we procure third-party fiber for them, we do not take any risk. We do not take the stumpage risk on a third-party market and we do not take the log-and-haul risk, the cost is passed through to the pellet manufacturer. And what we do is charge a fee for the services that we're performing on their behalf. And this project has been very fruitful and we've a number of contracts, and I'll talk about them in a second. We expect to 2015, we'll be producing, on an incremental basis, about $15 million of cash flow from this activity.
So a couple of the projects. We've talked about Drax Power in the past. Drax is an interesting case. They were really the first ones to come out and make a commitment to converting some of their capacity, they're actually converting half of their capacity to wood pellets. And they are the largest power producer in the U.K., the second power producer in Western Europe. They produce 4 gigawatts of power. They're going to take 2 gigawatts and convert that to biomass. They've committed over $1 billion and they're going to require about 8 million tons of pellets a year, so 16 million tons of a green feedstock. That's a massive supply of fiber for one facility. We entered into a 10-year agreement with them to provide them with 770,000 green tons a year. This is all 100% Plum Creek stock. And this project will start -- actually the Louisiana project, or mill, will start at the end of 2014, and the Mississippi mill will follow soon thereafter.
Another contract that we recently announced is with Enova Energy. And Enova Energy is building 3 plants in the Southeast United States, and we will be providing them with 3 million tons of fiber. And this is an example where Plum Creek came in and we're going to provide them 20% of the fiber off of our lands on a long-term contract, and then also provide them with procurement services for the remaining volumes. And again, on the remaining volumes, they take the stumpage risk and the log-and-haul risk and we get paid for service.
So what this does mean? Well, the real impact is pricing will go up in those markets where the mills are locating. As you can see in the past, pulpwood pricing has not been very exciting. But as you see in -- as we go forward, it's looking a little more exciting. But there are other benefits also. As we attract capital into these markets, we produce more jobs in these real communities, and a lot of these communities have been set back with the decline in pulp and paper in the recession.
And we create new value also for the timberlands, and not only for the Plum Creek, which, of course, we view is very important, but also for other timberlands. In every one of our wood baskets, we have a lot of small timberland owners. And as these new values come to market, they benefit from it also. And any time you can create a new value stream on the timberlands, it's more likely that these lands will be remaining in timber production and not taken to some other use, which I think is good for the whole industry.
And last, it's environmentally sound. And at Plum Creek, we always say wood is good, but also, wood is renewable. And as the world and the United States looks to reduce its carbon footprint and reduce its dependency on fossil fuels, wood is going to be a strategic resource to help affect that.
So moving on to the timber markets. Timberland has remained an attractive investment. Long-term performance has met expectations, even through the downturn. We saw people hold on to their timber assets. We thought that as the market came off, we would see more liquidity and people looking for alternatives, but we really actually saw people hold on to these assets, and the transaction set was relatively thin. And as prices have recovered, we're starting to see a little more activity. And while we think there are acquisitions to be had in the future, the competition is going to be difficult. It's going to be tough to do with these deals.
But there will be opportunities. The TIMOs are still raising funds, and the REITs are still allocating capital. And we expect as the TIMOs continue to mature and reposition some of their portfolios, there will be more transactions coming into the marketplace. But we don't see a lot of the very large mega transactions, the billion-dollar plus. What we anticipate is the $50 million to $200 million type transactions. Proportions of the portfolio are brought out into the marketplace, and that seems to be kind of the sweet spot for a majority of the deals that we've seen and possibly because it's very easy to access. TIMOs can raise moneys for that type of transaction. And so they're very competitive.
However, we do believe that there are opportunities to do negotiated deals also. And so our strategy has been focused in a couple of key areas. First, as Tom mentioned and as Rick mentioned, we're very bullish on the South. If you look at the map, we have a very nice footprint. We can acquire lands, bring it into our operations very efficiently. And so we're focused on the South. We like all of our other timberlands, and we're interested in every other region. And as deals come up in those regions, we'll look at them. We'll look at all the deals. But we see the South with the return on the sawlog pricing, the emerging bioenergy markets and also the strengthening real estate markets as a very nice place to invest. We'll also look for negotiated deals. We participate in auctions, and again, we look at every deal. We find that we can enter into a transaction where we can bring creative solutions to the seller that those are particularly effective for us.
And last, as you look at the way timber ownership has transitioned over the last 10 and 15 years, away from the integrated forest products companies to the TIMOs and the institutions and REITs, we now have seen those markets mature. The TIMOs has been at this now for 10-plus years. Institutions have become much more comfortable in owning these assets. TIMOs now control about 30 million acres. So as we think about where those opportunities might reside, we clearly are interested in how that institutional ownership will evolve over time. And we believe that at Plum Creek, with our strong balance sheet, our operating efficiencies and effectiveness and our history of creating value, there's probably opportunities to work with those institutions as they think about how to reposition the portfolios or potentially create liquidity. So we're very bullish overall on the U.S. timber markets, and we will continue to acquire timber and add to our portfolio in the cash accretive and value-added way.
Let's now turn it over to Larry Neilson, who'll talk to you about the manufacturing.
Larry D. Neilson
Thanks, Russell. Good morning. Tom and Russell have talked about some market opportunities and market dynamics that are in play in the marketplace right now, and we feel very confident that we're well positioned to capitalize on those opportunities. We have a growing harvest profile that served us well going into these recovering markets. We're the largest independent seller of wood fiber in the United States, and we move more than 2,200 loads of logs each day or about 65,000 tons of logs each business day, moved across the roads, Plum Creek logs. We operate in every major wood producing region, starting in the Northwest, going across to the Lake States, New England, West Virginia and all across the South. And we have a great customer relationships with over 700 customers, some new, many that we've had for many years across our 19 states.
This broad timberland provides some really terrific benefits for Plum Creek and for our customers. First of all, the Plum Creek risk management is a big plus for us. We're not located in any particular limited market area because we have markets in 19 states and many markets even within those states. So we have minimized the risk that way. Also, from a physical risk standpoint, being that we're spread around again with about a broad footprint, we don't have the risk of a catastrophe like pests, fires, storms or something that can wipe out a lot of our portfolio.
We have unique market insight, again, spread across 19 states and many markets within those states. We have professionals in every one of those markets. So we're able to share market data and market intelligence and best practices across our company for the benefit of all the other regions. We have terrific operational flexibility. Rick mentioned ebbs and flows in markets, and certainly those happen from time to time. We're able to emphasize harvest in one region and deemphasize in another region as those ebbs and flows happen. Not only from region to region but in product type. We have a different harvest mix that we can put into play to capture the right market dynamic. You noticed the last few years, we've harvested more pulpwood than we have -- sawtimber. We've focused more on pulpwood than sawtimber because those markets have been relatively stronger in the sawlog markets. we anticipated over time those preferences will change and we'll focus more on sawlog market than we will on pulpwood, and as those ebbs and flows happen, we'll address those.
Let me talk a little bit more about our regions, our different regions, and drill them a little bit more into our portfolio. First of all, our Northwest region, meaning Oregon, Washington and Montana, we have 1.4 million acres in these markets. Across the West Coast, it's predominantly Douglas fir that we grow. In Montana, it's mixed softwood. We certainly benefited in the Northwest from the export markets to China the last few years. Out of the Northwest region, we harvest about 2 million tons a year.
Moving over to the Northern Hardwoods region, this is the Lake States, Wisconsin and Michigan, as well as New England and West Virginia. And these -- the harvest here are characterized as mixed hardwoods, 1.7 million acres. And in this region, we also harvest about 2 million tons a year. This has been a steady region for us. It performs well year in and year out, has not a lot of volatility. It just continues to produce well.
Now our largest region, which we have spoken about a little bit today so far is the Southern region, 3.2 million acres, principally southern yellow pine. And this has been markets from Louisiana and Arkansas, across to Florida, up through Georgia, [indiscernible] North Carolina. So in several states along there, these are highly productive acres, highly productive regions, and this is truly a growth engine for Plum Creek moving forward.
Now with all this land, what we want to do is figure out a way to enhance the productivity as much as possible. And Rick talked about the $0.5 billion we've spent over the last 10 years to enhance the productivity. So we spend roughly $50 million a year. About equally split between reforestation costs and fertilization and silviculture costs. I thought I'd walk you through a typical rotation and talk about where we spend and where we make those investments.
If you look kind of in the upper right-hand corner of the slide, you'll see genotype selection. We have our own orchards across the country. And in those orchards, we selectively breed the best trees with each other to produce the best growing stock, the straightest, the fastest-growing, the most disease- and pest-resistant stock possible. We take those, the seedlings produced in our orchards, we take those to our nurseries, our own nurseries, where we plant and grow over 130 million seedlings a year. We plant on Plum Creek property about 60 million of those seedlings a year that we produce in our nurseries. So you see, we're fully self-sufficient from a supply standpoint of seedlings and the high-quality seedlings.
And then as you look at that, we prepare the site for those seedlings. We've learned over the last 20 years of doing this that there's a way to prepare the site to make it better and more productive for that young seedling to get a good start. So we do site preparation, and that includes some chemical preparation, and at times, some mechanical preparation. We will bed those trees up so that they have really good access to nutrients and natural light. And we're going to plant in year 1. And the next year, we're going to come back and make some more investments in what we call competition control. Again, we're going to try to eliminate the competition for those seedlings so they have as much access to natural light and soil nutrients as possible and they continue to get a good start.
We're going to go through in years 11 through 14. We're going to do our first thinning where we take out the smaller trees or the trees that don't look as healthy to give the other trees room to grow and put on more volume. And we're going to invest again in years 14 through 16 to fertilize those trees, again, try to maximize their growth potential. We'll thin one more time and take out that second thinning. We'll take out some pulpwood and we'll take out some chip-n-saw logs, all preparation for this final harvest in 23 through 26. There's 23 to 26 today, in today's rotation. And then we start this process all over again. So kind of a virtuous cycle that goes through, and we'll invest in different parts of that cycle to create value.
This is an interesting side. We want to talk to you about that investment and how that investment helps us get higher land values and higher cash returns. It's interesting. If you look at this tree on the left-hand side, this tree -- the tree that would have been planted 25 to 30 years ago, the tree is 65 -- it's labeled 65, and we call that a site 65 tree. What that means is that we anticipate that a tree at site 65 will be 65 feet tall at 25 years of age, simply that. These are trees that we're doing a final harvest on now. Acres that have the site 65 trees we're doing the -- our final harvest and going through and starting replanting.
The tree on the right is a tree that we planted in the last 8 -- we planted 8 to 12 years ago and we think that's a site 80 tree. So again, that tree is going to be 80 feet tall at 25 years of age. And this is a tree that we're involved in probably our first thinning very soon. Today, we're planting trees that we think will be site 85 or site 90. So we continue to improve the productivity of these acres.
I want to walk through how we get that improvement and where our investment translates into those additional 15 feet in this example of growth. First of all, it breaks into thirds. The first third is genetics. I mentioned what we do on our orchards, with our selective breeding. That gives us about 5 feet of that additional growth. The second piece is site prep. As I mentioned, we're doing a better job of site prep, preparing the site so that, that seedling gets a very good start. That's about 5 feet of gain. And another 5 feet is fertilization and competition control. So the competition control we do the year after we plant it and the fertilization we do in years 14 through 16 gets us that additional 5 feet of growth. So you can see the returns from those are pretty dramatic, great returns.
But maybe the best story is in the lower right-hand corner, when you look at the total harvest volume per acre. An acre of site 65 trees, we anticipate, will have a total harvest of 135 tons per acre. A site 80 tree will have a harvest volume of over 200 tons per acre. So not only have we got more volume, as evidenced there, we've also got a better mix. The mix of sawlogs or higher-value product will go up from 61% to 71%. And finally, in terms of dollar value at today's prices, that site 65 tree, the total harvest from that site at 1 acre will produce $2,200 of revenue. From the site 83, it will produce $4,100 of revenue. So nearly a double through the investments we've made.
So the harvest growth we've talked about there is the foundation for our future cash flow growth that we have all talked about today. First of all, our harvest is going to grow over 15% in the next 10 years from between 17 million and 18 million tons to over 20 million tons in 10 years. It goes up to 21 million tons at the end of 15 years. As I mentioned on the previous slide, we also have a more valuable mix. Our mix of sawlogs today is about 48%. Our mix of sawlogs at the end of this planning period, this 15-year period, will be 58%. So a full 10% increase in value of our most valuable piece of our harvest.
And then I will mention, too, that this is relatively -- this is very conservative. And we haven't assumed any new acquisitions, and we continue to assume that Jim Kilberg and his land management team will sell 1.1 million acres during his time. So our productivity is outpacing our land sale by a significant margin.
So I've talked about the asset and how we've improved the productivity of the asset, but it's also important how we get that asset from our forest to our customers. And our delivered log model is relatively unique amongst our peers. We deliver to our customers 80% of all the harvest that we cut on a particular year, which means that we arrange for the third-party contractors to cut and haul those logs to our customer's location instead of having our customer be responsible to go out and cut and haul those logs and bring them to their location. This provides a number of benefits, both for Plum Creek and to our customer.
First of all, we're able to contract with our customers and provide them a meaningful baseload of volume. The thing that a mill fears the most is running out of wood. And we can contract -- given our scope, our scale and our size, we can contract to deliver to them a baseload of wood, so we don't have to worry about that problem. We also can provide to them an on-spec product. Each mill operates in a sweet spot, has the right size of the log, a particular size of the log that they are the most effective and efficient at running through their mill. When we harvest any acre or any tract, we do as many as 7 different sorts in the field, which means that as we cut each stem, we may put it in 7 different piles, from large sawlogs to small sawlogs to pulpwood to polls to the new logs [ph], all sorts of different sorts. And we may deliver the harvest for any particular tract to as many as 5 different customers. So we're getting the right log that they use the best to their mill. We're able to do it reliably through our contractor workforce. We're able to do it year round, in all kinds of weather, good or bad. Those things allow us to be very flexible in our delivery. If a customer has an acute need for wood, they can call us up and we can react very quickly to make sure they get the wood in a timely fashion.
This is an example of the importance of that, getting the right log to the right mill. As you can see here, the different values for the different size sawlogs and chip-n-saw pulpwood and even biomass. And again, if we were to take a large log to a small sawlog mill, they may not value it like a different mill would value that. We may lose some or all of that $12 differential between a small sawlog and large sawlog. Conversely, we may have a pulpwood customer who needs more volume. And there's not more pulpwood volume in the marketplace. We can sell them chip-n-saw logs that they can go in and chip out, but we'll capture our $18 per ton price, capture that premium. So the benefit of this in-woods merchandising is very important for Plum Creek to maximize our value and also to the customer, make sure that they have the most effective, efficient feedstock for their particular mill.
I talked about our third-party contractor workforce. This is a key part of how -- of our delivery of our supply chain. And we have established relationships with log and hauling contractors to help us accomplish this work. In fact, we work with over 300 log and haul contractors. This experience -- this workforce allows us to be very consistent and provide good economic returns.
We've selected the best contractors we can find in the marketplace. We've further taken this 300 and taken a subset of this 300 contractors and entered into contracts with some of them we call core contracts or preferred contracts. What we do is we move about 40% of our total wood across the company through our core or preferred contractors. What we've done with these contractors is entered into 2- and 3-year agreements with them, guaranteeing them a minimum amount of harvest that they can count on each year. This helps them, obviously, to have confidence to keep their business running. It also allows them to have the confidence to hire and retain good employees. It also gives them the confidence to go out and purchase new capital equipment that's going to make them more effective and more efficient. It also gives their banker confidence to lend them money to improve their operation. So this has been terrific for us, and as I said, we move 40% of our volume through this group of contractors. Because of them and the others in the 300, we're able to control our costs, we're able to predict our costs, and we're able to drive efficiency gains.
One of the things we have done is we have started entering into contracts with third-party truckers. And about 10% of the wood we move across the South is hauled by a professional trucking company. It's cut by a logger and hauled by a third-party trucker. And that's one of the ways that we're trying to increase the contracting workforce out there. And we found it's very effective and very efficient for loggers. They were using it and like it because they can focus on what they do best. And we use truckers and their professional business day in and day out with logistics and dispatch programs and routing programs and economies of scale. They're in the business of moving things each day, and we use them. And we think it will expand this part of our business.
We're establishing the supply chain for our bioenergy customers. As Russell mentioned, they do not really want to build the supply chain and want to focus on what they do best. And our building up of this supply chain is helping them do -- conduct their business. And we're getting paid a fee to do it.
So here is kind of the money slide in this. These recovering markets, the structural changes, the market dynamics, the opportunities that are out there all yield to future growth in our EBITDA. So if you look at this slide, if you look at the lower kind of green, I guess it's a green color up there, that's kind of our baseline EBITDA the last few years, about $200 million of baseline EBITDA. Just with the value and mix changes that I've talked about this morning, at today's pricing, over this plan period, we add about $80 million kind of annual EBITDA just through those volume and mix improvements. And if you take the cyclical recovery that's happening in the Southern mills with the housing starts coming up, repair and remodel, expenditures increasing, just general economic improvements, if we get back to prerecessionary pricing, as Tom mentioned earlier, we add another $100 million of EBITDA per year. And you can see how that feathers in over this 15-year period.
Next, if you take the structural changes, the demand from China, the problem with the Canadian pine beetle it's causing to the Canadian supply, the bioenergy markets, if we get some uptick in price on sawlogs and on pulpwood, we anticipate another $160 million of annual EBITDA by the end of the planning period. So if you add to that inflation, in 10 years, we're approaching $600 million of EBITDA, and in 15 years, we're approaching $700 million of EBITDA. We believe these numbers, and these are very exciting numbers to us. We look at this and we think that the future is very bright for Plum Creek.
The timber resource part is going to be a significant part of this cash flow growth. We have, as I mentioned, a long-term growth in our harvest. We're seeing customers, new customers, coming to our markets, the Canadians coming to the South and the Europeans coming and announcing mills in the South. We see the bioenergy customer coming in and building pellet plants. And we see our existing customers having confidence now to expand their operations and to spend capital dollars to improve the efficiency and capacity of their mills. We think we do a good job of log merchandising in the field and in how we help our customers and then increase the value of our harvest. And our service component is certainly being recognized by the bioenergy sector as the value, and we're getting paid for that. But it's also being recognized by our existing customers who realize because of this deliver model, we do a lot of the work that they normally would have done. We save them time, effort, and it helps them sleep at night, knowing that we're involved.
I'll probably spend just a moment on our manufacturing business. Our manufacturing business is a key part of Plum Creek's business and has performed very, very well the last few years. We've focused on the high-end marketplace, the industrial marketplace and the high-end specialty markets. These markets have been less volatile during the downturn. It certainly have not had price erosion. In fact, it had price growth during the downturn.
So the 3 products that we deal with, our medium density fiberboard or MDF. We have 2 lines there, a very high-value thin board line and a thick board line. As I mentioned, these go to the specialty product outcome. They go to industrial applications, some fixtures, cabinetry, millwork, things like that. Plywood is also a very high-grade plywood that goes typically into many different uses, but transportation is a big part of it. Industrial trucking applications, marine applications. It's used for some furnitures substrates. But again, very high-quality, high-value plywood. In our softwood lumber, about 75% of our softwood lumber business is in the boards businesses. It's used for do-it-yourself markets, and it's used in repair and remodel markets. This is a higher-value, less volatile segment of the lumber market. Then 25% is in stud lumber.
Our manufacturing business over the last 20 years have performed very well. On average, it's produced about $48 million of annual cash flow. It has performed well even in the down years and have been profitable virtually every year. This year, we expect that we'll have cash flow of $60 million from our manufacturing business. We think that the next year will be a light kind of [ph] number, if not a little bit more. So very pleased with our manufacturing business and what it adds to the company. We think the future is very bright at Plum Creek, and we're looking forward to seeing these improvements across our landscape, across all the 19 states we do business in. I'll turn the time over to Jim Kilberg.
James A. Kilberg
Good morning. Let's start the real estate discussion by taking a current look at the assets in our land base. This is the slide I show you every year. And as we continue to optimize the management of our assets, this slide captures what our universe looks like today, from our most valuable development lands to the lands that still service productive timberland. And every asset is being managed for timber production. As you can see, we have 75,000 acres of development lands, and these are currently being taken through value uplift strategies such as entitlement. Those activities are done in our taxable REIT subsidiary. There are over 900,000 acres of HBU and nonstrategic lands that are disposed of in small parcels via local brokers. And then there will be 125,000 acres that have some kind of conservation outcome. This can be either sales or easements.
So how are our markets are doing? They're slowly improving. Certainly, as banks make it easier to borrow money and more high net worth investors enter the marketplace, we'll see the definitive acceleration in our asset class. In fact, Bank of America recently did a study of their high net worth investors, those with assets over $1 million. They found that 56% of those investors were hoarding cash. And of that number, only 16% were expected to invest in the short term. However, there's no question that we're seeing increased activity across all of our markets.
If you look at transaction counts, things began to improve in 2012 when counts rose 12% to 428 transactions. We expect another increase this year somewhere between 5% and 10%. Moreover, downward pressure on price is absolutely over, and prices have stabilized. In fact, we're actively looking for opportunities to increase price, and in some markets, we've already pushed list price 15% to 20%. The thing is that rural land is a discretionary purchase. It's largely dependent on consumer confidence, which is improving but still fragile. Housing starts are going in the right direction with close to 1 million units. Inventories are down 17% year-over-year. Foreclosures and shadow inventory, which peaked at over 6 million units, are now ranging around 1.4 million. Prices have increased 12% year-over-year, and most importantly, unemployment off its peak of 10% is hovering around 7.6%.
Let's take a look at the various asset classes. First, nonstrategic. Of course, these are our least valuable lands, but their affordability continues to make them attractive in the marketplace. And we still maintain very healthy margins to timber value.
Conservation, these are transactions we do with partners such as the Trust for Public Land and the Nature Conservancy. They're targeted towards very specific landscapes that we want to preserve. These types of transactions take a long time to structure. They're typically tied to state and federal funding, so they're constantly under pressure. But we're confident that this will continue to be an important part of our business. And in fact, this year, we'll do 46,000 acres of conservation transactions, and 20,000 acres of conservation easements are included in that, which will remain as working forest.
Then there's HBU/recreational lands. We sell these to families and individuals but also to investors. We today -- in today's market, we expect our high-value markets like Florida, Montana and Georgia to remain relatively flat, and a majority of our values will be gotten from our lower-value regions, the Gulf States and the Lake States regions. Having said this, in 2013, we'll sell over 40,000 acres in this asset class, and it will be well over 50% of our total activity. And this year, actually, we'll do several transactions in the $3,600 to $4,500 an acre range. So we are seeing improvement.
Now let's talk about our development business. On all of our development opportunities, we're really talking about 2 things, protecting property rights and moving value -- moving properties through the value chain through the entitlement process, and therefore, creating significant future value. In Maine, when I last spoke to you, we were expecting approval from the Supreme Court of Maine. Now we've got that approval. We've successfully created 17,000 acres of development reserve while conserving 363,000 acres in the conservation easement, which is really being operated as a working forest. In Maine, it's simply about waiting on market recovery.
Now earlier this year, we executed a comprehensive development agreement with the Rockefeller development group. They, of course, are a household name to many of you in this room as they own and manage 6 million square feet right here in New York City. Why Rockefeller? We chose them for several reasons: their institutional longevity. They've been in business 84 years. Their financial stability. They're owned by Mitsubishi Corp., which has a market cap of over $25 billion. They have deep experience in a multitude of property types: corporate headquarters, hotels, distribution centers, business parks, industrial parts, retail, residential, office, and of course, foreign trade zones. They have an extensive list of institutional clients, tenants take Time Inc., Federal Express, Delta, General Mills, McGraw-Hill and BMW. And finally, they're a national leader in foreign trade zone development, and that's very important to Plum Creek because a lot of our lands are close to ports on the eastern seaboard. So that particular skill is very important to us. Right now, Rockefeller is analyzing our entire portfolio for opportunities, but they're in due diligence on 2 specific deals. One of those is in Columbia County in North Florida, and I'll talk to you a little bit more about that in a moment.
And finally, I'm excited to bring you up to date on the largest development under consideration in Florida, and that's in Alachua County, which is home to the University of Florida and the city of Gainesville. We have 65,000 acres in the county and we are the largest landowner. And for many years, we've been involved in an open and transparent dialogue with the community on appropriate outcomes for this large land mass. This fall, we'll begin the entitlement phase. Let me give you a little context. So this is a partial view of our land holdings in Alachua County. Today, the vast majority of these lands have an agricultural zoning classification. That means as of right, we can split this entire landscape up into 5 acre lots. But for many reasons, we didn't feel that, that was the appropriate outcome, not from a planning standpoint, not from an economic development standpoint and certainly not from an environmental standpoint. We felt we could create real and lasting opportunity not only for Plum Creek but for the entire community.
Moreover, we realized several important things. The first is that the University of Florida sits on 2,500 acres, and they're simply out of land. In fact, they have to look to their agricultural school on their research fields whenever they want to grow the university. The second thing is that the University of Florida is a major research university. They have $750 million in grants that they get annually, but they have not attained the synergies in terms of corporate partnership, which help bolster university initiatives and seem like in towns like in Austin, Boulder or Palo Alto. Now from an infrastructure perspective, we have terrific infrastructure. Of course, here are our lands. Here's 301, which is the major north-south state road where truck traffic is carried. You can see the CSX rail line. This is a Class 1 rail and we have 8 miles of that rail in our property. Here's I-75, of course, University of Florida in Gainesville. Here is the airport. So very good, very good infrastructure.
And finally, while Gainesville is a lovely community, there's no question about that, the lack of employment -- they lack the employment to keep their talented graduates from leaving and even provide jobs for trailing spouses of professors who come to the university. So we decided to engage the community in a dialogue to find the best direction for these lands. And we formed the task force of 31 members, and those included folks in the economic development community, folks from the universities, both Santa Fe College and the University of Florida, folks from the community, as well as the environmental community. For the last 2 years, we've conducted an open and transparent visioning process. And in fact, you can go online to envisionalachua.com and look at what we've been doing in this space. We've held task force meetings, educational forums and community workshops. We've vetted the community's vision every step of the way. And in fact, just a couple of weeks ago, we won the American Planning Association award for planning. And now we're ready to start the entitlement phase.
So here's where the task force landed. The lands here that we show represent here 17,000 acres of our 65,000-acre footprint. So 17,000 acres to give you an idea, that's about the size of Manhattan, same size. You can see, we have 5 distinct development PODs, A through E. Now keep in mind that anything over 15,000 acres in the state of Florida requires you to go through what's called a sector planning process. There are 4 existing sector plans in the state of Florida today. All of those sector plans are residentially led. They're led by houses. Ours is going to different. It's going to led by jobs, employment. In fact, we've adopted a tagline, "Jobs from the GED to the Ph.D." So it's meant to be totally inclusive of the entire community. You can clearly see the connectivity here. I pointed out the rail and 301, and these are very nice improved state roads, 26 and 20, to come from. This is a 4-lane road, median, very nice road, very little activity at this point in time. This fall, we'll put forth 2 zoning applications on PODs A and B. Now POD A, as you can see, is on the Southwest corner, and therefore, it's closer to the University of Florida and to Gainesville. We hope that there will be a University of Florida use on this particular POD. PAD B down in the Southeast corner is closer to the rail and the city of Hawthorne. This is going to have a much industrial flavor on this particular PAD. Now this will take about 2 to 3 years to zone these parcels.
But let me give you an idea to really appreciate this scale in terms of 17,000 acres. We expect this project to have a 50-plus year life. Now a great example of this would be Jim Rouse's development called Columbia, Maryland between Baltimore and Washington. That development was started in 1967. Today, they're redeveloping their downtown urban core, and they're still breaking ground on burgeon residential land.
Now let's turn to Columbia. It's not hard to see why this side is so advantageous. Here at the site, and we branded it the North Florida INTERMODAL PARK, you can see it sits on State Road 90. You can see the CSX Class 1 rail here going east to west. You can see this is the Norfolk Southern Rail that terminates right here to the west. Of course, I-10 is right above us, and it's about an hour to the city of Jacksonville. You can see I-75 to the west, a very, very attractive site from a locational infrastructure perspective.
Over the last several years, while we've awaited recovery, we've been very busy creating value in this particular site. We secure entitlements on 8 million square feet of industrial zoning, along with some incredibly valuable designations. The first designation we got was called a RACEC designation. That means Rural Area of Critical Economic Concern. And what that means is for a 14-county, rural county area, the state of Florida deems our location the location for a catalyst tenant. We've gotten the Rural Enterprise Zone designation, and we are in the middle of getting our JAXPORT Foreign Trade Zone designation. Now what do these really mean? They mean $3 million to $5 million in tax credits, infrastructure grants, job training and expedited permitting.
Now over the next year, we've got 3 other tasks ahead of us, and we're on the 5-yard line as it relates to these activities. We've been working very closely with the Forest Service, with CSX rail, as well as the state of Florida, to complete an easement that goes through Forest Service lands where the rail sits on and create a rail spur right into our site. We're also going to get one last designation. It's called the McCallum Sweeney Mega Site certification. And this allows us to market to the largest tenants in the land, really opens up our scope in terms of attractiveness.
And finally, we'll begin our NEPA process. This is our environmental assessment process. So those 3 things will take over the next year's, but that won't stop us from marketing. And in fact, this is Rockefeller's initial space with initial site, and they're already deep in due diligence.
So in terms of closing, talking about our Real Estate segment, throughout the recession, our Real Estate segment produced very solid returns while positioning our development lands for market recovery. We're now seeing many indicators moving in the right direction and recovery take hold in most urban markets. As unemployment falls and consumer confidence stabilizes, we're confident that the discretionary real estate will grow. In the meantime, we're increasing the focus on our development lands and those near-term development opportunities, and we remain committed to $200 million of revenue per year.
Now let's switch gears and talk about the value we derive from our non-timber resources. Now [indiscernible], the theme is exactly the same, to maximize the value of every single acre that we own.
Over the last 10 years, we've built a recurring revenue stream that has averaged over $60 million a year, and we're focused on growing that number. Of course, we were able to create this value by first building a competent team of in-house experts, and this included geologists and engineers on staff. And their sole purpose is to source and manage the opportunities in their land, including wind, water, bauxite, zircon, kaolin, titanium, construction-grade gravel and sand and oil and gas. We've also partnered with the best in the industry, many of which are many household names. They're well-capitalized and deep in experience. They include Vulcan, TransCanada, Martin Marietta and DuPont. And finally, in a limited number of strong select markets that have the right geology, where favorable long-term demographic support construction activity where there are high barriers to entry and limited field of discipline operators, we're making small investments improving reserves. These investments are based on existing greenfields, in markets where we have deep knowledge, where we can leverage our team experience and reflects our long-term view. Creating on this level of recurring free cash flow gives us much more flexibility as we come out of recession.
Now let's talk about the individual product lines. In oil and gas, we've also majored with major companies such as EQT, CONSOL and Southwestern Energy, garnering royalty rates ranging from 12% to 20%. We have 160 leases of 600,000 acres in some stage of development but currently throwing off about $12 million of revenue per year.
We're well positioned in many of the emerging shale plays, the Marcellus in West Virginia, the Tuscaloosa in Mississippi and Louisiana and what's called the Brown Dense Smackover in Louisiana and Arkansas.
Our position in these areas could provide us additional opportunity to add 150,000 to 200,000 acres per exploration. In the construction material, industrial minerals businesses, we're currently active on 30,000 acres, but only half of these are currently producing and the other half are in some stage of development.
Here, royalty rates are in the 6% to 10% range, and we currently produce about $6 million of revenue per year. We expect to grow this to over $60 million of revenue per year.
In this arena, we also made 3 investments. We bought interest in 25 million tons in the Portland, Oregon market, and of course, we bought close to 400 million tons of aggregate interest in the Greenville-Spartanville (sic) [Spartanburg] market in South Carolina and in the Atlanta market.
And finally, in terms of our wind business, here we collect royalties while experienced, well-capitalized partners provide the investment dollars to build and permit these sites.
Now today we garnered about $100 million of recurring royalty revenue. We expect that grow to somewhere between $5 million and $6 million of revenue.
This business is extremely capital-intensive, and in fact, TransCanada in our Kibby main facility had to invest over $300 million to put 44 turbines on the ground, $300 million. Now those 44 turbines, they'll produce enough energy, theoretically, to provide power to 46,000 homes.
And the interesting thing is we have 2 other sites in the development mode right now looking at adding an additional 38 turbines.
Now let's talk about aggregate consumption. This slide is reflective of the exact same things that we're seeing in our core business in terms of volume and price recovery. It's really about 2 things. It's about market timing and population growth. Now in the recent recession, national aggregate production got down to its lowest level since 1992, that's 21 years ago. The last time we were at that level, there were 60 million fewer people in the country.
Now overly growth expectations. According to the U.S. Census, by 2030, we're expected to top 263 million people. By 2050, 438 million people. So consider this idea. Every mile of interstate contains 38,000 tons of aggregate; every home, 400 tons. 94% of aggregate -- 94% of asphalt is aggregate and 80% of concrete. So demographics are why U.S. aggregate production is expected to increase 30% over the next 5-plus years, all driven by public and private construction, residential, commercial, industrial development, as well as infrastructure maintenance, expansion and improvement. With these thoughts in mind, the acquisition of 255 million tons in the Atlanta market from Vulcan makes a lot of sense.
First, Atlanta is a robust market. It's a great place to do business. It has over 5.5 million people in the metro area and it grew nearly 25% between 2000 and 2010. These are urban quarries with high barriers to entry, terrific transportation infrastructure and high-growth markets. And just as importantly, in terms of Vulcan, we're partnering with a great company, they're smart and they're a tight operation, they run a tight operation. Moreover, a deal like this really gives us exposure to the other markets, enables us to build relationships that can be transferred to other existing greenfield sites in our portfolio. And finally, as you can see, in Atlanta, we expect average cash yields of over 9% and will derive somewhere around $10 million a year in recurring revenue. There's something else that makes this investment extremely compelling.
It's not just Plum Creek that recognizes that this is a unique moment in time to invest in this asset class. Investors are familiar with the benefits of investing in long-term recurring cash flows in stable, hard assets, just like timber, have expressed interest in co-investing in quality, well-positioned construction material reserves. They want to partner with us not just because of the economic story. They also like our management team and understand that we have the necessary experience and expertise in this space.
And finally, by bringing in third-party capital, we have the opportunity to invest in a geographically diverse set of assets, while keeping our total investment limited and improving our return to our shareholders by earning asset management fees. So how do all of these opportunities play out over the next 15 years? In closing, this space creates a very nice story for our shareholders, and this slide shows you exactly why. Over the next 15 years, we're creating long-term recurring cash flows from hard assets and we expect to grow the culmination of those cash flows to over $70 million per year.
David W. Lambert
Good morning. It certainly sense enthusiasm for my colleagues about our business prospects. This chart gives us a chance to look back in time a little bit over their last 5 years. And although it's been a tough recession in our space, we generated significant cash flows and maintained all of our commitments to our shareholders and did this on a very balanced basis, strengthened our balance sheet during this time period. What we see right now is we're certainly we're past the inflection point. We're on the trend up. In 2012, we saw a 19% growth in our EBITDA. Importantly, $44 million of this growth came from improvement out of our timber business, our subsurface business and our manufacturing business. As we look forward, we're seeing these trends continue.
In 2013, as Rick alluded to earlier, we're seeing $50 million of additional improvement in the same businesses. Importantly, all this is coming through improving pricing and margin expansion. It's been done on flat harvest volumes. And as we continue to move forward, in the structural thesis is that Tom and Russell have outlined take place, we would expect this trend to continue. In 2013, we're also seeing a little bit lower land sale activity and this is the basis of fewer large nonstrategic parcels. As Jim outlined in his presentation, we're seeing improvement in the rural lands on a smaller track basis. So this business is very well positioned.
I turn to our balance sheet. This has been kind a hallmark of Plum Creek. In the 24 years we've been public, we've always maintained an investment-grade profile and are committed to that. This provides us the strength to access the markets when we want and we're able to achieve very effective financing. We're currently rated mid-BBB by both agencies with stable outlooks. We have an excellent liquidity position with about $700 million of liquidity as of the end of the second quarter, half of that is represented by cash on hand. So we have the financial flexibility to be able to take advantage to some opportunities when they present themselves in the marketplace.
When we think of the strength of the balance sheet, we think of us using a prudent and modest amount of debt. When you look at our debt on a market-measured basis or debt-to-enterprise value, we're only at 23% of our market base capitalization, so we have the flexibility to grow our business when opportunities present themselves.
Drilling down a little bit more into our portfolio. Here on this pie chart, you can see the components of our debt. $2.25 billion in total with a very attractive overall financing cost of 3.6%. About 64% of this is fixed rate debt, but if you include -- exclude the revolver, which is if you net it against our cash balance, we're at about 76% fixed rate debt. 60% of our portfolio is public bonds. We've enjoyed great access to that market, and we have about 20% of our debt is a term loan, with still 6 years remaining on this but somewhat unique because it's done with a collection of farm credit banks, very attractively priced at about 1% currently.
I'd like to look forward and see what our upcoming maturities are. You see that we have a very well-laddered debt portfolio without any kind of near-term pressures or any large maturities upcoming, ones that are very digestible in the markets that we work in.
In 2013, we still have a few maturities left. In fact, today, we got to pay down $72 million of almost 7.75% debt. So we're very eager to have had that opportunity to pay that off today. If you look at our finance cost today, if we were to go out and do 10-year public bonds, we certainly would be below 4.5%. So as these upcoming maturities come due, it provides us a further opportunity. Our next real opportunity for debt refinancing is until 2015, and that debt is just barely under 6%. So at today's rates, we certainly would be picking up and saving there and we'd anticipate no incremental cost from that perspective. So we remain very well positioned from a financial standpoint to give us this flexibility. I could give you an update on our outlook for the third quarter. As many of you know, it's a relatively tough season as far as fires in the western part of the United States. We did have a couple of fires that happened on our lands, about 12,000 net acres got -- 12,000 net acres got impacted in Montana and Oregon, and it's split pretty much evenly between that. As a result of that, we will take a $0.02 per share charge in the third quarter as a result of this fire damage. Even with this charge, we still anticipate that we will be in the upper half of our guidance range of $0.38 to $0.43 per share for the quarter. And that concludes my remarks.
Rick R. Holley
Well, as they said at the offset, we, at Plum Creek, are more excited about the prospects for this company than ever before and hope that you sensed a lot of that in some of the activities going on and the outlook for the company and some of the initiatives that we have in place today. And here's a slide, kind of slightly different from the one you saw before, but as we look over the next 5 to 7 years, this is what's going to happen to our cash flow or adjusted EBITDA.
Today, it's about $530 million or at least it was in 2012, and we expect that to grow $770 million, and sets about $240 million. But importantly -- of growth, importantly, 140 million of less land sales, our Real Estate business over time will come down and therefore, really from those core recurring businesses that you're most excited about, we're going to grow our cash flow by some $380 million by the end of the decade. So we're very excited about the prospects for this company, our position in the marketplace, these numbers don't assume any acquisitions, and clearly, you heard Russell talk about opportunities in the marketplace that we expect to continue to, hopefully, grow our asset base with accretive acquisitions. So that concludes our prepared remarks and we'd be glad to entertain your questions.
Rick R. Holley
George L. Staphos - BofA Merrill Lynch, Research Division
If we go to Slide 57, which I think is the EBITDA long-term bridge, I think, Larry, you're presenting it. You present, obviously, a number of reasons why you're optimistic for the future. Some of the components, and correct me if I'm wrong, look like you're off a little bit from last year's forecast. So if you can help us reconcile some downturn in your forecast, let's say on the cyclical recovery relative to what looks to be from your vantage point, an uptick in optimism and so on, given the secular change, that would be helpful. That would be question #1. And secondly, you mentioned joint ventures a number of times today. Can you -- is it possible to update us in terms of whether you have any active dialogue on joint ventures? And what should we expect over the next couple of 3 quarters?
Larry D. Neilson
Well, I'll address the second part of your question, George. With respect to joint ventures, as you might expect, we spend a lot of time in the marketplace not only looking at transactions but talking to all of the owners at timberland be it the corporate owners that you all know, but also a lot of the institutional owners. And I think it's fair to say many of them are a bit disenchanted with the way those lands are managed, some of the theme or model doesn't work for them as well as it once did. And as Russell mentioned, a lot of the institutional owners liked the asset class, held it through the recession and understand that it very well and think there's probably a better way to do business. So we would look at over time as they look to change their business may be working with them. And so that's kind of the joint venture opportunities that we may see down the road because I think we can bring value to them that they can't get on their own today or certainly not with their present managers. With respect to the numbers, the opportunities, I guess, I didn't go back and reconcile those numbers that were off slightly, we'll certainly look at that and get the reasons why but there's probably just more of a case of volumes and maybe some land sales and that sort of thing, as opposed to anything fundamentally are minded that's changed. Yes?
Two quick questions. First short-term, we've heard from other companies that wet weather has been pushing up some of the southern log pricing. Are you seeing this as a stump on your land? And then turning longer-term, as you look to grow your land profile, where do you currently see the most opportunity? And are there any -- if a large transaction presents itself, is there a limit to the size that you would look at, at this point?
Rick R. Holley
Yes, with respect to the wet weather, it's really been more on the Atlantic South. Georgia, Florida, it's been extraordinarily wet there and also in Seattle, by the way, over the weekend. But -- so we've seen some market uplift, we've seen some better prices. Most of the paper plants, as you know, were short predominantly hardwood and when it's wet, you can't get into hardwood stands so they're struggling a bit with that so we're going to probably see a lot of hardwood, pulpwood prices kind of jump up here in the next few months as those mills try to have an inventory as they go into winter. On the Gulf South, we haven't seen the same weather patterns so we've seen pretty flat prices so we haven't seen that change. As far as long-term, looking at opportunities, I don't think we have any size limitations. As David mentioned, we have a very strong balance sheet, we have a lot of liquidity, I think we have ready-access to both debt and probably equity markets as well. I think people would find our equity very attractive to buy for the right opportunities. So I don't see Plum Creek having any size limitations on opportunities. And as Russell mentioned in his slide, we like everywhere we are. But if we had a dollar to invest, we'd invest it U.S. South for the reasons you mentioned. We think it's where most of the activities are going to be, where more value uplifts are going to be and you have all of these alternative land values there that you don't really have in the western United States. We'll get some microphones first.
John Charles Tumazos - John Tumazos Very Independent Research, LLC
John Tumazos. I think it's great that you did the deals in the pebble business as an alternative to wood, it's a deal for timber is wise -- sorry, the returns are higher. Could you tell us how the aggregate deals happened? Is Vulcan capital constrained in LBO or something? And could you tell us why the pebble deals are better than buying natural gas assets when the gas price is $3.50? Or a gold mine when the gold price is $1,200? Or a copper mine? And some of these mines do 3.25 million tons a day, and just think all the pebbles you get free just off the waste dumps. So could you tell us why pebbles are better than other things given that you're branching out?
Rick R. Holley
Well, the aggregate business was interesting to us for a couple of reasons: one, you saw it in the slide on production level, and price goes along with that. As the U.S. economy struggled in the last decade, a lot of those companies struggled because they're volumes were down and in some markets, prices were down as well. So some of them, in the case of Vulcan, looked to perhaps to do 2 things, I suspect -- and they'd have to answer themself -- but demonstrate the value of those assets they own, those -- the aggregate assets to the marketplace and also free up their balance sheet a bit to do some other things that they thought were important, perhaps acquire some other assets important to their operating assets. We studied this business a lot. We saw in many ways kind of what happened 2 decades ago or in the last decade or so. With respect to timber assets, where you had large paper companies that were struggling financially, that had only one asset that was sellable, which is their timberlands. As you know, Plum Creek made a number of very large acquisitions. We did a supply agreement and created a lot of value. We saw this pretty much the same. We saw construction material firms looking to maybe free up their balance sheet a bit. We went and saw what are the best markets in the country where we thought there was more value output and therefore that's why we went to South Carolina, Atlanta and worked with Vulcan. Because you also want to work with somebody that's well capitalized and long-term committed, a very good operator, which Vulcan is. So that's why those assets in those markets. We're in the natural gas business already and we see these markets, meaning construction materials, recovering a lot faster than natural gas, so there's so much gas in this country I don't know when prices are going to recover. We already have a fair amount of exposure to the natural gas business today. We didn't look at other minerals quite frankly. I don't know a lot about them so we really try to stick to something we understood, and we understood the construction materials business. Yes, sir, in the back?
Rick, could you give a sense -- or Dave, on the balance sheet, where would you be willing to take it if good acquisition opportunities present themselves?
Rick R. Holley
David W. Lambert
As Rick alluded, we have the position based on access to equity, access to debt. We could size any acquisition that we found attractive. So we don't view ourselves as capital constrained in that manner.
Rick R. Holley
But I think to maybe finish the question. It's very important for us to maintain investment-grade, balance sheet and credit rating. And there are certain metrics that the rating agencies will look and so we'll maintain those. So just for the sake of argument, if we did a $2 billion deal, we can't debt finance if we do 2 $2 billion deals, so it would be a combination of both debt and equity, to keep all of our ratios in line to maintain investment-grade balance sheet, which is very important to this company. Okay, Josh, your next.
Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division
Rick, I think, looking at southern sawlog values the key, as you said, is bringing new production and you outlined almost $1 billion of project. So my question is when do you think the bulk of these projects will be buying -- online in buying timber? Was that a 2014 event? Or 2015 event? And as part of that question, where do you think the sawlog industry is running in terms of percent of capacity right now?
Rick R. Holley
Well, as far as when, clearly, many of these mills are operating today. The investments that Canadians have made, they bought mills, but many of those mills they're going to put capital in and basically improve their productive capabilities, and therefore you should start to see increased production out of those mills. But those mills are operating today. Georgia-Pacific is in the process of making those investment with those mills, and we'll probably see the benefit of that more in 2014 than we are today because that's in process. Even the pellet mills, most of these are under construction, you're going to start to see the impact in the marketplace in 2014 and 2015. So I think that's the case. As far as the timber, it's probably 80% of where it was. It's probably down 20%. And if you look at lumber mills, there's still only probably operating at 83% to 85% of capacity today. It's interesting that I spent a lot of time as the whole management team is talking to our Southern customers and they got beat up pretty bad in the recession, these lumber mills. I mean, they're running 2 shifts, they hire a lot of people and they had to take a shift off, they had a lot of old people go, a lot of them had cash -- cash flow issues. And so they're very conservative as they start to bring this back. They're really looking in their mind that the recession is over and the recovery is for real. And as we start to see 1 million houses starts this year and it starts to continue to move in that direction, it may take a little longer than we'd we like to move in that direction, they're going to feel empowered to add back the shifts, spend some money that they obviously accumulated over the last couple of years on kiln capacity, which should be important to them and you'll start to see, as Tom talked, going from 14 billion to 15 billion to 16 billion and 17 billion of board feet of production capacity back in south. Because it was there before and it will get there again. Gail?
Gail S. Glazerman - UBS Investment Bank, Research Division
In terms of the supply chain in the south, you talked about that being kind of a headwind that would eventually correct itself. And I'm just wondering how do you see that being corrected? Is the volumes enough for what that imply? That some of the incremental recoveries going through to the harvester over the next few years? And in terms of the energy demand, can you talk a little bit about, I guess, just what the customers are looking for? Are they relatively indifferent hardwood, softwood? I think you've talked about Drax taking some biomass? And just a little bit more color on what those companies are looking for?
Rick R. Holley
Tom, you want to talk about the supply chain? Since you mentioned it's correcting itself, which I think is going to take a long time if it ever does but...
Thomas M. Lindquist
Yes, Gail, I think it's down. We saw almost 20% through the recession. This are very small margin businesses that took a -- had a real tough time. But as far as who's left? The operators are left with the better operators and when these volumes come back in the marketplace, we'll get the kind of pricing from people like us and other manufacturers to make investments in addition to log hauling and log-processing equipment. So we suspect it will take about 5 years to go back to a reasonable capacity position.
Rick R. Holley
You've heard us talk about contracted capacity line. It's the single biggest issue this industry has going for it. I know you've heard it from others as well but it's going to take some time for it to recover. And a lot of people that went to the sidelines, went out of business, are not coming back, so -- Russell, you might want to comment about energy demand?
Russell S. Hagen
Sure. So as we start setting up our sourcing to anyone of these facilities, they'll primarily take pulpwood but they'll also take all the stems and the tops and so that's the biomass component that comes in. And the Drax contract, we probably fee them about 15% biomass and the remainder will be around logs. As far as the hardwood, they'll pick up some of the hardwood components but that's really incidental to the harvesting.
Rick R. Holley
A couple of questions. One, if I look at the EBITDA waterfall chart, the $160 million from structural improvement in sawlog and pulpwood markets, how do you see that break out between the sawlog and the pulpwood?
Rick R. Holley
David W. Lambert
That's about $120 million sawlogs and $40 million pulpwood.
And then secondly, your team spoke bullishly about the outlook for the North American lumber markets. You obviously have some manufacturing capacity under what product side, how do you think about potentially investing capital in those businesses and perhaps even doing greenfield capacity on the lumber or other wood products side?
Rick R. Holley
Not on my watch.
Rick R. Holley
No, I think, what we do well is we manage land and all the components that go with land. We're in the manufacturing business in Montana. It's a well-capitalized business there. It's very strategic, as much as I hate to say that because I'm not an integrated model guy, but it's very strategic and we serve some very special markets there. So we did open one of our lumber mills recently or stud mill and running one shift there because we could create some value and is creating some cash flow because of the improvement in the lumber markets but I think we've been asked the same questions, so look at all those wood, what why don't you build up a plan? Let somebody else build -- spend their capital and get a return because they want to be in that business? We'll serve them through a service kind of arm or we'll supply wood to them in a long-term supply arrangement. But same with the lumber mills. We want to attract the capital to our marketplace, but we don't want to spend our capital. Let somebody else do it, that's really expert of that. The West Frasers of the world are terrific in the lumber business. I'd rather them own the mill than Plum Creek own the mill. Thank you. Yes, sir?
Just a quick question. I know Tom spoke in a greater detail about the longer-term outlook as it relates to the export markets in China. But maybe you can just put a little bit more color maybe what you've seen over the last 3 to 6 months, has there been any sort of reacceleration or deceleration just as far as demand you're seeing from Asia? And then second question just relates particularly in the U.S. South. I know you've talked about in the past just how kind of a recovery in sawlog pricing is going to unfold in different wood baskets at different points. Can you maybe put just a little bit more detail about what wood baskets you're seeing incremental pricing and empowering now? And where you think the most momentum is over the next 3, 6 months?
Rick R. Holley
Okay, with respect to China, over the last year or so, we've seen demand pretty well flattened out. And part of it, as you all know, is China is going through its own growth pains and too much house -- housing on the market today. Own prices had gone up and yet there's an abundance of housing that's unsold. They're still [indiscernible] economies, their government's kind of torn. So I suspect China demand is going to stay pretty flat. The $3 billion board fee Tom talked about is probably going to be there for the next 2 or 3 years until they get through some of their inventory, and some of their economic pains that they're struggling through. But what's interesting about China is we've attract them to southern markets as well. And we'll do about 200,000 tons of exports out of the south this year, which doesn't sound like a lot but when you start incremental demand on those marketplaces, you start to get the Chinese [indiscernible] southern yellow pine which is the lower priced specie than what they had to buy off the West Coast, and they like the economics and they like the specie, that's going to help some of those markets long-term, so we're going to continue to focus on that. With respect to the U.S. south end recovery, we've seen, again, the Atlantic South, some of it is weather-related but I think some of the supply demand tension from a couple of these pellet plants are already in place. You've seen pulpwood up $2 to $3 in some of those markets and I think that's going to hold in and probably even advance. And we're seeing sawlog prices up 10%, 15% in that market. When you look at the Gulf South, which is really Arkansas, Louisiana and Mississippi, it's been pretty flat. Maybe we've seen $0.50 a ton but it's been pretty flat. There's a lot of wood available and the capacity expansion just hasn't happened there yet. Yes?
Still on the export markets, you said 200,000 tons export from your southern timberlands. How much is shipped also to the export market from the west? And the flatness that you described 2012 versus 2011, it's pretty clear on the chart but I've heard more variability in your comments over the last 2 years in terms of what it's meant for Plum Creek. So I'm wondering whether if there is also some variability there in inventories or perhaps even market share?
Rick R. Holley
What are we going to do, Larry, from Oregon this year?
Larry D. Neilson
Oregon, we'll do about 150,000 tons from Oregon as well. It's off a little bit from last year but in Oregon is a mature market -- a mature export market so there's all the tension between the domestic and export. More a little bit ambivalent as to whether it goes export or domestic, so long as we get the price from it so ...
Rick R. Holley
Yes, as far as you hear one quarter we say, the China demand is up and prices are up and the next quarter we say it's down, it's really ebb and flow depending on the weather in China and different types seasonality. So as we're going to the fourth quarter, we'll see a little bit better demand and maybe prices will be up a bit where they were in the third quarter. First quarter is very strong, second quarter is a bit weak, third quarter was kind of a little bit better, fourth quarter will be better a again. So it's really a seasonality factor as when the Chinese are buying logs, what their inventory situation is in the Chinese ports. But as Larry said, we're somewhat ambivalent. The important thing, whatever we sell to China even out of Oregon, it puts tension on the domestic market and raises the overall pricing, which you saw on the one graph that Tom showed you as the only thing that changed in Oregon over the last 2 or 3 years although more recently maybe a little bit more demand in the domestic market where the Chinese buying logs and sawlog prices go up.
So you [Indiscernible]?
Rick R. Holley
Oh, absolutely. Josh?
Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division
Rick, going back to southern -- softwood timber supply again. One of the historical sources has been the non-industrial private land owner. We don't talk hear much talk about that anymore. Can you give us an idea of how important that person's status is? And what the trends are in terms of inventory both today and going forward?
Rick R. Holley
Well, the non-industrial land owner owns the majority, 75% of the lands in the south are owned by that group. Most of them in 10 acres or less. And they've been active. They've been in the marketplace, they've been selling, cutting trees and selling trees throughout the cycle. They're probably less disciplined than we and others are, we will hold back in weak markets. But clearly, the inventory, because you dropped the production levels by 20% or 30%, the inventory goes up. And historically, in the south, the softwood inventory was kind of 15 years worth and it's probably gone up a couple of years and a lot of it is non-industrial, [indiscernible] as well as Plum Creek and others, so maybe you're at 16 or 17 years now of inventory. You start to see this improvement in demand that inventory is going to off. And again the governor on this engine and as Gail asked the question, it's really a contractor capacity. You can't just turn the spigot on and just start to increase in a dramatic way to harvest off these lands because there's just not the contractor capacity to do it. And the challenge to a lot of non-industrials do is they don't sell delivered logs, they sell stumpage. And so if I'm going to sell stumpage to you for instance, then you're going to have to go out and find some contractors to manage it for you. And that's a challenge in the marketplace today so. Yes?
Just 2 more quick ones. First, on Slide 86, it shows incremental $40 million of EBITDA will come from non-timber resources. About $20 million on our estimates would come from aggregates, et cetera. Where will the other $20 million come from? And when do you expect to hit this $40 million level? And what come from more aggregate acquisitions increase mineral right income? And then switching gears a little bit, on the pine beetle, when do you start -- in your opinion, what's the updated timeframe that you'll start seeing the impact from the pine beetle problem?
Rick R. Holley
On the first one, Jim or Russell, on the...
James A. Kilberg
Yes, as far as the components of that cash flow, it does not consider any additional aggregate acquisitions. So that what is owned by Plum Creek and is in development on the aggregate lands and then what has been acquired. And also built in there is recovering the gas and also increased production on the gas.
Rick R. Holley
So it's a combination gas and the other. With respect to pine beetle, it's happening now. As you look at any of these curves, the harvest level in BC went up dramatically to try to cut as much of the dead, dying and diseased timber as possible as fast as they can. Now it's coming down because whatever they could cut, they've cut. So I think when you start to see the recovery in the market, as Tom said, the Canadians will not be able to respond. So where is, historically, Canada probably provided 35% to 38% of the construction lumber in United States, it's going to be 25% going forward. And that incremental it's going to have to be made up in the U.S. There will be some imports probably from Europe but 1% or 2%, most of them will come from the U.S. Yes, George?
George L. Staphos - BofA Merrill Lynch, Research Division
Two questions: one on pulpwood demand relative to energy demand and then a bigger picture question in terms of housing forecast and the like. If I look at Slide 36, you mentioned that there's 20 million tons of demand that you see on top of what is existing 140-million-ton market and you see that demand coming in in 5 years or so. And then you mentioned a couple of pages later on Page 38 a number of projects and I think it said something about those products are worth 12 million tons of demand, did I hear that correctly? And so is the 12 a subset of the 20 and in turn then where is the other 8 million tons come from in your forecast? That's question #1. Question #2 is this. Certainly, it's been an improving year for housing but even we've been reducing our forecast for starts over the course of the year. We're now at 930,000 starts. You keep using 1 million starts. What do you think has been the biggest decelerator in housing start activity this year? Has it been purely interest rates from what your economists and people in the field are saying? What's been stunting household formation from yours because that's been a big factor in terms of starts? And how confident are you in the 1.2 million for next year?
Rick R. Holley
Yes, I think I'll probably tend to agree with you this year, it's going to be maybe 950,000, you guys called it 930,000. It's probably not going to quite to get to 1 million. And I think the challenge, well, one of the challenges -- what's going on midnight last night? What's going on in this country, just generally, gives some uncertainty to the job situations and people's economic outlook generally. But affordability of homes is still, even though home prices have gone up, but there's still more of the affordability is better than it's ever been. At least that I can recall. The challenge many have is getting a home loan. Even though the mid-credit score opportunity a little easier than interest rates gone up so it's still more challenging for young families to get that mortgage loan. And the other challenge is you're all very familiar with is these homebuilders in the recession dump a lot of their inventory now they have no inventory. And so they're out trying to buy properties to get subdivided and have lots and that sort of thing so I think all of those things are going to impact and that's why this recovery is probably going to be a bit slower than we would otherwise think given the demographics and affordability. So we haven't done our budget for next year yet. And Tom mentioned, 1.2 million starts and we're probably between 1.1 million and 1.2 million, I suspect, but a lot is going to turn what happens here in this country in the next couple of months. Hopefully, we'll get our housing, the other Washington, in order. I doubt it but hopefully we do. And certainly help all of us in all of our businesses. I'm sorry, yes?
So on the pulpwood question...
Rick R. Holley
That one slide showing the list of projects, those are just examples. And so if you look at the map, there's actually more projects that are depicted on the map. What we do is we work with a group called For Risk [ph], they go out and they assess all the announced projects and they spend a lot of time in the market and they run screens against all the different projects and proposals and then they start calculating what they think the pulpwood demand would be. So the 20 million tons, in my mind, is a relatively conservative estimate of the future demand and is based on all the pulp mill or all the pellet facilities that have been announced that meet those screens and are most probably going to be developed. Okay. Mark?
Mark A. Weintraub - The Buckingham Research Group Incorporated
Two real quick ones. One, on the pulpwood pricing for these pellet projects, is a lot about fixed for long-term? Or is it going to vary, particularly pulpwood prices go up as you think will likely happen? And then the second question was you'd mentioned that on the third quarter, despite the $0.02 forest fire charges, you felt you're going to come out at the top half, what [indiscernible] To come out better than what you were anticipating as you gave the initial guidance?
Rick R. Holley
Do you want to answer the question on the pulpwood pricing?
The pulpwood pricing, they're not fixed prices. So and those prices are going to be indexed to market. So over time, as the market improves, those pulpwood prices will also improve and then we also have service fees that are additional to those prices. So we are definitely looking to the market to make sure that the market price dictates what our final return is. In some instances, we will put floors or a ceiling on the price so that we can minimize the swings, the real spikes, but given the history of pulpwood pricing, we're very comfortable where those floors and those ceilings are set so that we're reflecting market price.
Rick R. Holley
In respect to our earnings outlook, again, we said our guidance is $0.38 to $0.43, we'll be at the high end of the guidance even with the $0.02 charge. Really, we've just seen better performance in both resources and manufacturing and we'll share it with you at the end of the month. But it was just a bit better performance and certainly we had forecast when we last spoke with you. John?
John Charles Tumazos - John Tumazos Very Independent Research, LLC
In terms of the 5.2 million or 5.3 million core acres and then the various baskets of nonstrategic and HBU and other land, if the rates that you're putting acres to work or selling them, some of those other baskets wind up in 5 or 10 years? Should we expect 5 years from now that Plum Creek decides $0.5 million or $1 million of the core acres are no longer core? Or should we expect that the pebble business grows to replace the development Real Estate business? Or how should we view the more than 5-year future of the Real Estate business as some of the acres are sold? Or maybe we get good markets and some of them gets sold quicker?
Rick R. Holley
Yes, I mean, the 1.1 million acres, you're going to think about that over the next 15 to 20 years and that number is going to change. There'll be some of the 5.2 million core acres that over time get identified at some of the other value opportunity to conservation or some other higher value problem within the category but as we showed you here in the last slide today, if you just look at -- and this all assumed we sell that 1.1 million acres if you look at just the EBITDA from the company and the growth in part from the resource side, the manufacturing standpoint and natural resource, that's a $240 million or really $380 million because the real estate is going to come down over time. So we don't plan to -- if you think about the aggregate business, the acquisitions that we did, we put $225 million more or less into that business. We don't ever see it being a large part of Plum Creek. It will never be always be sub 10% of our net asset value and that's net asset value is about $4 billion. So it may grow from here but it's not going to be a big -- it's not going to be a decent contributor. We really like the cash flow, and we love cash flow in this company. It certainly helps to grow the dividend over time and these are long-term cash flows at a very low risk but is going to be a business that we grow. The core business of Plum Creek is growing and managing timber and the land that timber resides on. That's where we're going to create the value and that's where we plan to really grow in the future is how we grow the cash flow from our core timber business. Well, Thank you, ladies and gentlemen. As I said, the management team will kind of hang around here for a bit if you have other questions. And we'll talk to you at the end of month. And again, thank you for joining us today.
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