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Plum Creek Timber Company, Inc. (NYSE:PCL)

March 06, 2012 8:00 am ET

Executives

Rick R. Holley - Chief Executive Officer, President and Director

Thomas M. Lindquist - Chief Operating Officer and Executive Vice President

Larry D. Neilson - Former Senior Vice President of Business Development

James A. Kilberg - Senior Vice President of Real Estate

Russell S. Hagen - Senior Vice President of Business Development

David W. Lambert - Chief Financial Officer and Senior Vice President

Analysts

Unknown Analyst

George L. Staphos - BofA Merrill Lynch, Research Division

Gail S. Glazerman - UBS Investment Bank, Research Division

Rick R. Holley

Good morning, ladies and gentlemen, and we'll go ahead and get started. Just a little housekeeping. Anybody has a cellphone or BlackBerry, if you want to turn that off because it will affect the recording of this. We're being webcast today. But I want to thank all of you for joining us today for to the 2012 Plum Creek investor morning, as we call it. And I think we have some interesting things to present to you today. And hopefully, you get a lot out of this. So what we're going to do is go through a presentation. And then at the end, obviously, a Q&A period, and the management team and myself will stick around for any individual questions anybody might have after that.

You're all familiar with the Safe Harbor so we won't dwell on that particular piece.

I'm going to give a strategic overview, and then I'm going to have members of the management team go through the presentation, then I'll wrap it at the end.

So let me just introduce who’s up here with me today. We've got Tom Lindquist, Executive President and Chief Operating Officer. Tom's going to talk about the structural things that we see going on in our industry. Larry Neilson, Larry has taken on some additional responsibilities recently. Larry is now responsible for our resources and manufacturing operations, and he'll discuss that with you. And Jim Kilberg, who you know runs our real estate business and our real estate development business, and he'll take you through that. And then Russell Hagen. Russell is a Senior Vice President. He's in charge of our kind of non-timber resource businesses, basically oil and gas, construction materials or wind and other activities and also has responsibility for business development today. And of course, David Lambert, our Senior Vice President and Chief Financial Officer, he’ll talk to you a bit about our financial situation and also timberland markets at the end.

You always see this map. First slide we've show in every presentation we do. And I think it's important because it shows you the diversification of our timberland ownership. And I think diversification is key success in this business, like any real estate business. Being in different markets with different industry and different, in our case, weather dynamics, environmental issues, even local supply demand has huge impact, and this has served us very well over the last 2 or 3 years. As you know, a couple of years ago, we saw a very strong market due to wet weather in the South, we're able to take advantage of that and cut more saw timber, bring more pulp with the market.

Last year, we saw dry weather in the South. We held back on our sawlog harvest. We saw very good demand in the Pacific Northwest, demand particularly from the Chinese and, therefore, accelerate our harvest of timber in Oregon. So it allows us to go in and out of different markets and capture value, which is a key component of what we do at Plum Creek. So it gives us a lot of financial and operating flexibility.

As you think about the assets, we own 6.6 million acres, these are the common attributes. First of all, they're highly productive, and as you'll see a few minutes, is our harvest curve going forward, that shows the productivity of forest. The investments that we've made over time.

Attractive customer base, we spend a lot of time looking at each one of our micromarkets, seeing who's in the marketplace? How well capitalized are they? If they're in the paper business, what kind of product do they make? Does that compete globally, which in many cases, it needs to today? So we spent a lot of time thinking about the customer base.

So when you see Plum Creek divest in a certain area, a lot of times it has to do, even though the timber may be pretty good, is we're not comfortable long term with that marketplace. Maybe the customer base there, so we've divested in certain areas of the country, even from Core Timberlands, and redeploy that capital elsewhere, either with buying our stock back, paying our debt down or buying timberlands elsewhere.

And the other thing we want is significant market presence. You saw us do this timber deed at the earlier this year, we talked about it on our last conference call. And that was an area where we had significant market presence, lots of customers. So we're able to acquire that timber deed over the next 8 years, generate a lot of cash flow and add no additional overhead to Plum Creek. We have people in the area, we have customers in the area and we think we can add [ph] a lot of value doing that. So significant market presence is important as well.

Then high-value alternative attributes. I want to talk a lot of that today. Not just timber, not just land and real estate, but other attributes that we look at. Because you've heard us talk about at Plum Creek, our focus is maximizing the value of every single acre, whether it's growing trees, whether it's doing conservation and easements, whether it's selling a land for conservation or other recreational attributes, or given subsurface rights, seizing the opportunity, take advantage of what the value of every single acre is. And we’re going to talk more about that today.

One of the things that's increasingly important when you own assets in this business is sustainable management. And we're a part of the Sustainable Forestry Initiative. We're one of the early entrants in 1995. Since 1999, we've had all of our lands, 100%, third-party certified under the Sustainable Forestry Initiative. This is really important. It not only gives us, as the management team and our employees comfort, but it gives the communities, our investors and our customers comfort. Increasingly, investors are looking for companies that are managed on a sustainable basis. And increasingly, customers are looking to buy wood fiber where they have a chain of custody that it shows them that, that wood was procured, harvested from a source that is sustainable.

This is going to become increasingly important in the years ahead as we look at such things as the energy business and biomass and other things because again, the U.S. Government, if they have regulations around that, are going to want to make sure that, that wood or that biomass comes from sustainable sources.

You've seen these strategies. We've had the same strategies in place for probably 10 years. The first one is going through our portfolio and evaluating the highest use. Again, the best value per acre wins at Plum Creek every day. Whether we buy an acre, whether we sell an acre or how we manage an acre, long term. And Jim Kilberg, in a few minutes, is going to show this slide as to how all the lands at Plum Creek are categorized.

One thing that's important to know, we spent a lot of time understanding the value of every one of those acres. Even the acres that are part of a recreational portfolio, the HBU lands. We know every one of those marketplace. We know what transactions incurred in those marketplace. And we can tell you, acre by acre, what we believe the value is. We spend a lot of time on that and that's an important part of what we do.

Secondly is growing the value of our core timber business. As you know, the last few years, we've sold a lot of lands. But I think today, the value of our land on a per acre basis are more than they were before. And the reason for that, the lands that we've sold, are we think are lower productive lands, lower productivity lands and also lands in markets that we didn't think would be good long term. Therefore, the cash flow profile wasn't very positive.

And then during that same period of time, we bought over 200,000 acres of land. We're think in very good markets where they have the attributes we're looking for. And capturing lands with higher value alternative uses. That's our real estate business. And it's not just a matter of selling an acre of land. It's understanding the value of that acre of land. And when do we capture that value? How do we capture that value? And Jim Kilberg will talk some more about that in a few minutes.

And then capital allocation is everything. It's not just buying and getting bigger. It's not selling and getting smaller. It's how you allocate the capital you have to the highest, long-term, best value alternative for the company. As you know, over time, we've bought a lot of stock back. We paid a lot of debt down. And we bought some high-value timberlands. So we think, today, that we've done the right thing but capital location at Plum Creek continues and will continue to be job 1.

If you think about innovation, you certainly don't think about a land and timber company or anybody in this business for that matter. But if you think about the things that we've done over time, John Hobbs remind you, we have been very innovative. The first pure timber investment vehicle. First timber REIT from a public standpoint, the first to have all of our lands third-party certified and how we think about our portfolio. And even today, as we look at, we're going to talk about that today is the energy business, kind of an evolving opportunity for pulp wood and biomass both here in the U.S. as well as in European markets.

So we're always thinking about ways to get more value out of this asset we have, both the trees and the land. When we started to see, after the Timber Company merger, opportunities in real estate, we went out and hired new expertise to do that. We went out and found Tom Lindquist who brought in Jim Kilberg that understood the real estate business, so we could maximize the value of what we're doing there.

After the Timber Company merger, we also had lands suddenly in the U.S. South that had oil and gas opportunities, coal bed methane, coal assets. We're starting to see opportunities in construction materials, wind, and we went out and found experts in those areas too so that we could understand those assets and find a way to maximize the value of those assets.

And we also had people in the environmental arena, where we’re looking at mitigation banking. We're looking at such things as ecosystem services. If you think about a precious today, it is not oil. It's water. And what do you have under your forests? You have aquifers. So we have great opportunities in freshwater. So that's something that we are looking at over time, how do we maximize the value of that asset as well. So it's always looking for different things and making sure we're have experts on the Plum Creek team that understand those businesses.

As you all know, about 15 years ago, there's a major transformation in kind of the integrated manufacturers, paper and wood products. At that point in time, many of them had large ownerships of timberlands. And then they all identified an opportunity to free up their balance sheet by selling their timberlands and taking that capital and putting it in their core paper or wood products manufacturing businesses. And I think that was a win-win. I think it was a win for them, because I think they are more efficient going forward. And clearly it's a win because I think the timberlands are better managed today than they were otherwise.

There's a major transformation there, and Plum Creek participated in that. And that's how we grew to the acreage we have today.

We see on the horizon maybe another opportunity, which really is, we think, about the same way. As you look at construction materials and, today, we have about 30,000 acres of construction materials assets. That's kaolin, which is clay. That’s titanium. It's different aggregates, limestone which is used for concrete.

There's a number of companies large, and we'll call them integrated companies, in the construction materials business today and they're both operators, they have large cement or aggregate asphalt plants and they also own the quarries, the land as part of that.

We see an opportunity so maybe you can take and buy those assets, those quarry assets, those minerals to construction materials and do all sorts [indiscernible] fiber supply agreement. It's not fiber in this case, but clearly it's a natural resource asset.

So it may be an opportunity for Plum Creek in a business that we now, in the business we made a $12 million investment in last year, to grow in this area as well. And we think you'd be buying these assets at the bottom of the market. The cash flow profile is very positive. And again, this could be a win-win: A win for the operators, they could free up some capital; and a win for Plum Creek shareholders.

So it's something we're thinking about. But again, the bottom line here is capital allocation is paramount. If we can't find opportunities which have a very, very good return, both cash flow return and an earnings return, it's not something we'll participate in.

Over the last several years, I guess, think about 2008 until today, and it just seems like yesterday but it's almost 4 years ago, we started through this recession. One of the things that we focused on is really kind of conservative management of our portfolio. We bought some assets. We've sold some assets. We bought stock back. We bought debt back at very attractive prices. With the whole focused on maintaining lots of liquidity and a very strong balance sheet, and we've been able to do that.

And still, as we think about 2012, as I said on our last conference call, we're going to continue to do that. Until we see this economy clearly recovering and how it can get to a reasonable level, we're going to maintain a very conservative approach to managing the company.

But one of the things this has done is it served us very well, because it has given us of a lot of flexibility because we have a strong balance sheet. Even in the bottom of the marketplace, we were not worried about our balance sheet. We continue to have a lot of liquidity, which gives us a lot of flexibility to seize opportunities that come forward.

And here you can see, we reduced our debt by $533 million. And if you look at 2007 to today, our interest expense is $66 million less. And in 2012, it's going to be roughly the same number, about $80 million. We repurchased lots of shares over that period of time and saved $22 million of dividends. We've also managed our SG&A expense costs and cut costs by over $20 million.

And during the same period of time, we managed these assets for value. You hear us talk all the time about deferring the harvest of saw timber, accelerating the harvest of pulpwood. We look at these markets. When we see saw timber prices down below what we think the value is, we're going to take the saw timber off the market. And over the last several years, we've taken anywhere from 1 million to 1.5 million tons per years off the marketplace. Now a couple of years ago, we took 500,000 tons off the marketplace in Oregon. And over the last year, we brought some of it back and we're going to bring more of it back this year. So we took it off the market at a low price and we're bringing it back at a higher price.

We're seeing very good prices for pulpwood in different markets, and we've brought more pulpwood in the market. So it's really seizing the opportunity to maximize the value of those assets. We've done the same with real estate. If you look at Georgia, South Carolina and Florida, we have about 290,000 acres of higher-and-better-use lands. Now over the last couple of years, as we've seen weak markets in those areas, we've taken about 80,000 acres that we had on the market there off the market.

So again, we're not going to sell assets below what we believe the long-term value is, and we've managed that very well.

As we see markets, it's getting a little better. Not a lot better but it's getting a little better. As we said on our conference call, we think Southern Yellow Pine, Timber prices, sawlog prices can be a little better this year, and pulpwood prices are holding up. So we've seen a little bit better pricing. So we're bringing a little bit more volume back to market. We should see pretty good prices in Oregon again, because the Chinese are pretty active in that market as well.

So if you think about rural land, it's still pretty slow. But as Jim will talk about, some markets are better than others, and we're in good markets, and we're out of the poor markets.

In our development lands, we're seizing that opportunity in many communities, which are looking for economic development to get entitlements in place, so when the market recovers, we can bring in a developer, turn the land over to them and get that activity started. But we'll be ready when that opportunity arises.

And our manufacturing business has done very well as Larry will show you in a couple of minutes. Even in very difficult markets, it's had positive cash flow and positive earnings. That's really related to kind of products that we make and the customers that we do serve in that business.

So we're expecting some growth, growth in cash flow on 2012. We expect our cash flow to be up about $50 million in 2012 versus 2011. Now as you know in our earnings call, we said, earnings aren't going to be up but the cash flow is up, and that's largely due to land basis. As you know, when we sell land, it has different basis. For instance, if it's legacy Timber Company land, it has a pretty low basis. If it's legacy Plum Creek land, it has a pretty high basis because we rode up all those assets to the then market value when we did the merger in 2001.

So it really depends. So sometimes our basis is high. Sometimes it's low. And it's going to be a bit higher in 2012. But that doesn't impact our cash flow. That's why earnings are pretty flat and cash flow will be about $50 million.

Now I'll turn it over to Tom Lindquist.

Thomas M. Lindquist

Thanks, Rick. Well, in our industry, certainly, the supply and demand fundamentals are important. They are important to our economic performance and to our company's performance.

As you might guess, supply and demand that balance or imbalance affects sawlog prices. And we've done a lot of research over the years, and it's a clear correlation between lumber production and sawlog prices.

Lumber production goes up, sawlog prices go up. So we watch that very closely and obviously, we want sawlog prices to go up.

So how are the fundamentals doing? Well, this chart right here shows that the forecast for long-term demand is strong, and we believe this. The research behind this is demographic. The demographics are strong but clearly, this economy has tempered, that would be a nice way to say it, the demand as it comes to the marketplace right now, household formations in the traditional sense are off.

On the supply side, we're about 50 billion board feet of production right now on a basis of about 65 billion board feet, so at least 20% off. So in order for us to get sawlog price recovery, we've got to see economic recovery. We've got to see demand work against that production capacity to have sawlog prices go up.

So we think all things being equal, with an economic recovery, we'll see -- given these fundamentals, we'll see prerecession price levels for our sawlogs again.

What's interesting, though, and which is -- what's good news, I think, for us, is that all things are not equal. What we see right now going forward are 3 supply shocks that are underway. It's positive news. Supply shocks are going to require us to sort of redraw the supply and demand intersection zones and will give us a better price outcome sooner than we had looked at in traditional sense.

Before we jump into those 3 supply shocks, though, let's first talk about kind of our most famous case study in the history, the spotted owl, and what happened there. You can see from this chart right here, a spotted owl led reduction in federal harvest, it took about 8 billion board feet of logs off the market. On a lumber production equivalent, that's about 12 billion board feet.

What happened as a result of that shock? Well, the first thing that happened in the U.S. West was about 5 billion board feet of production was lost. That's 5 billion board feet was about a 9% supply shock. I'm speaking in terms of lumber production there.

What happened here, prices doubled. 12 billion board feet, though, production still went looking for a home. That's what you saw on the slide previous, where did they find the homes, well they found it in Eastern Canada and they found it in the U.S. South, U.S. South picked up about 70 billion board feet of production during that time period and prices doubled.

So it's obviously a nice trend here. You see supply shocks, you see prices go up. That's what we’re talking about here.

For us, we see 3 supply shocks right now in the marketplace. The first one has gotten a lot of publicity recently, and that's the beetle. And in this case, I mean, really, these numbers are kind of mind-boggling. Really, incredible. What's happened here, though, is that most of this process has run its course, most of the pine that's been impacted by the beetle has been killed.

So what's going to happen to this pine? Well, first of all, on the stump, these logs are merchantable for about 5 to 10 years, a little bit of variability West to East. It's 5 to 10 years. They have to go get it in that time frame in order for it to be economic. And the Canadian government was pretty rational they helped incent some production during this time period. And most of that volume you see here found its way into pretty nice marketplace.

2002, 2008, absorbed a lot of volumes from this harvest. But going forward, 2 things are at play, one is the merchantable inventory is coming down. Less opportunity in the field and recession is also playing a role. And what you're going to see out of British Columbia is a permanent, at least in our lifetime, a permanent reduction of capacity here.

This amount, in our estimation, is about 4 billion feet board feet of lumber production, or about a 6% supply shock. Compares favorably to the 9% supply shock from the owl.

What else is going on out there? Well, something that doesn't get a lot of attention at least compared to the beetle, is what’s going on in Eastern Canada. There's been a series of reductions in harvest, targets are sustainable rotation of these harvests and interestingly enough, this total reduction of harvest is also 6%. It's also 4 billion board feet. It's equal to the beetle. So it's pretty sizable and it's been masked by the recession. We haven't seen this impact come into the marketplace yet.

The third shock, really comes from stepping back from what's going on with Chinese demand in the Northwest and British Columbia. China, either quietly or maybe not so quietly has become the largest importer of logs and lumber in the world and over this past few years have developed a nice relationship with BC, with respect to lumber production but also the U.S. Northwest on log.

Just on lumber alone, North America, 3.5 billion board feet headed to China last year. If you factor in the log equivalent for lumber from the U.S. and Canada, that was 6 billion board feet or a 9% supply position.

Is it real? Is China real? Well, we think it is. This is a great graph. It shows how China has distributed its supply positions around the world. And we don't believe, you see these trends. There’s been a methodical placement of Chinese demand in these marketplaces. We don't believe they're going to let go of this foothold in North America.

Will it stay as large? Here's what happened last year, 2011, pretty large jump. Well, it may not, the Chinese may be variable in their purchasing approaches. But even if you knock off 1/3 of this demand in 2011, that's still 4 billion board feet of lumber production, a 6% supply shock.

So we see 3 6% supply shocks hitting the marketplace. So what's going to happen? I'm not going to call for logs that double in price, not yet at least, but certainly, when you look at these things and try to translate this, 4 billion board feet, that is a 6% supply shock, each one of those is the lumber equivalent of 250,000 single-family homes per year. So it's got to add up, got to place an impact on the marketplace. It's got to influence a redrawing of the supply and demand graphs. We think a few things are going to happen. We think you're going to see a lower intersection point for lumber -- I mean, for log price recovery to prerecession levels. We're going to call it around the 1 million to 1.2 million housing start level. We will see that recovery prerecession level for sawlog prices. And we think beyond that point, given the tension in the marketplace, we'll see sawlog prices advance beyond that point.

And we have some evidence for you. I mean, in Northwest, I mean, obviously, the Chinese demand, one of these 3 factors has already played a hand out in the Northwest, and we have sawlog price recovery equal to prerecession level prices, and the South’s next, we’re waiting for it. I mean, certainly, as this demand has to go someplace, and we think it's going to play against southern lumber production. And even if that production increases given the correlations that we've studied over time, log prices will continue to go up. Really positive news for sawlog.

What about the rest of the tree, beyond just the sawlogs? Well, for pulpwood and biomass, we see a different supply and demand balance working out right now. Right now, it's a pretty stable marketplace. So it's based upon about 180 million green tons per year of pulpwood harvest. But we see new demand coming into the marketplace. Demands can be led by a pellet business. It's primarily focused on Europe. That business is actually on the ground right now. It's being contracted for, plans are being led for facilities. We see that underway right now.

We've seen some really positive change in the liquid fuels business. Some new technologies have shown some promise in the industrial applications as well. And domestic power, although it's already inside the power base as a green energy source, so a lot of it in our own industry, it holds some potential. We show a question mark here because it probably needs federal policy to really grow. But nevertheless these 3 factors all together show a positive change in demand for pulpwood and biomass.

Pellets are the real story, though. It's focusing on Northern Europe, and what they're doing with those pellets, they're co-firing with electricity. I mean, for electricity with coal. It's a new marketplace. It's got some renewable energy, carbon-based focuses. We also see wood pellets right now on a BTU basis. These economics competing well against fuel oil in some these locations as well. So it's already underway there for that purpose.

What's interesting right now is the research we've done shows about 50 million to 75 million green tons of growth over the next 3 to 5 years in Northern Europe for their purposes. That's a big deal. We're participating. We've already signed a contract for 1 million tons, and we're looking at other contracts as well. If they’re priced right, we'll engage in more business.

But what does it mean for the U.S. South and for our overall demand? Well, we think the U.S. South is going to get about 40% market share of this 50 million to 75 million tons. So about 20 million tons of new business to demand [ph] against that base.

And we think that’s really logical, when you look at the economics of these marketplaces, you can see the European marketplace over there, you can see the U.S. South is going to drive ton basis. You can see there's plenty of economics for paper logistics and shipping.

So we're pretty excited about this change. Even if you factor in some competition from the recovery in lumber market in terms of chips, a 10 million to 15 million green ton change would be a 5% to 7% change in the overall marketplace, enough to give prices a little bit of a surge. And we think if you look at this even more carefully, where this demand for pellets might show up, it's going to show up in the coastal Southeast.

So that tonnage played into those submarkets is going to have a higher percentage impact, 10%, 15%, 20%. So if you have a geography, you have land in those areas, then you're going to see price come up more dramatically in those areas. And the good news is that we do, so we're excited about that as well.

So overall, what are the factors that favor pricing improvement? Number one, an economic recovery. When it comes over the next few years, backed by demographics. Number two, these structural changes. Supply-side for logs, for sure, it's real. It's there. Eastern Canada is underway. China is underway. And the beetle kill is transitioning into the marketplace as we speak.

And then certainly, on the demand side for pulpwood and biomass, we see the European energy market really playing a role there. And finally, the third key factor here is do you have the geography, do you have the assets that are in these production zones and demand zones and, again, Plum Creek does. So we're looking forward to seeing this change in supply demand hit our asset base.

So we're in the right place, we think, coming into the right time. The benefits, if you look at our assets, you will see we believe at least at $10 a ton improvement on sawlog prices, that just gets you back to prerecession levels. There's some opportunity beyond that for sure. And then we think a solid $5 ton improvement on pulpwood and the biomass harvest. So together, at least $150 million a year on our existing tonnage in cash flow from price.

Pretty positive story and, of course, we're looking forward to seeing these changes occur in the marketplace.

Thank you. And I'm going to introduce Larry.

Larry D. Neilson

Thanks, Tom. I’m going to start off today. Before I get in and talk about the resource business, I'll spend just a little bit of time giving you an update on our manufacturing business.

You know that in 2008 and 2009, we restructured this business. We closed some mills and we refocused our efforts to focus more on the specialty markets or the high-end markets, those markets that are not commodity-based markets.

You see the results in 2010 and 2011 have been significant improvements in that business. What we found is that the specialty business is much less tied to the -- is much more resilient during this downtimes of the marketplace. And we've been able to add new products in this market to add margins, high-end products from our MDF business and other businesses. And our EBITDA, as you see, has grown substantially over those last 2 years. We look at 2012 to be similar to 2011. We think with repair and remodel starting to break free a little bit, particularly in the construction area in the commercial markets and industrial markets that, that's starting to pick up a little bit. And we think that EBITDA will be, as I said, similar to 2011 and growing over the next 5 to 10 years in a good way. This business is very well run for us now. It's very efficient. We like this business, how it's running and how -- its outlook for the future.

Switching over to our resource business, Rick talked a little bit about managing the market and -- or how our geographic diversity helps us.

Our geographic diversity is a huge benefit for us. As he talked about moving harvest or shifting harvest from markets that are weaker to market that are stronger.

And I'd like to probably label this, we're actually pretty nimble in this business. We can move that harvest fairly easily from region to region. And within regions, we're able to move it from micromarket to micromarket to take advantage of markets that have a better margin. Likewise, in terms of mix, we're able to shift mix. And Rick mentioned this as well that we can shift mix from a saw timber, in the weak saw timber market, like we had in the South last year to moving more pulpwood where those markets are stronger.

So the other part I'll mention on this is our improving mix over time. If you look at the graph here, you'll see that our mix is shifting in the future, has shifted since 2009 to a stronger mix of saw timber. In 2009, it was 41%. Last year, it was 46%, and it's moving above 50% this year and will continue to improve in the future.

This slide, let me take a few minutes on this slide. I want to about talk about each of these big bullet points because they're very important, we think, in improving the supply chain and the way that we manage the business.

First of all, we're finding that our customer relationships are becoming more and more important, especially in this economy and this market. And so we're spending a lot of time building those customer relationships and improving them. You know that we move volume to our customers through a variety of methods, long-term fiber supply agreements that are maybe 10-, 20- or 30-year agreement. We also moved some on the open market. One of things we've done in the last few years is we've instituted some, what we call, mini fiber supply agreements. They're agreements that would be a 1-, 2- or 3-year agreement with key customers where we agree to provide a minimum level of furnished to their mills.

They like this because they know that Plum Creek because of our scale and our size and our processes that we can deliver regardless of the weather, regardless of what market and the conditions may be out there. They can always count on the quality and quantity that we tell them that we can deliver.

For this, they've been willing to pay us a premium for those -- for that volume coming to their mills because again, that’s -- their base level of volume going to the mill and they're confident that they can get that.

Secondly, contracted capacity. We think in the future, the contractors, the log and haul, are fiber to market. That's going to be a limiting factor. We're finding that workforce is aging, that some of them are not passing on those businesses to their next generation or the next-generation may not be as interested in the business. We looked at this a couple of years ago and said, boy, we to focus on this, so as the market improves, we can make sure that our wood gets to market.

So what we've done is we've instituted what we call core contractor agreements with the very best of the core contractors out there. So what we've done is signed agreements with them to give them a guarantee for a certain level of volume for 1- or 2- or 3-year period. They love this because they go out and then they have the confidence that, that business is going to be there. They can hire and retain the best employees. They can take that contract to the lending institutions, and the lenders will loan them money so they can purchase new capital equipment that makes them more effective and more efficient in their operations.

We like it because we have a more effective and efficient contractor. We have them contracted for a period of time so as volumes increase, we have them under contract. And also just because they like working with us because they trust us and they know that we're working to help them.

And we've gotten a discount for this volume for them, again, kind of a quantity discount that we've got a 1- or 2- or 3-year agreement with them and they know that they're going to have a certain level of volume, so we've been able to get that for a cheaper than we would have in the open market.

This is very important part of our business. Last year, we moved about 40% of our delivered wood through our core contractors. This year, we're going to increase that to over 50%. Again, just because we feel this is an important thing for us as the economy and as the market improves and as volumes increase.

Third bullet point here is logistics. We've spent a lot of time building our logistics program in the company. This year, we believe we will save about $9 million over what we would've spent had we not have a logistics program. When we talk about logistics, what does that mean? It means we're working to increase the weight limit on trucks or move more weight per truckload so it's more cost efficient.

We're looking at improved routing so that we have shorter tracks, shorter travel distances or we have more loaded miles and less unloaded miles or less unloaded back hauls. We're sharing some of the cost of fuel increases with our customers. And we have a thing that we call market optimization where we may move lumber or logs -- excuse me, we may move logs from our harvest site to a mill that's further away than the closest mill because it has a higher margin.

So we want to marginalize or we want to maximize the margin by moving that volume to the market that has the highest margin, not to the customer that's closest.

Lastly, we're developing a supply chain for this emerging business as Tom Lindquist talked about the emerging biomass and energy business.

These customers are interesting because they do not want to own the resource. They don't want to own land. They don't want to own the supply chain. They just want the fiber to their mills or to their locations. And so we can build that supply chain for them and, as Rick mentioned, provide that surety of a sustainable forestry initiative so that the chain of custody that they have will show that the furnished that they're getting is coming from a sustainable source.

Now talk about our resource itself for a minute. We have spent in the last 10 years well over $500 million to try and improve the productivity of our Timberland. This year, we'll spend $65 million on reforestation and fertilization, about equally split. So we have a real commitment toward improving the productivity of our Timberland.

I want to spend a minute and go through this diagram and explain it to you, starting over on the right-hand side here. In our orchards and in our nurseries, we produce and grow about 125 million seedlings a year in our nursery. We plant on Plum Creek land about half of that, about 60 million seedlings are planted on Plum Creek land each year. The balance of what we grow in our nursery is sold on the open market.

In that first year, you see competition control over there in the lower right-hand corner. We plant those seedlings and then we do competition control to make sure that those seedlings have a great chance for success, to make sure that they don't have to fight too much for light or soil nutrients. So we eliminate the competition as much as possible around them.

And then we'll have typically, in a typical harvest rotation, we'll have 2 fertilizations, one at year 10 and one at year 16. And shortly after that, a couple of years after that, will do thinnings to get the pulpwood out of there and to make sure that those trees that are left for sawtimber have the best chance for the maximized growth potential.

And then we'll harvest, do a final harvest in year 23, 24, 25, 26, somewhere in that period. In our forest today, on our land, we're growing about 20 million tons a year. Last year, we grew 20 million tons. We harvested 15.8 million tons. And this characteristic will continue for the future where we're going to grow more than we harvest. And we're continually working through increase the productivity of our timberlands and improving the way that we fertilize and improving our seedlings and improving each part of this, part of our business.

We have highly productive assets. Our harvest will grow. As I mentioned, last year, our harvest was 15.8 million tons. By 2019, our harvest will be 20 million tons. So we're going to grow about 30% between now and 2019.

Sawlogs account for 75% of that increase. And 75% of that harvest is coming from our fast-growing southern Timberland. This does not include any volume from the acres that will be sold through our real estate program that Jim Kilberg will talk about, so there’s no double counting of this harvest acreage. And it doesn't assume we buy any new Timberlands, which over time we'll likely purchase new Timberlands.

So let me break that down just a little bit between North and South, so you get a feel for how this mix in volume will change in the future.

There's 3 important points on this slide that I want to get across. The first is mix. If you look at mix in our Northern region, you'll see that we go from 58% sawlogs to 60% and above 60% in terms of our higher value sawlog component.

Our Southern segment, last year was 42% sawlog. Next year and the next 3-year period, it'll be at 50%, and that grows beyond 50% in the future. So our mix is definitely improving over time to a higher, richer mix of sawlogs.

Second point to get across is the growth. In our Northern segment, we're going to grow from -- our harvest will grow from 4 million tons to over 4.5 million tons during this 15-year cycle. And in the South, we'll grow more than 4 million tons from 11.8 million tons to about 16 million tons.

So a huge improvement in mix and also volume. If you were to take that change in mix and volume and apply it and use 2011 pricing, which was low in some areas of the country, and apply just that mix in volume improvement to those prices, you get $110 million of additional EBITDA year-over-year.

Let's compare that to -- let's talk about pricing. We just talked about volume and mix. But let's translate this over and talk about pricing for a moment.

This is West Coast Douglas Fir pricing. If you look over the last 15 years, Douglas Fir pricing has bounced around a little bit, but the average has been about where that red line, the bright red line is. It's been about $570 or $580 per thousand board feet. Look at what happened in 2009 -- 2008, 2009, 2010 in Oregon, pricing dropped in Oregon to a low of about $350 per thousand board feet.

But last year, it came back to approach that bright red line of $580 per thousand board feet. What caused that change? We'd look at the bar chart below and you'll see that, as Tom mentioned, the demand from China was a significant driver of improved pricing on the West Coast.

So as the West Coast volume of lumber and trees and logs that went to China improved, so did the price. And what we're seeing in the West Coast now is that sometimes, the export price is driving the market, and sometimes the domestic price is driving the market. We love that combination, that tension between the export and the domestic markets. We think that's good.

So we've had this price increase you see on this slide at the same time as West Coast inventories of sawlogs have grown slightly. It's actually a bit of a boring slide because for the last 20 years, these bars are pretty much the same. About 120 billion board feet of inventory, standing inventory. And you can see the last 2 or 3 years, they've grown a little bit because harvest has not kept up with growth that over such a large base, we do not believe that, that is going to impact in a negative way or dampen price improvement in these marketplaces, especially seeing what's happened with what the export market has done to these.

So switch over to southern sawlogs, and Tom mentioned this a little bit, but southern sawlog prices have dipped over the last couple of years. And you see the red line, the bright red line on this slide again, it's kind of the average price over the last 15 years. And it's about $38 a ton.

Today -- or last year, last year pricing in the South was a full $13 a ton less than that average price. We don't believe that, that is going to continue to be low like that because of the factors that Tom mentioned. Just from cyclical recovery, improving the general economic conditions, improving housing starts and repair and remodel, we believe we'll bring this price up. And if this price just comes back to the average over the last 15 years at existing volumes is an increase of $65 million of EBITDA. And with the future mix and volume changes in there would be $110 million of additional EBITDA.

So we look at this slide as an opportunity for us to grow the cash flow from our southern Timberland just as a matter, of course, with the cyclical recovery in the economy.

Likewise, here's a look at Southern sawlog inventory. They have trended down over time. As you see, for the last 20 years, they've trended down and gone up a little bit in the last couple of years. But again, we don't believe that this is going to be a significant cause for dampening of sawlog price rebounding in the future.

I'll spend just a minute talking about pulpwood. The pulp markets, as you've heard, have remained fairly strong over the last decade. And, in fact, if you look at this graph, they've increased a little bit over time. The pulp and paper industry has been pretty resilient, and these prices have stayed pretty strong. We believe that with a broader competition coming from OSB, when housing starts to improve, the OSB market will improve. And the export, we believe, the pulpwood markets are going to continue to show strength.

In fact, to give you an example of this, in our Southeast Georgia market, 5 years ago, the pulpwood pricing in Southeast Georgia was about, it was a little bit more than average across all of the South. But today, because of export demand out of the ports of Brunswick and Savannah, the pulpwood pricing in Southeast Georgia is a full $5 a ton more than the average across the rest of the South.

So again, the pricing tension brought about by export markets, we think, is very healthy for this business.

Just a quick glance at what we have done or what we have seen in our export activities. In 2010, our export activities were very small across the company. Probably 10,000 or 15,000 tons. Last year, there were 215,000 tons, predominantly with logs from Oregon going to China. In 2012, we think that this is going to double, that volume from 2011 will double, and will double through a combination of exports to China from Oregon, as well as some exports from the south that would go to China, as well as India and to Turkey.

We have an agreement with a company to move 120,000 tons to Turkey this year and in form of logs.

So we look at this, and as Tom mentioned, the export expansion opportunities from the south are significant. We're working hard to increase the demand for southern lumber and logs and chips going to various export destinations, including China, Turkey and India.

So here's the key slide in my deck. I want to spend a minute talking through this. This is the opportunity, and this kind of wraps together some of the things that Rick mentioned and that Tom mentioned and the opportunity from Plum Creek and what has us pretty bullish about the future for what we're doing.

If you look at this graph and you look at the lower, the lowest green section across the bottom. What that essentially does is it takes 2011 EBITDA for this resource business of about $175 million and it just flattens that out for the next 15-year period.

Just with the mix and volume improvement at today's prices, just the mix and volume that we know will happen, we add another $110 million of EBITDA within this 15-year cycle. If you take the cyclical recovery that Tom mentioned, which again, as housing improvements, general economic improvement and repair and remodel increases, it's an additional $110 million of EBITDA.

And then if you have the structural changes from those 3 catalysts that Tom mentioned, China and other export, impact of Canada's Canadian pine beetle and the decrease in their annual allowable cut, as well as the emergence of energy markets, that can be another $160 million.

And then in 2016 on this, we said it, from 2016 onwards, we're going to add inflation at 2.5% per year. And if that gets added on, it's another $130 million. So by the end of our 15-year cycle, we look at this and we see a very clear path for us to about a $700 million EBITDA number in this business, in the resource business from last year's $175 million.

A key point is that's at the end of 15 years. But as you look in the earlier period, we think that we'll be above $400 million of EBITDA earlier than that, obviously, as we ratchet up to those numbers.

So again, with the idea of the cyclical recovery we believe is going to happen, our volume and mix changes and these catalysts, we're very bullish about the future for Plum Creek.

I'll turn the time now over to Jim Kilberg.

James A. Kilberg

Good morning. Let's start the real estate discussion today by taking a current look at the land and our assets, the assets in our land base. Of course, Rick always starts with a map, and this is always my slide.

As we continue the management of our assets to optimize those -- that management, this is what our universe looks like today. From our most valuable development lands to the lands that still serve as productive Timberland, and every single acre is being managed with timber production.

As you can see, we have 100,000 acres of development lands, and those lands are typically taken to a value uplift activity such as entitlement and that work is done in our taxable REIT subsidiary.

There are also 1 million acres of HBU and non-strategic lands, and these lands will be disposed of as small parcels via local brokers. And finally, there are 100,000 acres of conservation lands, lands targeted for our conservation outcome, and these can be either sales or easements.

So what is it exactly that continues to make our business so compelling? Well, the foundation of our program is that our buyers continue to be end users. In fact, our buyers today are often using cash to make their investments, but they're also making use of a property’s recreational attributes.

Moreover, while some markets continue to struggle, moderately-priced markets in Wisconsin and Michigan and the Gulf South, which has seen the resurgence of economic activity, are seeing a healthy flow of transactions at attractive margins. And in fact, in these 2 regions, we'll see over 75% of our transactions in the first quarter of this year come from these regions.

Plum Creek's strength is in both its geographic and asset diversity. From small affordable 40-acre recreation tracks in Wisconsin, to large hunting plantations in the South, it is precisely this scale and diversity that allows us to mitigate risk and be disciplined about value, which is exactly what has enabled us to manage effectively through the downturn over the last couple of years.

Now looking at the graph, the light green bars depict the significant growth in our small acreage transactions through the peak in 2007 as well as a little softening over the last couple of years with a little bit of an uptick in 2010. But as you can see, the small track business has continued to average over $200 million per year. The purple bars represent large bulk sales, and the green bars represent the Montana legacy deal. Those 3 phases, which really helped to provide stability through a very difficult economic climate.

Of course, we continue to manage our assets proactively by entitling our most valuable lands to preserve property rights and to enhance value for the future. But within our disposition process, we remain focused on small affordable tracks and geographies, thereby decreasing the requirement for our buyers to need debt financing and, in fact, our buyers today can still buy about 150 acres for $250,000. What's important is that over time, as markets recover, we will reshift our focus to more valuable lands and higher-priced markets, allowing us, basically, to generate the same amount of revenue but on less acres.

Let's review our assets by category. First, nonstrategic. These are our least valuable lands. As you can see, value has remained fairly stable over the last couple of years. This is directly attributable to the relative affordability of these lands. It's precisely this affordability that will keep this asset class in demand for over the next couple of years and maybe even continue to see some slight appreciation in the near term.

I should also point out that while these are lower value acres, they still provide significant premium to underlying timber value.

Now let's look at conservation. Here we continue to work on very specific deals, targeted by folks like the Nature Conservancy and Trust for Public Land. We maintained terrific relationships with our partners and we continue to have opportunities in every market. However, the primary catalyst for conservation deals continues to be the federal government, which means that these deals are heavily dependent on the federal budgeting process.

They can take years to develop. And there have been oftentimes when we've had a deal that took over 10 years before cash was available. And needless to say, given the continued volatility surrounding government budgets and the general economy, we expect continued uncertainty in this asset class over the next couple of years.

Now let's talk about HBU and recreation. Now in relation to our small track strategy, HBU continues to represent our most valuable acres and the bulk of our remaining plan. While these acres might -- may not lend themselves to a development outcome, they have several uses and we've listed some on the slide here today.

But just like non-strategic, we expect our high-dollar markets like Florida, Montana and Georgia where –- they’ll remain flat in the near term. The majority of our revenue will come from the lower value, Gulf South and Lake States region.

In the Lake States regions, it's just about affordability, pure and simple. But in the Gulf South, it's truly about economic development. If you remember a couple of years ago, after the catastrophic event of Katrina, the federal government stopped permitting for oil exploration in the Gulf. This killed jobs. It's interesting because yesterday I was reading the New York Times, in the front page of yesterday's New York Times, the article right there in the center was about increased exploration in the Gulf. And that's terrific news because economic development of that kind for oil exploration and there's also a lot of natural gas exploration going on, that means economic development, that means jobs and that means Plum Creek is the beneficiary.

So this is a great story. Because our diversity allows us to take advantage of markets with strong buyer interest and not feel pressure to take prices for tracks that we don't feel that, that price reflects appropriately that track's ultimate value.

Finally, here we maintain our conviction that values will increase as markets recover, but we think it will be several years before we see that $3,000-an-acre level.

Now let's talk about development. Let's see, technical difficulty, here we go.

There's no question that it's been a challenging time to be in the development business. Just a couple of years ago, clients were discussing whether it's going to be a W- or U-shaped recovery. Now they're talking about an L-shape. The bottom line is that as long as unemployment remains at 8.3%, high levels, and housing starts are stalled at well less than 1 million starts, plus there's 2.4 million units of existing inventory and another 6 million units of what we call shadow inventory, that means houses that are either 90 days delinquent, headed for foreclosure or already bank-owned. Well, there's no question that recovery is going take some time.

What's important is that we continue to focus our efforts on entitlements with either to protect or enhance the value of our lands and position them for eventual recovery.

Let me give you a couple of very interesting examples. Now, there's been no shortage of press about the Moosehead plan. This is in the North Woods of Maine. It's a rural mixed-use plan that includes several residential units, as well as 2 resorts and a commercial node.

We expect, after years of hard work, we expect this Supreme Court decision from Maine this month, once that deal gets approved, we'll turn around immediately and execute and complete a conservation easement with the Nature Conservancy, which will yield Plum Creek $10 million.

The St. John's mitigation bank. Now this is the second bank that we've actually done. The first one was called blocks and rocks [ph]. It’s in Southeast Georgia. This is in St. John's County over the East Coast of Florida.

Here, we take a very wet, low performing piece of Timberland and, we perform activities to restore, enhance or preserve a natural -- what was a natural wetland.

Now but before forming this work, we create credits, and those credits can be banked and then sold in the open market. They're sold to municipalities, state departments of transportation and developers. Those are folks who damage wetlands in their everyday activities and therefore, are required to mitigate that damage.

Now in this particular bank, once these -- what we're preparing [ph] right now, we expect the credits -- the number of credits to be somewhere between 500 and 800 credits. Now depending on the value, which in today in Florida, the value for a wetland credit is about $125,000. At the peak, it was $175,000. Therefore, we expect to generate somewhere between $60 million and $100 million over a 15-year sell-through.

Our Columbia County deal has been through a number of processes and it deserves a little bit more detail. And then I'll get to the Alachua County deal.

So let's talk about Columbia County first. Here we go. Now while the entitlements approved here provide for a somewhat broader scope, what we're mostly talking about is a site that has a decidedly industrial tone. And I'll tell you why this site is so special. First, it has proximity to 2 interstates. This I-10, going east and west of Jacksonville, and this is I-75 going north and south. It's at the confluence of 2 Class I rail lines: CSX is here to the south, south -- and Norfolk Southern is right here.

Now here you can see the site. Right there, it's about 2,500 acres, and then we'll have this one piece that's got a RACEC designation that I'll explain in a second.

Here we've been successful to obtain not just base level entitlements -- but by the way, there's an airport that's right next door -- underutilized airport in Lake City. But here we've been successful in not just obtaining based level entitlements, we've also obtained 3 very important designations: an inland port, an enterprise zone -- a rural enterprise zone and a RACEC designation. Now RACEC stands for Rural Area of Critical Economic Concern. And what that means is that the State of Florida has designated our lands as the place for economic development in a 14-county rural area. This site is a very interesting site.

Let's talk about one more interesting opportunity. This one is in Alachua County. Now Alachua County is the place that encompasses both the city of Gainesville and the University of Florida. We are the largest landowner in the county with about 68,000 acres. The vast majority of these acres are currently designated in the comprehensive plan as agricultural lands, which means they're suitable for timber production. But also, they carry a base-level entitlement -- one dwelling for 5 acres.

Now what we thought here on these lands, and basically, you can see everything in purple, is what we're talking about. However, we thought if we work collaboratively with the community, we would have the ability to create together a smarter and more meaningful outcome. That's why over the last 1.5 years, we've been engaged with community leaders in a task force of 29 folks. Now we formed that task force that involves state, regional and local leadership, and they represent conservation interest, economic development, the community and the University of Florida. And we've been incredibly involved with the University at every level from the President, Bernie Machen; to 2 folks, who are executives at the University of Florida, who serve on this task force, all the way down to the School of Architecture. The School of Architecture used our site as a charette to provide development options that they then presented to the community. So it was a very interesting exercise.

The recommendation of the task force, which concluded actually last month, was to cluster development on 17,000 acres right here on the east side of Gainesville. And by the way, you can see the University of Florida here, and you can see how big their land mass is. 17,000 acres is really hard to comprehend in terms of scale. Exactly how big that is? I'm going to give you 2 examples. One close to home and one not as close.

The first is Columbia, Maryland, which is the city in between Baltimore and Washington, we’re equivalent to the size of Columbia, Maryland. That's huge. The second is the island of Manhattan. The island of Manhattan is about 14,582 acres right here. That gives you an idea of the scale in terms of how big this site is.

Now the recommendation of the task force in terms of proposed concepts was a mix of uses should be considered. Not just residential, commercial and industrial, but medical, institutional, educational, agricultural, and of course, conservation. Now over the course of the rest of the year, 2012, we're going to complete our technical site due diligence here, and we'll prepare for our first stage of zoning in 2013.

So where does that leave us? First, recovery. Recovery in our segment requires jobs and consumer confidence but also, liquidity, access to credit and absorption of existing primary residential units.

Second, our lands are extremely well positioned to take advantage of changing demographics. Both growth and migration are in the South. They will dominate. In fact, according to U.S. Census, for the first 30 years of the 21st century, the U.S. South will account for over 52% of the nation's growth.

Thirdly, our diversity. It reduces our risk and has allowed us to redirect our efforts and managed through a changing markets and a difficult economy. Certainly, we will shift towards more valuable geographies as markets recover.

And finally, we continue to believe in the enduring value of our land as the real estate business will sustain an average of $200 million per year over the next 15 years.

Russell S. Hagen

All right. Now we're going to talk about the non-timber business. But before I go into this, I think probably the best way to describe this business is this is a great example of how Plum Creek constantly looks for its highest value. We've been doing this business for about 10 years, and we've focused in 3 or 4 areas: primarily, energy, which is natural gas and oil; construction materials, which is hard aggregates and industrial minerals; and then also, wind and other surface assets.

And over the years, we've grown this business very well. But right now, we're working through, like everybody, the downturn in the economy. But we've positioned this business for continued growth and it will double in size over the next 15 years.

Now the structure of this business is primarily leased so we do not invest our capital into these assets. We go out, we find third parties, high-quality operators, well capitalized, who’ll bring in and develop these assets and we enter into a lease arrangement with them, and we receive royalties over long periods of time.

Now the outlook definitely is very positive. And as I'll describe, we've done quite a bit of work during this downturn to make sure that our assets are well positioned as the market recovers.

As you're aware, the U.S. energy markets are going through a significant transformation. The advent of new drilling technologies, the new frac-ing technologies is unleashing a tremendous amount of energy in the form of natural gas and now also oil.

And we've benefited greatly from that. In over the last 3 years, we've increased our overall leased acres by 60%. And today, we have over 600,000 acres under lease. Of that, about 250,000 is related to natural gas and oil unconventional development.

Today, we're about 90% leased of the available energy-related assets in our portfolio. Now this is a great story and we've benefited from it immensely over the last 3 years. However, it's kind of only halfway through the book. The second half of the story is, in this period of time, when we were leasing our reserves, gas prices were about $13 an Mcf. Today, as you're well aware, they're below $3 an Mcf. And so we've seen a slowdown in some of the development of the natural gas reserves.

However, about 15% of our reserves are related to oil. And so we're seeing a shift away from some of the natural gas to the development of oil. And so while it will take time to go through this trough, the demand for natural gas to increase and prices to stabilize, we will see increased production on some of our oil reserves.

And now shifting over to wind. This isn't the biggest business at Plum Creek and probably won't be. But I want to give you an example of how we approach the management of our land. About 5 years ago, we did a comprehensive review of all of our acres, 6.6 million acres, and we identified where we could develop wind energy. It was a very hot topic. And so we looked through and primarily focused on the Northeast, and you need a few things for a viable wind development to occur.

First, you need wind. That's very obvious. And the second is you need connection to the grid, which is a really difficult thing to do. The third, you need a very strong market, and fortunately for us and unfortunately for you, electricity prices in the Northeast are really high. And the last, you need government support. And in the Northeast, at the regional level, there's pretty good renewable energy markets.

So we focused our effort, and we've identified about 400 megawatts of energy development opportunities. And just to give you an equivalent, 400 megawatts will produce electricity for about 150,000 homes. And today, we have 132 megawatts in operation. TransCanada developed this project at our Kibby Mountain site up in Maine. That's our picture. So those are our lands right there. And we have another 300 megawatts that are under lease and will be developed over the next 5 years.

So moving to construction materials. As Rick mentioned, we have about 30,000 acres identified as high use for construction materials. About 20% of those acres are in production, another 25% are in some form of permitting and the remainder are in exploration or we've held off the market until the recovery occurs.

Now one thing that's happened in this industry is we had a tremendous amount of interest as we started bringing these properties to market in the early 2000s. And the reason is that the construction materials industry was depleting the reserves faster than they were replacing them. So they were coming to Plum Creek with our large land base and with our understanding of the materials that we had on our property and we were entering into leases.

During the mid-2000s, the industry went through significant consolidation. And I think what they really realized is it's easier to buy than it is to permit. But it really doesn't solve the underlying problem. They're still depleting resources faster than they're permitting. 2007, 2008, we had the market crash and then since then, you've seen a prolonged restructuring and delevering in the industry.

So this has impacted our greenfield development, and we have seen a delay and we'll continue to see a delay of some of these projects coming into the market. However, they don't lose their value because the work that we've done, we've identified which reserves make the most sense for which market, and so we will be patient and we will wait. The market will recover and we believe that permitting will ensue once the demand increases.

So this creates an interesting opportunity for us. And as Rick mentioned, as the industry goes through this protracted delevering and restructuring, we see a unique opportunity. And the opportunity is to partner with some of these companies, to monetize their reserves, allow them an opportunity to recapitalize, reinvest in their operations, we'll secure certain markets and in some instance, even grow. And we'll continue to look for opportunities to invest in these assets with great partners and great markets.

And as Rick mentioned also, we did one investment in the Portland market for 28 million tons of reserves over a 30-year life. We like the structure of the investment. We like the partner and we like the outlook. And so we'll continue to look for these opportunities. And I think it fits in with our overall strategy in these non-timber assets, and that's to continue to look for opportunities, to maximize the value of every acre that we own.

David?

David W. Lambert

I'm going to talk about our financial position we've been in the markets lately, in the bank markets, I'll give you an update there. And also, what we're seeing for the timberland markets.

Start off by looking at our balance sheet. We've maintained an exceptionally strong balance sheet through this cycle. And it's really provided us the flexibility to operate our assets in a prudent way where we can maximize the value, not necessarily today, but on a long-term basis. You've heard examples about how we have reduced our harvest in total and how we've favored the lower value pulpwood. We have the ability to generate greater cash flows over the last couple of years, but that wouldn’t have been the prudent thing to do.

Likewise, Jim Kilberg talked about how we've held back some of our higher value real estate lands in this market. So we're all about how to maximize that long-term value, and the strength of our balance sheet has given us that opportunity.

Likewise, we've been able to time our access to the capital markets and when we refinance our debt. And last week, we were able to complete the 2 new bank financings that I'll update you on shortly.

Along with this strength, you can see it evident in our credit ratings. Both S&P and Moody's have us rated as BBB flat, Baa2, both with stable outlooks. Last year, they both upgraded us. So even though it's been a tough environment for construction companies, timber companies, we actually strengthened our credit profile during this time period.

We're blessed with strong -- with this ability, we have low debt cost, a 4% weighted average cost of debt. And when you look at our debt overall, we have about $2 billion on our balance sheet at the end of the year with third parties. And when you compare and contrast this to the enterprise value as measured on a market basis, the $39 per share, debt as a percent of our enterprise value, is a modest 24%. We've maintained this profile over time.

Talked about financing activities. We tapped the bank markets and we completed the transactions last Friday, where we closed on 2 new deals. And so we've been able to demonstrate our continued access to both bank markets and bond markets in the past. We went out, and we actually upsized both of these facilities $100 million from where they had been.

In July of this year, we have a $350 million term loan that will expire. And so this is very favorably priced at LIBOR plus 37.5 basis points. We have 2 objectives. One, we wanted to make sure that we'd be able to refinance this on attractive terms. But since this rate is below market -- in today's market, we wanted to maintain the life of that facility through its maturity. So we put in place a new term loan. And we did this exclusively with farm credit banks, from the farm credit banking system. And so we were able to replace the $350 million facility with a $450 million facility with a 7-year term. That 7-year term is a little bit longer than you can traditionally get from your commercial banks.

And a unique feature of this facility is we've put it in a delayed draw option that will allow us to draw on this at any time between now and in the future. And so we anticipate it will draw on this facility in July when our other facility matures and replace it.

Pricing on this is a very attractive net basis of LIBOR plus 1%. At the same time we were out in the bank market, we looked at to redo our revolving line of credit. We've been monitoring the bank markets. We had put our existing $600 million line in place a little over a year ago. So we thought we could improve it on 3 fronts, both the size, the tenor, and the pricing and we were able to achieve all of these objectives.

We upsized the deal from $600 million to $700 million, and we increased the tenor to a 5-year facility, previously it was a 4-year maturity scheduled to expire in 2015. And so now the new maturity date is 2017.

In addition, we were able to tighten up the pricing on the facility, tightened within 50 basis points. And on a draw and all-in basis now, the pricing is LIBOR plus 1.25%. We got tremendous support from our banking group, and it was a very successful transaction.

I want to look forward -- and this is pro forma of our recent refinancings in the bank market, this is the profile of our upcoming maturities. You can see it's very well laddered with maturities due about every other year. Our next maturity is in 2013. We have about $250 million of private placement debt coming due that bares an average interest rate of 6.6%. So this will be an opportunity to take out that debt and actually still lower our overall interest cost.

We will be able to do that probably in the long-term public bond markets or we do have room under our existing line of credit where we could just absorb that in our line. But we remain very well positioned as far as upcoming financing.

One of the hallmarks of Plum Creek is we've always maintained a very strong liquidity position even during the most difficult times of the economy. And so this has allowed us to maintain all of our commitments to shareholders. And we assume that we'll do this in the future, and we're very committed to that. At the end of 2011, we had $500 million of liquidity, evenly split between a cash balance and room under our line of credit. Taking into account our recent new bank financings, we added about $100 million of new capacity to each of those lines. But with the closing of the timber deed acquisition that we discussed on our earnings call, we utilized $100 million of borrowings for that. So on a pro forma basis, our net liquidity now stands at about $600 million.

Rick talked earlier about our outlook in 2012, and we see cash flow from our business growing $50 million. So we remain very well

[Audio Gap]

to our investors.

And as Larry discussed, we see tremendous opportunities to grow our future cash flows from our timber business as these structural changes in pricing recovers. Russell talked about growth in our construction materials business. Jim talked about a recovery in some of our real estate market. Long-term, we see the ability to grow and deliver a very vibrant dividend to our shareholders.

I'd like to turn to the timberland markets and update you on what we're experiencing there. And 2011 was a little bit like 2010. Overall transaction levels appear muted compared to where they have been in the past. But we see this more of a shortage of supply in the market as opposed to a lack of demand.

When we look at institutional buyers trying to buy direct investment in timberlands, we see a strong liquidity on the sidelines, a couple of billion dollars looking to be placed. The problem is, there's really no natural sellers of timberland in today's marketplace.

Rick discussed a little bit of the transition on how the integrated paper companies transfer their land to the Timber Investment Management Organization. We saw over $20 million acres moved from a C-corp. ownership format to these institutional owners. And they've largely completed this, and there isn't the new wave of timberlands coming together, coming into the market.

Also during the downturn, we haven't seen distressed sellers in the marketplace. The timberlands are traditionally an asset that has a low level of debt applied to it towards them. Timberlands are also unique compared to manufacturing assets. They're always generating positive cash flows. And with low levels of debt service, there hasn't been distressed sellers.

Timberlands have also provided their investors largely what they were hoping for: diversification and non-correlation compared to the broader equity and bond market. It's a real hard tangible asset and inflation hedge. And there's still strong demand looking to enter into this space and garner the benefits of timberland ownership.

We're often asked, where are timberland markets today compared to the peak? And we've been telling you over the last year that we see they're off generally 10% or 15% from where they were at the peak, although we are experiencing some markets where we've seen a recovery of some of those values. Tom talked about the structural changes in the new China demand and the impact on logs on the West Coast. We're starting to see the benefits of that and some of the timberland values recovering in the West Coast.

If we look at the map of the country, you see respective values by region. You can see it in the Northeast, relatively modest values. These are indicative of a harvest that’s heavily weighted towards pulpwood, where it might be 80% pulpwood, 20% sawlog. It's also more hardwood-base and it's a very long growing cycle. So that would account for the relatively low values in that region compared to other regions where you might see much faster growth rates and a much higher percentage of sawlog harvest in the mix.

And so you see a very strong regional diversity. But also within a given region, you see broad ranges of transactions. And it's helpful to be able to peer into that and understand, well was that a transaction where there was a heavily stocked transaction, where it was an older age class and good markets. Or was this a very young timberland or with a higher percentage of hardwoods or in a relatively weak market. You have to have that insight.

One of the benefits Plum Creek has, as being the largest private landowner in the country, in every one of these markets, we think we have unique knowledge of what's happening in these wood baskets. And so when we go to transact, whether it's a buyer or a seller, we think we're uniquely positioned to capture value for our shareholders.

As you look at some of these values, I mentioned on the West Coast, we're seeing a recovery there. In the fourth quarter, we sold 18,000 acres in Western Oregon at $3,300 per acre. And as we indicated on our call, these were good timberlands but generally had a little weaker species mix than our average Oregon acres. So we would peg our benchmark value for our Western Oregon land at greater than that, probably near -- closer to $3,600 per acre in today's marketplace.

If you look at the U.S. South, you'll see a broad range of transactions, and we see values when they come to the market. Higher values near $1,600 to $1,900 per acre tend to be for well-stocked lands and good markets. Plum Creek, when we look at the average value of our portfolio in the South, we would benchmark that at closer to $1,600 per acre.

For us, it's not hard to go across the country and benchmark the individual values by region and build up our portfolio, calculate what the comparable market value is. And when we look at this and you were to say, "Wow, where would I want to invest in timberland if I was an investor today?" We still believe that the Plum Creek public stock price represents the most attractive investment opportunity in timberland. It's trading at an intrinsic value to the private market value, and we think that it represents a tremendous opportunity for the public to invest and garner the benefits of timber investment.

We're going to continue to be both active buyers and sellers, as you've heard, taking our knowledge and looking at each of these individual wood baskets and opportunities. And when we see a unique opportunity like the timber deed that we discussed in our fourth quarter call, it might feel non-traditional. But when we see an opportunity that will create returns for investors, we think we're uniquely positioned to take advantage of those.

I'll turn it back over to Rick.

Rick R. Holley

I mentioned at the onset, job one of Plum Creek's capital allocation. And it's one thing we focus on, we talk about all the time in the company. Not just the group up here, but the company -- employees throughout the company.

And we've talked about the conservative stance. And really, when we think about capital allocation, what we've done over the last several years, we've bought a lot of shares back. If you go back to 2005, we bought back almost 24 million shares of our stock, 13.5% of the outstandings and a average price of $35 a share. Very attractive acquisition. Not only we saved a lot of dividends, but we bought it, as David said, timberland at the most attractive value in the marketplace. That's what we do. When we think about buying our stock back, we’re buying timberlands, because timberland we know very well.

As I mentioned earlier, we bought back or bought in about [ph] $500 million of our debt. We've bought more timberlands, and I think we've managed the company very well in a very difficult time in the general U.S. economy.

One of the key attributes of Plum Creek is the dividend, and we want to continue to grow the dividend. I get asked about that all the time. And as we see the cash flow from our core timber and recurring real estate business grow, and it's starting to grow, we start to feel good that, that's going to be sustainable. That growth in that through the sustained improvement in the housing and U.S. economy, you will see us grow the dividend because we believe that the very important aspect of total shareholder value delivery in this company.

As you can see here, the dividend is very secure. We don't get asked a lot about it a lot. That's a good thing. Now we're going to get asked about, "Okay, now it’s that pretty safe and secure, things are improving. When are you going to grow it?”

Over the last few years, we've paid out about 65% of our FFO, funds from operation, in the form of a dividend. So not only funding our dividend from our cash flow from operations but also our capital expenditures as well. As I mentioned earlier, we would expect cash flow to be up some $15 million in 2012 with the number we have here in 2011.

It’s all about shareholder value creation. This is a long-term business. We plant trees that we won't cut for 25, 30 years. So it's a long-term business when we think about it that way. It's all about growing the value of the company on a per-share basis. Not getting bigger. It's about getting more valuable on a per-share basis that we focus on.

And we think one of the reasons we've been reasonably successful is the consistent approach that we've taken. We haven't gotten outside our comfort zone. We've got -- haven't gone into businesses we don't understand. Our strategy, as I showed you earlier, have been the same for 10 years. We've had a consistent approach, consistent strategic focus and a consistent management team during that point in time. And I think that's delivered a lot of value to shareholders.

And as you can see our report card on this slide is over a 10-year period, outperforming the S&P 500 and clearly, other forest products companies by a significant margin.

So now we'd like to open it up for your questions.

Question-and-Answer Session

Rick R. Holley

And I will repeat the question when you ask it. If it's an easy one, I'll take it. If it's a hard one, I'll give it to one of these gentlemen. So Chip?

Unknown Analyst

Just a couple of questions about the transaction you told us about in January on the timber deed. And I guess, the way to think about it is that you're going to get the right to cut those trees down. And if you could just answer 2 questions about this. One is, are the harvest prices that you'll ultimately get when you cut those trees down based on what the market is at the time? Or has that already been kind of locked in with the buyers? And secondly -- of the trees. Secondly, do you sort of have a window? I mean, you mentioned 7 years, but let's just say pricing was fantastic, could you accelerate that? Or let's say pricing isn’t so good, do you have a sort of outside date by which you can cut these trees?

Rick R. Holley

Well, the price is determined at market price at the time we cut the trees. So if we see weak market prices, we can hold the stumpage for a period of time. It's really in terms of 8 years and we have some room on the other side of that. But let's just say we saw phenomenal prices in 2012. We could harvest all of it. I mean, obviously, it's not realistic to do that, but we could would harvest all of it in 2012.

Unknown Analyst

Is there an outside date by which you had to have them harvested?

Rick R. Holley

Yes, it's really -- well, it's an 8-year term, but we can go on the other side of that by a year. So it's basically 9 years we have the ability to harvest the timberland. So we can cut it -- the amount of it anywhere over that period of time. Again, we're going to get some growth on, we knew we were going to get some growth, which is more value from that standpoint. But we have total flexibility and it's whatever market we sell to, we capture that price. George?

George L. Staphos - BofA Merrill Lynch, Research Division

I have 2 questions. One on Slide 45 and then one on the impact of [indiscernible] last year and the -- allowing you [indiscernible]. And last year was close to $800 million. This year, you're on a [ph] $700 million. Now, I realize '11 wound up a little bit lower and so the forecast being rebased is part of the impact. But it also looks like some of the structural benefit you expect maybe came in a little bit. Can you comment on what the variances are versus the forecast last year versus this year? In terms of China, I think in Slide 24 -- without going to back to slide here. It looks like China certainly is importing a lot more lumber on a relative basis versus log. Rick, when you talk with your contacts there, why that mixture, why wouldn't they want to import more logs and capture the value of the manufacturing in China? And if that's going to be the case, what do you think the implications are for you at long term?

Rick R. Holley

Well, with respect to the first question on Slide 45, the difference largely is due to a transaction like last year, which David Lambert mentioned, when we sold 18,000 acres in Oregon for $3,300 an acre. That's not a transaction we contemplated. We were approached by the buyer interested in that acreage or interest in some acreage, and we kind of parceled that off because it was a little lower quality and yet we got a very, very attractive price. Really factoring in a lot of the economic recovery we saw on the slide. So I think as you look out that far, it's really a transaction like that, which affects whether you're at $780 million or $700 million, so it's somewhat -- we still see the whole economic recovery and the structural changes as we depicted last year. And it's not a question of if, it's more of when. And when it's getting sooner. With respect to the Chinese market, they're buying -- and I was just there just last year and we're going to go there again next month, but the reason they're buying so much lumber is they don't have a lot of manufacturing capacity of any scale there today. A lot of the mills they have in China are small. I hate to use the term, but mom and pop, where they might buy 4 or 5 logs a day and make product out of them. So at least their economy is more dependent on finished lumber today. But over time, that's going to change as they build their own infrastructure there and have more sizable lumber and plywood operations. So they've got a lot of plywood mills. But the lumber business is not developed there, nearly as much as you might expect. But I suspect that'll happen over time, and you'll see more logs and probably less lumber. Yes, John?

Unknown Analyst

I have 2 questions. On Larry's slide, which is #37, where he presented it, the northern and southern harvest projections, and I was just curious, in northern you actually have flat even if you go out 20 years. If I'm reading this correct, it's actually down a little bit over time. So I'm just curious why is that with the growth of the trees, and then I have a totally unrelated question, which I'll wait.

Rick R. Holley

Well that's a hard question, so I’m going to give it to Larry. Okay, Larry?

Larry D. Neilson

Yes, I mean, our southern growth -- you're talking about the northern?

Unknown Analyst

Yes, why -- I mean, with the fact that trees grow, which is one of the reasons why we all like timber Plum Creek, you actually have over 20 years in northern harvest flat to declining. Why is that?

Larry D. Neilson

So it actually goes -- it goes up by about 0.5 million tons over the next 20 years. But at the end, there just because of the age class, differential falls off a little bit in those last 3 years. But then in subsequent years, it's going back up again. That's a 3-year -- those are 3-year windows.

Unknown Analyst

Right. Right, the blocks, I got that. So it's just the nature of the age and your plans are just going to fall.

Larry D. Neilson

Exactly.

Unknown Analyst

Okay. And then the other question was simple, is just, Tom, could you just review what you said about board feet and housing starts and the relationship between all that? You said some of the supply -- each of the 3 supply shocks were x amount of board feet, which is about 250,000 starts. Can you just review that, and those relationships?

Thomas M. Lindquist

Sure. There are 3 supply shocks, 6% each in my presentation. I try to put everything back into a lumber equivalent billion board feet. So those 3 shocks, 18%, as relates first of all to that spotted owl shock. It's about 2x spotted owl shock. We saw the prices rise with the spotted owl because the demand was there. The prices rose immediately as the lumber was produced elsewhere. In this shock, it’s certainly a larger supply shock overall, 18%, 12 billion board feet. We'd all get back to the basic denominator there. But the pricing will rise as demand goes against that supply. So we still have to have demand recoveries, right? So it's not going to be as immediate. That's why I didn’t call for a doubling. So we will see prices increase but if 65 billion board feet is the current production capacity, and we can debate that, it could be smaller, or larger, this piece of rationalization since the market high. That 12 billion board feet would sort of coming against that 65 and that puts you where, 53, or it’s 50 this year? So if you're working against that 53, gosh, you’re going to have that balance right there with a little bit of demand recovery. We think production will respond, though. I mean, there's capacity in the south in the timber harvest side in these facilities to improve production. For the south, we think in particular, will produce more than it has in the past. So that 50 grows and goes against the southern production capacity increase over time, so price will work against that production capacity there over time.

Unknown Analyst

Sure. And the ratio of the board feet start -- the ratio, you mentioned 250,000 starts?

Thomas M. Lindquist

Yes. We just tried to put that into a common term. 4 billion board feet, if you built a single-family home, the lumber equivalent would be plus or minus 250,000 homes, the lumber equipment. I'm not making a housing start equivalent. I'm making a lumber equivalent for a home.

Unknown Analyst

I'm sorry, that was 4 billion board feet, 250,000 homes?

Thomas M. Lindquist

That's correct. Yes. So we use housing starts as a proxy for demand. It's got a mix of single-family and multifamily.

Rick R. Holley

Gail?

Gail S. Glazerman - UBS Investment Bank, Research Division

A couple of questions on the energy potential. A few weeks ago, European utility pulled the plug on a project because they weren't given -- getting the government support they need. Is that something you're seeing? Has there been a change in Europe? And I guess, just domestically, do you see the impact of lower natural gas prices impact pellet demand at all?

Rick R. Holley

Russell?

Russell S. Hagen

Sure. Yes, I think the announcement you're talking about is there's 2 things that are happening in Europe. One, there's dedicated power, so they're actually building new facilities to burn pellets to generate electricity. And then there's co-fire. And so they're co-firing pellets with existing coal facilities. So the dedicated power has not gotten the government support, particularly in the U.K. So some of those projects are going away. However, the co-fire is getting the government support. And so you're seeing a lot of that pellet will go towards co-fire. As far as the natural gas prices, we've definitely seen domestically a shift in demand for biomass electricity generation. Gas prices are just too cheap. And we've seen some pressure even in the wind development also. So I think the new energy production, electricity production that will come on is going to be primarily gas related. And the biomass, will either need government subsidies or you'll have to see gas prices go up before it’s competitive.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. Just another quick question on the timber deed. I assume those volumes are included in the harvest forecast that you've given. And so presumably, over time, you'd expect your land to grow to include that or to replace that?

Rick R. Holley

Yes, so that the volume is included in the harvest numbers.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And just one last quick question in terms of the Chinese demand. You kind of talked about seeing a recovery during your earnings call. And I'm just wondering if you can give an update, is the trends still improving? And can you give us a sense of what pricing -- export prices are compared to kind of where they were last spring?

Rick R. Holley

Well, export prices last spring were -- I think the peak, which was last spring, was about $90 a ton. Today, prices in that market are in the kind of the mid-70s per ton, $70 per ton. The Chinese, we have slowed down latter part of last year. The government kind of turns it on and turns it off. They turned it back on, so there's a lot of interest in product. As we talked about here today, we'll more than double the amount of wood that we export to China in 2012 versus 2011. So -- and we think that demand's lasting. But again, the Chinese like they do with many commodities, they're kind of in and then they're out. They're in and they're out, because they're very price-sensitive buyers. So as that market starts to rise price-wise, they'll back off a little bit and then they come back again. So we think long term, they're in the market and it's -- it certainly helps stabilize prices there for both the domestic, as well as the export consumer. Yes, sir?

Unknown Attendee

You talked about 3 positive supply shocks from your perspective. And I was wondering with Russia’s accession into the WTO? And then kind of building up a lot of that saw mill manufacturing capacity, maybe along the Chinese border, if you could maybe talk about the prospect of sort of a Russian negative supply shock from your perspective? And it looks like they sort of doubled lumber imports into China, and if you could just maybe speak to that, and maybe what the cost of delivering lumber from Russia into China are versus the North America?

Rick R. Holley

Yes, we don't believe -- and again, we spent a lot of time talking to both -- and our Chinese customers because they understand that market very well and Japanese customers about what does Russia mean? If they take the tariff off, what does that mean? And when they imposed the tariff, there was a lot of manufacturing capacity, Russian manufacturing capacity built across the borders. So there's a lot of lumber, manufacturing lumber in Russia that wasn't 10 years ago. And much of that lumber, obviously, is coming to China. So a slide that Tom showed, the Chinese lumber imports from Russia have grown dramatically, and the log imports have stayed roughly the same. The problem with Russia is the infrastructure. There is the infrastructure doesn't exist, most of the forest that are closer to the border on the coast have been harvested. These are very slow growing forests. So now you're talking about moving logs in Russia to the ports like 1,000 miles. And the infrastructure is not in place to do that cost effectively. So when you think about the tariff, even if they eliminate the tariff, really, the Chinese don't think it matters. The Chinese concern is we can't get more wood out of Russia, probably. We're already tapped out in New Zealand which is the other large importer to China. And our demand is growing faster for wood products than our economy, which I think the growth rate they just said is going to be 7.5% versus 8%. So we have to go elsewhere. So they've gone to Canada, of course, and now they're in the United States buying logs and lumber as well. And they've talked to us, they still don't know that they can get everything they need, so now they're looking at the U.S. South. And we're trying to, of course, attract them to Southern Yellow Pine which they're looking very hard at. So I think their demand is so great over time. They can't rely on Russia, so I don't think it's really going to have any meaningful impact the fact they're in the WTO, and even if the tariff comes off totally.

Unknown Attendee

So you wouldn't expect any significant expansion of Russian lumber into China into 2012 or 2013? Or has it reached a normalized level?

Rick R. Holley

I wouldn't expect a lot of additional -- they both have a lot of mills there and I don't expect a whole lot of expansion from where we are today. Again, even the mills that are near the border have to get logs, and those logs are coming a long ways now. Yes, sir? Right here in front?

Unknown Attendee

Can you talk about the U.S. Forest Service? Could they ever increase their harvest over time?

Rick R. Holley

Well, the U.S. Forest Service clearly is the largest landowner in the United States and could increase their harvest over time. But I don't think that's going to happen for 2 reasons: One is a lot of their infrastructure is gone. In other words, their staffing and everything else to put sales up and handle the sales and work with whoever buys the stumpage. That capacity doesn't exist anymore. And secondly, even in the West, where they do put the sales up -- the timber stumpage sales up, most of them get sued by the environmental community and they're in court. So it's very difficult for the Forest Service to turn the switch back on. So I don't think you're going to see them as a meaningful competitor going forward. Yes, sir?

Unknown Attendee

Later this year, and certainly post the election, the U.S. tax code is going to up for grabs. It's subject to major change. And as I believe, already been some restriction on the pass-through of partnership income in Canada. What -- how do you evaluate the chance of a change in the taxation status of your REIT and your pass-through?

Rick R. Holley

Clearly, I think from a tax code standpoint, everything's up for grabs regardless of how the election comes out, whether it's a Republican or a Democratic President going forward. We don't lose a lot of sleep over it, but we pay attention to it. We're part of NAREIT, the National Association of Real Estate Investment Trust, which represents a huge constituency that which -- is all the major real estate companies, whether it's office buildings, shopping centers or timber for this -- for that matter. And they're very focused on that as well. Even when the administration has talked about pass-through and other entities, REITs have not been mentioned. But it’s not to say they won't be, so it’s something we pay close attention to, but not lose any sleep over. Chip?

Unknown Analyst

I have question back on Slide 45 where you give us a progression of the timber -- resource progression. And I know that Russell was talking a lot about the non-timber revenue sources, whether it’s from natural gas contracts or from construction materials and wind. And I just wanted to know, I believe you report that now. I know it's not a huge number as part of the resources you can verify that. And would those improvements be in basically the buildout from the baseline on Slide 45?

Rick R. Holley

No, natural resource or non-timber resource is reported in Other currently, which is not a segment. As it grows, we may look at having its own segment. The only thing that you -- besides just harvesting trees that appears in the timber resource segment, is really our leases, our hunting lease business, which is about $24 million a year. So that revenue and cash flow would be here. But the non-timber resource business is in the Other category. There's a question in the back?

Unknown Attendee

Rick, you mentioned your intent to grow the dividend over time as cash flow increases. Can you tell us what metrics we should be focusing on in order to assess the rate at which it might grow? I mean, you mentioned, for instance, that you've been paying out 65% of your cash flows. And how important is it to look at the different buckets of cash flow, i.e., whether it's coming from the timber harvest versus from the real estate? How should we think about how the dividend might grow as business develops?

Rick R. Holley

I think the buckets you should think about is clearly, the timber resource business, the one that's on Page 45. Also, look at the manufacturing business, which is recurring. And then Jim Kilberg talked earlier about that $200 million over the next 15-year baseload. Look at that. We're not going to think about one-time selling 18,000 acres in Oregon and those sorts of things. Those are nonrecurring in our minds, so we wouldn't think about that. But as you see the general economy and housing improve, the cash flow from those 3 segments is going to improve and then you should see us increase the dividend. And without a commitment -- and if I say it to you, it's a commitment, I guess. But as we did prerecession, we looked to increase the dividend every year by a meaningful amount, kind of the 5% is what we're doing before. And I would hope we'd get back to that. Whether we payout 65% or 70% or 68% or 72% in a given year is not as important. But we clearly don't want to get in front of ourselves and start paying out above where we could sustain it long term. Because we reduced this dividend once -- and at least as long as I'm here, it's not going to happen again. So -- but -- so we would hope to have meaningful increases as you see the cash flow from those businesses increase over time.

Unknown Attendee

And that makes a lot of sense. And I guess, the question would then be are we close to where we start the process of potentially going up by 5% a year if we see markets develop as you're expecting right now?

Rick R. Holley

Closer. Nice try. Good question. George? And we'll get John next right here. Sorry, John.

George L. Staphos - BofA Merrill Lynch, Research Division

Rick, I have 3 questions. First of all, in your discussions with your contacts in Washington and with government overall, what are some of the things that you are now discussing with them, to the extent you could comment on it, that would be helpful perhaps to develop into a positive for the industry and for you particularly over the next several years? Second question, obviously, one of the things that you talk a lot about as an opportunity is biomass and often mentioned trends positively for you. Nonetheless, it probably leads to some relationship issues with what have been your traditional customers. How do you manage that potential tension? And what opportunity's giving you right now to maybe lock in supply 3, 4, 5 years from now when you have that supply-demand tension broadly?

Rick R. Holley

Well, when we spend time, which we do in Washington, D.C., with members of Congress, members of the administration, we are always talking to them about the regulatory environment, which today it doesn't concern us greatly. But over the long term, it increasingly is concerning to us. Such things as last year, the EPA were going to put in what's called the tailoring rule, regulations would say burning of wood for power is the same from a carbon emissions standpoint as burning of coal, which is nonsensical. So we got -- we went to the administration, got the EPA to back off and at least do a 3-year kind of a review of the whole process and get to the right place. So the regulatory environment is something we’re always keen on, clearly the tax environment to remind people that we do pay taxes. They’re paid by our shareholders. This is a way for real estate to be owned from a broad standpoint, whether you're real estate as well as timber. So it's kind of reminding them that we do pay taxes. We're not completely a pass-through like some of the others that pay no taxes. And you mentioned energy and biomass. That's something we spend a lot of time talking to members of Congress about. First of all, helping them understand what that means, helping understand as we have any kind energy policy in this country that wood, especially in the South, is going to be an important part of the solution. We want to make sure that any definitions for biomass or wood used for energy, we have the proper definition and includes the whole log, not just biomass, not just residuals. And currently, in the Farm Bill, we do have the proper definition and we're going to make sure when that Farm Bill gets renewed that, that definition stays in place. And clearly, on the other side of that, the pulp and paper manufacturers don't want that. They don't want the whole log included. They want pulpwood for their own use and not have competition, which is understandable, but competition will come. It's coming in right now from the Europeans with respect to wood pellet processing. So -- but that's the kind of stuff we talk about with members of Congress. John?

Unknown Analyst

Rick, a question for David. If you reached that $400 million level of timber processing in that segment and the other segments had close to record years, what would be your tax position?

David W. Lambert

With the growth of cash flows depicted, our income per share would be growing. It is all capital gains income. But as a REIT, we're required to distribute our earnings and profits to maintain our REIT status. And so we anticipate growth in both earnings, cash flow and our dividends stream if that slide materializes and we see that growth.

Rick R. Holley

But we would have no additional tax liability. So basically, virtually everything you saw, the growth in our earnings and cash flow would be in the REIT and therefore, not taxed.

Unknown Analyst

Is that [indiscernible] last year?

David W. Lambert

That's all nontaxable income at the corporation level. It is not -- it's good REIT income.

Rick R. Holley

So as you go forward, the only thing that's really taxed are some of the development activities in real estate, which heretofore we're spending money kind of getting things in title, we haven't realized a lot of revenue. But any revenue there would be taxed because it's in the tax REIT subsidiary as well as anything from our manufacturing business. So really, the manufacturing, maybe little more tax in the future as that improves. And the real estate development, some of those projects which Jim talked about, if those come to fruition, which we hope they do in the next 5 years, there'll be some tax implication from that, but I don't think they'll be meaningful. I'll get you next.

Unknown Attendee

You talked about a reduction supply over the long-term from the pine beetle kill, but you also said that it has 5 years of usefulness on the stump. So would you expect a short- to intermediate-term increase in supply from the harvest of those logs?

Rick R. Holley

In Tom's slide, you can see the harvest levels in the last 3 or 4 years, it kind of went up. And that's because they accelerated the harvest. In other words, the Canadian government, the provincial government in BC, increased the allowable cuts to allow them to harvest more of the timber to get a lot of that beetle killed at least into the marketplace before it totally degraded. So it's kind of a 5-year, so that's why you saw the increase. Now you're going to see it come down. And again, they're trying to do it as quickly as they can. In fact, the Canadian provincial government there is

[Audio Gap]

for $0.25 a ton. So they're basically giving manufacturers the wood just to get it out -- to get it cut, and get it to a milling process so they don't have fire and other dangers down the road. So I don't expect you're going to see an increase now in the harvest. They've done what they could do. It's only going to come down from where we are today.

Unknown Attendee

And then you didn’t

[Audio Gap]

mention the U.S. impact of beetle kill, is that not going to be significant?

Rick R. Holley

Yes, the U.S –- any of you that have skied out West, you go to a places like Vale or -- in Colorado, you go to New Mexico or even Utah, if you look out in the vista, you see all these dead trees. Most of those trees are U.S. Forest Service lands or Bureau of Land Management, basically government lands. And the question was asked, are they going to increase the harvest? They aren’t even cutting stuff they should to avoid fires and things. So what's happening is we have beetle kill in our lands and others do. But when you have it, we have foresters going in and actively manage the land. So we’ll do a 5- or 10- or 15-acre clear cut and then the beetle has nowhere to go and that’s that. So we control that kind of situation because we've actively managed forests. Unlike the Canadian situation, which was a very old [indiscernible] pine forest, the beetle infestation started in the national park and spread out on the government lands. And they didn't control it, and it's just spread unfortunately like wildfire. And now it's on millions of acres. So but we have the same problem here. But if you have managed forests, it's really not a big issue. You have a question?

Unknown Attendee

Two questions. One, I just wanted to make sure we understood that why the West Coast sawlog inventory is growing again on Page 40. And the other question that relates to the Clean Water Act is, is that a -- that upcoming decision a significant issue for the company and the industry? And could you possibly quantify the additional expense from a negative ruling?

Rick R. Holley

Well, the first question, sawlog inventory -- and I think it's up here recently only because since 2007, '08, mills shut down and a lot of trees weren't cut. So I think it has to do with just lower demand and, therefore, there was obviously less supply needed. And so logs were left on the stumps so you saw a slight increase. But it's not really material when you look at total inventory there. With respect to the Clean Water Act, there was a decision a year or so ago by the Ninth Circuit Court basically saying that any activity on the roads, forest roads for instance -- why you call it the forest roads bill, would require a permit under the Clean Water Act. And so we're working with Congress, and we're also looking at taking the action with the Supreme Court to try to overturn the Ninth Circuit Court decision, which we think makes no sense. Basically, we've operated forest roads under best management practices and sustainable forest initiatives and other requirements for the last 35 years. And there's really not been any issues. But if this were left to be the case, what would cost Plum Creek is just time. We'd have to get permits from many of our activities we're involved, any kind of road where there was going to be water runoff. So many of our forest roads, if we went in to re-gravel them, if we went in to maintain them in some way, we would have to get a permit from the state governing body. So it's more of a time thing than in a cost thing. And it clearly slows this whole industry down. So George asked a question a few minutes ago, what we spend time working on? One is this forest roads thing. So what we did with Congress last year in the appropriations -- continuing restoration [ph] Appropriations Bill, we got one year like continuation where there's no permits required. And we'll -- if we don't get action through the Supreme Court, we'll go back to Congress and either get a permanent fix or get a one-year extension as well. We think we'll get it fixed long-term. Most members of the Congress are sympathetic. It's hard to get anything done in this administration and this Congress as you might well expect. And if you can't get tax reform and stuff, how are you going to get something like this which people pay less attention to? But we want to make sure everybody understands the implications, not only in the Northwest but throughout the country. So it's a big deal.

All right, well thank you, everyone, for your time and attention. As I mentioned, we're all going to stick around today. Individual questions, please feel free. And we'll talk to you at the end of the quarter. Thank you.

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Source: Plum Creek Timber Co. Inc. - Analyst/Investor Day
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