Wood Demand in US Rising for Bioenergy; Still Modest Relative to Expectations

29 08 2010

According to Wood Bioenergy US, wood pellet and wood-to-electricity plants in the continental US will consume over 30 million green tons in 2010.  This is based on screening the 376 wood-consuming, announced and operating bioenergy projects in the Wood Bioenergy US database as of August 24th, 2010.

The 2010 wood use estimate for bioenergy represents ~6% of Forisk’s forecasted total US wood consumption for industrial purposes this year, which include the production of paper and paperboard, OSB, plywood and softwood and hardwood lumber.  Analysis of these announced and operating bioenergy projects highlights competing realities:

  1. Uncertainty associated with federal legislation (i.e. EPA’s Tailoring Rule and Boiler MACT; USDA’s BCAP revisions) have slowed developing biomass projects;
  2. Understanding that “all wood baskets are not created equal” has created a sense of urgency for key wood-using projects to get sited, built and underway.
  3. Forest industry mills increasingly recognize their long experience and strategic advantages in producing bioenergy and have made moves to retain/regain/accept a leadership position in this sector.

Looking forward at the current crop of wood bioenergy projects:

  • They represent potential, incremental wood use of 123.7 million green tons/year by 2020 (see table).
  • Based on Forisk analysis, projects representing only 69.6 million tons/year pass basic viability screening.

Click here to download the complete Wood Bioenergy US summary.


Weyerhaeuser’s Special Dividend: Shareholders Vote Their Preferences

26 08 2010

With the payment of a $5.6 billion special dividend on September 1, 2010, Weyerhaeuser (WY) will have satisfied all of the requirements for its conversion to a real estate investment trust (REIT). We described the tax implications of the dividend in our previous post. Neena Mishra, Forisk’s Director of Equity Research, comments on the results of the WY shareholder vote regarding the distribution of the special dividend:

Shareholders of record at the close of business on July 22 were able to elect stock or cash for the special dividend and the results of the election were announced yesterday. Shareholders representing 66% of the shares outstanding elected to receive the special dividend in cash. However, since the cash portion of the dividend is capped at 10% of the aggregate, or $560 million, shareholders who elected cash will receive approximately $4.03 per share, or 15% of their special dividend, in cash and the balance in stock.

The remaining shareholders will receive the special dividend entirely in stock. The number of shares to be issued for the stock portion of the dividend will be determined this week by the average closing price of WY stock on August 24, 25 and 26.  Since the number of shares outstanding will go up substantially after the payout, the company may consider a reverse stock split in the coming months.

The accounting impact of the dividend on the financials would be a reduction in cash by $560 million, as well as a reduction in the deferred tax liability by approximately $1 billion (the tax liability previously recorded for the book versus tax basis difference in the timberland) and thus the net impact would be an increase in the shareholders’ equity by $440 million. The company will also recalculate the 2010 tax expense to reflect the REIT tax treatment.

WY will provide guidance on its future dividend policy in the fourth quarter. As we stated in earlier posts, we expect WY’s dividend payout to increase substantially after its REIT conversion to be more in-line with the dividends paid by the other three timber REITs:  Plum Creek (PCL), Rayonier (RYN) and Potlatch (PCH).

Weyerhaeuser REIT Conversion on Track; Revisiting Tax Implications

16 08 2010

As a major final step in its long road to converting to a real estate investment trust (REIT), Weyerhaeuser (WY) announced a special dividend of $5.6 billion on July 11, 2010.  Previously, we detailed Weyerhaeuser’s (WY) REIT conversion timeline, which remains on track.  Neena Mishra, Forisk’s Director of Equity Research, revisits additional tax implications for shareholders and the firm:

With 6.4 million acres of timberlands, WY remains perfectly suited for adopting a REIT structure. REITs must distribute 90% of their ordinary taxable income to shareholders and they pay no corporate level tax on qualified income (a large portion of WY’s timber segment income would qualify). In addition, most of the dividends received from a timber REIT are capital gains in nature, which are taxed at rates more favorable than ordinary dividends. As a result, investors can expect higher dividends and better after-tax returns going forward. Historically, timber REITs reward shareholders with attractive dividends, with current average yields for the group of 4.9%:

  • Plum Creek (PCL): 4.7%
  • Rayonier (RYN): 4.2%
  • Potlatch (PCH): 5.8%

In a previous post, we described the tax implications of the special dividend payment, which will effectively translate into a 2.5 to 1 stock split for shareholders. However, WY will treat it as a stock issuance for accounting purposes and will not adjust the EPS retroactively, as required in the case of a stock split. The cost basis of shares post dividend will be different from those owned by shareholders before the dividend payout; new shares issued for the special dividend will have a cost basis at the valuation at which they are issued. (Thus, tax implications for shareholders who sell shares will depend on whether they use the average cost or the specific identification method.)

After completing the special dividend payout in the third quarter, WY will revise its tax expense to reflect the effect of the REIT tax status. The tax rate on current year earnings will decrease, and the company will also decrease its deferred tax liability by approximately $1 billion.

Upon converting, Weyerhaeuser will join the Forisk Timber REIT (FTR, “footer”) Index (see figure), which includes the three publicly-traded timber REITs. With Weyerhaeuser, timber REITs will comprise ~7.5% of the total public REIT market capitalization. We expect greater, positive investor interest in this asset class as the FTR Index continues to outperform the S&P 500 with a 2.1% year-to-date return compared to a negative 3.2% return for the S&P 500.

Three Realities of Wood Bioenergy and Forest Owners

11 08 2010

Recent articles and media coverage of wood bioenergy projects and policies raised questions about carbon accounting, the role of subsidies and biomass definitions.  However, policy-makers and forest owners can benefit from a rooted understanding of what we know versus technologies and markets shrouded in uncertainty.  We recently published a white paper commissioned by the National Alliance of Forest Owners that specifies three areas of direct relevance to timberland owners and legislators that forest analysts understand well and can address with authority and data:

  • Half of announced wood-consuming bioenergy projects will fail.  Basic analysis of publicly-available data indicates that a large number of announced projects will never come on line.  Why is this important?  Because assessments of emerging wood bioenergy markets that assume all projects succeed are misleading and do not account for best available information.
  • Forest owners are long-term managers, not day traders.  Recent analysis confirms decades of forest economic research into forest owner behavior in light of evolving bioenergy markets and concludes “…landowner responses clearly increase supply and decrease raw materials costs in the long-run…”
  • Wood suppliers and loggers adapt to new markets incrementally.  Loggers – those tasked with working with forest owners to harvest residues to wood bioenergy facilities – apply systems that integrate smoothly and inexpensively with their existing forest operations.  New wood markets do not create a frenzy of forest harvesting.  Parallel concerns arose when pulp mills expanded in size and scope during the twentieth century.  Throughout this period, forest owners and wood suppliers adapted through improved forest management, incremental growth of logging operations and utilization of previously underutilized wood raw materials.

Click here for the complete 6-page white paper.

Timber REITs Make it a Clean Sweep with Q2 2010 Earnings Results

1 08 2010

Days after Plum Creek (PCL) posted second quarter earnings on July 26th (see “Plum Creek Beats the Street“), the balance of the timber REITs – Potlatch (PCH), Rayonier (RYN) and soon-to-be-REIT Weyerhaeuser (WY) – reported their results.  Neena Mishra, Forisk’s Director of Equity Research, assesses their performance relative to expectations:

Second quarter earnings from WY, RYN and PCH made it a clean sweep for the timber REIT segment.  Including PCL, all firms beat consensus expectations (see figure).  As a group, timber REITs exceeded consensus earnings per share by 29% for the quarter.

Timber REIT Earnings Q2 2010

On July 29, 2010, RYN reported net income at $39 million, or $0.48 per share, ahead of the street consensus by 11 cents.  The Timber segment benefited from higher prices, stronger export demand and lower costs.  Performance Fibers income, up 30% from one year-ago, reflected strong demand more than offsetting a decline in prices. On the other hand, Real Estate revenues and operating income were down from the prior-year quarter, primarily due to a reduction on non-strategic timberland sales. RYN appears to be well-positioned relative to its peers as a significant portion of its earnings derive from Performance Fibers, which continues to enjoy growing demand for its cellulose specialties and absorbent materials products.

PCH also reported results for the quarter on July 29th. Net income came in at $11.7 million, $0.29 per diluted common share, compared to $3.8 million, $0.09 per diluted common share, for the quarter one year ago. The results, which beat consensus by a penny, were driven by higher harvest volumes, improved sawlog pricing and the run-up in lumber and plywood pricing. PCH announced a sale agreement for ~41,500 acres of Wisconsin and Arkansas timberland to RMK Timberland Group for ~$29 million. The company also signed an option with RMK to sell ~46,500 additional acres in the fourth quarter for ~$35 million.

On July 30, 2010, WY reported net earnings of $42 million or $0.20 per diluted share (excluding special items), compared to a net loss of $106 million, or $0.50 per share, for the same period last year. The results exceeded consensus by six cents.  Strong performance by the Cellulose Fibers segment (due to higher price realizations) was somewhat offset by weaker results from Timberland and Wood Products. Log markets strengthened early in the quarter due to higher wood demand from mills and improved export markets but weaker markets for wood products later in the quarter affected net results. The company expects weaker results from Timberland, Wood Products and Real Estate in the third quarter, but substantially better earnings from Cellulose Fibers due to higher prices.  Finally, WY’s REIT conversion is on track and payout of the special dividend is expected on September 1, 2010.

We liked the results but, as noted in our previous post on PCL, discouraging housing data after the expiry of the home buyers tax credit lead our cautious outlook in the near term.  Record low mortgage rates and lower housing prices (resulting in higher affordability) have yet to offset the pessimism and practical restraints from the weak labor market.  Long term, however, timber REITs remain attractive for income-oriented investors as fundamental drivers for long-term wood demand and land remain in place.