Wood Bioenergy: Year End 2010 Finds 441 Projects in US

31 12 2010

According to Wood Bioenergy US, the number of announced and operating wood-consuming bioenergy projects in the continental US increased to 441 as of December 30, 2010 from 434 in October 2010.  In total, these projects represent potential, incremental wood use of 122.5 million green tons per year by 2020.  However, based on Forisk analysis of applied technologies and operational development, projects representing only 55% of this volume – 67.1 million tons per year – pass basic viability screening (see tables).

Click here to download the complete Wood Bioenergy US summary.


Economic Analysis of Tailoring Rule Quantifies Potential Impacts on Renewable Energy Jobs, Investment

22 12 2010

Last week, Forisk completed a study titled “Economic and Regional Impact Analysis of the Treatment of Biomass Energy Under the EPA Greenhouse Gas Tailoring Rule.”  Commissioned by the National Alliance of Forest Owners (NAFO), the research identified 130 publicly-known and announced wood bioenergy projects in the continental U.S. put “at-risk” by the Tailoring Rule.  These projects represent:

  • 5,384 MW of renewable electricity generation;
  • 11,844 to 26,380 green energy jobs;
  • $18.0 billion in capital investment; and
  • 53.4 million green tons of wood biomass per year.

The research relies on an inherently conservative approach and transparent assumptions.  As such, our team found the attention and critiques amusing and off-base.  For example:

  • The Environmental Defense Fund (EDF) asserts, using data from Forisk :), that the production of wood bioenergy continues to increase despite the Tailoring Rule (see EDF post).  However, EDF’s release disregards the timing and heart of Forisk’s bioenergy market analysis, which assesses the viability of new wood bioenergy capacity on a project-by-project basis.  Most projects cited by EDF were announced prior to the new Tailoring Rule.  And “announced” projects differ from “operating” projects; only 53% of the projects included in EDF’s analysis pass Forisk’s screening for viability (see NAFO post).
  • National Resources Defense Council (NRDC) critiques include concerns about the 53.4 million tons of wood cited in the Forisk study, asserting that this volume of wood must come at the expense of other uses or harvesting new forests (see NRDC post).  It ain’t so NRDC.  We completed research this year commissioned by the American Forest & Paper Association that identified, conservatively, ~50 million tons of “readily available” wood biomass in the U.S. for energy purposes. The sources of this biomass?  Unused forest residuals from current forest operations, unused wood from other land uses, and cleaned wood from municipal solid waste (see details and the complete study).

At the end of the day, initiating, building and operating wood bioenergy projects takes time and resources.  Many announced projects will fail.  The assumption that all announced projects will come online and concerns about available forest resources are the issues which motivated the development of Forisk’s bioenergy project screening methodology.  In practice, projections of bioenergy expansion divorced from the reality of what it takes to actually develop renewable energy capacity provide a disservice to those tasked with making policy and investment decisions.

Timber REITs and WY: What do Bond Ratings Tell Us?

17 12 2010

Our previous post on Weyerhaeuser’s (WY) dividend guidance noted that Standard & Poor’s (S&P) Rating Services raised its outlook on WY from “negative” to “stable.” How does S&P rate the three publicly-traded timber REITs?  How are rating agencies intended to protect the interests of investors?

While US financial markets source debt capital, rating agencies play a role in informing investors about the credit risk of debt securities and their issuers. The rating agencies do not make recommendations about buying or selling securities; rather they release independent ratings and opinions about the credit worthiness of a company or a financial product. Over the past two years, the three major credit rating agencies – Standard & Poor’s (S&P), Moody’s and Fitch – have been severely criticized for failing to flag the risks built up in financial institutions ahead of the credit crisis .  As a result, late last year, the Securities and Exchange Commission (SEC) tightened regulations on the credit-rating agencies and in turn, the agencies strengthened the performance criteria applied to the firms they rate. Currently only four nonfinancial firms – Johnson & Johnson, Microsoft, Exxon Mobil and ADP – earned S&P’s highest rating (AAA).

The following table summarizes S&P’s ratings and outlook on the four companies that we follow:

What should investors keep in mind regarding the credit ratings scale?

  • In rating long-term debt, agencies use alphanumeric letter grades to locate user/issue on the credit quality spectrum, starting from “AAA” (extreme strong capacity to meet financial commitments) and ending at “D” (has been a payment default).
  • Each latter grade has three notches and S&P uses + and – as modifiers. “BBB” and above are considered “Investment” grades and “BB” and below are considered “Speculative” grades.
  • Ratings are subject to revision and the agencies update their Outlook on a continuing basis.
  • A “Positive” outlook indicates that the rating may be raised and a “Negative” outlook indicates that the rating may be lowered, while “Stable” indicates a neutral outlook.

Weyerhaeuser (WY) Announces its Expected Dividend as a Timber REIT

14 12 2010

On December 13th, Weyerhaeuser (WY) announced an annual dividend payment of $0.60 per share in 2011. The first quarterly dividend payment of $0.15 per share is expected in March 2011, following the election of REIT status, effective January 1, 2010, by the company when it files its tax return in early 2011. At that point, the company technically becomes a REIT.

The dividend announcement falls in-line with our expectation of $0.50 to $0.60 per share. [Please see our earlier blog on the topic.] At the current closing price of $17.90 per share, the announced dividend yields 3.35%, compared with the average dividend yield of 5.02% for the timber REITs in the Forisk Timber REIT (FTR) Index: Plum Creek at 4.55%, Rayonier at 4.12% and Potlatch at 6.37%).

Management also stated its intent to target a dividend payout ratio of 75% of FAD (Funds Available for Distribution, defined as cash flow before debt repayments and dividends) over the cycle.  However, in 2011, the payout approximates 100% of FAD as WY does not expect significant improvement in the housing markets and economy in general in 2011.

We consider the target payout ratio of 75% of FAD positive news for WY investors. Why? WY has significant operating leverage as housing markets recover and its Timberland, Wood Products and Home Building businesses are positioned to benefit substantially. Management already stated its willingness to increase the dividend over time. Given the current scenario, WY will continue to defer harvest while the Taxable REIT Subsidiaries (TRSs) generate cash to support the dividend and the debt payments.

WY enjoyed other good news during the day. Standard & Poor’s Ratings Services raised its outlook on the firm from “negative” to “stable” on expectations for improved operating results for the company.

How do Timber REITs Fund Dividends? Thoughts on Yields and PCH

8 12 2010

From the desk of Neena Mishra, Director of Equity Research:

On December 3, 2010, Potlatch (PCH) announced its quarterly dividend of $0.51 per share, to be paid on December 27, 2010 to shareholders of record on December 13, 2010. At current prices, Potlatch’s dividend yield is 6.27%, substantially above the yields of its timber REIT peers, Plum Creek (PCL) and Rayonier (RYN). Weyerhaeuser (WY), which is expected to elect REIT status effective January 1, 2010, when it files tax returns in early 2011, will provide guidance to its dividend policy as a REIT this month. We expect WY’s dividend to be below the average for the group. [Please see our earlier blog on the topic.]

Timber REITs primarily fund their distributions using cash flows from their REIT-qualifying timberland operations. However, significant declines in timber prices and reduced harvest levels impacted cash flows from timberland operations. The shortfall between the cash available for distribution from operations and the dividend distributions are funded through revenues from sales of timberlands and cash flows from the taxable REIT subsidiaries (TRSs).

During the 12 months ending September 30, 2010, Funds Available for Distribution (FAD) also called Cash available for Distribution (CAD) for PCH was $77.7 million, whereas the dividend payout during this period was $81.5 million. During 2009 and 2010, PCH cash flows have been supported by major asset sales, such as: 24,800 acres in Arkansas to RMK Timberland group for $43.3 million (2009); a timber deed transaction with FIA for 49,536 acres of pre-merchantable timber for $49 million (2009); and 41,700 acres (August 2010) and 46,400 acres (October 2010) of timberlands in Wisconsin and Arkansas, for $28.7 million and $36.0 million respectively to RMK Timberland Group. After closing the final phase of its land sale to RMK, Potlatch had a cash balance of ~$105 million and should be able to fund dividends at the current level through 2011. Management stated that it will continue to defer harvest but hold the dividend at the current level, and then restore harvest levels as housing recovers to support the dividend. However, as dividend payments are not supported by FAD, there remains a risk for the reduction of dividends by PCH if housing markets lag longer than expected by Management.

Timber REIT Indices: Where Does Weyerhaeuser (WY) Fit?

4 12 2010

Launched in 2008, the Forisk Timber REIT (FTR) Index tracks the performance of publicly-traded timberland-owning real estate investment trusts in the US.  Firms qualify for the FTR Index – which currently includes Plum Creek (PCL), Rayonier (RYN) and Potlatch (PCH) – upon inception/conversion to REIT status.  Weyerhaeuser (WY), which has completed all necessary steps to adopt REIT status, technically becomes a REIT upon filing its tax return in 2011 and electing REIT status effective January 1, 2010. WY will be included in the Index effective the date shareholders can buy and sell shares of WY as a REIT.

The FTR Index currently constitutes 3.26% of total public REIT capitalization. With Weyerhaeuser, the timber REITs will constitute 5.92% of total public REIT capitalization (see table).  YTD, the FTR Index has returned 8.08%.

The Specialty Sector Index within the FTSE NAREIT Composite Index currently has six REITs, including the three timber REITs, and constitutes 5.8% of the Composite Index.  Effective December 20, 2010, the FTSE NAREIT Specialty Index will be discontinued and the FTSE NAREIT Timber Index will be created as a new Property Sector within the FTSE NAREIT All Equity REIT Index.

Weyerhaeuser and Plum Creek are currently constituents of the S&P 500 Index (which includes the 500 largest public companies representing ~75% of the US equities market, with a total Market Cap of $10,951.10 billion) while Rayonier and Potlatch are constituents of the S&P MidCap 400 Index (which includes mid-sized companies covering over 7% of the US equities market, with a total Market Cap of $1,079.49 billion). The S&P 500 has returned 7.04% YTD while the S&P MidCap 400 Index has returned 21.28% YTD.

The three timber REITs and WY are also constituents of the S&P Global Timber & Forestry Index, which includes 25 of the largest publicly-traded timber and forestry companies in 10 countries, with a total Market Cap of $100.13 billion. This index has returned 12.83% YTD.