Surprised by Criticism, Plum Creek Aims to Shore Up Image

By Beacon Staff

A sluggish housing market, skeptical politicians and an increasingly cynical media have tarnished both Plum Creek Timber Company’s profits and image in recent months. While CEO Rick Holley acknowledged he doesn’t foresee a short-term fix for the former, his presence in Western Montana – meeting with newspapers and municipalities, and emphasizing a need for renewed “transparency” – showed the company is approaching public relations with renewed zeal.

For the largest private landowner in the country, volatile real estate and timber industries have taken a toll. Plum Creek saw its earnings plunge in the first quarter of 2008 and Holley said a turnaround may not begin until 2010. He pointed to a “tough economic time,” while stressing that Plum Creek is in a better position than most to weather it.

Meanwhile, how the company has managed its land as it sells more property for development and logs fewer trees has come under greater scrutiny. While Plum Creek was lauded for preserving 320,000 acres as part of the “Montana Legacy Project,” closed-door negotiations over road easements between Plum Creek and the Bush administration have prompted a federal investigation.

Holley said some of the recent criticism has surprised him, but he understands why Plum Creek could be perceived as “guarded” about its future. Plans include the possible consolidation of mills and more development, but also, Holley said, investing heavily in Montana, where it employs 1,400 people, including 1,100 in the Flathead, and makes 25 percent of its revenue.

From his company’s dealings with the federal government on land access, to its approach to the 2009 Montana Legislature, Holley, along with Hank Ricklefs, vice president of northern resources and manufacturing, fielded a wide range of questions last week during a visit to the Beacon office. Holley said it’s part of an effort by the company to be more forthcoming. The following is a transcript of that interview:

Q: Recently, Plum Creek agreed to sell 320,000 acres of its land for $510 million in what Sen. Max Baucus, who secured federal funds to pay for half the total, called “the largest land purchase, for conservation purposes, in American history.” What other plans does Plum Creek have for its massive landholdings? Long term, can you estimate how much of your land will remain in timber, developed, sold to REITS (real estate investment trusts) or TIMOS (timber investment management organizations), and how much will be conserved?

Holley: Today we have roughly 1.2 million acres (in Montana) – this is before this conservation transaction (the Montana Legacy Project), which will bring us down to let’s call it 900,000 acres. If you go back five years, we sold about 210,000 acres, and 85 percent of that 210,000 acres was either sold for conservation or sold to other timber companies. We sold in the last five years about 27,000 acres that we call “higher and better use land” that were sold to largely individuals, who in many cases will eventually build a home on it. We’ve only done about 3,000 acres that we would categorize as development in the last five years. Now as we go ahead five years, it depends on the economic situation, we will probably sell 20,000 to 30,000 acres for higher and better use. We will probably have 3,000 to 5,000 acres, a similar number in the next five years, that will be developed. Now anything that gets developed has to go through the counties and go through platting and approval process. It’s going to be whether we get approval, whether it makes senses, the economic conditions, whether anyone will buy it. As far as conservation in the future, my guess is we’ve done so much conservation in Montana that there will be more. We don’t know where it is today. But I think it’s safe to say, even before this 320,000-acre deal, we’ve done over 200,000 acres of conservation in Montana. And this will put us at about 600,000 acres in total and there’s probably going to be more in the future.

Ricklefs: And that generally comes to us. It’s the conservation groups seeking us.

Holley: Even this Legacy transaction that Sen. Baucus worked on. We were approached by the Nature Conservancy. We did not approach them. They came up with this concept. Sen. Baucus talked with us about this concept and worked with parties on this.

Q: Critics of the deal have said the price tag is exorbitant. Economist Larry Swanson has said the “net present value per acres of forest” is $500 per acre. What justified the $1,600 per acre that was paid for this land? And about how much inventory, or timber, is left on these lands?

Holley: I don’t know the answer to how much timber or inventory is left on this land. But certainly the Nature Conservancy and the Trust for Public Lands, the buyers, they did their own inventory work and they were satisfied that these lands were well-stocked enough that they could provide to Plum Creek a 15-year fiber supply agreement. So we will obviously at market price buy logs off these lands over the next 15 years to supply to our mills here in the Flathead Valley.

So we’re comfortable that they’re well-stocked enough. And this transaction, a lot of these lands were in places like the Swan Valley. And land in the Swan Valley has sold for $10,000 to $12,000 an acre in large 640-acre sections. So you can imagine if you sold it in 40-acre segments how much money it would be. A lot of this is extraordinarily valuable land. Not valuable for timberland necessarily and for log values, it’s valued for other attributes. I think the Nature Conservancy calls this the “Crown Jewel of the Rockies.” These are extraordinary properties. So it’s hard to put a value on them in how many trees are on them.

Q: Many of these conserved lands were remote. What are your plans for more developable places, specifically in the Flathead Valley? For example, land near the Stillwater Forest and Whitefish Lake?

Holley: We have a block of land north of Whitefish Lake; a 15,000-acre block of land. And we think that that land over time is going to be a combination of probably some conservation, I suspect. Some of it will be developed because it’s close to Whitefish and we think there will be demand for that type of product there. Clearly, it’s going to continue to have access, we hope, for the public so they can recreate and use it. And there’s a lot of different species that use it, so we think it’s going to have a multiple-use aspect to it. That’s something we’re going to work closely with the county and the city about: What is the right outcome for that property over time?

Ricklefs: We’re equally concerned about water quality and have worked in that area to help promote and preserve water quality in the past – and water quality base-level measurements. It’s obviously too valuable a piece of property to just look at as growing trees.

Holley: If there is one thing that we hit ourselves on being guilty of – one of the reasons we’re out here seeing you and others – was in the past, maybe, we were not as forthcoming on future plans on things as we might have been. For instance, we know this property near Whitefish Lake is an extraordinary piece of property and we’re going to spend a lot time talking to the community, the city and others and involve them in the process. We think that’s the right outcome. They’re going to ultimately have to approve what happens anyway. But we need to involve them sooner in the process and on other things we do in the future.

People think, my gosh, Plum Creek has 1.2 million acres and they’re going to develop it. That’s what people think because they don’t know otherwise. One of the reasons I say, “Wait, over the next five years we’re probably going to do less than we’ve done over the last five years, and we didn’t do that much.” In reality we developed 3,000 acres in the state and only half of it has been sold today. And the future is not going to be that different. And I think that puts people at ease when it’s not as grand as they might think.

And I think the other thing that’s important is to make sure people understand the economic impact that Montana is to Plum Creek and Plum Creek is to Montana. It’s not just the 1,400 jobs, but it’s the jobs those 1,400 jobs create for contractors and suppliers. We did a study that says our economic impact in the state here is about $450 million a year. So we have a big economic stake and impact here. And it’s important that we work closer with communities and others.

Q: Plum Creek has been accused of “backroom dealings” with the Bush administration in regard to easements that would allow the company to use national forest roads to access its vast timberlands in Montana. Critics, including U.S. Sen. Jon Tester and presidential candidate Barack Obama, worry that that the deal threatens public access to hunting and fishing in Montana. Do you think those worries are justified?

Holley: No. We were quite surprised because we have had reciprocal access to these cost-share roads with the Forest Service since the 1960s, and the majority of them were built before the mid-1990s. The cost-share roads is 2,000 miles of roads, with 1,100 miles on Plum Creek land, 900 miles on Forest Service land. What happened in 2006 was a district ranger raised a full-use question on a piece of land on a cost-share road. The issue had never been raised since the early 60s until 2006 by anybody, including Missoula County. So we went back to the U.S. Forest Service and said we want to get this clarified. So we went back and sought help from their general counsel and their regional foresters – all kinds of people were involved in this process. As part of the process the Forest Service said a lot of things have changed since we put these cost-share agreements in place and we would like Plum Creek, because of concerns in the state about fires and road maintenance, we would like you to consider as part of any amendment we make to include protection for fires for inholdings and also maintenance on those roads so that the cost does not get borne by the U.S. government and taxpayers moving forward. And we said, “yeah, as part of this thing we would agree to do that.” So we thought what we were doing, two parties in agreement contract, was totally justified. So when it all hit the fan, it quite surprised us.

Then there’s the issue about access for hunting and fishing. You know, we have 1.2 million acres of land that has already been open to everybody here in the state and people outside the state that want to fish, hunt, camp, whatever, free of charge, as probably the largest private landholding with free access in the United States. So when we hear from others about their concern about access for hunters, wait a minute, there’s 1.2 million acres. In many cases, the only way the public gets to U.S. Forest Service land is on cost-share roads that cross Plum Creek land. So, we’re quite frankly taken back and we say, “maybe we made a mistake here when discussing this, that people would be considered and we should have engaged the public more generally.”

Q: City and county governments have also questioned how they could service these future remote subdivisions and there is also concern over fire protection in many of these remote areas adjacent to federal land. How does this factor into your future plans?

Holley: Before they approve a subdivision they’re going to put certain requirements in place. They’re going to require access roads to be paved. They’re going to require certain setbacks to protect from fires. And obviously we’re going to have to do that. What’s interesting, in 1996 Missoula County approved two subdivisions on land we had sold to others on cost-share roads. So this has gone on historically all the time. In fact, we think there are 200 to 300 homes off cost-share roads – inholders that access them every day.

Ricklefs: One important thing about these roads, is that in the original agreements, if Plum Creek was to sell a piece of our land to you, and it’s no longer Plum Creek land, that cost-share road is open to the public. So as far as guaranteeing public access, what we’ve done with the Forest Service historically is more supportive, by far, of public access and use to the roads and thus to public land. Obviously, if we sold you the land, you may not want others on it, but that road must be maintained open to the public.

Q: Plum Creek’s “good government” PAC (political action committee) gave to many of Flathead County’s Republican lawmakers for the June 3 primary, many of whom defended the company’s REIT status from being taxed in the 2007 legislative session. What issues will Plum Creek be pushing for, and fighting against, in the 2009 Legislature?

One big thing we would be working for, very much on both sides of the aisle, is the type of funding mechanism and program so the state can participate more broadly in the conservation purchases. There are some of these properties in the “Legacy” conservation package that are intermixed more with state lands than federal lands. The state would like to have the opportunity to participate in the eventual repurchase of those.

Q: If the issue of taxing REITs comes up again in the next session, will you oppose it?

Holley: Yes.

Q: In the first quarter of 2008, Plum Creek’s earnings fell 22 percent from a year prior – to $38 million from $45 million – while revenues remained relatively the same. As the real estate and timber markets remain volatile, what does the company expect in terms of its long-term health?

Holley: Our view is that again our earnings in 2008 will be down a bit from 2007, and that 2008 and 2009 will continue to be very difficult years in this industry. We don’t see any meaningful recovery until 2010. Again, the good news for Plum Creek, why our earnings have held up much better than a lot other similar companies, is our geographic diversity. The fact is that the timber markets in Montana have held up reasonably well, while the timber markets in Oregon and different parts of the northern states have held up well. Southern timber markets are poor. But it gives us flexibility and really helps us sustain our earnings even in difficult times. But I think this industry and this country are in for a couple difficult years before it improves. And what we need to see improve that will help our company more than anything else is the housing market.