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Timberlands HOW WE DID IN 2007 We report sales volume and annual production data for our Timberlands business segment in Our Business/What We Do/Timberlands. Here is a comparison of net sales and revenues to unaffiliated customers, intersegment sales, and contribution to earnings for the last three years: Net Sales and Revenues and Contribution to Earnings for Timberlands 
COMPARING 2007 WITH 2006 In 2007: • Net log sales and revenues to unaffiliated customers decreased $122 million, or 16 percent. • Sales of other products to unaffiliated customers increased $16 million, or 7 percent. • Intersegment sales decreased $347 million, or 21 percent. • Contribution to earnings declined $133 million, or 17 percent. Net Sales and Revenues – Unaffiliated Customers Net sales and revenues to unaffiliated customers decreased due primarily to the following: • Log sales in the West decreased 6 percent in volume and 10 percent in average price realizations as both the domestic and export markets slowed due to the declining U.S. housing market as well as the Japanese housing market. The reduction in sales and revenues in the Western operations was $102 million. • Log sales volume in Canada dropped 35 percent, primarily due to having fewer operations in Canada following the Domtar Transaction. Even though average price realizations increased 3 percent, net sales in Canada decreased $19 million. • Sales of Canadian chips decreased as a result of fewer operations in Canada. These decreases were partially offset by increases in the sales of nonstrategic timberlands in the U.S. Intersegment Sales The $347 million decrease in intersegment sales was primarily due to the following: • fewer mills in operation following the Domtar Transaction and several Canadian mill closures and curtailments; • lower U.S. mill usage due to the slower housing market; and • lower average log price realizations. Contribution to Earnings Contribution to earnings for the segment decreased $133 million, primarily due to the following: • lower price realizations and a change in the mix of log sales reduced earnings by $83 million; • higher operating costs, primarily for logging, trucking, handling and silviculture activities, reduced earnings by $41 million; • lower fee harvest volumes due to the long-term effects of hurricane Katrina, other storm events, and market downtime resulted in a $25 million reduction in earnings; • lower mineral and leasing income, primarily due to a change in the method of accounting for oil and gas revenues and revenues associated with leasing our timberlands for recreational use, resulted in an $18 million reduction in earnings; and • a charge for casualty losses resulting from a severe West coast wind and rain storm that occurred in December 2007 reduced earnings by $10 million. These decreases were partially offset by the following: • a $27 pretax gain on the 2007 sale of a log export facility; and • a $17 million increase in earnings from the sale of nonstrategic timberlands. COMPARING 2006 WITH 2005 In 2006: • Net log sales and revenues to unaffiliated customers increased $20 million, or 3 percent. • Sales of other products to unaffiliated customers decreased $51 million, or 18 percent. • Intersegment sales decreased $119 million, or 7 percent. • Contribution to earnings declined $17 million, or 2 percent. Net Sales and Revenues – Unaffiliated Customers Net sales and revenues to unaffiliated customers decreased due primarily to the following: • Sales of nonstrategic timberlands decreased by $49 million in 2006. Over half of that decrease was due to the 2005 sale of leased lands in Georgia that was not repeated in 2006. The leased lands in Georgia represented the last parcel remaining from the 2004 sale of timberlands in Georgia. • Log sales from the B.C. Coastal operations, which were sold in May 2005, were $21 million in 2005. These decreases were partially offset by increases in log sales in the U.S. and Canada of $32 million and $10 million, respectively. During 2006, average log price realizations increased 3 percent in the Western U.S., and 16 percent in Canada. Intersegment Sales The $119 million decrease in intersegment sales was primarily due to the following: • mill closures in Prince Albert, Saskatchewan during early 2006; • the sale of the B.C. Coastal operations in May 2005; and • declines in log sales from nonfee timber due to lower nonfee timber purchases during 2006 as compared with 2005. Contribution to Earnings Contribution to earnings decreased primarily due to the following: • the sale of the B.C. Coastal operations in May 2005, which contributed earnings of $16 million in 2005; • earnings on sales of nonstrategic timberlands, which decreased $7 million; • a decrease of $9 million in earnings related to changes in Canadian reforestation costs; and • cost increases of approximately $30 million due to higher fuel costs and hurricane salvage costs incurred during the first quarter of 2006. These decreases were partially offset by a net increase of $43 million in earnings from the Southern and Western U.S. operations in 2006, which reflected the following: • improved price realizations and mix – these factors contributed $24 million, more than half of which was in Western export log prices; • a slightly higher level of fee harvest in 2006, which contributed an additional $8 million in earnings; and • recognition of a $12 million timber loss in 2005 due to Hurricane Katrina. OUR OUTLOOK We expect Timberlands earnings to be lower in the first quarter of 2008 compared with the fourth quarter of 2007. • The continued weakness in the housing market and the lower volumes and higher costs due to the December storm event are expected to result in both lower volumes and lower prices in the Western market. • There will be fewer sales of nonstrategic timberlands. |