However, the company does not anticipate that it will be disproportionately affected by these programs as compared with typical owners of comparable timberlands or that these programs will significantly disrupt its planned operations over large areas or for extended periods.

In addition, the company participates in the Sustainable Forestry Initiative^SM sponsored by the American Forest & Paper Association, a code of conduct designed to supplement government regulatory programs with voluntary landowner initiatives to further protect certain public resources and values. Compliance with the Sustainable Forestry Initiative ^SM may require some increases in operating costs.

The combination of the forest management and harvest restrictions and effects described in the preceding paragraphs has increased operating costs, resulted in changes in the value of timber and logs from the company's Pacific Northwest timberlands, and contributed to increases in the prices paid for wood products and wood chips during periods of high demand. One additional effect may be the continuation of some reduced usage of, and some substitution of other products for, lumber and plywood. The company does not believe that the restrictions and effects described in the above paragraphs have had, or in 1999 or 2000 will have, a significant effect on the company's total harvest of timber, although they may have such an effect in the future.

In addition to the foregoing, the company is subject to federal, state or provincial and local air, water and land pollution control, solid and hazardous waste management, disposal and remediation laws and regulations in all areas in which it has operations and to market demands with respect to chemical content of some products and use of recycled fiber. Compliance with these laws, regulations and demands usually involves capital expenditures as well as operating costs. The company cannot easily quantify
future amounts of capital expenditures required to comply with these laws, regulations and demands, or the effects on operating costs, because in some instances compliance standards have not been developed or have not become final or definitive. In addition, compliance with standards frequently serves other purposes such as extension of facility life, increase in capacity, changes in raw material requirements, or increase in economic value of assets or products. While it is difficult to isolate the environmental component of most manufacturing capital projects, the company estimates that capital expenditures for environmental compliance were approximately $108 million (18 percent of total capital expenditures excluding acquisitions) in 1998. Based on its understanding of current regulatory requirements, the company expects that average expenditures will range from $100 million to $110 million (13 to 14 percent of total capital expenditures) in 1999 and 2000.

The company is involved in the environmental investigation or remediation of numerous sites, including 45 superfund sites where the company has been named as a potentially responsible party. Some of the sites are on property presently or formerly owned by the company where the company has the sole obligation to remediate the site or shares that obligation with one or more parties, and others are third-party sites involving several parties who have a joint and several obligation to remediate the site. The company's liability with respect to these sites ranges from insignificant at some sites to substantial at others, depending on the quantity, toxicity and nature of materials deposited by the company at the site and, with respect to some sites, the number and economic viability of the other responsible parties.

The company spent approximately $12 million in 1998 and expects to spend $13 million in 1999 on environmental remediation of these sites. It is the company's policy to accrue for environmental remediation costs when it is determined that it is probable that such an obligation exists and the amount of the obligation can be reasonably estimated. Based on currently available information and analysis, the company believes that it is reasonably possible that costs associated with all identified sites may exceed current accruals by amounts that may prove insignificant or that could range, in the aggregate, up to approximately $90 million over several years. This estimate of the upper end of the range of reasonably possible additional costs is much less certain than the estimates upon which accruals are currently based and utilizes assumptions less favorable to the company among the range of reasonably possible outcomes.

An Environmental Protection Agency (EPA) regulation under Title V of the Clean Air Act requires updated comprehensive operating permits at many of the company's manufacturing operations. The company will continue to prepare the permit applications in 1999 and anticipates that it will be able to obtain the necessary permits.

The EPA published proposed regulations on December 17, 1993, known as the "Cluster Rules," which would establish maximum achievable control technology standards for noncombustion sources under the Clean Air Act, and revised wastewater effluent limitations under the Clean Water Act. The original proposal has been modified on two occasions. The final rule was approved by the administrator of the EPA in November 1997 and went into effect in early 1998. The Cluster Rules will require the company to commit over the next several years approximately $80 million of additional capital to further reduce air emissions and wastewater discharges. >