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From little-known railroad subsidiary to the nation's largest private landowner: Plum Creek Timber Co.

January 8, 2008
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By Kevin Miller


In the summer of 1864, President Abraham Lincoln and Congress signed off on a land grant of tens of millions of acres to a handful of industrialists who would help transform the western frontier. The transcontinental railway that sprang from the Pacific Railroad Act of 1864 wouldn't pass through Maine.

But in a roundabout way, that railroad land grant set in motion a series of events that, nearly a century and a half later, enabled a Seattle-based company to propose the largest development plan in Maine history. Plum Creek Timber Co.’s rapid ascent from a little-known railroad subsidiary to the nation's largest private landowner is, in many ways, emblematic of the dramatic changes that have wracked the industrial forestry business in recent decades.

Now, Plum Creek's proposal for the Moosehead region - namely, to rezone land for nearly 1,000 house lots and two large resorts - is a sign of how the value of commercial forestland from Maine to Montana is changing, with serious policy and environmental implications.

A convoluted lineage
Fifteen years ago, few people in Maine had likely even heard of Plum Creek. And 20 years ago the company didn't even exist, at least not in a form resembling the corporate giant it is today.

Like many multibillion-dollar companies, Plum Creek’s corporate lineage is a bit convoluted. But the Plum Creek of here and now can trace its roots to those railroad magnates who used the 1864 land grant to finance the country’s first northern, transcontinental rail line.

The company held on to part of that land when construction of the Northern Pacific Railway was complete, a fact that still angers some who believe that railroads were legally obligated to give back or sell any remaining property.

Regardless, Northern Pacific still owned a substantial chunk of the former western frontier generations later when, in 1970, it merged with several other lines to become Burlington Northern. Then, in 1989, Burlington Northern spun off its timber and mill subsidiary into a separate enterprise.

The newly formed Plum Creek inherited about 1.4 million acres in Washington, Montana and Idaho from its railroad parent. At the time it was a $540 million business, remembers Plum Creek CEO Rick Holley. But the company's timberland assets - not to mention its overall worth - would balloon as the large paper companies, such as Champion and Georgia-Pacific, sold off the vast stands of timber nationwide that fed their mills.

One by one Plum Creek snapped up large tracts from the paper giants: 865,000 acres in Montana, 540,000 acres in Gulf Coast states and, in 1998, 905,000 acres of Sappi land in northern Maine. In return, Plum Creek agreed to a long-term contract to supply Sappi mills with fiber.

Suddenly, Mainers whose lives and livelihoods revolved around those woods had a new landlord from out West with a mixed reputation for aggressive harvesting.

Doing business in Maine
Maine was a logical location for Plum Creek given the state's quality wood resources and timberland history, according to Holley. Nor was the company intimidated by Maine’s reputation as a tough regulatory environment. After all, Holley said, there are no spotted owls or grizzly bears in Maine.

"I remember the morning we were going to announce the transaction, I met with Governor [Angus] King ... and he just wanted to make sure that we at Plum Creek knew that Maine was a challenging place to do business from a regulatory standpoint," Holley said in a recent interview.

"And I said, ‘Governor, in all due respect, we are well aware of that. We have been on the ground and we understand what it's like to do business in Maine.’"

One year later, in 1999, Plum Creek officials further strengthened the company's buying power by becoming the first publicly traded timber company to convert to a real estate investment trust.

Commonly known as REITs, this tax status essentially means that the company passes along at least 90 percent of its profits to shareholders, who pick up the tax tab. Plum Creek pays little to nothing in corporate income tax, although its taxable subsidiaries do.

That setup offers Plum Creek significant advantages, said Steven Chercover, a financial research analyst for the firm D.A. Davidson & Co. in Portland, Ore., who follows the timber industry.

While a traditional timber company, such as Weyerhaeuser, pays 30-some percent in taxes for every dollar it generates by turning a tree into pulp or board feet, Plum Creek the parent company pays zero percent, Chercover said.

"There is basically a disparity … in the tax code," Chercover said. Since Plum Creek's conversion to a REIT, several other large timberland owners have followed suit. But, Chercover added, "Plum Creek has been the single biggest beneficiary of that trend."

Becoming a REIT gave Plum Creek the capital investment needed to negotiate a multibillion-dollar merger in 2001 with Georgia-Pacific's lands subsidiary, The Timber Co., according to Holley. Overnight, Plum Creek’s land holdings more than doubled from 3.2 million acres to 7.8 million acres, catapulting the company to the top echelon of landowners nationally.

Soon thereafter, Holley said, company officials began examining whether some lands held more potential value as something other than board feet or paper pulp.

"We decided that we needed to focus on, and at least pay more attention to, understanding what those values were," Holley said. "So we went out and hired an executive to run what we called our real estate business."

Today, Plum Creek owns approximately 8.2 million acres nationwide. Of that, 6.1 million are what Holley calls the company's "long-term, core timberlands." But another 1.7 million have what is known in the industry as a "higher or better use," a designation that includes conservation land, valuable recreation land or real estate.

In 2001, Plum Creek's real estate segment, which includes both land slated for conservation and development, funneled roughly $100 million in revenue into the company. By last year that figure had grown to slightly more than $300 million, or about 19 percent of the company's $1.6 billion in total revenue.

Holley insists that while the real estate division is an increasingly important part of the company's bottom line, timberland always will be the bread and butter of Plum Creek’s business plan. The company looks first for lands that are well-managed with productive timber stands in good markets that will add value to shareholders, he said.

"What's been fortunate for Plum Creek is that many of these lands that we've acquired for timberland purposes, some of these do have other uses and other attributes," he said.

Moosehead region’s beauty Likewise, Holley said the company was not thinking about the real estate development potential of the Moosehead Lake region when it purchased 900,000-plus acres from Sappi in 1998.

He remembers being struck by the beauty of the Moosehead region at the time. But it was not until about five years ago, when the company really began inventorying its assets, that Plum Creek officials considered a development plan in Maine.

Because the company was the predominant landowner in the region, officials came up with the idea of a long-range concept plan that would guide development in the coming years, he said. Plum Creek has since made major revisions to the plan - including adding more than 350,000 acres of conservation - in response to public feedback.

"When we bought it in ’98, we had no idea there would be any development opportunity whatsoever," he said.

Some find that hard to believe.

Opponents of Plum Creek's development plan claim the company knew exactly what it was doing when it bought the land around one of Maine's top destinations for nature lovers.

Critics point out that Plum Creek paid less than $200 an acre for land that was specifically zoned for commercial forestry. Now the company stands to profit tens of thousands of dollars an acre - some predict $100,000 or more for some waterfront properties - that are included in its development plan. During recent public hearings and technical hearings, opponents repeatedly accused the company of attempting to fatten the pockets of out-of-state shareholders at the expense of the region’s "wilderness character." They also cited Plum Creek's real estate ventures out West, particularly in Montana, where the company has sold thousands of acres to developers, although not on the scale proposed near Moosehead.

"This is really the last wild area east of the Mississippi and we're about to give it away so that a company from Washington can make huge profits," one opponent told members of the Land Use Regulation Commission during a public hearing in Augusta.

"They came to make a profit, and a big profit," another opponent said during a Greenville hearing. Preserving public access

Holley points out that Plum Creek has permanently protected more land than almost any company in the country through sales to conservation groups or sales of conservation easements. He also stressed that, unlike some major landowners in Maine and many across the country, Plum Creek continues to allow the public to hunt, fish and recreate on its land free of charge.

"So that's another public attribute which we think is very important," Holley said.

Chercover, the financial analyst specializing in the forestry industry, predicted that real estate development would be a permanent part of timber companies' portfolio from here on out.

Plum Creek has led the transition among the timber giants toward seeing value in their lands beyond trees, he said. But Chercover said that unlike trees, which grow back after being cut, real estate sales are not a renewable cash crop.

"The real estate business is a big business, but it's not bigger than tree harvesting," Chercover said. "And you can't sell the same land twice."

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