Packaging Corp of America (PKG) 2009 Q4 法說會逐字稿

Thank you for joining Packaging Corporation of America's fourth quarter and full year 2009 earnings conference call. Your host today will be Paul Stecko, Chairman and CEO. Upon conclusion of the narrative, there will be a q-and-a session. I will now turn the conference call over to Mr. Stecko. Please go ahead when you are ready.

Thank you, good morning and thank you for joining us on our call. With me on the call is -- are Tom Hassfurther who runs the corrugated products business, Mark Kowzlan who runs our mill operations and Rick West, who you all know, is our CFO Again, thanks for participating, and we will take your questions when I complete the presentation.

Yesterday we reported fourth quarter earnings of $59 million or $0.57 a share. Fourth quarter net income included $44 million or $0.42 a share from alternative fuel mixture tax credits and after tax non-cash charges totaling $1.2 million or $0.01 a share from asset disposals related to previously announced major capital projects at our Counce and Valdosta mills to reduce energy costs. I should note that in 2010 and 2011, we will also be taking an after tax non-cash charge of about $1.5 million or $0.01 a share each quarter to account for all of the expected asset writeoffs related to these major capital projects.

For the fourth quarter, net sales were $532 million compared to $546 million in the fourth quarter of 2008. Excluding income from the alternative fuel mixture tax credits and the asset disposal charge, net income was $16 million or $0.16 a share, versus fourth quarter 2008 earnings of $30 million or $0.30 a share. This decrease in earnings was driven by lower container board and corrugated products price and mix of $0.32 a share, which was partially offset by higher volume of $0.08 a share, lower cost for energy of $0.08 a share and lower cost of transportation of $0.03 a share.

For the year, net income was $266 million or $2.60 a share, and excluding the alternative fuel mixture tax credits and the fourth quarter energy project asset disposal charges, earnings were $96 million or $0.94 a share, compared to $136 million or $1.31 in 2008. Full year net sales were $2.15 billion, compared to $2.36 billion in 2008. Our fourth quarter earnings were about $0.03 a share higher than our earnings guidance. As result of stronger than expected volume, which added an additional $0.02 per share to earnings and a lower than expected tax rate which added additional $0.01 a share to earnings.

Looking at the details of operations, fourth quarter demand picked up significantly with corrugated product shipments per workday up 8.3% over last year and up 4.3% over this year's third quarter. And to put the 4.3% pickup over the third quarter in perspective, over the last five years, excluding the severe downturn in 2008, our fourth quarter shipments per workday were basically flat. With the third quarter -- let me say that again, with third quarter -- flat with -- let me they again. Our fourth quarter shipments per workday were basically flat with the third quarter, with no fourth quarter being up more than 1.5% over the third quarter. So you can see this was an un usually strong fourth quarter for us volume-wise.

Another positive sign was that we saw no decline in shipments the second half of the December when the normal seasonal slowdown usually kicks in. As a result, not only were fourth quarter shipments up 8.3% over last year, they were only 2% below fourth quarter 2007, which was a very strong quarter for us. So all in all, demand for us has improved steadily and significantly since the end of the first quarter. Our outside sales of container board remained very strong, up 28,000 tons or 29% over last year's fourth quarter. In fact, we set a new all time quarterly record for export shipments. These higher shipments allow us to run our mills at a 97% operating grade which reduced our mill downtime to only 18,000 tons.

About half of this downtime was in October at our accounts mill with the wood fiber shortage we talked about on last quarter's call. We produced 600,000 tons of container board, and that's up 67,000 tons from last year's fourth quarter when we had operating grade of only 86%. We ended 2009 with our container board inventory on plan and up about 6,000 tons over year end 2008 in anticipation of a five day mill outage at Valdosta in January to make necessary tie-ins for our energy optimization project. We will also have Counce, our largest mill, down for a week in March for its annual maintenance outage. These two outages will reduce production by about 27,000 tons in the first quarter.

As I stated earlier, pricing and mix for container board and corrugated products were lower including the full impact of previously published changes in container board prices this year, reducing earnings by $0.32 a share compared to last year's fourth quarter. There were no changes in published prices for container board during the fourth quarter. However, Pulp & Paper Week reported last Friday that prices for container board increased $50 per ton in January in the east and $70 per ton in the west.

Moving to cost, the downturn in the economy drove much lower cost, especially for energy and transportation. Average prices paid for purchase fuels dropped by about 30% compared to last year's fourth quarter, including natural gas, which dropped about 45%. Even with our relatively low use of purchase fuels, lower usage and lower cost benefited earnings by $0.08 a share. Lower fuel usage was helped in large part by the upgrades we made the past two years in our bark boilers. Transportation costs were also down compared to last year's fourth quarter, driven by the lower diesel prices as well as by better availability of trucks and rail with the economic downturn, improving earnings by about $0.03 a share compared to last year's fourth quarter.

Industry published prices for old corrugated containers, or OCC, excluding delivery cost, increased by $25 a ton in the fourth quarter of 2009 compared to last year. About a 45% increase. Because of our relatively low use of OCC however, which is only about 17% of our total outside fiber purchases, this increase in OCC prices reduced our earnings by less than $0.01a share compared to last year's fourth quarter. Our chemical costs were also very good, down $0.02 a share. Published OCC prices did increase about $30 per ton again in January, and transaction prices are even higher in some cases. These price increases will affect us much less than most others, because again, our relatively low dependence on OCC.

Also, with much colder weather, natural gas prices have also started to increase. Here again, our relatively small usage of natural gas provides us a competitive advantage. Our wood costs were down $0.01 a share compared to last year's fourth quarter. But they were up about $0.03 a share compared to this year's third quarter. Of the $0.03 per share increase in wood costs, about half was due to higher freight costs for the chips we shipped from our Valdosta mill to our Counce mill to replenish Counce's wood inventory after extremely wet weather conditions. This money was well spent because with these chips, were able to build wood inventory at Counce and avoid further downtime through year end. But unfortunately, the weather has turned bad again in January, so we are not completely out of the woods yet in this issue. A lower tax rate with normal year end adjustments and true ups improved earnings by $0.01 a share compared to last area's fourth quarter. There were some other cost items which offset each other, including LIFO inventory reserve expenses, which was offset by lower bad debt expense.

Turning to cash, capital expenditures were $46 million during the quarter, including $12 million for our Counce and Valdosta energy optimization projects. For the year, capital expenditures were $114 million in total, including $15 million for the energy projects. We ended the quarter with $261 million cash on hand, up $36 million from the end of the third quarter and up $111 million from the end of last year. We received no cash payments for alternative fuel mixture credits during the quarter, however, we did benefit from $21 million of these credits which were used to reduce our fourth quarter cash tax payments. For the year, we reduced our tax payments by $48 million using alternative fuel mixture credits. Currently, we have remaining credits available of about $130 million, which we will utilize in part or in total in 2010. Our total available liquidity year end was about $560 million, including cash on hand of $261 million, fuel mix credits of about $130 million and $172 million in borrowings available under our credit facilities. Our long-term debt at year end was $658 million.

As I look at full year 2009 results, I think we had a pretty good year financially and strategically, considering the severe economic downtime -- downturn we experienced. Our corrugated product shipments began to pick up in late March and improved throughout the remainder of the year. Container board exports were very strong in 2009, and industry container board inventory levels have remained at record low levels throughout the year. Finally, manufacturing costs were lower, related in large part to the effects of the recession. The $80 per ton drop at published liner board prices and $90 for medium was the big negative for the year.

But on the positive side, we benefited from the alternative fuel mixture credits. Cash generated from operations, excluding any benefit from alternative fuel mixture credits, was about $260 million for us. Strategically, we took advantage of much lower construction and equipment costs that resulted during the economic downturn and initiated major capital projects at our Counce and Valdosta mills to reduce energy costs. The projects are on track for fourth quarter 2011 completion, and I am pleased to report that we have been able to lock in fixed price contracts, capitalizing on these lower price levels, for almost 80% of the total expected cost of the projects.

Looking ahead to the first quarter, we expect higher container board and corrugated products prices from announced price increases. But most of the earnings benefit from these increases will not be realized until the second quarter when the pass-through to boxes is completed. We expect mill downtime and higher operating costs from our annual maintenance outage accounts and our Valdosta mill outage work related to our energy project tie-ins. Also, higher recycled fiber costs, higher energy costs with colder weather, a higher effective tax rate and higher timing related benefit costs are expected in the first quarter. Considering all these items, we estimate our first quarter earnings will be about $0.12 per share. With that, we will be happy as always to entertain any questions.

But I have to remind you that some of the statements we've made on the call constituted forward-looking statements. These statements were based on current estimates, expectations and projections, and involve inherent risks and uncertainties including the direction of the economy and those identified as risk factors in our annual report on Form 10k on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements. So operator, I would ask you now to open the lines, and we would be happy to entertain your questions.

Yes sir. (Operator Instructions) Our first question comes from Mr. Mark Weintraub of Buckingham Research.

Paul, I just wanted to clarify the -- that Hudson's million alternative fuel mixture credit -- is that in addition to the $261 million of cash you have on the balance sheet, or is that included in that cash?

There is no cash in the 200 -- excuse me, there is no alternative fuel mixture credits included in the $260 million cash. That is cash.

Okay. So obviously, you guys have a tremendous amount of cash and liquidity, and some of it is going to the energy program. You're already generating a lot of cash operationally, we are just seeing prices starting to go up and so presumably, come second quarter, we're going to be generating even more. At what point do you relook at the dividend and/our share repurchase or some other use of cash?

Well, we look at it all the time, Mark. And as you said, and as I said, we are not getting -- the biggest part of the benefit of the cash generation will come in the second quarter when we've got the full price increase put in hopefully, and we have roughly $300 million of CapEx in our two projects that we will spend over the next two years. But if things keep going the way they've been going, I think we will be in the position sometime this year to start making some decisions in that regard. But not during the first quarter.

Okay, terrific. And then just second, can you give us a sense as to how demand was looking in January in your box business?

Yes. The short answer is, pretty darn good. To get a little more quantitative, our bookings through -- I got 13 days worth of data, there are 20 shipping days. So for roughly two-thirds of the month, our bookings are up 8% over last year, and our billings, which usually lag bookings at the beginning of the month, are up 6.6%. So what we saw in December, I was a little concerned with the way December ended, it ended with a bang for us, we didn't really see a slow down that would feel the effects of that in January. But that hasn't happened, and we are off to a very good start in January.

Thank you.

Thank you. Our next question comes from Claudia Hueston of JPMorgan.

Hi, thanks very much. Good morning.

Good morning Claudia.

Just a couple of questions, one just on the CapEx for 2010 and how we should be thinking about the CapEx for the year. And then also on the tax rate, what you view as a normal tax rate for 2010.

Okay. I'll -- let me take the first one. I will let Rick take the second one. On the Cap Ex, we are going to come in probably right around $300 million, maybe a little less. I'm hoping it will be $300 million because we are trying to accelerate our two energy projects. The return is very good and the sooner we can bring them in, obviously, the sooner we can start getting the return. But basically, a couple of hundred million for the energy projects, and probably around $100 million for the rest of the company, mills and box plants in 2010, so roughly $300 million.

Perfect, thanks.

And with regard tax rate, Rick, you want to handle that?

Yes. The effective tax rate for 2010, and of course, the fourth quarter could be lower, but generally about 37.5%.

Okay. Great, thank you.

Thank you. Our next question comes from Chip Dillon of Credit Suisse First Boston.

Good morning.

Good morning, Chip.

First question, just to be clear on the black liquor. You -- since your cash taxpayer, there is really no other benefit that you will get beyond the year end balance sheet, is that right? There's no tax receivables left to get, is that fair?

No, we have tax receivables left of about $130 million. We will record no more income, but we will be able to take the tax credits that we have remaining that we generated in 2009 and apply it against our 2010 taxes owed.

Okay, that's great to know. So that means you will be booking 37.5% but your cash tax payments will be reduced effectively by $130 million in 2010.

That is correct. You will only have your 3, maybe 3%, 4% for state income taxes.

Got you, okay.

Obviously, the reason we are doing that Chip, that maximizes the value of these credits to us.

Of course.

-- have used them for the way we think they were intended to be, as a tax credit, and that's the way we are using them, as opposed to income.

Got you, totally understand. Especially with cash paying you less than 1%. When you look at the capital spending number, it seems obviously a bit higher than what you had said earlier, which means you are spending more on the energy projects in 2010, and you mentioned you've already spent $15 million actually in 09. Is it fair to say that means that your CapEx will be a lot lower next year assuming nothing else changes, and we would only see maybe $85 million or so spent on the energy projects that year?

When you say next year, you mean 2011.

Yes.

Yes, okay, next year. In 2011, yes. We will spend less in 2011 on the energy projects than 2010, but we also have some projects that other internal projects in the company that we are going to start this year, a couple of projects in increasing some capacity in some of our box plants. The pick up in demand is wonderful, but you got to make sure you got the capacity to deliver that demand, and we have some very good return projects in our box plants to do that.

And given that you are going to have more than 200 of the 300 spent by the end of this year, is there a chance that you could jump the gun on that fourth quarter 2011 completion? Not that you are promising anything, but would seem that the odds of that are going up.

I would say, Chip, you are talking in terms of a month or two at best to pick it up.

Okay.

I don't think we will get all the way to 200 this year on the energy projects, but that's our goal. And maybe we only get the 190, but it's obviously very early in the year. But for a round number, I'm throwing out $300 million, and to be honest with you, there is a higher probability it will underrun that number by a little as opposed to overrun it.

Got you. And last question, given your position and involvement in Europe and just in the global industry, any feel for what you think is going on with OCC? Is this just a sort of a near term blip or maybe tied to the end of black liquor credits and maybe less unbleached raw pulping made, or could there be something more to it that's sustainable?

Well, I think the short answer is I don't think this is a one term blip. Our position has always been that we think that the world will run out of OCC because all the new capacity coming on is virtually 100% recycled. And that's if the world grows. This presumes the world will continue to grow. Then the makeup fiber has to come from virgin fiber. So we like where we are in terms of having the lowest dependence on OCC because we think long-term, OCC will be short. And if it's short, it will tend to rise in price. And obviously, the big fall off on OCC benefited ops the least in the short-term. But we are in this business for the long-term. We don't mind taking our lumps in the short-term, but we want to win in the long-term. As I like to tell people, I like the hand we have been dealt fiber-wise. I wouldn't trade it for anybody else's.

Got you. Thank you.

Thank you. Our next question comes from Mark Connelly of Sterne, Agee.

Thanks, Paul. Two things. Following on your comment about fiber, last quarter you talked a little bit about higher fiber costs and then of course, you did get a little bit of a shortage. Can you talk about what you are expecting over the next quarter? Is your downtime in outages going to help enough if fiber stays wet the way it has? And how concerned should we be, say over the next quarter, about the virgin fiber side?

To be honest with you, I feel a lot better than I did two and a half months ago. We ran out of wood two and a half months ago.That never happened -- I'd never experienced that in 30 years in the industry. So we did a pretty good job, and I felt very comfortable January 1. And then the cold weather and then the rain weather has hit us pretty hard. We are still a lot better than we were in the fall, and we think we are going to be all right. But if we have another prolonged bad weather spell, you never know.

The one negative is when we were short on wood, we tried to maximize the amount of OCC we used. But that's not such an attractive (inaudible) these days with OCC prices jumping $30 or more in January, and we are feeling OCC could go up another $20, $25 or $30 in February. And so one of the things that we have the ability to do, however, is we've got a fairly good system to cut excess chips in Valdosta where we've got wood and ship them to Counce. That costs us some money, but that's a pretty good buy compared to downtime and with OCC prices going up the way they are, it's a good alternative to have, and I feel much more comfortable because of that. But we are in better shape than we were in the fourth quarter, but we are not out of the woods. That's really as good as I can do with that question.

Are your virgin fiber costs higher than they were three months ago?

Virgin fiber costs are about the same. The only expense we are incurring extra is to ship chips, and it's strictly freight.

Right, okay.

Our wood costs are a little lower in Valdosta than they are at Counce, but we incur the incremental freight and net/net, those chips cost us more than the wood that we have available at Counce. The problem is if you can't get in to the woods, you can't get that wood. The other problem that's happened that's messed up the situation, it got so cold in January, 100 year low temperatures in and around Counce, wood is frozen solid. Wood is half water. So you are trying to chip ice, and it really beats up equipment. So we had a lot of downtime in our wood yards. But things warmed up at least, and now we've just got to fight the rain. But not we are not the only ones experiencing these problems. It's been a tough year all through the southeast in terms of getting firer in to the mills for everybody.

And just one last question. You talked about exports picking up, and that's what we're hearing from pretty much everybody. Are the margins on your export tons roughly the same as domestic?

No. Export pricing is lower --

Still.

-- offset by less freight, but still, domestic is better than export, but export is picking up a lot of steam and tons are short in export. You have got to go back long way, but you go back to 94-95, when prices hit 530 in the US, we were selling export business at 600 in South America. So it's hard to predict where export prices are going. I'm not saying they are going there, but it's happened before.

But the margins are getting better.

Absolutely.

Okay, very good. Thank you, Paul.

Thank you. Our next question comes from Richard Skidmore of Goldman Sachs.

Just wanted to talk a little bit about the box demand numbers that you put up in the fourth quarter and -- versus the industry. Can you talk about specifically where you think you might be gaining some share relative to the overall industry in the box business?

That's an interesting question. We thought about that and talked a fair number of customers. Probably what we concluded, the nature of our customer base, it's -- we are not big in the big national account business. We have a lot of customers, a lot of smaller customers. And in the first quarter of last year, our demand was worse than the industry's. We were 3% worse than the industry average in the first quarter of 2009. Then we rebounded and we were a couple of percent better than the industry and we continued to improve above the industry through the rest of the year. Now, I don't have industry data yet for the fourth quarter, but for December -- excuse me, I have it for the first two months but I don't have it for December. But I think that trend -- we will see the December numbers, but think we've also outperformed -- we will outperform the industry in the fourth quarter when those numbers come out.

And what I think is, I think the nature of our customers, when the recession hit, they hunkered down pretty fast in terms of shedding inventory, reducing costs, cutting their production schedules. Because the smaller companies I think just moved quickly because again, they did not have the liquidity that some of the big companies have, et cetera. But the opposite happened when the economy picked up. They were not -- they were more aggressive and less cautious than a lot of big companies, and they rebounded quicker. And I think we've ridden that wave through the rest of the year. And as I think some of the bigger companies pick up, that trend may subside a little bit, but I think it's just the nature of our customer base. They tend to do things pretty quick, they are smaller companies, and they manage cash very, very carefully. And that's the reason I think things have turned the way they've turned.

Okay, and -- appreciate the color. As you look at your production, I think you mentioned you had operated at 97% in the quarter. And as your box volumes have grown faster than the industry, is there a point at which you start thinking that you need more on the mill side to continue to grow faster than the industry in the corrugated side?

You would have to grow for a longer period of time than just nine months for that to happen. We have a bellows, and that bellows is we can pull tons out of export if we need them. We are just going to have to see where the economy goes. And this growth above the industry has been higher than I would have expected and again, I've told you the reason. We will be challenged in the first quarter with keeping up with demand because we got the two outages, 27,000 tons. We have got cold weather, we've got productivity problems with cold weather ,and we will be challenged to our pa -- we'll be very tight paper-wise until we get through these shut downs. And then as always, we are in much better shape after we get through this first quarter. So this is going be a particularly tough quarter for us in terms of making sure our mills run very well because we need the tons.

Thanks, Paul.

Thank you. (Operator Instructions) Our next question comes from George Staphos of Banc of America Securities.

Hi, everyone good morning. Paul, I was hoping you could maybe give us a bit more color regarding the energy projects and maybe how the returns have improved given, as you say, that you have been able to lock in a lot of the manufacturing costs, I think you said something about 80% on longer term contracts given the environment for contracting and project development. And I had a couple of follow ons.

Well, I don't -- they haven't improved, George, to any extent. You are talking tenths of a percent. When we budgeted this project, we assumed that we would be able to buy equipment, lockup construction at these prices. We had a contingency in there. Some of that contingency has dropped a little bit. But these projects are still, pick a number, 25%, and what needs to happen so drive that higher than 25%, is that the congress, once it gets through with healthcare, the other things have to take on some things such as Section 45 electricity credits. That was not handled at the end of the year as congress ran out of time. That will be one of the things that we think they are going to take up in the first quarter. That's got the potential to drive our return near 30%, if that happens. We are optimistic. There are two bills, one in the house, one in the senate, so I think levels the playing field with regard to electricity credits, and we're hopeful that that will be adopted.

Okay, but it sounds like you saved a few million dollars maybe, but it's not in the tens of millions of dollars on these projects from locking up long-term arrangements.

It's not. But the big plus, however, is that we have been able to lock in the prices and take the risk of escalating equipment and material prices off of the table. And I think we all know what has happened to things like steel and stainless steel prices over the last three or four years when stainless steel basically more than doubled in cost. And now things come back to levels where they are, and we've simply take that escalation risk off the table, and we are pretty happy about that.

Paul, that's fair. Switching gears, if we think about the market,and we now seen the liner board increase announced -- or excuse me, implemented for January, ballpark, how much of your box business do you think will have the requisite box price implementation in for in the second quarter? Are we talking 80%, 95%?

We only talked to our customers about box prices. We don't talk to anybody else about that. But I can talk about history with you. Historically, we have been able to put box prices through in a two to three month time frame. And we are very optimistic about this box price increase. The one negative on this box price increase is April 1, a lot of people, including our customers, are on quarterly pricing. April 1, as you know, is in the second quarter. So all of the people that their contracts require quarterly pricing, those automatically are off the table. So even if we put the thing in in two months, that last bunch which would occur April 1, you really don't get until the third month.

Okay, Paul --

In one day you would have it for a month, but that one day is not there.

Okay. Are there any shipment and/or market vagaries we have to be aware of, given that again, the Easter holiday falls right on, I think the beginning of April, or is that going to be a nonevent for you, do you think, in the industry?

We don't see it -- I can't speak for the industry, but it's a nonevent for us.

Okay. Hey Paul, last question and I will turn it over. Just as we look at the bridge from 4Q to 1Q, you enumerated directionally the things to consider. Obviously, we can do our own math on the downtime, but can you call out any of the other factors, whether it's energy or consumption, that we should keep a mind on on a per share or million of dollars basis. Thanks, guys. Good luck in the quarter.

And the answer is no, we don't break those into detail. There are detailed estimates. If you take them all together, you get to where we get. We have simply given the items, but we are not going to get in to each and every one of them in terms of the exact amount.

Alright, thanks, Paul.

Thank you. Our next question comes from Mark Wilde of Deutsche Bank.

-- possible for you to give us kind of a sequence, at least a rough sequence as we move through the year in terms of downtime? Seems like the downtime in the the northern mills usually comes in the second quarter.

Yes. As I said, we got the Counce shut down will be -- maintenance shut down will be in March of this year. Then in April, we will have Valdosta down again for its annual outage. Again, about a week down. And then we also take Tomahawk down in the second quarter, which will be in May. But again, that's always been that way. Filer can move around, but this year we are going to take Filer down in -- we're taking Filer down early in year also, in April, and then we'll have no shut downs the second half of the year. Filer was down last fall. We're moving that to April of this year.

Would Tomahawk and Filer City both be roughly one week?

Roughly one week.

Okay. Then with these OCC prices moving up so rapidly, can you give us a rule of thumb for you or what you think the industry's tipping point might be in terms of when OCC hits a certain point, you would rather run the pulp mill when it's below a certain point, you might opt to use OCC?

Well, we are at that point now. We would rather run virgin fiber than OCC from a cost point of view.

Where do you think that occurs? It is 110 --

That's a hard question. That's like saying, how much is a diamond cost per carat? You got to know the quality of the diamond. It varies by mill, Mark. It varies by your wood costs. It's different at Valdosta than Counce, and it's different at the semi chem mills. So that's not an easy question to answer just with one number. It's a range of numbers, depending on your wood costs. Now -- and so -- I'm not being evasive. It's just, wood costs can vary by $20 a ton between mills, and you have to factor that into it.

Okay, and then just a last question. These energy projects, do they both start up in the fourth quarter of 2011? Or actually, could you see one of the mills come up before the other and come up a little bit earlier?

They're both are going the to come up in the fourth quarter. Tentatively first of December, when I stay fourth quarter. We like to get another month or so off of those schedules whether we can or not. But it's too close to call right now. It's how things go. Weather is important. You want to try to get it done before it gets cold in Counce and how the winter work goes. It's not -- fortunately this winter, we didn't have that much work to do. But next winter, the winter of 2011 will be a critical winter in terms of how much construction work you can get done. Because it's very tough working outside in construction in very cold weather. So if you tell me how next winter is going to go, I can give you a better estimate. But if things are normal, we are talking near December of 2011.

Great, thanks.

Thank you. Our next question comes from Steven Atkinson of Bank of Montreal.

Hi. First question would be on the energy projects, do you have a targeted savings?

Yes. We have a targeted savings. In order to get the type of return you talk, there is a savings number associated with that. The complication comes with the Section 45 electric credits and where we can get a credit for the capital in the project or we can take it in terms of electricity revenues. And so that savings could vary anywhere from $90 million in savings if none of the credits were in capital, or it could drop as low as say, $75 million, $70 million, if we got a capital credit. For example, instead of taking $0.01 a share -- $0.01 per kilowatt hour, we could get capital back of, I will throw a number out that's not determined, but say $50 million that would come off the capital cost of the project. That might be better for us than taking the electricity credit. So the savings is going to be in a range, depending in what form and if the Section 45 legislation is passed. So it's a complicated answer to a simple question.

Actually, I really like the answer. The second thing is that given that it's taking a while to do the project, it sounds to me that you are doing the projects in a way that you are not going to upset the ongoing production, and the -- really, would there be any savings as you are going along, as you are gradually putting in the different pieces?

No, because the thing -- until it starts up and you are making steam through a turbine generator, there are no savings. But you did hit upon one important point, and that is that at Valdosta, we are building a recovery boiler separate from the existing operation. The existing operation will run until we start the new one up. We do have to make some tie-ins. So we had five days of downtime as a result of the project, but that will be it for downtime associated with the project at Valdosta. It's a little more complicated at Counce, because we have to rebuild two recovery boilers. And so what we will do is shut one down while it's being rebuilt ,we will run the other ones flat on. But that will result in some loss production until we then do the other one, and so -- and that's all figured in to our savings calculations. But we will lose some production at Counce because of the nature of that project. It's much simpler at Valdosta. But unfortunately, until we crank it up, there are no savings.

Yes, okay. So what would be the timing on the loss production at Counce?

That would be in 201. None this year.

Okay.

We got all the boiler equipment on order, and then we will take the boilers down, probably in concert with the first shutdown next year, so we'd save that time. We'd do it with the annual maintenance outage because that's free time, if you will, and then we'd do the other ones right after that. So you're talking next winter and spring.

Okay. That's great. One other question --

I'm going to hold you one more question so I can get to everybody.

Sure, okay. On your waste paper sourcing and collection, how do you -- do you just have contracts, or you have your own collection system?

No, we have contracts. And again, we only procure about 100,000 tons a quarter of OCC on the outside. So we don't use very much. We obviously don't need our own collection system, because we use so little.

Great, thanks a lot.

Thank you.

Thank you. Thank you. (Operator Instruction) Our next question comes from Mr. Andy Feinman of Iridian.

Thanks. So, you talked about not being out of the woods yet with the weather in southeast, but I think, knowing you Paul, that that's in your guidance. Normally, when you have a problem like that and you tell us a number like $0.12, you are factoring that in.

You are absolutely correct. I have given you my best thinking on what we think is going to happen, but I could be wrong.

Okay.

One of my skills is not predicting the weather.

Right.

If it goes as we hope it goes, we think it might go, then that's the best that I can do. The other thing I would point out, most of the real bad weather has really shifted more south through at least December. We thought unfortunately if you were the bottom half of Alabama, Mississippi, and into Louisiana, they've had a tougher time of it than we had. In the last few weeks, it's cropped up, the weather has moved back up north again. So if it goes back to a more normal pattern, we will be okay, and I think my numbers will be pretty accurate. If it's not a normal pattern, who knows?

Okay. Thanks. And the $658 million of long-term debt that you mentioned, does that include the capital leases?

No. I don't think so.

No it doesn't Andy.

Okay, alright. Thanks. That's all I had.

Okay, thanks Andy.

Thank you. (Operator Instructions) I'm show nothing further questions, sir.

Okay. Well listen, I would like to thank everybody for participating on the call. Any follow up questions, you can always get ahold of Rick or myself if you didn't get a chance to get on. I look forward to talking to you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, you may all disconnect. Thank you and have a nice day.