Whither Low-Grade Markets in the Northeast - Silviculture be Damned

Whither Low-Grade Markets in the Northeast - Silviculture be Damned November 17, 2017 Society of American Foresters Albuquerque, NM Charles Levesque, President Innovative Natural Resource Solutions LLC 37 Old Pound Road, Antrim NH 03440 levesque@inrsllc.com Phone 603-588-3272

Innovative Natural Resource Solutions LLC Founded in 1994 Offices in New Hampshire and Maine Focus at the intersection of forest industry, energy and economic development Services include: - consulting in renewable energy - advocacy - forest management and protection - forest certification and sustainability Clients from the private, non-profit and government sectors Conducted work in all regions of North America www.inrsllc.com

Outline: Low-grade timber markets in the northeast overview Pulp and paper Wood-fired electric generation (biomass) Thermal (biomass) Silviculture the effects of reduced low-grade markets Conclusion

Volume and Value to Landowner of Products from a Timber Harvest INRS 2015 (NH data) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Biomass Pulpwood Sawlogs Volume Value

We are still blessed with good timber markets in the northeast

Pulp and Paper

Since 1999, the Northern Forest region has lost 11 pulp mills New York - Deferiet - Lyons Falls New Hampshire - Groveton - Berlin Maine - Westbrook - Bucksport - Old Town - Lincoln - Millinocket - East Millinocket - Madison (May 2016)

10,000,000 Estimated Pulpwood Consumption by Maine Pulp Mills Estimates Based Upon INRS Data 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000-2008 2009 2010 2011 2012 2013 2014 2015 2016e

12,000,000 Maine Pulpmill Wood Use (tons) 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000-2014 2016 Hardwood Spruce - Fir Hemlock - Pine

Madison East Millinocket Lincoln Bucksport Millinocket Old Town Jay Woodland Rumford Somerset Maine Pulpwood Consumption by Mill Green Tons 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0

Coated Paper Market Key Items from Verso bankruptcy filing Verso emerged from bankruptcy July 2016 Traditional markets face decline The coated paper industry faces long-term, structural decline Driven by a move to digital in key markets (magazines, catalogues) A strong dollar has increased imports

Emails you never expected

Pulp and Paper realities in northeast Pulp and paper mills remain region s largest consumer of wood products, and represent significant fixed infrastructure. Mills produce a variety of products, including market pulp, communication papers (coated and uncoated), and tissue. Each of these markets is unique. The Northern American paper industry has been shrinking, both in output and capacity. Individual mills often do well, but new investment in production is extremely limited in the U.S. Northeast will remain a paper producing region for well into the future We can expect reduced pulpwood consumption, and reduced prices for pulpwood The closures are NOT cyclical.

Challenges to the Pulp & Paper Industry in NE You will hear High taxes High energy costs High wood costs And so on There are all very real, and present real challenges to the industry They aren t the fundamental issue, which is change in the marketplace, and a capital intensive industry that is hard to change with any reasonable speed.

New Investment at Woodland Pulp 2 new tissue machines ~$150 million in new investment Used New Markets Tax Credits 70 new employees FIRST SALEABLE JUMBO ROLL MARCH 16 15

SAPPI Announced Investment $165 million rebuild of PM1 at Somerset Mill $25 million in new wood yard (October 2016 completion) Clearly investing in the future of the mill, New England s largest market for low-grade wood

Catalyst Paper Seeking Investment Catalyst Paper (Rumford, Maine) currently seeking funding support for a new tissue machine Would diversify mill production currently coated paper grade as primary product $56 million investment 62 new jobs

Biomass

Biomass Plants Wood Energy (cont.) Innovative Natural Resource Solutions, LLC 19

Green Attributes (Renewable Energy Certificate) Biomass Electricity (MWh) Electricity (MWh) (Wholesale)

Average Monthly Wholesale Electricity Price Trailing 12 Month Average $180 $160 $140 $120 $100 $80 $60 $40 $20 $-

$50.00 CT Class 1 RECs (estimated) $45.00 $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 Source: Testimony (and verification through order) in DE 16-850 -ELECTRIC RENEWABLE PORTFOLIO STANDARDS Adjustment to Renewable Class Requirements Order Maintaining Class III RPS Requirements for 2017 and Modifying Class I Useful Thermal RPS Requirements for 2016 Order Number 25,978 17-Jan-17 Offered $17 In March 2017 $- 2015 2016 2017

What does it take to operate biomass in 2017? $80 $70 $60 $50 $40 $30 $20 $10 $0 Revenue Expenses Electricty RECs (CT) Fuel O&M Assumes: Electricity at average price for the past year ($31) RECs at recent broker quote ($24, which may be higher than current market) Biomass fuel at $25, 1.7 green tons per MWH O&M at $30 per MWh With these assumptions, this is not an attractive business

Status of Biomass Plants In New Hampshire, SB 129 just passed, improving economics of 6 legacy biomass plants Berlin BioPower (NH) has a PPA for up to 20 years (which would be ~2033) There is an above-market upset trigger, which may be reached as early as 2019 Would make operations of the facility much more exposed to the market Schiller Station (NH) part of Eversource divestiture of generation assets Sale terms call for continued operation of facility for continued operations of at least 18 months In Maine, state has a 2-year, $13.6 million effort to support 4 biomass plants Pinetree-Ryegate has a PPA for ~5 years Plainfield Renewable Energy (CT) sells most of its power under a PPA that runs through ~2028

Biomass Thermal

Northeast U.S. Pellet Manufacturers Pellet Fuel Manufacturers in Northeast US Operational as of June 2017 (>15,000 TPY Capacity)

10 Years Lookback in the Domestic U.S. Heating Pellet Industry Up Years 2005-2006 Hurricanes Katrina and Rita 2007-2008 Dramatic spike in oil/natural gas prices 2012-2015 Cold winters and steady increase in heating oil and propane prices

10 Years Lookback in the Domestic U.S. Heating Pellet Industry Down Years 2006-2007 Warm winter 2009-2010 Recession, rapid drop in fossil heating fuel prices 2015-2016 Record warm winter, sustained dramatic drop in fossil heating fuel prices 2016-2017 More of the same

Biomass Heating in New Hampshire Wood pellet and wood chip thermal systems NH Wood Energy Council has interactive map Schools Hospitals Business Non-profits Government https://www.nhwoodenergycouncil.org/

Firewood Often ignored traditional chunk firewood use in the 7- state northeastern region is significant: Over 2 million cords (5 million tons) annually

Whither Silviculture?

DATA

NH Nearly 5 million acres of forest (84% forested); Forest products industry is worth $2.5 billion a year with over 12,000 jobs; Has over 50 sawmills with 80% of production from top 10; Has 8 wood-fired power plants that together use over 3 million tons of wood chips per year; Over 125 commercial/institutional users of wood pellets or chips = 70,000 tons/yr Over 200,000 cords firewood

Volume and Value of New Hampshire Timber Harvest By Product Type INRS (2010 data)

Volume and Value of New Hampshire Timber Harvest By Product Type INRS (2015 data) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Sawlogs Pulpwood (and firewood) Biomass Value Volume

Volume and Value of New Hampshire Timber Harvest By Product Type INRS (2010 & 2015 data) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Sawlogs 2010 Sawlogs 2015 Pulpwood (and firewood) 2010 Pulpwood (and firewood) 2015 Biomass 2010 Biomass 2015 Value Volume

DATA take home (2010 2015) Less pulpwood being harvested More biomass being harvested Result is lower $$ to the landowner Reduced sawlog harvest are some low-value sawlogs going into the chipper? Consequences to silvicultural goals of growing more high quality/high value timber - UNCLEAR

INTERVIEWS

Interviews Loggers interviewed Foresters interviewed Survey not scientific (couple dozen sample) These are anecdotal findings

Interview results - LOGGERS Financial goal of harvests are to get the most gross revenue in the shortest period of time on the job (while satisfying landowner/forester) Loggers will sacrifice total gross revenue from a harvest if they can speed up completion of the job Result is that for whole tree harvesting configurations (the most common) more wood going into the chipper with reduced access to pulpwood markets

Interview results LOGGERS (cont.) Won t put a good sawlog into the chipper but a lowquality one might get chipped because of quick turnaround of chipped wood vs pulpwood and sawlogs As low-quality market options get reduced and the loggers are seeing that especially for softwood they might not bid on a job with a lot with improvement work or they might only seek out high quality wood harvests.

Interview results - FORESTERS Worried about doing improvement work thinnings and shelterwood that remove a high percentage of low-quality wood Some loggers are refusing to cut these harvests already or are paying a lot less for them if at all

Interview results FORESTERS (Cont.) Seeing a lot more wood going into the chipper for whole-tree harvesting operations because pulpwood markets are reduced = lower value for landowner Having to pay out-of-pocket to do some real low value harvest for wildlife habitat purposes Simply not harvesting some areas or lots that are high to low-quality of small average diameter or both.

Silvicultural Effects Conclusion Early effects of low-grade market reduction are being felt in the woods Whereas Southern New England had access to some of the low-grade markets previously, they and other distant areas from low-grade markets are not longer within procurement radii More and more forested areas in need of improvement silviculture prescriptions will remain untouched or deferred to better times (or let to grow).

Volume of Hardwood Sawtimber in New England and New York Board Feet 180,000,000,000 160,000,000,000 140,000,000,000 120,000,000,000 100,000,000,000 80,000,000,000 60,000,000,000 40,000,000,000 20,000,000,000 Vermont Rhode Island New York New Hampshire Massachusetts Maine Connecticut 0 1993-1998 2003-2007 2011-2016 Data source: USDA Forest Inventory & Analysis

New Low-Grade Market Potential Export of chips Eastport, Maine Searsport, Maine New pellet mills Export and domestic Biofuels Efforts at stand-alone, co-location with forest industries Biomass thermal District (campus) heating? Biomass CHP Co-location with existing biomass plants Announcement of a pepper greenhouse in Jonesboro, Maine A number of sawmill / sawlog projects A stud mill Increased capacity at some sawmills CLT manufacturing

The Wood

The Markets

The glass is half full We have markets, and are incredibly well positioned compared to other parts of the country We have the forest resource and supply infrastructure (landowners, loggers, entire forest industry ecosystem) that would make other regions jealous We live in close proximity to (and are part of) the greatest collection of consumers in the history of the world It is cold in New England, we heat buildings, we need process heat There may never be a better time to be develop a project or technology that uses low-grade, particularly softwood.

I would like to add you to my email lists Send an email to levesque@inrsllc.com to be placed on our monthly email list, which provides information on markets and developments of interest to the region s forestry community.

Charles Levesque Innovative Natural Resource Solutions LLC Phone 603-588-3272 Email levesque@inrsllc.com