Hancock Victorian Plantations

HHIT interest in Hancock Victorian Plantations:

- Ordinary Equity

- Loan Notes

11.4%

9.9%

Hancock Victorian Plantations (HVP) is Australia's largest private timber plantation company, with estates of approximately 245,000 hectares. The company was established following the privatisation of the Victorian Plantations Corporation in 1998. HVP acquired Grand Ridge Plantations (formerly Australian Paper Plantations) in 2001.

Performance highlights 2008

HVP generated a return of 10.4 percent for the year and 11.8 percent per annum since inception. The investment performance for the year was underpinned by HVP's strong operating performance, second only to a record year in 2003 over the asset's ten year history. However, this return was partly offset by a decision by HHIT's independent valuer to write down the value of HHIT's interest in HVP as at 30 June 2008, reflecting an increase in the risk free rate for the purposes of the discount rate used in the valuation.

HVP received $102.7 million in revenue (net of production costs) during the year, representing a 4.4 percent improvement on the previous year. Earnings before interest, tax, depreciation and amortisation (EBITDA) was above budget by 10.5 percent. Total stumpage volume and revenue were also above budget for the year due to strong demand and lower production costs. Both net operating profit before statutory adjustments and operating cash flow before interest were approximately 40.0 percent ahead of budget for the year.

The receipt of Australian Securities and Investments Commission (ASIC)'s approval by Willmott Forests for the utilisation of licensed land for MIS purposes enabled a record amount of land (3,019 hectares) to be transacted with Willmott Forests over the 12 month period. This further favourably contributed to HVP's cash and profit position and brings to resolution a two year negotiation process.

During 2008, HVP acquired an additional 476 hectares of plantations, including 122 hectares of semi-mature flat terrain plantations in Gippsland. The acquisition will assist in operationally filling the void left by the early harvest of wind-damaged plantation in the region and provides a return above the opportunistic hurdle rate.

During the year, HVP and the Victorian Government entered into an in-principle agreement regarding the Cores and Links area in Gippsland's Strzelecki Ranges. The agreement will return 8,000 hectares of land to the Government after a once-off harvest of 1,500 hectares of plantation to meet contractual obligations to Australian Paper's Maryvale mill. In addition, HVP will also provide permanent protection to a further 15,000 hectares of native forest. In exchange, HVP will receive $5.5 million in cash and in-kind support from the Government. HVP will also retain the rights to all existing and future eco-products, such as carbon and biodiversity credits arising from the protected vegetation within the Strzelecki Ranges. This deal represents an improved outcome to the previous non-binding Heads of Agreement which was signed in 2006.

Following a Forest Stewardship Council (FSC) certification audit, HVP achieved re-certification of its sustainable forest management accreditations and received clearance of all outstanding conditions from a previous audit.

Performance outlook

The outlook for 2008/2009 is positive. Whilst stumpage volume is expected to hold strong, in line with 2007/2008 levels, log prices are expected to rise in line with indexed contracts. Furthermore, HVP has secured increases in chip prices at historically high price levels for an unprecedented fixed price term through its joint venture Softwood Plantation Exporters (SPE). Some of this increase in revenue, however, is expected to be partially offset by increased fertiliser and haulage (fuel) costs.

HVP's transition during the year to self-insurance of its plantation estate with respect to fire will lead to an improvement in its fire prevention and suppression capabilities and produce a better long term outcome for the business in minimising plantation losses incurred.

The Board's endorsement of the prioritisation of various strategic initiatives for HVP, following a comprehensive strategic review process during the year, has provided the basis for the development of a long term strategic plan in order to create greater value for the business.

On 16 July 2008, the Federal Government's Green Paper on the proposed Carbon Pollution Reduction Scheme (CPRS) was released. This outlines the Government's preferred model for Australia's proposed carbon emissions trading scheme. The Forestry sector will be included on a voluntary 'opt-in' basis, under which forests established after 1 January 1990 will be eligible to create emission units (permits). Permits can be earned for increased carbon stored in the forest. A party that opts in would, however, also attract a liability on harvest based on the Kyoto rule that stored carbon in felled trees is treated as if it is released to the atmosphere at that time. It is the Government's intention, however, to also recognise carbon stored in wood products, but only once an international framework is established. Overall, therefore, the CPRS Paper seems potentially positive for the forestry sector, but it will ultimately depend on the design and details of the rules relating to the treatment of reforestation. The forestry industry is currently developing a position paper which it intends to present to the Government as part of the public submission process.