Fitch Revises Weyerhaeuser's Outlook to Negative; Affirms Ratings

Business Wire, Sept 21, 2007

CHICAGO -- Fitch Ratings has affirmed Weyerhaeuser Company's (Weyerhaeuser) long-term senior unsecured debt and Issuer Default Ratings (IDR) at 'BBB' and the commercial paper ratings of Weyerhaeuser and Weyerhaeuser Real Estate Company (WRECO) at 'F2'. The 'BBB' rating has also been assigned to Weyerhaeuser's new floating rate note issue of $450 million due Sept. 24, 2009. The Rating Outlook has been revised to Negative from Stable. The basis for the ratings is Weyerhaeuser's long-term earnings profile and the company's market positions, which do not show systemic weakness, only cyclical weakness and only in some markets. However, the dominant near-term mover in Weyerhaeuser's earnings will be Wood Products and the duration of losses in this business could extend beyond historical recovery periods if trends in the homebuilding industry continue, the basis for the Negative Outlook.

Weyerhaeuser has been meeting earnings expectations so far this year. Fitch's expectations presume a substantial fall in earnings next year. Next year's earnings will be led by more losses in Wood Products (lumber and panels) which will decline in the second half as prices respond to an anticipated declining supply. Curtailed sawmills are also expected to dampen earnings from Timberlands operations in the normal course of harvests with some slight weakness in log prices. Following a weak performance in 2007, WRECO's fortunes are not expected to improve much next year, but results should still be in the black.

The star performers in Weyerhaeuser's business portfolio next year look to be Cellulose Fibers and Containerboard Packaging and Recycling. The current high prices for absorbent pulp and kraft pulp should continue so long as linerboard exports to China remain strong and the U.S. dollar remains weak. Linerboard exports could weaken toward the end of next year as Chinese homeland capacity comes on-stream. Containerboard Packaging and Recycling operations should benefit from high prices through most of the year (not necessarily North American demand) and better downstream integration into box plants as Weyerhaeuser's streamlining efforts start to deliver on an aggregate $230 million in promised profit improvements.

It is anticipated that Weyerhaeuser will likely choke back somewhat on business reinvestment during this soft period which will partially compensate for a lower operating cash flow. However, next year could see Weyerhaeuser returning to the debt capital markets again to balance a negative free cash flow. Although credit metrics are likely to witness some deterioration this year (net debt/EBITDA of 3.5 times or so) and next, Weyerhaeuser is expected to conservatively manage its resources through this difficult period in advance of a partial earnings recovery.

Weyerhaeuser is also looking at strategic alternatives for its containerboard business. Historically operating margins have not equaled those of its competitors, and the business has not been a stellar contributor to the company's operating profits but does consume a good deal of capital. Given current markets it would be a good time to sell, and free cash flow might be better off without the business. In Fitch's opinion the loss of the containerboard business would not necessarily influence Weyerhaeuser's ratings if potential cash proceeds from a sale, after business reinvestment, were judiciously deployed to reduce the debt side of the company's capital structure.

Weyerhaeuser is the No. 1 producer of softwood lumber and a leading producer of cellulose pulps, containerboard and corrugated packaging. Weyerhaeuser Real Estate Co. builds moderately and medium-priced homes, principally in southern California and the western and southern U.S.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.