VARIABLE INTEREST ENTITIES

This note provides details about:


•	Forest Products special-purpose entities (SPEs) and


•	Real Estate variable interest entities (VIEs).

FOREST PRODUCTS SPECIAL PURPOSE ENTITIES

From 2002 through 2004, Forest Products sold certain nonstrategic timberlands in five separate transactions. We are the primary beneficiary and consolidate the assets and liabilities of certain monetization and buyer-sponsored SPEs involved in these transactions. We have an equity interest in the monetization SPEs, but no ownership interest in the buyer-sponsored SPEs. The following disclosures refer to assets of buyer-sponsored SPEs and liabilities of monetization SPEs. However, because these SPEs are distinct legal entities:


•	Assets of the SPEs are not available to satisfy our liabilities or obligations.


•	Liabilities of the SPEs are not our liabilities or obligations.

Our Consolidated Statement of Operations includes:


•	Interest expense on SPE debt of:

– $31 million in 2011,

– $32 million in 2010 and

– $33 million in 2009.


•	Interest income on SPE investments of:

– $34 million in 2011,

– $34 million in 2010 and

– $36 million in 2009.

Sales proceeds paid to buyer-sponsored SPEs were invested in restricted bank financial instruments with a balance of $909 million as of December 31, 2011. The weighted average interest rate was 3.81 percent during 2011 and 2010. Maturities of the bank financial instruments at the end of 2011 were:


•	$110 million in 2012,


•	$184 million in 2013,


•	$253 million in 2019 and


•	$362 million in 2020.

The long-term debt of our monetization SPEs was $767 million as of December 31, 2011, and $764 million as of December 31, 2010. The weighted average interest rate was 4.15 percent during 2011 and 2010. Maturities of the debt at the end of 2011 were:


•	$96 million in 2012,


•	$160 million in 2013,


•	$209 million in 2019 and


•	$302 million in 2020.

Bank financial instruments consist of bank guarantees backed by bank notes for three of the SPE transactions and letters of credit backed by cash deposits for two of the SPE transactions. Interest earned from each bank financial instrument is used to pay interest accrued on the corresponding SPE’s debt. Any shortfall between interest earned and interest accrued reduces our equity in the monetization SPEs.

Upon dissolution of the SPEs and payment of all obligations of the entities, we would receive any net equity remaining in the monetization SPEs and would be required to report deferred tax gains on our income tax return. In the event that proceeds from the bank financial instruments are insufficient to settle all of the liabilities of the SPEs, we are not obligated to contribute any funds to any of the SPEs. As of December 31, 2011, our net equity in the five SPEs was approximately $140 million and the deferred tax liability was estimated to be approximately $277 million.

REAL ESTATE VARIABLE INTEREST ENTITIES

In the ordinary course of business, our Real Estate segment enters into lot option purchase agreements in order to procure land and residential lots for development and the construction of homes in the future. The use of such lot option agreements generally allows us to reduce the risks associated with direct land ownership and development, and reduces our capital and financial commitments. Pursuant to these lot option purchase agreements, we generally provide a deposit to the seller as consideration for the right to purchase lots at different times in the future, usually at predetermined prices.

If the entity holding the lots under option is a VIE, our deposit represents a variable interest in that entity. If we are determined to be the primary beneficiary of the VIE, we consolidate the VIE in our financial statements and reflect its assets and liabilities as “Consolidated assets not owned” and “Consolidated liabilities not owned.” Creditors of the entities with which we have option agreements have no recourse against us. The maximum exposure to loss under our lot option agreements is limited to non-refundable option deposits and any capitalized pre-acquisition costs.

In determining whether we are the primary beneficiary of a VIE, we consider our ability to control activities of the VIE including, but not limited to the ability to:


•	determine the budget and scope of land development work, if any;


•	control financing decisions for the VIE; and


•	acquire additional land into the VIE or dispose of land in the VIE not already under contract.

If we conclude that we control such activities of the VIE, we also consider whether we have an obligation to absorb losses of or a right to receive benefits from the VIE.

As of the end of 2011 and 2010, our non-refundable option deposits to VIEs and capitalized pre-acquisition costs on assets under option from VIEs were not significant.