NOTE 12 – VARIABLE INTEREST ENTITIES AND PREFERRED SECURITIES OF SUBSIDIARIES

Variable Interest Entities

In connection with the 2006 sale of approximately 5.6 million acres of forestlands, International Paper received installment notes (the Timber Notes) totaling approximately $4.8 billion. The Timber Notes, which do not require principal payments prior to their August 2016 maturity, are supported by irrevocable letters of credit obtained by the buyers of the forestlands.

During 2006, International Paper contributed the Timber Notes to newly formed entities (the Borrower Entities) in exchange for Class A and Class B interests in these entities. Subsequently, International Paper contributed its $200 million Class A interests in the Borrower Entities, along with approximately $400 million of International Paper promissory notes, to other newly formed entities (the Investor Entities, and together with the Borrower Entities, the Entities) in exchange for Class A and Class B interests in these entities, and simultaneously sold its Class A interest in the Investor Entities to a third party investor. As a result, at December 31, 2006, International Paper held Class B interests in the Borrower Entities and Class B interests in the Investor Entities valued at approximately $5.0 billion. International Paper has no obligation to make any further capital contributions to these Entities and did not provide any financial support that was not previously contractually required for the three months ended March 31, 2012 and the year ended December 31, 2011.

Following the 2006 sale of forestlands and creation of the Entities discussed above, the Timber Notes were used as collateral for borrowings from a third party lender, which effectively monetized the Timber Notes. Certain provisions of the respective loan agreements required any bank issuing letters of credit supporting the Timber Notes to maintain a credit rating above a specified threshold. In the event the credit rating of a letter of credit bank is downgraded below the specified threshold, the letters of credit must be replaced within 60 days by letters of credit from a qualifying institution. The Company, retained to provide management services for the third-party entities that hold the Timber Notes, has, as required by the loan agreements, successfully replaced banks that fell below the specified threshold.

Also during 2006, the Entities acquired approximately $4.8 billion of International Paper debt obligations for cash, resulting in a total of approximately $5.2 billion of International Paper debt obligations held by the Entities at December 31, 2006. The various agreements entered into in connection with these transactions provide that International Paper has, and intends to affect, a legal right to offset its obligation under these debt instruments with its investments in the Entities. Accordingly, for financial reporting purposes, International Paper has offset approximately $5.2 billion of Class B interests in the Entities against $5.2 billion of International Paper debt obligations held by these Entities at March 31, 2012 and December 31, 2011. Despite the offset treatment, these remain debt obligations of International Paper. Remaining borrowings of $99 million and $92 million at March 31, 2012 and December 31, 2011, respectively, are included in Long-term debt in the accompanying consolidated balance sheet. Additional debt related to the above transaction of $38 million is included in Notes payable and current maturities of long-term debt at March 31, 2012 and December 31, 2011.

On October 7, 2011, Moody's Investor Services reduced its credit rating of senior unsecured long-term debt of the Royal Bank of Scotland Group Plc, which issued letters of credit that support $1.6 billion of Timber Notes, below the specific threshold. On November 22, 2011, letters of credit worth $707 million were replaced by another qualifying institution. The relevant parties agreed to extend the 60 day deadline, and then, on February 10, 2012, letters of credit worth $135 million were replaced by another qualifying institution. The Company and third party managing member instituted a replacement waiver for the remaining $797 million. Fees of $3 million were incurred in connection with this replacement. Also in connection with this replacement, fees of $2 million were prepaid and are being amortized over the life of the associated Timber Notes through 2016.

On November 29, 2011, Standard and Poors reduced its credit rating of senior unsecured long-term debt of Lloyds TSB Bank Plc, which issued letters of credit that support $1.2 billion of Timber Notes, below the specific threshold. The relevant parties agreed to extend the 60 day deadline and then, on February 10, 2012, these letters of credit were successfully replaced by another qualifying institution. Fees of $4 million were incurred in connection with this replacement.

On January 23, 2012, Standard and Poors reduced its credit rating of senior unsecured long-term debt of Société Générale SA, which issued letters of credit that support $666 million of Timber Notes, below the specified threshold. On February 23, 2012, these letters of credit were successfully replaced by another qualifying institution. Fees of $5 million were incurred in connection with this replacement.

Activity between the Company and the Entities was as follows:


	Three Months Ended March 31,
In millions	2012		2011
Revenue (loss) (a)	$	8	$	13
Expense (a)		20		20
Cash receipts (b)		15		14
Cash payments (c)		40		40

(a)	The net expense related to the Company's interest in the Entities is included in Interest expense, net in the accompanying consolidated statement of operations, as International Paper has and intends to affect its legal right to offset as discussed above.

(b)	The cash receipts are equity distributions from the Entities to International Paper.

(c)	The semi-annual payments include interest on the associated debt obligations discussed above.

Based on an analysis of the Entities discussed above under guidance that considers the potential magnitude of the variability in the structures and which party has a controlling financial interest, International Paper determined that it is not the primary beneficiary of the Entities, and therefore, should not consolidate its investments in these entities. It was also determined that the source of variability in the structures is the value of the Timber Notes, the assets most significantly impacting the structure's economic performance. The credit quality of the Timber Notes is supported by irrevocable letters of credit obtained by third party buyers which are 100% cash collateralized. International Paper analyzed which party has control over the economic performance of each entity, and concluded International Paper does not have control over significant decisions surrounding the Timber Notes and letters of credit and therefore is not the primary beneficiary. The Company's maximum exposure to loss equals the value of the Timber Notes; however, an analysis performed by the Company concluded the likelihood of this exposure is remote.

International Paper also held variable interests in two financing entities that were used to monetize long-term notes received from the sale of forestlands in 2001 and 2002. International Paper transferred notes (the Monetized Notes, with an original maturity of 10 years from inception) and cash having a value of approximately $1.0 billion to these entities in exchange for preferred interests, and accounted for the transfers as a sale of the notes with no associated gain or loss. In the same period, the entities acquired approximately $1.0 billion of International Paper debt obligations for cash. International Paper has no obligation to make any further capital contributions to these entities and did not provide any financial support that was not previously contractually required during the three months ended March 31, 2012 and the year ended December 31, 2011.

Activity between the Company and the 2001 financing entities was as follows:


In millions	Three Months Ended March 31, 2011
Revenue (loss) (a)	$	1
Expense (a)		3
Cash receipts (b)		0
Cash payments (c)		3

(a)	The net expense related to the Company's interest in the 2001 financing entities is included in Interest expense, net in the accompanying consolidated statement of operations, as International Paper has and intends to affect its legal right to offset as discussed above.

(b)	The cash receipts are equity distributions from the 2001 financing entities to International Paper.

(c)	The cash payments are related to interest on the associated debt obligations discussed above.

The 2001 Monetized Notes of $499 million matured on March 16, 2011. Following their maturity, International Paper purchased the Class A preferred interest in the 2001 financing entities from an external third party for $21 million. As a result of the purchase, effective March 16, 2011, International Paper owned 100% of the 2001 financing entities. Based on an analysis performed by the Company after the purchase, under guidance that considers the potential magnitude of the variability in the structure and which party has a controlling financial interest, International Paper determined that it was the primary beneficiary of the 2001 financing entities and thus consolidated the entities effective March 16, 2011. Effective April 30, 2011, International Paper liquidated its interest in the 2001 financing entities.

Activity between the Company and the 2002 financing entities was as follows:


	Three Months Ended March 31,
In millions	2012		2011
Revenue (a)	$	0	$	1
Expense (b)		0		2
Cash receipts (c)		111		1
Cash payments (d)		111		2

(a)	The revenue is included in Equity earnings (losses) in the accompanying consolidated statement of operations.

(b)	The expense is in included in Interest expense, net in the accompanying consolidated statement of operations.

(c)	The cash receipts are receipts from the maturity of the 2002 Monetized Notes.

(d)	The payments include both interest and principal on the associated debt obligations.

On May 31, 2011, the third party equity holder of the 2002 financing entities retired its Class A interest in the entities for $51 million. As a result of the retirement, effective May 31, 2011, International Paper owns 100% of the 2002 financing entities. Based on an analysis performed by the Company after the retirement, under guidance that considers the potential magnitude of the variability in the structure and which party has a controlling financial interest, International Paper determined that it is the primary beneficiary of the 2002 financing entities and thus consolidated the entities effective May 31, 2011.

During the three months ended March 31, 2012, approximately $111 million of the 2002 Monetized Notes matured. As a result of the maturities, Accounts and notes receivable, net and Notes payable and current maturities of long-term debt decreased $111 million and Deferred tax liabilities associated with the 2002 forestlands sales decreased $30 million.

Outstanding debt related to the 2002 financing entities of $48 million and $158 million is included in Notes payable and current maturities of long-term debt in the accompanying consolidated balance sheets at March 31, 2012 and December 31, 2011, respectively. The 2002 Monetized Notes of $141 million are included in Accounts and notes receivable, net in the accompanying consolidated balance sheet at March 31, 2012.

The use of the above entities facilitated the monetization of the credit enhanced Timber and Monetized Notes in a cost effective manner by increasing the borrowing capacity and lowering the interest rate while continuing to preserve the tax deferral that resulted from the forestlands installment sales and the offset accounting treatment described above.

In connection with the acquisition of Temple-Inland in February 2012, International Paper became the primary beneficiary of two variable interest entities.

In October 2007, Temple-Inland sold 1.55 million acres of timberland for $2.38 billion. The total consideration consisted almost entirely of notes (the Monetized Notes) due in 2027 issued by the buyer of the timberland, which Temple-Inland contributed to two wholly owned, bankruptcy-remote special purpose entities. The Monetized Notes are supported by $2.38 billion of irrevocable letters of credit issued by three banks, which are required to maintain minimum credit ratings on their long-term debt. The Monetized Notes are recorded in Financial Assets of Special Purpose Entities in the accompanying consolidated balance sheet.

In December 2007, Temple-Inland's two wholly owned special purpose entities borrowed $2.14 billion, which is recorded in Nonrecourse Financial Liabilities of Special Purpose Entities in the accompanying consolidated balance sheet. As of March 31, 2012, the fair value of this debt was still being assessed and is expected to be adjusted as part of the purchase price allocation by the fourth quarter of 2012. The loans are repayable in 2027 and are supported only by the $2.38 billion of notes and the irrevocable letters of credit supporting the notes and are nonrecourse to International Paper. The loan agreements provide that if a credit rating of any of the banks issuing the letters of credit is downgraded below the required minimum, the letters of credit issued by that bank must be replaced within 30 days with letters of credit from another qualifying financial institution.

The buyer of the timberland issued the $2.38 billion in notes from its wholly owned, bankruptcy-remote special purpose entities. The buyer's special purpose entities held the timberland from the transaction date until November 2008, at which time the timberland was transferred out of the buyer's special purpose entities. Due to the transfer of the timberland, Temple-Inland evaluated the buyer's special purpose entities and determined that the buyer's special purpose entities were variable interest entities and that Temple-Inland was the primary beneficiary. As a result, in 2008 Temple-Inland began consolidating the buyer's special purpose entities.

On January 23, 2012, Standard and Poors reduced its credit rating of the long-term debt of Société Genéralé SA, which issued letters of credit that support $506 million of Monetized Notes, below the specific threshold. As a result, on February 13, 2012, these letters of credit were successfully replaced by another qualifying institution. Fees of $2 million were incurred in connection with this replacement.

Activity between the Company and the 2007 financing entities was as follows:


In millions	Three Months Ended March 31, 2012
Revenue (a)	$	2
Expense (b)		4
Cash receipts (c)		3
Cash payments (d)		5

(a)	The revenue is included in Interest expense, net in the accompanying consolidated statement of operations.

(b)	The expense is in included in Interest expense, net in the accompanying consolidated statement of operations.

(c)	The cash receipts are interest received on the Financial assets of special purpose entities.

(d)	The payments are interest paid on Nonrecourse financial liabilities of special purpose entities.

Based on an analysis performed by the Company after the purchase of Temple-Inland, under guidance that considers the potential magnitude of the variability in the structure and which party has a controlling financial interest, International Paper determined that it was the primary beneficiary of the 2007 financing entities and thus consolidated the entities effective upon acquisition.

Preferred Securities of Subsidiaries

In March 2003, Southeast Timber, Inc. (Southeast Timber), a consolidated subsidiary of International Paper, issued $150 million of preferred securities to a private investor with future dividend payments based on LIBOR. Southeast Timber, which through a subsidiary initially held approximately 1.5 million acres of forestlands in the southern United States, was International Paper's primary vehicle for sales of southern forestlands. As of March 31, 2012, substantially all of these forestlands have been sold. These preferred securities may be put back to International Paper by the private investor upon the occurrence of certain events, and have a liquidation preference that approximates their face amount. The $150 million preferred third-party interest is included in Noncontrolling interests in the accompanying consolidated balance sheet. Distributions paid to the third-party investor were $1 million for each of the three months ended March 31, 2012 and 2011. The expense related to these preferred securities is shown in Net earnings (loss) attributable to noncontrolling interests in the accompanying consolidated statement of operations.