44 



As general background on the industry, pulp and paper is a cap- 

 ital intensive industry which requires not only large initial invest- 

 ments, but also significant on-going investments for the purposes 

 of maintenance, environmental compliance and facility improve- 

 ments. Additionally, the pulp and paper industry is commodity ori- 

 ented, highly cyclical and typically realizes relatively low profit 

 margins as a result of this. 



Expected rate of return, and the life of an investment project 

 that is required in order for a company to earn that return, can 

 vary significantly within the industry. In my experience, it is not 

 uncommon to observe project returns ranging from negative to 

 positive 30 or so percent and project life requirements ranging from 

 five to 25 to 30 years. These are wide ranges, I know, and of the 

 many factors that can potentially influence these measures, those 

 having the most significant impact include; the timing of the ex- 

 penditure relative to the industry cycle, the magnitude of the ex- 

 penditure in terms of dollar volume, and the purpose or nature of 

 the expenditure. 



Within my written testimony I have provided a rough categoriza- 

 tion of investments within the industry based on the purpose of ex- 

 penditure, and I have also provided ranges for expected rate of re- 

 turn, as well as for required project life or investment term that 

 are typically experienced within the industry. I have used this as 

 a reference in formulating my opinion as to the reasonableness of 

 KPC's request. 



My knowledge of the capital program being considered by KPC 

 is limited to the estimated aggregate value of the expenditure, ap- 

 proximately $200 million, the estimated completion of the expendi- 

 ture, which is five to eight years hence, and a general description 

 as provided by the company which described the expenditure as in- 

 cluding bleach plant modifications necessary to allow the facility to 

 produce elemental chlorine-free pulp, environmental equipment 

 and facilities modifications, an upgrade of the power generation fa- 

 cilities and improvements in the mill's chemical recovery systems. 



Given the general description and magnitude of the investment 

 project, it appears that the majority of the investment could be 

 classified best as a major replacement and environmental expendi- 

 ture. Based on my review of rate of return and project life require- 

 ments in the industry, it is within the range of expectations to re- 

 quire 15 to 25 years to allow for an adequate return on an invest- 

 ment program of this nature and magnitude. 



That concludes my testimony. Thank you. 



[Statement of Mr. Estey may be found at end of hearing.] 



The Chairman. Thank you. Jay. And I will move to David at this 

 time, and I see the other two gentlemen probably will say we were 

 going too late and they probably left or they'd be here. 



