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| PCL > SEC Filings for PCL > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-2009
Quarterly Report
Forward-Looking Statement
This Report contains forward-looking statements within the meaning of the Private Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking words such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates," "projects," "strategy," or "anticipates," or the negative of those words or other comparable terminology. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those described in the forward-looking statements, including those factors described under the heading "Risk Factors" in our filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and Securities Act of 1933, as amended, including, but not limited to, our Annual Report on Form 10-K for the year ended December 31, 2008. Some factors include changes in governmental, legislative and environmental restrictions, catastrophic losses from fires, floods, windstorms, earthquakes, volcanic eruptions, insect infestations or diseases, as well as changes in economic conditions and competition in our domestic and export markets and other factors described from time to time in our filings with the Securities and Exchange Commission. In addition, factors that could cause our actual results to differ from those contemplated by our projected, forecasted, estimated or budgeted results as reflected in forward-looking statements relating to our operations and business include, but are not limited to:
• the failure to meet our expectations with respect to our likely future performance;
• an unanticipated reduction in the demand for timber products and/or an unanticipated increase in supply of timber products;
• an unanticipated reduction in demand for higher and better use timberlands or non-strategic timberlands;
• our failure to make strategic acquisitions or to integrate any such acquisitions effectively or, conversely, our failure to make strategic divestitures; and
• our failure to qualify as a real estate investment trust, or REIT.
It is likely that if one or more of the risks materializes, or if one or more assumptions prove to be incorrect, the current expectations of the company and its management will not be realized. Forward-looking statements speak only as of the date made, and neither the company nor its management undertakes any obligation to update or revise any forward-looking statements.
The following discussion and analysis should be read in conjunction with the financial information and analysis included in our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2009.
Organization of the Company
In management's discussion and analysis of financial condition and results of operations (Item 2 of this form), when we refer to "Plum Creek," "the company," "we," "us," or "our," we mean Plum Creek Timber Company, Inc. and its consolidated subsidiaries. References to Notes to Consolidated Financial Statements refer to the Notes to the Consolidated Financial Statements of Plum Creek Timber Company, Inc. included in Item 1 of this Form 10-Q.
Plum Creek Timber Company, Inc., a Delaware Corporation and a real estate investment trust, or "REIT", for federal income tax purposes, is the parent company of Plum Creek Timberlands, L.P., a Delaware Limited Partnership (the "Operating Partnership"), and Plum Creek Ventures I, LLC, a Delaware Limited Liability Company ("PC Ventures"). Plum Creek conducts substantially all of its activities through the Operating Partnership and various wholly-owned subsidiaries of the Operating Partnership.
The Operating Partnership has borrowed and has currently outstanding $2.019 billion principal amount of debt, including $458 million of publicly issued notes. PC Ventures has borrowed and has currently outstanding $783 million in principal amount of debt from an entity (the Timberland Venture) in which a subsidiary of the Operating Partnership has an equity interest. PC Ventures has a preferred partnership interest in the Operating Partnership. Interest payments for this borrowing are funded by distributions to PC Ventures directly from the Operating Partnership. PC Ventures has no other activities.
As a result of this structure, Interest Expense (Note Payable to Timberland Venture) discussed below is not applicable to the Operating Partnership. Unless otherwise specified, all other discussion and analysis below are applicable to Plum Creek and the Operating Partnership.
Recent Events
Manufactured Products Restructure. As a result of the continuing decline in demand for wood products, during the first six months of 2009, we announced the permanent closure of two lumber mills and indefinitely suspended production at a third. We have also reduced production at our MDF and plywood facilities. The table below provides information on the status of our current manufacturing operations, by facility, and their practical annual production capacities and expected production for 2009.
2009 Production 2009 Estimated
Capacity Production
Product and Facility (in millions) (in millions)
Operating
Lumber - board feet
Columbia Falls, MT 72 53
Meridian, ID (Remanufacturing) 70 64
Plywood - square feet (3/8")
Columbia Falls, MT 120 72
Evergreen, MT 160 73
MDF - square feet (3/4")
Columbia Falls, MT (Thick Line MDF) 145 61
Columbia Falls, MT (Thin Line MDF) 122 71
Indefinitely Curtailed
Lumber - board feet
Evergreen, MT 92 12
Evergreen, MT (Remanufacturing) 65 8
Permanently Closed
Lumber - board feet
Pablo, MT N/A 23
Fortine, MT N/A 12
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A period-to-period comparison for our Manufactured Products Segment is included in the following.
Results of Operations
Second Quarter 2009 Compared to Second Quarter 2008
The following tables and narrative compare operating results by segment for the
quarters ended June 30 (in millions):
Quarter Ended June 30,
2009 2008 Change
Operating Income (Loss) by Segment
Northern Resources $ (7 ) $ 7 $ (14 )
Southern Resources 23 37 (14 )
Real Estate 44 35 9
Manufactured Products - (11 ) 11
Other 4 5 (1 )
Total Segment Operating Income 64 73 (9 )
Other Costs and Eliminations (11 ) (16 ) 5
Other Operating Income (Expense), net - - -
Operating Income $ 53 $ 57 $ (4 )
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Northern Resources Segment. Key operating statistics for the segment are as follows:
Quarter Ended June 30, 2009 Quarter Ended June 30, 2008
Harvest Tons Average Sales Harvest Tons Average Sales
(millions) Realization (millions) Realization
Sawlog ($/Ton Delivered) 0.371 $ 50 0.739 $ 68
Pulpwood ($/Ton Delivered) 0.397 $ 38 0.504 $ 43
Total 0.768 1.243
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Revenues decreased by $39 million, or 53%, to $35 million in the second quarter of 2009 compared to the second quarter of 2008. This decrease was due primarily to lower sawlog harvest volumes ($25 million), lower sawlog prices ($7 million), lower pulpwood harvest volumes ($5 million) and lower pulpwood prices ($2 million). Total harvest volumes for the second quarter of 2009 decreased by 38% compared to the second quarter of 2008. Sawlog harvest volumes were 50% lower compared to the second quarter of 2008 due primarily to harvest deferrals as a result of weak demand and recent timberland sales. We intend to realize the harvest of these deferred timber volumes once log prices improve. Pulpwood harvest volumes were 21% lower due primarily to temporarily increasing harvest levels in 2008 to capture favorable pulpwood prices, harvest deferrals in 2009 as a result of weak markets and recent timberland sales. Sawlog harvest levels for all of 2009 are expected to decrease by approximately 34% compared to the 3.4 million tons harvested during 2008 due primarily to harvest deferrals as a result of weak demand and recent timberland sales. Pulpwood harvest levels for all of 2009 are expected to decrease by approximately 21% compared to the 2.6 million tons harvested during 2008 due primarily to harvest levels in 2008 that were temporarily increased to capture favorable pulpwood prices, harvest deferrals in 2009 as a result of weak markets and recent timberland sales.
Sawlog prices were 26% lower in the second quarter of 2009 compared to the second quarter of 2008 due primarily to the decline in housing starts as a result of the recession in the U.S. Pulpwood prices declined in the second quarter of 2009 by 11% compared to the second quarter of 2008 as a result of the global recession which has reduced the demand for paper and packaging materials.
Northern Resources Segment operating loss was $7 million for the second quarter of 2009 compared to operating income of $7 million for the second quarter of 2008. This decrease of $14 million was due primarily to weaker sawlog prices and lower harvest volumes. Segment costs and expenses decreased by $25 million, or 37%, to $42 million due primarily to lower harvest volumes and lower log and haul rates per ton. Log and haul rates per ton decreased 12% ($3 million) from the second quarter of 2008 due primarily to lower fuel costs.
Southern Resources Segment. Key operating statistics for the segment are as follows:
Quarter Ended June 30, 2009 Quarter Ended June 30, 2008
Harvest Tons Average Sales Harvest Tons Average Sales
(millions) Realization (millions) Realization
Sawlog ($/Ton Stumpage) 1.217 $ 22 1.666 $ 26
Pulpwood ($/Ton Stumpage) 1.849 $ 9 2.221 $ 10
Total 3.066 3.887
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Revenues decreased by $39 million, or 31%, to $89 million in the second quarter of 2009 compared to the second quarter of 2008. This decrease was due primarily to lower sawlog harvest volumes ($20 million), lower pulpwood harvest volumes ($9 million), lower sawlog prices ($6 million) and lower pulpwood prices ($5 million). During the fourth quarter of 2008, we contributed 454,000 acres of timberlands in our Southern Resources Segment to Southern Diversified Timber, LLC ("the Timberland Venture"). Excluding the 0.308 million tons of sawlogs harvested in the second quarter of 2008 related to the Timberland Venture properties, sawlog harvest volumes decreased by 10% due primarily to harvest deferrals as a result of weak demand. We intend to realize the harvest of these deferred timber volumes once log prices improve. Excluding the 0.261 million tons of pulpwood harvested in the second quarter of 2008 related to the Timberland Venture properties, pulpwood harvest volumes decreased by 6% due primarily to temporarily increasing harvest levels in 2008 to capture favorable pulpwood prices. Sawlog harvest volumes for all of 2009 (excluding the 0.690 million tons of sawlogs harvested during 2008 from the Timberland Venture properties) are expected to decrease by 7% compared to the 4.9 million tons harvested in 2008 due primarily to continuing the deferral of harvests as a result of weak demand. Pulpwood harvest volumes for all of 2009 (excluding the 0.667 million tons of pulpwood harvested during 2008 from the Timberland Venture properties) are expected to decrease by 9% compared to the 7.3 million tons harvested in 2008 due primarily to the temporary increase in harvest levels in 2008 to capture favorable pulpwood prices.
Sawlog prices on a stumpage basis were 15% lower in the second quarter of 2009 compared to the second quarter of 2008 due primarily to the decline in housing starts as a result of the recession in the U.S. Sawlog prices on a delivered basis decreased by 12%. Pulpwood prices declined in the second quarter of 2009 by 3% compared to the second quarter of 2008 as a result of the global recession which has reduced the demand for paper and packaging materials.
Southern Resources Segment operating income was 26% of its revenues for the second quarter of 2009 and 29% for the second quarter of 2008. This decrease was due primarily to weaker sawlog prices and lower harvest volumes. Segment costs and expenses decreased by $25 million, or 28%, to $66 million. This decrease was due primarily to lower harvest levels and lower log and haul rates per ton. Log and haul rates per ton decreased 13% ($6 million) due primarily to lower fuel costs.
Real Estate Segment.
Quarter Ended June 30, 2009 Quarter Ended June 30, 2008
Acres Revenues Revenue Acres Revenues Revenue
Property Sold (millions) per Acre Sold (millions) per Acre
Small Non-Strategic 9,840 $ 9 $ 900 13,215 $ 17 $ 1,285
Conservation 3,895 7 1,705 595 1 1,555
Higher and Better Use / Recreational 10,955 24 2,200 11,785 32 2,740
Development Properties 25 - 13,650 700 7 9,630
Subtotal 24,715 40 26,295 57
Large Non-Strategic 59,160 38 650 - - -
Total 83,875 $ 78 26,295 $ 57
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Revenues increased by $21 million, or 37%, to $78 million in 2009. This increase is due primarily to revenue of $38 million from selling 59,160 large, non-strategic acres in Wisconsin and increased revenues from the sale of conservation properties ($6 million), offset in part by decreased revenue from development properties ($7 million), lower prices from higher and better use / recreational properties ($6 million), decrease in the number of acres of small non-strategic properties sold ($4 million), and lower prices from small non-strategic properties ($4 million).
From time to time, we may dispose of larger blocks of other timberlands to maximize value. Excluding the large non-strategic acres in Wisconsin, real estate revenues during the second quarter of 2009 decreased compared to the second quarter of 2008 due primarily to a decrease in the demand for rural real estate. The demand for rural real estate fell due to the decline in consumer discretionary capital (e.g., declining home values and stock market losses), declining consumer confidence and the inability of buyers to secure lending sources. Our average sales price per acre for higher and better use / recreational lands decreased approximately 20% compared to the second quarter of 2008 due primarily to selling more lower valued recreational properties. In the latter part of 2008, we changed our focus to listing for sale more of our lower valued recreational properties as demand and price for properties with a higher value per acre significantly weakened due to the recession. Our average sales price per acre for small non-strategic properties declined approximately 30% compared to the second quarter of 2008 due primarily to selling a mix of less valuable timberlands during 2009. During 2008, we sold a greater percentage of properties from higher value regions. Our remaining small non-strategic acres do not have as great of a percentage of high value properties as our sales mix in prior periods. Conservation sales vary significantly from period to period and are primarily impacted by government and not-for-profit funding, the limited number of conservation buyers, and the timing of our transactions.
Real Estate Segment operating income was 56% of its second quarter revenues for 2009 compared to 61% for 2008. Real Estate Segment costs and expenses increased by $12 million to $34 million in the second quarter of 2009 due primarily to the large, non-strategic land sale during 2009 ($16 million).
Manufactured Products Segment. Key operating statistics for the segment are as follows:
Quarter Ended June 30, 2009 Quarter Ended June 30, 2008
Sales Volume Sales Realization Sales Volume Sales Realization
Lumber 60,371 MBF $ 340 83,477 MBF $ 367
Plywood 40,729 MSF $ 353 68,616 MSF $ 404
Fiberboard 32,802 MSF $ 593 63,205 MSF $ 600
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Revenues decreased by $55 million, or 46%, to $66 million in the second quarter of 2009 compared to the second quarter of 2008. This decrease was due primarily to lower MDF sales volume ($18 million), lower plywood sales volume ($11 million), lower lumber sales volume ($7 million), lower lumber prices ($3 million) and lower plywood prices ($2 million). Additionally, freight charges (which is a component of both Revenues and Cost of Goods Sold) decreased by $6 million compared to the prior period due to significantly lower sales volume.
MDF sales volume decreased by 48% in the second quarter of 2009 compared to the second quarter of 2008. MDF demand has weakened considerably and is expected to remain weak until the housing market recovers. The weaker demand was due primarily to the significant decline in housing starts and increased competition from foreign MDF manufacturers due to favorable exchange rates.
Plywood sales volume was 41% lower during the second quarter of 2009 due primarily to weakness in specialty markets, such as recreational vehicle, transportation and concrete forming applications. The decline in these markets is due primarily to weak economic conditions in the U.S. Plywood sales prices were 13% lower during the second quarter of 2009.
Lumber sales volume declined 28% during the second quarter of 2009 due primarily to the weak demand for lumber as a result of declining housing starts. Housing starts for all of 2008 were 905,000 homes compared to average annual starts of 1.7 million earlier in the decade. Housing starts for 2009 are now forecasted to be approximately 550,000. As a result of the weak outlook for housing starts, we have permanently closed two lumber mills during 2009 and have curtailed production at our other lumber mills.
The Manufactured Products Segment operated at essentially break-even for the second quarter of 2009 compared to an $11 million operating loss for the second quarter of 2008. This increase in operating performance was due primarily to a $10 million lumber assets impairment charge we recorded in the second quarter of 2008. See Note 6 of the Notes to Consolidated Financial Statements. Manufactured Products Segment costs and expenses decreased by $66 million, or 50%, to $66 million for the second quarter of 2009. This decrease was due primarily to lower lumber, plywood and MDF sales volume and by the lumber assets impairment charge recorded during the second quarter of 2008.
Other Costs and Eliminations. Other costs and eliminations (which consists of corporate overhead and intercompany profit elimination) decreased operating income by $11 million during the second quarter of 2009 and by $16 million during the second quarter of 2008. The decrease of $5 million was due primarily to lower share-based compensation expense ($3 million), reduced depreciation on information technology assets ($1 million) and higher legal and other advisory costs incurred in the second quarter of 2008 related to the Timberland Venture ($1 million) transaction in 2008.
The decrease in share-based compensation expense is due to a decrease in the fair value of our value management plan awards in the second quarter of 2009. We adjust the fair value of our liability associated with our value management plan quarterly based on our relative total shareholder return compared to the performance of several peer groups.
Equity Earnings from Timberland Venture. On October 1, 2008, we contributed 454,000 acres of timberlands to Southern Diversified Timber, LLC ("SDT") in exchange for a common and preferred interest. Both interests are accounted for under the equity method of accounting. During the second quarter of 2009, we recorded our share of equity earnings from SDT of $14 million, which includes amortization ($2 million increase in equity earnings) of the difference between the book value of the company's investment and its proportionate share of SDT's net assets.
Interest Expense, net (Debt Obligations to Unrelated Parties). Interest expense, net of interest income, for debt obligations to unrelated parties decreased $11 million, or 32%, to $23 million in the second quarter of 2009. This decrease was due primarily to lower borrowings outstanding compared to the second quarter of 2008 ($6 million) and lower interest rates on our variable rate debt ($5 million). During the fourth quarter of 2008, we paid down approximately $420 million of debt, consisting of $219 million of debt principal payments and a $201 million reduction of outstanding borrowings on our line of credit. During the first six months of 2009, we paid down approximately $163 million of debt, consisting of $138 million of debt principal payments ($33 million during the second quarter of 2009) and a $25 million reduction of outstanding borrowings on our line of credit ($5 million during the second quarter of 2009).
Interest Expense (Note Payable to Timberland Venture). On October 1, 2008, we borrowed $783 million from SDT (a related party) for a ten-year term at a fixed annual interest rate of 7.375%. During the second quarter of 2009, we recorded $15 million of interest expense related to the note.
Benefit for Income Taxes. The benefit for income taxes was $3 million for the second quarter of 2009 compared to a benefit for income taxes of $8 million for the second quarter of 2008. The decrease in the tax benefit of $5 million is due primarily to higher losses in our manufacturing business (resulting in a tax benefit of $5 million) in the prior period. In the second quarter of 2008, the losses were higher in our manufacturing business primarily as a result of a $10 million lumber assets impairment charge during the quarter. See Note 6 of the Notes to Consolidated Financial Statements.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
The following tables and narrative compare operating results by segment for the
six months ended June 30 (in millions):
Six Months Ended June 30,
2009 2008 Change
Operating Income (Loss) by Segment
Northern Resources $ (5 ) $ 21 $ (26 )
Southern Resources 43 74 (31 )
Real Estate 214 68 146
Manufactured Products (22 ) (20 ) (2 )
Other 9 10 (1 )
Total Segment Operating Income 239 153 86
Other Costs and Eliminations (27 ) (30 ) 3
Other Operating Income (Expense), net - 3 (3 )
Operating Income $ 212 $ 126 $ 86
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Northern Resources Segment. Key operating statistics for the segment are as follows:
Six Months Ended June 30, 2009 Six Months Ended June 30, 2008
Harvest Tons Average Sales Harvest Tons Average Sales
(millions) Realization (millions) Realization
Sawlog ($/Ton Delivered) 0.896 $ 54 1.717 $ 67
Pulpwood ($/Ton Delivered) 1.010 $ 41 1.242 $ 41
Total 1.906 2.959
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Revenues decreased by $76 million, or 45%, to $92 million in the first six . . .
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