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PCL > SEC Filings for PCL > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for PLUM CREEK TIMBER CO INC

Form 10-Q for PLUM CREEK TIMBER CO INC


7-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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, 2013. 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 Plum Creek and its management will not be realized. Forward-looking statements speak only as of the date made, and neither Plum Creek 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 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2014.


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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" or "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 $2.6 billion principal amount of debt, including $1.3 billion of publicly issued notes. PC Ventures has borrowed and has currently outstanding $783 million in principal amount of debt ("the Note Payable to Timberland Venture") from an entity ("the Timberland Venture") in which a subsidiary of the Operating Partnership has a common and preferred equity interest. See Note 12 of the Notes to Consolidated Financial Statements. PC Ventures used the proceeds from the borrowing to make a $783 million capital contribution to the Operating Partnership in exchange for a preferred equity interest in the Operating Partnership. PC Ventures has no other activities and the Operating Partnership has no ownership interest in PC Ventures.

The Note Payable to Timberland Venture is an obligation of PC Ventures and not an obligation of the Operating Partnership. Therefore, any discussion of the Note Payable to Timberland Venture below is not applicable to the Operating Partnership. Unless otherwise specified, all other discussion and analysis below are applicable to both Plum Creek and the Operating Partnership.

Results of Operations

First Quarter 2014 Compared to First Quarter 2013

The following table compares Operating Income (Loss) by Segment and other items
impacting our net income for the quarters ended March 31 (in millions):
                                                         Quarter Ended March 31,
                                                         2014               2013           Change
Operating Income by Segment
Northern Resources                                  $        16         $        11     $        5
Southern Resources                                           31                  24              7
Real Estate                                                  12                  45            (33 )
Manufacturing                                                 9                  10             (1 )
Energy and Natural Resources                                  6                   5              1
Other                                                        (1 )                 -             (1 )
Total Segment Operating Income                               73                  95            (22 )
Other Costs and Eliminations                                (18 )               (17 )           (1 )
Other Unallocated Operating Income (Expense), net             1                   -              1
Equity Earnings from Timberland Venture                      15                  14              1
Total Interest Expense, net                                 (41 )               (35 )           (6 )
Provision (Benefit) for Income Taxes                          -                   1             (1 )
Net Income                                          $        30         $        56     $      (26 )


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Northern Resources Segment. In December 2013, we acquired approximately 501,000 acres of timberland from MeadWestvaco Corporation ("MWV"). Of the MWV timberlands acquired, approximately 147,000 acres are included in the Northern Resources Segment.

Key operating statistics for the segment are as follows:

                                        Quarter Ended March 31, 2014          Quarter Ended March 31, 2013
                                      Harvest Tons       Average Sales      Harvest Tons       Average Sales
                                       (millions)         Realization        (millions)         Realization
Sawlog ($/Ton Delivered)                 0.667         $            86         0.704         $            77
Pulpwood ($/Ton Delivered)               0.470         $            43         0.414         $            43
Total                                    1.137                                 1.118

Revenues increased by $3 million, or 4%, to $77 million in the first quarter of 2014 compared to the first quarter of 2013. Excluding the acquired MWV timberlands, revenues increased by $1 million, or 2% to $75 million. The increase was due primarily to higher sawlog prices ($5 million), but almost completely offset by lower sawlog volumes ($4 million).

Sawlog prices increased 11% in the first quarter of 2014 compared to the first quarter of 2013 and achieved a record high average sales realization. Sawlog prices, which were highest at the beginning of the quarter, increased due primarily to strong demand and limited supply. The demand for sawlogs on the West coast remains strong as lumber mills have maintained steady production levels compared to the first quarter of 2013 and the demand for export logs and lumber products, primarily to China, remains at historically high levels. The supply of West coast logs during the first quarter of 2014 was limited due to winter weather, which constrained harvesting activities.

Sawlog harvest volumes decreased 5% in the first quarter of 2014 compared to the first quarter of 2013. Excluding the MWV timberlands, sawlog harvest volumes decreased 8% in the first quarter of 2014 compared to the first quarter of 2013 due primarily to recent land sales and harvest schedule and timber inventory updates. Pulpwood harvest volumes increased 13% in the first quarter of 2014 compared to the first quarter of 2013. Excluding the MWV timberlands, pulpwood harvest volumes increased 6% in the first quarter of 2014 compared to the first quarter of 2013.

Excluding the MWV timberlands, Northern Resources Segment operating income was 21% of its revenues for the first quarter of 2014 compared to 15% of its revenues for the first quarter of 2013. The increase in operating performance was due primarily to higher sawlog prices. Segment costs and expenses decreased by $2 million, or 3%, to $61 million for the first quarter of 2014. Excluding the MWV timberlands, segment costs and expenses decreased by $4 million, or 5%, to $59 million due primarily to lower sawlog harvest volumes.

Southern Resources Segment. In December 2013, we acquired approximately 501,000 acres of timberland from MeadWestvaco Corporation ("MWV"). Of the MWV timberlands acquired, approximately 354,000 acres are included in the Southern Resources Segment.

Key operating statistics for the segment are as follows:

                                        Quarter Ended March 31, 2014          Quarter Ended March 31, 2013
                                      Harvest Tons       Average Sales      Harvest Tons       Average Sales
                                       (millions)         Realization        (millions)         Realization
Sawlog ($/Ton Stumpage)                  1.550         $            22         1.339         $            21
Pulpwood ($/Ton Stumpage)                2.054         $            12         1.771         $            11
Total                                    3.604                                 3.110

Revenues increased by $19 million, or 18%, to $123 million in the first quarter of 2014 compared to the first quarter of 2013. Excluding the acquired MWV timberlands, revenues increased by $2 million, or 2% to $106 million. This increase was due primarily to higher sawlog prices ($2 million) and higher pulpwood prices ($1 million).

Sawlog prices increased approximately 8% during the first quarter of 2014 compared to the first quarter of 2013 due primarily to increased log demand in anticipation of improving U.S. housing starts. However, sawlog price improvement remained modest as total lumber production in the Southern U.S. remained at relatively low levels and, as a result, there continued to be an adequate supply of logs at current demand levels in normal operating conditions. Excluding the MWV timberlands, sawlog harvest volumes


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increased 3% during the first quarter of 2014 compared to the first quarter of 2013. We experienced weather-related harvesting restrictions in most geographic areas of the Segment and harvested less sawlog volume than planned during the first quarter of 2014. For our full year 2014 sawlog harvest volume, we still expect an increase of approximately 25% (including MWV timberlands) compared to the 5.9 million tons we harvested in 2013.

Pulpwood prices increased 7% during the first quarter of 2014 compared to the first quarter of 2013. This increase was due primarily to good demand from our paper and packaging customers and increased fiber demand from competing uses, such as Oriented Strand Board and the export of wood pellets used to produce bioenergy. Excluding the MWV timberlands, pulpwood harvest volumes decreased approximately 3% during the first quarter of 2014 compared to the first quarter of 2013.

Excluding the MWV timberlands, Southern Resources Segment operating income was 26% of its revenues for the first quarter of 2014 compared to 23% of its revenues for the first quarter of 2013. The improved operating performance was due primarily to higher sawlog and pulpwood prices. Segment costs and expenses increased by $12 million, or 15%, to $92 million. Excluding the MWV timberlands, segment costs and expenses decreased by $1 million, or 2%, to $79 million.

Real Estate Segment.
                               Quarter Ended March 31, 2014                   Quarter Ended March 31, 2013
                          Acres          Revenues        Revenue         Acres          Revenues        Revenue
Property                   Sold         (millions)       per Acre         Sold         (millions)       per Acre
Small Non-Strategic         3,035     $          4     $    1,325          5,685     $          7     $    1,230
Large Non-Strategic             -                -              -         36,000               53          1,475
Conservation                3,415                6          1,685            970                3          2,580
Higher and Better Use
/ Recreational              4,125                9          2,200          7,595               15          2,015
Conservation Easements        n/a                4            340            n/a                -              -
Total                      10,575     $         23                        50,250     $         78

Revenues decreased by $55 million, or 71%, to $23 million in the first quarter of 2014. This decrease was due primarily to a decrease in large non-strategic land sales ($53 million) and a reduction of sales activity for our other properties due to unusual winter weather throughout most of the U.S. during the first quarter of 2014.

Revenue from the sale of large non-strategic timberlands was $53 million during the first quarter of 2013 compared with no sales during the first quarter of 2014. Large non-strategic sales are expected to provide a smaller percentage of our real estate revenues during 2014 compared to 2013.

Revenues from our higher and better use/ recreational land sales decreased by $6 million, or 40%, to $9 million during the first quarter of 2014. The decrease in sales was due primarily to a harsh and extended winter which reduced the number of individuals evaluating our properties during the first quarter of 2014. We believe the weather impact on sales to be temporary and expect sales activity to increase throughout the remainder of the year. The demand for some of our higher and better use properties has modestly improved due to stronger consumer sentiment and improvement in the U.S. economy. However, the demand for our premium higher and better use / recreational properties remains soft.

The timing of real estate sales is a function of many factors, including the general state of the economy, demand in local real estate markets, the ability to obtain entitlements, the ability of buyers to obtain financing, the number of competing properties listed for sale, the seasonal nature of sales (particularly in the northern states), the plans of adjacent landowners, our expectation of future price appreciation, the timing of harvesting activities, and the availability of government and not-for-profit funding (especially for conservation sales). In any period the average sales price per acre will vary based on the location and physical characteristics of the parcels sold. Also, 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. Additionally, the price per acre for conservation properties can vary significantly due to the geographic location and the rationale for the conservation designation.

We expect revenues from real estate sales during 2014 to range between $240 million and $280 million.


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Real Estate Segment operating income as a percent of revenue was 52% for the first quarter of 2014 and 58% for the first quarter of 2013. Real Estate Segment costs and expenses decreased by $22 million to $11 million in the first quarter of 2014 due primarily to selling fewer acres as a result of not selling large non-strategic properties in 2014.

Manufacturing Segment. Key operating statistics for the segment are as follows:

                                       Quarter Ended March 31, 2014         Quarter Ended March 31, 2013
                                       Sales          Average Sales                         Average Sales
                                       Volume        Realization (A)     Sales Volume      Realization (A)
Lumber                               37,703 MBF    $             573       30,535 MBF    $             568
Plywood                              39,188 MSF    $             451       46,905 MSF    $             462
MDF                                  50,681 MSF    $             678       52,329 MSF    $             639

(A) Represents product prices at the mill level.

Revenues increased by $4 million, or 5%, to $90 million in the first quarter of 2014 compared to the first quarter of 2013. This increase in revenues was due primarily to higher lumber sales volume ($3 million), higher lumber prices ($2 million) and higher MDF prices ($2 million), partially offset by lower plywood sales volumes ($3 million).

Lumber sales volume was 24% higher during the first quarter of 2014 compared to the first quarter of 2013 due primarily to resuming operations at our Evergreen, Montana sawmill in April 2013. Our average lumber realizations were flat due to the lower-valued stud lumber produced by the re-opened Evergreen sawmill. However, sales realizations from our board sawmill (which produces higher-value products) increased 15% during the first quarter of 2014 compared to the first quarter of 2013 due primarily to limited supply. The supply of boards has been limited, in part, as many lumber manufacturers switched to producing dimension lumber instead of boards due to improved demand for dimension lumber last year.

MDF average prices were 6% higher during the first quarter of 2014 compared to the first quarter of 2013 due primarily to a supply and demand imbalance. MDF demand has remained steady in many of our specialty markets for products, such as cabinet components, molding and architectural doors. MDF supply in North America continues to be impacted by lower import volumes and the closure of several high-cost domestic mills. Our MDF sales volume was negatively impacted during the first quarter of 2014 by severe winter weather and rail transportation issues.

Plywood sales volume was 17% lower during the first quarter of 2014 compared to the first quarter of 2013 due primarily to low log availability as a result of severe winter weather throughout most of the first quarter which constrained harvesting activities. Plywood sales volume for all of 2014 is expected to decline by approximately 12% compared to the sales volume of 187,000 MBF for all of 2013 due primarily to the weather-related harvesting restrictions.

Manufactured Products Segment operating income was 10% of its revenues for the first quarter of 2014 compared to 12% of its revenues for the first quarter of 2013. This decrease in operating performance was due primarily to higher raw material costs and lower plywood sales volumes. Manufactured Products Segment costs and expenses increased by $5 million, or 7%, to $81 million due primarily to increased lumber sales volumes and higher plywood raw material costs as a result of the declining supply of plywood logs in the region.

Energy and Natural Resources Segment. Revenues increased by $3 million, or 50%, to $9 million during the first quarter of 2014. This increase is due primarily to royalties from our recent acquisition of mineral rights in approximately 255 million tons of aggregate reserves in September 2013 ($2 million) and royalties from recently acquired coal and wind assets in the MeadWestvaco acquisition ($1 million).

Operating income was $6 million during the first quarter of 2014 compared to $5 million during the prior year quarter. Costs and expenses increased by $2 million due primarily to higher depletion expense associated with our newly acquired mineral rights, coal and wind assets.

Other Costs and Eliminations. Other costs and eliminations (which consists of corporate overhead and intercompany profit elimination) decreased operating income by $18 million during the first quarter of 2014 and decreased operating income by $17 million during the first quarter of 2013.


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Selling, General and Administrative Expenses. Corporate overhead costs along with Segment specific selling, general and administrative costs are reported in total on our Consolidated Statements of Income and decreased operating income by $29 million during the first quarter of 2014 and by $32 million in the first quarter of 2013. This decrease in expense of $3 million was due primarily to lower share-based compensation costs. The decrease in share-based compensation expense is due primarily to fair value adjustments associated with our value management plan. We adjust the fair value of our liability quarterly based on our relative total shareholder return compared to the performance of several peer groups.

Interest Expense, net. On December 6, 2013, we issued an $860 million installment note to MWV Community Development and Land Management, LLC ("MWV CDLM") in connection with the acquisition of certain timberland assets. Our effective net interest rate on this note is approximately 4.5%. Also during 2013, we paid off our remaining Private Debt ($260 million) and made pre-payments of approximately $24 million of principal on our Public Debt.

As a result of the above transactions, interest expense, net of interest income, increased $6 million, or 17%, to $41 million in the first quarter of 2014. This increase was due primarily to interest expense on our $860 million installment note payable ($9 million), offset by a reduction in interest expense as a result of the debt repayments in 2013 ($3 million).

Provision (Benefit) for Income Taxes. The benefit for income taxes was essentially $0 for the first quarter of 2014 compared to expense for income taxes of $1 million for the first quarter of 2013. This $1 million decrease in expense for income taxes was due primarily to lower earnings from our manufacturing businesses during the first quarter of 2014.

At March 31, 2014, we have recorded deferred tax assets of $60 million (net of a $10 million valuation allowance) and deferred tax liabilities of $34 million. Our determination of the realization of deferred tax assets is based upon management's judgment of various future events and uncertainties, including the timing, nature and amount of future taxable income earned by certain wholly-owned subsidiaries. A valuation allowance is recognized if management believes it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. Management believes that due to the reversal of various taxable temporary differences and/or the planned execution of prudent and feasible tax planning strategies, sufficient taxable income can be generated to utilize the company's remaining deferred tax assets of $60 million for which a valuation allowance was determined to be unnecessary.


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Financial Condition and Liquidity

We believe we have a strong balance sheet and do not foresee any near-term liquidity issues. At March 31, 2014, we had a cash balance of $104 million and had availability of $519 million under our line of credit. In addition to the discussion that follows, we have summarized our sources and uses of cash in a table later in this section.

Cash Flow

The following table summarizes total cash flows for operating, investing and
financing activities for the three months ended March 31 (in millions):
                                                        Three Months Ended March 31,
                                                           2014                 2013           Change
Net Cash Provided By (Used In) Operating Activities $           57         $          1     $       56
Net Cash Provided By (Used In) Investing Activities            (20 )                (16 )           (4 )
Net Cash Provided By (Used In) Financing Activities           (366 )                (45 )         (321 )
Change in Cash and Cash Equivalents                 $         (329 )       $        (60 )   $     (269 )

Cash Flows from Operating Activities. Net cash provided by operating activities for the three months ended March 31, 2014 was $57 million compared to $1 million for the three months ended March 31, 2013. The increase of $56 million is due primarily to a positive working capital change ($81 million), higher operating income from our Resources Segments ($12 million), and lower expenditures ($18 million) for the purchase of standing timber (timber deed), partially offset by lower proceeds from real estate sales ($55 million). See Results of Operations for a discussion of factors impacting operating income for our Resources Segments and factors impacting real estate proceeds for our Real Estate Segment.

The positive working capital change was due primarily to the timing of when proceeds from a like-kind exchange are reinvested in replacement property. During the first quarter of 2013, proceeds of $53 million from a large non-strategic real estate sale were placed in a like-kind exchange escrow account. During April 2013, these proceeds were used in connection with a timberland acquisition. There were no like-kind exchange transactions during the first three months of 2014. Furthermore, we had a favorable Interest Payable working capital variance of $13 million during the first quarter of 2014 compared to the first quarter of 2013 due primarily to the timing of interest payments related to the December 6, 2013, issuance of an $860 million installment note to MWV Community Development and Land Management, LLC.

In March 2013, we acquired approximately 0.9 million tons of standing timber under a timber deed that expires in 2020 for $18 million. The volume acquired under a timber deed, along with future growth, is harvested over the term of the deed.

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