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PCL > SEC Filings for PCL > Form 10-Q on 5-Aug-2014All Recent SEC Filings

Show all filings for PLUM CREEK TIMBER CO INC

Form 10-Q for PLUM CREEK TIMBER CO INC


5-Aug-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

Second Quarter 2014 Compared to Second Quarter 2013

The following table compares Operating Income (Loss) by Segment and other items
impacting our net income for the quarters ended June 30 (in millions):
                                                     Quarter Ended June 30,
                                                      2014             2013        Change
Operating Income (Loss) by Segment
Northern Resources                                $       5         $       8     $   (3 )
Southern Resources                                       33                23         10
Real Estate                                              45                30         15
Manufacturing                                            10                14         (4 )
Energy and Natural Resources                              6                 4          2
Other                                                    (3 )               -         (3 )
Total Segment Operating Income                           96                79         17
Other Costs and Eliminations                            (17 )             (18 )        1
Other Unallocated Operating Income (Expense), net         1                 1          -
Equity Earnings from Timberland Venture                  17                17          -
Total Interest Expense, net                             (42 )             (35 )       (7 )
Provision (Benefit) for Income Taxes                      -                (2 )        2
Net Income                                        $      55         $      46     $    9


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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 June 30, 2014             Quarter Ended June 30, 2013
                                       Harvest Tons        Average Sales       Harvest Tons        Average Sales
                                        (millions)          Realization         (millions)          Realization
Sawlog ($/Ton Delivered)                       0.499     $            83               0.581     $            79
Pulpwood ($/Ton Delivered)                     0.248     $            41               0.209     $            42
Total                                          0.747                                   0.790

Revenues decreased by $3 million, or 6%, to $50 million in the second quarter of 2014 compared to the second quarter of 2013. Excluding the acquired MWV timberlands, revenues decreased by $7 million, or 13%, to $46 million. The decrease was due primarily to lower sawlog harvest volumes ($9 million), partially offset by higher sawlog prices ($2 million).

Sawlog harvest volumes decreased 14% in the second quarter of 2014 compared to the second quarter of 2013. Excluding the MWV timberlands, sawlog harvest volumes decreased 19% in the second quarter of 2014 compared to the second quarter of 2013 due primarily to recent land sales and harvest schedule and timber inventory updates. Pulpwood harvest volumes increased 19% in the second quarter of 2014 compared to the second quarter of 2013. Excluding the MWV timberlands, pulpwood harvest volumes decreased 6% in the second quarter of 2014 compared to the second quarter of 2013.

Sawlog prices increased 5% in the second quarter of 2014 compared to the second quarter of 2013. Sawlog prices increased due primarily to improving demand and limited supply. The demand for sawlogs has improved due primarily to improving U.S. housing starts and increased exports of logs and lumber (primarily to China). Housing starts during the first six months of 2014 increased 6% compared to the first six months of 2013. The supply of sawlogs in our Northern Segment remains limited.

Excluding the MWV timberlands, Northern Resources Segment operating income was 9% of its revenues for the second quarter of 2014 compared to 15% of its revenues for the second quarter of 2013. The decrease in operating performance was due primarily to lower sawlog harvest levels. Segment costs and expenses were $45 million for both the second quarter of 2014 and the second quarter of 2013. Excluding the MWV timberlands, segment costs and expenses decreased by $4 million, or 9%, to $42 million due primarily to lower sawlog harvest volumes, partially offset by higher log and haul rates. Log and haul rates per ton increased 5% ($1 million) due primarily to salvage logging on our Montana and Oregon timberlands that were impacted by fires in 2013.

For 2014, we still expect sawlog harvest volumes to decrease by approximately 10% compared to the 2.5 million tons we harvested in 2013. Excluding the MWV timberlands, we expect sawlog harvest volume to decrease by approximately 15% compared to tons harvested in 2013. We expect pulpwood harvest volumes to increase by approximately 15% compared to the 1.4 million tons we harvested in 2013. Excluding MWV timberlands, we expect pulpwood harvest volume to be comparable to tons harvested in 2013.

Southern Resources Segment. In December 2013, we acquired approximately 501,000 acres of timberland from 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 June 30, 2014             Quarter Ended June 30, 2013
                                       Harvest Tons        Average Sales       Harvest Tons        Average Sales
                                        (millions)          Realization         (millions)          Realization
Sawlog ($/Ton Stumpage)                        1.619     $            22               1.276     $            21
Pulpwood ($/Ton Stumpage)                      2.159     $            12               1.688     $            11
Total                                          3.778                                   2.964

Revenues increased by $29 million, or 30%, to $127 million in the second quarter of 2014 compared to the second quarter of 2013. Excluding the acquired MWV timberlands, revenues increased by $8 million, or 8% to $106 million. This increase was due primarily to higher sawlog volumes ($3 million), higher sawlog prices ($2 million), higher pulpwood volumes ($2 million), and higher pulpwood prices ($1 million).


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Sawlog prices increased approximately 3% during the second quarter of 2014 compared to the second quarter of 2013 due primarily to increased log demand resulting from improved U.S. housing starts. Housing starts during the first six months of 2014 increased 6% compared to the first six months of 2013. Sawlog price improvement remained modest as total lumber production in the Southern U.S. was at relatively low levels and, as a result, there continued to be an adequate supply of logs at current demand levels.

Pulpwood prices increased 9% during the second quarter of 2014 compared to the second quarter of 2013. This increase was due primarily to continued 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.

Sawlog harvest volumes increased 27% during the second quarter of 2014 compared to the second quarter of 2013 and pulpwood harvest volumes increased 28% compared to the same period in the prior year. Excluding the MWV timberlands, sawlog harvest volumes increased 8% and pulpwood harvest volumes increased 6%. These increases are due primarily to harvest deferrals during the first half of 2013 to later in the year in anticipation of improving log prices.

Excluding the MWV timberlands, Southern Resources Segment operating income was 26% of its revenues for the second quarter of 2014 compared to 23% of its revenues for the second quarter of 2013. The improved operating performance was due primarily to higher sawlog and pulpwood prices. Segment costs and expenses increased by $19 million, or 25%, to $94 million for the second quarter of 2014 due primarily to higher harvest volumes ($15 million) and, to a lesser extent, increased forest management expenses ($2 million) and higher depletion rates ($1 million) related to the MWV timberlands. Excluding the MWV timberlands, segment costs and expenses increased by $4 million, or 5%, to $79 million due primarily to increased harvest volumes.

For 2014, we expect sawlog harvest volumes to increase by approximately 15% compared to the 5.9 million tons we harvested in 2013. Excluding the MWV timberlands, we expect sawlog harvest volume to be flat compared to tons harvested in 2013. We expect pulpwood harvest volumes to increase by approximately 30% compared to the 7.6 million tons we harvested in 2013. Excluding MWV timberlands, we expect pulpwood harvest volume to increase by approximately 5% compared to tons harvested in 2013.

Real Estate Segment.
                                Quarter Ended June 30, 2014                    Quarter Ended June 30, 2013
                           Acres          Revenues        Revenue         Acres          Revenues        Revenue
Property                   Sold          (millions)       per Acre         Sold         (millions)       per Acre
Small Non-Strategic         23,640     $         19     $      790         17,130     $         20     $    1,185
Large Non-Strategic              -                -              -              -                -              -
Conservation                11,875                8            635         17,525               14            835
Higher and Better Use
/ Recreational              31,530               46          1,485          9,825               19          1,925
Conservation Easements         n/a                4            300            n/a                -              -
Total                       67,045     $         77                        44,480     $         53

Revenues increased by $24 million, or 45%, to $77 million in the second quarter of 2014 compared to the second quarter of 2013. This increase was due primarily to selling approximately 49,400 acres in Wisconsin during the second quarter of 2014 for $45.3 million. The transaction consisted of the following collection of properties: approximately 22,400 acres of higher and better use / recreational property with an estimated value of $28.7 million; approximately 17,000 acres of small non-strategic property with an estimated value of $11.6 million; and approximately 10,000 acres of conservation property with an estimated value of $5 million.

Revenues from our higher and better use / recreational land sales increased due primarily to our second quarter of 2014 Wisconsin sale. Additionally, average per acre selling prices of higher and better use / recreational properties decreased by 23% during the second quarter of 2014 compared to the same period in the prior year due primarily to selling a significant number of acres in Wisconsin which generally has lower land values than other regions of the country. Correspondingly, the average per acre selling price for the second quarter of 2014 excluding the Wisconsin sale would have been similar to the revenue per acre we have realized in recent quarters.


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Revenues from the sale of conservation properties consisted of large parcels in both the second quarter of 2014 and 2013. During the second quarter of 2014 we sold approximately 10,000 acres in Wisconsin and during the second quarter of 2013 we sold approximately 12,000 acres in Maine. 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.

During the second quarter of 2014 the company sold a conservation easement in New Hampshire for $4 million. No easement sales occurred during the second quarter of 2013.

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). Also, in any period the average sales price per acre will vary based on the location and physical characteristics of the parcels sold.

Real Estate Segment operating income was 58% of its second quarter revenues for 2014 compared to 57% for 2013. Real Estate Segment costs and expenses increased by $9 million to $32 million in the second quarter of 2014 due primarily to selling more acres during 2014.

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

                                        Quarter Ended June 30, 2014          Quarter Ended June 30, 2013
                                       Sales          Average Sales                         Average Sales
                                       Volume        Realization (A)     Sales Volume      Realization (A)
Lumber                               39,697 MBF    $             594       36,770 MBF    $             544
Plywood                              37,620 MSF    $             468       48,364 MSF    $             464
MDF                                  54,831 MSF    $             675       60,273 MSF    $             668

(A) Represents product prices at the mill level.

Revenues decreased by $5 million, or 5%, to $94 million in the second quarter of 2014 compared to the second quarter of 2013. This decrease in revenues was due primarily to lower plywood sales volumes ($5 million) and lower MDF sales volumes ($4 million), partially offset by higher lumber prices ($3 million) and higher lumber sales volume ($1 million).

Plywood sales volume was 22% lower during the second quarter of 2014 compared to the second quarter of 2013 due primarily to a shortage of logs. During the first quarter of 2014, we experienced severe winter weather which prevented us from building adequate log inventories to support normal production levels during the second quarter of 2014. As a result, plywood sales volume for all of 2014 is expected to decline by approximately 10% compared to the sales volume of 187,000 MSF for all of 2013 due primarily to limited log availability.

MDF sales volume was 9% lower during the second quarter of 2014 compared to the second quarter of 2013 due primarily to a fire at our MDF facility. The fire, which occurred on June 10, 2014, temporarily suspended production at the facility. While production resumed in July, we expect MDF sales volume for all of 2014 to decline by approximately 6% compared to the sales volume of 214,000 MSF for all of 2013 as a result of the fire.

During the second quarter of 2014, we recorded a $2 million loss representing the net book value of the building and equipment damaged or destroyed by the MDF fire. We also recorded a $4 million gain related to partial insurance recoveries we expect to receive. The amount of insurance recoveries was based on the costs incurred during the second quarter to rebuild or replace the damaged building and equipment. Substantially all of these costs were capitalized during the second quarter of 2014. Both the building and equipment loss and the insurance recoveries are reported as Other Operating Gain in the Manufacturing Segment and are included in Other Operating Income (Expense), net in the Consolidated Statements of Income. See Note 11 of the Notes to Consolidated Financial Statements.

Lumber average prices increased 9% during the second quarter of 2014 compared to the second quarter of 2013 due primarily to a limited supply of boards. The supply of boards has been limited, in part, as many lumber manufacturers switched to producing


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dimension lumber instead of boards due to improved demand for dimension lumber. Lumber sales volume was 8% higher during the second quarter of 2014 compared to the second quarter of 2013 due primarily to resuming operations at our Evergreen, Montana (stud lumber) sawmill in April 2013.

Manufacturing Segment operating income was 11% of its revenues for the second quarter of 2014 compared to 14% of its revenues for the second quarter of 2013. This decrease in operating performance was due primarily to lower plywood and MDF sales volumes and higher raw material costs, partially offset by insurance recovery gains. Manufacturing Segment costs and expenses increased by $1 million, or 1%, to $86 million. The increase in costs and expenses was due primarily to increased lumber sales volumes and higher plywood and lumber raw material costs, offset, in part, by lower plywood and MDF sales volumes. Plywood and lumber raw material costs on a per unit basis increased by approximately $5 million during the second quarter of 2014 due primarily to a regional log shortage.

Energy and Natural Resources Segment. Revenues increased by $4 million, or 80%, to $9 million during the second 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 MWV acquisition ($2 million).

Operating income was $6 million during the second quarter of 2014 compared to $4 million during the prior year quarter. Costs and expenses increased by $2 million to $3 million during the second quarter of 2014 due primarily to higher depletion expense associated with our newly acquired mineral rights, coal and wind assets.

Other Segment. Beginning in 2014, in connection with the new business of providing timber and wood-fiber procurement services, we began reporting in our Other Segment business activities associated with the harvesting and selling of trees from timberlands that are not owned by the company. Additionally, we report in the Other Segment the equity earnings (losses) associated with our recently acquired investment in MWV-Charleston Land Partners, LLC ("MWV-CLP"). See Note 12 of the Notes to Consolidated Financial Statements. For the second quarter of 2014, the Other Segment reported a loss of $3 million that is due primarily to recording our share of equity loss from our investment in MWV-CLP.

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

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), paid down $225 million of our term credit agreement 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 $7 million, or 20%, to $42 million in the second 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 ($2 million).

Provision (Benefit) for Income Taxes. The provision for income taxes was essentially $0 for the second quarter of 2014 compared to a benefit for income taxes of $2 million for the second quarter of 2013. This $2 million increase in expense for income taxes was due primarily to higher earnings from real estate sales by our taxable REIT subsidiaries, which increased tax expense by $4 million, offset in part by lower earnings from our manufacturing businesses, which decreased tax expense by $2 million.


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Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

The following table compares Operating Income (Loss) by Segment and other items
impacting our net income for the six months ended June 30 (in millions):
                                                       Six Months Ended June 30,
                                                        2014                2013           Change
Operating Income (Loss) by Segment
Northern Resources                                $         21         $         19     $        2
Southern Resources                                          64                   47             17
Real Estate                                                 57                   75            (18 )
Manufacturing                                               19                   24             (5 )
Energy and Natural Resources                                12                    9              3
Other                                                       (4 )                  -             (4 )
Total Segment Operating Income                             169                  174             (5 )
Other Costs and Eliminations                               (35 )                (35 )            -
. . .
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