XNYS:PCL Plum Creek Timber Co Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-10239
PLUM CREEK TIMBER COMPANY, INC.
(Exact name of registrant as specified in its charter)
 
Organized in the
State of Delaware
 
I.R.S. Employer Identification No.
91-1912863

999 Third Avenue, Suite 4300
Seattle, Washington 98104-4096
Telephone: (206) 467-3600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer  x        Accelerated filer    o        Non-accelerated filer  o        Smaller reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o    No   x

The number of outstanding shares of the registrant’s common stock, as of July 31, 2012 was 161,523,146.


 
 
 
 
 




PLUM CREEK TIMBER COMPANY, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter ended June 30, 2012

TABLE OF CONTENTS
 




PART I – FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

PLUM CREEK TIMBER COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
 
 
Quarter Ended June 30,
(In Millions, Except Per Share Amounts)
 
2012
 
2011
REVENUES:
 
 
 
 
Timber
 
$
157

 
$
126

Real Estate
 
47

 
79

Manufacturing
 
85

 
74

Other
 
5

 
5

Total Revenues
 
294

 
284

 
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
Cost of Goods Sold:
 
 
 
 
Timber
 
123

 
101

Real Estate
 
16

 
27

Manufacturing
 
73

 
67

Other
 
1

 
1

Total Cost of Goods Sold
 
213

 
196

Selling, General and Administrative
 
27

 
25

Total Costs and Expenses
 
240

 
221

 
 
 
 
 
Other Operating Income (Expense), net
 
1

 

 
 
 
 
 
Operating Income
 
55

 
63

 
 
 
 
 
Equity Earnings from Timberland Venture
 
15

 
16

 
 
 
 
 
Interest Expense, net:
 
 
 
 
Interest Expense (Debt Obligations to Unrelated Parties)
 
19

 
20

Interest Expense (Note Payable to Timberland Venture)
 
15

 
15

Total Interest Expense, net
 
34

 
35

 
 
 
 
 
Income before Income Taxes
 
36

 
44

 
 
 
 
 
Provision (Benefit) for Income Taxes
 

 

 
 
 
 
 
Net Income
 
$
36

 
$
44

 
 
 
 
 
PER SHARE AMOUNTS:
 
 
 
 
 
 
 
 
 
Net Income per Share – Basic
 
$
0.22

 
$
0.27

Net Income per Share – Diluted
 
$
0.22

 
$
0.27

 
 
 
 
 
Dividends Declared – per Common Share Outstanding
 
$
0.42

 
$
0.42

 
 
 
 
 
Weighted-Average Number of Shares Outstanding
 
 
 
 
– Basic
 
161.5

 
162.0

– Diluted
 
161.7

 
162.3


See accompanying Notes to Consolidated Financial Statements

3


PLUM CREEK TIMBER COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

 
 
 
 
 
 
 
Six Months Ended June 30,
(In Millions, Except Per Share Amounts)
 
2012
 
2011
REVENUES:
 
 
 
 
Timber
 
$
312

 
$
267

Real Estate
 
147

 
141

Manufacturing
 
161

 
141

Other
 
11

 
10

Total Revenues
 
631

 
559

 
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
Cost of Goods Sold:
 
 
 
 
Timber
 
244

 
208

Real Estate
 
84

 
49

Manufacturing
 
143

 
128

Other
 
1

 
1

Total Cost of Goods Sold
 
472

 
386

Selling, General and Administrative
 
55

 
53

Total Costs and Expenses
 
527

 
439

 
 
 
 
 
Other Operating Income (Expense), net
 
1

 
3

 
 
 
 
 
Operating Income
 
105

 
123

 
 
 
 
 
Equity Earnings from Timberland Venture
 
28

 
30

 
 
 
 
 
Interest Expense, net:
 
 
 
 
Interest Expense (Debt Obligations to Unrelated Parties)
 
40

 
41

Interest Expense (Note Payable to Timberland Venture)
 
29

 
29

Total Interest Expense, net
 
69

 
70

 
 
 
 
 
Income before Income Taxes
 
64

 
83

 
 
 
 
 
Provision (Benefit) for Income Taxes
 
(1
)
 
1

 
 
 
 
 
Net Income
 
$
65

 
$
82

 
 
 
 
 
PER SHARE AMOUNTS:
 
 
 
 
 
 
 
 
 
Net Income per Share – Basic
 
$
0.40

 
$
0.51

Net Income per Share – Diluted
 
$
0.40

 
$
0.50

 
 
 
 
 
Dividends Declared – per Common Share Outstanding
 
$
0.84

 
$
0.84

 
 
 
 
 
Weighted-Average Number of Shares Outstanding
 
 
 
 
– Basic
 
161.4

 
161.9

– Diluted
 
161.7

 
162.2


See accompanying Notes to Consolidated Financial Statements

4


PLUM CREEK TIMBER COMPANY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

 
 
Quarter Ended June 30,
(In Millions)
 
2012
 
2011
NET INCOME
 
$
36

 
$
44

 
 
 
 
 
OTHER COMPREHENSIVE INCOME BEFORE INCOME TAXES:
 
 
 
 
  Defined Benefit Pension Plans:
 
 
 
 
       Amortization of Actuarial Loss Reclassified to Pension Expense
 
1

 

  Unrealized Gains (Losses) on Grantor Trust Assets:
 
 
 
 
       Unrealized Holding Gains (Losses) Arising During Period
 
(1
)
 
1

 
 
 
 
 
Other Comprehensive Income (Loss) Before Tax
 

 
1

 
 
 
 
 
Income Tax Expense (Benefit) Related to Items of Other Comprehensive Income
 

 

 
 
 
 
 
Other Comprehensive Income (Loss) After Tax
 

 
1

 
 
 
 
 
Comprehensive Income
 
$
36

 
$
45

 
 
 
 
 



 
 
Six Months Ended June 30,
(In Millions)
 
2012
 
2011
NET INCOME
 
$
65

 
$
82

 
 
 
 
 
OTHER COMPREHENSIVE INCOME BEFORE INCOME TAXES:
 
 
 
 
  Defined Benefit Pension Plans:
 
 
 
 
       Amortization of Actuarial Loss Reclassified to Pension Expense
 
2

 

  Unrealized Gains (Losses) on Grantor Trust Assets:
 
 
 
 
       Unrealized Holding Gains (Losses) Arising During Period
 
1

 
2

 
 
 
 
 
Other Comprehensive Income (Loss) Before Tax
 
3

 
2

 
 
 
 
 
Income Tax Expense (Benefit) Related to Items of Other Comprehensive Income
 

 

 
 
 
 
 
Other Comprehensive Income (Loss) After Tax
 
3

 
2

 
 
 
 
 
Comprehensive Income
 
$
68

 
$
84

 
 
 
 
 

See accompanying Notes to Consolidated Financial Statements


5


PLUM CREEK TIMBER COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
(In Millions, Except Per Share Amounts)
 
June 30,
2012
 
December 31,
2011
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and Cash Equivalents
 
$
260

 
$
254

Accounts Receivable
 
36

 
28

Inventories
 
46

 
48

Deferred Tax Asset
 
6

 
6

Assets Held for Sale
 
76

 
103

Other Current Assets
 
15

 
15

 
 
439

 
454

 
 
 
 
 
Timber and Timberlands, net
 
3,431

 
3,377

Property, Plant and Equipment, net
 
131

 
138

Equity Investment in Timberland Venture
 
201

 
201

Deferred Tax Asset
 
18

 
17

Investment in Grantor Trusts (at Fair Value)
 
37

 
36

Other Assets
 
37

 
36

Total Assets
 
$
4,294

 
$
4,259

 
 
 
 
 
LIABILITIES
 
 
 
 
Current Liabilities:
 
 
 
 
Current Portion of Long-Term Debt
 
$
176

 
$
352

Line of Credit
 
451

 
348

Accounts Payable
 
24

 
25

Interest Payable
 
26

 
26

Wages Payable
 
11

 
20

Taxes Payable
 
13

 
9

Deferred Revenue
 
36

 
27

Other Current Liabilities
 
8

 
8

 
 
745

 
815

 
 
 
 
 
Long-Term Debt
 
1,467

 
1,290

Note Payable to Timberland Venture
 
783

 
783

Other Liabilities
 
97

 
108

Total Liabilities
 
3,092

 
2,996

 
 
 
 
 
Commitments and Contingencies
 

 

 
 
 
 
 
STOCKHOLDERS’ EQUITY
 
 
 
 
Preferred Stock, $0.01 Par Value, Authorized Shares – 75.0, Outstanding – None
 

 

Common Stock, $0.01 Par Value, Authorized Shares – 300.6, Outstanding (net of Treasury Stock) – 161.5 at June 30, 2012 and 161.3 at December 31, 2011
 
2

 
2

Additional Paid-In Capital
 
2,269

 
2,261

Retained Earnings (Accumulated Deficit)
 
(99
)
 
(28
)
Treasury Stock, at Cost, Common Shares – 26.9 at June 30, 2012 and 26.9 at December 31, 2011
 
(938
)
 
(937
)
Accumulated Other Comprehensive Income (Loss)
 
(32
)
 
(35
)
Total Stockholders’ Equity
 
1,202

 
1,263

Total Liabilities and Stockholders’ Equity
 
$
4,294

 
$
4,259


See accompanying Notes to Consolidated Financial Statements

6


PLUM CREEK TIMBER COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
 
Six Months Ended June 30,
(In Millions)
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net Income
 
$
65

 
$
82

Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:
 
 
 
 
Depreciation, Depletion and Amortization
 
56

 
44

Basis of Real Estate Sold
 
75

 
43

Equity Earnings from Timberland Venture
 
(28
)
 
(30
)
Distributions from Timberland Venture
 
28

 
28

Deferred Income Taxes
 
(1
)
 
4

Deferred Revenue from Long-Term Gas Leases (Net of Amortization)
 
(5
)
 
12

Timber Deed Acquired
 
(98
)
 

Pension Plan Contributions
 
(7
)
 

Working Capital Changes Impacting Cash Flow:
 
 
 
 
   Like-Kind Exchange Funds
 

 
(35
)
   Other Working Capital Changes
 
(2
)
 
4

Other
 
6

 
5

Net Cash Provided By Operating Activities
 
89

 
157

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Capital Expenditures (Excluding Timberland Acquisitions)
 
(35
)
 
(28
)
Timberlands and Minerals Acquired
 
(13
)
 
(12
)
Other
 
(1
)
 

Net Cash Used In Investing Activities
 
(49
)
 
(40
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Dividends
 
(136
)
 
(136
)
Borrowings on Line of Credit
 
1,129

 
555

Repayments on Line of Credit
 
(1,026
)
 
(494
)
Debt Issuance Costs
 
(3
)
 

Principal Payments and Retirement of Long-Term Debt
 

 
(49
)
Proceeds from Stock Option Exercises
 
3

 
9

Acquisition of Treasury Stock
 
(1
)
 
(1
)
Net Cash Used In Financing Activities
 
(34
)
 
(116
)
 
 
 
 
 
Increase (Decrease) In Cash and Cash Equivalents
 
6

 
1

Cash and Cash Equivalents:
 
 
 
 
Beginning of Period
 
254

 
252

 
 
 
 
 
End of Period
 
$
260

 
$
253


See accompanying Notes to Consolidated Financial Statements


7

PLUM CREEK TIMBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Note 1. Basis of Presentation

General. When we refer to “Plum Creek,” “the company,” “we,” “us,” or “our,” we mean Plum Creek Timber Company, Inc., a Delaware Corporation and a real estate investment trust, or “REIT,” and all of its wholly-owned consolidated subsidiaries.

The consolidated financial statements include all of the accounts of Plum Creek and its subsidiaries. At June 30, 2012, the company owned and managed approximately 6.5 million acres of timberlands in the Northwest, Southern, and Northeast United States, and owned 8 wood product conversion facilities in the Northwest United States (2 of which have been indefinitely curtailed). Included in the 6.5 million acres are about 900,000 acres of higher value timberlands, which are expected to be sold and/or developed over the next fifteen years for recreational, conservation or residential purposes. Included within the 900,000 acres of higher value timberlands are approximately 700,000 acres we expect to sell for recreational uses, approximately 100,000 acres we expect to sell for conservation and approximately 100,000 acres that are identified as having development potential. In addition, the company has approximately 300,000 acres of non-strategic timberlands, which are expected to be sold in smaller acreage transactions over the near and medium term. In the meantime, all of our timberlands continue to be managed productively in our business of growing and selling timber.

Plum Creek has elected to be taxed as a REIT under sections 856-860 of the United States Internal Revenue Code and, as such, generally does not pay corporate-level income tax. However, the company conducts certain non-REIT activities through various taxable REIT subsidiaries, which are subject to corporate-level income tax. These activities include our manufacturing operations, the harvesting and selling of logs, and the development and/or sales of some of our higher value timberlands. Plum Creek’s overall effective tax rate is lower than the federal statutory corporate rate due to Plum Creek’s status as a REIT.

Intercompany transactions and accounts have been eliminated in consolidation. All transactions are denominated in United States dollars.

The consolidated financial statements included in this Form 10-Q are unaudited and do not contain all of the information required by U.S. generally accepted accounting principles to be included in a full set of financial statements. The consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The audited financial statements in the company’s 2011 Annual Report on Form 10-K include a summary of significant accounting policies of the company and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of operations for such periods have been included in this Form 10-Q. All such adjustments are of a normal and recurring nature. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year.

New Accounting Pronouncements

Fair Value Measurements and Disclosures. In 2011, the FASB amended fair value measurement and disclosure requirements. Among other things, the amendments changed certain disclosure requirements for fair value measurements. Upon adoption in the first quarter of 2012, the amendment having the most impact on the company relates to the fair value of debt disclosures. This amendment requires classification of the level within the fair value hierarchy and, for Level 2 and Level 3 measurements, a description of the valuation technique(s) and the inputs used in the fair value measurement, except that quantitative disclosures are not required. The amendments are effective for fiscal years and interim periods within those years, beginning on or after December 15, 2011. The adoption did not have a material impact on the company's financial position, results of operations or cash flows. See Note 8 of the Notes to Consolidated Financial Statements.



8

PLUM CREEK TIMBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 2. Earnings Per Share

The following table sets forth the reconciliation of basic and diluted earnings per share for the quarterly and six-month periods ended June 30 (in millions, except per share amounts):
 
Quarter Ended June 30,
 
2012
 
2011
Net Income Available to Common Stockholders
$
36

 
$
44

Denominator for Basic Earnings per Share
161.5

 
162.0

Effect of Dilutive Securities – Stock Options
0.2

 
0.3

Effect of Dilutive Securities – Restricted Stock, Restricted Stock Units and Value Management Plan

 

Denominator for Diluted Earnings per Share – Adjusted for Dilutive Securities
161.7

 
162.3

Per Share Amounts:
 
 
 
Net Income Per Share – Basic
$
0.22

 
$
0.27

Net Income Per Share – Diluted
$
0.22

 
$
0.27

 
 
 
 
 
Six Months Ended June 30,
 
2012
 
2011
Net Income Available to Common Stockholders
$
65

 
$
82

Denominator for Basic Earnings per Share
161.4

 
161.9

Effect of Dilutive Securities – Stock Options
0.3

 
0.3

Effect of Dilutive Securities – Restricted Stock, Restricted Stock Units and Value Management Plan

 

Denominator for Diluted Earnings per Share – Adjusted for Dilutive Securities
161.7

 
162.2

Per Share Amounts:
 
 
 
Net Income Per Share - Basic
$
0.40

 
$
0.51

Net Income Per Share - Diluted
$
0.40

 
$
0.50


Under the company's Stock Incentive Plan, the company grants restricted stock units, which prior to vesting, are entitled to non-forfeitable cash payments equal to dividends paid on the company's common shares. These awards are considered participating securities for purposes of computing basic and diluted earnings per share.

Antidilutive options were excluded for certain periods from the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares. Antidilutive options were as follows for the quarterly and six-month periods ended June 30 (shares in millions): 
 
Quarter Ended June 30,
 
2012
 
2011
Number of Options
1.1
 
1.1
Range of Exercise Prices
$41.55 to $43.23
 
$41.55 to $43.23
Expiration on or before
February 2021
 
February 2021
 
 
 
 
 
Six Months Ended June 30,
 
2012
 
2011
Number of Options
1.1
 
1.0
Range of Exercise Prices
$41.55 to $43.23
 
$41.55 to $43.23
Expiration on or before
February 2021
 
February 2021
 

 

9

PLUM CREEK TIMBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 3. Inventories

Inventories, accounted for using the lower of average cost or market, consisted of the following (in millions): 
 
June 30, 2012
 
December 31, 2011
Raw Materials (primarily logs)
$
5

 
$
10

Work-In-Process
2

 
1

Finished Goods
26

 
24

 
33

 
35

Supplies
13

 
13

Total
$
46

 
$
48



Note 4. Timber and Timberlands

Timber and Timberlands consisted of the following (in millions): 
 
June 30, 2012
 
December 31, 2011
Timber and Logging Roads, net
$
2,206

 
$
2,232

Timber Deed, net
99

 
5

Timberlands
1,126

 
1,140

Timber and Timberlands, net
$
3,431

 
$
3,377


In January 2012, the company purchased a timber deed in the Southern Resources Segment for $103 million, $5 million of which was paid as a deposit in December 2011. The timber deed encompasses approximately 4.7 million tons of standing timber which along with future growth, will be harvested over the eight-year term of the deed. The timber deed purchase price has been reflected in the Consolidated Statements of Cash Flows as an outflow under Cash Provided by Operating Activities.


Note 5. Property, Plant and Equipment

Property, Plant and Equipment consisted of the following (in millions): 
 
June 30, 2012
 
December 31, 2011
Land, Buildings and Improvements
$
86

 
$
86

Machinery and Equipment
316

 
315

 
402

 
401

Accumulated Depreciation
(271
)
 
(263
)
Property, Plant and Equipment, net
$
131

 
$
138





10

PLUM CREEK TIMBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 6. Borrowings

Debt consisted of the following (in millions): 
 
June 30, 2012
 
December 31, 2011
Variable Rate Debt
 
 
 
Term Credit Agreement (A)
$
350

 
$
350

Revolving Line of Credit (B)
451

 
348

Fixed Rate Debt
 
 
 
Senior Notes
1,293

 
1,292

Note Payable to Timberland Venture
783

 
783

Total Debt
2,877

 
2,773

Less:
 
 
 
Current Portion of Long-Term Debt
176

 
352

Line of Credit
451

 
348

Long-Term Portion
$
2,250

 
$
2,073


(A)
The interest rate on the $350 million term credit agreement was 0.62% and 0.65% as of June 30, 2012 and December 31, 2011, respectively. This agreement matured on July 10, 2012. On July 10, 2012, the company borrowed $450 million under a new term credit agreement and used a portion of the proceeds to repay the $350 million principal balance for the previous term credit agreement. The $450 million term credit agreement matures on April 3, 2019. The interest rate on the $450 million term credit agreement is based on LIBOR plus 1.50%. In addition, the company expects to receive patronage refunds under the term loan agreement. Patronage refunds are distributions of profits from banks in the farm credit system, which are cooperatives that are required to distribute profits to their members. The company expects that, after giving effect to patronage distributions, the effective net interest rate on the term loan will be LIBOR plus approximately 1%. The term loan agreement is subject to covenants that are substantially the same as those of our revolving line of credit.

The $350 million term credit agreement was classified as Long-Term Debt in our Consolidated Balance Sheet as of June 30, 2012 because the company had the ability and intent, as described above, to refinance this borrowing on a long-term basis.

(B)
On March 2, 2012, the company terminated its previous $600 million revolving line of credit due to mature on January 30, 2015 and entered into a new $700 million revolving line of credit agreement that matures on April 3, 2017. Subject to customary covenants, the line of credit allows for borrowings from time to time up to $700 million, including up to $100 million of standby letters of credit. Borrowings on the line of credit fluctuate daily based on cash needs. The interest rate on the line of credit is currently LIBOR plus 1.25%, including the facility fee. This rate can range from LIBOR plus 1% to LIBOR plus 2% depending on our debt ratings.

The weighted-average interest rate for the borrowings on the $700 million line of credit was 1.44% as of June 30, 2012. The weighted-average interest rate on the $600 million line of credit was 1.96% as of December 31, 2011. As of June 30, 2012, we had $451 million of borrowings and $2 million of standby letters of credit outstanding; $247 million remained available for borrowing under our $700 million line of credit. As of July 2, 2012, $245 million of the borrowings under our line of credit was repaid.




11

PLUM CREEK TIMBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 7. Stockholders’ Equity

The changes in the company’s stockholders’ equity accounts were as follows during 2012 (in millions): 
 
Common Stock
 
 
 
Retained
Earnings (Accumulated Deficit)
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
Shares
 
Dollars
 
Paid-in
Capital
 
 
Treasury
Stock
 
Total
Equity
January 1, 2012
161.3

 
$
2

 
$
2,261

 
$
(28
)
 
$
(937
)
 
$
(35
)
 
$
1,263

Net Income
 
 
 
 
 
 
29

 
 
 
 
 
29

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
3

 
3

Dividends
 
 
 
 
 
 
(68
)
 
 
 
 
 
(68
)
Stock Option Exercises
0.1

 

 
3

 
 
 
 
 
 
 
3

Shares Issued under Stock Incentive Plans
0.1

 

 

 
 
 
 
 
 
 

Share-based Compensation
 
 
 
 
2

 
 
 
 
 
 
 
2

Common Stock Repurchased

 

 
 
 
 
 
(1
)
 
 
 
(1
)
March 31, 2012
161.5

 
$
2

 
$
2,266

 
$
(67
)
 
$
(938
)
 
$
(32
)
 
$
1,231

Net Income
 
 
 
 
 
 
36

 
 
 
 
 
36

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 

 

Dividends
 
 
 
 
 
 
(68
)
 
 
 
 
 
(68
)
Share-based Compensation
 
 
 
 
3

 
 
 
 
 
 
 
3

June 30, 2012
161.5

 
$
2

 
$
2,269

 
$
(99
)
 
$
(938
)
 
$
(32
)
 
$
1,202




12

PLUM CREEK TIMBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 8. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis. The company’s fair value measurements of its financial instruments, measured on a recurring basis, are categorized as Level 1 measurements under the fair value hierarchy in the Accounting Standards Codification. A Level 1 valuation is based on quoted prices in active markets at the measurement date for identical unrestricted assets or liabilities. Summarized below are the Level 1 assets reported in the company’s financial statements at fair value, measured on a recurring basis (in millions): 
 
Balance at
June 30, 2012
 
Fair Value Measurements
at Reporting Date Using
Quoted Prices in Active
Markets of Identical Assets
(Level 1 Measurements)
Cash Equivalents (A)
$
257

 
$
257

Available-for-Sale Securities (B)
32

 
32

Trading Securities (B)
5

 
5

Total
$
294

 
$
294

 
 
 
 
 
Balance at
December 31, 2011
 
Fair Value Measurements
at Reporting Date Using
Quoted Prices in Active
Markets of Identical Assets
(Level 1 Measurements)
Cash Equivalents (A)
$
253

 
$
253

Available-for-Sale Securities (B)
31

 
31

Trading Securities (B)
5

 
5

Total
$
289

 
$
289

 
(A)
Consists of several money market funds and is included in the $260 million and $254 million of Cash and Cash Equivalents in the Consolidated Balance Sheets at June 30, 2012 and December 31, 2011, respectively.

(B)
Consists of several mutual funds and is included in Investment in Grantor Trusts in the Consolidated Balance Sheets at June 30, 2012 and December 31, 2011. At June 30, 2012, investments in these mutual funds were approximately 45% in domestic (U.S.) equities, 20% in international equities and 35% in debt securities.

Available-for-Sale Securities. Certain investments in the grantor trusts relate to the company's non-qualified pension plans and are classified as available-for-sale securities. The company has invested in various money market, debt and equity mutual funds and plans to use these investments to fund its non-qualified pension obligations. Unrealized holding gains and losses are included as a component of accumulated other comprehensive income. The company records changes in unrealized holding gains and losses in Other Comprehensive Income, unless an other than temporary impairment has occurred, which is then charged to expense. Changes in the fair value of available-for-sale securities were not material to the company's financial position or results of operations.

Trading Securities. Certain investments in the grantor trusts relate to the company's deferred compensation plans and are classified as trading securities. Deferred compensation amounts are invested in various money market, debt and equity mutual funds. The company plans to use these investments to fund deferred compensation obligations. Realized gains and losses and changes in unrealized gains and losses (and a corresponding amount of compensation expense) are recognized in the company's Consolidated Statements of Income. Deferred compensation obligations are included in Other Liabilities and were $5 million at both June 30, 2012 and December 31, 2011. Changes in the fair value of trading securities were not material to the company's financial position or results of operations.


13

PLUM CREEK TIMBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Other Instruments. The carrying amount of notes receivable approximates fair value due to the short-term maturities of these instruments. Summarized below is the carrying amount and fair value of the company's debt (estimated using the discounted cash flows method) at June 30, 2012, along with the categorization under the fair value hierarchy in the Accounting Standards Codification (in millions): 
 
 
 
 
Fair Value
 
 
Carrying Amount
 
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Public Debt (A)
 
$
1,030

 
$

 
$
1,112

 
$

 
$
1,112

Private Debt (B)
 
263

 

 
274

 

 
274

Term Credit Agreement (C)
 
350

 

 
350

 

 
350

Line of Credit (D)
 
451

 

 
451

 

 
451

Note Payable to Timberland Venture (E)
 
783

 

 

 
942

 
942

Total Debt
 
$
2,877

 
$

 
$
2,187

 
$
942

 
$
3,129


(A)
Fair value of the company's Public Debt (publicly issued Senior Notes) is estimated using multiple market quotes for the company's public bonds.

(B)
Fair value of the company's Private Debt (Senior Notes with various maturities and fixed interest rates which are privately placed with various lenders) is estimated using market quotes for the company's Public Debt adjusted for the different maturities and an illiquidity premium.

(C)
Fair value is estimated by adjusting the spread over LIBOR to a current market quote for comparable debt.

(D)
Fair value is estimated by adjusting the spread over LIBOR to a current market quote for comparable credit lines.

(E)
Fair value is estimated by using market quotes for the company's Public Debt adjusted by an estimated risk premium for holding company debt and the different maturity.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis. There were no fair value measurements of assets or liabilities measured on a nonrecurring basis during the six-month periods ended June 30, 2012 and 2011.



14

PLUM CREEK TIMBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 9. Employee Pension Plans

The components of pension cost were as follows for the quarterly and six-month periods ended June 30 (in millions): 
 
Quarter Ended June 30,
 
2012
 
2011
Service Cost
$
2

 
$
2

Interest Cost
2

 
2

Expected Return on Plan Assets
(2
)
 
(2
)
Recognized Actuarial Loss
1

 

Total Pension Cost
$
3

 
$
2

 
 
 
 
 
Six Months Ended June 30,
 
2012
 
2011
Service Cost
$
4

 
$
4

Interest Cost
4

 
4

Expected Return on Plan Assets
(4
)
 
(4
)
Recognized Actuarial Loss
2

 

Total Pension Cost
$
6

 
$
4


It is the company’s policy to fund its qualified plan annually such that the fair value of plan assets equals or exceeds the actuarially
computed accumulated benefit obligation (the approximate actuarially computed current pension obligation if the plan were
discontinued) over a market cycle (generally 3 to 5 years). During the second quarter of 2012, the company contributed $7 million to its qualified pension plan. Depending on asset returns and interest rates, the company may contribute up to an additional $8 million to the qualified pension plan during the second half of 2012. The company expects to contribute between $0 and $2 million to its grantor trust associated with its non-qualified pension plans during 2012.

Note 10. Commitments and Contingencies

Contingencies. The company is subject to regulations regarding forest, harvest and manufacturing practices and is, from time to time, involved in various legal proceedings, including environmental and regulatory matters, incidental to its business. Reserves have been established for any probable losses.

Unrecorded Contingencies. Management currently believes that resolving pending legal proceedings against the company, individually or in aggregate, will not have a material adverse impact on our financial position or results of operations. However, these matters are subject to inherent uncertainties and management’s view on these matters may change in the future. Were an unfavorable final outcome in one or multiple legal proceedings to occur, there exists the possibility of a material adverse impact on our financial position and the results of operations for the period in which any unfavorable outcome becomes reasonably estimable.


Note 11. Variable Interest Entities

In 2008, the company contributed 454,000 acres of timberlands located in its Southern Resources Segment to Southern Diversified Timber, LLC (“the Timberland Venture”) in exchange for a $705 million preferred interest and a 9% common interest valued at $78 million. The Timberland Venture’s other member, an affiliate of The Campbell Group LLC, contributed $783 million of cash in exchange for 91% of the Timberland Venture’s common interest. Following the contribution, the company borrowed $783 million from the Timberland Venture (“Note Payable to Timberland Venture”). The company accounts for its interest in the Timberland Venture under the equity method of accounting.
 
The Timberland Venture is a variable interest entity. The primary operating activities of the Timberland Venture consist of owning timberlands and entering into cutting contracts with an affiliate of the other member. Besides quarterly interest payments on the Note Payable to Timberland Venture, the company has not provided financing or other support to the venture. The venture is financed by a $15 million line of credit obtained by the Timberland Venture.


15

PLUM CREEK TIMBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

We are not the primary beneficiary of the Timberland Venture. The company does not manage the day-to-day operations of the Timberland Venture, it has only limited protective rights and its involvement is generally limited to receiving distributions on its preferred and common interests. We are not the primary beneficiary because we do not direct the activities that most significantly impact the Timberland Venture’s economic performance. We believe that the activities that most significantly impact the Timberland Venture’s economic performance include managing the timberlands along with the timing and extent of the harvesting activities, neither of which we control.

The carrying amount of the investment is $201 million at both June 30, 2012 and December 31, 2011, and it is reported in the Consolidated Balance Sheets as Equity Investment in Timberland Venture. Our maximum exposure to loss is $201 million, the carrying amount of the investment. Generally, losses are first allocated among the common interests based on positive capital accounts in which we hold a 9% common interest. No losses are allocated to our preferred interest ($705 million) until the common interests have absorbed losses of approximately $861 million.


Note 12. Summarized Income Statement Information of Unconsolidated Subsidiary

The earnings of the Timberland Venture are a significant component of consolidated earnings. See Note 11 of the Notes to Consolidated Financial Statements. Equity earnings for the Timberland Venture were $28 million for the six-month period ending June 30, 2012, and were $30 million for the six-month period ending June 30, 2011. Equity earnings includes the amortization of the difference between the book value of the company’s investment and its proportionate share of the Timberland Venture’s net assets of $5 million and $3 million for the six-month periods ended June 30, 2012 and 2011, respectively. Furthermore, interest expense in connection with the loan from the Timberland Venture was $29 million for each of the six-month periods ended June 30, 2012 and 2011. The table below presents summarized income statement information for the Timberland Venture for the six months ended June 30 (in millions): 
 
Six Months Ended June 30,
 
2012
 
2011
Revenues
$
7

 
$
7

Cost of Goods Sold(A)
8

 
7

Selling, General and Administrative Expenses
5

 
2

Operating Income (Loss)
(6
)
 
(2
)
Interest Income, net
29

 
29

Net Income before Allocation to Preferred and Common Interests
$
23

 
$
27


(A)
Cost of Goods Sold includes Depreciation, Depletion and Amortization of $7 million and $6 million for the six-month periods ended June 30, 2012 and 2011, respectively.


16

PLUM CREEK TIMBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 13. Segment Information

The tables below present information about reported segments for the quarterly and six-month periods ended June 30 (in millions): 
 
Northern
Resources
 
Southern
Resources
 
Real
Estate
 
Manufactured
Products
 
Other
 
Total (B)
 
 
 
 
 
 
 
 
 
 
 
 
Quarter Ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
External Revenues
$
52

 
$
105

 
$
47

 
$
85

 
$
5

 
$
294

Intersegment Revenues
4

 

 

 

 

 
4

Depreciation, Depletion and Amortization
6

 
18

 
1

 
3

 

 
28

Basis of Real Estate Sold

 

 
12

 

 

 
12

Operating Income
4

 
22

 
29

 
9

 
4

 
68

 
 
 
 
 
 
 
 
 
 
 
 
Quarter Ended June 30, 2011
 
 
 
 
 
 
 
 
 
 
 
External Revenues
$
42

 
$
84

 
$
79

 
$
74

 
$
5

 
$
284

Intersegment Revenues
2

 

 

 

 

 
2

Depreciation, Depletion and Amortization
5

 
12

 
1

 
3

 

 
21

Basis of Real Estate Sold

 

 
24

 

 

 
24

Operating Income
3

 
15

 
50

 
5

 
4

 
77

 
 
 
 
 
 
 
 
 
 
 
 
 
Northern
Resources
 
Southern
Resources
 
Real
Estate
 
Manufactured
Products
 
Other(A)
 
Total(B)
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
External Revenues
$
110

 
$
202

 
$
147

 
$
161

 
$
11

 
$
631

Intersegment Revenues
10

 

 

 

 

 
10

Depreciation, Depletion and Amortization
13

 
33

 
1

 
7

 

 
54

Basis of Real Estate Sold

 

 
75

 

 

 
75

Other Operating Gain

 

 

 

 

 

Operating Income
10

 
43

 
59

 
13

 
9

 
134

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2011
 
 
 
 
 
 
 
 
 
 
 
External Revenues
$
94

 
$
173

 
$
141

 
$
141

 
$
10

 
$
559

Intersegment Revenues
5

 

 

 

 

 
5

Depreciation, Depletion and Amortization
11

 
24

 
1

 
6

 

 
42

Basis of Real Estate Sold

 

 
43

 

 

 
43

Other Operating Gain

 

 

 

 
2

 
2

Operating Income
10

 
34

 
88

 
9

 
11

 
152


(A)
During the first quarter of 2011, the company received a payment of $2 million for the settlement of a dispute related to certain mineral rights. The $2 million payment is reported as Other Operating Gain in our Other Segment and is included in Other Operating Income (Expense), net in the Consolidated Statements of Income.

(B)
Consolidated depreciation, depletion and amortization includes unallocated corporate expense of $1 million for each of the quarterly periods ended June 30, 2012 and June 30, 2011; and $2 million for each of the six-month periods ended June 30, 2012 and June 30, 2011.


17

PLUM CREEK TIMBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

A reconciliation of total segment operating income to income before income taxes is presented below for the quarterly and six-month periods ended June 30 (in millions): 
 
Quarter Ended June 30,
 
2012
 
2011
Total Segment Operating Income
$
68

 
$
77

Corporate and Other Unallocated Expenses
(14
)
 
(14
)
Other Unallocated Operating Income (Expense), net
1

 

Operating Income
55

 
63

Equity Earnings from Timberland Venture
15

 
16

Total Interest Expense, net
(34
)
 
(35
)
Income before Income Taxes
$
36

 
$
44

 
 
 
 
 
Six Months Ended June 30,
 
2012
 
2011
Total Segment Operating Income
$
134

 
$
152

Corporate and Other Unallocated Expenses
(30
)
 
(30
)
Other Unallocated Operating Income (Expense), net
1

 
1

Operating Income
105

 
123

Equity Earnings from Timberland Venture
28

 
30

Total Interest Expense, net
(69
)
 
(70
)
Income before Income Taxes
$
64

 
$
83


Note 14. Subsequent Events
Quarterly Dividend. On August 7, 2012, the Board of Directors authorized the company to make a dividend payment of $0.42 per share, or approximately $68 million, which will be paid on August 31, 2012 to stockholders of record on August 17, 2012.


18


ITEM 1.
FINANCIAL STATEMENTS (CONTINUED)

Included in this item are the consolidated financial statements related to Plum Creek Timberlands, L.P., a Delaware Limited Partnership and a wholly-owned subsidiary of Plum Creek Timber Company, Inc. These financial statements are provided pursuant to Rule 3-10 of Regulation S-X in connection with the shelf registration statement on Form S-3 filed in December of 2011 pursuant to which Plum Creek Timberlands, L.P. has registered and from time to time may offer and sell debt securities. As of June 30, 2012, Plum Creek Timberlands, L.P. has publicly issued and outstanding $1,033 million aggregate principal amount of Senior Notes ("Public Debt") pursuant to the shelf registration statement.


PLUM CREEK TIMBERLANDS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
 
 
Quarter Ended June 30,
(In Millions)
 
2012
 
2011
REVENUES:
 
 
 
 
Timber
 
$
157

 
$
126

Real Estate
 
47

 
79

Manufacturing
 
85

 
74

Other
 
5

 
5

Total Revenues
 
294

 
284

 
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
Cost of Goods Sold:
 
 
 
 
Timber
 
123

 
101

Real Estate
 
16

 
27

Manufacturing
 
73

 
67

Other
 
1

 
1

Total Cost of Goods Sold
 
213

 
196

Selling, General and Administrative
 
27

 
25

Total Costs and Expenses
 
240

 
221

 
 
 
 
 
Other Operating Income (Expense), net
 
1

 

 
 
 
 
 
Operating Income
 
55

 
63

 
 
 
 
 
Equity Earnings from Timberland Venture
 
15

 
16

 
 
 
 
 
Interest Expense, net
 
19

 
20

 
 
 
 
 
Income before Income Taxes
 
51

 
59

 
 
 
 
 
Provision (Benefit) for Income Taxes
 

 

 
 
 
 
 
Net Income before Allocation to Series T-1 Preferred Interest and Partners
 
51

 
59

Net Income Allocable to Series T-1 Preferred Interest
 
(15
)
 
(15
)
Net Income Available to Common Interest Partners
 
$
36

 
$
44


See accompanying Notes to Consolidated Financial Statements

19


PLUM CREEK TIMBERLANDS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

 
 
 
 
 
 
 
Six Months Ended June 30,
(In Millions)
 
2012
 
2011
REVENUES:
 
 
 
 
Timber
 
$
312

 
$
267

Real Estate
 
147

 
141

Manufacturing
 
161

 
141

Other
 
11

 
10

Total Revenues
 
631

 
559

 
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
Cost of Goods Sold:
 
 
 
 
Timber
 
244

 
208

Real Estate
 
84

 
49

Manufacturing
 
143

 
128

Other
 
1

 
1

Total Cost of Goods Sold
 
472

 
386

Selling, General and Administrative
 
55

 
53

Total Costs and Expenses
 
527

 
439

 
 
 
 
 
Other Operating Income (Expense), net
 
1

 
3

 
 
 
 
 
Operating Income
 
105

 
123

 
 
 
 
 
Equity Earnings from Timberland Venture
 
28

 
30

 
 
 
 
 
Interest Expense, net
 
40

 
41

 
 
 
 
 
Income before Income Taxes
 
93

 
112

 
 
 
 
 
Provision (Benefit) for Income Taxes
 
(1
)
 
1

 
 
 
 
 
Net Income before Allocation to Series T-1 Preferred Interest and Partners
 
94

 
111

Net Income Allocable to Series T-1 Preferred Interest
 
(29
)
 
(29
)
Net Income Available to Common Interest Partners
 
$
65

 
$
82


See accompanying Notes to Consolidated Financial Statements


20


PLUM CREEK TIMBERLANDS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

 
 
Quarter Ended June 30,
(In Millions)
 
2012
 
2011
NET INCOME BEFORE ALLOCATION TO SERIES T-1 PREFERRED INTEREST AND PARTNERS
 
$
51

 
$
59

 
 
 
 
 
OTHER COMPREHENSIVE INCOME BEFORE INCOME TAXES:
 
 
 
 
  Defined Benefit Pension Plans:
 
 
 
 
       Amortization of Actuarial Loss Reclassified to Pension Expense
 
1

 

  Unrealized Gains (Losses) on Grantor Trust Assets:
 
 
 
 
       Unrealized Holding Gains (Losses) Arising During Period
 
(1
)
 
1

 
 
 
 
 
Other Comprehensive Income (Loss) Before Tax
 

 
1

 
 
 
 
 
Income Tax Expense (Benefit) Related to Items of Other Comprehensive Income
 

 

 
 
 
 
 
Other Comprehensive Income (Loss) After Tax
 

 
1

 
 
 
 
 
Comprehensive Income
 
$
51

 
$
60

 
 
 
 
 



 
 
Six Months Ended June 30,
(In Millions)
 
2012
 
2011
NET INCOME BEFORE ALLOCATION TO SERIES T-1 PREFERRED INTEREST AND PARTNERS
 
$
94

 
$
111

 
 
 
 
 
OTHER COMPREHENSIVE INCOME BEFORE INCOME TAXES:
 
 
 
 
  Defined Benefit Pension Plans:
 
 
 
 
       Amortization of Actuarial Loss Reclassified to Pension Expense
 
2

 

  Unrealized Gains (Losses) on Grantor Trust Assets:
 
 
 
 
       Unrealized Holding Gains (Losses) Arising During Period
 
1

 
2

 
 
 
 
 
Other Comprehensive Income (Loss) Before Tax
 
3

 
2

 
 
 
 
 
Income Tax Expense (Benefit) Related to Items of Other Comprehensive Income
 

 

 
 
 
 
 
Other Comprehensive Income (Loss) After Tax
 
3

 
2

 
 
 
 
 
Comprehensive Income
 
$
97

 
$
113