QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
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 25, 2011 was 161,985,207.
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, 2011, the company owned and managed approximately 6.7 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 6.7 million acres are about 1.0 million 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 1.0 million acres of higher value timberlands are approximately 800,000 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, 2010 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 2010 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.
The following tables set 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,
2011
2010
Net Income Available to Common Stockholders
$
44
$
35
Denominator for Basic Earnings per Share
162.0
162.3
Effect of Dilutive Securities – Stock Options
0.3
0.2
Effect of Dilutive Securities – Restricted Stock, Restricted Stock Units and Value Management Plan
—
—
Denominator for Diluted Earnings per Share – Adjusted for Dilutive Securities
162.3
162.5
Per Share Amounts:
Net Income Per Share – Basic
$
0.27
$
0.21
Net Income Per Share – Diluted
$
0.27
$
0.21
Six Months Ended June 30,
2011
2010
Income from Continuing Operations
$
82
$
111
Gain on Sale of Properties, net of tax
—
11
Net Income Available to Common Stockholders
$
82
$
122
Denominator for Basic Earnings per Share
161.9
162.6
Effect of Dilutive Securities – Stock Options
0.3
0.2
Effect of Dilutive Securities – Restricted Stock, Restricted Stock Units and Value Management Plan
—
—
Denominator for Diluted Earnings per Share – Adjusted for Dilutive Securities
162.2
162.8
Per Share Amounts – Basic:
Income from Continuing Operations
$
0.51
$
0.68
Gain on Sale of Properties, net of tax
$
—
$
0.07
Net Income
$
0.51
$
0.75
Per Share Amounts – Diluted:
Income from Continuing Operations
$
0.50
$
0.68
Gain on Sale of Properties, net of tax
$
—
$
0.07
Net Income
$
0.50
$
0.75
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):
As of June 30, 2011, the interest rate on the $350 million term credit agreement was 0.57%. This agreement matures June 15, 2012.
(B)
As of June 30, 2011, the weighted-average interest rate for the borrowings on the line of credit was 1.65%. As of June 30, 2011, we had $227 million of borrowings and $3 million of standby letters of credit outstanding; $370 million remained available for borrowing under our $600 million line of credit. As of July 1, 2011, all of the borrowings outstanding under our line of credit were repaid.
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, 2011
Fair Value Measurements
at Reporting Date Using
Quoted Prices in Active
Markets of Identical Assets
(Level 1 Measurements)
Cash Equivalents (A)
$
249
$
249
Available-for-Sale Securities (B)
33
33
Trading Securities (B)
5
5
Total
$
287
$
287
Balance at December 31, 2010
Fair Value Measurements
at Reporting Date Using
Quoted Prices in Active
Markets of Identical Assets
(Level 1 Measurements)
Cash Equivalents (A)
$
249
$
249
Available-for-Sale Securities (B)
30
30
Trading Securities (B)
5
5
Total
$
284
$
284
(A)
Consists of several money market funds and is included in the $253 million and $252 million of Cash and Cash Equivalents in the Consolidated Balance Sheets at June 30, 2011 and December 31, 2010, respectively.
(B)
Consists of several mutual funds and is included in Investment in Grantor Trusts in the Consolidated Balance Sheets at June 30, 2011 and December 31, 2010. At June 30, 2011, investments in these mutual funds were approximately 50% in domestic (U.S.) equities, 20% in international equities and 30% 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 June 30, 2011 and $5 million at December 31, 2010. Changes in the fair value of trading securities were not material to the company's financial position or results of operations.
Other Instruments. The carrying amount of notes receivable approximates fair value due to the short-term maturities of these instruments. The estimated fair value of the company's debt was approximately $2.90 billion and $2.83 billion at June 30, 2011 and December 31, 2010, respectively, and the carrying amount was $2.70 billion and $2.69 billion at June 30, 2011 and December 31, 2010, respectively. The fair value of the company's Public Debt (publicly issued Senior Notes) is estimated using market quotes. The 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 the same rates adjusted for the different maturities. The fair value of the company's Note Payable to Timberland Venture is estimated using the same rates as the Public Debt adjusted by an estimated
risk premium for holding company debt and the different maturity. The fair value of our Term Credit Agreement was determined by adjusting the spread over LIBOR to a current market spread for comparable debt.
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, 2011 and 2010.
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,
2011
2010
Service Cost
$
2
$
2
Interest Cost
2
2
Expected Return on Plan Assets
(2
)
(2
)
Total Pension Cost
$
2
$
2
Six Months Ended June 30,
2011
2010
Service Cost
$
4
$
4
Interest Cost
4
4
Expected Return on Plan Assets
(4
)
(4
)
Total Pension Cost
$
4
$
4
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 other 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
On October 1, 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.
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 $203 million at June 30, 2011 and $201 million at December 31, 2010, and it is reported in the Consolidated Balance Sheets as Equity Investment in Timberland Venture. Our maximum exposure to loss is $203 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 Affiliate
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 $30 million for the six-month period ending June 30, 2011, and were $29 million for the six-month period ending June 30, 2010. 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 $3 million and $3 million for each of the six-month periods ended June 30, 2011 and 2010. Furthermore, interest expense in connection with the loan from the Timberland Venture was $29 million and $29 million for each of the six-month periods ended June 30, 2011 and 2010. 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,
2011
2010
Revenues
$
7
$
10
Cost of Goods Sold(A)
8
12
Selling, General and Administrative Expenses
1
1
Operating Income (Loss)
(2
)
(3
)
Interest Income, net
29
29
Net Income before Allocation to Preferred and Common Interests
$
27
$
26
(A)
Cost of Goods Sold includes Depreciation, Depletion and Amortization of $6 million and $10 million for the six-month periods ended June 30, 2011 and 2010, respectively.
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(A)
Other
Total(C)
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
Other Operating Gain
—
—
—
—
—
—
Operating Income
3
15
50
5
4
77
Quarter Ended June 30, 2010
External Revenues
$
44
$
89
$
43
$
78
$
4
$
258
Intersegment Revenues
2
—
—
—
—
2
Depreciation, Depletion and Amortization
7
12
1
3
—
23
Basis of Real Estate Sold
—
—
11
—
—
11
Other Operating Gain
1
—
—
2
—
3
Operating Income
3
24
26
10
4
67
Northern
Resources
Southern
Resources
Real
Estate
Manufactured
Products(A)
Other(B)
Total(C)
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
Six Months Ended June 30, 2010
External Revenues
$
97
$
187
$
142
$
138
$
11
$
575
Intersegment Revenues
8
—
—
—
—
8
Depreciation, Depletion and Amortization
14
25
1
6
—
46
Basis of Real Estate Sold
—
—
43
—
—
43
Other Operating Gain
1
—
—
2
5
8
Operating Income
7
54
88
14
15
178
(A)
During the second quarter of 2010, the company sold certain lumber manufacturing assets for a gain of $2 million. For the quarter and six months ended June 30, 2010, the $2 million gain is reported as Other Operating Gain in our Manufactured Products Segment and is included in Other Operating Income (Expense), net in the Consolidated Statements of Income.
During the first quarter of 2011, the company received a payment of $2 million for the settlement of a dispute that related to certain mineral rights. For the six months ended June 30, 2011, 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.
During the first quarter of 2010, the company agreed to terminate a land lease for consideration of $5 million from the lessor. The land lease had been accounted for as an operating lease. For the six months ended June 30, 2010, the $5 million consideration is reported as Other Operating Gain in our Other Segment since the consideration was primarily for the release of mineral rights. For the six months ended June 30, 2010, the $5 million is included in Other Operating Income (Expense), net in the Consolidated Statements of Income.
During the first quarter of 2010, the company received $21 million for the sale of an undivided 50% interest in natural gas rights on approximately 110,000 acres in West Virginia and to modify an existing natural gas lease on the same acres. The company allocated the proceeds based on relative fair value and determined that $11 million was for the sale of the natural gas rights and $10 million was for a lease bonus related to the modification of exploration rights under the existing lease. The fair value of the undivided 50% interest in natural gas rights was derived using an income approach based on discounted future cash flows. For the six months ended June 30, 2010, the sale is reported as Gain on Sale of Properties, net of tax in the Consolidated Statements of Income and was not included in the Other Segment’s operating income. The fair value of the modification to the exploration rights under the existing lease was based on market analyses and comparable leases. The $10 million, along with the remaining deferred revenue at the time of the modification of $12 million associated with the original granting of exploration rights in 2008, is being amortized into revenue of the Other Segment over the expected three-year term.
(C)
Consolidated depreciation, depletion and amortization includes unallocated corporate depreciation of $1 million and $1 million for each of the quarterly periods ended June 30, 2011 and June 30, 2010; and $2 million and $2 million for each of the six-month periods ended June 30, 2011 and June 30, 2010.
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):
Quarterly Dividend. On August 2, 2011, 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, 2011 to stockholders of record on August 16, 2011.
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 April of 2009 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, 2011, Plum Creek Timberlands, L.P. has publicly issued and outstanding $1.033 billion 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)
2011
2010
REVENUES:
Timber
$
126
$
133
Real Estate
79
43
Manufacturing
74
78
Other
5
4
Total Revenues
284
258
COSTS AND EXPENSES:
Cost of Goods Sold:
Timber
101
100
Real Estate
27
16
Manufacturing
67
68
Other
1
1
Total Cost of Goods Sold
196
185
Selling, General and Administrative
25
21
Total Costs and Expenses
221
206
Other Operating Income (Expense), net
—
4
Operating Income
63
56
Equity Earnings from Timberland Venture
16
15
Interest Expense, net
20
19
Income before Income Taxes
59
52
Provision for Income Taxes
—
2
Net Income before Allocation to Series T-1 Preferred Interest and Partners
59
50
Net Income Allocable to Series T-1 Preferred Interest
(15
)
(15
)
Net Income Available to Common Interest Partners
$
44
$
35
See accompanying Notes to Consolidated Financial Statements
