Plum Creek Timber (PCL) 10-Q 2004 Q2 Quarterly report

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, 2004

OR

(  ) 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)

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

Organized in the State of Delaware          I.R.S. Employer Identification No. 91-1912863

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 [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ X ] No [  ]

The number of outstanding shares of the registrant's common stock as of July 23, 2004 was 183,322,667.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PLUM CREEK TIMBER COMPANY, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
	Quarter Ended
(In Millions, Except Per Share Amounts)	June 30, 2004			June 30, 2003
Revenues:
Timber	$	151		$	159
Real Estate		50			57
Manufacturing		134			99
Other		6			3
Total Revenues		341			318
Costs and Expenses:
Cost of Goods Sold:
Timber		80			79
Real Estate		38			36
Manufacturing		110			99
Other		2			1
Total Cost of Goods Sold		230			215
Selling, General and Administrative		22			19
Total Costs and Expenses		252			234
Gain on Sale of Other Assets		5			--
Operating Income		94			84
Interest Expense, net		27			29
Income before Income Taxes		67			55
Benefit (Provision) for Income Taxes		(10	)		3
Net Income	$	57		$	58
Net Income per Share - Basic	$	0.31		$	0.32
Net Income per Share - Diluted	$	0.31		$	0.31
Dividends Declared per Share	$	0.35		$	0.35
Weighted average number of Shares outstanding - Basic		183.3			183.0
Weighted average number of Shares outstanding - Diluted		184.0			183.5

See accompanying Notes to Consolidated Financial Statements

PLUM CREEK TIMBER COMPANY, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
	Six Months Ended
(In Millions, Except Per Share Amounts)	June 30, 2004			June 30, 2003
Revenues:
Timber	$	335		$	315
Real Estate		238			80
Manufacturing		256			191
Other		9			5
Total Revenues		838			591
Costs and Expenses:
Cost of Goods Sold:
Timber		173			160
Real Estate		124			55
Manufacturing		218			195
Other		3			2
Total Cost of Goods Sold		518			412
Selling, General and Administrative		40			36
Total Costs and Expenses		558			448
Gain on Sale of Other Assets		5			--
Operating Income		285			143
Interest Expense, net		56			57
Income before Income Taxes		229			86
Benefit (Provision) for Income Taxes		(17	)		5
Net Income	$	212		$	91
Net Income per Share - Basic	$	1.16		$	0.50
Net Income per Share - Diluted	$	1.15		$	0.49
Dividends Declared per Share	$	0.70		$	0.70
Weighted average number of Shares outstanding - Basic		183.2			183.5
Weighted average number of Shares outstanding - Diluted		184.0			184.1

See accompanying Notes to Consolidated Financial Statements

PLUM CREEK TIMBER COMPANY, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Millions, Except per Share Amounts)	June 30, 2004			December 31, 2003
ASSETS
Current Assets:
Cash and Cash Equivalents	$	328		$	260
Restricted Advance from Customer		4			3
Accounts Receivable		44			34
Inventories		54			54
Investment in Grantor Trust		12			13
Deferred Tax Asset		11			11
Other Current Assets		18			30
		471			405
Timber and Timberlands - Net		3,590			3,674
Property, Plant and Equipment - Net		271			303
Other Assets		7			5
Total Assets	$	4,339		$	4,387
LIABILITIES
Current Liabilities:
Current Portion of Long-Term Debt	$	32		$	33
Accounts Payable		26			27
Interest Payable		28			28
Wages Payable		16			23
Taxes Payable		24			15
Deferred Revenue		22			16
Liabilities Associated with Grantor Trust		12			13
Other Current Liabilities		23			13
		183			168
Long-Term Debt		1,408			1,437
Lines of Credit		466			594
Deferred Tax Liability		48			37
Other Liabilities		24			32
Total Liabilities		2,129			2,268
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 - 300.0,
issued (including Treasury Stock) - 185.3 at June, 2004 and
185.1 at December 31, 2003		2			2
Additional Paid-In Capital		2,157			2,150
Retained Earnings		93			9
Treasury Stock, at cost, Common shares - 2.0		(43	)		(43	)
Other Equity		1			1
Total Stockholders' Equity		2,210			2,119
Total Liabilities and Stockholders' Equity	$	4,339		$	4,387

See accompanying Notes to Consolidated Financial Statements

PLUM CREEK TIMBER COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
	Six Months Ended
(In Millions)	June 30, 2004			June 30, 2003
Cash Flows From Operating Activities:
Net Income	$	212		$	91
Adjustments to Reconcile Net Income to
Net Cash Provided By Operating Activities:
Depreciation, Depletion and Amortization		51			51
Basis of Real Estate Sold
(Including Impairment Losses of $19 in 2004 and $9 in 2003)		114			49
Deferred Income Taxes		12			(5	)
Gain on Sale of Other Assets		(5	)		--
Working Capital Changes		16			5
Other		(3	)		(1	)
Net Cash Provided By Operating Activities		397			190
Cash Flows From Investing Activities:
Property Additions(Excluding Timberland Acquisitions)		(32	)		(38	)
Timberlands Acquired
(Including Tax-Deferred Exchange Proceeds, Net)		(39	)		(17	)
Proceeds from Sale of Other Assets		27			--
Net Cash Used In Investing Activities		(44	)		(55	)
Cash Flows From Financing Activities:
Dividends		(128	)		(129	)
Borrowings of Long-term Debt and Lines of Credit		1,227			1,278
Repayments of Long-term Debt and Lines of Credit		(1,387	)		(1,244	)
Proceeds from Stock Option Exercises		3			--
Acquisition of Treasury Stock		--			(43	)
Net Cash Used In Financing Activities		(285	)		(138	)
Increase (Decrease) In Cash and Cash Equivalents		68			(3	)
Cash and Cash Equivalents:
Beginning of Period		260			246
End of Period	$	328		$	243

See accompanying Notes to Consolidated Financial Statements  

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

Note 1. Basis of Presentation

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.  At June 30, 2004, the company owned and managed approximately 7.7 million acres of timberlands in the Northwest, Southern and Northeast United States, and owned and operated ten wood product conversion facilities in the Northwest United States.

Plum Creek has elected to be taxed as a REIT under sections 856-860 of the United States Internal Revenue Code, and as such, is generally not subject to 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 sales of some of our higher and better use lands. As a result, the effective tax rate is lower than the federal statutory rate due to the exclusion of the REIT income.

Revenues from sales of timberlands are recognized upon closing of sales contracts in accordance with the full accrual method provided for in the Statement of Financial Accounting Standard No. 66, “Accounting for Sales of Real Estate.” Broker commissions and closing costs of our Real Estate Segment are included in cost of goods sold. Substantially all real estate transactions are settled in cash at closing. Plum Creek may sell timberlands to a single buyer under a multi-period contract covering a series of prescheduled closings and/or options. Under the multi-period contracts, once title and risk of loss have transferred to the buyer for individual properties, the properties sold cannot be returned for a refund. However, deposits for future closings under multi-period contracts may be refunded under certain circumstances. The company treats each closing under a multi-period arrangement as a separate sale and recognizes revenue in accordance with Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables.”

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

The financial statements included in this Form 10-Q are unaudited and do not contain all of the information required by accounting principles generally accepted in the United States of America to be included in a full set of financial statements. The balance sheet at December 31, 2003 has been derived from the audited 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 2003 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. 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.

Note 2. Timber and Timberlands, Property, Plant and Equipment, and Inventory

Timber and timberlands consisted of the following (in millions):

	June 30, 2004		December 31, 2003
Timber and logging roads - net	$	2,359	$	2,404
Timberlands		1,231		1,270
Timber and Timberlands - net	$	3,590	$	3,674

Property, plant and equipment consisted of the following (in millions):

	June 30, 2004			December 31, 2003
Land, buildings and improvements	$	82		$	81
Machinery and equipment		285			304
		367			385
Accumulated depreciation		(96	)		(82	)
Property, Plant and Equipment - net	$	271		$	303

Inventories, accounted for using the lower of average cost or market, consisted of the following (in millions):

	June 30, 2004		December 31, 2003
Raw materials (logs)	$	12	$	10
Work-in-process		3		4
Finished goods		29		31
		44		45
Supplies		10		9
Total	$	54	$	54

Note 3. Borrowings

In January of 2004, the company refinanced its revolving line of credit with a new $650 million facility maturing January 15, 2009. As of June 30, 2004, the interest rate for the new facility was LIBOR plus 1.00%, which included facility fees. This rate can range from LIBOR plus 0.75% to LIBOR plus 1.625% depending on our financial results. Subject to customary covenants, the line of credit allows for borrowings from time to time up to $650 million, including up to $50 million of standby letters of credit. Borrowings on the line of credit fluctuate daily based on cash needs. As of June 30, 2004, we had $466 million of borrowings and $6 million of standby letters of credit outstanding; $178 million remained available for borrowing under our line of credit. On July 1, 2004, $325 million of the borrowings under our line of credit was repaid.

Note 4. Earnings Per Share

The following table sets forth the reconciliation of basic and diluted earnings per share for thequarters ended June 30 (in millions, except per share amounts):

	2004		2003
Net income	$	57	$	58
Denominator for basic earnings per share		183.3		183.0
Effect of dilutive securities - stock options		0.6		0.3
Effect of dilutive securities - restricted stock, dividend equivalents,
and value management plan		0.1		0.2
Denominator for diluted earnings per share - adjusted for dilutive securities		184.0		183.5
Basic Earnings per Share	$	0.31	$	0.32
Diluted Earnings per Share	$	0.31	$	0.31

The following table sets forth the reconciliation of basic and diluted earnings per share for thesix months ended June 30 (in millions, except per share amounts):

	2004		2003
Net income	$	212	$	91
Denominator for basic earnings per share		183.2		183.5
Effect of dilutive securities - stock options		0.6		0.3
Effect of dilutive securities - restricted stock, dividend equivalents,
and value management plan		0.2		0.3
Denominator for diluted earnings per share - adjusted for dilutive securities		184.0		184.1
Basic Earnings per Share	$	1.16	$	0.50
Diluted Earnings per Share	$	1.15	$	0.49

Options to purchase approximately 0.5 million shares of common stock at exercise prices of $30.91 to $32.87 per share were outstanding during the second quarter and six months ended June 30, 2004, but were excluded from the computation of diluted earnings per shares because the options’ exercise prices were greater than the average market price of the common shares.  The options expire on or before February 2, 2014. During the second quarter and six months ended June 30, 2003, there were antidilutive options for approximately 1.1 million shares of common stock at exercise prices of $24.95 to $30.70 per share outstanding.

Note 5. Capital

The changes in the company’s capital accounts during 2004 were as follows (in millions):

	Common Stock
	Shares		Dollars		Paid-in Capital		Retained Earnings			Other Equity		Treasury Stock (B)			Total Equity
December 31, 2003		183.1	$	2	$	2,150	$	9		$	1	$	(43	)	$	2,119
Net Income								155								155
Dividends								(64	)							(64	)
Stock Option Exercises		0.1				2										2
VMA Shares Issued (A)		0.1				2										2
Deferred Compensation and
Other Comprehensive Loss						1										1
March 31, 2004		183.3		2		2,155		100			1		(43	)		2,215
Net Income								57								57
Dividends								(64	)							(64	)
Stock Option Exercises						1										1
Deferred Compensation and
Other Comprehensive Loss						1										1
June 30, 2004		183.3	$	2	$	2,157	$	93		$	1	$	(43	)	$	2,210

(A) At December 31, 2002, participants in Plum Creek’s Stock Incentive Plan earned 44,870 value management awards, which had a value of $200 per award, or $9 million in total. Under the terms of the plan, the awards were paid 50% in the first quarter of 2003 and 50% in the first quarter of 2004. Furthermore, each payment was made 50% in cash and 50% in Plum Creek stock.

(B) In October of 2002, the company’s Board of Directors authorized the company to repurchase up to $200 million of the company’s common stock. As of June 30, 2004, the company had repurchased approximately 2 million shares of common stock for a total cost of $43 million at an average price of $21.53 per share.

Note 6. Segment Information

The table below presents information about reported segments for thequarters ended June 30 (in millions):

	Northern Resources		Southern Resources		Real Estate(A)		Manufactured Products			Other(B)		Total
2004
External revenues	$	47	$	104	$	50	$	134		$	6	$	341
Intersegment revenue		15		--		--		--			--		15
Depreciation, depletion and
amortization		6		11		--		7			--		24
Operating income		16		45		12		23			4		100
2003
External revenues	$	47	$	112	$	57	$	99		$	3	$	318
Intersegment revenue		16		--		--		--			--		16
Depreciation, depletion and
amortization		4		14		--		7			1		26
Operating income (loss)		15		55		21		(4	)		2		89

The table below presents information about reported segments for thesix months ended June 30 (in millions):

	Northern Resources		Southern Resources		Real Estate(A)		Manufactured Products			Other(B)		Total
2004
External revenues	$	115	$	220	$	238	$	256		$	9	$	838
Intersegment revenue		42		--		--		--			--		42
Depreciation, depletion and
amortization		14		23		--		14			--		51
Operating income		48		101		114		34			6		303
2003
External revenues	$	104	$	211	$	80	$	191		$	5	$	591
Intersegment revenue		40		--		--		--			--		40
Depreciation, depletion and
amortization		12		25		--		13			1		51
Operating income (loss)		38		104		25		(9	)		3		161

(A) During 2003, we completed an evaluation of our timberlands in which we identified approximately 1.4 million acres of non-strategic timberlands and approximately 1.35 million acres of higher and better use timberlands. Approximately half of the non-strategic timberlands are made up of large blocks of property that are expected to be sold over the next two years. The other half of non-strategic timberlands consists generally of smaller properties that are expected to be sold over the next five to ten years. In the meantime, these timberlands continue to be used productively in our business of growing and selling timber. Of the 700,000 acres of large, non-strategic timberlands 51,000 acres and 255,000 acres, respectively, were sold during the quarter and six months ended June 30, 2004. Revenues from these large, non-strategic timberlands were $15 million and $133 million, respectively, for the quarter and six months ended June 30, 2004.

During the second quarter of 2004, the Real Estate segment recorded a $3 million impairment loss as a part of cost of goods sold on proposed sales of timberlands; no impairment was recorded during the second quarter of 2003. Impairment losses recognized as part of cost of goods sold during the six months ended June 30, 2004 totaled $19 million, compared to a $9 million impairment loss during the same period of 2003.

(B) Since 2001, Plum Creek has been a party to a joint operating agreement with Geomet, Inc., a coalbed methane developer, with whom the company jointly explored for and developed coalbed methane gas found on certain of its lands in West Virginia and Virginia. During the second quarter of 2004, the company sold its working interest in the joint operating agreement to Geomet, Inc. for $27 million. The resulting gain of $5 million before income taxes is included as Gain on Sale of Other Assets in our operating income for the quarter and six months ended June 30, 2004. In addition, the agreement provides for contingent additional sales proceeds of up to $3 million payable in 2008. Operating income from our working interest in the joint operating agreement was less than $1 million annually. Plum Creek retained its royalty interest in the project.

A reconciliation of total operating income to income before income taxes is presented below for thequarters ended June 30 (in millions):

	2004			2003
Total segment operating income	$	100		$	89
Interest expense, net		(27	)		(29	)
Corporate and other unallocated expenses		(11	)		(5	)
Gain on sale of other assets		5			--
Income before income taxes	$	67		$	55

A reconciliation of total operating income to income before income taxes is presented below for thesix months ended June 30 (in millions):

	2004			2003
Total segment operating income	$	303		$	161
Interest expense, net		(56	)		(57	)
Corporate and other unallocated expenses		(23	)		(18	)
Gain on sale of other assets		5			--
Income before income taxes	$	229		$	86

Note 7.    Employee Pension Plan

The components of net periodic benefit cost were as follows for thequarters ended June 30 (in millions):

	2004			2003
Service cost	$	2		$	2
Interest cost		2			2
Expected return on plan assets		(2	)		(2	)
Net periodic benefit cost	$	2		$	2

The components of net periodic benefit cost were as follows for thesix months ended June 30 (in millions):

	2004			2003
Service cost	$	3		$	3
Interest cost		3			3
Expected return on plan assets		(3	)		(3	)
Net periodic benefit cost	$	3		$	3

Note 8.    Stock-Based Compensation

The company expenses stock-based employee compensation in accordance with the fair value recognition provisions of Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” Under the prospective method adopted by the company in 2002, stock-based employee compensation cost is recognized using the fair value method for all employee awards granted, modified, or settled on or after January 1, 2002. The company recognized stock-based compensation expense of approximately $1 million each during the quarters ended June 30, 2004 and 2003 and $2 million each during the six-month periods ended June 30, 2004 and 2003.  Had the company used the fair value method of accounting for all stock-based compensation, net income for each of the quarters ended June 30, 2004 and 2003 would have been reduced by $0.1 million, and net income for each of the six-month periods ended June 30, 2004 and 2003 would have been reduced by $0.2 million.

Note 9.    Commitments and Contingencies

Contingencies.       The company is subject to regulations regarding forest and harvest practices and is, from time to time, involved in various legal proceedings, including environmental matters, incidental to its business. While administration of current regulations and any new regulations or proceedings have elements of uncertainty, it is anticipated that no pending legal proceedings or regulatory matters will have a materially adverse effect on the financial position, results of operations or liquidity of the company.

Environmental Contingencies. In connection with The Timber Company Merger in 2001, Plum Creek agreed to indemnify Georgia-Pacific for substantially all of the liabilities attributed to The Timber Company. During the fourth quarter of 2003, Georgia-Pacific provided Plum Creek with information for the first time about the existence of mine tailings and approximately 4.5 billion gallons of acidic surface water on approximately 90 acres in Hot Spring County, Arkansas on former Georgia-Pacific properties. Barite mining and related activities were conducted on the site between 1939 and 1981 in part by lessees of an entity that was acquired by Georgia-Pacific. The environmental issues associated with this site are currently being investigated and no remediation plan has yet been approved. There is not sufficient information, therefore, to adequately assess the costs, if any, associated with this matter or Georgia-Pacific’s degree of responsibility. No amounts have been accrued for this potential liability, as Plum Creek’s liability, if any, in this matter cannot be reasonably determined at this time. Furthermore, to the extent Plum Creek is required to indemnify Georgia-Pacific for its share of the remediation costs Plum Creek may be able to recover a portion of its cost from Georgia-Pacific’s insurance policy, or indemnity obligations of various lessees that conducted mining operations on the property, or both.

Note 10. Subsequent Event

On July 27, 2004, the Board of Directors authorized the company to make a dividend payment of $0.36 per share, or approximately $66 million, which will be paid on August 31, 2004 to stockholders of record on August 17, 2004.

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

Forward-Looking Statements

References to “Plum Creek,” “the company,” “we,” “us” or “our” are references to Plum Creek Timber Company, Inc., a Delaware corporation and a real estate investment trust, or REIT, for federal income tax purposes, and all of its wholly owned subsidiaries.

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 in “Risk Factors” below. 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:

• our failure to qualify as a real estate investment trust, or REIT;

• an unanticipated reduction in the demand for timber products and/or an unanticipated increase in the 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

• the failure to meet our expectations with respect to our likely future performance.

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 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 3, 2004.

Results of Operations

Second Quarter 2004 Compared to Second Quarter 2003

The following table and narrative compare operating results by segment for thequarters ended June 30 (in millions):

	2004			2003			Change
Operating Income (Loss) by Segment
Northern Resources	$	16		$	15		$	1
Southern Resources		45			55			(10	)
Real Estate		12			21			(9	)
Manufactured Products		23			(4	)		27
Other		4			2			2
Total Segment Operating Income		100			89			11
Other Costs & Eliminations		(11	)		(5	)		(6	)
Gain on Sale of Other Assets		5			--			5
Operating Income	$	94		$	84		$	10

Northern Resources Segment. Revenues decreased by $1 million, or 2%, to $62 million in 2004. This decrease was due primarily to lower sawlog harvest volumes ($8 million), offset in part by higher sawlog prices ($5 million). Sawlog harvest volumes were 16% lower due primarily to a planned reduction in annual harvest levels and the shifting of some second quarter volume into the first quarter of 2004. For all of 2004, sawlog harvest volumes are expected to decline by 7%. Sawlog harvest levels during the first quarter of 2004 were 5% higher than the prior year as a result of accelerating second quarter volume into the first quarter due to favorable harvesting conditions, which allowed us to take advantage of improving log prices. Sawlog prices increased by 12% due primarily to strong lumber and plywood markets.

Northern Resources Segment operating income was 26% of its revenues for 2004 and 24% for 2003. This increase was due primarily to higher sawlog prices. Segment costs and expenses decreased by $2 million, or 4%, to $46 million. This decrease was due primarily to the decrease in harvest volumes.

Southern Resources Segment. Revenues decreased by $8 million, or 7%, to $104 million in 2004. This decrease was due primarily to lower harvest volumes ($9 million). Harvest volumes were 11% lower due primarily to extremely wet weather conditions in our Southwest region and an ample supply of logs in our Southeast region. In our Southwest region, exceptionally wet weather conditions persisted during much of the second quarter, which caused us to curtail our harvesting operations. In our Southeast region, there was an excess supply of logs due to the continued dry weather conditions and log salvage operations as a result of recent forest fires. Several of our customers with 18-month pay-as-cut contracts elected to defer harvesting on these contracts and instead purchased logs sold on the spot market at lower prices. As a result, some of this deferred volume may not be harvested until next year.

Southern Resources Segment operating income was 43% of its revenues for 2004 and 49% for 2003. This decrease was due primarily to the decline in harvest volumes. Southern Resources Segment costs and expenses increased by $2 million, or 4%, to $59 million in 2004. This increase was due primarily to an increase in log and haul costs as a result of higher fuel costs.

Real Estate Segment. Revenues decreased by $7 million, or 12%, to $50 million in 2004. During 2003, we completed an evaluation of our timberlands in which we identified approximately 1.4 million acres of non-strategic timberlands and approximately 1.35 million acres of higher and better use timberlands. Approximately half of the non-strategic timberlands are made up of large blocks of property that are expected to be sold over the next two years. The other half of the non-strategic timberlands consists generally of smaller properties that are expected to be sold over the next five to ten years. During the second quarter of 2004, approximately 51,000 acres of the 700,000 acres of large, non-strategic timberlands were sold for $15 million. In the second quarter of 2003, the company sold $13 million of non-strategic timberlands. Excluding revenues from these large, non-strategic timberland sales, revenues decreased by $9 million, or 20%, to $35 million due primarily to the timing of sales. The timing of sales is a function of many factors, including the availability of government and not-for-profit funding, the general state of the economy, the plans of adjacent landowners, the company’s expectation of future price appreciation, and the timing of harvesting activities. We expect higher and better use timberland and small parcel, non-strategic timberland sales for the remainder of the year to range between $55 million and $65 million. Real Estate Segment sales could be higher depending on the extent of large, non-strategic timberlands sold during the remainder of the year.

Real Estate Segment operating income was 24% of its second quarter revenues for 2004, compared to 37% for 2003. This decrease was due primarily to an impairment loss of $3 million recognized during the second quarter of 2004 and the sale of timberlands with a higher per acre cost basis. Real Estate Segment costs and expenses increased by $2 million, or 6%, to $38 due primarily to the sale of timberlands with a higher per acre cost basis and a $3 million impairment loss, offset in part by fewer real estate sales.

Manufactured Products Segment. Revenues increased by $35 million, or 35%, to $134 million in the second quarter of 2004. This increase was due primarily to higher lumber prices ($14 million), higher plywood prices ($13 million), higher MDF sales volume ($8 million) and higher MDF prices ($3 million), offset in part by lower lumber volume ($4 million). Lumber prices increased by 41% due primarily to exceptionally strong housing starts during the first six months of 2004 on top of 25-year record high housing starts during 2003. Housing starts for the first six months of 2004 were 11% higher than housing during the same period in 2003. Plywood prices increased by 52% due primarily to near record high structural panel (plywood and oriented strand board) prices. Structural panel prices were at near record high levels during the second quarter of 2004 as a result of exceptionally strong housing starts and low field inventories at the beginning of the year. Wholesalers and distributors continued their just-in-time buying pattern during 2003, and as a result, field inventories were not sufficient to meet exceptionally strong demand during the first half of 2004. However, commodity structural panel prices peaked in April and have since declined by approximately 28%. MDF sale volume increased by 32% due primarily to resolving all major start-up issues associated with our new MDF thin-board line, and as a result, achieving our projected design capacity during the second quarter of 2004. MDF prices increase by 18% due primarily to improved demand and manufacturing efficiencies that resulted in producing a higher percentage of premium products. Lumber sales volume decreased by 10% due primarily to a regional decline in sawlog harvests.

Manufacturing Products Segment operating income was $23 million for the second quarter of 2004, compared to an operating loss of $4 million for the second quarter of 2003. The increase in operating performance was due primarily to higher lumber, plywood and MDF prices. Manufactured Products Segment costs and expenses increased by $8 million, or 8%, to $111 million in the second quarter of 2004. This increase in costs was due primarily to higher MDF sales volume.

Other Costs and Eliminations / Gain on Sale of Other Assets. Other Costs and Eliminations (which consists of corporate overhead and intercompany profit elimination) decreased operating income by $11 million in 2004, compared to a decrease of $5 million in 2003. Four million of the $6 million change relates to higher corporate expenses.

Since 2001, Plum Creek has been a party to a joint operating agreement with Geomet, Inc., a coalbed methane developer, with whom the company jointly explored for and developed coal bed methane gas found on certain of its lands in West Virginia and Virginia. During the second quarter of 2004, the company sold its working interest in the joint operating agreement to Geomet, Inc. for $27 million and recorded a gain of $5 million.

Provision for Income Taxes.The provision for income taxes was a $10 million expense for the second quarter of 2004, compared to a $3 million benefit for the second quarter of 2003. This change of $13 million was due primarily to the $27 million improvement in the operating performance for the Manufactured Products Segment and a $5 million gain on the sale of our working interest in the joint operating agreement to Geomet, Inc. Plum Creek has elected to be taxed as a REIT under sections 856-860 of the United States Internal Revenue Code, and as such, is generally not subject to 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 sales of some of our higher and better use lands.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

The following table and narrative compare operating results by segment for thesix months ended June 30 (in millions):

	2004			2003			Change
Operating Income (Loss) by Segment
Northern Resources	$	48		$	38		$	10
Southern Resources		101			104			(3	)
Real Estate		114			25			89
Manufactured Products		34			(9	)		43
Other		6			3			3
Total Segment Operating Income		303			161			142
Other Costs & Eliminations		(23	)		(18	)		(5	)
Gain on Sale of Other Assets		5			--			5
Operating Income	$	285		$	143		$	142

Northern Resources Segment. Revenues increased by $13 million, or 9%, to $157 million in 2004. This increase was due primarily to higher sawlog ($7 million) and pulpwood ($4 million) prices. Sawlog prices increased by 8% due primarily to strong hardwood specialty, lumber and plywood markets. Pulpwood prices increased by 17% due primarily to low mill fiber inventories and a shortage of logging contractors.

Northern Resources Segment operating income was 31% of its revenues for 2004 and 26% for 2003. This increase was due primarily to higher sawlog and pulpwood prices. Segment costs and expenses increased by $3 million, or 3%, to $109 million. This increase was due primarily to an increase in log and haul costs as a result of higher fuel costs.

Southern Resources Segment. Revenues increased by $9 million, or 4%, to $220 million in 2004. This increase was due primarily to a higher percentage of delivered log sales. The company increased its percentage of delivered log sales by decreasing its percentage of sales of standing timber. Under its delivered log sale agreements, the company is responsible for log and haul costs. When standing timber is sold the buyer incurs the log and haul costs. While revenues are higher when the company is responsible for the logging and hauling of timber, costs of sales generally increase by a similar amount. As a result, the company realizes lower operating income as a percentage of revenue, although operating income is not generally affected.

Southern Resources Segment operating income was 46% of its revenues for 2004 and 49% for 2003. This decrease was due primarily to the increased percentage of delivered log sales and higher fuel costs. Southern Resources Segment costs and expenses increased by $12 million, or 11%, to $119 million in 2004. This increase of $12 million was due primarily to an increase in log and haul costs as a result of a higher percentage of delivered log sales compared to sales of standing timber and higher fuel costs.

Real Estate Segment. Revenues increased by $158 million to $238 million in 2004. During 2003, we completed an evaluation of our timberlands in which we identified approximately 1.4 million acres of non-strategic timberlands and approximately 1.35 million acres of higher and better use timberlands. Approximately half of the non-strategic timberlands are made up of large blocks of property that are expected to be sold over the next two years. The other half of the non-strategic timberlands consists generally of smaller properties that are expected to be sold over the next five to ten years. During the six months ended June 30, 2004, approximately 250,000 acres of the 700,000 acres of large, non-strategic timberlands were sold for $133 million. During the first six months of 2003, the company sold $13 million of non-strategic timberlands. Excluding revenues from these large, non-strategic timberland sales, revenues increased by $38 million, or 57%, to $105 million due primarily to the timing of sales. The timing of sales is a function of many factors, including the availability of government and not-for-profit funding, the general state of the economy, the plans of adjacent landowners, the company’s expectation of future price appreciation, and the timing of harvesting activities. We expect higher and better use timberland and small parcel, non-strategic timberland sales for the remainder of the year to range between $55 million and $65 million. Real Estate Segment sales could be higher depending on the extent of large, non-strategic timberlands sold during the remainder of the year.

Real Estate Segment operating income was 48% of its revenues for 2004, compared to 31% for 2003. This increase was due primarily to the sale of timberlands with a lower per acre cost basis. Real Estate Segment costs and expenses increased by $69 million to $124 million. This increase of $69 million was due primarily to the sale of large, non-strategic timberlands. We recognized costs and expenses of $61 million in connection with the sale of approximately 250,000 acres of large parcel timberlands during 2004.

Manufactured Products Segment. Revenues increased by $65 million, or 34%, to $256 million in 2004. This increase was due primarily to higher lumber prices ($23 million), higher plywood prices ($23 million) and higher MDF sales volume ($16 million). Lumber prices increased by 32% due primarily to exceptionally strong housing starts during the first six months of 2004 on top of 25-year record high housing starts during 2003 and limited log availability. Housing starts for the first six months of 2004 were 11% higher than housing during the same period in 2003. Log availability was limited during the first half of 2004 as a result of severe forest fires in the Western United States and Canada during the second half of 2003. Plywood prices increased by 45% due primarily to near record high structural panel (plywood and oriented strand board) prices. Structural panel prices were at near record high levels during the first six months of 2004 as a result of exceptionally strong housing starts and low field inventories at the beginning of the year. Wholesalers and distributors continued their just-in-time buying pattern during 2003, and as a result, field inventories were not sufficient to meet exceptionally strong demand during the first half of 2004. However, commodity structural panel prices peaked in April and have since declined by approximately 28%. MDF sale volume increased by 30% due primarily to resolving all major start-up issues associated with our new MDF thin-board line, and as a result, achieving our projected design capacity during the first half of 2004.

Manufacturing Products Segment operating income was $34 million for the six months ended June 30, 2004, compared to an operating loss of $9 million for the same period in 2003. The increase in operating performance was due primarily to higher lumber and plywood prices and higher MDF sales volume. Manufactured Products Segment costs and expenses increased by $22 million, or 11%, to $222 million in the six months ended June 30, 2004. This increase in costs was due primarily to higher MDF sales volume ($11 million) and higher lumber raw material costs ($7 million).

Other Costs and Eliminations / Gain on Sale of Other Assets. Other Costs and Eliminations (which consists of corporate overhead and intercompany profit elimination) decreased operating income by $23 million in 2004, compared to a decrease of $18 million in 2003. Four million of the $5 million change relates to higher corporate expenses.

Since 2001, Plum Creek has been a party to a joint operating agreement with Geomet, Inc., a coalbed methane developer, with whom the company jointly explored for and developed coal bed methane gas found on certain of its lands in West Virginia and Virginia. During the second quarter of 2004, the company sold its working interest in the joint operating agreement to Geomet, Inc. for $27 million and recorded a gain of $5 million.

Provision for Income Taxes.The provision for income taxes was a $17 million expense for the six months ended June 30, 2004, compared to a $5 million benefit for the six months ended June 30, 2003. This change of $22 million was due primarily to the $43 million improvement in the operating performance for the Manufactured Products Segment and a $5 million gain on the sale of our working interest in a joint operating agreement to Geomet, Inc. Plum Creek has elected to be taxed as a REIT under sections 856-860 of the United States Internal Revenue Code, and as such, is generally not subject to 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 sales of some of our higher and better use lands.

Financial Condition and Liquidity

Net cash provided by operating activities during the six months ended June 30, 2004 totaled $397 million, compared to $190 million for the same period in 2003. The increase of $207 million was due primarily to a $158 million increase in revenues from timberland sales, including a $120 million increase in revenues from sales of large, non-strategic timberlands, which was used to repay debt, and a $43 million improvement in operating income from our manufacturing facilities.

In January of 2004, the company refinanced its revolving line of credit with a new $650 million facility maturing on January 15, 2009. As of June 30, 2004, the interest rate for the new facility was LIBOR plus 1.00%, which included facility fees. This rate can range from LIBOR plus 0.75% to LIBOR plus 1.625% depending on our financial results. Subject to customary covenants, the line of credit allows for borrowings from time to time up to $650 million, including up to $50 million of standby letters of credit. Borrowings on the line of credit fluctuate daily based on cash needs. As of June 30, 2004, we had $466 million of borrowings and $6 million of standby letters of credit outstanding; $178 million remained available for borrowing under our line of credit. On July 1, 2004, $325 million of the borrowings under our line of credit was repaid.

Our borrowing agreements contain various restrictive covenants, including limitations on harvest levels, sales of assets, the incurrence of indebtedness and making restricted payments (such as payments of cash dividends or stock repurchases). Our borrowing agreements limit our ability to make restricted payments based on available cash, which is generally our net income (excluding gains on the sale of capital assets) after adjusting for non-cash charges (such as depreciation and depletion), changes in various reserves, less capital expenditures and principal payments on indebtedness that are not financed. Additionally, the amount of available cash may be increased by the amount of proceeds from the sale of higher and better use properties and, under certain circumstances, by 50% of the amount of net proceeds from the sale of other assets. Furthermore, our line of credit requires that we maintain certain interest coverage and maximum leverage ratios. We were in compliance with all of our borrowing agreement covenants as of June 30, 2004.

The company’s leverage strategy is to maintain a balance sheet that provides the financial flexibility to pursue our strategic objectives. In order to maintain this financial flexibility, the company strives to maintain an investment grade credit profile. This is reflected in our moderate use of debt, good access to credit markets and no material covenant restrictions in our debt agreements that would prevent us from prudently using debt capital.

Cash required to meet our financial needs will be significant. We believe, however, that cash on hand and cash flows from continuing operations will be sufficient to fund planned capital expenditures, and interest and principal payments on our indebtedness for the next year. In 2006 and 2007, the company has significant long-term debt principal payment requirements. The company intends to refinance these principal payments at the time of maturity. The company, however, may not refinance the entire amount and may use cash generated from operations for a portion of the principal payments.

On July 27, 2004, our Board of Directors declared a dividend of $0.36 per share, or approximately $66 million, which will be paid on August 31, 2004 to stockholders of record on August 17, 2004. Future dividends will be determined by our Board of Directors, in its sole discretion, based on consideration of a number of factors including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, debt covenant restrictions that may impose limitations on the company’s ability to make cash payments, borrowing capacity, changes in the prices of and demand for Plum Creek’s products, and changes in our ability to sell timberlands at attractive prices. Other factors that our Board of Directors considers include the appropriate timing of timber harvests, acquisition and divestiture opportunities, stock repurchases, debt repayment and other means by which the company could deliver value to its stockholders.

In October of 2002, our Board of Directors authorized the company to repurchase up to $200 million of the company’s common stock. As of June 30, 2004, the company had repurchased approximately 2 million shares of common stock for a total cost of $43 million at an average price of $21.53 per share.

Capital expenditures, excluding the acquisition of timberlands, for the six months ended June 30, 2004 were $32 million, compared to $38 million for same period in 2003. Planned capital expenditures for 2004 are expected to be approximately $83 million and include approximately $63 million for our timberlands and $9 million for our manufacturing facilities. The timberland expenditures are primarily for reforestation and other expenditures associated with the planting and growing of trees.

Risk Factors Applicable to the Business of Plum Creek

Business and Operating Risks

      The Cyclical Nature of Our Business Could Adversely Affect Our Results of Operations

Our results of operations are affected by the cyclical nature of the forest products industry. Historical prices for logs and manufactured wood products have been volatile, and we, like other participants in the forest products industry, have limited direct influence over the time and extent of price changes for logs and wood products. The demand for logs and wood products is affected primarily by the level of new residential construction activity and, to a lesser extent, repair and remodeling activity and other industrial uses. The demand for logs is also affected by the demand for wood chips in the pulp and paper markets. These activities are, in turn, subject to fluctuations due to, among other factors:

• changes in domestic and international economic conditions;

• interest rates;

• population growth and changing demographics; and

• seasonal weather cycles (e.g., dry summers, wet winters).

Decreases in the level of residential construction activity generally reduce demand for logs and wood products. This results in lower revenues, profits and cash flows. In addition, industry-wide increases in the supply of logs and wood products during favorable price environments can also lead to downward pressure on prices. Timber owners generally increase production volumes for logs and wood products during favorable price environments. Such increased production, however, when coupled with even modest declines in demand for these products in general, could lead to oversupply and lower prices.

Our results of operations may also be subject to global economic changes as global supplies of wood fiber shift in response to changing economic conditions. Changes in global economic conditions that could affect our results of operations include, but are not limited to, new timber supply sources and changes in currency exchange rates, foreign and domestic interest rates and foreign and domestic trade policies.

In addition, changes in our ability to sell or exchange non-strategic timberlands and timberland properties that have higher and better uses at attractive prices could have a significant effect on our results of operations.

The following factors, among others, may adversely affect the timing and amount of our income generated by our land sales:

• general economic conditions;

• availability of funding for governmental agencies, developers, conservation organizations, individuals and others to purchase our lands for conservation, recreation, residential or other purposes;

• local real estate market conditions, such as oversupply of, or reduced demand for, properties sharing the same or similar characteristics as those in our portfolio;

• relative illiquidity of real estate investments;

• impact of federal, state and local land use and environmental protection laws; or

• changes in tax, real estate and zoning laws.

      The Forest Products Industry is Highly Competitive

The forest products industry is highly competitive in terms of price and quality. Wood products are subject to increasing competition from a variety of substitute products, including non-wood and engineered wood products. For example, plywood markets are subject to competition from oriented strand board, and U.S. lumber and log markets are subject to competition from other worldwide suppliers.

Historically, Canada has been a significant source of lumber for the U.S. market, particularly in the new home construction market. This source of lumber was constrained in April 1996 when a five-year lumber trade agreement between the U.S. and Canada went into effect. The trade agreement was intended to limit the volume of Canadian lumber exported into the U.S. through the assessment of an export tariff on annual lumber exports to the U.S. in excess of certain levels from the four major producing Canadian provinces.

The trade agreement expired in March 2001, and soon thereafter a U.S. industry coalition, of which Plum Creek is a member, submitted anti-dumping and countervailing duty petitions to the International Trade Commission and the U.S. Department of Commerce. In March 2002, the Department of Commerce rendered a final determination in favor of the U.S. industry coalition and set a 19.3% countervailing duty on Canadian lumber imports and an anti-dumping duty on all non-investigated Canadian exporters averaging 9.7% (representing the weighted average of the anti-dumping rates imposed on the investigated Canadian exporters). The Department of Commerce decreased these duties in April 2002 to 18.8% and 8.4%, respectively. In May 2002, the International Trade Commission rendered a final determination that the U.S. industry was threatened with material injury from Canadian lumber imports. Following this determination, the Department of Commerce put into effect the countervailing and anti-dumping duties in May 2002. Reports indicate, however, that the final duties have not had the effect of decreasing Canadian lumber imports into the U.S.

The future of the U.S.-imposed import duties on Canadian lumber remains uncertain. Canada appealed both the anti-dumping duty and the countervailing duty to the WTO and NAFTA appeal boards. Both the WTO and NAFTA issued initial rulings that affirmed the U.S. position that Canadian stumpage practices are, in fact, providing a subsidy to the Canadian industry, and upheld the validity of antidumping duties imposed on most Canadian producers. Both the WTO and NAFTA rulings also included provisions for re-examining the calculation and level of the countervailing and the anti-dumping duties. As a result of these re-examinations, the countervailing duty was lowered to 12%, and the anti-dumping duty was lowered only slightly, although a recent WTO reversal of its position could lead to an increase back up to original levels. However, on April 30, 2004, NAFTA ruled that the International Trade Commission’s determination of injury to U.S. industry from Canadian lumber imports, which is the basis for imposing the duties, was not supported with substantial evidence. The commission has appealed this determination.

To avoid protracted litigation, the U.S. and representatives of the Canadian government continue to pursue a settlement agreement. However, there can be no assurance that an agreement will be reached, or that the terms of any such final agreement would be favorable to the U.S. lumber industry’s interests. Therefore, other factors remaining unchanged, the downward pressure on domestic lumber and log prices caused by Canadian imports could continue or increase.

      Our Cash Dividends are Not Guaranteed and May Fluctuate

We have elected to be taxed as a REIT under sections 856-860 of the United States Internal Revenue Code of 1986, as amended. Generally, REITs are required to distribute 90% of their taxable income. However, REITs are required to distribute only their ordinary taxable income and not their net capital gains income. Accordingly, we do not believe that we are required to distribute material amounts of cash given that the majority of our taxable income is treated as capital gains income. Our Board of Directors, in its sole discretion, determines the amount of the quarterly dividends to be provided to our stockholders based on consideration of a number of factors including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions that may impose limitations on cash payments, future acquisitions and divestitures, harvest levels, changes in the price and demand for our products and general market demand for timberlands including those timberland properties that have higher and better uses. Consequently, our dividend levels may fluctuate.

      We May Be Unsuccessful in Carrying Out Our Acquisition Strategy

We intend to pursue acquisitions of strategic timberland properties. As with any investment, our future acquisitions, if any, may not perform in accordance with our expectations. In addition, we anticipate financing such acquisitions through cash from operations, borrowings under our unsecured credit facilities, proceeds from equity or debt offerings (including offerings of limited partnership units by our operating partnership) or proceeds from asset dispositions, or any combination thereof. Our inability to finance future acquisitions on favorable terms or the failure of any acquisitions to conform to our expectations, could adversely affect our results of operations.

      We Depend on External Sources of Capital for Future Growth

Our ability to finance growth is dependent to a significant degree on external sources of capital. Our ability to access such capital on favorable terms could be hampered by a number of factors, many of which are outside of our control, including, without limitation, a decline in general market conditions, increases in interest rates, an unfavorable market perception of our growth potential, a decrease in our current or estimated future earnings or a decrease in the market price of our common stock. In addition, our ability to access additional capital may also be limited by the terms of our existing indebtedness, which, among other things, restricts our incurrence of debt and the payment of dividends. Any of these factors, individually or in combination, could prevent us from being able to obtain the capital we require on terms that are acceptable to us, and the failure to obtain necessary capital could materially adversely affect our future growth.

      Our Ability to Harvest Timber May Be Subject to Limitations Which Could Adversely Affect Our
      Operations

Weather conditions, timber growth cycles, access limitations and regulatory requirements associated with the protection of wildlife and water resources may restrict harvesting of timberlands as may other factors, including damage by fire, insect infestation, disease, prolonged drought and other natural disasters. Although damage from such natural causes usually is localized and affects only a limited percentage of the timber, there can be no assurance that any damage affecting our timberlands will in fact be so limited. As is common in the forest products industry, we do not maintain insurance coverage with respect to damage to our timberlands.

Our revenues, net income and cash flow from our operations are dependent to a significant extent on the pricing of our products and our continued ability to harvest timber at adequate levels. In addition, the terms of our long-term debt agreements and lines of credit limit our ability to fund dividends to stockholders by accelerating the harvest of significant amounts of timber.

      Our Timberlands and Manufacturing Facilities Are Subject to Federal and State Environmental
      Regulations

We are subject to regulation under, among other laws, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response Compensation and Liability Act of 1980, the National Environmental Policy Act, and the Endangered Species Act, as well as comparable state laws and regulations. Violations of various statutory and regulatory programs that apply to our operations could result in civil penalties, remediation expenses, potential injunctions, cease and desist orders and criminal penalties.

We engage in the following activities that are subject to regulation:

• forestry activities, including harvesting, planting and road building, use and maintenance;

• the generation of air emissions;

• the discharge of industrial wastewater and storm water; and

• the generation and disposal of both hazardous and non-hazardous wastes.

Laws and regulations protecting the environment have generally become more stringent in recent years and could become more stringent in the future. Some environmental statutes impose strict liability, rendering a person liable for environmental damage without regard to the person’s negligence or fault. These laws or future legislation or administrative or judicial action with respect to protection of the environment may adversely affect our business.

The Endangered Species Act and comparable state laws protect species threatened with possible extinction. A number of species on our timberlands have been and in the future may be protected under these laws, including the northern spotted owl, marbled murrelet, gray wolf, grizzly bear, bald eagle, Karner blue butterfly, red-cockaded woodpecker, bull trout, and various other trout and salmon species. Protection of threatened and endangered species may include restrictions on timber harvesting, road building and other forest practices on private, federal and state land containing the affected species.

Stock Ownership

      Provisions in Our Certificate of Incorporation and Delaware Law May Prevent a Change in Control

Some provisions of our certificate of incorporation may discourage a third party from seeking to gain control of us. For example, the ownership limitations described in our certificate of incorporation could have the effect of delaying, deferring, or limiting a change of control in which holders of our common stock might receive a premium for their shares over the then prevailing market price. The following is a summary of provisions of our certificate of incorporation that may have this effect.

Ownership Limit. In order for us to maintain our qualification as a REIT, not more than 50% of the value of our outstanding shares of capital stock may be owned, directly or indirectly, by five or fewer individuals, as defined in the Internal Revenue Code. For the purpose of preserving our REIT qualification, our certificate of incorporation prohibits ownership, either directly or under the applicable attribution rules of the Internal Revenue Code, of more than 5% of the lesser of the total number of shares of our common stock outstanding or the value of the outstanding shares of our common stock by any stockholder other than by some designated persons agreed to by us or as set forth in our certificate of incorporation (the “Ownership Limit”). The Ownership Limit may have the effect of discouraging an acquisition of control of us without the approval of our Board of Directors.

The Ownership Limit in our certificate of incorporation also restricts the transfer of our common stock. For example, any transfer of our equity is null and void if the transfer would:

• result in any person owning, directly or indirectly, equity in excess of the Ownership Limit;

• result in our equity being owned, directly or indirectly, by fewer than 100 persons;

• result in us being "closely held" (as defined in the Internal Revenue Code);

• result in us failing to qualify as a "domestically controlled REIT" (as defined in the Internal Revenue Code); or

• otherwise cause us to fail to qualify as a REIT.

Preferred Stock. Our certificate of incorporation authorizes our Board of Directors to issue up to 75 million shares of preferred stock. Upon issuance, our Board of Directors will establish the preferences and rights for this preferred stock. These preferences and rights may include the right to elect additional directors. The issuance of preferred stock could have the effect of delaying or preventing a change in control of us even if a change in control were in our stockholders’ best interests.

Section 203 of the Delaware General Corporation Law.Section 203 of the Delaware General Corporation Law generally prohibits us from engaging in business transactions with a person or entity that owns 15% or more of our voting stock for a period of three years following the time such person or entity became an “interested stockholder” unless, prior to such time, our Board of Directors approved either the business combination or the transaction which resulted in such person or entity becoming an interested stockholder. A business transaction may include mergers, asset sales and other transactions resulting in financial benefit to the person or entity that owns 15% or more of our voting stock.

Tax Risks

      If We Fail to Qualify as a REIT, We Would Be Subject to Tax at Corporate Rates and Would Not
      Be Able to Deduct Dividends toStockholders When Computing Our Taxable Income

If in any taxable year we fail to qualify as a REIT:

• we would be subject to federal and state income tax on our taxable income at regular corporate rates of approximately 40%;

• we would not be allowed to deduct dividends to stockholders in computing our taxable income; and

• unless we were entitled to relief under the Internal Revenue Code, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which we lost qualification.

If we fail to qualify as a REIT, we might need to borrow funds or liquidate some investments in order to pay the additional tax liability. Accordingly, funds available for investment or dividends to our stockholders would be reduced for each of the years involved.

Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code to our operations and the determination of various factual matters and circumstances not entirely within our control. There are only limited judicial or administrative interpretations of these provisions. Although we operate in a manner consistent with the REIT qualification rules, we cannot assure you that we are or will remain so qualified.

In addition, the rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the United States Department of the Treasury. Changes to the tax law could adversely affect our stockholders. We cannot predict with certainty whether, when, in what forms, or with what effective dates, the tax laws applicable to us or our stockholders may be changed.

      If We Failed to Distribute the Earnings and Profits of The Timber Company, We Would Be Subject to
      Adverse Tax Consequences

In connection with The Timber Company’s October 6, 2001 merger with Plum Creek, we were required by January 31, 2002 to distribute the earnings and profits acquired from the six entities that comprised The Timber Company. We believe that the accelerated payment of our fourth quarter dividend for 2001, which we paid on December 28, 2001, was sufficient to distribute these earnings and profits. If we failed to distribute an amount equal to these earnings and profits, we might be subject to adverse tax consequences. We expect that, even if the earnings and profits were subsequently adjusted upward by the Internal Revenue Service, the amount we distributed exceeded such earnings and profits. Nevertheless, such an adjustment may give rise to the imposition of the 4% excise tax on the excess income required to be distributed over the amounts treated as distributed after application of the earnings and profits rule.

      Certain of Our Business Activities are Potentially Subject to Prohibited Transactions Tax or
      Corporate Level Income Tax.

REITs are generally intended to be passive entities and can thus only engage in those activities permitted by the Internal Revenue Code (Code), which for Plum Creek generally include: owning and managing a timberland portfolio; growing timber; and the sale of standing timber. Accordingly, the manufacture and sale by us of wood products, certain types of timberlands sales and sales of logs are conducted through one or more of our taxable REIT subsidiaries (“TRSs”) because such activities could generate non-qualifying REIT income and could constitute “prohibited transactions.” Prohibited transactions are defined by the Code to be sales or other dispositions of property to customers in the ordinary course of a trade or business.

By conducting our business in this manner we satisfy the REIT requirements of the Code and avoid the 100% tax that could be imposed if a REIT were to conduct a prohibited transaction. We may not always be successful, however, in limiting such activities to our TRSs. Therefore, we could be subject to the 100% prohibited transactions tax if such instances were to occur. The net income of our TRSs is subject to corporate level income tax.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Approximately $1.4 billion of the long-term debt of the company bears interest at fixed rates, and therefore the fair value of these instruments is affected by changes in market interest rates. The following table presents contractual principal cash flows based upon maturity dates of the company’s debt obligations and the related weighted-average contractual interest rates by expected maturity dates for the fixed rate debt (in millions):

	2004			2005			2006			2007			2008			Thereafter			Total		Fair Value(B)
June 30, 2004
Fixed Rate Debt
Principal due(A)	$	--		$	27		$	157		$	123		$	147		$	953		$	1,407	$	1,528
Avg. interest rate		7.6	%		7.5	%		7.5	%		7.4	%		7.5	%		7.2	%
Variable Rate Debt(C)													$	20		$	466		$	486	$	486

	2003			2004			2005			2006			2007			Thereafter			Total		Fair Value(B)
June 30, 2003
Fixed Rate Debt
Principal due(A)	$	--		$	27		$	27		$	157		$	123		$	1,100		$	1,434	$	1,659
Avg. interest rate		7.6	%		7.6	%		7.5	%		7.5	%		7.4	%		7.3	%
Variable Rate Debt							$	433								$	20		$	453	$	453

(A) Excludes unamortized premium of $13 million at June 30, 2004 and $19 million at June 30, 2003.

(B) The decrease in the fair value of our fixed rate debt compared to June 30, 2003 was due primarily to an increase in market interest rates for long-term debt and the repayment of $27 million of borrowings during the six months ended June 30, 2004.

(C) As of June 30, 2004, the average interest rate on the $466 million borrowings under our $650 million revolving line of credit maturing on January 15, 2009 was based on LIBOR plus 1.00%, which included facility fees. This rate can range from LIBOR plus 0.75% to LIBOR plus 1.625% depending on our financial results. On July 1, 2004, $325 million of variable rate debt was repaid. The interest rate on the $20 million variable rate senior-note borrowings due in 2008 is based on 3-month LIBOR plus 1.445%.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

The company’s management, with the participation of the company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the company’s management, including the Chief Executive Officer and Chief Financial Officer, has concluded that the company’s disclosure controls and procedures were effective as of the end of such period.

(b) Control over Financial Reporting

There have been no changes in the company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

There is no pending or threatened litigation involving the company that we believe would have a material adverse effect on the company’s financial position, results of operations or liquidity.

Items 2 and 3 of Part II are not applicable and have been omitted.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS

The company’s 2004 Annual Meeting of Stockholders was held on May 4, 2004. Proxies were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. At the meeting, the following items were submitted to a vote of the stockholders:

(a) Nine individuals nominated by the board for re-election for one-year terms expiring at the 2005 Annual Meeting of Stockholders were re-elected by a plurality vote, with no solicitations in opposition as follows:

	Votes Cast
Nominee	For	Withheld
Rick. R. Holley	162,904,244	2,033,133
Ian B. Davidson	156,670,341	8,267,036
Robin Josephs	156,587,232	8,350,145
David D. Leland	128,304,452	36,632,925
John G. McDonald	156,260,162	8,677,215
Hamid R. Moghadam	162,901,937	2,035,439
John H. Scully	161,696,892	3,240,485
Stephen C. Tobias	162,841,519	2,095,857
Carl B. Webb	162,615,183	2,322,194

           There were no broker non-votes.

(b) An amendment and restatement of the company’s stock incentive plan was approved by the stockholders with 94,672,915 votes in favor of the proposal, 12,500,160 votes against the proposal, 2,397,150 abstentions and 55,367,157 broker non-votes.

(c) The board’s appointment of Ernst & Young LLP as the company’s independent auditor was ratified by the stockholders with 155,085,636 votes in favor of the proposal, 8,498,792 votes against the proposal, 1,352,948 abstentions and no broker non-votes.

(d) A shareholder proposal regarding certain environmental principles sponsored by the Coalition For Environmentally Responsible Economies (“CERES”) was included in the company’s proxy materials in accordance with Rule 14a-8 of the Securities Exchange Act of 1934, as amended, but was not properly presented by the sponsoring stockholder at the meeting and, therefore, was not submitted for approval by the stockholders.

Item 5 of Part II is not applicable and has been omitted.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) List of Exhibits

Each exhibit set forth below in the Index to Exhibits is filed as a part of this report. All exhibits not filed herewith are incorporated herein by reference to a prior filing as indicated.

INDEX TO EXHIBITS

Exhibit Designation	Nature of Exhibit
2.4	Agreement and Plan of Merger by and among Georgia-Pacific Corporation, North American Timber Corp., NPI Timber, Inc., GNN Timber, Inc., GPW Timber, Inc., LRFP Timber, Inc., NPC Timber,  Inc. and Plum Creek Timber Company, Inc. (Form 8-K/A, File No. 1-10239, dated July 18, 2000).  Amendment No. 1 to the Agreement and Plan of Merger, dated as of June 12, 2001 (Form 8-K, File No. 1-10239, dated June 12, 2001).
3.1	Restated Certificate of Incorporation of Plum Creek Timber Company, Inc. (Form 10-Q, File No. 1-10239, for the quarter ended March 31, 2002).
3.2	Amendment and Restated By-laws of Plum Creek Timber Company, Inc. (Form 10-Q, File No. 1-10239, for the quarter ended March 31, 2002).
4.3	The registrant agrees that it will furnish to the Commission a copy of any of its debt instruments not listed herein upon request.
10.15	Form of Executive Stock Option, Dividend Equivalent Right and Value Management Award Agreement under Amended and Restated Stock Incentive Plan.
31.1	Certification of Rick R. Holley, President and Chief Executive Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of William R. Brown, Executive Vice President and Chief Financial Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of Rick R. Holley, President and Chief Executive Officer, pursuant to Rules 13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of William R. Brown, Executive Vice President and Chief Financial Officer, pursuant to Rules 13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

The company filed a Current Report on Form 8-K, dated April 19, 2004, furnishing a copy of its press release announcing the company’s results of operations for the quarter ended March 31, 2004, and certain related information.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PLUM CREEK TIMBER COMPANY, INC.
(Registrant)

By:   /s/  William R. Brown
WILLIAM R. BROWN
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)

Date:  August 2, 2004