PLUM CREEK TIMBERLANDS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended | |||||||||||
(In Millions) | December 31, 2003 | December 31, 2002 | December 31, 2001 | ||||||||
Revenues: | |||||||||||
Timber | $ | 664 | $ | 649 | $ | 423 | |||||
Real Estate | 124 | 98 | 80 | ||||||||
Manufacturing | 397 | 381 | 86 | ||||||||
Other | 11 | 9 | 9 | ||||||||
Total Revenues | 1,196 | 1,137 | 598 | ||||||||
Costs and Expenses: | |||||||||||
Cost of Goods Sold: | |||||||||||
Timber | 345 | 318 | 188 | ||||||||
Real Estate | 77 | 34 | 20 | ||||||||
Manufacturing | 390 | 370 | 83 | ||||||||
Other | 4 | 2 | 1 | ||||||||
Total Cost of Goods Sold | 816 | 724 | 292 | ||||||||
Selling, General and Administrative | 77 | 75 | 56 | ||||||||
Total Costs and Expenses | 893 | 799 | 348 | ||||||||
Operating Income | 303 | 338 | 250 | ||||||||
Interest Expense, net | 117 | 103 | 54 | ||||||||
Income before Income Taxes | 186 | 235 | 196 | ||||||||
Benefit (Provision) for Income Taxes | 6 | (2 | ) | 142 | |||||||
Net Income | $ | 192 | $ | 233 | $ | 338 | |||||
See accompanying Notes to Consolidated Financial Statements
PLUM CREEK TIMBERLANDS, L.P.
CONSOLIDATED BALANCE SHEETS
(In Millions) | December 31, 2003 | December 31, 2002 | ||||||
---|---|---|---|---|---|---|---|---|
Assets | ||||||||
Current Assets: | ||||||||
Cash and Cash Equivalents | $ | 260 | $ | 246 | ||||
Restricted Advance from Customer | 3 | 4 | ||||||
Accounts Receivable | 34 | 33 | ||||||
Inventories | 54 | 58 | ||||||
Investment in Grantor Trusts | 22 | 19 | ||||||
Deferred Tax Asset | 11 | 11 | ||||||
Other Current Assets | 28 | 14 | ||||||
412 | 385 | |||||||
Timber and Timberlands - Net | 3,674 | 3,599 | ||||||
Property, Plant and Equipment - Net | 303 | 307 | ||||||
Other Assets | 6 | 7 | ||||||
Total Assets | $ | 4,395 | $ | 4,298 | ||||
Liabilities | ||||||||
Current Liabilities: | ||||||||
Current Portion of Long-Term Debt | $ | 33 | $ | 33 | ||||
Accounts Payable | 27 | 25 | ||||||
Interest Payable | 28 | 21 | ||||||
Wages Payable | 23 | 23 | ||||||
Taxes Payable | 15 | 11 | ||||||
Deferred Revenue | 16 | 18 | ||||||
Liabilities Associated with Grantor Trusts | 22 | 19 | ||||||
Other Current Liabilities | 15 | 14 | ||||||
179 | 164 | |||||||
Long-Term Debt | 1,437 | 1,170 | ||||||
Lines of Credit | 594 | 669 | ||||||
Deferred Tax Liability | 37 | 44 | ||||||
Other Liabilities | 29 | 29 | ||||||
Total Liabilities | 2,276 | 2,076 | ||||||
Commitments and Contingencies | ||||||||
Equity | ||||||||
Partners' Capital | 2,119 | 2,222 | ||||||
Total Liabilities and Equity | $ | 4,395 | $ | 4,298 | ||||
See accompanying Notes to Consolidated Financial Statements
PLUM CREEK TIMBERLANDS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended | |||||||||||
(In Millions) | December 31, 2003 | December 31, 2002 | December 31, 2001 | ||||||||
Cash Flows From Operating Activities | |||||||||||
Net Income | $ | 192 | $ | 233 | $ | 338 | |||||
Adjustments to Reconcile Net Income to | |||||||||||
Net Cash Provided By Operating Activities: | |||||||||||
Depreciation, Depletion and Amortization | |||||||||||
(2003 Includes $4 LossRelated to Forest Fires) | 107 | 105 | 55 | ||||||||
Basis of Real Estate Sold (2003 Includes $14 Impairment Losses) | 66 | 28 | 18 | ||||||||
Deferred Income Taxes | (7 | ) | 1 | (198 | ) | ||||||
Working Capital Changes (2001 Net of Effect of Business Acquisition) | 2 | (5 | ) | (4 | ) | ||||||
Other | 9 | 6 | 14 | ||||||||
Net Cash Provided By Operating Activities | 369 | 368 | 223 | ||||||||
Cash Flows From Investing Activities | |||||||||||
Property Additions (Excluding Timberland Acquisitions) | (84 | ) | (91 | ) | (76 | ) | |||||
Timberlands Acquired (Including Tax-Deferred Exchange Proceeds, Net) | (162 | ) | (158 | ) | 17 | ||||||
Merger Costs | -- | -- | (29 | ) | |||||||
Cash Received in Conjunction with Acquisition | -- | -- | 159 | ||||||||
Net Cash Provided By (Used In) Investing Activities | (246 | ) | (249 | ) | 71 | ||||||
Cash Flows From Financing Activities | |||||||||||
Cash Distributions | (299 | ) | (257 | ) | (292 | ) | |||||
Borrowings of Long-term Debt | 298 | 25 | 536 | ||||||||
Retirement of Long-term Debt | (33 | ) | (34 | ) | (676 | ) | |||||
Borrowings on Lines of Credit | 1,922 | 1,708 | 499 | ||||||||
Repayments on Lines of Credit | (1,997 | ) | (1,508 | ) | (153 | ) | |||||
Other | -- | -- | (15 | ) | |||||||
Net Cash Used In Financing Activities | (109 | ) | (66 | ) | (101 | ) | |||||
Increase In Cash and Cash Equivalents | 14 | 53 | 193 | ||||||||
Cash and Cash Equivalents: | |||||||||||
Beginning of Period | 246 | 193 | -- | ||||||||
End of Period | $ | 260 | $ | 246 | $ | 193 | |||||
Supplementary Cash Flow Information | |||||||||||
Cash Paid (Received) During the Year for: | |||||||||||
Interest | $ | 112 | $ | 110 | $ | 69 | |||||
Income Taxes - Net | $ | (1 | ) | $ | 4 | $ | 56 | ||||
Cash Received in Connection with Acquisition: | |||||||||||
Fair Value of Assets Acquired | $ | 2,659 | |||||||||
Liabilities Assumed | 970 | ||||||||||
Equity Issued | (1,848 | ) | |||||||||
Cash Acquired | $ | 159 | |||||||||
See accompanying Notes to Consolidated Financial Statements
2003 | 2002 | 2001 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Net income, as reported | $ | 192 | $ | 233 | $ | 338 | |||||
Add: Stock-based employee compensation expense included | |||||||||||
in reported net income, net of related tax effects | 4 | 5 | 1 | ||||||||
Deduct: Total stock-based employee compensation expense | |||||||||||
determined under fair value based method | |||||||||||
for all awards, net of related tax effects | (4 | ) | (5 | ) | (4 | ) | |||||
Pro forma net income | $ | 192 | $ | 233 | $ | 335 | |||||
Stock-based employee compensation expense included in reported net income, net of related tax effects is comprised of expenses related to the following for theyears ended December 31 (in millions): |
2003 | 2002 | 2001 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Stock options | $ | 0 | .9 | $ | 0 | .4 | $ | 0 | .6 | ||
Plum Creek value management awards, dividend | |||||||||||
equivalents, and grants of restricted stock | 3 | .0 | 4 | .1 | 0 | .7 | |||||
Total | $ | 3 | .9 | $ | 4 | .5 | $ | 1 | .3 | ||
December 31, 2003 | December 31, 2002 | |||||||
---|---|---|---|---|---|---|---|---|
Timber and logging roads - net | $ | 2,404 | $ | 2,352 | ||||
Timberlands | 1,270 | 1,247 | ||||||
Timber and Timberlands - net | $ | 3,674 | $ | 3,599 | ||||
During the third quarter of 2003, a loss of $4 million was recorded in the Northern Resources Segment as a result of forest fires on approximately 45,000 acres in Montana. The $4 million loss represents the book basis of the timber volume destroyed by fire. Property, plant and equipment consisted of the following (in millions): |
December 31, 2003 | December 31, 2002 | |||||||
---|---|---|---|---|---|---|---|---|
Land, buildings and improvements | $ | 81 | $ | 82 | ||||
Machinery and equipment | 304 | 285 | ||||||
385 | 367 | |||||||
Accumulated depreciation | (82 | ) | (60 | ) | ||||
Property, Plant and Equipment - net | $ | 303 | $ | 307 | ||||
Property, Plant and Equipment – net at December 31, 2003 includes $22 million of capitalized costs associated with the Operating Partnership’s coalbed methane exploration and development activities and $9 million at December 31, 2002. Inventories, accounted for using the lower of average cost or market, consisted of the following (in millions): |
December 31, 2003 | December 31, 2002 | |||||||
---|---|---|---|---|---|---|---|---|
Raw materials (logs) | $ | 10 | $ | 17 | ||||
Work-in-process | 4 | 4 | ||||||
Finished goods | 31 | 27 | ||||||
45 | 48 | |||||||
Supplies | 9 | 10 | ||||||
Total | $ | 54 | $ | 58 | ||||
Note 4. Income Taxes Plum Creek Timber Company, L.P. is a limited partnership and therefore is not subject to income tax. Plum Creek Timber Company, L.P.'s taxable income is allocated 100% to Plum Creek Timber Company, Inc. Plum Creek Timber Company, Inc. has elected to be taxed as a REIT under sections 856-860 of the United States Internal Revenue Code. A REIT's income, including its allocated share of taxable income from partnerships, is generally not subject to corporate-level income tax if it satisfies certain requirements as set forth in the Internal Revenue Code. Under these sections, a REIT is permitted to deduct dividends paid to stockholders in computing its taxable income. If a company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Plum Creek conducts its activities through various wholly owned operating partnerships. The activities of the operating partnerships consist primarily of sales of timber under pay-as-cut contracts, and the income from such sales is not subject to corporate income tax. In addition, our various taxable REIT subsidiaries (subchapter "C" corporations) harvest and sell logs, purchase and sell timber under pay-as-cut contracts or lump-sum sales, conduct our manufacturing operations and sell some higher and better use timberlands. The Operating Partnership's tax provision includes the tax expense and/or benefit associated with Plum Creek's various taxable REIT subsidiaries, as well as any tax expense and/or benefit incurred by the REIT (e.g., built-in gains tax) and allocated to the operating partnership that caused the related income tax expense or benefit. As a consequence of The Timber Company Merger, which involved merging a taxable entity into a nontaxable entity, Plum Creek will generally be subject to corporate-level tax (built-in gains tax) only if it makes a taxable disposition of certain property acquired in The Timber Company Merger within the ten-year period following the merger date. The built-in gains tax only applies to gains from such asset sales to the extent that the fair value of the property exceeded its tax basis at the merger date. The built-in gains tax does not apply to income generated from the harvesting and sale of trees. In accordance with SFAS No. 109, "Accounting for Income Taxes", a tax benefit of $216 million was recognized in the fourth quarter of 2001. This tax benefit represents the elimination of the deferred tax liability associated with temporary differences related primarily to timberlands held by the Operating Partnership that are not expected to be disposed of in transactions subject to built-in gains tax during a ten-year period following the merger. The Timber Company was included in Georgia-Pacific's consolidated tax return through the date of The Timber Company Merger and in Plum Creek's tax return subsequent to the date of the merger. For periods prior to The Timber Company Merger, the provision for income taxes includes The Timber Company's allocated portion of Georgia-Pacific's income taxes currently payable and those deferred because of temporary differences between the financial statement basis and the tax basis of assets and liabilities through the merger date. For periods subsequent to The Timber Company Merger, the tax provision reflects the operations of Plum Creek's taxable REIT subsidiaries and any built-in gains tax associated with certain dispositions of property previously owned by The Timber Company. The provision (benefit) for income taxes consists of the following for theyears ended December 31 (in millions): |
2003 | 2002 | 2001 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Federal income taxes: | |||||||||||
Current | $ | 1 | $ | 1 | $ | 49 | |||||
Deferred | 4 | 3 | 17 | ||||||||
State income taxes: | |||||||||||
Current | -- | -- | 7 | ||||||||
Deferred | (1 | ) | -- | 1 | |||||||
Benefit of operating loss carryforwards | (10 | ) | (2 | ) | -- | ||||||
Adjustment to deferred tax liability due to | |||||||||||
change in tax status | -- | -- | (216 | ) | |||||||
Provision (benefit) for income taxes | $ | (6 | ) | $ | 2 | $ | (142 | ) | |||
The federal statutory income tax rate was 35%. The income generated by the Operating Partnership is generally not subject to federal and state income tax. The provision for income taxes is reconciled as follows to the federal statutory rate for theyears ended December 31 (in millions): |
2003 | 2002 | 2001 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Provision for income taxes computed at the | |||||||||||
Federal statutory tax rate | $ | 65 | $ | 82 | $ | 69 | |||||
Adjustment to deferred tax liabilities for | |||||||||||
change in tax status at date of merger | -- | -- | (216 | ) | |||||||
Partnership income not subject to Federal tax | (68 | ) | (79 | ) | (1 | ) | |||||
State income taxes, net of Federal benefit | (1 | ) | -- | 6 | |||||||
Permanent book-tax differences | (2 | ) | (1 | ) | -- | ||||||
Provision (benefit) for income taxes | $ | (6 | ) | $ | 2 | $ | (142 | ) | |||
Deferred income taxes are provided for net operating loss carryforwards and the temporary differences between the financial reporting basis and tax basis of the Operating Partnership’s assets and liabilities. The components of net deferred income tax liabilities are as follows (in millions): |
December 31, 2003 | December 31, 2002 | |||||||
---|---|---|---|---|---|---|---|---|
Deferred income tax assets: | ||||||||
Accrued compensation | $ | 14 | $ | 13 | ||||
Net operating loss carryforwards | 17 | 8 | ||||||
Other accruals and reserves | 6 | 11 | ||||||
37 | 32 | |||||||
Deferred income tax liabilities: | ||||||||
Machinery and equipment | (60 | ) | (62 | ) | ||||
Timber and timberlands | (3 | ) | (3 | ) | ||||
(63 | ) | (65 | ) | |||||
Deferred income tax liability, net | $ | (26 | ) | $ | (33 | ) | ||
Deferred income tax liabilities at December 31, 2003 and 2002 are net of $11 million of deferred tax assets included in current assets. Plum Creek conducts its activities through various wholly owned operating partnerships and through several taxable REIT subsidiaries. The activities of the Operating Partnership are not subject to corporate-level income tax. The book basis of the Operating Partnership’s assets and liabilities exceeds its tax basis by approximately $1.6 billion at December 31, 2003. Plum Creek’s taxable REIT subsidiaries file a consolidated federal income tax return. Operating loss carryforwards for the taxable REIT subsidiaries as of December 31, 2003 are approximately $44 million expiring between 2020 and 2023. The Timber Company filed its federal income tax return as part of Georgia-Pacific’s (GP) consolidated income tax return for all tax years through the date of The Timber Company Merger. Under the agreement governing the terms of The Timber Company Merger, the Operating Partnership remains liable to GP for any additional tax that would result from audit adjustments by the Internal Revenue Service (the “Service”) for any open tax years. The Service has completed all examinations of GP’s consolidated income tax returns through 1998. The Service has proposed certain adjustments for 1997 and 1998 for which final settlement has not been reached. The proposed adjustments are in dispute and are currently in administrative appeals before the Service. No amounts have been accrued for these proposed IRS adjustments as we believe there are substantial defenses for the matters in dispute. GP’s consolidated income tax returns for 1999 and 2000 are currently under examination. Additionally, the Service has completed examinations of the federal income tax return of Plum Creek Timber Company, Inc. and the consolidated federal income tax return of the taxable REIT subsidiaries for the period ended December 31, 1999 and for the year 2000. Plum Creek has no open tax years prior to 2001. Note 5. Borrowings Long–term debt and the lines of credit consist of the following (in millions): |
December 31, 2003 | December 31, 2002 | |||||||
---|---|---|---|---|---|---|---|---|
Lines of Credit:(A) | ||||||||
Revolving Line of Credit due 2005 | $ | 594 | $ | 599 | ||||
364-day Revolving Line of Credit due 2003 | -- | 70 | ||||||
Senior Notes due 2007, 11.125% plus unamortized premium of $5.3 at | ||||||||
12/31/03, effective rate 6.19% | 62 | 79 | ||||||
First Mortgage Notes due 2007, 11.125% plus unamortized premium of $4.7 at 12/31/03, effective rate 6.19% | 56 | 71 | ||||||
Senior Notes due 2007, 5.31% | 25 | 25 | ||||||
Senior Notes due 2009, 8.73% plus unamortized premium of $7.9 at | ||||||||
12/31/03, effective rate 7.55% | 158 | 159 | ||||||
Senior Notes due 2011, mature serially 2007 to 2011, 7.62% to 7.83%, | ||||||||
plus unamortized premium of $1.9 at 12/31/03, effective rates of | ||||||||
6.96% to 7.84% | 173 | 174 | ||||||
Senior Notes due 2013, mature serially 2006 to 2013, 6.96% to 7.76%, | ||||||||
less unamortized discount of $6.1 at 12/31/03, effective rates of | ||||||||
6.95% to 8.04% | 494 | 493 | ||||||
Senior Notes due 2016, mature serially 2006 to 2016, 7.74% to 8.05%, | ||||||||
plus unamortized premium of $1.9 at 12/31/03, effective rates of | ||||||||
6.96% to 8.04% | 202 | 202 | ||||||
Senior Notes due 2013, mature serially 2008 to 2013, 4.96% to 6.18% | 280 | -- | ||||||
Senior Notes due 2008, 3-month LIBOR plus 1.445%, at 12/31/03 2.615% | 20 | -- | ||||||
Total Long-term Debt | $ | 2,064 | $ | 1,872 | ||||
Less: Current Portion | (33 | ) | (33 | ) | ||||
Long-term Portion | $ | 2,031 | $ | 1,839 | ||||
(A) | At December 31, 2003, the Operating Partnership had $594 million of borrowings and $5 million of standby letters of credit outstanding under its $600 million revolving line of credit maturing on September 30, 2005. During 2003, the Operating Partnership elected not to renew the $150 million 364-day revolving line of credit. The interest rate for the $600 million facility at December 31, 2003 was 2.7%, based on LIBOR plus 1.5%, which included facility fees. Interest rates vary and are based on a series of borrowings with maturities that can range from one week to six months. The average interest rate for both facilities at December 31, 2002 was 3.6% including facility fees. |
Subject to customary covenants, the line of credit maturing in 2005 allows for borrowings from time to time up to $600 million, including up to $50 million of standby letters of credit. Borrowings on the line of credit fluctuate daily based on cash needs. At December 31, 2002, the 364-day Revolving Line of Credit was classified as long-term debt due to the Operating Partnership’s intent and ability to subsequently refinance these borrowings on a long-term basis. On January 15, 2004, the Operating Partnership refinanced its revolving line of credit. The new $650 million facility has a maturity of five years. The interest rate for the new facility is based on LIBOR plus 1.25%, which includes facility fees. On January 22, 2003, the Operating Partnership issued $300 million of senior notes maturing serially in 2008 to 2013 consisting of the following (in millions): |
Maturity | Interest Rate | Principal Amount | |||
2008 | 3-month LIBOR plus 1.445% | $ 20 | |||
2008 | 4.96% | 47 | |||
2010 | 5.48% | 55 | |||
2013 | 6.18% | 178 | |||
$ 300 | |||||
The proceeds from the issuance of these notes were used to repay a portion of the outstanding borrowings under the lines of credit and for general business funding purposes. Principal payments of $14 million are due on the Senior Notes due 2007 for each of the years between 2004 and 2007. Principal payments of $13 million are due on the First Mortgage Notes due 2007 for each of the years between 2004 and 2007. In connection with the purchase price allocation associated with The Timber Company Merger, a premium was recorded to reflect the difference between the market rate of interest and the stated interest rates. The unamortized premium was $16 million and $22 million at December 31, 2003 and 2002, respectively. The Senior Notes (excluding the Senior Notes due 2011) and the First Mortgage Notes are redeemable prior to maturity subject to a premium on redemption, which is based upon interest rates of United States Treasury securities having similar average maturities as these notes. The premium that would have been due upon early retirement approximated $218 million at December 31, 2003 and $229 million at December 31, 2002. The Senior Notes are unsecured. The First Mortgage Notes are collateralized by substantially all of the property, plant and equipment of the lumber, plywood and MDF manufacturing facilities. The Senior Notes due 2011 are not redeemable prior to maturity. The aggregate maturities on the note agreements and the line of credit are as follows as ofDecember 31, 2003 (in millions): |
Maturity | Note Agreements | Line of Credit | ||||||
2004 | $ | 33 | ||||||
2005 | 32 | |||||||
2006 | 161 | |||||||
2007 | 125 | |||||||
2008 | 168 | |||||||
Thereafter | 951 | $ | 594 | |||||
Total | $ | 1,470 | $ | 594 | ||||
The note agreements and the line of credit contain certain restrictive covenants, including limitations on harvest levels, sales of assets, payment of cash distributions and the incurrence of indebtedness. In addition, the line of credit requires the maintenance of a minimum interest coverage ratio. The Operating Partnership was in compliance with such covenants at December 31, 2003. As of December 30, 2000, $640 million of Georgia-Pacific's debt was allocated to The Timber Company. Interest was charged to The Timber Company in proportion to the respective amount of its debt at a rate equal to the weighted average interest rate of Georgia-Pacific's debt, excluding debt incurred in recent acquisitions, calculated on a quarterly basis and was 6.7% for the period December 31, 2000 to October 5, 2001. In October 2001, the Operating Partnership replaced approximately $650 million of Georgia-Pacific debt attributed to The Timber Company with third party debt following The Timber Company Merger. The first $500 million of allocated debt was refinanced with fixed rate debt (Senior Notes due 2013) and the debt in excess of $500 million was refinanced with variable rate bank debt. Note 6. Financial Instruments The carrying amounts of cash and cash equivalents and notes receivable approximate fair value due to the short-term maturities of these instruments. The estimated fair value of the Operating Partnership's debt, based on current interest rates for similar obligations with like maturities, was approximately $2.21 billion and $2.00 billion at December 31, 2003 and 2002, respectively. The carrying amount was $2.06 billion and $1.87 billion at December 31, 2003 and 2002, respectively. Unrealized holding gains relating to mutual fund investments held in a grantor trust were $0.3 million at December 31, 2003. The change in unrealized holding gains or losses has been recognized in the Operating Partnership's consolidated statement of income resulting in a gain of $2.8 million in 2003, a loss of $1.1 million in 2002 and a gain of $0.6 million in 2001, respectively. See Note 7 of the Notes to Financial Statements regarding hedging arrangements during 2002. Note 7. Partners' Capital The changes in Partners' Capital are as follows (in millions): |
Year Ended December 31, 2003 | Year Ended December 31, 2002 | Period from October 6, 2001 to December 31, 2001 | Period from December 31, 2000 to October 5, 2001 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Beginning | $ | 2,222 | $ | 2,247 | $ | 349 | $ | 145 | ||||||
Acquisition of Plum Creek and | ||||||||||||||
Recapitalization | -- | -- | 1,849 | -- | ||||||||||
Net Income | 192 | 233 | 226 | 112 | ||||||||||
Distributions to Parent | (299 | ) | (258 | ) | (177 | ) | (175 | ) | ||||||
Capital Contributions from Parent | 4 | -- | -- | 267 | ||||||||||
Ending | $ | 2,119 | $ | 2,222 | $ | 2,247 | $ | 349 | ||||||
Under the terms of our note agreements and line of credit (see Note 5 of the Note to Financial Statements), Plum Creek Timberlands, L.P. is restricted from transferring assets and funds in the form of loans, advances or cash distributions to its Parent, Plum Creek Timber Company, Inc. Our note agreements and line of credit limit the transfer of funds based on the amount of available cash, which in general is our net income after adjusting for non-cash charges (such as depreciation and depletion), changes in various reserves less capital expenditures, and principal payments on indebtedness that was not financed. Additionally, the amount of available cash may be increased by the amount of proceeds from the sale of higher and better use timberlands and, under certain circumstances, by 50% of the amount of net proceeds from the sale of other assets. Plum Creek Timberlands, L.P. can also make loans or advances to Plum Creek Timber Company, Inc. subject to certain restrictions. Based on these provisions, Plum Creek Timberlands, L.P. could distribute or advance the cash on its consolidated balance sheet as of December 31, 2003, or $260 million, all of which is considered unrestricted assets. At December 31, 2003, the Operating Partnership had net assets of $2,119 million of which $1,859 million were restricted from being transferred to Plum Creek Timber Company, Inc. At December 31, 2002, the Operating Partnership had net assets of $2,222 million of which $1,976 million were restricted from being transferred to Plum Creek Timber Company, Inc. During 2002, Operating Partnership entered into two treasury-lock arrangements to secure current long-term interest rates on approximately $100 million of the $300 million fixed rate debt that was issued in January 2003. See Note 5 of the Notes to Financial Statements. The Operating Partnership designated these transactions as cash flow hedges. The Operating Partnership incurred a loss of approximately $0.7 million in connection with these arrangements. In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” the loss is recorded as other comprehensive loss, which is included in Partners’ Capital. Hedge ineffectiveness is reported in earnings and was not material in 2003 or 2002. Reclassification adjustments to interest expense will occur over the life of the related debt. Prior to The Timber Company Merger, The Timber Company was required to transfer to Georgia-Pacific: (1) certain installment notes receivable and related commercial paper and deferred tax liabilities plus approximately $85 million cash, and (2) approximately $24 million cash for the cost of tax risk insurance. Accordingly, the following were transferred to Georgia-Pacific during the third quarter of 2001 (in millions): |
Installment Notes | $ 355 | |
Commercial Paper | $ 349 | |
Deferred Income Tax Liability | $ 200 | |
Cash | $ 109 |
2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|
Change in benefit obligation | ||||||||
Benefit obligation at beginning of period | $ | 81 | $ | 70 | ||||
Service cost | 5 | 5 | ||||||
Interest cost | 6 | 5 | ||||||
Amendment | 1 | 1 | ||||||
Actuarial loss | 8 | 5 | ||||||
Benefits paid | (6 | ) | (5 | ) | ||||
Benefit obligation at end of period | $ | 95 | $ | 81 | ||||
Change in plan assets | ||||||||
Fair value of plan assets at beginning of period | $ | 63 | $ | 65 | ||||
Actual return on plan assets | 14 | (5 | ) | |||||
Employer contributions | 6 | 8 | ||||||
Benefits paid | (6 | ) | (5 | ) | ||||
Fair value of plan assets at end of period | $ | 77 | $ | 63 | ||||
The funded status and the amounts recognized on the accompanying balance sheets under the caption “Other Current Liabilities” are set forth in the following table (in millions): |
December 31, 2003 | December 31, 2002 | |||||||
---|---|---|---|---|---|---|---|---|
Funded status | $ | (18 | ) | $ | (18 | ) | ||
Unrecognized net actuarial loss | 14 | 14 | ||||||
Unrecognized prior service cost | 2 | 1 | ||||||
Accrued benefit cost | $ | (2 | ) | $ | (3 | ) | ||
No minimum liability has been recorded at either December 31, 2003 or 2002, because the fair value of plan assets exceeded the accumulated benefit obligation (the approximate actuarially computed current pension obligation if the plans were discontinued) by $5 million at December 31, 2003 and $1 million at December 31, 2002. The accumulated benefit obligation was $72 million at December 31, 2003 and $62 million at December 31, 2002. The components of pension cost were as follows (in millions): |
Year ended December 31, 2003 | Year ended December 31, 2002 | Period October 6, 2001 to December 31, 2001 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Components of net periodic benefit cost | |||||||||||
Service cost | $ | 5 | $ | 5 | $ | 1 | |||||
Interest cost | 6 | 5 | 1 | ||||||||
Expected return on plan assets | (5 | ) | (6 | ) | (1 | ) | |||||
Net periodic benefit cost | 6 | 4 | 1 | ||||||||
Special termination benefits | -- | -- | 2 | ||||||||
Total pension cost | $ | 6 | $ | 4 | $ | 3 | |||||
Most of the Operating Partnership’s salaried and all hourly employees who complete one year of service in which they work at least 1,000 hours are eligible to participate in the plan. Participants vest after five years of service. Subsequent to The Timber Company Merger, the cash balance of benefits of salaried employees is determined based primarily on certain percentages of compensation, age, years of service and interest accrued based on the 30-year treasury bond rate. Furthermore, employees of the Operating Partnership on September 1, 2000 earn benefits based on the greater of the cash balance formula or the amount of a monthly pension benefit that is based principally on highest monthly average earnings during any consecutive sixty-month period and the number of years of service credit. The benefits of hourly employees are generally based on a fixed amount per year of service. The Operating Partnership’s contributions to the plan vary from year to year, but the Operating Partnership has made at least the minimum contributions required by law in each year. Management intends to fund annually such that the fair value of plan assets equals or exceeds the actuarially computed accumulated benefit obligation. As a result of the Operating Partnership’s contribution policy, annual pension contributions are significantly impacted by investment returns and changes in interest rates. Based on current interest rates and expected investment returns, the Operating Partnership expects 2004 pension contributions to range between $2 million and $7 million. As of year-end, plan assets were allocated as follows: |
December 31, 2003 | December 31, 2002 | |||||||
---|---|---|---|---|---|---|---|---|
Large Capitalization Domestic Equities | 41 | % | 32 | % | ||||
Small and Mid-Size Capitalization Domestic Equities | 13 | % | 10 | % | ||||
International Equities | 12 | % | 11 | % | ||||
Fixed Income | 33 | % | 33 | % | ||||
Cash (A) | 1 | % | 14 | % | ||||
Total | 100 | % | 100 | % | ||||
(A) | Our 2002 pension contribution of $8 million was contributed in December 2002 but was not invested with our various fund managers until first quarter of 2003. |
It is the Operating Partnership’s investment policy to achieve maximum returns at a reasonable risk for pension assets over a full market cycle. The Operating Partnership uses seven fund managers to capture favorable returns in various asset classes and to diversify risk. Target allocations for the various asset classes are as follows: |
Large Capitalization Domestic Equities | 35% to 45% | |
Small and Mid-Size Capitalization Domestic Equities | 10% to 15% | |
International Equities | 10% to 15% | |
Fixed Income | 30% to 40% |
Pension assets are rebalanced on a quarterly basis to maintain the above target allocations. To further reduce risk, fund managers are required to invest in a diversified portfolio. No more than 5% of an equity portfolio can be invested in a single company and no more than 20% of an equity portfolio can be invested in any one sector of the market (other than the financials’ sector). No more than 10% of a fixed income portfolio can be invested in a single issuer (other than U.S. treasuries). Furthermore, equity investments are limited to common stocks, common stock equivalents and preferred stock. Fixed income investments are limited to U.S. treasuries, agencies of the U.S. Government, domestic corporations, municipalities, domestic banks, and other U.S. financial institutions. Over a full market cycle the investment goals for pension assets are as follows: |
Large Capitalization Domestic Equities | Exceed the S&P 500 Index by 1% per annum | |
Small and Mid-Size Capitalization Domestic Equities | Exceed the Russell 2000 Index by 1% per annum | |
International Equities | Exceed the Morgan Stanley Capital International Europe, Australia and Far East Index by 1% per annum | |
Fixed Income | Exceed the Lehman Brothers Aggregate Bond Index and exceed the median return for all fixed income funds | |
Weighted-average assumptions used to determine benefit obligation: |
December 31, 2003 | December 31, 2002 | |||||||
---|---|---|---|---|---|---|---|---|
Discount rate | 6.25 | % | 6.75 | % | ||||
Rate of compensation increase | 4.50 | % | 5.00 | % | ||||
Weighted-average assumptions used to determine net periodic benefit cost for theyears ended December 31: |
2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|
Discount rate | 6.75 | % | 7.25 | % | ||||
Expected long-term return on plan assets | 7.75 | % | 8.25 | % | ||||
Rate of compensation increase | 4.50 | % | 5.00 | % | ||||
PLUM CREEK COMMON STOCK OPTIONS | ||||||||
---|---|---|---|---|---|---|---|---|
Options Outstanding | ||||||||
Number of shares | Wtd. avg. exercise price | |||||||
Balance at October 6, 2001 | 3,841,394 | $ | 16 | .57 | ||||
Plum Creek options acquired in merger | 583,700 | 25 | .94 | |||||
Options granted | 79,883 | 24 | .95 | |||||
Options exercised/surrendered | (1,882,352 | ) | 16 | .86 | ||||
Options cancelled/forfeited | (7,055 | ) | 20 | .96 | ||||
Balance at December 31, 2001 | 2,615,570 | $ | 18 | .70 | ||||
Options granted | 480,050 | $ | 29 | .62 | ||||
Options exercised/surrendered | (1,020,522 | ) | 16 | .66 | ||||
Options cancelled/forfeited | (46,794 | ) | 24 | .50 | ||||
Balance at December 31, 2002 | 2,028,304 | $ | 22 | .18 | ||||
Options granted | 478,750 | $ | 21 | .99 | ||||
Options exercised/surrendered | (91,243 | ) | 16 | .35 | ||||
Options cancelled/forfeited | (17,897 | ) | 25 | .07 | ||||
Balance at December 31, 2003 | 2,397,914 | $ | 22 | .34 | ||||
The following table summarizes the options outstanding and exercisable: |
Options Outstanding | Options Exercisable | ||||||||||||||||
Range of prices | Number | Wtd. avg. remaining life | Wtd. avg. exercise price | Number | Wtd. avg. exercise price | ||||||||||||
December 31, 2001 | |||||||||||||||||
$15.29 - $26.25 | 2,615,570 | 6.0 years | $ | 18.70 | 2,056,162 | $ | 16.75 | ||||||||||
December 31, 2002 | |||||||||||||||||
$29.70 - $30.70 | 460,050 | 9.1 years | $ | 29.72 | -- | $ | -- | ||||||||||
$22.21 - $26.25 | 634,954 | 7.8 years | $ | 25.82 | 227,976 | $ | 25.78 | ||||||||||
$16.94 - $18.34 | 253,927 | 2.7 years | $ | 17.22 | 253,927 | $ | 17.22 | ||||||||||
$15.29 - $16.42 | 679,373 | 3.7 years | $ | 15.52 | 679,373 | $ | 15.52 | ||||||||||
$15.29 - $30.70 | 2,028,304 | 6.1 years | $ | 22.18 | 1,161,276 | $ | 17.91 | ||||||||||
December 31, 2003 | |||||||||||||||||
$29.70 - $30.70 | 451,800 | 8.1 years | $ | 29.72 | 112,950 | $ | 29.72 | ||||||||||
$24.35 - $26.27 | 628,549 | 6.8 years | $ | 25.85 | 380,950 | $ | 25.81 | ||||||||||
$21.91 - $23.97 | 471,750 | 9.1 years | $ | 21.94 | 1,250 | $ | 22.21 | ||||||||||
$16.94 - $18.34 | 236,500 | 1.8 years | $ | 17.26 | 236,500 | $ | 17.26 | ||||||||||
$15.29 - $16.42 | 609,315 | 2.7 years | $ | 15.53 | 609,315 | $ | 15.53 | ||||||||||
$15.29 - $30.70 | 2,397,914 | 6.0 years | $ | 22.34 | 1,340,965 | $ | 19.96 | ||||||||||
Accounting for Stock-Based Compensation. The Operating Partnership’s compensation expense in connection with Plum Creek’s stock-based compensation plans was $6.5 million for the year ended December 31, 2003 compared to $7.8 million during 2002, and $1 million for the period from October 6, 2001 to December 31, 2001. Effective January 1, 2002, the Operating Partnership has elected to adopt prospectively the fair value recognition provisions of SFAS No. 123, “Accounting for Stock Based Compensation,” for its accounting of stock options. Of the $6.5 million stock-based compensation expense in 2003, $0.9 million relates to the expensing of stock options that were granted since January 1, 2002. Approximately $0.4 million of the $7.8 million stock-based compensation expense for 2002 relates to the expensing of stock options that were granted during 2002. Prior to January 1, 2002, the Operating Partnership had adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Summarized below are the assumptions used in computing the pro forma amounts in Note 1 of the Notes to Financial Statements. The weighted-average measurement date fair values were computed using the Black-Scholes option valuation model with the following assumptions: |
Plum Creek Options | Timber Company Options | ||||||||||||||||
Granted 2003 | Granted 2002 | Granted 2001 (A) | Outstanding at merger date(B) | Converted at merger date(C) | |||||||||||||
Expected life in years | 7 | 7 | 7 | 7 | 5 | ||||||||||||
Risk-free interest rates | 3.5 | % | 3.5-4.8 | % | 4.4 | % | 6.5 | % | 6.2 | % | |||||||
Volatility | 29 | % | 31 | % | 25 | % | 24 | % | 34 | % | |||||||
Dividend yield | 6.4 | % | 6.0-7.7 | % | 9.1 | % | 8.4 | % | 4.0 | % | |||||||
Weighted-average | |||||||||||||||||
measurement date fair | |||||||||||||||||
values per share | $ | 3.27 | $ | 4.21- 4.33 | $ | 2.01 | $ | 2.93 | $ | 7.07 |
The following additional assumptions were used in computing the pro forma disclosures for 2001: |
(A) | Newly Granted Plum Creek Options. Plum Creek options that were granted on October 8, 2001, subsequent to The Timber Company Merger, were based on a fair value of $2.01 per share as of the grant date. Pro forma net income was computed based on amortizing the fair value of these options over their vesting period. |
(B) | Outstanding Plum Creek Options. Plum Creek options that were outstanding on the date of The Timber Company Merger were based on a weighted-average fair value of $2.93 per share as of the merger announcement date of July 18, 2000. Pro forma net income was computed based on amortizing the fair value of the unvested options over the remaining vesting period. |
(C) | Outstanding Timber Company Options. Timber Company options that were converted to Plum Creek options in connection with The Timber Company Merger were based on a weighted-average fair value of $7.07 per share as of July 17, 2000, the date of the latest modification. Since The Timber Company options were all vested as of the merger date, the entire fair value was expensed in computing 2001 pro forma net income. Furthermore, a portion of the grant date fair value for The Timber Company options was amortized in computing 2001 pro forma net income for the period from December 31, 2000 to October 5, 2001. |
GEORGIA-PACIFIC’S LONG-TERM INCENTIVE PLANS Georgia-Pacific’s authorized capital stock included 250 million shares of Timber Company Stock. In connection with the merger, holders of stock options to purchase Timber Company Stock received Plum Creek options using the exchange ratio of 1.37 to one. 1997 Long-Term Incentive Plans. Georgia-Pacific reserved 3,800,000 shares of Timber Company Stock for issuance under The Timber Company 1997 Long-Term Incentive Plan (“The Timber Company Plan”). Options covering 950 shares and 624,250 shares were granted under The Timber Company Plan on January 28, 1999 and January 21, 2000, respectively. These grants have a 10-year term and, initially, vested ratably over four and three-year periods, except that all grants vested in connection with The Timber Company Merger. Employee Stock Purchase Plan. Georgia-Pacific reserved 1,500,000 shares of Timber Company Stock for issuance under the 2000 Employee Stock Purchase Plan (the “2000 Purchase Plan”), which offered employees the right to subscribe for shares of Timber Company Stock at a subscription price equal to 90% of the lower of the price per share on the first day or the last day of the purchase period. The purchase period for the initial one-year period began on July 1, 2000 and ended on June 30, 2001. An employee could terminate his or her subscription at any time before he or she pays the full price of the shares subscribed and would receive in cash, the full amount withheld, without interest. 1995 Outside Directors Stock Plan. Georgia-Pacific reserved 200,000 shares of Timber Company common stock for issuance under the 1995 Outside Directors Stock Plan (the “Directors Plan”), which provided for the issuance of shares of common stock to non-employee directors of Georgia-Pacific on a restricted basis. Each non-employee director was issued 647 restricted shares of Timber Company common stock in 2000 and 346 restricted shares in 1999, respectively. These shares were redeemed in connection with the merger. Employee Stock Option Plans. The 1995 Shareholder Value Incentive Plan (the “SVIP”) provided for the granting of stock options having a term of either 5½ or 10 years to officers and key employees. Under the amended and restated SVIP, no further grants may be made. Options having a term of 10 years became exercisable in 9½ years unless certain performance targets tied to Georgia-Pacific’s common stock performance were met, in which case the holder could exercise such options after 3, 4 or 5 years from the grant date. Options having a term of 5½ years could be exercised only if such performance targets were met in the third, fourth or fifth year after such grant date. At the time options were exercised, the exercise price was payable in cash or by surrender of shares of common stock already owned by the optionee. All options were vested as of February 2000. Additional information relating to Georgia-Pacific’s Timber Company employee common stock options is provided below. All amounts have been retroactively restated to reflect the 1.37 to 1 exchange ratio. |
TIMBER COMPANY COMMON STOCK OPTIONS | ||||||||
---|---|---|---|---|---|---|---|---|
Options Outstanding | ||||||||
Number of shares | Wtd. avg. exercise price | |||||||
Balance at December 31, 2000 | 6,726,289 | $ | 16.39 | |||||
Options exercised/surrendered | (2,859,711 | ) | $ | 16.15 | ||||
Options cancelled/forfeited | (25,184 | ) | $ | 16.43 | ||||
Balance at October 5, 2001 | 3,841,394 | |||||||
Operating Leases | Timber Obligations | |||||||
2004 | $ | 3 | $ | 1 | ||||
2005 | 3 | 1 | ||||||
2006 | 2 | 1 | ||||||
2007 | 2 | 1 | ||||||
2008 | 1 | 1 | ||||||
Thereafter | 5 | 7 | ||||||
Total | $ | 16 | $ | 12 | ||||
Note 12. Segment Information The Operating Partnership is organized into eight business units on the basis of both product line and geographic region. Each business unit has a separate management team due to geographic location, marketing strategies and/or production processes. In applying SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” these business units have been aggregated into five reportable segments based on similar long-term economic characteristics. The Operating Partnership’s reportable segments are: (1) Northern Resources, (2) Southern Resources, (3) Real Estate, (4) Manufactured Products and (5) Other. The Northwest Resource unit and the Northeast Resource unit are aggregated into the Northern Resources Segment. The Northern Resources Segment consists primarily of timberlands located in Idaho, Maine, Michigan, Montana, New Hampshire, Oregon, Pennsylvania, western Virginia, Washington, West Virginia and Wisconsin. The Northern Resources Segment grows timber for sale primarily in domestic regional markets. Additionally, some logs are sold in export markets, primarily the Pacific Rim countries and Canada. The Northern Resources Segment sells primarily softwood and hardwood sawlogs and softwood and hardwood pulpwood. Softwood sawlogs are sold primarily to regional lumber and plywood manufacturers. Logs harvested in Montana are sold primarily to our lumber and plywood mills (which are part of the Manufactured Products Segment). Hardwood sawlogs are sold primarily to furniture manufacturers. Softwood and hardwood pulpwood is sold primarily to regional paper and packaging manufacturers. The Southwest Resource unit and the Southeast Resource unit are aggregated into the Southern Resources Segment. The Southern Resources Segment consists primarily of timberlands located in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Texas and eastern Virginia. The Southern Resources Segment grows timber for sale primarily in domestic regional markets. The Southern Resources Segment sells primarily softwood sawlogs and pulpwood. Softwood sawlogs are sold primarily to regional lumber and plywood manufacturers. Softwood pulpwood is sold primarily to regional paper and packaging manufacturers. The Southern Resources Segment leases timberlands to third parties on an annual basis for recreational purposes. The Real Estate Segment consists of sales of higher and better use timberlands and sales of non-strategic timberlands. Management estimates that included in the Operating Partnership’s 8.1 million acres of timberlands are 1.35 million acres of higher and better use timberlands and 1.4 million acres of non-strategic timberlands. The higher and better use timberlands are expected to be sold over the next 15 years for conservation, residential or recreational purposes. Approximately half of the non-strategic timberlands are expected to be sold in large blocks over the next two years. The other half of the non-strategic timberlands, which are generally in smaller tracts, is 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. The lumber and panel businesses are aggregated into the Manufactured Products Segment. The Manufactured Products Segment consists of four lumber mills, two plywood mills, two MDF facilities and one lumber remanufacturing facility in Montana, and one lumber remanufacturing facility in Idaho. The lumber facilities produce boards, studs, and dimension lumber and the panel facilities produce high-quality plywood and MDF panels. All of these products are targeted to domestic lumber retailers, home construction, and industrial customers, and to a lesser extent for export primarily to Canada. Residual chips are sold to regional pulp and paper manufacturers. Revenues from manufactured products during 2003 were $192 million for lumber, $115 million for plywood and $90 million of MDF. In 2002, revenues from manufactured products were $203 million for lumber, $105 million for plywood and $73 million of MDF. During the period from October 6 to December 31, 2001, revenues from manufactured products were $49 million for lumber, $24 million for plywood and $13 million for MDF. Prior to The Timber Company Merger, The Timber Company was not in the manufacturing business. The Other Segment consists primarily of income associated with mineral extraction, natural gas production and communication and transportation rights of way. Mineral income consists of royalty revenue from the extraction of oil and gas, natural aggregates and coal. Additionally, through a joint operating agreement, a subsidiary of the Operating Partnership has been involved in the exploration and development of coalbed methane gas, which may be found on some of the Operating Partnership’s properties in West Virginia and Virginia. As of December 31, 2003, the Operating Partnership had invested $23 million in the exploration and development of coalbed methane compared to $9 million invested as of December 31, 2002 and $1 million invested as of December 31, 2001. During 2003, the Operating Partnership began producing and selling coalbed methane from some of its wells. Segment data includes external revenues, intersegment revenues and operating income, as well as export revenue and depreciation, depletion and amortization. The Operating Partnership evaluates performance and allocates capital to the segments based on operating income before interest, unallocated corporate expenses and taxes. Asset information is not reported by segment, as the Operating Partnership does not produce such information internally. The table below presents information about reported segments for theyears ended December 31 (in millions): |
Northern Resources | Southern Resources | Real Estate | Manufactured Products | Other | Total | |||||||||||||||
2003 | ||||||||||||||||||||
External revenues | $ | 219 | $ | 445 | $ | 124 | $ | 397 | $ | 11 | $ | 1,196 | ||||||||
Intersegment revenues | 90 | -- | -- | -- | -- | 90 | ||||||||||||||
Export revenues | 22 | -- | -- | 14 | -- | 36 | ||||||||||||||
Depreciation, depletion | ||||||||||||||||||||
and amortization(A) | 30 | 51 | -- | 25 | 1 | 107 | ||||||||||||||
Operating income (loss) | 82 | 216 | 47 | (5 | ) | 7 | 347 | |||||||||||||
2002 | ||||||||||||||||||||
External revenues | $ | 226 | $ | 423 | $ | 98 | $ | 381 | $ | 9 | $ | 1,137 | ||||||||
Intersegment revenues | 94 | -- | -- | -- | -- | 94 | ||||||||||||||
Export revenues | 26 | -- | -- | 11 | -- | 37 | ||||||||||||||
Depreciation, depletion | ||||||||||||||||||||
and amortization | 33 | 49 | -- | 23 | -- | 105 | ||||||||||||||
Operating income | 80 | 227 | 64 | 1 | 7 | 379 | ||||||||||||||
2001 | ||||||||||||||||||||
External revenues | $ | 104 | $ | 319 | $ | 80 | $ | 86 | $ | 9 | $ | 598 | ||||||||
Intersegment revenues | 32 | -- | -- | -- | -- | 32 | ||||||||||||||
Export revenues | 4 | -- | -- | 3 | -- | 7 | ||||||||||||||
Depreciation, depletion | ||||||||||||||||||||
and amortization | 13 | 38 | -- | 4 | -- | 55 | ||||||||||||||
Operating income | 30 | 187 | 59 | 1 | 8 | 285 | ||||||||||||||
(A) | Northern Resources and Total include $4 million loss related to forest fires. |
A reconciliation of total operating income to income before income taxes is presented below for the years ended December 31 (in millions): |
2003 | 2002 | 2001 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Total segment operating income | $ | 347 | $ | 379 | $ | 285 | |||||
Interest expense, net | (117 | ) | (103 | ) | (54 | ) | |||||
Corporate and other unallocated expenses | (44 | ) | (41 | ) | (35 | ) | |||||
Income before income taxes | $ | 186 | $ | 235 | $ | 196 | |||||
Intersegment sales prices are determined quarterly, based upon estimated market prices and terms in effect at the time. Export revenues consist of log sales, primarily to Japan and Canada, as well as manufactured product sales primarily to Canada. The Operating Partnership does not hold any long-lived foreign assets. During 2003, 2002 and 2001, the Operating Partnership recognized revenues of $177 million, $195 million and $170 million, respectively, from sales to Georgia-Pacific. Of the $177 million sales to Georgia-Pacific in 2003, $12 million were attributable to the Northern Resources Segment, $136 million to the Southern Resources Segment and $29 million to the Manufactured Products Segment. In 2002, $14 million of the $195 million sales to Georgia-Pacific were attributable to the Northern Resources Segment, $152 million to the Southern Resources Segment and $29 million to the Manufactured Products Segment. In 2001, $26 million of the $170 million sales to Georgia-Pacific were attributable to the Northern Resources Segment, $138 million to the Southern Resources Segment and $6 million to the Manufactured Products Segment. At December 31, 2003 and 2002, the Operating Partnership had net accounts receivable from Georgia-Pacific of $3 million and $10 million, respectively. Note 13. Subsequent Events (Unaudited) In February 2004, Plum Creek Timberlands, L.P. made a distribution of approximately $62 million to its Parent, Plum Creek Timber Company, Inc. Since 2001, the Operating Partnership has been a party to a joint operating agreement with Geomet, Inc., a coalbed methane developer, with whom the Operating Partnership jointly explored for and developed coalbed methane gas found on certain of its lands in West Virginia and Virginia. During the first quarter of 2004, the Operating Partnership entered into a binding agreement to sell its working interest in the joint operating agreement to Geomet, Inc. for $27 million. The transaction is scheduled to close in the second quarter of 2004 and expected to result in a gain of $5 million. In addition, the agreement provides for contingent additional sales proceeds of up to $3 million payable in 2008. The Operating Partnership will retain its royalty interest in the project. Note 14. Unaudited Selected Quarterly Financial Data |
(In Millions) | 1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | ||||||||||
2003 | ||||||||||||||
Revenues | $ | 273 | $ | 318 | $ | 290 | $ | 315 | ||||||
Gross Profit | 76 | 103 | 92 | 109 | ||||||||||
Operating Inc | 59 | 84 | 72 | 88 | ||||||||||
Net Income | 33 | 58 | 45 | 56 | ||||||||||
2002 | ||||||||||||||
Revenues | $ | 275 | $ | 271 | $ | 310 | $ | 281 | ||||||
Gross Profit | 101 | 99 | 116 | 97 | ||||||||||
Operating Inc | 84 | 82 | 97 | 75 | ||||||||||
Net Income | 56 | 53 | 70 | 54 |
Report of Independent Accountants Tothe Board of Directors and Partners of Plum Creek Timberlands, L.P. In our opinion, the accompanying consolidated statements of income and of cash flowspresent fairly, in all material respects, the results of operations of Plum Creek Timberlands, L.P. and its cash flows for the year ended December 31, 2001in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Seattle, Washington |
PLUM CREEK TIMBERLANDS, L.P. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) | ||||||||
---|---|---|---|---|---|---|---|---|
Six Months Ended | ||||||||
(In Millions) | 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 | ||||
See accompanying Notes to Consolidated Financial Statements |
PLUM CREEK TIMBERLANDS, L.P. CONSOLIDATED BALANCE SHEETS (UNAUDITED) | ||||||||
---|---|---|---|---|---|---|---|---|
(In Millions) | 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 Trusts | 24 | 22 | ||||||
Deferred Tax Asset | 11 | 11 | ||||||
Other Current Assets | 16 | 28 | ||||||
481 | 412 | |||||||
Timber and Timberlands - Net | 3,590 | 3,674 | ||||||
Property, Plant and Equipment - Net | 271 | 303 | ||||||
Other Assets | 7 | 6 | ||||||
Total Assets | $ | 4,349 | $ | 4,395 | ||||
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 Trusts | 24 | 22 | ||||||
Other Current Liabilities | 23 | 15 | ||||||
195 | 179 | |||||||
Long-Term Debt | 1,408 | 1,437 | ||||||
Lines of Credit | 466 | 594 | ||||||
Deferred Tax Liability | 48 | 37 | ||||||
Other Liabilities | 24 | 29 | ||||||
Total Liabilities | 2,141 | 2,276 | ||||||
Commitments and Contingencies | ||||||||
EQUITY | ||||||||
Partners' Capital | 2,208 | 2,119 | ||||||
Total Liabilities and Equity | $ | 4,349 | $ | 4,395 | ||||
See accompanying Notes to Consolidated Financial Statements |
PLUM CREEK TIMBERLANDS, L.P. 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: | ||||||||
Cash Distributions | (125 | ) | (172 | ) | ||||
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 | ) | ||||
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 TIMBERLANDS, L.P. |
| 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 | ||||
During the six months ended June 30, 2004, the Operating Partnership recorded a $19 million impairment loss on proposed sales of timberlands as a part of cost of goods sold, compared to a $9 million impairment loss during the same period of 2003. The $19 million impairment loss recognized in 2004 relates to approximately 56,000 acres of timberlands with a book basis of $36 million. Sales on 51,000 acres of these timberlands closed during the six months ended June 30, 2004; the remaining 5,000 acres are expected to be sold during 2004. The $9 million impairment loss recognized in 2003 relates to approximately 29,000 acres of non-strategic timberlands with a book basis of $22 million, which the Operating Partnership sold during the six months ended June 30, 2003. 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 Operating Partnership 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, the Operating Partnership 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. Employee Pension Plan Plum Creek Timber Company, Inc. provides defined benefit pension plans that cover substantially all employees of the Operating Partnership. Employee pension and retirement plan obligations and costs are allocated to the Operating Partnership. 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 5. Stock-Based Compensation Plum Creek Timber Company, Inc. has a stock-based compensation plan. Certain executives and key employees of the Operating Partnership are covered by these plans. All of Plum Creek’s activities are conducted through the Operating Partnership. Therefore, all stock-based compensation expense is allocated to the Operating Partnership. Proceeds from the exercise of Plum Creek Timber Company, Inc. stock options are retained by Plum Creek Timber Company, Inc. The Operating Partnership 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 Operating Partnership 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 Operating Partnership recognized stock-based compensation expense of approximately $2 million during each of the six-month periods ended June 30, 2004 and 2003. Had the Operating Partnership used the fair value method of accounting for all stock-based compensation, net income for each of the six-month periods ended June 30, 2004 and 2003 would have been reduced by $0.2 million. Note 6. Segment Information 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 255,000 acres were sold during the six months ended June 30, 2004. Revenues from these large, non-strategic timberlands were $133 million for the six months ended June 30, 2004. |
During the six months ended June 30, 2004, the Real Estate segment recorded a $19 million impairment loss as a part of cost of goods sold on proposed sales of timberlands, compared to a $9 million impairment loss during the same period of 2003. See Note 2 of the Notes to Financial Statements. |
(B) | Since 2001, Operating Partnership has been a party to a joint operating agreement with Geomet, Inc., a coalbed methane developer, with whom the Operating Partnership jointly explored for and developed coalbed methane gas found on certain of its lands in West Virginia and Virginia. During 2004, the Operating Partnership 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 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. The Operating Partnership retained its royalty interest in the project. |
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. Commitments and Contingencies Contingencies. The Operating Partnership 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 Operating Partnership. 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 the Operating Partnership 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 the Operating Partnership’s liability, if any, in this matter cannot be reasonably determined at this time. Furthermore, to the extent the Operating Partnership is required to indemnify Georgia-Pacific for its share of the remediation costs the Operating Partnership 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. |