Northern Resources Segment. Revenues increased by $7 million, or 3%, to $249 million in 2005. This increase was due primarily to higher product prices ($12 million), offset in part by lower harvest volume ($4 million). Sawlog prices increased by 5% ($8 million) due primarily to a higher demand for logs as a result of increased lumber production, and a limited supply of logs. Pulpwood prices increased by 9% ($4 million) due primarily to low log inventories at our customers at the beginning of 2005. The decrease in harvest volume was due primarily to the timing of harvesting activity. During the first nine months of 2005, we purchased a greater percentage of sawlogs for our Montana mills from external log suppliers, and therefore lowered the harvest levels from our timberlands, as compared to the same period in 2004. For all of 2005, harvest levels in the Northern Resources Segment are expected to increase by approximately 3% over the 5.2 million tons we harvested during 2004.
Northern Resources Segment operating income was 30% of its revenues in 2005 and 31% of its revenues in 2004. Segment costs and expenses increased by $7 million, or 4%, to $174 million. This increase was due primarily to higher log and haul costs per ton ($8 million). Log and haul costs on a per ton basis increased by 7% due primarily to higher fuel costs. Southern Resources Segment. Revenues increased by $44 million, or 13%, to $382 million in 2005. This increase was due primarily to a higher percentage of delivered log sales compared to sales of standing timber ($18 million), higher harvest volume ($14 million), and higher softwood sawlog prices ($5 million). Revenues increased by $18 million due to the company’s increased 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. The company sells logs on a delivered basis when, in management’s judgment, log merchandising efforts will yield a premium over selling stumpage. While revenues are higher when the company is responsible for the logging and hauling of timber, a large portion of that increase in revenue is to cover the related increase in cost of sales. As a result, on delivered log sales the company realizes lower operating income as a percentage of revenue, even though operating income is generally improved. Harvest volume increased due primarily to favorable harvesting conditions during most of 2005 and a planned increase in harvest levels. For all of 2005, we expect the harvest volume to increase by 3% over the 13.3 million tons we harvested during 2004 as a result of an increased percentage of maturing timber on our southern timberlands. Softwood sawlog prices increased temporarily during the first quarter of 2005 due primarily to a weather-related shortage of logs. Several of our customers had low log inventories at the end of 2004 due to wet weather during the second half of 2004 and, as a result, offered higher prices in order to rebuild log decks. Southern Resources Segment operating income was 45% of its revenues for both 2005 and 2004. Southern Resources Segment costs and expenses increased by $25 million, or 14%, to $210 million in 2005. This increase 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, higher harvest volume and an increase in the per ton rate for log and haul cost. The per ton rate increase for log and haul costs, which increased costs and expenses by $6 million, was due primarily to higher fuel costs. In 2005, the company recorded $2 million of expense for timber destroyed by Hurricane Katrina. Real Estate Segment. Revenues decreased by $60 million to $220 million in 2005. During the nine months ended September 30, 2004, approximately 255,000 acres of large, non-strategic timberlands were sold for $133 million. Excluding revenues from these large, non-strategic timberland sales, revenues increased $73 million to $220 million for the nine months ended September 30, 2005, compared to $147 million for the same period in 2004. This increase is due primarily to an increase in land sales activity as the company executes its strategy of selling non-strategic timberlands. During the first nine months of 2005 we sold approximately 158,000 acres with an average sales price of $1,340 per acre, compared to approximately 104,500 acres with an average sales price of $1,410 per acre for the same period in the prior year. Furthermore, we recognized $8 million from the sale of conservation easements during 2005 while there were no revenues from conservation easements during 2004. During the nine months ended September 30, 2005, small non-strategic and conservation timberland sales accounted for approximately 90% of the acres sold and higher and better use timberland sales represented approximately 10% of the acres sold. Excluding large, non-strategic timberland sales, small non-strategic and conservation timberland sales accounted for approximately 83% of the acres sold during the nine months ended September 30, 2004, and higher and better use timberland sales represented 17% of the acres sold.
The timing of real estate 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, non-strategic and conservation timberland sales for the remainder of the year to range between $30 million and $40 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 52% of its revenues for 2005, compared to 50% for 2004. Real Estate Segment costs and expenses decreased by $35 million to $105 million. This decrease of $35 million was due primarily to the sale of large, non-strategic timberlands during the first nine months of 2004 for which we recognized costs, expenses and impairment losses of $64 million, offset in part by selling over 50% more acres of small, non-strategic and conservation timberland during 2005 than during the same period in 2004. Manufactured Products Segment. Revenues decreased by $13 million, or 3%, to $383 million in 2005. This decrease was due primarily to lower lumber prices ($9 million) and lower plywood prices ($9 million), offset in part by higher MDF prices ($9 million). Despite record high housing starts (U.S. housing starts during the first nine months of 2005 were 6% higher than the 25-year record high housing starts during the first nine months of 2004), lumber prices decreased by 7% due primarily to increased lumber production and imports. U.S. lumber production during the first seven months of 2005 was 4% higher than lumber production during the first seven months of 2004 due to the start-up of new mills and capacity expansions. Furthermore, lumber imports from Canada during the first seven months of 2005 increased by 5% over the same period in the prior year, and offshore imports (Europe and Latin America) increased by 38% due primarily to the strength of the U.S. economy and weak foreign markets. Plywood prices decreased by 9% due primarily to the increase in North American structural panels (plywood and oriented strand board) production capacity and offshore imports. During the past year, North American structural panels production capacity has increased by approximately one billion square feet, or approximately 3% of the annual U.S. structural panel consumption. Furthermore, offshore imports (primarily Latin America) during the first nine months of 2005 increased by 35% over the same period in the prior year. MDF prices increased by 9% due primarily to improved demand and a richer product mix. MDF demand has increased due to strong housing starts and improved repair and remodel markets. During the first half of 2004, we resolved all of our start-up issues associated with our new MDF thin-board line and, as a result, have increased the percentage of higher-margin products we produce. Manufactured Products Segment operating income was 7% of its revenues for 2005 and 14% for 2004. This decrease was due primarily to lower lumber and plywood prices and higher log and raw material costs. Manufactured Products Segment costs and expenses increased by $18 million, or 5%, to $357 million in 2005. This increase was due primarily to higher log costs for our lumber and plywood mills, and higher resin costs for our plywood and MDF mills. Log costs have increased due primarily to a declining supply of logs in Montana and favorable lumber and plywood prices. 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 $43 million in 2005, compared to a decrease of $39 million in 2004. The $4 million increase is due primarily to higher corporate overhead associated with accounting and timber and timberland systems, and corporate compliance. During the second quarter of 2004, we sold our working interest in our coalbed methane gas 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 for the first nine months of 2005 was $6 million, compared to $27 million for the first nine months of 2004. This change of $21 million is due primarily to a $31 million decline in the operating income of the Manufacturing Products Segment (resulting in a lower tax expense of $12 million), a $5 million remeasurement of our Deferred Tax Liability, and the $5 million gain we recognized during the second quarter of 2004 from the sale of our coalbed methane gas working interest (resulting in a higher tax expense in the prior year of $2 million).
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 the development and/or sale of some of our higher and better use lands. In addition to corporate-level income tax on certain non-REIT activities conducted through various taxable REIT subsidiaries, the company is subject to built-in gains tax on certain property dispositions as a consequence of our October 6, 2001 merger with The Timber Company. Our merger with The Timber Company involved merging a taxable entity into a nontaxable entity, and as a result, Plum Creek will generally be subject to corporate-level income tax (built-in gains tax) if the company makes a taxable disposition of certain property acquired in the merger within the ten-year period following the merger date. However, the tax is generally not payable to the extent proceeds from such dispositions are reinvested in qualifying like-kind replacement property. During the fourth quarter of 2001, in connection with our merger with The Timber Company, we wrote-off all of The Timber Company’s deferred income tax liability related to timber and timberlands except for $11 million. The $11 million deferred income tax liability relates to the book-tax basis difference of timber and timberlands that were expected to be sold, and subject to, the built-in gains tax during the ten-year period ending October 6, 2011. During the period October 6, 2001 to September 30, 2005, $1 million of the $11 million deferred income tax liability was used in connection with sales of timberlands subject to the built-in gains tax. In accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," we are required to remeasure the amount of deferred income taxes needed in connection with expected sales of timberlands subject to the built-in gains tax whenever management has better information to make an estimate. Prior to the third quarter of 2005, the company was in the process of expanding its real estate sales and believed it needed $11 million of deferred income taxes for expected sales of timberlands subject to built-in gains tax. During the third quarter of 2005, management revised its prior projection of future sales as well as the extent to which future sales proceeds could be successfully reinvested in like-kind property. Based upon the revised projection, management estimated that the company needed $5 million of deferred incomes taxes associated with timberlands acquired in connection with our 2001 merger with The Timber Company. This estimate was based on projected timberland sales subject to the ability to successfully reinvest proceeds in like-kind properties. Therefore, during the third quarter of 2005, we lowered the related deferred tax liability associated with expected sales of timberlands subject to built-in gains tax from $10 million to $5 million and correspondingly, recorded a deferred tax benefit of $5 million. Since there is significant judgment in estimating future sales subject to the built-in gains tax and our ability to successfully reinvest proceeds in like-kind property, these estimates may be revised during the remaining built-in gains tax period. Any revised estimate may result in a material adjustment to our deferred tax liability. Gain on Sale of Properties, net of tax. During the first quarter of 2005, we sold our remaining coal reserves for total proceeds of $22 million. The net gain from this sale, after reducing the proceeds for costs of sales and applicable income taxes, was $20 million, which has been reported in our income statement as a separate line item below Income from Continuing Operations.
Financial Condition and Liquidity Net cash provided by operating activities during the nine months ended September 30, 2005, totaled $427 million, compared to $516 million for the same period in 2004. This decrease of $89 million was due primarily to lower real estate sales. Revenues from real estate sales for the first nine months of 2005 was $60 million less than during the same period in the prior year. During the first nine months of 2004 we recognized revenue of $133 million from the sale of large non-strategic timberlands while we had no sales of large non-strategic timberlands during the first nine months of 2005. On September 30, 2005, Plum Creek entered into a real estate purchase and sale agreement to purchase approximately 650,000 acres of timberlands in Michigan, subject to customary closing conditions. The transaction is valued at approximately $345 million, and is expected to close in the fourth quarter of 2005. Plum Creek expects to fund this transaction with a combination of like-kind exchange funds and debt. In August of 2004, the company filed with the Securities and Exchange Commission a shelf registration statement under which the company from time to time may offer and sell any combination of preferred stock, common stock, depositary shares, warrants and guarantees up to a total amount of $400 million, and under which Plum Creek Timberlands, L.P., the company’s wholly owned operating partnership, from time to time may offer and sell debt securities of up to an additional total amount of $400 million. As of September 30, 2005, the entire amounts for issuance of equity and debt securities remained available under the shelf registration statement. The company has a $650 million facility revolving line of credit maturing on January 15, 2009. As of September 30, 2005, the weighted-average interest rate for the line of credit was 4.51%. The interest rate on the line of credit is based on LIBOR plus 0.875% and includes 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 September 30, 2005, we had $501 million of borrowings and $6 million of standby letters of credit outstanding; $143 million remained available for borrowing under our line of credit. As of October 7, 2005, $386 million of the borrowings under our line of credit was repaid. In April of 2005, the company retired its $20 million variable rate senior note bearing interest at 3-month LIBOR plus 1.445% due in 2008 prior to its maturity using funds available under the company’s revolving line of credit. Furthermore, in June 2005, the company made principal payments totaling $27 million on borrowings due under the company’s 1989 senior and first mortgage notes bearing interest at 11.125%. In May of 2005, the company entered into a $50 million one-year term loan agreement to finance the acquisition of approximately 35,000 acres of Florida timberlands. As of September 30, 2005, the interest rate for the term loan was 4.32%, which is based on LIBOR plus 0.5%. This rate can range from LIBOR plus 0.4% to LIBOR plus 1.075% depending on our financial results. The company’s 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). The 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. The company was in compliance with such covenants at September 30, 2005.
The company’s financial policy 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’s objective is to maintain its investment grade credit rating. 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. Also, the company has $50 million in short-term debt that matures in 2006. 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 November 1, 2005, our Board of Directors authorized the company to make a dividend payment of $0.38 per share, or approximately $70 million, which will be paid on November 30, 2005, to stockholders of record on November 16, 2005. 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. The company has authorization from our Board of Directors to repurchase up to $200 million of the company’s common stock. As of September 30, 2005, 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 pursuant to this authorization (see Item 2 of Part II). Capital expenditures, excluding the acquisition of timberlands, for the nine months ended September 30, 2005, were $53 million, compared to $49 million for the same period in 2004. Planned capital expenditures, excluding timberland acquisitions, for 2005 are expected to range between $90 million and $100 million, of which approximately 50% are considered discretionary and approximately 50% are considered maintenance expenditures. Discretionary expenditures consist primarily of silviculture investments (e.g., fertilizers and herbicides) associated with our timberlands and to a lesser extent land development investments. Maintenance expenditures consist primarily of reforestation costs for our timberlands and projects at our manufacturing facilities to sustain operating activities or improve safety. 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:
|
