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[GRAPHIC]
Plum Creek
The nature of business
1998 ANNUAL REPORT
PLUM CREEK TIMBER COMPANY, L.P.
In nature as in business
strength is tested during times of challenge.
How Plum Creek acted in the challenges of 1998
and created opportunities for new growth
is the story of this report.
FIVE-YEAR FINANCIAL HIGHLIGHTS
Plum Creek Timber Company, L.P., is the fifth largest private timberland
owner in the United States. The Company owns over 3.3 million acres of
timberland in the Northwest, Southern and Northeastern United States,
employs a workforce of approximately 2,400 employees, operates 11
manufacturing facilities and is the recognized leader in Environmental
Forestry. Owning this vast resource base of some of the world's most
productive timberlands allows us to be the preferred supplier of
value-added forest products to a variety of specialty markets.
Plum Creek has approximately 65,000 Unitholders and trades on the New York
Stock Exchange under the symbol PCL.
Year ended December 31,
------------------------------------------------------------
(In millions, except per Unit) 1998 1997 1996(1) 1995 1994
Revenues $ 699.4 $ 725.6 $ 633.7 $ 585.1 $ 578.7
Depreciation, depletion and amortization 69.3 70.2 56.9 54.1 54.1
Operating income 141.1 173.3 165.0 159.0 164.1
Net income 75.4 111.7 223.6 110.7 112.2
Capital expenditures(2) 64.3 28.3 19.3 30.7 25.8
Net cash provided by operations 164.0 190.0 171.9 165.2 155.1
Net income per Unit 0.90 1.72 4.71 2.17 2.36
Cash distributions declared per Unit 2.28 2.20 2.02 1.96 1.67
Operating data:
Northwest timberlands fee timber
harvested (MMBF) 495 512 577 562 559
Southern timberlands fee timber
harvested (M Cunits) 764 799 127
Northeastern timberlands fee timber
harvested (M Tons) 131
Lumber production (MMBF) 635 582 461 433 388
Plywood production (MMSF) (3/8" basis)(3) 323 312 297 294 290
MDF production (MMSF) (3/4" basis) 132 127 113 102 123
[1] Included in 1996 results of operations was a gain of $105.7 million
related to the Newport Asset Sale. Results include the impact of the
Southern Region Acquisition from October 19, 1996, and the Newport Asset
Sale from October 12, 1996.
[2] Does not include $181.1 million related to the Maine Timberland
Acquisition in 1998 or $560.7 million related to the Southern Region
Acquisition in 1996.
[3] Does not include 111 MMSF, 200 MMSF and 37 MMSF for the years ended
December 31, 1998, 1997 and 1996, respectively, related to production at
the Joyce, Louisiana, plywood facility that was closed in July 1998.
TO OUR UNITHOLDERS
As I reflect on 1998, it was a year of many accomplishments: the
acquisition of 905,000 acres in the state of Maine; congressional approval
of the 1-90 land exchange in the Cascade Mountains of western Washington; a
number of higher and better use land sales--several to conservation groups;
the reconfiguration of our manufacturing facilities in Joyce, Louisiana,
into a world-class lumber operation; and the announcement of our intention
to convert from a Master Limited Partnership (MLP) to a Real Estate
Investment Trust (REIT). All of these accomplishments help position Plum
Creek as one of the premier companies in the industry and will certainly
contribute to the growing value of the Company.
Our financial performance in 1998, however, was not among the year's high
points. Despite a strong U.S. economy and housing market, weak demand in
Asia caused log and lumber products that are normally sold into the Asian
market to be redirected into the U.S. market, putting tremendous downward
pressure on prices. The pricing impact was offset in part by favorable
results in our plywood, medium density fiberboard (MDF) and Southern
resource businesses as well as ongoing sales of higher and better use
lands.
Plum Creek's earnings for the year were $75.4 million, or $0.90 per Unit,
on revenues of $699.4 million, compared to prior year earnings of $111.7
million, or $1.72 per Unit, on revenues of $725.6 million.
For the year, Northwest lumber prices were 12 percent below the prior year
period, and prices for Southern lumber declined 13 percent. Cascades Region
domestic log prices declined 13 percent from the prior year, and prices for
logs in the Rocky Mountain Region declined 4 percent in 1998 compared to
the prior year. Cascades Region export log prices declined 16 percent for
the year compared to 1997 levels.
The strategic focus and geographic diversity of our operations helped to
partially offset the lumber and log price declines experienced in 1998. Our
Southern resource operations and our plywood and MDF product lines
performed well. For the year, prices for Southern sawlogs equaled pricing
for 1997, while pulp log prices increased 5 percent compared to 1997
levels. Plywood prices for the year were 2 percent above prices achieved
for the full year 1997. Although MDF prices were flat year-to-year, our
focus on improving production efficiencies substantially decreased costs
and improved margins. Earnings also benefited from our active higher and
better use land sales program, which generated revenues of $32.8 million
for the year.
Looking ahead, our challenges continue, particularly in the marketplace.
But the opportunities for Plum Creek are many. Our 3.3 million acres of
high-quality timberland make us the fifth largest private timberland owner
in the U.S. Our manufacturing businesses--lumber, plywood and MDF--are well
capitalized and employ some of the most creative and hardworking people
with whom I have had the pleasure to work. These businesses are
well-positioned in their respective markets and heavily focused on
higher-end, value-added products for a variety of retail and industrial
customers who tell us, time and again, that Plum Creek quality is second to
none.
Although the impact on the bottom line cannot be directly measured, our
efforts to remain the leader in environmentally responsible resource
management continue to pay dividends. Our Habitat Conservation Plan (HCP)
in western Washington, which protects some 285 wildlife species and the
ecosystems they inhabit, celebrated its second anniversary in 1998. Early
indications show that the benefits of this plan are exceeding our high
expectations. During the year, we made significant progress on our native
fish HCP, which will cover 1.7 million acres of our Northwest timberland
and provide protection for numerous species of fish.
During the fourth quarter, we successfully completed our $181 million
acquisition of 905,000 acres of timberland in Maine. We believe these
timberlands are some of the best in the entire Northeastern part of the
country. This purchase fits one of our key strategic objectives: expanding
and enhancing our timberland ownership and successfully completing
acquisitions that are accretive to cash flow.
By December, we had substantially completed a $31 million capital project
at our Joyce, Louisiana, complex. The result is a state-of-the-art lumber
manufacturing facility with the ability to produce
MAP OF OWNERSHIP
[MAP]
over 220 million board feet of lumber annually--more than twice the
capacity of the previous plant. In addition, our purchase of a lumber
remanufacturing facility in Meridian, Idaho, will not only increase our
overall lumber production, but also supply more value-added products to our
retail lumber customers.
On October 21, 1998, Congress approved a large land exchange between Plum
Creek and the U.S. Forest Service. Several years in the making, this
exchange involves almost 70,000 acres of land in the Cascades. It will put
thousands of acres of environmentally sensitive lands near the Alpine Lakes
Wilderness area into public ownership. In exchange, Plum Creek will receive
timberlands more suitable for long-term forest management--a real win-win
for the public and the Company.
In February, Unitholders of record as of January 22, 1999, received our
proxy statement/prospectus outlining the details of Plum Creek's proposed
conversion to a publicly traded REIT. We are very excited about this
conversion transaction and believe it will be very beneficial to the
Company and to you, our owners, for the following reasons:
- We believe that the REIT is a superior structure for growth,
as it will expand our access to equity and debt capital
markets. The REIT will permit a broader base of investors
by allowing institutions, such as mutual funds, to invest
in Plum Creek, which should enhance investor value compared
to remaining an MLP.
- The REIT conversion will eliminate the General Partner
structure we have in the MLP, resulting in the alignment of
all shareholder interests and a significantly lower cost of
capital. This latter fact will make future acquisitions
more accretive to cash flow and more beneficial to
investors than can occur under the MLP structure.
- The conversion will not cause a change to our current annual
cash distribution of $2.28 per Unit; and our dividend
philosophy, which is to provide stable and rising dividends
over time, will not change.
- Investors will continue to receive favorable tax treatment in
the REIT structure. Specifically, investors will continue
to receive the flow-through benefit of capital gains, and a
significant portion of the quarterly dividend will continue
for the next several years to represent a non-taxable
return of capital. Tax reporting for investors will also be
simplified in the REIT structure--investors will receive a
Form 1099 for tax filing purposes, rather than a Schedule
K-1.
The conversion has been structured to be tax-free to Unitholders, who will
receive one share in the REIT for each Unit currently held. The shares of Plum
Creek will continue to be traded on the New York Stock Exchange under the
trading symbol "PCL."
Please keep in mind that the conversion transaction will not change who we are
or how we conduct our business. Plum Creek will continue to have the same
management, assets, and focus on growth and value. We will remain a focused
forest products company.
The conversion to the REIT structure will be a major accomplishment for the
Company as we become the first timber REIT in the financial
marketplace--and just as we have been mentioned as the most successful
timber MLP ever, we plan to be the most successful timber REIT ever.
The strategic initiatives that have contributed to our past growth will
continue to guide us in the future:
- Maximizing the Company's overall value through leadership and
innovation in economically sound and environmentally
responsible resource management.
- Aggressively pursuing strategic and financially attractive
timber acquisitions that enhance the Company's resource base
and value over the long term.
- Focusing on the sale or exchange of lands that have higher and
better uses than long-term timber management.
- Serving value-added industrial and retail markets with
high-quality products and services.
As I look to 1999 and beyond, I see a well-positioned Company with
exceptional assets, a strong brand name in value-added niche markets, a
reputation for environmental initiative, a focused management team and a
dedicated workforce. Our challenges will be many, especially during this
period of economic uncertainty in Asia, but our opportunities are
limitless.
Thank you for your continued support of Plum Creek.
/s/ RICK HOLLEY
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Rick Holley
President and Chief Executive Officer
PLUM CREEK'S STRATEGIC APPROACH
TO THE SHIFTING LANDSCAPE
OF OUR INDUSTRY GIVES US
STRONG ROOTS IN UNCERTAIN TIMES
AND PLANTS THE SEEDS OF HEALTHY GROWTH
FOR DECADES TO COME.
GROWING VALUE FROM THE GROUND UP
On the verge of the 21st century, the nature of business is change--and a
company is as successful as its ability to manage the challenges and leverage
the opportunities change brings. Plum Creek's strategic vision serves the
Company, our customers and our investors well on both counts.
The Company is guided by a handful of clear, consistent strategies:
expanding our resource base; focusing on high-quality products for
value-added markets; and being leaders in environmentally responsible
resource management.
These strategies, which today are and will continue to be responsible for
Plum Creek's value growth over the long term, contribute to our strength
and stability in tough times, too. They allow us to remain both focused and
flexible in the midst of evolving economies, marketplaces and competition.
Our focus allows us to recognize the strategic opportunities that arise;
our flexibility, backed by our financial strength, allows us to act on
those opportunities when the time is right.
As Plum Creek addressed the difficult market conditions created by the
Asian economic crisis during the year, we continued to build the value of
the Company for the long term. True to our strategic focus, we took
advantage of new opportunities to significantly grow our asset base and
strengthen our market position, while enhancing our resource management and
environmental leadership.
In a world where change is as inevitable as the seasons, it's how Plum
Creek manages change that distinguishes the Company's vision and its
growing value--to our investors and our customers.
Plum Creek's strategies for growth allow us to remain strong during adverse
market conditions while seizing timely opportunities to acquire new
timberlands, upgrade our manufacturing facilities, realize the value of our
higher and better use lands, and advance our environmental leadership into
the next century.
PLUM CREEK'S NEW NORTHEAST REGION
INCREASES OUR TIMBERLAND BASE BY MORE THAN 37 PERCENT.
GROWING RESOURCE BASE, GROWING DIVERSIFICATION
In November 1998, Plum Creek increased the geographic diversification and
value of our resource base by acquiring 905,000 acres of well-managed,
productive timberlands in central Maine.
We have gained a new and major presence in the Northeastern United States
with our $181.1 million purchase from Sappi Fine Paper, North America
(formerly S.D. Warren Company), a subsidiary of South African-based Sappi
Limited. The acquisition brings our total ownership to more than 3.3
million acres, making Plum Creek the fifth largest private timberland owner
in the nation.
Plum Creek's new Northeast Region reflects our strategic priority to grow
our resource base as industry consolidation intensifies and values
increasingly belong to the owner of the fiber. Just as important, the
acquisition meets our rigorous criteria for high-quality assets that
immediately generate positive cash flow on a stand-alone basis and enhance
the overall cash flow of the Company. Like our 1996 expansion into the
Southern U.S., the Northeast Region strengthens Plum Creek's competitive
position by broadening our market base, enhancing our national profile and
giving us access to a larger, more diverse asset base.
Our new timberlands are considered among the best in the Northeast-- a
nearly equal mix of softwoods and hardwoods on relatively contiguous flat
land. Spruce, fir, maple and birch grow at a rate enhanced by good soils,
ample rain and a team of professionals who know the land and care about the
environment. Over the years, these timberlands have benefited from good
silviculture, conservative harvesting and a tradition of stewardship
similar to ours--all of which have contributed to
"The acquisition in the Northeast is a great fit for Plum Creek. It
leverages our strengths in marketing, forestry and science and lets us
expand our knowledge base in hardwoods. It enhances our ability to build
and deliver increasing value to our owners--not only now, but for the long
term."
Rick Holley,
President and CEO
a smooth transition of ownership and uninterrupted productivity. We have
retained the majority of the skilled employees who have managed these lands so
thoughtfully over the years.
Ideally situated in the heart of Maine's greatest concentration of
sawmills, pulpmills and chipmills, our Northeast timberlands serve a region
that enjoys very stable demand and pricing for wood fiber. As part of the
purchase, Plum Creek entered into a 25-year fiber supply agreement and an
additional 15-year option to provide Sappi with 300,000 to 375,000 tons of
hardwood pulpwood annually for its paper facility in Skowhegan, Maine, at
market prices. This agreement represents approximately one-third of the
total annual harvest from our new timberlands. A mix of hardwood pulpwood,
hardwood sawlogs, softwood pulpwood and some softwood sawlogs will be sold
to surrounding U.S. and Canadian mills.
We see significant opportunities to build on the success of our new
timberlands. Through improved merchandising, we expect to increase the
value of each harvest. Getting the highest value out of every log is a
trademark of Plum Creek's forestry practices--and a matter of careful
sorting on the ground to ensure that each log reaches its highest-value
destination. Vigilant sorting by harvesting crews is especially valuable
with hardwoods, which can be directed to many different types of end-use
applications.
Other value-added opportunities include the potential for conservation
transactions. Plum Creek is negotiating with the State of Maine for
easements on our timberlands located along portions of Moosehead Lake, the
Kennebec River and Flagstaff Lake. These easements would relinquish
development rights, but retain harvesting rights, on approximately 3,000
acres of our property's
"Our new Maine timberlands will deepen our understanding of national
markets. They also contribute to a very good mix of resources, giving us a
broader, more diverse foundation to take full advantage of market upswings
across the U.S. and minimize the effects of any regional downturns."
Jim Lehner,
General Manager, Northeast Region
OUR FORESTERS ARE CONTINUALLY FINDING NEW WAYS TO MAKE OUR
TIMBERLANDS MORE PRODUCTIVE.
[PHOTOGRAPHS]
CLOCKWISE FROM TOP LEFT. Forester Dan Lamontagne takes a core sample from a
mature red pine in Bingham, Maine. A stand of Douglas fir in the Murr Creek
area near Kalispell, Montana. Little Bitterroot Lake, in the Salish
Mountains of Montana, surrounded by managed forest.
THE MODERNIZATION OF OUR JOYCE SAWMILL
DOUBLES ITS CAPACITY TO SERVE OUR VALUE-ADDED MARKETS.
most scenic and popular recreation land. We will pursue other opportunities
for future conservation agreements in keeping with our strategic intent to
optimize the value of our higher and better use lands.
In 1999, we will review our Environmental Principles to ensure that
Northeast management issues and practices are carefully considered and
incorporated. Although no significant environmental issues exist on our new
lands, we recognize that Plum Creek's environmental leadership and forest
management practices were a major factor in successfully acquiring them. We
look forward to managing the growing value of our Northeast Region with the
same innovation and care that we bring to all of our timberland holdings.
INVESTING IN MARKET-DRIVEN MANUFACTURING
As 1998 drew to a close, the first lumber began coming off the lines at Plum
Creek's new state-of-the-art sawmill in Joyce, Louisiana. The high-volume,
multi-line sawmill is constructed on the site of the former plywood plant and
sawmill that Plum Creek acquired with our Southern timberlands in 1996.
The $31 million modernization of the Joyce facility represents a strategic
investment that builds on Plum Creek's expertise in serving targeted markets
with high-quality products. Our Southern lumber operations will be strengthened
through improved productivity and efficiency. With an annual capacity of 220
million board feet--double that of the old sawmill--our new plant is one
"Plum Creek's new state-of-the-art sawmill at Joyce will allow us to
capture greater value from our timber resource through higher productivity
and efficiency. The dedicated workforce at Joyce has a reputation for
manufacturing products of high quality; we look forward to growing the
operation from its new base."
Charlie Grenier,
Executive Vice President
of the largest in the United States. Together, its size and flexible
technology will allow us to generate more value from our Southern assets
over the long term and meet the evolving needs of the market niches we
serve.
Plum Creek's market-driven manufacturing strategy also prompted our
acquisition of a remanufacturing facility in Meridian, Idaho. This highly
successful plant, which we purchased in May from Canfor USA, has allowed us
to expand our strong position in the do-it-yourself retail market and meet
the demand for new value-added products.
Today, more than half of the lumber Plum Creek produces is committed to
specific value-added customer programs. The vast majority of these programs
serve the growing retail home center market for repair and remodeling, a
highly desirable market segment that is less cyclical and more
recession-proof than the new-construction market. Our Meridian facility
will enhance our ability to meet retailers' growing demand for high-quality
lumber products. Based on existing customer commitments, this flexible,
market-driven facility purchases lumber from a wide variety of
suppliers--including our own mills in Montana--grades it to proprietary
standards and sells it to national home centers, many of which are among
Plum Creek's largest customers. With a strong reputation for high-quality
products and services, and easy access to a wide variety of wood sources,
Meridian represents a strategic and significant growth opportunity for Plum
Creek.
GROWING PRODUCTIVITY IN OUR SOUTHERN TIMBERLANDS
In addition to improving our manufacturing facilities in 1998, Plum Creek
developed a plan to make our Southern timberlands more productive for
decades to come.
"Our new remanufacturing facility at Meridian, Idaho, is a successful
operation that has been smoothly integrated into our Northwest lumber
business from day one. The employees are experts in pine boards and
edge-glued lumber. They bring a lot to the table--and it's all compatible
with Plum Creek's reputation for high-quality, value-added products and
service."
Henry Ricklefs,
General Manager, Lumber
NEW MANAGEMENT PRACTICES IN THE SOUTH
WILL INCREASE YIELDS AND SHORTEN ROTATION CYCLES.
Based on the expertise of the foresters and research scientists who manage
our Southern pine plantations, our new plan applies the latest science and
silviculture to optimize timber growth. The plan draws on three management
practices for maximizing Southern pine growth: bedding sites as needed to
raise the planting rows out of standing water; controlling grasses and
weeds that compete with the pines' development; and periodically applying a
phosphorus-rich fertilizer where site-specific soil and needle samples
indicate the need. Although Plum Creek's Southern timberlands are already
very productive, our research indicates that this program can significantly
increase their productivity. The bottom line: these efforts will enhance
the value of every acre of our timberland, while leaving both soil and site
healthier in the process.
To ensure that our new management practices deliver the projected return on
investment, our foresters will compare tree growth every three years
against the specific Standards of Growth Performance we have established.
We will continue building on our knowledge base and applying new
silvicultural advances that enhance the growth and yield of our
timberlands--increasing the value of Plum Creek's resource base.
PRESERVING SPECIAL PLACES
Plum Creek recognizes that portions of our timberland ownership have unique
ecological, recreational or historic values that outweigh their economic
value. In 1998, we worked with Congress to enact legislation that will
consummate a major land exchange with the federal government in 1999. In
addition, we successfully negotiated with a number of conservation buyers
to complete transactions that will transfer several special places into
public ownership.
In our Southern pine plantations, Plum Creek is initiating new management
practices designed to optimize timber growth and significantly increase the
productivity of every acre. These silvicultural advances will also enhance the
health of the soil and the site for future plantings.
1-90 Land Exchange Over the years, land exchanges with the federal
government have been fundamental to Plum Creek's vision of responsible
asset management and stewardship. This year, we formalized Washington
state's largest land exchange in 50 years, with far-reaching benefits for
everyone involved.
In the 1-90 Land Exchange, Plum Creek agreed to trade approximately 54,000
acres of our most biologically sensitive and heavily recreated lands in
Washington for almost 17,000 acres of productive, federally owned
timberlands in other parts of the state. The lands we will receive are more
accessible, easier to manage and subject to fewer biological and
recreational concerns. They will give us a future of more reliable harvests
closer to our customer base.
The exchange will eliminate much of the "checkerboard" land ownership
pattern in the central Cascades, consolidating it in a way that improves
public and private land management and benefits wildlife. Federally owned
lands will now encompass a rich, uninterrupted wildlife corridor from the
Alpine Lakes Wilderness Area to Mount Rainier National Park--an important
"biological connection" for the north-south movement of spotted owls and
other species dependent on mature forests. The certainty that this vital
ecosystem will be preserved for wildlife habitat will be one of the land
exchange's greatest legacies.
The exchange is the culmination of a process that was open and responsive to
public input, which included 18 Native American tribes and numerous
environmental and conservation
"The 1-90 Land Exchange resolves a lot of long-standing land use issues in
the Cascades. Going forward, it will make public and private land
management easier and more effective, with tremendous benefits for all
concerned. It's really a success story of putting the right lands in the
right hands."
Bill Brown,
Vice President, Strategic Business Development
[PHOTOGRAPH]
PLUM CREEK WORKS IN PARTNERSHIPS THAT ENSURE PREDICTABLE
FOREST MANAGEMENT FOR DECADES TO COME.
[PHOTOGRAPHS]
CLOCKWISE FROM TOP LEFT: A young conifer. Thorp Lake is one of the many
special places that would come under public ownership through the I-90 Land
Exchange. A forested hillside in the Cascades.
WE BELIEVE IN HONORING AND PROTECTING
SPECIAL PLACES FOR FUTURE GENERATIONS.
organizations. Through the leadership of U.S. Senators Slade Gorton and
Patty Murray and Congressman Doc Hastings, the final legislation approved
by Congress represents a bipartisan effort that considered all interests in
the region. Fully two-thirds of our newly acquired lands will be managed
under the guidelines of our existing Habitat Conservation Plan.
The landscape of ownership shaped by the 1-90 Land Exchange is a carefully
crafted solution that allows public and private interests to manage their
assets more effectively and with greater certainty for generations to come.
Preserving history at Glade Creek Camp Plum Creek's strategic commitment to
realize the value of our higher and better use lands in a thoughtful manner
has great potential to benefit the interests of both the Company and the
public. In August, we realized some of that potential with the sale of
Glade Creek Camp to the Idaho Heritage Trust.
The 160-acre parcel of land includes one of the most historically and
culturally valuable sites on the entire Lewis and Clark Trail. Glade Creek
Camp is the only campsite in Idaho that remains essentially the same today
as it was in September 1805, when the explorers stopped there and
Meriwether Lewis recorded it in his journal. The site holds significance
for the Nez Perce Tribe, who saved the explorers from starvation and showed
them the way across the rugged Rockies. Public interest in the site has
grown with its mention in Stephen E. Ambrose's best-selling account of the
expedition, Undaunted Courage, and with the approaching bicentennial of the
Lewis and Clark expedition. The State of Idaho is developing a plan to
preserve the site's historical significance.
"...this nearly pristine site will be forever maintained as Lewis and Clark
knew it. It is a perfect gem of a site, about as pretty and untouched as
any Lewis and Clark campground from St. Louis to the Pacific Coast. This is
public-private partnership at its best. Hats off to Plum Creek and the
State of Idaho."
Stephen E. Ambrose,
author of Undaunted Courage
Lindbergh Lake One of the most scenic areas in western Montana has been
protected with Plum Creek's sale to the federal government of 1,800 acres
at the south end of Lindbergh Lake. Located near the Mission Mountains
Wilderness Area, the land includes over four miles of pristine waterfront
and is home to grizzly bears, elk and deer. Its proximity to Missoula and
Kalispell makes it a major recreational area as well. Congress appropriated
$10 million from the Land and Water Conservation Fund to acquire the
property from Plum Creek, which entered into a creative partnership with
the Trust for Public Lands and the U.S. Forest Service. Montana's
congressional delegation and a broad coalition of conservation groups were
instrumental in completing the transaction for this special place. We
expect to sell an additional 700 acres in the area to the federal
government in 1999.
Upper Ouachita National Wildlife Refuge In 1998, Plum Creek sold 4,750
acres of prime habitat for the threatened red-cockaded woodpecker to The
Nature Conservancy (TNC) of Louisiana. The land will be added to the Upper
Ouachita National Wildlife Refuge in Louisiana and Arkansas. U.S. Fish and
Wildlife Service officials project that the land could ultimately support
up to 20 clusters of woodpeckers in what is the largest financial project
ever undertaken by TNC of Louisiana.
Like all of Plum Creek's strategic initiatives, our land management is
continually infused with fresh ideas and insight, new advances in science
and technology, and a culture that places a high value on personal
initiative. It is a living example of how Plum Creek has positioned itself
to acknowledge change and channel it in ways that carry the Company
forward--into market leadership and growing value.
With the sale of Plum Creek's higher and better use lands in 1998, more
than 7,900 acres of wildlife habitat will be transferred into public
ownership for conservation. Much of it is important habitat to the
endangered and threatened species indigenous to these areas.
OUR ENVIRONMENTAL PRINCIPLES
LOOK GOOD ON PAPER-AND EVEN BETTER IN PRACTICE.
At Plum Creek, our Environmental Principles are more than words. They are
daily working guidelines for everything we do. From our timberlands to our
manufacturing facilities, we have made significant progress in improving
our practices since we adopted these principles in 1991. Along the way, we
have built a strong track record of environmental stewardship. So when we
say Plum Creek is a leader in environmentally responsible resource
management, it's more than just words. It's the way we do business.
LEADING THE WAY
[PHOTOGRAPH]
IN THE FOREST
Furthering our commitment to sustainable forestry In 1998, Plum Creek was
one of the first timber companies to commit to the third-party verification
program of the Sustainable Forestry Initiative (SFI). Developed by the
American Forest & Paper Association, the SFI program sets forth a
comprehensive nationwide approach to responsible forest stewardship.
Similar to Plum Creek's own Environmental Principles, SFI principles are
designed to ensure that forest management is integrated with the
conservation of soil, air and water resources, wildlife and fish habitat,
and aesthetics. Building on previous audit initiatives (see below), we will
institute a third-party verification program, in which independent teams
will conduct audits of each of our four operating regions over a three-year
cycle. These audits will measure adherence to the objectives and
performance measures established by SFI as well as our own Environmental
Principles.
Further strengthening Plum Creek's commitment to SFI is our enhanced policy on
log procurement, which will be fully implemented by the end of 1999. Our new
policy requires that all logs delivered to Plum Creek mills be harvested by
trained logging professionals who demonstrate adherence to SFI principles. Our
goal: to assure our customers and the public that all Plum Creek products are
derived from logs harvested in an environmentally responsible manner.
Environmental performance reviews In 1998, Plum Creek completed our fourth
year of resource audits with the assistance of PricewaterhouseCoopers LLP,
an internationally recognized auditing firm. The results of the internal
audits showed continued excellence in applying our Environmental Principles
to day-to-day harvest activities. Areas of significant achievement included
prudent planning and administration, greater sensitivity to visual
aesthetics, and innovative road and bridge design to enhance water quality.
Our timberlands in Montana were also audited by the State for environmental
performance and water quality protection. Eleven sites were randomly
selected for inspection by the State-led multidisciplinary team. The
findings: six sites received a 100 percent rating. Our overall rating was
98 percent--significantly above statewide averages and among the best in
the state.
Reforestation Timberland regeneration is key to sustainable forest
management. Before harvesting occurs on any of our lands, Plum Creek
foresters have already made plans for the next generation of trees. Care is
taken to plant seedlings that will grow best in each area, depending on
elevation, slope and geography. In 1998, Plum Creek planted more than 15
million seedlings.
In areas where natural reforestation is the best alternative, we monitor
growth and supplement with planting as needed. We also participate in
research cooperatives with other companies to improve tree growth and
develop trees that are resistant to insects and disease.
Conservation agreements Plum Creek's protection of wildlife habitat is an
example of our environmental leadership. In addition to successfully
implementing our Environmental Principles, we now manage more than a
quarter-million acres under conservation agreements. The habitats of
hundreds of species are protected by these agreements, including five
species listed as threatened under the Endangered Species Act.
Marking HCP progress In 1996, Plum Creek initiated a Habitat Conservation
Plan (HCP) that provided unprecedented habitat protection in the central
Cascades for 285 wildlife species on 170,000 acres. Just two years into the
50-year plan, we have demonstrable progress to report.
[PHOTOGRAPH]
OUR HABITAT CONSERVATION PLAN REAFFIRMS THE
LINK BETWEEN A HEALTHY ECOSYSTEM AND A HEALTHY BUSINESS.
- We have completed detailed scientific analysis in 13 of the 20
watersheds to be studied in the HCP area.
- Monitoring has confirmed a stable population of spotted owls on
these lands over the last two years, including 85 juveniles.
- We have closed or restricted access to 24 roads to address
watershed concerns and habitat requirements for wolves, grizzly
bears and other species included in the HCP.
- Our scientists discovered the Larch Mountain salamander, a
species not previously known to exist in the western Cascades.
It is protected under the HCP.
Just as Plum Creek's leading-edge science played a role in the HCP's
development, it now plays a role in implementation and monitoring. The plan
draws on advanced aquatic monitoring systems, and on landscape and information
technology that is setting a recognized scientific standard for conservation
efforts throughout the country.
Developing a Native Fish HCP for other Northwest lands. As we realize the
benefits of the Cascades HCP, we are developing a similar long-term
management agreement for bull trout and other native fish species in
Montana, Idaho and Washington. Due to increasing concern for the welfare of
all fish species in the Northwest, the HCP's scope will voluntarily extend
beyond bull trout protection to include other native fish such as salmon
and steelhead.
Generally, the "four Cs" of habitat conditions that are good for bull
trout--water that is clean, cold, complex and connected--are good for other
native fish species. For this reason, it makes good business and
environmental sense to protect as many aquatic species as possible under
the new HCP. We are
[PHOTOGRAPH]
[PHOTOGRAPH]
currently developing the Environmental Impact Statement and negotiating
mitigation requirements to arrive at a plan that serves the Company, the
public interest and the well-being of this natural resource for decades to
come.
IN OUR MILLS
Performance audits In addition to audits of our timberlands, Plum Creek
conducts internal and third-party audits of our manufacturing facilities to
ensure compliance with our Environmental Principles and state and federal laws.
In 1998, Plum Creek again retained CH2M Hill, a highly respected environmental
management firm, to audit the environmental performance of all of our
manufacturing sites. The results of this year's audits show that we are
protecting water and air quality, properly handling hazardous material and
stormwater runoff, and minimizing energy consumption.
According to CH2M Hill, "Overall, Plum Creek has a very good compliance status
that CH2M Hill believes is above the industry average."
Air quality In our Montana mills, design and installation of
state-of-the-art emission control technology has resulted in a 63 percent
decrease in particulate emissions over the past five years. In 1998, major
changes to the fuel-handling system at our Ksanka sawmill resulted in the
elimination of two air-emission sources, a reduction of fugitive dust emissions
and a decrease in the amount of waste materials destined for a landfill.
By upgrading the particulate-control device in the boiler at our Huttig,
Arkansas, sawmill, we have also reduced particulate emissions by over 65
percent.
[PHOTOGRAPH]
Wood fiber recovery Because of Plum Creek's commitment to fully utilize
all trees harvested, we have developed innovative ways to eliminate waste and
put all our wood fiber to work. Bark from logs is used for boiler fuel at our
mills or sold for use as landscape materials. Short and low-grade pieces of
lumber that previously were chipped for pulp are now finger-jointed to make
longer, stronger pieces of lumber. Sawdust and planer shavings that were once
burned are now raw materials for the world's highest-grade medium density
fiberboard, Plum Creek's MDF(2). We continue to research new and better ways to
increase the utilization and value of every log.
A safe workplace Providing a safe and healthy work environment is another
commitment Plum Creek takes seriously. Safe work practices are recognized
and reinforced through peer feedback. In 1998, to protect and promote the
health and safety of our employees, we instituted a Company-wide
drug-testing program in which all employees are randomly tested for drugs
and alcohol.
INTO THE FUTURE
In 1999, Plum Creek will implement third-party verification audits of our
timberlands. These audits will include compliance with the principles of
the SFI as well as our own Environmental Principles. We will also introduce
our Environmental Principles in our newly acquired Maine timberlands with
careful consideration for the region's lands, forestry methods and
environmental issues.
At Plum Creek, environmental leadership means putting our principles into
action--throughout the year and throughout our Company.
COMBINED STATEMENT OF INCOME
Year Ended December 31,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands, except per unit)
Revenues ................................. $ 699,370 $ 725,571 $ 633,741
--------- --------- ---------
Costs and Expenses:
Cost of goods sold .................. 505,366 503,259 429,897
Selling, general and administrative . 52,917 49,031 38,856
--------- --------- ---------
Total costs and expenses ........... 558,283 552,290 468,753
--------- --------- ---------
Operating income ......................... 141,087 173,281 164,988
Interest expense ......................... (60,622) (60,364) (50,141)
Interest income .......................... 1,042 1,113 1,291
Gain (loss) on disposition of assets - net (805) (1,223) 108,852
Reorganization costs ..................... (4,763)
Other expense - net ...................... 14 (1,031)
--------- --------- ---------
Income before income taxes ............... 75,953 111,776 224,990
Provision for income taxes ............... 517 80 1,391
--------- --------- ---------
Net income ............................... $ 75,436 $ 111,696 $ 223,599
General Partner interest ................. 33,713 31,918 27,777
--------- --------- ---------
Net income allocable to Unitholders ...... $ 41,723 $ 79,778 $ 195,822
--------- --------- ---------
Net income per Unit ...................... $ 0.90 $ 1.72 $ 4.71
--------- --------- ---------
See accompanying Notes to Combined Financial Statements.
COMBINED BALANCE SHEET
December 31,
------------------------------
1998 1997
----------- ----------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents .............. $ 113,793 $ 135,381
Accounts receivable .................... 32,007 28,698
Inventories ............................ 55,963 58,956
Timber contract deposits ............... 2,647 3,711
Other current assets ................... 6,053 5,508
----------- ----------
210,463 232,254
Timber and timberlands - net ............. 1,030,484 887,694
Property, plant and equipment - net ...... 186,179 163,556
Other assets ............................. 11,117 17,393
----------- ----------
Total assets ............................. $ 1,438,243 $1,300,897
----------- ----------
LIABILITIES
Current liabilities:
Current portion of long-term debt ...... $ 18,400 $ 18,400
Accounts payable ....................... 15,320 12,990
Interest payable ....................... 10,964 9,556
Wages payable .......................... 14,795 17,156
Taxes payable .......................... 4,081 4,757
Workers' compensation liabilities ...... 1,550 1,450
Other current liabilities .............. 15,766 9,683
----------- ----------
80,876 73,992
Long-term debt ........................... 742,608 584,000
Line of credit ........................... 200,000 161,000
Workers' compensation liabilities ........ 7,495 8,466
Other liabilities ........................ 1,849 3,102
----------- ----------
Total liabilities ........................ 1,032,828 830,560
----------- ----------
Commitments and contingencies
PARTNERS' CAPITAL
Limited Partners' Units .................. 406,857 469,824
General Partner .......................... (1,442) 513
----------- ----------
Total partners' capital .................. 405,415 470,337
----------- ----------
Total liabilities and partners' capital .. $ 1,438,243 $1,300,897
----------- ----------
See accompanying Notes to Combined Financial Statements.
COMBINED STATEMENT OF CASH FLOWS
Year Ended December 31,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ................................. $ 75,436 $ 111,696 $ 223,599
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and
amortization ............................ 69,287 70,243 56,945
Loss (gain) on property
dispositions - net ...................... 805 1,223 (108,852)
Working capital changes, net of effect
of business acquisitions and disposition:
Accounts receivable ..................... (3,309) (5,001) 8,053
Inventories ............................. 6,974 (5,072) (1,052)
Timber contract deposits ................ 1,064 2,276 1,663
Other current assets .................... (513) 9,517 (10,579)
Accounts payable ........................ 2,330 (453) (2,328)
Interest payable ........................ 1,408 26 1,987
Wages payable ........................... (2,361) 3,969 (77)
Taxes payable ........................... (676) (518) (661)
Workers' compensation liabilities ....... 100 (868)
Other current liabilities ............... 6,083 471 2,148
Other .................................... 7,376 1,599 1,970
--------- --------- ---------
Net cash provided by operating activities ... 164,004 189,976 171,948
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Southern Region acquisition ................ (555,966)
Proceeds from Newport Asset sale ........... 148,676
Business acquisitions ...................... (12,353)
Additions to other properties .............. (54,927) (28,348) (19,280)
Proceeds from other property
dispositions .............................. 1,457 917 7,329
Other ...................................... (11) (649)
--------- --------- ---------
Net cash used in investing activities ...... (65,834) (28,080) (419,241)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions ......................... (140,358) (133,007) (110,116)
Borrowings on lines of credit and
bridge facility ........................... 695,000 814,950 948,250
Payments on lines of credit and
bridge facility ........................... (656,000) (814,950) (884,750)
Issuance of long-term debt ................. 200,000
Retirement of long-term debt ............... (18,400) (17,400) (14,100)
Issuance of Limited Partner Units .......... 144,297
--------- --------- ---------
Net cash provided by (used in) financing
activities ................................ (119,758) (150,407) 283,581
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents ................................ (21,588) 11,489 36,288
Cash and cash equivalents:
Beginning of year .......................... 135,381 123,892 87,604
--------- --------- ---------
End of year ................................ $ 113,793 $ 135,381 $ 123,892
========= ========= =========
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid during the year for:
Interest paid - net ........................ $ 58,785 $ 59,650 $ 46,635
Income taxes paid - net .................... $ 362 $ 737 $ 972
Noncash investing and financing activities:
Business acquisition ....................... $ 177,060
Issuance of unsecured debt for
business acquisition ...................... $ 177,060
See accompanying Notes to Combined Financial Statements.
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1. ACCOUNTING POLICIES
Basis of Presentation. Plum Creek Timber Company, L.P. (the
"Partnership"), a Delaware limited partnership, Plum Creek Manufacturing,
L.P. ("Manufacturing"), and Plum Creek Marketing, Inc. ("Marketing"), own,
manage and operate approximately 3.3 million acres of timberland and 11
wood products conversion facilities in the Northwest, Southern and
Northeastern United States. The Partnership owns 98% of Manufacturing and
96% of Marketing. Plum Creek Management Company, L.P. (the "General
Partner"), manages the businesses of the Partnership, Manufacturing and
Marketing and owns the remaining 2% General Partner interest of
Manufacturing and 4% of Marketing. As used herein, "Company" refers to the
combined entities of the Partnership, Manufacturing and Marketing.
The combined financial statements of the Company include all the
accounts of the Partnership, Manufacturing and Marketing. All significant
intercompany transactions have been eliminated in combination.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Net Income per Unit. Net income per Unit is calculated using the
weighted average number of Units outstanding, divided into the combined
Partnership net income, after adjusting for the General Partner interest. The
weighted average number of Units outstanding was 46,323,300, 46,323,300 and
41,619,803 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Revenue Recognition. Revenues received from the sale of logs, wood
products and by-products, primarily wood chips, are generally recorded as
revenue at the time of shipment. Sales are denominated in U.S. dollars.
Sales of timberlands identified by the Partnership as higher and better use
lands (for use other than for forest management purposes) are included in
revenues when the sale is consummated.
Cash and Cash Equivalents. The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. Substantially all of the cash and cash equivalents are
deposited with one financial institution.
Inventories. Logs, work-in-process, and finished goods inventories
are stated at the lower of average cost or market on the last-in, first-out
("LIFO") method. Cost for manufactured inventories includes raw materials,
labor, supplies, energy, depreciation and production overhead. Cost of log
inventories includes timber depletion, stumpage, associated logging and
harvesting costs, road costs and production overhead. The average cost
method is used to value the Company's supplies inventories.
Timber and Timberlands. Timber and timberlands, including logging
roads, are stated at cost less depletion for timber previously harvested
and accumulated amortization. Cost of the Partnership's timber harvested is
determined based on the volume of timber harvested in relation to the
amount of estimated recoverable timber. The Partnership estimates its
timber inventory using statistical information and data obtained from
physical measurements, site maps, photo-types and other information
gathering techniques. For timberlands located in the Southern and
Northeastern United States, estimates of future growth and costs related
thereto are also made. The cost of logging roads is amortized over the
estimated useful life on a straight-line basis.
Property, Plant and Equipment. Property, plant and equipment is
stated at cost. Improvements and replacements are capitalized. Depreciation
is provided for on a straight-line basis for buildings and improvements
(over 20 to 31-1/2 years) and on a unit-of-production basis for machinery
and equipment, which approximates a straight-line basis. Maintenance and
repairs necessary to maintain properties in operating condition are
expensed as incurred. The cost and related accumulated depreciation of
property sold or retired are removed from the accounts and any gain or loss
is recorded.
Income Taxes. The Partnership and Manufacturing are not subject to
federal income tax and their income or loss is included in the tax returns of
individual Unitholders. The Partnership files composite returns in the
states in which it does business, paying taxes on behalf of nonresident
Unitholders. State taxes paid on behalf of nonresident Unitholders are
included in other expense. Marketing, as a separate taxable corporation,
provides for income taxes on a separate company basis.
Employee Pension and Retirement Plans. The Company adopted
Statement of
Financial Accounting Standards ("SFAS") No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"), in 1998.
The provisions of SFAS 132 revise employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of these plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable. See
Note 11 to Notes to Combined Financial Statements.
Unit-Based Compensation Plans. The Company accounts for Unit-based
compensation plans under the provisions of Accounting Principles Board
Opinion No. 25 ("APB 25"). The Company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). See Note 12 to Notes to Combined Financial Statements for
discussion of the above referenced plans.
Segment Reporting. The Company adopted SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information" ("SFAS 131"), in
1998. SFAS 131 supercedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments.
The adoption of SFAS 131 did not affect results of operations or financial
position but did affect the disclosure of segment information. Prior year
amounts have been restated in order to conform to the 1998 presentation.
See Note 15 to Notes to Combined Financial Statements.
New Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new model for
accounting for derivatives and hedging activities. The implementation of
SFAS 133 is required for financial statements issued for periods beginning
after June 15, 1999; early application is permitted. Adoption of this
standard is not expected to have a material impact on the Company's financial
position, results of operation or cash flows.
NOTE 2. REORGANIZATION
On June 8, 1998 the Partnership announced that the Board of
Directors of PC Advisory Corp. I ("Advisory Corp"), the ultimate general
partner of the Partnership, had authorized the Partnership to seek approval
from its Unitholders to convert (the "Conversion Transaction") its
structure from a publicly traded Master Limited Partnership into a publicly
traded Real Estate Investment Trust (the "REIT"). The Conversion
Transaction is conditioned upon the approval of the holders of two-thirds
of the Partnership's outstanding Units. In connection with the Conversion
Transaction, the Unitholders will exchange, on a one-for-one basis, their
Units for shares of common stock in the REIT. The General Partner will
exchange its general partner interest in the Partnership and Manufacturing
and its interest in Marketing for a 27% equity interest in the REIT and
will also receive certain control rights. The solicitation of Unitholder
approval of the Conversion Transaction and the exchange of shares in the
REIT for the Partnership's outstanding Units was made by means of a proxy
statement/prospectus provided to the Unitholders of record as of January
22, 1999. Reorganization costs are being expensed in the period incurred
and are reflected as a separate line item in the financial statements.
On September 11, 1998, a Unitholder, individually and as a purported
representative of all Unitholders as of June 8, 1998 (the "Plaintiff"), filed
a purported class action lawsuit (the "Action") in the Court of Chancery in
the State of Delaware against the Partnership, the General Partner and
Advisory Corp (collectively, the "Plum Creek Defendants"), alleging that the
General Partner's receipt of a 27% equity interest in the REIT violates the
General Partner's and Advisory Corp's fiduciary duties to the Unitholders.
On November 17, 1998, the Plaintiff filed an amended complaint
which also challenged the General Partner's receipt of certain special
voting and board nomination rights. On December 17, 1998, the Delaware
Court of Chancery granted the Plum Creek Defendants' motion to dismiss. On
January 11, 1999, the Plaintiff filed a notice of appeal in the Supreme
Court of the State of Delaware with respect to the Action. The Plum Creek
Defendants intend to continue to vigorously defend themselves in connection
with this appeal.
On February 8, 1999, the Plaintiff in the Action, individually and
as a purported representative of all Unitholders, filed a second purported
class action lawsuit in the Court of Chancery in the State of Delaware
against the Plum Creek Defendants. This new action alleges that the
Partnership's proxy statement/prospectus, included in a registration
statement filed with the Securities and Exchange Commission on January 28,
1999, is false and misleading. The proxy statement/prospectus has been
provided to all Unitholders of record as of January 22, 1999, in connection
with the Special Meeting of Unitholders scheduled for March 22, 1999, at
which approval of the Conversion Transaction will be sought. The Plaintiff
claims that, through alleged misstatements and omissions, the General
Partner and its affiliate have breached a fiduciary duty of candor to the
Unitholders. The Plum Creek Defendants dispute the Plaintiff's allegations
and intend to defend themselves vigorously.
The General Partner's decision to proceed with the Conversion
Transaction is in the sole discretion of the General Partner, subject to
receipt of the requisite Unitholder's approval and satisfaction of the
other conditions precedent in the Conversion Agreement. The General Partner
currently expects to delay the consummation of the Conversion Transaction
until the Action, including the appeal and any additional claims that may
be brought, is fully resolved to the General Partners' satisfaction.
NOTE 3. ACQUISITION
On November 12, 1998, the Partnership acquired 905,000 acres of
forest lands in central Maine (the "Maine Timberland Acquisition") from
S.D. Warren Company, a Pennsylvania corporation, for a purchase price of
$180.0 million, plus $300,000 for working capital. As part of the
acquisition, the Partnership entered into a long-term fiber agreement to
supply fiber to S.D. Warren Company's paper facility in Skowhegan, Maine at
prevailing market prices. The acquisition was accounted for as a purchase
and the operations of the business acquired have been included in the
Company's combined financial statements from the date of acquisition. The
total purchase price of $181.1 million, including $700,000 of acquisition
costs and $105,000 of assumed liabilities, was allocated as follows (in
thousands):
Timber and Timberlands ................... $177,618
Property, Plant and Equipment ............ 2,940
Other Assets ............................. 590
--------
Total Assets Acquired .................... $181,148
========
Total Liabilities Assumed ................ $ 105
========
The acquisition was financed with approximately $4 million cash and
the balance with unsecured promissory notes that were issued to the seller
(Senior Notes due 2011, see Note 7 to Notes to Combined Financial
Statements). The Senior Notes due 2011 have an average maturity of 10 years
with effective interest rates ranging from 7.16% to 7.32%.
The unaudited combined results of operations of the Company on a pro
forma basis as though the Maine Timberland Acquisition and the issuance of
the Senior Notes due 2011 had occurred as of the beginning of the years ended
December 31, 1998 and 1997, were as follows (in thousands, except per Unit):
1998 1997
-------- --------
Revenues .......................... $739,000 $774,032
Net Income ........................ 73,540 110,987
Net Income Allocable to Unitholders 39,865 79,083
Net Income per Unit ............... $ 0.86 $ 1.71
The pro forma financial information is not necessarily indicative of
results of operations that would have occurred had the Maine Timberland
Acquisition occurred as of those dates or of results which may occur in the
future.
NOTE 4. ACCOUNTS RECEIVABLE
Accounts receivable were presented net of allowances for doubtful
accounts of $1,323,000 and $1,285,000 at December 31, 1998 and 1997,
respectively.
NOTE 5. INVENTORIES
Inventories consisted of the following at December 31 (in thousands):
1998 1997
------- -------
Raw materials (logs) ....... $25,129 $29,177
Work-in-process ............ 6,554 6,108
Finished goods ............. 15,831 15,295
Export logs ................ 53 715
------- -------
47,567 51,295
Supplies ................... 8,396 7,661
------- -------
Total ...................... $55,963 $58,956
======= =======
Excluding supplies, which are valued at average cost, the cost of the
LIFO inventories valued at the lower of average cost or market (which
approximates current cost) at December 31, 1998 and 1997 was $46.9 million
and $50.0 million, respectively.
NOTE 6. TIMBER AND TIMBERLANDS AND PROPERTY, PLANT AND EQUIPMENT
Timber and timberlands consisted of the following at December 31 (in
thousands):
1998 1997
---------- --------
Timber and logging roads - net ....... $ 907,830 $789,513
Timberlands .......................... 122,654 98,181
---------- --------
Timber and timberlands - net ......... $1,030,484 $887,694
========== ========
Property, plant and equipment consisted of the following at December 31
(in thousands):
1998 1997
--------- ---------
Land, buildings and improvements .... $ 66,714 $ 61,155
Machinery and equipment ............. 275,149 235,349
--------- ---------
341,863 296,504
Accumulated depreciation ............ (155,684) (132,948)
--------- ---------
Property, plant and equipment - net.. $ 186,179 $ 163,556
========= =========
NOTE 7. BORROWINGS
Long-term debt and the Line of Credit consisted of the following at
December 31 (in thousands):
1998 1997
--------- ---------
Senior Notes due 2007 ......... $ 122,000 $ 130,300
First Mortgage Notes due 2007.. 112,000 122,100
Senior Notes due 2009 ......... 150,000 150,000
Senior Notes due 2011 ......... 177,008
Senior Notes due 2016 ......... 200,000 200,000
Line of Credit ................ 200,000 161,000
--------- ---------
Total long-term debt .......... 961,008 763,400
Less: current portion ......... (18,400) (18,400)
--------- ---------
Long-term portion ............. $ 942,608 $ 745,000
========= =========
On November 12, 1998, the Partnership issued $171.4 million of senior
notes (the "Senior Notes due 2011") to S.D. Warren Company to finance the
Maine Timberland Acquisition. The Company recorded a premium on the Senior
Notes due 2011 of $5.6 million to reflect the market value of the notes at
the date of issuance. The premium will be amortized using the effective
interest rate method over the terms of the notes. The Senior Notes due 2011
mature in 2007 through 2011 and bear interest at rates ranging from 7.62% to
7.83%, payable quarterly. The effective interest rates on the Senior Notes
due 2011 range from 7.16% to 7.32%.
The Partnership has an unsecured revolving line of credit ("Line of
Credit") which matures on December 13, 2001 and bears interest at a floating
rate (7.0% as of December 31, 1998 and 1997). The weighted average interest
rate for borrowings under the Line of Credit during 1998 and 1997 was 5.9%
and 6.1%, respectively. Borrowings on the Line of Credit fluctuate daily
based on cash needs. Subject to customary covenants, the Line of Credit
allows the Partnership to borrow from time to time up to $225 million,
including up to $20 million of standby letters of credit issued on behalf of
the Partnership and Manufacturing. As of December 31, 1998, $25 million
remained available for borrowing under the Line of Credit and the Company had
no outstanding standby letters of credit. As of January 4, 1999, the
Partnership had repaid $100 million of the borrowings under the Line of
Credit.
The Senior Notes due 2007 and the First Mortgage Notes due 2007 bear
interest at 11.125%, payable semiannually. The Senior Notes due 2009 bear
interest at 8.73%, payable semiannually. The Senior Notes due 2016 mature in
2006 through 2016 and bear interest at rates ranging from 7.74% through
8.05%, payable semiannually. 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
U.S. Treasury securities having similar average maturities as these notes.
At December 31, 1998 and 1997, the premium that would have been due upon
early retirement would have approximated $146 million and $116 million,
respectively. The four series of senior notes are unsecured. The First
Mortgage Notes are collateralized by a significant portion of the property,
plant and equipment of Manufacturing and are guaranteed by the Partnership.
The aggregate maturities on the Senior Notes and the First Mortgage
Notes (collectively, the "Note Agreements") and the Line of Credit are as
follows (in thousands):
Note Line
Agreements of Credit
---------- ---------
1999................................ $ 18,812
2000................................ 27,392
2001................................ 27,423 $ 200,000
2002................................ 27,458
2003................................ 27,494
Thereafter.......................... 632,429
All principal and interest payments due under the Note Agreements are
nonrecourse to the General Partner. The Note Agreements and the Line of
Credit contain certain restrictive covenants, including limitations on
harvest levels, sales of assets, cash distributions and the incurrence of
indebtedness. In addition, the Line of Credit requires the maintenance of a
required interest coverage ratio. The Company was in compliance with such
covenants at December 31, 1998 and 1997.
NOTE 8. FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximate fair value
due to the short-term maturities of these instruments. The estimated fair
value of the Company's debt, based on current interest rates for similar
obligations with like maturities, was approximately $1.02 billion and $843
million and was carried at $961 million and $763 million as of December 31,
1998 and 1997, respectively.
NOTE 9. PARTNERS' CAPITAL
The changes in Partners' Capital were as follows (in thousands):
Limited General
Partners Partner Total
--------- --------- ---------
January 1, 1996 ................... $ 234,117 $ (249) $ 233,868
Net Income ........................ 195,822 27,777 223,599
Cash Distributions ................ (84,131) (25,985) (110,116)
Issuance of Limited Partner Units . 144,297 144,297
--------- --------- ---------
December 31, 1996 ................. 490,105 1,543 491,648
Net Income ........................ 79,778 31,918 111,696
Cash Distributions ................ (100,059) (32,948) (133,007)
--------- --------- ---------
December 31, 1997 ................. 469,824 513 470,337
Net Income ........................ 41,723 33,713 75,436
Cash Distributions ................ (104,690) (35,668) (140,358)
--------- --------- ---------
December 31, 1998 ................. $ 406,857 $ (1,442) $ 405,415
========= ========= =========
The total number of Units outstanding at December 31, 1998 and 1997 was
46,323,300. On October 22, 1996, the Partnership issued 5,600,000 Units for
net proceeds of $141.4 million. On November 5, 1996, 115,000 additional
Units were issued by the Partnership for net proceeds of $2.9 million. The
combined proceeds are net of issuance costs of $8.6 million.
In accordance with the Partnership Agreement, the General Partner is
authorized to make quarterly cash distributions. For the years ended
December 31, 1998, 1997 and 1996, the General Partner declared $2.28, $2.20
and $2.02 per Unit, respectively, to be paid to the Partnership's
Unitholders. For quarterly cash distributions exceeding $0.21-2/3 per Unit,
the General Partner is provided with an incentive distribution. See Note 13
to Notes to Combined Financial Statements.
NOTE 10. INCOME TAXES
The provision for income taxes was as follows (in thousands):
Year Ended December 31,
-------------------------------------
1998 1997 1996
---- --- ------
Current Federal .................. $426 $43 $1,201
Current State..................... 91 37 190
---- --- ------
Total ............................ $517 $80 $1,391
==== === ======
Reconciliation of the federal statutory rate to the effective income
tax rate was as follows:
1998 1997 1996
------ ------ ------
Statutory tax rate .................... 35.0% 35.0% 35.0%
State tax net of federal tax benefit .. 0.0 0.0 0.1
Nontaxable partnership income ......... (34.3) (34.9) (34.6)
Other ................................. 0.0 0.0 0.1
------ ------ ------
Effective tax rate .................... 0.7% 0.1% 0.6%
====== ====== ======
NOTE 11. EMPLOYEE PENSION AND RETIREMENT PLANS
PENSION PLAN. The Company provides defined benefit pension plans that
cover substantially all employees. The following tables provide a
reconciliation of benefit obligations, plan assets, and funded status of the
plans for the years ended December 31 (in thousands):
CHANGE IN BENEFIT PLAN
1998 1997
-------- --------
Benefit obligation at beginning of year ......... $ 56,286 $ 48,756
Service cost .................................... 3,668 2,941
Interest cost ................................... 4,046 3,522
Actuarial loss .................................. 5,640 4,130
Benefits paid ................................... (2,917) (3,063)
-------- --------
Benefit obligation at end of year ............... $ 66,723 $ 56,286
======== ========
Change in plan assets ........................... 1998 1997
-------- --------
Fair value of plan assets at beginning of year .. $ 57,635 $ 49,727
Actual return on plan assets .................... 9,341 9,471
Benefits paid ................................... (2,917) (3,063)
Employer contributions .......................... 1,500
-------- --------
Fair value of plan assets at end of year ........ $ 64,059 $ 57,635
======== ========
Funded Status ................................... $ (2,664) $ 1,349
Unrecognized net actuarial loss ................. 1,287 855
Unrecognized prior service cost ................. 668 776
-------- --------
Prepaid (Accrued) benefit cost .................. $ (709) $ 2,980
======== ========
NOTE 11. EMPLOYEE PENSION AND RETIREMENT PLANS (CONTINUED)
The components of the Company's pension cost were as follows for the
years ended December 31 (in thousands):
COMPONENTS OF NET PERIODIC BENEFIT COST 1998 1997 1996
------- ------- -------
Service cost .......................... $ 3,668 $ 2,941 $ 2,419
Interest cost ......................... 4,046 3,522 3,388
Expected return on plan assets ........ (4,342) (3,817) (3,507)
Amortization of prior service cost .... 108 108 108
Recognized actuarial loss ............. 208 169 436
------- ------- -------
Net periodic benefit cost ............. $ 3,688 $ 2,923 $ 2,844
======= ======= =======
The following assumptions were used in accounting for the Company's
pension plan as of December 31:
1998 1997 1996
------- ------- -------
Weighted average discount rate .......... 6.75% 7.0% 7.5%
Rate of increase in compensation levels . 5.0% 5.0% 5.0%
Expected long-term rate of return on plan
assets ................................ 8.5% 8.5% 8.5%
THRIFT AND PROFIT SHARING PLAN. The Company sponsors an employee
thrift and profit sharing plan under section 401 of the Internal Revenue
Code. This plan covers substantially all full-time employees. The Company
matches employee contributions of up to six percent of compensation at
rates ranging from 35% to 100%, depending upon the Company's financial
performance. Amounts charged to expense were $2.9 million, $3.9 million and
$2.6 million during 1998, 1997 and 1996, respectively. The Company matched
70%, 100% and 100% for the years 1998, 1997 and 1996, respectively.
Approximately 725 employees were added to the plan during the fourth
quarter of 1996 as a result of the October 18, 1996 acquisition in the
Southern United States.
OTHER BENEFIT PLANS. Certain executives and key employees of the
General Partner participate in incentive benefit plans established by the
General Partner which provide for the granting of Units and/or cash bonuses
upon meeting performance objectives. See Note 12 to Notes to Combined
Financial Statements.
NOTE 12. UNIT-BASED COMPENSATION PLANS
Effective October 1, 1993, and January 1, 1994 the General Partner
established a Long-Term Incentive Plan and a Key Employee Long-Term
Incentive Plan, (collectively "the 1994 Plans"), respectively. The 1994
Plans authorized the granting of up to 2,500,000 Unit Appreciation Rights
("UARs") to certain executives and key employees (collectively
"participants") of the General Partner. When any of five Unit Value Targets
("UVTs") established by the 1994 Plans were met through a combination of
Unit market appreciation plus Partnership cash distributions ("Total
Unitholder Return"), a percentage of the UARs was triggered and Units were
credited to the participants' accounts. In general, each successive UVT is
met when Total Unitholder Return over the life of the plan equals or
exceeds approximately 15% compounded annual growth. Units in participants'
accounts earn additional Units equal to the amount of any subsequent
partnership distribution. The performance period under the 1994 Plans
during which UVTs may be met ended December 31, 1998, at which time all
earned Units vested. Costs incurred by the General Partner in administering
and funding the 1994 Plans were borne by the Partnership.
On April 17, 1998, the fifth and final target under the 1994 Plans
was met. As a result of meeting all five targets, participants' accounts
were credited with 902,866 Units, net of forfeitures. Total compensation
expense for the 1994 Plans was $27.3 million, of which $13.3 million, $7.8
million, and $3.9 million was recognized in 1998, 1997 and 1996,
respectively. Approximately 70% of the Units will be distributed during the
first quarter of 1999, with the remainder being distributed subsequent to
the participants separation from the Company.
Effective April 18, 1998, the General Partner established a new
Long- Term Incentive Plan and a new Key Employee Long-Term Incentive Plan,
(collectively "the 1998 Plans") with terms similar to those of the
previously adopted 1994 Plans. The 1998 Plans authorize granting up to
1,175,000 UARs to certain executives and key employees (collectively
"participants"). The performance period under which UARs may be earned ends
December 31, 2003. Earned Units generally vest at the end of the
performance period. Costs incurred by the General Partner in administering
and funding the 1998 Plans are borne by the Partnership.
Under the 1998 Plans, the General Partner has granted 1,163,500 UARs,
net of forfeitures, to participants which could result in 1,163,500 Units
being earned over the life of the 1998 Plans if all targets were met. As of
December 31, 1998 no UVTs have been achieved under the 1998 Plans.
Accordingly, no compensation cost has been recognized in the Combined
Statement of Income.
The Company applies APB 25 in accounting for the 1994 and the 1998
Plans. In general, under APB 25 no compensation expense is recognized until
a UVT is met. Effective January 1, 1996, SFAS 123 encouraged adoption of
fair value-based method for valuing the cost of stock-based compensation.
Under SFAS 123, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the plan's performance period.
However, SFAS 123 allowed companies to continue to apply the principles of
APB 25 in recognizing expense and disclose pro forma net earnings and earnings
per share in accordance with SFAS 123. Furthermore, since most of the grants
under the 1994 Plans were granted prior to the effective date of SFAS 123,
pro forma disclosure is only required with respect to grants made after
December 31, 1994. Had compensation expense for the Company's Unit-based
compensation plans been determined consistent with SFAS 123, the Company's
net income and net income per Unit would have been as follows:
1998 1997 1996
---- ---- ----
(In Thousands, Except per Unit)
Net Income:
As reported ......... $ 75,436 $ 111,696 $ 223,599
Pro forma ........... 75,407 111,992 223,624
Net Income per Unit:
As reported ......... $ 0.90 $ 1.72 $ 4.71
Pro forma ........... 0.90 1.73 4.71
NOTE 12. UNIT-BASED COMPENSATION PLANS (CONTINUED)
The effect of applying SFAS 123 for the pro forma disclosures is not
representative of the effects expected on reported net income and net income
per Unit in future years, since the disclosures do not reflect compensation
expense for UARs granted prior to 1995. In addition, UAR valuations are
based on highly subjective assumptions about the future, including Unit price
volatility.
The Company used the Monte Carlo path-dependent model to determine the
fair value of UAR grants. The following tables summarize UAR grants and
assumptions applied in determining pro forma compensation expense under the
1994 and 1998 Plans for the years ended December 31:
1994 PLANS
1998 1997 1996
---------- ---------- ----------
UARs Granted ......................... 16,333 22,533 90,601
Weighted-average fair value of UARs ..
granted ............................ $ 13.98 $ 4.64 $ 6.02
Risk-free interest rate .............. 5.25% 6.28% 6.00%
Expected dividend yield .............. 6.20% 7.40% 7.50%
Expected life of UARs granted (years). 0.83 1.67 2.17
Expected Unit price volatility ....... 24.3% 18.2% 23.2%
1998 PLANS
1998
-------------
UARs Granted .................................. 1,163,500
Weighted-average fair value of UARs granted.... $ 12.25
Risk-free interest rate ....................... 5.70%
Expected dividend yield ....................... 7.125%
Expected life of UARs granted (years).......... 5.67
Expected Unit price volatility ................ 24.7%
Under the 1994 Plans, if all five targets were met one UAR is
converted into approximately one-half Unit. Under the 1998 Plans, if all
five targets were met one UAR is converted into one Unit.
Effective January 1, 1994, the General Partner established a
Management Incentive Plan ("MIP") for certain executives of the General
Partner. An annual bonus of up to 100% of the respective executive's base
salary may be awarded if certain performance objectives established by the
General Partner are met by the Company and by the executive. One-half of
the bonus will be paid annually in cash and the remaining half will be
converted into Units at fair market value and will be distributed at the
end of three years. Units in executives' accounts will earn additional
Units equal to the amount of any subsequent Partnership cash distributions.
Costs incurred in administering and funding the MIP have been borne by the
General Partner.
NOTE 13. RELATED-PARTY TRANSACTIONS
The General Partner has overall responsibility for the management
of the Company. The General Partner has a 2% General Partner interest in
the income and cash distributions of the Partnership, subject to certain
adjustments, and owns 2% and 4% interests in Manufacturing and Marketing,
respectively. The Company reimburses the General Partner for the actual
costs of administering its businesses. Amounts reimbursed to the General
Partner for such costs were $7.7 million, $6.7 million and $5.7 million for
the years ended December 31, 1998, 1997 and 1996, respectively.
The Partnership is required under the Partnership Agreement to
reimburse the General Partner for compensation costs related to the
management of the Partnership, including the purchase of Units associated
with the Unit-Based Compensation Plans discussed in Note 12 to Notes to
Combined Financial Statements. During 1998 and 1997, the Partnership paid
the General Partner $2.4 million and $9.2 million, respectively, for the
purchase of 89,780 Units and 280,482 Units, respectively. In January 1999,
a final payment of $6.2 million was paid by the Partnership to the General
Partner in connection with the funding of the 1994 Plans.
Net income is allocated to the General Partner based on 2% of
the Company's combined net income (adjusted for the incentive distribution),
plus the incentive distribution, as provided by the Partnership Agreement.
The incentive distributions paid in 1998, 1997 and 1996 were approximately
$32.9 million, $30.3 million and $23.8 million, respectively.
Certain conflicts of interest could arise as a result of the
relationships described above. The Board of Directors and management of the
General Partner have a duty to manage the Company in the best interests of
the Unitholders and, consequently, must exercise good faith and integrity in
handling the assets and affairs of the Company. Related non-interest bearing
receivables and payables between the General Partner and the Company are
settled in the ordinary course of business. As of December 31, 1998 and
1997, the Company had receivables from the General Partner of $507,978 and
$138,502, respectively.
NOTE 14. COMMITMENTS AND CONTINGENCIES
A portion of the Company's log requirements is acquired through
contracts with public and private sources. Except for required deposits, no
amounts are recorded until such time as the Company harvests the timber. At
December 31, 1998 and 1997, the unrecorded amounts of those contract
commitments were approximately $10.8 million and $15.8 million,
respectively. During 1993, the Partnership entered into a log sourcing
contract to sell logs to a customer over a ten-year period ending in 2003,
based upon prevailing market rates. The Partnership has an annual commitment
to supply pulpwood and residual chips to a customer for a 20-year period
ending in 2016, based upon prevailing market rates. As part of the Maine
Timberland Acquisition, the Partnership entered into a long-term fiber
agreement to supply fiber to S.D. Warren Company's paper facility in
Skowhegan, Maine at prevailing market prices. The fiber supply agreement with
S.D. Warren Company expires in 2023 and may be extended for up to 15
additional years at the option of S.D. Warren Company.
There are no contingent liabilities which would have a materially
adverse effect on the financial position, the results of operations or
liquidity of the Company.
The Company is subject to regulations regarding harvest practices
and is 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, the General Partner believes that none of the pending legal
proceedings or regulatory matters will have a materially adverse effect on
the financial position, the results of operations or liquidity of the
Company.
The Company leases buildings and equipment under non-cancelable
operating lease agreements. The Company's operating lease expense was $3.2
million, $2.9 million and $2.3 million for 1998, 1997 and 1996,
respectively. The following summarizes the future minimum lease payments
(in thousands):
1999 ................................. $ 3,335
2000 ................................. 2,687
2001 ................................. 2,197
2002 ................................. 1,744
2003 ................................. 1,546
Thereafter ........................... 657
-------
Total ................................ $12,166
=======
NOTE 15. SEGMENT INFORMATION
The Company 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 different production processes and/or marketing
strategies. In applying SFAS 131, these business units have been aggregated
into five reportable segments based on similar long-term economic
characteristics. The Company's reportable segments are: Lumber, Northern
Resources, Panel, Southern Resources, and Land Sales.
The Northwest Lumber unit and the Southern Lumber unit are
aggregated into the Lumber segment. The Lumber segment consists of eight
manufacturing facilities in the Northwest and Southern United States. These
facilities produce boards, studs, and dimension lumber targeted towards
domestic lumber retailers, home construction, and industrial customers, and
to a lesser extent, Pacific Rim countries and Europe. Residual chip
products are sold to regional pulp and paper manufacturers.
The Cascades, Rocky Mountain, and Northeastern Resource units are
aggregated into the Northern Resources segment. The Northern Resources
segment consists of timberlands in the Northwest and Northeastern United
States. Northern Resources grows and harvests timber for sale in export
markets, primarily Pacific Rim countries and Canada, and domestic markets,
primarily Idaho, Maine, Montana, and Washington. The domestic market
includes sawlog sales directly to the Lumber and Panel segments and to
unaffiliated wood product manufacturers, as well as pulp logs and chips to
third-party domestic pulp and paper manufacturers.
The Panel segment consists of one MDF and two plywood manufacturing
facilities located in the Northwest United States. These facilities produce
high-quality panels that are primarily targeted towards domestic industrial
customers, such as boat, recreational vehicle, furniture and door
manufacturers, and to a lesser extent, Pacific Rim countries, Canada and
Europe. Residual chip products are sold to regional pulp and paper
manufacturers.
The Southern Resources segment consists of timberlands located in the
Southern United States. Southern Resources grows and harvests timber for sale
in domestic markets, primarily Arkansas and Louisiana. Southern Resources'
revenues are derived from sawlog sales to the Lumber segment and to
unaffiliated domestic mills, as well as pulp logs and chips to third-party
domestic pulp and paper manufacturers.
The Land Sales segment consists of timberlands in the various
resource units that have been identified from time-to-time as having a
higher and better use than forest management, such as for recreational or
conservation purposes.
A plywood manufacturing facility in the Southern United States and
a chip facility in the Northwest United States are included in "Other." The
plywood facility was permanently closed and the chip facility was sold in
1998.
The accounting policies of the segments are substantially the same as
those described in Note 1 to Notes to Combined Financial Statements. For
segment purposes, however, inventories are stated at the lower of average
cost or market on the first-in, first-out ("FIFO") method. Segment data
includes external revenues, intersegment revenues and operating income, as
well as export revenues and depreciation, depletion, and amortization. The
Company evaluates performance and allocates capital to the segments based on
operating income before; other gains and losses, interest, unallocated
corporate expenses, and taxes. Asset information by reportable segment is not
reported, as the Company does not produce such information internally.
The table below presents information about reported segments for the
years ending December 31, 1998, 1997, and 1996 (in thousands).
Northern Southern Land
Lumber Resources Panel Resources Sales Other Total
------ --------- ----- --------- ----- ----- -----
1998
External
revenues $281,614 $131,625 $154,640 $68,800 $32,813 $29,878 $699,370
Intersegment
revenues 118,675 49,562 168,237
Export
revenues 7,127 23,197 1,638 31,962
Depreciation,
depletion and
amortization 13,105 29,716 10,598 15,530 274 69,223
Operating
income 2,599 73,715 14,360 53,568 26,598 (2,247) 168,593
1997
External
revenues $294,839 $158,535 $149,618 $ 54,780 $ 17,884 $ 49,915 $725,571
Intersegment
revenues 115,387 64,287 179,674
Export
revenues 16,125 41,003 5,950 63,078
Depreciation,
depletion and
amortization 11,514 30,204 10,004 17,734 678 70,134
Operating
income 34,667 98,792 8,462 54,313 13,963 (1,152) 209,045
1996
External
revenues $239,252 $196,427 $138,947 $ 7,115 $ 42,324 $ 9,676 $633,741
Intersegment
revenues 112,330 11,139 123,469
Export
revenues 16,613 53,111 2,966 72,690
Depreciation,
depletion and
amortization 11,576 32,017 9,024 2,897 156 55,670
Operating
income 18,596 119,767 5,305 8,149 35,434 (1,682) 185,569
NOTE 15. SEGMENT INFORMATION (CONTINUED)
Intersegment sales prices are determined quarterly, based upon
estimated market prices and terms in effect at that time. Export revenues
consist of log sales to Japan and Canada, as well as lumber and panel sales
primarily to Canada and Mexico. No single customer provides more than 10%
of the Company's revenue. The Company holds no long-lived foreign assets.
A reconciliation of total operating income to combined income before
income taxes, for the years ended December 31 is as follows (in thousands):
1998 1997 1996
--------- --------- ---------
Total segment operating income ....... $ 168,593 $ 209,045 $ 185,569
Gain (Loss) of disposition of
assets - net ....................... (805) (1,223) 108,852
Interest expense - net ............... (59,580) (59,251) (48,850)
Corporate and other unallocated
expenses ........................... (32,255) (36,795) (20,581)
--------- --------- ---------
Combined income before income taxes .. $ 75,953 $ 111,776 $ 224,990
========= ========= =========
NOTE 16. SUBSEQUENT EVENT
On January 26, 1999, the Board of Directors of the General Partner
authorized the Partnership to make a distribution of $0.57 per Unit for the
fourth quarter of 1998. Total distributions will approximate $35.5 million
(including $9.1 million to the General Partner) and will be paid on February
25, 1999 to Unitholders of record on February 12, 1999.
Combined Quarterly Information
(Unaudited)
(In Thousands, Except per Unit)
1998 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
---- ------- ------- ------- -------
Revenues ............................. $164,325 $171,799 $174,476 $188,770
Gross profit ......................... 45,681 50,675 42,625 55,023
Operating income ..................... 36,041 32,885 32,101 40,060
Net income ........................... 21,280 16,131 16,042 21,983
Net income allocable to Unitholders .. 13,181 7,631 7,544 13,367
Net income per Unit .................. $ 0.28 $ 0.17 $ 0.16 $ 0.29
1997 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
---- ------- ------- ------- -------
Revenues ............................. $171,248 $171,962 $198,663 $183,698
Gross profit ......................... 53,764 53,736 63,639 51,173
Operating income ..................... 43,222 42,683 47,666 39,710
Net income ........................... 27,358 27,224 32,801 24,313
Net income allocable to Unitholders .. 20,147 19,006 24,472 16,153
Net income per Unit .................. $ 0.43 $ 0.42 $ 0.52 $ 0.35
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE UNITHOLDERS AND DIRECTORS OF THE GENERAL PARTNER OF PLUM CREEK TIMBER
COMPANY, L.P.
In our opinion, the accompanying combined balance sheet and the related
combined statements of income and of cash flows present fairly, in all
material respects, the financial position of Plum Creek Timber Company, L.P.
at December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. 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 generally accepted auditing standards, 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 the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Seattle, Washington
January 26, 1999
REPORT OF MANAGEMENT
The management of Plum Creek Timber Company, L.P. is responsible
for the preparation, fair presentation, and integrity of the information
contained in the financial statements in this Annual Report. These
statements have been prepared in accordance with generally accepted
accounting principles and include amounts determined using management's
best estimates and judgments.
The Company maintains a system of internal controls to provide
reasonable assurance that assets are safeguarded and that transactions are
recorded properly to produce reliable financial records. The system of
internal controls includes appropriate divisions of responsibility,
established policies and procedures (including a code of conduct to foster a
strong ethical climate) that are communicated throughout the Company, and
careful selection, training and development of our people. The Company
conducts a corporate audit program to provide assurance that the system of
internal controls is operating effectively.
Our independent certified public accountants have performed audit
procedures deemed appropriate to obtain reasonable assurance that the
financial statements are free of material misstatement.
The Board of Directors provides oversight to the financial reporting
process through its Audit and Compliance Committee, which meets regularly
with management, corporate audit, and the independent certified public
accountants to review the activities of each and to ensure that each is
meeting its responsibilities with respect to financial reporting and internal
controls.
/s/ RICK R. HOLLEY
- ------------------
Rick R. Holley
President and Chief Executive Officer
/s/ DIANE M. IRVINE
- -------------------
Diane M. Irvine
Vice President and Chief Financial Officer
DIRECTORS
David D. Leland
Chairman of the Board
Plum Creek Timber Company, L.P.
Rick R. Holley
President and Chief Executive Officer
Plum Creek Timber Company, L.P.
Ian B. Davidson
Chairman and Chief Executive Officer
D.A. Davidson & Co.
George M. Dennison
President
The University of Montana
Charles R. Grenier
Executive Vice President
Plum Creek Timber Company, L.P.
William E. Oberndorf
Managing Director
SPO Partners & Co.
William J. Patterson
Managing Director
SPO Partners & Co.
John H. Scully
Managing Director
SPO Partners & Co.
OFFICERS
Rick R. Holley
President and Chief Executive Officer
Charles P. Grenier
Executive Vice President
Wiliam R. Brown
Vice President, Strategic Business Development
Michael J. Covey
Vice President, Resources
Barbara L. Crowe
Vice President, Human Resources
Diane M. Irvine
Vice President and Chief Financial Officer
James A. Kraft
Vice President, General Counsel and Secretary
David W. Lambert
Treasurer
PRINCIPAL HEADQUARTERS
Plum Creek Timber Company, L.P.
999 Third Avenue, Suite 2300
Seattle, Washington 98104
(206) 467-3600
www.plumcreek.com
ANNUAL MEETING
No Annual Meeting is required for the Partnership
INVESTOR CONTACT
Any questions or information requests can be referred to Michelle D. Monfor,
Director, Investor Relations
(800) 858-5347 or (206) 467-3613
FORM 10-K
Additional copies of this Report and Plum Creek's Report on Form 10-K are
available without charge upon written request to:
Plum Creek Timber Company, L.P.
Investor Relations Department
999 Third Avenue, Suite 2300
Seattle, Washington 98104
STOCK TRANSFER AGENT AND REGISTRAR
BankBoston, N.A.
c/o Boston Equiserve
P.O. Box 8040
Boston, Massachusetts 02266-8040
Telephone inquiries: (800) 730-6001
Facsimile: (781) 828-8813
Internet: www.equiserve.com
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1800 First Interstate Center
Seattle, Washington 98104
[PLUM CREEK LOGO] Plum Creek
Leaders in Environmental Forestry