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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10239
PLUM CREEK TIMBER COMPANY, L.P.
(Exact name of registrant as specified in its charter)
999 Third Avenue, Seattle, Washington 98104-4096
Telephone: (206) 467-3600
Organized in the State of Delaware I.R.S. Employer Identification
No. 91-1443693
Securities registered pursuant to Section 12(b) of the Act:
Depositary Units, Representing Limited Partner Interests
The above securities are registered on the New York Stock Exchange.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: None.
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PLUM CREEK TIMBER COMPANY, L.P.
TABLE OF CONTENTS
ITEM NO. CAPTION PAGE
- -------- ------- ----
PART I
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1. & 2. Business and Properties 4
Segment Information 4
Resources Segment 4
Manufacturing Segment 7
Federal and State Regulations 10
Income Tax Considerations 13
Encumbrances 14
Competition 15
Employees 15
3. Legal Proceedings 16
4. Submission of Matters to a Vote of Security Holders 16
PART II
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5. Market for the Registrant's Common Equity
and Related Unitholder Matters 17
6. Selected Financial Data 18
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
8. Financial Statements and Supplementary 26
Financial Information
9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 44
PART III
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10. & 11. Directors and Executive Officers of the Registrant
and Executive Compensation 44
12. Security Ownership of Certain Beneficial Owners
and Management 44
13. Certain Relationships and Related Transactions 44
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PART IV
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14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 44
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PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
GENERAL
Plum Creek Timber Company, L.P. (the "Partnership"), a Delaware
limited partnership and its subsidiaries, Plum Creek Manufacturing, L.P.
("Manufacturing"), and Plum Creek Marketing, Inc. ("Marketing"), own, manage,
and operate 2.0 million acres of timberland and ten wood products conversion
facilities in Montana, Washington and Idaho. The Partnership owns 98 percent
of Manufacturing, and 96 percent 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 percent and 4 percent of
Manufacturing and Marketing, respectively. As used herein, "Company" refers to
the combined entities of the Partnership, Manufacturing and Marketing.
SEGMENT INFORMATION
As used herein, "Resources Segment" refers to the combined timber and
land management business of the Partnership. "Manufacturing Segment" refers to
the combined business of Manufacturing and Marketing. Certain financial
information for each business segment is included in Note 12 of Notes to
Combined Financial Statements.
RESOURCES SEGMENT
GENERAL. The Resources Segment consists of approximately 2.0 million
acres of timberland in the Pacific Northwest (the "Timberlands"). The
Timberlands are geographically segregated into two regions, the Cascade Region
in western Washington, and the Rocky Mountain Region in western Montana,
northern Idaho and eastern Washington. At December 31, 1994, the 2.0 million
acres of Timberland contained an estimated timber inventory of 10.5 billion
board feet ("BBF") of standing timber of which 2.3 BBF and 8.2 BBF were located
in the Cascade and Rocky Mountain regions, respectively.
The Resources Segment grows and harvests timber for sale in export and
domestic markets and sells land on an opportunistic basis, which is designated
as having a higher and better use than for forest management.
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The following summarizes the major components of the Resources
Segment's operating income:
(In thousands) 1994 1993 1992
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Export Logs $ 38,973 $ 41,448 $ 24,074
Domestic Logs $ 109,053 $ 85,594 $ 42,781
Land Sales $ 1,919 $ 7,691 $ 20,306
Operating income from export log sales decreased primarily due to a
decrease in sales volume. Operating income from domestic log sales increased
by 27% from 1993 primarily due to increased sales volume and higher prices.
The increase in sales volume was due to higher harvest levels as a result of
the Montana Timberland Acquisition (see below). Higher prices were attributed
to timber supply constraints as well as increased wood product demand. Land
sales declined in 1994, primarily due to the Partnership's strategy of
deferring land sales until the completion of state and county growth management
processes. Land sales in 1992 included the strategic sale of the Company's
164,000 acre Gallatin Unit located in southwestern Montana.
CASCADE REGION. The Cascade Region consists of approximately 330,000
acres of timberland. Approximately 47% of the total timber harvest in the
Cascade Region (compared to 49% and 40% in 1993 and 1992, respectively) was
sold for export to Pacific Rim countries, principally Japan. Logs not sold for
export were sold to domestic mills owned by third parties, as the Company does
not own mills in the Cascade Region. Logs sold for export are generally of
higher quality than logs sold into the domestic market. Sales of export logs
have decreased slightly as a relative percentage of total sales in 1994 as
compared to 1993 due to an increase in the supply of logs from other sources.
Sales of export logs in 1993 increased as a relative percentage of total sales
as compared to 1992, primarily due to the continuing log shortage which caused
export customers to compete for logs traditionally sold to the domestic market.
ROCKY MOUNTAIN REGION. The Rocky Mountain Region consists of
approximately 1,709,000 acres of timberland. During 1994, 58% of the total
timber harvest in the Rocky Mountain Region was sold to the Manufacturing
Segment (compared to 59% and 61% in 1993 and 1992, respectively), with the
remainder sold to third-party domestic mills.
On November 1, 1993, the Partnership purchased approximately 865,000
acres of timberland and other timber related assets (the "Montana Timberland
Acquisition") from Champion International Corporation for approximately $260
million. These timberlands are located in western Montana in close proximity
to existing Company assets. Management believes the Montana Timberland
Acquisition provides operating flexibility by allowing Manufacturing to be more
self-sufficient from a raw material standpoint.
Simultaneous to the Montana Timberland Acquisition, the Partnership
entered into a log sourcing agreement with Stimson Lumber Company ("Stimson")
to supply Stimson's Montana mills
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with 950 million board feet ("MMBF") of logs, at estimated market prices, over
a ten year period ending in 2003. At December 31, 1994, the Partnership had a
remaining commitment of approximately 814 MMBF.
TIMBER MANAGEMENT STRATEGY. The Partnership's resource operations
involve timber management and harvesting operations, which include road
construction and reforestation, as well as wildlife and watershed management.
These activities are based on data concerning tree species, site productivity
indices as to the type and number of trees by size and age classification,
classification of soils, stocking per acre, and information on forest
management costs. From this data, coupled with current economic and market
conditions, the Partnership develops its annual harvesting plan based upon
silvicultural considerations, balancing ecological demands of the forest with a
view toward maximizing the value of its timber and timberland assets.
The Partnership employs a number of traditional and newly developed
harvesting techniques on its lands based on site specific characteristics and
other considerations. During 1994, the Partnership practiced "Environmental
Forestry" on 100% of its Timberlands. Environmental Forestry attempts to
better protect and maintain the ecosystem while providing for a reasonable
harvest. As a part of this, the Partnership has adopted a technique, used on a
portion of the Timberlands, which prescribes retention of a mix of green and
dead trees at the harvest site, including some large trees, snags and downed
logs to enrich and protect the soil for successive generations of trees, and to
provide habitat for a variety of wildlife species. The Partnership intends to
continue to expand as appropriate, this component of Environmental Forestry.
The Partnership's forestry operations encompass a variety of climatic
conditions, topographic features and vegetation types. Particular forestry
practices vary by geographic region and depend upon factors such as soil
productivity, tree size, age and stocking. For instance, harvesting on steep
slopes or during wet seasons is often done using cable yarding systems to
prevent damage to soils. Harvesting methods include a variety of partial
removals such as seed trees, shelterwood, overstory removal and selective
harvests, as well as sometimes clear-cutting. The method chosen depends on
tree species, terrain, visual concerns and regeneration objectives. Forest
stands may be thinned periodically to improve growth and stand quality until
they are harvested. Environmental factors, such as length of growing season,
also affect the period of time between harvest. This period, called rotation,
can be as short as 40 years in the Cascade Region and as long as 80 years in
the Rocky Mountain Region.
Different areas within a forest may be planted or seeded in successive
years to provide a variety of age classes within the forest. A variety of age
classes tends to provide a regular source of cash flow as the various timber
stands within the forest reach harvestable age. The timing of harvests of
merchantable timber depends in part on maturity cycles and in part on economic
conditions. The Partnership will continue to develop its forest management
operations to take advantage of technological, biological and genetic advances
to improve timber yields to the greatest extent possible. The Partnership's
forestry practices now include thinning of some timber stands, controlled
burning, fertilization of timber plantations where cost effective, disease and
pest control and reforestation.
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It is the Partnership's policy to ensure that every acre harvested is
promptly reforested. Based on the geographic and climatic conditions of the
harvest site, harvested areas may be regenerated naturally by leaving mature
trees to reseed the area. Natural regeneration methods are widely used in the
Rocky Mountain Region. During 1994, the Partnership planted over 5 million
seedlings, mostly in the Cascade Region where about 80% of the reforestation is
done by planting. Seedlings, which are from one to three years old when
planted, are obtained partially from Plum Creek's nursery in Pablo, Montana.
The Partnership manages its forest inventory with the use of a
computerized timber inventory system. The timber inventory is calculated using
statistical information obtained by physical measurements, site maps and
photo-types. In addition, the system incorporates estimates related to growth
which considers species, topographical information, soil types, and other
factors, as well as specifications on merchantability. During 1993 and 1994,
the Partnership implemented Geographical Information Systems ("GIS") to
further enhance timber management activities. The GIS systems store spatial
and attribute data related to the Timberlands and provide a wide array of
mapping and analytical tools. Various data bases include geographic
information, species, volume and diameter specifications for each site.
Forests are subject to a number of natural hazards, including damage
by fire, insects and diseases. Severe weather conditions and other natural
disasters can also reduce the productivity of forest lands and can interfere
with the processing and delivery of forest products. However, damage from
natural causes is typically localized and would only affect a portion of the
Timberlands at any given time. Nevertheless, such hazards are to a large extent
unpredictable and there can be no assurance that losses will be so limited.
The size, species, diversity and checker-board ownership of the Timberlands, as
well as the Partnership's forest management practices, should help to minimize
these risks. Consistent with the practices of other large timber companies,
the Partnership does not maintain insurance against loss to standing timber on
the Timberlands, but maintains insurance for loss of logs due to fire and other
occurrences following harvesting.
MANUFACTURING SEGMENT
GENERAL. The Manufacturing Segment consists of four lumber mills, two
plywood plants, a lumber remanufacturing facility and a medium density
fiberboard ("MDF") facility in western Montana and a lumber mill and a wood
chip plant in Washington, collectively known as the "Conversion Facilities".
The Conversion Facilities produce a wide variety of lumber, plywood and MDF
products that are sold to Marketing which markets and sells the products.
Marketing targets the products to retail home centers and various specialty
niche markets which are less cyclical than the traditional housing related
markets. In addition, in order to enhance customer service and provide prompt
deliveries, Marketing has established a network of 37 independent warehouses
located strategically throughout the United States.
The remanufacturing facility was constructed in 1994. This new plant
produces finger-jointed lumber for the home center market. Finger-jointing is
an engineered process which produces usable lumber by connecting short pieces
of lumber formerly sold as lower value lumber products
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or relegated to the wood chipper and sold as a lower valued by-product. This
new facility became operational late in the year and, therefore, contributed
less than 1% of 1994 lumber production.
RAW MATERIALS. Manufacturing obtains the majority of its raw logs
from the Partnership's Timberlands. The Resources Segment provided 63%, 51%,
and 51% of Manufacturing's raw log needs in 1994, 1993 and 1992, respectively.
The increase in sourcing from the Resources Segment was primarily due to
increased harvest levels as a result of the Montana Timberlands Acquisition.
The price of logs obtained from the Partnership is determined quarterly based
upon estimated market prices and terms in effect at the time.
Manufacturing has and will continue to purchase stumpage and logs from
external sources, which include the United States Forest Service ("USFS"),
Bureau of Indian Affairs ("BIA"), Bureau of Land Management ("BLM") and state
and private timberland owners. At December 31, 1994 and 1993, Manufacturing
had 100 MMBF and 146 MMBF, respectively, of timber under contract from external
sources which may be harvested over the next three years. The USFS has a
ten-year harvest plan which is expected to provide for a 1995 harvest of 255
MMBF in the geographic area of the Conversion Facilities. However, due in part
to legal challenges and changes in public policy, the USFS will most likely
sell less than that volume. Manufacturing is permitted to bid on up to
approximately fifty percent annually of this USFS volume, with the remainder
set aside for small businesses. In addition, approximately 545 MMBF of timber
is expected to be made available annually from other sources. The geographic
area in which the Conversion Facilities operate may expand or contract from
year to year as the cost of logs and value of manufactured products fluctuate.
(For further discussion of other timber supply issues see "Federal and State
Regulations".)
PRODUCTS AND MARKETS
LUMBER. Manufacturing produces a diverse line of lumber products,
including boards and studs which are manufactured at two studmills, three
random-length lumber mills and a lumber remanufacturing plant. For the years
ended December 31, 1994, 1993 and 1992 these mills produced on a comparable
mill basis 388 MMBF, 352 MMBF, and 355 MMBF of lumber, respectively.
Production increased in 1994 due to improved wood utilization and additional
production hours added to meet increased demand for wood products. Lumber
product revenues represented approximately 38% of combined revenues for 1994,
1993 and 1992.
The Manufacturing Segment targets its lumber sales away from the more
cyclical housing construction markets and towards domestic lumber retailers,
such as retail home center chains, for use in repair and remodeling projects.
Value-added products such as consumer appearance boards, pull-to-length boards,
premium furring strips and premium studs, aimed at retail and other specialty
markets have made the Manufacturing Segment less dependent on the cyclical
housing related market. All of Manufacturing's lumber mills are also capable
of making products for export markets. In 1994, 62% of Manufacturing's lumber
products were sold into retail markets, 20% to industrial and remanufactured
product markets, 12% to stocking distributors and 6% to export markets. These
amounts compare to 60%, 20%, 13% and 7% for these same markets, respectively,
in 1993. The increase in the relative percentages sold to retail markets and
an offsetting decrease to the stocking distributors and export markets was the
result of the Company's continued focus on the
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more specialty and niche markets that are less reliant upon residential
construction.
PLYWOOD. Manufacturing produces high-grade plywood which is
primarily sold into specialized industrial markets. Plywood products are
manufactured at the Company's two plywood facilities. For the years ended
December 31, 1994, 1993 and 1992 the plywood plants produced 290 million square
feet ("MMSF") (3/8" basis), 289 MMSF, and 294 MMSF of plywood, respectively.
Plywood product revenues represented 17%, 18% and 18% of combined revenues in
1994, 1993 and 1992, respectively. During 1993 and 1994, automated layup
lines were installed in the plywood plants. These lines will increase
productivity, enhance wood recovery and produce a superior product for the
industrial markets served.
During 1994 and 1993, 80% and 76%, respectively, of Manufacturing's
plywood products were sold in specialty industrial markets, including carpet
strip, recreational boat and recreational vehicle markets. The increase in
sales to industrial markets was the result of the Company's continued focus on
specialty markets in an effort to be less reliant upon the more cyclical home
construction markets. Manufacturing's plywood products are generally of higher
quality and value than commodity construction grade products, which makes them
more valuable in these specialty niche markets.
MEDIUM DENSITY FIBERBOARD. Manufacturing produces MDF products which
are primarily sold to furniture manufacturers and commercial store fixture
producers. For the years ended December 31, 1994, 1993 and 1992 the plant
produced 123 MMSF (3/4" basis), 106 MMSF, and 109 MMSF of MDF, respectively.
The increased production volume in 1994 was due to improvements in the
production process. The 1993 production was down slightly due to a February
fire at the plant which caused temporary production delays.
The Manufacturing Segment supplies high quality MDF to markets
primarily in North America and Pacific Rim countries. In 1994, the
Manufacturing Segment sold approximately 47% of its MDF directly to domestic
industrial manufacturers or fabricators, 32% to stocking distributors, 17% into
overseas export markets, primarily Pacific Rim countries, and 4% to retail and
other markets. These amounts compare to 46%, 32%, 17% and 5% to the same
markets, respectively, in 1993.
CHIPS. Manufacturing's lumber and plywood mills produce wood chips
as a by-product from the conversion of raw logs into finished products. These
wood chips are sold to regional paper and pulp mills as well as to the
Company's MDF facility. The Company's lumber and plywood facilities produced
288 thousand bone dry tons ("MBDT"), 257 MBDT and 269 MBDT of chips in 1994,
1993 and 1992, respectively. Residual wood chip sales volume was 12% higher in
1994 as compared to 1993 due to increased lumber production and increased chip
recoveries.
Manufacturing also produces wood chips at its Cle Elum, Washington
chip plant. The chip plant produced 54 MBDT, 76 MBDT and 76 MBDT in 1994, 1993
and 1992, respectively. The decrease in production in 1994 was caused by
halting production for three months due to log supply shortages.
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FEDERAL AND STATE REGULATIONS
GENERAL. The activities of the Company are subject to various federal
and state environmental laws and regulations which impose limitations on the
discharge of pollutants into the air and water and which also establish
standards for the treatment, storage and disposal of solid and hazardous waste,
and govern the discharge of runoff stormwater and wastewater. The General
Partner believes that the Company is in substantial compliance with such laws
and regulations. (See Item 3. Legal Proceedings.)
The activities of the Company are also subject to federal and state
regulations regarding natural resources and forestry operations and the
requirements of the federal Occupational Safety and Health Act and comparable
state statutes relating to the health and safety of the Company's employees.
The General Partner believes that the Company is in substantial compliance with
such laws and regulations.
The Company conducts operations in or near significant environmentally
sensitive areas which include the habitats of numerous species including a
number of threatened or endangered species. As a result, the Company's
activities in such areas may be subject to restrictions relating to the
harvesting of timber and the construction of roads.
NORTHERN SPOTTED OWL REGULATIONS. In July 1990, the United States
Fish and Wildlife Service ("USFWS") listed the Northern Spotted Owl ("Owl") as
a threatened species throughout its range in Washington, Oregon and California
under the federal Endangered Species Act ("ESA").
At the time of the listing, the USFWS issued suggested guidelines
("Guidelines") to be followed by landowners in order to comply with the ESA's
prohibition against harming or harassing Owls. These Guidelines were rescinded
in response to an industry lawsuit, but continue to serve as the basis for
USFWS enforcement of the ESA. The Guidelines impose several requirements,
including the restriction and preclusion of harvest activities in areas within
a 1.8 mile radius (approximately 6,600 acres) of known nest sites or activity
centers for pairs of Owls or territorial single Owls ("Activity Areas"). Under
the Guidelines, at least 40% in the aggregate of the area within Activity Areas
has to be maintained as suitable Owl habitat. In addition, 70 acres
immediately around nest sites have to be preserved.
On June 9, 1992, the USFWS published its draft recovery plan (the
"Draft Plan") for the Owl. A recovery plan, once final, is not legally
binding, but it may form the basis for future regulation. The Draft Plan
recommends that 7.5 million acres of federal land be set aside in designated
conservation areas ("DCA's") where timber harvesting and road building would be
prohibited.
In June 1992, the Washington State Forest Practices Board (the
"Board") adopted temporary regulations related to all forest practice
applications ("FPA's") within Activity Areas. The regulations require that
FPA's comply with the Washington State Environmental Policy Act ("SEPA") and
Forest Practices Act for all activities within the 500 acres of habitat
surrounding nest sites or activity centers. By its terms, the rule was to have
sunseted in March 1994. The Board,
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however, has extended the rule until June 1995, when permanent regulations are
scheduled to be adopted.
On July 16, 1993, the Clinton Administration proposed a new forest
policy (the "Forest Plan") that would substantially reduce harvest from public
lands in Owl forests and provide for the conservation of the Owl and numerous
other species. In December 1994, the Forest Plan was approved by a Federal
District Court.
In March 1994, the U.S. Circuit Court of Appeals for the District of
Columbia ruled in Sweet Home Chapter of Communities for a Great Oregon v.
Babbitt, that Congress never intended habitat modifications to be a violation
of the ESA. The court therefore found invalid the regulation that defines
"harm" to a species to include habitat modification. This regulation provides
the legal basis for the Guidelines. The United States Supreme Court announced
in January 1995, that it will review the Circuit Court's decision, with a
ruling expected in the summer of 1995. The government has also taken the
position that the Circuit Court's ruling does not apply to areas outside of the
District of Columbia circuit. Accordingly, it is unclear whether the Circuit
Court's decision will reduce the regulatory impact of the ESA on the
Partnership.
Finally, on February 7, 1995, the USFWS announced that it is proposing
to draft a special rule ("Special Rule") to redefine private landowner
obligations with regard to Owls under the ESA. In its description of the
proposed Special Rule, the USFWS indicated that the Guidelines will serve as
the basis for regulation in special emphasis areas ("SEA") for the Owl.
However, outside of the SEAs, only 70 acres around nest sites will be
restricted. If adopted, the proposed Special Rule is not likely to materially
alter the current level of regulation on the Partnership's activities due to
the Owl. This is because a substantial majority of the Partnership's Cascade
Region timberlands that contain occupied Owl habitat lie within SEAs.
IMPACT OF REGULATIONS ON PARTNERSHIP. Under the Guidelines issued by
the USFWS in 1990, approximately 143,000 acres of the 330,000 acres in the
Partnership's Cascade region line within Activity Areas. Compliance with the
ESA and SEPA is causing delays and in some cases modification of Partnership
FPA's in Owl Activity Areas and may cause denials of future Partnership FPA's.
In July 1994, the Partnership announced that it intended to apply for a permit
under the ESA from the USFWS that would cover the Partnership's forest
management on 170,000 acres in the Cascade Region. The permit, if issued,
would serve as the basis for regulating the Partnership's forest management
activities and replace restrictions for Owls under the Guidelines, the Special
Rule, if adopted, and SEPA. It is unclear what the conditions to the permit,
or the cost, will be. There are, therefore, no assurances that the permit will
continue to be pursued or ultimately whether a permit will be issued by the
USFWS.
The permit, if issued, would provide additional certainty and
predictability to the Partnership's harvest activities. These activities would
be regulated by a Habitat Conservation Plan ("HCP") which, under the ESA,
allows impacts on listed species incidental to normal management activities in
exchange for mitigating measures agreed to by the landowner. The Partnership's
HCP
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would address four listed species: the Owl, Marbled Murrelet, Grizzly Bear and
Gray Wolf, as well as numerous other species in the planning area.
The ESA also prohibits the federal government from causing jeopardy to
species listed under the ESA or from destroying or adversely modifying their
designated critical habitat. Private landowners are potentially affected by
this restriction if a private activity requires federal action, such as the
granting of access or federal funding. Where there is such a federal
connection, the federal agency involved must consult with the USFWS to
determine that the proposed activity would not cause jeopardy to the listed
species or cause direct or indirect adverse modification of its designated
critical habitat. If the landowner's proposed activity does adversely modify
critical habitat, it must propose, where possible, alternatives or
modifications to the proposed activity. The Partnership's Timberlands are often
intermingled with federal land in or near areas that include the habitats of a
number of threatened or endangered species such as the Owl and the Grizzly
Bear. Thus, access across federal lands to certain of the Partnership's
Timberlands in such areas has been, and is likely to continue to be, delayed by
the administrative process and legal challenges and may be subjected to
restriction under the ESA.
The ultimate impact of the Owl listing on the Partnership will depend
on (i) the number of Activity Areas actually found on or near Partnership
Timberlands, (ii) the availability and amount of suitable habitat within
individual Activity Areas, (iii) the outcome of the Clinton Administration's
forest policy, (iv) future regulations and restrictions placed on private and
public lands, (v) promulgation, interpretation and application of Owl
regulations by both the USFWS (including the proposed Special Rule) and the
Washington State Department of Natural Resources, (vi) the outcome of the
Partnership's efforts to obtain a permit from the USFWS, (vii) the impact of
reduced harvests upon stumpage prices, and (viii) the outcome of litigation.
Although the continuing uncertainty surrounding efforts to conserve the Owl
make it difficult to assess the future impact of the Owl listing on the
Partnership, at this time the General Partner does not believe that federal and
state laws and regulations related to the Owl will have a materially adverse
effect on the financial position of the Company, its results of operations or
liquidity. There can be no assurances, however, that (i) future interpretation
or administration of current laws and regulations, (ii) changes in laws or
regulations, (iii) increases in the number of Owls on or near Partnership
lands, or (iv) decreases in suitable habitat adjacent to Partnership lands will
not adversely affect the operations, financial position or liquidity of the
Company.
The General Partner anticipates that increasingly strict laws and
regulations relating to the environment, natural resources, forestry
operations, and health and safety matters, as well as increased social concern
over environmental issues, may result in additional restrictions on the Company
causing increased costs, additional capital expenditures and reduced operating
flexibility.
LEGISLATION RESTRICTING LOG EXPORTS. Federal legislation currently
prohibits the sale of unprocessed logs harvested from federal lands located in
the western half of the U.S. if such logs will be exported from the United
States by the purchaser thereof or if such logs will be used by the purchaser
thereof as a substitute for timber from private lands which is exported by such
purchaser.
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This prohibition does not impact the purchase of timber by the Partnership from
federal lands in the geographic area of the Conversion Facilities. In
addition, federal legislation prohibits the export of unprocessed logs
harvested from certain state lands. As a result, Washington and Oregon
currently prohibit the export of all logs harvested from state lands.
Proposals have also been made from time to time, but to date have been
unsuccessful, to either ban or tax the export of unprocessed logs harvested
from private lands.
INCOME TAX CONSIDERATIONS
PARTNERSHIP STATUS. The Partnership is not a taxable entity and
incurs no federal income tax liability. Each partner is required to take into
account in computing his or her federal income tax liability, his or her
allocable share of income, gains, losses, deductions and credits of the
Partnership, regardless of whether cash distributions are made. Distributions
by the Partnership to a partner are generally not taxable unless the
distribution is in excess of the partner's adjusted basis in his or her
partnership interest.
Publicly traded partnerships will, as a general rule, be taxed as
corporations. However, an exception (the "Qualifying Income Exception") exists
with respect to publicly traded partnerships of which 90% or more of the gross
income for every taxable year consists of qualifying income. Qualifying income
includes income from the processing, refining, marketing or transportation of
timber. The Partnership's principal sources of income include income from the
sale of timber, the transportation of timber, the operation of sawmills and the
production of plywood and MDF. The Internal Revenue Service ("IRS") has issued
two rulings to the Partnership that income from the operation of sawmills and
the production of plywood and MDF is qualified for this purpose.
SECTION 754 ELECTION. The Partnership has made the election permitted
by Section 754 of the Internal Revenue Code (the "Code"). The election will
generally permit a purchaser of depositary units representing limited partner
interests ("Units") to adjust his or her share of the basis in the
Partnership's properties ("Inside Basis") pursuant to Section 743(b) of the
Code to fair market value (as reflected by his or her Unit cost). A
Unitholder's allocable share of Partnership income, gains, losses and
deductions is determined in accordance with the Unitholder's unique basis under
this election. Such election is irrevocable and may not be changed without the
consent of the IRS. The Section 743(b) adjustment is attributed solely to a
purchaser of Units and is not added to the basis of the Partnership's assets
associated with all of the Unitholders.
FEDERAL INCOME TAXATION - GENERAL. Marketing, organized as a separate
corporation, reports all of its income, gains, losses, deductions and credits
arising from its operations on its own tax return and pays a corporate tax on
any resulting net income. Under current law, Marketing's net income is subject
to federal income tax at rates of up to 35%. Losses realized by Marketing do
not flow through to the Partnership, but are carried back and forward, within
certain limitations, to offset taxable income of Marketing in past or future
years. Distributions, if any, received by the Partnership from Marketing
generally would be characterized as either taxable dividends of current
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or accumulated earnings and profits or in the absence of earnings and profits,
as a nontaxable return of capital (to the extent of the Partnership's tax basis
in Marketing's stock) or as taxable capital gain (after the Partnership's basis
in such stock is reduced to zero).
STATE TAX INFORMATION. The Partnership conducts operations in three
states, two of which (Idaho and Montana) have a state income tax. To simplify
the Unitholders' state filing requirements, the Partnership files composite
returns in each of those states and pays the state income tax due for
non-resident Unitholders. Marketing conducts operations in approximately 25
states for which it pays state corporate income taxes.
TAX-EXEMPT ENTITIES. Certain entities otherwise generally exempt from
federal income taxes (such as individual retirement accounts ("IRAs"), employee
benefit plans and other charitable or exempt organizations) may be subject to
federal income tax if their share of Unrelated Business Taxable Income ("UBTI")
exceeds $1,000. For years prior to 1994, all income derived from publicly
traded partnerships was classified as UBTI. For years after 1993, income will
be classified as UBTI dependent upon source. Most of the Partnership's income
will continue to be classified as UBTI. Regulated investment companies are
required to derive 90% or more of their gross income from qualified sources,
such as interest or security trading income; gross income from the Partnership
is not qualifying income for purposes of this test.
TIMBER INCOME. Section 631 of the Code provides special rules by
which gains from the sale of timber or cut logs, which would otherwise be
taxable as ordinary income, are treated in whole or in part as capital gains
from the sale of property used in a trade or business. The Partnership has
elected to apply the provisions of Section 631. Substantially all of the
Partnership's 1994 taxable income is expected to qualify for capital gains
treatment.
ENCUMBRANCES
Under the terms of the Senior Notes due 2007, the Senior Notes due
2009 and the Lines of Credit, the Partnership has agreed not to pledge, assign
or transfer the Timberlands, except under limited circumstances. Under the
terms of the First Mortgage Notes of Manufacturing, the holders of these notes
have a first mortgage lien on substantially all of the Conversion Facilities.
In addition, the Partnership guarantees the First Mortgage Notes of
Manufacturing.
The Partnership's title to the timberlands acquired during the
formation of the Company on June 8, 1989 includes the related hard rock mineral
interests. However, the Partnership did not obtain the hard rock mineral
interests to the 865,000 acres of timberland purchased in the Montana
Timberland Acquisition. In addition, the Partnership does not own oil and gas
interests to any of its Timberlands. The title to the Timberlands is subject
to presently existing easements, rights of way, flowage and flooding rights,
servitudes, cemeteries, camping sites, hunting and other leases, licenses and
permits, none of which materially adversely affect the value of the Timberlands
or materially restrict the harvesting of timber or other operations of the
Partnership.
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COMPETITION
RESOURCES SEGMENT. In export log markets, the Partnership competes
with other U.S. companies, Chile, New Zealand, Russia, Canada and Scandinavia,
all of which have abundant timber resources. Competitive factors generally
will include price, species and grade and ability to meet delivery
requirements.
In domestic log markets, the Partnership competes with numerous
private land and timber owners in the Northwestern U.S. and the states of
Idaho, Montana, Oregon and Washington, as well as foreign imports, primarily
from Chile and Argentina. In addition, the Partnership competes with the U.S.
Government, principally the USFS and the BLM, and the BIA. Timber supplied
from the U.S. Government, Washington and Oregon land is restricted from export,
and is sold solely into domestic markets. (See Federal and State Regulations.)
Domestic wood and fiber consuming facilities tend to purchase raw
materials within relatively small geographic areas, generally within a 200 mile
radius, due to log transportation costs. Competitive factors within a market
area generally will include price, species and grade, proximity to wood
consuming facilities and ability to meet delivery requirements.
MANUFACTURING SEGMENT. Markets for forest products are highly
competitive in terms of price and quality. The Manufacturing Segment competes
in domestic lumber markets primarily with other U.S. and Canadian companies.
The Manufacturing Segment competes in the Japanese lumber market primarily with
Japanese, Canadian, Russian and Scandinavian companies. The domestic plywood
market is characterized by numerous large and small producers and is subject to
competition from oriented strand board and waferboard, which are less
expensive, but generally lower quality substitutes.
Competition in the markets for commodity-grade lumber and plywood is
primarily based on pricing strategies. Sales in specialty niche markets and
retail markets are strongly influenced by product quality, customer service,
efficiency of distribution and the ability to supply products in the future, in
addition to price. The ability to provide companion products and a variety of
substitute products is also used as a marketing strategy for certain products.
MDF producers typically compete on a global scale. Accordingly, sales are
generally determined by product quality and level of customized services the
producer can provide, rather than by geographic location.
EMPLOYEES
The Company currently has approximately 352 salaried and 1,446 hourly
employees, including employees of the General Partner that manage the
businesses of the Company, and believes that its employee relations are good.
The Company's wage scale and benefits are generally competitive with other
forest products companies. The Company's employees are not unionized. The
harvesting and delivery of logs are conducted by independent contractors who
are not
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employees of the Company.
ITEM 3. LEGAL PROCEEDINGS
On May 1, 1992, the Company received a Notice of Violation ("NOV")
from the Environmental Protection Agency ("EPA") under the Clean Air Act. The
NOV alleges that Plum Creek's Evergreen veneer dryers in Kalispell, Montana
were not in compliance with an air quality permit on January 15, 1992 when
visible emissions from the veneer dryers were observed by the EPA. These
dryers were also the subject of a suit filed by the Montana Air Quality Bureau
("MAQB") in March 1990. Prior to the January 15, 1992 alleged violation, the
Company entered into a Consent Decree with the MAQB pursuant to which the
Company paid a $7,000 civil penalty. Pursuant to the Consent Decree, the
Company installed approximately $900,000 of emission control equipment on the
dryers on April 14, 1992, in order to comply with the permit and all State and
Federal visible emission limits. The EPA is seeking a civil penalty of
$180,000 in addition to the civil penalty previously paid. Plum Creek is
working with the EPA to resolve issues arising under the NOV.
On April 25, 1994, the Company received a citation from the MAQB,
under Montana regulations, alleging that the Company had commenced the
construction of a pollution control device for the wood fired boiler serving
the Columbia Falls facility prior to receiving an air quality permit. The
MAQB has not notified the Company of what sanctions, if any, the MAQB would
seek as a result of the citation. On August 31, 1994, the Company received a
citation from the MAQB alleging that the wood fired boiler serving the Columbia
Falls facility was not in compliance with the facility's air quality permit
when visible emissions from the boiler were observed by the MAQB and the EPA.
The MAQB has not notified the Company of what sanctions, if any, the MAQB would
seek as a result of the citation. The pollution control device for the boiler
has been permitted and was installed in October 1994.
There is no pending litigation, and to the knowledge of the General
Partner there is no threatened litigation, involving the Company which would
have a material adverse effect on the business, the financial position, results
of operations or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED UNITHOLDER MATTERS
The Partnership's Units are traded on the New York Stock Exchange. As
of December 31, 1994, there were approximately 44,500 beneficial owners of
40,608,300 outstanding Units.
Trading price data, as reported by the New York Stock Exchange, and
declared cash distribution information for 1994 and 1993 are as follows (1993 $
per Unit amounts have been restated for the December 6, 1993 three-for-one Unit
split):
1994 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- ---- -------- -------- -------- --------
High $ 32-1/2 $ 28-5/8 $ 26-1/2 $ 24-3/4
Low 23 21-1/2 22-5/8 19-5/8
Cash Distribution per Unit $0.38 $0.43 $0.43 $0.43
1993 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- ---- -------- -------- -------- --------
High $ 16-5/8 $ 17-7/8 $ 21-3/4 $ 26-3/4
Low 14-5/8 15-1/2 17-3/8 20-7/8
Cash Distribution per Unit $ 0.333 $ 0.333 $ 0.333 $ 0.38
Cash distributions are paid from available cash as defined by the
Partnership's partnership agreement. It is the Company's intention to maintain
the distribution into the foreseeable future; however, there can be no
guarantee. In addition, the Company's debt agreements have certain restrictive
covenants limiting the amount of the cash distribution.
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ITEM 6. SELECTED FINANCIAL DATA
1994 1993(2) 1992(5) 1991(6) 1990
---- ------- ------- ------- ----
For the year:
(In millions, except per Unit):
Revenues (1) $ 578.7 $ 501.0 $ 439.9 $ 389.8 $ 372.8
Depreciation, Depletion and
Amortization 54.1 38.8 39.0 43.0 44.9
Operating Income 164.1 126.6 97.8 55.7 52.4
Net Income 112.2 91.4 64.2 18.7 22.2
Capital Expenditures (4) 25.8 284.6 25.6 11.4 20.8
Net Cash Provided by Operations 155.1 115.3 78.0 62.1 52.8
Net Income per Unit (3) 2.36 1.92 1.34 0.37 0.44
Cash Distributions Declared
per Unit (3) 1.67 1.38 1.17 1.07 1.03
At year end (in millions):
Working Capital 93.5 53.2 100.6 73.8 73.0
Total Assets 823.2 816.5 586.1 580.8 607.4
Total Debt 544.4 569.9 318.5 325.0 325.0
Partners' Capital $ 223.0 $ 192.6 $ 225.3 $ 211.7 $ 240.6
Operating Data:
Fee Timber Harvested (MMBF) (1) 559 458 469 563 503
Non-Fee Timber Harvested (MMBF) 71 77 117 76 102
Lumber Production (MMBF) 388 352 395 409 372
Plywood Production (MMSF)
(3/8" basis) 290 289 294 279 268
MDF Production (MMSF)
(3/4" basis) 123 106 109 103 97
(1) Revenues and fee timber harvest increased in 1994 in part due to the
November 1993 Montana Timberland Acquisition.
(2) During 1993, the Company elected to change its method for valuing
inventories from average cost to the last-in, first-out ("LIFO") method. This
change in accounting lowered 1993 earnings by $8.0 million or $0.18 per Unit.
The cumulative effect of the accounting change and pro forma effects on prior
years' earnings have not been included because such effects are not reasonably
determinable. In addition, on August 30, 1993, the Partnership redeemed the
1.25 million (on a pre-Unit split basis) DPIs for $63.0 million.
(3) Per Unit amounts have been restated for the December 6, 1993 three-for-one
Unit split.
(4) Included in 1993 capital expenditures was $255.3 million paid for the
timberlands acquired as part of the Montana Timberland Acquisition.
(5) Included in 1992 results of operations was the sale of the 164,000 acre
Gallatin Unit, together with the Belgrade sawmill for $23 million plus the
value of inventory. The sale resulted in a net gain of $15.6 million.
(6) Effective January 1, 1991, the Company increased the estimated remaining
lives of its machinery and equipment. This change in accounting estimate
increased the Company's 1991 net income by $9.3 million or $0.21 per Unit.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Plum Creek Timber Company, L.P. (the "Partnership"), a Delaware
limited partnership and its subsidiaries, Plum Creek Manufacturing, L.P.
("Manufacturing"), and Plum Creek Marketing, Inc., ("Marketing"), own, manage,
and operate 2.0 million acres of timberland and ten wood products conversion
facilities in Montana, Washington and Idaho. The Partnership owns 98 percent
of Manufacturing and 96 percent 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 percent and 4 percent of
Manufacturing and Marketing, respectively. As used herein, "Company" refers to
the combined entities of the Partnership, Manufacturing and Marketing.
"Resources Segment" refers to the combined timber and land management business
of the Partnership. "Manufacturing Segment" refers to the combined business of
Manufacturing and Marketing.
EVENTS AND TRENDS AFFECTING OPERATING RESULTS
MARKET FORCES. The demand for logs and manufactured wood products
depends upon international and domestic market conditions, the value of the
U.S. dollar in foreign exchange markets, competition and other factors. In
particular, the demand for logs, lumber and plywood is affected by residential
and industrial construction, and repair and remodel activity. These activities
are subject to fluctuations due to changes in economic conditions, tariffs,
interest rates, population growth and other economic, demographic and
environmental factors.
SEASONALITY. Domestic log sales volumes are typically at their lowest
point in the second quarter of each year during spring break-up, when warming
weather thaws and softens roadbeds, restricting access to logging sites.
Revenues from export log sales are affected in part by variations in inventory
in the countries where such logs are sold as well as by weather conditions.
Winter logging activity in the Pacific Northwest takes place at lower
elevations, where predominantly second growth logs are found, affecting the
volume of higher quality export logs sold during this time of the year.
Demand for manufactured products is generally lower in the fall and
winter quarters when activity in the construction, industrial and repair and
remodeling markets is slower, and higher in the spring and summer quarters when
these markets are more active. Working capital varies with seasonal
fluctuations. Log inventories increase going into the winter season to prepare
for reduced harvest during spring break-up.
CURRENT MARKET CONDITIONS. Prices for both export and domestic logs
continued to be strong in 1994, as in 1993, primarily due to log shortages
resulting from litigation and environmental
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restrictions as well as improved demand for finished wood products. In
addition, competition between and within the Northwest export and domestic log
markets continues to be strong for available timber as buyers continue to
compete for shrinking timber supplies.
Prices for lumber, plywood and MDF strengthened during 1994. Industry
composite indices for lumber and plywood commodity prices were 5% and 7%
higher, respectively, in 1994 than 1993. The price improvement was primarily
due to improved wood product demand as well as reduced timber supplies. MDF
prices increased by 22% in 1994, as compared to 1993, due to increasing
worldwide demand for MDF products.
FINANCIAL CONDITION AND LIQUIDITY
Net cash provided by operating activities was $155.1 million, $115.3
million and $78.0 million for 1994, 1993, and 1992, respectively. The increase
in net cash provided by operating activities was primarily attributed to higher
net income due to increases in domestic log sales volumes resulting from higher
harvest levels. Operating cash flows for 1994 included a $9.2 million use of
cash, net of expense, for the funding of unit award benefit plans. Future
funding of these benefit plans is contingent on meeting targets as defined in
the plans. For further discussion of these benefit plans, see Note 10 of Notes
to Combined Financial Statements. On December 31, 1994, the Company had $60.9
million of cash and cash equivalents.
On August 1, 1994, the Partnership issued $150 million of senior
unsecured notes (the "Senior Notes due 2009") bearing interest at 8.73%, due in
full on August 1, 2009. The proceeds obtained from the issuance of the Senior
Notes due 2009 were used to repay a portion of the bank borrowings
("Acquisition Line of Credit") incurred to finance the November 1993 Montana
Timberland Acquisition.
On November 15, 1994, the Partnership entered into two unsecured
revolving lines of credit ("Lines of Credit") with a group of banks that permit
the Partnership to borrow up to $135 million for general corporate purposes,
including up to $5 million of standby letters of credit issued on behalf of the
Partnership or Manufacturing. Proceeds obtained from the Lines of Credit were
used to refinance the remaining portion of the Acquisition Line of Credit
incurred to finance the November 1993 Montana Timberland Acquisition and to
consolidate the Company's remaining outstanding lines of credit. As of
December 31, 1994, there were letters of credit issued in the amounts of $1.1
million and $0.5 million for the Partnership and Manufacturing, respectively.
The Lines of Credit bear a floating rate of interest. One line of
credit allows the Partnership to borrow $100 million through October 31, 1999,
of which $82.5 million was outstanding at December 31, 1994. The other line of
credit allows the Partnership to borrow $35 million through October 30, 1995
(any borrowings outstanding at that time are payable in quarterly installments,
at the option of the Partnership, due January 1996 through October 1997), of
which $15 million was outstanding at December 31, 1994. On January 5, 1995,
$48.5 million of borrowings outstanding on the Lines of Credit were repaid.
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The Company's long-term debt agreements and Lines of Credit contain
certain restrictive covenants, including limitations on harvest levels, sale of
assets, cash distributions and the amount of future indebtedness. The Company
was in compliance with such covenants as of December 31, 1994 and 1993.
On August 30, 1993, the Partnership redeemed the 1.25 million Deferred
Participation Interests ("DPIs") for $49.50 per DPI (on a pre-Unit split
basis), plus direct costs associated with redeeming the DPIs (see Note 10 of
Notes to Combined Financial Statements).
The Partnership will distribute $0.43 per Unit for the fourth quarter
of 1994. The distribution will equal $22.1 million (including $4.6 million to
the General Partner), and will be paid on March 1, 1995 to Unitholders of
record on February 15, 1995. The computation of cash available for
distribution includes a required reserve for the payment of principal and
interest, as well as other reserves established at the discretion of the
General Partner, for working capital, capital expenditures or future cash
distributions.
Cash required to meet the Partnership's quarterly cash distributions,
capital expenditures and to satisfy interest and principal payments on the
Company's debt will be significant. The General Partner expects that all debt
service will be funded from cash generated by operations. The Partnership
expects to make cash distributions from current funds and cash generated from
operations.
The Company is involved in certain environmental and regulatory
proceedings and other related matters. Although it is possible that new
information or future developments could require the Company to reassess its
potential exposure related to these matters, the Company believes, based upon
available information, that the resolution of these issues will not have a
materially adverse effect on its results of operations, financial position or
liquidity.
CAPITAL EXPENDITURES
Capital expenditures for the Resources Segment were $7.1 million,
$260.5 million and $7.9 million for 1994, 1993 and 1992, respectively.
Resource Segment capital expenditures included the construction of logging
roads and reforestation. Resources Segment capital expenditures for 1993
included $255.3 million of timberlands purchased as part of the Montana
Timberland Acquisition, as well as construction of logging roads and
reforestation. Capital expenditures for the Manufacturing Segment were $18.7
million, $24.1 million and $17.7 million for 1994, 1993 and 1992, respectively.
Manufacturing Segment capital expenditures in 1994 included the addition of the
lumber remanufacturing facility, the installation of various lumber and plywood
optimization projects, and the initial stages of the MDF project (see below)
which is scheduled for completion in mid-1995.
Planned capital expenditures for the Resources Segment in 1995 are $8
million, primarily for logging roads and reforestation. The Manufacturing
Segment's 1995 planned capital expenditures are $22 million which includes a
project in the MDF plant to produce Super-Refined
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MDF(2), a higher quality MDF product that can be machined and finished more
efficiently, adding significant value to the MDF product line. Planned capital
expenditures also include the purchase and installation of various lumber and
plywood value-added projects, equipment upgrades to meet environmental
requirements, as well as replacements and upgrades of other equipment in
several of the Conversion Facilities.
It is anticipated that the planned 1995 capital expenditures will be
funded from current funds and cash generated from operations.
RESULTS OF OPERATIONS
The following table compares operating income by segment for the years
ended December 31, 1994, 1993 and 1992.
Operating Income by Segment
(In Thousands)
1994 1993 1992
---- ---- ----
Resources . . . . . . . . . . . . $ 150,730 $ 135,238 $ 86,315
Manufacturing . . . . . . . . . . 32,175 11,471 28,164
Other & Eliminations . . . . . (18,771) (20,152) (16,697)
-------- --------- --------
Total . . . . . . . . . . . . . . $ 164,134 $ 126,557 $ 97,782
---------- ---------- ----------
1994 COMPARED TO 1993
Resources Segment revenues were $324.4 million and $266.1 million for
the years ended 1994 and 1993, respectively. Revenues were $58.3 million
higher in 1994, primarily due to increased sales volumes and higher prices for
domestic logs, offset in part by lower export log sales volumes and lower land
sales. Domestic log sales volume increased by 24% as compared to 1993
primarily due to increased harvest levels. The Company's 1994 fee timber
harvest was 559 MMBF which was 101 MMBF higher than 1993, primarily as a result
of the Montana Timberland Acquisition. Domestic log prices increased in 1994
by 8% as compared to 1993. The higher prices were primarily the result of
increased demand for wood products as well as from log shortages in the
Northwest caused in part by legal challenges to federal timber sales and
changes in federal timber policy. In addition, 1994 land sales were $6.4
million lower than 1993. Land sales declined in 1994, primarily due to the
Partnership's strategy of deferring land sales until the completion of state
and county growth management processes.
Resources Segment costs and expenses were $173.7 million and $130.9
million for the years
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ended 1994 and 1993, respectively. Costs and expenses were $42.8 million
higher in 1994 primarily due to the increase in the production volumes of
domestic logs, higher log and haul costs resulting from longer hauling
distances and higher road amortization and timber depletion rates resulting
from the additional roads and timber obtained in the Montana Timberland
Acquisition.
Manufacturing Segment revenues were $372.2 million and $324.6 million
for the years ended 1994 and 1993, respectively. Revenues were $47.6 million
higher in 1994 due to sales volume increases and higher prices in all product
lines. Lumber, plywood, and MDF prices increased in 1994 by 7%, 7% and 22%,
respectively, over 1993. The higher prices were the result of improved
domestic wood product demand and the impact of the log supply shortage. Lumber
sales volumes were 7% higher in 1994 as compared to 1993, primarily due to
increased production. MDF sales volumes increased by 15% in 1994 due to
increased production as a result of production improvements.
Manufacturing Segment costs and expenses were $340.1 million and $313.1
million for the years ended 1994 and 1993, respectively. The $27.0 million of
higher costs and expenses were primarily due to increased lumber and MDF
production volumes and higher log costs (14% and 15% higher for lumber and
plywood, respectively) which were the result of improving demand for finished
wood products and the log supply shortage.
Other and eliminations decreased by $1.4 million for the year ended 1994
as compared to 1993, primarily due to a decrease in the cost of employee
benefit plans and a decrease in executive incentive compensation paid by the
Partnership. Profit resulting from intercompany log sales is deferred until
the Manufacturing Segment converts existing log inventories into finished
products and sells them to third parties.
Interest expense increased by $10.7 million in 1994 as compared to 1993
due to an increase in average debt outstanding in 1994, as a result of
borrowings in November 1993 to finance the Montana Timberlands Acquisition.
Net other expense increased by $4 million in 1994 as compared to 1993 primarily
due to an increase in the minority interest elimination as a result of an
increase in net income in the Manufacturing Segment, an increase in fixed asset
retirements and an increase in the expense for state taxes payable on behalf of
non-resident Unitholders.
The income allocated to the General Partner increased by $7.5 million
during 1994 compared to 1993 as a result of higher net income and higher
quarterly distributions to the Unitholders which increased the incentive
distribution paid to the General Partner. Net income is allocated to the
General Partner based on 2 percent of the Company's net income (adjusted for
the incentive distribution paid), plus the incentive distribution. The
incentive distribution is based on a percentage of the quarterly distribution
paid which totaled $1.62 per Unit for the year ended 1994, compared to $1.30
per Unit in 1993 (1993 per Unit amounts were restated for the December 6, 1993
three-for-one Unit split).
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1993 COMPARED TO 1992
Resources Segment revenues were $266.1 million and $211.7 million for
the years ended 1993 and 1992, respectively. Revenues were $54.4 million
higher in 1993, primarily due to higher prices for both export and domestic
logs, offset in part by lower land sales and lower harvest levels. Export and
domestic log prices increased in 1993 by 33% and 40%, respectively, as
compared to 1992. The higher prices were primarily the result of increased
demand for wood products as well as from log shortages in the Northwest caused
in part by legal challenges to federal timber sales. In addition, 1993 land
sales were $12.2 million lower than 1992 primarily due to the July 1992
strategic sale of the 164,000 acre Gallatin Unit. The Company's 1993 fee
timber harvest was 458 MMBF (including 12 MMBF from the timberlands acquired
during the Montana Timberland Acquisition) which was 11 MMBF lower than 1992
and was the result of planned harvest reductions.
Resources Segment costs and expenses were $130.9 million and $125.4
million for the years ended 1993 and 1992, respectively. Costs and expenses
were $5.5 million higher in 1993, primarily due to higher log & haul costs
which were the result of longer hauling distances and more expensive line and
helicopter logging, higher Washington state excise tax expense resulting from
higher stumpage values and higher silviculture expenses. These amounts were
partially offset by a reduction in the planned fee harvest level.
Manufacturing Segment revenues were $324.6 million and $294.0 million
for the years ended 1993 and 1992, respectively. Revenues were $30.6 million
higher in 1993 due to higher prices in all product lines, partially offset by
10% lower lumber sales volume resulting primarily from the July 1992 sale of
the Belgrade sawmill. Lumber (on a comparable mill basis), plywood, and MDF
prices increased in 1993 by 23%, 21% and 4%, respectively, over 1992. The
higher prices were the result of improved domestic wood product demand and the
impact of the log supply shortage.
Manufacturing Segment costs and expenses were $313.1 million and
$265.8 million for the years ended 1993 and 1992, respectively. The $47.3
million of higher costs and expenses were due to higher log costs (38% and 44%
higher for lumber and plywood, respectively) which were the result of improving
demand for finished wood products and the log supply shortage. In addition,
during 1993 the Company changed its method for valuing inventories from average
cost to last-in, first-out ("LIFO") which resulted in $18.0 million of
additional costs for the Manufacturing Segment (see Note 3 to Notes to Combined
Financial Statements).
Other and eliminations increased by $3.5 million for the year ended
1993 as compared to 1992 primarily due to higher employee benefit plan
expenses. These amounts were offset in part by lower intersegment profit
accumulating in inventory resulting from the Company's change in its method for
valuing inventories from average cost to LIFO. The change to LIFO resulted in
approximately $10.0 million of lower profit accumulating in inventory. Profit
resulting from intercompany log sales is deferred until the Manufacturing
Segment converts existing log inventories into finished products and sells them
to third parties.
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The income allocated to the General Partner increased by $4.1
million during 1993 compared to 1992 as a result of a higher net income and
higher quarterly distributions to the Unitholders, which increased the
incentive distribution paid to the General Partner. Net income is allocated to
the General Partner based on 2 percent of the Company's net income (adjusted
for the incentive distribution paid), plus the incentive distribution. The
incentive distribution is based on a percentage of the quarterly distribution
paid which totaled $1.30 per Unit for the year ended 1993, which compares to
$1.13 per Unit in 1992 (per Unit amounts were restated for the December 6, 1993
three-for-one Unit split).
EXPORT SALES
The Company sells logs and finished wood products for export. These
sales are denominated in U.S. dollars and are generally sold to Pacific Rim
countries, principally Japan, and to Canada. Combined export revenues as a
percentage of total revenues were 15%, 17% and 16% for 1994, 1993,
and 1992, respectively.
EFFECT OF INFLATION
During recent years the Company has experienced increased costs due to
the effect of inflation, particularly in the Manufacturing Segment, on the cost
of raw materials (cost of logs), labor, supplies and energy. However, the
Company utilizes the LIFO inventory valuation method for its raw materials,
work-in-process and finished goods inventory which generally matches current
costs to current revenues and thus, tends to reflect the impact of inflation on
cost of goods sold.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION
PLUM CREEK TIMBER COMPANY, L. P.
COMBINED STATEMENT OF INCOME
Year Ended December 31,
---------------------------------
1994 1993 1992
---- ---- ----
(In Thousands, Except Per Unit)
Revenues ....................................... $ 578,657 $ 501,006 $ 439,904
--------- --------- ---------
Costs and Expenses:
Cost of Goods Sold ......................... 372,467 337,107 305,686
Selling, General and Administrative ........ 42,056 37,342 36,436
--------- --------- ---------
Total Costs and Expenses ................. 414,523 374,449 342,122
--------- --------- ---------
Operating Income ............................... 164,134 126,557 97,782
Interest Expense ............................... (47,410) (36,737) (35,749)
Interest Income ................................ 889 2,203 2,870
Other Expense - Net ............................ (4,477) (474) (602)
--------- --------- ---------
Income before Income Taxes ..................... 113,136 91,549 64,301
Provision for Income Taxes ..................... 924 105 80
--------- --------- ---------
Net Income ..................................... $ 112,212 $ 91,444 $ 64,221
General Partner Interest ....................... 16,325 8,837 4,760
--------- --------- ---------
Net Income Allocable to Unitholders ............ $ 95,887 $ 82,607 $ 59,461
--------- --------- ---------
Net Income per Unit ............................ $ 2.36 $ 1.92 $ 1.34
--------- --------- ---------
See accompanying Notes to Combined Financial Statements.
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PLUM CREEK TIMBER COMPANY, L. P.
COMBINED BALANCE SHEET
December 31,
---------------------------
1994 1993
---- ----
(In Thousands)
ASSETS
Current Assets:
Cash and Cash Equivalents ................. $ 60,942 $ 34,025
Accounts Receivable ....................... 26,866 28,711
Inventories ............................... 54,685 48,102
Timber Contract Deposits .................. 2,823 2,987
Other Current Assets ...................... 4,013 5,399
----------- ----------
149,329 119,224
Timber and Timberlands - Net ............... 495,462 526,762
Property, Plant and Equipment - Net ........ 162,017 162,633
Other Assets ............................... 16,418 7,923
----------- ----------
Total Assets ............................. $ 823,226 $ 816,542
----------- ----------
LIABILITIES
Current Liabilities:
Current Portion of Long-Term Debt ......... $ 13,000 $ 13,000
Current Portion of Lines of Credit ........ 12,500
Accounts Payable .......................... 13,231 13,038
Interest Payable .......................... 7,681 3,005
Wages Payable ............................. 6,430 7,857
Taxes Payable ............................. 6,094 5,648
Workers' Compensation Liabilities ......... 2,610 2,610
Other Current Liabilities ................. 6,778 8,338
----------- ----------
55,824 65,996
Long-Term Debt ............................. 433,900 296,900
Lines of Credit ............................ 97,500 247,500
Workers' Compensation Liabilities .......... 9,367 9,805
Other Liabilities .......................... 3,658 3,786
----------- ----------
Total Liabilities ........................ 600,249 623,987
----------- ----------
Commitments and Contingencies
PARTNERS' CAPITAL
Limited Partners' Units .................... 223,028 192,925
General Partner ............................ (51) (370)
----------- ----------
Total Partners' Capital .................. 222,977 192,555
----------- ----------
Total Liabilities and Partners' Capital .. $ 823,226 $ 816,542
----------- ----------
See accompanying Notes to Combined Financial Statements.
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PLUM CREEK TIMBER COMPANY, L. P.
COMBINED STATEMENT OF CASH FLOWS
Year Ended December 31,
-----------------------------------
1994 1993 1992
---- ---- ----
(In Thousands)
Cash Flows From Operating Activities:
Net Income......................................... $ 112,212 $ 91,444 $ 64,221
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization....... 54,143 38,806 39,008
Gain on Property Dispositions - Net............ (419) (7,708) (20,876)
Working Capital Changes:
Accounts Receivable .......................... 1,845 (14,183) 1,276
Inventories .................................. (6,583) 1,946 (6,237)
Timber Contract Deposits ..................... 164 (510) 2,472
Other Current Assets ......................... 1,386 (3,662) (549)
Accounts Payable ............................. 193 3,657 (1,156)
Interest Payable ............................. 4,676 742 51
Wages Payable ................................ (1,427) 1,386 (924)
Taxes Payable ................................ 446 2,039 332
Workers' Compensation Liabilities ............ (72) 102
Other Current Liabilities .................... (1,560) 3,620 (446)
Funding of Benefit Plans - Net................ (9,198)
Other.......................................... (763) (2,164) 730
-------- -------- -------
Net Cash Provided By Operating Activities .... $ 155,115 $ 115,341 $ 78,004
-------- -------- -------
Cash Flows From Investing Activities:
Additions to Properties.......................... $ (25,837) $(284,612) $(25,615)
Proceeds from Property Dispositions.............. 4,472 6,496 28,591
Other............................................ 458
-------- -------- -------
Net Cash Provided By (Used In)
Investing Activities ...................... $ (20,907) $(278,116) $ 2,976
-------- -------- -------
Cash Flows From Financing Acitvities:
Cash Distributions............................... $ (81,790) $ (61,164) $(50,580)
Borrowings on Lines of Credit.................... 368,345 260,000
Payments on Lines of Credit...................... (530,846)
Issuance of Long-Term Debt....................... 150,000
Retirement of Long-Term Debt..................... (13,000) (8,600) (6,500)
Redemption of Deferred Participation Interests... (63,018)
-------- -------- -------
Net Cash Provided By (Used In)
Financing Activities ...................... $(107,291) $ 127,218 $(57,080)
-------- -------- -------
Increase (Decrease) in Cash
and Cash Equivalents............................. 26,917 (35,557) 23,900
Cash and Cash Equivalents
Beginning of Year................................ 34,025 69,582 45,682
-------- -------- -------
End of Year...................................... $ 60,942 $ 34,025 $ 69,582
-------- -------- -------
Supplementary Cash Flow Information
- -----------------------------------
Interest Paid.................................... $ 42,734 $ 35,995 $ 35,698
Income Taxes Paid - Net.......................... $ 973 $ 197 $ 50
See accompanying Notes to Combined Financial Statements.
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PLUM CREEK TIMBER COMPANY, L. P.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION. Plum Creek Timber Company, L.P. (the
"Partnership"), a Delaware limited partnership and its subsidiaries, Plum Creek
Manufacturing, L.P. ("Manufacturing"), and Plum Creek Marketing, Inc.
("Marketing"), own, manage and operate 2.0 million acres of timberland and ten
wood products conversion facilities in Montana, Washington and Idaho. The
Partnership owns 98 percent of Manufacturing and 96 percent 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
percent and 4 percent of Manufacturing and Marketing, respectively. As used
herein, "Company" refers to the combined entities of the Partnership,
Manufacturing and Marketing. "Resources Segment" refers to the timber and land
management business of the Partnership, and "Manufacturing Segment" refers to
the combined businesses of 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. Certain
financial statement reclassifications have been made to the 1993 and 1992
amounts presented for comparability purposes and have no impact on net income.
NET INCOME PER UNIT. Net income per Unit is calculated using the
weighted average number of Units outstanding, net of redeemed Units, plus, in
1993 and 1992, any unredeemed Deferred Participation Interests ("DPIs" - see
Note 10 to Notes to Combined Financial Statements) divided into the combined
Partnership net income, after adjusting for the General Partner Interest. The
weighted average number of Units outstanding was 40,608,300, 43,084,327 and
44,358,300 for the years ended December 31, 1994, 1993 and 1992, respectively.
On October 18, 1993, the General Partner authorized a three-for-one
Unit split of the Partnership's outstanding Units. The Unit split entitled
each Unitholder of record on November 15, 1993 to receive two additional Units
for each Unit held on the record date. The split was effective and payable on
December 6, 1993. All references to number of Units and to per Unit
information in the combined financial statements have been restated to reflect
the Unit split on a retroactive basis.
REVENUE RECOGNITION. Revenues received from the sale of logs, wood
products and by-products, primarily wood chips, are generally recorded as
operating revenue at the time of shipment. Sales of export logs and wood
products are denominated in U.S. dollars.
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.
INVENTORIES. Inventories are stated at the lower of cost or market.
Cost for manufactured
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inventories includes raw materials, labor, supplies, energy, depreciation and
production overhead. Cost of logs purchased by the Manufacturing Segment from
the Partnership is determined quarterly, based upon estimated market prices and
terms in effect at the time. Cost of export log inventories includes timber
depletion, stumpage, associated logging and harvesting costs, road costs and
production overhead. Effective January 1, 1993, the Company changed its method
for valuing logs, work-in-process and finished goods inventories from the
average cost to the last-in, first-out ("LIFO") method (see Note 3 to Notes to
Combined Financial Statements). 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. 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 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 for nonresident Unitholders. Taxes
paid for nonresident Unitholders are included in other expense. Marketing, as
a separate taxable corporation, provides for income taxes on a separate company
basis. Marketing provides for deferred taxes in order to reflect the tax
consequences in future years of the difference between the financial statement
and tax basis of assets and liabilities at year-end.
2. ACCOUNTS RECEIVABLE
Accounts receivable were presented net of allowances for doubtful
accounts of $1,160,000 and $1,174,000 at December 31, 1994 and 1993,
respectively.
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3. INVENTORIES
Inventories consisted of the following at December 31 (in thousands):
1994 1993
---- ----
Raw materials (logs) . . . . . . . . . . . . . . . $ 25,908 $ 22,868
Work-in-process . . . . . . . . . . . . . . . . . 5,349 5,442
Export logs . . . . . . . . . . . . . . . . . . . 1,274 2,488
Finished goods . . . . . . . . . . . . . . . . . . 16,485 13,570
------- ------
49,016 44,368
Supplies . . . . . . . . . . . . . . . . . . . . . 5,669 3,734
------- ------
Total . . . . . . . . . . . . . . . . . . . . $ 54,685 $ 48,102
------- ------
Effective January 1, 1993, the Company changed its method of valuing
logs, work-in-process and finished goods inventories from the average cost
method of accounting to the LIFO method. Management believes the LIFO method
results in a better matching of current costs with current revenues. The
effect of this change in 1993 was to decrease earnings by $8.0 million, or
$0.18 per Unit. The cumulative effect of this accounting change and the pro
forma effects on prior years' earnings have not been included because such
effects are not reasonably determinable. 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, 1994
and 1993 was $54.9 million and $52.4 million, respectively.
4. TIMBER AND TIMBERLANDS AND PROPERTY, PLANT AND EQUIPMENT
Timber and timberlands consisted of the following at December 31 (in
thousands):
1994 1993
---- ----
Timber and logging roads - net . . . . . . . . . $ 450,956 $ 482,175
Timberlands . . . . . . . . . . . . . . . . . . . 44,506 44,587
-------- -------
Timber and Timberlands - net . . . . . . . . . $ 495,462 $ 526,762
-------- -------
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Property, plant and equipment consisted of the following at December
31 (in thousands):
1994 1993
---- ----
Land, buildings and improvements . . . . . . . . $ 47,429 $ 43,173
Machinery and equipment . . . . . . . . . . . . . 208,085 197,353
-------- --------
255,514 240,526
Accumulated depreciation . . . . . . . . . . . . . (93,497) (77,893)
-------- --------
Property, Plant and Equipment - net . . . . . $162,017 $162,633
-------- --------
On November 1, 1993, the Partnership purchased approximately 865,000
acres of timberland and other timber related assets (the "Montana Timberland
Acquisition") from Champion International Corporation for approximately $260
million. Approximately $255.3 million of the Montana Timberland Acquisition's
purchase price was allocated to timber and timberlands. These timberlands are
located in western Montana in close proximity to existing Company assets.
On July 31, 1992, the Company completed the sale of approximately
164,000 acres of timberland in its Gallatin Unit, together with its Belgrade
sawmill for $23 million plus the value of inventory. The sale resulted in a
net gain of approximately $15.6 million.
5. BORROWINGS
Long-term debt consisted of the following at December 31 (in
thousands):
1994 1993
---- ----
Senior Notes due 2007 . . . . . . . . . . . . . . . $151,800 $158,400
Senior Notes due 2009 . . . . . . . . . . . . . . . 150,000
First Mortgage Notes . . . . . . . . . . . . . . . 145,100 151,500
Lines of Credit . . . . . . . . . . . . . . . . . . 97,500 260,000
-------- --------
Total Long-term Debt . . . . . . . . . . . . . 544,400 569,900
Less: Current Portion . . . . . . . . . . . . (13,000) (25,500)
-------- --------
Long-Term Portion. . . . . . . . . . . . . . . $531,400 $544,400
-------- --------
On August 1, 1994, the Partnership issued $150 million of senior notes
due in full on August 1, 2009 (the "Senior Notes due 2009") which bear
interest at 8.73%, payable semi-annually. The proceeds obtained from the
issuance of the Senior Notes due 2009 were used to refinance a portion of the
$260 million Line of Credit incurred to finance the November 1, 1993 Montana
Timberland Acquisition.
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The Senior Notes due 2007 and the First Mortgage Notes bear interest
of 11.125%, payable semi-annually. The Senior Notes due 2007, the Senior Notes
due 2009 and the First Mortgage Notes (collectively, the "Note Agreements") 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 maturity
as the Note Agreements. At December 31, 1994 and 1993, the premium that would
have been due upon early retirement would have approximated $57 million and
$110 million, respectively. The two series of senior notes are unsecured. The
First Mortgage Notes are collateralized by the property, plant and equipment of
Manufacturing and are guaranteed by the Partnership.
On November 15, 1994, the Partnership entered into two unsecured
revolving lines of credit ("Lines of Credit") with a group of banks that permit
the Partnership to borrow up to $135 million for general corporate purposes,
including up to $5 million of standby letters of credit issued on behalf of the
Partnership or Manufacturing. As of December 31, 1994, there were letters of
credit issued in the amounts of $1.1 million and $0.5 million for the
Partnership and Manufacturing, respectively. Proceeds obtained from the Lines
of Credit were used to retire the remaining portion of the $260 million Line of
Credit incurred to finance the November 1, 1993 Montana Timberland Acquisition
and consolidate the Company's remaining outstanding lines of credit.
The Lines of Credit bear a floating rate of interest (6.86% at
December 31, 1994). One line of credit allows the Partnership to borrow $100
million through October 31, 1999, of which $82.5 million was outstanding at
December 31, 1994. The other line of credit allows the Partnership to borrow
$35 million through October 30, 1995 (any borrowings outstanding at that time
are payable, at the option of the Partnership, in quarterly installments due
January 1996 through October 1997), of which $15 million was outstanding at
December 31, 1994. The $15 million was classified as long-term debt due in
1999 due to the Company's intent and ability to finance these borrowings on a
long-term basis. As of December 31, 1994, the unused portion of Lines of
Credit was $37.5 million. On January 5, 1995, $48.5 million of borrowings on
the Lines of Credit were repaid.
The annual principal payments on the Note Agreements and mandatory
principal payments under the Lines of Credit are as follows (in thousands):
Note Lines of
Agreements Credit
---------- --------
1995 $ 13,000
1996 14,100
1997 17,400
1998 18,400
1999 18,400 $97,500
2000 through 2007 26,950
2009 150,000
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All principal and interest payments due under the Note Agreements and
Lines of Credit are nonrecourse to the General Partner.
The Note Agreements and the Lines of Credit contain certain
restrictive covenants, including limitations of harvest levels, sale of assets,
cash distributions and the amount of future indebtedness. The Company was in
compliance with such covenants at December 31, 1994 and 1993.
6. 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 $570 million and $648
million and was carried at $544 million and $570 million as of December 31,
1994 and 1993, respectively.
7. PARTNERS' CAPITAL
The changes in Partners' Capital were as follows (in thousands):
Limited General
Partners DPIs Partner Total
-------- -------- ------- ---------
January 1, 1992 $ 197,688 $ 15,000 $(1,036) $ 211,652
Net Income 59,461 4,760 64,221
Cash Distributions (46,022) (4,558) (50,580)
--------- -------- -------- ---------
December 31, 1992 211,127 15,000 (834) 225,293
Net Income 82,607 8,837 91,444
Cash Distributions (52,791) (8,373) (61,164)
Redemption of DPIs (48,018) (15,000) (63,018)
--------- -------- -------- ---------
December 31, 1993 192,925 (370) 192,555
Net Income 95,887 16,325 112,212
Cash Distributions (65,784) (16,006) (81,790)
--------- -------- -------- ---------
December 31, 1994 $ 223,028 $ $ (51) $ 222,977
--------- -------- -------- ---------
The total number of Units outstanding at December 31, 1994 and 1993
was 40,608,300. At December 31, 1992 there were 1.25 million DPIs (on a
pre-Unit split basis) outstanding. The DPIs were redeemed on August 30, 1993
(see Note 10 to Notes to Combined Financial Statements).
In accordance with the Partnership Agreement, the General Partner is
authorized to make quarterly cash distributions. For the years ended December
31, 1994, 1993 and 1992, the General Partner declared $1.67, $1.38 and $1.17
per Unit, respectively, to be paid to the Partnership's
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Unitholders. If quarterly cash distributions exceed $0.22 per Unit, the
General Partner is provided with an incentive distribution. See Note 10 to
Notes to Combined Financial Statements.
8. INCOME TAXES
The provision for income taxes was as follows (in thousands):
Year Ended December 31,
----------------------------------------------
1994 1993 1992
----------- ---------- ----------
Current Federal . . . . . . . $ 829 $ 49 $ 61
Current State . . . . . . . . 95 56 19
----- ------- -----
Total . . . . . . . . . . . . $ 924 $ 105 $ 80
---- ------- -----
Reconciliation of the federal statutory rate to the effective income
tax rate was as follows:
1994 1993 1992
---- ---- ----
Statutory tax rate . . . . . . . . . . . . . 35.0% 35.0% 34.0%
State tax net of federal tax benefit . . . . 0.1 0.1 0.1
Nontaxable partnership income . . . . . . . . (33.6) (34.3) (33.6)
Net operating loss carryforward . . . . . . (0.7) (0.7) (0.4)
------ ------ ------
Effective tax rate . . . . . . . . . . . 0.8% 0.1% 0.1%
------ ------ ------
9. EMPLOYEE PENSION AND RETIREMENT PLANS
PENSION PLAN. The Company's pension plan is a non-contributory
defined benefit plan covering substantially all employees. The salaried
employee benefits are based on years of credited service and the highest
five-year average compensation levels, and the hourly employee benefits are
based on years of service. Contributions to the plans are based upon the
Projected Unit Credit actuarial funding method and are limited to amounts that
are currently deductible for tax purposes. The Company's pension expense was
$1.9 million, $2.1 million and $1.6 million for 1994, 1993, and 1992,
respectively.
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The following table sets forth the funded status of the Company's
pension plan at December 31 (in thousands):
1994 1993
---- ----
Actuarial present value of benefit obligations:
Vested . . . . . . . . . . . . . . . . . . . . . . . . $ 27,256 $ 28,611
Non-vested . . . . . . . . . . . . . . . . . . . . . . 608 637
------- -------
Accumulated benefit obligation . . . . . . . . . . . . . . 27,864 29,248
------- -------
Projected benefit obligation . . . . . . . . . . . . . . . 34,113 37,514
Plan assets, primarily marketable equity and debt
securities, at fair market value . . . . . . . . . . . . 32,800 31,437
------- -------
Projected benefit obligation in excess of plan assets . . . (1,313) (6,077)
Unrecognized net loss . . . . . . . . . . . . . . . . . . . 4,807 7,934
Prior service cost not yet recognized . . . . . . . . . . . 346 366
------- -------
Prepaid pension cost . . . . . . . . . . . . . . . . . . . $ 3,840 $ 2,223
------- -------
The components of the Company's pension cost were as follows (in thousands):
Year Ended December 31,
-----------------------------------
1994 1993 1992
------ ------- ------
Service cost . . . . . . . . . . . . . . . . $ 1,441 $ 1,374 $ 1,084
Interest cost on a projected obligation . . . 2,709 2,573 2,335
Return on plan assets . . . . . . . . . . . . 432 (3,578) (1,008)
Minimum amortization of loss . . . . . . . . (2,715) 1,763 (784)
------- ------- -------
Net pension cost . . . . . . . . . . . . $ 1,867 $ 2,132 $ 1,627
------- ------- -------
The following assumptions were used in the accounting for the
Company's pension plan as of December 31:
1994 1993 1992
------ ------- ------
Weighted average discount rate . . . . . . . . . . . . 8.5% 7.5% 8.5%
Rate of increase in compensation levels . . . . . . . 5.0% 5.0% 5.0%
Expected long-term rate of return on plan assets . . . 8.0% 8.0% 9.0%
The Company adopted two nonqualified defined benefit pension plans for
executives and key management employees effective January 1, 1993 and January
1, 1994, respectively. The projected
36
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benefit obligation for these plans was $2.7 million and $1.9 million as of
December 31, 1994 and 1993, respectively. The Company's pension expense for
these plans was $0.8 million and $0.4 million for 1994 and 1993, respectively.
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 6 percent of compensation at rates ranging from
35 to 75 percent, depending upon the Company's financial performance. Amounts
charged to expense were $2.0 million, $2.3 million and $2.4 million during
1994, 1993 and 1992, respectively.
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 10 to Notes to Combined
Financial Statements.
10. RELATED-PARTY TRANSACTIONS
The General Partner is responsible for all decisions related to the
management of the Company. The General Partner has a 2 percent general partner
interest in the income and cash distributions of the Partnership, subject to
certain adjustments, and owns 2 percent and 4 percent interests in
Manufacturing and Marketing, respectively. The Company reimburses the General
Partner for the actual cost of administering its businesses. Amounts
reimbursed to the General Partner for such costs were $5.0 million and $4.8
million for the years ended December 31, 1994 and 1992, respectively. During
1993, the Company directly paid the costs associated with administering the
businesses.
Effective October 1, 1993, the General Partner established a Long-Term
Incentive Plan ("LTIP") which provides for granting Unit Appreciation Rights
("UARs") to certain executives of the General Partner. When any of five Unit
Value Targets ("UVTs") established by the LTIP are met through a combination of
Unit market appreciation plus Partnership cash distributions, a percentage of
the UARs is triggered and Units are credited to the executives' accounts. The
performance period under the LTIP during which UVTs may be met ends December
31, 1998 at which time any earned Units will be distributed. Costs incurred by
the General Partner in administering and funding the LTIP are borne by the
Partnership.
The General Partner has granted 1,250,000 UARs, net of forfeitures,
which could result in a total of 628,573 Units being earned under the LTIP if
all UVTs are met. Units in the executives' accounts will earn additional Units
equal to the amount of any subsequent Partnership cash distributions. During
1994, two UVTs were achieved and 141,429 Units were allocated to the
executives' accounts. Total compensation expense with respect to the
achievement of these two UVTs will be approximately $3.8 million of which $0.8
million was recognized in 1994 . The
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remaining compensation expense will be recognized over the remaining
performance period ending December 31, 1998.
Effective January 1, 1994, the General Partner established a Key
Employee Long-Term Incentive Plan ("KLTIP") for certain of its other key
employees. The KLTIP provisions are similar to the LTIP described above, but
different UVTs apply. In 1994, the General Partner granted 368,000 UARs, net
of forfeitures, which could result in a total of 185,036 Units being earned
under the KLTIP if all UVTs are met. Units in the participants' accounts will
earn additional Units equal to the amount of any subsequent Partnership cash
distributions. No UVTs have been achieved under the KLTIP. Costs incurred by
the General Partner in administering and funding the plan are borne by the
Partnership.
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 these
benefit plans. During 1994, the Partnership paid the General Partner for its
purchase of 496,800 Units at a total cost of $12.8 million, of which $10.5
million was funded from current operations and $2.3 million from funds held by
an employee benefit trust of the Partnership.
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 plan are borne by the General Partner.
On August 12, 1993, the Partnership held a special meeting of the
Unitholders to approve a proposal to redeem the 1.25 million DPIs (on a
pre-Unit split basis). Approval was obtained and on August 30, 1993, the
Partnership redeemed the 1.25 million DPIs for $49.50 per DPI (on a pre-Unit
split basis), plus direct costs associated with redeeming the DPIs.
Net income is allocated to the General Partner based on 2 percent 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 1994, 1993 and 1992 were approximately $14.4
million, $7.2 million and $3.5 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, 1994 and 1993,
the Company had a receivable from the General Partner of $176,000
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and $8,000, respectively.
11. 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, 1994 and 1993, the unrecorded amounts of those contract
commitments were approximately $30.4 million and $47.0 million, respectively.
During 1993, the Partnership entered into a log sourcing contract to sell
approximately 950 million board feet ("MMBF") of logs to a customer over a
10-year period ending in 2003, at prevailing market rates. At December 31,
1994 the Partnership had a remaining commitment of approximately 814 MMBF.
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 $1.8
million for 1994 and $1.9 million for 1993 and 1992. The following summarizes
the minimum lease payments (in thousands):
1995 . . . . . . . . . . . $ 1,823
1996 . . . . . . . . . . . 1,656
1997 . . . . . . . . . . . 1,454
1998 . . . . . . . . . . . 1,145
1999 . . . . . . . . . . . 547
Thereafter . . . . . . . . 2,088
------
Total . . . . . . . . . . $ 8,713
------
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12. SEGMENT INFORMATION
YEAR ENDED DECEMBER 31,
-----------------------
(In Thousands)
Revenues 1994 1993 1992
---- ---- ----
Resources $ 324,426 $ 266,084 $ 211,701
Manufacturing 372,248 324,625 294,024
Eliminations (118,017) (89,703) (65,821)
--------- -------- --------
$ 578,657 $ 501,006 $ 439,904
--------- -------- --------
Operating Income
Resources $ 150,730 $ 135,238 $ 86,315
Manufacturing 32,175 11,471 28,164
Other and Eliminations (18,771) (20,152) (16,697)
--------- -------- --------
$ 164,134 $ 126,557 $ 97,782
--------- -------- --------
Depreciation, Depletion and Amortization
Resources $ 36,782 $ 22,570 $ 23,679
Manufacturing 17,361 16,236 15,329
--------- -------- --------
$ 54,143 $ 38,806 $ 39,008
--------- -------- --------
Identifiable Assets
Resources $ 617,942 $ 615,730 $ 370,811
Manufacturing 244,413 236,700 230,392
Eliminations (39,129) (35,888) (15,087)
--------- -------- --------
$ 823,226 $ 816,542 $ 586,116
--------- -------- --------
Capital Expenditures
Resources 7,139 $ 260,534 $ 7,887
Manufacturing 18,698 24,078 17,728
--------- -------- --------
$ 25,837 $ 284,612 $ 25,615
--------- -------- --------
Operating revenues include both sales to unaffiliated customers and
intersegment sales. Intersegment sales prices are determined quarterly, based
upon estimated market prices and terms in effect at that time and are
eliminated in combination. Intersegment sales from the Resources Segment to
the Manufacturing Segment were $118.0 million, $89.7 million and $65.8 million
for 1994, 1993 and 1992, respectively.
Operating income from the Resources Segment includes land sales of
$1.9 million, $7.7 million and $20.3 million, for 1994, 1993 and 1992,
respectively. Combined export revenues, primarily to Pacific Rim countries, as
a percentage of total revenues were 15%, 17% and 16% for 1994, 1993
and 1992, respectively.
During 1994, net sales to one Resources Segment customer were
approximately 11% of combined revenues.
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As disclosed in Note 3 to Notes to Combined Financial Statements,
during 1993 the Company changed its method for valuing inventories from average
cost to LIFO. The change in accounting method lowered 1993 operating income by
$18.0 million for the Manufacturing Segment and was offset by $10.0 million of
lower intercompany profit accumulating in inventory resulting from the change
to LIFO. The cumulative effect of the accounting change and pro forma effects
on prior years' earnings have not been included because such effects are not
reasonably determinable.
13. SUBSEQUENT EVENT
On January 24, 1995, the Board of Directors of the General Partner
authorized the Partnership to make a distribution of $0.43 per Unit for the
fourth quarter of 1994. Total distributions will approximate $22.1 million
(including $4.6 million to the General Partner) and will be paid on March 1,
1995 to Unitholders of record on February 15, 1995.
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42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Unitholders and Directors of the General Partner of
Plum Creek Timber Company, L.P.
We have audited the accompanying combined balance sheet of Plum Creek Timber
Company, L.P. as of December 31, 1994 and 1993, and the related combined
statements of income and cash flows for each of the three years in the period
ended December 31, 1994. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Plum Creek Timber
Company, L.P. at December 31, 1994 and 1993, and the combined results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 3 of the Combined Financial Statements, the Company
changed its method of accounting for inventories effective January 1, 1993.
Coopers & Lybrand L.L.P.
Seattle, Washington
January 24, 1995
42
43
SUPPLEMENTARY FINANCIAL INFORMATION
Combined Quarterly Information
(Unaudited)
(In Thousands, Except per Unit)
1994 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- ---- ------- ------- ------- -------
Operating Revenues . . . . . . . $ 142,457 $ 135,659 $ 147,387 $ 153,154
Operating Income . . . . . . . . . 43,421 35,947 39,799 44,967
Net Income . . . . . . . . . . . . . . 30,651 23,798 26,755 31,008
Net Income Allocable
to Unitholders . . . . . . . . 27,071 20,354 22,147 26,315
Net Income per Unit . . . . . . . $0.67 $0.50 $0.54 $0.65
1993 (1) 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- -------- ------- ------- ------- -------
Operating Revenues . . . . . . . $ 116,422 $ 117,077 $ 129,955 $ 137,552
Operating Income . . . . . . . . 32,701 35,311 29,095 29,450
Net Income . . . . . . . . . . . 23,560 26,264 21,297 20,323
Net Income Allocable
to Unitholders . . . . . . . . 21,889 23,802 18,935 17,981
Net Income per Unit (2) . . . . . $0.49 $ 0.54 $ 0.44 $ 0.45
(1) Effective January 1, 1993, the Company changed its method of valuing logs,
work-in-process and finished goods inventories from the average cost method of
accounting to the LIFO method. The effect of the change in 1993 was to
decrease earnings by $2.0 million, $1.9 million, $2.1 million and $2.0 million
for the first, second, third and fourth quarters of 1993, respectively, or
$0.05, $0.04, $0.05, and $0.04 per Unit, for the same respective periods. The
cumulative effect of this accounting change and the pro forma effects on prior
years' earnings have not been included because such effects are not reasonably
determinable.
(2) Per Unit amounts have been restated for the December 6, 1993 three-for-one
Unit split.
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44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Items 10. and 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
AND EXECUTIVE COMPENSATION, Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT and Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS will be filed by amendment to this Form 10-K on Form 10K/A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION
The following combined financial statements of the Company are
included in Part II, Item 8 of this Form 10-K:
Combined Statement of Income . . . . . . . . . . . . . . . . . 26
Combined Balance Sheet . . . . . . . . . . . . . . . . . . . . 27
Combined Statement of Cash Flows . . . . . . . . . . . . . . . 28
Notes to Combined Financial Statements . . . . . . . . . . . . 29
Report of Independent Accountants . . . . . . . . . . . . . . . 42
Supplementary Financial Information . . . . . . . . . . . . . . 43
(2) FINANCIAL STATEMENT SCHEDULES
Not applicable.
(3) LIST OF EXHIBITS
All required exhibits will be filed by amendment to this Form
10-K on Form 10K/A.
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45
(B) REPORTS ON FORM 8-K
None.
45
46
SIGNATURES
Pursuant to the requirements of Section 13 (or 15(d)) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
PLUM CREEK TIMBER COMPANY, L. P.
--------------------------------
(Registrant)
By: Plum Creek Management Company, L.P.
as General Partner
BY: RICK R. HOLLEY
-------------------------------------
Rick R. Holley
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, in the capacities and on
the dates indicated, on behalf of, as applicable, Plum Creek Management
Company, L.P., the registrant's general partner, and/or PC Advisory Corp. I,
the general partner of the managing general partner of the registrant's general
partner.
By DAVID D. LELAND Chairman of the Board of January 24, 1995
------------------------ Directors, PC Advisory Corp. I
By IAN B. DAVIDSON Director, PC Advisory Corp. I January 24, 1995
------------------------
By GEORGE M. DENNISON Director, PC Advisory Corp. I January 24, 1995
------------------------
By RICK R. HOLLEY President and Chief Executive January 24, 1995
------------------------ Officer, Plum Creek Management
Co., L.P.
Director, PC Advisory Corp. I
By WILLIAM E. OBERNDORF Director, PC Advisory Corp. I January 24, 1995
------------------------
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47
By WILLIAM J. PATTERSON Director, PC Advisory Corp. I January 24, 1995
------------------------
By JOHN H. SCULLY Director, PC Advisory Corp. I January 24, 1995
------------------------
By DIANE M. IRVINE Vice President and Chief Financial January 24, 1995
------------------------ Officer, Plum Creek Management
Co., L.P.
By DAVID A. BROWN Controller, Plum Creek January 24, 1995
------------------------ Management Co., L.P.
47