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EX-32.2 - SECTION 906 CFO CERTIFICATION - PLUM CREEK TIMBER CO INCex32220150930.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - PLUM CREEK TIMBER CO INCex31120150930.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - PLUM CREEK TIMBER CO INCex31220150930.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - PLUM CREEK TIMBER CO INCex32120150930.htm
EX-12.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - PLUM CREEK TIMBER CO INCex12120150930.htm

 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-10239
PLUM CREEK TIMBER COMPANY, INC.
(Exact name of registrant as specified in its charter)
 
Organized in the
State of Delaware
 
I.R.S. Employer Identification No.
91-1912863

601 Union Street, Suite 3100
Seattle, Washington 98101-1374
Telephone: (206) 467-3600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer  x        Accelerated filer    o        Non-accelerated filer  o        Smaller reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o    No   x

The number of outstanding shares of the registrant’s common stock, as of October 30, 2015 was 173,598,748.


 
 
 
 
 





PLUM CREEK TIMBER COMPANY, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter ended September 30, 2015

TABLE OF CONTENTS
 




PART I – FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

PLUM CREEK TIMBER COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
 
Quarter Ended September 30,
(In Millions, Except Per Share Amounts)
 
2015
 
2014
REVENUES:
 
 
 
 
Timber
 
$
186

 
$
200

Real Estate
 
129

 
69

Manufacturing
 
85

 
91

Energy and Natural Resources
 
8

 
8

Other
 
6

 
7

Total Revenues
 
414

 
375

 
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
Cost of Goods Sold:
 
 
 
 
Timber
 
139

 
144

Real Estate
 
43

 
35

Manufacturing
 
76

 
78

Energy and Natural Resources
 
3

 
3

Other
 
4

 
6

Total Cost of Goods Sold
 
265

 
266

Selling, General and Administrative
 
35

 
23

Total Costs and Expenses
 
300

 
289

 
 
 
 
 
Other Operating Income (Expense), net
 
1

 
5

 
 
 
 
 
Operating Income
 
115

 
91

 
 
 
 
 
Earnings from Unconsolidated Entities
 
25

 
15

 
 
 
 
 
Interest Expense, net:
 
 
 
 
Interest Expense (Debt Obligations to Unrelated Parties)
 
27

 
27

Interest Expense (Note Payable to Timberland Venture)
 
14

 
14

Total Interest Expense, net
 
41

 
41

 
 
 
 
 
Income before Income Taxes
 
99

 
65

 
 
 
 
 
Provision (Benefit) for Income Taxes
 
(1
)
 
4

 
 
 
 
 
Net Income
 
$
100

 
$
61

 
 
 
 
 
PER SHARE AMOUNTS:
 
 
 
 
 
 
 
 
 
Net Income per Share – Basic
 
$
0.58

 
$
0.34

Net Income per Share – Diluted
 
$
0.58

 
$
0.34

 
 
 
 
 
Dividends Declared – per Common Share Outstanding
 
$
0.44

 
$
0.44

 
 
 
 
 
Weighted-Average Number of Shares Outstanding
 
 
 
 
– Basic
 
174.3

 
176.8

– Diluted
 
174.6

 
177.1

 
 
 
 
 
 
 
 
 
 
SUPPLEMENTAL INCOME STATEMENT INFORMATION:
 
 
 
 
    Equity Earnings from Timberland Venture
 
$
19

 
$
16

    Equity Earnings (Loss) from Real Estate Development Ventures
 
6

 
(1
)
Earnings from Unconsolidated Entities
 
$
25

 
$
15


See accompanying Notes to Consolidated Financial Statements




3



PLUM CREEK TIMBER COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
 
 
 
 
 
 
Nine Months Ended September 30,
(In Millions, Except Per Share Amounts)
 
2015
 
2014
REVENUES:
 
 
 
 
Timber
 
$
548

 
$
563

Real Estate
 
263

 
169

Manufacturing
 
271

 
275

Energy and Natural Resources
 
24

 
26

Other
 
16

 
15

Total Revenues
 
1,122

 
1,048

 
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
Cost of Goods Sold:
 
 
 
 
Timber
 
405

 
407

Real Estate
 
144

 
75

Manufacturing
 
236

 
241

Energy and Natural Resources
 
8

 
8

Other
 
14

 
14

Total Cost of Goods Sold
 
807

 
745

Selling, General and Administrative
 
100

 
82

Total Costs and Expenses
 
907

 
827

 
 
 
 
 
Other Operating Income (Expense), net
 
6

 
9

 
 
 
 
 
Operating Income
 
221

 
230

 
 
 
 
 
Earnings from Unconsolidated Entities
 
66

 
44

 
 
 
 
 
Interest Expense, net:
 
 
 
 
Interest Expense (Debt Obligations to Unrelated Parties)
 
81

 
81

Interest Expense (Note Payable to Timberland Venture)
 
43

 
43

Total Interest Expense, net
 
124

 
124

 
 
 
 
 
Income before Income Taxes
 
163

 
150

 
 
 
 
 
Provision (Benefit) for Income Taxes
 

 
4

 
 
 
 
 
Net Income
 
$
163

 
$
146

 
 
 
 
 
PER SHARE AMOUNTS:
 
 
 
 
 
 
 
 
 
Net Income per Share – Basic
 
$
0.93

 
$
0.82

Net Income per Share – Diluted
 
$
0.93

 
$
0.82

 
 
 
 
 
Dividends Declared – per Common Share Outstanding
 
$
1.32

 
$
1.32

 
 
 
 
 
Weighted-Average Number of Shares Outstanding
 
 
 
 
– Basic
 
175.2

 
177.0

– Diluted
 
175.5

 
177.3

 
 
 
 
 
 
 
 
 
 
SUPPLEMENTAL INCOME STATEMENT INFORMATION:
 
 
 
 
Equity Earnings from Timberland Venture
 
$
59

 
$
48

Equity Earnings (Loss) from Real Estate Development Ventures
 
7

 
(4
)
Earnings from Unconsolidated Entities
 
$
66

 
$
44


See accompanying Notes to Consolidated Financial Statements

4


PLUM CREEK TIMBER COMPANY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

 
 
Quarter Ended September 30,
(In Millions)
 
2015
 
2014
NET INCOME
 
$
100

 
$
61

 
 
 
 
 
OTHER COMPREHENSIVE INCOME BEFORE INCOME TAXES:
 
 
 
 
  Defined Benefit Pension Plans:
 
 
 
 
       Amortization of Actuarial Loss Reclassified to Pension Expense
 
1

 

  Unrealized Gains (Losses) on Grantor Trust Assets:
 
 
 
 
       Unrealized Holding Gains (Losses) Arising During Period
 
(3
)
 
2

       Less: Reclassification for Amounts Recognized in Net Income
 

 

 
 
 
 
 
Other Comprehensive Income (Loss) Before Tax
 
(2
)
 
2

 
 
 
 
 
Income Tax Expense (Benefit) Related to Items of Other Comprehensive Income
 

 

 
 
 
 
 
Other Comprehensive Income (Loss) After Tax
 
(2
)
 
2

 
 
 
 
 
Comprehensive Income
 
$
98

 
$
63

 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
(In Millions)
 
2015
 
2014
NET INCOME
 
$
163

 
$
146

 
 
 
 
 
OTHER COMPREHENSIVE INCOME BEFORE INCOME TAXES:
 
 
 
 
  Defined Benefit Pension Plans:
 
 
 
 
       Amortization of Actuarial Loss Reclassified to Pension Expense
 
3

 
1

  Unrealized Gains (Losses) on Grantor Trust Assets:
 
 
 
 
       Unrealized Holding Gains (Losses) Arising During Period
 
(4
)
 
1

       Less: Reclassification for Amounts Recognized in Net Income
 
(1
)
 

 
 
 
 
 
Other Comprehensive Income (Loss) Before Tax
 
(2
)
 
2

 
 
 
 
 
Income Tax Expense (Benefit) Related to Items of Other Comprehensive Income
 

 

 
 
 
 
 
Other Comprehensive Income (Loss) After Tax
 
(2
)
 
2

 
 
 
 
 
Comprehensive Income
 
$
161

 
$
148

 
 
 
 
 

See accompanying Notes to Consolidated Financial Statements


5


PLUM CREEK TIMBER COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
(In Millions, Except Per Share Amounts)
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and Cash Equivalents
 
$
81

 
$
92

Accounts Receivable
 
43

 
38

Inventories
 
59

 
61

Deferred Tax Asset
 
6

 
6

Assets Held for Sale
 
39

 
98

Other Current Assets
 
16

 
15

 
 
244

 
310

 
 
 
 
 
Timber and Timberlands, net
 
3,924

 
4,009

Minerals and Mineral Rights, net
 
283

 
289

Property, Plant and Equipment, net
 
113

 
120

Equity Investment in Timberland Venture
 
217

 
217

Equity Investment in Real Estate Development Ventures
 
107

 
126

Deferred Tax Asset
 
28

 
23

Investment in Grantor Trusts (at Fair Value)
 
45

 
48

Other Assets
 
43

 
45

Total Assets
 
$
5,004

 
$
5,187

 
 
 
 
 
LIABILITIES
 
 
 
 
Current Liabilities:
 
 
 
 
Current Portion of Long-Term Debt
 
$
439

 
$
439

Line of Credit
 
42

 
95

Accounts Payable
 
36

 
27

Interest Payable
 
32

 
22

Wages Payable
 
21

 
31

Taxes Payable
 
17

 
10

Deferred Revenue
 
30

 
23

Other Current Liabilities
 
16

 
10

 
 
633

 
657

 
 
 
 
 
Long-Term Debt
 
1,976

 
1,976

Note Payable to Timberland Venture
 
783

 
783

Other Liabilities
 
106

 
100

Total Liabilities
 
3,498

 
3,516

 
 
 
 
 
Commitments and Contingencies
 

 

 
 
 
 
 
STOCKHOLDERS’ EQUITY
 
 
 
 
Preferred Stock, $0.01 Par Value, Authorized Shares – 75.0, Outstanding – None
 

 

Common Stock, $0.01 Par Value, Authorized Shares – 300.6, Outstanding (net of Treasury Stock) – 173.6 at September 30, 2015 and 175.9 at December 31, 2014
 
2

 
2

Additional Paid-In Capital
 
2,963

 
2,955

Retained Earnings (Accumulated Deficit)
 
(340
)
 
(271
)
Treasury Stock, at Cost, Common Shares – 30.8 at September 30, 2015 and 28.3 at December 31, 2014
 
(1,094
)
 
(992
)
Accumulated Other Comprehensive Income (Loss)
 
(25
)
 
(23
)
Total Stockholders’ Equity
 
1,506

 
1,671

Total Liabilities and Stockholders’ Equity
 
$
5,004

 
$
5,187


See accompanying Notes to Consolidated Financial Statements

6


PLUM CREEK TIMBER COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
 
Nine Months Ended September 30,
(In Millions)
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net Income
 
$
163

 
$
146

Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:
 
 
 
 
Depreciation, Depletion and Amortization (Includes $2 MDF Fire Impairment Loss in 2014)
 
99

 
101

Basis of Real Estate Sold
 
131

 
60

Earnings from Unconsolidated Entities
 
(66
)
 
(44
)
Distributions from Timberland Venture
 
59

 
57

Distributions from Real Estate Development Ventures
 
7

 

Deferred Income Taxes
 
(5
)
 
2

Working Capital Changes
 
25

 
3

Other
 
9

 
(3
)
Net Cash Provided By (Used In) Operating Activities
 
422

 
322

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Capital Expenditures, Excluding Timberland Acquisitions (Includes $9 MDF Fire Replacement Capital in 2014)
 
(61
)
 
(65
)
Timberlands Acquired
 
(7
)
 

Contributions to Real Estate Development Ventures
 
(5
)
 
(9
)
Distributions from Real Estate Development Ventures
 
24

 
5

Insurance Recoveries (Property Damage)
 
2

 
3

Sales/(Purchases) of Marketable Securities, net
 
1

 

Other
 
(1
)
 

Net Cash Provided By (Used In) Investing Activities
 
(47
)
 
(66
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Dividends
 
(232
)
 
(234
)
Borrowings on Line of Credit
 
374

 
985

Repayments on Line of Credit
 
(427
)
 
(1,300
)
Proceeds from Stock Option Exercises
 
1

 
2

Acquisition of Treasury Stock
 
(102
)
 
(52
)
Net Cash Provided By (Used In) Financing Activities
 
(386
)
 
(599
)
 
 
 
 
 
Increase (Decrease) In Cash and Cash Equivalents
 
(11
)
 
(343
)
Cash and Cash Equivalents:
 
 
 
 
Beginning of Period
 
92

 
433

 
 
 
 
 
End of Period
 
$
81

 
$
90


See accompanying Notes to Consolidated Financial Statements


7

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



Note 1. Basis of Presentation

General. When we refer to “Plum Creek,” “the company,” “we,” “us,” or “our,” we mean Plum Creek Timber Company, Inc., a Delaware Corporation and a real estate investment trust, or “REIT,” and all of its wholly-owned consolidated subsidiaries.

The consolidated financial statements include all of the accounts of Plum Creek and its subsidiaries. At September 30, 2015, the company owned and managed approximately 6.3 million acres of timberlands in the Northwest, Southern, and Northeast United States. Included in the 6.3 million acres are approximately 675,000 acres of higher value timberlands, which are expected to be sold and/or developed over the next fifteen years for recreational, conservation or residential purposes. Included within the 675,000 acres of higher value timberlands are approximately 500,000 acres we expect to sell for recreational uses, approximately 100,000 acres we expect to sell for conservation and approximately 75,000 acres that are identified as having development potential. In addition, the company has approximately 200,000 acres of non-strategic timberlands, which are expected to be sold in smaller acreage transactions over the near and medium term. In the meantime, all of our timberlands continue to be managed productively in our business of growing and selling timber. At September 30, 2015, the company owned six wood product conversion facilities in the Northwest United States. In March 2015, due to the loss of a significant customer, the company permanently closed its remanufacturing facility in Meridian, Idaho. In October 2015, this facility was sold for $4 million, which approximated its net book value.

Plum Creek has elected to be taxed as a REIT under sections 856-860 of the United States Internal Revenue Code and, as such, generally does not pay corporate-level income tax. However, the company conducts certain non-REIT activities through various taxable REIT subsidiaries, which are subject to corporate-level income tax. These activities include our manufacturing operations, the harvesting and selling of logs, the development and/or sale of some of our higher value timberlands, timber and wood fiber procurement services, coal leases, and the company's investment in real estate development ventures. Plum Creek’s overall effective tax rate is lower than the federal statutory corporate rate due to Plum Creek’s status as a REIT.

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

The consolidated financial statements included in this Form 10-Q are unaudited and do not contain all of the information required by U.S. generally accepted accounting principles to be included in a full set of financial statements. The consolidated balance sheet at December 31, 2014 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The audited financial statements in the company’s 2014 Annual Report on Form 10-K include a summary of significant accounting policies of the company and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of operations for such periods have been included in this Form 10-Q. All such adjustments are of a normal and recurring nature. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year.

Reclassifications. Certain prior year amounts have been reclassified to conform to the 2015 presentation. The reclassifications had no impact on operating income or net income.


 

8

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


Note 2. Earnings Per Share

The following table sets forth the reconciliation of basic and diluted earnings per share for the quarterly and nine-month periods ended September 30 (in millions, except per share amounts):
 
Quarter Ended September 30,
 
2015
 
2014
Net Income Available to Common Stockholders
$
100

 
$
61

Denominator for Basic Earnings per Share
174.3

 
176.8

Effect of Dilutive Securities – Stock Options
0.2

 
0.2

Effect of Dilutive Securities – Restricted Stock Units and Value Management Plan
0.1

 
0.1

Denominator for Diluted Earnings per Share – Adjusted for Dilutive Securities
174.6

 
177.1

Per Share Amounts:
 
 
 
Net Income Per Share – Basic
$
0.58

 
$
0.34

Net Income Per Share – Diluted
$
0.58

 
$
0.34

 
 
 
 
 
Nine Months Ended September 30,
 
2015
 
2014
Net Income Available to Common Stockholders
$
163

 
$
146

Denominator for Basic Earnings per Share
175.2

 
177.0

Effect of Dilutive Securities – Stock Options
0.2

 
0.2

Effect of Dilutive Securities – Restricted Stock Units and Value Management Plan
0.1

 
0.1

Denominator for Diluted Earnings per Share – Adjusted for Dilutive Securities
175.5

 
177.3

Per Share Amounts:
 
 
 
Net Income Per Share - Basic
$
0.93

 
$
0.82

Net Income Per Share - Diluted
$
0.93

 
$
0.82


Under the company's Stock Incentive Plan, the company grants restricted stock units, which prior to vesting, are entitled to non-forfeitable cash payments equal to dividends paid on the company's common shares. These awards are considered participating securities for purposes of computing basic and diluted earnings per share.

Antidilutive options were excluded for certain periods from the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares. Antidilutive options were as follows for the quarterly periods and nine-month periods ended September 30 (shares in millions): 
 
Quarter Ended September 30,
 
2015
 
2014
Number of Options
0.3
 
Range of Exercise Prices
$42.22 to $43.23
 
N/A
Expiration on or before
May 2018
 
N/A
 
 
 
 
 
Nine Months Ended September 30,
 
2015
 
2014
Number of Options
0.1
 
Range of Exercise Prices
$42.22 to $43.23
 
N/A
Expiration on or before
May 2018
 
N/A


9

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


Note 3. Inventories

Inventories, accounted for using the lower of average cost or market, consisted of the following (in millions): 
 
September 30, 2015
 
December 31, 2014
Raw Materials (primarily logs)
$
13

 
$
12

Work-In-Process
2

 
3

Finished Goods
29

 
31

 
44

 
46

Supplies
15

 
15

Total
$
59

 
$
61



Note 4. Timber and Timberlands

Timber and Timberlands consisted of the following (in millions): 
 
September 30, 2015
 
December 31, 2014
Timber and Logging Roads, net
$
2,474

 
$
2,518

Timber Deeds, net
71

 
83

Timberlands
1,379

 
1,408

Timber and Timberlands, net
$
3,924

 
$
4,009



Note 5. Property, Plant and Equipment

Property, Plant and Equipment consisted of the following (in millions): 
 
September 30, 2015
 
December 31, 2014
Land, Buildings and Improvements
$
93

 
$
97

Machinery and Equipment
333

 
331

 
426

 
428

Accumulated Depreciation
(313
)
 
(308
)
Property, Plant and Equipment, net
$
113

 
$
120




10

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


Note 6. Income Taxes

Plum Creek has elected to be taxed as a REIT under sections 856-860 of the United States Internal Revenue Code. A REIT generally does not pay corporate-level income tax if it distributes 100% of its taxable income to shareholders and satisfies other organizational and operational requirements as set forth in the Internal Revenue Code. If a company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years.

Plum Creek operates as a REIT through various wholly-owned subsidiaries and a joint venture partnership. The activities of the operating partnerships and joint venture partnership consist primarily of sales of standing timber under pay-as-cut sales contracts.

Plum Creek conducts certain activities through various wholly-owned taxable REIT subsidiaries, which are subject to corporate-level income tax. These activities include the company's manufacturing operations, the harvesting and sale of logs, the development and/or sale of some of the company's higher value timberlands, timber and wood fiber procurement services, coal leases, and the company's investment in real estate development ventures. Plum Creek's taxable REIT subsidiaries file a consolidated federal income tax return.

Prior to 2011, Plum Creek was generally subject to corporate-level tax (built-in gains tax) when the company made a taxable disposition of certain properties acquired in a 2001 merger. The built-in gains tax applied to gains recognized from such asset sales to the extent that the fair value of the property exceeded its tax basis at the merger date. Built-in gains tax was generally not payable on dispositions of property to the extent the proceeds from such dispositions were reinvested in qualifying like-kind replacement property.

The company's 2008 federal income tax return is currently being audited by the Internal Revenue Service (“IRS”). The IRS has proposed an adjustment to the company's U.S. federal income tax treatment of the Timberland Venture formation transaction, which occurred on October 1, 2008, on the basis that the transfer of the timberlands to Southern Diversified Timber, LLC was a taxable transaction to the company at the time of the transfer rather than a nontaxable capital contribution to the Timberland Venture. The company has filed a protest with IRS Appeals. Based on recent discussions with IRS Appeals, the company does not expect to reach a resolution with IRS Appeals and plans to file a petition in the United States Tax Court.

If the IRS's position is upheld on judicial appeal, it could result in a maximum built-in gains tax liability of approximately $100 million. In addition, the company could be required to accelerate the distribution to its stockholders of up to $600 million of gain from the transaction. The company expects that as much as 80% of any such distribution could be made with the company's common stock, and stockholders would be subject to tax on the distribution at the applicable capital gains tax rate. The company would also be required to pay interest on the undistributed gain, which would be substantial, and, if applicable, penalties.

We believe the transfer of the timberlands was a nontaxable contribution to the Timberland Venture and not a taxable transaction. We have not accrued income taxes for financial reporting purposes with respect to this matter and do not believe it is reasonably possible any material accrual will be made within the next twelve months. We are confident in our position and believe that the proposed re-characterization of the Timberland Venture formation transaction by the IRS will ultimately be unsuccessful. We intend to vigorously contest this re-characterization.



11

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


Note 7. Borrowings

Debt consisted of the following (in millions): 
 
September 30, 2015
 
December 31, 2014
Variable Rate Debt
 
 
 
Term Credit Agreement (A)
$
225

 
$
225

Revolving Line of Credit (B)
42

 
95

Fixed Rate Debt
 
 
 
Senior Notes
1,330

 
1,330

Installment Note Payable
860

 
860

Note Payable to Timberland Venture
783

 
783

Total Debt
3,240

 
3,293

Less:
 
 
 
Current Portion of Long-Term Debt
439

 
439

Line of Credit
42

 
95

Long-Term Portion
$
2,759

 
$
2,759


(A)
The company has a $225 million term credit agreement that matures on April 3, 2019. The interest rate on the $225 million term credit agreement was 1.69% and 1.67% as of September 30, 2015 and December 31, 2014, respectively. After giving effect to expected patronage distributions, the effective net interest rate on the term loan was approximately 1% as of both September 30, 2015 and December 31, 2014.

(B)
The weighted-average interest rate for the borrowings on the line of credit was 1.37% and 1.34% as of September 30, 2015 and December 31, 2014, respectively. As of September 30, 2015, we had $42 million of borrowings and $1 million of standby letters of credit outstanding; $657 million remained available for borrowing under our $700 million line of credit. As of October 1, 2015, all of the borrowings outstanding under our line of credit were repaid.




12

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


Note 8. Stockholders’ Equity

The changes in the company’s stockholders’ equity accounts were as follows during 2015 (in millions): 
 
Common Stock
 
 
 
Retained
Earnings (Accumulated Deficit)
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
Shares
 
Dollars
 
Paid-in
Capital
 
 
Treasury
Stock
 
Total
Equity
January 1, 2015
175.9

 
$
2

 
$
2,955

 
$
(271
)
 
$
(992
)
 
$
(23
)
 
$
1,671

Net Income
 
 
 
 
 
 
42

 
 
 
 
 
42

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
(1
)
 
(1
)
Dividends
 
 
 
 
 
 
(77
)
 
 
 
 
 
(77
)
Stock Option Exercises

 

 
1

 
 
 
 
 
 
 
1

Shares Issued under Stock Incentive Plans
0.2

 

 

 
 
 
 
 
 
 

Share-based Compensation
 
 
 
 
3

 
 
 
 
 
 
 
3

Common Stock Repurchased
(0.5
)
 

 
 
 
 
 
(21
)
 
 
 
(21
)
March 31, 2015
175.6

 
$
2

 
$
2,959

 
$
(306
)
 
$
(1,013
)
 
$
(24
)
 
$
1,618

Net Income
 
 
 
 
 
 
21

 
 
 
 
 
21

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
1

 
1

Dividends
 
 
 
 
 
 
(78
)
 
 
 
 
 
(78
)
Share-based Compensation
 
 
 
 
2

 
 
 
 
 
 
 
2

Common Stock Repurchased
(0.7
)
 

 
 
 
 
 
(31
)
 
 
 
(31
)
June 30, 2015
174.9

 
$
2

 
$
2,961

 
$
(363
)
 
$
(1,044
)
 
$
(23
)
 
$
1,533

Net Income
 
 
 
 
 
 
100

 
 
 
 
 
100

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
(2
)
 
(2
)
Dividends
 
 
 
 
 
 
(77
)
 
 
 
 
 
(77
)
Share-based Compensation
 
 
 
 
2

 
 
 
 
 
 
 
2

Common Stock Repurchased
(1.3
)
 

 
 
 
 
 
(50
)
 
 
 
(50
)
September 30, 2015
173.6

 
$
2

 
$
2,963

 
$
(340
)
 
$
(1,094
)
 
$
(25
)
 
$
1,506



13

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


The changes in the company’s accumulated other comprehensive income (loss) by component, net of tax, were as follows during 2015 (in millions): 
 
Net Unrealized Holding Gain (Loss) (A)
 
Defined Benefit Plan Actuarial Net Loss (B)
 
Gain on Cash Flow Hedge
 
Total
January 1, 2015
$
14

 
$
(42
)
 
$
5

 
$
(23
)
Other Comprehensive Income (Loss) before Reclassifications
(1
)
 

 

 
(1
)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
(1
)
 
1

 

 

March 31, 2015
$
12

 
$
(41
)
 
$
5

 
$
(24
)
Other Comprehensive Income (Loss) before Reclassifications

 

 

 

Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)

 
1

 

 
1

June 30, 2015
$
12

 
$
(40
)
 
$
5

 
$
(23
)
Other Comprehensive Income (Loss) before Reclassifications
(3
)
 

 

 
(3
)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)

 
1

 

 
1

September 30, 2015
$
9

 
$
(39
)
 
$
5

 
$
(25
)

(A)
Unrealized holding gains are reclassified to Other Operating Income (Expense), net in the Consolidated Statements of Income when the related available for sale securities are sold.

(B)
Amortization of actuarial gains and losses on the company's defined benefit pension plans is included in the computation of pension cost. See Note 10 of the Notes to Consolidated Financial Statements.



14

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


Note 9. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis. The company’s fair value measurements of its cash equivalents, available-for-sale securities, and trading securities, measured on a recurring basis, are categorized as Level 1 measurements under the fair value hierarchy in the Accounting Standards Codification. A Level 1 valuation is based on quoted prices in active markets at the measurement date for identical unrestricted assets or liabilities. Summarized below are the Level 1 assets reported in the company’s financial statements at fair value, measured on a recurring basis (in millions): 
 
Balance at
September 30, 2015
 
Fair Value Measurements
at Reporting Date Using
Quoted Prices in Active
Markets of Identical Assets
(Level 1 Measurements)
Cash Equivalents (A)
$
80

 
$
80

Available-for-Sale Securities (B)
40

 
40

Trading Securities (B)
5

 
5

Total
$
125

 
$
125

 
 
 
 
 
Balance at
December 31, 2014
 
Fair Value Measurements
at Reporting Date Using
Quoted Prices in Active
Markets of Identical Assets
(Level 1 Measurements)
Cash Equivalents (A)
$
90

 
$
90

Available-for-Sale Securities (B)
43

 
43

Trading Securities (B)
5

 
5

Total
$
138

 
$
138

 
(A)
Consists of several money market funds and is included in the $81 million and $92 million of Cash and Cash Equivalents in the Consolidated Balance Sheets at September 30, 2015 and December 31, 2014, respectively.

(B)
Consists of several mutual funds and is included in Investment in Grantor Trusts in the Consolidated Balance Sheets at September 30, 2015 and December 31, 2014. At September 30, 2015, investments in these mutual funds were approximately 45% in domestic (U.S.) equities, 25% in international equities and 30% in debt securities.

Available-for-Sale Securities. Certain investments in the grantor trusts relate to the company's non-qualified pension plans and are classified as available-for-sale securities. The company has invested in various money market, debt and equity mutual funds and plans to use these investments to fund its non-qualified pension obligations. Unrealized holding gains and losses are included as a component of accumulated other comprehensive income. The company records changes in unrealized holding gains and losses in Other Comprehensive Income, unless an other than temporary impairment has occurred, which is then charged to expense. Changes in the fair value of available-for-sale securities were not material to the company's financial position or results of operations for the quarters and nine-month periods ended September 30, 2015 and September 30, 2014. As of both September 30, 2015 and December 31, 2014, the amortized cost of the available-for-sale securities was approximately $31 million. See Note 8 of the Notes to Consolidated Financial Statements.

Trading Securities. Certain investments in the grantor trusts relate to the company's deferred compensation plans and are classified as trading securities. Deferred compensation amounts are invested in various money market, debt and equity mutual funds. The company plans to use these investments to fund deferred compensation obligations. Realized gains and losses and changes in unrealized gains and losses (and a corresponding amount of compensation expense) are recognized in the company's Consolidated Statements of Income. Deferred compensation obligations are included in Other Liabilities and were $5 million at both September 30, 2015 and December 31, 2014. Changes in the fair value of trading securities were not material to the company's financial position or results of operations for the quarters and nine-month periods ended September 30, 2015 and September 30, 2014.


15

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


Other Instruments. Summarized below are the carrying amount and fair value of the company's debt (estimated using the discounted cash flow method) along with the categorization under the fair value hierarchy in the Accounting Standards Codification (in millions): 
 
 
 
 
Fair Value at September 30, 2015
 
 
Carrying Amount at September 30, 2015
 
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Public Debt (A)
 
$
1,330

 
$

 
$
1,377

 
$

 
$
1,377

Term Credit Agreement (B)
 
225

 

 
225

 

 
225

Line of Credit (C)
 
42

 

 
42

 

 
42

Installment Note Payable (D)
 
860

 

 
905

 

 
905

Note Payable to Timberland Venture (E)
 
783

 

 

 
885

 
885

Total Debt
 
$
3,240

 
$

 
$
2,549

 
$
885

 
$
3,434

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value at December 31, 2014
 
 
Carrying Amount at
December 31, 2014
 
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Public Debt (A)
 
$
1,330

 
$

 
$
1,398

 
$

 
$
1,398

Term Credit Agreement (B)
 
225

 

 
225

 

 
225

Line of Credit (C)
 
95

 

 
95

 

 
95

Installment Note Payable (D)
 
860

 

 
906

 

 
906

Note Payable to Timberland Venture (E)
 
783

 

 

 
892

 
892

Total Debt
 
$
3,293

 
$

 
$
2,624

 
$
892

 
$
3,516


(A)
Fair value of the company's Public Debt (publicly issued Senior Notes) is estimated using multiple market quotes for the company's public bonds.

(B)
Fair value is estimated by adjusting the spread over LIBOR to a current market quote for comparable debt.

(C)
Fair value is estimated by adjusting the spread over LIBOR to a current market quote for comparable credit lines.

(D)
Fair value is estimated by adjusting the spread over the applicable Treasury rate to a current market quote for comparable debt.

(E)
Fair value is estimated by using market quotes for the company's Public Debt adjusted by an estimated risk premium for holding company debt and the different maturity.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis. There were no fair value measurements of assets or liabilities measured on a nonrecurring basis during the nine-month periods ended September 30, 2015 and 2014.



16

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


Note 10. Employee Pension Plans

The components of pension cost were as follows for the quarterly and nine-month periods ended September 30 (in millions): 
 
Quarter Ended September 30,
 
2015
 
2014
Service Cost
$
2

 
$
2

Interest Cost
2

 
2

Expected Return on Plan Assets
(2
)
 
(2
)
Recognized Actuarial Loss
1

 

Total Pension Cost
$
3

 
$
2

 
 
 
 
 
Nine Months Ended September 30,
 
2015
 
2014
Service Cost
$
6

 
$
6

Interest Cost
7

 
6

Expected Return on Plan Assets
(8
)
 
(7
)
Recognized Actuarial Loss
3

 
1

Total Pension Cost
$
8

 
$
6



Note 11. Commitments and Contingencies

Contingencies. The company is subject to regulations regarding forest, harvest and manufacturing practices and is, from time to time, involved in various legal proceedings, including, but not limited to, environmental and regulatory matters, incidental to its business. Reserves have been established for any probable losses. Except as discussed in Note 6, management does not believe that these matters, individually or in the aggregate, are material. However, it is possible that one or more of these matters could become material in the future, and an unfavorable outcome in one or more of these matters could have a material negative financial impact on the company. See Note 6 of the Notes to Consolidated Financial Statements for a discussion of a tax proceeding involving the company and its consolidated subsidiaries.


Note 12. Variable Interest Entities

Real Estate Development Ventures. MWV-Charleston Land Partners, LLC (“MWV-CLP”) is a variable interest entity. The primary activities of MWV-CLP are the active development of residential and commercial real estate on approximately 22,000 acres ("Class A Properties") and the identification, entitlement, marketing, and selling of approximately 57,000 acres of high-value rural and development-quality lands ("Class B Properties"). MWV-CLP is managed by an affiliate of WestRock Company (formerly MeadWestvaco Corporation). MWV-CLP is financed by regular capital calls from the manager of MWV-CLP in proportion to a member’s ownership interest. If a member does not make a capital contribution, the member’s ownership interest is diluted. The company made an initial capital contribution of $152 million in 2013. Also, during the years 2014 to 2020, the company agreed to make additional capital contributions of at least $48 million in connection with its interest in the Class B Properties, of which $34 million remained outstanding as of September 30, 2015. The company does not intend to provide any other sources of financing for MWV-CLP. We account for our interest in MWV-CLP under the equity method of accounting.

The company is not the primary beneficiary of MWV-CLP. The company considers the activities that most significantly impact the economic performance of MWV-CLP to be the day-to-day operating decisions along with the oversight responsibilities for the real estate development projects and properties. WestRock Company has the power to direct the activities of MWV-CLP that most significantly impact its economic performance through its ability to manage the day-to-day operations of MWV-CLP. WestRock Company also has the ability to control all management decisions associated with the 22,000 acres of the Class A Properties through its majority representation on the board of directors for the Class A Properties and its joint control of the Class B Properties due to its equal representation on the board of directors for the Class B Properties.

The carrying amount of our investment in MWV-CLP is $107 million at September 30, 2015 and $126 million at December 31, 2014, and it is reported in the Consolidated Balance Sheets as Equity Investment in Real Estate Development Ventures. Our

17

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


maximum exposure to loss is $107 million, our carrying amount of our investment, plus any future capital contributions we elect to contribute to MWV-CLP. At a minimum, the company has agreed to make capital contributions in connection with its interest in the Class B Properties of $34 million over the next six years. The company has a 50% ownership interest in the Class B Properties, and therefore, is entitled to 50% of the earnings or losses associated with these properties. Additionally, the company has a 4% ownership interest in the Class A Properties in which it is generally entitled to 4% of the earnings or losses associated with these properties.

Timberland Venture. In 2008, the company contributed 454,000 acres of timberlands located in its Southern Resources Segment to Southern Diversified Timber, LLC (“the Timberland Venture”) in exchange for a $705 million preferred interest and a 9% common interest valued at $78 million. The Timberland Venture’s other member, an affiliate of The Campbell Group LLC, contributed $783 million of cash in exchange for 91% of the Timberland Venture’s common interest. Following the contribution, the company borrowed $783 million from the Timberland Venture (“Note Payable to Timberland Venture”). The company accounts for its interest in the Timberland Venture under the equity method of accounting.
 
The Timberland Venture is a variable interest entity. The primary operating activities of the Timberland Venture consist of owning timberlands and entering into cutting contracts with an affiliate of the other member. Besides quarterly interest payments on the Note Payable to Timberland Venture, the company has not provided financing or other support to the venture. The venture generates sufficient cash from operating activities to finance its operations.

We are not the primary beneficiary of the Timberland Venture. The company does not manage the day-to-day operations of the Timberland Venture, has only limited protective rights and its involvement is generally limited to receiving distributions on its preferred and common interests. We are not the primary beneficiary because we do not direct the activities that most significantly impact the Timberland Venture’s economic performance. We believe that the activities that most significantly impact the Timberland Venture’s economic performance include managing the timberlands along with the timing and extent of the harvesting activities, neither of which we control.

The carrying amount of the investment is $217 million at both September 30, 2015 and December 31, 2014, respectively, and it is reported in the Consolidated Balance Sheets as Equity Investment in Timberland Venture. Our maximum exposure to loss is $217 million, the carrying amount of the investment. Generally, losses are first allocated among the common interests based on positive capital accounts in which we hold a 9% common interest. No losses are allocated to our preferred interest ($705 million) until the common interests have absorbed losses of approximately $861 million.


Note 13. Summarized Income Statement Information of the Timberland Venture

The earnings of the Timberland Venture are a significant component of consolidated earnings. See Note 12 of the Notes to Consolidated Financial Statements. Equity earnings for the Timberland Venture were $59 million for the nine-month period ending September 30, 2015 and were $48 million for the nine-month period ending September 30, 2014. Equity earnings includes the amortization of the difference between the book value of the company’s investment and its proportionate share of the Timberland Venture’s net assets. For the nine-month periods ended September 30, 2015 and September 30, 2014, amortization of basis difference was $15 million and $7 million, respectively. Furthermore, interest expense in connection with the loan from the Timberland Venture was $43 million for each of the nine-month periods ended September 30, 2015 and 2014. The table below presents summarized income statement information for the Timberland Venture (in millions): 
 
Nine Months Ended September 30,
 
2015
 
2014
Revenues
$
17

 
$
15

Cost of Goods Sold (A)
12

 
14

Selling, General and Administrative Expenses
4

 
3

Operating Income (Loss)
1

 
(2
)
Interest Income, net
43

 
43

Net Income before Allocation to Preferred and Common Interests
$
44

 
$
41


(A)
Cost of Goods Sold includes Depreciation, Depletion and Amortization of $11 million and $13 million for the nine-month periods ended September 30, 2015 and 2014, respectively.

18

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


Note 14. Segment Information

The tables below present information about reported segments for the quarterly and nine-month periods ended September 30 (in millions): 
 
Northern
Resources
 
Southern
Resources
 
Real
Estate
 
Manufacturing(A)
 
Energy and Natural Resources
 
Other(B)
 
Total(C)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
External Revenues
$
50

 
$
136

 
$
129

 
$
85

 
$
8

 
$
6

 
$
414

Intersegment Revenues
5

 

 

 

 

 

 
5

Depreciation, Depletion and Amortization
7

 
21

 

 
3

 
3

 

 
34

Basis of Real Estate Sold

 

 
39

 

 

 

 
39

Other Operating Gain

 

 

 
1

 

 

 
1

Equity Earnings (Loss)

 

 

 

 

 
6

 
6

Operating Income (Loss)
6

 
33

 
84

 
8

 
5

 
6

 
142

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
External Revenues
$
64

 
$
136

 
$
69

 
$
91

 
$
8

 
$
7

 
$
375

Intersegment Revenues
7

 

 

 

 

 

 
7

Depreciation, Depletion and Amortization
7

 
22

 
1

 
3

 
2

 

 
35

Basis of Real Estate Sold

 

 
29

 

 

 

 
29

Other Operating Gain

 

 

 
5

 

 

 
5

Equity Earnings (Loss)

 

 

 

 

 
(1
)
 
(1
)
Operating Income (Loss)
13

 
35

 
34

 
16

 
6

 
(1
)
 
103

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Northern
Resources
 
Southern
Resources
 
Real
Estate(D)
 
Manufacturing(A)
 
Energy and Natural Resources
 
Other(B)
 
Total(C)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
External Revenues
$
155

 
$
393

 
$
263

 
$
271

 
$
24

 
$
16

 
$
1,122

Intersegment Revenues
17

 

 

 

 

 

 
17

Depreciation, Depletion and Amortization
20

 
62

 

 
8

 
7

 

 
97

Basis of Real Estate Sold

 

 
131

 

 

 

 
131

Other Operating Gain

 

 

 
3

 

 

 
3

Equity Earnings (Loss)

 

 

 

 

 
7

 
7

Operating Income (Loss)
22

 
96

 
114

 
31

 
15

 
7

 
285

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
External Revenues
$
177

 
$
386

 
$
169

 
$
275

 
$
26

 
$
15

 
$
1,048

Intersegment Revenues
21

 

 

 

 

 

 
21

Depreciation, Depletion and Amortization
21

 
59

 
1

 
12

 
6

 

 
99

Basis of Real Estate Sold

 

 
60

 

 

 

 
60

Other Operating Gain

 

 

 
7

 

 

 
7

Equity Earnings (Loss)

 

 

 

 

 
(4
)
 
(4
)
Operating Income (Loss)
34

 
99

 
91

 
35

 
18

 
(5
)
 
272



19

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


(A)
During the second quarter of 2014, we experienced a fire at our MDF facility and recorded a $2 million loss representing the net book value of the building and equipment damaged or destroyed by the fire. We recorded gains related to insurance recoveries of $1 million and $5 million for the quarterly periods ended September 30, 2015 and September 30, 2014, respectively and recorded insurance gains of $3 million and $9 million for the nine-month periods ended September 30, 2015 and September 30, 2014, respectively. Insurance recoveries were received for costs incurred to rebuild or replace the damaged building and equipment and for business interruption costs. Both the building and equipment loss and the insurance recoveries are reported as Other Operating Gain in the Manufacturing Segment and are included in Other Operating Income (Expense), net in the Consolidated Statements of Income.

(B)
For segment reporting, Equity Earnings (Loss) from Real Estate Development Ventures is included in Operating Income (Loss) for the Other Segment. Equity earnings of $6 million and an equity loss of $1 million were recorded for the quarterly periods ended September 30, 2015 and September 30, 2014, respectively, and equity earnings of $7 million and an equity loss of $4 million were recorded for the nine-month periods ended September 30, 2015 and September 30, 2014, respectively.

(C)
Consolidated depreciation, depletion and amortization includes unallocated corporate expense of $0 for each of the quarterly periods ended September 30, 2015 and September 30, 2014, and $2 million for each of the nine-month periods ended September 30, 2015 and September 30, 2014.

(D)
In January 2015, the company closed the second phase of a two-phase transaction with The Nature Conservancy, selling approximately 117,000 acres in Montana for $85 million. The first phase of the transaction, a sale of approximately 48,000 acres in Washington, closed in 2014. The total sales price of $131 million was allocated among the Montana and Washington properties based on an external appraisal.

A reconciliation of total segment operating income to income before income taxes is presented below for the quarterly and nine-month periods ended September 30 (in millions):