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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 June 30, 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)
<TABLE>
<S> <C>
Delaware 91-1443693
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
999 Third Avenue, Seattle, Washington 98104-4096
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
filing requirements for the past 90 days.
Yes X No
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLUM CREEK TIMBER COMPANY, L.P.
COMBINED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Second Quarter
----------------------
1994 1993
-------- --------
(In Thousands, Except Per Unit)
<S> <C> <C>
Revenues ........................................... $135,659 $117,077
-------- --------
Costs and Expenses:
Cost of Goods Sold ............................. 88,900 73,562
Selling, General and Administrative ............ 10,812 8,204
-------- --------
Total Costs and Expenses ..................... 99,712 81,766
-------- --------
Operating Income ................................... 35,947 35,311
Interest Expense ................................... (11,123) (8,798)
Interest Income .................................... 242 512
Other Expense - Net ................................ (1,073) (687)
-------- --------
Income before Income Taxes ......................... 23,993 26,338
Provision for Income Taxes ......................... 195 74
-------- --------
Net Income ......................................... $ 23,798 $ 26,264
General Partner Interest ........................... 3,444 2,462
-------- --------
Net Income Allocable to Unitholders ................ $ 20,354 $ 23,802
======== ========
Net Income per Unit ................................ $ 0.50 $ 0.54
======== ========
</TABLE>
See accompanying Notes to Combined Financial Statements.
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PLUM CREEK TIMBER COMPANY, L.P.
COMBINED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months
----------------------
1994 1993
-------- --------
(In Thousands, Except Per Unit)
<S> <C> <C>
Revenues ........................................... $278,116 $233,499
-------- --------
Costs and Expenses:
Cost of Goods Sold ............................. 176,799 148,231
Selling, General and Administrative ............ 21,949 17,256
-------- --------
Total Costs and Expenses ..................... 198,748 165,487
-------- --------
Operating Income ................................... 79,368 68,012
Interest Expense ................................... (22,362) (17,657)
Interest Income .................................... 518 1,229
Other Expense - Net ................................ (2,769) (1,672)
-------- --------
Income before Income Taxes ......................... 54,755 49,912
Provision for Income Taxes ......................... 306 88
-------- --------
Net Income ......................................... $ 54,449 $ 49,824
General Partner Interest ........................... 7,024 4,133
-------- --------
Net Income Allocable to Unitholders ................ $ 47,425 $ 45,691
======== ========
Net Income per Unit ................................ $ 1.17 $ 1.03
======== ========
</TABLE>
See accompanying Notes to Combined Financial Statements.
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PLUM CREEK TIMBER COMPANY, L. P.
COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
-------- --------
(In Thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents ...................... $ 28,520 $ 34,025
Accounts Receivable ............................ 37,974 28,711
Inventories .................................... 38,462 48,102
Timber Contract Deposits ....................... 468 2,987
Other Current Assets ........................... 8,618 5,399
-------- --------
114,042 119,224
Timber and Timberlands - Net ....................... 514,413 526,762
Property, Plant and Equipment - Net ................ 161,128 162,633
Other Assets ....................................... 17,783 7,923
-------- --------
Total Assets ................................... $807,366 $816,542
======== ========
LIABILITIES
Current Liabilities:
Current Portion of Long-Term Debt .............. $ 13,000 $ 13,000
Current Portion of Long-Term Lines of Credit ... 13,750 12,500
Accounts Payable ............................... 12,751 13,038
Interest Payable ............................... 2,864 3,005
Wages Payable .................................. 5,253 7,857
Taxes Payable .................................. 6,238 5,648
Workers' Compensation Liabilities .............. 2,610 2,610
Other Current Liabilities ...................... 9,428 8,338
-------- --------
65,894 65,996
Long-Term Debt ..................................... 283,900 296,900
Long-Term Lines of Credit .......................... 233,750 247,500
Workers' Compensation Liabilities .................. 9,479 9,805
Other Liabilities .................................. 5,012 3,786
-------- --------
Total Liabilities .............................. 598,035 623,987
-------- --------
Commitments and Contingencies
PARTNERS' CAPITAL
Limited Partners' (40,608,300 Units) ............... 209,487 192,925
General Partner..................................... (156) (370)
-------- --------
Total Partners' Capital ........................ 209,331 192,555
-------- --------
Total Liabilities and Partners' Capital ........ $807,366 $816,542
======== ========
</TABLE>
See accompanying Notes to Combined Financial Statements.
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PLUM CREEK TIMBER COMPANY, L. P.
COMBINED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months
----------------------
1994 1993
-------- --------
(In Thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income ......................................... $ 54,449 $ 49,824
Adjustments to Reconcile Net Income to
Net Cash Provided By Operating Activities:
Depreciation, Depletion and Amortization ....... 23,899 16,225
Gain on Asset Dispositions - Net ............... (1,785) (5,699)
Working Capital Changes:
Accounts Receivable .......................... (9,263) (10,994)
Inventories .................................. 9,640 8,791
Timber Contract Deposits and Other Current
Assets...................................... (700) (4,460)
Accounts Payable ............................. (287) 5,918
Other Accrued Liabilities..................... (1,065) 2,320
Incentive Compensation Costs ................... (10,026)
Other ......................................... 469 2
--------- --------
Net Cash Provided By Operating Activities .......... $ 65,331 $ 61,927
--------- --------
Cash Flows From Investing Activities:
Expenditures for Property, Plant and Equipment . $ (8,304) $(12,664)
Expenditures for Timber and Timberlands ........ (2,012) (1,430)
Proceeds from Asset Dispositions ............... 2,653 3,949
--------- --------
Net Cash Used In Investing Activities .............. $ (7,663) $(10,145)
--------- --------
Cash Flows From Financing Activities:
Cash Distributions ............................. $ (37,673) $(29,508)
Retirement of Long-Term Debt.................... (13,000) (8,600)
Borrowings Under the Lines of Credit ........... 147,290
Repayments Under the Lines of Credit ........... (159,790)
--------- --------
Net Cash Used In Financing Activities .............. $ (63,173) $(38,108)
--------- --------
Increase (Decrease) In Cash and Cash Equivalents ... (5,505) 13,674
Cash and Cash Equivalents:
Beginning of Period ........................... 34,025 69,582
--------- --------
End of Period .................................. $ 28,520 $ 83,256
========= ========
</TABLE>
See accompanying Notes to Combined Financial Statements.
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PLUM CREEK TIMBER COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined financial statements include all the accounts of Plum
Creek Timber Company, L.P. (the "Partnership") and its combined subsidiaries.
All significant intercompany transactions have been eliminated in the
combination.
The Partnership owns 98 percent of Plum Creek Manufacturing, L.P.
("Manufacturing") and 96 percent of Plum Creek Marketing, Inc. ("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 of Manufacturing and 4 percent of Marketing. As used
herein, "Company" refers to the combined entities of the Partnership,
Manufacturing and Marketing.
The financial statements included in this Form 10-Q are unaudited and
do not contain all of the information required by generally accepted accounting
principles to be included in a full set of financial statements. The
financial statements in the Partnership's 1993 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. All such adjustments are of a normal and
recurring nature. Certain financial statement reclassifications have been made
to the prior year information for comparability purposes and have no impact on
net income. Certain 1993 information has been restated for the December 6, 1993
three-for-one Unit split, and the change in accounting for certain inventories
from the average cost method to the last-in, first-out ("LIFO") method of
accounting. See Note 2 to Notes to Combined Financial Statements. The results
of operations for any interim period are not necessarily indicative of the
results of operations for the entire year.
The taxable income, deductions, and credits of the Partnership and
Manufacturing are allocated to the Unitholders based on the number of
depositary units representing limited partner interests ("Units") held and the
holding period. Distributions of cash to a Unitholder are considered a
non-taxable return of capital to the extent of the Unitholder's basis in the
Units (as such basis is increased by the allocable share of the Partnership's
and Manufacturing's taxable income). Any such distributions in excess of the
Unitholder's basis in the Units will result in taxable gain. However,
Unitholders will be required to include in their income tax filings their
allocable share of the Partnership's and Manufacturing's income, regardless of
whether cash distributions are made. It is anticipated that 1994 taxable
income allocated to Unitholders will be in excess of 1994 cash distributions.
For tax-exempt entities, such as IRAs, a portion of the Partnership's and
Manufacturing's taxable income is treated as Unrelated Business Taxable
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Income ("UBTI"). To the extent a tax-exempt entity has more than $1,000 of
UBTI, it may be required to pay federal income taxes. Marketing, as a separate
corporation, provides for income taxes based upon its anticipated level of
taxable income for the year.
Net Income per Unit is calculated using the weighted average number of
Units outstanding, plus the unredeemed Deferred Participation Interests ("DPIs"
- - - 1.25 million outstanding at June 30, 1993, on a pre-Unit split basis, which
were redeemed in August 1993) divided into the combined Company net income,
after adjusting for the General Partner Interest. The weighted average number
of Units outstanding was 40,608,300 for the three and six month periods ended
June 30, 1994 and 44,358,300 for the three and six month periods ended June 30,
1993, respectively.
2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
----------- -----------
(in thousands)
<S> <C> <C>
Raw materials (logs) . . . . . . . . . . . . . . $ 9,774 $22,868
Work-in-process . . . . . . . . . . . . . . . . 6,920 5,442
Export logs . . . . . . . . . . . . . . . . . . 1,050 2,488
Finished goods . . . . . . . . . . . . . . . . . 16,893 13,570
------- -------
34,637 44,368
Supplies . . . . . . . . . . . . . . . . . . . . 3,825 3,734
------- ------
Total . . . . . . . . . . . . . . . . . . . . $38,462 $48,102
======= =======
</TABLE>
During the fourth quarter of 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 change to LIFO was effective
January 1, 1993 and decreased previously reported earnings for the three and
six month periods ended June 30, 1993 by $1.9 million ($0.04 per Unit) and $3.9
million ($0.09 per Unit), respectively. The cost of the LIFO inventories
valued at the lower of average cost or market (which approximates current cost)
at June 30, 1994 and December 31, 1993 was $43.2 million and $52.4 million.
3. BORROWINGS
At June 30, 1994, the Company had $43.5 million of borrowings under
short-term revolving credit agreements, which were classified as long-term debt
due to the Company's intent and ability to finance these borrowings on a
long-term basis using its existing $247.5 million bank credit agreement. As of
June 30, 1994, the Company had unused bank lines of credit totaling $55
million. See Note 5 to Notes to Combined Financial Statements.
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4. BENEFIT PLANS
On April 4, 1994, the Partnership announced that the Board of
Directors of the General Partner authorized the General Partner to purchase up
to 1.2 million Units for certain of its executive and key employee incentive
compensation benefit plans. 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.
5. SUBSEQUENT EVENTS
On July 19, 1994, the Board of Directors of the General Partner
authorized the Partnership to make a distribution of $0.43 per Unit for the
second quarter of 1994. Total distributions will equal approximately $22.1
million (including $4.6 million to the General Partner) and will be paid on
August 26, 1994 to Unitholders of record on August 16, 1994.
On August 1, 1994, the Partnership issued $150 million of senior
unsecured notes (the "Notes") bearing interest at 8.73%. The Notes are due in
full on August 1, 2009 and are redeemable prior to maturity subject to a
premium on redemption. The premium is calculated based upon interest rates of
U.S. Treasury securities having a similar maturity as the Notes plus one half
of one percent. The Notes contain certain restrictive covenants that are
substantially similar to those in the Partnership's existing long-term debt
agreements. Interest on the Notes is payable semi-annually on August 1st and
February 1st of each year.
The proceeds obtained from the issuance of the Notes were used to
repay a portion of the floating-rate bank borrowings incurred to finance the
November 1993 Montana Timberland Acquisition. Subsequent to the bank debt's
repayment, the available borrowings under the Company's $247.5 million
long-term line of credit were reduced to $110 million. The available
borrowings will further decrease by $7.3 million semiannually through November
1, 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Plum Creek Timber Company, L.P. (the "Partnership") owns 98 percent of
Plum Creek Manufacturing, L.P. ("Manufacturing") and 96 percent of Plum Creek
Marketing, Inc. ("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 of Manufacturing and 4 percent of
Marketing. 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 businesses of the Partnership, and
"Manufacturing Segment" refers to the combined businesses 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 markets, competition, log supply, the use and
introduction of alternative products 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 from 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,
both domestically and 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,
decreasing the volume of old growth logs sold during this time of the year.
Demand for manufactured products is generally lower in the fall and
winter 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 during the winter months to prepare for reduced
harvest during spring break-up.
CURRENT MARKET CONDITIONS. Second quarter 1994 industry composite
indices for lumber and plywood commodity prices were 7% and 5% higher,
respectively, than the second quarter 1993. However, second quarter 1994
prices for lumber and plywood decreased from the first quarter 1994 levels due
to excess supply, which resulted from the poor first quarter weather conditions
that temporarily built-up market inventories as well as increased lumber
imports from Canada.
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Prices for domestic logs have decreased slightly from levels
experienced earlier in the year due to increased supply of lumber and plywood
products. Export log market demand remained firm as a result of steady wood
product demand in Asia, principally Japan.
REGULATION. 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 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 has to be preserved. Under the guidelines, approximately 140,000
acres of the 330,000 acres in the Partnership's Cascade region lie within
Activity Areas.
The USFWS announced on December 29, 1993, that it is proposing to
draft a special rule ("Special Rule") to redefine private landowner obligations
under the ESA. In its description of the proposed Special Rule, the USFWS
indicated that the guidelines would serve as the basis for regulation in areas
of special concern ("ASC") for the Owl. Outside of the ASCs, only 70 acres
around nest sites would be restricted. A substantial majority of the
Partnership's Timberlands that contain occupied Owl habitat lie within ASCs.
Accordingly, the proposed Special Rule, if adopted in its current form, is not
likely to materially alter the current level of regulation on the Partnership's
activities due to the Owl.
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 government has appealed the ruling.
The government has also taken the position that the ruling does not apply to
areas outside of the District of Columbia circuit. Accordingly, it is unclear
whether the decision will reduce the regulatory impact of the ESA on the
Partnership.
All forest practice applications ("FPA's") within Activity Areas must
also comply with the Washington State Environmental Policy Act ("SEPA") and
Forest Practices Act. In June 1992, the Washington State Forest Practices
Board (the "Board") adopted regulations which provide that SEPA will apply to
FPA's for activities on 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, however, has extended the rule until October 2, 1994.
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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 regulation for Owls
under the guidelines, the Special Rule and SEPA. It is unclear what conditions
to the permit, as well as the cost would be. There are therefore no assurances
that the permit will continue to be pursued or ultimately a permit will be
issued by the USFWS.
The ESA also prohibits the federal government from causing jeopardy to
the Owl or destroying or adversely modifying its 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 Owl or direct or indirect adverse modification of its
designated critical habitat, or if it would, then to 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.
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.
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 April 1994, the Clinton Administration formally adopted the Forest Plan and
submitted it for judicial approval. Before the Forest Plan can be implemented
the Clinton Administration intends to implement its policies administratively.
However, the Forest Plan has been subjected to additional legal challenges and
thus, its implementation remains uncertain.
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, including the proposed Special Rule, (iv) future regulations
and restrictions placed on private and public lands, (v) promulgation,
interpretation and application of Owl regulations by both the USFWS 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
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<PAGE> 12
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 or its results of operations. 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 or financial position 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. 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.
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. 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 Company will work with the EPA to provide information and
resolve issues arising under the NOV. The EPA has not notified the Company
what sanctions, if any, the EPA would seek as a result of 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 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.
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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 financial position or the results of
operations of the Company.
FINANCIAL CONDITION AND LIQUIDITY
During the first six months of 1994, net cash provided by operating
activities totaled $65.3 million compared to $61.9 million for the same period
in 1993. The increase was primarily due to higher net income, which was the
result of generally higher prices and higher sales volumes, particularly higher
domestic log sales volumes that resulted from the 865,000 acres of timberland
purchased in November 1993 (the "Montana Timberland Acquisition"). These
amounts were partially offset by cash advances and reimbursements to the
General Partner to fund the General Partner's various executive and key
employee benefit plans and a decrease in land sales.
The Partnership and Manufacturing each have short-term revolving
credit agreements with a group of banks that allow for borrowings of up to $35
million and $20 million, respectively. As of June 30, 1994, the Partnership
and Manufacturing had outstanding borrowings under these facilities in the
amounts of $24.2 million and $19.3 million, respectively. Also, as of June 30,
1994, there were letters of credit issued in the amounts of $2.6 million and
$0.5 million for the Partnership and Manufacturing, respectively.
The Partnership and Manufacturing have a reciprocal short-term $20
million intercompany borrowing agreement between the two entities. At June 30,
1994, the Partnership had outstanding borrowings owed to Manufacturing totaling
$19.3 million. Total short-term borrowings in the aggregate by Manufacturing
under its revolving credit agreements (bank and intercompany) cannot exceed $20
million. The Partnership and Manufacturing have a capital facility which
enables Manufacturing to borrow up to $20 million from the Partnership on a
long-term basis. There were no such borrowings outstanding as of June 30,
1994.
The Partnership has a long-term line of credit with a group of banks
(the "Line of Credit"). At June 30, 1994, the Line of Credit allowed for up to
$247.5 million of borrowings of which $204 million of borrowings were
outstanding. In August 1994, the Partnership repaid $150 million of borrowings
under the Line of Credit with proceeds from the issuance of the Notes
(described in further detail below). Subsequent to the repayment, the
available borrowings under the Line of Credit were reduced to $110 million.
The available borrowings will further to decrease by $7.3 million semiannually
through November 1, 2001.
On August 1, 1994, the Partnership issued $150 million of senior
unsecured notes (the "Notes") bearing interest at 8.73%. The Notes are due in
full on August 1, 2009 and are redeemable prior to maturity subject to a
premium on redemption. The premium is calculated based upon interest rates of
U.S. Treasury securities having a similar maturity as the Notes plus one half
of one percent. The Notes contain certain restrictive covenants that are
substantially similar to those in the Partnership's existing long-term debt
agreements. Interest on the Notes
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<PAGE> 14
is payable semi-annually on August 1st and February 1st of each year. The
proceeds obtained from the issuance of the Notes were used to repay a portion
of the floating-rate bank borrowings incurred to finance the November 1993
Montana Timberland Acquisition.
The Company's borrowing agreements contain certain restrictive
covenants, including limitations on harvest levels, land sales, cash
distributions and the amount of future indebtedness. The Company was in
compliance with such covenants as of June 30, 1994.
On July 19, 1994, the Board of Directors of the General Partner
authorized the Partnership to make a distribution of $0.43 per Unit for the
second quarter of 1994. Total distributions will equal approximately $22.1
million (including $4.6 million to the General Partner) and will be paid on
August 26, 1994 to Unitholders of record on August 16, 1994. The computation
of cash available for distribution includes required reserves 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,
and future cash distributions.
On April 4, 1994, the Partnership announced that the Board of
Directors of the General Partner authorized the General Partner to purchase up
to 1.2 million Units for certain of its executive and key employee incentive
compensation benefit plans. 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.
Cash required to meet the Company's quarterly cash distributions,
capital expenditures, funding of benefit plans, and principal and interest
payments will be significant. The General Partner expects that all debt
service, cash distributions, capital expenditures and funding of benefit plans
will be funded 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 or financial position.
CAPITAL EXPENDITURES
Capital expenditures for the first six months of 1994 totaled $10.3
million compared to $14.1 million for the same period in 1993. Total 1994
capital expenditures are expected to approximate $29 million, which
approximates the total amount expended in 1993 (excluding the $255.3 million
expended on the purchase of the Montana Timberland Acquisition). The principal
projects included in the 1994 plan include the purchase and installation of
various lumber value-added projects, semi-automatic lay-up line and core
composer in plywood, wood
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<PAGE> 15
chip refining and value-added projects in MDF, equipment upgrades to meet
environmental requirements and road construction and reforestation of the
Timberlands. It is anticipated that the planned 1994 capital expenditures
will be funded from current funds and cash generated from operations.
RESULTS OF OPERATIONS
SECOND QUARTER 1994 COMPARED TO SECOND QUARTER 1993
The following table compares operating income by segment for the
quarters ended June 30, 1994 and 1993.
Operating Income by Segment
(Unaudited)
<TABLE>
<CAPTION>
Second Quarter
---------------------------------
(In Thousands)
1994 1993
----------- ----------
<S> <C> <C>
Resources Segment . . . . . . . . . . . . . . . . $ 26,179 $ 25,629
Manufacturing Segment . . . . . . . . . . . . . . 2,602 7,269
Other Costs and Eliminations . . . . . . . . . . . 7,166 2,413
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . $ 35,947 $ 35,311
========= =========
</TABLE>
Resources Segment revenues were $59.6 million and $47.6 million for
the second quarter 1994 and 1993, respectively. Revenues were $12.0 million
higher in 1994 primarily due to higher prices and volumes for domestic logs,
which increased by 5% and 52%, respectively, over the prior year quarter. The
higher prices resulted from increased domestic demand for wood products caused
by an improving U.S. economy as well as from continued logging curtailments in
the Northwest. The higher 1994 domestic log sales volume was caused by
favorable logging conditions, weaker alternative export log markets, and
increased harvest levels in the Rocky Mountain Region, which resulted from the
additional timber inventory obtained in the Montana Timberland Acquisition.
These amounts were partially offset by lower sales volumes and lower prices for
export logs, which decreased by 9% and 7%, respectively, from the second
quarter 1993. The lower export log prices and volumes were the result of
increased market substitution of lower cost alternative wood fiber
(principally, Russian logs, Canadian lumber and Scandinavian logs and lumber).
Resources Segment costs and expenses were $33.4 million and $22.0
million for the second quarter 1994 and 1993, respectively. Costs and expenses
were $11.4 million higher in 1994 primarily due to higher sales volumes of
domestic logs, higher log and haul costs caused by longer hauling distances,
higher road expenses resulting from the additional timberland acquired as part
of the Montana Timberland Acquisition, and higher Washington state excise tax
expense resulting from higher stumpage values.
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<PAGE> 16
Manufacturing Segment revenues were $90.0 million and $80.2 million
for the second quarter 1994 and 1993, respectively. Revenues were $9.8 million
higher in 1994 due to higher prices and volumes in all product lines. Lumber,
plywood and MDF prices increased by 6%, 1% and 20%, respectively, over the
second quarter 1993. The higher prices were primarily the result of an
improving U.S. economy, which increased domestic wood product demand. Lumber
and plywood sales volumes were 7% and 3% higher during the second quarter 1994
as compared to the year earlier period due to higher production (caused by
additional production hours) and a reduction of inventories that had
temporarily increased during the first quarter 1994 as a result of poor weather
conditions. MDF sales volumes were 14% higher during the second quarter 1994
as compared to the year earlier period due to efficiency improvements in the
production process.
Manufacturing Segment costs and expenses were $87.4 million and $72.9
million for the second quarter 1994 and 1993, respectively. The $14.5 million
of higher costs and expenses were primarily due to higher sales volumes in all
product lines and higher log costs (32% and 30% higher for lumber and plywood,
respectively).
Interest expense was $2.3 million higher during the second quarter
1994 as compared to the prior year period, due to the increased amount of
long-term debt incurred to finance the Montana Timberland Acquisition.
Other Costs and Eliminations increased operating income by $4.8
million more in the second quarter of 1994 as compared to the second quarter
1993. The variance was primarily due to lower intercompany profit accumulating
in inventory during the second quarter 1994. The profit on intercompany log
sales is deferred until Manufacturing converts existing log inventories into
finished products and sells them to third parties.
The income allocated to the General Partner was $1.0 million higher in
the second quarter of 1994 as compared to the year earlier period. The
increase was the result of a higher quarterly distribution to 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), plus the incentive
distribution. The incentive distribution is based on a percentage of the
quarterly distribution paid during the quarter, which was $0.38 per Unit in the
second quarter 1994 as compared to $0.33 per Unit during the second quarter
1993 (1993 amounts were restated for the December 6, 1993 three-for-one Unit
split).
Second quarter 1994 earnings per Unit were $0.04 lower than the prior
year period. The lower results were due to lower second quarter 1994 net
income, which was offset in part by a decrease in the weighted average number
of Units outstanding caused by the August 1993 redemption of the DPIs.
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<PAGE> 17
SIX MONTHS 1994 COMPARED TO SIX MONTHS 1993
The following table compares operating income by segment for the six
months ended June 30, 1994 and 1993.
Operating Income by Segment
(Unaudited)
<TABLE>
<CAPTION>
Six Months
---------------------------------
(In Thousands)
1994 1993
----------- ----------
<S> <C> <C>
Resources Segment . . . . . . . . . . . . . . . . $ 64,216 $ 54,202
Manufacturing Segment . . . . . . . . . . . . . . 10,960 15,098
Other Costs and Eliminations . . . . . . . . . . . 4,192 (1,288)
-------- ---------
Total . . . . . . . . . . . . . . . . . . . . . $ 79,368 $ 68,012
========= =========
</TABLE>
Resources Segment revenues were $135.5 million and $103.9 million for
the six month periods ended June 30, 1994 and 1993, respectively. Revenues
were $31.6 million higher in 1994 primarily due to higher prices and volumes
for domestic logs, which was offset in part by lower sales volumes of export
logs and $5.7 million of lower land sales. Domestic log prices increased by
27% during the first six months of 1994 as compared to the same period in 1993
due primarily to improving domestic wood product demand resulting from an
improving U.S. economy as well as from continued logging curtailments in the
Northwest. During the first six months of 1994 domestic log sales volumes were
34% higher than the year earlier period primarily due to favorable logging
conditions and the increased timber inventory in the Rocky Mountain Region that
was obtained in the November 1993 Montana Timberland Acquisition. These
amounts were partially offset by lower sales volumes of export logs, which
decreased by 9% from the prior year due primarily to increased market
substitution of lower cost alternative wood fiber (principally, Russian logs,
Canadian lumber and Scandinavian logs and lumber).
Resources Segment costs and expenses were $71.3 million and $49.7
million for the first six months of 1994 and 1993, respectively. Costs and
expenses were $21.6 million higher in 1994 due to higher sales volumes of
domestic logs, higher log and haul costs caused by longer hauling distances,
higher road expenses resulting from the additional timberland acquired as part
of the Montana Timberland Acquisition, and higher silvicultural expenses
resulting from the Company's fertilization program in the Cascade Region.
Manufacturing Segment revenues were $181.0 million and $159.6 million
during the first six months of 1994 and 1993, respectively. Revenues were
$21.4 million higher in 1994 due to generally higher prices and volumes.
During the first six months of 1994, lumber, plywood and MDF prices increased
by 7%, 4% and 19%, respectively, over the same period in 1993. The higher
prices were primarily the result of an improving U.S. economy, that increased
domestic wood product demand. Lumber sales volumes were 7% higher during the
first six months of
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<PAGE> 18
1994 as compared to the year earlier period due to higher production (caused by
additional production hours). MDF sales volumes were 17% higher during the
first six months of 1994 as compared to the year earlier period due to
efficiency improvements in the production process. Furthermore, 1993's MDF
results were adversely affected by a fire at the plant that temporarily
interrupted MDF production.
Manufacturing Segment costs and expenses were $170.0 million and
$144.5 million for the six month period ended June 30, 1994 and 1993,
respectively. The $25.5 million of higher costs and expenses were primarily
due to higher sales volumes of lumber and MDF and higher log cost (32% and 31%
higher for lumber and plywood, respectively).
Other Costs and Eliminations increased operating income by $5.5
million more during the six month period ended June 30 1994 as compared to same
period in 1993. The variance was primarily due to lower intercompany profit
accumulating in inventory during the first six months of 1994. The profit on
intercompany log sales is deferred until Manufacturing converts existing log
inventories into finished products and sells them to third parties.
Interest expense was $4.7 million higher during the first six months
of 1994 as compared to the prior year period, due to the increased amount of
long-term debt incurred to finance the Montana Timberland Acquisition.
The income allocated to the General Partner was $2.9 million higher
during the first six months of 1994 as compared to the year earlier period.
The increase was the result of higher net income and a higher quarterly
distribution to 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),
plus the incentive distribution. The incentive distribution is based on a
percentage of the quarterly distribution paid each quarter, which was $0.76 per
Unit during the first two quarters of 1994 as compared to $0.63 per Unit during
the first two quarters of 1993 (1993 amounts were restated for the December 6,
1993 three-for-one Unit split).
For the six month period ended June 30, 1994 earnings per Unit were
$0.14 higher than the prior year period. The higher results were due to higher
1994 net income as well as from a decrease in the weighted average number of
Units outstanding caused by the August 1993 redemption of the DPIs.
PART II - OTHER INFORMATION
Items 1, 2, 3, 4, 5 and 6 of Part II are not applicable and have been omitted.
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SIGNATURES
Pursuant to the requirements 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: s/Diane M. Irvine
------------------------------
DIANE M. IRVINE
Vice President and
Chief Financial Officer
By: s/Allan F. Trinkwald
------------------------------
ALLAN F. TRINKWALD
Controller and Treasurer
Date: August 15, 1994
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