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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 September 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)
Delaware 91-1443693
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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>
Third Quarter
---------------------------
1994 1993
---- ----
(In Thousands, Except Per Unit)
<S> <C> <C>
Revenues ............................................... $ 147,387 $ 129,955
-------------- -------------
Costs and Expenses:
Cost of Goods Sold ................................. 97,188 92,350
Selling, General and Administrative ................ 10,400 8,510
-------------- -------------
Total Costs and Expenses ......................... 107,588 100,860
-------------- -------------
Operating Income ....................................... 39,799 29,095
Interest Expense ....................................... (12,002) (8,619)
Interest Income ........................................ 190 771
Other Income (Expense) - Net ........................... (913) 103
-------------- -------------
Income before Income Taxes ............................. 27,074 21,350
Provision for Income Taxes ............................. 319 53
-------------- -------------
Net Income ............................................. $ 26,755 $ 21,297
General Partner Interest ............................... 4,608 2,362
-------------- -------------
Net Income Allocable to Unitholders .................... $ 22,147 $ 18,935
============== =============
Net Income per Unit .................................... $ 0.54 $ 0.44
============== =============
</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>
Nine Months
----------------------------
1994 1993
---- ----
(In Thousands, Except Per Unit)
<S> <C> <C>
Revenues ............................................... $ 425,503 $ 363,454
-------------- -------------
Costs and Expenses:
Cost of Goods Sold ................................. 273,987 240,581
Selling, General and Administrative ................ 32,349 25,766
-------------- -------------
Total Costs and Expenses ......................... 306,336 266,347
-------------- -------------
Operating Income ....................................... 119,167 97,107
Interest Expense ....................................... (34,364) (26,276)
Interest Income ........................................ 708 2,000
Other Expense - Net .................................... (3,682) (1,569)
-------------- -------------
Income before Income Taxes ............................. 81,829 71,262
Provision for Income Taxes ............................. 625 141
-------------- -------------
Net Income ............................................. $ 81,204 $ 71,121
General Partner Interest ............................... 11,632 6,495
-------------- -------------
Net Income Allocable to Unitholders .................... $ 69,572 $ 64,626
============== =============
Net Income per Unit .................................... $ 1.71 $ 1.47
============== =============
</TABLE>
See accompanying Notes to Combined Financial Statements
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PLUM CREEK TIMBER COMPANY, L. P.
COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
---- ----
(In Thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents .......................... $ 53,310 $ 34,025
Accounts Receivable ................................ 31,310 28,711
Inventories ........................................ 46,233 48,102
Timber Contract Deposits ........................... 1,795 2,987
Other Current Assets ............................... 5,684 5,399
-------------- -------------
138,332 119,224
Timber and Timberlands - Net .......................... 505,621 526,762
Property, Plant and Equipment - Net .................. 160,578 162,633
Other Assets ........................................... 16,286 7,923
============== =============
Total Assets ....................................... $ 820,817 $ 816,542
============== =============
LIABILITIES
Current Liabilities:
Current Portion of Long-Term Debt .................. $ 13,000 $ 13,000
Current Portion of Long-Term Lines of Credit ....... 3,200 12,500
Accounts Payable ................................... 13,006 13,038
Interest Payable ................................... 12,735 3,005
Wages Payable ...................................... 5,471 7,857
Taxes Payable ...................................... 7,247 5,648
Workers' Compensation Liabilities .................. 2,610 2,610
Other Current Liabilities .......................... 8,336 8,338
-------------- -------------
65,605 65,996
Long-Term Debt ......................................... 433,900 296,900
Long-Term Lines of Credit .............................. 94,300 247,500
Workers' Compensation Liabilities ...................... 9,255 9,805
Other Liabilities ...................................... 3,730 3,786
-------------- -------------
Total Liabilities .................................. 606,790 623,987
-------------- -------------
Commitments and Contingencies
PARTNERS' CAPITAL
Limited Partners' (40,608,300 Units) ................... 214,173 192,925
General Partner......................................... (146) (370)
-------------- -------------
Total Partners' Capital ............................ 214,027 192,555
-------------- -------------
Total Liabilities and Partners' Capital ............ $ 820,817 $ 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>
Nine Months
-----------------------------
1994 1993
---- ----
(In Thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income ............................................. $ 81,204 $ 71,121
Adjustments to Reconcile Net Income to
Net Cash Provided By Operating Activities:
Depreciation, Depletion and Amortization ........... 39,122 25,395
Gain on Asset Dispositions - Net ................... (2,530) (7,276)
Working Capital Changes:
Accounts Receivable .............................. (2,599) (21,187)
Inventories ...................................... 1,869 8,038
Timber Contract Deposits and Other Current Assets. 907 (5,829)
Accounts Payable ................................. (32) (109)
Other Accrued Liabilities......................... 8,941 12,725
Funding of Benefit Plans ........................... (9,613)
Other .............................................. (31) (481)
-------------- -------------
Net Cash Provided By Operating Activities .............. $ 117,238 $ 82,397
-------------- -------------
Cash Flows From Investing Activities:
Expenditures for Property, Plant and Equipment ..... $ (13,098)$ (17,929)
Expenditures for Timber and Timberlands ............ (3,338) (2,801)
Proceeds from Asset Dispositions ................... 3,715 6,122
-------------- -------------
Net Cash Used In Investing Activities .................. $ (12,721)$ (14,608)
-------------- -------------
Cash Flows From Financing Activities:
Cash Distributions ................................. $ (59,732)$ (45,336)
Redemption of Deferred Participation Interests ..... (63,018)
Issuance of Long-Term Debt ......................... 150,000
Retirement of Long-Term Debt........................ (13,000) (8,600)
Borrowings Under the Lines of Credit ............... 239,345
Repayments Under the Lines of Credit ............... (401,845)
------------- -------------
Net Cash Used In Financing Activities .................. $ (85,232)$ (116,954)
------------- -------------
Increase (Decrease) In Cash and Cash Equivalents ....... 19,285 (49,165)
Cash and Cash Equivalents:
Beginning of Period ............................... 34,025 69,582
------------- -------------
End of Period ...................................... $ 53,310 $ 20,417
============== =============
</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. The 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. 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, substantially all of the Partnership's and
Manufacturing's taxable income is treated as Unrelated Business Taxable Income
("UBTI"). To the extent a tax-exempt entity has more than $1,000 of UBTI, it
may be
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required to pay federal income taxes. Marketing, as a separate corporation,
provides for its own income taxes.
Net Income per Unit is calculated using the weighted average number
of Units outstanding, plus the then unredeemed Deferred Participation Interests
("DPIs" - 1.25 million outstanding until their redemption on August 30, 1993,
on a pre-Unit split basis) 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 nine month periods ended
September 30, 1994 and 43,053,951 and 43,918,740 for the three and nine month
periods ended September 30, 1993, respectively.
2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1994 1993
--------- --------
(in thousands)
<S> <C> <C>
Raw materials (logs) . . . . . . . . . . . . . . $ 16,132 $ 22,868
Work-in-process . . . . . . . . . . . . . . . . 7,205 5,442
Export logs . . . . . . . . . . . . . . . . . . 2,267 2,488
Finished goods . . . . . . . . . . . . . . . . . 16,644 13,570
-------- --------
42,248 44,368
Supplies . . . . . . . . . . . . . . . . . . . . 3,985 3,734
-------- --------
Total . . . . . . . . . . . . . . . . . . . . $ 46,233 $ 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
nine month periods ended September 30, 1993 by $2.1 million ($0.05 per Unit)
and $6.0 million ($0.14 per Unit), respectively. The cost of the LIFO
inventories valued at the lower of average cost or market (which approximates
current cost) at September 30, 1994 and December 31, 1993 was $48.9 million and
$52.4 million, respectively.
3. BORROWINGS
At September 30, 1994, the Company had $49.5 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 $110 million bank credit
agreement. As of September 30, 1994, the Company had unused bank lines of
credit totaling $67.5 million. See Note 5 to Notes to Combined Financial
Statements.
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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 February 1st and
August 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.
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 funded $12.8 million
toward the cost of these plans, 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 October 18, 1994, the Board of Directors of the General Partner
authorized the Partnership to make a distribution of $0.43 per Unit for the
third quarter of 1994. Total distributions will equal approximately $22.1
million (including $4.6 million to the General Partner) and will be paid on
November 29, 1994 to Unitholders of record on November 15, 1994.
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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. Third quarter 1994 industry composite
indices for lumber and plywood commodity prices were 16% and 19% higher,
respectively, than in the third quarter 1993. Third quarter 1994 composite
prices for lumber were 5% below second quarter 1994 levels, while third quarter
1994 composite prices for plywood were 10% higher than second quarter 1994
levels.
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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
("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 143,000 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 is now deciding whether to
seek review of this decision by the United States Supreme Court. 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 in 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 January, 1995.
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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 restrictions for Owls
under the Guidelines, the Special Rule, if adopted, 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 whether a permit would be issued by the USFWS.
The ESA also prohibits the federal government from causing jeopardy to
species listed under the ESA or destroying or adversely modifying their
designated critical habitat. Private landowners are potentially affected by
this restriction if a private activity requires federal action, such as the
granting of access or federal funding. Where there is such a federal
connection, the federal agency involved must consult with the USFWS to
determine that the proposed activity would not cause jeopardy to the listed
species or 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 for the wood fired boiler serving
the Columbia Falls facility prior to receiving an air
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quality permit. The MAQB has not notified the Company of what sanctions, if
any, the MAQB would seek as a result of the citation. On August 31, 1994, the
Company received a citation from the MAQB alleging that the wood fired boiler
serving the Columbia Falls facility was not in compliance with the facility's
air quality permit when visible emissions from the boiler were observed by the
MAQB and the EPA. The MAQB has not notified the Company of what sanctions, if
any, the MAQB would seek as a result of the citation. The pollution control
device for the boiler has been permitted and was installed in October 1994.
There is no pending litigation, and to the knowledge of the General
Partner there is no threatened litigation involving the Company which would
have a material adverse effect on the financial position or the results of
operations of the Company.
FINANCIAL CONDITION AND LIQUIDITY
During the first nine months of 1994, net cash provided by operating
activities totaled $117.2 million compared to $82.4 million for the same period
in 1993. The increase was primarily due to higher net income from higher
domestic log sales volumes that resulted from the 865,000 acres of timberland
purchased in November 1993 (the "Montana Timberland Acquisition") and favorable
changes to working capital. These amounts were partially offset by
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 September 30, 1994, the
Partnership and Manufacturing had outstanding borrowings under these facilities
in the amounts of $32.2 million and $17.3 million, respectively. Also, as of
September 30, 1994, there were letters of credit issued in the amounts of $1.1
million and $0.5 million for the Partnership and Manufacturing, respectively.
The Partnership and Manufacturing have a reciprocal short-term $20
million intercompany borrowing agreement between the two entities. At
September 30, 1994, the Partnership had outstanding borrowings owed to
Manufacturing totaling $17.3 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 September 30, 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 February 1st and
August 1st of each year. The proceeds obtained
12
<PAGE> 14
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 Partnership has a long-term line of credit with a group of banks
(the "Line of Credit"). Prior to the issuance of the Notes on August 1, 1994,
the Partnership had available borrowings under the Line of Credit of $247.5
million. During the third quarter of 1994, available borrowings under the Line
of Credit were reduced to $110.0 million, of which $48.0 million were
outstanding as of September 30, 1994. The Line of Credit decreases by $7.3
million semiannually through November 1, 2001.
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 September 30, 1994.
On October 18, 1994, the Board of Directors of the General Partner
authorized the Partnership to make a distribution of $0.43 per Unit for the
third quarter of 1994. Total distributions will equal approximately $22.1
million (including $4.6 million to the General Partner) and will be paid on
November 29, 1994 to Unitholders of record on November 15, 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 reimbursed the General
Partner for funding its benefit plans in the acquisition 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.
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<PAGE> 15
CAPITAL EXPENDITURES
Capital expenditures for the first nine months of 1994 totaled $16.4
million compared to $20.7 million for the same period in 1993. Total 1994
capital expenditures are expected to approximate $27 million. 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 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.
14
<PAGE> 16
RESULTS OF OPERATIONS
THIRD QUARTER 1994 COMPARED TO THIRD QUARTER 1993
The following table compares operating income by segment for the
quarters ended September 30, 1994 and 1993.
<TABLE>
<CAPTION>
Operating Income by Segment
(Unaudited)
Third Quarter
----------------------
(In Thousands)
1994 1993
---------- ----------
<S> <C> <C>
Resources Segment . . . . . . . . . . . . . . . . $ 42,656 $ 36,730
Manufacturing Segment . . . . . . . . . . . . . . 10,339 (2,417)
Other Costs and Eliminations . . . . . . . . . . . (13,196) (5,218)
--------- --------
Total . . . . . . . . . . . . . . . . . . . . . $ 39,799 $ 29,095
========= ========
</TABLE>
Resources Segment revenues were $89.9 million and $71.2 million for
the third quarter 1994 and 1993, respectively. Revenues were $18.7 million
higher in 1994 primarily due to higher prices and volumes for domestic logs,
which increased by 5% and 28%, 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
increased harvest levels in the Rocky Mountain Region, which resulted from the
additional timber inventory obtained in the Montana Timberland Acquisition.
Resources Segment costs and expenses were $47.2 million and $34.5
million for the third quarter 1994 and 1993, respectively. Costs and expenses
were $12.7 million higher in 1994 primarily due to higher sales volumes of
domestic logs and higher depletion rates resulting from the additional
timberland acquired as part of the Montana Timberland Acquisition.
Manufacturing Segment revenues were $96.5 million and $82.3 million
for the third quarter 1994 and 1993, respectively. Revenues were $14.2 million
higher in 1994 due to higher prices and volumes in all product lines. Lumber,
plywood and MDF prices increased by 12%, 9% and 23%, respectively, over the
third 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 both 4% higher during the third quarter 1994 as
compared to the year earlier period due to higher production. MDF sales
volumes were 18% higher during the third quarter 1994 as compared to the year
earlier period due to efficiency improvements in the production process.
15
<PAGE> 17
Manufacturing Segment costs and expenses were $86.1 million and $84.8
million for the third quarter 1994 and 1993, respectively. The $1.3 million of
higher costs and expenses were primarily due to higher sales volumes in all
product lines.
Other Costs and Eliminations decreased operating income by $8.0
million in the third quarter of 1994 as compared to the third quarter 1993.
The variance was primarily due to higher intercompany profit accumulating in
inventory during the third 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.
Interest expense was $3.4 million higher during the third quarter 1994
as compared to the prior year period, due to additional long- term debt
incurred to finance the November 1993 Montana Timberland Acquisition.
The income allocated to the General Partner was $2.2 million higher in
the third 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 $0.43 per Unit in the
third quarter 1994 as compared to $0.33 per Unit during the third quarter 1993
(1993 amounts were restated for the December 6, 1993 three-for-one Unit split).
Third quarter 1994 earnings per Unit were $0.10 higher than the prior
year period. The higher results were due to higher third quarter 1994 net
income and a decrease in the weighted average number of Units outstanding
caused by the August 1993 redemption of the DPIs.
16
<PAGE> 18
NINE MONTHS 1994 COMPARED TO NINE MONTHS 1993
The following table compares operating income by segment for the nine
months ended September 30, 1994 and 1993.
<TABLE>
<CAPTION>
Operating Income by Segment
(Unaudited)
Nine Months
--------------------
(In Thousands)
1994 1993
----------- -----------
<S> <C> <C>
Resources Segment . . . . . . . . . . . . . . . . $ 106,872 $ 90,932
Manufacturing Segment . . . . . . . . . . . . . . 21,299 12,681
Other Costs and Eliminations . . . . . . . . . . . (9,004) (6,506)
---------- ---------
Total . . . . . . . . . . . . . . . . . . . . . $ 119,167 $ 97,107
========== =========
</TABLE>
Resources Segment revenues were $225.4 million and $175.1 million for
the nine month periods ended September 30, 1994 and 1993, respectively.
Revenues were $50.3 million higher in 1994 primarily due to higher prices and
sales volumes for domestic logs, which was offset in part by lower sales
volumes of export logs and lower land sales. Domestic log prices increased by
16% during the first nine 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 nine months of 1994 domestic log sales volumes
were 31% higher than the year earlier period primarily due to higher harvest
levels caused by 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 7% from the prior year due primarily to increased substitution of
lower cost alternative wood fiber (principally, Russian logs, Canadian lumber
and Scandinavian logs and lumber).
Resources Segment costs and expenses were $118.5 million and $84.2
million for the first nine months of 1994 and 1993, respectively. Costs and
expenses were $34.3 million higher in 1994 due to higher production volumes of
domestic logs, higher log and haul costs caused by longer hauling distance, and
higher depletion rates which resulted from the additional timber inventory
obtained in the Montana Timberland Acquisition.
Manufacturing Segment revenues were $277.5 million and $241.9 million
during the first nine months of 1994 and 1993, respectively. Revenues were
$35.6 million higher in 1994 due to generally higher prices and sales volumes.
During the first nine months of 1994, lumber, plywood and MDF prices increased
by 9%, 6% and 21%, respectively, over the same period in 1993. The higher
prices were primarily the result of improvements in U.S. economy, that
increased domestic wood product demand. Lumber sales volumes were 6% higher
during the first nine months of 1994 as compared to the year earlier period due
to higher production levels. MDF sales volumes were 17% higher during the
first nine months of 1994 as compared to the
17
<PAGE> 19
year earlier period due to production improvements. 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 $256.2 million and
$229.2 million for the nine month period ended September 30, 1994 and 1993,
respectively. The $27.0 million of higher costs and expenses were primarily
due to higher sales volumes of lumber and MDF and higher log costs (21% higher
for both lumber and plywood).
Other Costs and Eliminations decreased operating income by $2.5
million during the nine month period ended September 30, 1994 as compared to
the same period in 1993. The variance was primarily due to higher intercompany
profit accumulating in inventory during the first nine 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 $8.1 million higher during the first nine months
of 1994 as compared to the prior year period, due to the increased amount of
long-term debt incurred to finance the November 1993 Montana Timberland
Acquisition.
The income allocated to the General Partner was $5.1 million higher
during the first nine 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 $1.19 per
Unit during the first three quarters of 1994 as compared to $0.97 per Unit
during the first three quarters of 1993 (1993 amounts were restated for the
December 6, 1993 three-for-one Unit split).
For the nine month period ended September 30, 1994 earnings per Unit
were $0.24 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.
18
<PAGE> 20
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
(Principal Financial Officer
and Principal Accounting
Officer)
Date: November 3, 1994
19
