10-K 1 a10-k20111231.htm FORM 10-K 10-K 2011.12.31
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10239

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

999 Third Avenue, Suite 4300
Seattle, Washington 98104-4096
Telephone: (206) 467-3600
Securities registered pursuant to Section 12(b) of the Act: 
Title of each class
 
Name of exchange on which registered
Common Stock, par value $0.01 per share
 
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:    None

Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x No  o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o    No  x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S–K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10–K or any amendment to this Form 10–K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

The aggregate market value of the voting common stock held by non-affiliates based on the closing sales price on June 30, 2011, was $6,543,356,610. For this calculation, all executive officers, directors and stockholders owning more than 5% of the outstanding common stock have been deemed affiliates. Such determination should not be deemed an admission that such executive officers, directors and stockholders are, in fact, affiliates of the registrant.

The number of outstanding shares of the registrant’s common stock, as of February 15, 2012 was 161,406,910.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10–K (e.g., Part I, Part II, etc.) into which the document is incorporated:

Portions of the Proxy Statement for registrant’s 2012 Annual Meeting of Shareholders to be held on May 8, 2012, are incorporated by reference into Part III of this Annual Report on Form 10-K.




PLUM CREEK TIMBER COMPANY, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2011

TABLE OF CONTENTS
 
Part I.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Part II.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
 
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Part III.
 
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Part IV.
 
Exhibits, Financial Statement Schedules



PART I / ITEM 1
 

Part I
When we refer to “Plum Creek,” “the company,” “we,” “us,” or “our,” we mean Plum Creek Timber Company, Inc. and its consolidated subsidiaries. References in Items 1 through 7 to Notes to Consolidated Financial Statements refer to the Notes to the Consolidated Financial Statements of Plum Creek Timber Company, Inc. included in Item 8 of this form.

ITEM 1. BUSINESS
Industry Overview

General

The timber industry possesses several unique characteristics that distinguish it from the broader paper and forest products industry. The timber industry, which consists primarily of timberland owners, provides raw material and conducts resource management activities for the paper and forest products industry, including the planting, fertilizing, thinning, and harvesting of trees and the marketing of logs. Logs are marketed and sold either as sawlogs to lumber and other wood products manufacturers or as pulplogs to pulp and paper manufacturers or producers of oriented strand board (“OSB”). Also, over time, timberlands may become more valuable for purposes other than growing timber. In these circumstances, timberlands may be sold to realize these values.

We believe timber is an attractive asset class for many reasons, including the following:

Renewable Resource. Timber is a growing and renewable resource that, when properly managed, increases in volume and value as it grows over time. Larger diameter trees command a higher price than smaller trees because they may be converted to higher value end-use products such as lumber and plywood.

Predictable and Improving Growth Rates. Predictable biological growth is an attractive feature of timberland assets because it contributes to predictable, long-term harvest planning. The development and application of intensive forest management practices continue to improve biological growth rates.

Harvest Flexibility. Timberland owners have some flexibility to increase their harvests when prices are high and decrease their harvests when prices are low, allowing timberland owners to maximize the long-term value of their growing resource base.

Supply and Demand Dynamics
There are six primary end-markets for most of the timber harvested in the United States: products used in new housing construction; products used in the repair and remodeling of existing housing; products for industrial uses; raw material for the manufacture of pulp and paper and OSB; wood fiber for energy production; and logs for export.

Supply. Timber supply can fluctuate based upon a variety of factors. The supply of timber is limited, to some extent, by the availability of timberlands. The availability of timberlands, in turn, is limited by several factors, including government restrictions relating to environmental regulation and land use and alternate uses such as agriculture. The large amounts of capital and length of time required to create new timberlands also limits timber supply.

Over the long-term, timber supply increases when modern forestry techniques increase productivity of timberlands and when some marginal agriculture lands revert to timberlands or are planted as forests for conservation purposes. In certain regional markets, log supply can expand when log imports increase relative to log exports.

Demand. The demand for timber is directly related to the underlying demand for pulp and paper products, lumber, panel and other wood related products. The demand for pulp and paper is largely driven by general macroeconomic conditions, including population growth, per-capita income levels, and industry capacity. The demand for lumber and manufactured wood products is affected primarily by the level of new residential construction activity, repair and remodeling activity and industrial demand, which, in turn, is impacted by changes in general economic and demographic factors, including population, interest rates for home mortgages and construction loans. The demand for United States

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timber is also impacted by the amounts of pulp and paper products, lumber, panel and other wood products that are imported into the United States. Significant factors determining the volume of products shipped into the United States by foreign producers are currency valuation shifts as well as tariffs and quotas. Demand for lumber and logs and the volume of products that are shipped from the United States (exports) are also impacted by macroeconomic conditions in foreign markets, primarily China, Canada, Japan and Mexico. In addition to these historically significant factors, the demand for timber may also be affected by emerging markets for wood-based biofuel and bioenergy.
 
Our Business

We are the largest private timberland owner in the United States. As of December 31, 2011, we owned 6.6 million acres of timberlands located in 19 states. Our objective is to maximize the long-term value of these assets. We analyze each timberland acre comprehensively to understand its highest-valued use. We realize these values in many different ways, including harvesting the trees, selling the timberland or converting our trees to lumber, plywood and other wood products.

Our timberlands are well diversified, not only geographically, but also by species mix and age distribution. Growth rates vary depending on species, location, age and forestry practices. We manage our timberlands in two business segments: the Northern Resources Segment, consisting of timberlands in Maine, Michigan, Montana, New Hampshire, Oregon, Vermont, Washington, West Virginia and Wisconsin; and the Southern Resources Segment, consisting of timberlands in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina and Texas. In addition, our Other Segment includes our natural resource businesses that focus on opportunities for oil and natural gas production, mineral extraction, wind power and communication and transportation rights of way. The Real Estate Segment comprises our sales of higher and better use timberlands (some of which are sold through our wholly-owned taxable REIT subsidiaries), and sales of non-strategic timberlands, including sales of large blocks of timberlands. Our Real Estate Segment includes development of certain properties, internally and through a third party joint venture.

Our Manufactured Products Segment, also conducted through our wholly-owned taxable REIT subsidiaries, includes two lumber mills (of which one mill is curtailed until markets improve), two plywood mills, two medium density fiberboard (“MDF”) production lines, one lumber remanufacturing facility in Idaho and one lumber remanufacturing facility in Montana (which is curtailed until markets improve). The Montana facilities, strategically located near our timberlands, convert logs to lumber, plywood and other wood products, and convert chips, sawdust and wood shavings to MDF.

Our Strategies for Growing Asset Value

Our strategies for growing asset value are guided by our disciplined focus to maximize the long-term value of our assets across our geographically diverse ownership. We seek to maximize the long-term value by managing our 6.6 million acres with the ultimate best use in mind. We strive to optimize our resource base through intensive resource management, disciplined acquisitions and dispositions and practicing environmentally responsible resource management.

Intensive Resource Management. We grow the value of our core timber business through intensive management of our timberlands. We view our core timber resource base as a renewable asset with substantial inherent value. We seek to manage our timberlands in a manner that optimizes the balance among current cash flows, the biological growth of our timber and prudent environmental management. Our management approach employs advanced forest management practices, including the use of a computerized timber inventory system, thinning and fertilization, and selective breeding to produce superior seedlings. Tree growth rates vary by region because of differences in weather, climate and soil conditions. Newly-planted seedlings take 20 to 30 years to reach harvest maturity in the Southern United States, 35 to 60 years in the Northwestern United States, 45 to 70 years in the Northeastern United States and 70 to 90 years in inland regions of the Western United States, depending on the desired product. Our goal is to harvest trees at their optimal economic value. We merchandise the tree to get the most value from each log segment, while meeting customer specifications.

Furthermore, as part of our resources business, we focus on realizing the maximum value for non-timber resources on our properties, including opportunities relating to mineral extraction. Our strategy involves forming alliances with industry leaders to identify and pursue such opportunities.

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Disciplined Acquisitions and Dispositions. We estimate that included in the company’s 6.6 million acres of timberlands are approximately 900,000 acres of higher value timberlands that we expect to sell, exchange, and/or develop over the next fifteen years for recreational, conservation or residential purposes. Included within the 900,000 acres of higher value timberlands are approximately 700,000 acres we expect to sell for recreational uses, approximately 100,000 acres we expect to sell for conservation and approximately 100,000 acres that are identified as having development potential. In addition, the company identified approximately 300,000 acres of non-strategic timberlands, which are expected to be sold in smaller acreage transactions over the near and medium term. In the meantime, all of our timberlands will continue to be managed productively in our business of growing and selling timber. Some of our real estate activities, including our real estate development business, are conducted through our wholly-owned taxable REIT subsidiaries.
 
We may sell or exchange timberlands that have high environmental or other public values and reinvest in timberlands that are more suitable for commercial timber management. In addition, we may sell conservation easements that limit development rights, but ensure that the timberlands will be maintained as a working forest in perpetuity. We may also sell or exchange timberlands that are less strategic to the company to other forest products companies or non-industrial investors.

Our disciplined acquisition and disposition strategy has allowed us to expand and diversify our timberland holdings. In 1989, our timber holdings were 1.4 million acres compared to 6.6 million acres at December 31, 2011. This growth through acquisitions has enhanced our operating flexibility and reduced our exposure to regional timber market fluctuations. We expect that any future acquisitions of timberland would be in or near one or more of the timber producing areas of the United States, including, but not limited to, in or near states in which we currently own timberlands.
The table below summarizes acquisitions and dispositions by Plum Creek:
(dollars in millions)
 
2011  (A)
 
2010 (B)
 
2009 (C)
Acquisitions
 
 
 
 
 
 
Purchase Price
 
$
101

 
$

 
$

Acres
 
59,000

 

 

Dispositions
 
 
 
 
 
 
Acres
 
185,000

 
258,000

 
297,000

 
(A) 
Acquired timberlands consist primarily of 50,000 acres located in Alabama and Georgia. Dispositions included 45,000 acres located in the Northern Resources Segment and 140,000 acres in the Southern Resources Segment.
(B) 
There were no significant timberland acquisitions in 2010. Dispositions included 142,000 acres located in the Northern Resources Segment and 116,000 acres in the Southern Resources Segment.
(C) 
There were no significant timberland acquisitions in 2009. Dispositions included 248,000 acres located in the Northern Resources Segment and 49,000 acres in the Southern Resources Segment.

Environmentally Responsible Resource Management. We believe that environmentally sound management practices contribute to our growth in value by providing greater predictability in the management of our assets. We follow the principles of the Sustainable Forestry Initiative® program (“SFISM”) which are aimed at the sound management of all natural resources, including soils, air, watersheds, fisheries and wildlife habitats. These principles are reflected in our habitat planning efforts. We currently have three major conservation agreements under which we manage approximately 1.2 million acres of our timberlands. Our forestry practices on all of our timberlands have been independently audited and certified under the SFISM program. Our manufacturing business follows a set of internally developed environmental principles. See “Federal and State Regulations” below.

Segment Information

Certain financial information for each business segment is included in Note 19 of the Notes to Consolidated Financial Statements and is incorporated herein by reference.

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Northern Resources Segment

As of December 31, 2011, the Northern Resources Segment encompassed approximately 3.3 million acres of timberlands in Maine, Michigan, Montana, New Hampshire, Oregon, Vermont, Washington, West Virginia and Wisconsin, and contained an estimated 108 million tons of standing timber. Consistent with industry practices in the North, Plum Creek’s estimated inventory of standing timber includes deductions for visible and hidden defect. Furthermore, Plum Creek’s estimated inventory includes volumes in environmentally sensitive areas, where we defer harvest until conditions permit the removal of trees without adversely affecting the environment.
 
Timber harvested in the Northern Resources Segment is sold predominately as delivered logs to domestic mills and, in Montana, is also used in our manufacturing facilities. Competitors in the domestic log market include the United States Forest Service, the Bureau of Land Management, the Bureau of Indian Affairs, the British Columbia Ministry of
Forests, and numerous private individuals, domestic and foreign industrial timberland owners, and state agencies located in the regions in which we operate. In the Northern Resources Segment, domestic wood and fiber consuming facilities tend to purchase raw materials within a 200-mile radius due to transportation costs. Competitive factors within a market area generally will include price, species, grade, quality, proximity to wood consuming facilities and the ability to consistently meet customer requirements. We compete based on price, on our reputation as a stable and consistent supplier of well-merchandised, high-quality logs, on our status as a Sustainable Forestry Initiative® certified supplier, and on our ability to maintain qualified independent logging and hauling contractors.

The Northern Resources Segment has several log supply agreements. In general, the agreements require us to supply a specified volume of timber to certain manufacturing facilities in the U.S. We had the following supply agreements in the Northern Resources Segment as of December 31, 2011:
Company
  
Location
  
Product Type
  
Price
  
Expiration Date
Verso Paper Corp. (A)
 
Maine
  
Pulpwood
  
Market Prices
  
December 31, 2013
Moose River Company, Inc. (B)
 
Maine
 
Sawlogs
 
Market Prices
 
June 30, 2013
Escanaba Paper Company (B)
  
Michigan
  
Pulpwood
  
Market Prices
  
December 31, 2016
Swanson Group, Inc. (C)
  
Oregon
  
Sawlogs
  
Market Prices
  
November 15, 2021
Sappi, Ltd. (D)
  
Maine
  
Pulpwood
  
Market Prices
  
November 30, 2023
 
(A)May be mutually extended for two years.
(B)May be mutually extended for three years.
(C)May be mutually extended for five years.
(D)May be extended for fifteen years at the option of Sappi, Ltd.

During 2011, approximately 37% of the timber harvested in our Northern Resources Segment was sold pursuant to a supply agreement. We expect this percentage to be approximately 33% during 2012. The volume commitments under these supply agreements may restrict our ability to sell timberlands in certain areas within our Northern Resources Segment, but also provide us stable demand.

Southern Resources Segment

As of December 31, 2011, the Southern Resources Segment consisted of approximately 3.3 million acres of timberlands (including approximately 221,000 acres of leased land) located in the states of Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina and Texas, and contained an estimated 145 million tons of standing timber. Consistent with industry practices in the South, Plum Creek’s estimated inventory of standing timber includes deductions for visible defect. Furthermore, Plum Creek’s estimated inventory includes volume in environmentally sensitive areas, where we defer harvest until conditions permit the removal of trees without adversely affecting the environment.

Logs in the Southern Resources Segment are sold to third party mills producing a wide array of forest products,

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including manufacturers of lumber, plywood, OSB, and pulp and paper products. We compete with numerous private and industrial timberland owners as well as federal and state agencies across the Southern United States. Due to transportation costs, domestic wood and fiber consuming facilities in the Southern Resources Segment tend to purchase raw material within a 100-mile radius. Competitive factors within our Southern Resources Segment include price, species, grade, quality, proximity to wood consuming facilities and the ability to consistently meet customer requirements. We compete based on our reputation as a stable and consistent supplier of well-merchandised, high-quality logs, on price, on our status as a Sustainable Forestry Initiative® certified supplier, and on our ability to maintain qualified independent logging and hauling contractors. The Southern Resources Segment has a single customer, with multiple facilities, that represents 21% of its revenues. While not expected, the loss of this customer (all facilities) could have a significant impact on its operating income. The customer purchases sawlogs and pulpwood for facilities located across the Southern Resources Segment. These facilities produce lumber, plywood, OSB and pulp and paper products. The loss of an individual facility would not likely have a significant impact on operating income.
  
The Southern Resources Segment has several log supply agreements. In general, the agreements require us to supply a specific volume of timber to certain manufacturing facilities in the U.S. We had the following supply agreements in the Southern Resources Segment as of December 31, 2011: 
Company
  
Location
  
Product Type
  
Price
  
Expiration Date
Evergreen Packaging
  
Arkansas
  
Pulpwood
  
Market Prices
  
December 31, 2012
Rock-Tenn Corp.
 
Louisiana
 
Pulpwood
 
Market Prices
 
September 30, 2014
Newport Timber LLC
  
Georgia
  
Pulpwood
  
Market Prices
  
December 31, 2014
West Fraser South, Inc. (A)
  
Arkansas and Louisiana
  
Sawlogs
  
Market Prices
  
December 31, 2015
Graphic Packaging Corp. (B)
  
Louisiana
  
Pulpwood
  
Market Prices
  
August 6, 2016
 
(A) 
May be renewed for five-year periods upon mutual consent of both parties.
(B) 
May be extended up to an additional ten years by either party.

During 2011, approximately 21% of the timber harvested in our Southern Resources Segment was sold pursuant to a supply agreement. We expect this percentage to be approximately 20% during 2012. The volume commitments under these supply agreements may restrict our ability to sell timberlands in certain areas within our Southern Resources Segment, but also provide us stable demand.

Real Estate Segment

In our Real Estate Segment, we compete with numerous sellers of entitled and unentitled land in hundreds of local markets. Buyers of our timberlands range from individuals purchasing small parcels to large investors looking to own and/or manage large blocks of commercial timberlands. Until a parcel of land is sold, all of our timberlands are managed productively in our business of growing and selling timber. Some of our real estate activities, including our real estate development business, are conducted through our wholly-owned taxable REIT subsidiaries.

The timing of real estate sales is a function of many factors, including the general state of the economy, demand in local real estate markets, the ability of buyers to obtain financing, the ability to obtain entitlements, the number of competing properties listed for sale, the seasonal nature of sales (particularly in the northern states), the plans of adjacent landowners, our expectation of future price appreciation, the timing of harvesting activities, and the availability of government and not-for-profit funding (especially for conservation sales). Also, in any period the price per acre will vary based on the location and physical characteristics of the parcels sold.

Higher Value Timberlands. We review our timberlands to identify properties that may have higher values other than as commercial timberlands. Included in our 6.6 million acres are approximately 900,000 acres of higher value timberlands that we expect to sell, exchange, and/or develop over the next fifteen years for recreational, conservation or residential purposes. Included within the 900,000 acres of higher value timberlands are approximately 700,000 acres we expect to sell for recreational uses, approximately 100,000 acres we expect to sell for conservation and approximately 100,000 acres that are identified as having development potential.

The 100,000 acres identified as having development potential are expected to be developed internally or through third-

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party arrangements over the next fifteen to twenty years. Projects developed internally by the company will generally be low-intensity development limited to activities associated with obtaining entitlements. For larger and more complicated projects, it is our intent to sell to, or enter into third-party joint venture arrangements, with leading land developers. As a result of the current weak housing environment, we expect that the development of many of these properties will be delayed.

Non-Strategic Timberlands. We will, from time to time, make other opportunistic sales of our timberlands. These transactions may involve selling timberlands located in areas where we would like to reduce our market presence, timberlands with lower than average productivity characteristics, or timberlands that can be sold at a price exceeding our value of holding and operating as commercial timberland. We consider these timberlands non-strategic and may sell them in either large or small acreage transactions.

We have approximately 300,000 acres of non-strategic timberlands, which we expect to sell in smaller acreage transactions over the near and medium term (“small non-strategic”). In addition to these 300,000 acres, we may make sales of non-strategic timberlands in larger acreage transactions to commercial timberland buyers as opportunities arise (“large non-strategic”). Examples of such large acreage sales in the recent past include the 30,000 acres we sold in Mississippi for $43 million and the 18,000 acres we sold in Oregon for $60 million in 2011 and the 24,000 acres we sold in Louisiana for $32 million in 2010.

Manufactured Products Segment

Lumber. We produce a diverse line of softwood lumber products, including common, select and edge-glued boards, studs and finger-jointed studs. Lumber products manufactured in our Montana pine board sawmill and remanufacturing facility in Idaho are targeted to domestic lumber retailers, such as retail home centers for use in repair and remodeling projects. Lumber products from our Montana studmill and finger-joint stud remanufacturing plant are targeted to contractor distribution yards for use in home construction. Both pine board and stud lumber products are also sold to stocking distributors who serve a wide variety of end uses. In June 2009, we curtailed both the studmill and the finger-joint stud remanufacturing plant, but maintain both of these facilities in a state of readiness to resume production when lumber market conditions improve.

Competition in our lumber markets is based on price and quality and, to a lesser extent, the ability to meet delivery requirements on a consistent long-term basis and to provide specialized customer service. We compete in domestic lumber markets with many United States, Canadian and European producers. Canadian lumber producers have a significant position in the United States market due to their lower wood fiber costs. Competition from European lumber producers varies from year to year and is significantly impacted by alternative international wood markets and changes in both currency exchange rates and ocean freight rates. The lumber market is also subject to competition from substitute products, such as products made from engineered wood composites, fiber/cement composites, plastics and steel.

Our lumber and plywood mills produce residual wood chips, sawdust and planer shavings as by-products of the conversion of logs into finished products. The wood chips are sold to regional paper and pulp mills or used in our MDF facilities, which also consume wood chips, sawdust and shavings.

Plywood. Our two plywood plants in western Montana produce high-grade softwood plywood that we sell primarily into domestic specialized industrial markets (boat, recreational vehicle and transportation end-uses) and commercial markets (concrete forming overlay products). Our plywood products are generally of higher quality than commodity construction grade products and generally command higher prices in these specialty markets. While some plywood products are sold directly to large industrial customers, the majority is sold via stocking wholesale distributors. During 2011, we sold approximately 7% of our plywood in Canada. See “Lumber” above for a discussion of residual by-products.

Competition within the plywood market is based primarily on price and quality and, to a lesser extent, the ability to offer a full line of products and meet delivery requirements on a consistent, long-term basis. The domestic plywood market is characterized by numerous large and small producers and is also subject to competition from oriented strand board (OSB), a less expensive structural wood panel used primarily in new residential construction markets. Due to its low cost, OSB accounts for approximately 59% of North American structural panel production. To improve operating

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performance, some commodity plywood manufacturers have refocused their products toward the specialty plywood market, resulting in increased competition in the markets we serve. We expect to remain competitive due to our strong customer base, supply of superior quality timber and reputation for high-quality products.

Medium Density Fiberboard. Our MDF facilities in western Montana supply high-quality MDF to a wide range of customers throughout North America. Some of the more common uses for our MDF include furniture and cabinet components, architectural moldings, doors, store fixtures, core material for hardwood plywood, face material for softwood plywood, commercial wall paneling and substrate for laminate flooring. During 2011, we sold approximately 11% and 5% of our MDF in Canada and Mexico, respectively.

Outside North America, the MDF industry has undergone dramatic growth in terms of productive capacity and demand for its products over the past several years. Manufacturers compete on a global scale on the basis of price, quality, service and the availability of specialty products. Additionally, MDF is a ready substitute for solid wood, hardboard and hardwood plywood in specific applications. Competition in the North American MDF industry will continue to be influenced by imports from New Zealand, Asia and South America. In addition, the continuing shift of end product production to offshore manufacturing, as has been seen with certain types of furniture from China and moldings from South America, continues to negatively impact the North American MDF industry. Recently, a weak U.S. dollar along with stronger markets in select Asian and European countries has moderated the impact of imports on U.S. MDF producers.

Raw Materials. Our lumber and plywood facilities obtain approximately half of their logs from our Montana timberlands. Our timberlands currently supply high-quality logs and preferred timber species to our lumber and plywood facilities, although future harvest levels on our Montana timberlands are expected to decline modestly. Also, over time the average log size will decline due to past harvest and growth patterns.

Our lumber and plywood facilities have purchased and will continue to source stumpage and logs from external suppliers, primarily the United States Forest Service, Bureau of Indian Affairs, and state and private timberland owners. We expect to increase purchases of logs from external sources as harvest levels on our Montana timberlands decline. However, timberland harvest levels in and around Montana over the last several years have been declining, and we may experience a reduction in total future log supply which could impact manufacturing facility production or operating rates. The geographic area from which our lumber and plywood facilities obtain logs may expand or contract from year to year as the cost of logs and value of manufactured products fluctuates. (For further discussion of other timber supply issues, see “Federal and State Regulations” below). Our MDF facilities have a consistent supply of chips, sawdust and wood shavings from internal and external sources. However, as a result of declining residual by-products due to lower lumber and plywood production near our MDF facilities, we have had to expand the area in which we purchase chips, sawdust and wood shavings. This has resulted in longer hauling distances and higher raw material costs. Future MDF wood fiber sourcing is expected to also include a portion of pulpwood processed into wood chips. Both MDF and plywood use large quantities of resins, which are procured from a reliable supplier. Our lumber remanufacturing facility (the Idaho pine board plant) obtains about 10-20% of its lumber raw materials from our Plum Creek sawmill. The remainder has been procured from third-party suppliers.

Competition. Markets for manufactured forest products are highly competitive in terms of price and quality. Also, wood products are subject to increasing competition from a variety of substitutes, including non-wood and engineered wood products as well as import competition from other worldwide suppliers. We believe we can compete effectively because of our extensive private timber inventory, our reputation for environmentally responsible forestry, which has positioned us to meet regulatory challenges on a cost-effective basis, our reputation as a dependable, long-term supplier of quality products, our innovative approach to providing high-quality, value-added products to various retail and industrial niche markets and the integration of our timberlands with efficient manufacturing processes.

Other Segment - Natural Resources

We focus on realizing the maximum value potential of our extensive property ownership, including opportunities for oil and natural gas production, mineral extraction and wind power development, along with communication and transportation rights of way. This segment consists of natural resource products and markets subject to widely varying forms and levels of competition. Our strategy involves forming alliances with industry leaders to identify and develop natural resource opportunities. We currently receive royalty revenue from the extraction of oil, natural gas and other

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minerals, and wind leases from our ownership. Additionally, we receive payments in exchange for granting oil and gas exploration rights and communication and transportation rights of way.

We continue to evaluate a wide variety of non-timber natural resource opportunities, and we expect to continue to negotiate royalty arrangements and leases to capture the maximum value for our non-timber natural resource assets. Some of these activities are conducted through our wholly-owned taxable REIT subsidiaries.

Resource Management and Environmental Stewardship

Resource Management

We view our timberlands as assets with substantial inherent value and strive to manage them in an economically prudent and environmentally responsible manner to enhance their value. We seek to enhance value by improving the productivity of our forests, controlling harvesting costs, and sorting and merchandising logs to obtain their highest value.

We use different management techniques in each of our regions, employing a variety of the most cost effective silvicultural methods available. We expect timber growth rates on our timberlands to continue to improve over time as a result of genetic advances in seedlings and intensive forest management practices such as thinning, competition control, and fertilization.
  
Technology and forest management advances have increased growth rates and shortened harvest cycles. We believe our focus on intensive management practices will enhance forest productivity and increase the value of our timberlands over time.

Value can be enhanced on younger timber stands through thinning operations. Value increases as trees grow and add wood volume. Thinning a timber stand enables the healthier and potentially more valuable trees to grow more rapidly. As trees grow larger, they can be used in higher value applications such as high-grade lumber, plywood, and furniture.

Intensive silvicultural applications enhance the growth and value of our timberlands, including the use of trees that are bred specifically for growth, quality and disease resistant traits, early and mid-rotation applications of fertilizers, application of chemicals to control plant competition, and pre-commercial thinning to improve tree growth. These treatments improve not only the growth of the forests, but enhance the quality of the wood grown, reduce future harvesting costs, and shorten the length of harvest rotations.

To maximize the productivity of our timberlands, our approach is to ensure that every acre harvested is promptly reforested. Based on the geographic and climatic conditions of the harvest site, harvested areas may be planted or regenerated naturally by leaving mature trees to reseed the area. Natural regeneration methods are used on a substantial portion of our timberlands in the Northern Resources Segment. In the Southern Resources Segment, substantially all reforestation is done by planting.

Forests are subject to a number of natural hazards, including damage by fire, hurricanes, insects and disease. Changes in global climate conditions may intensify these natural hazards. Severe weather conditions and other natural disasters can also reduce the productivity of timberlands and disrupt the harvesting and delivery of forest products. While damage from natural causes is typically localized and would normally affect only a small portion of our timberlands at any one time, these hazards are unpredictable and losses might not be so limited. The size and diversity of our timberlands, together with our intensive forest management, should help to minimize these risks. Consistent with the practices of other large timber companies, we do not maintain insurance against loss of standing timber on our timberlands due to natural disasters, but we do maintain insurance for loss of already harvested logs due to fire and other significant occurrences.

Environmental Stewardship

We practice environmentally responsible resource management. We adhere to the philosophy that environmentally sound management practices contribute to the company’s growth in value by providing greater predictability in the

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management of its natural resource assets. We follow the principles and objectives of the Sustainable Forestry Initiative® program (“SFISM”), which sets forth a comprehensive approach to responsible forest stewardship. Our forestry practices on all of our timberlands have been independently audited and certified under the SFISMprogram. The SFISM program principles, which can be found on the company’s website at www.plumcreek.com, are designed to ensure that forest management is integrated with the conservation of soil, air and water resources, wildlife and fish habitat, and aesthetics.

Consistent with these principles, we have actively engaged in habitat conservation planning. The habitats of hundreds of species are protected by several agreements, including numerous species listed as threatened or endangered under the Endangered Species Act. These Habitat Conservation Plans (“HCPs”) are as follows: 
Habitat Conservation Agreement
  
Protects
  
State(s)
  
Acres
(millions)
Central Cascades HCP
  
315 species
  
Washington
  
0.1
Native Fish HCP
  
5 species of trout 
and salmon
  
Montana
  
0.9
Karner Blue Butterfly HCP
  
Karner Blue 
Butterfly
  
Wisconsin
  
0.2
Seasonal Effects

Log sales volumes from our Northern Resources Segment are typically at their lowest point in the second quarter of each year when warming weather thaws and softens roadbeds, thus restricting access to logging sites. Log sales volumes from our Southern Resources Segment are generally at their lowest point during the first quarter of each year, as winter rains limit operations.
  
Demand for manufactured products is generally lowest in the winter quarter when activity in construction markets is slower, and higher in the spring, summer and fall quarters when construction activity increases. Working capital varies with seasonal fluctuations.

Timberland sales activity in the northern states is typically at its lowest point in the late fall and winter months when access to the properties is limited due to winter weather.

Federal and State Regulations

General Environmental Regulation

Our operations are subject to federal, state and local environmental laws and regulations, including laws relating to water, air, solid waste and hazardous substances and the requirements of the Federal Occupational Safety and Health Act and comparable state statutes relating to the health and safety of our employees. Although we believe that we are in material compliance with these requirements, there can be no assurance that we will not incur significant costs, civil and criminal penalties, and liabilities, including those relating to claims for damages to property or natural resources, resulting from our operations. We maintain environmental and safety compliance programs and conduct regular internal and independent third-party audits of our facilities and timberlands to monitor compliance with these laws and regulations.

We also expect legislative and regulatory developments in the area of climate change to address carbon dioxide emissions and renewable energy and fuel standards. It is unclear as of this date how any such developments will affect our business. Enactment of new environmental laws or regulations, or changes in existing laws or regulations or the interpretation of these laws or regulations, might require significant expenditures.

Endangered Species

The Endangered Species Act protects species threatened with possible extinction. A number of species indigenous to our timberlands have been listed as threatened or endangered or have been proposed for one or the other status

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under the Endangered Species Act. As a result, our activities in or adjacent to the habitat of these species may be subject to restrictions on the harvesting of timber, reforestation activities and the construction and use of roads.

We have received incidental take permits pursuant to our Habitat Conservation Plans from the U.S. Fish and Wildlife Service that in total cover our forest management on 1.2 million acres in the Northern Resources Segment as of December 31, 2011. As required by the Endangered Species Act, we prepared Habitat Conservation Plans that will govern our management activities on the timberlands covered by the plans in these regions during their respective terms. The Habitat Conservation Plans require us to maintain certain levels of wildlife and fish habitat, and to take numerous other mitigation measures, including the protection of riparian areas. With the implementation of these mitigation measures, we are authorized to conduct forestry practices that are consistent with the conservation plans, even though they may have an adverse impact on the habitat of listed species covered by the plans.

Although the Habitat Conservation Plans have been implemented and are functioning as expected, there can be no assurance that they will remain in force or be sufficient to protect us against subsequent changes to the Endangered Species Act. Nor can there be any assurance that the Habitat Conservation Plans, individually or collectively, will be sufficient to protect us against the listing of additional species, or against changes to other applicable laws and regulations. Any of these changes could materially and adversely affect our operations.

Clean Water

The Clean Water Act and comparable state laws, regulations and best management practices programs protect water quality. As a result, our resource management activities adjacent to rivers and streams as well as the point source discharges from our manufacturing facilities are subject to strict regulation. Most silvicultural activities are defined by regulation to be “non-point sources” and thus do not require federal permits from the Environmental Protection Agency, but rather are subject to state regulation and best management practices programs. Recent litigation, however, has challenged this silvicultural exemption under the Clean Water Act. Accordingly, there can be no assurance that our forest management activities will not be subject to increased regulation under the Clean Water Act in the future. Refer to Part II, Item 7, Recent Events, Clean Water Act - Ninth Circuit Ruling for further discussion of this litigation.

At this time, we believe that federal and state laws and regulations related to the protection of endangered species and clean water will not have a material adverse effect on our financial position, results of operations or liquidity. We anticipate, however, that increasingly strict laws and regulations relating to the environment, natural resources and forestry operations, as well as increased social concern over environmental issues, may result in additional restrictions on us leading to increased costs, additional capital expenditures and reduced operating flexibility. We believe that our experience provides us a relative competitive advantage in managing environmental risks.

Timberlands

Our forest practices are and will in the future be subject to specialized statutes and regulations in the states where we operate. Many of these states have enacted laws that regulate forestry operations, such as growing, harvesting and processing activities on timberlands. Among other requirements, these laws impose some reforestation obligations on the owners of timberlands. Several states require prior notification before beginning harvesting activities. A number of states require a regulatory review taking from 15 to 30 days or more prior to harvesting, depending upon the environmental and other sensitivities of the proposed activity. Other state laws and regulations control the following activities: slash burning and harvesting during fire hazard periods; activities that affect water sources or are in proximity to inland shorelines; activities that affect water quality; and some grading and road construction activities.

Encumbrances

Under the terms of our debt agreements, we have agreed not to pledge, assign or transfer timberlands, except under limited circumstances.

We hold fee title to almost all of our timberlands, with approximately 3% held as leasehold interests. Furthermore, there are no material liens or mortgages of any kind on our timberlands. The title to our timberlands does not always include the related hard rock mineral interests or oil and gas rights. Title to the timberlands is subject to presently

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existing easements, rights of way, flowage and flooding rights, servitudes, hunting and other leases, licenses and permits, none of which materially adversely affect the value of the timberlands or materially restrict the harvesting of timber or other operations.

Employees

As of December 31, 2011, we had 645 salaried and 547 non-union hourly employees. We believe that our employee relations are good. Our wage scale and benefits are generally competitive with other forest products companies. The planting of tree seedlings and the harvesting and delivery of logs are conducted by independent contractors.

Certain Corporate Governance and Other Available Information

The company maintains a code of ethics entitled the Plum Creek Code of Conduct, which applies to each director and to all of the company’s employees including the principal executive officer, the principal financial officer and the principal accounting officer. In addition, each committee of the company’s board of directors is governed by a charter. The Plum Creek Code of Conduct and the governing charters of the Audit, Compensation, and Corporate Governance and Nominating committees, along with the company’s Corporate Governance Guidelines, can be found in the “Corporate Governance” section of the company’s website accessible to the public at www.plumcreek.com. To find this section, click on the “Investors” link and then the “Corporate Governance” link. The company will post any amendments to, or waivers from, a provision of the Plum Creek Code of Conduct (to the extent applicable to any director or any of the company’s executive officers, including the principal executive officer, principal financial officer or principal accounting officer) at this location on its website. The company will also post to its website the name of any director who simultaneously serves on the audit committee of more than three public companies, along with the Board’s determination that such service would not impair any such director’s ability to serve on the company’s audit committee. In addition to these documents, the company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and reports concerning transactions in the company’s stock by directors and certain officers of the company, and any amendments to those reports, can also be found on our website by first clicking the “Investors” link, then the “Financial Publications” link and finally the “SEC Filings” link. Copies of any of these documents may be obtained free of charge through our website or by contacting the company’s Investor Relations Department at 999 Third Avenue, Suite 4300, Seattle, Washington 98104, or by calling (206) 467-3600.
 

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ITEM 1A. RISK FACTORS

Business and Operating Risks

The Cyclical Nature of Our Business Could Adversely Affect Our Results of Operations

Our results of operations are affected by the cyclical nature of the economy, the forest products industry and real estate markets. Historical prices for logs, land and manufactured wood products have been volatile, and we have limited direct influence over the time and extent of price changes. The demand for logs and wood products is affected primarily by the level of new residential construction activity and, to a lesser extent, repair and remodeling activity and other industrial uses. The demand for logs is also affected by the demand for wood chips in the pulp and paper and engineered wood products markets. These activities are, in turn, subject to fluctuations due to, among other factors:

changes in domestic and international economic conditions;
interest rates;
population growth and changing demographics; and
seasonal weather cycles (e.g., dry summers, wet winters).

Decreases in the level of residential construction activity generally reduce demand for logs and wood products. This results in lower revenues, profits and cash flows. In addition, industry-wide increases in the supply of logs and wood products during favorable price environments can also lead to downward pressure on prices. Timber owners generally increase production volumes for logs and wood products during favorable price environments. Such increased production, however, when coupled with even modest declines in demand for these products in general, could lead to oversupply and lower prices.

Our results of operations may also be subject to global economic changes as global supplies of wood fiber and wood products shift in response to changing economic conditions. Changes in global economic conditions that could affect our results of operations include, but are not limited to, new timber supply sources and changes in currency exchange rates, foreign and domestic interest rates and foreign and domestic trade policies. In particular, the recent turmoil in the financial markets and the limited availability of credit is having a negative financial impact on potential buyers of our logs, manufactured forest products and timberland.

In addition, changes in our ability to sell or exchange non-strategic timberlands and timberland properties that have higher and better uses at attractive prices, or changes that adversely affect our ability to execute on certain real estate development activities conducted through our wholly-owned taxable REIT subsidiaries, could have a significant effect on our results of operations. We do not expect significant, if any, improvement in real estate prices or demand during 2012, and recovery to pre-2009 levels may take several years. Many real estate developers are expected to continue to postpone their planned development activities, which may make it more difficult for us to sell development property.

The following factors, among others, may adversely affect the timing and amount of our income generated by our timberland sales or our real estate development activities:

general economic conditions;
availability of funding for governmental agencies, developers, conservation organizations, individuals and others to purchase our timberlands for recreational, conservation, residential or other purposes;
local real estate market conditions, such as oversupply of, or reduced demand for, properties sharing the same or similar characteristics as our timberlands;
competition from other sellers of land and real estate developers;
weather conditions or natural disasters having an adverse effect on our properties;
relative illiquidity of real estate investments;
changes in interest rates;
impact of federal, state and local land use and environmental protection laws;
changes in laws, regulations or the regulatory environment affecting tax, real estate and zoning;
our ability to obtain all land use entitlements and other permits necessary for our development activities; or
real estate markets and their impact on our ability or the ability of our partners to timely pursue our joint venture development strategy.

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The Forest Products Industry is Highly Competitive

The forest products industry is highly competitive in terms of price and quality. Wood products are subject to increasing competition from a variety of substitute products, including non-wood and engineered wood products. For example, plywood markets are subject to competition from oriented strand board, and U.S. lumber and log markets are subject to competition from other worldwide suppliers.

Historically, Canada has been a significant source of lumber for the U.S. market, particularly in the new home construction market. After years of trade disputes over Canadian lumber imports, the U.S. and Canada executed a definitive agreement establishing a system of tiered taxes and/or volume restrictions relating to Canadian lumber imports to the U.S. The agreement expires in 2015. Notwithstanding the signing of this agreement, there can be no assurance that it will at all times, or at any time, effectively create a fair trade environment. Therefore, downward pressure on domestic timber and lumber prices caused by Canadian imports could continue or increase.

Our Joint Ventures May Pose Unique Risks

We may participate in joint venture transactions from time to time, including but not limited to joint ventures involving the ownership and management of timberlands, and we may enter into other joint venture projects with similar or different structures and terms. Any joint venture involves risks including, but not limited to, the risk that one or more of our joint venture partners takes actions that are contrary to our agreed upon terms, our instructions to them or to our policies or objectives, any one of which could cause adverse consequences for us.

Our Cash Dividends are Not Guaranteed and May Fluctuate

We have elected to be taxed as a REIT under sections 856-860 of the United States Internal Revenue Code of 1986, as amended. Generally, REITs are required to distribute 90% of their taxable income. However, REITs are required to distribute only their ordinary taxable income and not their net capital gains income. Accordingly, we do not believe that we are required to distribute material amounts of cash given that substantially all of our taxable income is treated as capital gains income. To the extent capital gains income is not distributed to shareholders, a REIT would be subject to a 35% federal corporate income tax and applicable state income taxes on the undistributed capital gains income. In addition, the shareholders would be required to report their share of the retained capital gains income on their respective income tax returns, but would receive a refundable tax credit for their share of the tax paid at the corporate level.

Our Board of Directors, in its sole discretion, determines the amount of the quarterly dividends (including the determination of whether to retain net capital gains income) to be provided to our stockholders based on consideration of a number of factors including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions that may impose limitations on cash payments, future acquisitions and divestitures, harvest levels, changes in the price and demand for our products and general market demand for timberlands, including those timberland properties that have higher and better uses. Consequently, our dividend levels may fluctuate.

We May Be Unsuccessful in Carrying Out Our Acquisition Strategy

We intend to pursue acquisitions of strategic timberland properties when market conditions warrant. As with any investment, our future acquisitions, if any, may not perform in accordance with our expectations. In addition, we anticipate financing such acquisitions through cash from operations, borrowings under our unsecured credit facilities, proceeds from equity or debt offerings (including offerings of limited partnership units by our operating partnership) or proceeds from asset dispositions, or any combination thereof. Our inability to finance future acquisitions on favorable terms or the failure of any acquisitions to conform to our expectations, could adversely affect our results of operations.

We Depend on External Sources of Capital for Future Growth

Our ability to finance growth is dependent to a significant degree on external sources of capital. Our ability to access such capital on favorable terms could be hampered by a number of factors, many of which are outside of our control,

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including, without limitation, a decline in general market conditions, decreased market liquidity, a downgrade to our public debt rating, increases in interest rates, an unfavorable market perception of our growth potential, a decrease in our current or estimated future earnings or a decrease in the market price of our common stock. In addition, our ability to access additional capital may also be limited by the terms of our existing indebtedness, which, among other things, restricts our incurrence of debt and the payment of dividends. Any of these factors, individually or in combination, could prevent us from being able to obtain the capital we require on terms that are acceptable to us, and the failure to obtain necessary capital could materially adversely affect our future growth.
 
Our Ability to Harvest and Deliver Timber May Be Subject to Limitations Which Could Adversely Affect Our Operations

Weather conditions, timber growth cycles, access limitations, availability of contract loggers and haulers, and regulatory requirements associated with the protection of wildlife and water resources may restrict harvesting of timberlands as may other factors, including damage by fire, insect infestation, disease, prolonged drought, flooding and other natural disasters. Changes in global climate conditions could intensify one or more of these factors. Although damage from such natural causes usually is localized and affects only a limited percentage of the timber, there can be no assurance that any damage affecting our timberlands will in fact be so limited. As is common in the forest products industry, we do not maintain insurance coverage with respect to damage to our timberlands.

Our revenues, net income and cash flow from operations are dependent to a significant extent on the pricing of our products and our continued ability to harvest timber at adequate levels. In addition, the terms of our long-term debt agreements limit our ability to fund dividends to stockholders by accelerating the harvest of significant amounts of timber.

Activities Conducted on Our Timberlands and in Our Manufacturing Facilities Are Subject to Federal and State Environmental Laws and Regulations

Laws, regulations and related judicial decisions and administrative interpretations affecting our business are subject to change, and new laws and regulations that may affect our business are frequently enacted. These changes may adversely affect our ability to harvest and sell timber, operate our manufacturing facilities, remediate contaminated properties and/or develop real estate. These laws and regulations relate to, among other things, the protection of timberlands, endangered species, timber harvesting practices, recreation and aesthetics and the protection and restoration of natural resources, air and water quality. Over time, the complexity and stringency of these laws and regulations have increased, and the enforcement of these laws and regulations has intensified.

We are subject to regulation under, among other laws, the Clean Air Act, the Clean Water Act ("CWA"), the Resource Conservation and Recovery Act, the Comprehensive Environmental Response Compensation and Liability Act of 1980 and the Endangered Species Act, as well as comparable state laws and regulations. Any violation of these and similar environmental laws and related rules and regulations that apply to our operations could result in significant civil penalties and remediation expenses, along with potential injunctions, cease and desist orders and criminal penalties.

We engage directly in the following activities that are subject to regulation:

forestry activities, including harvesting, planting, herbicide and other silvicultural activities, and construction, use and maintenance of roads;
the generation of air emissions;
the discharge of industrial wastewater and storm water; and
the generation and disposal of both hazardous and non-hazardous chemicals and materials.

Some environmental laws impose strict liability, rendering a person liable for environmental damage without regard to the person’s negligence or fault. These laws or future legislation or administrative or judicial action with respect to protection of the environment may adversely affect our business or require significant expenditures.

We are occasionally involved in environmental management matters and proceedings related to our manufacturing operations, our manufactured products and our timberland and natural resources holdings.  Our manufacturing processes use hazardous substances and generate pollutants.  Accordingly, we may be subject to claims for product

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liability or negligence, including claims for personal injury or property damage alleged to have arisen out of the use of our products or the release of hazardous substances. Moreover, on some of our vast land holdings we may discover environmental contamination. To date, we have not incurred significant costs for any material liabilities relating to such matters.

The Endangered Species Act and comparable state laws protect species threatened with possible extinction. A number of species on our timberlands have been and in the future may be protected under these laws. Protection of threatened and endangered species may include restrictions on timber harvesting, road building and other forest practices on private, federal and state land containing the affected species.

The Clean Water Act ("CWA") regulates the direct and indirect discharge of pollutants into the waters of the United States. Under the CWA, it is unlawful to discharge any pollutant from a “point source” into U.S. navigable waters without a permit obtained under the Environmental Protection Agency's (“EPA”) National Pollutant Discharge Elimination System ("NPDES") permit program. Historically, storm water from forest roads conveyed through ditches, culverts and channels were exempted by EPA rule from this permit requirement, leaving these sources of water discharge to state regulation. However, a recent federal circuit court decision has overturned this exemption. The U.S. Supreme Court has been asked to review that decision, and legislation was recently passed that temporarily stays the court's decision until September 30, 2012. However, the EPA exemption and future regulation of forest road storm water runoff remains uncertain. Should water runoff from roads be subject to NPDES permitting, a significant increase in operational and compliance costs for the company is possible. For a more complete description of this matter, see our discussion under Management's Discussion and Analysis of Financial Condition and Results of Operations.
In addition to the foregoing activities, we have leased some of our properties to third-party operators for the purpose of exploring, developing and producing oil and gas and mineral extraction in exchange for fees and royalty payments. These activities involve drilling wells and are subject to federal, state and local laws and regulations. Some of these wells involve hydraulic fracturing, which is a process that creates a fracture extending from the well bore in a rock formation to enable gas or oil to move through the rock pores to a production well. Fractures are typically created through the injection of water, chemicals and sand into the rock formation. On some of our properties, these operations may create risk of environmental liabilities for any unlawful discharge of oil, gas or other chemicals into the air, soil or water. Generally, our lease arrangements provide that our third-party operators indemnify us against any such operating liability and that they maintain liability insurance. However, if for any reason our third-party operators do not indemnify us, or if liability insurance were not in effect, then it is possible that we could be responsible for costs associated with environmental liability caused by third-party operators. If that were to occur, such costs could have a material adverse effect on our financial condition and results of operations.
The Impacts of Climate-Related Initiatives Remain Uncertain at This Time

There are several international, federal and state-level proposals addressing domestic and global climate issues. Generally, such proposals in the U.S. could impose regulation or taxation on the production of carbon dioxide and other “greenhouse gases” in an attempt to reduce emissions to the atmosphere, and provide tax and other incentives to produce and use more “clean energy.” Any future legislative and regulatory activity in this area could, in some way, affect us, but it is unclear at this time whether any such impact would be positive, negative, or significant.

Changes in Transportation Availability or Costs

Our business depends on the availability of logging contractors and providers of transportation of wood products, and is materially affected by the cost of these service providers. Therefore, an increase in the cost of fuel could negatively impact our financial results by increasing the cost associated with logging activities and transportation services, and could also result in an overall reduction in the availability of these services.

Stock Ownership

Provisions in Our Certificate of Incorporation and Delaware Law May Prevent a Change in Control

Some provisions of our certificate of incorporation may discourage a third party from seeking to gain control of us. For example, the ownership limitations described in our certificate of incorporation could have the effect of delaying,

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deferring, or limiting a change of control in which holders of our common stock might receive a premium for their shares over the then prevailing market price. The following is a summary of provisions of our certificate of incorporation that may have this effect.

Ownership Limit. In order for us to maintain our qualification as a REIT, not more than 50% of the value of our outstanding shares of capital stock may be owned, directly or indirectly, by five or fewer individuals, as defined in the Internal Revenue Code. For the purpose of preserving our REIT qualification, our certificate of incorporation prohibits ownership, either directly or under the applicable attribution rules of the Internal Revenue Code, of more than 9.8% of the lesser of the total number of shares of our common stock outstanding or the value of the outstanding shares of our common stock by any stockholder (the “Ownership Limit”). The Ownership Limit may have the effect of discouraging an acquisition of control of us without the approval of our Board of Directors.

The Ownership Limit in our certificate of incorporation also restricts the transfer of our common stock. For example, any transfer of our equity is null and void if the transfer would:

result in any person owning, directly or indirectly, equity in excess of the Ownership Limit;
result in our equity being owned, directly or indirectly, by fewer than 100 persons;
result in us being “closely held” (as defined in the Internal Revenue Code);
result in us failing to qualify as a “domestically controlled REIT” (as defined in the Internal Revenue Code); or
otherwise cause us to fail to qualify as a REIT.

Preferred Stock. Our certificate of incorporation authorizes our Board of Directors to issue up to 75 million shares of preferred stock. Upon issuance, our Board of Directors will establish the preferences and rights for this preferred stock. These preferences and rights may include the right to elect additional directors. The issuance of preferred stock could have the effect of delaying or preventing a change in control of us even if a change in control were in our stockholders’ best interests.

Section 203 of the Delaware General Corporation Law. Section 203 of the Delaware General Corporation Law generally prohibits us from engaging in business transactions with a person or entity that owns 15% or more of our voting stock for a period of three years following the time such person or entity became an “interested stockholder” unless, prior to such time, our Board of Directors approved either the business combination or the transaction which resulted in such person or entity becoming an interested stockholder. A business transaction may include mergers, asset sales and other transactions resulting in financial benefit to the person or entity that owns 15% or more of our voting stock.

Tax Risks

If We Fail to Qualify as a REIT, We Would Be Subject to Tax at Corporate Rates and Would Not Be Able to Deduct Dividends to Stockholders When Computing Our Taxable Income

If in any taxable year we fail to qualify as a REIT, unless we were entitled to relief under the Internal Revenue Code:

we would be subject to federal and state income tax on our taxable income at regular corporate rates;
we would not be allowed to deduct dividends to stockholders in computing our taxable income; and
we would also be disqualified from treatment as a REIT for the four taxable years following the year during which we lost qualification.

If we fail to qualify as a REIT, we might need to borrow funds or liquidate some investments in order to pay the additional tax liability. Accordingly, funds available for investment or dividends to our stockholders would be reduced.

Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code to our operations and the determination of various factual matters and circumstances not entirely within our control. There are only limited judicial or administrative interpretations of these provisions. Although we operate in a manner consistent with the REIT qualification rules, we cannot assure you that we are or will remain so qualified.
  

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In addition, federal and state tax laws are constantly under review by persons involved in the legislative process, the Internal Revenue Service, the United States Department of the Treasury, and state taxing authorities. Changes to the tax law could adversely affect our stockholders. We cannot predict with certainty whether, when, in what forms, or with what effective dates, the tax laws applicable to us or our stockholders may be changed.

Certain of Our Business Activities are Potentially Subject to Prohibited Transactions Tax or Corporate-Level Income Tax

Under the Internal Revenue Code, REITs must generally engage in the ownership and management of income producing real estate. For Plum Creek, this generally includes owning and managing a timberland portfolio for the production and sale of standing timber. Accordingly, the manufacture and sale by us of wood products, the harvesting and sale of logs, and the development and/or sale of certain timberlands are conducted through one or more of our wholly-owned taxable REIT subsidiaries (“TRSs”) because such activities could either generate non-qualifying REIT income or could constitute “prohibited transactions.” Prohibited transactions are defined by the Internal Revenue Code generally to be sales or other dispositions of property to customers in the ordinary course of a trade or business. By conducting our business as described above we believe that we satisfy the REIT requirements of the Internal Revenue Code and could not be subject to the 100% tax that could be imposed if a REIT were to engage in a prohibited transaction. We may not always be successful, however, in limiting such activities to our TRSs. Therefore, we could be subject to the 100% prohibited transactions tax if such instances were to occur. The net income of our TRSs is subject to corporate-level income tax.


ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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ITEM 2. PROPERTIES

We believe that our timberlands and manufacturing facilities are suitable and adequate for current operations (see Item 1. “Business” for discussion of the location and description of properties and encumbrances related to the properties). We own and operate modern manufacturing facilities, reported as part of our Manufactured Products Segment, strategically located near our Montana timberlands. The manufacturing facilities are maintained through on-going capital investments, regular maintenance and equipment upgrades. Additional information about our facilities by product line follows: 
 
 
Annual
Capacity
(in millions)  (A)
 
2011 Actual
Production
(in millions) (B)
Lumber—board feet
 
 
 
 
Columbia Falls, MT
 
95

 
67

Evergreen, MT
 
100

 

Evergreen, MT (Remanufacturing)
 
65

 

Meridian, ID (Remanufacturing)
 
70

 
56

Total Lumber Capacity
 
330

 
123

Plywood—square feet (3/8”)
 
 
 
 
Columbia Falls, MT
 
120

 
85

Evergreen, MT
 
160

 
92

Total Plywood Capacity
 
280

 
177

MDF—square feet (3/4”)
 
 
 
 
Columbia Falls, MT (Thick Line MDF)
 
145

 
60

Columbia Falls, MT (Thin Line MDF)
 
120

 
103

Total MDF Capacity
 
265

 
163

 
(A) 
Capacity represents the proven annual production capabilities of the facility under normal operating conditions and producing a normal product mix. Production volumes may vary due to several factors, including end-use market conditions, wood fiber supply and labor availability.
(B) 
Actual production in 2011 was lower than our historic operating levels as a result of the significant decline in demand for wood products caused by low U.S. housing starts and the ongoing optimization of our facilities' production volumes to our longer term operating expectations. During 2009, we suspended production at our Evergreen, MT sawmill and remanufacturing facility.
 

ITEM 3. LEGAL PROCEEDINGS

There is no individual pending or threatened litigation involving the company that we believe would have a material adverse effect on the company’s financial position, results of operations or liquidity. However, see Note 15 of the Notes to Consolidated Financial Statements.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.


PLUM CREEK 2011 FORM 10-K | 18


Executive Officers of the Registrant

Executive officers are elected annually at the first quarterly meeting of the Board of Directors following the annual meeting of stockholders.
 
Name
 
Age
 
Office (M)
 
Officer
Since
Rick R. Holley (A)
 
60

 
President and Chief Executive Officer
 
1989
Thomas M. Lindquist (B)
 
51

 
Executive Vice President and Chief Operating Officer
 
2001
David W. Lambert (C)
 
51

 
Senior Vice President and Chief Financial Officer
 
2002
James A. Kilberg (D)
 
55

 
Senior Vice President, Real Estate
 
2003
James A. Kraft (E)
 
56

 
Senior Vice President, General Counsel and Secretary
 
1989
Larry D. Neilson (F)
 
52

 
Senior Vice President, Resources and Operations Support
 
2002
Russell S. Hagen (G)
 
46

 
Senior Vice President, Business Development
 
2006
David A. Brown (H)
 
57

 
Vice President, Chief Accounting Officer
 
2002
Barbara L. Crowe (I)
 
60

 
Vice President, Human Resources
 
1997
Joan K. Fitzmaurice (J)
 
54

 
Vice President, Communications, Sustainability and Audit
 
2002
Thomas G. Ray (K)
 
53

 
Vice President, Northwest Resources and Manufacturing
 
2008
Thomas M. Reed (L)
 
63

 
Vice President, Southern Resources
 
2003
 
(A) 
Served since January 1994 as President and Chief Executive Officer. Mr. Holley was Vice President and Chief Financial Officer from April 1989 to December 1993.
(B) 
Served since April 2007 as Executive Vice President and Chief Operating Officer. From December 2001 to March 2007, Mr. Lindquist served as Executive Vice President.
(C) 
Served since August 2006 as Senior Vice President and Chief Financial Officer. From January 2006 to August 2006, Mr. Lambert served as Vice President, Business Development. Mr. Lambert was Vice President, Treasurer from January 2002 to January 2006, Director of Planning, Treasurer from June 1998 to January 2002 and Director of Finance and Treasurer from November 1994 to June 1998.
(D) 
Served since April 2006 as Senior Vice President, Real Estate. Mr. Kilberg previously served as Vice President, Land Management from January 2003 to March 2006.
(E) 
Served since January 2002 as Senior Vice President, General Counsel and Secretary. Mr. Kraft was Vice President, General Counsel and Secretary from April 1996 to January 2002, Vice President, Law from January 1994 to April 1996 and Vice President, Law and Corporate Affairs from April 1989 to December 1993.
(F) 
Served since September 2011 as Senior Vice President, Resources and Operations Support. From October 2005 to September 2011, Mr. Neilson served as Senior Vice President, Business Development. Mr. Neilson was Vice President, Real Estate from August 2002 to October 2005.
(G) 
Served since December 2011 as Senior Vice President, Business Development. From September 2011 to December 2011, Mr. Hagen served as Vice President, Business Development. From October 2006 to September 2011, Mr. Hagen served as Vice President, Real Estate Development. Mr. Hagen served as General Manager, Energy and Natural Resources from January 2002 to October 2006, Director, Financial Operations and Technology from December 1999 to January 2002 and Director, Financial Operations and Risk Management from April 1995 to December 1999.
(H) 
Served since February 2006 as Vice President, Chief Accounting Officer. Mr. Brown was Vice President, Controller (Chief Accounting Officer) from March 2004 to February 2006, Vice President, Controller from January 2002 to March 2004, Controller from November 1994 to January 2002 and Director of Planning from July 1994 to November 1994.
(I) 
Served since April 1997 as Vice President, Human Resources.
(J) 
Served since September 2011 as Vice President, Communications, Sustainability and Audit. From June 2002

PLUM CREEK 2011 FORM 10-K | 19


to September 2011, Ms. Fitzmaurice served as Vice President, Corporate Communications, Audit and Information Technology.
(K) 
Served since April 2010 as Vice President, Northwest Resources and Manufacturing. Mr. Ray was Vice President, Northwest Operations from December 2009 to March 2010, Vice President, Montana Operations from December 2008 to December 2009 and General Manager, Northwest Resources from 2001 to November 2008.
(L) 
Served since August 2006 as Vice President, Southern Resources. From September 2002 to August 2006, Mr. Reed served as Vice President, Southeast Region. Mr. Reed was Regional Manager, Coastal Operations from September 2001 to September 2002.
(M) 
There are no family relationships among the executive officers of the company.


PLUM CREEK 2011 FORM 10-K | 20

PART II / ITEM 5
 

Part II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Plum Creek Timber Company, Inc.’s common stock is traded on the New York Stock Exchange. As of February 15, 2012, there were 14,879 stockholders of record and 161,406,910 outstanding shares.

Trading price data, as reported on the New York Stock Exchange Composite Tape, and declared cash dividend information for the years ended December 31, 2011 and 2010, are as follows: 
 
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
2011
 
 
 
 
 
 
 
 
High
 
$
43.72

 
$
44.28

 
$
41.60

 
$
38.60

Low
 
37.52

 
38.13

 
34.00

 
33.02

Cash Dividend per Share
 
$
0.42

 
$
0.42

 
$
0.42

 
$
0.42

2010
 
 
 
 
 
 
 
 
High
 
$
39.38

 
$
43.75

 
$
38.90

 
$
39.34

Low
 
34.91

 
33.17

 
33.11

 
35.18

Cash Dividend per Share
 
$
0.42

 
$
0.42

 
$
0.42

 
$
0.42


Future dividends will be determined by our Board of Directors, in its sole discretion, based on consideration of a number of factors including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, debt covenant restrictions that may impose limitations on our ability to make cash payments, borrowing capacity, changes in the prices of and demand for our products, and changes in our ability to sell or exchange timberlands at attractive prices. Other factors that our Board of Directors considers include the appropriate timing of timber harvests, acquisition and divestiture opportunities, stock repurchases, debt repayment and other means by which the company delivers value to our stockholders. See Notes 8 and 9 of the Notes to Consolidated Financial Statements for the restrictions under our debt agreements to pay dividends.
 
 

PLUM CREEK 2011 FORM 10-K | 21

PART II / ITEM 5
 

Company Stock Price Performance

The following graph shows a five-year comparison of cumulative total stockholder returns for the company, the Standard & Poor’s 500 Composite Index and the Standard & Poor’s Paper and Forest Product Stock Index for the five years ended December 31, 2011. The total stockholder return assumes $100 invested at the beginning of the period in the company’s common stock, the Standard & Poor’s 500 Composite Index and the Standard & Poor’s Paper and Forest Product Stock Index. It also assumes reinvestment of all dividends.

The following table shows total stockholder return for the previous one year ended December 31:
 
 
2007
 
2008
 
2009
 
2010
 
2011
Plum Creek
 
20.3
%
 
(21.4
)%
 
14.5
%
 
3.8
%
 
1.9
%
S&P Paper and Forest Product Stock Index
 
3.9
%
 
(59.6
)%
 
95.5
%
 
5.5
%
 
14.0
%
S&P 500 Index
 
5.5
%
 
(37.0
)%
 
26.5
%
 
15.1
%
 
2.1
%

The following table shows total indexed return of stock price plus reinvestment of dividends, assuming an initial investment of $100.00 at December 31, 2006 for the years ended December 31:
 
 
12/31/2006
 
2007
 
2008
 
2009
 
2010
 
2011
Plum Creek
 
$
100

 
$
120

 
$
95

 
$
108

 
$
112

 
$
115

S&P Paper and Forest Product Stock Index
 
$
100

 
$
104

 
$
42

 
$
82

 
$
87

 
$
99

S&P 500 Index
 
$
100

 
$
105

 
$
66

 
$
84

 
$
97

 
$
99


Notwithstanding anything to the contrary set forth in any of the Company’s previous filings under the Securities Act of 1933, as amended, or the Exchange Act that might incorporate future filings, including this Form 10-K, in whole or in part, the preceding company stock price performance graph shall not be incorporated by reference into any such filings; nor shall such graph be incorporated by reference into any future filings.

PLUM CREEK 2011 FORM 10-K | 22

PART II / ITEM 5
 

Purchase of Equity Securities

The following table contains information about the company’s purchases of equity securities during the fourth quarter of 2011:
Period
 
Total Number of
Shares  Purchased (A)
 
Average Price  Paid
per Share
 
Total Number of
Shares  Purchased as Part of
Publicly Announced
Plans or
Programs (B)
 
Maximum Number
(or  Approximate
Dollar Value)
of Shares that May
Yet Be
Purchased Under
the  Plans
or Programs (B)
October 1, 2011
through
October 31, 2011
 
299,212  
shares of common
stock
 
$34.88
 
298,400  
shares of common
stock
 
$ 175 million
November 1, 2011
through
November 30, 2011
 
0  
shares of common
stock
 
 
0  
shares of common
stock
 
$ 175 million
December 1, 2011
through
December 31, 2011
 
0  
shares of common
stock
 
 
0  
shares of common
stock
 
$ 175 million
Total
 
299,212  
shares of common
stock
 
$34.88
 
298,400  
shares of common
stock
 
 

(A) 
Includes shares of the company’s common stock purchased from employees in non-open market transactions. The shares of stock were sold by the employees to the company in exchange for cash that was used to pay withholding taxes associated with the vesting of restricted stock unit awards under the company’s stock incentive plan. The price per share surrendered is based on the closing price of the company’s stock on the vesting dates of the awards.
(B) 
The Board of Directors, from time to time, has authorized a share repurchase program. On August 3, 2010, the Board of Directors authorized a $200 million share repurchase program, which was publicly announced on August 4, 2010. At December 31, 2011, the remaining share repurchase authorization was $175 million.


PLUM CREEK 2011 FORM 10-K | 23

PART II / ITEM 6
 

ITEM 6. SELECTED FINANCIAL DATA

Financial Highlights

The following table summarizes selected financial highlights for the five most recent fiscal years (dollars in millions, except per share amounts):
 
 
2011
 
2010
 
2009
 
2008
 
2007
Income Statement Items
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
1,167

 
$
1,190

 
$
1,294

 
$
1,614

 
$
1,675

Operating Income 
 
275

 
297

 
299

 
328

 
424

Equity Earnings from Timberland Venture
 
56

 
57

 
55

 
15

 

Interest Expense (Note Payable to Timberland Venture)
 
58

 
58

 
58

 
14

 

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

 
80

 
89

 
134

 
147

Income before Income Taxes (A)
 
192

 
203

 
205

 
206

 
277

Provision (Benefit) for Income Taxes
 
(1
)
 
1

 
(31
)
 
(27
)
 
(3
)
Income from Continuing Operations
 
193

 
202

 
236

 
233

 
280

Gain on Sale of Properties, net of tax
 

 
11

 

 

 
2

Net Income
 
193

 
213

 
236

 
233

 
282

 
 
 
 
 
 
 
 
 
 
 
Non-Cash Items
 
 
 
 
 
 
 
 
 
 
Depreciation, Depletion and Amortization (B)
 
96

 
96

 
109

 
135

 
134

Basis of Real Estate Sold
 
77

 
132

 
155

 
149

 
108

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Items
 
 
 
 
 
 
 
 
 
 
Total Assets
 
4,259

 
4,251

 
4,448

 
4,780

 
4,664

Total Debt Obligations (to Unrelated Parties) (C)
 
1,996

 
1,909

 
2,006

 
2,189

 
2,532

Note Payable to Timberland Venture
(a Related Party)
 
783

 
783

 
783

 
783

 

 
 
 
 
 
 
 
 
 
 
 
Earnings per Share (Diluted)
 
 
 
 
 
 
 
 
 
 
Income from Continuing Operations
 
$
1.19

 
$
1.24

 
$
1.44

 
$
1.37

 
$
1.60

Net Income
 
$
1.19

 
$
1.31

 
$
1.44

 
$
1.37

 
$
1.61

 
 
 
 
 
 
 
 
 
 
 
Dividends Declared per Share
 
$
1.68

 
$
1.68

 
$
1.68

 
$
1.68

 
$
1.68

 
 
 
 
 
 
 
 
 
 
 
Timberland and Mineral Acquisitions
 
 
 
 
 
 
 
 
 
 
Purchase Price
 
$
101

 
$

 
$

 
$
119

 
$
174

Acres
 
59,000

 

 

 
147,000

 
69,000

 
 
 
 
 
 
 
 
 
 
 
Timberland Dispositions (Acres) (D)
 
185,000

 
258,000

 
297,000

 
314,000

 
252,000

 
 
 
 
 
 
 
 
 
 
 
Harvest Volume (in Million Tons)
 
15.8

 
15.4

 
15.8

 
19.6

 
20.4

 
(A) 
Includes a $13 million loss in 2010, a $2 million loss in 2009 and an $11 million gain in 2008 on extinguishment of debt.
(B) 
Includes a $10 million lumber manufacturing assets impairment loss in both 2009 and 2008 and a $4 million loss related to forest fires in 2007.
(C) 
Includes Timber Obligations accounted for as capital leases.
(D) 
Timberland dispositions during 2008 do not include approximately 454,000 acres located in the Southern Resources Segment that were contributed to a timberland venture in exchange for an equity interest.


PLUM CREEK 2011 FORM 10-K | 24

PART II / ITEM 7
 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statement

This Report contains forward-looking statements within the meaning of the Private Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “projects,” “strategy,” or “anticipates,” or the negative of those words or other comparable terminology. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those described in the forward-looking statements, including those factors described in “Risk Factors” under Item 1A in this Form 10-K. Some factors include changes in governmental, legislative and environmental restrictions, catastrophic losses from fires, floods, windstorms, earthquakes, volcanic eruptions, insect infestations or diseases, as well as changes in economic conditions and competition in our domestic and export markets and other factors described from time to time in our filings with the Securities and Exchange Commission. In addition, factors that could cause our actual results to differ from those contemplated by our projected, forecasted, estimated or budgeted results as reflected in forward-looking statements relating to our operations and business include, but are not limited to:

the failure to meet our expectations with respect to our likely future performance;
an unanticipated reduction in the demand for timber products and/or an unanticipated increase in supply of timber products;
an unanticipated reduction in demand for higher and better use or non-strategic timberlands;
our failure to make strategic acquisitions or to integrate any such acquisitions effectively or, conversely, our failure to make strategic divestitures; and
our failure to qualify as a real estate investment trust, or REIT.

It is likely that if one or more of the risks materializes, or if one or more assumptions prove to be incorrect, the current expectations of Plum Creek and its management will not be realized. Forward-looking statements speak only as of the date made, and neither Plum Creek nor its management undertakes any obligation to update or revise any forward-looking statements.

Organization of the Company

In management’s discussion and analysis of financial condition and results of operations (Item 7 of this form), when we refer to “Plum Creek,” “the company,” “we,” “us,” or “our,” we mean Plum Creek Timber Company, Inc. and its consolidated subsidiaries. References to Notes to Consolidated Financial Statements refer to the Notes to the Consolidated Financial Statements of Plum Creek Timber Company, Inc. included in Item 8 of this Form 10-K.

Plum Creek Timber Company, Inc., a Delaware Corporation and a real estate investment trust, or “REIT”, for federal income tax purposes, is the parent company of Plum Creek Timberlands, L.P., a Delaware Limited Partnership (the “Operating Partnership” or “Partnership”), and Plum Creek Ventures I, LLC, a Delaware Limited Liability Company (“PC Ventures”). Plum Creek conducts substantially all of its activities through the Operating Partnership and various wholly-owned subsidiaries of the Operating Partnership.

The Operating Partnership has borrowed and has currently outstanding $2.0 billion principal amount of debt, including $1.0 billion of publicly issued notes. PC Ventures has borrowed and has currently outstanding $783 million in principal amount of debt (“the Note Payable to Timberland Venture”) from an entity (“the Timberland Venture”) in which a subsidiary of the Operating Partnership has a common and preferred equity interest. See Note 16 of the Notes to Consolidated Financial Statements. PC Ventures used the proceeds from the borrowing to make a $783 million capital contribution to the Operating Partnership in exchange for a preferred equity interest in the Operating Partnership. PC Ventures has no other activities and the Operating Partnership has no ownership interest in PC Ventures.

The Note Payable to Timberland Venture is an obligation of PC Ventures and not an obligation of the Operating Partnership. Therefore, any discussion of the Note Payable to Timberland Venture below is not applicable to the Operating Partnership. Unless otherwise specified, all other discussion and analysis below are applicable to both Plum Creek and the Operating Partnership.

PLUM CREEK 2011 FORM 10-K | 25

PART II / ITEM 7
 


Overview

2011 Operating Performance Compared to 2010

Our operating income for 2011 of $275 million was $22 million lower than our operating income for 2010. Our operations continue to be negatively impacted by near record low housing starts, which are a result of high unemployment, declining home values, an excess supply of homes for sale and the difficulties associated with obtaining financing for home and/or real estate purchases. We expect many of these adverse trends will continue to negatively impact our operating results in 2012.

Operating income in our Northern Resources Segment increased by $11 million from $13 million in 2010 to $24 million in 2011. This increase was due primarily to higher sawlog prices and harvest levels in Oregon as a result of an improved demand from China for export logs. Operating income in our Southern Resources Segment decreased by $33 million from $107 million in 2010 to $74 million in 2011. This decrease was due primarily to lower sawlog and pulpwood prices. Both sawlog and pulpwood prices declined because of the abundant supply of logs due primarily to favorable harvesting conditions. Sawlog prices were also negatively impacted by near record low housing starts.

Operating income in our Manufacturing Products Segment decreased by $9 million from $24 million in 2010 to $15 million in 2011. This decrease was primarily due to the rising of cost of raw materials used to manufacture our plywood and MDF products.

Operating income in our Real Estate Segment increased by $15 million from $180 million in 2010 to $195 million in 2011. Despite selling fewer acres and recognizing lower revenues in 2011, our operating income increased due primarily to selling more properties in 2011 that had a lower book basis.

Liquidity

We ended 2011 with a strong balance sheet and we do not foresee any liquidity issues in 2012. At December 31, 2011, we had a cash balance of $254 million and availability on our line of credit of $250 million. During 2011, we generated $374 million of cash from operating activities. Despite anticipated improved cash flow as a result of higher sawlog harvest volumes and prices, we expect cash provided by operating activities in 2012 to decline due to using $98 million of cash for the purchase of an eight-year timber deed. We expect our cash balance to improve approximately $50 million during 2012 due to anticipated higher sawlog volumes and prices, and also due to financing the purchase of the timber deed. As a result, we expect more than adequate cash to fund our current dividend (approximately $271 million) and planned capital expenditures (approximately $80 million). We have scheduled debt principal payments of $353 million in 2012 and $174 million in January 2013, which we expect to refinance at favorable interest rates.

Key Economic Factors Impacting Our Resources and Manufactured Products Business

Our operating performance for the Resources and Manufactured Products Segments is impacted primarily by the supply and demand for logs and wood products in the United States. The short-term supply of logs is impacted primarily by weather and the level of harvesting activities. The demand for logs and wood products in the United States is impacted by housing starts, repair and remodeling activities, industrial activity and the amount of imported lumber, primarily from Canada.

Selected U.S. housing economic data for the last five years was as follows at December 31:
 
 
2011
 
2010
 
2009
 
2008
 
2007
U.S. Housing Starts (in millions)
 
0.61

 
0.59

 
0.55

 
0.90

 
1.35

Supply of Existing Homes for Sale (in months)
 
6

 
8

 
7

 
11

 
10

30-yr. Fixed Interest Mortgage Rates (average)
 
4.5
%
 
4.7
%
 
5.0
%
 
6.0
%
 
6.3
%

The housing market in 2011 remained depressed again for the fourth consecutive year. Despite record low interest rates and pent-up demand for housing, the U.S. housing market experienced no improvement during 2011. Housing

PLUM CREEK 2011 FORM 10-K | 26

PART II / ITEM 7
 

starts continue to be negatively impacted by high unemployment, declining home values, an excess supply of homes for sale, and strict lending standards.

Housing starts in 2011 increased by 3% over the prior year due to a 54% increase in multi-family starts. However, single-family starts declined by 9% to approximately 430,000 starts in 2011, which was the lowest number of single-family starts in the past 50 years. With a single family unit using approximately twice as much wood as a multi-family unit, the demand for wood products continued to decline in 2011.

Housing starts are not expected to significantly improve until the employment outlook improves and home prices stabilize. Unlike prior recoveries from recession, the unemployment rate continues to remain high and at the end of January 2012, was 8.3%. Although the unemployment rate is slowly declining, at the current rate of job creation it is expected to take another several years before the U.S. returns to full employment. Home values (nationally) continued falling in 2011, declining an additional 3%. Currently, there exists an estimated six million homes that either have been foreclosed or are in the process of foreclosure, that are behind on their mortgage payments, or that owe more on their loan than the value of their home. As a result, home prices may continue to decline in 2012.

While we believe favorable demographics will bode well for the wood products business in the long-run and that annual housing starts will return to more normal levels (i.e. between 1.5 million and 1.6 million annual starts), for the last several years, low housing starts have significantly reduced lumber demand and, therefore, log demand. This has resulted in weak pricing for the logs and wood products we sell. We expect the prices for our logs and wood products to remain weak until there is a significant improvement in the number of U.S. housing starts, reduced levels of unemployment and a decline in the number of homes for sale.

We use independent third-party contract loggers and haulers to deliver our logs to our customers. As weak business conditions in the timber business have persisted for several years, there are fewer loggers and haulers available in certain markets to produce logs. While we continue to enhance strong working relationships with our loggers and haulers, when log markets improve there may be production and delivery constraints that could impact log prices and, potentially, our ability to benefit from these conditions by delivering logs.
 
Over the past several years, fuel prices have fluctuated significantly. Our timber and manufacturing operations are significantly impacted by changing fuel prices. The table below summarizes the average annual U.S. On-Highway diesel fuel prices and the impact of fluctuating fuel prices on our operating income compared to the prior annual period:
 
 
2011
 
2010
 
2009
 
2008
 
2007
Increase/(Decrease) Operating Income (in millions)
 
$
(15
)
 
$
(4
)
 
$
36

 
$(23)
 
N/A

Annual Average U.S. On-Highway Diesel Price (per gallon)
 
$
3.85

 
$
2.99

 
$
2.46

 
$3.81
 
$
2.88


Higher Value and Non-Strategic Timberlands

From time to time, we review our timberlands to identify properties that may have higher values other than as commercial timberlands (see discussion in Item 1 - Real Estate Segment). We estimate that included in the company's 6.6 million acres of timberlands at December 31, 2011, are approximately 900,000 acres of higher value timberlands which are expected to be sold, exchanged, and/or developed over the next 15 years for recreational, conservation or residential purposes. Included within the 900,000 acres of higher value timberlands are approximately 700,000 acres we expect to sell for recreational uses, approximately 100,000 acres we expect to sell for conservation and approximately 100,000 acres that are identified as having development potential. Furthermore, the company has approximately 300,000 acres of non-strategic timberlands, which are expected to be sold over the near and medium term in smaller scale transactions (“small non-strategic”). Not included in the above 900,000 higher value acres and 300,000 small non-strategic acres are other acres that are expected to be sold in large acreage transactions to commercial timberland buyers as opportunities arise (“large non-strategic”). Some of our real estate activities, including our real estate development business, are conducted through our wholly-owned taxable REIT subsidiaries. In the meantime, all of our timberlands continue to be managed productively in our business of growing and selling timber.

During 2011, we sold approximately 47,000 acres of higher and better use / recreational properties for proceeds of $96 million, approximately 67,000 acres of conservation properties for proceeds of $70 million, approximately 22,000 acres of small non-strategic properties for proceeds of $27 million, along with approximately 48,000 acres of large

PLUM CREEK 2011 FORM 10-K | 27

PART II / ITEM 7
 

non-strategic properties for proceeds of $103 million. We expect revenue from real estate sales during 2012 to range between $275 million and $325 million. We expect an increased proportion of our 2012 revenue for real estate sales to come from the sale of large non-strategic properties.

Our land development business slowed dramatically starting in 2008 and has since remained weak. We do not expect any significant proceeds from the sale of real estate development properties in 2012. We expect our real estate development business to remain weak until there is a significant improvement in consumer confidence, real estate values begin appreciating and financing becomes available for such properties.

Harvest Levels

The volume of trees we harvest each year and the percentage of sawlogs and pulpwood (product mix) included in our annual harvest also impact our operating performance. During 2011, we harvested a total of 15.8 million tons compared to a total of 15.4 million tons during 2010. We expect total 2012 harvest levels to increase approximately 7% as a result of the recent purchase of an eight-year timber deed and increasing our sawlog harvest. While we have the flexibility to modify our annual harvest volumes, based on market conditions, we expect harvest levels to increase approximately 10% over the near-term (next five years) and more than 30% over the long-term (ten years and beyond) compared to 2011 harvest levels. Future harvest levels may vary from historic or expected levels due to weaker or stronger than anticipated markets or other factors outside of our control, such as weather and fires. Future harvest levels may also be impacted by the acquisition of timberlands or the disposition of timberlands beyond the 1.2 million acres described above in the Higher Value and Non-Strategic Timberlands section.


Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Under different assumptions or conditions, actual results may differ from these estimates.

We believe the following critical accounting policies affect our most significant judgments and estimates used in preparation of our consolidated financial statements:

Revenue Recognition for Timber Sales

Timber sales revenues are recognized when legal ownership and the risk of loss transfer to the purchaser and the quantity sold is determinable. We sell timber under delivered log agreements and through sales of standing timber (or “stumpage”) using pay-as-cut sales contracts or timber deed sale agreements.

Delivered Log Sales. Under a delivered log sale agreement, we harvest the timber and deliver it to the buyer. Revenue is recognized when the log is delivered as risk of loss and title transfer to the buyer. With delivered log sales, we incur the cost of logging and hauling.

Pay-as-Cut Sales Contracts. Pay-as-cut sales contracts are agreements in which the buyer agrees to purchase and harvest specified timber on a tract of land for an agreed upon price for each type of tree over the term of the contract (usually 12 to 18 months). In some cases, an advance is received in connection with pay-as-cut sales contracts. In other cases, the buyer agrees to harvest only certain trees on a tract of land. Under pay-as-cut sales contracts, the buyer is responsible for all logging and hauling costs. Revenue is recognized when the timber is harvested, as title and risk of loss has transferred to the buyer. Total revenue recognized under a pay-as-cut sales contract is the total volume of wood removed multiplied by the unit price for each type of tree.

Timber Deeds. Timber deed sales are agreements in which the buyer agrees to purchase and harvest specified timber (i.e. mature pulpwood and/or sawlogs) on a tract of land over the term of the contract (usually less than 18 months). Unlike a pay-as-cut sales contract, risk of loss and title to the trees transfer to the buyer when the contract is signed. The buyer pays the full purchase price when the contract is signed and we do not have any additional performance

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obligations. Under a timber deed, the buyer is responsible for all logging and hauling costs and the timing of such activity. Revenue from a timber deed sale is recognized when the contract is signed because the earnings process is complete. Timber deeds are generally marketed and sold to the highest bidder. Bids are typically based on a timber cruise which is an estimate of the total volume of timber on a tract of land broken down by the various types of trees (such as softwood sawlogs, hardwood pulpwood, etc.). Total revenue recognized under a timber deed is not dependent upon the volume or types of trees actually harvested.

The following table summarizes amounts recognized under each method from sales to external customers in the company’s consolidated financial statements for the years ended December 31 (in millions): 
 
 
2011
 
2010
Revenues from:
 
 
 
 
Delivered log sales
 
$
497

 
$
486

Pay-as-cut sales
 
$
35

 
$
30

Timber deed sales
 
$
3

 
$
12


Substantially all of our timber sales in the Northern Resources Segment are under delivered log sale agreements. In our Southern Resources Segment, approximately 11% of our timber sales in 2011 and 12% of our timber sales 2010 consisted of pay-as-cut sales contracts or timber deed sales. Under sales of stumpage, the buyer is responsible for the logging and hauling costs; therefore, the operating profit as a percentage of revenue is typically higher in our Southern Resources Segment.

Real Estate Sales

The timing of real estate sales is a function of many factors, including the general state of the economy, demand in local real estate markets, the ability to obtain entitlements, the ability of buyers to obtain financing, the number of competing properties listed for sale, the seasonal nature of sales (particularly in the northern states), the plans of adjacent landowners, our expectation of future price appreciation, the timing of harvesting activities, and the availability of government and not-for-profit funding (especially for conservation sales). As a result, the timing of our real estate sales may materially impact our reported operating income and net income.
 
During 2011, the Real Estate Segment reported an operating profit percentage of approximately 65%. Over the last ten years, the Real Estate Segment’s annual operating profit percentage has ranged from 40% to 70% of revenues. The operating profit percentage depends on the nature of the interest sold and how much the market value of the property has risen over its book value. For example, sales of properties that have been held by the company for a long time (i.e. decades) will tend to have relatively higher operating profit percentages than properties that have been held by the company for shorter time periods. In contrast, the sale of conservation easements will generally have an operating profit percentage of close to 100% because historically no book basis was allocated to these types of sales.

In general, timberlands are acquired primarily for long-term use in our timber operations. In connection with timberland acquisitions, we are generally not able to identify, with any level of precision, our future real estate sales (i.e. specific properties with a higher value than for use in timber production). However, our purchase price allocation and related appraisals for these acquisitions may reflect greater values for real estate which may be sold in the future but are not yet specifically identified. Therefore, in connection with our purchase price allocation for timberland acquisitions, the greater values for real estate are allocated proportionately among all of the acres acquired. Specific properties cannot be identified in advance because their value is dependent upon numerous factors, most of which are not known at the acquisition date, including current and future zoning restrictions, current and future environmental restrictions, future changes in demographics, future changes in the economy, current and future plans of adjacent landowners, and current and future funding of government and not-for-profit conservation and recreation programs. We believe that current and future results of operations could be materially different under different purchase price allocation assumptions.

Impairment of Long-Lived Assets

We evaluate our ability to recover the net investment in long-lived assets when required by the accounting standards. We recognize an impairment loss in connection with long-lived assets used in our business when the carrying value

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(net book value) of the assets exceeds the estimated future undiscounted cash flows attributable to those assets over their expected useful life. Impairment losses are measured by the extent to which the carrying value of a group of assets exceeds the fair value of such assets at a given point in time. Generally, our fair value measurements used in calculating an impairment loss are categorized as Level 3 measurements (i.e. unobservable inputs that are supported by little or no market activity) under the fair value hierarchy in the Accounting Standards Codification. Typically, we will use a discounted cash flow model or an external appraisal to estimate the fair value of the affected assets. Furthermore, we recognize an impairment loss in connection with long-lived assets held for sale when the carrying value of the assets exceeds an amount equal to their fair value less selling costs.

The company has had a long history of acquiring timberlands. Management is required to estimate the fair values of acquired assets and liabilities as of the acquisition date. Subsequent to the original allocation, assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable through future operations. Our long-lived assets are grouped and evaluated for impairment at the lowest level for which there are independent cash flows. We track cash flows for our 6.6 million acres of timberlands by grouping them into seven geographic areas in the Northern Resources Segment and five geographic areas in the Southern Resources Segment. Additionally, we track cash flows for each of our manufacturing facilities.

Timber and Timberlands Used in Our Business. For assets used in our business, an impairment loss is recorded only when the carrying value of those assets is not recoverable through future operations. The recoverability test is based on undiscounted future cash flows over the expected life of the assets. We use one harvest cycle (which ranges between 20 and 90 years) for evaluating the recoverability of our timber and timberlands. Because of the inherently long life of timber and timberlands, we do not expect to incur an impairment loss in the future for the timber and timberlands used in our timber business.

Timber and Timberlands Held for Sale. An impairment loss is recognized for long-lived assets held for sale when the carrying value of those assets exceeds an amount equal to its fair value less selling costs. An asset is generally considered to be held for sale when we have committed to a plan to sell the asset, the asset is available for immediate sale in its present condition, we have initiated an active program to locate a buyer (e.g., listed with a broker), and the sale is expected to close within one year. During the last several years, the above criteria have been met by some of our timberland properties, and we have recognized annual impairment losses of between $1 million and $3 million for certain of these properties (see Note 4 of the Notes to Consolidated Financial Statements).
 
An impairment loss is generally not recorded until management expects that timberlands will be sold within the next 12 months. For many properties that are currently listed for sale, it is difficult to conclude whether they will be sold within one year and to estimate the price. Nevertheless, management performs a probability assessment for all properties that are listed for sale and records an impairment loss (to the extent the property’s book basis exceeds its estimated fair value net of selling cost) in the quarter in which management expects the property will be sold within twelve months.

We expect to continue to sell or exchange timberlands to other forest products companies or non-industrial buyers, and it is probable that we will recognize additional impairment losses, some of which could be material, in the future in connection with sales of timberlands.

Property, Plant and Equipment. The carrying value of Property, Plant and Equipment represents primarily the net book value of our eight (two of which are curtailed until markets improve) manufacturing facilities. Each manufacturing facility is tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable through future operations. The estimated future cash flows over the remaining useful life of a manufacturing facility is highly subjective and is dependent upon estimates for future product pricing, raw material costs and availability, volumes of product sold, and residual value of the facility. No impairment losses were recorded during 2011 or 2010. During 2009, as a result of an analysis to rationalize and consolidate its lumber operations, the company recorded an impairment charge of $10 million related to certain lumber manufacturing assets.

We currently estimate that the carrying value for our eight facilities is recoverable through future operations and that our estimate of future cash flows is reasonable. However, if wood product prices were to remain weak at current levels for an extended period of time, or if log or raw material availability declines, we may record an impairment loss for one or more of our manufacturing facilities in a future period.


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Capitalized Real Estate Development Costs. Current and future costs associated with specific real estate development projects are capitalized once management has concluded it is probable that a project will be successful. Real estate development costs are expensed as incurred when management is not able to conclude that it is probable a project will be successful. Furthermore, previously capitalized costs for specific projects are written-off when management revises its prior assessment and concludes that it is probable a project will not be successful and costs will not be recovered. For many of our projects, there is less judgment in making this determination due to prior experience in the local market or advice from consultants. However, for some of our larger projects where we have limited experience in the local market or for projects in environmentally sensitive areas, there is significant judgment in assessing the expected outcome for the projects. At December 31, 2011, we have $30 million of capitalized costs associated with projects that management expects will be successful. Of these capitalized costs, approximately $18 million represent costs for a single project that has been approved by a state commission but is being appealed in court by groups opposed to the project. While not expected, if the approval is reversed, some or all of these capitalized costs could be written off in the next twelve months.

Depletion

Depletion, or costs attributed to timber harvested, is recorded as trees are harvested. Depletion rates for each geographic area are adjusted at least annually. Depletion rates are computed by dividing (A) the sum of (1) the original cost of the timber less previously recorded depletion plus (2) estimated future silviculture costs, including the impact of inflation, that are expected to be incurred over the next harvest cycle, by (B) the total timber volume that is estimated to be harvested over the harvest cycle. The harvest cycle can be as short as 20 years in the South to as long as 90 years in the North. The estimate of future silviculture costs is limited to the expenditures that are expected to impact growth rates over the harvest cycle. The depletion rate calculations do not include an estimate for either future reforestation costs associated with a stand’s final harvest or future volume in connection with the replanting of a stand subsequent to its final harvest.
 

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The following table summarizes depletion expense recognized in the company’s financial statements, key assumptions and sensitivities to changes in assumptions for the years ended December 31 (dollars in millions, except per ton amounts):
 
 
 
2011
 
2010
Depletion Expense
 
 
 
 
Northern Resources Segment
 
$
17

 
$
18

Southern Resources Segment
 
48

 
48

Total Depletion Expense
 
$
65

 
$
66

 
 
 
 
 
Average Depletion Rates (per ton)
 
 
 
 
Northern Resources Segment
 
$
4.13

 
$
4.61

Southern Resources Segment
 
$
4.09

 
$
4.18

 
 
 
 
 
Assumptions Used to Determine the Average Depletion Rates
 
 
 
 
Estimated Future Silviculture Costs, including the Impact of Inflation
 
 
 
 
Northern Resources Segment
 
$
49

 
$
62

Southern Resources Segment (A)
 
$
531

 
$
485

 
 
 
 
 
Estimated Future Volume (in million tons)
 
 
 
 
Northern Resources Segment
 
269

 
271

Southern Resources Segment  (B)
 
413

 
392

 
 
 
 
 
Sensitivity of Results to Changes in Key Assumptions
 
 
 
 
Increase in Depletion Expense for a 10%:
 
 
 
 
Increase in Estimated Future Silviculture Costs (C)
 
 
 
 
Northern Resources Segment
 
$
0.1

 
$
0.1

Southern Resources Segment
 
$
1.5

 
$
1.4

 
 
 
 
 
Decrease in Estimated Future Volume (D)
 
 
 
 
Northern Resources Segment
 
$
1.9

 
$
2.3

Southern Resources Segment
 
$
5.2

 
$
5.3

 
(A) 
Reflects an increase in our estimates of future costs associated with fertilization treatments due to higher chemical and application costs and more acres treated.
(B) 
Increase from 2010 is due primarily to an increase in our estimate of rotation length for certain stands and improved growth rates.
(C) 
Assumes future timber volumes do not change.
(D) 
Assumes future silviculture costs do not change.

Significant estimates and judgments are required to determine both future silviculture costs and the volume of timber available for harvest over the harvest cycle. Some of the factors impacting the estimates are changes in inflation rates, the cost of fertilizers and chemicals, the cost of capital, the actual and estimated increase in growth rates from fertilizer applications, the relative price of sawlogs and pulpwood, the actual and expected real price appreciation of timber, the scientific advancement in seedling and growing technology, and changes in harvest cycles.

We have invested in technology that enables us to predict our current standing inventory of trees, future growth rates, and the benefits of scientific advancements in connection with seedlings, planting techniques and fertilizer applications. Therefore, while estimates with respect to depletion computations will be revised at least annually, we do not expect the depletion rates will change materially from year to year.



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Depletion Expense in 2012. In January 2012, we purchased standing timber under an eight-year timber deed for approximately $103 million with initial volume of approximately 4.7 million tons. The timber deed will have its own unique depletion rate. We expect depletion expense in our Southern Resources Segment to increase by approximately $11 million as a result of harvesting a portion of the timber deed's standing timber in 2012.

Accounting for Share-Based Compensation

Plum Creek has a stockholder approved Stock Incentive Plan that provides for the award of non-qualified stock options, restricted stock and restricted stock units, value management awards and dividend equivalents. See Note 13 of the Notes to Consolidated Financial Statements.
  
Grants of value management awards are classified and accounted for as liabilities. As a result, the expense recognized over the performance period will equal the fair value (i.e., cash value) of an award as of the last day of the performance period multiplied by the number of awards that are earned. Furthermore, the quarterly expense recognized during the performance period is based on the fair value as of the end of the most recent quarter. Prior to the end of the performance period, compensation cost for value management awards is based on the awards’ most recent quarterly fair values and the number of months of service rendered during the performance period.

Fair values for value management awards are computed based on our historical relative total shareholder return and simulated relative total shareholder return compared to the performance of peer groups consisting of forest products companies, the S&P 500 Index and the Morgan Stanley REIT Index over the same period (“Peer Group”). The simulated total shareholder return of the company and the Peer Group is computed using a Monte Carlo simulation. The key assumptions used in the simulation of the company’s and the Peer Group’s total shareholder return are volatility, beta (the measure of how Plum Creek’s stock moves relative to the market as a whole) and risk-free interest rate.

The fair value of the liability for outstanding value management awards at December 31, 2011 was $3 million, which is based on the current fair value of outstanding awards multiplied by the percentage of months that services were provided during the performance period. The liability at December 31, 2011 could range between $0 and $13 million based on the possible fair value of all outstanding liability based awards. We could have a material adjustment to our share-based compensation liability to the extent there is a material change in the fair value of our value management awards during the quarter.

Pensions

Pension Plans Overview. Plum Creek provides pension benefits under defined benefit pension plans that cover substantially all of our employees. See Note 12 of the Notes to Consolidated Financial Statements. We maintain a qualified defined benefit pension plan and two supplemental (non-qualified) defined benefit pension plans. Participants’ benefits vest after three years of service. The cash balance benefits for salaried employees is determined based primarily on certain percentages of compensation, age, years of service and interest accrued based on the 30-year Treasury bond rate. Participants who were employees of the company on September 1, 2000, earn benefits based on the greater of the cash balance benefits or a monthly pension benefit that is principally based on the highest monthly average earnings during any consecutive sixty-month out of the last 120-month period and the number of years of service credit. The benefits to hourly employees are generally based on a fixed amount per year of service.

Plum Creek’s contributions to its qualified pension plan vary from year to year, but the company has made at least the minimum contributions required by law in each year. It is generally the company’s policy to fund the qualified pension plan annually such that the fair value of plan assets equals or exceeds the actuarially computed accumulated benefit obligation (the approximate actuarially computed current pension obligation if the plan was discontinued) over a market cycle (generally 3 to 5 years). The company has the same funding policy for the non-qualified plan. However, assets related to the non-qualified plans are held in a grantor trust and are subject to the claims of creditors and, therefore, are not considered plan assets.

Under current U.S. generally accepted accounting principles (U.S. GAAP), the company makes estimates and assumptions that can have a significant impact on the amounts reflected in our financial statements. These assumptions and their sensitivities, along with the application of the accounting principles and impact to our financial statements, are discussed in the next several sections.

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Current Year Impact and Analysis. During 2011, our pension liability increased from $135 million to $164 million and our pension assets decreased from $106 million to $100 million. Our pension liability represents the present value of expected future benefit payments and is remeasured annually as of December 31. Each year, our pension liability increases due to employees working for one more year (service cost), and getting one year closer to receiving benefit payments (interest cost), and decreases as pension benefits are paid. Our pension liability is also adjusted due to changes in interest rates. During 2011, our pension liability increased by $21 million (an actuarial loss) due to falling interest rates. Actuarial losses are initially recognized in other comprehensive income (loss) and then subsequently amortized (charged) to pension expense over future periods.

Annually, our plan assets increase due to cash contributions from the company, decrease due to pension benefit payments, and will increase or decrease as a result of realized and unrealized gains and losses for the assets. Our pension expense is reduced by the expected returns on plan assets. We currently estimate that our long-term return on plan assets will average 7.5% per year. Based on the plan assets balance, our 2011 pension expense was reduced by $7 million (the expected return on plan assets in dollars). The actual return on plan assets was a loss of $3 million for 2011. We initially recognize this difference (shortfall) of $10 million in other comprehensive income (loss) and then subsequently will amortize (charge) to pension expense over future periods.

At December 31, 2011, our cumulative net actuarial pension loss recognized in accumulated other comprehensive income (loss) was $53 million (includes both unrecognized changes in our pension liability and plan assets), of which $4 million will be amortized (charged) to 2012 pension expense. Each year the future amortization of our actuarial pension loss recognized in pension expense will increase or decrease due to changes in interest rates and actual returns on plan assets compared to expected returns. Additionally, while not expected, future company contributions may need to be increased to the extent interest rates remain low or actual investment returns on plan assets do not meet our expectations.

Significant Assumptions. The computation of the company’s benefit obligation, pension cost and accrued pension liability under U.S. GAAP requires us to make certain assumptions involving primarily the following (weighted-average rates):
 
 
2011
 
2010
Assumptions Used to Determine the Benefit Obligation at December 31
 
 
 
 
Discount Rates (A)
 
 
 
 
Annuity Distributions
 
4.95
%
 
5.90
%
Lump-Sum Distributions
 
3.02
%
 
4.19
%
Rate of Compensation Increase (B)
 
3.45
%
 
3.45
%
 
 
 
 
 
Assumptions Used to Determine Net Periodic Benefit Cost
 
 
 
 
Discount Rate
 
 
 
 
Annuity Distributions
 
5.90
%
 
5.90
%
Lump-Sum Distributions
 
4.19
%
 
4.31
%
Expected Long-Term Return on Plan Assets (C)
 
7.50
%
 
7.75
%
Rate of Compensation Increase (B)
 
3.45
%
 
3.45
%
 
(A) 
The December 31, 2011 discount rate for annuity distributions was determined by the resulting yield of a hypothetical bond portfolio at December 31, 2011, matched to the expected benefit payments under the plans. Bonds selected for this portfolio had a Moody’s or Standard & Poor’s credit rating of “AA” or better as of December 31, 2011. The December 31, 2011 discount rate for lump-sum distributions is based on yields on 30-year U.S. Treasury bonds.
(B) 
The assumed rate of increase of future compensation levels represents our long-term estimate of such increases on the basis of the composition of plan participants, past results and market expectations.
(C) 
The expected long-term rate of return on plan assets assumption is based on the current level of expected returns on risk free investments (primarily government bonds), the historical level of the risk premium associated with

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the other asset classes in which the portfolio is invested and the expectations for future returns on each asset class. The expected return for each asset class was then weighted based on the target asset allocation to develop the expected long-term rate of return on plan assets assumption for the portfolio.

Since pension benefits may be settled in either a single lump-sum or an annuity distribution, both the estimated percentage of participants electing a lump-sum payment and the assumed interest rate (discount rate) used in computing the lump-sum benefit are key assumptions. We currently estimate that approximately half of the qualified plan participants will elect a lump-sum distribution upon termination. Other key assumptions used in the estimate include primarily those underlying the mortality table, and expected long-term rates for inflation, retirement and withdrawals, all of which are based on plan experience and standard actuarial methods but which are nevertheless subject to uncertainty.

It is likely that the actual return on plan assets and the outcome of other uncertain variables will differ from those used in estimating our pension costs and pension obligation. Furthermore, the company may, from time to time, adjust the asset allocation, which may have an impact on the long-term rate of return on plan assets.

Financial Measures and Sensitivities. The following table summarizes key financial measures and sensitivities to changes in assumptions for the years ended December 31 (in millions):
 
 
 
2011
 
2010
Key Financial Measures
 
 
 
 
Pension Expense 
 
$
9

 
$
8

Cash Pension Plan Contributions—Qualified Plan
 
3

 
4

Cash Grantor Trust Funding—Supplemental Plans
 

 
1

Current Accrued Pension Liability
 
4

 
3

Non-Current Accrued Pension Liability
 
60

 
26

Sensitivity to Changes in Key Assumptions
 
 
 
 
Increase in Pension Expense for Every 0.25 Percentage Point:
 
 
 
 
Decrease in Long-Term Rate of Return on Plan Assets
 
$
0.3

 
$
0.3

Decrease in Weighted-Average Discount Rate
 
0.6

 
0.6

Increase in Rate of Increase in Compensation Levels
 
0.2

 
0.2

Increase in Qualified Pension Funding (actuarially
    computed accumulated benefit obligation) for:
 
 
 
 
Every 0.25 Percentage Point Decrease in the Weighted-Average Discount Rate
 
$
4.1

 
$
3.3

Every 0.25 Percentage Point Decrease in the Weighted-Average Discount Rate Assumption for Lump-Sum Benefits
 
$
1.4

 
$
1.3

 
Assuming an average long-term rate of return on plan assets of 7.50%, and weighted-average discount rates of 4.95% for annuity distributions (and 3.02% for lump-sum distributions) for 2012 and beyond, and a 3.45% rate of increase in compensation levels, we project our annual pension expense for 2012 will be approximately $11 million and will range between $11 million and $12 million each year for 2013 through 2016. In 2012, we expect our cash funding for the qualified pension plan to range between $3 million and $7 million and our cash funding for the supplemental (non-qualified) pension plans to range between $0 and $2 million. Assuming no change to our disclosure assumptions, under our present funding policy and current funding rules for the qualified pension plan we would expect cash contributions to be approximately $10 million each year in 2013 through 2015 and approximately $9 million in 2016. We expect to fund between $0 and $2 million in 2012 to our supplemental (non-qualified) pension plans and approximately $1 million each year for 2013 through 2016.


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Off-Balance Sheet Arrangements, Contractual Obligations, Contingent Liabilities and Commitments

The company has no off-balance sheet debt. Our consolidated financial statements reflect all of the operations and assets and liabilities of the company. The company has an equity investment in an unconsolidated entity, discussed below. Otherwise, the company has no other relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities. The company is not a party to any derivative transactions.

On October 1, 2008, the company contributed 454,000 acres of timberlands located in its Southern Resources Segment to a timberland venture in exchange for an equity interest. The company accounts for its interests under the equity method of accounting. See Notes 16 and 17 of the Notes to Consolidated Financial Statements.

The following table summarizes our contractual obligations at December 31, 2011 (in millions):
 
 
 
 
 
Payment Due by Period
Contractual Obligations
 
Total
 
Less Than
1 Year
 
1-3 Years
 
3-5 Years
 
More Than
5 Years
Long-Term Debt (A)
 
$
2,374

 
$
426

 
$
368

 
$
891

 
$
689

Note Payable to Timberland Venture (B)
 
1,187

 
58

 
116

 
116

 
897

Operating Lease Obligations
 
12

 
3

 
5

 
3

 
1

Timber Obligations
 
6

 
1

 
1

 

 
4

Long-Term Incentive Plans
 
3

 

 
3

 

 

Purchase Obligations (C)
 
370

 
55

 
68

 
45

 
202

Other Long-Term Liabilities (D)
 

 

 

 

 

Total Contractual Obligations
 
$
3,952

 
$
543

 
$
561

 
$
1,055

 
$
1,793

 
(A) 
In addition to principal, long-term debt includes related interest obligations based on the coupon or stated interest rate for our fixed rate debt and the variable interest rate as of December 31, 2011 of 0.65% for our $350 million term credit agreement. Interest obligations are $73 million (less than one year), $115 million (1-3 years), $78 million (3-5 years), and $114 million (more than 5 years). As we expect borrowings outstanding under our line of credit to vary, only repayment of the principal is included. In 2011, interest expense related to our line of credit was less than $1 million.
(B) 
On October 1, 2008, the company borrowed $783 million from the Timberland Venture (a related party). The annual interest rate on the note payable is fixed at 7.375%. Interest obligations are $58 million (less than one year), $116 million (1-3 years), $116 million (3-5 years), and $114 million (more than 5 years).
(C) 
Purchase obligations are comprised primarily of $230 million for a 15-year agreement for the purchase of urea to be used as fertilizer on our timberlands, $46 million for long-term timber leases, $44 million for timber harvest contracts, $32 million for fiber supply agreements to supply our manufacturing facilities, and approximately $12 million for raw materials (wood fiber) and electricity for our MDF facilities.
(D) 
We have not included any amounts for our other long-term liabilities, as we cannot estimate when we will be obligated to satisfy these liabilities. At December 31, 2011, other long-term liabilities include workers’ compensation of $10 million, deferred compensation obligations of $5 million and non-qualified pension obligations of $36 million (including $4 million classified as a current liability). We expect to fund approximately $2 million for workers’ compensation payments in 2012. We have two grantor trusts, which hold assets associated with our deferred compensation obligations and non-qualified pension obligations. At December 31, 2011, the fair value of assets in one of our grantor trusts is approximately equal to our deferred compensation obligation of $5 million. The December 31, 2011 fair value of assets in the other grantor trust was approximately $31 million and the actuarially computed accumulated benefit obligation for our non-qualified pension plans was $31 million. Assets in our grantor trusts have been reserved for the above obligations. However, grantor trust assets are subject to the claims of creditors in the event of bankruptcy. Additionally, based on current interest rates and

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expected returns, the company expects 2012 contributions to the qualified pension plan to range between $3 million and $7 million and between $0 and $2 million for the supplemental (non-qualified) pension plans. See Notes 10 and 12 of the Notes to Consolidated Financial Statements.
We have not included in the table above our purchase of a timber deed. In December 2011, we signed an agreement to acquire a timber deed in the Southern Resources Segment for $103 million. Concurrent with the execution of this agreement, we paid a $5 million deposit. In January 2012, we completed this acquisition and paid the remaining purchase price of $98 million. The timber deed encompasses approximately 4.7 million tons of standing timber and will be harvested over the eight-year term of the deed.

Events and Trends Affecting Operating Results

Harvest Plans

We determine our annual timber (sawlogs and pulpwood, including stumpage sales) harvesting plans based on a number of factors. At the stand level, ranging in size from 10 to 200 acres, we consider the age, size, density, health and economic maturity of the timber. A stand is a contiguous block of trees of a similar age, species mix or silvicultural regime. At the forest level, ranging in size from 100,000 to almost 1 million acres, we consider the long-term sustainability and environmental impact of certain levels of harvesting, certain external conditions such as supply agreements, and the level of demand for wood within the region. A forest is a broad administrative unit, made up of a large number of stands. Harvest scheduling is the technical approach using computer modeling that considers all of the above factors along with forest growth rates and financial assumptions to project future harvest plans for a number of years forward.

Our actual harvest levels may vary from planned levels due to log demand, sales prices, the availability of timber from other sources, the level of timberland sales and acquisitions, the availability of legal access, abnormal weather conditions, fires and other factors outside of our control. We believe that our harvest plans are sufficiently flexible to permit modification in response to short-term fluctuations in the markets for logs. Furthermore, future harvest levels will be impacted by sales and purchases of timberlands. The impact will depend on the level and extent we are able to reinvest proceeds in productive timberlands and the stocking levels and age class distribution of any newly acquired timberlands.

Harvest levels are also impacted by the purchase of a long-term timber deed. In January 2012, the company acquired approximately 4.7 million tons of standing timber in our Southern Resources segment for a total purchase price of $103 million. We expect to harvest the 4.7 million tons plus the related growth over the eight-year term of the timber deed.

Northern Resources Segment. Harvest levels were 4.0 million tons (58% sawlogs and 42% pulpwood) during 2011 and 4.0 million tons (54% sawlogs and 46% pulpwood) during 2010. In 2012, we expect sawlog harvest volumes to increase by approximately 8% due to favorable export markets, and we expect pulpwood harvest volumes in 2012 to be comparable to 2011 harvest volumes. While the company has flexibility to modify our annual harvest volumes, based on market conditions, we expect harvest levels beyond 2012 in both the near-term and long-term to increase by more than 10% and we expect the product mix (i.e., the percentage of sawlogs vs. pulpwood) to improve to greater than 60% sawlogs compared to 2011 harvest levels.

Southern Resources Segment. Harvest levels were 11.8 million tons (42% sawlogs and 58% pulpwood) during 2011 and 11.5 million tons (44% sawlogs and 56% pulpwood) during 2010. In 2012, we expect sawlog harvest volumes to increase by approximately 20% as a result of the recent purchase of an eight-year timber deed and harvesting volume that was previously deferred. We expect pulpwood harvest volumes in 2012 to be comparable to 2011 harvest volumes. While the company has flexibility to modify our annual harvest volumes, based on market conditions, we expect harvest levels beyond 2012 to be at moderately higher levels over the near-term (next five years) and increase more than 35% over the long-term (ten years and beyond) and we expect the product mix to improve to approximately 50% sawlogs compared to 2011 harvest levels.


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Manufactured Products Segment Production Levels

The results of our Manufactured Products Segment are driven largely by the strength of the U.S. housing market, which began declining in 2007 and has remained very weak. In 2011, housing starts increased 3% from 2010 levels to approximately 600,000 starts, but they remain significantly below historical averages achieved in the previous decade of approximately 1.7 million starts per year. During 2009, we permanently closed two lumber mills, suspended production at one additional lumber mill and one remanufacturing facility and reduced production at another lumber mill. We have also reduced production at our MDF and plywood facilities in response to the decline in demand. During 2011, we continued to operate all of our Manufactured Products facilities at reduced or suspended levels similar to 2010. Until markets for wood products improve, our expected production levels (and sales volumes) will be significantly lower than the combined capacity of our facilities.

Clean Water Act - Ninth Circuit Ruling

In August, 2010, a three judge panel of the U.S. Court of Appeals for the Ninth Circuit ruled in Northwest Environmental Defense Center (NEDC) v. Brown that ditches and culverts associated with “forest roads” were “point sources” under the Clean Water Act (“CWA”) and thus required National Pollution Discharge Elimination System (NPDES) permits should storm water runoff that is channeled and/or conveyed from such sources be discharged into waters of the United States. In May, 2011, the court denied a petition for rehearing, leaving its prior decision in place.  The plaintiff alleged that the defendants violated the CWA by not obtaining EPA permits for stormwater runoff from logging roads into systems of ditches, culverts and channels that is then discharged into forest streams and rivers.  The plaintiff further alleged that timber hauling on logging roads is a major source of sediment that flows through the stormwater collection system. 

This decision overturns a long standing EPA rule that had exempted such sources of runoff from CWA permitting. Since 1976, the EPA has promulgated and amended a regulation specifically exempting from NPDES permitting requirements “point source” silviculture activities such as nursery operations, site preparation, reforestation and subsequent silvicultural treatment, thinning, prescribed burning, pest and fire control, harvesting operations, surface drainage, or road construction and maintenance from which there is “natural runoff” (the Silviculture Rule).  Under the Silviculture Rule, the EPA did not require permitting for discharges from ditches, culverts and channels that collect stormwater runoff from logging roads. Instead, these forestry sources of stormwater runoff are regulated by the states, many of which do so by adopting best management practices.

The outcome of the court's decision is uncertain. A petition for review has been filed with the United States Supreme Court seeking to appeal the decision. After reviewing, the Supreme Court has requested the U.S. Solicitor General seek out and report to the Court the views of several relevant federal agencies, including the EPA, the U.S. Department of Agriculture, the Department of Interior and the Council on Environmental Quality. It is expected that the Supreme Court will decide whether to hear the appeal shortly after receiving this report.

In addition, legislation passed by Congress in late December 2011 prohibits the EPA from implementing the NPDES permitting regime mandated by the Ninth Circuit decision through September 30, 2012.

Should the Ninth Circuit's ruling stand, its impact on the company and the timber industry is unknown. It is unclear whether the EPA would require NPDES permits for forest roads outside of the area covered by the Ninth Circuit. It is also unclear what, if any, additional regulatory restrictions would be imposed by the NPDES permitting process. Further, if logging and other forest management roads and operations currently within the scope of the Silviculture Rule were placed within the NPDES permitting regime, it is possible that CWA "Total Maximum Daily Load" (TMDL) allocations in various stream drainages, "anti-degradation," and other NPDES requirements could be affected. A significant increase in operational and compliance costs for landowners and operators is possible depending upon the regulatory response to the court's decision.

Comparability of Financial Statement Periods

Acquisitions and Divestitures. We have pursued and expect to continue to pursue both the acquisition and divestiture of timberlands to increase the value of our assets. Accordingly, the comparability of periods covered by the company’s financial statements is, and in the future may be, affected by the impact of timberland acquisitions and divestitures.

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The following table summarizes timberland acquisitions and dispositions for each of the past three years, along with our total acres owned at each of the past three year ends (in acres):
 
 
2011
 
2010
 
2009
Acquisitions:
 
 
 
 
 
 
Northern Resources
 

 

 

Southern Resources
 
59,000

 

 

 
 
 
 
 
 
 
Dispositions
 
 
 
 
 
 
Northern Resources
 
45,000

 
142,000

 
248,000

Southern Resources
 
140,000

 
116,000

 
49,000

 
 
 
 
 
 
 
Total Ownership at December, 31 (in millions)
 
6.6

 
6.8

 
7.0

 
 
 
 
 
 
 





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Results of Operations

The following table compares Operating Income (Loss) by Segment and other items impacting our income from continuing operations for the years ended December 31 (in millions):
 
 
2011
 
2010
 
2009
Operating Income (Loss) by Segment
 
 
 
 
 
 
Northern Resources
 
$
24

 
$
13

 
$
(3
)
Southern Resources
 
74

 
107

 
81

Real Estate
 
195

 
180

 
278

Manufactured Products
 
15

 
24

 
(23
)
Other
 
21

 
23

 
17

Total Segment Operating Income
 
329

 
347

 
350

Other Costs and Eliminations
 
(55
)
 
(51
)
 
(51
)
Other Unallocated Operating Income (Expense), net
 
1

 
1

 

Operating Income
 
275

 
297

 
299

Equity Earnings from Timberland Venture
 
56

 
57

 
55

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

 
80

 
89

Interest Expense (Note Payable to Timberland Venture)
 
58

 
58

 
58

Loss on Extinguishment of Debt
 

 
(13
)
 
(2
)
Provision (Benefit) for Income Taxes
 
(1
)
 
1

 
(31
)
Income from Continuing Operations
 
$
193

 
$
202

 
$
236

 
 
 
 
 
 
 

2011 Compared to 2010

Northern Resources Segment.
 
Year Ended December 31, 2011
 
Year Ended December 31, 2010
 
Harvest Tons
(millions)
 
Average Sales
Realization
 
Harvest Tons
(millions)
 
Average Sales
Realization
Sawlog ($/Ton Delivered)
2.319

 
$
69

 
2.134

 
$
63

Pulpwood ($/Ton Delivered)
1.680

 
$
41

 
1.823

 
$
39

Total
3.999

 
 
 
3.957

 
 
 
 
 
 
 
 
 
 

Revenues increased by $23 million, or 11%, to $233 million in 2011 compared to 2010. This increase was due primarily to higher sawlog prices ($15 million), higher sawlog harvest volumes ($11 million) and higher pulpwood prices ($4 million), partially offset by lower pulpwood harvest volumes ($5 million).

Sawlog prices were 10% higher in 2011 compared to 2010 due primarily to the increase in demand from China for the export of sawlogs from the Pacific Northwest. The strong export demand has favorably impacted domestic log prices by limiting the supply of domestic sawlogs. Export demand and sawlog prices declined moderately during the fourth quarter of 2011 due to high log inventories and a slowdown in China's economic growth. However, demand and prices remained strong compared to the prior year. Sawlog harvest volumes were 9% higher in 2011 compared to 2010 due primarily to the harvesting of volume that was previously deferred due to weak log prices. A portion of the previously deferred volume was harvested in 2011 to capture favorable export log prices.

Pulpwood prices were 6% higher in 2011 compared to 2010 due primarily to steady demand from paper mills and a reduced supply of wood chips as a result of lower regional lumber production. Pulpwood harvest volumes were 8% lower due primarily to accelerating pulpwood harvest volume in prior years to take advantage of favorable log prices.

Sawlog harvest volumes in 2012 are expected to increase by approximately 8% as we restore harvest volume to

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normal levels in anticipation of continued favorable export markets. Pulpwood harvest volumes in 2012 are expected to be comparable to 2011 harvest volume.

Northern Resources Segment operating income was 10% of its revenues for 2011 and 6% of its revenues for 2010. This increase was due primarily to higher sawlog prices. Segment costs and expenses increased by $12 million, or 6%, to $209 million for 2011 due primarily to an increase in the log and haul rate per ton. On a per ton basis, costs increased 11% ($13 million) in 2011 compared to 2010 due primarily to more expensive harvesting methods, longer hauling distances, and higher fuel costs. During 2010, we primarily harvested from stands with below average logging and hauling costs due to weak log prices.

Southern Resources Segment.
 
Year Ended December 31, 2011
 
Year Ended December 31, 2010
 
Harvest Tons
(millions)
 
Average Sales
Realization
 
Harvest Tons
(millions)
 
Average Sales
Realization
Sawlog ($/Ton Stumpage)
4.969

 
$
19

 
5.021

 
$
23

Pulpwood ($/Ton Stumpage)
6.822

 
$
9

 
6.446

 
$
12

Total
11.791

 
 
 
11.467

 
 
 
 
 
 
 
 
 
 

Revenues decreased by $18 million, or 5%, to $359 million in 2011 compared to 2010. This decrease was due primarily to lower pulpwood prices ($14 million), lower sawlog prices ($9 million) and lower sawlog harvest volumes ($3 million), partially offset by higher pulpwood harvest volumes ($10 million).

Pulpwood prices were 22% lower on a stumpage basis (8% lower on a delivered basis) in 2011 compared to 2010. This decrease was due primarily to unusually dry harvesting conditions for most of 2011 compared to unusually wet harvesting conditions in 2010. Also, in the prior year pulpwood markets were impacted by the temporary supply-chain disruption resulting from the February 2010 earthquake in Chile.

Sawlog prices were 14% lower on a stumpage basis (6% lower on a delivered basis) in 2011 compared to 2010. This decrease was due primarily to an ample supply of logs as a result of favorable harvesting conditions, weak demand and, to a lesser extent, selling a greater proportion of smaller diameter sawlogs. The demand for sawlogs remained weak throughout 2011 due primarily to near record low housing starts as a result of falling home prices, a sluggish U.S. economy and high unemployment.

Pulpwood harvest volumes were 6% higher in 2011 compared to 2010 and sawlog harvest volumes were 1% lower due primarily to relatively stronger pulpwood prices. While both pulpwood and sawlog prices were weak during 2011, pulpwood prices were relatively more favorable than sawlog prices.

Sawlog harvest volumes in 2012 are expected to increase by approximately 20% due to the recent purchase of a timber deed and harvesting of previously deferred volume. Approximately 0.7 million tons are expected to be harvested in 2012 as a result of the timber deed, of which 0.5 million tons will be sawlogs. In January 2012, we purchased a timber deed containing approximately 4.7 million tons of standing timber which we expect to harvest over the next eight years. Pulpwood harvest volumes in 2012 are expected to be comparable to 2011 harvest volume.

Southern Resources operating income was 21% of its revenues for 2011 and 28% of its revenues for 2010. This decrease was due primarily to lower sawlog and pulpwood prices and higher log and haul costs. Segment costs and expenses increased by $15 million, or 6%, to $285 million due primarily to an increase in the cost of fuel. Log and haul costs on a per ton basis increased 7% ($11 million) in 2011 compared to 2010.


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Real Estate Segment.
 
Year Ended December 31, 2011
 
Year Ended December 31, 2010
Property
Acres
Sold
 
Revenues
(millions)
 
Revenue
per Acre
 
Acres
Sold
 
Revenues
(millions)
 
Revenue
per Acre
Small Non-Strategic
22,165

 
$
27

 
$
1,220

 
63,235

 
$
61

 
$
970

Large Non-Strategic
48,450

 
103

 
2,115

 
24,310

 
32

 
1,320

Conservation
67,425

 
70

 
1,050

 
116,105

 
122

 
1,050

Higher and Better Use / Recreational
47,295

 
96

 
2,015

 
53,265

 
114

 
2,140

Development Properties
20

 

 
6,405

 
845

 
3

 
3,415

Conservation Easements
n/a

 
5

 
460

 
n/a

 
4

 
455

Total
185,355

 
$
301

 
 
 
257,760

 
$
336

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Revenues decreased by $35 million to $301 million in 2011. This decrease is due primarily to lower revenues from sales of conservation properties ($52 million), small non-strategic properties ($34 million) and higher and better use / recreational properties ($18 million), offset in part by an increase in revenue from the sale of large non-strategic properties ($71 million).

Revenues from the sale of conservation properties decreased as a result of selling fewer acres. Conservation properties sold during 2011 consisted primarily of two sales totaling approximately 57,000 acres in Florida, Arkansas, and Louisiana. In comparison, during 2010 we sold approximately 70,000 acres in the third and final phase of a 310,000 acre multi-year conservation sale in Montana and approximately 35,000 acres from two conservation properties in Wisconsin and Arkansas. Conservation sales vary significantly from period to period and are primarily impacted by government and not-for-profit funding, the limited number of conservation buyers, and the timing of our transactions. Additionally, the price per acre for conservation properties can vary significantly due to the geographic location and the rationale for the conservation designation.

The decrease in small non-strategic acres sold during 2011 compared to 2010 was due primarily to an unusually large sale during the first quarter of 2010 when a collection of approximately 23,000 acres were sold to a single buyer.

Revenues from our higher and better use / recreational land sales decreased due primarily to selling approximately 6,000 (or 11%) fewer acres and to a lesser extent from a 5% lower average price per acre compared to sales in 2010. Demand for higher and better use / recreational properties (especially our higher value properties) remains weak due to concerns over near-term real estate values, low consumer confidence, and the inability of buyers to secure debt financing.

Revenue from the sale of large non-strategic timberlands was $103 million in 2011 compared to $32 million in 2010. The company took advantage of favorable demand for large parcels of commercial timberlands and increased the sale of large non-strategic properties.
  
The timing of real estate sales is a function of many factors, including the general state of the economy, demand in local real estate markets, the ability to obtain entitlements, the ability of buyers to obtain financing, the number of competing properties listed for sale, the seasonal nature of sales (particularly in the northern states), the plans of adjacent landowners, our expectation of future price appreciation, the timing of harvesting activities, and the availability of government and not-for-profit funding (especially for conservation sales). Also, in any period the sales average will vary based on the location and physical characteristics of the parcels sold.

At December 31, 2011, the company owned approximately 6.6 million acres of timberlands. Included in the 6.6 million acres are approximately 900,000 acres of higher value timberlands which are expected to be sold over the next fifteen years and 300,000 acres of non-strategic timberlands which are expected to be sold in smaller acreage transactions over the near and medium term (“small non-strategic”). Not included in the above 900,000 higher value acres and 300,000 small non-strategic acres are other acres that are expected to be sold in large acreage transactions to commercial timberland buyers as opportunities arise (“large non-strategic”). We expect revenue from real estate sales during 2012 to range between $275 million and $325 million. We expect an increased proportion of our 2012 revenue

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for real estate sales to come from the sale of large non-strategic acres.

The Real Estate Segment operating income as a percent of revenue was 65% for the year ended December 31, 2011 compared to 54% for 2010. This increase is due primarily to selling large and small non-strategic acres at a higher price per acre in 2011 compared to 2010 and a low operating margin for the large conservation sale in Montana during the fourth quarter of 2010. Real Estate Segment costs and expenses decreased by $50 million to $106 million in 2011 due primarily to selling fewer acres. For 2012, we expect operating income as a percent of revenue to be lower, at approximately 45% of segment revenue, due to selling properties with a higher book value.

Manufactured Products Segment.
 
Year Ended December 31, 2011
 
Year Ended December 31, 2010
 
Sales Volume
 
Average Sales
Realization (A)
 
Sales Volume
 
Average Sales
Realization (A)
Lumber
115,925 MBF
 
$
518

 
116,090 MBF
 
$
507

Plywood
172,433 MSF
 
$
379

 
172,716 MSF
 
$
378

MDF
160,144 MSF
 
$
608

 
157,017 MSF
 
$
606


(A) 
Represents product prices at the mill level.

Revenues increased by $8 million, or 3%, to $273 million in 2011 compared to 2010. This increase was due primarily to higher freight charges ($3 million), higher MDF sales volume ($2 million), and higher lumber prices ($1 million). Freight charges are included in both Revenues and Costs of Goods Sold. The Manufactured Products Segment continues to be impacted by weakness in the U.S. housing market and very low levels of demand for wood products.

Manufactured Products Segment operating income was 5% of its revenues for 2011 compared to 9% of its revenues for 2010. This decrease in operating performance was due primarily to increased manufacturing costs and a gain from the sale of certain lumber manufacturing assets during 2010. The $2 million gain on sale is included in Other Operating Income (Expense), net in the Consolidated Statements of Income for 2010. Manufactured Products Segment costs and expenses increased by $17 million, or 7%, to $258 million for 2011 due primarily to higher raw materials costs ($7 million) and increased freight charges ($3 million). For 2011, higher raw materials costs consisted mostly of higher resin costs at MDF ($4 million), higher costs of operating supplies to produce specialty plywood products ($2 million) and higher log costs ($1 million). We continue to operate our manufacturing facilities at a reduced capacity.

Other Segment. Operating income decreased $2 million to $21 million in 2011 compared to 2010 due primarily to a $5 million operating gain in connection with the termination of a land lease (primarily for the release of mineral rights) in 2010. Partially offsetting the decrease in operating income was a payment of $2 million that we received during 2011 for the settlement of a dispute that related to certain mineral rights. The $2 million and $5 million gains are recorded in our Other Segment and reported as Other Operating Income (Expense), net in our Consolidated Statements of Income. See Note 19 of the Notes to Consolidated Financial Statements.

Other Costs and Eliminations. Other costs and eliminations (which consists of corporate overhead and intercompany profit elimination) decreased operating income by $54 million during 2011 compared to $50 million during 2010. The increase of $4 million was due primarily to higher share-based compensation costs ($3 million) and higher legal and regulatory compliance costs ($2 million).

The increase in share-based compensation expense is due primarily to fair value adjustments. We adjust the fair value of our liability associated with our value management plan quarterly based on our relative total shareholder return compared to the performance of several peer groups. See Note 13 of the Notes to Consolidated Financial Statements.

Selling, General and Administrative Expenses. Corporate overhead costs along with Segment specific selling, general, and administrative costs are reported in total on our Consolidated Statements of Income and decreased operating income by $106 million in 2011 compared to $95 million in 2010. This increase in expense of $11 million was due primarily to a large charitable contribution we made to a forest conservation fund ($5 million) in 2011, higher compensation expenses ($2 million) and higher legal and regulatory compliance costs ($2 million).


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Interest Expense, net. Interest expense, net of interest income, was $139 million in 2011. This was essentially flat compared to 2010.

Provision (Benefit) for Income Taxes. The benefit for income taxes was $1 million for 2011 compared to a provision for income taxes of $1 million in 2010. This decrease in tax expense of $2 million was due primarily to a $9 million decrease in operating income from our manufacturing business during 2011 compared to 2010 (resulting in lower tax expense of $4 million), offset in part by a $3 million valuation allowance recorded during 2011. The valuation allowance is related to certain state net operating loss carryforwards and other associated deferred tax assets for which we do not believe it is more likely than not they will be realized in future periods.

Our determination of the realization of deferred tax assets is based upon management's judgment of various future events and uncertainties, including the timing, nature and amount of future taxable income earned by certain wholly-owned subsidiaries. A valuation allowance is recognized if management believes it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. At December 31, 2011, we have recorded deferred tax assets of $62 million (net of a $3 million valuation allowance) and deferred tax liabilities of $39 million. Management believes that due to the reversal of various taxable temporary differences and/or the planned execution of prudent and feasible tax planning strategies, sufficient taxable income can be generated to utilize the company's remaining deferred tax assets for which a valuation allowance was determined to be unnecessary.


2010 COMPARED TO 2009

Northern Resources Segment.
 
Year Ended December 31, 2010
 
Year Ended December 31, 2009
 
Harvest Tons
(millions)
 
Average Sales
Realization
 
Harvest Tons
(millions)
 
Average Sales
Realization
Sawlog ($/Ton Delivered)
2.134

 
$
63

 
2.137

 
$
55

Pulpwood ($/Ton Delivered)
1.823

 
$
39

 
2.268

 
$
40

Total
3.957

 
 
 
4.405

 
 
 
 
 
 
 
 
 
 

Revenues decreased by $2 million to $210 million in 2010. Revenues were slightly lower compared to 2009 as higher sawlog prices ($18 million) were offset by lower pulpwood volumes ($18 million) and lower pulpwood prices ($2 million). Sawlog prices were 15% higher in 2010 compared to 2009. The increase was due primarily to improvement in demand during the spring building season as a result of low mill log inventories and improving lumber and plywood prices. Additionally, sawlog prices in the Northwestern U.S. have also been favorably impacted by increased lumber production compared to 2009 and improved export demand for sawlogs (primarily from China). However, sawlog prices remained relatively weak during most of 2010 due to near record low housing starts as a result of an excess supply of homes for sale and high unemployment.

Pulpwood harvest volumes were 20% lower due primarily to temporary increases in harvest levels in prior years to capture favorable pulpwood prices. In 2010 and 2009, we deferred a portion of the sawlog harvest in Oregon due to weak demand and prices.