10-K 1 a10-k20141231.htm FORM 10-K 10-K 2014.12.31
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, 2014

OR

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

PLUM CREEK TIMBER COMPANY, INC.
(Exact name of registrant as specified in its charter) 


Organized in the
State of Delaware
 
I.R.S. Employer Identification No.
91-1912863

601 Union Street, Suite 3100
Seattle, Washington 98101-1374
Telephone: (206) 467-3600
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, 2014, was $6,924,257,143. 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 20, 2015 was 176,059,055.

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 2015 Annual Meeting of Shareholders to be held on May 5, 2015, 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, 2014

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 7A 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 for the paper and forest products industry, and conducts resource management activities, 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, producers of oriented strand board (“OSB”), and producers of wood pellets for use in bioenergy. 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 comprehensive 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

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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 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

Plum Creek is among the largest and most geographically diverse private landowners in the nation. As of December 31, 2014, we owned approximately 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-value 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, South Carolina, Texas, and Virginia. In addition, our Energy and Natural Resources Segment includes our natural resource businesses that focus on opportunities for oil and natural gas production, construction aggregates and mineral extraction, wind power and communication and transportation rights of way. The Real Estate Segment comprises our sales of higher and better use timberlands, 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 joint venture arrangements. Some of these activities are conducted through our wholly-owned taxable REIT subsidiaries.

Our Manufacturing Segment, also conducted through our wholly-owned taxable REIT subsidiaries, includes two lumber mills, two plywood mills and two medium density fiberboard (“MDF”) production lines in Montana and one lumber remanufacturing facility in Idaho. On January 29, 2015, the company announced it will be permanently closing its remanufacturing facility in Idaho. 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 Other Segment provides timber and wood-fiber procurement services to certain customers. These activities consist primarily of harvesting and selling trees from timberlands that are not owned by us. Additionally, our share of the equity earnings / (losses) from our equity investment in MWV-Charleston Land Partners, LLC ("MWV-CLP") are reported in the Other Segment. Our equity investment in MWV-CLP consists of 93,000 acres of high-value rural lands and development-quality lands near Charleston, South Carolina. These activities are conducted through our wholly-owned taxable REIT subsidiaries.

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 diligent resource management, disciplined acquisitions and dispositions and practicing environmentally responsible resource management.

Sustainable Resource Management. We grow the value of our core timber business by actively managing our working forests. 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

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selective breeding to produce superior seedlings. Tree growth rates vary by region because of differences in weather, climate and soil conditions. Over the past decade, we have planted more than 600 million trees and planned for the natural regeneration of millions more trees. 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 value. We merchandise the tree to get the most value from each log segment, while meeting customer specifications.

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

Disciplined Acquisitions and Dispositions. The U.S. timberland market is highly fragmented. To the extent high-quality timberlands are available for acquisition, we believe we are well-positioned to compete for these properties because we are willing to enter into long-term supply agreements with sellers, we can structure acquisitions on a tax-efficient basis, we have broad geographic reach, we have a strong reputation for prudent environmental management, and we maintain a conservative capital structure, which provides us ready access to capital. In 2013, we acquired approximately 501,000 acres of timberlands in Alabama, Georgia, South Carolina, Virginia and West Virginia, along with related minerals and wind power leases. Also in 2013, we acquired approximately 46,000 acres of timberlands in Georgia and Alabama. No timberlands were acquired during 2014.

We estimate that included in the company’s 6.6 million acres of timberlands are approximately 775,000 acres of higher value timberlands that we expect to sell, exchange, and/or develop over the next fifteen years for recreational, conservation, commercial and residential purposes. Included within the 775,000 acres of higher value timberlands are approximately 500,000 acres we expect to sell for recreational uses, approximately 200,000 acres we expect to sell for conservation and approximately 75,000 acres that are identified as having development potential. In addition, the company identified approximately 225,000 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 other forest products companies or non-industrial investors.

Our disciplined acquisition and disposition strategy has allowed us to expand and diversify our timberland holdings since our formation in 1989. This growth and diversification has enhanced our operating flexibility and reduced our exposure to regional timber market fluctuations. We expect that 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.

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 (“SFI”) which are aimed at the sound management of all natural resources, including soils, air, watersheds, fisheries and wildlife habitats. Forestry practices on all of our timberlands have been independently audited and certified under the SFI program. Our planning efforts for species listed as threatened or endangered under the Endangered Species Act have resulted in three major habitat conservation agreements under which we manage approximately 0.9 million acres of our timberlands. Our manufacturing business follows a set of internally developed environmental principles. See “Federal and State Regulations” below.


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Segment Information

Certain financial information for each business segment is included in Note 21 of the Notes to Consolidated Financial Statements and is incorporated herein by reference.

Northern Resources Segment

As of December 31, 2014, the Northern Resources Segment encompassed approximately 3.1 million acres of timberlands in Maine, Michigan, Montana, New Hampshire, Oregon, Vermont, Washington, West Virginia and Wisconsin, and contained an estimated 97 million tons of standing timber, including approximately 22 million tons of standing timber in the states of Washington and Oregon. Consistent with industry practices, Plum Creek’s estimated inventory of standing timber includes deductions for defects. Furthermore, Plum Creek’s estimated standing timber includes volumes in environmentally sensitive areas, (1) where due to self-imposed restrictions we expect to defer harvest until conditions permit the removal of trees without adversely affecting the environment and (2) where regulations or universally accepted management practices restrict harvest volumes (approximately 7 million tons). For a description of how we estimate tons of standing timber, see the section ("Resource Management and Environmental Stewardship") below.

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, 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 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 long-term (i.e. greater than 1 year) log supply agreements, under which we sell approximately 39% of the Northern Resources Segment's total volume. In general, the agreements require us to supply a specified volume of sawlogs or pulpwood to certain manufacturing facilities in the U.S. Our supply agreements reflect a market-based sales price. The terms of each agreement require sales price to be updated periodically, generally on a quarterly basis. Substantially all of the supply agreements use one or more of the following market indicators to determine the selling price:

Average log prices for similarly situated regional customers (excluding the supply agreement customer) realized by Plum Creek over a defined time period;
Average log prices from other log suppliers paid by the log supply agreement customer over a defined time period; and/or
Negotiated base market price that is adjusted each period using published composite indexes.

During 2014, approximately 17% of the sawlogs and 76% of the pulpwood harvested in our Northern Resources Segment was sold pursuant to these long-term supply agreements. We expect these percentages to be approximately 19% of sawlogs and 74% of pulpwood during 2015. 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, 2014, the Southern Resources Segment consisted of approximately 3.5 million acres of timberlands (including approximately 209,000 acres of leased land) located in the states of Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Texas, and Virginia, and contained an estimated 171 million tons of standing timber. This estimate includes volume related to long-term timber deeds acquired in 2012 and 2013. Consistent with industry practices, Plum Creek’s estimated inventory of standing timber includes deductions for defects. Furthermore, Plum Creek’s estimated standing timber includes volumes in environmentally sensitive areas, (1) where

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due to self-imposed restrictions we expect to defer harvest until conditions permit the removal of trees without adversely affecting the environment and (2) where regulations or universally accepted management practices restrict harvest volumes (approximately 9 million tons). For a description of how we estimate tons of standing timber, see the section ("Resource Management and Environmental Stewardship") below.

Logs in the Southern Resources Segment are sold to third party mills producing a wide array of forest products, including manufacturers of lumber, plywood, OSB, and pulp and paper products. Competitors in the Southern log markets include numerous private individuals, other industrial timberland owners, and to a lesser extent, state and federal agencies who own and manage forests in the region. 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 18% of its revenues. While not expected, the loss of this customer (all the facilities we currently serve) could have a significant impact on our operating income. The customer purchases sawlogs and pulpwood for its 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 long-term (i.e. greater than 1 year) log supply agreements, under which we sell approximately 31% of the Southern Resources Segment's total volume. In general, the agreements require us to supply a specified volume of sawlogs or pulpwood to certain manufacturing facilities in the U.S. Our supply agreements reflect a market-based sales price. The terms of each agreement require sales price to be updated periodically, generally on a quarterly basis. Substantially all of the supply agreements use one or more of the following market indicators to determine the selling price:

Average log prices for similarly situated regional customers (excluding the supply agreement customer) realized by Plum Creek over a defined time period;
Average log prices from other log suppliers paid by the log supply agreement customer over a defined time period; and/or
Negotiated base market price that is adjusted each period using published composite indexes.

During 2014, approximately 26% of the sawlogs and 33% of the pulpwood harvested in our Southern Resources Segment was sold pursuant to these long-term supply agreements. We expect these percentages to be approximately 25% of sawlogs and 36% of pulpwood during 2015. 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.


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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 775,000 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 775,000 acres of higher value timberlands are approximately 500,000 acres we expect to sell for recreational uses, approximately 200,000 acres we expect to sell for conservation and approximately 75,000 acres that are identified as having development potential.

The 75,000 acres identified as having development potential are expected to be developed internally or through third-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 joint venture arrangements with leading land developers. In the near term, we are focused on several industrial projects. The development of residential properties is expected to be gradual and will depend on local market conditions.

Non-Strategic Timberlands. We will 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. The price per acre will vary based on many factors, including the location and physical characteristics of the non-strategic timberlands sold.

We have approximately 225,000 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 225,000 acres, from time to time, we sell timberlands in larger acreage transactions to commercial timberland buyers as opportunities arise (“large non-strategic”). Demand for larger acreage parcels has remained strong and we have received good values for sales during recent years. During 2014, we sold 23,000 large non-strategic acres in two transactions for $65 million. During 2013, we sold 51,000 large non-strategic acres in two transactions for $106 million.

Manufacturing Segment

Lumber. We produce a diverse line of softwood lumber products, including boards (common and select) and studs. Lumber products manufactured in our western 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 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. On January 29, 2015, due to the loss of a significant customer, we announced we will be permanently closing our remanufacturing facility in Idaho. The closure of this facility should not have a significant impact on our 2015 results.

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 low 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 majority of wood chips, sawdust, and shavings are used in our MDF facilities.


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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 2014, we sold approximately 5% 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 65% of North American structural panel production. To improve operating 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 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 2014, we sold approximately 7% and 2% 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. 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.

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 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. 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 our 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). In addition to buying logs, 22% of our plywood production in 2014 was supplemented through veneer purchased throughout the Pacific Northwest and Canada, and we estimate this amount could increase to as much as 40% in 2015. Our MDF facilities have a consistent supply of wood 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 wood 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.

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 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.

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Energy and Natural Resources

We focus on realizing the maximum value potential of our non-timber ownership, including opportunities for oil and natural gas production, construction materials, industrial mineral extraction and wind energy 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, develop and sometimes acquire producing natural resources properties and mineral rights. As the owner of mineral rights and interests, we typically do not invest in operations but instead enter into contracts with operators granting them the right to produce and sell natural resources from our property in exchange for rents and royalties. We currently receive rental and royalty revenue from the extraction of oil, coal bed methane, natural gas, coal, construction aggregates and other minerals, and wind energy production from our ownership. Additionally, we receive payments in exchange for granting oil and gas exploration rights, and communication and transportation rights of way.

In addition to realizing values from our existing timberland ownership, we have also made recent opportunistic acquisitions of natural resource assets. In 2013, we acquired certain minerals and wind power leases for $67 million that were associated with approximately 501,000 acres of timberlands in Alabama, Georgia, South Carolina, Virginia, and West Virginia. Also in 2013, we acquired mineral rights in approximately 255 million tons of aggregate reserves at four quarries in Georgia for approximately $156 million. In 2012, we acquired mineral rights in approximately 144 million tons of aggregate reserves at four quarries in South Carolina for approximately $76 million. We expect to continue to negotiate royalty arrangements and leases to capture the maximum value for our non-timber natural resources 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.

Timberland Operations. We use different management techniques in each of our regions, implementing a variety of cost effective silvicultural treatments. We expect timber growth rates on our intensively managed timberlands to continue to improve over time as a result of genetic advances in seedlings and forest management practices such as thinning, competition control, and fertilization.
  
Technology and forest management advances have increased growth rates, resulting in trees reaching economic maturity at earlier ages. We believe our focus on active forest management practices will enhance forest productivity and increase the value of our timberlands over time.

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

Advanced silvicultural techniques, such as the use of trees that are bred specifically for growth, quality and disease resistant traits, application of fertilizers, plant competition control, and pre-commercial thinning, enhance the growth and value of our timberlands. These treatments improve the growth of the forests, enhance the quality of the wood grown, and can potentially reduce future harvesting costs.

To maintain and improve the productivity of our timberlands, our approach is to ensure that acres harvested are promptly reforested. Based on site conditions and geography, harvested areas may be regenerated by planting or regenerated naturally by leaving mature trees to reseed the area. Natural regeneration methods are used on a substantial portion

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of our timberlands in the Northern Resources Segment. In the Southern Resources Segment, softwood lands are reforested by planting and hardwood lands are reforested through natural means.

Timber Inventory. Estimation of our standing timber inventory is guided by a set of policies and procedures. Timber volume data is collected through a process generally referred to as a “timber cruise,” whereby field measurements, including the number of trees by diameter and height, within sample areas are used to statistically estimate total volume for each timber stand. We perform timber cruises on a portion of our timberlands each year. Inventory is estimated and maintained at either the individual stand level or at the strata level. Stratum are groups of similar age, species, productivity, and harvest history. For stands that have not been cruised in the present year, growth models are used to estimate the current inventory. The key inputs in the growth process include prior silviculture treatments, stand age, site productivity and the number of trees by diameter and height. Formulas are utilized to estimate wood volume and weight from the grown diameter and height information. Our timber inventory estimates are updated to account for harvesting activities, timberland acquisitions and divestitures, biological growth, new timber cruise data and natural disturbances (e.g. fire, disease, or weather events), among other factors.

We believe that our inventory estimation process is consistent with accepted industry practices. We continuously work to improve the quality of our inventory information by evaluating new technologies and implementing processes where we can achieve higher quality data at a reasonable cost. We collaborate with forestry experts at leading universities to validate our inventory estimation practices. In addition, our process is reviewed by external foresters in connection with our sustainability certification under the Sustainable Forestry Initiative® standard, and the results of this review confirm that our approach is consistent with accepted industry practices.
 
Timber Loss. 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 active 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 at our manufacturing facilities.

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 management of its natural resource assets. We follow the principles and objectives of the Sustainable Forestry Initiative® program (“SFI”), 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 SFI program. The SFI program principles are designed to ensure that forest management is integrated with the conservation of soil, air and water resources, wildlife and fish habitat, and aesthetics.


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Consistent with these principles, we have actively engaged in habitat conservation planning. The habitats of many 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
  
Acres
Central Cascades HCP
  
315 species
  
Washington
  
25,000
Native Fish HCP (A)
  
5 species of trout 
and salmon
  
Montana
  
890,000
Karner Blue Butterfly HCP
  
Karner Blue 
Butterfly
  
Wisconsin
  
10,000
 
 
 
 
 
 
 

(A)    During 2014, we announced the sale of approximately 165,000 acres of timberlands in Montana and
Washington to The Nature Conservancy for $131 million. The sale closed in two phases - the first phase, which consisted of approximately 48,000 acres in Washington, closed in December 2014, and the second phase, which consisted of approximately 117,000 acres in Montana, closed in January 2015. See Note 5 of the Notes to Consolidated Financial Statements. The Montana phase of this sale reduced the acres under HCP to approximately 770,000.

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.


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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 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 0.9 million acres in the Northern Resources Segment as of December 31, 2014. 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 and 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 ("EPA"), but rather are subject to state regulation and best management practices programs. Litigation in the Ninth Circuit Court of Appeals had challenged this silvicultural exemption under the Clean Water Act. However, in 2013, the U.S. Supreme Court upheld the EPA's interpretation of its regulation exempting logging roads and related silvicultural activities from permitting requirements. In addition to the Court's ruling, Congress passed legislation confirming that permitting cannot be required under the EPA's existing rules. However, the EPA remains free to regulate stormwater discharges from forest roads through measures other than federal permitting, including state regulation and voluntary best management practices. 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.

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, including reforestation, silviculture, 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.


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Encumbrances

Under the terms of our debt agreements, we have agreed not to pledge or secure our 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 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, 2014, we had 701 salaried and 624 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 “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 601 Union Street, Suite 3100, Seattle, Washington 98101, 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 and the bio-energy production 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 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 improvement in real estate prices or demand during 2015, and recovery to pre-2009 levels may take several years.

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. However, the agreement expires in 2015, and it is uncertain when or if a new agreement will be reached, and if reached what the terms of such agreement would be. Moreover, even if a new agreement is reached, 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 participate in joint ventures and may participate in additional joint venture projects 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 (the “Internal Revenue Code”). 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 stockholders, 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 stockholders 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 distributed 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 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 acquisitions 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.


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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, 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 total amount of debt. 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 Results of Operations

Our primary assets are our timberlands. Weather conditions, timber growth cycles, access limitations, availability of contract loggers and haulers, and regulations associated with the protection of wildlife and water resources may restrict our ability to harvest our timberlands. Other factors that may restrict our timber harvest include damage to our standing timber by fire or by insect infestation, disease, prolonged drought, flooding, severe weather and other natural disasters. Changes in global climate conditions could intensify one or more of these factors. Although damage from such causes usually is localized and affects only a limited percentage of standing 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 for 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. Therefore, if we were to be restricted from harvesting on a significant portion of our timberlands for a prolonged period of time, or if material damage to a significant portion of our standing timber were to occur, then we could suffer an adverse impact to our results of operations.

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, and this trend is expected to continue.

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.


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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 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 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.
In 2010, the U.S. Court of Appeals for the Ninth Circuit ruled that ditches and culverts associated with “forest roads” were “point sources” under the CWA and thus required NPDES permits. 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.

This decision overturned a long-standing EPA interpretation of Phase I of its Industrial Stormwater Rule under which EPA exempts certain sources of runoff from CWA permitting. Since 1976, the EPA has exempted 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”. Under the EPA’s interpretation of Phase I of its Industrial Stormwater Rule, the agency does not require permitting for discharges from ditches, culverts and channels that collect stormwater runoff from logging roads. The EPA, however, stated that stormwater discharges from forest roads should be evaluated under “Phase II” of the Stormwater Rule because it allows for a broad range of flexible approaches that are better suited to address the complexity of forest road ownership, management, and use.

In March 2013, the U.S. Supreme Court reversed the Ninth Circuit court’s decision and upheld the EPA’s interpretation of its Industrial Stormwater Rule. Stormwater runoff from logging roads and related silvicultural activities thus remain exempt under Phase I of the Stormwater Rule from NPDES permitting requirements. In addition to the Court's ruling, Congress recently passed legislation confirming that NPDES permitting cannot be required under either Phase I or Phase II of the EPA's Stormwater Rules. However, the EPA remains free to regulate stormwater discharges from forest roads through measures other than NPDES permitting, including state regulation and voluntary best management practices.

In addition to the foregoing activities, we have leased some of our properties to third-party operators for the purpose of exploring, extracting, developing and producing oil, gas, rock and other minerals, as the case may be, in exchange for fees and royalty payments. These activities are subject to federal, state and local laws and regulations. Some of our third party leases related to oil and gas activities involve third party operators drilling wells, and 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

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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 any Climate-Related Legislation or Regulation 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, 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,

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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.
  
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, the development and/or sale of certain timberlands and certain mineral royalty transactions 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 should 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.

PLUM CREEK 2014 FORM 10-K | 18

PART I / ITEM 2
 

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 Manufacturing Segment, strategically located near our western 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)
 
2014 Actual
Production
(in millions) (B)
Lumber—board feet
 
 
 
 
Columbia Falls, MT
 
80

 
65

Evergreen, MT
 
65

 
45

Meridian, ID (Remanufacturing)
 
70

 
56

Total Lumber Capacity
 
215

 
166

Plywood—square feet (3/8”)
 
 
 
 
Columbia Falls, MT
 
110

 
85

Evergreen, MT
 
110

 
82

Total Plywood Capacity
 
220

 
167

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

 
98

Columbia Falls, MT (Thin Line MDF)
 
120

 
113

Total MDF Capacity
 
265

 
211

 
(A) 
Capacity represents the 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 lumber and plywood production during 2014 was lower than our historic operating levels due primarily to a declining supply of logs in western Montana. Actual MDF production during 2014 was lower than our historic operating levels due primarily to a fire at our MDF facility in June 2014. On January 29, 2015, due to the loss of a significant customer, we announced we will be permanently closing our remanufacturing facility in Idaho. The closure of this facility should not have a significant impact on our 2015 results.
 


PLUM CREEK 2014 FORM 10-K | 19

PART I / ITEM 3
 

ITEM 3. LEGAL PROCEEDINGS

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

The company's 2008 federal income tax return is currently being audited by the Internal Revenue Service (“IRS”). The IRS has proposed an adjustment to the company's U.S. federal income tax treatment of the Timberland Venture formation transaction, which occurred on October 1, 2008, on the basis that the transfer of the timberlands to Southern Diversified Timber, LLC was a taxable transaction to the company at the time of the transfer rather than a nontaxable capital contribution to the Timberland Venture. We have filed a protest with IRS Appeals.

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

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


ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.


PLUM CREEK 2014 FORM 10-K | 20


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 (J)
 
Officer
Since
Rick R. Holley (A)
 
63

 
Chief Executive Officer
 
1989
Thomas M. Lindquist (B)
 
54

 
President and Chief Operating Officer
 
2001
David W. Lambert (C)
 
54

 
Senior Vice President and Chief Financial Officer
 
2002
James A. Kilberg (D)
 
59

 
Senior Vice President, Real Estate, Energy and Natural Resources
 
2003
James A. Kraft (E)
 
59

 
Senior Vice President, General Counsel and Secretary
 
1989
Larry D. Neilson (F)
 
55

 
Senior Vice President, Resources and Operations Support
 
2002
Russell S. Hagen (G)
 
49

 
Senior Vice President, Business Development
 
2006
Timothy E. Punke (H)
 
44

 
Senior Vice President, Corporate Affairs and Public Policy
 
2013
Barbara L. Crowe (I)
 
63

 
Vice President, Human Resources
 
1997
 
(A) 
Served since February 2013 as Chief Executive Officer. From January 1994 to February 2013, Mr. Holley served as President and Chief Executive Officer. Mr. Holley was Vice President and Chief Financial Officer from April 1989 to December 1993.
(B) 
Served since February 2013 as President and Chief Operating Officer. From April 2007 to February 2013, Mr. Lindquist served as Executive Vice President and Chief Operating Officer and from December 2001 to March 2007 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 February 2013 as Senior Vice President, Real Estate, Energy and Natural Resources. From April 2006 to February 2013, Mr. Kilberg served as Senior Vice President, Real Estate and from January 2003 to March 2006 served as Vice President, Land Management.
(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 September 2013 as Senior Vice President, Corporate Affairs and Public Policy.  Prior to joining Plum Creek, Mr. Punke served from January 2007 to September 2013 as partner and co-founder of the Monument Policy Group, a government affairs consulting firm, and from 2005 to 2007, as a partner with the law firm K&L Gates.
(I) 
Served since April 1997 as Vice President, Human Resources.
(J) 
There are no family relationships among the executive officers of the company.


PLUM CREEK 2014 FORM 10-K | 21

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 20, 2015, there were 12,894 stockholders of record and 176,059,055 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, 2014 and 2013, are as follows: 
 
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
2014
 
 
 
 
 
 
 
 
High
 
$
46.74

 
$
45.45

 
$
45.31

 
$
43.63

Low
 
40.73

 
40.57

 
38.70

 
38.78

Cash Dividend per Share
 
$
0.44

 
$
0.44

 
$
0.44

 
$
0.44

2013
 
 
 
 
 
 
 
 
High
 
$
52.28

 
$
54.62

 
$
50.06

 
$
50.08

Low
 
44.73

 
44.01

 
43.15

 
42.95

Cash Dividend per Share
 
$
0.42

 
$
0.44

 
$
0.44

 
$
0.44


 
 
 

PLUM CREEK 2014 FORM 10-K | 22

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 ("S&P") 500 Index, and the S&P Global Timber and Forestry Index for the five years ended December 31, 2014. The total stockholder return assumes $100 invested at the beginning of the period in the company’s common stock, the S&P 500 Index, and the S&P Global Timber and Forestry Index. It also assumes reinvestment of all dividends.


The following table shows total stockholder return for the previous one year ended December 31:
 
 
2010
 
2011
 
2012
 
2013
 
2014
Plum Creek
 
3.8
%
 
1.9
 %
 
26.7
%
 
8.7
%
 
(4.1
)%
S&P Global Timber and Forestry Index
 
17.1
%
 
(16.5
)%
 
22.8
%
 
20.4
%
 
2.8
 %
S&P 500 Index
 
15.1
%
 
2.1
 %
 
16.0
%
 
32.4
%
 
13.7
 %


PLUM CREEK 2014 FORM 10-K | 23

PART II / ITEM 5
 

The following table shows total indexed return of stock price plus reinvestment of dividends, assuming an initial investment of $100.00 at December 31, 2009 for the years ended December 31:
 
 
12/31/2009
 
2010
 
2011
 
2012
 
2013
 
2014
Plum Creek
 
$
100

 
$
104

 
$
106

 
$
134

 
$
146

 
$
140

S&P Global Timber and Forestry Index
 
$
100

 
$
117

 
$
98

 
$
120

 
$
145

 
$
149

S&P 500 Index
 
$
100

 
$
115

 
$
118

 
$
136

 
$
180

 
$
205


Purchase of Equity Securities

None.


PLUM CREEK 2014 FORM 10-K | 24

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):
 
 
2014
 
2013
 
2012
 
2011
 
2010
Income Statement Items
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
1,476

 
$
1,340

 
$
1,339

 
$
1,167

 
$
1,190

Operating Income (A)
 
322

 
295

 
281

 
275

 
297

Equity Earnings from Timberland Venture
 
63

 
63

 
59

 
56

 
57

Equity Earnings from Real Estate Development Ventures
 
3

 

 

 

 

Interest Expense (Note Payable to Timberland Venture)
 
58

 
58

 
58

 
58

 
58

Interest Expense (Debt Obligations to Unrelated Parties)
 
108

 
83

 
82

 
81

 
80

Income before Income Taxes (B)
 
222

 
213

 
200

 
192

 
203

Provision (Benefit) for Income Taxes
 
8

 
(1
)
 
(3
)
 
(1
)
 
1

Income from Continuing Operations
 
214

 
214

 
203

 
193

 
202

Gain on Sale of Properties, net of tax
 

 

 

 

 
11

Net Income
 
214

 
214

 
203

 
193

 
213

 
 
 
 
 
 
 
 
 
 
 
Non-Cash Items
 
 
 
 
 
 
 
 
 
 
Depreciation, Depletion and Amortization (C)
 
138

 
119

 
114

 
96

 
96

Basis of Real Estate Sold
 
129

 
91

 
138

 
77

 
132

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Items
 
 
 
 
 
 
 
 
 
 
Total Assets (E)
 
5,187

 
5,695

 
4,384

 
4,259

 
4,251

Total Debt Obligations (to Unrelated Parties) (D)
 
2,515

 
2,886

 
2,172

 
1,996

 
1,909

Note Payable to Timberland Venture
(a Related Party)
 
783

 
783

 
783

 
783

 
783

 
 
 
 
 
 
 
 
 
 
 
Earnings per Share (Diluted)
 
 
 
 
 
 
 
 
 
 
Income from Continuing Operations
 
$
1.21

 
$
1.30

 
$
1.25

 
$
1.19

 
$
1.24

Net Income
 
$
1.21

 
$
1.30

 
$
1.25

 
$
1.19

 
$
1.31

 
 
 
 
 
 
 
 
 
 
 
Dividends Declared per Share
 
$
1.76

 
$
1.74

 
$
1.68

 
$
1.68

 
$
1.68

 
 
 
 
 
 
 
 
 
 
 
Timberland Acquisitions (E)
 
 
 
 
 
 
 
 
 
 
Purchase Price
 
$

 
$
950

 
$
18

 
$
89

 
$

Acres
 

 
551,000

 
13,000

 
59,000

 

 
 
 
 
 
 
 
 
 
 
 
Timberland Dispositions (Acres)
 
184,000

 
168,000

 
269,000

 
185,000

 
258,000

 
 
 
 
 
 
 
 
 
 
 
Minerals and Mineral Rights Acquired (E)
 
$

 
$
213

 
$
76

 
$
12

 
$

 
 
 
 
 
 
 
 
 
 
 
Harvest Volume (in Million Tons)
 
19.6

 
17.4

 
17.9

 
15.8

 
15.4

 
(A) 
Includes a $2 million loss due to MDF fire damages and the related $13 million insurance recoveries received, resulting in a net $11 million gain in 2014.
(B) 
Includes a $4 million loss in 2013 and a $13 million loss in 2010 on extinguishment of debt.
(C) 
Includes a $2 million loss due to MDF fire damages in 2014 and a $4 million loss due to forest fire damages in 2013.
(D) 
Includes Timber Obligations accounted for as capital leases.
(E) 
Timberland acquisitions during 2013 include 501,000 acres in Alabama, Georgia, South Carolina, Virginia and West Virginia acquired from MeadWestvaco Corporation. Minerals and mineral rights acquired during 2013 include certain proven and probable coal reserves ($50 million) and surface leases ($7 million) acquired from MeadWestvaco Corporation. See Note 2 of the Notes to Consolidated Financial Statements.

PLUM CREEK 2014 FORM 10-K | 25

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 $2.5 billion principal amount of debt, including $1.3 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 18 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 2014 FORM 10-K | 26

PART II / ITEM 7
 

Overview

2014 Performance Compared to 2013

Our operating income for 2014 was $322 million compared to $295 million for 2013. Prices for nearly all the logs and wood products we sell continued to improve during 2014 due primarily to the improving U.S. economy and the increase in housing starts. U.S. housing starts for all of 2014 were just over 1 million units, which was an increase of 9% over the prior year and have increased by over 80% compared to the record low starts of 554,000 units in 2009 (lowest since 1945). We expect this positive trend to continue in 2015. Real estate markets during 2014 were generally comparable to the prior year. Real estate revenue for both 2014 and 2013 was slightly less than $300 million; however, during 2014 we sold approximately 10% more acres while operating income decreased by approximately 20% due primarily to selling properties which have a higher book basis. In addition to improving prices for logs and wood products, our 2014 operating results were favorably impacted by the following:

In December 2013, we acquired approximately 501,000 acres of timberland from MeadWestvaco Corporation ("MWV"), along with related minerals and wind power leases and an equity interest in approximately 109,000 acres of high-value rural and development quality lands (see Note 2 of the Notes to Consolidated Financial Statements). Of the MWV timberlands acquired, approximately 147,000 acres are included in the Northern Resources Segment and approximately 354,000 acres are included in the Southern Resources Segment. The total purchase price was approximately $1.1 billion, which consisted of a $221 million cash payment and the issuance of an installment note payable for $860 million.

In September 2013, we acquired mineral rights in approximately 255 million tons of aggregate reserves at four quarries in Georgia for approximately $156 million (see Note 6 of the Notes to Consolidated Financial Statements).

On June 10, 2014, we experienced a fire at our MDF facility and recorded a $2 million loss related to the building and equipment damaged or destroyed by the fire. During 2014, we also recorded a $13 million gain related to insurance recoveries that we received, which, when combined with the building and equipment loss, resulted in a net gain of $11 million for 2014. See Note 17 of the Notes to Consolidated Financial Statements.

Operating income in our Northern Resources Segment increased $12 million to $44 million in 2014. During 2014, harvest volumes in our Northern Resources Segment were 3.9 million tons, of which approximately 0.2 million tons were harvested from the MWV timberlands. Excluding the impact of the MWV timberlands, operating income in the Northern Resources Segment increased by $8 million to $40 million. The increase in operating performance was due primarily to higher sawlog prices as a result of continued strong demand and a limited log supply. Operating income in our Southern Resources Segment increased $29 million to $137 million in 2014. During 2014, harvest volumes in our Southern Resources Segment were 15.8 million tons, of which 2.6 million tons were harvested from the MWV timberlands. Excluding the impact of the MWV timberlands, operating income in the Southern Resources Segment increased by $13 million to $121 million. This increase was due primarily to higher sawlog and pulpwood prices as a result of improving demand.

Operating income in our Manufacturing Segment increased $6 million to $49 million in 2014. Excluding the net gains from the MDF fire, operating income in our Manufacturing Segment decreased $5 million to $38 million in 2014. This decrease was due primarily to lower MDF and plywood sales volumes and higher raw material costs.

Operating income in our Real Estate Segment decreased $36 million to $133 million in 2014. This decrease was due primarily to selling properties in 2014 with a lower operating margin compared to the prior year. The lower operating margin was due primarily to selling properties which had a higher book basis compared to the properties that were sold during 2013. Revenues in our Real Estate Segment increased $3 million to $289 million in 2014.

Operating income in our Energy and Natural Resources Segment increased $6 million to $25 million in 2014. This increase was due primarily to royalties from our September 2013 acquisition of mineral rights and royalties from our MWV acquisition of coal and wind assets.


PLUM CREEK 2014 FORM 10-K | 27

PART II / ITEM 7
 

Our net income for 2014 was $214 million, unchanged from our net income in 2013. Interest expense increased $25 million to $166 million in 2014. This increase was due primarily to interest expense on our $860 million installment note payable. Our provision for income taxes increased $9 million to $8 million in 2014. This increase was due primarily to higher earnings by our taxable REIT subsidiaries.

Our net cash flows from operating activities increased $53 million to $457 million in 2014. This increase was due primarily to improved earnings before depletion from our Resources and Energy and Natural Resources Segments ($67 million) partially offset by higher payments for interest expense ($25 million). We expect net cash provided by operating activities in 2015 to be similar to 2014.

Key Economic Factors Impacting Our Resources and Manufacturing Businesses

Our operating performance for the Resources and Manufacturing 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 and industrial activity. The demand for U.S. logs and lumber is reduced, in part, by 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:
 
 
2014
 
2013
 
2012
 
2011
 
2010
U.S. Housing Starts (in millions)
 
1.01

 
0.92

 
0.78

 
0.61

 
0.59

Supply of Existing Homes for Sale (in months)
 
4

 
5

 
4

 
6

 
8

30-yr. Fixed Interest Mortgage Rates (average)
 
4.2
%
 
4.0
%
 
3.7
%
 
4.5
%
 
4.7
%

Housing starts continued to improve during 2014, increasing by 9% over the prior year and by more than 80% over the record low housing starts experienced during 2009. The improvement in housing starts was due primarily to the improving U.S. economy, declining unemployment, near record low mortgage interest rates, and improving consumer confidence. Despite the improvement in housing starts to slightly over 1 million starts for 2014, housing starts remain at recessionary levels.

Housing starts are at recessionary levels due primarily to the low labor participation rate, weak wage growth, high debt levels, the high cost of a new home, along with strict lending standards, all factors which have prevented young families from purchasing a new home. The unemployment rate has steadily declined during the past several years and was 5.6% at the end of 2014. However, a better measure of employment as it relates to housing is the labor participation rate, which was 62.7% at the end of 2014 (its lowest level in the past 25 years). The low participation rate is due in part to individuals dropping out of the workforce as a result of the disappointing job opportunities. Furthermore, a large percentage of the jobs created since the end of the recession have been in low-paying sectors, such as retail and hospitality. Also, stagnant wage growth has impacted the housing sector.

The challenges of finding a well paying job have especially impacted young families. As a result of weak job opportunities along with high levels of student debt, first-time home buyers, which historically have accounted for 40% of home sales, currently account for less than 30% of sales. The decline in first-time home buyers is also causing a significant shift in the mix of housing starts. Historically, single-family starts have accounted for approximately 80% and multifamily starts have accounted for approximately 20% of the total starts. However, because more households are renting instead of owning a home, the multifamily share of housing starts is currently above 30%. This trend negatively impacts the demand for wood products since multifamily starts use only about one-third as much wood as is used in single-family starts.

Another trend that could negatively impact the demand for logs in the U.S. in the future is the level of lumber imports. Recently, the U.S. dollar hit an 11-year high compared to other major currencies, which is likely to result in greater lumber imports. At the same time, China’s economic growth during 2014 slowed to levels not seen in the past 25 years. The decline in China’s economic growth, along with the strong U.S. dollar, are several of the key reasons why Canada increased their lumber imports to the U.S. during 2014. Canada recently increased their lumber imports to the U.S. by over 10% and currently represents approximately 28% of the lumber available in the U.S.


PLUM CREEK 2014 FORM 10-K | 28

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The recessionary level of housing starts has most significantly impacted our Southern Resources Segment. Average sawlog prices in our Northern Resources Segment during 2014 were $85 per ton (delivered basis), which is the highest average sales realization during the past ten years. In comparison, average sawlog prices in our Southern Resources Segment were $22 per ton (stumpage basis), which was approximately 40% lower than our 2005 average of $37 per ton. Some key reasons for this difference is that in our Northern Resources Segment, mill owners have added more shifts, and there has been relatively strong export demand for logs and wood products (primarily in the Northwestern U.S.) throughout most of 2014. However, in our Southern Resources Segment, log prices have increased modestly since our recent low prices in 2011 when the average sales realization for the year was $19 per ton. This limited price improvement is due primarily to Southern mill owners being more reluctant to add shifts or restart mills, and due to the readily available supply of logs for the current level of lumber and plywood production.

During 2015, we expect the rebound in housing starts to continue at a slow pace. Housing starts are expected to continue to improve during 2015 due primarily to the growth in the U.S. economy, improving consumer confidence, and low interest rates. We expect sawlog prices in our Northern Resources Segment to remain strong and we expect sawlog prices in our Southern Resources Segment to continue to gradually improve during 2015 due in part to an expected increase in demand. The demand for sawlogs in our Southern Resources Segment is expected to improve partially due to the increase in sawmill capacity. During 2014, numerous mills in the South invested capital to expand their production capacity along with the start-up of a major new lumber mill in Florida.

Furthermore, we believe favorable demographics will bode well for the wood products business in the long-run and that eventually housing starts will return to normal levels (i.e., annual housing starts of between 1.5 million and 1.6 million). However, due to the low labor participation rate, stagnant wage growth, high levels of student debt, and the slowing world economy, there remains considerable uncertainty regarding the extent and timing of the recovery in the housing sector. Therefore, as long as housing starts remain at recessionary levels and there is an adequate supply of sawlogs to meet the current demand, we believe sawlog prices and operating results in our Southern Resources segment will not significantly improve from 2014 levels.

We use independent third-party contract loggers and haulers to deliver our logs to our customers. Following the weak business conditions in the timber business that persisted for several years, there are fewer of these contractors available in certain markets to produce and deliver logs. While we continue to enhance strong working relationships with the independent loggers and haulers, as log markets continue to improve there may be production and delivery constraints that could impact log prices and/or delivery. Furthermore, despite the recent sharp decline in diesel fuel prices, we do not expect this decline to favorably impact our operating results due to the higher costs resulting from an overall shortage of loggers and haulers.

Higher Value and Non-Strategic Timberlands

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, 2014, are approximately 775,000 acres of higher value timberlands which are expected to be sold, exchanged, and/or developed over the next fifteen years for recreational, conservation, commercial and residential purposes. Included within the 775,000 acres of higher value timberlands are approximately 500,000 acres we expect to sell for recreational uses, approximately 200,000 acres we expect to sell for conservation and approximately 75,000 acres that are identified as having development potential. Furthermore, the company has approximately 225,000 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 775,000 higher value acres and 225,000 small non-strategic acres are other acres that may be sold, from time to time, 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 2014, we sold approximately 65,000 acres of higher and better use / recreational properties for proceeds of $126 million, approximately 66,000 acres of conservation properties for proceeds of $63 million, approximately 30,000 acres of small non-strategic properties for proceeds of $27 million, along with approximately 23,000 acres of large non-strategic properties for proceeds of $65 million. We expect revenue from real estate sales during 2015 to range

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between $250 million and $300 million. Revenue from large non-strategic sales during 2014 was approximately 22% of total real estate revenue. In 2015, we expect revenues from large non-strategic sales to be approximately one-third of total real estate revenue.

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 2015.

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 2014, we harvested a total of 19.6 million tons, which was comprised of 45% sawlogs and 55% pulpwood. We expect total 2015 harvest levels to be comparable to 2014 harvest volumes, ranging between 19 million and 20 million tons. While we have the flexibility to modify our annual harvest volumes, based on market conditions, we expect harvest levels beyond 2015 in the near-term (next five years) to improve modestly (less than 5%) compared to 2014 harvest levels, and we expect harvest levels in the longer-term (ten years and beyond) to improve by nearly 10% over 2014 harvest levels. Additionally, over the longer-term we expect the percentage of sawlogs to increase from 45% to nearly 50%. 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 1.0 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, less frequently, 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 18 months or less). 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): 
 
 
2014
 
2013
 
2012
Revenues from:
 
 
 
 
 
 
Delivered log sales
 
$
668

 
$
577

 
$
553

Pay-as-cut sales
 
$
46

 
$
35

 
$
37

Timber deed sales
 
$
10

 
$
19

 
$
14


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 2014 and 13% of our timber sales in 2013 and 2012 consisted of pay-as-cut sales contracts and 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 2014, the Real Estate Segment reported an operating profit percentage of approximately 46%. Over the last ten years, the Real Estate Segment’s annual operating profit percentage has ranged from 45% to 65% 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 development rights.

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.

In connection with the sale of timberlands, a portion of the original cost of the underlying land and standing timber is included in the real estate segment cost of goods sold. The book basis related to the land being sold is generally based on a specific identification of the costs allocated to the acres being sold. However, the book basis related to the standing timber is based on timber depletion rates. The company has a separate depletion rate for each geographic region in which the company operates (i.e., seven rates in our Northern Resources Segment and six rates in our

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Southern Resources Segment). In connection with an acquisition, the company will either establish new depletion rate(s) or average the acquisition cost and timber inventory with existing depletion rate(s) depending upon how the timberlands will be managed. For example, in connection with our December 6, 2013, acquisition of approximately 501,000 acres of timberlands from MeadWestvaco (see Note 2 of the Notes to Consolidated Financial Statements), the company created a new depletion rate associated with the approximately 126,000 acres acquired in Virginia. The remaining timberlands acquired from MeadWestvaco were combined with existing timberlands in computing new depletion rates for 2014. Management believes that current and future results of operations could be materially different depending upon how depletion rates are established in connection with major acquisitions. For example, in 2014, cost of real estate sales would have been approximately $5 million higher if new depletion rates had been established for all 501,000 acres of the acquired MeadWestvaco timberlands.

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 (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. These estimates of fair value are typically derived from external appraisals and are based on significant assumptions and estimates. Any changes in these estimates and assumptions could impact current and future depletion rates, basis for real estate sales, and our impairment analysis. 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 approximately 6.6 million acres of timberlands by grouping them into seven geographic areas in the Northern Resources Segment and six 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 recognized annual impairment losses of $7 million and $4 million in 2014 and 2013, respectively (see Note 5 of the Notes to Consolidated Financial Statements). No impairment losses were recognized in 2012.
 
An impairment loss is generally not recorded until management expects that the 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

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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 primarily represents the net book value of our seven 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 2014, 2013 or 2012.

We currently estimate that the carrying value for our seven facilities is recoverable through future operations and that our estimate of future cash flows is reasonable. However, if wood product prices were to weaken 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.

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, 2014, we have $37 million of capitalized costs associated with projects that management expects will be successful.

Depletion

Depletion, or costs attributed to timber harvested, is recorded as trees are harvested and sold. 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. Additionally, the depletion rate calculations do not include future volume that is environmentally and/or legally restricted from being harvested.

The original cost of the timber includes capitalized costs associated with the purchase of timber along with reforestation costs and other costs associated with the planting and growing of trees. When timberlands are purchased, management is required, as part of its purchase price allocation, to estimate the fair value of the timber as of the acquisition date. There are significant assumptions and estimates associated with the allocation of purchase price, which in turn, could significantly impact our current and future depletion rates.

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.
 
We establish separate depletion rates for purchased timber deeds in order to allocate the cost of a timber deed over its term (based on harvest volumes).


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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):
 
 
 
2014
 
2013
Depletion Expense
 
 
 
 
Northern Resources Segment (A)
 
$
17

 
$
20

Southern Resources Segment (B)(C)
 
65

 
45

Total Depletion Expense
 
$
82

 
$
65

 
 
 
 
 
Average Depletion Rates (per ton)
 
 
 
 
Northern Resources Segment (A)
 
$
4.42

 
$
4.18

Southern Resources Segment (B)(D)
 
$
4.31

 
$
3.64

 
 
 
 
 
Assumptions Used to Determine the Average Depletion Rates
 
 
 
 
Estimated Future Silviculture Costs, including the Impact of Inflation
 
 
 
 
Northern Resources Segment
 
$
52

 
$
55

Southern Resources Segment (B)(D)
 
$
353

 
$
327

 
 
 
 
 
Estimated Future Volume (in million tons)
 
 
 
 
Northern Resources Segment
 
254

 
263

Southern Resources Segment (B)(D)
 
452

 
409

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

 
$
0.1

Southern Resources Segment
 
$
1.2

 
$
1.0

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

 
$
2.2

Southern Resources Segment
 
$
7.2

 
$
5.0

 
(A) 
Depletion expense for 2013 includes a $4 million loss, representing the book basis of timber volume destroyed as a result of forest fires in Montana and Oregon. Average depletion rate (per ton) does not include the fire loss.
(B) 
Increase from 2013 was due primarily to the December 2013 MeadWestvaco timberland acquisition (see further discussion below and Note 2 of the Notes to Consolidated Financial Statements).
(C) 
Depletion expense does not include the depletion associated with the long-term timber deeds we purchased in 2013 and 2012. Depletion expense associated with these timber deeds was $11 million and $16 million for 2014 and 2013, respectively. We expect 2015 depletion expense associated with these timber deeds to be approximately $15 million.
(D) 
Does not include the long-term timber deeds we purchased in 2013 and 2012.
(E) 
Assumes future timber volumes do not change.
(F) 
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, 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. Management updates all of the above estimates at least annually, or whenever new and supportable information becomes known. Management

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believes that current and future timber depletion (and therefore, current and future results of operations) could be materially impacted by the timing and extent the above assumptions are revised.

In connection with an acquisition, the company will either establish new depletion rate(s) or average the acquisition cost and timber inventory with existing depletion rate(s) depending upon how the timberlands will be managed. For example, in connection with our December 6, 2013, acquisition of approximately 501,000 acres of timberlands from MeadWestvaco (see Note 2 of the Notes to Consolidated Financial Statements), the company created a new depletion rate associated with the approximately 126,000 acres acquired in Virginia. The remaining timberlands acquired from MeadWestvaco were combined with existing timberlands in computing new depletion rates for 2014. Management believes that current and future results of operations could be materially different depending upon how depletion rates are established in connection with major acquisitions. For example, in 2014, depletion expense would have been approximately $4 million higher if new depletion rates had been established for all 501,000 acres of the acquired MeadWestvaco timberlands.

Equity Method Investments

The company has two material equity method investments: (1) an investment in MWV-Charleston Land Partners, LLC (Real Estate Development Joint Ventures) and (2) an investment in Southern Diversified Timber, LLC (Timberland Venture). See Note 18 of the Notes to Consolidated Financial Statements. These investments are presented separately in both our consolidated statements of income and our consolidated balance sheets.

On December 6, 2013, in connection with the MeadWestvaco timberland acquisition, the company and MeadWestvaco Corporation (“MWV”) formed a limited liability company (MWV-Charleston Land Partners, LLC or “MWV-CLP”). Plum Creek contributed cash to MWV-CLP and MWV contributed approximately 109,000 acres of real estate development properties. The book basis of Plum Creek’s initial investment in MWV-CLP was $139 million (based on the December 6, 2013 purchase price allocation), and Plum Creek’s share of MWV-CLP’s net book basis as of December 6, 2013, was approximately $52 million (based on MWV’s historical cost in the contributed properties). In accordance with the Accounting Standards Codification, this basis difference of $87 million is being amortized (i.e., additional expense) into equity earnings (losses) in future periods as either the real estate development properties are sold or timber on the real estate properties is harvested and sold.

On October 1, 2008, Plum Creek and The Campbell Group LLC formed a limited liability company (Southern Diversified Timber, LLC or “the Timberland Venture”). Plum Creek contributed approximately 454,000 acres of timberlands and The Campbell Group LLC contributed cash. Plum Creek’s initial book basis in the Timberland Venture was $174 million (Plum Creek’s basis in the timberlands at the date of transfer) and Plum Creek’s share of the Timberland Venture’s initial net book basis was $783 million (based on fair value of contributed properties). In accordance with the Accounting Standards Codification, this basis difference of $609 million is being amortized (i.e., additional earnings) into equity earnings in future periods as either timber on these properties is harvested and sold or timberlands are sold.

There are significant judgments in determining the amount of basis amortization to be recognized each period for our equity method investments. The judgments primarily relate to the allocations of both the book basis in our equity method investment and our share of the venture’s net book basis among the various assets held by the venture. For example, the key judgments associated with our investment in MWV-CLP were the allocations of our investment in MWV-CLP ($139 million) and our share of MWV-CLP’s net book basis ($52 million) among the various assets of MWV-CLP, which consists primarily of various real estate development properties and standing timber. Additionally, since generally there is a wide range of per acre values within each real estate development property, there is judgment in determining how many homogenous groupings of acres there are within each development property, and then, how much book basis should be allocated to each unique grouping. Finally, there is judgment in estimating the amount of timber volume the venture expects to harvest in the future.

The judgments related to our investment in the Timberland Venture primarily relates to the allocations of our investment in the Timberland Venture ($174 million) and our share of the Timberland Venture’s net book basis ($783 million) among the various assets of the Timberland Venture, which consists primarily of land and standing timber. Additionally, there is judgment in estimating the amount of timber volume the venture expects to harvest in the future.


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During 2014, the basis amortization included in equity earnings related to our investment in MWV-CLP was $11 million (additional expense) and the basis amortization included in equity earnings related to our investment in the Timberland Venture was $9 million (additional earnings). During 2013, there was no basis amortization included in equity earnings related to our investment in MWV-CLP, and the basis amortization included in equity earnings related to our investment in the Timberland Venture was $10 million (additional earnings). Management believes that current and future equity earnings (losses) could be materially different depending upon the assumptions used in allocating both our book basis in our equity method investments and our share of the ventures’ net book basis among the assets of the ventures.

Accounting for Share-Based Compensation

Plum Creek has a stockholder approved Stock Incentive Plan that provides for the award of shares of the company's stock including, but not limited to, common stock awards, restricted stock units and value management awards. See Note 15 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 MSCI U.S. 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 as of December 31, 2014 was $4 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 as of December 31, 2014 could range between $0.3 and $26 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 14 of the Notes to Consolidated Financial Statements. We maintain a qualified defined benefit pension plan and two 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.


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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.

Current Year Impact and Analysis. During 2014, our pension liability increased from $178 million to $218 million and our pension assets increased from $144 million to $154 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 and mortality assumptions. During 2014, our pension liability increased by $32 million (an actuarial loss) due primarily to declining interest rates, and to a lesser extent, a change in our mortality assumptions (plan participants are living longer). 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 7.25% per year. Based on the plan assets balance, our 2014 pension expense was reduced by $9 million (the expected return on plan assets in dollars). The actual return on plan assets was a gain of $7 million for 2014. We initially recognize this difference (shortfall) of $2 million in other comprehensive income (loss) and then subsequently will amortize (charge) to pension expense over future periods.

At December 31, 2014, our cumulative net actuarial pension loss recognized in accumulated other comprehensive income (loss) was $54 million (includes both unrecognized changes in our pension liability and plan assets), of which $4 million will be amortized (charged) to 2015 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 to the extent that 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):
 
 
2014
 
2013
Assumptions Used to Determine the Benefit Obligation at December 31
 
 
 
 
Discount Rates (A)
 
 
 
 
Annuity Distributions
 
4.15
%
 
5.05
%
Lump-Sum Distributions
 
3.04
%
 
3.80
%
Rate of Compensation Increase (B)
 
3.45
%
 
3.45
%
 
 
 
 
 
Assumptions Used to Determine Net Periodic Benefit Cost
 
 
 
 
Discount Rate
 
 
 
 
Annuity Distributions
 
5.05
%
 
4.35
%
Lump-Sum Distributions
 
3.80
%
 
2.80
%
Expected Long-Term Return on Plan Assets (C)
 
7.25
%
 
7.25
%
Rate of Compensation Increase (B)
 
3.45
%
 
3.45
%
 
(A) 
The December 31, 2014 discount rate for annuity distributions was determined by the resulting yield of a hypothetical bond portfolio at December 31, 2014, 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, 2014. The December 31, 2014 discount rate for lump-sum distributions is based on yields on 30-year U.S. Treasury bonds.

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(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 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): 
 
 
2014
 
2013
Key Financial Measures
 
 
 
 
Pension Expense 
 
$
8

 
$
11

Cash Pension Plan Contributions—Qualified Plan
 
9

 

Cash Grantor Trust Funding—Non-Qualified Plans
 
1

 

Non-Current Pension Asset (Qualified Plan)
 

 
10

Current Accrued Pension Liability (Non-Qualified Plans)
 
5

 
5

Non-Current Accrued Pension Liability
 
59

 
39

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
 
0.7

 
0.8

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
 
$
5.0

 
$
3.8

Every 0.25 Percentage Point Decrease in the Weighted-Average Discount Rate Assumption for Lump-Sum Benefits
 
$
1.3

 
$
1.0

 
Assuming an average long-term rate of return on plan assets of 7.25%, and weighted-average discount rates of 4.15% for annuity distributions (and 3.04% for lump-sum distributions) and a 3.45% rate of increase in compensation levels for 2015 and beyond, we project our annual pension expense for 2015 will be approximately $10 million and will range between $8 million and $9 million each year for 2016 through 2019. Based on current interest rates and expected returns, in 2015, we expect our cash funding for the qualified pension plan to range between $4 million and $8 million and our cash funding for the non-qualified pension plans to range between $1 million and $4 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 range between $6 million and $7 million each year in 2016 through 2019. We expect to fund between $2 million and $3 million each year for 2016 through 2019 to our non-qualified pension plans.


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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 equity investments in unconsolidated entities, 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.

On December 6, 2013, in connection with the MWV timberland acquisition (see Note 2 of the Notes to Consolidated Financial Statements) the company and MWV formed a limited liability company (MWV-Charleston Land Partners, LLC or “MWV-CLP”). Plum Creek contributed cash to MWV-CLP and MWV contributed real estate development properties, which consisted of both residential and commercial properties currently under development (“Class A Properties”) and high-value development lands (“Class B Properties”). Plum Creek contributed $12 million in exchange for a 5% interest in Class A Properties and $140 million in exchange for a 50% interest in Class B Properties. Plum Creek has committed to contribute capital of at least $39 million over the next six years in connection with its interest in Class B Properties. The company uses the equity method of accounting for both its Class A and Class B interests. See Notes 18 and 19 of the Notes to Consolidated Financial Statements.

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 18 and 19 of the Notes to Consolidated Financial Statements.

During 2013, the company entered into several treasury lock transactions to hedge against interest rate risk on its Installment Note Payable. These transactions are accounted for as cash flow hedges, and we are amortizing the $5 million gain on these transactions as a reduction to interest expense on the installment note over its term of ten years. See Notes 11 and 13 of the Notes to Consolidated Financial Statements. The company is not a party to any other derivative transactions.

Contractual Obligations. The following table summarizes our contractual obligations at December 31, 2014 (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)
 
$
3,205

 
$
547

 
$
172

 
$
490

 
$
1,996

Note Payable to Timberland Venture (B)
 
1,014

 
58

 
115

 
841

 

Operating Lease Obligations
 
31

 
4

 
8

 
7

 
12

Timber Obligations
 
5

 
1

 

 

 
4

Long-Term Incentive Plans
 
4

 

 
4

 

 

Purchase Obligations (C)
 
244

 
104

 
104

 
10

 
26

Other Long-Term Liabilities (D)
 

 

 

 

 

Total Contractual Obligations
 
$
4,503

 
$
714

 
$
403

 
$
1,348

 
$
2,038

 
(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, 2014 of 1.67% for our term credit agreement. During 2014, the company accrued patronage distributions related to 2014, which resulted in an effective net interest rate on the term loan of approximately 1%. See Note 11 of the Notes to Consolidated Financial Statements. Interest obligations are $108 million (less than one year), $172 million (1-3 years), $170 million (3-5 years), and $242 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 2014, interest expense related to our line of credit was less than $1 million.

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(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), $115 million (1-3 years), and $58 million (3-5 years).
(C) 
Purchase obligations are comprised primarily of $135 million for timber harvest contracts, $44 million for long-term timber leases, $21 million for fiber supply agreements to supply our manufacturing facilities, approximately $15 million for electricity and natural gas for our MDF facilities, $9 million for fiber supply agreements to supply external customers, and $7 million for raw materials (wood fiber and resin) for our manufacturing 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, 2014, other long-term liabilities include workers’ compensation of $7 million, deferred compensation obligations of $5 million and pension obligations of $64 million (including $5 million classified as a current liability). We expect to fund approximately $1 million for workers’ compensation payments in 2015. We have two grantor trusts, which hold assets associated with our deferred compensation obligations and non-qualified pension obligations. At December 31, 2014, 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, 2014 fair value of assets in the other grantor trust was approximately $43 million and the actuarially computed accumulated benefit obligation for our non-qualified pension plans was $45 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 expected returns, the company expects 2015 contributions to the qualified pension plan to range between $4 million and $8 million and between $1 million and $4 million for the grantor trust associated with the non-qualified plans. See Notes 12 and 14 of the Notes to Consolidated Financial Statements.


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Events and Trends Affecting Operating Results

Gain Recognized in Connection with Redemption of Member’s Interest

On October 1, 2008, Plum Creek contributed approximately 454,000 acres of timberlands to Southern Diversified Timber, LLC (“Timberland Venture”) in exchange for a $705 million preferred interest and a 9% common interest valued at $78 million. The other member contributed cash of $783 million in exchange for a 91% common interest. Following the contribution of cash by the other member, Plum Creek borrowed $783 million from the Timberland Venture (“Note Payable to Timberland Venture”). No gain was recognized by Plum Creek in 2008 in connection with the contribution of its timberlands to the Timberland Venture. See Notes 18 and 19 of the Notes to Consolidated Financial Statements.

Under the terms of the Timberland Venture agreement, the other member has the option of having the Timberland Venture redeem its interest during the period October 1, 2015 to March 31, 2016. Plum Creek has a similar option during the period October 1, 2017 to March 31, 2018. The Timberland Venture agreement also provides that in connection with a redemption, all of the timberlands held by the Timberland Venture will be distributed to the other member, subject to adjustments to capital accounts in connection with the revaluation of the Timberland Venture’s assets at the time of the redemption. If the other member exercises its right, depending upon the fair value of the Timberland Venture’s net assets on the date of redemption, Plum Creek expects to recognize a non-operating book gain (and an increase in reported net income) of between $500 million and $600 million. The company believes the earliest this book gain could be recognized is 2016. However, while the company believes the potential redemption would result in the recognition of a book gain, the company does not believe a redemption would result in a taxable gain nor would it impact the company’s quarterly dividend distributions.

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 of timberland sales will depend on the level and extent we reinvest proceeds in productive timberlands and the stocking levels and age class distribution of any newly acquired timberlands. For example, in December 2013 we acquired approximately 501,000 acres of timberlands in Alabama, Georgia, South Carolina, Virginia, and West Virginia from MeadWestvaco Corporation ("MWV"). Of the MWV timberlands acquired, approximately 147,000 acres are included in the Northern Resources Segment and approximately 354,000 acres are included in the Southern Resources Segment. The volume harvested from the MWV timberlands in 2014 was nearly 3 million tons.

Harvest levels are also impacted by purchases of long-term timber deeds. In 2013, we purchased a timber deed in the Southern Resources Segment, which encompasses approximately 0.9 million tons of standing timber. In 2012, we acquired approximately 4.7 million tons of standing timber in our Southern Resources Segment. The volume acquired under a timber deed, plus the related growth, is harvested over the term of each timber deed. Both timber deeds expire in 2020.

Northern Resources Segment. Sawlog harvest levels during 2014 were 2.3 million tons and pulpwood harvest levels were 1.6 million tons. Sawlog harvest levels during 2015 are expected to decrease between 5% and 10% due primarily to recent land sales and harvest schedule updates. Pulpwood harvest levels during 2015 are expected to

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be comparable to 2014 harvest levels. While the company has flexibility to modify annual harvest volumes based on market conditions, we expect sawlog harvest levels beyond 2015 in the near-term (next five years) to decrease by between 5% and 10% compared to 2014 harvest levels, and we expect sawlog harvest levels in the longer-term (ten years and beyond) to decrease by between 15% and 20% compared to 2014 harvest levels. Additionally, we expect pulpwood harvest levels beyond 2015 in the near-term to be comparable to 2014 harvest levels and in the longer-term we expect pulpwood harvest levels to decrease by between 5% and 10% compared to 2014 harvest levels.

Southern Resources Segment. Sawlog harvest levels during 2014 were 6.5 million tons and pulpwood harvest levels were 9.3 million tons. Both sawlog and pulpwood harvest levels during 2015 are expected to be comparable to 2014 harvest levels. While the company has flexibility to modify annual harvest volumes based on market conditions, we expect sawlog harvest levels beyond 2015 in the near-term (next five years) to increase by nearly 15% compared to 2014 harvest levels, and we expect sawlog harvest levels in the longer-term (ten years and beyond) to increase by nearly 50% compared to 2014 harvest levels. Additionally, we expect pulpwood harvest levels beyond 2015 in the near-term and long-term to be comparable to 2014 harvest levels.

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. 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):
 
 
2014
 
2013
 
2012
Acquisitions:
 
 
 
 
 
 
Northern Resources
 

 
147,000

 

Southern Resources
 

 
404,000

 
13,000

 
 
 
 
 
 
 
Dispositions
 
 
 
 
 
 
Northern Resources
 
136,000

 
66,000

 
147,000

Southern Resources
 
48,000

 
102,000

 
122,000

 
 
 
 
 
 
 
Total Ownership at December 31 (in millions)
 
6.6

 
6.8

 
6.4






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Results of Operations

The following table compares Operating Income (Loss) by Segment and other items impacting our net income for the years ended December 31 (in millions):
 
 
2014
 
2013
 
2012
Operating Income (Loss) by Segment
 
 
 
 
 
 
Northern Resources
 
$
44

 
$
32

 
$
20

Southern Resources
 
137

 
108

 
90

Real Estate
 
133

 
169

 
187

Manufacturing
 
49

 
43

 
29

Energy and Natural Resources
 
25

 
19

 
19

      Other
 
2

 

 

Total Segment Operating Income
 
390

 
371

 
345

Other Costs and Eliminations
 
(67
)
 
(73
)
 
(65
)
Other Unallocated Operating Income (Expense), net
 
2

 
(3
)
 
1

Operating Income
 
325

 
295

 
281

Equity Earnings from Timberland Venture
 
63

 
63

 
59

Interest Expense (Debt Obligations to Unrelated Parties)
 
108

 
83

 
82

Interest Expense (Note Payable to Timberland Venture)
 
58

 
58

 
58

Loss on Extinguishment of Debt
 

 
(4
)
 

Provision (Benefit) for Income Taxes
 
8

 
(1
)
 
(3
)
Net Income
 
$
214

 
$
214

 
$
203

 
 
 
 
 
 
 


2014 Compared to 2013

Northern Resources Segment.  In December 2013, we acquired approximately 501,000 acres of timberland from MeadWestvaco Corporation ("MWV"). Of the MWV timberlands acquired, approximately 147,000 acres are included in the Northern Resources Segment.
 
Year Ended December 31, 2014
 
Year Ended December 31, 2013
 
Harvest Tons
(millions)
 
Average Sales
Realization
 
Harvest Tons
(millions)
 
Average Sales
Realization
Sawlog ($/Ton Delivered)
2.310

 
$
85

 
2.487

 
$
79

Pulpwood ($/Ton Delivered)
1.575

 
$
44

 
1.411

 
$
43

Total
3.885

 
 
 
3.898

 
 
 
 
 
 
 
 
 
 

Revenues increased by $4 million, or 2%, to $264 million in 2014 compared to 2013. Excluding the acquired MWV timberlands, revenues decreased by $11 million, or 4% to $249 million. The decrease was due primarily to lower sawlog volumes ($23 million), partially offset by higher sawlog prices ($11 million) and higher pulpwood prices ($3 million).

Sawlog harvest volumes decreased 7% during 2014 compared to 2013. Excluding the MWV timberlands, sawlog harvest volumes decreased 12% during 2014 compared to 2013 due primarily to recent land sales and harvest schedule and timber inventory updates. Pulpwood harvest volumes increased 12% during 2014 compared to 2013. Excluding the MWV timberlands, pulpwood harvest volumes were essentially flat during 2014 compared to 2013.

Sawlog prices increased 8% during 2014 compared to 2013. Sawlog prices increased due primarily to improved demand and, to a lesser extent, limited supply. The demand for sawlogs has improved due primarily to improving U.S. housing starts, which increased by 9% compared to 2013. Furthermore, sawlog prices were favorably impacted throughout most of the year by the export of logs and lumber to China. The supply of sawlogs in our Northern Segment

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remained limited throughout most of 2014 due in part to weather-related harvesting restrictions. Pulpwood prices increased 3% during 2014 compared to 2013 due primarily to weather-related harvesting constraints.

Excluding the MWV timberlands, Northern Resources Segment operating income was 16% of its revenues for 2014 compared to 12% of its revenues for 2013. The increase in operating performance was due to improved log prices and lower operating expenses, offset in part by lower sawlog harvest volumes and higher log and haul rates. Additionally, during 2013 we incurred a $4 million charge for timber losses from forest fires. Segment costs and expenses decreased by $8 million, or 4%, to $220 million. Excluding the MWV timberlands, segment costs and expenses decreased by $19 million, or 8%, to $209 million due primarily to lower sawlog harvest volumes, lower operating expenses and a $4 million forest fire loss in 2013, offset in part by higher log and haul rates. Operating expenses decreased by $7 million due primarily to lower logging road costs, as a result of lower sawlog harvest volumes, and lower share-based compensation costs. During 2013, we recorded a $4 million loss (i.e. the book basis of timber volume destroyed) related to forest fires on approximately 12,000 acres in Oregon and Montana. No forest fire losses were experienced during 2014. Log and haul rates per ton increased 4% ($5 million) due primarily to salvage logging on our Montana and Oregon timberlands that were impacted by fires in 2013.

For 2015, we expect sawlog harvest volumes to decrease between 5% and 10% compared to the 2.3 million tons we harvested in 2014 due primarily to recent land sales and harvest schedule updates. We expect pulpwood harvest volumes in 2015 to approximate the 1.6 million tons we harvested in 2014.


Southern Resources Segment. In December 2013, we acquired approximately 501,000 acres of timberland from MWV. Of the MWV timberlands acquired, approximately 354,000 acres are included in the Southern Resources Segment.

Key operating statistics for the segment are as follows:
 
Year Ended December 31, 2014
 
Year Ended December 31, 2013
 
Harvest Tons
(millions)
 
Average Sales
Realization
 
Harvest Tons
(millions)
 
Average Sales
Realization
Sawlog ($/Ton Stumpage)
6.470

 
$
22

 
5.892

 
$
22

Pulpwood ($/Ton Stumpage)
9.283

 
$
12

 
7.564

 
$
11

Total
15.753

 
 
 
13.456

 
 
 
 
 
 
 
 
 
 

Revenues increased by $96 million, or 22%, to $531 million in 2014 compared to 2013. Excluding the acquired MWV timberlands, revenues increased by $11 million, or 3% to $446 million. This increase was due primarily to higher sawlog prices ($7 million), an increased proportion of delivered log sales ($7 million), higher pulpwood prices ($6 million) and higher pulpwood volumes ($5 million), partially offset by lower sawlog volumes ($13 million).

In certain markets during 2014, demand for delivered log sales, particularly sawlogs, was generally stronger than markets for the sale of standing timber (or “stumpage”). Under delivered log sale agreements, we are responsible for log and haul costs, while under agreements to sell standing timber, the buyer is responsible for log and haul costs. While revenues are higher under a delivered log sale, a large portion of the increase is to cover the related increase in cost of sales.

Sawlog prices increased approximately 4% during 2014 compared to 2013 due primarily to modestly increased log demand resulting from improved U.S. housing starts, which increased by 9% compared to 2013. Despite the continued increase in lumber mill production capacity expansions and a 5% increase in lumber production in the Southern U.S. during 2014, the price improvement for sawlogs has been modest because at current production levels there remains an adequate supply of logs.
  
Pulpwood prices increased 10% during 2014 compared to 2013. This increase was due primarily to continued good demand from our paper and packaging customers and increased fiber demand from competing uses, such as Oriented Strand Board and the export of wood pellets used to produce bioenergy.


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Sawlog harvest volumes increased 10% during 2014 compared to 2013. Excluding the MWV timberlands, sawlog harvest volumes decreased 5% during 2014 compared to 2013 due primarily to the deferral of harvest volumes until sawlog prices improve. Pulpwood harvest volumes increased 23% during 2014 compared to 2013. Excluding the MWV timberlands, pulpwood harvest volumes were comparable to the tons harvested in 2013.

Excluding the MWV timberlands, Southern Resources Segment operating income was 27% of its revenues for 2014 compared to 25% of its revenues for 2013. This increase was due primarily to higher sawlog and pulpwood prices. Segment costs and expenses increased by $67 million, or 21%, to $394 million for 2014 due primarily to higher harvest volumes and, to a lesser extent, increased forest management expenses ($6 million) related to the MWV timberlands and higher depletion rates ($4 million). Excluding the MWV timberlands, segment costs and expenses decreased by $2 million, or 1%, to $325 million due primarily to lower depletion rates, offset in part by higher log and haul rates. Depletion rates per ton decreased by 12% ($7 million) in 2014 compared to 2013 due primarily to harvesting lower volume from the timber deeds the company acquired in 2013 and 2012. During 2014, the company harvested approximately 700,000 tons related to timber deeds compared to harvesting approximately 1 million tons in 2013. Log and haul rates per ton increased by 2% ($4 million) in 2014 compared to 2013. Despite the sharp decline in diesel fuel prices during the second half of 2014, log and haul rates per ton increased due primarily to a shortage of loggers and haulers.

For 2015, we expect sawlog harvest volumes to approximate the 6.5 million tons we harvested in 2014. We expect pulpwood harvest volumes in 2015 to approximate the 9.3 million tons we harvested in 2014. Additionally, during 2015 we expect to harvest a higher percentage of sawlogs and pulpwood from our Gulf South Region, which generally has lower sales realizations.


Real Estate Segment.
 
Year Ended December 31, 2014
 
Year Ended December 31, 2013
Property
Acres
Sold
 
Revenues
(millions)
 
Revenue
per Acre
 
Acres
Sold
 
Revenues
(millions)
 
Revenue
per Acre
Small Non-Strategic
30,465

 
$
27

 
$
880

 
44,100

 
$
54

 
$
1,235

Large Non-Strategic
22,920

 
65

 
2,845

 
51,370

 
106

 
2,050

Conservation
66,015

 
63

 
945

 
26,005

 
26

 
1,000

Higher and Better Use / Recreational
64,615

 
126

 
1,965

 
46,970

 
95

 
2,010

Conservation Easements
n/a

 
8

 
320

 
n/a

 
5

 
600

Total
184,015

 
$
289

 
 
 
168,445

 
$
286

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Revenues increased by $3 million, or 1%, to $289 million in 2014. Revenues were slightly higher; however, the mix changed as revenues decreased from large non-strategic land sales by $41 million and by $27 million from small non-strategic sales, offset by an increase in the revenues from conservation sales of $37 million and sales of higher and better use / recreational properties of $31 million.

Revenues from the sale of large non-strategic timberlands were $65 million in 2014 compared to $106 million during 2013. This decrease of $41 million was due primarily to selling fewer large non-strategic acres during 2014 as a result of improved demand for higher and better use / recreational properties and higher conservation sales. Additionally, the price per acre for large non-strategic timberlands can vary significantly due to the geographic location, the stocking level including timber species and age class distribution, the timber growth rates, and the demand and supply of wood fiber in the local market.

Revenues from small non-strategic sales decreased due primarily to selling approximately 13,600 (31%) fewer acres during 2014 compared to 2013 and realizing a lower sales price per acre in 2014. We sold nearly 22,000 acres during 2013 to a single buyer. Our average sales price per acre for small non-strategic properties decreased by 29% for 2014 compared to 2013 due primarily to selling approximately 17,000 acres in Wisconsin to a single buyer. Per acre values in the Lake States are generally lower than most other regions of the country in which we hold properties.


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Revenues from the sale of conservation properties were $63 million in 2014 compared to $26 million during 2013. Occasionally, the company is approached by a conservation organization to purchase a substantial portion of our ownership in one or more states, which is being held for timber production. During 2014, we agreed to sell approximately 165,000 acres of timberlands located in Montana and Washington to The Nature Conservancy. The sale closed in two phases. The first phase closed during the fourth quarter of 2014 for approximately $46 million and consisted of nearly 48,000 acres in Washington State. The second phase closed in January 2015 for $85 million and consisted of 117,000 acres in Montana. In general, conservation sales vary significantly from period to period and are primarily impacted by government and not-for-profit funding and the limited number of conservation buyers. Additionally, the price per acre for conservation properties can vary significantly due to the geographic location and the rationale for the conservation designation.

Revenue from our higher and better use / recreational properties increased as a result of selling approximately 17,650 (38%) more acres compared to 2013. This increase was due primarily to selling 22,400 acres for approximately $29 million as part of a collection of properties sold to a timberland investor in Wisconsin during the second quarter of 2014. The demand for our premium higher and better use / recreational properties remains soft.

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). In any period the average sales price per acre will vary based on the location and physical characteristics of the parcels sold.

At December 31, 2014, the company owns approximately 6.6 million acres of timberlands. Included in the 6.6 million acres are approximately 775,000 acres of higher value timberlands (approximately 675,000 acres of higher value timberlands after adjusting for the January 2015 sale to The Nature Conservancy) which are expected to be sold over the next fifteen years and 225,000 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 775,000 higher value acres and 225,000 small non-strategic acres are 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 2015 to range between $250 million and $300 million with approximately one-third of the revenue from the sale of large non-strategic land sales. The proceeds from the sale of large non-strategic properties is expected to be used for capital allocation, such as stock repurchases and debt repayments.

The Real Estate Segment operating income as a percent of revenue was 46% for 2014 compared to 59% for 2013. This decrease was due primarily to selling properties in 2014 with a lower operating margin compared to the operating margin of properties sold in 2013. This decline in operating margins resulted primarily from the fourth quarter sale of conservation lands in Washington State that had basis in excess of the selling price, and selling approximately 8,800 acres that had high book value from the recent MeadWestvaco acquisition. Conversely, the properties sold in 2013 were generally from regions with lower book value as the properties had been owned for decades. Real Estate Segment costs and expenses increased by $39 million to $156 million in 2014 due primarily to selling property with higher book value and selling more acres during 2014. Similar to the sale of Washington properties to The Nature Conservancy in 2014, the sale of Montana properties to The Nature Conservancy in January 2015 had high book values, which will likely cause our real estate segment operating income as a percent of revenue for 2015 to be comparable to 2014.



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Manufacturing Segment. On June 10, 2014, we experienced a fire at our MDF facility and recorded a $2 million loss representing the net book value of the building and equipment damaged or destroyed by the fire. During 2014, we also recorded a $13 million gain related to insurance recoveries that we received, which, when combined with the building and equipment loss, resulted in a net gain of $11 million for the year ended December 31, 2014. Insurance recoveries were $10 million for the costs incurred during 2014 to rebuild or replace the damaged building and equipment and $3 million for business interruption costs. Substantially all of the costs incurred to rebuild or replace the damaged building and equipment were capitalized during 2014. Both the building and equipment loss and the insurance recoveries are reported as Other Operating Gain in the Manufacturing Segment and are included in Other Operating Income (Expense), net in the Consolidated Statements of Income. See Note 17 of the Notes to Consolidated Financial Statements.
 
Year Ended December 31, 2014
 
Year Ended December 31, 2013
 
Sales Volume
 
Average Sales
Realization (A)
 
Sales Volume
 
Average Sales
Realization (A)
Lumber
153,865 MBF
 
$
576

 
145,917 MBF
 
$
534

Plywood
166,824 MSF
 
$
483

 
187,142 MSF
 
$
458

MDF
204,026 MSF
 
$
676

 
213,647 MSF
 
$
665


(A) 
Represents product prices at the mill level.

Revenues increased by $6 million, or 2%, to $368 million in 2014. This increase in revenues was due primarily to higher lumber prices ($9 million), higher lumber sales volumes ($5 million), higher plywood prices ($5 million) and higher MDF prices ($4 million), partially offset by lower plywood sales volumes ($10 million), and lower MDF sales volumes ($7 million).

Lumber sales prices increased 8% during 2014 compared to 2013 due primarily to a limited supply of boards. The supply of boards has been limited, in part, as many lumber manufacturers switched to producing dimension lumber instead of boards due to improved demand for dimension lumber. Lumber sales volume was 5% higher during 2014 compared to 2013 due primarily to resuming operations at our Evergreen, Montana (stud lumber) sawmill in April 2013.

Plywood sales volume was 11% lower during 2014 compared to 2013 due primarily to a declining supply of logs in the region. Plywood average prices were 6% higher during 2014 compared to 2013 due primarily to continued strong demand for our specialty plywood products along with a reduced supply. The supply of plywood has also declined due to a competing West Coast plywood mill that was destroyed by fire in July 2014.

MDF sales volume was 5% lower during 2014 compared to 2013 due primarily to a fire at our MDF facility in June 2014. The fire suspended production at the facility until early July. MDF average prices were 2% higher during 2014 compared to 2013.

Excluding the $11 million net gain from insurance recoveries, Manufacturing Segment operating income was 10% of its revenues for 2014 compared to 12% of its revenues for 2013. This decrease in operating performance was due primarily to lower MDF and plywood sales volumes and higher raw material costs. Excluding insurance recoveries, Manufacturing Segment costs and expenses increased by $11 million, or 3%, to $330 million. The increase in costs and expenses was due primarily to increased lumber sales volumes and higher raw material costs (in all of our product lines), partially offset by lower MDF and plywood sales volumes. Plywood and lumber raw material costs increased by approximately $17 million during 2014 compared to 2013. The higher plywood raw material costs ($10 million) were due primarily to a combination of higher log costs and additional purchases of veneer from other plywood manufacturers, both as a result of the declining supply of logs in the region. The higher lumber raw material costs ($7 million) were due primarily to higher cost of boards for our remanufacturing mill and higher log costs for our other lumber mills as a result of the declining supply of logs in the region.



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Energy and Natural Resources Segment. Revenues increased by $11 million, or 48%, to $34 million in 2014. This increase was due primarily to royalties from our recent acquisition of mineral rights in approximately 255 million tons of aggregate reserves in September 2013 ($6 million), and royalties from recently acquired coal and wind assets in the MeadWestvaco acquisition ($5 million).

Operating income was $25 million for 2014 compared to $19 million in 2013.  Costs and expenses increased by $5 million to $9 million in 2014 due primarily to higher depletion expense associated with our newly acquired mineral rights and coal and wind assets ($7 million), offset in part by a gain associated with a contract termination ($2 million). See Note 21 of the Notes to Consolidated Financial Statements.

Other Segment. The Other Segment includes revenues and expenses associated with our new business of providing timber and wood-fiber procurement services by the harvesting and selling of trees from timberlands that are not owned by the company. Additionally, equity earnings (losses) associated with the company's investment in MWV-Charleston Land Partners, LLC (see Note 18 of the Notes to Consolidated Financial Statements) are reported in the Other Segment. In 2014, the Other Segment reported operating income of $2 million that was due primarily to recording our share of equity earnings from our investment in MWV-CLP. There were no similar activities in 2013.

Other Costs and Eliminations. Other costs and eliminations (which consists of corporate overhead and intercompany profit elimination) decreased operating income by $67 million during 2014 compared to $73 million during 2013. The decrease of $6 million was due primarily to lower transaction expenses related to our timberland acquisition in 2013 from MWV ($4 million) and lower share-based compensation costs ($4 million) partially offset by an increase in information technology costs, compliance costs and charitable contributions ($2 million). See Note 2 of the Notes to Consolidated Financial Statements for discussion of the timberland acquisition. The decrease in share-based compensation expense was due primarily to fair value adjustments associated with our value management plan. We adjust the fair value of our liability quarterly based on our relative total shareholder return compared to the performance of several peer groups.

Other Unallocated Operating Income (Expense), net. Other unallocated operating income and expense (which consists of income and expenses not allocated to the operating segments) increased operating income by $2 million during 2014 and decreased operating income by $3 million during 2013. The decrease in expense of $5 million compared to 2013 was due primarily to a loss related to the early termination of an equipment lease in 2013. The equipment lease was accounted for as an operating lease prior to termination. Other unallocated operating income and expense items are included in Other Operating Income (Expense), net in the Consolidated Statements of Income.

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 $115 million in 2014 compared to $123 million in 2013. This decrease in expense of $8 million was due primarily to lower share-based compensation costs ($7 million) and transaction expenses related to our timberland acquisition from MWV in 2013 ($4 million) offset in part by higher wage costs ($3 million). The decrease in share-based compensation costs is primarily a result of fair value adjustments associated with our value management plan.

Interest Expense, net. In December 2013, we issued an $860 million installment note to MWV CDLM in connection with the acquisition of certain timberland assets. Our effective net interest rate on this note is approximately 4.5%. Also during 2013, we paid off our remaining Private Debt ($260 million), paid down $225 million of our term credit agreement and made pre-payments of approximately $24 million of principal on our Public Debt.

As a result of the above transactions, interest expense, net of interest income, increased $25 million, or 18%, to $166 million in 2014 compared to $141 million in 2013. This increase was due primarily to interest expense on our $860 million installment note payable ($35 million), offset by a reduction in interest expense as a result of the debt repayments in 2013 ($10 million).

Loss on Extinguishment of Debt. During 2013, we prepaid approximately $10 million of principal of Private Debt, $24 million of principal of Public Debt and $225 million of principal of the term credit agreement. These prepayments resulted in a $4 million loss. See Notes 2 and 11 of the Notes to Consolidated Financial Statements.


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Provision (Benefit) for Income Taxes. The provision for income taxes was $8 million for income taxes in 2014 compared to a benefit for income taxes of $1 million in 2013. This $9 million increase in expense for income taxes was due primarily to higher earnings from real estate sales by our taxable REIT subsidiaries ($3 million), higher earnings from harvesting and log selling operations conducted by our taxable REIT subsidiaries ($3 million) and higher earnings from our manufacturing businesses ($2 million). Real estate sales are made by both our taxable REIT subsidiaries and various wholly-owned subsidiaries of our REIT depending upon the nature and characteristics of the timberlands being sold.  Earnings increased for our harvesting and log selling operations due primarily to higher harvest volumes following our timberland acquisition from MWV in December 2013. Higher earnings for our manufacturing businesses are due primarily to gains for insurance recoveries recognized during 2014 related to our MDF facility. See Note 17 of the Notes to Consolidated Financial Statements.

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, 2014, we have recorded deferred tax assets of $65 million (net of a $12 million valuation allowance) and deferred tax liabilities of $36 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 of $65 million for which a valuation allowance was determined to be unnecessary.


2013 COMPARED TO 2012

Northern Resources Segment.
 
Year Ended December 31, 2013
 
Year Ended December 31, 2012
 
Harvest Tons
(millions)
 
Average Sales
Realization
 
Harvest Tons
(millions)
 
Average Sales
Realization
Sawlog ($/Ton Delivered)
2.487

 
$
79

 
2.601

 
$
69

Pulpwood ($/Ton Delivered)
1.411

 
$
43

 
1.586

 
$
42

Total
3.898

 
 
 
4.187

 
 
 
 
 
 
 
 
 
 

Revenues increased by $14 million, or 6%, to $260 million in 2013 compared to 2012. This increase was due primarily to higher sawlog prices ($25 million), partially offset by lower sawlog harvest volumes ($7 million) and by lower pulpwood harvest volumes ($7 million).

Sawlog prices increased 15% in 2013 compared to 2012 due primarily to improved demand and limited supply. The demand for sawlogs on the West coast improved due primarily to lumber and plywood mills increasing production along with the strengthening demand for export logs, primarily to China. Lumber and plywood production increased compared to 2012 primarily as a result of near record high lumber and plywood prices during the first half of 2013 and improving U.S. housing starts. Housing starts during 2013 increased by 18% compared to 2012 and increased by over 60% to almost 1 million starts from the record low housing starts of 554,000 in 2009. The supply of logs was limited during most of 2013 due to weather-related harvesting restrictions earlier in the year and harvesting restrictions related to forest fires later in the year.

Sawlog harvest volumes were 4% lower in 2013 compared to 2012. Sawlog harvest volumes decreased from 2012 due primarily to harvest schedule and timber inventory updates, and recent land sales.

Pulpwood harvest volumes were 11% lower in 2013 compared to 2012 due primarily to an excess supply of wood chips on the West coast and, to a lesser extent, harvest schedule updates and recent land sales in the Northeastern U.S. Throughout most of 2013, there was an excess supply of wood chips on the West coast due to an increase in lumber and plywood production.

Northern Resources Segment operating income was 12% of its revenues for 2013 compared to 8% of its revenues for 2012 due primarily to higher sawlog prices, partially offset by a loss related to several forest fires and higher log and

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haul rates. Segment costs and expenses increased by $2 million, or 1%, to $228 million for 2013. Segment costs and expenses were impacted by a $4 million fire loss and higher log and haul rates per ton ($7 million); however, these increases were almost entirely offset by lower harvest volumes. The $4 million fire loss represents the book basis of timber volume destroyed as a result of forest fires on approximately 12,000 acres in Oregon and Montana. Log and haul rates increased 5% during 2013 compared to 2012 due primarily to longer haul distances, harvesting stands that require more expensive logging methods, and lower volumes per acre on certain harvest units.


Southern Resources Segment.
 
Year Ended December 31, 2013
 
Year Ended December 31, 2012
 
Harvest Tons
(millions)
 
Average Sales
Realization
 
Harvest Tons
(millions)
 
Average Sales
Realization
Sawlog ($/Ton Stumpage)
5.892

 
$
22

 
5.739

 
$
20

Pulpwood ($/Ton Stumpage)
7.564

 
$
11

 
8.010

 
$
10

Total
13.456