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TMCNet:  PLUM CREEK TIMBER CO INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[August 05, 2014]

PLUM CREEK TIMBER CO INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) 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 under the heading "Risk Factors" in our filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and Securities Act of 1933, as amended, including, but not limited to, our Annual Report on Form 10-K for the year ended December 31, 2013. 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 timberlands 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.

The following discussion and analysis should be read in conjunction with the financial information and analysis included in our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2014.

36-------------------------------------------------------------------------------- Table of Contents Organization of the Company In management's discussion and analysis of financial condition and results of operations (Item 2 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 1 of this Form 10-Q.

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 $2.6 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 12 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.

Results of Operations Second Quarter 2014 Compared to Second Quarter 2013 The following table compares Operating Income (Loss) by Segment and other items impacting our net income for the quarters ended June 30 (in millions): Quarter Ended June 30, 2014 2013 Change Operating Income (Loss) by Segment Northern Resources $ 5 $ 8 $ (3 ) Southern Resources 33 23 10 Real Estate 45 30 15 Manufacturing 10 14 (4 ) Energy and Natural Resources 6 4 2 Other (3 ) - (3 ) Total Segment Operating Income 96 79 17 Other Costs and Eliminations (17 ) (18 ) 1 Other Unallocated Operating Income (Expense), net 1 1 - Equity Earnings from Timberland Venture 17 17 - Total Interest Expense, net (42 ) (35 ) (7 ) Provision (Benefit) for Income Taxes - (2 ) 2 Net Income $ 55 $ 46 $ 9 37-------------------------------------------------------------------------------- Table of Contents 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.

Key operating statistics for the segment are as follows: Quarter Ended June 30, 2014 Quarter Ended June 30, 2013 Harvest Tons Average Sales Harvest Tons Average Sales (millions) Realization (millions) RealizationSawlog ($/Ton Delivered) 0.499 $ 83 0.581 $ 79 Pulpwood ($/Ton Delivered) 0.248 $ 41 0.209 $ 42 Total 0.747 0.790 Revenues decreased by $3 million, or 6%, to $50 million in the second quarter of 2014 compared to the second quarter of 2013. Excluding the acquired MWV timberlands, revenues decreased by $7 million, or 13%, to $46 million. The decrease was due primarily to lower sawlog harvest volumes ($9 million), partially offset by higher sawlog prices ($2 million).

Sawlog harvest volumes decreased 14% in the second quarter of 2014 compared to the second quarter of 2013. Excluding the MWV timberlands, sawlog harvest volumes decreased 19% in the second quarter of 2014 compared to the second quarter of 2013 due primarily to recent land sales and harvest schedule and timber inventory updates. Pulpwood harvest volumes increased 19% in the second quarter of 2014 compared to the second quarter of 2013. Excluding the MWV timberlands, pulpwood harvest volumes decreased 6% in the second quarter of 2014 compared to the second quarter of 2013.

Sawlog prices increased 5% in the second quarter of 2014 compared to the second quarter of 2013. Sawlog prices increased due primarily to improving demand and limited supply. The demand for sawlogs has improved due primarily to improving U.S. housing starts and increased exports of logs and lumber (primarily to China). Housing starts during the first six months of 2014 increased 6% compared to the first six months of 2013. The supply of sawlogs in our Northern Segment remains limited.

Excluding the MWV timberlands, Northern Resources Segment operating income was 9% of its revenues for the second quarter of 2014 compared to 15% of its revenues for the second quarter of 2013. The decrease in operating performance was due primarily to lower sawlog harvest levels. Segment costs and expenses were $45 million for both the second quarter of 2014 and the second quarter of 2013. Excluding the MWV timberlands, segment costs and expenses decreased by $4 million, or 9%, to $42 million due primarily to lower sawlog harvest volumes, partially offset by higher log and haul rates. Log and haul rates per ton increased 5% ($1 million) due primarily to salvage logging on our Montana and Oregon timberlands that were impacted by fires in 2013.

For 2014, we still expect sawlog harvest volumes to decrease by approximately 10% compared to the 2.5 million tons we harvested in 2013. Excluding the MWV timberlands, we expect sawlog harvest volume to decrease by approximately 15% compared to tons harvested in 2013. We expect pulpwood harvest volumes to increase by approximately 15% compared to the 1.4 million tons we harvested in 2013. Excluding MWV timberlands, we expect pulpwood harvest volume to be comparable to tons harvested in 2013.

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: Quarter Ended June 30, 2014 Quarter Ended June 30, 2013 Harvest Tons Average Sales Harvest Tons Average Sales (millions) Realization (millions) RealizationSawlog ($/Ton Stumpage) 1.619 $ 22 1.276 $ 21 Pulpwood ($/Ton Stumpage) 2.159 $ 12 1.688 $ 11 Total 3.778 2.964 Revenues increased by $29 million, or 30%, to $127 million in the second quarter of 2014 compared to the second quarter of 2013. Excluding the acquired MWV timberlands, revenues increased by $8 million, or 8% to $106 million. This increase was due primarily to higher sawlog volumes ($3 million), higher sawlog prices ($2 million), higher pulpwood volumes ($2 million), and higher pulpwood prices ($1 million).

38-------------------------------------------------------------------------------- Table of Contents Sawlog prices increased approximately 3% during the second quarter of 2014 compared to the second quarter of 2013 due primarily to increased log demand resulting from improved U.S. housing starts. Housing starts during the first six months of 2014 increased 6% compared to the first six months of 2013. Sawlog price improvement remained modest as total lumber production in the Southern U.S. was at relatively low levels and, as a result, there continued to be an adequate supply of logs at current demand levels.

Pulpwood prices increased 9% during the second quarter of 2014 compared to the second quarter of 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.

Sawlog harvest volumes increased 27% during the second quarter of 2014 compared to the second quarter of 2013 and pulpwood harvest volumes increased 28% compared to the same period in the prior year. Excluding the MWV timberlands, sawlog harvest volumes increased 8% and pulpwood harvest volumes increased 6%.

These increases are due primarily to harvest deferrals during the first half of 2013 to later in the year in anticipation of improving log prices.

Excluding the MWV timberlands, Southern Resources Segment operating income was 26% of its revenues for the second quarter of 2014 compared to 23% of its revenues for the second quarter of 2013. The improved operating performance was due primarily to higher sawlog and pulpwood prices. Segment costs and expenses increased by $19 million, or 25%, to $94 million for the second quarter of 2014 due primarily to higher harvest volumes ($15 million) and, to a lesser extent, increased forest management expenses ($2 million) and higher depletion rates ($1 million) related to the MWV timberlands. Excluding the MWV timberlands, segment costs and expenses increased by $4 million, or 5%, to $79 million due primarily to increased harvest volumes.

For 2014, we expect sawlog harvest volumes to increase by approximately 15% compared to the 5.9 million tons we harvested in 2013. Excluding the MWV timberlands, we expect sawlog harvest volume to be flat compared to tons harvested in 2013. We expect pulpwood harvest volumes to increase by approximately 30% compared to the 7.6 million tons we harvested in 2013.

Excluding MWV timberlands, we expect pulpwood harvest volume to increase by approximately 5% compared to tons harvested in 2013.

Real Estate Segment.

Quarter Ended June 30, 2014 Quarter Ended June 30, 2013 Acres Revenues Revenue Acres Revenues Revenue Property Sold (millions) per Acre Sold (millions) per Acre Small Non-Strategic 23,640 $ 19 $ 790 17,130 $ 20 $ 1,185 Large Non-Strategic - - - - - - Conservation 11,875 8 635 17,525 14 835 Higher and Better Use / Recreational 31,530 46 1,485 9,825 19 1,925 Conservation Easements n/a 4 300 n/a - - Total 67,045 $ 77 44,480 $ 53 Revenues increased by $24 million, or 45%, to $77 million in the second quarter of 2014 compared to the second quarter of 2013. This increase was due primarily to selling approximately 49,400 acres in Wisconsin during the second quarter of 2014 for $45.3 million. The transaction consisted of the following collection of properties: approximately 22,400 acres of higher and better use / recreational property with an estimated value of $28.7 million; approximately 17,000 acres of small non-strategic property with an estimated value of $11.6 million; and approximately 10,000 acres of conservation property with an estimated value of $5 million.

Revenues from our higher and better use / recreational land sales increased due primarily to our second quarter of 2014 Wisconsin sale. Additionally, average per acre selling prices of higher and better use / recreational properties decreased by 23% during the second quarter of 2014 compared to the same period in the prior year due primarily to selling a significant number of acres in Wisconsin which generally has lower land values than other regions of the country. Correspondingly, the average per acre selling price for the second quarter of 2014 excluding the Wisconsin sale would have been similar to the revenue per acre we have realized in recent quarters.

39-------------------------------------------------------------------------------- Table of Contents Revenues from the sale of conservation properties consisted of large parcels in both the second quarter of 2014 and 2013. During the second quarter of 2014 we sold approximately 10,000 acres in Wisconsin and during the second quarter of 2013 we sold approximately 12,000 acres in Maine. Conservation sales vary significantly from period to period and are primarily impacted by government and not-for-profit funding, the limited number of conservation buyers, and the timing of our transactions. Additionally, the price per acre for conservation properties can vary significantly due to the geographic location and the rationale for the conservation designation.

During the second quarter of 2014 the company sold a conservation easement in New Hampshire for $4 million. No easement sales occurred during the second quarter of 2013.

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

Real Estate Segment operating income was 58% of its second quarter revenues for 2014 compared to 57% for 2013. Real Estate Segment costs and expenses increased by $9 million to $32 million in the second quarter of 2014 due primarily to selling more acres during 2014.

Manufacturing Segment. Key operating statistics for the segment are as follows: Quarter Ended June 30, 2014 Quarter Ended June 30, 2013 Sales Average Sales Average Sales Volume Realization (A) Sales Volume Realization (A) Lumber 39,697 MBF $ 594 36,770 MBF $ 544 Plywood 37,620 MSF $ 468 48,364 MSF $ 464 MDF 54,831 MSF $ 675 60,273 MSF $ 668 (A) Represents product prices at the mill level.

Revenues decreased by $5 million, or 5%, to $94 million in the second quarter of 2014 compared to the second quarter of 2013. This decrease in revenues was due primarily to lower plywood sales volumes ($5 million) and lower MDF sales volumes ($4 million), partially offset by higher lumber prices ($3 million) and higher lumber sales volume ($1 million).

Plywood sales volume was 22% lower during the second quarter of 2014 compared to the second quarter of 2013 due primarily to a shortage of logs. During the first quarter of 2014, we experienced severe winter weather which prevented us from building adequate log inventories to support normal production levels during the second quarter of 2014. As a result, plywood sales volume for all of 2014 is expected to decline by approximately 10% compared to the sales volume of 187,000 MSF for all of 2013 due primarily to limited log availability.

MDF sales volume was 9% lower during the second quarter of 2014 compared to the second quarter of 2013 due primarily to a fire at our MDF facility. The fire, which occurred on June 10, 2014, temporarily suspended production at the facility. While production resumed in July, we expect MDF sales volume for all of 2014 to decline by approximately 6% compared to the sales volume of 214,000 MSF for all of 2013 as a result of the fire.

During the second quarter of 2014, we recorded a $2 million loss representing the net book value of the building and equipment damaged or destroyed by the MDF fire. We also recorded a $4 million gain related to partial insurance recoveries we expect to receive. The amount of insurance recoveries was based on the costs incurred during the second quarter to rebuild or replace the damaged building and equipment. Substantially all of these costs were capitalized during the second quarter of 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 11 of the Notes to Consolidated Financial Statements.

Lumber average prices increased 9% during the second quarter of 2014 compared to the second quarter of 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 40-------------------------------------------------------------------------------- Table of Contents dimension lumber instead of boards due to improved demand for dimension lumber.

Lumber sales volume was 8% higher during the second quarter of 2014 compared to the second quarter of 2013 due primarily to resuming operations at our Evergreen, Montana (stud lumber) sawmill in April 2013.

Manufacturing Segment operating income was 11% of its revenues for the second quarter of 2014 compared to 14% of its revenues for the second quarter of 2013.

This decrease in operating performance was due primarily to lower plywood and MDF sales volumes and higher raw material costs, partially offset by insurance recovery gains. Manufacturing Segment costs and expenses increased by $1 million, or 1%, to $86 million. The increase in costs and expenses was due primarily to increased lumber sales volumes and higher plywood and lumber raw material costs, offset, in part, by lower plywood and MDF sales volumes. Plywood and lumber raw material costs on a per unit basis increased by approximately $5 million during the second quarter of 2014 due primarily to a regional log shortage.

Energy and Natural Resources Segment. Revenues increased by $4 million, or 80%, to $9 million during the second quarter of 2014. This increase is due primarily to royalties from our recent acquisition of mineral rights in approximately 255 million tons of aggregate reserves in September 2013 ($2 million) and royalties from recently acquired coal and wind assets in the MWV acquisition ($2 million).

Operating income was $6 million during the second quarter of 2014 compared to $4 million during the prior year quarter. Costs and expenses increased by $2 million to $3 million during the second quarter of 2014 due primarily to higher depletion expense associated with our newly acquired mineral rights, coal and wind assets.

Other Segment. Beginning in 2014, in connection with the new business of providing timber and wood-fiber procurement services, we began reporting in our Other Segment business activities associated with the harvesting and selling of trees from timberlands that are not owned by the company. Additionally, we report in the Other Segment the equity earnings (losses) associated with our recently acquired investment in MWV-Charleston Land Partners, LLC ("MWV-CLP").

See Note 12 of the Notes to Consolidated Financial Statements. For the second quarter of 2014, the Other Segment reported a loss of $3 million that is due primarily to recording our share of equity loss from our investment in MWV-CLP.

Other Costs and Eliminations. Other costs and eliminations (which consists of corporate overhead and intercompany profit elimination) decreased operating income by $17 million during the second quarter of 2014 and decreased operating income by $18 million during the second quarter of 2013.

Interest Expense, net. On December 6, 2013, we issued an $860 million installment note to MWV Community Development and Land Management, LLC ("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 $7 million, or 20%, to $42 million in the second quarter of 2014. This increase was due primarily to interest expense on our $860 million installment note payable ($9 million), offset by a reduction in interest expense as a result of the debt repayments in 2013 ($2 million).

Provision (Benefit) for Income Taxes. The provision for income taxes was essentially $0 for the second quarter of 2014 compared to a benefit for income taxes of $2 million for the second quarter of 2013. This $2 million increase in expense for income taxes was due primarily to higher earnings from real estate sales by our taxable REIT subsidiaries, which increased tax expense by $4 million, offset in part by lower earnings from our manufacturing businesses, which decreased tax expense by $2 million.

41-------------------------------------------------------------------------------- Table of Contents Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013 The following table compares Operating Income (Loss) by Segment and other items impacting our net income for the six months ended June 30 (in millions): Six Months Ended June 30, 2014 2013 Change Operating Income (Loss) by Segment Northern Resources $ 21 $ 19 $ 2 Southern Resources 64 47 17 Real Estate 57 75 (18 ) Manufacturing 19 24 (5 ) Energy and Natural Resources 12 9 3 Other (4 ) - (4 ) Total Segment Operating Income 169 174 (5 ) Other Costs and Eliminations (35 ) (35 ) - Other Unallocated Operating Income (Expense), net 2 1 1 Equity Earnings from Timberland Venture 32 31 1 Total Interest Expense, net (83 ) (70 ) (13 ) Provision (Benefit) for Income Taxes - (1 ) 1 Net Income $ 85 $ 102 $ (17 ) Northern Resources Segment. In December 2013, we acquired approximately 501,000 acres of timberland from MWV. Of the MWV timberlands acquired, approximately 147,000 acres are included in the Northern Resources Segment.

Key operating statistics for the segment are as follows: Six Months Ended June 30, 2014 Six Months Ended June 30, 2013 Harvest Tons Average Sales Harvest Tons Average Sales (millions) Realization (millions) Realization Sawlog ($/Ton Delivered) 1.166 $ 85 1.285 $ 78 Pulpwood ($/Ton Delivered) 0.718 $ 43 0.623 $ 42 Total 1.884 1.908 Revenues were $127 million for both the first six months of 2014 and the first six months of 2013. Excluding the acquired MWV timberlands, revenues decreased by $6 million, or 5% to $121 million. The decrease was due primarily to lower sawlog volumes ($13 million), partially offset by higher sawlog prices ($8 million).

Sawlog harvest volumes decreased 9% during the first six months of 2014 compared to the first six months of 2013. Excluding the MWV timberlands, sawlog harvest volumes decreased 13% during the first six months of 2014 compared to the first six months of 2013 due primarily to recent land sales and harvest schedule and timber inventory updates. Pulpwood harvest volumes increased 15% during the first six months of 2014 compared to the first six months of 2013. Excluding the MWV timberlands, pulpwood harvest volumes increased 2% during the first six months of 2014 compared to the first six months of 2013.

Sawlog prices increased 9% during the first six months of 2014 compared to the first six months of 2013. Sawlog prices increased due primarily to improved demand and limited supply. The demand for sawlogs has improved due primarily to improving U.S. housing starts and increased exports of logs and lumber (primarily to China). Housing starts during the first six months of 2014 increased 6% compared to the first six months of 2013. The supply of sawlogs in our Northern Segment remains limited.

Excluding the MWV timberlands, Northern Resources Segment operating income was 16% of its revenues for the first six months of 2014 compared to 15% of its revenues for the first six months of 2013. The increase in operating performance was due primarily to higher sawlog prices. Segment costs and expenses decreased by $2 million, or 2%, to $106 million. Excluding the MWV timberlands, segment costs and expenses decreased by $6 million, or 6%, to $102 million due primarily to lower sawlog harvest 42-------------------------------------------------------------------------------- Table of Contents volumes, partially offset by higher log and haul rates. Log and haul rates per ton increased 4% ($2 million) due primarily to salvage logging on our Montana and Oregon timberlands that were impacted by fires in 2013.

For 2014, we still expect sawlog harvest volumes to decrease by approximately 10% compared to the 2.5 million tons we harvested in 2013. Excluding the MWV timberlands, we expect sawlog harvest volume to decrease by approximately 15% compared to tons harvested in 2013. We expect pulpwood harvest volumes to increase by approximately 15% compared to the 1.4 million tons we harvested in 2013. Excluding MWV timberlands, we expect pulpwood harvest volume to be comparable to tons harvested in 2013.

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: Six Months Ended June 30, 2014 Six Months Ended June 30, 2013 Harvest Tons Average Sales Harvest Tons Average Sales (millions) Realization (millions) Realization Sawlog ($/Ton Stumpage) 3.169 $ 22 2.615 $ 21 Pulpwood ($/Ton Stumpage) 4.213 $ 12 3.459 $ 11 Total 7.382 6.074 Revenues increased by $48 million, or 24%, to $250 million in the first six months of 2014 compared to the first six months of 2013. Excluding the acquired MWV timberlands, revenues increased by $10 million, or 5% to $212 million. This increase was due primarily to higher sawlog volumes ($8 million), higher sawlog prices ($4 million), higher pulpwood prices ($2 million), partially offset by a decreased proportion of delivered sales ($4 million).

Sawlog harvest volumes increased 21% during the first six months of 2014 compared to the first six months of 2013. Excluding the MWV timberlands, sawlog harvest volumes increased 6% due primarily to harvest deferrals during the first half of 2013 to later in the year in anticipation of improving log prices.

Sawlog prices increased approximately 6% during the first six months of 2014 compared to the first six months of 2013 due primarily to increased log demand resulting from improved U.S. housing starts. Housing starts during the first six months of 2014 increased 6% compared to the first six months of 2013. Sawlog price improvement remained modest as total lumber production in the Southern U.S. was at relatively low levels and, as a result, there continued to be an adequate supply of logs at current demand levels.

Pulpwood prices increased 8% during the first six months of 2014 compared to the first six months of 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.

In certain markets, demand for delivered log sales was generally stronger in the prior year (i.e. during the first six months of 2013) 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.

Excluding the MWV timberlands, Southern Resources Segment operating income was 26% of its revenues for the first six months of 2014 compared to 23% of its revenues for the first six months of 2013. The improved operating performance was due primarily to higher sawlog and pulpwood prices. Segment costs and expenses increased by $31 million, or 20%, to $186 million for the first six months of 2014 due primarily to higher harvest volumes ($24 million) and, to a lesser extent, increased forest management expenses ($3 million) and higher depletion rates ($3 million) related to the MWV timberlands. Excluding the MWV timberlands, segment costs and expenses increased by $4 million, or 2%, to $158 million due primarily to increased harvest volumes.

For 2014, we expect sawlog harvest volumes to increase by approximately 15% compared to the 5.9 million tons we harvested in 2013. Excluding the MWV timberlands, we expect sawlog harvest volume to be flat compared to tons harvested in 2013. We expect pulpwood harvest volumes to increase by approximately 30% compared to the 7.6 million tons we harvested in 2013.

Excluding MWV timberlands, we expect pulpwood harvest volume to increase by approximately 5% compared to tons harvested in 2013.

43-------------------------------------------------------------------------------- Table of Contents Real Estate Segment.

Six Months Ended June 30, 2014 Six Months Ended June 30, 2013 Acres Revenues Revenue Acres Revenues Revenue Property Sold (millions) per Acre Sold (millions) per Acre Small Non-Strategic 26,675 $ 23 $ 850 22,815 $ 27 $ 1,195 Large Non-Strategic - - - 36,000 53 1,475 Conservation 15,290 14 865 18,495 17 925 Higher and Better Use / Recreational 35,655 55 1,570 17,420 34 1,960 Conservation Easements n/a 8 320 n/a - - Total 77,620 $ 100 94,730 $ 131 Revenues decreased by $31 million, or 24%, to $100 million in the first six months of 2014 compared to the first six months of 2013. This decrease is due primarily to a decrease in large non-strategic land sales ($53 million), offset in part by an increase in higher and better use / recreational sales ($21 million) and increase in conservation easement sales ($8 million).

Revenue from the sale of large non-strategic timberlands was $53 million during the first six months of 2013 compared with no sales during the same period in 2014. Large non-strategic sales are expected to provide a smaller percentage of our real estate revenues during 2014 compared to 2013.

Revenues from our higher and better use / recreational land sales increased due primarily to selling approximately 18,200 more acres compared to the first six months of 2013. This increase was due primarily to a Wisconsin transaction which closed during the second quarter of 2014 and consisted of a sale of approximately 22,400 acres of higher and better use / recreational property with an estimated value of $28.7 million; approximately 17,000 acres of small non-strategic property with an estimated value of $11.6 million; and approximately 10,000 acres of conservation property with an estimated value of $5 million. Additionally, average per acre selling prices for higher and better use / recreational properties decreased 20% during the first six months of 2014 compared to the same period in the prior year due primarily to selling a significant number of acres in Wisconsin which generally has lower land values than other regions of the country. Correspondingly, the average per acre selling price for the first half of 2014 excluding the Wisconsin sale would have been similar to the revenue per acre we have realized in recent quarters.

During the first half of 2014 the company sold conservation easements in New Hampshire for nearly $8 million. No easement sales occurred during the first six months of 2013.

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.

We expect revenues from real estate sales during 2014 to range between $240 million and $280 million.

Real Estate Segment operating income as a percent of revenue was 57% for the first six months of 2014 and 2013. Real Estate Segment costs and expenses decreased by $13 million to $43 million in the first half of 2014 due primarily to selling fewer acres.

44-------------------------------------------------------------------------------- Table of Contents Manufacturing Segment. Key operating statistics for the segment are as follows: Six Months Ended June 30, 2014 Six Months Ended June 30, 2013 Average Sales Average Sales Sales Volume Realization (A) Sales Volume Realization (A) Lumber 77,400 MBF $ 584 67,305 MBF $ 555 Plywood 76,808 MSF $ 460 95,269 MSF $ 463 MDF 105,512 MSF $ 677 112,602 MSF $ 655 (A) Represents product prices at the mill level.

Revenues were $184 million for the first six months of 2014 and were $185 million for the first six months of 2013. Higher lumber prices ($5 million), higher lumber volumes ($4 million), and higher MDF prices ($2 million), were offset by lower plywood sales volumes ($8 million) and lower MDF sales volumes ($4 million).

Lumber sales prices increased 5% during the first six months of 2014 compared to the first six months of 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 15% higher during the first six months of 2014 compared to the first six months of 2013 due primarily to resuming operations at our Evergreen, Montana (stud lumber) sawmill in April 2013.

MDF sales volume was 6% lower during the first six months of 2014 compared to the first six months of 2013 due primarily to a fire at our MDF facility. The fire, which occurred on June 10, 2014, temporarily suspended production at the facility. While production resumed in July, we expect MDF sales volume for all of 2014 to decline by approximately 6% compared to the sales volume of 214,000 MSF for all of 2013 as a result of the fire. MDF average prices were 3% higher during the first six months of 2014 compared to the first six months of 2013.

During the second quarter of 2014, we recorded a $2 million loss representing the net book value of the building and equipment damaged or destroyed by the MDF fire. We also recorded a $4 million gain related to partial insurance recoveries we expect to receive. The amount of insurance recoveries was based on the costs incurred during the second quarter to rebuild or replace the damaged building and equipment. Substantially all of these costs were capitalized during the second quarter of 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 11 of the Notes to Consolidated Financial Statements.

Plywood sales volume was 19% lower during the first six months of 2014 compared to the first six months of 2013 due primarily to a shortage of logs. During the first quarter of 2014, we experienced severe winter weather which prevented us from building adequate log inventories to support normal production levels during the first half of 2014. As a result, plywood sales volume for all of 2014 is expected to decline by approximately 10% compared to the sales volume of 187,000 MSF for all of 2013 due primarily to limited log availability.

Manufacturing Segment operating income was 10% of its revenues for the first six months of 2014 compared to 13% of its revenues for the first six months of 2013.

This decrease in operating performance was due primarily to lower plywood and MDF sales volumes and higher raw material costs, partially offset by insurance recovery gains. Manufacturing Segment costs and expenses increased by $6 million, or 4%, to $167 million. The increase in costs and expenses is due primarily to increased lumber sales volumes and higher raw material costs (in all of our product lines), offset, in part, by lower plywood and MDF sales volumes. Plywood and lumber raw material costs on a per unit basis increased by approximately $10 million during the first six months of 2014 compared to the first six months of 2013 due primarily to a regional log shortage and MDF costs on a per unit basis increased by approximately 5% ($2 million) in the same period due primarily to rising resin and fiber costs.

Energy and Natural Resources Segment. Revenues increased by $7 million, or 64%, to $18 million during the first six months of 2014. This increase is due primarily to royalties from our recent acquisition of mineral rights in approximately 255 million tons of aggregate reserves in September 2013 ($4 million) and royalties from recently acquired coal and wind assets in the MWV acquisition ($3 million).

Operating income was $12 million during the first six months of 2014 compared to $9 million during the first six months of 2013. Costs and expenses increased by $4 million to $6 million during the first six months of 2014 due primarily to higher depletion expense associated with our newly acquired mineral rights, coal and wind assets.

45-------------------------------------------------------------------------------- Table of Contents Other Segment. Beginning in 2014, in connection with the new business of providing timber and wood-fiber procurement services, we began reporting in our Other Segment business activities associated with the harvesting and selling of trees from timberlands that are not owned by the company. Additionally, we report in the Other Segment the equity earnings (losses) associated with our recently acquired investment in MWV-CLP. See Note 12 of the Notes to Consolidated Financial Statements. For the first six months of 2014, the Other Segment reported a loss of $4 million that is due primarily to recording our share of equity loss from our investment in MWV-CLP.

Other Costs and Eliminations. Other costs and eliminations (which consist of corporate overhead and intercompany profit elimination) decreased operating income by $35 million for both the first six months of 2014 and 2013.

Interest Expense, net. On December 6, 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 $13 million, or 19%, to $83 million in the first six months of 2014.

This increase was due primarily to interest expense on our $860 million installment note payable ($19 million), offset by a reduction in interest expense as a result of the debt repayments in 2013 ($6 million).

Provision (Benefit) for Income Taxes. The provision for income taxes was essentially $0 for the first six months of 2014 compared to a benefit for income taxes of $1 million for the first six months of 2013. This $1 million increase in expense for income taxes was due primarily to higher earnings from real estate sales by our taxable REIT subsidiaries, which increased tax expense by $3 million, offset in part by lower earnings from our manufacturing businesses, which decreased tax expense by $2 million.

At June 30, 2014, we have recorded deferred tax assets of $59 million (net of a $10 million valuation allowance) and deferred tax liabilities of $33 million.

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. 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 $59 million for which a valuation allowance was determined to be unnecessary.

Financial Condition and Liquidity We believe we have a strong balance sheet and do not foresee any near-term liquidity issues. At June 30, 2014, we had a cash balance of $107 million and had availability of $546 million under our line of credit. In addition to the discussion that follows, we have summarized our sources and uses of cash for the six months ended June 30, 2014 and 2013 in a table later in this section.

Cash Flow The following table summarizes total cash flows for operating, investing and financing activities for the six months ended June 30 (in millions): Six Months Ended June 30, 2014 2013 Change Net Cash Provided By (Used In) Operating Activities $ 189 $ 140 $ 49 Net Cash Provided By (Used In) Investing Activities (43 ) (109 ) 66 Net Cash Provided By (Used In) Financing Activities (472 ) (32 ) (440 ) Change in Cash and Cash Equivalents $ (326 ) $ (1 ) $ (325 ) Cash Flows from Operating Activities. Net cash provided by operating activities for the six months ended June 30, 2014 was $189 million compared to $140 million for the six months ended June 30, 2013. The increase of $49 million is due primarily to positive working capital changes ($47 million), higher operating income from our Resources Segments ($19 million), and lower expenditures ($18 million) for the purchase of standing timber (timber deed), partially offset by lower proceeds from real estate 46-------------------------------------------------------------------------------- Table of Contents sales ($28 million). See Results of Operations for a discussion of factors impacting operating income for our Resources Segments and factors impacting real estate proceeds for our Real Estate Segment.

The positive working capital changes reflect a decrease in other current assets and increases in accounts payable and interest payable during the first six months of 2014 compared to the first six months of 2013. The decrease in other current assets was due primarily to the payment of a refundable deposit ($20 million) during the second quarter of 2013 in connection with securing an asset that is now subject to an operating lease. This deposit was refunded to the company in the third quarter of 2013. The favorable accounts payable working capital variance ($10 million) is due primarily to higher harvest volumes in our Resources Segments and increased raw materials costs for our Manufacturing Segment and, to a lesser extent, the timing of payment processing for our independent loggers and haulers. The interest payable working capital variance ($8 million) is due primarily to the timing and amount of interest payments related to the December 6, 2013, issuance of an $860 million installment note to MWV Community Development and Land Management, LLC.

During the first six months of 2013, we acquired approximately 0.9 million tons of standing timber under a timber deed that expires in 2020 for $18 million. The volume acquired under a timber deed, along with future growth, is harvested over the term of the deed.

Capital Expenditures. Capital expenditures (excluding timberland acquisitions) for the six months ended June 30, 2014 were $40 million compared to $31 million for the same period in 2013. Planned capital expenditures for 2014 are expected to range between $85 million and $90 million and include approximately $70 million for our timberlands, $7 million for our manufacturing facilities, $4 million for our real estate development projects, and $6 million for investments in information technology. The timberland expenditures are primarily for reforestation and other expenditures associated with the planting and growing of trees. Approximately 55% of planned capital expenditures in 2014 are discretionary, primarily expenditures for silviculture. Capital expenditures at our manufacturing facilities consist primarily of expenditures to sustain operating activities.

During the second quarter of 2014, we incurred a fire loss at our MDF facility.

Not included in planned capital expenditures described in the paragraph above, we expect to incur approximately $8 million to $10 million of total capital expenditures to restore the facility. We have incurred approximately $4 million of capital expenditures to rebuild the damaged building and equipment as of June 30, 2014. We expect to receive insurance proceeds, reduced by our $1 million deductible, to reimburse the company for these costs. Insurance proceeds related to reimbursed costs will be reported, when received, under investing activities in the Consolidated Statements of Cash Flows. No insurance proceeds were received for the six months ended June 30, 2014.

Expenditures for real estate development are included in Other Operating Activities, net on the Consolidated Statements of Cash Flows.

Real Estate Development Ventures. In connection with the timberland acquisition from MWV in 2013, the company and MWV formed a limited liability company (MWV-CLP). Plum Creek has agreed to make capital contributions to MWV-CLP through the year 2020, with minimum required contributions of $9 million during 2014. During the six months ended June 30, 2014, the company made a contribution of $4 million to MWV-CLP. Distributions of $1 million were received from MWV-CLP during the six months ended June 30, 2014.

Future Cash Requirements. Cash required to meet our future financial needs will be significant; however, we do not have any scheduled debt principal payments in 2014. Our next scheduled debt principal payment is our 5.875% Senior Notes ($439 million) which mature in November 2015. We believe that our cash flows from operating activities over the next twelve months will be more than adequate to fund planned capital expenditures and our dividend.

47-------------------------------------------------------------------------------- Table of Contents The following table summarizes our sources and uses of cash (in millions): Six Months Ended June 30, 2014 2013 Change Sources of Cash: Operations (A) $ 155 $ 172 $ (17 ) Changes in Working Capital 7 (40 ) 47 Cash Distributions from Timberland Venture 28 27 1 Cash from Stock Option Exercises 1 35 (34 ) Increase Debt Obligations, net - 75 (75 ) Total Sources of Cash 191 269 (78 ) Uses of Cash: Returned to Stockholders: Dividends (156 ) (140 ) (16 ) Common Stock Repurchases (2 ) (2 ) - Reinvest in the Business: Capital Expenditures, including Real Estate Development (B) (41 ) (32 ) (9 ) Timber Deed Acquired - (18 ) 18 Timberlands Acquired - (78 ) 78 Contribution to Real Estate Development Ventures, net of Distributions (3 ) - (3 ) Reduce Debt Obligations, net (315 ) - (315 ) Total Uses of Cash (517 ) (270 ) (247 ) Change in Cash and Cash Equivalents $ (326 ) $ (1 ) $ (325 ) (A) Calculated from the Consolidated Statements of Cash Flows by adding Depreciation, Depletion and Amortization, Basis of Real Estate Sold, Earnings from Unconsolidated Entities, Deferred Revenue from Long-Term Gas Leases (Net of Amortization), Deferred Income Taxes, and Other Operating Activities (excluding Expenditures for Real Estate Development - see Footnote B) to Net Income.

(B) Calculated from the Consolidated Statements of Cash Flows by adding Capital Expenditures (excluding Timberland Acquisitions) and Expenditures for Real Estate Development, which are included in Other Operating Activities. Expenditures for Real Estate Development were $1 million for each of the six month periods ending June 30, 2014 and 2013.

Borrowings Debt Financing. We strive to maintain a balance sheet that provides the financial flexibility to pursue our strategic objectives. In order to maintain this financial flexibility, our objective is to maintain an investment grade credit rating. This is reflected in our moderate use of debt, established access to credit markets and no material covenant restrictions in our debt agreements that would prevent us from prudently using debt capital. All of our borrowings, except for the Note Payable to Timberland Venture, are made by Plum Creek Timberlands, L.P., the company's wholly-owned operating partnership ("the Partnership"). Furthermore, all of the outstanding indebtedness of the Partnership is unsecured.

Line of Credit. We have a $700 million revolving line of credit agreement that matures in January 2019. Subject to customary covenants, the line of credit allows for borrowings from time to time up to $700 million, including up to $60 million of standby letters of credit. Borrowings on the line of credit fluctuate daily based on cash needs. The interest rate on the line of credit is currently LIBOR plus 1.25%, including the facility fee. This rate can range from LIBOR plus 1% to LIBOR plus 2% depending on our debt ratings.

The weighted-average interest rate for the borrowings on the line of credit was 1.36% and 1.37% as of June 30, 2014 and December 31, 2013, respectively. As of June 30, 2014, we had $152 million of borrowings and $2 million of standby letters of credit outstanding; $546 million remained available for borrowing under our line of credit. As of July 1, 2014, $105 million of the borrowings outstanding under our line of credit was repaid.

48-------------------------------------------------------------------------------- Table of Contents Term Credit Agreement. The company has a $225 million term credit agreement that matures on April 3, 2019. The interest rate on the $225 million term credit agreement was 1.65% and 1.66% as of June 30, 2014 and December 31, 2013, respectively. The interest rate on the $225 million term credit agreement is based on LIBOR plus 1.50%. After giving effect to patronage distributions, the effective net interest rate on the term credit agreement was approximately 1% as of both June 30, 2014 and December 31, 2013. The term credit agreement is subject to covenants that are substantially the same as those of our revolving line of credit. The agreement allows for prepayment of the borrowings at any time prior to the maturity date without premium or penalty.

Senior Notes. As of June 30, 2014, the company had publicly issued and outstanding $1,333 million aggregate principal amount of Senior Notes with various maturities and fixed interest rates ("Public Debt"). The Public Debt consists of $439 million of 5.875% Public Debt which matures in 2015, $569 million of 4.70% Public Debt which matures in 2021 and $325 million of 3.25% Public Debt which matures in 2023. The Public Debt is issued by the Partnership and is fully and unconditionally guaranteed by Plum Creek Timber Company, Inc.

Public Debt outstanding, including unamortized discount, was $1,329 million as of both June 30, 2014 and December 31, 2013.

Plum Creek Timber Company, Inc. and the Partnership have filed a shelf registration statement with the Securities and Exchange Commission. Under the shelf registration statement, Plum Creek Timber Company, Inc., from time to time, may offer and sell any combination of preferred stock, common stock, depositary shares, warrants and guarantees, and the Partnership, from time to time, may offer and sell debt securities. The company and the Partnership intend to maintain a shelf registration statement with respect to such securities.

Installment Note Payable. The company has an $860 million installment note payable to MWV CDLM issued in connection with a December 2013 timberland acquisition. MWV CDLM has pledged the installment note to banks in the farm credit system. The annual interest rate on the installment note is fixed at 5.207%. The company's effective net interest rate on the installment note, after giving effect to patronage distributions, was approximately 4.5% as of both June 30, 2014 and December 31, 2013.

During the ten year term of the note, interest is paid semi-annually with the principal due upon maturity. The installment note matures on December 6, 2023, but may be extended at the request of the holder (at prevailing market terms) if, at the time of the request, the company intends to refinance all or a portion of the installment note for a term of five years or more. The installment note is generally not redeemable prior to maturity except in certain limited circumstances and could be subject to a premium on redemption. The installment note is subject to covenants similar to those of our revolving line of credit and term credit agreement.

Debt Covenants. Our Senior Notes, Term Credit Agreement, Line of Credit and Installment Note Payable contain various restrictive covenants, none of which are expected to materially impact the financing of our ongoing operations. We are in compliance with all of our borrowing agreement covenants as of June 30, 2014.

Our Term Credit Agreement, Line of Credit and Installment Note Payable require that we maintain certain interest coverage and not exceed certain maximum leverage ratios. We have no covenants and restrictions associated with changes in our debt ratings. Our Term Credit Agreement, Line of Credit and Installment Note Payable each contain a covenant restricting our ability to make any restricted payments, which includes dividend payments, if we are in default under our debt agreements. Furthermore, there are no material covenants associated with our Note Payable to Timberland Venture, and this indebtedness is not considered in computing any of our debt covenants since the debt is an obligation of Plum Creek Timber Company, Inc. and not the Partnership.

As of June 30, 2014, we can borrow the entire amount available under our Line of Credit, and we expect to be able to incur at least this level of additional indebtedness for the next twelve months.

49-------------------------------------------------------------------------------- Table of Contents Equity Dividends. On August 4, 2014, the Board of Directors declared a dividend of $0.44 per share, or approximately $78 million, which will be paid on August 29, 2014 to stockholders of record on August 15, 2014. Future dividends will be determined by our Board of Directors, in its sole discretion, based on consideration of a number of factors. The primary factors considered by the Board in declaring the current dividend amount were current period and full year forecasted cash flow and operating results, as measured by Funds from Operations (defined as net income plus non-cash charges for depletion, depreciation and amortization, and the cost basis of real estate sales). In addition, the Board also considers the following factors when determining dividends: the company's capital requirements; economic conditions; tax considerations; borrowing capacity; changes in the prices of, and demand for, our products; changes in our ability to sell timberlands at attractive prices; and the appropriate timing of timber harvests, acquisition and divestiture opportunities, stock repurchases, debt repayment and other means by which the company could deliver value to its stockholders.

Share Repurchases. Plum Creek's Board of Directors has authorized a common stock repurchase program that may be increased from time to time at the Board of Directors' discretion. At June 30, 2014, $175 million was available for share repurchases under the current Board of Directors' authorization.

Other Information Standards Issued and Not Yet Implemented. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard is effective for reporting periods beginning after December 15, 2016 and early adoption is not permitted. The comprehensive new standard will supersede existing revenue recognition guidance, including industry-specific requirements, and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions.

For Plum Creek, the standard will be effective in the first quarter of 2017. The guidance permits two implementation approaches: (1) a retrospective application of the new standard with restatement of prior years; or (2) a modified retrospective basis whereby the new standard would be applied to new contracts and existing contracts with remaining performance obligations as of the effective date, with a cumulative catch-up adjustment recorded to beginning retained earnings. The company is currently evaluating the impact that adoption of this standard will have on our consolidated financial statements and disclosures, and the implementation approach to be used.

Performance and Liquidity Measures (Non-GAAP Measures) For a discussion of the factors impacting our operating performance see the discussion included in this Item under Results of Operations. For a discussion of the factors impacting our liquidity, see the discussion included in this Item under Financial Condition and Liquidity.

Adjusted EBITDA. We define Adjusted EBITDA as earnings from continuing operations, excluding Equity Earnings from the Timberland Venture, and before interest expense (including any gains or losses from extinguishment of debt), taxes, depreciation, depletion, amortization, and basis in real estate sold. In addition to including Equity Earnings from Real Estate Development Ventures in Adjusted EBITDA, we also include, as an add back to Operating Income for the Other Segment, our proportional share of depreciation, depletion, amortization, and basis in real estate sold from this equity method investment. Adjusted EBITDA is not considered a measure of financial performance under U.S. generally accepted accounting principles (U.S. GAAP) and the items excluded from Adjusted EBITDA are significant components of our consolidated financial statements.

We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates operating performance comparisons from period to period, and each business segment's contribution to that performance, by eliminating non-cash charges to earnings, which can vary significantly by business segment.

These non-cash charges include timber depletion, depreciation of fixed assets and the basis in real estate sold. We also use Adjusted EBITDA as a supplemental liquidity measure because we believe it is useful in measuring our ability to generate cash. In addition, we believe Adjusted EBITDA is used by investors, lenders and rating agencies to assess our financial performance.

50-------------------------------------------------------------------------------- Table of Contents Second Quarter 2014 Compared to Second Quarter 2013 The following table compares Adjusted EBITDA by segment for the quarters ended June 30 (in millions): Quarter Ended June 30, 2014 2013 Change Adjusted EBITDA by Segment Northern Resources $ 11 $ 13 $ (2 ) Southern Resources 52 37 15 Real Estate 70 47 23 Manufacturing 16 18 (2 ) Energy and Natural Resources 8 5 3 Other (2 ) - (2 ) Other Costs and Eliminations, net (15 ) (16 ) 1 Total Adjusted EBITDA $ 140 $ 104 $ 36 The following schedules provide a reconciliation of Adjusted EBITDA to net income and net cash from operating activities, the most directly comparable U.S.

GAAP performance and liquidity measures, for the quarters ended June 30 (in millions): Quarter Ended June 30, 2014 Depreciation, Depletion and Basis of Real Operating Income Amortization Estate Sold Adjusted EBITDA By Segment (1) Northern Resources $ 5 $ 6 $ - $ 11 Southern Resources 33 19 - 52 Real Estate 45 - 25 70 Manufacturing 10 6 - 16 Energy and Natural Resources 6 2 - 8 Other (3 ) 1 - (2 ) Other Costs and Eliminations (17 ) 1 - (16 ) Other Unallocated Operating Income (Expense), net 1 - - 1 Total $ 80 $ 35 $ 25 $ 140 Reconciliation to Net Income (2) Equity Earnings from Timberland Venture 17 Interest Expense (42 ) (Provision) Benefit for Income Taxes - Net Income $ 55 Reconciliation to Net Cash Provided By Operating Activities (1) Net Cash Flows from Operations $ 132 Interest Expense 42 Amortization of Debt Costs - Provision / (Benefit) for Income Taxes - Distributions from Timberland Venture - Equity Earnings, Depletion, Amortization, and Basis of Real Estate Sold from Real Estate Development Ventures (1 ) Deferred Income Taxes - Gain on Sale of Properties and Other Assets - Deferred Revenue from Long-Term Gas Leases - Timber Deed Acquired - Pension Plan Contributions - Working Capital Changes (31 ) Other (2 ) Adjusted EBITDA $ 140 (1) Includes Equity Loss from Real Estate Development Ventures ($2 million) in Operating Income for the Other Segment, along with our proportional share of depreciation, depletion, amortization ($1 million), and basis in real estate sold ($0) from this equity method investment.

(2) Includes reconciling items not allocated to segments for financial reporting purposes.

51 -------------------------------------------------------------------------------- Table of Contents Quarter Ended June 30, 2013 Depreciation, Depletion and Basis of Real Operating Income Amortization Estate Sold Adjusted EBITDA By Segment Northern Resources $ 8 $ 5 $ - $ 13 Southern Resources 23 14 - 37 Real Estate 30 - 17 47 Manufacturing 14 4 - 18 Energy and Natural Resources 4 1 - 5 Other - - - - Other Costs and Eliminations (18 ) 1 - (17 ) Other Unallocated Operating Income (Expense), net 1 - - 1 Total $ 62 $ 25 $ 17 $ 104 Reconciliation to Net Income (1) Equity Earnings from Timberland Venture 17 Interest Expense (35 ) (Provision) Benefit for Income Taxes 2 Net Income $ 46 Reconciliation to Net Cash Provided By Operating Activities Net Cash Flows from Operations $ 139 Interest Expense 35 Amortization of Debt Costs - Provision / (Benefit) for Income Taxes (2 ) Distributions from Timberland Venture - Equity Earnings, Depletion, Amortization, and Basis of Real Estate Sold from Real Estate Development Ventures - Deferred Income Taxes 2 Gain on Sale of Properties and Other Assets - Deferred Revenue from Long-Term Gas Leases 1 Timber Deed Acquired - Pension Plan Contributions - Working Capital Changes (65 ) Other (6 ) Adjusted EBITDA $ 104 (1) Includes reconciling items not allocated to segments for financial reporting purposes.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013 The following table compares Adjusted EBITDA by segment for the six months ended June 30 (in millions): Six Months Ended June 30, 2014 2013 Change Adjusted EBITDA by Segment Northern Resources $ 35 $ 31 $ 4 Southern Resources 101 75 26 Real Estate 88 117 (29 ) Manufacturing 28 32 (4 ) Energy and Natural Resources 16 10 6 Other (3 ) - (3 ) Other Costs and Eliminations, net (32 ) (33 ) 1 Total Adjusted EBITDA $ 233 $ 232 $ 1 52-------------------------------------------------------------------------------- Table of Contents The following schedules provide a reconciliation of Adjusted EBITDA to net income and net cash from operating activities, the most directly comparable U.S.

GAAP performance and liquidity measures, for the six months ended June 30 (in millions): Six Months Ended June 30, 2014 Depreciation, Depletion and Basis of Real Operating Income Amortization (1) Estate Sold Adjusted EBITDA By Segment (1) Northern Resources $ 21 $ 14 $ - $ 35 Southern Resources 64 37 - 101 Real Estate 57 - 31 88 Manufacturing 19 9 - 28 Energy and Natural Resources 12 4 - 16 Other (4 ) 1 - (3 ) Other Costs and Eliminations (35 ) 1 - (34 ) Other Unallocated Operating Income (Expense), net 2 - - 2 Total $ 136 $ 66 $ 31 $ 233 Reconciliation to Net Income (2) Equity Earnings from Timberland Venture 32 Interest Expense (83 ) (Provision) Benefit for Income Taxes - Net Income $ 85 Reconciliation to Net Cash Provided By Operating Activities(1) Net Cash Flows from Operations $ 189 Interest Expense 83 Amortization of Debt Costs (1 ) Provision / (Benefit) for Income Taxes - Distributions from Timberland Venture (28 ) Equity Earnings, Depletion, Amortization, and Basis of Real Estate Sold from Real Estate Development Ventures (2 ) Deferred Income Taxes - Gain on Sale of Properties and Other Assets - Deferred Revenue from Long-Term Gas Leases 2 Timber Deed Acquired - Pension Plan Contributions - Working Capital Changes (7 ) Other (3 ) Adjusted EBITDA $ 233 (1) Includes Equity Loss from Real Estate Development Ventures ($3 million) in Operating Income for the Other Segment, along with our proportional share of depreciation, depletion, amortization ($1 million), and basis in real estate sold ($0) from this equity method investment.

(2) Includes reconciling items not allocated to segments for financial reporting purposes.

53 -------------------------------------------------------------------------------- Table of Contents Six Months Ended June 30, 2013 Depreciation, Depletion and Basis of Real Operating Income Amortization Estate Sold Adjusted EBITDA By Segment Northern Resources $ 19 $ 12 $ - $ 31 Southern Resources 47 28 - 75 Real Estate 75 - 42 117 Manufacturing 24 8 - 32 Energy and Natural Resources 9 1 - 10 Other - - - - Other Costs and Eliminations (35 ) 1 - (34 ) Other Unallocated Operating Income (Expense), net 1 - - 1 Total $ 140 $ 50 $ 42 $ 232 Reconciliation to Net Income (1) Equity Earnings from Timberland Venture 31 Interest Expense (70 ) (Provision) Benefit for Income Taxes 1 Net Income $ 102 Reconciliation to Net Cash Provided By Operating Activities Net Cash Flows from Operations $ 140 Interest Expense 70 Amortization of Debt Costs (1 ) Provision / (Benefit) for Income Taxes (1 ) Distributions from Timberland Venture (27 ) Equity Earnings, Depletion, Amortization and Basis of Real Estate Sold from Real Estate Development Ventures - Deferred Income Taxes 1 Gain on Sale of Properties and Other Assets - Deferred Revenue from Long-Term Gas Leases 4 Timber Deed Acquired 18 Pension Plan Contributions - Working Capital Changes 40 Other (12 ) Adjusted EBITDA $ 232 (1) Includes reconciling items not allocated to segments for financial reporting purposes.

Off-Balance Sheet Arrangements, Contractual Obligations, Contingent Liabilities and Commitments The company has no off-balance sheet debt. For information on contractual obligations, see the table Contractual Obligations in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2013 Annual Report on Form 10-K.

54-------------------------------------------------------------------------------- Table of Contents

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