Annual Report (Form 10-K), fiscal year 1994





ITEM 3. LEGAL PROCEEDINGS
On May 1, 1992, the Company received a Notice of Violation ("NOV") from the Environmental Protection Agency ("EPA") under the Clean Air Act. The NOV alleges that Plum Creek's Evergreen veneer dryers in Kalispell, Montana were not in compliance with an air quality permit on January 15, 1992 when visible emissions from the veneer dryers were observed by the EPA. These dryers were also the subject of a suit filed by the Montana Air Quality Bureau ("MAQB") in March 1990. Prior to the January 15, 1992 alleged violation, the Company entered into a Consent Decree with the MAQB pursuant to which the Company paid a $7,000 civil penalty. Pursuant to the Consent Decree, the Company installed approximately $900,000 of emission control equipment on the dryers on April 14, 1992, in order to comply with the permit and all State and Federal visible emission limits. The EPA is seeking a civil penalty of $180,000 in addition to the civil penalty previously paid. Plum Creek is working with the EPA to resolve issues arising under the NOV.
On April 25, 1994, the Company received a citation from the MAQB, under Montana regulations, alleging that the Company had commenced the construction of a pollution control device for the wood fired boiler serving the Columbia Falls facility prior to receiving an air quality permit. The MAQB has not notified the Company of what sanctions, if any, the MAQB would seek as a result of the citation. On August 31, 1994, the Company received a citation from the MAQB alleging that the wood fired boiler serving the Columbia Falls facility was not in compliance with the facility's air quality permit when visible emissions from the boiler were observed by the MAQB and the EPA. The MAQB has not notified the Company of what sanctions, if any, the MAQB would seek as a result of the citation. The pollution control device for the boiler has been permitted and was installed in October 1994.
There is no pending litigation, and to the knowledge of the General Partner there is no threatened litigation, involving the Company which would have a material adverse effect on the business, the financial position, results of operations or liquidity of the Company.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED UNITHOLDER MATTERS
The Partnership's Units are traded on the New York Stock Exchange. As of December 31, 1994, there were approximately 44,500 beneficial owners of 40,608,300 outstanding Units.
Trading price data, as reported by the New York Stock Exchange, and declared cash distribution information for 1994 and 1993 are as follows (1993 $ per Unit amounts have been restated for the December 6, 1993 three-for-one Unit split):
Cash distributions are paid from available cash as defined by the Partnership's partnership agreement. It is the Company's intention to maintain the distribution into the foreseeable future; however, there can be no guarantee. In addition, the Company's debt agreements have certain restrictive covenants limiting the amount of the cash distribution.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
(1) Revenues and fee timber harvest increased in 1994 in part due to the November 1993 Montana Timberland Acquisition.
(2) During 1993, the Company elected to change its method for valuing inventories from average cost to the last-in, first-out ("LIFO") method. This change in accounting lowered 1993 earnings by $8.0 million or $0.18 per Unit. The cumulative effect of the accounting change and pro forma effects on prior years' earnings have not been included because such effects are not reasonably determinable. In addition, on August 30, 1993, the Partnership redeemed the 1.25 million (on a pre-Unit split basis) DPIs for $63.0 million.
(3) Per Unit amounts have been restated for the December 6, 1993 three-for-one Unit split.
(4) Included in 1993 capital expenditures was $255.3 million paid for the timberlands acquired as part of the Montana Timberland Acquisition.
(5) Included in 1992 results of operations was the sale of the 164,000 acre Gallatin Unit, together with the Belgrade sawmill for $23 million plus the value of inventory. The sale resulted in a net gain of $15.6 million.
(6) Effective January 1, 1991, the Company increased the estimated remaining lives of its machinery and equipment. This change in accounting estimate increased the Company's 1991 net income by $9.3 million or $0.21 per Unit.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Plum Creek Timber Company, L.P. (the "Partnership"), a Delaware limited partnership and its subsidiaries, Plum Creek Manufacturing, L.P. ("Manufacturing"), and Plum Creek Marketing, Inc., ("Marketing"), own, manage, and operate 2.0 million acres of timberland and ten wood products conversion facilities in Montana, Washington and Idaho. The Partnership owns 98 percent of Manufacturing and 96 percent of Marketing. Plum Creek Management Company, L.P., (the "General Partner"), manages the businesses of the Partnership, Manufacturing and Marketing and owns the remaining 2 percent and 4 percent of Manufacturing and Marketing, respectively. As used herein, "Company" refers to the combined entities of the Partnership, Manufacturing and Marketing. "Resources Segment" refers to the combined timber and land management business of the Partnership. "Manufacturing Segment" refers to the combined business of Manufacturing and Marketing.
EVENTS AND TRENDS AFFECTING OPERATING RESULTS
MARKET FORCES. The demand for logs and manufactured wood products depends upon international and domestic market conditions, the value of the U.S. dollar in foreign exchange markets, competition and other factors. In particular, the demand for logs, lumber and plywood is affected by residential and industrial construction, and repair and remodel activity. These activities are subject to fluctuations due to changes in economic conditions, tariffs, interest rates, population growth and other economic, demographic and environmental factors.
SEASONALITY. Domestic log sales volumes are typically at their lowest point in the second quarter of each year during spring break-up, when warming weather thaws and softens roadbeds, restricting access to logging sites. Revenues from export log sales are affected in part by variations in inventory in the countries where such logs are sold as well as by weather conditions. Winter logging activity in the Pacific Northwest takes place at lower elevations, where predominantly second growth logs are found, affecting the volume of higher quality export logs sold during this time of the year.
Demand for manufactured products is generally lower in the fall and winter quarters when activity in the construction, industrial and repair and remodeling markets is slower, and higher in the spring and summer quarters when these markets are more active. Working capital varies with seasonal fluctuations. Log inventories increase going into the winter season to prepare for reduced harvest during spring break-up.
CURRENT MARKET CONDITIONS. Prices for both export and domestic logs continued to be strong in 1994, as in 1993, primarily due to log shortages resulting from litigation and environmental
restrictions as well as improved demand for finished wood products. In addition, competition between and within the Northwest export and domestic log markets continues to be strong for available timber as buyers continue to compete for shrinking timber supplies.
Prices for lumber, plywood and MDF strengthened during 1994. Industry composite indices for lumber and plywood commodity prices were 5% and 7% higher, respectively, in 1994 than 1993. The price improvement was primarily due to improved wood product demand as well as reduced timber supplies. MDF prices increased by 22% in 1994, as compared to 1993, due to increasing worldwide demand for MDF products.
FINANCIAL CONDITION AND LIQUIDITY
Net cash provided by operating activities was $155.1 million, $115.3 million and $78.0 million for 1994, 1993, and 1992, respectively. The increase in net cash provided by operating activities was primarily attributed to higher net income due to increases in domestic log sales volumes resulting from higher harvest levels. Operating cash flows for 1994 included a $9.2 million use of cash, net of expense, for the funding of unit award benefit plans. Future funding of these benefit plans is contingent on meeting targets as defined in the plans. For further discussion of these benefit plans, see Note 10 of Notes to Combined Financial Statements. On December 31, 1994, the Company had $60.9 million of cash and cash equivalents.
On August 1, 1994, the Partnership issued $150 million of senior unsecured notes (the "Senior Notes due 2009") bearing interest at 8.73%, due in full on August 1, 2009. The proceeds obtained from the issuance of the Senior Notes due 2009 were used to repay a portion of the bank borrowings ("Acquisition Line of Credit") incurred to finance the November 1993 Montana Timberland Acquisition.
On November 15, 1994, the Partnership entered into two unsecured revolving lines of credit ("Lines of Credit") with a group of banks that permit the Partnership to borrow up to $135 million for general corporate purposes, including up to $5 million of standby letters of credit issued on behalf of the Partnership or Manufacturing. Proceeds obtained from the Lines of Credit were used to refinance the remaining portion of the Acquisition Line of Credit incurred to finance the November 1993 Montana Timberland Acquisition and to consolidate the Company's remaining outstanding lines of credit. As of December 31, 1994, there were letters of credit issued in the amounts of $1.1 million and $0.5 million for the Partnership and Manufacturing, respectively.
The Lines of Credit bear a floating rate of interest. One line of credit allows the Partnership to borrow $100 million through October 31, 1999, of which $82.5 million was outstanding at December 31, 1994. The other line of credit allows the Partnership to borrow $35 million through October 30, 1995 (any borrowings outstanding at that time are payable in quarterly installments, at the option of the Partnership, due January 1996 through October 1997), of which $15 million was outstanding at December 31, 1994. On January 5, 1995, $48.5 million of borrowings outstanding on the Lines of Credit were repaid.
The Company's long-term debt agreements and Lines of Credit contain certain restrictive covenants, including limitations on harvest levels, sale of assets, cash distributions and the amount of future indebtedness. The Company was in compliance with such covenants as of December 31, 1994 and 1993.
On August 30, 1993, the Partnership redeemed the 1.25 million Deferred Participation Interests ("DPIs") for $49.50 per DPI (on a pre-Unit split basis), plus direct costs associated with redeeming the DPIs (see Note 10 of Notes to Combined Financial Statements).
The Partnership will distribute $0.43 per Unit for the fourth quarter of 1994. The distribution will equal $22.1 million (including $4.6 million to the General Partner), and will be paid on March 1, 1995 to Unitholders of record on February 15, 1995. The computation of cash available for distribution includes a required reserve for the payment of principal and interest, as well as other reserves established at the discretion of the General Partner, for working capital, capital expenditures or future cash distributions.
Cash required to meet the Partnership's quarterly cash distributions, capital expenditures and to satisfy interest and principal payments on the Company's debt will be significant. The General Partner expects that all debt service will be funded from cash generated by operations. The Partnership expects to make cash distributions from current funds and cash generated from operations.
The Company is involved in certain environmental and regulatory proceedings and other related matters. Although it is possible that new information or future developments could require the Company to reassess its potential exposure related to these matters, the Company believes, based upon available information, that the resolution of these issues will not have a materially adverse effect on its results of operations, financial position or liquidity.
CAPITAL EXPENDITURES
Capital expenditures for the Resources Segment were $7.1 million, $260.5 million and $7.9 million for 1994, 1993 and 1992, respectively. Resource Segment capital expenditures included the construction of logging roads and reforestation. Resources Segment capital expenditures for 1993 included $255.3 million of timberlands purchased as part of the Montana Timberland Acquisition, as well as construction of logging roads and reforestation. Capital expenditures for the Manufacturing Segment were $18.7 million, $24.1 million and $17.7 million for 1994, 1993 and 1992, respectively. Manufacturing Segment capital expenditures in 1994 included the addition of the lumber remanufacturing facility, the installation of various lumber and plywood optimization projects, and the initial stages of the MDF project (see below) which is scheduled for completion in mid-1995.
Planned capital expenditures for the Resources Segment in 1995 are $8 million, primarily for logging roads and reforestation. The Manufacturing Segment's 1995 planned capital expenditures are $22 million which includes a project in the MDF plant to produce Super-Refined
MDF(2), a higher quality MDF product that can be machined and finished more efficiently, adding significant value to the MDF product line. Planned capital expenditures also include the purchase and installation of various lumber and plywood value-added projects, equipment upgrades to meet environmental requirements, as well as replacements and upgrades of other equipment in several of the Conversion Facilities.
It is anticipated that the planned 1995 capital expenditures will be funded from current funds and cash generated from operations.
RESULTS OF OPERATIONS
The following table compares operating income by segment for the years ended December 31, 1994, 1993 and 1992.
Operating Income by Segment (In Thousands)
1994 COMPARED TO 1993
Resources Segment revenues were $324.4 million and $266.1 million for the years ended 1994 and 1993, respectively. Revenues were $58.3 million higher in 1994, primarily due to increased sales volumes and higher prices for domestic logs, offset in part by lower export log sales volumes and lower land sales. Domestic log sales volume increased by 24% as compared to 1993 primarily due to increased harvest levels. The Company's 1994 fee timber harvest was 559 MMBF which was 101 MMBF higher than 1993, primarily as a result of the Montana Timberland Acquisition. Domestic log prices increased in 1994 by 8% as compared to 1993. The higher prices were primarily the result of increased demand for wood products as well as from log shortages in the Northwest caused in part by legal challenges to federal timber sales and changes in federal timber policy. In addition, 1994 land sales were $6.4 million lower than 1993. Land sales declined in 1994, primarily due to the Partnership's strategy of deferring land sales until the completion of state and county growth management processes.
Resources Segment costs and expenses were $173.7 million and $130.9 million for the years
ended 1994 and 1993, respectively. Costs and expenses were $42.8 million higher in 1994 primarily due to the increase in the production volumes of domestic logs, higher log and haul costs resulting from longer hauling distances and higher road amortization and timber depletion rates resulting from the additional roads and timber obtained in the Montana Timberland Acquisition.
Manufacturing Segment revenues were $372.2 million and $324.6 million for the years ended 1994 and 1993, respectively. Revenues were $47.6 million higher in 1994 due to sales volume increases and higher prices in all product lines. Lumber, plywood, and MDF prices increased in 1994 by 7%, 7% and 22%, respectively, over 1993. The higher prices were the result of improved domestic wood product demand and the impact of the log supply shortage. Lumber sales volumes were 7% higher in 1994 as compared to 1993, primarily due to increased production. MDF sales volumes increased by 15% in 1994 due to increased production as a result of production improvements.
Manufacturing Segment costs and expenses were $340.1 million and $313.1 million for the years ended 1994 and 1993, respectively. The $27.0 million of higher costs and expenses were primarily due to increased lumber and MDF production volumes and higher log costs (14% and 15% higher for lumber and plywood, respectively) which were the result of improving demand for finished wood products and the log supply shortage.
Other and eliminations decreased by $1.4 million for the year ended 1994 as compared to 1993, primarily due to a decrease in the cost of employee benefit plans and a decrease in executive incentive compensation paid by the Partnership. Profit resulting from intercompany log sales is deferred until the Manufacturing Segment converts existing log inventories into finished products and sells them to third parties.
Interest expense increased by $10.7 million in 1994 as compared to 1993 due to an increase in average debt outstanding in 1994, as a result of borrowings in November 1993 to finance the Montana Timberlands Acquisition. Net other expense increased by $4 million in 1994 as compared to 1993 primarily due to an increase in the minority interest elimination as a result of an increase in net income in the Manufacturing Segment, an increase in fixed asset retirements and an increase in the expense for state taxes payable on behalf of non-resident Unitholders.
The income allocated to the General Partner increased by $7.5 million during 1994 compared to 1993 as a result of higher net income and higher quarterly distributions to the Unitholders which increased the incentive distribution paid to the General Partner. Net income is allocated to the General Partner based on 2 percent of the Company's net income (adjusted for the incentive distribution paid), plus the incentive distribution. The incentive distribution is based on a percentage of the quarterly distribution paid which totaled $1.62 per Unit for the year ended 1994, compared to $1.30 per Unit in 1993 (1993 per Unit amounts were restated for the December 6, 1993 three-for-one Unit split).
1993 COMPARED TO 1992
Resources Segment revenues were $266.1 million and $211.7 million for the years ended 1993 and 1992, respectively. Revenues were $54.4 million higher in 1993, primarily due to higher prices for both export and domestic logs, offset in part by lower land sales and lower harvest levels. Export and domestic log prices increased in 1993 by 33% and 40%, respectively, as compared to 1992. The higher prices were primarily the result of increased demand for wood products as well as from log shortages in the Northwest caused in part by legal challenges to federal timber sales. In addition, 1993 land sales were $12.2 million lower than 1992 primarily due to the July 1992 strategic sale of the 164,000 acre Gallatin Unit. The Company's 1993 fee timber harvest was 458 MMBF (including 12 MMBF from the timberlands acquired during the Montana Timberland Acquisition) which was 11 MMBF lower than 1992 and was the result of planned harvest reductions.
Resources Segment costs and expenses were $130.9 million and $125.4 million for the years ended 1993 and 1992, respectively. Costs and expenses were $5.5 million higher in 1993, primarily due to higher log & haul costs which were the result of longer hauling distances and more expensive line and helicopter logging, higher Washington state excise tax expense resulting from higher stumpage values and higher silviculture expenses. These amounts were partially offset by a reduction in the planned fee harvest level.
Manufacturing Segment revenues were $324.6 million and $294.0 million for the years ended 1993 and 1992, respectively. Revenues were $30.6 million higher in 1993 due to higher prices in all product lines, partially offset by 10% lower lumber sales volume resulting primarily from the July 1992 sale of the Belgrade sawmill. Lumber (on a comparable mill basis), plywood, and MDF prices increased in 1993 by 23%, 21% and 4%, respectively, over 1992. The higher prices were the result of improved domestic wood product demand and the impact of the log supply shortage.
Manufacturing Segment costs and expenses were $313.1 million and $265.8 million for the years ended 1993 and 1992, respectively. The $47.3 million of higher costs and expenses were due to higher log costs (38% and 44% higher for lumber and plywood, respectively) which were the result of improving demand for finished wood products and the log supply shortage. In addition, during 1993 the Company changed its method for valuing inventories from average cost to last-in, first-out ("LIFO") which resulted in $18.0 million of additional costs for the Manufacturing Segment (see Note 3 to Notes to Combined Financial Statements).
Other and eliminations increased by $3.5 million for the year ended 1993 as compared to 1992 primarily due to higher employee benefit plan expenses. These amounts were offset in part by lower intersegment profit accumulating in inventory resulting from the Company's change in its method for valuing inventories from average cost to LIFO. The change to LIFO resulted in approximately $10.0 million of lower profit accumulating in inventory. Profit resulting from intercompany log sales is deferred until the Manufacturing Segment converts existing log inventories into finished products and sells them to third parties.
The income allocated to the General Partner increased by $4.1 million during 1993 compared to 1992 as a result of a higher net income and higher quarterly distributions to the Unitholders, which increased the incentive distribution paid to the General Partner. Net income is allocated to the General Partner based on 2 percent of the Company's net income (adjusted for the incentive distribution paid), plus the incentive distribution. The incentive distribution is based on a percentage of the quarterly distribution paid which totaled $1.30 per Unit for the year ended 1993, which compares to $1.13 per Unit in 1992 (per Unit amounts were restated for the December 6, 1993 three-for-one Unit split).
EXPORT SALES
The Company sells logs and finished wood products for export. These sales are denominated in U.S. dollars and are generally sold to Pacific Rim countries, principally Japan, and to Canada. Combined export revenues as a percentage of total revenues were 15%, 17% and 16% for 1994, 1993, and 1992, respectively.
EFFECT OF INFLATION
During recent years the Company has experienced increased costs due to the effect of inflation, particularly in the Manufacturing Segment, on the cost of raw materials (cost of logs), labor, supplies and energy. However, the Company utilizes the LIFO inventory valuation method for its raw materials, work-in-process and finished goods inventory which generally matches current costs to current revenues and thus, tends to reflect the impact of inflation on cost of goods sold.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION
PLUM CREEK TIMBER COMPANY, L. P. COMBINED STATEMENT OF INCOME
See accompanying Notes to Combined Financial Statements.
PLUM CREEK TIMBER COMPANY, L. P. COMBINED BALANCE SHEET
See accompanying Notes to Combined Financial Statements.
PLUM CREEK TIMBER COMPANY, L. P. COMBINED STATEMENT OF CASH FLOWS
See accompanying Notes to Combined Financial Statements.
PLUM CREEK TIMBER COMPANY, L. P. NOTES TO COMBINED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION. Plum Creek Timber Company, L.P. (the "Partnership"), a Delaware limited partnership and its subsidiaries, Plum Creek Manufacturing, L.P. ("Manufacturing"), and Plum Creek Marketing, Inc. ("Marketing"), own, manage and operate 2.0 million acres of timberland and ten wood products conversion facilities in Montana, Washington and Idaho. The Partnership owns 98 percent of Manufacturing and 96 percent of Marketing. Plum Creek Management Company, L.P. (the "General Partner"), manages the businesses of the Partnership, Manufacturing and Marketing and owns the remaining 2 percent and 4 percent of Manufacturing and Marketing, respectively. As used herein, "Company" refers to the combined entities of the Partnership, Manufacturing and Marketing. "Resources Segment" refers to the timber and land management business of the Partnership, and "Manufacturing Segment" refers to the combined businesses of Manufacturing and Marketing.
The combined financial statements of the Company include all the accounts of the Partnership, Manufacturing and Marketing. All significant intercompany transactions have been eliminated in combination. Certain financial statement reclassifications have been made to the 1993 and 1992 amounts presented for comparability purposes and have no impact on net income.
NET INCOME PER UNIT. Net income per Unit is calculated using the weighted average number of Units outstanding, net of redeemed Units, plus, in 1993 and 1992, any unredeemed Deferred Participation Interests ("DPIs" - see Note 10 to Notes to Combined Financial Statements) divided into the combined Partnership net income, after adjusting for the General Partner Interest. The weighted average number of Units outstanding was 40,608,300, 43,084,327 and 44,358,300 for the years ended December 31, 1994, 1993 and 1992, respectively.
On October 18, 1993, the General Partner authorized a three-for-one Unit split of the Partnership's outstanding Units. The Unit split entitled each Unitholder of record on November 15, 1993 to receive two additional Units for each Unit held on the record date. The split was effective and payable on December 6, 1993. All references to number of Units and to per Unit information in the combined financial statements have been restated to reflect the Unit split on a retroactive basis.
REVENUE RECOGNITION. Revenues received from the sale of logs, wood products and by-products, primarily wood chips, are generally recorded as operating revenue at the time of shipment. Sales of export logs and wood products are denominated in U.S. dollars.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
INVENTORIES. Inventories are stated at the lower of cost or market. Cost for manufactured
inventories includes raw materials, labor, supplies, energy, depreciation and production overhead. Cost of logs purchased by the Manufacturing Segment from the Partnership is determined quarterly, based upon estimated market prices and terms in effect at the time. Cost of export log inventories includes timber depletion, stumpage, associated logging and harvesting costs, road costs and production overhead. Effective January 1, 1993, the Company changed its method for valuing logs, work-in-process and finished goods inventories from the average cost to the last-in, first-out ("LIFO") method (see Note 3 to Notes to Combined Financial Statements). The average cost method is used to value the Company's supplies inventories.
TIMBER AND TIMBERLANDS. Timber and timberlands, including logging roads, are stated at cost less depletion for timber previously harvested and accumulated amortization. Cost of the Partnership's timber harvested is determined based on the volume of timber harvested in relation to the amount of estimated recoverable timber. The Partnership estimates its timber inventory using statistical information and data obtained from physical measurements, site maps, photo-types and other information gathering techniques. The cost of logging roads is amortized over the estimated useful life on a straight-line basis.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is stated at cost. Improvements and replacements are capitalized. Depreciation is provided for on a straight-line basis for buildings and on a unit-of-production basis for machinery and equipment, which approximates a straight-line basis. Maintenance and repairs necessary to maintain properties in operating condition are expensed as incurred. The cost and related accumulated depreciation of property sold or retired are removed from the accounts and any gain or loss is recorded.
INCOME TAXES. The Partnership and Manufacturing are not subject to federal income tax and their income or loss is included in the tax returns of individual Unitholders. The Partnership files composite returns in the states in which it does business, paying taxes for nonresident Unitholders. Taxes paid for nonresident Unitholders are included in other expense. Marketing, as a separate taxable corporation, provides for income taxes on a separate company basis. Marketing provides for deferred taxes in order to reflect the tax consequences in future years of the difference between the financial statement and tax basis of assets and liabilities at year-end.
2. ACCOUNTS RECEIVABLE
Accounts receivable were presented net of allowances for doubtful accounts of $1,160,000 and $1,174,000 at December 31, 1994 and 1993, respectively.
3. INVENTORIES
Inventories consisted of the following at December 31 (in thousands):
Effective January 1, 1993, the Company changed its method of valuing logs, work-in-process and finished goods inventories from the average cost method of accounting to the LIFO method. Management believes the LIFO method results in a better matching of current costs with current revenues. The effect of this change in 1993 was to decrease earnings by $8.0 million, or $0.18 per Unit. The cumulative effect of this accounting change and the pro forma effects on prior years' earnings have not been included because such effects are not reasonably determinable. Excluding supplies, which are valued at average cost, the cost of the LIFO inventories valued at the lower of average cost or market (which approximates current cost) at December 31, 1994 and 1993 was $54.9 million and $52.4 million, respectively.
4. TIMBER AND TIMBERLANDS AND PROPERTY, PLANT AND EQUIPMENT
Timber and timberlands consisted of the following at December 31 (in thousands):
Property, plant and equipment consisted of the following at December 31 (in thousands):
On November 1, 1993, the Partnership purchased approximately 865,000 acres of timberland and other timber related assets (the "Montana Timberland Acquisition") from Champion International Corporation for approximately $260 million. Approximately $255.3 million of the Montana Timberland Acquisition's purchase price was allocated to timber and timberlands. These timberlands are located in western Montana in close proximity to existing Company assets.
On July 31, 1992, the Company completed the sale of approximately 164,000 acres of timberland in its Gallatin Unit, together with its Belgrade sawmill for $23 million plus the value of inventory. The sale resulted in a net gain of approximately $15.6 million.
5. BORROWINGS
Long-term debt consisted of the following at December 31 (in thousands):
On August 1, 1994, the Partnership issued $150 million of senior notes due in full on August 1, 2009 (the "Senior Notes due 2009") which bear interest at 8.73%, payable semi-annually. The proceeds obtained from the issuance of the Senior Notes due 2009 were used to refinance a portion of the $260 million Line of Credit incurred to finance the November 1, 1993 Montana Timberland Acquisition.
The Senior Notes due 2007 and the First Mortgage Notes bear interest of 11.125%, payable semi-annually. The Senior Notes due 2007, the Senior Notes due 2009 and the First Mortgage Notes (collectively, the "Note Agreements") are redeemable prior to maturity subject to a premium on redemption, which is based upon interest rates of U.S. Treasury securities having similar average maturity as the Note Agreements. At December 31, 1994 and 1993, the premium that would have been due upon early retirement would have approximated $57 million and $110 million, respectively. The two series of senior notes are unsecured. The First Mortgage Notes are collateralized by the property, plant and equipment of Manufacturing and are guaranteed by the Partnership.
On November 15, 1994, the Partnership entered into two unsecured revolving lines of credit ("Lines of Credit") with a group of banks that permit the Partnership to borrow up to $135 million for general corporate purposes, including up to $5 million of standby letters of credit issued on behalf of the Partnership or Manufacturing. As of December 31, 1994, there were letters of credit issued in the amounts of $1.1 million and $0.5 million for the Partnership and Manufacturing, respectively. Proceeds obtained from the Lines of Credit were used to retire the remaining portion of the $260 million Line of Credit incurred to finance the November 1, 1993 Montana Timberland Acquisition and consolidate the Company's remaining outstanding lines of credit.
The Lines of Credit bear a floating rate of interest (6.86% at December 31, 1994). One line of credit allows the Partnership to borrow $100 million through October 31, 1999, of which $82.5 million was outstanding at December 31, 1994. The other line of credit allows the Partnership to borrow $35 million through October 30, 1995 (any borrowings outstanding at that time are payable, at the option of the Partnership, in quarterly installments due January 1996 through October 1997), of which $15 million was outstanding at December 31, 1994. The $15 million was classified as long-term debt due in 1999 due to the Company's intent and ability to finance these borrowings on a long-term basis. As of December 31, 1994, the unused portion of Lines of Credit was $37.5 million. On January 5, 1995, $48.5 million of borrowings on the Lines of Credit were repaid.
The annual principal payments on the Note Agreements and mandatory principal payments under the Lines of Credit are as follows (in thousands):
All principal and interest payments due under the Note Agreements and Lines of Credit are nonrecourse to the General Partner.
The Note Agreements and the Lines of Credit contain certain restrictive covenants, including limitations of harvest levels, sale of assets, cash distributions and the amount of future indebtedness. The Company was in compliance with such covenants at December 31, 1994 and 1993.
6. FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximate fair value due to the short-term maturities of these instruments. The estimated fair value of the Company's debt, based on current interest rates for similar obligations with like maturities, was approximately $570 million and $648 million and was carried at $544 million and $570 million as of December 31, 1994 and 1993, respectively.
7. PARTNERS' CAPITAL
The changes in Partners' Capital were as follows (in thousands):
The total number of Units outstanding at December 31, 1994 and 1993 was 40,608,300. At December 31, 1992 there were 1.25 million DPIs (on a pre-Unit split basis) outstanding. The DPIs were redeemed on August 30, 1993 (see Note 10 to Notes to Combined Financial Statements).
In accordance with the Partnership Agreement, the General Partner is authorized to make quarterly cash distributions. For the years ended December 31, 1994, 1993 and 1992, the General Partner declared $1.67, $1.38 and $1.17 per Unit, respectively, to be paid to the Partnership's
Unitholders. If quarterly cash distributions exceed $0.22 per Unit, the General Partner is provided with an incentive distribution. See Note 10 to Notes to Combined Financial Statements.
8. INCOME TAXES
The provision for income taxes was as follows (in thousands):
Reconciliation of the federal statutory rate to the effective income tax rate was as follows:
9. EMPLOYEE PENSION AND RETIREMENT PLANS
PENSION PLAN. The Company's pension plan is a non-contributory defined benefit plan covering substantially all employees. The salaried employee benefits are based on years of credited service and the highest five-year average compensation levels, and the hourly employee benefits are based on years of service. Contributions to the plans are based upon the Projected Unit Credit actuarial funding method and are limited to amounts that are currently deductible for tax purposes. The Company's pension expense was $1.9 million, $2.1 million and $1.6 million for 1994, 1993, and 1992, respectively.
The following table sets forth the funded status of the Company's pension plan at December 31 (in thousands):
The components of the Company's pension cost were as follows (in thousands):
The following assumptions were used in the accounting for the Company's pension plan as of December 31:
The Company adopted two nonqualified defined benefit pension plans for executives and key management employees effective January 1, 1993 and January 1, 1994, respectively. The projected
benefit obligation for these plans was $2.7 million and $1.9 million as of December 31, 1994 and 1993, respectively. The Company's pension expense for these plans was $0.8 million and $0.4 million for 1994 and 1993, respectively.
THRIFT AND PROFIT SHARING PLAN. The Company sponsors an employee thrift and profit sharing plan under section 401 of the Internal Revenue Code. This plan covers substantially all full-time employees. The Company matches employee contributions of up to 6 percent of compensation at rates ranging from 35 to 75 percent, depending upon the Company's financial performance. Amounts charged to expense were $2.0 million, $2.3 million and $2.4 million during 1994, 1993 and 1992, respectively.
OTHER BENEFIT PLANS. Certain executives and key employees of the General Partner participate in incentive benefit plans established by the General Partner which provide for the granting of Units and/or cash bonuses upon meeting performance objectives. See Note 10 to Notes to Combined Financial Statements.
10. RELATED-PARTY TRANSACTIONS
The General Partner is responsible for all decisions related to the management of the Company. The General Partner has a 2 percent general partner interest in the income and cash distributions of the Partnership, subject to certain adjustments, and owns 2 percent and 4 percent interests in Manufacturing and Marketing, respectively. The Company reimburses the General Partner for the actual cost of administering its businesses. Amounts reimbursed to the General Partner for such costs were $5.0 million and $4.8 million for the years ended December 31, 1994 and 1992, respectively. During 1993, the Company directly paid the costs associated with administering the businesses.
Effective October 1, 1993, the General Partner established a Long-Term Incentive Plan ("LTIP") which provides for granting Unit Appreciation Rights ("UARs") to certain executives of the General Partner. When any of five Unit Value Targets ("UVTs") established by the LTIP are met through a combination of Unit market appreciation plus Partnership cash distributions, a percentage of the UARs is triggered and Units are credited to the executives' accounts. The performance period under the LTIP during which UVTs may be met ends December 31, 1998 at which time any earned Units will be distributed. Costs incurred by the General Partner in administering and funding the LTIP are borne by the Partnership.
The General Partner has granted 1,250,000 UARs, net of forfeitures, which could result in a total of 628,573 Units being earned under the LTIP if all UVTs are met. Units in the executives' accounts will earn additional Units equal to the amount of any subsequent Partnership cash distributions. During 1994, two UVTs were achieved and 141,429 Units were allocated to the executives' accounts. Total compensation expense with respect to the achievement of these two UVTs will be approximately $3.8 million of which $0.8 million was recognized in 1994 . The
remaining compensation expense will be recognized over the remaining performance period ending December 31, 1998.
Effective January 1, 1994, the General Partner established a Key Employee Long-Term Incentive Plan ("KLTIP") for certain of its other key employees. The KLTIP provisions are similar to the LTIP described above, but different UVTs apply. In 1994, the General Partner granted 368,000 UARs, net of forfeitures, which could result in a total of 185,036 Units being earned under the KLTIP if all UVTs are met. Units in the participants' accounts will earn additional Units equal to the amount of any subsequent Partnership cash distributions. No UVTs have been achieved under the KLTIP. Costs incurred by the General Partner in administering and funding the plan are borne by the Partnership.
The Partnership is required under the Partnership agreement to reimburse the General Partner for compensation costs related to the management of the Partnership, including the purchase of Units associated with these benefit plans. During 1994, the Partnership paid the General Partner for its purchase of 496,800 Units at a total cost of $12.8 million, of which $10.5 million was funded from current operations and $2.3 million from funds held by an employee benefit trust of the Partnership.
Effective January 1, 1994, the General Partner established a Management Incentive Plan ("MIP") for certain executives of the General Partner. An annual bonus of up to 100% of the respective executive's base salary may be awarded if certain performance objectives established by the General Partner are met by the Company and by the executive. One-half of the bonus will be paid annually in cash and the remaining half will be converted into Units at fair market value and will be distributed at the end of three years. Units in executives' accounts will earn additional Units equal to the amount of any subsequent Partnership cash distributions. Costs incurred in administering and funding the plan are borne by the General Partner.
On August 12, 1993, the Partnership held a special meeting of the Unitholders to approve a proposal to redeem the 1.25 million DPIs (on a pre-Unit split basis). Approval was obtained and on August 30, 1993, the Partnership redeemed the 1.25 million DPIs for $49.50 per DPI (on a pre-Unit split basis), plus direct costs associated with redeeming the DPIs.
Net income is allocated to the General Partner based on 2 percent of the Company's combined net income (adjusted for the incentive distribution), plus the incentive distribution, as provided by the Partnership Agreement. The incentive distributions paid in 1994, 1993 and 1992 were approximately $14.4 million, $7.2 million and $3.5 million, respectively.
Certain conflicts of interest could arise as a result of the relationships described above. The Board of Directors and management of the General Partner have a duty to manage the Company in the best interests of the Unitholders and, consequently, must exercise good faith and integrity in handling the assets and affairs of the Company. Related non-interest bearing receivables and payables between the General Partner and the Company are settled in the ordinary course of business. As of December 31, 1994 and 1993, the Company had a receivable from the General Partner of $176,000
and $8,000, respectively.
11. COMMITMENTS AND CONTINGENCIES
A portion of the Company's log requirements is acquired through contracts with public and private sources. Except for required deposits, no amounts are recorded until such time as the Company harvests the timber. At December 31, 1994 and 1993, the unrecorded amounts of those contract commitments were approximately $30.4 million and $47.0 million, respectively. During 1993, the Partnership entered into a log sourcing contract to sell approximately 950 million board feet ("MMBF") of logs to a customer over a 10-year period ending in 2003, at prevailing market rates. At December 31, 1994 the Partnership had a remaining commitment of approximately 814 MMBF.
There are no contingent liabilities which would have a materially adverse effect on the financial position, the results of operations or liquidity of the Company.
The Company is subject to regulations regarding harvest practices and is involved in various legal proceedings, including environmental matters, incidental to its business. While administration of current regulations and any new regulations or proceedings have elements of uncertainty, the General Partner believes that none of the pending legal proceedings or regulatory matters will have a materially adverse effect on the financial position, the results of operations or liquidity of the Company.
The Company leases buildings and equipment under non-cancelable operating lease agreements. The Company's operating lease expense was $1.8 million for 1994 and $1.9 million for 1993 and 1992. The following summarizes the minimum lease payments (in thousands):
12. SEGMENT INFORMATION
Operating revenues include both sales to unaffiliated customers and intersegment sales. Intersegment sales prices are determined quarterly, based upon estimated market prices and terms in effect at that time and are eliminated in combination. Intersegment sales from the Resources Segment to the Manufacturing Segment were $118.0 million, $89.7 million and $65.8 million for 1994, 1993 and 1992, respectively.
Operating income from the Resources Segment includes land sales of $1.9 million, $7.7 million and $20.3 million, for 1994, 1993 and 1992, respectively. Combined export revenues, primarily to Pacific Rim countries, as a percentage of total revenues were 15%, 17% and 16% for 1994, 1993 and 1992, respectively.
During 1994, net sales to one Resources Segment customer were approximately 11% of combined revenues.
As disclosed in Note 3 to Notes to Combined Financial Statements, during 1993 the Company changed its method for valuing inventories from average cost to LIFO. The change in accounting method lowered 1993 operating income by $18.0 million for the Manufacturing Segment and was offset by $10.0 million of lower intercompany profit accumulating in inventory resulting from the change to LIFO. The cumulative effect of the accounting change and pro forma effects on prior years' earnings have not been included because such effects are not reasonably determinable.
13. SUBSEQUENT EVENT
On January 24, 1995, the Board of Directors of the General Partner authorized the Partnership to make a distribution of $0.43 per Unit for the fourth quarter of 1994. Total distributions will approximate $22.1 million (including $4.6 million to the General Partner) and will be paid on March 1, 1995 to Unitholders of record on February 15, 1995.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Unitholders and Directors of the General Partner of Plum Creek Timber Company, L.P.
We have audited the accompanying combined balance sheet of Plum Creek Timber Company, L.P. as of December 31, 1994 and 1993, and the related combined statements of income and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Plum Creek Timber Company, L.P. at December 31, 1994 and 1993, and the combined results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 3 of the Combined Financial Statements, the Company changed its method of accounting for inventories effective January 1, 1993.
Coopers & Lybrand L.L.P. Seattle, Washington January 24, 1995
SUPPLEMENTARY FINANCIAL INFORMATION
Combined Quarterly Information (Unaudited) (In Thousands, Except per Unit)
(1) Effective January 1, 1993, the Company changed its method of valuing logs, work-in-process and finished goods inventories from the average cost method of accounting to the LIFO method. The effect of the change in 1993 was to decrease earnings by $2.0 million, $1.9 million, $2.1 million and $2.0 million for the first, second, third and fourth quarters of 1993, respectively, or $0.05, $0.04, $0.05, and $0.04 per Unit, for the same respective periods. The cumulative effect of this accounting change and the pro forma effects on prior years' earnings have not been included because such effects are not reasonably determinable.
(2) Per Unit amounts have been restated for the December 6, 1993 three-for-one Unit split.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Items 10. and 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND EXECUTIVE COMPENSATION, Item 12.







ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION
The following combined financial statements of the Company are included in Part II, Item 8 of this Form 10-K:
(2) FINANCIAL STATEMENT SCHEDULES
Not applicable.
(3) LIST OF EXHIBITS
All required exhibits will be filed by amendment to this Form 10-K on Form 10K/A.
(B) REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 (or 15(d)) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PLUM CREEK TIMBER COMPANY, L. P. -------------------------------- (Registrant)
By: Plum Creek Management Company, L.P. as General Partner
BY: RICK R. HOLLEY ------------------------------------- Rick R. Holley President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, in the capacities and on the dates indicated, on behalf of, as applicable, Plum Creek Management Company, L.P., the registrant's general partner, and/or PC Advisory Corp. I, the general partner of the managing general partner of the registrant's general partner.