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Rating Action:

MOODY'S RATES PLUM CREEK TIMBER COMPANY; SENIOR DEBT SHELF OF MAIN SUBSIDIARY RATED (P)Baa3

25 Aug 2004
MOODY'S RATES PLUM CREEK TIMBER COMPANY; SENIOR DEBT SHELF OF MAIN SUBSIDIARY RATED (P)Baa3

$800 Million Universal Shelf Rated.

New York, August 25, 2004 -- Moody's Investors Service assigned a (P)Baa3 rating to Plum Creek Timberland L.P.'s senior unsecured debt shelf. The rating outlook is stable. The parent company is Plum Creek Timber Company, Inc., one of the USA's largest REITs and a leading owner of timberlands.

According to Moody's, the rating reflects Plum Creek's large, geographically diverse and unencumbered timberland asset base, strong fixed charge coverage and sufficient liquidity. The rating also takes into account the cyclicality of Plum Creek's performance, as well as the materiality of its total leverage in relation to the volatility of Plum Creek's earnings. Moody's notes positively, however, that Plum Creek's leverage has been dropping recently. Plum Creek Timber Company is one of the largest private owners of timberlands in the United States, with 7.7 million acres in twenty-one states.

With respect to its core timberlands, Plum Creek intends to grow its land and timber asset base through acquisitions, as well as reforestation and silvicultural efforts. The age distribution of the standing timber varies by region, with shorter rotations (20 -- 30 years) more prevalent in the Southern region and longer rotations (40-90 years) in the Northern region. The timberlands segment's primary products are saw logs and pulpwood; the key end markets are construction and pulp and paper. Moody's views Plum Creek's timberlands business as a core operation with material scope and diversity that enhance cash flow stability. While the price for wood can vary and is a key risk, Plum Creek has some capacity to speed or slow cuttings to manage cash flow.

Plum Creek also engages in natural resource businesses related to its property ownership, such as mineral extraction, natural gas production and communication and transportation rights-of-way. With the recent sale of its coal bed methane business, this segment is comprised primarily of royalty streams, which, although relatively consistent, are not anticipated to be significant to the REIT's overall operations in the near to medium-term.

In addition, Plum Creek also sells and manages higher-and-better-use (HBU) lands (real estate with market value in excess of timberlands, typically sold for conservation, recreation or development) and periodically sells non-strategic timberlands. Moody's considers this segment to be highly profitable, and it should grow in the medium term, although the transactional nature of cash flows generated by real estate sales makes them less predictable.

Also, through taxable REIT subsidiaries, Plum Creek conducts manufacturing activities, which include converting logs to lumber, plywood and other wood products, and converting chips, sawdust and wood shavings to medium density fiberboard (MDF). Plum Creek owns four lumber mills, two plywood plants, two MDF facilities and two lumber remanufacturing facilities. Although Plum Creek's manufacturing business focuses on value-added segments, Plum Creek is still subject to cyclical supply and demand fluctuations in the commodity-based forest products industry. Moody's notes that although the size of Plum Creek's manufacturing operations is small in relation to the total company, this segment is highly volatile and is an important credit issue for the REIT. Moody's also recognizes that during cyclical peaks these manufacturing operations can be highly profitable.

For the first half of 2004, timberlands business (sales of either standing timber or logs delivered to customers) contributed 49% of Plum Creek's operating income, real estate operations comprised 38% and manufacturing generated 11%. By contrast, for 2003, timberlands contributed 86% of operating income, with real estate adding 14%, and manufacturing posting a small loss, reflecting the cyclicality of Plum Creek's real estate and wood-related manufacturing businesses.

Plum Creek's capital structure exhibits material leverage, with debt at approximately 43% of gross assets (on a GAAP basis) as of June 30, 2004, virtually all of it unsecured. Plum Creek Timberlands, L.P. has a $650 million unsecured revolving credit facility, 72% of which was drawn at June 30, 2004. This contributes to its relatively high variable-rate debt of approximately 26% of total debt. The proportion of floating-rate debt in the capital structure is inflated by Plum Creek's purposeful preservation of cash at quarter-ends. Adjusting for this, Plum Creek's variable rate debt was a modest 8% of total debt, which is a decline from the historical pattern. Moody's expects Plum Creek to maintain robust levels of undrawn capacity on its line of credit.

The stable rating outlook reflects Moody's expectation that Plum Creek will successfully pursue its strategy of redeploying funds generated by sales of non-strategic timberlands and higher and better use (HBU) holdings into growing its core timberlands portfolio. Moody's also anticipates the manufacturing segment to maintain positive contribution to operating income through the cycle, and that revenue from the timberlands segment will be relatively steady.

Moody's said that the rating would be lowered should secured debt increase to above 10% of gross assets or the unencumbered portfolio decrease below 90% of gross assets. Reductions in the fixed charge coverage below 3.5X or worsened performance of the manufacturing segment (below -5% of operating income) would also put pressure on Plum Creek's rating. The calculation of fixed charge coverage includes Plum Creek's real estate basis in the EBITDA, which is a non-cash adjustment for the historical cost of the real estate sold.

A rating upgrade would likely occur should Plum Creek decrease its effective leverage to below 35% of gross assets, while achieving sustained improvement in the EBITDA margin, to above 40% (excluding real estate basis).

The following ratings were assigned:

Plum Creek Timber Company, Inc. -- Preferred stock shelf at (P)Ba2.

Plum Creek Timberlands, L.P. -- Unsecured senior debt shelf at (P)Baa3, unsecured subordinated debt shelf at (P)Ba1.

Plum Creek Timber Company, Inc. [NYSE: PCL] is a Real Estate Investment Trust headquartered in Seattle, Washington, USA. It is one of the largest private owners of timberlands in the United States with 7.7 million acres under management, and assets of $4.3 billion at June 30, 2004.

New York
John J. Kriz
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Philip Kibel
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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