International Paper 2014 Annual Report Download - page 105

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The use of the two wholly-owned special purpose
entities discussed below preserved the tax deferral that
resulted from the 2007 Temple-Inland timberlands
sales. The Company recognized an $840 million
deferred tax liability in connection with the 2007 sales,
which will be settled with the maturity of the notes in
2027.
In October 2007, Temple-Inland sold 1.55 million acres
of timberlands for $2.38 billion. The total consideration
consisted almost entirely of notes due in 2027 issued
by the buyer of the timberlands, which Temple-Inland
contributed to two wholly-owned, bankruptcy-remote
special purpose entities. The notes are shown in
Financial assets of special purpose entities in the
accompanying consolidated balance sheet and are
supported by $2.38 billion of irrevocable letters of credit
issued by three banks, which are required to maintain
minimum credit ratings on their long-term debt. In the
third quarter of 2012, International Paper completed its
preliminary analysis of the acquisition date fair value of
the notes and determined it to be $2.09 billion. As of
December 31, 2014 and 2013, the fair value of the notes
was $2.27 billion and $2.62 billion, respectively. These
notes are classified as Level 2 within the fair value
hierarchy, which is further defined in Note 14.
In December 2007, Temple-Inland's two wholly-owned
special purpose entities borrowed $2.14 billion shown
in Nonrecourse financial liabilities of special purpose
entities in the accompanying consolidated balance
sheet. The loans are repayable in 2027 and are secured
only by the $2.38 billion of notes and the irrevocable
letters of credit securing the notes and are nonrecourse
to the Company. The loan agreements provide that if a
credit rating of any of the banks issuing the letters of
credit is downgraded below the specified threshold, the
letters of credit issued by that bank must be replaced
within 30 days with letters of credit from another
qualifying financial institution. In the third quarter of
2012, International Paper completed its preliminary
analysis of the acquisition date fair value of the
borrowings and determined it to be $2.03 billion. As of
December 31, 2014 and 2013, the fair value of this debt
was $2.16 billion and $2.49 billion, respectively. This
debt is classified as Level 2 within the fair value
hierarchy, which is further defined in Note 14.
During 2012, the credit ratings for two letter of credit
banks that support $1.0 billion of the 2007 Monetized
Notes were downgraded below the specified threshold.
These letters of credit were successfully replaced by
other qualifying institutions. Fees of $8 million were
incurred in connection with these replacements.
Activity between the Company and the 2007 financing
entities was as follows:
In millions 2014 2013 2012
Revenue (loss) (a) $26$27$28
Expense (b) 25 29 28
Cash receipts (c) 7812
Cash payments (d) 18 21 22
(a) The revenue is included in Interest expense, net in the
accompanying consolidated statement of operations and
includes approximately $19 million, $19 million and $17 million
for the years ended December 31, 2014, 2013 and 2012,
respectively, of accretion income for the amortization of the
purchase accounting adjustment of the Financial assets of
special purpose entities.
(b) The expense is included in Interest expense, net in the
accompanying consolidated statement of operations and
includes $7 million, $7 million and $6 million for the years
ended December 31, 2014, 2013 and 2012, respectively, of
accretion expense for the amortization of the purchase
accounting adjustment on the Nonrecourse financial liabilities
of special purpose entities.
(c) The cash receipts are interest received on the Financial assets
of special purpose entities.
(d) The cash payments are interest paid on Nonrecourse financial
liabilities of special purpose entities.
PREFERRED SECURITIES OF SUBSIDIARIES
In March 2003, Southeast Timber, Inc. (Southeast
Timber), a consolidated subsidiary of International
Paper, issued $150 million of preferred securities to a
private investor with future dividend payments based
on LIBOR. Southeast Timber, which through a
subsidiary initially held approximately 1.50 million acres
of forestlands in the southern United States, was
International Paper’s primary vehicle for sales of
southern forestlands. As of December 31, 2014,
substantially all of these forestlands have been sold.
On March 27, 2013, Southeast Timber redeemed its
Class A common shares owned by the private investor
for $150 million. Distributions paid to the third-party
investor were $1 million and $6 million in 2013 and 2012,
respectively. The expense related to these preferred
securities is shown in Net earnings (loss) attributable
to noncontrolling interests in the accompanying
consolidated statement of operations.
NOTE 13 DEBT AND LINES OF CREDIT
During the second quarter of 2014, International Paper
issued $800 million of 3.65% senior unsecured notes
with a maturity date in 2024 and $800 million of 4.80%
senior unsecured notes with a maturity date in 2044.
The proceeds from this borrowing were used to repay
approximately $960 million of notes with interest rates
ranging from 7.95% to 9.38% and original maturities
from 2018 to 2019. Pre-tax early debt retirement costs
of $262 million related to these debt repayments,
including $258 million of cash premiums, are included
in Restructuring and other charges in the