International Paper 2012 Annual Report Download - page 97

In the event the credit rating of the letter of credit
bank is downgraded below a specified threshold, the
new bank is required to provide credit support for its
obligation. Fees of $5 million were incurred in con-
nection with this replacement.
On November 29, 2011, Standard and Poor’s
reduced its credit rating of senior unsecured long-
term debt of Lloyds TSB Bank Plc, which issued let-
ters of credit that support $1.2 billion of the Timber
Notes, below the specified threshold. The letters of
credit were successfully replaced by another qualify-
ing institution. Fees of $4 million were incurred in
connection with this replacement.
On January 23, 2012, Standard and Poor’s reduced
its credit rating of senior unsecured long-term debt
of Société Générale SA, which issued letters of credit
that support $666 million of the Timber Notes, below
the specified threshold. The letters of credit were
successfully replaced by another qualifying
institution. Fees of $5 million were incurred in con-
nection with this replacement.
On June 21, 2012, Moody’s Investor Services
reduced its credit rating of senior unsecured long-
term debt of BNP Paribas, which issued letters of
credit that support $707 million of Timber Notes,
below the specified threshold. On December 19,
2012, the Company and the third-party managing
member agreed to a continuing replacement waiver
for these letters of credit, terminable upon 30 days
notice.
Activity between the Company and the Entities was
as follows:
In millions 2012 2011 2010
Revenue (loss) (a) $49 $49 $42
Expense (a) 90 79 79
Cash receipts (b) 36 28 32
Cash payments (c) 87 79 82
(a) The net expense related to the Company’s interest in the Enti-
ties is included in Interest expense, net in the accompanying
consolidated statement of operations, as International Paper
has and intends to effect its legal right to offset as discussed
above.
(b) The cash receipts are equity distributions from the Entities to
International Paper.
(c) The semi-annual payments are related to interest on the asso-
ciated debt obligations discussed above.
Based on an analysis of the Entities discussed above
under guidance that considers the potential magni-
tude of the variability in the structures and which
party has a controlling financial interest, Interna-
tional Paper determined that it is not the primary
beneficiary of the Entities, and therefore, should not
consolidate its investments in these entities. It was
also determined that the source of variability in the
structure is the value of the Timber Notes, the
assets most significantly impacting the structure’s
economic performance. The credit quality of the
Timber Notes is supported by irrevocable letters of
credit obtained by third-party buyers which are 100%
cash collateralized. International Paper analyzed
which party has control over the economic perform-
ance of each entity, and concluded International
Paper does not have control over significant deci-
sions surrounding the Timber Notes and letters of
credit and therefore is not the primary beneficiary.
The Company’s maximum exposure to loss equals
the value of the Timber Notes; however, an analysis
performed by the Company concluded the likelihood
of this exposure is remote.
International Paper also held variable interests in two
financing entities that were used to monetize long-
term notes received from the sale of forestlands in
2001 and 2002. International Paper transferred notes
(the Monetized Notes, with an original maturity of 10
years from inception) and cash of approximately $1.0
billion to these entities in exchange for preferred
interests, and accounted for the transfers as a sale of
the notes with no associated gain or loss. In the
same period, the entities acquired approximately
$1.0 billion of International Paper debt obligations for
cash. International Paper has no obligation to make
any further capital contributions to these entities and
did not provide any financial support that was not
previously contractually required during the years
ended December 31, 2012 , 2011 or 2010.
Activity between the Company and the 2001 financ-
ing entities was as follows:
In millions 2012 2011 2010
Revenue (loss) (a) $— $1 $(1)
Expense (a) —312
Cash receipts (b) ——4
Cash payments (c) —312
(a) The net expense related to the Company’s interest in the 2001
financing entities is included in Interest expense, net in the
accompanying consolidated statement of operations, as Inter-
national Paper has and intends to effect its legal right to offset
as discussed above.
(b) The cash receipts are equity distributions from the 2001 financ-
ing entities to International Paper.
(c) The cash payments are related to interest on the associated
debt obligations discussed above.
The 2001 Monetized Notes of $499 million matured on
March 16, 2011. Following their maturity, International
Paper purchased the Class A preferred interest in the
2001 financing entities from an external third-party for
$21 million. As a result of the purchase, effective
March 16, 2011, International Paper owned 100% of
the 2001 financing entities. Based on an analysis per-
formed by the Company after the purchase, under
guidance that considers the potential magnitude of
the variability in the structure and which party has a
controlling financial interest, International Paper
70