Edgar Filing: INTERNATIONAL PAPER CO /NEW/

IP-9.30.2014-FORM 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2014

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

_________________________________________

Commission File Number 1-3157

INTERNATIONAL PAPER COMPANY

(Exact name of registrant as specified in its charter)



New York	13-0872805
(State or other jurisdiction of	(I.R.S. Employer
incorporation of organization)	Identification No.)

6400 Poplar Avenue, Memphis, TN	38197
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (901) 419-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of shares outstanding of the registrant’s common stock, par value $1.00 per share, as of October 31, 2014 was 423,613,841.

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INDEX



		PAGE NO.
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statement of Operations - Three Months and Nine Months Ended September 30, 2014 and 2013	1

	Consolidated Statement of Comprehensive Income - Three Months and Nine Months Ended September 30, 2014 and 2013	2

	Consolidated Balance Sheet - September 30, 2014 and December 31, 2013	3

	Consolidated Statement of Cash Flows - Nine Months Ended September 30, 2014 and 2013	4

	Condensed Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4.	Controls and Procedures	44

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 6.	Exhibits	46

Signatures		47

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PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

INTERNATIONAL PAPER COMPANY

Consolidated Statement of Operations

(Unaudited)

(In millions, except per share amounts)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Net Sales	$	6,051		$	5,975		$	17,674		$	17,635
Costs and Expenses
Cost of products sold	4,055			4,048			12,149			12,242
Selling and administrative expenses	467			473			1,331			1,352
Depreciation, amortization and cost of timber harvested	358			397			1,060			1,164
Distribution expenses	394			402			1,137			1,197
Taxes other than payroll and income taxes	43			46			137			138
Restructuring and other charges	24			59			830			87
Net (gains) losses on sales and impairments of businesses	—			1			—			1
Net bargain purchase gain on acquisition of business	—			—			—			(13		)
Interest expense, net	158			146			465			478
Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings	552			403			565			989
Income tax provision (benefit)	147			38			89			61
Equity earnings (loss), net of taxes	(72		)	16			(64		)	(30		)
Earnings (Loss) From Continuing Operations	333			381			412			898
Discontinued operations, net of taxes	16			(5		)	(4		)	50
Net Earnings (Loss)	349			376			408			948
Less: Net earnings (loss) attributable to noncontrolling interests	(6		)	(6		)	(13		)	(11		)
Net Earnings (Loss) Attributable to International Paper Company	$	355		$	382		$	421		$	959
Basic Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders
Earnings (loss) from continuing operations	$	0.80		$	0.87		$	0.99		$	2.05
Discontinued operations, net of taxes	0.04			(0.01		)	(0.01		)	0.11
Net earnings (loss)	$	0.84		$	0.86		$	0.98		$	2.16
Diluted Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders
Earnings (loss) from continuing operations	$	0.79		$	0.86		$	0.98		$	2.03
Discontinued operations, net of taxes	0.04			(0.01		)	(0.01		)	0.11
Net earnings (loss)	$	0.83		$	0.85		$	0.97		$	2.14
Average Shares of Common Stock Outstanding – assuming dilution	428.6			449.7			433.7			448.7
Cash Dividends Per Common Share	$	0.3500		$	0.3000		$	1.0500		$	0.9000
Amounts Attributable to International Paper Company Common Shareholders
Earnings (loss) from continuing operations	$	339		$	387		$	425		$	909
Discontinued operations, net of taxes	16			(5		)	(4		)	50
Net earnings (loss)	$	355		$	382		$	421		$	959

The accompanying notes are an integral part of these consolidated financial statements.

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INTERNATIONAL PAPER COMPANY

Consolidated Statement of Comprehensive Income

(Unaudited)

(In millions)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014			2013
Net Earnings (Loss)	$	349		$	376	$	408		$	948
Other Comprehensive Income (Loss), Net of Tax:
Amortization of pension and post-retirement prior service costs and net loss:
U.S. plans	60			76		181			230
Pension and postretirement liability adjustments:
U.S. plans	—			103		(106		)	103
Non-U.S. plans	(1		)	—		2			—
Change in cumulative foreign currency translation adjustment	(492		)	34		(399		)	(312		)
Net gains/losses on cash flow hedging derivatives:
Net gains (losses) arising during the period	1			7		17			(3		)
Reclassification adjustment for (gains) losses included in net earnings (loss)	(7		)	4		(6		)	(5		)
Total Other Comprehensive Income (Loss), Net of Tax	(439		)	224		(311		)	13
Comprehensive Income (Loss)	(90		)	600		97			961
Net (earnings) loss attributable to noncontrolling interests	6			6		13			11
Other comprehensive (income) loss attributable to noncontrolling interests	2			—		5			15
Comprehensive Income (Loss) Attributable to International Paper Company	$	(82	)	$	606	$	115		$	987

The accompanying notes are an integral part of these consolidated financial statements.

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INTERNATIONAL PAPER COMPANY

Consolidated Balance Sheet

(In millions)



	September 30, 2014			December 31, 2013
	(unaudited)
Assets
Current Assets
Cash and temporary investments	$	1,718		$	1,802
Accounts and notes receivable, net	3,293			3,756
Inventories	2,493			2,825
Deferred income tax assets	334			302
Other current assets	301			340
Total Current Assets	8,139			9,025
Plants, Properties and Equipment, net	12,897			13,672
Forestlands	547			557
Investments	530			733
Financial Assets of Special Purpose Entities (Note 13)	2,141			2,127
Goodwill	3,931			3,987
Deferred Charges and Other Assets	1,218			1,427
Total Assets	$	29,403		$	31,528
Liabilities and Equity
Current Liabilities
Notes payable and current maturities of long-term debt	$	724		$	661
Accounts payable	2,619			2,900
Accrued payroll and benefits	449			511
Other accrued liabilities	1,078			1,055
Total Current Liabilities	4,870			5,127
Long-Term Debt	8,988			8,827
Nonrecourse Financial Liabilities of Special Purpose Entities (Note 13)	2,049			2,043
Deferred Income Taxes	3,600			3,765
Pension Benefit Obligation	1,961			2,205
Postretirement and Postemployment Benefit Obligation	374			412
Other Liabilities	584			702
Redeemable Noncontrolling Interest	—			163
Equity
Common stock, $1 par value, 2014 – 448.7 shares and 2013 – 447.2 shares	449			447
Paid-in capital	6,158			6,463
Retained earnings	4,446			4,446
Accumulated other comprehensive loss	(3,065		)	(2,759		)
	7,988			8,597
Less: Common stock held in treasury, at cost, 2014 – 25.202 shares and 2013 – 10.868 shares	1,172			492
Total Shareholders’ Equity	6,816			8,105
Noncontrolling interests	161			179
Total Equity	6,977			8,284
Total Liabilities and Equity	$	29,403		$	31,528

The accompanying notes are an integral part of these consolidated financial statements.

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INTERNATIONAL PAPER COMPANY

Consolidated Statement of Cash Flows

(Unaudited)

(In millions)



	Nine Months Ended September 30,
	2014			2013
Operating Activities
Net earnings (loss)	$	408		$	948
Depreciation, amortization and cost of timber harvested	1,068			1,176
Deferred income tax provision, net	(139		)	55
Restructuring and other charges	865			131
Pension plan contributions	(353		)	(31		)
Net (gains) losses on sales and impairments of businesses	—			1
Net bargain purchase gain on acquisition of business	—			(13		)
Equity (earnings) loss, net	64			30
Periodic pension expense, net	290			413
Other, net	66			(134		)
Changes in current assets and liabilities
Accounts and notes receivable	(214		)	(357		)
Inventories	(118		)	(121		)
Accounts payable and accrued liabilities	(49		)	(10		)
Interest payable	16			(8		)
Other	29			(89		)
Cash Provided By (Used For) Operations	1,933			1,991
Investment Activities
Invested in capital projects	(961		)	(759		)
Acquisitions, net of cash acquired	—			(507		)
Proceeds from spinoff	385			733
Proceeds from sale of fixed assets	49			76
Other	(31		)	(32		)
Cash Provided By (Used For) Investment Activities	(558		)	(489		)
Financing Activities
Repurchases of common stock and payments of restricted stock tax withholding	(891		)	(70		)
Issuance of common stock	59			288
Issuance of debt	1,970			212
Reduction of debt	(1,762		)	(637		)
Change in book overdrafts	20			(65		)
Dividends paid	(451		)	(400		)
Acquisition of redeemable noncontrolling interest	(114		)	—
Debt tender premiums paid	(269		)	—
Redemption of preferred securities	—			(150		)
Other	(4		)	(28		)
Cash Provided By (Used For) Financing Activities	(1,442		)	(850		)
Effect of Exchange Rate Changes on Cash	(17		)	(8		)
Change in Cash and Temporary Investments	(84		)	644
Cash and Temporary Investments
Beginning of period	1,802			1,302
End of period	$	1,718		$	1,946

The accompanying notes are an integral part of these consolidated financial statements.

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INTERNATIONAL PAPER COMPANY

Condensed Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and in accordance with the instructions to Form 10-Q and, in the opinion of management, include all adjustments that are necessary for the fair presentation of International Paper Company’s (International Paper’s, the Company’s or our) financial position, results of operations, and cash flows for the interim periods presented. Except as disclosed herein, such adjustments are of a normal, recurring nature. Results for the first nine months of the year may not necessarily be indicative of full year results. It is suggested that these consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 which have previously been filed with the Securities and Exchange Commission.

On July 1, 2014, International Paper completed the spinoff of its distribution solutions business, xpedx, and xpedx's merger with Unisource Worldwide, Inc., with the combined companies now operating as Veritiv Corporation (Veritiv). As a result of the spinoff, all current and prior year amounts have been adjusted to reflect xpedx as a discontinued operation. See Note 8 for further discussion.

NOTE 2 - RECENT ACCOUNTING DEVELOPMENTS

Share-Based Payment

In June 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That Performance Target Could Be Achieved After the Requisite Service Period." This guidance provides that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. As such, an entity should not record compensation expense related to an award for which transfer to the employee is contingent on the entity's satisfaction of a performance target until it becomes probable that the performance target will be met. This ASU is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those years. The Company is currently evaluating the provisions of this guidance.

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." The guidance replaces most existing revenue recognition guidance and provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years, and permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the provisions of this guidance.

Discontinued Operations

In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. This guidance should be applied prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date which is fiscal years beginning on or after December 15, 2014, and interim periods within those annual periods. The Company chose to early adopt the provisions of this guidance in the third quarter 2014. See Note 8 for further discussion and disclosures.

Hedge Accounting

In July 2013, the FASB issued ASU 2013-10, "Derivatives and Hedging," which amends ASC 815, "Derivatives and Hedging," to allow entities to use the Fed Funds Swap Rate, in addition to U.S. Treasury rates and LIBOR, as a benchmark interest rate in accounting for fair value and cash flow hedges in the United States. The ASU also eliminates the provision that prohibits the use of different benchmark rates for similar hedges except in rare and justifiable circumstances. The ASU is effective prospectively for qualifying new hedging relationships entered into on or after July 17, 2013 and for hedging relationships redesignated on or after that date. The adoption of the provisions of this guidance did not have a material effect on the Company's consolidated financial statements.

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Income Taxes

In July 2013, the FASB also issued ASU 2013-11, "Income Taxes," which provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance should be applied to all unrealized tax benefits that exist as of the effective date which is fiscal years beginning after December 15, 2013, and interim periods within those years. The adoption of the provisions of this guidance did not have a material effect on the Company's consolidated financial statements.

NOTE 3 - EQUITY

A summary of the changes in equity for the nine-month periods ended September 30, 2014 and 2013 is provided below:



	Nine Months Ended September 30,
	2014									2013
In millions, except per share amounts	Total International Paper Shareholders’ Equity			Noncontrolling Interests			Total Equity			Total International Paper Shareholders’ Equity			Noncontrolling Interests			Total Equity
Balance, January 1	$	8,105		$	179		$	8,284		$	6,304		$	332		$	6,636
Issuance of stock for various plans, net	221			—			221			418			—			418
Repurchase of stock	(891		)	—			(891		)	(70		)	—			(70		)
Common stock dividends ($1.05 per share in 2014 and $0.9000 per share in 2013)	(462		)	—			(462		)	(409		)	—			(409		)
xpedx spinoff	(313		)	—			(313		)	—			—			—
Dividends paid to noncontrolling interests by subsidiary	—			—			—			—			(1		)	(1		)
Noncontrolling interests of acquired entities, net	—			—			—			—			7			7
Acquisition of redeemable noncontrolling interests	47			—			47			—			—			—
Remeasurement of redeemable noncontrolling interest	(6		)	—			(6		)	—			—			—
Comprehensive income (loss)	115			(18		)	97			987			(26		)	961
Ending Balance, September 30	$	6,816		$	161		$	6,977		$	7,230		$	312		$	7,542

NOTE 4 - OTHER COMPREHENSIVE INCOME

The following table presents changes in AOCI for the three-month period ended September 30, 2014:



In millions	Defined Benefit Pension and Postretirement Items (a)			Change in Cumulative Foreign Currency Translation Adjustments (a)			Net Gains and Losses on Cash Flow Hedging Derivatives (a)			Total (a)
Balance, July 1, 2014	$	(2,087	)	$	(553	)	$	12		$	(2,628	)
Other comprehensive income (loss) before reclassifications	(1		)	(475		)	1			(475		)
Amounts reclassified from accumulated other comprehensive income	60			(17		)	(7		)	36
Net Current Period Other Comprehensive Income (Loss)	59			(492		)	(6		)	(439		)
Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest	—			2			—			2
Balance, September 30, 2014	$	(2,028	)	$	(1,043	)	$	6		$	(3,065	)


(a)	All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.

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The following table presents changes in AOCI for the three-month period ended September 30, 2013:



In millions	Defined Benefit Pension and Postretirement Items (a)			Change in Cumulative Foreign Currency Translation Adjustments (a)			Net Gains and Losses on Cash Flow Hedging Derivatives (a)			Total (a)
Balance, July 1, 2013	$	(3,442	)	$	(592	)	$	(17	)	$	(4,051	)
Other comprehensive income (loss) before reclassifications	103			34			7			144
Amounts reclassified from accumulated other comprehensive income	76			—			4			80
Net Current Period Other Comprehensive Income (Loss)	179			34			11			224
Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest	—			15			—			15
Balance, September 30, 2013	$	(3,263	)	$	(543	)	$	(6	)	$	(3,812	)


(a)	All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.

The following table presents changes in AOCI for the nine-month period ended September 30, 2014:



In millions	Defined Benefit Pension and Postretirement Items (a)			Change in Cumulative Foreign Currency Translation Adjustments (a)			Net Gains and Losses on Cash Flow Hedging Derivatives (a)			Total (a)
Balance, January 1, 2014	$	(2,105	)	$	(649	)	$	(5	)	$	(2,759	)
Other comprehensive income (loss) before reclassifications	(104		)	(382		)	17			(469		)
Amounts reclassified from accumulated other comprehensive income	181			(17		)	(6		)	158
Net Current Period Other Comprehensive Income (Loss)	77			(399		)	11			(311		)
Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest	—			5			—			5
Balance, September 30, 2014	$	(2,028	)	$	(1,043	)	$	6		$	(3,065	)


(a)	All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.

The following table presents changes in AOCI for the nine-month period ended September 30, 2013:



In millions	Defined Benefit Pension and Postretirement Items (a)			Change in Cumulative Foreign Currency Translation Adjustments (a)			Net Gains and Losses on Cash Flow Hedging Derivatives (a)			Total (a)
Balance, January 1, 2013	$	(3,596	)	$	(246	)	$	2		$	(3,840	)
Other comprehensive income (loss) before reclassifications	103			(329		)	(3		)	(229		)
Amounts reclassified from accumulated other comprehensive income	230			17			(5		)	242
Net Current Period Other Comprehensive Income (Loss)	333			(312		)	(8		)	13
Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest	—			15			—			15
Balance, September 30, 2013	$	(3,263	)	$	(543	)	$	(6	)	$	(3,812	)


(a)	All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.

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The following table presents details of the reclassifications out of AOCI for the three-month and nine-month periods ended September 30:



Details About Accumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income (a)													Location of Amount Reclassified from AOCI
	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
In millions:
Defined benefit pension and postretirement items:
Prior-service costs	$	(4	)	$	(2	)	$	(13	)	$	(7	)	(b)	Cost of products sold
Actuarial gains (losses)	(95		)	(123		)	(284		)	(370		)	(b)	Cost of products sold
Total pre-tax amount	(99		)	(125		)	(297		)	(377		)
Tax (expense) benefit	39			49			116			147
Net of tax	(60		)	(76		)	(181		)	(230		)

Change in cumulative foreign currency translation adjustments:
Business acquisition/divestitures	17			—			17			(17		)		Net bargain purchase loss on acquisition of business
Tax (expense)/benefit	—			—			—			—
Net of tax	17			—			17			(17		)

Net gains and losses on cash flow hedging derivatives:
Foreign exchange contracts	10			(6		)	6			7			(c)	Cost of products sold
Total pre-tax amount	10			(6		)	6			7
Tax (expense)/benefit	(3		)	2			—			(2		)
Net of tax	7			(4		)	6			5
Total reclassifications for the period	$	(36	)	$	(80	)	$	(158	)	$	(242	)

(a)Amounts in parentheses indicate debits to earnings/loss.


(b)	These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 16 for additional details).


(c)	This accumulated other comprehensive income component is included in our derivatives and hedging activities (see Note 15 for additional details).

NOTE 5 - EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS

Basic earnings per common share are computed by dividing earnings by the weighted average number of common shares outstanding. Diluted earnings per common share are computed assuming that all potentially dilutive securities, including “in-the-money” stock options, were converted into common shares. A reconciliation of the amounts included in the computation of earnings (loss) per common share, and diluted earnings (loss) per common share is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
In millions, except per share amounts	2014		2013		2014		2013
Earnings (loss) from continuing operations	$	339	$	387	$	425	$	909
Effect of dilutive securities (a)	—		—		—		—
Earnings (loss) from continuing operations – assuming dilution	$	339	$	387	$	425	$	909
Average common shares outstanding	425.3		445.9		429.9		444.1
Effect of dilutive securities (a)
Restricted stock performance share plan	3.3		3.6		3.7		4.3
Stock options	—		0.2		0.1		0.3
Average common shares outstanding – assuming dilution	428.6		449.7		433.7		448.7
Basic earnings (loss) from continuing operations per common share	$	0.80	$	0.87	$	0.99	$	2.05
Diluted earnings (loss) from continuing operations per common share	$	0.79	$	0.86	$	0.98	$	2.03


(a)	Securities are not included in the table in periods when antidilutive.

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NOTE 6 - RESTRUCTURING AND OTHER CHARGES

2014: During the three months ended September 30, 2014, restructuring and other charges totaling $24 million before taxes ($15 million after taxes) were recorded. Details of these charges were as follows:



	Three Months Ended September 30, 2014
In millions	Before-Tax Charges		After-Tax Charges
Courtland mill shutdown (a)	$	3	$	2
Early debt extinguishment costs	13		8
EMEA packaging restructuring	5		3
Other	3		2
Total	$	24	$	15

During the three months ended June 30, 2014, restructuring and other charges totaling $307 million before taxes ($188 million after taxes) were recorded. Details of these charges were as follows:



	Three Months Ended June 30, 2014
In millions	Before-Tax Charges			After-Tax Charges
Courtland mill shutdown (a)	$	49		$	30
Early debt extinguishment costs	262			160
Brazil packaging	(7		)	(5		)
Other	3			3
Total	$	307		$	188

During the three months ended March 31, 2014, restructuring and other charges totaling $499 million before taxes ($305 million after taxes) were recorded. Details of these charges were as follows:



	Three Months Ended March 31, 2014
In millions	Before-Tax Charges		After-Tax Charges
Courtland mill shutdown (a)	$	495	$	302
Other	4		3
Total	$	499	$	305

(a)

During 2013, the Company deferred accelerating depreciation for certain assets as we evaluated possible alternative uses by one of our other businesses. The net book value of these assets at December 31, 2013 was approximately $470 million. During the first quarter of 2014, we completed our evaluation and concluded that there were no alternative uses for these assets. We recognized approximately $430 million and approximately $36 million of accelerated depreciation related to these assets during the first quarter of 2014 and second quarter of 2014, respectively. Other components of the second quarter of 2014 Courtland mill shutdown cost include site closure costs of $7 million, and severance charges of $6 million. Other components of the first quarter of 2014 Courtland mill shutdown cost include site closure costs of $30 million, severance charges of $15 million and $20 million of other non-cash charges. Components of the third quarter of 2014 Courtland mill shutdown cost include severance charges of $2 million.

2013: During the three months ended September 30, 2013, restructuring and other charges totaling $59 million before taxes ($36 million after taxes) were recorded. Details of these charges were as follows:



	Three Months Ended September 30, 2013
In millions	Before-Tax Charges			After-Tax Charges
Early debt extinguishment costs	$	15		$	9
Courtland mill shutdown	51			31
Bellevue box plant facility sale	(9		)	(6		)
Other	2			2
Total	$	59		$	36

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During the three months ended June 30, 2013, restructuring and other charges totaling a gain of $24 million before taxes ($14 million after taxes) were recorded. Details of these charges were as follows:



	Three Months Ended June 30, 2013
In millions	Before-Tax Charges			After-Tax Charges
Early debt extinguishment costs	$	3		$	2
Insurance reimbursements	(30		)	(19		)
Other	3			3
Total	$	(24	)	$	(14	)

During the three months ended March 31, 2013, restructuring and other charges totaling $52 million before taxes ($32 million after taxes) were recorded. Details of these charges were as follows:



	Three Months Ended March 31, 2013
In millions	Before-Tax Charges		After-Tax Charges
Early debt extinguishment costs	$	6	$	4
Augusta paper machine shutdown	44		27
Other	2		1
Total	$	52	$	32

NOTE 7 - ACQUISITIONS AND JOINT VENTURES

Olmuksan

2014: In May 2014, the Company launched a voluntary tender offer for the remaining outstanding 12.6% public shares of Olmuksan. The Company continues to purchase outstanding shares in an effort to obtain 100% ownership status. As of September 30, 2014, the Company owned 91.5% of Olmuksan's outstanding and issued shares.

2013: On January 3, 2013, International Paper completed the acquisition (effective date of acquisition on January 1, 2013) of the shares of its joint venture partner, Sabanci Holding, in the Turkish corrugated packaging company, Olmuksa International Paper Sabanci Ambalaj Sanayi ve Ticaret A.S., now called Olmuksan International Paper Ambalaj Sanayi ve Ticaret A.S. (Olmuksan), for a purchase price of $56 million. The acquired shares represent 43.7% of Olmuksan's shares. Prior to this acquisition, International Paper held a 43.7% equity interest in Olmuksan.

Because the transaction resulted in International Paper becoming the majority shareholder, owning 87.4% of Olmuksan's outstanding and issued shares, its completion triggered a mandatory call for tender of the remaining public shares which began in March 2013 and ended in April 2013, with no shares tendered. As a result, the remaining 12.6% owned by other parties have been considered noncontrolling interests. Olmuksan's financial results have been consolidated with the Company's Industrial Packaging segment beginning January 1, 2013, the effective date on which International Paper obtained majority control of the entity.

Following the transaction, the Company's previously held 43.7% equity interest in Olmuksan was remeasured to a fair value of $75 million, resulting in a gain of $9 million. In addition, the cumulative translation adjustment balance of $17 million relating to the previously held equity interest was reclassified, as expense, to Net bargain purchase gain on acquisition of business in the accompanying consolidated statement of operations, from accumulated other comprehensive income.

The preliminary purchase price allocation indicated that the sum of the cash consideration paid, the fair value of the noncontrolling interest and the fair value of the previously held interest was less than the fair value of the underlying assets by $22 million, resulting in a bargain purchase price gain being recorded on this transaction.

The $17 million reclassification of the cumulative translation balance and $18 million of the estimated bargain purchase gain were recorded in the 2013 first-quarter earnings. The $9 million gain resulting from the measurement of the previously held equity interest and an additional $4 million bargain purchase gain were recorded in 2013 second-quarter earnings and are included in Net bargain purchase gain on acquisition of business line item in the accompanying consolidated statement of operations.

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The following table summarizes the final allocation of the purchase price to the fair value of assets and liabilities acquired as of January 1, 2013, which was completed in the fourth quarter of 2013.



In millions
Cash and temporary investments	$	5
Accounts and notes receivable	72
Inventory	31
Other current assets	2
Plants, properties and equipment	106
Investments	11
Total assets acquired	227
Notes payable and current maturities of long-term debt	17
Accounts payable and accrued liabilities	27
Deferred income tax liability	4
Postretirement and postemployment benefit obligation	6
Total liabilities assumed	54
Noncontrolling interest	18
Net assets acquired	$	155

Pro forma information related to the acquisition of Olmuksan has not been included as it does not have a material effect on the Company's consolidated results of operations.

Orsa IP

2014: On April 8, 2014, the Company acquired the remaining 25% of shares of Orsa International Paper Embalagens S.A. (Orsa IP) from its joint venture partner, Jari Celulose, Papel e Embalagens S.A. (Jari), a Grupo Orsa company, for approximately $127 million, of which $105 million was paid in cash with the remaining $22 million held back pending satisfaction of certain indemnification obligations by Jari. An additional $11 million, which was initially not included in the purchase price, was placed in an escrow account pending resolution of certain open matters. During the third quarter, these open matters were successfully resolved, which resulted in $9 million paid out of escrow to Jari and correspondingly added to the final purchase consideration. The remaining $2 million was released back to the Company. During the second quarter of 2014, the Company reversed the $168 million of Redeemable noncontrolling interest included on the March 31, 2014 consolidated balance sheet with the net difference between this balance and the 25% purchase price being reflected as an increase to Retained earnings on the consolidated balance sheet.

2013: On January 14, 2013, International Paper and Jari formed Orsa IP with International Paper holding a 75% stake. The value of International Paper's initial investment in Orsa IP was approximately $471 million. Because International Paper acquired majority control of the joint venture, Orsa IP's financial results have been consolidated with our Industrial Packaging segment from the date of formation on January 14, 2013. The 25% owned by Jari was considered a redeemable noncontrolling interest and met the requirements to be classified outside permanent equity. As such, the Company reported $163 million in Redeemable noncontrolling interest in the December 31, 2013 consolidated balance sheet.

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The following table summarizes the final allocation of the purchase price to the fair value of assets and liabilities acquired as of January 14, 2013, which was completed in the fourth quarter of 2013.



In millions
Cash and temporary investments	$	16
Accounts and notes receivable, net	5
Inventory	27
Plants, properties and equipment	290
Goodwill	260
Other intangible assets	110
Other long-term assets	2
Total assets acquired	710
Accounts payable and accrued liabilities	68
Deferred income tax liability	37
Total liabilities assumed	105
Noncontrolling interest	134
Net assets acquired	$	471

The identifiable intangible assets acquired in connection with the Orsa IP acquisition included the following:



In millions	Estimated Fair Value		Average Remaining Useful Life
			(at acquisition date)
Asset Class:
Customer relationships	$	88	12 years
Trademark	3		6 years
Wood supply agreement	19		25 years
Total	$	110

Pro forma information related to the acquisition of Orsa IP has not been included as it does not have a material effect on the Company's consolidated results of operations.

Due to the complex organizational structure of Orsa IP's operations, and the extended time required to prepare consolidated financial information in accordance with accounting principles generally accepted in the United States, the Company reports its share of Orsa IP's operating results on a one-month lag basis.

NOTE 8 - DIVESTITURES / SPINOFF

Discontinued Operations

2014: On July 1, 2014, International Paper completed the spinoff of its distribution solutions business, xpedx, and xpedx's merger with Unisource Worldwide, Inc., with the combined companies now operating as Veritiv Corporation (Veritiv). The xpedx business had historically represented the Company's Distribution reportable segment.

The spinoff was accomplished by the contribution of the xpedx business to Veritiv and the distribution of 8,160,000 shares of Veritiv common stock on a pro-rata basis to International Paper shareholders. International Paper received a payment of approximately $385 million, subject to final working capital, net debt adjustments, financed with new debt in Veritiv's capital structure. A payment of $25 million for the final working capital, net debt adjustments was received in the fourth quarter of 2014.

All current and historical operating results for xpedx are included in Discontinued operations, net of tax, in the consolidated statement of operations. The following summarizes the major classes of line items comprising Earnings (Loss) Before Income Taxes and Equity Earnings reconciled to Discontinued Operations, net of tax, related to the xpedx spinoff for all periods presented in the consolidated statement of operations:

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	Three Months Ended September 30,					Nine Months Ended September 30,
In millions	2014			2013		2014			2013
Net Sales	$	—		$	1,431	$	2,604		$	4,196
Cost and Expenses
Cost of products sold	—			1,265		2,309			3,705
Selling and administrative expenses	—			99		191			302
Depreciation, amortization and cost of timber harvested	—			4		9			12
Distribution expenses	—			36		69			112
Restructuring and other charges	(11		)	17		24			44
Other, net	—			2		3			6
Earnings (Loss) Before Income Taxes and Equity Earnings	11			8		(1		)	15
Income tax provision (benefit)	(3		)	3		—			5
Discontinued Operations, Net of Taxes (a)	$	14		$	5	$	(1	)	$	10


(a)	These amounts, along with those disclosed below related to the Temple-Inland Building Products divestitures, are included in Discontinued operations, net of tax, in the consolidated statement of operations.

Total cash provided by operations related to xpedx of $29 million and $48 million for the nine months ended September 30, 2014 and 2013, respectively, is included in Cash Provided By (Used For) Operations in the consolidated statement of cash flows. Total cash provided by investing activities related to xpedx of $3 million and $11 million for the nine months ended September 30, 2014 and 2013, respectively, is included in Cash Provided By (Used For) Investing Activities in the consolidated statement of cash flows.

2013: On April 1, 2013, the Company finalized the sale of Temple-Inland's 50% interest in Del-Tin Fiber L.L.C. (Del-Tin) to joint venture partner Deltic Timber Corporation (Deltic) for $20 million in assumed liabilities and cash.

On July 19, 2013, the Company finalized the sale of its Temple-Inland Building Products division to Georgia-Pacific Building Products, LLC for approximately $726 million in cash.

Related to the these divestitures, the Company recorded income of $2 million and a loss of $10 million for the three months ended September 30, 2014 and 2013, respectively, and a loss of $3 million and income of $40 million for the nine months ended September 30, 2014 and 2013, respectively. These amounts are included in Discontinued operations, net of tax in the consolidated statement of operations.

NOTE 9 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

Temporary Investments



In millions	September 30, 2014		December 31, 2013
Temporary investments	$	1,245	$	1,398

Accounts and Notes Receivable



In millions	September 30, 2014		December 31, 2013
Accounts and notes receivable, net:
Trade	$	3,056	$	3,497
Other	237		259
Total	$	3,293	$	3,756

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Inventories



In millions	September 30, 2014		December 31, 2013
Raw materials	$	465	$	372
Finished pulp, paper and packaging	1,436		1,834
Operating supplies	576		572
Other	16		47
Total	$	2,493	$	2,825

Depreciation Expense



	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2014		2013		2014		2013
Depreciation expense	$	333	$	363	$	986	$	1,076

Valuation Accounts

Certain valuation accounts were as follows:



In millions	September 30, 2014		December 31, 2013
Accumulated depreciation	$	20,762	$	20,074
Allowance for doubtful accounts	86		109

There was no material activity related to asset retirement obligations during either of the nine months ended September 30, 2014 or 2013.

Interest

Cash payments related to interest were as follows:



	Nine Months Ended September 30,
In millions	2014		2013
Interest payments	$	503	$	537

Amounts related to interest were as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2014		2013		2014		2013
Interest expense (a)	$	172	$	162	$	512	$	520
Interest income (a)	14		15		47		41
Capitalized interest costs	5		4		17		12


(a)	Interest expense and interest income exclude approximately $10 million and $29 million for the three months and nine months ended September 30, 2014 and $11 million and $35 million for the three months and nine months ended September 30, 2013, respectively, related to investments in and borrowings from variable interest entities for which the Company has a legal right of offset (see Note 13).

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Postretirement Benefit Expense

The components of the Company’s postretirement benefit expense were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
In millions	2014			2013			2014			2013
Service cost	$	—		$	—		$	1		$	1
Interest cost	3			4			10			11
Actuarial loss	2			2			4			5
Amortization of prior service credit	(3		)	(6		)	(10		)	(18		)
Net postretirement benefit expense	$	2		$	—		$	5		$	(1	)

Other

Selling and administrative expenses included $1 million ($1 million after taxes) and $15 million ($9 million after taxes) for the three months and nine months ended September 30, 2014 and $24 million ($15 million after taxes) and $50 million ($31 million after taxes) for the three months and nine months ended September 30, 2013 for integration costs associated with the Temple-Inland acquisition.

NOTE 10 - GOODWILL AND OTHER INTANGIBLES

Goodwill

The following table presents changes in goodwill balances as allocated to each business segment for the nine-month period ended September 30, 2014:



In millions	Industrial Packaging			Printing Papers				Consumer Packaging			Total
Balance as of January 1, 2014
Goodwill	$	3,430		$	2,311			$	1,787		$	7,528
Accumulated impairment losses (a)	—			(1,877		)		(1,664		)	(3,541		)
	3,430			434				123			3,987
Reclassifications and other (b)	(14		)	(24		)		(2		)	(40		)
Additions/reductions	—			(16		)	(c)	—			(16		)
Balance as of September 30, 2014
Goodwill	3,416			2,271				1,785			7,472
Accumulated impairment losses (a)	—			(1,877		)		(1,664		)	(3,541		)
Total	$	3,416		$	394			$	121		$	3,931


(a)	Represents accumulated goodwill impairment charges since the adoption of ASC 350, “Intangibles – Goodwill and Other” in 2002.


(b)	Represents the effects of foreign currency translations and reclassifications.


(c)	Reflects a reduction from tax benefits generated by the deduction of goodwill amortization for tax purposes in Brazil.

At December 31, 2013, there was $400 million of goodwill and $400 million of accumulated impairment losses included on the consolidated balance sheet, associated with the Distribution reportable segment. Effective July 1, 2014, the Company completed the spinoff of its xpedx business which had historically represented the Company's Distribution reportable segment. Following the spinoff of xpedx, the assets and liabilities of this business have been adjusted off of the consolidated balance sheet and are not included on the consolidated balance sheet as of September 30, 2014.

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Other Intangibles

Identifiable intangible assets comprised the following:



	September 30, 2014				December 31, 2013
In millions	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Customer relationships and lists	$	622	$	185	$	602	$	139
Non-compete agreements	76		52		76		46
Tradenames, patents and trademarks	61		42		67		33
Land and water rights	82		9		76		5
Fuel and power agreements	5		3		7		2
Software	23		21		17		15
Other	42		17		75		32
Total	$	911	$	329	$	920	$	272

The Company recognized the following amounts as amortization expense related to intangible assets:



	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2014		2013		2014		2013
Amortization expense related to intangible assets	$	19	$	28	$	55	$	59

NOTE 11 - INCOME TAXES

International Paper made income tax payments, net of refunds, as follows:



	Nine Months Ended September 30,
In millions	2014		2013
Income tax payments, net	$	193	$	224

The following table presents a rollforward of unrecognized tax benefits and related accrued estimated interest and penalties for the nine months ended September 30, 2014:



In millions	Unrecognized Tax Benefits			Accrued Estimated Interest and Tax Penalties
Balance at December 31, 2013	$	(161	)	$	(54	)
Activity for three months ended March 31, 2014	5			9
Activity for the three months ended June 30, 2014	—			2
Activity for the three months ended September 30, 2014	6			3
Balance at September 30, 2014	$	(150	)	$	(40	)

The Company currently estimates, that as a result of ongoing discussions, pending tax settlements and expirations of statutes of limitations, the amount of unrecognized tax benefits could be reduced by approximately $4 million during the next 12 months.

Included in the Company’s income tax provisions for the nine months ended September 30, 2014 and 2013, are $351 million and $179 million of income tax benefits, respectively, related to special items. The components of the net provision related to special items were as follows:



	Nine Months Ended September 30,
In millions	2014			2013
Special items	$	(360	)	$	(59	)
Tax-related adjustments:
State legislative changes	10			—
IRS audit settlement	—			(122		)
Other	(1		)	2
Income tax provision (benefit) related to special items	$	(351	)	$	(179	)

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NOTE 12 - COMMITMENTS AND CONTINGENCIES

Environmental Proceedings

International Paper has been named as a potentially responsible party in environmental remediation actions under various federal and state laws, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Many of these proceedings involve the cleanup of hazardous substances at large commercial landfills that received waste from many different sources. While joint and several liability is authorized under CERCLA and equivalent state laws, as a practical matter, liability for CERCLA cleanups is typically allocated among the many potential responsible parties. Remedial costs are recorded in the consolidated financial statements when they become probable and reasonably estimable. International Paper has estimated the probable liability associated with these matters to be approximately $95 million in the aggregate at September 30, 2014.

Cass Lake: One of the matters referenced above is a closed wood treating facility located in Cass Lake, Minnesota. During 2009, in connection with an environmental site remediation action under CERCLA, International Paper submitted to the EPA a remediation feasibility study. In June 2011, the EPA selected and published a proposed soil remedy at the site with an estimated cost of $46 million. The overall remediation reserve for the site is currently $50 million to address the selection of an alternative for the soil remediation component of the overall site remedy. In October 2011, the EPA released a public statement indicating that the final soil remedy decision would be delayed. In the unlikely event that the EPA changes its proposed soil remedy and approves instead a more expensive clean-up alternative, the remediation costs could be material, and significantly higher than amounts currently recorded. In October 2012, the Natural Resource Trustees for this site provided notice to International Paper and other potentially responsible parties of their intent to perform a Natural Resource Damage Assessment. It is premature to predict the outcome of the assessment or to estimate a loss or range of loss, if any, which may be incurred.

Other: In addition to the above matters, other remediation costs typically associated with the cleanup of hazardous substances at the Company’s current, closed or formerly-owned facilities, and recorded as liabilities in the balance sheet, totaled approximately $40 million at September 30, 2014. Other than as described above, completion of required remedial actions is not expected to have a material effect on our consolidated financial statements.

Kalamazoo River: The Company is a potentially responsible party with respect to the Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site (Kalamazoo River Superfund Site) in Michigan. The EPA asserts that the site is contaminated primarily by PCBs as a result of discharges from various paper mills located along the Kalamazoo River, including a paper mill formerly owned by St. Regis Paper Company (St. Regis). The Company is a successor in interest to St. Regis. The Company has not received any orders from the EPA with respect to the site and continues to collect information from the EPA and other parties relative to the site to evaluate the extent of its liability, if any, with respect to the site. Accordingly, it is premature to estimate a loss or range of loss with respect to this site.

Also in connection with the Kalamazoo River Superfund Site, the Company was named as a defendant by Georgia-Pacific Consumer Products LP, Fort James Corporation and Georgia Pacific LLC in a contribution and cost recovery action for alleged pollution at the site. The suit seeks contribution under CERCLA for $79 million in costs purportedly expended by plaintiffs as of the filing of the complaint and for future remediation costs. The suit alleges that a mill, during the time it was allegedly owned and operated by St. Regis, discharged PCB contaminated solids and paper residuals resulting from paper de-inking and recycling. Also named as defendants in the suit are NCR Corporation and Weyerhaeuser Company. In mid-2011, the suit was transferred from the District Court for the Eastern District of Wisconsin to the District Court for the Western District of Michigan. The trial of the initial liability phase took place in February 2013. Weyerhaeuser conceded prior to trial that it was a liable party with respect to the site. In September 2013, an opinion and order was issued in the suit. The order concluded that the Company (as the successor to St. Regis) was not an “operator,” but was an “owner,” of the mill at issue during a portion of the relevant period and is therefore liable under CERCLA. The order also determined that NCR is a liable party as an "arranger for disposal" of PCBs in waste paper that was de-inked and recycled by mills along the Kalamazoo River. The order did not address the Company's responsibility, if any, for costs for which plaintiffs in the suit are seeking recovery. This will be the subject of a separate trial, which has been set for September 2015. The Company thus believes it is premature to predict the outcome or to estimate a loss or range of loss, if any, which may be incurred.

Harris County: International Paper and McGinnis Industrial Maintenance Corporation, a subsidiary of Waste Management, Inc., are potentially responsible parties at the San Jacinto River Waste Pits Superfund Site (San Jacinto Superfund Site) in Harris County, Texas, and have been actively participating in investigation and remediation activities at this Superfund Site. In December 2011, Harris County, Texas filed a suit against the Company in Harris County District Court seeking civil penalties with regard to the alleged discharge of dioxin into the San Jacinto River since 1965 from waste impoundments that are part of the San Jacinto River Superfund Site. Also named as defendants in this action are McGinnis Industrial Maintenance Corporation, Waste Management, Inc. and Waste Management of Texas, Inc. Harris County is seeking civil penalties pursuant to the Texas Water Code and the Texas Administrative Code, which provide for the imposition of civil penalties between $50 and $25,000 per day. Trial began on October 7, 2014. Until a verdict or settlement is reached, it continues to be premature to

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predict the outcome or to estimate our maximum reasonably possible loss. However, we do not believe that material loss is probable.

In October 2012, a civil lawsuit was filed against the same defendants, including the Company, in the District Court of Harris County by approximately 400 local fishermen seeking medical monitoring and damages with regard to the alleged discharge of dioxin into the San Jacinto River since 1965 from waste impoundments that are a part of the San Jacinto Superfund Site. Trial is currently scheduled for January 2015. This case is in the discovery phase and it is therefore premature to predict the outcome or to estimate a loss or range of loss, if any, which may be incurred. In December 2012, residents of an up-river neighborhood filed a civil action against the same defendants, including the Company, in the District Court of Harris County alleging property damage and personal injury from the alleged discharge of dioxin into the San Jacinto River from the San Jacinto Superfund Site. Trial is currently scheduled for February 2015. This case is in the discovery phase and it is therefore premature to predict the outcome or to estimate a loss or range of loss, if any, which may be incurred.

Legal Proceedings

Antitrust: In September 2010, eight containerboard producers, including International Paper and Temple-Inland, were named as defendants in a purported class action complaint that alleged a civil violation of Section 1 of the Sherman Act. The suit is captioned Kleen Products LLC v. Packaging Corp. of America (N.D. Ill.). The complaint alleges that the defendants, beginning in February 2004 through November 2010, conspired to limit the supply and thereby increase prices of containerboard products. The alleged class is all persons who purchased containerboard products directly from any defendant for use or delivery in the United States during the period February 2004 to November 2010. The complaint seeks to recover an unspecified amount of treble actual damages and attorney’s fees on behalf of the purported class. Four similar complaints were filed and have been consolidated in the Northern District of Illinois. Moreover, in January 2011, International Paper was named as a defendant in a lawsuit filed in state court in Cocke County, Tennessee alleging that International Paper violated Tennessee law by conspiring to limit the supply and fix the prices of containerboard from mid-2005 to the present. Plaintiffs in the state court action seek certification of a class of Tennessee indirect purchasers of containerboard products, damages and costs, including attorneys’ fees. The Company disputes the allegations made and is vigorously defending each action. However, because the federal action is in the discovery stage and the Tennessee action is in a preliminary stage, we are unable to predict an outcome or estimate a range of reasonably possible loss.

Beginning in late December 2012, certain purchasers of gypsum board filed a number of purported class action complaints alleging civil violations of Section 1 of the Sherman Act against Temple-Inland and a number of other gypsum manufacturers. The complaints were similar and alleged that the gypsum manufacturers conspired or otherwise reached agreements to: (1) raise prices of gypsum board either from 2008 or 2011 through the present; (2) avoid price erosion by ceasing the practice of issuing job quotes; and (3) restrict supply through downtime and limiting order fulfillment. The alleged classes are all persons who purchased gypsum board and/or gypsum finishing products directly or indirectly from any defendant. The complainants seek to recover unspecified treble actual damages and attorneys' fees on behalf of the purported classes. On April 8, 2013, the Judicial Panel on Multidistrict Litigation ordered transfer of all pending cases to the U.S. District Court for the Eastern District of Pennsylvania for coordinated and consolidated pretrial proceedings, and the direct purchaser plaintiffs and indirect purchaser plaintiffs filed their respective amended consolidated complaints in June 2013. The amended consolidated complaints allege a conspiracy or agreement beginning in or before September 2011. In October 2014, we reached an agreement in principle to settle the U.S. cases for an immaterial amount. This settlement in principle is subject to negotiation and execution of a definitive settlement agreement, which would then be subject to court approval.

In addition, in September 2013, similar purported class actions were filed in courts in Quebec, Canada and Ontario, Canada, with each suit alleging violations of the Canadian Competition Act and seeking damages and injunctive relief. The Company intends to dispute the allegations made and to vigorously defend the litigation. Because these Canadian cases are in a preliminary stage, we are unable to predict an outcome or estimate our maximum reasonably possible loss. However, we do not believe that any material loss is probable.

Tax: The Company was previously being challenged by the Brazil taxing authorities concerning the statute of limitations related to the use of certain tax credits. The Company was previously appealing an unfavorable March 2012 administrative court ruling. During August 2014, the Company settled this claim for $22 million ($11 million after taxes) as part of a tax amnesty program sponsored by the Brazil taxing authorities.

General: The Company is involved in various other inquiries, administrative proceedings and litigation relating to environmental and safety matters, contracts, sales of property, intellectual property, personal injury, labor and employment and other matters, some of which allege substantial monetary damages. While any proceeding or litigation has the element of uncertainty, the Company believes that the outcome of any of the lawsuits or claims that are pending or threatened or all of them combined (other than those that cannot be assessed due to their preliminary nature) will not have a material effect on its consolidated financial statements.

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NOTE 13 - VARIABLE INTEREST ENTITIES AND PREFERRED SECURITIES OF SUBSIDIARIES

Variable Interest Entities

In connection with the 2006 sale of approximately 5.6 million acres of forestlands, International Paper received installment notes (the Timber Notes) totaling approximately $4.8 billion. The Timber Notes, which do not require principal payments prior to their August 2016 maturity, are supported by irrevocable letters of credit obtained by the buyers of the forestlands.

During 2006, International Paper contributed the Timber Notes to newly formed entities (the Borrower Entities) in exchange for Class A and Class B interests in these entities. Subsequently, International Paper contributed its $200 million Class A interests in the Borrower Entities, along with approximately $400 million of International Paper promissory notes, to other newly formed entities (the Investor Entities, and together with the Borrower Entities, the Entities) in exchange for Class A and Class B interests in these entities, and simultaneously sold its Class A interest in the Investor Entities to a third party investor. As a result, at December 31, 2006, International Paper held Class B interests in the Borrower Entities and Class B interests in the Investor Entities valued at approximately $5.0 billion. International Paper did not provide any financial support that was not previously contractually required for the nine months ended September 30, 2014 and the year ended December 31, 2013.

Following the 2006 sale of forestlands and creation of the Entities discussed above, the Timber Notes were used as collateral for borrowings from third party lenders, which effectively monetized the Timber Notes. Provisions of certain loan agreements require any bank issuing letters of credit supporting the Timber Notes to maintain a credit rating at or above a specified threshold. In the event the credit rating of a letter of credit bank is downgraded below the specified threshold, the letters of credit must be replaced within 60 days with letters of credit from a qualifying financial institution or for one of the letter of credit banks, collateral must be posted. The Company, retained to provide management services for the third-party entities that hold the Timber Notes, has, as required by the loan agreements, successfully replaced banks that fell below the specified threshold.

Also during 2006, the Entities acquired approximately $4.8 billion of International Paper debt obligations for cash, resulting in a total of approximately $5.2 billion of International Paper debt obligations held by the Entities at December 31, 2006. The various agreements entered into in connection with these transactions provide that International Paper has, and intends to affect, a legal right to offset its obligation under these debt instruments with its investments in the Entities. Accordingly, for financial reporting purposes, International Paper has offset approximately $5.2 billion of Class B interests in the Entities against $5.4 billion and $5.3 billion of International Paper debt obligations held by these Entities at September 30, 2014 and December 31, 2013, respectively. Despite the offset treatment, these remain debt obligations of International Paper. Remaining borrowings of $60 million and $67 million at September 30, 2014 and December 31, 2013, respectively, are included in Long-term debt in the accompanying consolidated balance sheet. Additional debt related to the above transaction of $107 million and $79 million is included in Notes payable and current maturities of long-term debt at September 30, 2014 and December 31, 2013, respectively.

Activity between the Company and the Entities was as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2014		2013		2014		2013
Revenue (a)	$	10	$	11	$	29	$	35
Expense (a)	18		20		54		61
Cash receipts (b)	10		14		22		33
Cash payments (c)	36		39		73		84


(a)	The net expense related to the Company’s interest in the Entities is included in the accompanying consolidated statement of operations, as International Paper has and intends to affect 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 associated debt obligations discussed above.

Based on an analysis of the Entities discussed above under guidance that considers the potential magnitude of the variability in the structures and which party has a controlling financial interest, International Paper determined that it is not the primary beneficiary of the Entities, and therefore, does not consolidate its investments in these entities. It was also determined that the source of variability in the structures 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 performance of each entity, and concluded International Paper does not have control over significant decisions surrounding the Timber Notes and letters of credit and therefore is not the primary beneficiary. The Company’s maximum exposure to loss

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equals the value of the Timber Notes; however, an analysis performed by the Company concluded the likelihood of this exposure is remote.

The use of the above entities facilitated the monetization of the credit enhanced Timber Notes in a cost effective manner by increasing the borrowing capacity and lowering the interest rate while continuing to preserve the tax deferral that resulted from the forestlands installment sales and the offset accounting treatment described above.

In connection with the acquisition of Temple-Inland in February 2012, two special purpose entities became wholly-owned subsidiaries of International Paper.

In October 2007, Temple-Inland sold 1.55 million acres of timberland for $2.38 billion. The total consideration consisted almost entirely of notes due in 2027 issued by the buyer of the timberland, 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 September 30, 2014, the fair value of the notes was $2.23 billion. These notes are classified as Level 2 within the fair value hierarchy, which is further defined in Note 14 in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

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. 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 us. 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 September 30, 2014, the fair value of this debt was $2.12 billion. This debt is classified as Level 2 within the fair value hierarchy, which is further defined in Note 14 in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

Activity between the Company and the 2007 financing entities was as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2014		2013		2014		2013
Revenue (a)	$	6	$	6	$	19	$	20
Expense (b)	6		7		19		22
Cash receipts (c)	2		2		5		6
Cash payments (d)	4		5		13		16


(a)	The revenue is included in Interest expense, net in the accompanying consolidated statement of operations and includes approximately $5 million and $14 million for the three months and nine months ended September 30, 2014 and 2013, respectively, of accretion income for the amortization of the purchase accounting adjustment on 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 approximately $2 million and $5 million for the three months and nine months ended September 30, 2014 and 2013, 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 1.5 million acres of forestlands in the southern United States, was International Paper’s primary vehicle for sales of southern forestlands. As of September 30, 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 for the nine months ended June 30, 2013. The expense related to these preferred securities is shown in Net earnings (loss) attributable to noncontrolling interests in the accompanying consolidated statement of operations.

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NOTE 14 - DEBT

Amounts related to early debt extinguishment during the three months and nine months ended September 30, 2014 and 2013 were as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2014		2013		2014		2013
Early debt reductions (a)	$	262	$	442	$	1,301	$	500
Pre-tax early debt extinguishment costs (b)	13		15		275		24

(a)

Reductions related to notes with interest rates ranging from 4.75% to 9.38% with original maturities from 2015 to 2027 and from 5.45% to 7.40% with original maturities from 2014 to 2033 for the three months ended September 30, 2014 and 2013, respectively, and from 4.75% to 9.38% with original maturities from 2018 to 2029 and from 5.20% to 7.95% with original maturities from 2014 to 2033 for the nine months ended September 30, 2014 and 2013, respectively.


(b)	Amounts are included in Restructuring and other charges in the accompanying consolidated statements of operations.

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 $957 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 $257 million of cash premiums, are included in Restructuring and other charges in the accompanying consolidated statement of operations for the nine months ended September 30, 2014.

During the second quarter of 2014, International Paper borrowed $225 million under a receivable securitization facility at a rate of 0.90%. Prior to June 30, 2014, International Paper fully repaid the $225 million borrowed.

Subsequent to September 30, 2014, the Company repaid approximately $160 million of variable rate debt with an original maturity of February 2017.

During the first quarter of 2013, International Paper borrowed $260 million under a receivable securitization facility at a rate of 0.95% payable monthly. Prior to June 30, 2013, International Paper fully repaid the $260 million borrowed.

At September 30, 2014, the fair value of International Paper’s $9.7 billion of debt was approximately $10.7 billion. The fair value of the Company’s long-term debt is estimated based on the quoted market prices for the same or similar issues. International Paper’s long-term debt is classified as Level 2 within the fair value hierarchy, which is further defined in Note 14 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At September 30, 2014, the Company held long-term credit ratings of BBB (stable outlook) and Baa2 (stable outlook) by S&P and Moody’s, respectively.

NOTE 15 - DERIVATIVES AND HEDGING ACTIVITIES

As a multinational company we are exposed to market risks, such as changes in interest rates, currency exchanges rates and commodity prices.

For detailed information regarding the Company’s hedging activities and related accounting, refer to Note 14 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

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The notional amounts of qualifying and non-qualifying financial instruments used in hedging transactions were as follows:



In millions	September 30, 2014	December 31, 2013
Derivatives in Cash Flow Hedging Relationships:
Foreign exchange contracts (Sell / Buy; denominated in sell notional): (a)
Brazilian real / U.S. dollar - Forward	282	502
British pounds / Brazilian real – Forward	7	17
European euro / Brazilian real – Forward	13	27
European euro / Polish zloty – Forward	228	252
U.S. dollar / Brazilian real – Forward	127	290
U.S. dollar / Brazilian real – Zero-cost collar	—	18
Derivatives in Fair Value Hedging Relationships:
Interest rate contracts (in USD)	230	175
Derivatives Not Designated as Hedging Instruments:
Foreign exchange contracts (Sell / Buy; denominated in sell notional): (b)
Indian rupee / U.S. dollar - Forward	—