Edgar Filing: INTERNATIONAL PAPER CO /NEW/

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, 2015

¨ 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 30, 2015 was 414,566,922.

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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, 2015 and 2014	1

	Consolidated Statement of Comprehensive Income - Three Months and Nine Months Ended September 30, 2015 and 2014	2

	Consolidated Balance Sheet - September 30, 2015 and December 31, 2014	3

	Consolidated Statement of Cash Flows - Nine Months Ended September 30, 2015 and 2014	4

	Condensed Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41

Item 4.	Controls and Procedures	41

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 6.	Exhibits	43

Signatures		44

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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,
	2015			2014			2015			2014
Net Sales	$	5,691		$	6,051		$	16,922		$	17,674
Costs and Expenses
Cost of products sold	3,891			4,055			11,703			12,149
Selling and administrative expenses	417			467			1,226			1,331
Depreciation, amortization and cost of timber harvested	329			358			980			1,060
Distribution expenses	334			394			1,058			1,137
Taxes other than payroll and income taxes	39			43			127			137
Restructuring and other charges	25			24			219			830
Impairment of business	186			—			186			—
Interest expense, net	141			158			422			465
Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings	329			552			1,001			565
Income tax provision (benefit)	106			147			346			89
Equity earnings (loss), net of taxes	(13		)	(72		)	84			(64		)
Earnings (Loss) From Continuing Operations	210			333			739			412
Discontinued operations, net of taxes	—			16			—			(4		)
Net Earnings (Loss)	210			349			739			408
Less: Net earnings (loss) attributable to noncontrolling interests	(10		)	(6		)	(21		)	(13		)
Net Earnings (Loss) Attributable to International Paper Company	$	220		$	355		$	760		$	421
Basic Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders
Earnings (loss) from continuing operations	$	0.53		$	0.80		$	1.81		$	0.99
Discontinued operations, net of taxes	—			0.04			—			(0.01		)
Net earnings (loss)	$	0.53		$	0.84		$	1.81		$	0.98
Diluted Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders
Earnings (loss) from continuing operations	$	0.53		$	0.79		$	1.80		$	0.98
Discontinued operations, net of taxes	—			0.04			—			(0.01		)
Net earnings (loss)	$	0.53		$	0.83		$	1.80		$	0.97
Average Shares of Common Stock Outstanding – assuming dilution	417.5			428.6			421.9			433.7
Cash Dividends Per Common Share	$	0.4000		$	0.3500		$	1.2000		$	1.0500
Amounts Attributable to International Paper Company Common Shareholders
Earnings (loss) from continuing operations	$	220		$	339		$	760		$	425
Discontinued operations, net of taxes	—			16			—			(4		)
Net earnings (loss)	$	220		$	355		$	760		$	421

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,
	2015			2014			2015			2014
Net Earnings (Loss)	$	210		$	349		$	739		$	408
Other Comprehensive Income (Loss), Net of Tax:
Amortization of pension and post-retirement prior service costs and net loss:
U.S. plans	72			60			215			181
Pension and postretirement liability adjustments:
U.S. plans	14			—			14			(106		)
Non-U.S. plans	—			(1		)	(2		)	2
Change in cumulative foreign currency translation adjustment	(562		)	(492		)	(955		)	(399		)
Net gains/losses on cash flow hedging derivatives:
Net gains (losses) arising during the period	(8		)	1			(2		)	17
Reclassification adjustment for (gains) losses included in net earnings (loss)	7			(7		)	12			(6		)
Total Other Comprehensive Income (Loss), Net of Tax	(477		)	(439		)	(718		)	(311		)
Comprehensive Income (Loss)	(267		)	(90		)	21			97
Net (earnings) loss attributable to noncontrolling interests	10			6			21			13
Other comprehensive (income) loss attributable to noncontrolling interests	5			2			6			5
Comprehensive Income (Loss) Attributable to International Paper Company	$	(252	)	$	(82	)	$	48		$	115

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, 2015			December 31, 2014
	(unaudited)
Assets
Current Assets
Cash and temporary investments	$	1,104		$	1,881
Accounts and notes receivable, net	2,832			3,083
Inventories	2,340			2,424
Deferred income tax assets	326			331
Assets held for sale	1,095			—
Other current assets	212			240
Financial assets of special purpose entities (Note 13)	4,845			—
Total Current Assets	12,754			7,959
Plants, Properties and Equipment, net	11,832			12,728
Forestlands	356			507
Investments	260			248
Financial Assets of Special Purpose Entities (Note 13)	2,159			2,145
Goodwill	3,472			3,773
Deferred Charges and Other Assets	1,148			1,324
Total Assets	$	31,981		$	28,684
Liabilities and Equity
Current Liabilities
Notes payable and current maturities of long-term debt	$	753		$	742
Liabilities held for sale	943			—
Accounts payable	2,096			2,664
Accrued payroll and benefits	422			477
Other accrued liabilities	1,113			1,026
Nonrecourse Financial Liabilities of Special Purpose Entities (Note 13)	4,220			—
Total Current Liabilities	9,547			4,909
Long-Term Debt	8,887			8,631
Nonrecourse Financial Liabilities of Special Purpose Entities (Note 13)	2,056			2,050
Deferred Income Taxes	3,191			3,063
Pension Benefit Obligation	3,017			3,819
Postretirement and Postemployment Benefit Obligation	363			396
Other Liabilities	450			553
Equity
Common stock, $1 par value, 2015 – 448.9 shares and 2014 – 448.9 shares	449			449
Paid-in capital	6,251			6,245
Retained earnings	4,656			4,409
Accumulated other comprehensive loss	(5,358		)	(4,646		)
	5,998			6,457
Less: Common stock held in treasury, at cost, 2015 – 34.347 shares and 2014 – 28.734 shares	1,649			1,342
Total Shareholders’ Equity	4,349			5,115
Noncontrolling interests	121			148
Total Equity	4,470			5,263
Total Liabilities and Equity	$	31,981		$	28,684

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,
	2015			2014
Operating Activities
Net earnings (loss)	$	739		$	408
Depreciation, amortization and cost of timber harvested	980			1,068
Deferred income tax provision, net	101			(139		)
Restructuring and other charges	219			865
Pension plan contributions	(750		)	(353		)
Impairment of business	186			—
Equity (earnings) loss, net	(84		)	64
Periodic pension expense, net	350			290
Other, net	132			66
Changes in current assets and liabilities
Accounts and notes receivable	(166		)	(214		)
Inventories	(221		)	(118		)
Accounts payable and accrued liabilities	77			(49		)
Interest payable	24			16
Other	3			29
Cash Provided By (Used For) Operations	1,590			1,933
Investment Activities
Invested in capital projects	(998		)	(961		)
Proceeds from spinoff	—			385
Investment in Special Purpose Entities	(198		)	—
Proceeds from sale of fixed assets	32			49
Other	(35		)	(31		)
Cash Provided By (Used For) Investment Activities	(1,199		)	(558		)
Financing Activities
Repurchases of common stock and payments of restricted stock tax withholding	(505		)	(891		)
Issuance of common stock	2			59
Issuance of debt	2,440			1,970
Reduction of debt	(2,202		)	(1,762		)
Change in book overdrafts	15			20
Dividends paid	(503		)	(451		)
Acquisition of redeemable noncontrolling interest	—			(114		)
Debt tender premiums paid	(211		)	(269		)
Other	—			(4		)
Cash Provided By (Used For) Financing Activities	(964		)	(1,442		)
Cash Included in Assets Held for Sale	(143		)	—
Effect of Exchange Rate Changes on Cash	(61		)	(17		)
Change in Cash and Temporary Investments	(777		)	(84		)
Cash and Temporary Investments
Beginning of period	1,881			1,802
End of period	$	1,104		$	1,718

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, 2014 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 prior year amounts have been adjusted to reflect xpedx as a discontinued operation. See Note 8 for further discussion.

NOTE 2 - RECENT ACCOUNTING DEVELOPMENTS

Business Combinations

In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-16, "Business Combinations - Simplifying the Accounting for Measurement Period Adjustments." This ASU provides that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The ASU also requires acquirers to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized at the acquisition date. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. This ASU must be applied prospectively to adjustments to provisional amounts that occur after the effective date. Early adoption is permitted for financial statements that have not been issued. The Company is currently evaluating the provisions of this guidance.

Inventory

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory." This ASU provides that entities should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measure using LIFO or the retail inventory method. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The Company is currently evaluating the provisions of this guidance.

Cloud Computing Arrangements

In April 2015, the FASB issued ASU 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." This ASU provides clarification on whether a cloud computing arrangement includes a software license. If a software license is included, the customer should account for the license consistent with its accounting of other software licenses. If a software license is not included, the arrangement should be accounted for as a service contract. This ASU is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those years. Early adoption is permitted. The Company is currently evaluating the provisions of this guidance.

Debt Issuance Costs

In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30: Simplifying the Presentation of Debt Issuance Costs," which simplifies the balance sheet presentation of the costs for issuing debt. This ASU is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those years; however, early adoption is allowed. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The Company is currently evaluating the provisions of this guidance.

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Consolidation

In February 2015, the FASB issued ASU 2015-02, "Consolidation," which amends the requirements for consolidation and significantly changes the consolidation analysis required. 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.

Share-Based Payment

In June 2014, the 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 was 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; however, in August 2015, the FASB issued ASU 2015-14 which defers the effective date by one year making the guidance effective for annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the provisions of this guidance. Early adoption will be permitted as of the original effective date in ASU 2014-09.

NOTE 3 - EQUITY

A summary of the changes in equity for the nine months ended September 30, 2015 and 2014 is provided below:



	Nine Months Ended September 30,
	2015									2014
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	$	5,115		$	148		$	5,263		$	8,105		$	179		$	8,284
Issuance of stock for various plans, net	204			—			204			221			—			221
Repurchase of stock	(505		)	—			(505		)	(891		)	—			(891		)
Common stock dividends ($1.20 per share in 2015 and $1.05 per share in 2014)	(513		)	—			(513		)	(462		)	—			(462		)
Xpedx spinoff	—			—			—			(313		)	—			(313		)
Acquisition of redeemable noncontrolling interests	—			—			—			47			—			47
Remeasurement of redeemable noncontrolling interest	—			—			—			(6		)	—			(6		)
Comprehensive income (loss)	48			(27		)	21			115			(18		)	97
Ending Balance, September 30	$	4,349		$	121		$	4,470		$	6,816		$	161		$	6,977

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NOTE 4 - OTHER COMPREHENSIVE INCOME

The following table presents changes in AOCI for the three-month period ended September 30, 2015:



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, 2015	$	(2,993	)	$	(1,905	)	$	12		$	(4,886	)
Other comprehensive income (loss) before reclassifications	14			(562		)	(8		)	(556		)
Amounts reclassified from accumulated other comprehensive income	72			—			7			79
Net Current Period Other Comprehensive Income (Loss)	86			(562		)	(1		)	(477		)
Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest	—			5			—			5
Balance, September 30, 2015	$	(2,907	)	$	(2,462	)	$	11		$	(5,358	)


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

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.

The following table presents changes in AOCI for the nine-month period ended September 30, 2015:



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, 2015	$	(3,134	)	$	(1,513	)	$	1		$	(4,646	)
Other comprehensive income (loss) before reclassifications	12			(955		)	(2		)	(945		)
Amounts reclassified from accumulated other comprehensive income	215			—			12			227
Net Current Period Other Comprehensive Income	227			(955		)	10			(718		)
Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest	—			6			—			6
Balance, September 30, 2015	$	(2,907	)	$	(2,462	)	$	11		$	(5,358	)


(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 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	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 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,
	2015			2014			2015			2014
In millions:
Defined benefit pension and postretirement items:
Prior-service costs	$	(9	)	$	(4	)	$	(25	)	$	(13	)	(b)	Cost of products sold
Actuarial gains (losses)	(108		)	(95		)	(326		)	(284		)	(b)	Cost of products sold
Total pre-tax amount	(117		)	(99		)	(351		)	(297		)
Tax (expense) benefit	45			39			136			116
Net of tax	(72		)	(60		)	(215		)	(181		)

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

Net gains and losses on cash flow hedging derivatives:
Foreign exchange contracts	(12		)	10			(19		)	6			(c)	Cost of products sold
Total pre-tax amount	(12		)	10			(19		)	6
Tax (expense)/benefit	5			(3		)	7			—
Net of tax	(7		)	7			(12		)	6
Total reclassifications for the period	$	(79	)	$	(36	)	$	(227	)	$	(158	)


(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).

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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 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	2015		2014		2015		2014
Earnings (loss) from continuing operations	$	220	$	339	$	760	$	425
Effect of dilutive securities (a)	—		—		—		—
Earnings (loss) from continuing operations – assuming dilution	$	220	$	339	$	760	$	425
Average common shares outstanding	415.1		425.3		418.7		429.9
Effect of dilutive securities (a)
Restricted stock performance share plan	2.4		3.3		3.2		3.7
Stock options	—		—		—		0.1
Average common shares outstanding – assuming dilution	417.5		428.6		421.9		433.7
Basic earnings (loss) from continuing operations per common share	$	0.53	$	0.80	$	1.81	$	0.99
Diluted earnings (loss) from continuing operations per common share	$	0.53	$	0.79	$	1.80	$	0.98


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

NOTE 6 - RESTRUCTURING AND OTHER CHARGES

2015: During the three months ended September 30, 2015, restructuring and other charges totaling $25 million before taxes were recorded. Details of these charges were as follows:



	Three Months Ended September 30, 2015
In millions
Timber monetization restructuring	$	17
Sale of Carolina Coated Bristols brand and the Riegelwood mill conversion costs	7
Other	1
Total	$	25

During the three months ended June 30, 2015, restructuring and other charges totaling $194 million before taxes were recorded. Details of these charges were as follows:



	Three Months Ended June 30, 2015
In millions
Early debt extinguishment costs	$	207
Sale of Carolina Coated Bristols brand and the Riegelwood mill conversion costs	(14		)
Other	1
Total	$	194

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



	Three Months Ended September 30, 2014
In millions
Courtland mill shutdown (a)	$	3
Early debt extinguishment costs	13
EMEA packaging restructuring	5
Other	3
Total	$	24

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



	Three Months Ended June 30, 2014
In millions
Courtland mill shutdown (a)	$	49
Early debt extinguishment costs	262
Brazil packaging	(7		)
Other	3
Total	$	307

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



	Three Months Ended March 31, 2014
In millions
Courtland mill shutdown (a)	$	495
Other	4
Total	$	499

(a)

During 2013, the Company deferred accelerating depreciation for certain assets as we evaluated possible alternative uses by one of our other businesses. 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 and second quarters 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 2014 Courtland mill shutdown cost include severance charges of $2 million.

NOTE 7 - ACQUISITIONS AND JOINT VENTURES

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 Jari 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 of 2014, these open matters were successfully resolved, which resulted in $9 million being 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.

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 $411 million, financed with new debt in Veritiv's capital structure.

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 the three months and nine months ended September 30, 2014 in the consolidated statement of operations:

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In millions	Three Months Ended September 30, 2014			Nine Months Ended September 30, 2014
Net Sales	—			$	2,604
Cost and Expenses
Cost of products sold	—			2,309
Selling and administrative expenses	—			191
Depreciation, amortization and cost of timber harvested	—			9
Distribution expenses	—			69
Restructuring and other charges	(11		)	24
Other, net	—			3
Earnings (Loss) Before Income Taxes and Equity Earnings	11			(1		)
Income tax provision (benefit)	(3		)	—
Discontinued Operations, Net of Taxes (a)	$	14		$	(1	)


(a)	These amounts, along with net income of $2 million and a net loss of $3 million related to the Temple-Inland Building Products divestitures, are included in Discontinued operations, net of tax, in the consolidated statement of operations for the three and nine months ended September 30, 2014, respectively.

Total cash provided by operations related to xpedx of $29 million for the nine months ended September 30, 2014 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 for the nine months ended September 30, 2014 is included in Cash Provided By (Used for) Investment Activities in the consolidated statement of cash flows.

Other Divestitures and Impairments

The Company announced on October 8, 2015 that it had signed a definitive agreement with the Company's Chinese coated board joint venture partner, Shandong Sun Holding Group Co., Ltd., to sell its 55% interest in the IP Asia Coated Paperboard (IP-Sun JV) business within the Company's Consumer Packaging segment for RMB 149 million (approximately USD $23 million). A determination was made that the current book value of the asset group exceeded its estimated fair value of $23 million, which is the agreed upon selling price. As a result, a pre-tax charge of $186 million was recorded during the three months ended September 30, 2015 in the Company's Consumer Packaging segment to write down the long-lived assets of this business to their estimated fair value. The amount of pre-tax losses related to the IP-Sun JV included in the Company's consolidated statement of operations for the three months and nine months ended September 30, 2015 were $208 million and $238 million, respectively, and for the three months and nine months ended September 30, 2014, $11 million and $33 million, respectively. The 2015 losses include the third quarter pre-tax impairment charge of $186 million ($125 million after taxes). The amount of pre-tax losses related to noncontrolling interest of the IP-Sun JV included in the Company's consolidated statement of operations for the three months and nine months ended September 30, 2015 were $9 million and $19 million, respectively, and for the three months and nine months ended September 30, 2014, $2 million and $7 million, respectively. The assets related to the IP-Sun JV, totaling $1.095 billion are included in Assets held for sale in current assets in the accompanying consolidated balance sheet at September 30, 2015. The liabilities of the IP-Sun JV, totaling $943 million are included in Liabilities held for sale in current liabilities in the accompanying consolidated balance sheet at September 30, 2015. The table below reflects the major asset and liability categories of IP-Sun JV's balance sheet as consolidated in International Paper's balance sheet as of September 30, 2015.

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The IP-Sun JV will be deconsolidated from International Paper's consolidated balance sheet following the completion of the sale, which was deemed effective on October 13, 2015.



In millions	September 30, 2015
Total current assets	$	620
Plants, properties and equipment	479
Goodwill	117
Deferred Charges and Other Assets	65
	1,281
Impairment Charge	(186		)
Total assets	$	1,095

Payables and other short-term liabilities	$	564
Debt	373
Other long-term liabilities	6
Total liabilities	943
Shareholder's equity	56
Noncontrolling interest	96
Total equity	152
Total liabilities and equity	$	1,095

NOTE 9 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

Temporary Investments



In millions	September 30, 2015		December 31, 2014
Temporary investments	$	611	$	1,480

Accounts and Notes Receivable



In millions	September 30, 2015		December 31, 2014
Accounts and notes receivable, net:
Trade	$	2,631	$	2,860
Other	201		223
Total	$	2,832	$	3,083

Inventories



In millions	September 30, 2015		December 31, 2014
Raw materials	$	416	$	494
Finished pulp, paper and packaging	1,263		1,273
Operating supplies	560		562
Other	101		95
Total	$	2,340	$	2,424

Depreciation Expense



	Three Months Ended September 30				Nine Months Ended September 30,
In millions	2015		2014		2015		2014
Depreciation expense	$	309	$	333	$	919	$	986

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Valuation Accounts

Certain valuation accounts were as follows:



In millions	September 30, 2015		December 31, 2014
Accumulated depreciation	$	20,455	$	20,340
Allowance for doubtful accounts	71		82

There was no material activity related to asset retirement obligations during either of the three months or nine months ended September 30, 2015 or 2014.

Interest

Cash payments related to interest were as follows:



	Nine Months Ended September 30,
In millions	2015		2014
Interest payments	$	471	$	503

Amounts related to interest were as follows:



	Three Months Ended September 30				Nine Months Ended September 30,
In millions	2015		2014		2015		2014
Interest expense (a)	$	158	$	172	$	481	$	512
Interest income (a)	17		14		59		47
Capitalized interest costs	5		5		19		17


(a)	Interest expense and interest income exclude approximately $7 million and $25 million for the three months and nine months ended September 30, 2015 and $10 million and $29 million for the three months and nine months ended September 30, 2014, respectively related to investments in and borrowings from variable interest entities for which the Company has a legal right of offset (see Note 13).

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, 2015:



In millions	Industrial Packaging			Printing Papers				Consumer Packaging			Total
Balance as of January 1, 2015
Goodwill	$	3,396		$	2,234			$	1,784		$	7,414
Accumulated impairment losses (a)	(100		)	(1,877		)		(1,664		)	(3,641		)
	3,296			357				120			3,773
Reclassifications and other (b)	(73		)	(96		)		(120		)	(289		)
Additions/reductions	(1		)	(11		)	(c)	—			(12		)
Balance as of September 30, 2015
Goodwill	3,322			2,127				1,664			7,113
Accumulated impairment losses (a)	(100		)	(1,877		)		(1,664		)	(3,641		)
Total	$	3,222		$	250			$	—		$	3,472


(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 as well as a reclassification to Assets held for sale of $117 million in Consumer Packaging due to the pending sale of our equity interest in IP-Sun JV.


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

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Other Intangibles

Identifiable intangible assets comprised the following:



	September 30, 2015				December 31, 2014
In millions	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Customer relationships and lists	$	494	$	156	$	561	$	157
Non-compete agreements	70		55		74		53
Tradenames, patents and trademarks	60		51		61		44
Land and water rights	32		5		81		9
Fuel and power agreements	5		3		5		3
Software	21		20		23		22
Other	40		23		43		21
Total	$	722	$	313	$	848	$	309

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	2015		2014		2015		2014
Amortization expense related to intangible assets	$	16	$	19	$	45	$	55

NOTE 11 - INCOME TAXES

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



	Nine Months Ended September 30,
In millions	2015		2014
Income tax payments, net	$	118	$	193

The following table presents a rollforward of unrecognized tax benefits and related accrued estimated interest and penalties for the nine months ended September 30, 2015:



In millions	Unrecognized Tax Benefits			Accrued Estimated Interest and Tax Penalties
Balance at December 31, 2014	$	(158	)	$	(41	)
Activity for three months ended March 31, 2015	8			7
Activity for the three months ended June 30, 2015	—			(1		)
Activity for three months ended September 30, 2015	1			2
Balance at September 30, 2015	$	(149	)	$	(33	)

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 $40 million during the next 12 months.

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Included in the Company’s income tax provisions for the nine months ended September 30, 2015 and 2014, are $109 million and $351 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	2015			2014
Special items	$	(70	)	$	(360	)
Tax-related adjustments:
Return to Accrual	23			—
Internal restructurings	(62		)	—
State legislative changes	—			10
Other	—			(1		)
Income tax provision (benefit) related to special items	$	(109	)	$	(351	)

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Environmental Proceedings

CERCLA and State Actions

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 $97 million in the aggregate at September 30, 2015.

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 United States Environmental Protection Agency (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 $47 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 (NRDA). It is premature to predict the outcome of the NRDA or to estimate a loss or range of loss, if any, which may be incurred.

Other Remediation Costs

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, 2015. Other than as described above, completion of required remedial actions is not expected to have a material effect on our consolidated financial statements.

Legal Proceedings

Environmental

Kalamazoo River: The Company is a potentially responsible party (PRP) with respect to the Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site in Michigan. The EPA asserts that the site is contaminated by PCBs primarily 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. Although the Company has not received any orders from the EPA, in December 2014, the EPA sent the Company a letter demanding payment of $19 million to reimburse the EPA for costs associated with a Time Critical Removal Action of PCB contaminated sediments from a portion of the site. The Company's CERCLA liability has not been finally determined with respect to this or any other portion of the site and we have declined to reimburse the EPA at this time. As noted below, the Company is involved in allocation/apportionment litigation with regard to the site. Accordingly, it is premature to predict the outcome or estimate our maximum reasonably possible loss with respect to this site. However, we do not believe that any material loss is probable.

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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. NCR Corporation and Weyerhaeuser Company are also named as defendants in the suit. 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 was 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 plaintiffs seek to recover. This is the subject of a separate trial, which commenced September 24, 2015. We are unable to predict the outcome or estimate our maximum reasonably possible loss. However, we do not believe that any material loss is probable.

Harris County: International Paper and McGinnis Industrial Maintenance Corporation, a subsidiary of Waste Management, Inc., are PRPs 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 seeking civil penalties with regard to the alleged discharge of dioxin into the San Jacinto River from waste impoundments that are part of the San Jacinto River Superfund Site. In November 2014, International Paper secured a zero liability jury verdict. Harris County appealed the verdict in April 2015, and that appeal is pending. In October 2015, the Company settled for an immaterial amount a lawsuit related to the San Jacinto Superfund Site brought by approximately 400 local fishermen seeking medical monitoring and damages.The Company is defending one additional lawsuit related to the San Jacinto Superfund Site in which approximately 400 individuals allege property damage and personal injury. Because this case is still in the discovery phase, it is premature to predict the outcome or to estimate a loss or range of loss, if any, which may be incurred.

Antitrust

Containerboard: 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. International Paper Company (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 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. In March 2015, the district court certified a class of direct purchasers of containerboard products; in June 2015, the United States Court of Appeals for the Seventh Circuit granted the defendants' petition to appeal and the class certification issue is now pending in that court. In June 2015, International Paper and Temple-Inland were named as defendants in a lawsuit captioned Del Monte Fresh Product N.A., Inc. v. Packaging Corporation of America (S.K. Fl.), in which the plaintiff asserts substantially similar allegations to those raised in the Kleen Products LLC action. 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. No class certification materials have been filed to date in the Tennessee action. The Company disputes the allegations made and is vigorously defending each action. However, because the Kleen Products LLC action is in the discovery stage and the Florida action and the Tennessee action are in a preliminary stage, we are unable to predict an outcome or estimate a range of reasonably possible loss.

Gypsum: 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. 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 alleged a conspiracy or agreement beginning on or before September 2011. The alleged classes were all persons who purchased gypsum board directly or indirectly

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from any defendant. The complainants sought to recover unspecified treble actual damages and attorneys' fees on behalf of the purported classes. In February 2015, we executed a definitive agreement to settle these cases for an immaterial amount, and this settlement received final court approval and was paid in the third quarter of 2015. In March 2015, several homebuilders filed an antitrust action in the United States District Court for the Northern District of California alleging that they purchased gypsum board and making similar allegations to those contained in the above settled proceeding. The Company intends to dispute the allegations made and to vigorously defend that lawsuit and any lawsuit brought by any purported class member that elected to opt out of the settlement.

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. In May 2015, we reached an agreement in principle to settle these Canadian cases, as well as a similar action filed in British Columbia, Canada, 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.

General

The Company is involved in various other inquiries, administrative proceedings and litigation relating to environmental and safety matters, labor and employment, contracts, sales of property, intellectual property, personal injury 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.

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 special purpose 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 special purpose 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, 2015 and the year ended December 31, 2014.

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 or obtained waivers for 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 provided that International Paper had, and intended to effect, a legal right to offset its obligation under these debt instruments with its investments in the Entities. Accordingly, for financial reporting purposes, International Paper had offset approximately $5.2 billion of Class B interests in the Entities against $5.3 billion of International Paper debt obligations held by these Entities at December 31, 2014, and despite the offset treatment, these remained debt obligations of International Paper. Remaining borrowings of $50 million at December 31, 2014 are included in Long-term debt in the accompanying consolidated balance sheet. Additional debt related to the above transaction of $107 million is included in Notes payable and current maturities of long-term debt at December 31, 2014.

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The use of the Entities facilitated the monetization of the credit enhanced Timber Notes in a cost effective manner by increasing borrowing capacity and lowering the interest rate, while providing for the offset accounting treatment described above. Additionally, the monetization structure preserved the tax deferral that resulted from the 2006 forestlands sales.

Based on an analysis of the Entities under ASC 810, "Consolidation," that considers the potential magnitude of the variability in the structures and which party has a controlling financial interest, International Paper determined that it was not the primary beneficiary of the Entities at December 31, 2014, and therefore, did not consolidate its investments in the Entities. The Company also determined that the source of variability in the structures is the value of the Timber Notes, the assets most significantly impacting the structures' economic performance. The credit quality of the Timber Notes is supported by irrevocable letters of credit obtained by the Timber Note issuers. International Paper analyzed which party had control over the economic performance of each Entity, and concluded International Paper did not have control over significant decisions surrounding the Timber Notes and letters of credit and therefore was not the primary beneficiary at December 31, 2014. The Company’s maximum exposure to loss at December 31, 2014 equaled the principal amount of the Timber Notes; however, an analysis performed by the Company concluded the likelihood of this exposure was remote.

In order to extend the 2006 monetization structure and maintain the long-term nature of the $1.4 billion deferred tax liability, we initiated a series of actions during the third quarter of 2015. First, International Paper acquired the Class A interests in the Investor Entities from a third party for $198 million in cash. As a result, International Paper became the owner of all of the Class A and Class B interests in the Entities and became the primary beneficiary of the Entities. The assets and liabilities of the Entities, primarily consisting of the Timber Notes and third party bank loans, were recorded at fair value as of the acquisition date of the Class A interests.

Subsequent to purchasing the Class A interests in the Investor Entities, International Paper restructured the Entities, which resulted in the formation of wholly-owned, bankruptcy-remote special purpose entities (the 2015 Financing Entities). As part of the restructuring, the Timber Notes held by the Borrower Entities, subject to the third party bank loans, were contributed to the 2015 Financing Entities along with approximately $150 million in International Paper debt obligations, approximately $600 million in cash and approximately $130 million in demand loans from International Paper, and certain Entities were liquidated. As a result of these transactions, International Paper began consolidating the 2015 Financing Entities during the third quarter of 2015.

The Timber Notes are shown in Financial assets of special purpose entities on the accompanying consolidated balance sheet and mature in August 2016 unless extended for an additional five years. These notes are supported by approximately $4.8 billion of irrevocable letters of credit. The 2015 Financing Entities used $630 million in cash to pay down a portion of the existing third party bank loans and refinanced these loans on nonrecourse terms. As a result of the refinancing, the 2015 Financing Entities have approximately $4.2 billion of loans shown in Nonrecourse financial liabilities of special purpose entities on the accompanying consolidated balance sheet. These loans mature in May 2016, are nonrecourse to the Company, and are secured by approximately $4.8 billion of Timber Notes, the irrevocable letters of credit supporting the Timber Notes and approximately $150 million of International Paper debt obligations. The $150 million of International Paper debt obligations are eliminated in the consolidation of the 2015 Financing Entities and are not reflected in the Company’s consolidated balance sheet. The Company has begun the process to refinance the nonrecourse loans for an additional term of approximately five years and extend the Timber Notes in accordance with their terms for an additional term of approximately five years. These extensions are expected to be completed during the fourth quarter of 2015. The purchase of the Class A interests and subsequent restructuring described above facilitated the refinancing of the third party bank loans on nonrecourse terms. The transactions described in this paragraph result in continued long-term classification of the $1.4 billion deferred tax liability recognized in connection with the 2006 forestlands sale.

As of September 30, 2015, the fair value of the Timber Notes and loans is $4.84 billion and $4.24 billion, respectively. The Timber Notes and loans 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, 2014.

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Activity between the Company and the 2015 Financing Entities (the Entities prior to the purchase of the Class A interest discussed above) was as follows:



	Three Months Ended September 30				Nine Months Ended September 30,
In millions	2015		2014		2015		2014
Revenue (a)	$	9	$	10	$	27	$	29
Expense (a)	19		18		56		54
Cash receipts (b)	11		10		21		22
Cash payments (c)	20		36		56		73

(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 effect its legal right to offset as discussed above. After formation of the 2015 Financing Entities, the revenue and expense are included in Interest expense, net in the accompanying consolidated statement of operations.


(b)	The cash receipts are equity distributions from the Entities to International Paper prior to the formation of the 2015 Financing Entities. After formation of the 2015 Financing Entities, cash receipts are interest received on the Financial assets of special purpose entities.


(c)	The cash payments are interest payments on the associated debt obligations of the Entities discussed above. After formation of the 2015 Financing Entities, the payments represent interest paid on Nonrecourse financial liabilities of special purpose entities.

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

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 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, 2015, the fair value of the notes was $2.09 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, 2014.

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, 2015, the fair value of this debt was $1.98 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, 2014.

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



	Three Months Ended September 30				Nine Months Ended September 30,
In millions	2015		2014		2015		2014
Revenue (a)	$	7	$	6	$	20	$	19
Expense (b)	7		6		20		19
Cash receipts (c)	1		2		5		5
Cash payments (d)	5		4		13		13


(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 and nine months ended September 30, 2015 and 2014, 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 and nine months ended September 30, 2015 and 2014, 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.

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NOTE 14 - DEBT

Amounts related to early debt extinguishment during the three months and nine months ended September 30, 2015 and 2014 were as follows:



	Three Months Ended September 30				Nine Months Ended September 30,
In millions	2015		2014		2015		2014
Early debt reductions (a)	$	90	$	262	$	1,479	$	1,301
Pre-tax early debt extinguishment costs	1		13		208		275

(a)

Reductions related to notes with interest rates ranging from 4.75% to 5.85% with original maturities from 2019 to 2030 and from 4.75% to 9.38% with original maturities from 2015 to 2027 for the three months ended September 30, 2015 and 2014, respectively, and from 4.70% to 9.38% with original maturities from 2015 to 2030 and from 4.75% to 9.38% with original maturities from 2018 to 2029 for the nine months ended September 30, 2015 and 2014, respectively.

In September 2015, International Paper borrowed $300 million under a receivable securitization facility at a rate of 0.90%. Subsequent to September 30, 2015, International Paper fully repaid the $300 million borrowed.

In May 2015, International Paper issued $700 million of 3.80% senior unsecured notes with a maturity date in 2026, $600 million of 5.00% senior unsecured notes with a maturity date in 2035, and $700 million of 5.15% senior unsecured notes with a maturity date in 2046. The proceeds from this borrowing were used to repay approximately $1.0 billion of notes with interest rates ranging from 4.75% to 9.38% and original maturities from 2018 to 2022, along with $211 million of cash premiums associated with the debt repayments. Additionally, the proceeds from this borrowing were used to make a $750 million voluntary cash contribution to the Company's pension plan. Pre-tax early debt retirement costs of $207 million related to the debt repayments, including the $211 million of cash premiums, are included in Restructuring and other charges in the accompanying consolidated statement 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.

At September 30, 2015, the fair value of International Paper’s $9.6 billion of debt was approximately $10.4 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, 2014.

Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At September 30, 2015, 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, 2014.

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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, 2015	December 31, 2014
Derivatives in Cash Flow Hedging Relationships:
Foreign exchange contracts (Sell / Buy; denominated in sell notional): (a)
Brazilian real / U.S. dollar - Forward	—	166
British pounds / Brazilian real - Forward	1	5
European euro / Brazilian real - Forward	2	9
European euro / Polish zloty - Forward	187	280
Mexican peso / U.S. dollar - Forward	203	—
U.S. dollar / Brazilian real - Forward	24	125
Derivatives in Fair Value Hedging Relationships:
Interest rate contracts (in USD)	17	230
Derivatives Not Designated as Hedging Instruments:
Electricity contract (in Megawatt Hours)	1	—
Foreign exchange contracts (Sell / Buy; denominated in sell notional): (b)
European euro / British pounds - Forward	28	—
European euro / U.S. dollar - Forward	18	—
Indian rupee / U.S. dollar - Forward	31	43
Mexican peso / U.S. dollar - Forward	64	187
U.S. dollar / Brazilian real - Forward	—	11
Interest rate contracts (in USD)	38	—


(a)	These contracts had maturities of three years or less as of September 30, 2015.


(b)	These contracts had maturities of one year or less as of September 30, 2015.

The following table shows gains or losses recognized in AOCI, net of tax, related to derivative instruments:



	Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)
	Three Months Ended September 30					Nine Months Ended September 30,
In millions	2015			2014		2015			2014
Foreign exchange contracts	$	(8	)	$	1	$	(2	)	$	17
Total	$	(8	)	$	1	$	(2	)	$	17

During the next 12 months, the amount of the September 30, 2015 AOCI balance, after tax, that is expected to be reclassified to earnings is a gain of $2 million.

The amounts of gains and losses recognized in the consolidated statement of operations on qualifying and non-qualifying financial instruments used in hedging transactions were as follows:



	Gain (Loss) Reclassified from AOCI (Effective Portion)										Location of Gain (Loss) Reclassified from AOCI (Effective Portion)
	Three Months Ended September 30					Nine Months Ended September 30,
In millions	2015			2014		2015			2014
Derivatives in Cash Flow Hedging Relationships:
Foreign exchange contracts	$	(7	)	$	7	$	(12	)	$	6	Cost of products sold
Total	$	(7	)	$	7	$	(12	)	$	6

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	Gain (Loss) Recognized															Location of Gain (Loss) In Consolidated Statement of Operations
	Three Months Ended September 30							Nine Months Ended September 30,
In millions	2015			2014				2015				2014
Derivatives in Fair Value Hedging Relationships:
Interest rate contracts	$	—		$	(1	)		$	3			$	—			Interest expense, net
Debt	—			1				(3		)		—				Interest expense, net
Total	$	—		$	—			$	—			$	—
Derivatives Not Designated as Hedging Instruments:
Electricity contract	$	(7	)	$	(2	)		$	(6	)		$	1			Cost of products sold
Foreign exchange contracts	(1		)	(1		)		(3		)		(1		)		Cost of products sold
Interest rate contracts	2			3			(a)	11			(b)	10			(c)	Interest expense, net
Total	$	(6	)	$	—			$	2			$	10

(a) Excluding gain of $1 million related to debt reduction recorded to Restructuring and other charges.

(b) Excluding gain of $3 million related to debt reduction recorded to Restructuring and other charges.

(c) Excluding gain of $7 million, net related to debt issuance and debt reduction recorded to Restructuring and other charges.

The following activity is related to fully effective interest rate swaps designated as fair value hedges:



			2015						2014
In millions	Issued		Terminated		Undesignated		Issued		Terminated		Undesignated
Second Quarter	$	—	$	175	$	38	$	—	$	—	$	—
First Quarter	—		—		—		55		—		—
Total