Edgar Filing: INTERNATIONAL PAPER CO /NEW/

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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, 2016

¨ 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 28, 2016 was 411,213,412.

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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, 2016 and 2015	1

	Consolidated Statement of Comprehensive Income - Three Months and Nine Months Ended September 30, 2016 and 2015	2

	Consolidated Balance Sheet - September 30, 2016 and December 31, 2015	3

	Consolidated Statement of Cash Flows - Nine Months Ended September 30, 2016 and 2015	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,
	2016			2015			2016			2015
Net Sales	$	5,266		$	5,691		$	15,698		$	16,922
Costs and Expenses
Cost of products sold	3,622			3,891			11,345			11,703
Selling and administrative expenses	380			417			1,142			1,226
Depreciation, amortization and cost of timber harvested	314			329			899			980
Distribution expenses	353			334			1,012			1,058
Taxes other than payroll and income taxes	41			39			123			127
Restructuring and other charges	46			25			47			219
Net (gains) losses on sales and impairments of businesses	5			186			70			186
Interest expense, net	132			141			384			422
Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings	373			329			676			1,001
Income tax provision (benefit)	107			106			139			346
Equity earnings (loss), net of taxes	43			(13		)	151			84
Earnings (Loss) From Continuing Operations	309			210			688			739
Discontinued operations, net of taxes	—			—			(5		)	—
Net Earnings (Loss)	309			210			683			739
Less: Net earnings (loss) attributable to noncontrolling interests	(3		)	(10		)	(3		)	(21		)
Net Earnings (Loss) Attributable to International Paper Company	$	312		$	220		$	686		$	760
Basic Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders
Earnings (loss) from continuing operations	$	0.76		$	0.53		$	1.68		$	1.81
Discontinued operations, net of taxes	—			—			(0.01		)	—
Net earnings (loss)	$	0.76		$	0.53		$	1.67		$	1.81
Diluted Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders
Earnings (loss) from continuing operations	$	0.75		$	0.53		$	1.66		$	1.80
Discontinued operations, net of taxes	—			—			(0.01		)	—
Net earnings (loss)	$	0.75		$	0.53		$	1.65		$	1.80
Average Shares of Common Stock Outstanding – assuming dilution	415.3			417.5			415.5			421.9
Cash Dividends Per Common Share	$	0.4400		$	0.4000		$	1.3200		$	1.2000
Amounts Attributable to International Paper Company Common Shareholders
Earnings (loss) from continuing operations	$	312		$	220		$	691		$	760
Discontinued operations, net of taxes	—			—			(5		)	—
Net earnings (loss)	$	312		$	220		$	686		$	760

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,
	2016			2015			2016			2015
Net Earnings (Loss)	$	309		$	210		$	683		$	739
Other Comprehensive Income (Loss), Net of Tax:
Amortization of pension and post-retirement prior service costs and net loss:
U.S. plans	72			72			471			215
Pension and postretirement liability adjustments:
U.S. plans	(53		)	14			(598		)	14
Non-U.S. plans	—			—			17			(2		)
Change in cumulative foreign currency translation adjustment	3			(562		)	373			(955		)
Net gains/losses on cash flow hedging derivatives:
Net gains (losses) arising during the period	5			(8		)	(5		)	(2		)
Reclassification adjustment for (gains) losses included in net earnings (loss)	(3		)	7			(7		)	12
Total Other Comprehensive Income (Loss), Net of Tax	24			(477		)	251			(718		)
Comprehensive Income (Loss)	333			(267		)	934			21
Net (earnings) loss attributable to noncontrolling interests	3			10			3			21
Other comprehensive (income) loss attributable to noncontrolling interests	(1		)	5			(1		)	6
Comprehensive Income (Loss) Attributable to International Paper Company	$	335		$	(252	)	$	936		$	48

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, 2016			December 31, 2015
	(unaudited)
Assets
Current Assets
Cash and temporary investments	$	2,562		$	1,050
Accounts and notes receivable, net	2,807			2,675
Inventories	2,222			2,228
Deferred income tax assets	287			312
Other current assets	225			212
Total Current Assets	8,103			6,477
Plants, Properties and Equipment, net	12,205			11,980
Forestlands	447			366
Investments	325			228
Financial Assets of Special Purpose Entities (Note 13)	7,028			7,014
Goodwill	3,362			3,335
Deferred Charges and Other Assets	1,131			1,131
Total Assets	$	32,601		$	30,531
Liabilities and Equity
Current Liabilities
Notes payable and current maturities of long-term debt	$	78		$	426
Accounts payable	2,031			2,078
Accrued payroll and benefits	394			434
Other accrued liabilities	1,038			986
Total Current Liabilities	3,541			3,924
Long-Term Debt	10,823			8,844
Nonrecourse Financial Liabilities of Special Purpose Entities (Note 13)	6,282			6,277
Deferred Income Taxes	3,273			3,231
Pension Benefit Obligation	3,709			3,548
Postretirement and Postemployment Benefit Obligation	320			364
Other Liabilities	424			434
Equity
Common stock, $1 par value, 2016 – 448.9 shares and 2015 – 448.9 shares	449			449
Paid-in capital	6,180			6,243
Retained earnings	4,793			4,649
Accumulated other comprehensive loss	(5,458		)	(5,708		)
	5,964			5,633
Less: Common stock held in treasury, at cost, 2016 – 37.716 shares and 2015 – 36.776 shares	1,755			1,749
Total Shareholders’ Equity	4,209			3,884
Noncontrolling interests	20			25
Total Equity	4,229			3,909
Total Liabilities and Equity	$	32,601		$	30,531

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,
	2016			2015
Operating Activities
Net earnings (loss)	$	683		$	739
Depreciation, amortization and cost of timber harvested	899			980
Deferred income tax provision (benefit), net	45			101
Restructuring and other charges	47			219
Pension plan contributions	(750		)	(750		)
Net (gains) losses on sales and impairments of businesses	70			186
Equity (earnings) loss, net	(151		)	(84		)
Periodic pension expense, net	718			350
Other, net	125			132
Changes in current assets and liabilities
Accounts and notes receivable	(83		)	(166		)
Inventories	(6		)	(221		)
Accounts payable and accrued liabilities	(37		)	77
Interest payable	24			24
Other	(18		)	3
Cash Provided By (Used For) Operations	1,566			1,590
Investment Activities
Invested in capital projects	(903		)	(998		)
Acquisitions, net of cash acquired	(56		)	—
Proceeds from divestitures, net of cash divested	105			—
Investment in Special Purpose Entities	—			(198		)
Proceeds from sale of fixed assets	13			32
Other	(130		)	(35		)
Cash Provided By (Used For) Investment Activities	(971		)	(1,199		)
Financing Activities
Repurchases of common stock and payments of restricted stock tax withholding	(132		)	(505		)
Issuance of common stock	—			2
Issuance of debt	3,447			2,440
Reduction of debt	(1,855		)	(2,202		)
Change in book overdrafts	(5		)	15
Dividends paid	(543		)	(503		)
Debt tender premiums paid	(31		)	(211		)
Other	(3		)	—
Cash Provided By (Used For) Financing Activities	878			(964		)
Cash Included in Assets Held for Sale	—			(143		)
Effect of Exchange Rate Changes on Cash	39			(61		)
Change in Cash and Temporary Investments	1,512			(777		)
Cash and Temporary Investments
Beginning of period	1,050			1,881
End of period	$	2,562		$	1,104

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, 2015 which have previously been filed with the Securities and Exchange Commission.

NOTE 2 - RECENT ACCOUNTING DEVELOPMENTS

Cash Flow Classification

In August 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)." The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles in the classification of certain cash receipts and payments in the statement of cash flows. The ASU's amendments add or clarify guidance on eight cash flow issues, including; (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods with those years and must be applied retrospectively to all periods presented but may be applied prospectively from the earliest date practicable if retrospective application would be impracticable. Early adoption is permitted. The Company is currently evaluating the provisions of this guidance.

Stock Compensation

In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." Under this new guidance, all excess tax benefits and tax deficiencies will be recognized in the income statement as they occur, replacing current guidance which requires tax benefits that exceed compensation costs (windfalls) to be recognized in equity. The new guidance will also change the cash flow presentation of excess tax benefits, classifying them as operating inflows rather than financing activities as they are currently classified. In addition, the new guidance will allow companies to provide net settlement of stock-based compensation to cover tax withholding as long as the net settlement doesn't exceed the maximum individual statutory tax rate in the employee's tax jurisdiction. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition

method or a retrospective transition method. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods with those years. Early adoption is permitted. The Company is currently evaluating the provisions of this guidance.

Investments - Equity Method and Joint Ventures

In March 2016, the FASB issued ASU 2016-07, "Simplifying the Transition to the Equity Method of Accounting." The amendments in the ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon

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qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years and should be applied prospectively upon the effective date. Early adoption is permitted. The Company is currently evaluating the provisions of this guidance.

Derivatives and Hedging

Also in March 2016, the FASB issued ASU 2016-05, "Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships." The amendments in this ASU apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815. This ASU clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years, and allows for the amendments to be applied on either a prospective basis or a modified retrospective basis. The Company is currently evaluating the provisions of this guidance.

Leases

In February 2016, the FASB issued ASU 2016-02, "Leases." This ASU will require most leases to be recognized on the balance sheet which will increase reported assets and liabilities. Lessor accounting will remain substantially similar to current U.S. GAAP. This ASU is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years, and mandates a modified retrospective transition method for all entities. The Company is currently evaluating the provisions of this guidance.

Classification of Deferred Taxes

In November 2015, the FASB issued ASU 2015-17, "Balance Classification of Deferred Taxes." This ASU requires entities to offset all deferred tax assets and liabilities (and valuation allowances) for each tax-paying jurisdiction within each tax-paying component. The net deferred tax must be presented as a single noncurrent amount. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years and may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Early adoption is permitted. The initial application of the requirements of this guidance will be included in our 2017 first quarter Form 10-Q.

Business Combinations

In September 2015, the FASB issued 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, 2015, and interim periods within those years. This ASU must be applied prospectively to adjustments to provisional amounts that occur after the effective date. The application of the requirements of this guidance did not have a material effect on the consolidated financial statements.

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 and should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. 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. A reporting entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. The application of the requirements of this guidance did not have a material effect on the consolidated financial statements.

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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. A reporting 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 application of the requirements of this guidance did not have a material effect on the consolidated financial statements.

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. A reporting entity may apply the amendments in this update using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The application of the requirements of this guidance did not have a material effect on the consolidated financial statements.

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. Entities may apply the amendments in this ASU either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The application of the requirements of this guidance did not have a material effect on the consolidated financial statements.

Revenue Recognition

In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers," which amends certain aspects of the new revenue standard, ASU 2014-09. This guidance clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The amendments also reframe the indicators to focus on evidence that an entity is acting as a principal rather than as an agent. This ASU has the same effective date as the new revenue standard, ASU 2014-09, and entities are required to adopt this ASU by using the same transition method used to adopt the new revenue standard. The Company is currently evaluating the provisions of this guidance.

In May 2016, the FASB issued ASU 2016-11, "Revenue Recognition and Derivatives and Hedging," which rescinds certain SEC guidance from the FASB's Accounting Standards Codification in response to announcements made by the SEC staff at the EITF’s March 3, 2016, meeting. Specifically, the ASU supersedes SEC observer comments on the following topics. Upon the adoption of ASU 2014-09: (a) Revenue and expense recognition for freight services in process (ASC 605-20-S99-2); (b) Accounting for shipping and handling fees and costs (ASC 605-45-S99-1); (c) Accounting for consideration given by a vendor to a customer (ASC 605-50-S99-1); and (d) Accounting for gas-balancing arrangements (ASC 932-10-S99-5), and upon the adoption of ASU 2014-16: Determining the nature of a host contract related to a hybrid financial instrument issued in the form of a share under ASC 815 (ASC 815-10-S99-3). The Company is currently evaluating the provisions of this guidance.

In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers." The amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. This ASU has the same effective date as the new revenue standard, ASU 2014-09, and entities are required to adopt this ASU by using the same transition method used to adopt the new revenue standard. The Company is currently evaluating the provisions of this guidance.

In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers." This guidance amends the principal-versus-agent implementation guidance and illustrations in ASU 2014-09. This ASU clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. Therefore, for contracts involving more than one specified good or service, the entity may be the principal for one or more specified goods or services and the agent for others. This ASU has the same effective date as the new revenue standard, ASU 2014-09, and entities are required to adopt this ASU by using the same transition method used to adopt the new revenue standard. The Company is currently evaluating the provisions of this guidance.

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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. Early adoption will be permitted as of the original effective date in ASU 2014-09. The Company is currently evaluating the provisions of this guidance.

NOTE 3 - EQUITY

A summary of the changes in equity for the nine months ended September 30, 2016 and 2015 is provided below:



	Nine Months Ended September 30,
	2016									2015
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	$	3,884		$	25		$	3,909		$	5,115		$	148		$	5,263
Issuance of stock for various plans, net	100			—			100			204			—			204
Repurchase of stock	(132		)	—			(132		)	(505		)	—			(505		)
Common stock dividends ($1.32 per share in 2016 and $1.20 per share in 2015)	(550		)	—			(550		)	(513		)	—			(513		)
Transactions of equity method investees	(37		)	—			(37		)	—			—			—
Divestiture of noncontrolling interests	—			(3		)	(3		)	—			—			—
Other	8			—			8			—			—			—
Comprehensive income (loss)	936			(2		)	934			48			(27		)	21
Ending Balance, September 30	$	4,209		$	20		$	4,229		$	4,349		$	121		$	4,470

NOTE 4 - OTHER COMPREHENSIVE INCOME

The following table presents changes in AOCI for the three-month period ended September 30, 2016:



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, 2016	$	(3,298	)	$	(2,179	)	$	(4	)	$	(5,481	)
Other comprehensive income (loss) before reclassifications	(53		)	3			5			(45		)
Amounts reclassified from accumulated other comprehensive income	72			—			(3		)	69
Net Current Period Other Comprehensive Income (Loss)	19			3			2			24
Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest	—			(1		)	—			(1		)
Balance, September 30, 2016	$	(3,279	)	$	(2,177	)	$	(2	)	$	(5,458	)


(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, 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 nine-month period ended September 30, 2016:



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, 2016	$	(3,169	)	$	(2,549	)	$	10		$	(5,708	)
Other comprehensive income (loss) before reclassifications	(581		)	376			(5		)	(210		)
Amounts reclassified from accumulated other comprehensive income	471			(3		)	(7		)	461
Net Current Period Other Comprehensive Income (Loss)	(110		)	373			(12		)	251
Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest	—			(1		)	—			(1		)
Balance, September 30, 2016	$	(3,279	)	$	(2,177	)	$	(2	)	$	(5,458	)


(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 (Loss)	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 details of the reclassifications out of AOCI for the three-month and nine-month periods ended September 30, 2016 and 2015:



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,
	2016			2015			2016			2015
In millions:
Defined benefit pension and postretirement items:
Prior-service costs	$	(9	)	$	(9	)	$	(27	)	$	(25	)	(b)	Cost of products sold
Actuarial gains (losses)	(108		)	(108		)	(739		)	(326		)	(b)	Cost of products sold
Total pre-tax amount	(117		)	(117		)	(766		)	(351		)
Tax (expense) benefit	45			45			295			136
Net of tax	(72		)	(72		)	(471		)	(215		)

Business acquisition/divestitures	—			—			3			—				Net (gains) losses on sales and impairments of businesses
Tax (expense)/benefit	—			—			—			—
Net of tax	—			—			3			—

Net gains and losses on cash flow hedging derivatives:
Foreign exchange contracts	5			(12		)	10			(19		)	(c)	Cost of products sold
Total pre-tax amount	5			(12		)	10			(19		)
Tax (expense)/benefit	(2		)	5			(3		)	7
Net of tax	3			(7		)	7			(12		)
Total reclassifications for the period	$	(69	)	$	(79	)	$	(461	)	$	(227	)


(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 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	2016		2015		2016		2015
Earnings (loss) from continuing operations	$	312	$	220	$	691	$	760
Effect of dilutive securities	—		—		—		—
Earnings (loss) from continuing operations – assuming dilution	$	312	$	220	$	691	$	760
Average common shares outstanding	411.2		415.1		411.0		418.7
Effect of dilutive securities
Restricted stock performance share plan	4.1		2.4		4.5		3.2
Average common shares outstanding – assuming dilution	415.3		417.5		415.5		421.9
Basic earnings (loss) from continuing operations per common share	$	0.76	$	0.53	$	1.68	$	1.81
Diluted earnings (loss) from continuing operations per common share	$	0.75	$	0.53	$	1.66	$	1.80

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NOTE 6 - RESTRUCTURING AND OTHER CHARGES

2016: During the three months ended September 30, 2016, restructuring and other charges totaling $46 million before taxes were recorded. Details of these charges were as follows:



	Three Months Ended September 30, 2016
In millions
Early debt extinguishment costs	$	29
India packaging evaluation write-off	17
Total	$	46

During the three months ended June 30, 2016, no restructuring and other charges were recorded.

During the three months ended March 31, 2016, restructuring and other charges totaling $1 million before taxes were recorded. Details of these charges were as follows:



	Three Months Ended March 31, 2016
In millions
Gain on sale of investment in Arizona Chemical	$	(8	)
Riegelwood mill conversion costs	9
Total	$	1

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
Sales of Carolina Coated Bristols brand net of 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
Sales of Carolina Coated Bristols brand net of Riegelwood mill conversion costs	(14		)
Other	1
Total	$	194

During the three months ended March 31, 2015, no restructuring and other charges were recorded.

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NOTE 7 - ACQUISITIONS

Weyerhaeuser Pulp Business

On May 1, 2016, the Company entered into a definitive agreement to purchase the pulp business of Weyerhaeuser Company for $2.2 billion in cash, subject to certain adjustments, including a reduction for the amount of debt being assumed, which was approximately $88 million as of September 30, 2016. Because the transaction is a purchase of assets, International Paper expects to realize a tax benefit with an estimated net present value of approximately $300 million. Under the terms of the agreement, International Paper will acquire four fluff pulp mills, one Northern bleached softwood kraft mill and two converting facilities of modified fiber, located in the United States, Canada and Poland. The acquisition is expected to close in the fourth quarter of 2016, subject to the satisfaction of certain closing conditions, primarily the receipt of regulatory approvals. On August 4, 2016, the Company learned that the U.S. Department of Justice had completed its investigation of the transaction without taking any action, but regulatory approval is still needed in other jurisdictions.

Holmen Paper Newsprint Mill

On June 30, 2016, the Company completed the previously announced acquisition of Holmen Paper's newsprint mill in Madrid, Spain. Under the terms of the agreement, International Paper purchased the Madrid newsprint mill, as well as, associated recycling operations and a 50% ownership interest in a cogeneration facility. The Company intends to convert the mill during the second half of 2017 to produce recycled containerboard with an expected capacity of 380,000 metric tonnes. Once completed, the converted mill will support the Company's corrugated packaging business in EMEA.

The Company's aggregated purchase price for the mill, recycling operations and 50% ownership of the cogeneration facility was €53 million (approximately $59 million using June 30, 2016 exchange rate). The measurement period adjustments recognized in the third quarter of 2016 were to reallocate the purchase price from property, plant and equipment to the specific asset and liability balance sheet line items. Approximately $60 million of the purchase price was allocated to property, plant and equipment, $14 million to current assets (primarily cash and accounts receivable), $7 million to equity method investments, $1 million to long-term assets, $9 million to short-term liabilities and $14 million to long-term liabilities related to a supply contract entered into with the seller. The initial valuation amounts are not considered completed as of September 30, 2016 as the final allocation of the purchase price to the mill, recycling operations and the cogeneration facility businesses are yet to be determined. The amount of revenue and earnings recognized since the acquisition date are $41 million and a net loss of $3 million, respectively, for the three months ended September 30, 2016. Proforma information related to the acquisition of the Holmen businesses has not been included as it is impractical to obtain the information due to the lack of availability of financial data and does not have a material effect on the Company's consolidated results of operations.

NOTE 8 - DIVESTITURES / SPINOFF

Other Divestitures and Impairments

2016: On March 14, 2016, the Company announced that it had entered into a definitive agreement to sell its corrugated packaging business in China and Southeast Asia to Xiamen Bridge Hexing Equity Investment Partnership Enterprise. Under the terms of the transaction, International Paper is to receive a total of approximately RMB 1 billion (approximately $149 million at the June 30, 2016 exchange rate), subject to post-closing adjustments and other payments, including the buyer's assumption of the liability for loans of approximately $55 million. Subsequent to the announced agreement, a determination was made that the current book value of the asset group exceeded its estimated fair value of $149 million which was the agreed upon selling price, less costs incurred to sell. As a result, a combined pre-tax charge of $41 million was recorded during the first and second quarters of 2016 in the Company's Industrial Packaging segment to write down the long-lived assets of this business to their estimated fair value. In addition, the Company recorded a pre-tax charge of $24 million in the 2016 second quarter for severance that was contingent upon the sale of this business and a pre-tax charge of $5 million in the third quarter of 2016, resulting from post-closing adjustments. The sale of this business was completed on June 30, 2016.

In the third quarter of 2016, post-closing adjustments were finalized which resulted in a reduction to the total cash to be received of RMB 43 million (approximately $7 million at the September 30, 2016 exchange rate). Remaining payments to be received total $17 million and are payable up to three years from the closing of the sale.

The amount of pre-tax losses related to the IP Asia Packaging business included in the Company's consolidated statement of operations were $7 million and $80 million for the three months and nine months ended September 30, 2016, respectively, and $2 million and $7 million for three months and nine months ended September 30, 2015, respectively.

2015: 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

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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. 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. The sale of this business was finalized on October 13, 2015.

NOTE 9 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

Temporary Investments

Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost. Temporary investments totaled $2.1 billion and $738 million at September 30, 2016 and December 31, 2015, respectively.

Accounts and Notes Receivable



In millions	September 30, 2016		December 31, 2015
Accounts and notes receivable, net:
Trade	$	2,594	$	2,480
Other	213		195
Total	$	2,807	$	2,675

The allowance for doubtful accounts was $72 million and $70 million at September 30, 2016 and December 31, 2015, respectively.

Inventories



In millions	September 30, 2016		December 31, 2015
Raw materials	$	303	$	339
Finished pulp, paper and packaging	1,192		1,248
Operating supplies	609		563
Other	118		78
Total	$	2,222	$	2,228

Depreciation

Accumulated depreciation was $21.5 billion and $20.7 billion at September 30, 2016 and December 31, 2015. Depreciation expense was $294 million and $309 million for the three months ended September 30, 2016 and 2015, respectively, and $845 million and $919 million for the nine months ended September 30, 2016 and 2015, respectively.

Interest

Interest payments made during the nine months ended September 30, 2016 and 2015 were $511 million and $471 million, respectively.

Amounts related to interest were as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2016		2015		2016		2015
Interest expense (a)	$	181	$	158	$	513	$	481
Interest income (a)	49		17		129		59
Capitalized interest costs	7		5		21		19


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

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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, 2016:



In millions	Industrial Packaging			Printing Papers				Consumer Packaging			Total
Balance as of January 1, 2016
Goodwill	$	3,325		$	2,124			$	1,664		$	7,113
Accumulated impairment losses (a)	(237		)	(1,877		)		(1,664		)	(3,778		)
	3,088			247				—			3,335
Reclassifications and other (b)	(1		)	38				—			37
Additions/reductions	—			(10		)	(c)	—			(10		)
Balance as of September 30, 2016
Goodwill	3,324			2,152				1,664			7,140
Accumulated impairment losses (a)	(237		)	(1,877		)		(1,664		)	(3,778		)
Total	$	3,087		$	275			$	—		$	3,362


(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.

Other Intangibles

Identifiable intangible assets comprised the following:



	September 30, 2016				December 31, 2015
In millions	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Customer relationships and lists	$	512	$	202	$	495	$	166
Non-compete agreements	70		63		69		56
Tradenames, patents and trademarks	60		56		61		54
Land and water rights	8		2		33		6
Software	24		22		22		20
Other	46		26		46		29
Total	$	720	$	371	$	726	$	331

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	2016		2015		2016		2015
Amortization expense related to intangible assets	$	14	$	16	$	39	$	45

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NOTE 11 - INCOME TAXES

International Paper made income tax payments, net of refunds, of $68 million and $118 million for the nine months ended September 30, 2016 and 2015, respectively.

The following table presents a rollforward of unrecognized tax benefits and related accrued estimated interest and penalties for the nine months ended September 30, 2016:



In millions	Unrecognized Tax Benefits			Accrued Estimated Interest and Tax Penalties
Balance at December 31, 2015	$	(150	)	$	(34	)
Activity for three months ended March 31, 2016	26			(1		)
Activity for the three months ended June 30, 2016	20			5
Activity for the three months ended September 30, 2016	6			8
Balance at September 30, 2016	$	(98	)	$	(22	)

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 $5 million during the next 12 months.

Included in the Company’s income tax provisions for the nine months ended September 30, 2016 and 2015, are $(91) million and $(109) 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	2016			2015
Special items	$	(37	)	$	(70	)
Tax-related adjustments:
Internal restructurings	(63		)	(62		)
Return to accrual	23			23
2010-2012 IRS audit closure	(14		)	—
Income tax provision (benefit) related to special items	$	(91	)	$	(109	)

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Environmental Proceedings

CERCLA and State Actions

International Paper has been named as a potentially responsible party (PRP) 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 PRPs. Remediation 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, 2016.

Cass Lake: One of the matters included above arises out of a closed wood-treating facility located in Cass Lake, Minnesota. In June 2011, the United States Environmental Protection Agency (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 March 2016, the EPA issued a proposed plan concerning clean-up standards at a portion of the site, the estimated cost of which is included within the $50 million reserve referenced above. 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.

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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 as of September 30, 2016. 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 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 polychlorinated biphenyls (PCBs) primarily as a result of discharges from various paper mills located along the Kalamazoo River, including a paper mill (the Allied Paper Mill) formerly owned by St. Regis Paper Company (St. Regis). The Company is a successor in interest to St. Regis. In March 2016, the Company and other PRPs received a special notice letter from the EPA (i) inviting participation concerning the remedy for a portion of the site, and (ii) demanding reimbursement of EPA past costs totaling $37 million, including $19 million in past costs previously demanded by the EPA. Separately, in April 2016, the EPA issued a unilateral administrative order to the Company and certain other PRPs to remove PCB contaminated sediments from a different portion of the site. The Company has responded to both the special notice letter and the unilateral administrative order, and in the case of the unilateral administrative order, has agreed along with two other parties to comply with the order subject to its sufficient cause defenses. On October 26, 2016, the Company and another PRP received a special notice letter from the EPA inviting participation in the remedial design component of the landfill remedy for the Allied Paper Mill. The record of decision establishing the final landfill remedy for the Allied Paper Mill was issued by the EPA in September 2016. The Company is evaluating the special notice letter. The Company’s CERCLA liability has not been finally determined with respect to these or any other portions of the site, and other than agreeing to perform the unilateral administrative order subject to its sufficient cause defenses, the Company has declined to perform any work or 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.

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 costs purportedly expended by plaintiffs ($79 million 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 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 past or future costs. The parties’ responsibility, including that of the Company, was the subject of a second trial, which was concluded in late 2015. A decision has not been rendered and it is unclear to what extent the Court will address responsibility for future costs in that decision. 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 (MIMC), a subsidiary of Waste Management, Inc., are PRPs at the San Jacinto River Waste Pits Superfund Site (San Jacinto River Superfund Site) in Harris County, Texas. The Company and MIMC have been actively participating in investigation and remediation activities at the site and have undertaken a time-critical removal action to install an armored cap over the northern impoundments. In September 2016, the EPA issued a proposed remedial action plan (PRAP) for the site, which identifies the preferred remedy as the removal of the contaminated material protected by the armored cap. In addition, the EPA selected a preferred remedy for the separate southern impoundments that requires offsite disposal. The Company is evaluating the PRAP and working with the other stakeholders to prepare comments on the PRAP. At this stage, 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.

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.

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In November 2014, International Paper secured a zero liability jury verdict. In April 2015, Harris County appealed the verdict, and in October 2016, the appellate court affirmed the trial court’s verdict. The Company is also defending an additional lawsuit related to the San Jacinto River Superfund Site brought by approximately 400 individuals who 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.

Vicksburg: In the first quarter of 2016, the Company received notice from the Mississippi Department of Environmental Quality (MDEQ) of a proposed penalty in excess of $100,000 arising from alleged violations of air emission permitting requirements at the Company’s Vicksburg, Mississippi paper mill. The Company resolved the matter in the third quarter of 2016 and paid a financial penalty of less than $100,000.

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 Co. (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 unspecified treble damages and attorneys' 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 on August 4, 2016, affirmed the District Court's decision on all counts. We will continue to aggressively defend this case, including the possibility of further challenges to class certification. In June 2015, International Paper and Temple-Inland were named as defendants in a lawsuit, later dismissed without prejudice in November 2015, captioned Del Monte Fresh Products N.A., Inc. v. Packaging Corporation of America (S.K. Fl.), in which the Plaintiff asserted substantially similar allegations to those raised in the Kleen Products action. Likewise, in June 2016, a lawsuit captioned Ashley Furniture Indus., Inc. v. Packaging Corporation of America (W.D. Wis.),was filed in federal court in Wisconsin. The Ashley Furniture lawsuit closely tracks the allegations found in the Kleen Products complaint but also asserts Wisconsin state antitrust claims. 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 action is in the discovery stage and the Tennessee and Ashley Furniture actions 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 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. In June 2016, we settled the homebuilder claims for an immaterial amount and the action has been dismissed.

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. The executed settlement agreement is proceeding through the normal court approval process.

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Tax

On October 16, 2015, the Company was notified of a $92 million tax assessment issued by the state of Sao Paulo, Brazil (State) for tax years 2011 through 2013. The assessment pertains to invoices issued by the Company related to the sale of paper to the editorial segment, which is exempt from the payment of ICMS value-added tax. This assessment is in the preliminary stage. The Company does not believe that a material loss is probable. During the second quarter of 2016, the Company received a favorable first instance judgment vacating the State's assessment. The Company anticipates that the State will appeal the judgment.

General

The Company is involved in various other inquiries, administrative proceedings and litigation relating to environmental and safety matters, labor and employment, personal injury, contracts, sales of property, intellectual property 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 these 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 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 Class A interests in the Borrower Entities, along with 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.

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. 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 obligations under these debt instruments with its investments in the Entities and despite the offset treatment, these remained debt obligations of International Paper. 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.

During 2015, International Paper initiated a series of actions, including acquiring the Class A interests from a third party for $198 million in cash and a restructuring, in order to extend the 2006 monetization structure and maintain the long-term nature of the $1.4 billion deferred tax liability. The restructuring resulted in the formation of wholly-owned, bankruptcy-remote special purpose entities (the 2015 Financing Entities) and International Paper began consolidating the 2015 Financing Entities during the third quarter of 2015. As part of the transactions, International Paper extended the maturity date on the Timber Notes and entered into nonrecourse third party bank loans totaling approximately $4.2 billion (the Extension Loans).

The Timber Notes are shown in Financial Assets of special purpose entities on the accompanying consolidated balance sheet and mature in August 2021 unless extended for an additional five years. These notes are supported by approximately $4.8 billion of irrevocable letters of credit. The Extension Loans are shown in Nonrecourse financial liabilities of special purpose entities on the accompanying consolidated balance sheet and mature in the fourth quarter of 2020.

In addition, provisions of loan agreements related to approximately $1.1 billion of the Extension Loans require the bank issuing the 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 the 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.

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As of September 30, 2016, the fair value of the Timber Notes and Extension Loans is $4.86 billion and $4.40 billion, respectively. The Timber Notes and Extension 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, 2015.

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	2016		2015		2016		2015
Revenue (a)	$	24	$	9	$	71	$	27
Expense (a)	32		19		96		56
Cash receipts (b)	47		11		76		21
Cash payments (c)	64		20		98		56

(a)

For the three months and nine months ended September 30, 2016, the revenue and expense are included in Interest expense, net in the accompanying consolidated statement of operations. For the three months and nine months ended September 30, 2015, 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.


(b)	For the three months and nine months ended September 30, 2016, cash receipts are interest received on the Financial assets of special purpose entities. For the three months and nine months ended September 30, 2015, the cash receipts are equity distributions from the Entities to International Paper prior to the formation of the 2015 Financing Entities.


(c)	For the three months and nine months ended September 30, 2016, the payments represent interest paid on Nonrecourse financial liabilities of special purpose entities. For the three months and nine months ended September 30, 2015, the cash payments are interest payments on the associated debt obligations of the Entities discussed above.

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, 2016, the fair value of the notes was $2.15 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, 2015.

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, 2016, the fair value of this debt was $2.02 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, 2015.

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



	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2016		2015		2016		2015
Revenue (a)	$	8	$	7	$	26	20
Expense (b)	10		7		26		20
Cash receipts (c)	4		1		10		5
Cash payments (d)	7		5		19		13

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(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, 2016 and 2015, 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, 2016 and 2015, 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.

NOTE 14 - DEBT

Amounts related to early debt extinguishment during the three months and nine months ended September 30, 2016 and 2015 were as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Early debt reductions (a)	$	266	$	90	$	266	$	1,479
Pre-tax early debt extinguishment costs	29		1		29		208


(a)	Reductions related to notes with an interest rate of 7.95% and original maturity in 2018 for both the three and nine months ended September 30, 2016, and from 4.75% to 5.85% with original maturities from 2019 to 2030 and from 4.70% to 9.38% with original maturities from 2015 to 2030 for the three and nine months ended September 30, 2015, respectively.

In August 2016, International Paper issued $1.1 billion of 3.00% senior unsecured notes with a maturity date in 2027 and $1.2 billion of 4.40% senior unsecured notes with a maturity date in 2047. In addition, the Company repaid approximately $266 million of notes with an interest rate of 7.95% and an original maturity of 2018. Pre-tax early debt retirement costs of $29 million related to the debt repayments, including $31 million of cash premiums, are included in Restructuring and other charges in the accompanying consolidated statement of operations.

During the first nine months of 2016, International Paper borrowed and repaid $800 million under a receivable securitization facility at an average rate of 1.20%. The Company had no borrowings outstanding under this program at September 30, 2016.

During the first nine months of 2016, International Paper entered into a $250 million contractually committed bank credit facility that expires on December 31, 2016 and has a facility fee of 0.15% per annum payable quarterly. During the first nine months of 2016, the Company borrowed and repaid $230 million on the bank credit facility and the bank credit facility was terminated during the third quarter of 2016.

In June 2016, International Paper entered into a commercial paper program with a borrowing capacity of $750 million. Under the terms of the program, individual maturities on borrowings may vary, but not exceed one year from the date of issue. Interest bearing notes may be issued either as fixed notes or floating rate notes. As of September 30, 2016, the Company had no borrowings outstanding under this program.

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.

At September 30, 2016, the fair value of International Paper’s $10.9 billion of debt was approximately $12.2 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, 2015.

Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At September 30, 2016, the Company held long-term credit ratings of BBB (stable outlook) and Baa2 (stable outlook) by S&P and Moody’s, respectively.

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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, 2015.

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



In millions	September 30, 2016		December 31, 2015
Derivatives in Cash Flow Hedging Relationships:
Foreign exchange contracts (a)	$	260	$	290
Derivatives in Fair Value Hedging Relationships:
Interest rate contracts	—		17
Derivatives Not Designated as Hedging Instruments:
Electricity contract	6		16
Foreign exchange contracts	22		35
Interest rate contracts	—		38


(a)	These contracts had maturities of two years or less as of September 30, 2016.

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	2016		2015			2016			2015
Foreign exchange contracts	$	5	$	(8	)	$	6		$	(2	)
Interest rate contracts	—		—			(11		)	—
Total	$	5	$	(8	)	$	(5	)	$	(2	)

During the next 12 months, the amount of the September 30, 2016 AOCI balance, after tax, that is expected to be reclassified to earnings is a gain of $1 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	2016		2015			2016		2015
Derivatives in Cash Flow Hedging Relationships:
Foreign exchange contracts	$	3	$	(7	)	$	7	$	(12	)	Cost of products sold
Total	$	3	$	(7	)	$	7	$	(12	)

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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	2016			2015			2016		2015
Derivatives in Fair Value Hedging Relationships:
Interest rate contracts	$	—		$	—		$	—	$	3			Interest expense, net
Debt	—			—			—		(3		)		Interest expense, net
Total	$	—		$	—		$	—	$	—
Derivatives Not Designated as Hedging Instruments:
Electricity contract	$	—		$	(7	)	$	—	$	(6	)		Cost of products sold
Foreign exchange contracts	—			(1		)	—		(3		)		Cost of products sold
Interest rate contracts	2		(a)	2			5		11			(b)	Interest expense, net
Total	$	2		$	(6	)	$	5	$	2

(a) Excluding gain of $2 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.

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



			2016						2015
In millions	Issued		Terminated		Undesignated		Issued		Terminated		Undesignated
Second Quarter	$	—	$	—	$	—	$	—	$	175	$	38
First Quarter	—		55		—		—		—		—
Total	$	—	$	55	$	—	$	—	$	175	$	38

Fair Value Measurements

For a discussion of the Company’s fair value measurement policies under the fair value hierarchy, refer to Note 14 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

The Company has not changed its valuation techniques for measuring the fair value of any financial assets or liabilities during the year. Transfers between levels, if any, are recognized at the end of the reporting period.

The following table provides a summary of the impact of our derivative instruments in the consolidated balance sheet:

Fair Value Measurements

Level 2 – Significant Other Observable Inputs



	Assets						Liabilities
In millions	September 30, 2016			December 31, 2015			September 30, 2016			December 31, 2015
Derivatives designated as hedging instruments
Foreign exchange contracts – cash flow	$	6	(a)	$	5	(a)	$	1	(b)	$	1	(b)
Total derivatives designated as hedging instruments	$	6		$	5		$	1		$	1
Derivatives not designated as hedging instruments
Electricity contract	$	—		$	—		$	3	(b)	$	7	(c)
Foreign exchange contracts	1		(a)	—			—			—
Total derivatives not designated as hedging instruments	$	1		$	—		$	3		$	7
Total derivatives	$	7		$	5		$	4		$	8


(a)	Included in Other current assets in the accompanying consolidated balance sheet.


(b)	Included in Other accrued liabilities in the accompanying consolidated balance sheet.


(c)	Includes $4 million recorded in Other accrued liabilities and $3 million recorded in Other liabilities in the accompanying consolidated balance sheet.

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The above contracts are subject to enforceable master netting arrangements that provide rights of offset with each counterparty when amounts are payable on the same date in the same currency or in the case of certain specified defaults. Management has made an accounting policy election to not offset the fair value of recognized derivative assets and derivative liabilities in the consolidated balance sheet. The amounts owed to the counterparties and owed to the Company are considered immaterial with respect to each counterparty and in the aggregate with all counterparties.

Credit-Risk-Related Contingent Features

Certain of the Company’s financial instruments used in hedging transactions are governed by standard credit support arrangements with counterparties. If the lower of the Company’s credit rating by Moody’s or S&P were to drop below investment grade, the Company would be required to post collateral for all of its derivatives in a net liability position, although no derivatives would terminate. As of September 30, 2016, there were no derivative instruments containing credit-risk-related contingent features in a net liability position. The fair value of derivative instruments containing credit risk-related contingent features in a net liability position was $1 million as of December 31, 2015. The Company was not required to post any collateral as of September 30, 2016 or December 31, 2015. For more information on credit-risk-related contingent features, refer to Note 14 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

NOTE 16 - RETIREMENT PLANS

International Paper sponsors and maintains the Retirement Plan of International Paper Company (the Pension Plan), a tax-qualified defined benefit pension plan that provides retirement benefits to substantially all U.S. salaried employees and hourly employees (receiving salaried benefits) hired prior to July 1, 2004, and substantially all other U.S. hourly and union employees who work at a participating business unit regardless of hire date. These employees generally are eligible to participate in the Pension Plan upon attaining 21 years of age and completing one year of eligibility service. U.S. salaried employees and hourly employees (receiving salaried benefits) hired after June 30, 2004, are not eligible for the Pension Plan, but receive a company contribution to their individual savings plan accounts; however, salaried employees hired by Temple Inland prior to March 1, 2007 also participate in the Pension Plan.

The Pension Plan provides defined pension benefits based on years of credited service and either final average earnings (salaried employees and hourly employees receiving salaried benefits), hourly job rates or specified benefit rates (hourly and union employees). A detailed discussion of these plans is presented in Note 16 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

The Company will freeze participation, including credited service and compensation, for salaried employees under the Pension Plan, the Pension Restoration Plan and the SERP for all service on or after January 1, 2019. In addition, compensation under the Temple-Inland Retirement Plan and the Temple-Inland Supplemental Executive Retirement Plan (collectively, the Temple Retirement Plans) will also be frozen beginning January 1, 2019. Credited service was previously frozen for the Temple Retirement Plans. This change will not affect benefits accrued through December 31, 2018.

Net periodic pension expense for our qualified and nonqualified U.S. defined benefit plans comprised the following:



	Three Months Ended September 30,						Nine Months Ended September 30,
In millions	2016			2015			2016			2015
Service cost	$	41		$	40		$	114		$	120
Interest cost	135			149			449			448
Expected return on plan assets	(199		)	(196		)	(611		)	(588		)
Actuarial loss	103			107			293			322
Amortization of prior service cost	11			11			31			33
Settlement	3			15			442			15
Net periodic pension expense	$	94		$	126		$	718