IP-6.30.2013-FORM 10-Q
Table of Contents

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 June 30, 2013
 
¨ 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 July 31, 2013 was 445,958,910.



Table of Contents

INDEX
 
 
 
PAGE NO.
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
 
 
 
Item 6.
 
 


Table of Contents

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
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Net Sales
$
7,335

 
$
7,077

 
$
14,425

 
$
13,732

Costs and Expenses
 
 
 
 
 
 
 
Cost of products sold
5,414

 
5,270

 
10,634

 
10,254

Selling and administrative expenses
515

 
474

 
1,082

 
987

Depreciation, amortization and cost of timber harvested
396

 
366

 
775

 
728

Distribution expenses
449

 
448

 
871

 
795

Taxes other than payroll and income taxes
47

 
44

 
96

 
85

Restructuring and other charges
(4
)
 
21

 
55

 
55

Net (gains) losses on sales and impairments of businesses

 
78

 

 
71

Net bargain purchase gain on acquisition of business
(13
)
 

 
(13
)
 

Interest expense, net
168

 
172

 
332

 
340

Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings
363

 
204

 
593

 
417

Income tax provision (benefit)
94

 
57

 
25

 
127

Equity earnings (losses), net of taxes
(36
)
 
(26
)
 
(46
)
 
18

Earnings (Loss) From Continuing Operations
233

 
121

 
522

 
308

Discontinued operations, net of taxes
24

 
16

 
50

 
21

Net Earnings (Loss)
257

 
137

 
572

 
329

Less: Net earnings (loss) attributable to noncontrolling interests
(2
)
 
3

 
(5
)
 
7

Net Earnings (Loss) Attributable to International Paper Company
$
259

 
$
134

 
$
577

 
$
322

Basic Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders
 
 
 
 
 
 
 
Earnings (loss) from continuing operations
$
0.53

 
$
0.27

 
$
1.19

 
$
0.69

Discontinued operations, net of taxes
0.05

 
0.04

 
0.11

 
0.05

Net earnings (loss)
$
0.58

 
$
0.31

 
$
1.30

 
$
0.74

Diluted Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders
 
 
 
 
 
 
 
Earnings (loss) from continuing operations
$
0.52

 
$
0.27

 
$
1.18

 
$
0.68

Discontinued operations, net of taxes
0.05

 
0.04

 
0.11

 
0.05

Net earnings (loss)
$
0.57

 
$
0.31

 
$
1.29

 
$
0.73

Average Shares of Common Stock Outstanding – assuming dilution
448.5

 
438.2

 
447.9

 
439.3

Cash Dividends Per Common Share
$
0.3000

 
$
0.2625

 
$
0.6000

 
$
0.5250

Amounts Attributable to International Paper Company Common Shareholders
 
 
 
 
 
 
 
Earnings (loss) from continuing operations
$
235

 
$
118

 
$
527

 
$
301

Discontinued operations, net of taxes
24

 
16

 
50

 
21

Net earnings (loss)
$
259

 
$
134

 
$
577

 
$
322

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

1

Table of Contents

INTERNATIONAL PAPER COMPANY
Consolidated Statement of Comprehensive Income
(Unaudited)
(In millions)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Net Earnings (Loss)
$
257

 
$
137

 
$
572

 
$
329

Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
 
 
Amortization of pension and post-retirement prior service costs and net loss:
 
 
 
 
 
 
 
U.S. plans
76

 
49

 
154

 
98

Pension and postretirement liability adjustments:
 
 
 
 
 
 
 
U.S. plans

 

 

 
24

Change in cumulative foreign currency translation adjustment
(337
)
 
(474
)
 
(346
)
 
(275
)
Net gains/losses on cash flow hedging derivatives:
 
 
 
 
 
 
 
Net gains (losses) arising during the period
(15
)
 
(21
)
 
(10
)
 
6

Reclassification adjustment for (gains) losses included in net earnings (loss)
(12
)
 
9

 
(9
)
 
13

Total Other Comprehensive Income (Loss), Net of Tax
(288
)
 
(437
)
 
(211
)
 
(134
)
Comprehensive Income (Loss)
(31
)
 
(300
)
 
361

 
195

Net (earnings) loss attributable to noncontrolling interests
2

 
(3
)
 
5

 
(7
)
Other comprehensive (income) loss attributable to noncontrolling interests
14

 
15

 
15

 
15

Comprehensive Income (Loss) Attributable to International Paper Company
$
(15
)
 
$
(288
)
 
$
381

 
$
203

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

2

Table of Contents

INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(In millions)
 
June 30,
2013
 
December 31,
2012
 
(unaudited)
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and temporary investments
$
1,205

 
$
1,302

Accounts and notes receivable, net
3,946

 
3,562

Inventories
2,745

 
2,730

Deferred income tax assets
322

 
323

Assets of businesses held for sale
774

 
759

Other current assets
276

 
229

Total Current Assets
9,268

 
8,905

Plants, Properties and Equipment, net
13,838

 
13,949

Forestlands
578

 
622

Investments
730

 
887

Financial Assets of Special Purpose Entities (Note 13)
2,118

 
2,108

Goodwill
4,437

 
4,315

Deferred Charges and Other Assets
1,576

 
1,367

Total Assets
$
32,545

 
$
32,153

Liabilities and Equity
 
 
 
Current Liabilities
 
 
 
Notes payable and current maturities of long-term debt
$
1,068

 
$
444

Accounts payable
2,926

 
2,775

Accrued payroll and benefits
472

 
508

Liabilities of businesses held for sale
54

 
44

Other accrued liabilities
1,157

 
1,227

Total Current Liabilities
5,677

 
4,998

Long-Term Debt
9,057

 
9,696

Nonrecourse Financial Liabilities of Special Purpose Entities (Note 13)
2,040

 
2,036

Deferred Income Taxes
3,137

 
3,026

Pension Benefit Obligation
4,089

 
4,112

Postretirement and Postemployment Benefit Obligation
453

 
473

Other Liabilities
1,067

 
1,176

Equity
 
 
 
Common stock, $1 par value, 2013 – 445.9 shares and 2012 – 439.9 shares
446

 
440

Paid-in capital
6,362

 
6,042

Retained earnings
3,967

 
3,662

Accumulated other comprehensive loss
(4,036
)
 
(3,840
)
 
6,739

 
6,304

Less: Common stock held in treasury, at cost, 2013 – 0.696 shares and 2012 – 0.013 shares
32

 

Total Shareholders’ Equity
6,707

 
6,304

Noncontrolling interests
318

 
332

Total Equity
7,025

 
6,636

Total Liabilities and Equity
$
32,545

 
$
32,153

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

3

Table of Contents

INTERNATIONAL PAPER COMPANY
Consolidated Statement of Cash Flows
(Unaudited)
(In millions)
 
 
Six Months Ended
June 30,
 
2013
 
2012
Operating Activities
 
 
 
Net earnings (loss)
$
572

 
$
329

Discontinued operations, net of taxes
(50
)
 
(21
)
Earnings (loss) from continuing operations, including portion attributable to noncontrolling interest
522

 
308

Depreciation, amortization and cost of timber harvested
775

 
728

Deferred income tax provision, net
36

 
110

Restructuring and other charges
55

 
55

Pension plan contribution
(31
)
 
(44
)
Net (gains) losses on sales and impairments of businesses

 
71

Net bargain purchase gain on acquisition of business
(13
)
 

Equity (earnings) losses, net
46

 
(18
)
Periodic pension expense, net
279

 
170

Other, net
(36
)
 
(16
)
Changes in current assets and liabilities
 
 
 
Accounts and notes receivable
(334
)
 
276

Inventories
(32
)
 
33

Accounts payable and accrued liabilities
78

 
(243
)
Interest payable
(17
)
 
20

Other
(89
)
 
(39
)
Cash Provided By (Used For) Operations – Continuing Operations
1,239

 
1,411

Cash Provided By (Used For) Operations – Discontinued Operations
40

 
(36
)
Cash Provided By (Used For) Operations
1,279

 
1,375

Investment Activities
 
 
 
Invested in capital projects
(488
)
 
(705
)
Acquisitions, net of cash acquired
(501
)
 
(3,734
)
Proceeds from divestitures

 
5

Other
(61
)
 
(93
)
Cash Provided By (Used For) Investment Activities – Continuing Operations
(1,050
)
 
(4,527
)
Cash Provided By (Used For) Investment Activities – Discontinued Operations
(3
)
 
(53
)
Cash Provided By (Used For) Investment Activities
(1,053
)
 
(4,580
)
Financing Activities
 
 
 
Repurchases of common stock and payments of restricted stock tax withholding
(51
)
 
(35
)
Issuance of common stock
243

 
21

Issuance of debt
168

 
1,919

Reduction of debt
(160
)
 
(1,135
)
Change in book overdrafts
(79
)
 
(46
)
Dividends paid
(266
)
 
(229
)
Redemption of securities
(150
)
 

Other
(12
)
 
(37
)
Cash Provided By (Used For) Financing Activities
(307
)
 
458

Effect of Exchange Rate Changes on Cash
(16
)
 
(19
)
Change in Cash and Temporary Investments
(97
)
 
(2,766
)
Cash and Temporary Investments
 
 
 
Beginning of period
1,302

 
3,994

End of period
$
1,205

 
$
1,228

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

4

Table of Contents

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 six 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, 2012 which have previously been filed with the Securities and Exchange Commission.
NOTE 2 - RECENT ACCOUNTING DEVELOPMENTS
Disclosures About Offsetting Assets and Liabilities
In December 2011, the Financial Accounting Standards Board (FASB) issued ASU No. 2011-11, "Disclosures about Offsetting Assets and Liabilities", which amends ASC 210, "Balance Sheet". This ASU requires entities to disclose gross and net information about both instruments and transactions eligible for offset in the statement of financial position and those subject to an agreement similar to a master netting arrangement. This would include derivatives and other financial securities arrangements. This guidance was effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013 and was required be applied retrospectively. The application of the requirements of this guidance did not have a material effect on the consolidated financial statements.
Intangibles – Goodwill and Other
In July 2012, the FASB issued ASU 2012-02, "Testing Indefinite-Lived Intangible Assets for Impairment," which amends ASC 350, "Intangibles - Goodwill and Other". This ASU gives an entity the option to first assess qualitative factors if it is more likely than not that the fair value of indefinite-lived intangible assets are less than their carrying amount. If that assessment indicates no impairment, the quantitative impairment test is not required. This amendment was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of the provisions of this guidance did not have a material effect on the Company's consolidated financial statements.
Comprehensive Income
In February 2013, the FASB issued ASU 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company adopted the provisions of this guidance in the first quarter of 2013.

5

Table of Contents

NOTE 3 - EQUITY
A summary of the changes in equity for the six-month periods ended June 30, 2013 and 2012 is provided below:
 
Six Months Ended
June 30,
 
2013
 
2012
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
$
6,304

 
$
332

 
$
6,636

 
$
6,645

 
$
340

 
$
6,985

Issuance of stock for various plans, net
345

 

 
345

 
99

 

 
99

Repurchase of stock
(51
)
 

 
(51
)
 
(35
)
 

 
(35
)
Common stock dividends ($0.600 per share in 2013 and $0.525 per share in 2012)
(272
)
 

 
(272
)
 
(237
)
 

 
(237
)
Dividends paid to noncontrolling interests by subsidiary

 
(1
)
 
(1
)
 

 
(3
)
 
(3
)
Noncontrolling interests of acquired entities, net

 
7

 
7

 

 
92

 
92

Acquisition of noncontrolling interests

 

 

 

 
(2
)
 
(2
)
Comprehensive income (loss)
381

 
(20
)
 
361

 
203

 
(8
)
 
195

Ending Balance, June 30
$
6,707

 
$
318

 
$
7,025

 
$
6,675

 
$
419

 
$
7,094


NOTE 4 - ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI)
The following table presents changes in AOCI for the three-month period ended June 30, 2013:
In millions
 
Defined Benefit Pension and Postretirement Items (a)
 
Change in Cumulative Foreign Currency Translation Adjustments (a)
 
Net Gains and Losses on Cash Flow Hedging Derivatives (a)
 
Total (a)
Balance as of March 31, 2013
 
$
(3,518
)
 
$
(255
)
 
$
10

 
$
(3,763
)
Other comprehensive income (loss) before reclassifications
 

 
(337
)
 
(15
)
 
(352
)
Amounts reclassified from accumulated other comprehensive income
 
76

 

 
(12
)
 
64

Net Current Period Other Comprehensive Income
 
76

 
(337
)
 
(27
)
 
(288
)
Balance as of June 30, 2013
 
$
(3,442
)
 
$
(592
)
 
$
(17
)
 
$
(4,051
)
(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 June 30, 2012:
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 as of March 31, 2012
 
$
(2,779
)
 
$
82

 
$
(5
)
 
$
(2,702
)
Other comprehensive income (loss) before reclassifications
 

 
(474
)
 
(21
)
 
(495
)
Amounts reclassified from accumulated other comprehensive income
 
49

 

 
9

 
58

Net Current Period Other Comprehensive Income
 
49

 
(474
)
 
(12
)
 
(437
)
Balance as of June 30, 2012
 
$
(2,730
)
 
$
(392
)
 
$
(17
)
 
$
(3,139
)
(a) All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.




6

Table of Contents


The following table presents changes in AOCI for the six-month period ended June 30, 2013:
In millions
 
Defined Benefit Pension and Postretirement Items (a)
 
Change in Cumulative Foreign Currency Translation Adjustments (a)
 
Net Gains and Losses on Cash Flow Hedging Derivatives (a)
 
Total (a)
Balance as of January 1, 2013
 
$
(3,596
)
 
$
(246
)
 
$
2

 
$
(3,840
)
Other comprehensive income (loss) before reclassifications
 

 
(363
)
 
(10
)
 
(373
)
Amounts reclassified from accumulated other comprehensive income
 
154

 
17

 
(9
)
 
162

Net Current Period Other Comprehensive Income
 
154

 
(346
)
 
(19
)
 
(211
)
Balance as of June 30, 2013
 
$
(3,442
)
 
$
(592
)
 
$
(17
)
 
$
(4,051
)
(a) All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.
The following table presents changes in AOCI for the six-month period ended June 30, 2012:
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 as of January 1, 2012
 
$
(2,852
)
 
$
(117
)
 
$
(36
)
 
$
(3,005
)
Other comprehensive income (loss) before reclassifications
 
24

 
(240
)
 
6

 
(210
)
Amounts reclassified from accumulated other comprehensive income
 
98

 
(35
)
 
13

 
76

Net Current Period Other Comprehensive Income
 
122

 
(275
)
 
19

 
(134
)
Balance as of June 30, 2012
 
$
(2,730
)
 
$
(392
)
 
$
(17
)
 
$
(3,139
)
(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 period ended June 30, 2013:
Details About Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income (a)
 
Location of Amount Reclassified from AOCI
In millions:
 
 
 
 
Defined benefit pension and postretirement items:
 
 
 
 
Prior-service costs
 
$
(3
)
(b)
Cost of products sold
Actuarial gains/(losses)
 
(122
)
(b)
Cost of products sold
Total pre-tax amount
 
(125
)
 
 
Tax (expense)/benefit
 
49

 
 
Net of tax
 
$
(76
)
 
 
Net gains and losses on cash flow hedging derivatives:
 
 
 
 
Foreign exchange contracts
 
$
18

(c)
Cost of products sold
Total pre-tax amount
 
18

 
 
Tax (expense)/benefit
 
(6
)
 
 
Net of tax
 
12

 
 
Total reclassifications for the period
 
$
(64
)
 
 
(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).


7

Table of Contents

The following table presents details of the reclassifications out of AOCI for the three-month period ended June 30, 2012:
Details About Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income (a)
 
Location of Amount Reclassified from AOCI
In millions:
 
 
 
 
Defined benefit pension and postretirement items:
 
 
 
 
Prior-service costs
 
$

(b)
Cost of products sold
Actuarial gains/(losses)
 
(80
)
(b)
Cost of products sold
Total pre-tax amount
 
(80
)
 
 
Tax (expense)/benefit
 
31

 
 
Net of tax
 
$
(49
)
 
 
Net gains and losses on cash flow hedging derivatives:
 
 
 
 
Foreign exchange contracts
 
$
(10
)
(c)
Cost of products sold
Natural gas contracts
 
(4
)
(c)
Cost of products sold
Total pre-tax amount
 
(14
)
 
 
Tax (expense)/benefit
 
5

 
 
Net of tax
 
(9
)
 
 
Total reclassifications for the period
 
$
(58
)
 
 

(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).

The following table presents details of the reclassifications out of AOCI for the six-month period ended June 30, 2013:
Details About Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income (a)
 
Location of Amount Reclassified from AOCI
In millions
 
 
 
 
Defined benefit pension and postretirement items:
 
 
 
 
Prior-service costs
 
$
(5
)
(b)
Cost of products sold
Actuarial gains/(losses)
 
(247
)
(b)
Cost of products sold
Total pre-tax amount
 
(252
)
 

Tax (expense)/benefit
 
98

 

Net of tax
 
$
(154
)
 

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

 
 
Net of tax
 
$
(17
)
 
 
Net gains and losses on cash flow hedging derivatives:
 
 
 
 
Foreign exchange contracts
 
$
13

(c)
Cost of products sold
Total pre-tax amount
 
13

 

Tax (expense)/benefit
 
(4
)
 

Net of tax
 
9

 

Total reclassifications for the period
 
$
(162
)
 


(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).



8

Table of Contents

The following table presents details of the reclassifications out of AOCI for the six-month period ended June 30, 2012:
Details About Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income (a)
 
Location of Amount Reclassified from AOCI
In millions
 
 
 
 
Defined benefit pension and postretirement items:
 
 
 
 
Prior-service costs
 
$
(1
)
(b)
Cost of products sold
Actuarial gains/(losses)
 
(159
)
(b)
Cost of products sold
Total pre-tax amount
 
(160
)
 

Tax (expense)/benefit
 
62

 

Net of tax
 
$
(98
)
 

Change in cumulative foreign currency translation adjustments:
 
 
 
 
Business acquisitions/divestitures
 
$
48

 
Net (gains) losses on sales and impairments of businesses
Tax (expense)/benefit
 
(13
)
 
 
Net of tax
 
$
35

 
 
Net gains and losses on cash flow hedging derivatives:
 
 
 
 
Foreign exchange contracts
 
$
(10
)
(c)
Cost of products sold
Natural gas contracts
 
(11
)
(c)
Cost of products sold
Total pre-tax amount
 
(21
)
 
 
Tax (expense)/benefit
 
8

 
 
Net of tax
 
(13
)
 
 
Total reclassifications for the period
 
$
(76
)
 
 

(a) Amounts in parentheses indicate debits to earnings/loss.
(b) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 16 for additional details).
(c) This accumulated other comprehensive income component is included in our derivatives and hedging activities (see Note 15 for additional details).

NOTE 5 - EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS
Basic earnings per common share are computed by dividing earnings by the weighted average number of common shares outstanding. Diluted earnings per common share are computed assuming that all potentially dilutive securities, including “in-the-money” stock options, were converted into common shares. A reconciliation of the amounts included in the computation of earnings (loss) per common share, and diluted earnings (loss) per common share is as follows: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions, except per share amounts
2013
 
2012
 
2013
 
2012
Earnings (loss) from continuing operations
$
235

 
$
118

 
$
527

 
$
301

Effect of dilutive securities (a)

 

 

 

Earnings (loss) from continuing operations – assuming dilution
$
235

 
$
118

 
$
527

 
$
301

Average common shares outstanding
444.9

 
434.8

 
443.2

 
434.5

Effect of dilutive securities (a)
 
 
 
 
 
 
 
Restricted stock performance share plan
3.3

 
3.4

 
4.3

 
4.8

Stock options (b)
0.3

 

 
0.4

 

Average common shares outstanding – assuming dilution
448.5

 
438.2

 
447.9

 
439.3

Basic earnings (loss) from continuing operations per common share
$
0.53

 
$
0.27

 
$
1.19

 
$
0.69

Diluted earnings (loss) from continuing operations per common share
$
0.52

 
$
0.27

 
$
1.18

 
$
0.68

(a) Securities are not included in the table in periods when antidilutive.
(b)
Options to purchase 12.1 million shares for the three months ended June 30, 2012 and 12.1 million shares for the six months ended June 30, 2012 were not included in the computation of diluted common shares outstanding because their exercise price exceeded the average market price of the Company’s common stock for each respective reporting period.

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NOTE 6 - RESTRUCTURING AND OTHER CHARGES
2013: During the three months ended June 30, 2013, restructuring and other charges totaling a gain of $4 million before taxes ($2 million after taxes) were recorded. Details of these charges were as follows:
 
Three Months Ended
June 30, 2013
In millions
Before-Tax
Charges
 
After-Tax
Charges
Early debt extinguishment costs
$
3

 
$
2

Insurance reimbursements
(30
)
 
(19
)
xpedx restructuring
17

 
10

Other
6

 
5

Total
$
(4
)
 
$
(2
)
During the three months ended March 31, 2013, restructuring and other charges totaling $59 million before taxes ($36 million after taxes) were recorded. Details of these charges were as follows:
 
Three Months Ended
March 31, 2013
In millions
Before-Tax
Charges
 
After-Tax
Charges
Early debt extinguishment costs
$
6

 
$
4

xpedx restructuring
7

 
4

Augusta paper machine shutdown
44

 
27

Other
2

 
1

Total
$
59

 
$
36

2012: During the three months ended June 30, 2012, restructuring and other charges totaling $21 million before taxes ($13 million after taxes) were recorded. Details of these charges were as follows: 
 
Three Months Ended
June 30, 2012
In millions
Before-Tax
Charges
 
After-Tax
Charges
Early debt extinguishment costs
$
10

 
$
6

xpedx restructuring
10

 
6

Other
1

 
1

Total
$
21

 
$
13

During the three months ended March 31, 2012, restructuring and other charges totaling $34 million before taxes ($23 million after taxes) were recorded. Details of these charges were as follows:
 
Three Months Ended March 31, 2012
In millions
Before-Tax
Charges
 
After-Tax
Charges
Early debt extinguishment costs
$
16

 
$
10

xpedx restructuring
19

 
14

Other
(1
)
 
(1
)
Total
$
34

 
$
23



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NOTE 7 - ACQUISITIONS AND JOINT VENTURES
Acquisitions
2013: On January 3, 2013, International Paper completed the acquisition (effective date of acquisition on January 1, 2013) of the shares of its joint venture partner, Sabanci Holding, in the Turkish corrugated packaging company, Olmuksa International Paper Sabanci Ambalaj Sanayi ve Ticaret A.S. (now called Olmuksan International Paper or Olmuksan), for a purchase price of $56 million. The acquired shares represent 43.7% of Olmuksan's shares. Prior to this acquisition, International Paper held a 43.7% equity interest in Olmuksan.
Because the transaction resulted in International Paper becoming the majority shareholder, owning 87.4% of Olmuksan's outstanding and issued shares, its completion triggered a mandatory call for tender of the remaining public shares which began in March 2013 and ended in April 2013, with no shares tendered. Also as a result of International Paper taking majority control of the entity, Olmuksan's financial results have been consolidated with the Company's Industrial Packaging segment beginning January 1, 2013, the effective date which International Paper obtained majority control of the entity.
Following the transaction, the Company's previously held 43.7% equity interest in Olmuksan was remeasured to a fair value of $75 million, resulting in a gain of $9 million. The fair value was estimated by applying the discounted cash flow approach, using a 13% discount rate, long-term sustainable growth rates ranging from 6% to 9% and a corporate tax rate of 20%. In addition, the cumulative translation adjustment balance of $17 million relating to the previously held equity interest was reclassified, as expense, to Net bargain purchase gain on acquisition of business in the accompanying consolidated statement of operations, from accumulated other comprehensive income.
The preliminary purchase price allocation indicates that the sum of the cash consideration paid, the fair value of the noncontrolling interest and the fair value of the previously held interest is less than the fair value of the underlying assets by $22 million, resulting in a bargain purchase price gain being recorded on this transaction.
The $17 million reclassification of the cumulative translation balance and $18 million of the estimated bargain purchase gain were recorded in the 2013 first-quarter earnings. The $9 million gain resulting from the measurement of the previously held equity interest and an additional $4 million bargain purchase gain were recorded in 2013 second-quarter earnings and are included in the Net bargain purchase gain on acquisition of business line item in the accompanying consolidated statement of operations.
Due to the timing of the completion of the acquisition, certain assumptions and estimates were used in determining the preliminary purchase price allocation. Those assumptions and estimates primarily relate to the amounts allocated to deferred taxes and contingent liabilities (which are included in Accounts payable and accrued liabilities in the accompanying consolidated balance sheet), as work is still ongoing as of June 30, 2013 to determine the fair value of those assets and liabilities at the acquisition date. Therefore, the amounts disclosed may change as the purchase price allocation is finalized. The purchase price allocation is expected to be finalized in the third quarter of 2013.
The following table summarizes the preliminary allocation of the purchase price to the fair value of assets and liabilities acquired as of January 1, 2013.
In millions
 
Cash and temporary investments
$
5

Accounts and notes receivable
72

Inventory
31

Other current assets
2

Plants, properties and equipment
105

Investments
11

Total assets acquired
226

Notes payable and current maturities of long-term debt
17

Accounts payable and accrued liabilities
27

Deferred income tax liability
4

Postretirement and postemployment benefit obligation
6

Total liabilities assumed
54

Noncontrolling interest
18

Net assets acquired
$
154

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

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2012: On February 13, 2012, International Paper completed the acquisition of Temple-Inland Inc. (Temple-Inland). International Paper acquired all of the outstanding common stock of Temple-Inland for $32.00 per share in cash, totaling approximately $3.7 billion, and assumed approximately $700 million in Temple-Inland’s debt. As a condition to allowing the transaction to proceed, the Company entered into an agreement on a proposed Final Judgment with the Antitrust Division of the U.S. Department of Justice (DOJ) that required the Company to divest three containerboard mills, with approximately 970,000 tons of aggregate containerboard capacity. On July 2, 2012, International Paper finalized the sales of its Ontario and Oxnard (Hueneme), California containerboard mills to New-Indy Containerboard LLC, and its New Johnsonville, Tennessee containerboard mill to Hood Container Corporation. By completing these transactions, the Company satisfied its divestiture obligations under the Final Judgment. See Note 8 for further details of these divestitures.
Temple-Inland's results of operations are included in the consolidated financial statements from the date of acquisition on February 13, 2012.
The following summarizes the allocation of the purchase price to the fair value of assets and liabilities acquired as of February 13, 2012, which was finalized in the fourth quarter of 2012. 
In millions
 
Accounts and notes receivable
$
466

Inventory
484

Deferred income tax assets – current
140

Other current assets
57

Plants, properties and equipment
2,911

Financial assets of special purpose entities
2,091

Goodwill
2,139

Other intangible assets
693

Deferred charges and other assets
54

Total assets acquired
9,035

Notes payable and current maturities of long-term debt
130

Accounts payable and accrued liabilities
704

Long-term debt
527

Nonrecourse financial liabilities of special purpose entities
2,030

Deferred income tax liability
1,252

Pension benefit obligation
338

Postretirement and postemployment benefit obligation
99

Other liabilities
221

Total liabilities assumed
5,301

Net assets acquired
$
3,734

The identifiable intangible assets acquired in connection with the Temple-Inland acquisition included the following: 
In millions
Estimated
Fair  Value
 
Average
Remaining
Useful Life
 
 
 
(at acquisition date)
Asset Class:
 
 
 
Customer relationships
$
536

 
12-17 years
Developed technology
8

 
5-10 years
Tradenames
109

 
Indefinite
Favorable contracts
14

 
4-7 years
Non-compete agreement
26

 
2 years
Total
$
693

 
 
In connection with the purchase price allocation, inventories were written up by approximately $20 million before taxes ($12 million after taxes) to their estimated fair value. As the related inventories were sold in the 2012 first quarter, this amount was expensed in Cost of products sold for the quarter.
Additionally, Selling and administrative expenses included $14 million ($8 million after taxes) and $26 million ($16 million after taxes), for the three months and six months ended June 30, 2013, respectively, and $35 million ($22 million after taxes)

12

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and $78 million ($55 million after taxes), for the three months and six months ended June 30, 2012, respectively, in charges for integration costs associated with the acquisition.
The following unaudited pro forma information for the six months ended June 30, 2012 represents the results of operations of International Paper as if the Temple-Inland acquisition had occurred as of January 1, 2012. This information does not purport to represent International Paper’s actual results of operations if the transaction described above would have occurred on January 1, 2012, nor is it necessarily indicative of future results. 
In millions, except per share amounts
 
Six Months Ended
June 30, 2012
Net sales
 
$
14,024

Earnings (loss) from continuing operations (a)
 
342

Net earnings (loss) (a)
 
363

Diluted earnings (loss) from continuing operations per common share (a)
 
0.78

Diluted net earnings (loss) per common share (a)
 
0.83

 (a) Attributable to International Paper Company common shareholders.
Joint Ventures
2013: On January 14, 2013, International Paper and Brazilian corrugated packaging producer, Jari Celulose, Papel e Embalagens S.A. (Jari), a Grupo Orsa company, formed Orsa International Paper Embalagens S.A. (Orsa IP). The new entity, in which International Paper holds a 75% stake, includes three containerboard mills and four box plants, which make up Jari's former industrial packaging assets. This acquisition supports the Company's strategy of growing its global packaging presence and better serving its global customer base.
The value of International Paper's investment in Orsa IP is approximately $465 million. Because International Paper acquired majority control of the joint venture, Orsa IP's financial results have been consolidated with our Industrial Packaging segment from the date of formation on January 14, 2013.
Due to the timing of the completion of the acquisition, certain assumptions and estimates were used in determining the preliminary purchase price allocation. Those assumptions and estimates primarily relate to the amounts allocated to deferred taxes and postretirement and postemployment benefit obligations, as work is still ongoing as of June 30, 2013 to determine the fair value of those assets and liabilities at the acquisition date. Therefore, the amount disclosed may change materially as the purchase price allocation is refined. The purchase price allocation is expected to be finalized during the fourth quarter of 2013.
The following table summarizes the preliminary allocation of the purchase price to the fair value of assets and liabilities acquired as of January 14, 2013.
In millions
 
Cash and temporary investments
$
16

Accounts and notes receivable, net
5

Inventory
27

Plants, properties and equipment
293

Goodwill
190

Other intangible assets
144

Other long-term assets
3

Total assets acquired
678

Accounts payable and accrued liabilities
10

Deferred income tax liability
69

Total liabilities assumed
79

Noncontrolling interest
134

Net assets acquired
$
465


13

Table of Contents

The identifiable intangible assets acquired in connection with the Orsa IP acquisition included the following: 
In millions
Estimated
Fair  Value
 
Average
Remaining
Useful Life
 
 
 
(at acquisition date)
Asset Class:
 
 
 
Customer relationships
$
116

 
12 years
Trademark
4

 
6 years
Wood supply agreement
24

 
25 years
Total
$
144

 
 
Pro forma information related to the acquisition of Orsa IP has not been included as it does not have a material effect on the Company's consolidated results of operations.
Due to the complex organizational structure of Orsa IP's operations, and the extended time required to prepare consolidated financial information in accordance with accounting principles generally accepted in the United States, the Company reports its share of Orsa IP's operating results on a one-month lag basis.
NOTE 8 - BUSINESSES HELD FOR SALE, DIVESTITURES AND IMPAIRMENTS
Discontinued Operations
On July 19, 2013, the Company finalized the sale of its Temple-Inland Building Products division, which included 15 manufacturing facilities, to Georgia-Pacific Building Products, LLC for $710 million in cash, subject to customary closing adjustments.
On April 1, 2013, the Company finalized the sale of Temple-Inland's 50% interest in Del-Tin Fiber L.L.C. (Del-Tin) to joint venture partner Deltic Timber Corporation (Deltic) for $20 million in assumed liabilities and cash. Accordingly, the Del-Tin assets (which included a manufacturing facility) were excluded from the sale to Georgia-Pacific and the purchase price under our sale agreement with Georgia-Pacific was adjusted from $750 million to $710 million.
The operating results of the Temple-Inland Building Products business have been included in Discontinued operations from the date of acquisition. The assets of this business, totaling $774 million and $759 million at June 30, 2013 and December 31, 2012, respectively, are included in Assets of businesses held for sale in current assets in the accompanying consolidated balance sheet at June 30, 2013 and December 31, 2012. Included in these amounts are $26 million and $153 million related to goodwill and intangibles, respectively. The liabilities of this business, totaling $54 million and $44 million at June 30, 2013 and December 31, 2012, respectively, are included in Liabilities of businesses held for sale in the accompanying consolidated balance sheet at June 30, 2013 and December 31, 2012.
Other Divestitures and Impairments
2012: As referenced in Note 7, on July 2, 2012, International Paper finalized the sales of its Ontario and Oxnard (Hueneme), California containerboard mills to New-Indy Containerboard LLC, and its New Johnsonville, Tennessee containerboard mill to Hood Container Corporation. A pre-tax charge of $9 million ($5 million after taxes) was recorded during the three months ended June 30, 2012 for costs associated with the divestiture of these three containerboard mills. Also, in anticipation of the divestiture of the Hueneme mill in Oxnard, California, a pre-tax charge of $62 million ($38 million after taxes) was recorded during the three months ended June 30, 2012 to adjust the long-lived assets of the mill to their fair value.
Also during the three months ended June 30, 2012, the Company recorded a pre-tax charge of $6 million ($4 million after taxes) to adjust the previously estimated loss on the sale of the Company's Shorewood business.
During the three months ended March 31, 2012, the Company recorded a pre-tax gain of $7 million ($6 million after taxes) to adjust the previously estimated loss on the sale of the Company’s Shorewood business. The sale of the Shorewood non-U.S. business was completed in January 2012.
All of the charges discussed above are included in Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations.


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Table of Contents

NOTE 9 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Temporary Investments 
In millions
June 30, 2013
 
December 31, 2012
Temporary investments
$
855

 
$
934

Accounts and Notes Receivable
In millions
June 30, 2013
 
December 31, 2012
Accounts and notes receivable, net:
 
 
 
Trade
$
3,685

 
$
3,316

Other
261

 
246

Total
$
3,946

 
$
3,562

Inventories 
In millions
June 30, 2013
 
December 31, 2012
Raw materials
$
344

 
$
360

Finished pulp, paper and packaging
1,737

 
1,728

Operating supplies
588

 
588

Other
76

 
54

Total
$
2,745

 
$
2,730

Depreciation Expense 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2013
 
2012
 
2013
 
2012
Depreciation expense
$
360

 
$
353

 
$
716

 
$
698

Valuation Accounts
Certain valuation accounts were as follows: 
In millions
June 30, 2013
 
December 31, 2012
Accumulated depreciation
$
19,418

 
$
18,934

Allowance for doubtful accounts
135

 
119

During the second quarter of 2013, a reserve of $28 million on $42 million of total receivables from a large envelope company was recorded due to their filing for bankruptcy protection in June 2013. The reserve is based on the Company's estimate of ultimate expected losses associated with the outstanding receivable balance.
There was no material activity related to asset retirement obligations during either of the six months ended June 30, 2013 or 2012.
Interest
Cash payments related to interest were as follows: 
 
Six Months Ended
June 30,
In millions
2013
 
2012
Interest payments
$
384

 
$
349


15

Table of Contents

Amounts related to interest were as follows: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2013
 
2012
 
2013
 
2012
Interest expense (a)
$
181

 
$
179

 
$
358

 
$
362

Interest income (a)
13

 
7

 
26

 
22

Capitalized interest costs
4

 
13

 
8

 
19


(a)
Interest expense and interest income exclude approximately $11 million and $24 million for the three months and six months ended June 30, 2013 and $12 million and $20 million for the three months and six months ended June 30, 2012, respectively, related to investments in and borrowings from variable interest entities for which the Company has a legal right of offset (see Note 13).
Postretirement Benefit Expense
The components of the Company’s postretirement benefit expense were as follows: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2013
 
2012
 
2013
 
2012
Service cost
$
1

 
$

 
$
1

 
$
1

Interest cost
3

 
5

 
7

 
10

Actuarial loss

 
3

 
3

 
5

Amortization of prior service credit
(6
)
 
(7
)
 
(12
)
 
(14
)
Net postretirement benefit expense
$
(2
)
 
$
1

 
$
(1
)
 
$
2


NOTE 10 - GOODWILL AND OTHER INTANGIBLES
Goodwill
The following table presents changes in goodwill balances as allocated to each business segment for the six-month period ended June 30, 2013: 
In millions
Industrial
Packaging
 
Printing
Papers
 
Consumer
Packaging
 
Distribution
 
Total
Balance as of January 1, 2013
 
 
 
 
 
 
 
 
 
Goodwill
$
3,165

  
$
2,396

  
$
1,783

  
$
400

 
$
7,744

Accumulated impairment losses (a)

  
(1,765
)
 
(1,664
)
 

 
(3,429
)
 
3,165

  
631

  
119

  
400

 
4,315

Reclassifications and other (b)
(14
)
 
(44
)
 
2

 

 
(56
)
Additions/reductions
190

(c) 
(12
)
(d) 

 

 
178

Balance as of June 30, 2013
 
 
 
 
 
 
 
 
 
Goodwill
3,341

  
2,340

  
1,785

  
400

 
7,866

Accumulated impairment losses (a)

  
(1,765
)
 
(1,664
)
 

 
(3,429
)
Total
$
3,341

  
$
575

  
$
121

  
$
400

 
$
4,437

 
(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)
Represents Orsa IP, the newly formed joint venture in Brazil.
(d)
Reflects a reduction from tax benefits generated by the deduction of goodwill amortization for tax purposes in Brazil.


16

Table of Contents

Other Intangibles
Identifiable intangible assets comprised the following: 
 
June 30, 2013
 
December 31, 2012
In millions
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Customer relationships and lists
$
737

 
$
125

 
$
644

 
$
112

Non-compete agreements
79

 
38

 
83

 
30

Tradenames, patents and trademarks
161

 
16

 
144

 
16

Land and water rights
69

 
6

 
87

 
6

Fuel and power agreements
18

 
14

 
17

 
12

Software
29

 
28

 
22

 
19

Other
105

 
16

 
83

 
19

Total
$
1,198

 
$
243

 
$
1,080

 
$
214

The Company recognized the following amounts as amortization expense related to intangible assets: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2013
 
2012
 
2013
 
2012
Amortization expense related to intangible assets
$
19

 
$
7

 
$
36

 
$
15

NOTE 11 - INCOME TAXES
International Paper made income tax payments, net of refunds, as follows: 
 
Six Months Ended
June 30,
In millions
2013
 
2012
Income tax payments, net
$
164

 
$
(20
)
The following table presents a rollforward of unrecognized tax benefits and related accrued estimated interest and penalties for the six months ended June 30, 2013: 
In millions
Unrecognized
Tax Benefits
 
Accrued Estimated
Interest and Tax
Penalties
Balance at December 31, 2012
$
(972
)

$
(104
)
Activity for three months ended March 31, 2013
99

 
20

Activity for the three months ended June 30, 2013
6

 
1

Balance at June 30, 2013
$
(867
)

$
(83
)
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 $750 million during the next 12 months and approximately $680 million of this reduction will positively impact the effective rate.
Included in the Company’s income tax provisions for the six months ended June 30, 2013 and 2012, are $126 million and $79 million of income tax benefits, respectively, related to special items. The components of the net provision related to special items were as follows: 
 
Six Months Ended
June 30,
In millions
2013
 
2012
Special items
$
(37
)
 
$
(82
)
Tax-related adjustments:
 
 
 
Temple-Inland acquisition

 
3

IRS audit settlement
(91
)
 

Other
2

 

Income tax provision (benefit) related to special items
$
(126
)
 
$
(79
)

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Table of Contents


NOTE 12 - COMMITMENTS AND CONTINGENCIES
Environmental Proceedings
International Paper has been named as a potentially responsible party in environmental remediation actions under various federal and state laws, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Many of these proceedings involve the cleanup of hazardous substances at large commercial landfills that received waste from many different sources. While joint and several liability is authorized under CERCLA and equivalent state laws, as a practical matter, liability for CERCLA cleanups is typically allocated among the many potential responsible parties. Remedial costs are recorded in the consolidated financial statements when they become probable and reasonably estimable. International Paper has estimated the probable liability associated with these matters to be approximately $96 million in the aggregate.
Cass Lake: One of the matters referenced above is a closed wood treating facility located in Cass Lake, Minnesota. During 2009, in connection with an environmental site remediation action under CERCLA, International Paper submitted to the EPA a site 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 $52 million to address this selection of an alternative for the soil remediation component of the overall site remedy. In October 2011, the EPA released a public statement indicating that the final soil remedy decision would be delayed. In the unlikely event that the EPA changes its proposed soil remedy and approves instead a more expensive clean-up alternative, the remediation costs could be material, and significantly higher than amounts currently recorded. In October 2012, the Natural Resource Trustees for this site provided notice to International Paper and other potentially responsible parties of their intent to perform a Natural Resource Damage Assessment. It is premature to predict the outcome of the assessment or to estimate a loss or range of loss, if any, which may be incurred.
Other: In addition to the above matters, other remediation costs typically associated with the cleanup of hazardous substances at the Company’s current, closed or formerly-owned facilities, and recorded as liabilities in the balance sheet, totaled approximately $44 million at June 30, 2013. Other than as described above, completion of required remedial actions is not expected to have a material effect on our consolidated financial statements.
Kalamazoo River: The Company is a potentially responsible party with respect to the Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site (Kalamazoo River Superfund Site) in Michigan. The EPA asserts that the site is contaminated primarily by PCBs as a result of discharges from various paper mills located along the Kalamazoo River, including a paper mill formerly owned by St. Regis Paper Co. (St. Regis). The Company is a successor in interest to St. Regis. International Paper has not received any orders from the EPA with respect to the site and is in the process of collecting information from the EPA and other parties relative to the site to evaluate the extent of its liability, if any, with respect to the site. Accordingly, it is premature to estimate a loss or range of loss with respect to this site.
Also in connection with the Kalamazoo River Superfund Site, the Company was named as a defendant by Georgia-Pacific Consumer Products LP, Fort James Corporation and Georgia Pacific LLC in a contribution and cost recovery action for alleged pollution at the Kalamazoo River Superfund Site. The suit seeks contribution under CERCLA for $79 million in costs purportedly expended by plaintiffs as of the filing of the complaint and for future remediation costs. The suit alleges that a mill, during the time it was allegedly owned and operated by St. Regis, discharged PCB contaminated solids and paper residuals resulting from paper de-inking and recycling. Also named as defendants in the suit are NCR Corporation and Weyerhaeuser Company. In mid-2011, the suit was transferred from the District Court for the Eastern District of Wisconsin to the District Court for the Western District of Michigan. The trial of the initial liability phase took place in February 2013, although there has not yet been any decision regarding the Company's liability. The Company thus believes it is premature to predict the outcome or to estimate a loss or range of loss, if any, which may be incurred.
Harris County: International Paper and McGinnis Industrial Maintenance Corporation, a subsidiary of Waste Management, Inc., are potentially responsible parties at the San Jacinto River Waste Pits Superfund Site (San Jacinto River Superfund Site) in Harris County, Texas, and have been actively participating in investigation and remediation activities at this Superfund site. In December 2011, Harris County, Texas filed a suit against the Company in Harris County District Court seeking civil penalties with regard to the alleged discharge of dioxin into the San Jacinto River since 1965 from waste impoundments that are part of the San Jacinto River Superfund Site. Also named as defendants in this action are McGinnis Industrial Maintenance Corporation, Waste Management, Inc. and Waste Management of Texas Inc. Harris County is seeking civil penalties pursuant to the Texas Water Code, which provides for the imposition of civil penalties between $50 and $25,000 per day. The case is in the discovery phase and it is therefore premature to predict the outcome or to estimate a loss or range of loss, if any, which may be incurred.
In October 2012, a civil lawsuit was filed against the same defendants, including the Company, in the District Court of Harris County by what are now 659 plaintiffs seeking medical monitoring and damages with regard to the alleged discharge of dioxin into the San Jacinto River since 1965 from waste impoundments that are a part of the San Jacinto Superfund Site. This case is

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in the discovery phase and it is therefore premature to predict the outcome or to estimate a loss or range of loss, if any, which may be incurred. In December 2012, residents of an up-river neighborhood filed a civil action against the same defendants, including the Company, in the District Court of Harris County alleging property damage and personal injury from the alleged discharge of dioxin into the San Jacinto River from the San Jacinto Superfund Site. This case is in the discovery phase and it is therefore premature to predict the outcome or to estimate a loss or range of loss, if any, which may be incurred.
Bogalusa: In August 2011, Temple-Inland's Bogalusa, Louisiana paper mill received predictive test results indicating that Biochemical Oxygen Demand (BOD) limits for permitted discharge from the wastewater treatment pond into the Pearl River were exceeded after an upset condition at the mill and subsequently confirmed reports of a fish kill on the Pearl River (the Bogalusa Incident). Temple-Inland initiated a full mill shut down, notified the Louisiana Department of Environmental Quality (LDEQ) of the situation and took corrective actions to restore the water quality of the river. On September 2, 2011, Bogalusa mill operations were restarted upon receiving approval from the LDEQ. The LDEQ, the Mississippi DEQ, and other regulatory agencies in those states each gave notice of intent to levy penalties and recover restitution damages resulting from the Bogalusa Incident. To date, we have settled for a total of approximately $1 million the known claims of various Mississippi regulatory agencies and the Louisiana Department of Wildlife and Fisheries (LDWF).
In February 2013, a plea agreement was reached with the U.S. Attorney's Office in New Orleans as a result of a federal criminal investigation into the Bogalusa Incident. On May 29, 2013, the U.S. District Court in New Orleans approved the plea agreement and sentenced Temple-Inland subsidiary, TIN Inc., to a misdemeanor violation of the Clean Water Act and a misdemeanor violation of the National Wildlife Refuge statute. The sentence included a $3.3 million financial penalty, which was paid in the second quarter of 2013, and a two-year corporate probation period for TIN Inc.
On June 17, 2013, the LDEQ levied a civil enforcement penalty for the Bogalusa Incident of approximately $1.7 million against TIN Inc. The Company will not contest the penalty and will pay the assessment in the third quarter of 2013. The Bogalusa Mill also expects the LDEQ to levy a civil penalty in an amount greater than $100,000, but not material, arising from an LDEQ environmental multi-media audit in 2011 and from air permit deviations self-disclosed by the mill in 2012.
Temple-Inland (or its affiliates) is a defendant in 28 civil lawsuits in Louisiana and Mississippi related to the Bogalusa Incident. Fifteen of these civil cases were filed in Louisiana state court shortly after the incident and have been removed and consolidated in an action pending in the U.S. District Court for the Eastern District of Louisiana along with a civil case originally filed in that court. During August 2012, an additional 13 causes of action were filed in federal or state court in Mississippi and Louisiana. In October 2012, International Paper and the Plaintiffs' Steering Committee, the group of attorneys appointed by the Louisiana federal court to organize and coordinate the efforts of all the plaintiffs in this litigation, reached a tentative understanding on key structural terms and an amount for resolution of the litigation. The court granted preliminary approval for the proposed class action settlement on December 19, 2012. There were no opt-outs and four objections which were all later withdrawn. The Fairness Hearing was held July 10, 2013, and the court issued its Final Order and Judgment Approving Class Action Settlement the same day. Under the terms of the settlement agreement, the class action settlement will be deemed final on August 9, 2013, and we will have until September 8, 2013 to fund the settlement. A total of 2,073 putative class members submitted a claim. This settlement does not have a material effect on the Company's consolidated financial statements.
Legal Proceedings
Antitrust: In September 2010, eight containerboard producers, including International Paper and Temple-Inland, were named as defendants in a purported class action complaint that alleged a civil violation of Section 1 of the Sherman Act. The suit is captioned Kleen Products LLC v. Packaging Corp. of America (N.D. Ill.). The complaint alleges that the defendants, beginning in August 2005 through November 2010, conspired to limit the supply and thereby increase prices of containerboard products. The alleged class is all persons who purchased containerboard products directly from any defendant for use or delivery in the United States during the period August 2005 to the present. The complaint seeks to recover an unspecified amount of treble actual damages and attorney’s fees on behalf of the purported class. Four similar complaints were filed and have been consolidated in the Northern District of Illinois. Moreover, in January 2011, International Paper was named as a defendant in a lawsuit filed in state court in Cocke County, Tennessee alleging that International Paper violated Tennessee law by conspiring to limit the supply and fix the prices of containerboard from mid-2005 to the present. Plaintiffs in the state court action seek certification of a class of Tennessee indirect purchasers of containerboard products, damages and costs, including attorneys’ fees. The Company disputes the allegations made and intends to vigorously defend each action. However, because the Kleen Products case is in the discovery phase and the Tennessee action is in the preliminary stages, we are unable to predict an outcome or estimate a range of reasonably possible loss.
In late December 2012, purchasers of gypsum board filed purported class action complaints alleging civil violations of Section 1 of the Sherman Act against Temple-Inland and a number of other gypsum manufacturers in three separate actions. Two of the actions were filed in the U.S. District Court for the Eastern District of Pennsylvania (E.D. PA) and one in the U.S. District Court for the Northern District of Illinois (N.D. IL). The case in the N.D. IL was voluntarily dismissed in December. Since that

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time, approximately 25 additional actions were collectively filed between the E.D. PA and the N.D. IL and the U.S. District Court for the Western District of North Carolina (W.D. NC), on behalf of direct and indirect purchasers. The complaints are similar and allege 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 limit order fulfillment. The alleged classes are all persons who purchased gypsum board and/or gypsum finishing products directly or indirectly from any defendant and the conspiracy is alleged to have commenced on or before either September 2011 or January 2008. The complainants seek to recover unspecified treble actual damages and attorneys' fees on behalf of the purported classes. On April 8, 2013, the Judicial Panel on Multidistrict Litigation ordered transfer of all pending cases to E.D. PA for coordinated and consolidated pretrial proceedings, and the direct purchaser plaintiffs and indirect purchaser plaintiffs filed their respective amended consolidated complaints in June 2013. The amended consolidated complaints allege a conspiracy or agreement beginning in or before September 2011. The Company disputes the allegations made and intends to vigorously defend the consolidated action. Because the cases are in preliminary stages, we are unable to predict an outcome or estimate a range of reasonably possible loss. However, we do not believe that any loss is probable.
Guaranty Bank: As we have previously disclosed, Temple-Inland was named as a defendant in a lawsuit filed in August 2011 in the United States District Court for the Northern District of Texas captioned Tepper v. Temple-Inland Inc. This lawsuit was brought by the liquidation trustee for Guaranty Financial Group, Inc., Temple-Inland’s former financial services business which was spun off by Temple-Inland in 2007, on behalf of certain creditors of the business. The lawsuit alleged, among other things, that Temple-Inland and certain of its affiliates, officers, and directors caused the failure of Guaranty Financial Group and its wholly-owned subsidiary Guaranty Bank and asserted various claims related to the failure. In October 2012, the Company entered into a settlement with the liquidation trustee and the Federal Deposit Insurance Corporation (FDIC) to resolve this litigation. The settlement, which has been approved by the bankruptcy court, resolved all claims related to the spin-off and subsequent failure of Guaranty Bank that have been or could be asserted by the trustee or the FDIC, in its capacity as Receiver of Guaranty Bank, against Temple-Inland and its affiliates or any of its former officers, directors or employees. In exchange for this full release from liability, Temple-Inland agreed to release certain bankruptcy-related claims it and other defendants asserted in the Guaranty Financial Group bankruptcy, and to make $80 million in payments ($38 million to the trustee and $42 million to the FDIC) (the Settlement Amount), a portion of which will be tax deductible. In December 2012, the settlement was closed and the Settlement Amount was paid and releases were exchanged. Pursuant to a settlement reached with its insurers, the Company was reimbursed $30 million of the Settlement Amount in the second quarter of 2013, and expects to recover a significant portion of defense costs incurred.
Temple-Inland is also a defendant in a lawsuit captioned North Port Firefighters’ Pension v. Temple-Inland Inc., filed in November 2011 in the United States District Court for the Northern District of Texas and subsequently amended. The lawsuit alleges a class action against Temple-Inland and certain individual defendants contending that Temple-Inland and certain individual defendants misrepresented the financial condition of Guaranty Financial Group during the period December 12, 2007 through August 24, 2009. Temple-Inland distributed the stock of Guaranty Financial Group to its shareholders on December 28, 2007, after which Guaranty Financial Group was an independent, publicly held company. The action is pled as a securities claim on behalf of persons who acquired Guaranty Financial Group stock during the putative class period. Although focused chiefly on statements made by Guaranty Financial Group to its shareholders after it was an independent, publicly held company, the action repeats many of the same allegations of fact made in the Tepper litigation. On June 20, 2012, all defendants in the lawsuit filed motions to dismiss the amended complaint. On March 28, 2013, the district court granted Temple-Inland's and the individual defendants' motions to dismiss without prejudice. The plaintiff must first seek the court's leave prior to filing any amended complaint against the Company. On July 30, 2013, the district court dismissed the Second Amended Complaint filed against the individual defendants with prejudice, also noting that since the plaintiff did not seek the court's leave to amend their complaint with respect to the claims against Temple-Inland, all claims against Temple-Inland were dismissed with prejudice. 
Each of the individual defendants in both the Tepper litigation and the North Port litigation has requested advancement of their costs of defense from Temple-Inland and has asserted a right to indemnification by Temple-Inland. We believe that all or part of these defense costs would be covered losses under Temple-Inland’s directors and officers insurance. The carriers under the applicable policies have been notified of the claims and each has responded with a reservation of rights letter.
Tax: The Company is currently being challenged by Brazilian tax authorities concerning the statute of limitations related to the use of certain tax credits. The Company is appealing an unfavorable March 2012 administrative court ruling. The potential loss to the Company in the event of a final unfavorable outcome is approximately $29 million.
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, personal injury, property damage 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

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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 entities (the Borrower Entities) in exchange for Class A and Class B interests in these entities. Subsequently, International Paper contributed its $200 million Class A interests in the Borrower Entities, along with approximately $400 million of International Paper promissory notes, to other newly formed entities (the Investor Entities, and together with the Borrower Entities, the Entities) in exchange for Class A and Class B interests in these entities, and simultaneously sold its Class A interest in the Investor Entities to a third party investor. As a result, at December 31, 2006, International Paper held Class B interests in the Borrower Entities and Class B interests in the Investor Entities valued at approximately $5.0 billion. International Paper did not provide any financial support that was not previously contractually required for the six months ended June 30, 2013 and the year ended December 31, 2012.
Following the 2006 sale of forestlands and creation of the Entities discussed above, the Timber Notes were used as collateral for borrowings from third party lenders, which effectively monetized the Timber Notes. Provisions of certain loan agreements require any bank issuing letters of credit supporting the Timber Notes to maintain a credit rating at or above a specified threshold. In the event the credit rating of a letter of credit bank is downgraded below the specified threshold, the letters of credit must be replaced within 60 days with letters of credit from a qualifying financial institution or for one of the letter of credit banks, collateral must be posted. The Company, retained to provide management services for the third-party entities that hold the Timber Notes, has, as required by the loan agreements, successfully replaced banks that fell below the specified threshold.
Also during 2006, the Entities acquired approximately $4.8 billion of International Paper debt obligations for cash, resulting in a total of approximately $5.2 billion of International Paper debt obligations held by the Entities at December 31, 2006. The various agreements entered into in connection with these transactions provide that International Paper has, and intends to affect, a legal right to offset its obligation under these debt instruments with its investments in the Entities. Accordingly, for financial reporting purposes, International Paper has offset approximately $5.2 billion of Class B interests in the Entities against $5.3 billion of International Paper debt obligations held by these Entities at June 30, 2013 and December 31, 2012. Despite the offset treatment, these remain debt obligations of International Paper. Remaining borrowings of $74 million and $79 million at June 30, 2013 and December 31, 2012, respectively, are included in Long-term debt in the accompanying consolidated balance sheet. Additional debt related to the above transaction of $79 million is included in Notes payable and current maturities of long-term debt at June 30, 2013 and December 31, 2012.
On October 7, 2011, Moody’s Investor Services reduced its credit rating of senior unsecured long-term debt of the Royal Bank of Scotland Group Plc, which issued letters of credit that support $1.6 billion of Timber Notes, below the specified threshold. On November 22, 2011, letters of credit worth $707 million were replaced by another qualifying institution. The Company and the third party managing member agreed to extend the 60 day deadline, and then, on February 10, 2012, letters of credit worth $135 million were replaced by another qualifying institution. Fees of $5 million were incurred in connection with these replacements. The Company and the third party managing member instituted a replacement waiver for the remaining $797 million, and then on July 25, 2012, these letters of credit were successfully replaced by another qualifying institution. In the event the credit rating of the letter of credit bank is downgraded below a specified threshold, the new bank is required to provide credit support for its obligation. Fees of $5 million were incurred in connection with this replacement.
On January 23, 2012, Standard and Poor's reduced its credit rating of senior unsecured long-term debt of Société Générale SA, which issued letters of credit that support $666 million of the Timber Notes, below the specified threshold. The letters of credit were successfully replaced by another qualifying institution. Fees of $5 million were incurred in connection with this replacement.
On June 21, 2012, Moody's Investor Services reduced its credit rating of senior unsecured long-term debt of BNP Paribas, which issued letters of credit that support $707 million of Timber Notes, below the specified threshold. On December 19, 2012, the Company and the third-party managing member agreed to a continuing replacement waiver for these letters of credit, terminable upon 30 days notice.

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Activity between the Company and the Entities was as follows: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2013
 
2012
 
2013
 
2012
Revenue (a)
$
11

 
$
12

 
$
24

 
$
20

Expense (a)
19

 
20

 
41

 
40

Cash receipts (b)

 

 
19

 
15

Cash payments (c)

 

 
45

 
40

 
(a)
The net expense related to the Company’s interest in the Entities is included in the accompanying consolidated statement of operations, as International Paper has and intends to affect its legal right to offset as discussed above.
(b)
The cash receipts are equity distributions from the Entities to International Paper.
(c)
The semi-annual payments are related to interest on the associated debt obligations discussed above.
Based on an analysis of the Entities discussed above under guidance that considers the potential magnitude of the variability in the structures and which party has a controlling financial interest, International Paper determined that it is not the primary beneficiary of the Entities, and therefore, does not consolidate its investments in these entities. It was also determined that the source of variability in the structures is the value of the Timber Notes, the assets most significantly impacting the structure’s economic performance. The credit quality of the Timber Notes is supported by irrevocable letters of credit obtained by third party buyers which are 100% cash collateralized. International Paper analyzed which party has control over the economic performance of each entity, and concluded International Paper does not have control over significant decisions surrounding the Timber Notes and letters of credit and therefore is not the primary beneficiary. The Company’s maximum exposure to loss equals the value of the Timber Notes; however, an analysis performed by the Company concluded the likelihood of this exposure is remote.
International Paper also held a variable interest in financing entities that were used to monetize long-term notes received from the sale of forestlands in 2002. International Paper transferred notes (the Monetized Notes, with an original maturity of 10 years from inception) and cash having a value of approximately $500 million to the entities in exchange for preferred interests, and accounted for the transfers as a sale of the notes with no associated gain or loss. In the same period, the entities acquired approximately $500 million of International Paper debt obligations for cash. International Paper has no obligation to make any further capital contributions to these entities and did not provide any financial support that was not previously contractually required during the six months ended June 30, 2013 and the year ended December 31, 2012.
On May 31, 2011, the third party equity holder of the 2002 financing entities retired its Class A interest in the entities for $51 million. As a result of the retirement, effective May 31, 2011, International Paper owns 100% of the 2002 financing entities. Based on an analysis performed by the Company after the retirement, under guidance that considers the potential magnitude of the variability in the structure and which party has a controlling financial interest, International Paper determined that it is the primary beneficiary of the 2002 financing entities and thus consolidated the entities effective May 31, 2011. During 2011, approximately $191 million of the 2002 Monetized Notes matured.
During the six months ended June 30, 2012, approximately $252 million of the 2002 Monetized Notes matured. Cash receipts upon maturity were used to pay the associated debt obligations. Effective June 1, 2012, International Paper liquidated its interest in the 2002 financing entities.
The use of the above entities facilitated the monetization of the credit enhanced Timber and Monetized Notes in a cost effective manner by increasing the borrowing capacity and lowering the interest rate while continuing to preserve the tax deferral that resulted from the forestlands installment sales and the offset accounting treatment described above.
In connection with the acquisition of Temple-Inland in February 2012, two special purpose entities became wholly-owned subsidiaries of International Paper.
In October 2007, Temple-Inland sold 1.55 million acres of timberland for $2.38 billion. The total consideration consisted almost entirely of notes due in 2027 issued by the buyer of the timberland, which Temple-Inland contributed to two wholly-owned, bankruptcy-remote special purpose entities. The notes are shown in Financial assets of special purpose entities in the accompanying consolidated balance sheet and are supported by $2.38 billion of irrevocable letters of credit issued by three banks, which are required to maintain minimum credit ratings on their long-term debt. In the third quarter of 2012, International Paper completed its preliminary analysis of the acquisition date fair value of the notes and determined it to be$2.09 billion. As a result of this analysis, Financial assets of special purpose entities decreased by $292 million and Goodwill increased by the same amount. As of June 30, 2013, the fair value of the notes was $2.42 billion.
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

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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 a result of this analysis, Nonrecourse financial liabilities of special purpose entities decreased by $110 million and Goodwill decreased by the same amount. As of June 30, 2013, the fair value of this debt was $2.31 billion.
On January 23, 2012, Standard and Poor's reduced its credit rating of senior unsecured long-term debt of Société Générale SA, which issued letters of credit that support $506 million of the 2007 Monetized Notes, below the specific threshold. These letters of credit were successfully replaced by another qualifying institution. Fees of $2 million were incurred in connection with this replacement.
On June 21, 2012, Moody's Investor Services reduced its credit rating of senior unsecured long-term debt of Barclays Bank PLC, which issued letters of credit that support approximately $500 million of the 2007 Monetized Notes, below the specified threshold. These letters of credit were successfully replaced by another qualifying institution. Fees of $6 million were incurred in connection with this replacement.
Activity between the Company and the 2007 financing entities was as follows: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2013
 
2012
 
2013
 
2012
Revenue (a)
$
7

 
$
4

 
$
14

 
$
6

Expense (b)
7

 
5

 
15

 
9

Cash receipts (c)
2

 
4

 
4

 
7

Cash payments (d)
5

 
5

 
11

 
10

 
(a)
The revenue is included in Interest expense, net in the accompanying consolidated statement of operations and includes $9 million 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 $3 million of accretion expense for the amortization of the purchase accounting adjustment on the Nonrecourse financial liabilities of special purpose entities.
(c)
The cash receipts are interest received on the Financial assets of special purpose entities.
(d)
The cash payments are interest paid on Nonrecourse financial liabilities of special purpose entities.
Preferred Securities of Subsidiaries
In March 2003, Southeast Timber, Inc. (Southeast Timber), a consolidated subsidiary of International Paper, issued $150 million of preferred securities to a private investor with future dividend payments based on LIBOR. Southeast Timber, which through a subsidiary initially held approximately 1.5 million acres of forestlands in the southern United States, was International Paper’s primary vehicle for sales of southern forestlands. As of June 30, 2013, substantially all of these forestlands have been sold. On March 27, 2013, Southeast Timber redeemed its Class A common shares owned by the private investor for $150 million. As a result, Noncontrolling interests decreased by $150 million in the accompanying consolidated balance sheet. Distributions paid to the third-party investor were $1 million and $3 million for the six months ended June 30, 2013 and 2012, respectively. The expense related to these preferred securities is shown in Net earnings (loss) attributable to noncontrolling interests in the accompanying consolidated statement of operations.
NOTE 14 - DEBT
Amounts related to early debt extinguishment during the three months and six months ended June 30, 2013 and 2012 were as follows: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2013
 
2012
 
2013
 
2012
Early debt reductions (a)
$
32

 
$
406

 
$
58

 
$
436

Pre-tax early debt extinguishment costs (b)
3

 
10

 
9

 
26

 
(a)
Reductions related to notes with interest rates ranging from 5.20% to 7.95% with original maturities from 2018 to 2027 and from 1.63% to 7.95% with original maturities from 2017 to 2018 for the three months ended June 30, 2013 and 2012, respectively, and 5.20% to 7.95% with original maturities from 2014 to 2027 and from 1.63% to 7.95% with original maturities from 2012 to 2018 for the six months ended June 30, 2013 and June 30, 2012, respectively.
(b)
Amounts are included in Restructuring and Other Charges in the accompanying consolidated statements of operations.

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In February 2012, International Paper borrowed $1.2 billion under a term loan with an initial interest rate of LIBOR plus a margin of 138 basis points that varied depending on the credit rating of the Company and entered into a $200 million term loan with an interest rate of LIBOR plus a margin of 175 basis points, both with maturity dates in 2017. The proceeds from these borrowings were used, along with available cash, to fund the acquisition of Temple-Inland. During 2012, International Paper fully repaid the $1.2 billion term loan.
Subsequent to June 30, 2013, International Paper made early debt repayments of approximately $98 million with interest rates ranging from 5.45% to 6.45% with original maturities from 2022 to 2033. On July 19, 2013, International Paper, elected to redeem, on August 20, 2013, a $300 million note with an interest rate of 7.40% and original maturity in 2014. International Paper estimates early debt extinguishment costs are expected to be approximately $17 million.
At June 30, 2013, the fair value of International Paper’s $10.1 billion of debt was approximately $11.5 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 12 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At June 30, 2013, the Company held long-term credit ratings of BBB (stable outlook) and Baa3 (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 13 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
The notional amounts of qualifying and non-qualifying financial instruments used in hedging transactions were as follows:
In millions
June 30, 2013
 
December 31, 2012
 
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
Foreign exchange contracts (Sell / Buy; denominated in sell notional): (a)
 
 
 
 
Brazilian real / U.S. dollar - Forward
585

 

 
British pounds / Brazilian real – Forward
4

  
13

  
European euro / Brazilian real – Forward
22

  
13

  
European euro / Polish zloty – Forward
146

 &#