Fitch Affirms Potlatch Corp. Ratings at 'BB+'; Outlook Remains Positive

Business Wire, Jan 22, 2008

CHICAGO -- Fitch Ratings has affirmed Potlatch Corporation's (PCH) senior unsecured public and bank credit facility and Issuer Default Ratings (IDR) of 'BB+'. The Rating Outlook remains Positive.

PCH has surprisingly managed to preserve credit measures since its conversion to a Real Estate Investment Trust (REIT) despite the spillover of the housing market's troubles into lumber and plywood. Operating earnings of the Resource (timber harvesting) and Land Sales and Development enterprises through last year's third quarter are well ahead of 2006, largely on volumes, and the earnings momentum looks as though it will continue into 2008, prompted by recent land acquisitions. Pulp and paperboard earnings, which have been periodically weak, have recovered with recent price increases in both product lines and should also start out the year solidly. Consumer Product earnings (tissue), which have been hurt by escalating pulp prices, can look forward to some recapture with higher pricing in 2008. At question is a turn in fortunes for PCH manufactured lumber and plywood whose mills are strategically linked to the company's fiber basket. Although lumber and plywood are not likely to offset the progress made in PCH's other business lines, their combined cash flow plus cash from non-core timberland sales may not be great enough to finance maintenance capital, shareholder distributions and an active appetite for more timberland acquisitions, a difficult balancing act.

PCH's recent purchase of 179,000 acres of Idaho timberlands is likely to push the company's net debt/EBITDA (rolling four quarters) to around 2.0 times (x). Fitch does not expect this to change much through 2008 (major land acquisitions aside) which by measured comparison to its peers is a Positive Outlook.

PCH is a mid-sized, integrated forester and manufacturer of wood and pulp based products. PCH's timberlands provide the majority of the raw materials for the manufacture of lumber, plywood and particleboard. PCH also makes pulp, paperboard and tissue and is a leading producer of retail private-label tissue products.

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