DBRS Confirms Potlatch Corporation at BB (high) and BB (low)

Dominion Bond Rating Service (DBRS) has today confirmed the Senior Unsecured debt and Senior Subordinated debt of Potlatch Corporation (Potlatch or the Company) at BB (high) and BB (low), respectively. The trend is Stable.

The current rating continues to reflect the Company’s business risks which are in line with the forest product industry average and also recognizes the weaker lumber and sawlog market conditions that are expected to reduce profitability in the next two years.

Overriding the negative short term outlook are the current strong credit metrics that will compensate for an extended period of weaker market conditions. North American building products markets are forecasted to be weaker in 2006 and 2007 as high housing prices and rising mortgage rates reduce housing demand. Lumber and sawlog prices are expected to decline, but to levels that will allow producers to remain profitable. Tissue products are expected to provide a stable source of earnings partially compensating for the weaker business segments. However, the net effect is forecasted to be a reduction in earnings from 2005 levels.

Despite a weaker earnings outlook, free cash flow is expected to be marginally positive for the foreseeable future. However, annual distributions to shareholders of $76 million and moderate capital expenditures are not expected to leave sufficient cash to reduce debt from current levels. Potlatch had cash and available credit facilities of $163 million at March 31, 2006 and liquidity should not be a problem in the near term. The Company has additional financial flexibility in the form of timberland assets that can be easily monetized. The estimated U.S. private timberland market value of $1.0+ billion (about three times the value of the Company’s total debt) provides support to Potlatch’s long-term debt.

The Company intends to grow its timberlands business through acquisitions and a period of weak earnings, and debt-financed acquisitions would negatively impact credit quality. A major debt-financed acquisition during soft market conditions would pressure the rating.

Notes:
This rating is based on public information.
All figures are in U.S. dollars, unless otherwise noted.