Potlatch Reports Third Quarter Results

SPOKANE, Wash.--(Business Wire)--
Potlatch Corporation (NYSE:PCH) today reported financial results
for the third quarter ended September 30, 2008.

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Q3 2008 Financial Summary

-- Earnings from continuing operations for the quarter were $25.7
million, or $0.65 per diluted common share, compared to $42.5
million, or $1.08 per diluted common share for Q3 2007.
-- Q3 2008 earnings from continuing operations reflected
significantly lower operating income from the Pulp and
Paperboard segment due to rising costs for fiber, energy and
chemicals as well as a planned maintenance outage which cost $9
million. The weaker results from Pulp and Paperboard were
partially offset by strength in Consumer Products and Real
Estate operating earnings, which were up $5.8 million and $0.8
million, respectively, over the same quarter last year.
Included in the quarterly results were costs of $2.4 million
associated with the company's efforts to implement the
potential tax-free spin-off transaction of the pulp-based
businesses, and income of $2.1 million from legal settlements.
-- Q3 2007 earnings included an income tax benefit of $3.5 million
due to the final determination of amounts owed to the Internal
Revenue Service for the years 1995-2004.

-- Net earnings for the quarter, including discontinued operations,
were $25.3 million, or $0.63 per diluted common share, compared to
$41.0 million, or $1.04 per diluted common share for Q3 2007.
-- Q3 2008 net earnings included after-tax losses from discontinued
operations of $0.5 million associated with the previously
announced permanent closure of the company's Prescott,
Arkansas, lumber mill.
-- Q3 2007 results included after-tax losses from discontinued
operations of $1.5 million associated with the sale of the
company's hybrid poplar tree farm in Boardman, Oregon, and
losses at the Prescott lumber mill.

-- Net cash provided by operating activities from continuing
operations for Q3 2008 was $32.3 million, compared with $52.4
million for the same period in 2007; the decrease was primarily
the result of lower operating earnings.
*T

"The Resource segment experienced ideal logging conditions in
Idaho during Q3 2008, resulting in northern region harvest levels that
were 12 percent higher than Q3 2007," said Michael J. Covey, chairman,
president and chief executive officer. "Harvest levels in our southern
region were nearly 4 percent lower in Q3 2008 than Q3 2007 due to
extremely wet conditions from hurricane activity. Overall pricing in
the northern region declined 3.7 percent in Q3 2008 from Q3 2007. In
the southern region, overall prices declined by 4.5 percent due to
continued weakness in the lumber market. In both regions, higher
pulpwood pricing helped to offset the weakness in sawlog pricing.

"The Real Estate segment had solid results in Q3 2008, which
resulted from the sale of nearly 5,200 acres of rural recreational
property. During the quarter, 52 of the 53 transactions scheduled to
close were completed, at an average price of approximately $1,250 per
acre. Excluding the large one-time non-core land sale we had in
Northern Minnesota earlier this year, our year-to-date average price
per acre sold is approximately $1,700. We are seeing a shift in mix in
our real estate business towards rural recreational real estate, away
from higher-priced HBU real estate.

"The Wood Products segment continued to experience weak market
conditions. Operating earnings declined to $0.8 million in Q3 2008
versus $4.6 million in Q3 2007. Earnings did improve modestly from Q2
2008, driven by lower segment administrative costs and slightly higher
earnings in our lumber product line, offset by lower earnings in our
panel business. Due to the weak market conditions, we curtailed
operations at one sawmill location for one week during October to
avoid building excess inventories. We expect to experience continued
weak market conditions for our wood products for the remainder of the
year.

"The Pulp and Paperboard segment saw operating earnings decline to
$0.5 million in the third quarter, down from $17.6 million in Q3 2007
and $6.2 million in Q2 2008. While pulp and paperboard pricing and
sales volumes remained strong, we continued to experience significant
inflationary pressures on key input costs such as wood fiber,
chemicals and energy. Further, a scheduled seven-day maintenance
outage at our Idaho mill during the quarter resulted in maintenance
costs that were $6.5 million higher than in the third quarter of last
year. While we expect cost pressures to ease in Q4 for energy and
chemicals, wood fiber costs for our Idaho pulp and paperboard
operations remain high and are not expected to drop until we see a
recovery in the housing market and increased output of residual chips
from northwest sawmills. Further, we have scheduled maintenance
outages for a boiler in Idaho and the pulp mill in Arkansas during Q4,
which will also adversely affect costs.

"The Consumer Products segment had very strong operating results
for the quarter, with operating earnings of $10.9 million, far
outpacing operating earnings of $6.9 million in Q2 2008 and $5.1
million in Q3 2007. Operating results during Q3 2008 were stronger
than any quarter since Q2 2002, which reflects the strength of our
private label tissue strategy and record converting and tissue
production levels at our three manufacturing facilities. Increases in
pricing and sales volumes resulted in higher revenues, which were
partially offset by higher costs for pulp, petroleum-based packaging
supplies and maintenance. Lower energy costs also contributed to the
significant earnings improvement and we are beginning to see pulp
prices decline, which will contribute favorably to earnings in the
fourth quarter of 2008 and beyond.

"Energy costs, which rose steeply in the first half of 2008,
appeared to level out during Q3 2008. However, for the company as a
whole, increased energy costs negatively impacted 2008 year-to-date
operating earnings by $19.4 million versus 2007.

"On July 17, 2008, our Board authorized management to move forward
with the spin-off of our pulp-based manufacturing businesses. The new
company, Clearwater Paper Corporation, will include our Pulp and
Paperboard and Consumer Products segments, and our Lewiston lumber
mill. We initially planned on capitalizing Clearwater with $175
million of high yield notes, the proceeds of which were going to be
paid to Potlatch. Unfortunately, with the credit markets in a state of
disarray, this does not currently appear to be a viable approach.
However, we have developed a comparable approach to capitalizing
Clearwater, which entails two steps. In the first step, Clearwater
will increase its anticipated revolver from $75 million to
approximately $120 million, and then immediately draw $50 million and
remit that cash to Potlatch. The second step will entail Clearwater
retaining the obligation to repay the $100 million liability for
Potlatch's credit sensitive debentures. This structure should still
allow for a fourth quarter spin-off, subject to final Board approval
based on regulatory, market and other conditions," concluded Mr.
Covey.

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Year-to-Date 2008 Financial Summary

-- Earnings from continuing operations for the first nine months of
2008 were $71.9 million, or $1.81 per diluted common share,
compared to $83.9 million, or $2.13 per diluted common share for
the first nine months of 2007.
-- YTD 2008 earnings from continuing operations included $4.2
million of pre-tax costs associated with our efforts to
implement the spin-off of our pulp-based businesses. The
results also included a pre-tax charge of $3.0 million ($1.8
million after-tax) related to the settlements in the OSB
antitrust lawsuit. The settlements remain subject to final
court approval. These costs were partially offset by income of
$2.2 million resulting from two legal settlements.
-- YTD 2007 earnings included a $2.7 million ($2.3 million after-
tax) restructuring charge for the Resource segment and a one-
time payment of $1.4 million ($0.9 million after-tax) for
retroactive pay associated with the settlement of the union
contracts for the company's pulp and paperboard and consumer
products operations in Lewiston, Idaho, partially offset by an
income tax benefit of $3.5 million due to the final
determination of amounts owed to the Internal Revenue Service
for the years 1995-2004.

-- Net earnings for the first nine months of 2008, including
discontinued operations, were $57.0 million, or $1.43 per diluted
common share, compared to $45.2 million, or $1.15 per diluted
common share for the first nine months of 2007.
-- YTD 2008 earnings included after-tax losses from discontinued
operations of $14.9 million associated with the permanent
closure of the company's Prescott, Arkansas, lumber mill. Of
the after-tax charge, $12.4 million was related to asset
impairment, severance, pension curtailment and other costs, and
$2.5 million was related to net operating losses at the mill.
-- YTD 2007 earnings included an after-tax loss on disposal of
$33.0 million for the asset write-down and costs related to the
sale of the company's hybrid poplar tree farm and after-tax net
operating losses of $3.8 million for the tree farm and $1.9
million for the Prescott lumber mill.

-- Net cash provided by operating activities from continuing
operations for the first nine months of 2008 was $81.0 million
compared with $124.2 million for the same period in 2007.
*T

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Q3 2008 Business Performance

Resource
----------------------------------------------------------------------
-- Operating income for the segment was $30.8 million for Q3 2008,
compared to $38.2 million earned in Q3 2007.
-- Fee harvest levels were up a total of 6 percent.
-- Harvest levels in the northern region were up 12 percent due to
ideal logging conditions in Idaho, while the southern fee
harvest was down 4 percent due to extremely wet conditions in
Q3 2008.
-- Average overall sales prices per ton across all markets and
products declined 3 percent when compared to Q3 2007, but were
within expectations.

Real Estate
----------------------------------------------------------------------
-- Operating income for the segment was $3.2 million for Q3 2008,
compared to $2.4 million for Q3 2007.
-- Land sold totaled nearly 5,200 acres at an overall average price
of approximately $1,250 per acre.

Wood Products
----------------------------------------------------------------------
-- The segment reported operating income of $0.8 million for Q3 2008,
compared to $4.6 million for Q3 2007.
-- Lumber results were negatively impacted by the continued
downturn in the housing market, resulting in lower net sales
prices and shipments.
-- Decreased revenues were partially offset by lower production
costs, primarily due to lower log costs.

Pulp and Paperboard
----------------------------------------------------------------------
-- Operating income for the segment was $0.5 million for Q3 2008,
compared to $17.6 million for Q3 2007.
-- Sales prices for both pulp and paperboard products continued to
be strong, as paperboard prices increased 10 percent and pulp
prices rose 2 percent when compared to the same period in 2007;
paperboard prices were slightly above the average sales prices
for the second quarter of this year.
-- Fiber costs were $10.9 million higher, repair and maintenance
costs were $6.5 million higher, chemical costs were $6.3
million higher and energy costs were $5.8 million higher in Q3
2008 compared to Q3 2007.

Consumer Products
----------------------------------------------------------------------
-- Operating income for the segment was $10.9 million for Q3 2008,
compared to $5.1 million for the same period last year.
-- Revenues increased $16.1 million as a result of price increases
announced early in Q2 2008 coupled with higher sales volumes.
Higher costs for customer freight, pulp, packaging supplies and
energy partially offset the revenue improvements.

Dividend Distribution
----------------------------------------------------------------------
During the third quarter, Potlatch paid a regular quarterly
distribution on the company's common stock of $0.51 per share.
*T

Outlook

"Our Resource and Consumer Products businesses continue to perform
very well in this challenging economic environment," said Mr. Covey.
"As we stated last quarter, demand for rural recreational real estate
tracts is weak and we expect this business to remain weak for at least
the next two quarters. Although our Wood Products business did see
some improvements in Q2 and Q3 2008, we expect continued weakness for
the remainder of the year. Similarly, our Pulp and Paperboard business
experienced considerable input cost inflation during the quarter,
although some of these cost pressures are beginning to moderate.
Finally, we are making excellent progress on the spin-off of
Clearwater Paper Corporation and expect to have this completed during
Q4," concluded Mr. Covey.

Conference Call Information

A live Web cast and conference call will be held today, October
23, 2008, at 8 a.m. Pacific time (11 a.m. Eastern). Those interested
may access the Web cast at www.potlatchcorp.com and conference call by
dialing 866-393-8403 for U.S./Canada and 706-902-3785 for calls
outside the U.S./Canada. Participants will be asked to provide pass
code number 65549920. Supplemental materials that we will discuss
during the call are available on our website.

For those unable to participate in the live call, an archived
recording will be available through the Potlatch Corporation website
at www.potlatchcorp.com for approximately one year following the
conference call. A telephone replay of the conference call will be
available until October 30, 2008, by calling 800-642-1687 for
U.S./Canada, or 706-645-9291 for calls outside the U.S./Canada, and
entering pass code number 65549920.

About Potlatch

Potlatch is a Real Estate Investment Trust (REIT) with
approximately 1.7 million acres of forestland in Arkansas, Idaho,
Minnesota and Wisconsin. Through its taxable REIT subsidiary, the
company also operates 12 manufacturing facilities that produce lumber
and panel products and bleached pulp products, including paperboard
and tissue. The company, which employs approximately 3,600 people,
also conducts a real estate sales and development business through its
taxable REIT subsidiary. Potlatch, a verified forest practices leader,
is committed to providing superior returns to stockholders through
long-term stewardship of its resources.

Forward-Looking Statements

This press release contains certain forward-looking statements
within the meaning of the Private Litigation Reform Act of 1995 as
amended, including without limitation, statements about future company
performance, future earnings and cash flow, direction of markets,
future energy and other production costs, and the proposed spin-off of
our pulp-based businesses. These forward-looking statements are based
on current expectations, estimates, assumptions and projections that
are subject to change, and actual results may differ materially from
the forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, changes
in timberland values; changes in timber harvest levels on the
company's lands; changes in timber prices; changes in policy regarding
governmental timber sales; changes in the United States and
international economies; changes in exchange rates between the U.S.
dollar and other currencies; changes in the level of construction
activity; changes in tariffs, quotas and trade agreements involving
wood products; changes in worldwide demand for Potlatch's products;
changes in worldwide production and production capacity in the forest
products industry; competitive pricing pressures for the company's
products; unanticipated manufacturing disruptions; changes in general
and industry-specific environmental laws and regulations; unforeseen
environmental liabilities or expenditures; weather conditions; changes
in raw material, energy, and other costs; the ability to satisfy
complex rules in order to remain qualified as a REIT; changes in tax
laws that could reduce the benefits associated with REIT status; and
other risks and uncertainties described from time to time in the
company's public filings with the Securities and Exchange Commission.
The company does not undertake to update any forward-looking
statements.

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Potlatch Corporation and Consolidated Subsidiaries
Statements of Operations and Comprehensive Income
Unaudited (Dollars in thousands - except per-share amounts)

Quarter Ended Nine Months Ended
September 30, September 30,
------------------- -----------------------
2008 2007 2008 2007
----------------------------------------------------------------------
Revenues $457,075 $420,546 $1,289,876 $1,189,338
----------------------------------------------------------------------
Costs and expenses:
Depreciation, depletion
and amortization 21,069 20,284 57,204 57,752
Materials, labor and
other operating
expenses 387,436 330,110 1,081,574 960,244
Selling, general and
administrative expenses 19,908 23,134 67,285 64,835
Restructuring charge - (140) - 2,691
----------------------------------------------------------------------
428,413 373,388 1,206,063 1,085,522
----------------------------------------------------------------------
Earnings from continuing
operations before
interest and taxes 28,662 47,158 83,813 103,816
Interest expense (8,106) (7,380) (25,280) (22,271)
Interest income 98 1,047 552 1,943
----------------------------------------------------------------------
Earnings from continuing
operations before taxes 20,654 40,825 59,085 83,488
Income tax benefit (5,061) (1,708) (12,841) (394)
----------------------------------------------------------------------
Earnings from continuing
operations 25,715 42,533 71,926 83,882
----------------------------------------------------------------------
Discontinued operations:
Loss from discontinued
operations
(including losses on
disposal of $(387),
$-, $(20,403) and
$(35,774)) (763) (2,499) (24,490) (42,791)
Income tax benefit (298) (979) (9,551) (4,096)
----------------------------------------------------------------------
(465) (1,520) (14,939) (38,695)
----------------------------------------------------------------------
Net earnings $ 25,250 $ 41,013 $ 56,987 $ 45,187
======================================================================
Other comprehensive
income, net of tax $ 971 $ 1,366 $ 3,742 $ 4,100
----------------------------------------------------------------------
Comprehensive income $ 26,221 $ 42,379 $ 60,729 $ 49,287
======================================================================
Earnings per common share
from continuing
operations:
Basic $ 0.65 $ 1.09 $ 1.82 $ 2.15
Diluted 0.65 1.08 1.81 2.13
Loss per common share from
discontinued operations:
Basic (0.01) (0.04) (0.38) (0.99)
Diluted (0.01) (0.04) (0.38) (0.98)
Net earnings per common
share:
Basic 0.64 1.05 1.45 1.16
Diluted 0.63 1.04 1.43 1.15
Average shares outstanding
(in thousands):
Basic 39,515 39,172 39,432 39,050
Diluted 39,793 39,415 39,713 39,316
----------------------------------------------------------------------

Certain 2007 amounts have been reclassified to conform to the 2008
presentation.
*T

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Potlatch Corporation and Consolidated Subsidiaries
Condensed Balance Sheets
Unaudited (Dollars in thousands - except per-share amounts)

September 30, December 31,
2008 2007
----------------------------------------------------------------------
Assets
Current assets:
Cash $ 3,790 $ 9,047
Short-term investments 8,453 22,289
Receivables, net 132,249 114,260
Inventories 172,594 169,396
Prepaid expenses 19,986 18,967
Assets held for sale 3,135 -
----------------------------------------------------------------------
Total current assets 340,207 333,959
Land other than timberlands 8,250 8,549
Plant and equipment, at cost less
accumulated depreciation 473,583 510,776
Timber, timberlands and related deposits,
net 566,071 534,513
Pension assets 118,886 108,435
Other assets 21,621 20,972
----------------------------------------------------------------------

$ 1,528,618 $ 1,517,204
======================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Current installments on long-term debt $ 410 $ 209
Current notes payable 113,700 110,300
Accounts payable and accrued liabilities 187,520 174,198
----------------------------------------------------------------------
Total current liabilities 301,630 284,707
Long-term debt 320,918 321,301
Liability for pensions and other
postretirement employee benefits 262,735 261,956
Other long-term obligations 20,026 18,923
Deferred taxes 37,371 51,981
Stockholders' equity 585,938 578,336
----------------------------------------------------------------------

$ 1,528,618 $ 1,517,204
======================================================================

Stockholders' equity per common share $14.83 $14.73
Working capital $ 38,577 $ 49,252
Current ratio 1.1:1 1.2:1
----------------------------------------------------------------------
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Potlatch Corporation and Consolidated Subsidiaries
Condensed Statements of Cash Flows
Unaudited (Dollars in thousands)

Nine Months Ended
September 30,
--------------------
2008 2007
----------------------------------------------------------------------
Cash Flows From Continuing Operations
Net earnings $ 56,987 $ 45,187
Adjustments to reconcile net earnings to net
operating cash flows from continuing
operations:
Loss from discontinued operations 2,493 5,712
Loss on disposal of discontinued operations 12,446 32,983
Depreciation, depletion and amortization 57,204 57,752
Proceeds from sales deposited with a like-
kind exchange intermediary (34,626) (16,812)
Basis of real estate sold 7,788 879
Deferred taxes (17,001) (4,305)
Equity-based compensation expense 5,000 4,284
Employee benefit plans (5,805) (8,671)
Other 292 572
Working capital changes (2,760) 6,156
Excess tax benefit from share-based payment
arrangements (2,103) (2,447)
Income tax benefit related to stock issued in
conjunction with stock compensation plans 1,074 2,955
----------------------------------------------------------------------
Net cash provided by operating activities
from continuing operations 80,989 124,245
----------------------------------------------------------------------
Cash Flows From Investing
Change in short-term investments 47,600 (6,820)
Additions to plant and properties (47,589) (79,238)
Deposits on timberlands (27,328) (162,280)
Other, net 205 (501)
----------------------------------------------------------------------
Net cash used for investing activities from
continuing operations (27,112) (248,839)
----------------------------------------------------------------------
Cash Flows From Financing
Change in book overdrafts (7,033) 2,628
Increase in notes payable 3,400 110,000
Issuance of common stock 3,793 7,955
Repayment of long-term debt (182) (3,131)
Distributions to common stockholders (60,405) (57,439)
Excess tax benefit from share-based payment
arrangements 2,103 2,447
Other, net (3,107) (1,421)
----------------------------------------------------------------------
Net cash (used for) provided by financing
activities from continuing operations (61,431) 61,039
----------------------------------------------------------------------
Cash flows from continuing operations (7,554) (63,555)
Cash flows of discontinued operations:
Operating cash flows 2,282 728
Investing cash flows 15 63,100
Financing cash flows - -
----------------------------------------------------------------------
Increase (decrease) in cash (5,257) 273
Cash at beginning of period 9,047 7,759
----------------------------------------------------------------------
Cash at end of period $ 3,790 $ 8,032
======================================================================

Certain 2007 amounts have been reclassified to conform to the 2008
presentation.
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Highlights
Unaudited (Dollars in thousands - except per-share amounts)

Quarter Ended Nine Months Ended
September 30, September 30,
------------------- -----------------------
2008 2007 2008 2007
----------------------------------------------------------------------
Distributions per common
share $ 0.51 $ 0.49 $ 1.53 $ 1.47
======================================================================

Segment Information
Unaudited (Dollars in thousands)

Quarter Ended Nine Months Ended
September 30, September 30,
------------------- -----------------------
2008 2007 2008 2007
----------------------------------------------------------------------
Revenues
Resource $ 94,552 $ 99,707 $ 199,893 $ 231,411
----------------------------------------------------------------------
Real Estate 6,750 3,679 43,198 12,335
----------------------------------------------------------------------
Wood Products
Lumber 68,655 77,513 191,351 229,735
Plywood 11,353 14,247 39,361 41,963
Particleboard 4,456 4,721 14,177 15,313
Other 14,480 9,838 39,538 30,824
----------------------------------------------------------------------
98,944 106,319 284,427 317,835
----------------------------------------------------------------------
Pulp and Paperboard
Paperboard 170,532 149,805 483,725 423,292
Pulp 24,856 24,244 72,742 70,479
Other 210 241 604 821
----------------------------------------------------------------------
195,598 174,290 557,071 494,592
----------------------------------------------------------------------
Consumer Products 128,517 112,429 370,476 328,614
----------------------------------------------------------------------
524,361 496,424 1,455,065 1,384,787
Intersegment revenues (67,286) (75,878) (165,189) (195,449)
----------------------------------------------------------------------

Total consolidated
revenues $457,075 $420,546 $1,289,876 $1,189,338
======================================================================

Operating income (loss)
Resource $ 30,770 $ 38,175 $ 60,176 $ 71,272
Real Estate 3,238 2,405 31,232 9,412
Wood Products 767 4,641 (9,541) 14,068
Pulp and Paperboard 533 17,559 17,779 28,535
Consumer Products 10,932 5,139 21,224 14,006
Eliminations (5,647) (8,446) 764 527
----------------------------------------------------------------------
40,593 59,473 121,634 137,820
Corporate (19,939) (18,648) (62,549) (54,332)
----------------------------------------------------------------------
Earnings from continuing
operations before taxes $ 20,654 $ 40,825 $ 59,085 $ 83,488
======================================================================

Certain 2007 amounts have been reclassified to conform to the 2008
presentation.
*T

Potlatch Corporation
Media
Matt Van Vleet, 509-254-1571
or
Investors
Douglas D. Spedden, 509-835-1549

Copyright Business Wire 2008