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EX-24 - EXHIBIT 24 - POTLATCHDELTIC CORPpch10k2015ex24-powersofatt.htm
EX-12 - EXHIBIT 12 - POTLATCHDELTIC CORPpch10k2015ex12-fixedcharges.htm
EX-21 - EXHIBIT 21 - POTLATCHDELTIC CORPpch10k2015ex21-subsidiaries.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended December 31, 2015
 
o
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 1-32729
POTLATCH CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
 
82-0156045
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
601 West 1st Ave., Suite 1600
 
 
Spokane, Washington
 
99201
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (509) 835-1500
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS
 
NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock
 
The Nasdaq Global Select Market
($1 par value)
 
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    x Yes    ¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act    ¨ Yes    x No
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.  x Yes    ¨ 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 (§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).    x Yes    ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
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 x    Accelerated filer ¨    Non-accelerated filer (Do not check if a smaller reporting company) ¨    Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨ Yes    x No
The aggregate market value of the common stock held by non-affiliates of the registrant at June 30, 2015, was approximately $1,436.7 million, based on the closing price of $35.32.
As of January 31, 2016, 40,680,713 shares of the registrant's common stock, par value $1 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2015 annual meeting of stockholders expected to be filed with the Commission on or about April 1, 2016 are incorporated by reference in Part III hereof.





POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Table of Contents 
  
  
PAGE
NUMBER
 
 
 
 
 
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
 
 
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
 
 
 
 
 
 
ITEM 9.
ITEM 9A.
ITEM 9B.
 
 
 
 
 
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
 
 
 
 
 
ITEM 15.
 
 
 
 





EXPLANATORY NOTE
For purposes of this report, any references to "the company,” “us,” “we,” and “our” include Potlatch Corporation and its consolidated subsidiaries.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation, statements regarding:
timber inventory;
increasing lumber demand and pricing in North America in 2016;
increased North American housing starts and repair and remodel activity;
increased lumber production in 2016;
the expected positive effect on timber prices of increased lumber demand and higher lumber prices;
expected sawlog prices in 2016;
expected timber harvest level of between 4.0 million and 4.8 million tons each year over the next several years;
expected 2016 overall timber harvest of 4.4 million tons;
expected sale of 38% of Northern region timber volume under log supply agreements in 2016;
expected sales of 75,000 acres of higher and better use (HBU) property,130,000 acres of rural real estate property and 80,000 acres of non-strategic timberland over the next decade or more;
funding of our dividends in 2016;
compliance with REIT tax rules;
Forest Steward Council® (FSC®) and Sustainable Forest Initiative® (SFI®) certification of our timberlands;
expectations regarding premium prices for FSC®-certified logs and FSC®-certified lumber;
realization of deferred tax assets;
expected capital expenditures in 2016;
expectations regarding funding of our pension plans in 2016;
expectations regarding supplemental pension plan payments in 2016;
estimated future benefit payments;
estimated future payments under operating leases;
estimated long-term rate of return on pension assets;
estimated future debt payments; and
expected liquidity in 2016 to fund our operations, regular stockholder dividends, capital expenditures and debt service obligations and related matters.
Words such as “anticipate,” “expect,” “will,” “intend,” “plan,” “target,” “project,” “believe,” “seek,” “schedule,” “estimate,” “could,” “can,” “may,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements reflect our current views regarding future events based on estimates and assumptions, and are therefore subject to known and unknown risks and uncertainties and are not guarantees of future performance.
Our actual results of operations could differ materially from our historical results or those expressed or implied by forward-looking statements contained in this report. Important factors that could cause or contribute to such differences include, but are not limited to, the following: 
changes in timber growth rates;
changes in silviculture;
timber cruising variables;
changes in state forest acts or best management practices;
changes in timber harvest levels on our lands;
changes in timber prices;
changes in timberland values;
changes in policy regarding governmental timber sales;
changes in the United States and international economies;
changes in interest rates and discount rates;
changes in exchange rates;
changes in requirements for FSC® or SFI® certification;
changes in the level of residential and commercial construction and remodeling activity;
changes in tariffs, quotas and trade agreements involving wood products;

2015 FORM 10-K / 1



changes in demand for our products;
changes in production and production capacity in the forest products industry;
competitive pricing pressures for our 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 and other costs;
collectability of amounts owed by customers;
changes in federal and state tax laws;
the ability to satisfy complex rules in order to remain qualified as a REIT; and
changes in tax laws that could reduce the benefits associated with REIT status.
For a discussion of some of the factors that may affect our business, results and prospects, see Part 1 - Item 1A. Risk Factors.
Forward-looking statements contained in this report present our views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of our views to reflect events or circumstances occurring after the date of this report.
 



2 / POTLATCH CORPORATION



Part I

ITEM 1. BUSINESS
General
Potlatch Corporation is a real estate investment trust (REIT) that owns approximately 1.6 million acres of timberlands in Alabama, Arkansas, Idaho, Minnesota and Mississippi. We derive much of our income from investments in real estate, including the sale of standing timber. Through wholly owned taxable REIT subsidiaries, which we refer to collectively in this report as Potlatch TRS, we operate a real estate sales business and five wood products manufacturing facilities that produce lumber and plywood.
Our businesses are organized into three operating segments:
Resource: Our Resource segment manages our timberlands to optimize revenue producing opportunities while adhering to our strict stewardship standards. Management activities include planting and harvesting trees and building and maintaining roads. The Resource segment also generates revenues from activities such as hunting leases, recreation permits and leases, mineral rights leases, biomass production and carbon sequestration.
Wood Products: Our Wood Products segment manufactures and markets lumber, plywood and residual products.
Real Estate: The business of our Real Estate segment consists primarily of the sale of land holdings deemed non-strategic or identified as having higher and better use alternatives. The Real Estate segment engages in real estate sales and limited subdivision activity through Potlatch TRS.
Additional information regarding each of our operating segments is included in this section, as well as in Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 15: Segment Information in the Notes to Consolidated Financial Statements.
We are focused on the ownership of timberland, which we view as a unique and attractive asset due to the renewable nature of timber resources and timber’s long-term history of price appreciation in excess of inflation. Our primary objectives include using our timberland investments to generate income and maximizing the long-term value of our assets. We pursue these objectives by adhering to the following strategies: 
Managing our timberlands to improve their long-term sustainable yield. We manage our timberlands in a manner designed to optimize the balance among timber growth, prudent environmental management and current cash flow, in order to achieve increasing levels of sustainable yield over the long-term. We may choose to harvest timber at levels above or below our current estimate of sustainability for short periods of time, for the purpose of improving the long-term productivity of certain timber stands or in response to market conditions. In addition, we focus on optimizing timber returns by continually improving productivity and yields through advanced silvicultural practices that take into account soil, climate and biological considerations.
Pursuing attractive acquisitions. We actively pursue timberland acquisitions that meet our financial and strategic criteria. The critical elements of our acquisition strategy generally include acquiring properties that complement our existing land base, are immediately cash flow accretive and have attractive timber or higher and better use (HBU) values.
Maximizing the value of our timberland real estate. A portion of our acreage is more valuable for recreational purposes or to other timberland or real estate investors rather than for growing timber. We continually assess the potential uses of our lands and manage them proactively for the highest value. We have identified approximately 20% of our timberlands as having values that are potentially greater than timberland values.
Practicing sound environmental stewardship. We pursue a program of environmental stewardship and active involvement in federal, state and local policymaking to maximize our assets’ long-term value. We manage our timberlands in a manner consistent with the principles set forth by SFI® or FSC®.

2015 FORM 10-K / 3



Potlatch Corporation, formerly known as Potlatch Holdings, Inc., was incorporated in Delaware in September 2005 to facilitate a restructuring to qualify for treatment as a REIT for federal income tax purposes. It is the successor to the business of the original Potlatch Corporation, which was incorporated in Maine in 1903.
Effective January 1, 2006, we restructured our operations to qualify for treatment as a REIT. As a REIT, we generally are not subject to federal and state corporate income taxes on our income from investments in real estate that we distribute to our stockholders, including the income derived from the sale of standing timber. As of January 1, 2016, we are no longer subject to corporate taxes on certain built-in gains (the excess of fair market value over tax basis on real property held since January 1, 2006) on sales of real property held by the REIT. We are required to pay federal corporate income taxes on income from our non-real estate investments, principally the operations of Potlatch TRS.
Available Information
We make our periodic and current reports that we file with, or furnish to, the Securities and Exchange Commission (SEC) available on or through our website, www.potlatchcorp.com (under “Investor Resources – Financial Information”), at no charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. Information on our website is not part of this report. In addition, the reports and materials that we file with the SEC are available at the SEC’s website (www.sec.gov) and at the SEC’s Public Reference Room at 100 F Street, N.E., Washington DC 20549. Interested parties may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Business Segments
Resource Segment
Industry Background. The demand for timber depends primarily upon the markets for wood related products, including lumber, panel products, paper and other pulp-based products. The end uses for timber vary widely, depending on species, size and quality. Historically, timber demand has experienced cyclical fluctuations, although sometimes at different times and rates for products or geographic regions. The demand for sawlogs, lumber and other manufactured wood products is significantly dependent upon the level of new residential construction and remodeling activity, which, in turn, is affected by general economic and demographic factors, including population growth, new household formations, interest rates for home mortgages and construction loans, and credit availability. Increases in residential construction and remodeling activities are generally followed by higher lumber prices, which are usually followed by higher log prices. The demand for pulpwood is dependent on the paper and pulp-based manufacturing industries. Both pulpwood and sawlogs are affected by domestic and international economic conditions, global population growth and other demographic factors, industry capacity and the value of the U.S. dollar in relation to foreign currencies. Locally, timber demand also fluctuates due to the expansion or closure of individual wood products and pulp-based manufacturing facilities.
Timber supplies can fluctuate depending upon factors such as changes in weather conditions and harvest strategies, as well as occasionally high timber salvage efforts due to storm damage, unusual pest infestations such as the mountain pine beetle, or fires. Local timber supplies also change in response to prevailing timber prices. Rising timber prices often lead to increased harvesting on private timberlands, including lands not previously made available for commercial timber operations. The supply of timber generally is adequate to meet demand, although this could tighten in the event of higher demand due to U.S. housing starts, increased log and lumber exports, and the impacts from a natural disaster, such as fire, hurricane, earthquake, insect infestation, drought, disease, ice storms, windstorms, flooding or other factors.
Timberland Acquisition. On December 7, 2014, we acquired approximately 201,000 acres of timberland in Alabama and Mississippi for $384 million. The acquisition complemented our existing ownership in our Southern Region. The acquired timber consisted of approximately 73% softwood and 27% hardwoods. We bought the timberland subject to three supply agreements. In addition, we assumed recreational leases that cover approximately 90% of the timberlands acquired. They are generally annual leases that are subject to renewal and generate approximately $1.5 million in annual revenues.

4 / POTLATCH CORPORATION



Ownership. The Resource segment manages approximately 1.6 million acres of timberlands including approximately 20,000 acres under long-term leases. We are the largest private landowner in Idaho. The following table provides additional information about our timberlands.
(Acres in thousands)
 
 
 
 
REGION
 
STATE
 
DESCRIPTION
 
ACRES
Northern region
 
Idaho
 
Variety of commercially viable softwood species, such as grand fir, Douglas fir, inland red cedar and other associated softwoods
 
790

 
 
Minnesota
 
Primarily aspen, pine and other mixed hardwoods
 
169

 
 
 
 
Total Northern region
 
959

Southern region
 
Alabama
 
Primarily southern yellow pine and other hardwoods
 
98

 
 
Arkansas
 
Primarily southern yellow pine and other hardwoods
 
415

 
 
Mississippi
 
Primarily southern yellow pine and other hardwoods
 
100

 
 
 
 
Total Southern region
 
613

 
 
 
 
Total
 
1,572

Operation. The primary business of the Resource segment is the management of our timberlands to optimize the value of all possible revenue producing opportunities while adhering to our strict stewardship standards. Management activities include planting and harvesting trees and building and maintaining roads. The segment also generates revenue from non-timber resources such as from hunting leases, recreation permits and leases, mineral rights leases, biomass production and carbon sequestration.
We strive to maximize cash flow while managing our timberlands sustainably over the long-term. From time to time, we may choose, within the parameters of our environmental commitments, to harvest timber at levels above or below our estimate of sustainability for short periods in order to take advantage of strong demand or to adjust to weak demand. To maximize our timberlands' long-term value, we manage them intensively, based upon timber species and local growing conditions. Our harvest plans take into account changing market conditions, are designed to contribute to the growth of the remaining timber, and reflect our policy of environmental stewardship. We reforest our acreage in a timely fashion to enhance its long-term value. We employ silvicultural techniques to improve timber growth rates, including vegetation control, fertilization and thinning. In deciding whether to implement any silvicultural practice, we analyze the associated costs and long-term benefits, with the goal of achieving an attractive return over time.
Inventory. As of the end of 2015, our estimated standing merchantable timber inventory was 66 million tons, including 36 million tons in the North and 30 million tons in the South. This estimate is derived using methods consistent with industry practice and is based on statistical methods and field sampling. The estimated inventory volume includes timber in environmentally sensitive areas where the timberlands are managed in a manner consistent with best management practices, state forest practice acts and the SFI® or FSC® forest management standards.
The aggregate estimated volume of current standing merchantable timber inventory is updated annually to reflect increases due to reclassification of young growth to merchantable timber when the young growth meets defined diameter specifications, the annual growth rates of merchantable timber and the acquisition of additional merchantable timber, and to reflect decreases due to timber harvests and land sales. Timber volumes are estimated from cruises of the timber tracts, which are generally completed on a five to ten year cycle. Since the individual cruises collect field data at different times for specific sites, the growth model projects standing inventory from the cruise date to a common reporting date. Annual growth rates for the merchantable inventory have historically been in the range of 2% to 5% in the North and 6% to 9% in the South.
Harvest. Our short-term and long-term harvest plans are critical factors in our long-term management process. Each year, we prepare a harvest plan designating the timber tracts and volumes to be harvested during that particular year. Each harvest plan reflects our analysis of the age, size and species distribution of our timber, as well as our expectations about harvest methods, growth rates, the volume of each species to be harvested, anticipated acquisitions and dispositions, thinning operations, regulatory constraints and other relevant information. Among other things, the optimal harvest cycles, or rotations, for timber vary by location and species and tend to change over time as a result of silvicultural advances, changes in the markets for different sizes and ages of timber and other factors. Since harvest plans are based on projections of weather, timber growth rates, regulatory constraints and other assumptions, many of which are beyond our control, there can be no assurance that we will be able to harvest the volumes projected or the specific timber stands designated in our harvest plans.

2015 FORM 10-K / 5



Detailed harvest information by region and product is presented in Management's Discussion and Analysis of Financial Condition and Results of Operations. The following table presents a summary of our total 2015 timber harvest by region.
 
  TIMBER HARVESTED
(Tons in thousands)
SAWLOGS
 
PULPWOOD
 
STUMPAGE
 
TOTAL
Northern region
1,993

 
195

 
24

 
2,212

Southern region
736

 
1,128

 
321

 
2,185

Total
2,729

 
1,323

 
345

 
4,397

We expect our harvest level to range between 4.0 million and 4.8 million tons each year over the next several years, depending on market conditions and other factors, assuming no significant timberland acquisitions or dispositions. Based on our current projections, which are based on constant timberland holdings, and that take into consideration such factors as market conditions, the ages of our timber stands and recent timberland sales and acquisitions, we expect to harvest approximately 4.4 million tons in 2016.
The Resource segment sells a portion of its logs at market prices to our wood products manufacturing facilities. Intersegment sales to our wood products manufacturing facilities in 2015 were approximately 20% of our total Resource segment revenues. The segment also sells sawlogs and pulpwood to a variety of forest products companies located near our timberlands. The segment’s customers range in size from small operators to multinational corporations. Idaho Forest Group, LLC operates five sawmills in Idaho and represented slightly more than 10% of our consolidated revenues in 2015, 2014 and 2013. The segment competes with owners of timberlands that operate in areas near our timberlands, ranging from private owners of small tracts of land to some of the largest timberland companies in the United States. The segment competes principally on the basis of distance to market, price, log quality and customer service.
In 2015, approximately 38% of our harvest volumes in both the Northern and Southern regions were sold under log supply agreements. We expect approximately the same amount to be sold under log supply agreements in 2016. In general, our log supply contracts require a specified volume of timber to be delivered to defined customer facilities at prices that are adjusted periodically to reflect market conditions. Prices in our Northern region contracts are adjusted periodically by species to prevailing market prices for logs, lumber, wood chips and other residuals. Prices in our Southern region contracts are adjusted every three months for pine and hardwood logs based on prevailing market prices for logs. Currently our log supply agreements are in place for one to six years.
Other. Our timberlands include a wide diversity of softwood and hardwood species and are certified to either the SFI® or FSC® standards. We adhere to principles that include commitments to sustainable forestry, responsible practices, forest health and productivity, and protection of special sites. We are generally able to sell some FSC®-certified logs at premium prices.
Our operations are subject to numerous federal, state and local laws and regulations, including those relating to the environment, endangered species, our forestry activities and health and safety. Due to the significance of regulation to our business, we integrate wildlife, habitat and watershed management into our resource management practices. We also take an active approach to regulatory developments by participating in standard-setting where possible. We work cooperatively with regulators to create voluntary conservation plans that address environmental concerns while preserving our ability to operate our timberlands efficiently. Despite our active participation in governmental policymaking and regulatory standard-setting, there can be no assurance that endangered species, environmental and other laws will not restrict our operations or impose significant costs, damages, penalties and liabilities on us. In particular, we anticipate that endangered species and environmental laws will generally become increasingly stringent.
The volume and value of timber that can be harvested from our lands may be affected by natural disasters such as fire, insect infestation, disease, ice storms, hurricanes, wind storms, floods and other weather conditions and causes. We assume substantially all risk of loss to the standing timber we own from fire and other hazards, consistent with industry practice in the United States, because insuring for such losses is not practicable.
Wood Products Segment
Our Wood Products segment manufactures and markets lumber, plywood and residual products at five mills located in Arkansas, Idaho, Michigan and Minnesota. The segment’s products are largely commodity products, which are sold through our sales offices to end users, retailers or wholesalers for nationwide distribution primarily for use in home building, industrial products and other construction activity.

6 / POTLATCH CORPORATION



A description of our wood products manufacturing facilities, which are all owned by us, together with their respective 2015 capacities and actual production, are as follows:
  
ANNUAL CAPACITY1,2
 
PRODUCTION2
Sawmills:
 
 
 
Warren, Arkansas
175 mmbf
 
175 mmbf
St. Maries, Idaho
165 mmbf
 
170 mmbf
Gwinn, Michigan
175 mmbf
 
166 mmbf
Bemidji, Minnesota
135 mmbf
 
123 mmbf
Plywood Mill:
 
 
 
St. Maries, Idaho
150 mmsf
 
161 mmsf
1 
Capacity represents the proven annual production capabilities of the facility under normal operating conditions and producing a normal product mix. Normal operating conditions are based on the configuration, efficiency and the number of shifts worked at each individual facility. In general, the definition includes two shifts per day for five days (two 40-hour shifts) per week at each facility, which is consistent with industry-wide recognized measures. Production can exceed capacity due to efficiency gains and overtime.
2  
mmbf stands for million board feet; mmsf stands for million square feet, 3/8 inch panel thickness basis.
We are the eighth largest lumber manufacturer in the U.S. We believe that competitiveness in this industry is largely based on individual mill efficiency and on the availability of competitively priced raw materials on a facility-by-facility basis, rather than the number of mills operated. This is due to the fact that it is generally not economical to transfer logs between or among facilities, which might permit a greater degree of specialization and operating efficiencies. Instead, each facility must utilize the raw materials that are available to it in a relatively limited geographic area. For these reasons, we believe we are able to compete effectively with companies that have a larger number of mills. We compete based on product quality, customer service and price. We can produce and sell FSC®-certified products that generally command premium pricing.
For our Wood Products operations, the principal raw material used is logs, which are obtained from our Resource segment or purchased on the open market. We generally do not maintain long-term supply contracts for a significant volume of logs. During 2015, 2014 and 2013, 33%, 38% and 39% of our log purchases, respectively, were provided by our Resource segment.
Real Estate Segment
The activities of our Real Estate segment consist primarily of the sale of selected non-core timberland real estate, which consists of three categories of property: HBU, rural recreational real estate and non-strategic.
HBU properties have characteristics that provide primarily home site or other development potential as a result of superior location or other attractive amenities. These properties tend to have a much higher value than timberlands.
Rural recreational real estate properties also have a higher value than timberlands, but do not have the same developmental potential as HBU properties. For example, these properties may be appropriate for hunting, conservation or secondary rural housing.
Non-strategic properties often have locational or operational disadvantages for us, and are typically on the fringe of our ownership areas.
The Real Estate segment engages in real estate sales and limited subdivision activities through Potlatch TRS.
From time to time, we also take advantage of opportunities to sell timberland where we believe pricing to be particularly attractive, to match a sale with a purchase of more desirable property while deferring taxes in a like-kind exchange (LKE) transaction, or to meet various other financial or strategic objectives. Sales of conservation properties and conservation easements on our properties are also included in this segment. Results for the segment depend on the demand for our non-core timberlands, the types of properties sold, the basis of these properties and the timing of closings of property sales. Although large sales of non-strategic properties can cause results that are not comparable or predictable between periods, we have maintained a relatively consistent level of rural real estate and HBU sales.

2015 FORM 10-K / 7



A main focus of this segment is to continually assess the highest value use of our lands. We conduct periodic stratification assessments on our lands and as new lands are acquired. The following tools are used in assessing our lands:
on-the-ground analysis and verification of modeling assumptions;
electronic analysis, using geographic information systems; and
certain measured and ranked attributes, such as timber potential, recreational opportunities, accessibility, special features and population and demographic trends.
We have identified approximately 285,000 acres of non-core timberland real estate. This includes approximately 75,000 acres of HBU property, 80,000 acres of non-strategic timberland and 130,000 acres of rural recreational real estate property. Sales of these lands are expected to occur over a decade or more, with the goal of utilizing LKE transactions or other tax-advantaged methods when it is appropriate.
Seasonality
Log and pulpwood sales volumes in our Resource segment are typically lower in the first half of each year as winter rains in the Southern region and spring thaw in the Northern region limit timber harvesting operations due to softened roadbeds and wet logging conditions that restrict access to logging sites. The third quarter is typically our Resource segment's strongest production quarter. Real Estate dispositions and acquisitions can be adversely affected when access to any properties to be sold or considered for acquisition is limited due to adverse weather conditions. Demand for our manufactured wood products typically decreases in the winter months when construction activity is slower and increases in the spring, summer and fall when construction activity is generally higher.
Geographic Areas
All of our timberlands, wood products manufacturing facilities and other real estate assets are located within the continental United States. In 2015, 2014 and 2013, approximately 1%, 1%, and 2% of the respective year's Wood Products' segment revenues were derived from sales of manufactured wood products to Canada and Mexico. The remainder of our revenues were from domestic sales.
Environmental Regulation
Our operations are subject to laws and regulations, including those relating to the environment, endangered species, our forestry activities and health and safety. Due to the significance of regulation to our business, we integrate wildlife, habitat and watershed management into our resource management practices. We also take an active approach to regulatory developments by participating in standard-setting where possible. We work cooperatively with regulators to create voluntary conservation plans that address environmental concerns while preserving our ability to operate our timberlands efficiently.
Enactment of new environmental laws or regulations, or changes in existing laws or regulations, particularly relating to air and water quality, or their enforcement, may require significant expenditures by us or may adversely affect our timberland management and harvesting activities.
Similarly, a number of species indigenous to our timberlands have been listed as threatened or endangered or have been proposed for one or the other status under the Endangered Species Act. As a result, our activities in or adjacent to the habitat of these species may be subject to restrictions on the harvesting of timber, reforestation activities and the construction and use of roads.
We expect legislative and regulatory developments in the area of climate change to address carbon dioxide emissions and renewable energy and fuel standards. It is unclear as of this date how any such developments will affect our business.
At this time, we believe that federal and state laws and regulations related to the protection of endangered species and air and water quality will not have a material adverse effect on our financial position, results of operations or liquidity. We anticipate, however, that increasingly strict laws and regulations relating to the environment, natural resources and forestry operations, as well as increased social concern over environmental issues, may result in additional restrictions on us, leading to increased costs, additional capital expenditures and reduced operating flexibility.


8 / POTLATCH CORPORATION



There is extensive federal and state environmental regulation with respect to air emissions, wastewater discharges, solid and hazardous waste management, site remediation, forestry operations, and threatened and endangered species. We are also subject to the requirements of the Federal Occupational Safety and Health Act and comparable state statutes relating to the health and safety of our employees. We maintain environmental and safety compliance programs and conduct regular internal and independent third-party audits of our facilities and timberlands to monitor compliance with these laws and regulations. Compliance with environmental regulations is a significant factor in our business and requires capital expenditures as well as additional operating costs.
We believe that our manufacturing facilities and timberland operations are currently in substantial compliance with applicable environmental laws and regulations. We cannot be certain, however, that situations that give rise to material environmental liabilities will not be discovered.
Information regarding potentially material environmental proceedings is included in Note 14: Commitments and Contingencies in the Notes to Consolidated Financial Statements contained in this report and incorporated herein by reference.
Employees
As of December 31, 2015, we had 927 employees. The workforce consisted of 231 salaried, 661 hourly and 35 temporary or part-time employees. As of December 31, 2015, 18% of the workforce was covered under one collective bargaining agreement, which expires in May 2016.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a significant degree of risk. Our business, financial condition, results of operations or liquidity could be materially adversely affected by any of the following risks and, as a result, the trading price of our common stock could decline. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently deem immaterial may also impair our business, financial condition, results of operations or liquidity. In addition to the risk factors discussed below, investors should carefully consider the risks and uncertainties presented in Part 1 - Item 1. Business.
Business and Operating Risks
Our cash dividends are not guaranteed and may fluctuate, which could adversely affect our stock price.
Under the REIT rules, to remain qualified as a REIT, a REIT must distribute, within a certain period after the end of each year, 90% of its ordinary taxable income for such year. Our REIT income, however, consists primarily of net capital gains resulting from payments received under timber cutting contracts with Potlatch TRS and third parties, rather than ordinary taxable income. Therefore, unlike most REITs, we are not required to distribute material amounts of cash to remain qualified as a REIT. If, after giving effect to our dividends, we have not distributed an amount equal to 100% of our REIT taxable income, then we would be required to pay tax on the undistributed portion of such taxable income at regular corporate tax rates and our stockholders would be required to include their proportionate share of any undistributed capital gain in income and would receive a credit or refund for their share of the tax paid by us.
Our Board of Directors, in its sole discretion, determines the actual amount of dividends to be made to stockholders based on consideration of a number of factors, including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions in our industry and in the markets for our products, tax considerations, borrowing capacity, debt covenant restrictions, timber prices, harvest levels on our timberlands, market demand for timberlands, including timberland properties we have identified as potentially having a higher and better use, and future acquisitions and dispositions. For a description of debt covenants that could limit our ability to make dividends to stockholders in the future, see Liquidity and Capital Resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Consequently, the level of future dividends to our stockholders may fluctuate, and any reduction in the dividend rate may adversely affect our stock price.
The cyclical nature of our business could adversely affect our results of operations.
The financial performance of our operations is affected by the cyclical nature of our business. The markets for timber, manufactured wood products and real estate are influenced by a variety of factors beyond our control. The demand for our timber and manufactured wood products is affected by the level of new residential construction activity and, to a lesser extent, home repair and remodeling activity, which are subject to fluctuations due to

2015 FORM 10-K / 9



changes in economic conditions, interest rates, credit availability, population growth, weather conditions and other factors. The demand for logs is also affected by the demand for wood chips in the pulp and paper markets. The supply of timber and logs has historically increased during favorable pricing environments, which then causes downward pressure on prices. Historical prices for our manufactured wood products have been volatile, and we have limited direct influence over the timing and extent of price changes for our manufactured wood products. The demand for real estate can be affected by changes in factors such as interest rates, credit availability and economic conditions, as well as by the impact of federal, state and local land use and environmental protection laws.
All of our timberlands are located in Alabama, Arkansas, Idaho, Minnesota, and Mississippi. As a result, we may be susceptible to adverse economic and other developments in these regions, including industry slowdowns, business layoffs or downsizing, relocations of businesses, changes in demographics, increases in real estate and other taxes and increased regulation, any of which could have a material adverse effect on us.
In addition, the geographic concentration of our property makes us more susceptible to adverse impacts from a single natural disaster such as fire, hurricane, earthquake, insect infestation, drought, disease, ice storms, windstorms, flooding and other factors that could negatively impact our timber production.
Our operating results and cash flows will be materially affected by supply and demand for timber.
A variety of factors affect prices for timber, including factors affecting demand, such as changes in economic conditions, the level of domestic new construction and remodeling activity, foreign demand, interest rates, credit availability, population growth, weather conditions and pest infestation, as well as changes in timber supply and other factors. All of these factors can vary by region, timber type (sawlogs or pulpwood logs) and species.
Timber prices are affected by changes in demand on a local, national or international level. The closure of a mill in the regions where we own timber can have a material adverse effect on demand and therefore pricing. As the demand for paper nationwide continues to decline, closures of pulp mills have adversely affected the demand for pulpwood and wood chips in certain of the regions in which we operate. Also, demand in other parts of the world may affect timber prices in the markets in which we compete. For example, during the past year, demand from Asia has declined from previous years, and although we do not sell into the Asian markets, Asian demand has affected supply and demand in the markets in which we participate. The recent decrease in Asian demand has had a negative impact on lumber and timber prices in the markets in which we compete.
Timber prices are also affected by changes in timber availability at the local, national and international level. Our timberland ownership is currently concentrated in Alabama, Arkansas, Idaho, Minnesota and Mississippi. In Alabama, Arkansas, Minnesota and Mississippi, most timberlands are privately owned. Historically, increases in timber prices have often resulted in substantial increases in harvesting on private timberlands, including lands not previously made available for commercial timber operations, causing a short-term increase in supply that has tended to moderate price increases. Decreases in timber prices have often resulted in lower harvest levels, causing short-term decreases in supply that have tended to moderate price decreases. In the South, harvest deferrals during recent years have led to an oversupply of timber in the region, which has reduced prices. In Idaho, where a greater proportion of timberland is government owned, any substantial increase in timber harvesting from government-owned land could significantly reduce timber prices, which would harm our results of operations. For more than 20 years, environmental concerns and other factors have limited timber sales by federal agencies, which historically had been major suppliers of timber to the U.S. forest products industry, particularly in the West. Any reversal of policy that substantially increases timber sales from government-owned land could have a material adverse effect on our results of operations and cash flows.
On a local level, timber supplies can fluctuate depending upon factors such as changes in weather conditions and harvest strategies of local timberland owners, as well as occasionally high timber salvage efforts due to events such as unusual pest infestations or fires.
Our wood products are commodities that are widely available from other producers.
Because commodity products have few distinguishing properties from producer to producer, competition for these products is based primarily on price, which is determined by supply relative to demand and competition from substitute products. Prices for our products are affected by many factors outside of our control, and we have no influence over the timing and extent of price changes, which often are volatile. Our profitability with respect to these products depends, in part, on managing our costs, particularly raw material and energy costs, which represent significant components of our operating costs and can fluctuate based upon factors beyond our control.

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The wood products industry is highly competitive.
The markets for our wood products are highly competitive and companies that have substantially greater financial resources than we do compete with us in each of our lines of business. Our wood products are subject to competition from wood products manufacturers in the United States and Canada. Recently, a strong U.S. dollar relative to the Canadian dollar has led to rising imports of Canadian lumber to the United States, depressing U.S. lumber prices. After years of trade disputes over Canadian softwood lumber imports, the United States and Canada signed a Softwood Lumber Agreement in 2006, which expired in October 2015. The agreement established a system of tiered taxes and volume restrictions relating to Canadian lumber imports to the United States. There is no assurance that this agreement will be renewed or renegotiated in the future. With the expiration of the agreement, the United States is subject to a one-year standstill on trade litigation and we currently have little recourse to address the import of Canadian lumber into the United States that may compete unfairly with our products. Even if the Softwood Lumber Agreement is renegotiated, there can be no assurance that it will at all times, or at any time, effectively create a fair trade environment.
In addition, our wood products manufacturing facilities are relatively capital intensive, which leads to high fixed costs and generally results in continued production as long as prices are sufficient to cover variable costs. These conditions have contributed to substantial price competition, particularly during periods of reduced demand. Some of our wood products competitors may currently be lower-cost producers than we are, or in the case of Canadian competitors, are currently benefiting from a weak Canadian dollar relative to the U.S. dollar, and accordingly these competitors may be less adversely affected than we are by price decreases. Wood products also are subject to significant competition from a variety of substitute products, including non-wood and engineered wood products. To the extent there is a significant increase in competitive pressure from substitute products or other domestic or foreign suppliers, our business could be adversely affected.
Changes in demand for our real estate and delays in the timing of real estate transactions may affect our revenues and operating results.
A number of factors, including availability of credit, a slowing of residential real estate development, population shifts and changes in demographics could reduce the demand for our real estate and negatively affect our results of operations. Changes in investor interest in purchasing timberlands could reduce our ability to execute sales of non-strategic timberlands and could also negatively affect our results of operations. In addition, changes in the interpretation or enforcement of current laws, or the enactment of new laws, regarding the use and development of real estate, or changes in the political composition of federal, state and local governmental bodies could lead to new or greater costs, delays and liabilities that could materially adversely affect our real estate business, profitability or financial condition.
In addition, there are inherent uncertainties in the timing of real estate transactions that could adversely affect our operating results in any particular quarter. The timing of real estate sales is a function of many factors, including the general state of the economy, demand in local real estate markets, the number of properties listed for sale, the seasonal nature of sales, the plans of adjacent landowners and our expectations of future price appreciation. Delays in the completion of transactions or the termination of potential transactions may be beyond our control. These events could adversely affect our operating results.
We may be unable to harvest timber or we may elect to reduce harvest levels due to market conditions, either of which could adversely affect our results of operations and cash flows.
Our timber harvest levels and sales may be limited due to weather conditions, timber growth cycles, restrictions on access, availability of contract loggers and regulatory requirements associated with the protection of wildlife and water resources, as well as by other factors, including damage by fire, pest infestation, disease and natural disasters such as ice storms, wind storms, tornados, hurricanes and floods. Changes in global climate conditions could intensify one or more of these factors. Although damage from such natural causes usually is localized, affecting only a limited percentage of our timber, there can be no assurance that any damage affecting our timberlands will be limited. We typically experience seasonally lower harvest activity during the winter and early spring due to weather conditions. Severe weather conditions and other natural disasters can also reduce the productivity of timberlands and disrupt the harvesting and delivery of logs. Our financial results and cash flows are dependent to a significant extent on our continued ability to harvest timber at adequate levels.

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On a short-term basis, we may adjust our timber harvest levels in response to market conditions. Longer term, our timber harvest levels will be affected by acquisitions of additional timberlands, sales of existing timberlands and shifts in harvest from one region to another. In addition to timberland acquisitions and sales, future timber harvest levels may be affected by changes in estimates of long-term sustainable yield because of silvicultural advances, natural disasters, fires, pests, insects and other hazards, regulatory constraints and other factors beyond our control.
We do not insure against losses of standing timber from fire or any other causes.
The volume and value of timber that can be harvested from our lands may be affected by natural disasters such as fire, pest infestation, disease, ice storms, wind storms, tornados, hurricanes, floods and other weather conditions and causes beyond our control. As is typical in the forest industry, we assume substantially all risk of loss to the standing timber we own from fire and other hazards because insuring for such losses is not practicable. Consequently, a reduction in our timber inventory could adversely affect our financial results and cash flows.
A material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales or negatively affect our results of operations and financial condition.
Any of our manufacturing facilities, or any of our machines within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including unscheduled maintenance outages, prolonged power failures, equipment failures, labor difficulties, disruptions in the transportation infrastructure, such as roads, bridges, railroad tracks and tunnels, fire, ice storms, floods, windstorms, tornados, hurricanes or other catastrophes, terrorism or threats of terrorism, governmental regulations and other operational problems.
Any such downtime or facility damage could prevent us from meeting customer demand for our products and/or require us to make unplanned capital expenditures. If one of these machines or facilities were to incur significant downtime, our ability to meet our production targets and satisfy customer requirements could be impaired, resulting in lower sales and income.
Our businesses are affected by transportation availability and costs.
Our business depends on the availability of logging contractors and providers of transportation of wood products, and is materially affected by the cost of these service providers. Therefore, increases in the cost of fuel could negatively impact our financial results by increasing the cost associated with logging activities and transportation services, and could also result in an overall reduction in the availability of these services.
We may be unsuccessful in carrying out our acquisition strategy.
We have pursued, and may continue to pursue, acquisitions of strategic timberland properties and other forest products assets. We compete with buyers that have substantially greater financial resources than we have for acquisition opportunities. We intend to finance acquisitions through cash from operations, borrowings under our credit facility, proceeds from equity or debt offerings, proceeds from asset dispositions, or any combination thereof. In addition, it is uncertain whether any acquisitions we make will perform in accordance with our expectations. The failure to identify and complete acquisitions of suitable properties, our inability to finance future acquisitions on favorable terms or our inability to complete like-kind exchanges, could adversely affect our operating results and cash flows.
Our businesses are subject to extensive environmental laws and regulations.
Our operations are subject to a variety of federal, state and local laws and regulations regarding protection of the environment, including those relating to the protection of timberlands, endangered species, timber harvesting practices, recreation and aesthetics, protection and restoration of natural resources, air and water quality and remedial standards for contaminated soil, sediments and groundwater. Failure to comply with these requirements can result in significant fines or penalties, as well as liabilities for remediation of contaminated sites, natural resource damages or alleged personal injury or property damage claims.
Laws, regulations and related judicial decisions and administrative interpretations affecting our business are subject to change and new laws and regulations that may affect our business are frequently enacted. These changes may adversely affect our ability to harvest and sell timber and operate our manufacturing facilities and may adversely affect the ability of others to develop property we intend to sell for higher and better use purposes. Over time, the complexity and stringency of these laws and regulations have increased markedly and the enforcement of these laws and regulations has intensified. We believe that these laws and regulations will continue to become more

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restrictive and over time could adversely affect our operating results. Regulatory restrictions on future harvesting activities may be significant. Federal, state and local laws and regulations, which are intended to protect threatened and endangered species, as well as waterways and wetlands, limit and may prevent timber harvesting, road building and other activities on our timberlands. For example, the Clean Water Act and comparable state laws, regulations and best management practices programs protect water quality. As a result, our resource management activities adjacent to rivers and streams, as well as the point source discharges from our manufacturing facilities, are subject to strict regulation and there can be no assurance that our forest management and manufacturing activities will not be subject to increased regulation under the Clean Water Act in the future.
Similarly, the threatened and endangered species restrictions apply to activities that would adversely impact a protected species or significantly degrade its habitat. A number of species on our timberlands have been, and in the future may be, protected under these laws. If current or future regulations or their enforcement become more restrictive, the amount of our timberlands subject to harvest restrictions could increase.
We anticipate that increasingly strict laws and regulations relating to the environment, natural resources and forestry operations, as well as increased social concern over environmental issues, may result in additional restrictions on us leading to increased costs, additional capital expenditures and reduced operating flexibility.
Our manufacturing operations are subject to stringent environmental laws, regulations and permits covering air emissions, wastewater discharge, water usage and waste handling and disposal that govern how we operate our facilities. These laws, regulations and permits, now and in the future, may restrict our current production and limit our ability to increase production, and impose significant costs on our operations with respect to environmental compliance. Overall, it is expected that environmental compliance costs will likely increase over time as environmental requirements become more stringent and as the expectations of the communities in which we operate become more demanding.
Certain environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) impose strict, and under certain circumstances joint and several, liability on responsible parties, including current and former owners and operators of contaminated sites, for costs of investigation and remediation of contamination. They also impose liability for related damages to natural resources. We have in the past been identified by the Environmental Protection Agency (EPA) as a potentially responsible party under CERCLA at various locations, and we are currently identified as a potentially responsible party in connection with one of our properties. Additional information regarding this matter is included in Note 14: Commitments and Contingencies in the Notes to Consolidated Financial Statements included in this report, and that information is incorporated herein by reference. It is possible that other facilities we own or operate, or formerly owned or operated, or timberlands we now own or acquire, could also become subject to liabilities under these laws. The cost of investigation and remediation of contaminated properties could increase operating costs and adversely affect our financial results. Although we believe we have appropriate reserves recorded for the investigation and remediation of known matters, there can be no assurance that actual expenditures will not exceed our expectations and that reserves will not be increased or that other unknown liabilities will not be discovered in the future.
Environmental groups and interested individuals may intervene in the regulatory processes in the locations where we own timberlands and operate our wood products mills. Delays or restrictions on our operations due to the intervention of environmental groups or interested individuals could adversely affect our operating results. In addition to intervention in regulatory proceedings, interested parties may file or threaten to file lawsuits that seek to prevent us from obtaining permits, harvesting timber under contract with federal or state agencies, implementing capital improvements or pursuing operating plans or require us to obtain permits before pursuing operating plans. Any lawsuit, or even a threatened lawsuit, could delay harvesting on our timberlands or impact our ability to operate or invest in our wood products mills.
Our defined benefit pension plans are currently underfunded.
As a result of the steep downturn in the stock market in 2008 and the resulting effects on long-term interest rates and discount rates, our defined benefit pension plans have been underfunded since December 31, 2008, as the projected benefit obligation exceeds the aggregate fair value of plan assets. As a result of the underfunding, we may be required to make contributions to our qualified pension plans. Based on estimated year-end asset values and projections of plan liabilities, we expect we will not be required to make a contribution to our qualified pension plans in 2016. Our non-qualified pension plan and post retirement employee benefit plans are unfunded and benefit payments are paid from our general assets. During 2016, we estimate that we will make supplemental pension plan payments of $1.8 million and postretirement employee benefits payments of $4.2 million.

2015 FORM 10-K / 13



The determination of pension plan expense and the requirements for funding our pension plans are based on a number of actuarial assumptions. Two critical assumptions are the expected rate of return on plan assets and the discount rate applied to pension plan obligations. Pension plan assets primarily consist of equity and fixed income investments; therefore, fluctuations in actual equity market returns and changes in long-term interest rates may result in increased pension costs in future periods. Changes in assumptions regarding discount rates and expected rates of return on plan assets could also increase future pension costs. Changes in any of these factors may significantly impact future contribution requirements.
We depend on external sources of capital for future growth.
Our ability to finance growth is dependent to a significant degree on external sources of capital. Our ability to access such capital on favorable terms could be hampered by a number of factors, many of which are outside of our control, including a decline in general market conditions, decreased market liquidity, a downgrade to our public debt rating, increases in interest rates, an unfavorable market perception of our growth potential, a decrease in our current or estimated future earnings or a decrease in the market price of our common stock. In addition, our ability to access additional capital may also be limited by the terms of our existing indebtedness, which, among other things, restricts our incurrence of debt and the payment of dividends. Any of these factors, individually or in combination, could prevent us from being able to obtain the capital we require on terms that are acceptable to us, and the failure to obtain necessary capital could materially adversely affect our future growth.
A strike or other work stoppage, or our inability to renew collective bargaining agreements on favorable terms, could adversely affect our financial results.
As of December 31, 2015, approximately 18% of our workforce was covered by one collective bargaining agreement, which expires in May 2016. While we believe our relations with our employees are satisfactory, we cannot be certain that we will be able to negotiate a new collective bargaining agreement on favorable terms. If we are unable to negotiate an acceptable new agreement with the union upon expiration of the existing contract, we could experience a strike or work stoppage. Even if we are successful in negotiating a new agreement, the new agreement could call for higher wages or benefits paid to union members, which would increase our operating costs and could adversely affect our profitability. If our unionized workers were to engage in a strike or other work stoppage, or other non-unionized operations were to become unionized, we could experience a significant disruption of operations at our facilities or higher ongoing labor costs. A strike or other work stoppage in the facilities of any of our major customers or suppliers could also have similar effects on us.
Risks Related to Our Indebtedness
Our indebtedness could materially adversely affect our ability to generate sufficient cash to make dividends to stockholders and fulfill our debt obligations, our ability to react to changes in our business and our ability to incur additional indebtedness to fund future needs.
Our debt requires interest and principal payments. As of December 31, 2015, we had long-term debt of $607.6 million, including $5.0 million due in February 2016. We also had $30.0 million outstanding under our revolving line of credit. Subject to the limits contained in our debt instruments, we may be able to incur additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions or for other purposes. If we do so, the risks related to our indebtedness could intensify.
Our indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness or to make dividends to our stockholders. Our indebtedness, combined with our other financial obligations and contractual commitments, could have important consequences for stockholders. For example, it could:
make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in an event of default under the agreements governing such indebtedness;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for dividends to stockholders, working capital, capital expenditures, acquisitions and other purposes;
increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage compared with our competitors that have relatively less indebtedness;

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limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; and
limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for dividends to stockholders, working capital, capital expenditures, acquisitions and other corporate purposes.
Changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and have an adverse effect on the market price of our securities.
Credit rating agencies rate our debt securities on factors that include our operating results, actions that we take, their view of the general outlook for our industry and their view of the general outlook for the economy. Actions taken by the rating agencies can include maintaining, upgrading or downgrading the current rating or placing the company on a watch list for possible future downgrading. Downgrading the credit rating of our debt securities or placing us on a watch list for possible future downgrading could limit our access to the credit markets, increase our cost of financing, and have an adverse effect on the market price of our securities. For additional detail on our credit ratings, see Liquidity and Capital Resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
REIT and Tax-Related Risks
If we fail to remain qualified as a REIT, income from our timberlands will be subject to taxation at regular corporate rates and we will have reduced funds available for dividends to our stockholders.
Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code to our operations, including satisfaction of certain asset, income, organizational, dividends, stockholder ownership and other requirements, on a continuing basis. Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations and the possibility of future changes in our circumstances, no assurance can be given that we will remain qualified as a REIT.
In addition, the rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury (Treasury). Changes to the tax laws affecting REITs or taxable REIT subsidiaries, which may have retroactive application, could adversely affect our stockholders or us. We cannot predict how changes in the tax laws might affect our stockholders or us. Accordingly, we cannot provide assurance that new legislation, Treasury regulations, administrative interpretations or court decisions will not significantly affect our ability to remain qualified as a REIT, the federal income tax consequences of such qualification, the determination of the amount of REIT taxable income or the amount of tax paid by the TRS.
If in any taxable year we fail to remain qualified as a REIT:
we would not be allowed a deduction for dividends to stockholders in computing our taxable income; and
we would be subject to federal income tax on our taxable income at regular corporate rates, including any applicable alternative minimum tax.
Any such corporate tax liability could be substantial and would reduce the amount of cash available for dividends to our stockholders, which in turn could have an adverse impact on the value of our common stock. In addition, we would be disqualified from treatment as a REIT for the four taxable years following the year during which the qualification was lost, unless we are entitled to relief under certain statutory provisions. As a result, net income and the funds available for dividends to our stockholders could be reduced for up to five years, which would have an adverse impact on the value of our common stock.
Certain of our business activities are potentially subject to a prohibited transactions tax on 100% of our net income derived from such activities, which would reduce our cash flow and impair our ability to make dividends.
REITs are generally intended to be passive entities and can thus only engage in those activities permitted by the Internal Revenue Code, which for us generally include owning and managing a timberland portfolio, growing timber and selling standing timber.
Accordingly, the manufacture and sale of wood products, certain types of timberland sales, and the harvest and sale of logs are conducted through Potlatch TRS because such activities generate non-qualifying REIT income and

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could constitute “prohibited transactions” if such activities were engaged in directly by the REIT. In general, prohibited transactions are defined by the Internal Revenue Code to be sales or other dispositions of property held primarily for sale to customers in the ordinary course of a trade or business.
By conducting our business in this manner, we believe we will satisfy the REIT requirements of the Internal Revenue Code and thus avoid the 100% tax that could be imposed if a REIT were to conduct a prohibited transaction. We may not always be successful, however, in limiting such activities to Potlatch TRS. Therefore, we could be subject to the 100% prohibited transactions tax if such instances were to occur, which would adversely affect our cash flow and impair our ability to make quarterly dividends.
Our REIT structure may limit our ability to invest in our non-REIT qualifying operations.
Our use of Potlatch TRS enables us to continue to engage in non-REIT qualifying business activities consisting primarily of our manufacturing facilities, assets used for the harvesting of timber and the sale of logs and selected land parcels that we expect to be sold or developed for higher and better use purposes. However, under the Internal Revenue Code, no more than 25% of the value of the assets of a REIT may be represented by securities of our taxable REIT subsidiaries. This threshold decreases to 20% in 2018. This may limit our ability to make investments in our wood products manufacturing operations or in other non-REIT qualifying operations.
Our ability to fund dividends and service our indebtedness using cash generated through our taxable REIT subsidiary may be limited.
The rules with which we must comply to maintain our status as a REIT limit our ability to use dividends from Potlatch TRS for the payment of stockholder dividends and to service our indebtedness. In particular, at least 75% of our gross income for each taxable year as a REIT must be derived from sales of our standing timber and other types of real estate income. No more than 25% of our gross income may consist of dividends from Potlatch TRS and other non-qualifying types of income. This requirement may limit our ability to receive dividends from Potlatch TRS and may impact our ability to fund dividends to stockholders and service the REIT's indebtedness using cash from Potlatch TRS.
We may not be able to complete desired like-kind exchange transactions for property we sell.
We sometimes seek to match sales and acquisitions of properties, which allows us to use Internal Revenue Code section 1031 like-kind exchange tax-deferred treatment. The matching of sales and purchases provides us with significant tax benefits, primarily the deferral of any gain on the property sold until the ultimate disposition or harvest of the replacement property. While we may attempt to complete like-kind exchanges when it is appropriate, it is unlikely that we will be able to do so in all instances due to various factors, including the lack of availability of suitable replacement property on acceptable terms and the inability to complete a qualifying like-kind exchange transaction within the time frames required by the Internal Revenue Code. The inability to obtain like-kind exchange treatment could result in the payment of taxes with respect to TRS property, and a corresponding reduction in income and cash available for dividends to stockholders.
We may not be able to realize our deferred tax assets.
We may not have sufficient future taxable income to realize all our deferred tax assets. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which our temporary differences are deductible as governed by the tax code. The amount of our deferred tax assets could be reduced in the near term if future taxable income does not materialize or management is unable to implement one or more strategies that it has identified to generate taxable income. See Note 13: Income Taxes in the Notes to Consolidated Financial Statements contained in this report for additional information about our deferred tax assets.

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Risks Related to Ownership of Our Common Stock
The price of our common stock may be volatile.
The market price of our common stock may be influenced by many factors, some of which are beyond our control, including those described above under Business and Operating Risks and the following: actual or anticipated fluctuations in our operating results or our competitors’ operating results, announcements by us or our competitors of capacity changes, acquisitions or strategic investments, our growth rate and our competitors’ growth rates, the financial markets, interest rates and general economic conditions, changes in stock market analyst recommendations regarding us, our competitors or the forest products industry generally, or lack of analyst coverage of our common stock, failure to pay cash dividends or the amount of cash dividends paid, sales of our common stock by our executive officers, directors and significant stockholders or sales of substantial amounts of common stock, changes in accounting principles and changes in tax laws and regulations.
Certain provisions of our certificate of incorporation and bylaws and of Delaware law may make it difficult for stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial.
Certain provisions of our certificate of incorporation and bylaws and Delaware law may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interest of us and our stockholders. The provisions in our certificate of incorporation and bylaws include, among other things, the following:
a classified board of directors with three-year staggered terms;
the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval;
stockholder action can only be taken at a special or regular meeting and not by written consent and stockholders cannot call a special meeting except upon the written request of stockholders entitled to cast not less than a majority of all of the votes entitled to be cast at the meeting;
advance notice procedures for nominating candidates to our board of directors or presenting matters at stockholder meetings;
removal of directors only for cause;
allowing only our board of directors to fill vacancies on our board of directors;
in order to facilitate the preservation of our status as a REIT under the Internal Revenue Code, a prohibition on any single stockholder, or any group of affiliated stockholders, from beneficially owning more than 9.8% of our outstanding common or preferred stock, unless our board waives or modifies this ownership limitation;
unless approved by the vote of at least 80% of our outstanding shares, we may not engage in business combinations, including mergers, dispositions of assets, certain issuances of shares of stock and other specified transactions, with a person owning or controlling, directly or indirectly, 5% or more of the voting power of our outstanding common stock; and
supermajority voting requirements to amend our bylaws and certain provisions of our certificate of incorporation.
While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction that stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. We are also subject to Delaware laws that could have similar effects. One of these laws prohibits us from engaging in a business combination with a significant stockholder unless specific conditions are met.

ITEM 1B. UNRESOLVED STAFF COMMENTS
None.


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ITEM 2. PROPERTIES
Information on our locations and facilities is included in Part I - Item 1. Business under each of the respective segment headers.

ITEM 3. LEGAL PROCEEDINGS
Other than the environmental proceedings described in Note 14: Commitments and Contingencies in the Notes to Consolidated Financial Statements, which is incorporated herein by reference, we believe there is no pending or threatened litigation that would have a material adverse effect on our financial position, operations or liquidity.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

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Part II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on The Nasdaq Global Select Market (NASDAQ). The quarterly high and low sales price per share of our common stock and the quarterly cash dividend payments per share for 2015 and 2014, were as follows:
  
2015
 
2014
QUARTER
HIGH
LOW
CASH
DIVIDENDS
 
HIGH
LOW
CASH
DIVIDENDS
1st
$
43.55

$
37.95

$
0.375

 
$
42.44

$
37.52

$
0.35

2nd
40.11

35.00

0.375

 
41.80

37.04

0.35

3rd
36.34

28.40

0.375

 
43.20

39.83

0.35

4th
34.24

28.00

0.375

 
44.20

39.89

0.375

There were approximately 1,105 stockholders of record at January 31, 2016.
Our Board of Directors, in its sole discretion, determines the actual amount of dividends to be made to stockholders based on consideration of a number of factors, including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions in our industry and in the markets for our products, tax considerations, borrowing capacity, debt covenant restrictions, timber prices, harvest levels on our timberlands, market demand for timberlands, including timberland properties we have identified as potentially having a higher and better use, and future acquisitions and dispositions. Consequently, the level of dividends to our stockholders may fluctuate and any reduction in the dividend rate may adversely affect our stock price.
Reference is made to the discussion in Liquidity and Capital Resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations of (i) the covenants in our credit facility and term loan and the indenture governing our senior notes with which we must comply in order to make cash dividends and (ii) the REIT tax rules, which under certain circumstances may restrict our ability to receive dividends from Potlatch TRS, our taxable REIT subsidiary.
There are currently no authorized repurchase programs in effect under which we may repurchase shares.
The following table provides certain information as of December 31, 2015, with respect to our equity compensation plans:
INFORMATION ABOUT SECURITIES AUTHORIZED FOR ISSUANCE UNDER OUR EQUITY COMPENSATION PLAN
PLAN CATEGORY
NUMBER OF SECURITIES
TO BE ISSUED UPON
EXERCISE OF
OUTSTANDING OPTIONS,
WARRANTS OR RIGHTS1 

 
WEIGHTED AVERAGE
EXERCISE PRICE OF
OUTSTANDING OPTIONS,
WARRANTS OR RIGHTS2
 
 
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
UNDER EQUITY
COMPENSATION PLANS

Equity compensation plans approved by security holders
422,208

 
$

 
1,264,065

Equity compensation plans not approved by security holders

 
 

 

Total
422,208

 
$

 
1,264,065


1 
Includes 161,049 performance shares and 53,216 restricted stock units, or RSUs, which are the maximum number of shares that can be awarded under the performance share and RSU programs, not including future dividend equivalents. Also includes 207,943 deferred compensation stock equivalent units.
2 
Performance shares and RSUs do not have exercise prices and are therefore not included in the weighted average exercise price calculation.




2015 FORM 10-K / 19



Company Stock Price Performance
The following graph and table show a five year comparison of cumulative total stockholder returns for the company, the NAREIT Equity Index, the Standard & Poor’s 500 Composite Index and a group of six companies that we refer to as our Peer Group for the period ended December 31, 2015. The total stockholder return assumes $100 invested at December 31, 2010, with quarterly reinvestment of all dividends.
 
AT DECEMBER 31,
 
2011
 
2012
 
2013
 
2014
 
2015
Potlatch Corporation
$
101

 
$
131

 
$
144

 
$
150

 
$
113

NAREIT Equity Index
108

 
128

 
131

 
170

 
176

S&P 500 Composite
102

 
118

 
157

 
178

 
181

2015 Peer Group1
104

 
143

 
152

 
162

 
154


1  
Our Peer Group companies are Deltic Timber Corp., Plum Creek Timber Co., Inc., Rayonier Inc., St. Joe Co., Universal Forest Products Inc. and Weyerhaeuser Co. Returns are weighted based on market capitalizations as of the beginning of each year.

The performance graph above is being furnished solely to accompany this Report pursuant to Item 201(e) of Regulation S-K and is not being filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation in such filing.

20 / POTLATCH CORPORATION



ITEM 6. SELECTED FINANCIAL DATA
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
(Dollars in thousands – except per share amounts)
2015
 
2014
 
2013
 
2012
 
2011
Revenues
$
575,336

 
$
606,950

 
$
570,289

 
$
525,134

 
$
497,421

Net income
31,714

 
89,910

 
70,581

 
42,594

 
40,266

 
 
 
 
 
 
 
 
 
 
Total assets1,2
$
1,016,612

 
$
1,031,746

 
$
677,202

 
$
714,787

 
$
740,548

Working capital2
(9,967
)
 
20,298

 
79,044

 
73,444

 
55,806

Long-term debt (including current portion)1,2
603,881

 
625,668

 
316,764

 
353,465

 
360,731

Total stockholders’ equity
203,736

 
225,066

 
204,148

 
138,643

 
142,138

 
 
 
 
 
 
 
 
 
 
Current ratio
0.9 to 1

 
1.3 to 1

 
2.6 to 1

 
2.2 to 1

 
1.7 to 1

Long-term debt to stockholders’ equity ratio
3.0 to 1

 
2.8 to 1

 
1.6 to 1

 
2.6 to 1

 
2.6 to 1

 
 
 
 
 
 
 
 
 
 
Capital expenditures:3
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
$
18,987

 
$
13,261

 
$
10,280

 
$
5,636

 
$
5,338

Timberlands reforestation and roads, net
13,745

 
10,971

 
12,313

 
11,774

 
11,158

Total capital expenditures
$
32,732

 
$
24,232

 
$
22,593

 
$
17,410

 
$
16,496

 
 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.78

 
$
2.21

 
$
1.74

 
$
1.06

 
$
1.00

Diluted
0.77

 
2.20

 
1.73

 
1.05

 
1.00

Weighted-average shares outstanding (in thousands):
 
 
 
 
 
 
 
 
 
Basic
40,842

 
40,749

 
40,503

 
40,333

 
40,159

Diluted
40,988

 
40,894

 
40,709

 
40,553

 
40,383

Dividends per share
$
1.50

 
$
1.425

 
$
1.28

 
$
1.24

 
$
1.84


1 In December 2014, we acquired approximately 201,000 acres of timberland in Alabama and Mississippi for a total purchase price of $384 million, which was funded with $310 million of new term loans and cash on hand.
2 Debt issuance costs in 2011 - 2014 were reclassified to conform with the 2015 presentation.
3 Excludes the acquisition of timber and timberlands.




2015 FORM 10-K / 21



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Factors Influencing Our Results of Operations and Cash Flows
The operating results of our Resource, Wood Products and Real Estate business segments have been and will continue to be influenced by a variety of factors, including the cyclical nature of the forest products industry, changes in timber prices and in harvest levels from our timberlands, competition, timberland valuations, demand for our non-strategic timberland for higher and better use purposes, lumber prices, the efficiency and level of capacity utilization of our wood products manufacturing operations, changes in our principal expenses such as log costs, asset dispositions or acquisitions and other factors. See Part I - Item 1. Business for additional information.
Overview
During 2015, the Resource and Wood Products segment results were affected by lower lumber prices resulting from excess supply in the lumber markets due to several factors. In early 2015, adverse weather in the eastern part of the United States slowed housing starts, while a mild winter in the western part of the United States allowed strong log and lumber production volumes. A decrease in lumber exported by Canada to China, coupled with a weak Canadian dollar relative to the U.S. dollar, resulted in higher Canadian lumber sales into the United States.
Following the December 2014 acquisition of timberlands in Alabama and Mississippi, harvest volumes increased in 2015, as well as associated logging, hauling, depletion and amortization costs.
During 2015, we completed large capital projects at each of our lumber mills, which will increase log utilization, recovery of higher grade lumber, and production. These capital projects resulted in lower production volumes due to down time taken during installation. We also encountered higher log costs in Michigan and Minnesota.
According to industry forecasts, the 2016 housing market is expected to continue improving at a moderate pace. This is expected to provide a modest increase in 2016 lumber prices. We anticipate harvest volumes will remain flat at 4.4 million tons with little variation among our regions. We also expect our lumber mill production will increase as a result of the capital projects we completed in 2015.
Results of Operations
Our business is organized into three reporting segments: Resource, Wood Products and Real Estate. Sales between segments are recorded as intersegment revenues based on prevailing market prices. For 2015, the Resource segment's sales to Wood Products was 20%. Our other segments generally do not generate intersegment revenues.
In the period-to-period discussions of our consolidated results of operations, our revenues are reported after elimination of intersegment revenues. In the business segment discussions, each segment’s revenues are presented before elimination of intersegment revenues.

22 / POTLATCH CORPORATION



CONSOLIDATED RESULTS COMPARING 2015 WITH 2014
The following table sets forth year-to-year changes in items included in our Consolidated Statements of Income for the years ended December 31:
(Dollars in thousands)
2015
 
2014
 
CHANGE
Revenues
$
575,336

 
$
606,950

 
$
(31,614
)
(5
)%
Costs and expenses:

 

 
 
 
Cost of goods sold
470,037

 
429,789

 
40,248

9
 %
Selling, general and administrative expenses
46,392

 
44,655

 
1,737

4
 %
 
516,429

 
474,444

 
41,985

9
 %
Operating income
58,907

 
132,506

 
(73,599
)
(56
)%
Interest expense, net
(32,761
)
 
(22,909
)
 
(9,852
)
(43
)%
Income before income taxes
26,146

 
109,597

 
(83,451
)
(76
)%
Income tax benefit (provision)
5,568

 
(19,687
)
 
25,255

128
 %
Net income
$
31,714

 
$
89,910

 
$
(58,196
)
(65
)%
Revenues
The decrease in revenues in 2015, compared with 2014, was due to lower log and lumber prices across all of our regions. Saw log prices decreased an average of 6% while pulpwood prices decreased an average of 2%, compared with 2014. Lumber sales prices decreased 14% in 2015, compared with 2014. The decrease in revenues was partially offset by a 20% increase in harvest volumes as a result of our acquisition of Alabama and Mississippi timberlands in December 2014. Real Estate revenues decreased $11.5 million due to less acres sold in 2015. A more detailed discussion of revenues follows in the operating results by business segments.
Cost of goods sold
Cost of goods sold increased 9% in 2015, compared with 2014, as a result of increased logging, hauling depreciation, depletion and amortization as a result of our acquisition of Alabama and Mississippi timberlands in December 2014, as well as higher fiber and lumber manufacturing costs. A more detailed discussion of cost of goods sold follows in the operating results by business segments.
Selling, general and administrative expenses
The increase in selling, general and administrative expenses in 2015, compared with 2014, is primarily due to higher pension expense resulting from the adoption of new mortality tables at December 31, 2014, partially offset by the absence of an annual cash incentive compensation expense in 2015.
Income taxes
Income taxes are primarily due to income or loss from Potlatch TRS. For 2015, the income tax benefit of $5.6 million is primarily the result of Potlatch TRS's loss before income tax of $14.2 million. For 2014, the income tax expense of $19.7 million was the result of Potlatch TRS's income before income tax of $61.6 million.

2015 FORM 10-K / 23



BUSINESS SEGMENT RESULTS COMPARING 2015 WITH 2014
Resource Segment
 
 
 YEARS ENDED DECEMBER 31,
 
 
 
(Dollars in thousands)
2015
 
2014
 
CHANGE
Revenues1
$
263,875

 
$
252,581

 
$
11,294

4
 %
Cost of goods sold:
 
 
 
 
 
 
Logging and hauling
126,085

 
117,938

 
8,147

7
 %
Depreciation, depletion and amortization
28,583

 
17,428

 
11,155

64
 %
Other
26,289

 
25,815

 
474

2
 %
 
180,957

 
161,181

 
19,776

12
 %
Selling, general and administrative expenses
6,568

 
6,424

 
144

2
 %
Operating income
$
76,350

 
$
84,976

 
$
(8,626
)
(10
)%
 

 

 


Harvest Volumes (in tons)
 
 
 
 
 
 
Northern region
 
 
 
 
 
 
 
Sawlog
1,992,965

 
1,982,113

 
10,852

1
 %
 
Pulpwood
194,902

 
201,926

 
(7,024
)
(3
)%
 
Stumpage
23,574

 
16,312

 
7,262

45
 %
 
  Total
2,211,441

 
2,200,351

 
11,090

1
 %
 
 
 
 
 
 
 
 
Southern region

 

 


 
Sawlog
736,333

 
619,750

 
116,583

19
 %
 
Pulpwood
1,127,561

 
817,408

 
310,153

38
 %
 
Stumpage
321,172

 
21,798

 
299,374

n/m

 
  Total
2,185,066

 
1,458,956

 
726,110

50
 %
 
 
 
 
 
 




Total harvest volume
4,396,507

 
3,659,307

 
737,200

20
 %
 
 
 
 
 
 




Sales Price/Unit ($ per ton)
 
 
 
 




Northern region2
 
 
 
 




 
Sawlog
$
87

 
$
91

 
$
(4
)
(4
)%
 
Pulpwood
$
42

 
$
43

 
$
(1
)
(2
)%
 
Stumpage
$
9

 
$
11

 
$
(2
)
(18
)%
 
 
 
 
 
 
 
 
Southern region2
 
 
 
 
 
 
 
Sawlog
$
43

 
$
46

 
$
(3
)
(7
)%
 
Pulpwood
$
33

 
$
34

 
$
(1
)
(3
)%
 
Stumpage
$
19

 
$
14

 
$
5

36
 %

1 
Prior to elimination of intersegment fiber revenues of $53.7 million in 2015 and $62.3 million in 2014.
2 
Sawlog and pulpwood sales prices are on a delivered basis, which includes contracted logging and hauling costs charged to the customer. Stumpage sales provide our customers the right to harvest standing timber. As such, the customer contracts the logging and hauling and bears such costs.



24 / POTLATCH CORPORATION



Revenues increased 4% in 2015, compared with 2014, due to a 20% increase in harvest volumes as a result of our acquisition of Alabama and Mississippi timberlands in December 2014. This increase was partially offset by a decrease in sawlog and pulpwood prices of 6% and 3%, respectively.
Volumes in our Northern region remained relatively flat consistent with our planned harvest volumes. Lower Northern region sawlog prices were the result of lower lumber prices as approximately two-thirds of our Northern sawlog sales are indexed to the price of lumber.
Harvest volumes in our Southern region were approximately 100,000 tons lower than planned harvest volumes due to weather constraints. Sawlog prices decreased 7% due to a decline in hardwood sawlog prices. Pulpwood prices were fairly constant with an increase in pine pulpwood partially offset by hardwood pulpwood. Stumpage prices fluctuate based on the mix of pulpwood and sawlog volume.
Logging, hauling and depletion expense increased due to higher harvest volumes. This was partially offset by lower fuel costs in the Northern region.
Wood Products Segment
 
 YEARS ENDED DECEMBER 31,
 
 
 
(Dollars in thousands)
2015
 
2014
 
CHANGE
Revenues
$
336,214

 
$
376,239

 
$
(40,025
)
(11
)%
Cost of goods sold1:
 
 
 
 
 
 
Fiber costs
180,971

 
176,782

 
4,189

2
 %
Manufacturing cost
127,998

 
118,104

 
9,894

8
 %
Finished goods inventory change
1,548

 
(2,370
)
 
3,918

(165
)%
Other2
25,675

 
26,804

 
(1,129
)
(4
)%
 
336,192

 
319,320

 
16,872

5
 %
Selling, general and administrative expenses
5,257

 
4,477

 
780

17
 %
Operating income (loss)
$
(5,235
)
 
$
52,442

 
$
(57,677
)
(110
)%
 
 
 
 
 
 
 
Lumber shipments (MBF)
626,630

 
659,583

 
(32,953
)
(5
)%
Lumber sales prices ($ per MBF)
$
346

 
$
402

 
$
(56
)
(14
)%

1 
Prior to elimination of intersegment fiber costs of $53.7 million in 2015 and $62.3 million in 2014.
2 
Other cost of goods sold is primarily customer freight.
Revenues decreased 11% in 2015, compared with 2014. Of this decrease, 8% was due to lower lumber prices and 3% was due to fewer lumber shipments. Decreased shipments were primarily due to mill down time for large capital projects installations at each of our four lumber mills as well as downtime taken at certain mills near year end to balance supply with demand.
Cost of goods sold fluctuated based on the following factors:
Fiber costs increased $4.2 million primarily due to higher log costs in Minnesota and Michigan as a result of strong demand by pulp and paper manufacturers, partially offset by lower production volumes.
Manufacturing costs increased primarily due to higher payroll and maintenance expense, largely the result of overtime and temporary labor associated with projects at the mills, as well as higher pension costs related to the adoption of updated mortality tables and a reduction in the discount rate at the end of 2014. Depreciation also increased as a result of the large capital project installations at our lumber mills.
Inventory fluctuates based on a combination of production volume, fiber costs, manufacturing costs and shipments.

2015 FORM 10-K / 25



Real Estate Segment
 
 YEARS ENDED DECEMBER 31,
 
 
(Dollars in thousands)
2015
 
2014
 
CHANGE
Revenues
$
28,989

 
$
40,460

 
$
(11,471
)
 
(28
)%
Cost of goods sold:
 
 
 
 
 
 
 
Basis of real estate sold
7,394

 
9,355

 
(1,961
)
 
(21
)%
Other
2,519

 
2,050

 
469

 
23
 %
 
9,913

 
11,405

 
(1,492
)
 
(13
)%
Selling, general and administrative expenses
2,227

 
2,110

 
117

 
6
 %
Operating income
16,849

 
26,945

 
(10,096
)
 
(37
)%
 
 
 
 
 
 
 
 
  
2015
 
2014
  
ACRES SOLD
 
AVERAGE
PRICE/ACRE
 
ACRES SOLD
 
AVERAGE
PRICE/ACRE
HBU
4,599

 
$
3,340

 
3,784

 
$
2,129

Rural real estate
9,036

 
$
1,329

 
28,059

 
$
1,112

Non-strategic timberland
1,753

 
$
900

 
1,560

 
$
779

Total
15,388

 
 
 
33,403

 
 

Real Estate revenues were 28% lower in 2015, compared with 2014, due to less acres sold in Minnesota and Idaho, partially offset by the sale of HBU commercial sites and higher acres sold in the South. In 2014, we had two large sales consisting of 9,400 acres in Minnesota and 11,000 acres in Idaho. The increase in acres sold in the South is the result of properties identified as HBU during our acquisition of Alabama and Mississippi timberlands in December 2014.

CONSOLIDATED RESULTS COMPARING 2014 WITH 2013
The following table sets forth year-to-year changes in items included in our Consolidated Statements of Income for the years ended December 31:
(Dollars in thousands)
2014
 
2013
 
CHANGE
Revenues
$
606,950

 
$
570,289

 
$
36,661

6
 %
Costs and expenses:
 
 
 
 
 
 
Cost of goods sold
429,789

 
408,772

 
21,017

5
 %
Selling, general and administrative expenses
44,655

 
50,397

 
(5,742
)
(11
)%
Environmental remediation charge

 
3,522

 
(3,522
)
n/m

 
474,444

 
462,691

 
11,753

3
 %
Operating income
132,506

 
107,598

 
24,908

23
 %
Interest expense, net
(22,909
)
 
(23,132
)
 
223

1
 %
Income before income taxes
109,597

 
84,466

 
25,131

30
 %
Income tax provision
(19,687
)
 
(13,885
)
 
(5,802
)
42
 %
Net income
$
89,910

 
$
70,581

 
$
19,329

27
 %
Revenues. Revenues from all three business segments increased in 2014 over 2013. Resource and Wood Products segment revenues increased primarily due to higher sales prices. The Real Estate segment sold more acres in 2014, compared with 2013. A more detailed discussion of revenues follows in the operating results by business segments.
Cost of goods sold. Cost of goods sold increased in 2014 over 2013 primarily due to higher fiber costs and labor-related expenses due to increased shipments by our Wood Products segment, increased acres sold by our Real Estate segment, and higher forest management and road costs in our Resource business. A more detailed discussion of cost of goods sold follows in the operating results by business segments.

26 / POTLATCH CORPORATION



Selling, general and administrative expenses. Selling, general and administrative expenses decreased in 2014, compared with 2013, primarily due to lower bonus and incentive plan expenses and non-cash mark-to-market adjustments related to our deferred compensation plans.
Environmental remediation charge. In 2013, we recorded pre-tax charges of $3.5 million for remediation costs related to our Avery Landing site in Idaho. Physical clean-up activities at the site were completed in 2013.
Income taxes. Our effective tax rate for 2014 was 18% compared with 16% in 2013. The increase resulted primarily from proportionately higher operating income in Potlatch TRS.


2015 FORM 10-K / 27




BUSINESS SEGMENT RESULTS COMPARING 2014 WITH 2013

Resource Segment
 
 
 YEARS ENDED DECEMBER 31,
 
 
 
(Dollars in thousands)
2014
 
2013
 
CHANGE
Revenues1
$
252,581

 
$
238,228

 
$
14,353

6
 %
Cost of goods sold:
 
 
 
 


Logging and hauling
117,938

 
117,529

 
409

 %
Depreciation, depletion and amortization
17,428

 
17,440

 
(12
)
 %
Other
25,815

 
24,010

 
1,805

8
 %
 
161,181

 
158,979

 
2,202

1
 %
Selling, general and administrative expenses
6,424

 
5,824

 
600

10
 %
Operating income
$
84,976

 
$
73,425

 
$
11,551

16
 %
 
 
 
 
 
 
 
Harvest Volumes (in tons)
 
 
 
 
 
 
Northern region
 
 
 
 
 
 
 
Sawlog
1,982,113

 
2,031,637

 
(49,524
)
(2
)%
 
Pulpwood
201,926

 
127,998

 
73,928

58
 %
 
Stumpage
16,312

 
25,397

 
(9,085
)
(36
)%
 
  Total
2,200,351

 
2,185,032

 
15,319

1
 %
 
 
 
 
 
 
 
 
Southern region
 
 
 
 
 
 
 
Sawlog
619,750

 
694,147

 
(74,397
)
(11
)%
 
Pulpwood
817,408

 
821,781

 
(4,373
)
(1
)%
 
Stumpage
21,798

 
8,353

 
13,445

161
 %
 
  Total
1,458,956

 
1,524,281

 
(65,325
)
(4
)%
 
 
 
 
 
 
 
 
Total harvest volume
3,659,307

 
3,709,313

 
(50,006
)
(1
)%
 
 
 
 
 
 
 
 
Sales Price/Unit ($ per ton)
 
 
 
 
 
 
Northern region2
 
 
 
 
 
 
 
Sawlog
$
91

 
$
85

 
$
6

7
 %
 
Pulpwood
$
43

 
$
36

 
$
7

19
 %
 
Stumpage
$
11

 
$
8

 
$
3

38
 %
 
 
 
 
 
 
 
 
Southern region2
 
 
 
 
 
 
 
Sawlog
$
46

 
$
43

 
$
3

7
 %
 
Pulpwood
$
34

 
$
32

 
$
2

6
 %
 
Stumpage
$
14

 
$
12

 
$
2

17
 %

1 
Prior to elimination of intersegment fiber revenues of $62.3 million in 2014 and $60.1 million in 2013.
2 
Sawlog and pulpwood sales prices are on a delivered basis, which includes contracted logging and hauling costs charged to the customer. Stumpage sales provides our customers the right to harvest standing timber. As such, the customer contracts the logging and hauling and bears such costs.
Resource revenues increased in 2014, compared with 2013, due to increased sales prices, primarily for sawlogs and pulpwood in Idaho, and increased volume of pulpwood harvested in Idaho.

28 / POTLATCH CORPORATION



In our Northern region, approximately two-thirds of our sawlog sales are indexed to the price of lumber. Sawlog prices increased due to improved lumber prices and stronger demand. Sawlog harvest volumes were down slightly from 2013. Pulpwood volumes and prices increased in 2014 primarily due to lower production in 2013. During 2013, an oversupply of residuals and chips in the Northwest market lowered pulpwood prices. As a result of the lower pulpwood prices, we minimized pulpwood production in 2013.
In our Southern region, sawlog volumes decreased in 2014, compared with 2013, as wet weather conditions limited access to hardwood stands. Sawlog prices increased primarily due to a higher mix of hardwoods, which have a higher price compared with pine. Pulpwood prices increased as a result of improved demand for hardwood pulpwood.
Expenses increased $2.8 million, or 2%, in 2014, compared with 2013, primarily due to increased forest management and road costs.
Wood Products Segment
 
 YEARS ENDED DECEMBER 31,
 
 
 
(Dollars in thousands)
2014
 
2013
 
CHANGE
Revenues
$
376,239

 
$
366,015

 
$
10,224

3
 %
Cost of goods sold1:
 
 
 
 
 
 
Fiber costs
176,782

 
169,556

 
7,226

4
 %
Manufacturing cost
118,104

 
112,260

 
5,844

5
 %
Finished goods inventory change
(2,370
)
 
(4,496
)
 
2,126

(47
)%
Other2
26,804

 
25,178

 
1,626

6
 %
 
319,320

 
302,498

 
16,822

6
 %
Selling, general and administrative expenses
4,477

 
4,625

 
(148
)
(3
)%
Operating income
$
52,442

 
$
58,892

 
$
(6,450
)
(11
)%
 
 
 
 
 
 
 
Lumber shipments (MBF)
659,583

 
641,217

 
18,366

3
 %
Lumber sales prices ($ per MBF)
$
402

 
$
392

 
$
10

3
 %

1 
Prior to elimination of intersegment fiber costs of $62.3 million in 2014 and $60.1 million in 2013.
2 
Other cost of goods sold is primarily customer freight.
Revenues increased 3% in 2014, compared with 2013, due to a 3% increase in both lumber sales prices and shipments.
Cost of goods sold fluctuated based on the following factors:
Fiber costs increased $7.2 million due to a 7% increase in log costs, primarily in Idaho, and higher lumber shipments.
Manufacturing costs increased primarily due to labor-related expenses and other variable costs due to increased production and sales volumes.
Inventory fluctuates based on a combination of production volume, fiber costs, manufacturing costs and shipments.

2015 FORM 10-K / 29




Real Estate Segment
 
 YEARS ENDED DECEMBER 31,
 
 
(Dollars in thousands)
2014
 
2013
 
CHANGE
Revenues
$
40,460

 
$
26,160

 
$
14,300

 
55
 %
Cost of goods sold:
 
 
 
 
 
 
 
Basis of real estate sold
9,355

 
3,536

 
5,819

 
165
 %
Other
2,050

 
2,280

 
(230
)
 
(10
)%
 
11,405

 
5,816

 
5,589

 
96
 %
Selling, general and administrative expenses
2,110

 
2,078

 
32

 
2
 %
Operating income
$
26,945

 
$
18,266

 
$
8,679

 
48
 %
 
 
 
 
 
 
 
 
  
2014
 
2013
  
ACRES SOLD
 
AVERAGE
PRICE/ACRE
 
ACRES SOLD
 
AVERAGE
PRICE/ACRE
HBU
3,784

 
$
2,129

 
4,799

 
$
2,033

Rural real estate
28,059

 
$
1,112

 
9,494

 
$
1,310

Non-strategic timberland
1,560

 
$
779

 
4,669

 
$
849

Total
33,403

 
 
 
18,962

 
 
Revenues increased $14.3 million, expenses increased $5.6 million and operating income increased $8.7 million in 2014, compared with 2013, primarily due to increased acres sold in 2014 and product mix. In 2014, we had two large sales consisting of 9,400 acres in Minnesota and 11,000 acres in Idaho.

Liquidity and Capital Resources
Overview
At December 31, 2015, our financial position included long-term debt of $603.9 million, compared with $625.7 million at December 31, 2014. We also had $30.0 million outstanding on our revolving line of credit at the end of 2015. Our current ratio at December 31, 2015 was 0.9 to 1, compared with 1.3 to 1 at December 31, 2014. At December 31, 2015, we had $218.6 million available on our revolving line of credit. Dividends to stockholders in 2015 totaled $61.0 million, compared with $57.8 million in 2014.
Net Cash From Operations
Net cash provided from operating activities were:
$74.0 million in 2015,
$131.4 million in 2014 and
$90.3 million in 2013.
Year ended December 31, 2015 compared with year ended December 31, 2014
Net cash from operating activities in 2015 decreased $57.4 million from 2014:
Cash received from customers decreased $42.5 million, primarily due to lower log and lumber prices. A more detailed discussion of revenues is included in the Business Segment Results section.
Cash paid to employees, suppliers and others increased $26.2 million in 2015 from 2014 primarily due to increased logging and hauling expense as a result of our acquisition of Alabama and Mississippi timberlands in December 2014, as well as higher fiber and lumber manufacturing costs.
Cash paid for interest increased $8.8 million as a result of $310.0 million of long-term debt incurred in December 2014 for the acquisition of timberlands in Alabama and Mississippi. Net cash paid for interest expense in 2015 was $29.7 million compared with $20.9 million in 2014.

30 / POTLATCH CORPORATION



Partially offsetting the decrease was:
Net cash outflows related to income taxes decreased $16.5 million. In 2015 cash paid for taxes was $1.6 million, compared with $18.1 million in 2014.
Cash contributions to our qualified pension plans decreased $3.6 million in 2015 from 2014. We did not make a qualified pension plan contribution in 2015.
Year ended December 31, 2014 compared with year ended December 31, 2013
Net cash from operating activities in 2014 increased $41.1 million from 2013:
Cash received from customers increased $49.6 million, primarily due to increased sales and cash received by the Resource, Wood Products and Real Estate segments. A more detailed discussion of revenues is included in the Business Segment Results section.
Net cash outflows related to income taxes decreased $2.0 million. Net cash paid for taxes in 2014 was $18.1 million compared with $20.1 million in 2013.
Partially offsetting the increase was:
Cash paid to employees, suppliers and others increased $8.2 million in 2014 from 2013 primarily due to higher log costs and labor-related expenses due to increased shipments by our Wood Products segment.
Cash contributions to our qualified pension plans increased $3.6 million in 2014 from 2013, as we did not make a qualified pension plan contribution in 2013.
Net Cash Flows from Investing Activities
Net cash used for investing activities was $14.3 million in 2015, $382.7 million in 2014 and $12.0 million in 2013. In 2015, we used $32.7 million for capital expenditures and $10.2 million for the acquisition of timber and timberlands, partially offset by $26.3 million provided by short-term investments. In 2014, we used $389.0 million for the acquisition of timber and timberlands and $24.2 million for capital expenditures, partially offset by $25.9 million provided by the reduction in short-term investments. In 2013, we used $22.6 million for capital expenditures partially offset by $10.8 million provided by the reduction in short-term investments.
We anticipate that we will spend $19 million for capital expenditures in 2016. Our capital spending is primarily related to reforestation expenditures, logging road construction and high-return discretionary projects and routine general replacement projects for our wood products manufacturing facilities.
Net Cash Flow from Financing Activities
Net cash used in financing activities was $56.5 million in 2015. Net cash provided by financing activities was $250.4 million in 2014. Net cash used in financing activities was $89.6 million in 2013. Net cash used in financing activities in 2015 was primarily attributable to dividends to stockholders, which totaled $61.0 million, and the maturity and redemption of $22.5 million of debentures, partially offset by $30.0 million provided by our revolving line of credit. In 2014, proceeds from the borrowing of long-term debt provided $310.0 million used to acquire timberlands, partially offset by dividends to stockholders of $57.8 million. In 2013, net cash used for financing activities was primarily attributable to paying dividends to stockholders of $51.9 million and the redemption of $36.7 million of debt.
Credit Agreement
On August 12, 2014, we entered into an amended and restated credit agreement with an expiration date of February 12, 2020. This credit agreement provides for a revolving line of credit with an initial aggregate principal amount not to exceed $250 million, which may be increased by up to an additional $250 million, subject to certain conditions and agreement of the lenders. It also includes a sublimit of $40 million for the issuance of standby letters of credit and a sublimit of $15 million for swing line loans. Usage under either or both subfacilities reduces availability under the revolving line of credit. At December 31, 2015, there was $30.0 million in borrowings outstanding under the revolving line of credit and approximately $1.4 million of the letter of credit subfacility was being used to support outstanding standby letters of credit. Available borrowing capacity at December 31, 2015 was $218.6 million.
We may use the funds borrowed under the credit agreement, among other things, to refinance existing indebtedness, fund working capital needs and capital expenditures, and for other general corporate purposes, including acquisitions.
The agreement governing our bank credit facility contains certain covenants that limit our ability and that of our subsidiaries to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees,

2015 FORM 10-K / 31



repurchase or redeem capital stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates or change the nature of our business. The bank credit facility also contains financial maintenance covenants including the maintenance of a minimum interest coverage ratio, a maximum leverage ratio and maximum allowable acres that may be sold. We will be permitted to pay dividends to our stockholders under the terms of the bank credit facility so long as we expect to remain in compliance with the financial maintenance covenants.
In January 2015, a financial covenant in the credit agreement was amended to increase the maximum allowable acres that may be sold during the term of the agreement due to the acquisition of additional timberlands in Alabama and Mississippi in December 2014. In November 2015, the credit agreement was amended to increase the maximum allowable amount of Potlatch capital stock the Company may repurchase from $50 million to $100 million.
Term Loans
In December 2014, we entered into an amended and restated term loan agreement. The amended term loan agreement provided additional term loan facilities of $310 million to fund the acquisition of timberlands in Alabama and Mississippi. The amended term loan agreement totaling $322 million contains covenants similar to the credit agreement discussed above.
Senior Notes
In 2009, we sold $150 million aggregate principal amount of 7.5% senior notes. The terms of these notes limit our ability, and the ability of any subsidiary guarantors, to borrow money, pay dividends, redeem or repurchase capital stock, enter into sale and leaseback transactions, and create liens. Dividends and the repurchase of our capital stock, are permitted as follows: 
We may use 100% of our Funds Available for Distribution, or FAD, for the period January 1, 2010 through the end of the quarter preceding the payment date, less cumulative restricted payments previously made from FAD during that period, to make restricted payments. Our cumulative FAD less our dividends paid was $77.5 million at December 31, 2015.
If our cumulative FAD, less cumulative restricted payments previously made from FAD, is insufficient to cover a restricted payment, then we are permitted to make payments from a basket amount, which was approximately $90.1 million at December 31, 2015.
If our cumulative FAD less our aggregate restricted payments made from FAD is insufficient to cover a restricted payment and we have depleted the basket, we may still make a restricted payment, so long as, after giving effect to the payment, our ratio of indebtedness to earnings before interest, taxes, depreciation, depletion, amortization and basis of real estate sold, or EBITDDA, from continuing operations for the preceding four full fiscal quarters does not exceed 4.25 to 1.00.
FAD, as defined in the indenture governing the senior notes, is earnings from continuing operations, plus depreciation, depletion and amortization, plus basis of real estate sold, and minus capital expenditures. For purposes of this definition, capital expenditures exclude all expenditures relating to direct or indirect timberland purchases in excess of $5 million.
Financial Covenants
The table below sets forth the financial covenants in the credit and term loan agreements and our status with respect to these covenants as of December 31, 2015:
  
CREDIT AGREEMENT COVENANT REQUIREMENTS
 
TERM LOAN COVENANT REQUIRMENTS
 
ACTUALS AT DECEMBER 31, 2015
Minimum Interest Coverage Ratio
3.00 to 1.00
 
3.00 to 1.00
 
3.28 to 1.00
Maximum Leverage Ratio
40%
 
40%
 
25%
Maximum Allowable Acres that may be sold
480,000
 
475,407
 
22,210
The Interest Coverage Ratio is EBITDDA, which is defined as net income adjusted for interest expense, income taxes, depreciation, depletion and amortization, the basis of real estate sold and non-cash equity compensation expense, divided by interest expense for the same period.
The Leverage Ratio is our Total Funded Indebtedness divided by our Total Asset Value. Our Total Funded Indebtedness consists of our long-term debt, including any current portion of long-term debt, revolving line of credit

32 / POTLATCH CORPORATION



borrowings, plus the total amount outstanding under the letter of credit subfacility. Our Total Asset Value per the credit agreement is defined as the value of our timberlands, the book basis of our wood products manufacturing facilities, cash and cash equivalents, short-term investments, and the cash value of our company-owned life insurance (COLI). The book basis of our Wood Products manufacturing facilities and the cash value of our COLI are each limited to 5% of Total Asset Value.
Future Cash Requirements
Based on our outlook for 2016 and taking into account planned harvest activities, we expect to fund a majority of our 2016 annual cash dividends using the cash flows from our REIT-qualifying timberland operations and from cash and short-term investments on hand. We will also utilize cash dividends from Potlatch TRS to fund our cash dividends, while maintaining compliance with the limits imposed by our REIT status. In particular, at least 75% of our gross income for each taxable year as a REIT must be derived from sales of our standing timber and other types of real estate income. No more than 25% of our gross income may consist of dividends from Potlatch TRS and other non-qualifying types of income. This requirement may limit our ability to receive dividends from Potlatch TRS and may impact our ability to fund dividends to stockholders using cash flows from Potlatch TRS.
Dividends to Shareholders
The following table summarizes the historical tax characteristics of dividends to shareholders for the years ended December 31:
(Amounts per share)
2015
 
2014
 
2013
Capital gain dividends
$
1.28

 
$
1.425

 
$
1.28

Non-taxable return of capital
0.22

 

 

Total dividends
$
1.50

 
$
1.425

 
$
1.28

Credit Ratings
Two major debt rating agencies routinely evaluate our debt and our cost of borrowing can increase or decrease depending on our credit rating. In November 2015, Moody’s affirmed our debt rating of 'Baa3', with a negative outlook. In November 2015, Standard & Poor's downgraded our rating to 'BB', with a stable outlook.
Off-Balance Sheet Arrangements
We had no off-balance sheet financing agreements or guarantees as defined by Item 303 of Regulation S-K at December 31, 2015 and December 31, 2014 that we believe are reasonably likely to have a current or future effect on our financial condition, results of operations, or cash flows.

2015 FORM 10-K / 33




Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2015:  
  
PAYMENTS DUE BY PERIOD
(Dollars in thousands)
TOTAL
 
WITHIN
1 YEAR
 
1-3 YEARS
 
4-5 YEARS
 
MORE THAN
5 YEARS
Long-term debt1
$
607,585

 
$
5,000

 
$
25,250

 
$
236,000

 
$
341,335

Interest on long-term debt2
180,586

 
28,427

 
56,181

 
41,197

 
54,781

Revolving line of credit borrowings1
30,000

 
30,000

 

 

 

Operating leases3
9,618

 
3,601

 
4,960

 
969

 
88

Purchase obligations4
18,074

 
10,617

 
5,641

 
1,816

 

Other long-term liabilities5
139,748

 

 
22,185

 
43,432

 
74,131

Total
$
985,611

 
$
77,645

 
$
114,217

 
$
323,414

 
$
470,335

1 
2 
Amounts presented for interest payments assume that all long-term debt outstanding as of December 31, 2015 will remain outstanding until maturity, and interest rates on variable debt in effect as of December 31, 2015 will remain in effect until maturity. Estimated cash flows related to interest rate swaps are also included in this category.
3 
4 
Purchase obligations primarily include open purchase orders for goods or services that are legally binding on the company and that specify fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude arrangements that the company can cancel without penalty.
5 
Other long-term liabilities include the liability associated with cost share logging roads, employee-related obligations, qualified pension contributions, supplemental pension payments and payments for other postretirement employee benefit obligations. See Note 7. Accounts Payable and Accrued Liabilities, Note 9. Other Long-Term Obligations and Note 11: Savings Plans, Pension Plans and Other Postretirement Employee Benefits, in the Notes to Consolidated Financial Statements for additional detail.

Critical Accounting Policies and Estimates
Our accompanying Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported. The following are critical accounting policies which are both very important to the portrayal of our financial condition and results of operations and which require some of management’s most difficult, subjective and complex judgments. The accounting for these matters involves forming estimates based on current facts, circumstances and assumptions which, in management’s judgment, could change in a manner that would materially affect management’s future estimates with respect to such matters and, accordingly, could cause our future reported financial condition and results of operations to differ materially from financial results reported based on management’s current estimates.
Timber and timberlands. Timber and timberlands are recorded at cost, net of depletion. Expenditures for reforestation, including all costs related to stand establishment, such as site preparation, costs of seeds or seedlings and tree planting, are capitalized. Expenditures for forest management, consisting of regularly recurring items necessary to the ownership and administration of our timber and timberlands, are accounted for as current operating expenses. Our depletion is determined based on costs capitalized and the related current estimated timber volume. The volume does not include anticipated future growth.
There are currently no authoritative accounting rules relating to costs to be capitalized for timber and timberlands. We have used relevant portions of current accounting rules, industry practices and our judgment in determining costs to be capitalized or expensed. Alternate interpretations and judgments could significantly affect the amounts capitalized. Additionally, models and observations used to estimate the current timber volume on our lands are subject to judgments that could significantly affect volume estimates.

34 / POTLATCH CORPORATION



Different assumptions for either the cost or volume estimates, or both, could have a significant effect upon amounts reported in our Consolidated Financial Statements. Because of the number of variables involved and the interrelationship between the variables, sensitivity analysis of individual variables is not practical.
Long-lived assets. A significant portion of our total assets are invested in our timber and timberlands and our wood products manufacturing facilities. The cyclical patterns of our businesses cause cash flows to fluctuate by varying degrees from period to period. As a result, an impairment could materially affect our financial position or results of operation.
Our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, as measured by its undiscounted estimated future cash flows. We use our operational budgets to estimate future cash flows. Budgets are inherently uncertain estimates of future performance due to the fact that all inputs, including revenues, costs and capital spending, are subject to frequent change for many reasons, including those described above in "timber and timberlands."
Income taxes. We believe it is more likely than not that we will have sufficient future taxable income to realize our deferred tax assets. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which temporary differences are deductible. In making this assessment, we consider the scheduled reversal of deferred tax liabilities (including the impact of available carryforward periods), projected taxable income and tax planning strategies. Based on projected taxable income for Potlatch TRS over the periods for which the deferred tax assets are deductible, as well as certain tax planning strategies that management has undertaken and expects to have the ability to undertake in the future, we have recorded a $0.5 million valuation allowance on certain Idaho Investment Tax Credits. With the exception of the valuation allowance, we believe that it is more likely than not that we will realize the remaining $65.7 million in benefits of these deductible differences and carryforwards at December 31, 2015. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced or management is unable to implement one or more tax planning strategies.
Contingent liabilities. We are subject to lawsuits, investigations and other claims related to environmental, product and other matters, and are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. We record contingent liabilities when it becomes probable that we will have to make payments and the amount of loss can be reasonably estimated. Assessing probability and estimating losses requires analysis of multiple factors, including historical experience, judgments about the potential actions of third party claimants and courts and recommendations of legal counsel. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility that an ultimate loss may occur.
Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges. These exposures and proceedings can be significant and the ultimate negative outcomes could be material to our financial position, operating results or cash flow in any given quarter or year. See Note 14: Commitments and Contingencies in the Notes to Consolidated Financial Statements for more information.
Pension and postretirement employee benefits. The determination of pension plan expense and the requirements for funding our pension plans are based on a number of actuarial assumptions. Two critical assumptions are the discount rate applied to pension plan obligations and the expected rate of return on plan assets. For other postretirement employee benefit (OPEB) obligations related to certain health care and life insurance benefits provided to qualified retired employees, critical assumptions in determining OPEB expense are the discount rate applied to benefit obligations and the assumed health care cost trend rates used in the calculation of benefit obligations.
Note 11: Savings Plans, Pension Plans and Other Postretirement Employee Benefits in the Notes to Consolidated Financial Statements includes information on the components of pension and OPEB expense and the underlying actuarial assumptions used to calculate periodic expense for the three years ended December 31, 2015, as well as the funded status of our pension plans and OPEB obligations as of December 31, 2015 and 2014.
The discount rate used in the determination of pension and OPEB benefit obligations in 2015, 2014 and 2013 was calculated using hypothetical bond portfolios consisting of “AA” or better rated securities that match the expected monthly pension and OPEB benefit payments. The portfolios were well-diversified over corporate industrial, corporate financial, municipal, federal and foreign government issuers. At December 31, 2015, we calculated

2015 FORM 10-K / 35



pension obligations using a 4.65% discount rate. We used a discount rate of 4.25% and 5.10% at December 31, 2014 and 2013, respectively.
To determine the expected long-term rate of return on pension assets, we employ a process that analyzes historical long-term returns for various investment categories, as measured by appropriate indices. These indices are weighted based upon the extent to which plan assets are invested in the particular categories in arriving at our determination of a composite expected return. The expected long-term rates of return on pension plan assets was 6.75% for the year ended December 31, 2015, and 7.50% and 8.00% for the years ended December 31, 2014 and December 31, 2013. We reduced the expected long-term rate of return to 6.50% for 2016 to reflect lower expected future rates of return.
Net periodic pension plan cost in 2015 was $20.9 million. A decrease in the discount rate or the rate of expected return on plan assets, all other assumptions remaining the same, would increase net periodic cost. A 25 basis point decrease in the discount rate would increase net periodic cost by approximately $0.8 million in 2016 and increase the projected benefit obligation by approximately $10.1 million at December 31, 2015. A 25 basis point decrease in the assumption for the expected return on plan assets would increase net periodic cost by approximately $0.7 million in 2016. The actual rates of return on plan assets may vary significantly from the assumption used.
For our OPEB obligations, the net periodic benefit for 2015 was $5.8 million. The discount rate used to calculate OPEB obligations, which was determined using the same methodology we used for our pension plans, was 4.25%, 3.90% and 4.45% at December 31, 2015, 2014 and 2013, respectively. The assumed health care cost trend rate used to calculate OPEB obligations as of December 31, 2015 was 7.70% for a certain group of participants under age 65 in our hourly plan and our Arkansas participants covered by a collective bargaining agreement, grading ratably to an assumption of 4.40% in 2075.
A decrease in the discount rate or increase in the health care cost trend rate assumption, all other assumptions remaining the same, would increase our OPEB liability. A 25 basis point decrease in the OPEB discount rate would have a de minimis increase on net periodic cost. A 1% increase in the health care cost trend rate assumption would have affected our OPEB obligation by approximately $63.2 million, as reported in Note 11: Savings Plans, Pension Plans and Other Postretirement Employee Benefits in the Notes to Consolidated Financial Statements. The actual rates of health care cost increases may vary significantly from the assumption used because of unanticipated changes in health care costs.
PROSPECTIVE ACCOUNTING PRONOUNCEMENTS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk exposure on financial instruments includes interest rate risk on our short-term investments, bank credit facility, term loans and interest rate swap agreements. All market risk sensitive instruments were entered into for purposes other than trading purposes.
Our short-term investments consist of diversified depository accounts, money market funds and variable rate demand obligations, all of which have very short maturity periods, and therefore earn an interest rate commensurate with low-risk instruments. We do not attempt to hedge our exposure to interest rate risk for our short-term investments.
The interest rates applied to borrowings under our credit facility adjust often and therefore react quickly to any movement in the general trend of market interest rates. We do not attempt to mitigate the effects of short-term interest rate fluctuations on our credit facility borrowings through the use of derivative financial instruments. Outstanding borrowings under our credit facility were $30.0 million at December 31, 2015.
We are exposed to interest rate risk through our variable rate debt instruments. At December 31, 2015, we had six separate interest rate swaps with notional amounts totaling $74.3 million. The swaps convert interest payments with fixed rates ranging between 7.50% and 8.89% to three-month LIBOR plus a spread between 5.84% and 6.52%. The interest rate swaps terminate at various dates between February 2016 and November 2019. See Note 10: Financial Instruments in the Notes to Consolidated Financial Statements for additional information.


36 / POTLATCH CORPORATION



Quantitative Information about Market Risks
The following table summarizes our outstanding debt, interest rate swaps and average interest rates as of December 31, 2015:
  
EXPECTED MATURITY DATE
(Dollars in thousands)
2016
 
2017
 
2018
 
2019
 
2020
 
THEREAFTER
 
TOTAL
Variable rate debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal due
$

 
$

 
$

 
$
40,000

 
$
40,000

 
$
40,000

 
$
120,000

Average interest rate
 
 
 
 
 
 
1.98
%
 
2.23
%
 
2.23
%
 
2.14
%
Fair value at 12/31/15
 
 
 
 
 
 
 
 
 
 
 
 
$
120,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal due
$
5,000

 
$
11,000

 
$
14,250

 
$
150,000

 
$
6,000

 
$
301,335

 
$
487,585

Average interest rate
8.80
%
 
5.64
%
 
8.88
%
 
7.50
%
 
3.70
%
 
5.09
%
 
5.98
%
Fair value at 12/31/15
 
 
 
 
 
 
 
 
 
 
 
 
$
506,021

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed to variable
$
7

 
$
107

 
$
421

 
$
46

 
$

 
$

 
$
581

Fair value at 12/31/15
 
 
 
 
 
 
 
 
 
 
 
 
$
581


1 
The fair value of interest rate swaps are included in current and long-term debt on the Consolidated Balance Sheets. The derivative assets are included in the other assets and current receivables on the Consolidated Balance Sheets.

A hypothetical increase or decrease of 50 and 100 basis points (BPS) related to our interest rate swap agreements would have the following effects on fair value:
(Dollars in thousands)
NOTIONAL AMOUNT
 
INTEREST RATE SWAP AGREEMENTS - FAIR VALUE1
 
Current
 
+50 BPS
 
+100 BPS
 
-50 BPS
 
-100 BPS
Maturing in:
 
 
 
 
 
 
 
 
 
 
 
2016
$
5,000

 
$
14

 
$
14

 
$
14

 
$
14

 
$
14

2017
5,000

 
115

 
83

 
51

 
148

 
174

2018
14,250

 
446

 
308

 
172

 
586

 
737

2019
50,000

 
155

 
(758
)
 
(1,652
)
 
1,088

 
2,054

Total
$
74,250

 
$
730

 
$
(353
)
 
$
(1,415
)
 
$
1,836

 
$
2,979


1 
Fair value for this table is calculated on a termination value basis. Accrued interest is included and a credit value adjustment, which is used for GAAP purposes, is excluded.


2015 FORM 10-K / 37



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Potlatch Corporation:

We have audited the accompanying consolidated balance sheets of Potlatch Corporation and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for each of the years in the three‑year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Potlatch Corporation and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three‑year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Potlatch Corporation’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 12, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.


/s/ KPMG LLP


Seattle, Washington
February 12, 2016



38 / POTLATCH CORPORATION




POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
 
  
FOR THE YEARS ENDED DECEMBER 31,
  
2015
 
2014
 
2013
Revenues
$
575,336