Edgar Filing: POTLATCH CORP

PCH.10K.2014

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, 2014
	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. x

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, 2014, was approximately $1,680.5 million, based on the closing price of $41.40.

As of January 31, 2015, 40,605,179 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 2014 annual meeting of stockholders expected to be filed with the Commission on or about April 1, 2015 are incorporated by reference in Part III hereof.

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES

Table of Contents



		PAGE NUMBER
PART I
ITEM 1.	Business	3
ITEM 1A.	Risk Factors	9
ITEM 1B.	Unresolved Staff Comments	17
ITEM 2.	Properties	17
ITEM 3.	Legal Proceedings	18
ITEM 4.	Mine Safety Disclosures	18

PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
ITEM 6.	Selected Financial Data	20
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	20
ITEM 8.	Financial Statements and Supplementary Data	20
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	21
ITEM 9A.	Controls and Procedures	21
ITEM 9B.	Other Information	21

PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	22
ITEM 11.	Executive Compensation	22
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	23
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	23
ITEM 14.	Principal Accounting Fees and Services	23

PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	24
SIGNATURES		25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES		26
EXHIBIT INDEX		74

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;


•	payments under timber cutting contracts;


•	increasing lumber demand and pricing in North America in 2015;


•	increased North American housing starts and repair and remodel activity;


•	the expected positive effect on timber prices of increased lumber demand and higher lumber prices;


•	expected sawlog prices in 2015;


•	expected increase in 2015 timber harvest volume of 800,000 tons from acquisition of Alabama and Mississippi timberlands;


•	expected generation of $1.5 million in annual revenues from recreational leases in Alabama and Mississippi;


•	expected harvest level of between 4.0 million and 4.8 million tons each year over the next 15 years;


•	expected 2015 overall timber harvest of 4.5 million tons;


•	expected sale of 37% of Northern region timber volume under log supply agreements in 2015;


•	expected volumes and value of timber to be sold in the Southern region in 2015 under log supply agreements;


•	expected sales of 80,000 acres of higher and better use (HBU) property,140,000 acres of rural real estate property and 80,000 acres of non-strategic timberland over the next decade or more;


•	funding of our dividend distributions in 2015;


•	compliance with REIT tax rules;


•	FSC^® and 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 2015;


•	expectations regarding funding of our pension plans in 2015;


•	expectations regarding supplemental pension plan payments in 2015:


•	estimated future benefit payments;


•	estimated future payments under operating leases;


•	estimated future debt payments; and


•	expected liquidity in 2015 to fund our operations, regular stockholder distributions, 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;

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•	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;


•	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.

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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 and development 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 and plywood.


•	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, subdivision and development activities 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 16: 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 then-current estimate of sustainability for short periods of time, including 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 non-core timberland real estate. A portion of our acreage is more valuable for development or recreational purposes 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 the Sustainable Forestry Initiative^® (SFI^®) or Forest Stewardship Council^® (FSC^®).

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.

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Effective January 1, 2006, we restructured our operations to qualify for treatment as a REIT for federal income tax purposes. As a REIT, if we meet certain requirements 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. We are, with some exceptions, subject to corporate taxes on certain built-in gains (the excess of fair market value over tax basis at January 1, 2006) on sales of real property (other than timber) held by the REIT through December 31, 2015. 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 available on or through our website, www.potlatchcorp.com (under “Investor Resources – Financial Information”), our periodic and current reports that we file with, or furnish to, the Securities and Exchange Commission (SEC), 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 (http://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, which 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.

The supply of timber has been significantly affected by reductions in timber sales by the United States government and by state governments, particularly in the western United States. These reductions have been caused primarily by increasingly stringent environmental and endangered species laws and by a change in the emphasis of domestic governmental policy toward habitat preservation, conservation and recreation, and away from timber management. Because most timberlands in the southeastern United States are privately owned, changes in sales of publicly owned timber affect local timber supplies and prices in the Southeast less immediately than in the western United States with a much larger proportion of public timber ownership. 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 as a result of higher U.S. housing starts, the effect of the mountain pine beetle infestation in western Canada, the level of log and lumber exports to Asia from the U.S. and Canada, and the level of annual allowable cut in Canada.

Timberland Acquisition. On December 7, 2014, we acquired approximately 201,000 acres of timberland in Alabama and Mississippi for $384 million. The acquisition complements our existing ownership in our Southern Region. The acquired timber consists of approximately 73% softwood and 27% hardwoods, and is expected to increase annual timber harvest volumes by approximately 800,000 tons in 2015. 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 are expected to generate approximately $1.5 million in annual revenues.

Ownership. The Resource segment manages approximately 1.6 million acres of timberlands in the North, consisting of our Idaho and Minnesota timberlands, and the South, consisting of our Alabama, Arkansas and

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Mississippi timberlands. This total includes approximately 17,000 acres under long-term leases. We are the largest private landowner in Idaho. The following table provides additional information about our timberlands.



REGION	STATE	DESCRIPTION	ACRES (thousands)
Northern region	Idaho	Variety of commercially viable softwood species, such as grand fir, Douglas fir, inland red cedar and other associated softwoods	791
	Minnesota	Primarily aspen, pine and other mixed hardwoods	178
		Total Northern region	969
Southern region	Alabama	Primarily southern yellow pine and other hardwoods	101
	Arkansas	Primarily southern yellow pine and other hardwoods	410
	Mississippi	Primarily southern yellow pine and other hardwoods	100
		Total Southern region	611
		Total	1,580

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 revenues 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 2014, our estimated standing merchantable timber inventory was 68 million tons, including 37 million tons in the North and 31 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%-5% in the North and 6%-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.

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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 2014 timber harvest by region.



	TIMBER HARVESTED (TONS)
(in thousands)	SAWLOGS	PULPWOOD	STUMPAGE	TOTAL
Northern region	1,982	202	16	2,200
Southern region	620	817	22	1,459
Total	2,602	1,019	38	3,659

We expect our harvest level to range between 4.0 million and 4.8 million tons each year over the next 15 years, depending on market conditions and other factors. Based on our current projections 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 4.5 million tons in 2015.

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 2014 were approximately 25% of our total Resource segment revenues. The segment also sells sawlogs and pulpwood to a variety of forest products companies located near our timberlands. Idaho Forest Group, LLC represented slightly more than 10% of our consolidated revenues in 2014, 2013 and 2012. The segment’s customers range in size from small operators to multinational corporations. 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 2014, approximately 37% of our Northern region’s volume and 34% of our Southern region’s volume were sold under log supply agreements. We expect approximately the same amount to be sold under log supply agreements in 2015 in our Northern region. In our Southern region, we added three more supply agreements when we acquired the Alabama and Mississippi timberlands with volume commitments that cease in 2016 or 2021. As a result, we expect contracted volumes to increase approximately 75% and revenues to increase approximately $11 million. 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 two to seven 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 in not practicable.

Wood Products Segment

Our Wood Products segment manufactures and markets lumber and plywood at five mills located in Arkansas, Idaho, Michigan and Minnesota. The segment’s products are largely commodity products, which are sold through

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our sales offices to end users, retailers or wholesalers for nationwide distribution primarily for use in home building, industrial products and other construction activity.

A description of our wood products manufacturing facilities, which are all owned by us, together with their respective 2014 capacities and actual production, are as follows:



	ANNUAL CAPACITY^1,2	PRODUCTION²
Sawmills:
Warren, Arkansas	175 mmbf	190 mmbf
St. Maries, Idaho	160 mmbf	170 mmbf
Gwinn, Michigan	170 mmbf	176 mmbf
Bemidji, Minnesota	120 mmbf	128 mmbf
Plywood Mill:
St. Maries, Idaho	150 mmsf	159 mmsf

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 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 ninth 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. Our manufacturing facilities 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 2014, 2013 and 2012, 38%, 39% and 36% 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 consist of three categories of property: HBU, rural real estate and non-strategic.


•	HBU properties have characteristics that provide development potential as a result of superior location or other attractive amenities. These properties tend to have a much higher value than timberlands.


•	Rural 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, subdivision and development 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

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results that are not comparable or predictable between periods, we have maintained a relatively consistent level of rural real estate and HBU sales.

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 300,000 acres of non-core timberland real estate. This includes approximately 80,000 acres of HBU property, 80,000 acres of non-strategic timberland and 140,000 acres of rural 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 and assets are located within the continental United States. In 2014, 2013 and 2012, approximately 1%, 2% and 2%, of the respective year's revenues were derived from sales of manufactured wood products to Canada and Mexico, with the remainder of our revenues resulting from domestic sales.

Environmental Regulation

We are subject to extensive federal and state environmental regulation of our wood products manufacturing facilities and timberlands, particularly 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.

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.

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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.

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, 2014, we had 887 employees. The workforce consisted of 219 salaried, 631 hourly and 37 temporary or part-time employees. As of December 31, 2014, 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 distributions 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 distributions, we have not distributed an amount equal to 100% of our REIT ordinary taxable income and net capital gains 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 distributions 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 distributions 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 distributions to our stockholders may fluctuate, and any reduction in the distribution 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 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

2014 FORM 10-K / 9

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.

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 few years, demand from Asia has remained steady, and although we do not sell into the Asian markets, Asian demand has affected supply and demand in the markets in which we participate. A decrease in Asian demand may have 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 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.

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 to a lesser extent in Canada. After years of trade disputes over Canadian softwood lumber imports, the United States and Canada signed a 7 year Softwood Lumber Agreement in 2006, which was subsequently extended to 2015. The agreement establishes 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 beyond 2015. If it is not renewed or renegotiated, the United States is subject to a one-year standstill on trade litigation upon expiration of the agreement and we would have little recourse to address the import of Canadian lumber into the United States that competes unfairly with our products. Even if the Softwood Lumber Agreement is renewed or renegotiated, there can be no assurance that it will at all times, or at any time, effectively create a fair trade environment. The London Court of International Arbitration has twice ruled that Canada has violated the Softwood Lumber Agreement.

10 / POTLATCH CORPORATION

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, 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.

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.

2014 FORM 10-K / 11

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 intend to 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, or 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 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.

12 / POTLATCH CORPORATION

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, 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, implementing capital improvements or pursuing operating plans or to 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 the fourth quarter of 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, during 2015 we are not required to make a contribution to our qualified pension plans. However, we will be making payments of approximately $1.8 million for our non-qualified pension plan.

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, so 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. In addition, in 2014, the Society of Actuaries' Retirement Plans Experience Committee released new mortality tables. Adoption of these tables could result in increased funding requirements in future periods. 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

2014 FORM 10-K / 13

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 dividend distributions. 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, 2014, 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 distributions 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, 2014, we had long-term debt of $629.3 million, including $22.9 million due in December 2015. 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 distributions 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 distributions 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 to our competitors that have relatively less indebtedness;


•	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 distributions to stockholders, working capital, capital expenditures, acquisitions and other corporate purposes.

14 / POTLATCH CORPORATION

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.

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 distribution 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, distribution, 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 distributions 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 distribution 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 distribution 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 distributions.

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 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.

2014 FORM 10-K / 15

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 distributions.

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 may limit our ability to make investments in our wood products manufacturing operations or in other non-REIT qualifying operations.

Our ability to fund distributions 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 distributions 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 distributions 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 REIT property sold in 2015, and a corresponding reduction in income and cash available for distribution 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 8: Income Taxes in the Notes to Consolidated Financial Statements contained in this report for additional information about our deferred tax assets.

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.

16 / POTLATCH CORPORATION

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 take over 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 or 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.

ITEM 2. PROPERTIES

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

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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.

18 / POTLATCH CORPORATION

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 distribution payments per share for 2014 and 2013, were as follows:



	2014						2013
QUARTER	HIGH		LOW		CASH DISTRIBUTIONS		HIGH		LOW		CASH DISTRIBUTIONS
1st	$	42.44	$	37.52	$	0.350	$	46.01	$	39.43	$	0.31
2nd	41.80		37.04		0.350		51.48		39.66		0.31
3rd	43.20		39.83		0.350		44.93		37.59		0.31
4th	44.20		39.89		0.375		43.84		38.01		0.35

There were approximately 1,160 stockholders of record at January 31, 2015.

Our Board of Directors, in its sole discretion, determines the actual amount of distributions 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 distributions to our stockholders may fluctuate and any reduction in the distribution 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 bank credit facility and term loan and the indenture governing our senior notes with which we must comply in order to make cash distributions 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.

See Part III - Item 12. Security Ownerships of Certain Beneficial Owners and Management and Related Stockholder Matters of this report for a tabular summary of shares authorized for issuance under our equity compensation plans, which information is incorporated herein by reference.

2014 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, 2014. The total stockholder return assumes $100 invested at December 31, 2009, with quarterly reinvestment of all dividends.



	At December 31,
	2010		2011		2012		2013		2014
Potlatch Corporation	$	108	$	109	$	142	$	156	$	163
NAREIT Equity Index	128		139		164		168		218
S&P 500 Composite	115		117		136		180		205
2014 Peer Group¹	110		114		157		167		179


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.

ITEMS 6, 7, 7A and 8.

The information called for by Items 6, 7, 7A and 8, inclusive, of Part II of this form is contained in the following sections of this report at the pages indicated below:



		PAGE NUMBER

ITEM 6	Selected Financial Data	27
ITEM 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
ITEM 7A	Quantitative and Qualitative Disclosures About Market Risk	40
ITEM 8	Financial Statements and Supplementary Data	42

20 / POTLATCH CORPORATION

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING

AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

We conducted an evaluation (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act)), under the supervision and with the participation of management, including the Chief Executive Officer (CEO)and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of December 31, 2014. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation, the CEO and CFO have concluded that these disclosure controls and procedures were effective as of December 31, 2014.

Management's Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act of 1934.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, with the participation of our CEO and CFO, assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013).

Based on our assessment, management believes that, as of December 31, 2014, our internal control over financial reporting is effective based on those criteria.

The effectiveness of our internal control over financial reporting as of December 31, 2014, has been audited by KPMG LLP, an independent registered public accounting firm. The audit report is included in the Reports of Independent Registered Public Accountants section of this document.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the latest fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

2014 FORM 10-K / 21

Part III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Certain of the information required by this item is incorporated by reference to the information appearing under the headings "Board of Directors," "Corporate Governance" and "Security Ownership of Certain Beneficial Owners and Management – Section 16(a) Beneficial Ownership Reporting Compliance" from our definitive Proxy Statement to be filed with the Commission on or about April 1, 2015.

Our Corporate Conduct and Ethics Code, which is applicable to all directors, officers and employees, can be found on our website at www.potlatchcorp.com. We post any amendments to or waivers from our Corporate Conduct and Ethics Code on our website.

Executive Officers of the Registrant

Information as of February 13, 2015, and for at least the past five years concerning our executive officers is as follows:

Michael J. Covey (age 57), has served as Chief Executive Officer since February 2006 and served as President and Chief Executive Officer from 2006 to March 2013. He has been a director of the company since February 2006, and has served as Chairman of the Board of the company since January 2007.

Eric J. Cremers (age 51), has served as President and Chief Operating Officer, and a director of the company, since March 2013, as Executive Vice President and Chief Financial Officer from March 2012 to March 2013, and as Vice President, Finance and Chief Financial Officer from July 2007 to March 2012.

Jerald W. Richards (age 46), has served as Vice President and Chief Financial Officer since September 2013. He was employed by Weyerhaeuser Company and served as Chief Accounting Officer from October 2010 to August 2013 and corporate segment controller from 2008 to October 2010.

William R. DeReu (age 48), has served as Vice President, Real Estate and Lake States Resource since February 2012 and as Vice President, Real Estate from May 2006 to February 2012.

Lorrie D. Scott (age 60), has served as Vice President, General Counsel and Corporate Secretary since July 2010. Prior to July 2010, she was employed by Weyerhaeuser Realty Investors, Inc., and served as Senior Vice President and General Counsel from October 2007 to July 2010.

Thomas J. Temple (age 58), has served as Vice President, Wood Products and Southern Resource since February 2012, and as Vice President, Wood Products from January 2009 to February 2012.

The term of office of the officers of the company expires at the annual meeting of our board, and each officer holds office until the officer’s successor is duly elected and qualified or until the earlier of the officer’s death, resignation, retirement, removal by the board or as otherwise provided in our bylaws.

ITEM 11. EXECUTIVE COMPENSATION

Information set forth under the headings "Report of the Executive Compensation Personnel Policies Committee," "Compensation Discussion and Analysis" and "Corporate Governance - Compensation Committee Interlocks and Insider Participation" in our definitive Proxy Statement to be filed with the Commission on or about April 1, 2015, is incorporated herein by reference.

22 / POTLATCH CORPORATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information regarding any person or group known by us to be the beneficial owner of more than five percent of our common stock as well as the security ownership of management set forth under the heading "Security Ownership of Certain Beneficial Owners and Management" in our definitive Proxy Statement to be filed with the Commission on or about April 1, 2015, is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE

The information required by this item regarding certain relationships and related transactions is included under the heading "Corporate Governance - Transactions with Related Persons" in our definitive Proxy Statement to be filed with the Commission on or about April 1, 2015, and is incorporated herein by reference.

The information required by this item regarding director independence is included under the headings "Board of Directors" and "Corporate Governance - Director Independence" in our definitive Proxy Statement to be filed with the Commission on or about April 1, 2015, and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item regarding principal accounting fees and services is included under the heading "Fees Paid to Independent Registered Public Accounting Firm in 2014 and 2013" in our definitive Proxy Statement to be filed with the Commission on or about April 1, 2015, and is incorporated herein by reference.

2014 FORM 10-K / 23

Part IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Consolidated Financial Statements

Our consolidated financial statements are listed in the Index to Consolidated Financial Statements and Schedules.

Financial Statement Schedules

None.

Exhibits

Exhibits are listed in the Exhibit Index.

24 / POTLATCH CORPORATION

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



POTLATCH CORPORATION
(Registrant)
By	/S/ MICHAEL J. COVEY
	Michael J. Covey
	Chairman of the Board and Chief Executive Officer

Date: February 13, 2015

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 13, 2015, by the following persons on behalf of the registrant in the capacities indicated.



BY	/S/ MICHAEL J. COVEY	Director, Chairman of the Board, and Chief Executive Officer (Principal Executive Officer)
	Michael J. Covey

BY	/S/ ERIC J. CREMERS	Director, President and Chief Operating Officer
	Eric J. Cremers

BY	/S/ JERALD W. RICHARDS	Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
	Jerald W. Richards

	*	Director
	Boh A. Dickey

	*	Director
	William L. Driscoll

	*	Director
	Charles P. Grenier

	*	Director
	John S. Moody

	*	Director
	Lawrence S. Peiros

	*	Director
	Gregory L. Quesnel



*By	/S/ LORRIE D. SCOTT
	Lorrie D. Scott
	(Attorney-in-fact)

2014 FORM 10-K / 25

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES

Index to Consolidated Financial Statements and Schedules

The following documents are filed as part of this report:



	PAGE NUMBER

Selected Financial Data	27

Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Consolidated Financial Statements:
Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012	42
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012	43
Consolidated Balance Sheets at December 31, 2014 and 2013	44
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012	45
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014, 2013 and 2012	46

Notes to Consolidated Financial Statements	47
Reports of Independent Registered Public Accounting Firm	72

26 / POTLATCH CORPORATION

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES

Selected Financial Data

(Dollars in thousands – except per-share amounts)



	2014		2013		2012		2011		2010
Revenues	$	606,950	$	570,289	$	525,134	$	497,421	$	539,447
Net income	89,910		70,581		42,594		40,266		40,394

Total assets	$	1,035,421	$	680,530	$	718,897	$	746,220	$	781,711
Working capital	21,469		80,051		74,510		57,242		95,762
Long-term debt (including current portion)	629,343		320,092		357,576		366,403		368,496
Stockholders’ equity	225,066		204,148		138,643		142,138		204,439

Current ratio	1.3 to 1		2.6 to 1		2.2 to 1		1.7 to 1		2.5 to 1
Long-term debt to stockholders’ equity ratio	2.8 to 1		1.6 to 1		2.6 to 1		2.6 to 1		1.8 to 1

Capital expenditures:¹
Property, plant and equipment	$	13,261	$	10,280	$	5,636	$	5,338	$	5,215
Timberlands reforestation and roads	10,971		12,313		11,774		11,158		9,786
Total capital expenditures	$	24,232	$	22,593	$	17,410	$	16,496	$	15,001

Net income per share:
Basic	$	2.21	$	1.74	$	1.06	$	1.00	$	1.01
Diluted	2.20		1.73		1.05		1.00		1.00
Weighted-average shares outstanding (in thousands):
Basic	40,749		40,503		40,333		40,159		39,971
Diluted	40,894		40,709		40,553		40,383		40,219
Distributions per share	$	1.425	$	1.28	$	1.24	$	1.84	$	2.04

¹ Excludes the acquisition of timber and timberlands.

2014 FORM 10-K / 27

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We delivered solid financial results in 2014, raised our dividend, completed a strategic acquisition of approximately 201,000 acres of timberlands in Alabama and Mississippi, and preserved our investment grade rating. Resource segment income increased approximately 16% in 2014, due largely to an increase in Northern sawlog prices. Lumber prices remained strong, which resulted in another strong year for our Wood Products segment. Real Estate activity included two large, opportunistic sales in 2014, which resulted in a 48% increase in the segment’s earnings.

According to industry forecasts, total demand for North American lumber is anticipated to increase an additional 4 billion board feet, or approximately 8%, over 2014 levels. The majority of the growth is expected in the new home construction market segment as the U.S. housing market continues its gradual recovery. Factors such as home price increases, the cost of new mortgages, the mortgage approval process and the availability of desirable building lots will continue to play into the pace of the housing recovery. Participation by first-time homebuyers has been low to this point in the recovery by historical standards, and would provide an additional boost to demand. We anticipate southern pine sawlog prices will remain flat in 2015.

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, 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.

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. Approximately one-quarter of the Resource segment's sales have been to our Wood Products segment the last three years. 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 discussions by business segments, each segment’s revenues are presented before elimination of intersegment revenues.

28 / POTLATCH CORPORATION

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, 2014 and 2013.



	YEARS ENDED DECEMBER 31,
(Dollars in thousands)	2014			2013			AMOUNT OF CHANGE			PERCENT 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 taxes	(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. Higher Resource segment revenues were primarily due to increased prices. Our Real Estate segment had a much higher volume of acres sold in 2014 and our Wood Products segment experienced both higher prices and increased shipments for manufactured wood products. 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 log costs and labor-related expenses due to increased shipments by our Wood Products segment, increased acres sold by our Real Estate segment, and higher logging costs, forest management expenses and road costs in our Resource business.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased in 2014 from 2013 primarily due to lower 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 18.0% compared to 16.4% in 2013. The increase resulted primarily from proportionately higher operating income in the TRS.

2014 FORM 10-K / 29

BUSINESS SEGMENT RESULTS COMPARING 2014 WITH 2013

Resource Segment



		YEARS ENDED DECEMBER 31,
(Dollars in thousands)		2014		2013		INCREASE (DECREASE)			PERCENT CHANGE
Revenues (before elimination of intersegment revenues)		$	252,581	$	238,228	$	14,353		6	%
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 region
	Sawlog	$	91	$	85	$	6		7	%
	Pulpwood	$	43	$	36	$	7		19	%
	Stumpage	$	11	$	8	$	3		38	%

Southern region
	Sawlog	$	46	$	43	$	3		7	%
	Pulpwood	$	34	$	32	$	2		6	%
	Stumpage	$	14	$	12	$	2		17	%

Revenues increased in 2014 over 2013 due to increased prices, primarily for sawlogs and pulpwood in Idaho, and the increased volume of pulpwood harvested in Idaho. Higher prices accounted for $15.3 million of the revenue variance, while the decrease in total harvest volume accounted for a negative $3.2 million impact on the variance.

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 overall. However, sawlog harvest volumes were down slightly from 2013. Pulpwood volumes and prices increased substantially in 2014 primarily due to an oversupply of residuals and chips in the Northwest market in 2013 that resulted in lower pulpwood prices, which led us to minimize pulpwood production in 2013.

In our Southern region, sawlog volumes decreased as weather conditions negatively impacted production by limiting access to hardwood stands in 2014. Sawlog prices increased due primarily to a shift in product mix related to increased demand for higher priced hardwoods. Pulpwood prices increased as a result of improved demand for hardwood pulpwood.

Expenses for the segment increased $2.8 million, or 2%, in 2014 over 2013, primarily due to higher per-unit logging costs, increased forest management and road costs, and higher administrative expenses.

30 / POTLATCH CORPORATION

Wood Products Segment



	YEARS ENDED DECEMBER 31,
(Dollars in thousands)	2014		2013		INCREASE (DECREASE)			PERCENT CHANGE
Revenues	$	376,239	$	366,015	$	10,224		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	%

Revenues for the segment increased in 2014 over 2013 due to both increased lumber prices and shipments. Expenses for the segment increased $16.7 million, or 5%, due to the higher cost of logs consumed, primarily related to increased prices for sawlogs in Idaho and increased production, and labor-related expenses and other variable costs due to increased shipments.

Real Estate Segment



	YEARS ENDED DECEMBER 31,
(Dollars in thousands)	2014		2013		INCREASE (DECREASE)		PERCENT CHANGE
Revenues	$	40,460	$	26,160	$	14,300	55		%
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		$	1,212	18,962		$	1,380

Revenues increased $14.3 million, expenses increased $5.6 million and operating income increased $8.7 million in 2014 compared to 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.

2014 FORM 10-K / 31

CONSOLIDATED RESULTS COMPARING 2013 WITH 2012

The following table sets forth year-to-year changes in items included in our Consolidated Statements of Income for the years ended December 31, 2013 and 2012.



	YEARS ENDED DECEMBER 31,
(Dollars in thousands)	2013			2012			AMOUNT OF CHANGE		PERCENT CHANGE
Revenues	$	570,289		$	525,134		$	45,155	9	%
Costs and expenses:
Cost of goods sold	408,772			390,773			17,999		5	%
Selling, general and administrative expenses	50,397			49,419			978		2	%
Environmental remediation charge	3,522			—			3,522		n/m
	462,691			440,192			22,499		5	%
Operating income	107,598			84,942			22,656		27	%
Interest expense, net	(23,132		)	(25,539		)	2,407		9	%
Income before income taxes	84,466			59,403			25,063		42	%
Income taxes	(13,885		)	(16,809		)	2,924		(17	)%
Net income	$	70,581		$	42,594		$	27,987	66	%

Revenues. Revenues increased in 2013 over 2012 from the Resource segment, primarily from higher log prices in Idaho, and the Wood Products segment, due to higher prices for manufactured wood products, partially offset by decreased revenues from our Real Estate segment due to fewer acres sold in 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 2013 over 2012, primarily due to higher log costs in Wood Products and higher logging and hauling costs and depletion expense in our Resource segment as a result of higher harvest volumes.

Interest expense, net. Net interest expense decreased in 2013 from 2012 primarily due to the early redemption of $36.7 million of debt in 2013.

Income taxes. Our effective tax rate for 2013 was 16.4% compared to 28.3% in 2012. The decrease resulted primarily from proportionately higher operating income in the REIT.

32 / POTLATCH CORPORATION

BUSINESS SEGMENT RESULTS COMPARING 2013 WITH 2012

Resource Segment



		YEARS ENDED DECEMBER 31,
(Dollars in thousands)		2013		2012		INCREASE (DECREASE)			PERCENT CHANGE
Revenues (before elimination of intersegment revenues)		$	238,228	$	207,846	$	30,382		15	%
Operating income		$	73,425	$	49,543	$	23,882		48	%

Harvest Volumes (in tons)
Northern region
	Sawlog	2,031,637		1,946,138		85,499			4	%
	Pulpwood	127,998		299,934		(171,936		)	(57	)%
	Stumpage	25,397		34,049		(8,652		)	(25	)%
	Total	2,185,032		2,280,121		(95,089		)	(4	)%

Southern region
	Sawlog	694,147		586,658		107,489			18	%
	Pulpwood	821,781		691,411		130,370			19	%
	Stumpage	8,353		—		8,353			n/m
	Total	1,524,281		1,278,069		246,212			19	%

Total harvest volume		3,709,313		3,558,190		151,123			4	%

Sales Price/Unit ($ per ton)
Northern region
	Sawlog	$	85	$	75	$	10		13	%
	Pulpwood	$	36	$	40	$	(4	)	(10	)%
	Stumpage	$	8	$	10	$	(2	)	(20	)%

Southern region
	Sawlog	$	43	$	42	$	1		2	%
	Pulpwood	$	32	$	31	$	1		3	%
	Stumpage	$	12	$	—	$	12		n/m

Revenues increased in 2013 over 2012 due to increased prices, primarily for sawlogs in Idaho, and the incremental harvest volumes provided by land acquisitions in Arkansas in late 2012. Increased prices accounted for $22.0 million of the revenue variance, while the increase in total harvest volume accounted for $8.6 million of the variance.

In our Northern region, sawlog prices and volume increased due to stronger demand. An oversupply of residuals and chips in the Northwest market resulted in lower pulpwood prices, which led us to minimize pulpwood production.

In our Southern region, both sawlog and pulpwood volumes increased. Sawlog prices increased due primarily to a shift in product mix related to increased demand for higher priced hardwoods. Pulpwood prices increased as a result of slightly improved demand for both pine and hardwood pulpwood.

Expenses for the segment increased $6.5 million, or 4%, in 2013 over 2012, primarily due to higher logging and hauling costs, from increased per-unit costs as well as volume, and higher depletion expense from increased harvest volumes.

2014 FORM 10-K / 33

Wood Products Segment



	YEARS ENDED DECEMBER 31,
(Dollars in thousands)	2013		2012		INCREASE (DECREASE)			PERCENT CHANGE
Revenues	$	366,015	$	329,404	$	36,611		11	%
Operating income	$	58,892	$	45,456	$	13,436		30	%

Lumber shipments (MBF)	641,217		649,119		(7,902		)	(1	)%
Lumber sales prices ($ per MBF)	$	392	$	342	$	50		15	%

Revenues for the segment increased in 2013 over 2012 as lumber prices increased, but were partially offset by a small decrease in shipments. Expenses for the segment increased $23.2 million, or 8%, due to the higher cost of logs consumed, primarily related to increased prices for sawlogs in Idaho, and increased logging and hauling expenses, primarily due to a higher volume of logs sourced from third party timberlands in Idaho, and labor-related expenses.

Real Estate Segment



	YEARS ENDED DECEMBER 31,
(Dollars in thousands)	2013		2012		INCREASE (DECREASE)			PERCENT CHANGE
Revenues	$	26,160	$	38,238	$	(12,078	)	(32		)%
Operating income	$	18,266	$	28,056	$	(9,790	)	(35		)%

	2013				2012
	ACRES SOLD		AVERAGE PRICE/ACRE		ACRES SOLD			AVERAGE PRICE/ACRE
HBU	4,799		$	2,033	7,080			$	2,969
Rural real estate	9,494		$	1,310	11,724			$	1,218
Non-strategic timberland	4,669		$	849	4,140			$	711
Total	18,962		$	1,380	22,944			$	1,667

Revenues decreased $12.1 million, expenses decreased $2.3 million and operating income decreased $9.8 million in 2013 compared to 2012, all primarily due to the sale of fewer acres of land in 2013 and product mix.

Liquidity and Capital Resources

Overview

At December 31, 2014, our financial position included long-term debt of $629.3 million, including a current portion of $22.9 million, compared to $320.1 million at December 31, 2013. We incurred $310.0 million of long-term debt in December 2014 for the acquisition of timberlands in Alabama and Mississippi. The ratio of long-term debt to stockholders’ equity was 2.8 to 1 and 1.6 to 1 at December 31, 2014 and 2013, respectively. We increased our quarterly cash distributions in the fourth quarter of 2014 to $0.375 per share from $0.35 per share.

Cash and short-term investments totaled $31.0 million at December 31, 2014. The available borrowing capacity under our credit agreement is $248.6 million.

Net Cash From Operations

Net cash provided from operating activities was:


•	$131.4 million in 2014,


•	$90.3 million in 2013 and


•	$80.0 million in 2012.

34 / POTLATCH CORPORATION

Year ended December 31, 2014 compared to 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 to $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.

Year ended December 31, 2013 compared to year ended December 31, 2012

Net cash from operating activities in 2013 increased $10.3 million from 2012:


•	Cash received from customers increased $36.4 million, primarily due to increased sales and cash received by our Resource and Wood Products segments, partially offset by decreased sales and cash received from our Real Estate segment. A more detailed discussion of revenues is included in the Business Segment Results section.


•	Qualified pension plan contributions decreased $21.6 million in 2013 from 2012, as we did not make a qualified pension plan contribution in 2013.

Partially offsetting increased cash from customers were:


•	Cash paid to employees, suppliers and others increased $29.4 million in 2013 from 2012 primarily due to higher log costs in Wood Products and higher logging and hauling costs in our Resource segment as a result of higher harvest volumes.


•	Net cash outflows related to income taxes increased $20.0 million. Net cash paid in taxes in 2013 was $20.1 million compared to $0.1 million in 2012. The 2012 income tax liability was lower due primarily to use of net operating loss carryforwards.

Net Cash Flows from Investing Activities

Net cash used for investing activities was $382.7 million in 2014, $12.0 million in 2013 and $8.6 million in 2012. 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 short-term investments. In 2013, we used $22.6 million for capital expenditures partially offset by $10.8 million provided by short term investments. In 2012, we used $29.2 million for capital expenditures and timberland acquisitions, which was partially offset by the $21.8 million we borrowed against our COLI plan to fund our 2012 qualified pension contributions.

We anticipate that we will spend $36 million for capital expenditures in 2015. 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 provided by financing activities was $250.4 million in 2014. Net cash used in financing activities was $89.6 million in 2013 and $62.2 million in 2012. In 2014, proceeds from the borrowing of long-term debt provided $310.0 million used to acquire timberlands, partially offset by distributions to stockholders of $57.8 million. In 2013, net cash used for financing activities was primarily attributable to paying distributions to stockholders of $51.9 million and the redemption of $36.7 million of debt. Net cash used for financing activities in 2012 was primarily attributable to paying distributions to stockholders of $50.0 million and the redemption of $21.7 million of debt, partially offset by the issuance of $12.0 million of term loans.

Credit Agreement

On August 12, 2014, we entered into an amended and restated credit agreement with an expiration date of February 12, 2020, which supersedes our previous credit agreement dated as of December 11, 2012. This new credit agreement provides for a revolving line of credit with an initial aggregate principal amount not the exceed

2014 FORM 10-K / 35

$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. As of December 31, 2014, there were no borrowings outstanding under the revolving line of credit, and approximately $1.4 million of the letter of credit subfacility was being used to support several outstanding letters of credit. Available borrowing capacity at December 31, 2014 was $248.6 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, 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 distributions to our stockholders under the terms of the bank credit facility so long as we remain in pro forma compliance with the financial maintenance covenants.

The table below sets forth the financial covenants in the bank credit facility and our status with respect to these covenants as of December 31, 2014:



	COVENANT REQUIREMENT	ACTUALS AT DECEMBER 31, 2014
Minimum Interest Coverage Ratio	3.00 to 1.00	7.45 to 1.00
Maximum Leverage Ratio	40%	27%
Maximum Allowable Acres that may be sold	433,051	6,822

The Interest Coverage Ratio is our twelve months ended 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, 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, the cash value of our company-owned life insurance (COLI), and the purchase price of timberlands acquired. 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.

Term Loans

On December 5, 2014, we entered into an amended and restated term loan agreement totaling $322 million, consisting of $310 million of new term loans to fund the acquisition of timberlands in Alabama and Mississippi and $12 million of term loans that we incurred in December 2012 to fund two timberland acquisitions in Arkansas. The new debt consists of six tranches of term loans, with $40 million maturing each year from 2019 through 2023 and $110 million maturing in 2024. The first three tranches are variable rate term loans based on 3-month LIBOR plus a spread between 1.65% and 1.90%. The last three tranches are fixed rate term loans with interest rates between 4.29% and 4.64%. Our original term loans from 2012 consist of two $6 million tranches, with rates of 2.95% on the 2017 maturity and 3.70% on the 2020 maturity. The term loan agreement contains the same covenants and restrictions as those in our bank credit facility.

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

36 / POTLATCH CORPORATION

from FAD during that period, to make restricted payments. Our cumulative FAD less our dividends paid was $95.7 million at December 31, 2014.


•	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, 2014.

•

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.

Future Cash Requirements

Based on our outlook for 2015 and taking into account planned harvest activities, we expect to fund a majority of our 2015 annual cash distributions using the cash flows from our REIT-qualifying timberland operations and from cash and short-term investments on hand at December 31, 2014. 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 distributions. 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 distributions to stockholders using cash flows from Potlatch TRS.

Credit Ratings

The major debt rating agencies routinely evaluate our debt and our access to capital, and our cost of borrowing can increase or decrease depending on our credit rating. In April 2013, Moody’s upgraded our debt rating to investment grade 'Baa3' from 'Ba1', and in December 2014 affirmed our Baa3 rating, with a stable outlook. In April 2013, Standard & Poor's upgraded our corporate credit and senior unsecured ratings to 'BB+' from 'BB', and in December 2014 affirmed our 'BB+' rating, with a negative outlook. The December 2014 affirmations occurred after our borrowing of $310 million of term loans for our acquisition of timberlands in Alabama and Mississippi.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2014:



	PAYMENTS DUE BY PERIOD
(Dollars in thousands)	TOTAL		WITHIN 1 YEAR		1-3 YEARS		4-5 YEARS		MORE THAN 5 YEARS
Long-term debt¹	$	630,085	$	22,500	$	16,000	$	204,250	$	387,335
Interest on long-term debt²	212,440		33,179		56,311		50,931		72,019
Operating leases³	12,193		4,211		5,052		1,575		1,355
Purchase obligations⁴	16,765		3,316		10,881		2,568		—
Other obligations⁵	181,013		50,022		15,659		26,984		88,348
Total	$	1,052,496	$	113,228	$	103,903	$	286,308	$	549,057


¹	See Note 9: Debt in the Notes to Consolidated Financial Statements.


²	Amounts presented for interest payments assume that all long-term debt outstanding as of December 31, 2014 will remain outstanding until maturity, and interest rates on variable debt in effect as of December 31, 2014 will remain in effect until maturity. Estimated cash flows related to interest rate swaps are also included in this category.


³	See Note 14: Commitments and Contingencies in the Notes to Consolidated Financial Statements.


⁴	Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on the company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or

2014 FORM 10-K / 37

variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude arrangements that the company can cancel without penalty.

⁵

Other obligations includes current liabilities, as well as qualified pension contributions, supplemental pension payments and payments for other postretirement employee benefit obligations. See Note 10: Accounts Payable and Accrued Liabilities and Note 13: Savings Plans, Pension Plans and Other Postretirement Employee Benefits in the Notes to Consolidated Financial Statements for additional detail.

Off-Balance Sheet Arrangements

We currently are not a party to off-balance sheet arrangements that would require disclosure under this section.

Distributions to Shareholders

The following table summarizes the historical tax characteristics of distributions to shareholders for the years ended December 31:



(Amounts per share)	2014		2013		2012
Capital gain distributions	$	1.425	$	1.28	$	0.71
Non-taxable return of capital	—		—		0.53
Total distributions	$	1.425	$	1.28	$	1.24

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 in the timber and timberlands category. 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.

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, long-lived assets are a material component of our financial position with the potential for material change in valuation if assets are determined to be impaired.

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 different reasons, including the reasons previously described above under “Factors Influencing our

38 / POTLATCH CORPORATION

Results of Operations and Cash Flows.” Because of the number of variables involved, the interrelationship between the variables and the long-term nature of the impairment measurement, sensitivity analysis of individual variables is not practical.

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 believe that it is more likely than not that we will realize the $59.1 million in benefits of these deductible differences and carryforwards at December 31, 2014. 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 of loss and estimating probable 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.

While we do our best in developing our projections, 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 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 13: 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, 2014, as well as the funded status of our pension plans and OPEB obligations as of December 31, 2014 and 2013.

The discount rate used in the determination of pension and OPEB benefit obligations in 2014, 2013 and 2012 was calculated using hypothetical bond portfolios consisting of “AA” or better rated securities that match the expected monthly benefit payments under our pension plans and OPEB obligations. The portfolios were well-diversified over corporate industrial, corporate financial, municipal, federal and foreign government issuers. At December 31, 2014, we calculated pension obligations using a 4.25% discount rate. We used a discount rate of 5.10% and 4.15% at December 31, 2013 and 2012, 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 7.50% for the year ended December 31, 2014, and 8.00% for the years ended December 31, 2013 and December 31, 2012. We reduced the expected long-term rate of return to 6.75% for 2015 to reflect the change in the pension plan's investment portfolio.

Net periodic pension plan cost in 2014 was $15.0 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

2014 FORM 10-K / 39

decrease in the discount rate would increase net periodic cost by approximately $0.7 million in 2015 and increase the projected benefit obligation by approximately $11.6 million at December 31, 2014. A 25 basis point decrease in the assumption for the expected return on plan assets would increase net periodic cost by approximately $0.8 million in 2015. The actual rates of return on plan assets may vary significantly from the assumption used because of unanticipated changes in financial markets.

For our OPEB obligations, the net periodic benefit for 2014 was $5.7 million. The discount rate used to calculate OPEB obligations, which was determined using the same methodology we used for our pension plans, was 3.90%, 4.45% and 3.70% at December 31, 2014, 2013 and 2012, respectively. The assumed health care cost trend rate used to calculate OPEB obligations as of December 31, 2014 was 0% for our salaried and non-represented plans and a certain group of participants over age 65 in our hourly plan; 5.70% for our Arkansas participants covered by a collective bargaining agreement, grading ratably to an assumption of 4.30% in 2094; and 5.70% for a certain group of participants under age 65 in our hourly plan, grading ratably to an assumption of 4.30% in 2094.

An 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 discount rate would increase net periodic cost by less than $0.1 million. A 1% increase in the health care cost trend rate assumption would have affected our OPEB obligation by approximately $0.1 million, as reported in Note 13: 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

See prospective accounting pronouncements in Note 1: Summary of Principal Accounting Policies in the Notes to Consolidated Financial Statements.

Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risks 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 bank 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 bank credit facility borrowings through the use of derivative financial instruments. There were no outstanding borrowings under our bank credit facility at December 31, 2014.

Approximately two-thirds of our long-term debt is fixed rate and therefore changes in market interest rates do not expose us to interest rate risk for these financial instruments. However, in December 2014 we issued $120 million of term loans at variable rates. In addition, we entered into interest rate swap agreements to effectively convert some of our fixed rate debt to variable rate. As of December 31, 2014, we had seven separate interest rate swaps with notional amounts totaling $96.75 million. The swaps convert interest payments with fixed rates ranging between 6.95% and 8.89% to three-month LIBOR plus a spread between 4.738% and 6.518%. The interest rate swaps terminate at various dates between December 2015 and November 2019. See Note 12: Financial Instruments and Concentration of Risk in the Notes to Consolidated Financial Statements for additional information.

We have occasionally entered into lumber swap contracts to mitigate commodity price risk related to sales from our Wood Products segment. These contracts cash settled at various dates throughout the length of the contracts. Our last lumber swap settled in 2012; there were no lumber swaps outstanding at December 31, 2014 or 2013. See Note 12: Financial Instruments and Concentration of Risk in the Notes to Consolidated Financial Statements for additional information about our lumber swaps.

40 / 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, 2014:



	EXPECTED MATURITY DATE
(Dollars in thousands)	2015			2016			2017			2018			2019			THEREAFTER			TOTAL
Variable rate debt:
Principal due	$	—		$	—		$	—		$	—		$	40,000		$	80,000		$	120,000
Average interest rate													1.88		%	2.13		%	2.05		%
Fair value at 12/31/14																			$	120,000

Fixed rate debt:
Principal due	$	22,500		$	5,000		$	11,000		$	14,250		$	150,000		$	307,335		$	510,085
Average interest rate	6.95		%	8.80		%	5.64		%	8.88		%	7.50		%	5.06		%	6.02		%
Fair value at 12/31/14																			$	537,943

Interest rate swaps¹:
Fixed to variable	$	372		$	92		$	169		$	551		$	(391	)	$	—		$	793
Fair value at 12/31/14																			$	793
¹Interest rate swaps are included in 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:
2015	$	22,500	389			302			216			460		470
2016	5,000		99			76			52			119		124
2017	5,000		178			121			66			239		296
2018	14,250		579			369			163			797		1,019
2019	50,000		(399		)	(1,537		)	(2,645		)	779		1,980
Total	$	96,750	$	846		$	(669	)	$	(2,148	)	$	2,394	$	3,889
¹Fair 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.

2014 FORM 10-K / 41

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Income

(Dollars in thousands, except per-share amounts)



	FOR THE YEARS ENDED DECEMBER 31,
	2014			2013			2012
Revenues	$	606,950		$	570,289		$	525,134
Costs and expenses:
Cost of goods sold¹	429,789			408,772			390,773
Selling, general and administrative expenses	44,655			50,397			49,419
Environmental remediation charges	—			3,522			—
	474,444			462,691			440,192
Operating income	132,506			107,598			84,942
Interest expense, net	(22,909		)	(23,132		)	(25,539		)
Income before income taxes	109,597			84,466			59,403
Income taxes	(19,687		)	(13,885		)	(16,809		)
Net income	$	89,910		$	70,581		$	42,594

Net income per share:
Basic	$	2.21		$	1.74		$	1.06
Diluted	2.20			1.73			1.05

Distributions per share	$	1.425		$	1.28		$	1.24

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

¹A 2012 asset impairment charge of $107 was reclassified to cost of goods sold.

42 / POTLATCH CORPORATION

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Dollars in thousands)



	FOR THE YEARS ENDED DECEMBER 31,
	2014			2013			2012
Net income	$	89,910		$	70,581		$	42,594
Other comprehensive income (loss), net of tax:
Defined benefit pension plans and other postretirement employee benefits (OPEB):
Net gain (loss) arising during the period, net of tax expense (benefit) of $(15,598), $21,424 and $(5,968)	(24,396		)	33,510			(9,334		)
Prior service credit arising during the period, net of tax expense of $0, $0 and $2,159	—			—			3,273
Amortization of actuarial loss included in net periodic cost, net of tax expense of $6,488, $9,024 and $7,208	10,149			14,114			11,275
Amortization of prior service credit included in net periodic cost, net of tax benefit of $(3,468), $(3,482) and $(3,343)	(5,425		)	(5,446		)	(5,230		)
Other comprehensive income (loss), net of tax	(19,672		)	42,178			(16		)
Comprehensive income	$	70,238		$	112,759		$	42,578

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

2014 FORM 10-K / 43

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands, except per-share amounts)



	AT DECEMBER 31
	2014			2013
ASSETS
Current assets:
Cash	$	4,644		$	5,586
Short-term investments	26,368			52,251
Receivables, net of allowance for doubtful accounts of $450	9,928			16,572
Inventories	31,490			36,275
Deferred tax assets	6,168			7,724
Other assets	15,065			11,961
Total current assets	93,663			130,369
Property, plant and equipment, net	65,749			59,976
Timber and timberlands, net	828,420			455,871
Deferred tax assets	37,228			21,576
Other assets	10,361			12,738
Total assets	$	1,035,421		$	680,530
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	22,870		$	—
Current liability for pensions and other postretirement employee benefits	6,260			6,701
Accounts payable and accrued liabilities	43,064			43,617
Total current liabilities	72,194			50,318
Long-term debt	606,473			320,092
Liability for pensions and other postretirement employee benefits	115,936			83,619
Other long-term obligations	15,752			22,353
Total liabilities	810,355			476,382
Stockholders’ equity:
Preferred stock, authorized 4,000,000 shares, no shares issued	—			—
Common stock, $1 par value, authorized 100,000,000 shares, issued 40,605,179 and 40,536,879 shares	40,605			40,537
Additional paid-in capital	346,441			337,887
Accumulated deficit	(43,588		)	(75,556		)
Accumulated other comprehensive loss, net of tax of $(77,586) and $(64,868)	(118,392		)	(98,720		)
Total stockholders’ equity	225,066			204,148
Total liabilities and stockholders' equity	$	1,035,421		$	680,530

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

44 / POTLATCH CORPORATION

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollars in thousands)



	FOR THE YEARS ENDED DECEMBER 31,
	2014			2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	89,910		$	70,581		$	42,594
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, depletion and amortization	26,749			26,962			26,247
Basis of real estate sold	8,646			2,904			5,048
Change in deferred taxes	(1,616		)	(2,467		)	15,992
Employee benefit plans	2,122			7,561			4,317
Employee equity-based compensation expense	4,137			4,377			4,067
Other, net	(2,191		)	(1,972		)	599
Change in:
Receivables	7,016			(5,904		)	2,865
Inventories	4,785			(7,347		)	(325		)
Other assets	(1,421		)	1,668			(1,459		)
Accounts payable and accrued liabilities	(2,388		)	(3,468		)	163
Funding of qualified pension plans	(3,550		)	—			(21,630		)
Timber deposits and cost share roads	(827		)	(2,643		)	1,503
Net cash from operating activities	131,372			90,252			79,981
CASH FLOWS FROM INVESTING ACTIVITIES
Change in short-term investments	25,883			10,826			(88		)
Transfer from company owned life insurance (COLI)	28,870			—			21,751
Transfer to COLI	(25,515		)	—			—
Property, plant and equipment	(13,261		)	(10,280		)	(5,636		)
Timberlands reforestation and roads¹	(10,971		)	(12,313		)	(11,774		)
Acquisition of timber and timberlands¹	(388,952		)	(1,060		)	(11,778		)
Other, net	1,263			823			(1,122		)
Net cash from investing activities	(382,683		)	(12,004		)	(8,647		)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to common stockholders	(57,848		)	(51,868		)	(50,041		)
Repayment of long-term debt	—			(36,663		)	(21,662		)
Proceeds from issuance of long-term debt	310,000			—			12,000
Issuance of common stock	398			1,904			1,075
Change in book overdrafts	1,465			(955		)	462
Deferred financing costs	(2,388		)	(25		)	(2,148		)
Employee tax withholdings on vested performance share awards	(1,104		)	(1,738		)	(1,714		)
Other, net	(154		)	(302		)	(140		)
Net cash from financing activities	250,369			(89,647		)	(62,168		)
Increase (decrease) in cash	(942		)	(11,399		)	9,166
Cash at beginning of year	5,586			16,985			7,819
Cash at end of year	$	4,644		$	5,586		$	16,985

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest	$	20,918		$	22,229		$	23,884
Income taxes, net	18,104			20,097			53

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

¹Acquisitions of timber and timberlands in 2013 and 2012 were reclassified in order to conform to the 2014 presentation.

2014 FORM 10-K / 45

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands, except per-share amounts)



	Common Stock Issued			Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance, December 31, 2011	40,202,170	$	40,202	$	329,206	$	(86,388	)	$	(140,882	)	$	142,138
Exercise of stock options and stock awards	60,857	61		1,031		—			—			1,092
Performance share and restricted stock unit awards	126,153	126		3,096		(361		)	—			2,861
Net income	—	—		—		42,594