Potlatch Corp., the big Spokane-based wood-products concern, says the national credit crisis has forced it to change how it will finance the planned spin-off of its pulp-based operations into a new publicly traded company called Clearwater Paper Corp.

Potlatch announced last spring that it was considering the spin-off, which would shift the company's consumer-products, paperboard, and pulp facilities into the new entity. Potlatch, which is a real estate investment trust, or REIT, would retain its timber and land holdings and its lumber, plywood, and particleboard operations. Both companies would remain based in Spokane. Overall, Potlatch currently employs about 3,800 people, including about 60 in Spokane, and had 2007 revenues of $1.7 billion.

Until recently, the company planned to capitalize Clearwater by having the new company sell about $175 million worth of senior, unsecured high-yield notes. The net proceeds of that offering, an expected $150 million to $160 million, would then have been paid to Potlatch for Clearwater's share of Potlatch's existing debt, says company spokesman Matt Van Vleet.

Given the disarray in the credit markets, that plan no longer is viable, Van Vleet says, adding, "The appetite for high-yield debt in this environment is extremely limited."

The new plan would include two steps, Potlatch says. First, Clearwater would increase an already negotiated asset-backed revolving line of credit to $120 million from $75 million, then draw $50 million from that line to pay Potlatch. In a second step, Clearwater would take on the obligation to pay $100 million in existing Potlatch debentures that are scheduled to mature in December 2009.

The idea is that Clearwater then would refinance the $100 million in debentures before the maturity date. If the credit markets don't improve by then, Potlatch would pay the debentures off itself and replace that Clearwater obligation with a note for the money to be paid directly to Potlatch.

Van Vleet says the spin-off hasn't been delayed because of the new financing structure. He says the company has always said it would occur sometime in the fourth quarter, and that timetable still is in place. Before the spin-off can occur, the company still must receive approval from the Securities and Exchange Commission and confirmation from the Internal Revenue Service that the spin-off will be a tax-free transaction, Van Vleet says.

Under terms of the spin-off, Potlatch shareholders would receive one share of Clearwater stock for every 2 1/2 shares they own of Potlatch. Potlatch's shares will continue to be traded on the New York Stock Exchange under the symbol PCH. Shares of Clearwater also are expected to be traded on the NYSE.

Meanwhile, in preparation for the spin-off, Potlatch has leased 9,000 square feet of office space for Clearwater's planned headquarters here in the Bank of America Financial Center downtown. Potlatch's headquarters are located nearby in the Wells Fargo Center.

Van Vleet says it hasn't been determined yet how many people would be employed in Clearwater's new headquarters, but says they mostly would be people from Potlatch.

Last summer, Potlatch named Gordon L. Jones, a 30-year veteran of the pulp and paper industry, to be president and CEO of Clearwater. Michael J. Covey will remain chairman, president, and CEO of Potlatch. In September, the company announced that Linda K. Massman would serve as vice president of finance and chief financial officer for Clearwater. Massman most recently was a group vice president for Minneapolis-based Supervalu Inc.

Clearwater would take on Potlatch's consumer-products facilities in Lewiston, Idaho; Las Vegas, Nev.; and Elwood, Ill., as well as its pulp and paperboard facilities in Lewiston and Cypress Bend, Ark. The operations to be spun off had 2007 revenues of about $1.2 billion, Potlatch says.

Late last month, Potlatch reported third-quarter earnings of $25.3 million, or 63 cents a share, compared with $41 million, or $1.04 a share, in the year-earlier quarter.

The company reported that its quarterly earnings were hurt by lower operating income in its pulp and paperboard divisions, which were partially offset by strength in its tissue and real estate segments. The wood-products segment continued to be weak in the quarter, the company said.