Friends of the Van Duzen River
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Palco posts giant losses . . .
Water board's approval of 75 percent of harvests not enough, company says

North Coast Journal - March 24, 2005

Palco posts giant losses
Water board's approval of 75 percent of harvests not enough, company says

North Coast Journal

March 24, 2005

Despite selling nearly 300 million board feet of timber in 2004, the Pacific Lumber Co. lost $49.3 million last year and may soon face a serious financial crisis, according to two annual securities reports filed by the timber giant's parent company, the Houston-based Maxxam, Inc., last week.

The reports, filed with the federal Securities and Exchange Commission, state that Palco actually made a profit of $5.4 million on its operations last year, which included the sale of timber and generation of electricity at its Scotia cogeneration plant.

However, that small profit does not take into account around $55 million in payments made last year on the company's long-term debt. Through its subsidiary, Scotia Pacific, Pacific Lumber owes around $750
million to bondholders. The majority of that debt stems from Maxxam's takeover of the company in 1985.

In the reports the company states that its high debt load makes it more seriously threatened by changing external conditions, including increased environmental regulation of the type that the North Coast
Regional Water Quality Control Board seeks to impose on its operations in the Freshwater and Elk River watersheds.

"Due to its highly leveraged condition, the Company is more sensitive than less leveraged companies to factors affecting its operations, including low log prices, governmental regulation and litigation affecting timber harvesting practices on the Company Timberlands, and general economic conditions," states Scotia Pacific's annual report to bondholders.

The reports show the company's financial losses are starting to have serious, on-the-ground effects on its ability to operate. The company defaulted on a short-term line of credit at the beginning of the year
and has seen its credit rating plummet to CCC+. The company openly expresses concern about its ability to meet an upcoming debt service payment in June, and fears that it may be forced into large layoffs,
bankruptcy or other extreme measures.

On Feb. 28, the company's attorneys informed four regulatory agencies that it did not have the funds to comply with terms of its Habitat Conservation Plan, the environmental protection agreement that it has
operated under since 1999.

The annual reports were submitted to the SEC on March 16, the same day that Pacific Lumber officials appeared in Santa Rosa at a meeting of the Water Quality Control Board. The officials, including Palco CEO Robert Manne and chief counsel Jared Carter, warned at the meeting that the company would soon go broke unless the board allowed more logging in Freshwater and Elk.

On a 5-3 vote, the board passed McKinleyville attorney John Corbett's motion to allow Pacific Lumber to log up to 75 percent of its California Department of Forestry-approved timber harvest plans in the two sediment-impaired watersheds. New board member Lyle Marshall, chairman of the Hoopa Valley Tribe, voted against Corbett's motion.

The action overturned a decision by the water board's scientific staff. In February, Catherine Kuhlman, the water board's executive officer, issued an order that allowed the company to harvest up to 50 percent of
the CDF limits in the two watersheds, saying that the science showed that only 50 percent of the timber harvest plans could be harvested if the watersheds were to be placed on the road to recovery.

The Humboldt Watershed Council and the Environmental Protection Information Center have appealed the Water Quality Control Board's decision to the State Water Resources Control Board. EPIC attorney
Sharon Duggan said Tuesday the regional board exceeded its mandate by making a decision based on the company's economic condition, not environmental science.

"The science as we understand at this point clearly indicates that 50 percent would be the maximum," she said. "That's the staff's position, and the regional board exceeded that without having a basis in science
-- in fact -- for doing so."

Manne, in a press release, stated that Palco was "very disappointed" the board had approved only 75 percent of the harvests, and that it was not sure if the amount of timber released by the board last week would be enough for the company to avoid layoffs and bankruptcy.

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