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