Eureka Reporter on Palco

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Eureka Reporter on Palco


2/9/05 PALCO Faces Financial Trouble; Critic Says It's PALCO's Fault
by Glenn Franco Simmons
The Eureka Reporter

The Pacific Lumber Co. (www.palco.com/) reported Wednesday that it is working with the North Coast Regional Water Quality Control Board, and separately with PALCO's bank lender, in efforts to avoid a "financial liquidity shortfall."

"At PALCO, virtually all revenue comes from sales of lumber and other products produced from timber owned by our subsidiary, Scotia Pacific Co. LLC," said Robert Manne, PALCO president and CEO. "This is why the North Coast Regional Water Quality Control Board should sign off on timber harvesting plans already approved by the California Department of Forestry and every other applicable state and federal regulatory agency.

"Under the Headwaters Agreement, PALCO agreed to a historic Habitat Conservation Plan that includes stringent environmental standards to protect water quality, rare and endangered plants, fish and wildlife habitat and restrict harvest on more than half of our 217,000 acres of forest. All our timber harvesting plans satisfy the HCP."

Manne said no other timber company operating in the state abides by such tough environmental standards.

"We are not asking for anything more than what the Headwaters Agreement provides," Manne said. "Even if we got everything we are now asking for, the company would harvest less than what Headwaters contemplates. Because the rules were changed in the middle of the game, the company has never come close to harvesting the amounts allowed by the Headwaters Agreement. In the years since Headwaters, the company has harvested below the level permitted by an average of 27 million board feet annually."

He also said that no other timber company has been treated under the new rules the way PALCO has.

"If PALCO cannot begin harvesting in the very near future, revenues will not be sufficient to sustain PALCO's current level of operations," Manne said. "Also, if PALCO cannot harvest and purchase enough Scotia Pacific timber, Scotia Pacific may not be able to fund required interest payments due in July 2005 on its approximately $750 million of Timber Notes. "These unreleased timber harvesting plans represent 48 percent of the company's planned first quarter harvest and 38 percent of planned first half harvest levels."

In recent credit rating actions by both Moody's and Standard & Poor's, the timber collateralized notes issued by Scotia Pacific were placed on a credit watch with negative implications by S&P and were downgraded by Moody's due to concern over weak cash flows from timber operations, as a result of the North Coast Regional Water Quality Control Board's delay in releasing previously approved timber harvesting plans, Manne said.

"We are not asking for more than the Headwaters Agreement allows," Manne said. "What we want is what we were promised - a dependable supply of wood from our own property and timely review of our timber harvest permits. Despite the millions of dollars PALCO spends on scientific research each year, despite earning national recognition for our sustainable forestry practices, and despite multiple layers of state and federal oversight and review of our operations, the regional water board staff is taking action designed to block critical operations under our harvest permits.

"We are hopeful that we will be able to obtain both staff clearance of our approved timber harvesting plans as well as lender consent to amend PALCO's line of credit, but this relief is by no means assured. In our discussions with PALCO's lender, we are seeking to cure or avoid defaults by PALCO and provide the enhanced liquidity necessary to fund our ongoing operations."

"Let there be no misunderstanding," Manne continued. "If our efforts with both the regional water board staff and our bank lender are not successful, PALCO will not have sufficient liquidity from timber operations and its line of credit to sustain ongoing operations. In such a circumstance, PALCO and its subsidiaries, including Scotia Pacific, expect that they will be forced to take extraordinary actions: reduce expenditures by laying off employees and shutting down various operations; seek other sources of liquidity, such as from asset sales."

PALCO could have to consider seeking protection by filing under the U.S. Bankruptcy Code, Manne said.

"The outcome of our efforts to avoid a financial liquidity shortfall are of grave importance to Humboldt County, where PALCO employs about 700 people and Scotia Pacific employs another 120, as well as to the whole state of California which consumes 80 percent of our redwood," said Manne.

Mark Lovelace of the Humboldt Watershed Council said it is difficult for him to understand how PALCO can be in the position it finds itself.

"I find it hard to understand how PL can be in such dire financial straits after making so much money over the last 20 years," Lovelace said. "What happened to the $480 million the company received from the Headwaters deal? What happened to the $325 million from selling off the cutting and welding division, the $60 million from gutting the employee pension fund, the $250 million dividend from the 1998 bond sale, the $37 million in real estate and the $2.5 billion in profits that have been made off of PL's timber?

"All told, Maxxam has made $3.6 billion off of PL in the last 20 years. That is all money which has been taken away from the workers, away from PL and away from Humboldt County. Where did the money go?"

Lovelace said he also does not understand why the company owes money.

"I find it hard to understand how a company that has made so much money can still owe $760 million of the $870 million debt incurred 20 years ago," Lovelace said. "Why doesn't this company have any money available to keep its workers busy restoring these watersheds and fixing the damage caused by the company's liquidation logging?"

PALCO has proposed restoration work to the water board. (See accompanying story.)

"For all of that money to have simply vanished indicates either gross negligence (or) mismanagement ?," Lovelace said. "Perhaps we should all be paying more attention to the (district attorney's) fraud lawsuit against this company. Speaking of which, it is notable that the only time that any of that $3.6 billion has come back into this county was to fund last year's failed recall attempt. The fate of PL is not the water board's responsibility, it is Maxxam's responsibility."

The Humboldt Watershed Council consists of Humboldt County residents and property owners who are concerned with what they consider the degradation of local watersheds.

They are also concerned about the impact that this alleged degradation has "upon our safety, property and quality of life," according to the council's Web site at www.epochdesign.com/hwc/main.html.

"We believe that maintaining the health of our watersheds is important not only for wildlife and the environment, but for the people and industries that call Humboldt County home," the Web site states. "We envision a vibrant future for Humboldt County that includes a healthy environment and a healthy economy. To achieve this, we support efforts to create and maintain a responsible and sustainable timber industry by conserving the resource base upon which it depends. We promote restoration of our fish populations and the revitalization of our fishing industry."

On its Web site, the council says it stands for:

* "Preserving the health of our watersheds, for the benefit of the people, wildlife and industries that depend upon them.
* "Keeping nutrient-rich soil on our slopes, where it can grow trees, rather than in our creeks, rivers and bay.
* "Ensuring the long-term health of our timber industry by conserving the resources upon which it depends.
* "Diversification of our timber industry, to increase opportunities for local ownership.
* "A local economy based on value-added forest products, rather than raw logs.
* "Restoring fish habitat, encouraging genetic diversity and maintaining healthy watersheds.
* "Providing a strong voice for the local community in addressing local resource issues.
* "Simplified regulations and other incentives for small, independent land owners and loggers who practice sustainable forestry.
* "Protection of virgin forests and endangered species.
* "Constructive dialogue that focuses on solutions rather than obstruction."

According to its Web site, PALCO's core purposes are:

* "Protect and enhance the environmental, economic and social health of our company and the communities we serve.
* "Meet or exceed all the local, state and federal laws and regulations.
* "Provide competitive financial returns to our owners and investors."

On its Web site, PALCO's goals are:
* "An industry leader in environmentally sensitive forestry and an award-winning steward of our lands and resources.
* "A leader in environmental science known for the quality, experience, knowledge and contributions of our scientists and foresters.
* "The industry leader in providing top-quality certified redwood and Douglas fir wood products in the domestic and international markets we serve.
* "The preferred business partner of our suppliers, contractors and customers.
* "An innovative company committed to sustainable state-of-the-art harvesting, replanting and timber stand management techniques that preserve our forests for future generations.
* "A progressive, well-managed company that provides an excellent return for our investors and shareholders.
* "A good corporate citizen whose employees contribute time and energy to their communities.
* "The preferred place to work.
* "A company that listens to its critics and responds to valid criticisms.
* "A national model for forest products companies, known for our comprehensive Habitat Conservation Plan, our third-party certifications for sustainability and environmental excellence, and our scientific research to protect and restore the plants, animals and wildlife habitat on our lands.
* "A wise steward of the long-term quality, health and appearance of our lands, streams, wildlife, fisheries and habitat.
* "A positive force in revitalizing the town of Scotia and strategically refocusing it to once again become a growing, vibrant and thriving community."


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