March 1st 2008

By Steve Wilent, Source features writer
From the March 2008 issue of The Forestry Source

Pacific Lumber Company's declaration of bankruptcy last year set off a flurry of activity by the company to restructure its debt and by two other groups that seek control of the company's 220,000 acres of forestland, two sawmills, planer mill, and company town--Scotia--in Northern California. In January, The Nature Conservancy announced that it, too, would make a separate offer for the property.

Palco, as the company is known, is owned by Maxxam Corp., a Houston-based holding company headed by financier Charles Hurwitz. Maxxam's hostile takeover of Palco in 1986 stirred great controversy in California and beyond, as recounted in The Last Stand: The War between Wall Street and Main Street over California's Ancient Redwoods, by David Harris (Sierra Club Books, 1997). Before the takeover, Palco reportedly had no debt. After the takeover, Palco sharply increased timber harvesting to pay off the bonds Maxxam had sold to finance the $863 million purchase.

In response to the increased harvesting, Palco's lands became the locus of the so-called Redwood Summer protests in 1990 and subsequent protests in 1996, when hundreds of protesters were arrested, including musician Bonnie Raitt and others who had chained themselves to gates at a Palco mill. Beginning in 1997, activist Julia Butterfly Hill staged a two-year "tree-sit" in a large redwood tree, which she dubbed "Luna," on Palco land. She lived in the tree until 1999, when Palco set aside Luna and all other trees within a three-acre buffer zone.

These protests and the media coverage they generated helped pave the way to a 1999 deal in which the United States and California governments agreed to pay nearly $500 million to Palco for 7,475 acres of its old-growth timber, now known as the Headwaters Preserve. As part of the deal, Palco agreed to develop a Habitat Conservation Plan (HCP) and a Sustained Yield Plan (SYP) for the remainder of its lands.

"We operate under the most restrictive, most responsible land stewardship program ever implemented against private timberland, anywhere," said Frank Bacik, Palco vice-president and general counsel. "We're prohibited from harvesting on about one-third of our timberland, just on the basis of watershed and species protection, and for months of the year, wet conditions or bird-breeding seasons or other limitations restrict our management."

Palco blames the State of California--specifically, the North Coast Regional Water Quality Control Board--for most of its financial troubles. In December 2006, the company filed a lawsuit against the state, claiming that the water board's regulatory limitations on timber harvesting had significantly reduced the company's timber harvests and increased its harvesting costs. According to Palco, the Headwaters Agreement was designed to provide regulatory certainty and a stable harvest level of 175 MMBF.

"However, just the opposite occurred: harvest levels became increasingly unpredictable," said the company in its disclosure statement in the bankruptcy case. "From 1998 to 2005, annual harvest levels averaged 150 million board feet (MMBF) per year, a substantial decrease from prior levels. In 2006, the annual harvest levels dropped to below 100 MMBF."

Palco said that it harvested an average of 244 MMBF per year before the implementation of the HCP-SYP.

A 2007 company press release states, "The failure of the state to live up to the terms of the Headwaters Agreement has prevented Pacific Lumber and Scopac [subsidiary Scotia Pacific Co. LLC] from remaining economically viable without restructuring."

A Palco spokesperson offered no additional comment on the Headwaters case except to say that it is proceeding through the California Superior Court in Fresno. The company said that the disposition of its reorganization plan does not depend on success in the claim against California.

By the end of 2006, Palco had accumulated nearly $1 billion in debt and could not meet all of its interest payments. In January 2007 it filed for Chapter 11 bankruptcy protection in the US Bankruptcy Court for the Southern District of Texas in Corpus Christi.

Since then, three proposals have been submitted to the bankruptcy court:

1) Maxxam's reorganization plan includes selling residential and commercial properties in the town of Scotia and nearly 28,000 acres of forestland, including 6,600 acres in Marbled Murrelet Conservation Areas and 1,000 acres for residential development along with 20,000 adjacent acres under a no-development conservation easement. The company also would double production at its Scotia sawmill and planer mill. Palco would retain 181,000 acres.

2) A group of investment firms led by the Bank of New York Mellon Corp., which together hold most of Palco's timberlands as security for about $700 million in debt, said that it would auction off the land to satisfy most of that debt.

3) Mendocino Redwoods Co. (MRC), which owns 225,000 acres of timberland and a mill in Mendocino County, south of Palco's lands, and Marathon Structured Finance Fund, a Palco creditor, propose a joint venture to own and operate Pacific Lumber as one unit.

On January 29, California Governor Arnold Schwarzenegger sent a letter to the court, saying that the future of Palco's lands are "of paramount importance to all Californians."

"These lands and assets represent a unique public trust for the people of California," wrote Schwarzenegger. "Pacific Lumber Company made assurances in 1999 for the future management of its lands that, as part of the Headwaters Agreement, included the expenditure of nearly $500 million of federal and state public funds. The United States and the people of California have a strong interest in a successful reorganization of a Pacific Lumber Company that will result in sound management practices for the future of these lands."

The bankruptcy court will begin hearings on the plans on April 1.

Sustainable Harvests

Once the court and creditors agree on a settlement, a group led by The Nature Conservancy will make an offer to purchase either Palco's assets or a conservation easement on its land.

The Nature Conservancy and its allies say they have the resources to do so. The group includes the Save-the-Redwoods League, Community Forestry Team (a coalition of local forestry, conservation, and environmental advocates), Conservation Forestry LLC, and the Redwood Forest Foundation Inc. (RFFI), as well as two powerful financial partners: Bank of America, one of the nation's largest banks, and Atlas Holdings LLC, a Connecticut company that operates four paper mills and nine packaging plants throughout North America, including Finch Paper Holdings LLC. Last year, Atlas sold Finch Paper's 161,000 acres of forestland in the Adirondacks to The Nature Conservancy.

Also last year, Bank of America helped RFFI purchase nearly 51,000 acres of redwood and Douglas-fir forest in Northern California (see "Bank of America, Redwood Foundation Announce Partnership," August 2007).

"We have a vision for what we'd like to see happen with the property: permanent, sustainable timber operations and a permanent conservation easement," said Nature Conservancy spokesperson Jordan Peavey. "We intend to make a bid if the auction [by the Bank of New York group] goes forward. If somebody else's plan is approved, then we'll approach them and try to talk with them about what we'd like to accomplish. We'd love to work with them."

Sandy Dean, chair of MRC, said Palco's lands would be a good fit with MRC's existing operations.

"Our plan is to bring our forest practices to Palco lands and immediately seek Forest Stewardship Council certification, and devote capital and our management team to make the Scotia sawmill a success. And do all that without seeking any government or philanthropic support," he said.

FSC certification, said Dean, would mean a halt Palco's practice of clearcutting, the protection of old-growth trees, better erosion-control measures, and overall annual harvest rates that are less than annual growth rates. Mendocino Redwood's existing timberlands are FSC certified. Palco timberland and procurement operations have been certified under the Sustainable Forestry Initiative since 2006.

"I think we can show that the private model we've been pursuing is making good progress on both being successful as a business but also being good stewards of the land. What we find exciting about the Palco opportunity is the chance to show that what we've done at MRC isn't a fluke and that we can execute the model on a larger scale."

MRC sister company Mendocino Forest Products supplies lumber to Home Depot and other retailers across the nation. Dean said products from Palco mills also would be sold through that retail network.

"We think there is a significant business opportunity to benefit the Scotia sawmill by taking its operations an additional step, to include the distribution of the products they make," said Dean. "Our Ukiah mill, which produces 55 million board feet of redwood lumber a year, is married to a distribution business that distributes 400 million board feet of redwood and complimentary products. A big piece of our plan is to make that distribution network available to the Scotia mill to help it be more successful."

If MRC is successful in its bid for Palco, said Dean, Mendocino Forest Products would add a second shift at its Ukiah sawmill while it makes capital improvements to the Scotia mill, and would offer Scotia mill workers the chance to staff the second shift.