February 1st 2008

John Driscoll
The Times-Standard
February 1, 2008

A federal bankruptcy judge has three possible futures for the Pacific Lumber Co.'s in his hands.

Three plans to resuscitate the troubled company were filed with Judge Richard Schmidt in U.S. Bankruptcy Court in Texas late Wednesday, and they are as different from each other as they could possibly be. One of the reorganization proposals -- or some modification -- will likely be approved by the court in April.

The company's own revised proposal still envisions converting some of its timberland to a high-end community, but now looks to more densely cluster homes and facilities. It also makes bold claims that the plan would spare hundreds of jobs, keep land in timber production and pay all its creditors in full over about a decade.

"What is clear, however, is that only the debtor's joint plan seems likely to preserve the going concern value of the debtors' existing businesses for the benefit of all constituencies in the case rather than for the parochial interests of each competing plan proponent," the plan reads.

In the most drastic contrast, the creditors --who are owed $714 million secured by Palco's 210,000 acres -- look to sell the land and other assets to a qualified buyer or buyers

looking to operate the timberlands as a going concern. It would make Scotia Pacific a separate entity, use a market-driven approach to paying creditors and allow any party -- including Maxxam -- to bid as much as they believe the assets are worth.
"The debtors' bankruptcy cases are the final result of an aggressive campaign to harvest some of the most valuable timberland in the world, the ancient redwood forests of California," the noteholders' plan reads.

A coalition of community groups, investors and conservation organizations said it intends to make a bid for the assets if the noteholders' plan is approved by the court. The group includes the Humboldt Watershed Council, the Redwood Forest Foundation, Atlas Holdings, The Nature Conservancy and the Save-the-Redwoods League, among others. Several thousand acres would be set aside to preserve old-growth trees, and the sawmill and timberlands would be operated sustainably, the group said in a statement.

"Our coalition has the financial capacity, timber management expertise, conservation interest and local community participation to offer the best solution for the community, local workers and for conservation," said George Yandell, The Nature Conservancy's North Coast project director.

Another of Palco's major creditors, Marathon Structured Finance Fund, in league with Mendocino Redwood Co. looks to take over the company's operations, ridding it of top management, and running the sawmill and timberlands with existing employees. It would reduce the company's debt, restructure Scotia and allow current residents to buy their homes. Mendocino Redwood has a proven track record in the business, they say, and vows to operate the company in an environmentally sensitive way.

A lot hinges on how much Palco's assets are worth, and how feasible the plans are in light of that. Palco assumes the highest value: The timberlands and other assets -- real estate, Scotia, the Scotia power plant and other holdings -- are worth $1.12 billion in their current state, it insists. The company has far more equity than debt, it claims, not including another $300 million in value it can add through the development project and the sale of old-growth timberland devoted to threatened marbled murrelets.

The Bank of New York, representing the noteholders, sees those figures as wildly optimistic. Its attorneys wrote that some investors have expressed interest in buying the timberlands for between $550 million to $600 million.

Mendocino Redwood argues that it believes there will be serious opposition to Palco's proposal from creditors, regulators, local residents and environmentalists. Mendocino Redwood also holds that Palco can't service the debt it will end up with by operating the merged timberland and sawmill operations.

Retooling redwoods

Palco's plan

  • Sell 6,000 acres of marbled murrelet reserves for $300 million
  • Split off 22,000 acres for an exclusive development, which includes denser clustering of houses and facilities than first plan
  • Marathon Structured Finance Fund would get Scotia, Scotia mill, idle mills
  • Timber noteholders would get $375 million in preferred stock, 49 percent of common stock and 10-year notes of $225 million secured by Scotia Pacific assets
  • Unsecured debt paid in full
  • Maxxam will make contributions

M&M map

Mendocino Redwood and Marathon plan

  • Provide $225 million in cash and convert $135 million of debt owed to Marathon into equity
  • New management team would operate timberland and Scotia sawmill as a combined entity
  • Reduce debt obligations by $625 million
  • Trade creditors would get 75 percent of claims
  • Timber noteholders would get $175 million plus new notes totaling $325 million
  • Seek Forest Stewardship Council certification
  • Invest $7.5 million into Scotia mill to improve flexibility

Test the market

Timber Noteholders' plan

  • Sell timberland and related assets in one or more sales
  • Bidders must keep Scotia Pacific employees -- except CEO, CFO and general counsel --for at least a year
  • Mills could be sold by Marathon as part of the same process
  • Would settle or prosecute outstanding litigation
  • Keep Scotia Pacific separate from Palco
  • Pay 99 percent of unsecured claims
  • Community and environmental groups may bid to operate a "sustainable" timber and lumber operation

John Driscoll can be reached at 441-0504 or jdriscoll@times-standard.com.