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Friday, June 17, 2005 -
The State Water Resources Control Board in Sacramento found that a December decision by the executive officer of the North Coast Regional Water Quality Control Board, and another in March by the board itself, improperly freed up logging in the impacted watersheds. "As the lead agency for protecting the waters of the state, the board feels this order is appropriate for protecting water quality," said state board Chairman Arthur Baggett Jr. The five-member state board voted unanimously to approve the order. At issue was the permitting of timber plans covering 1,100 acres in the two areas, which stretched the limits of a general waste discharge permit. Executive Officer Catherine Kuhlman released 50 percent of the acreage in December, and in March her board released another 25 percent. Much of the logging has already been done, but Palco spokesman Chuck Center said as much as 7 million board feet of timber is standing and no longer accessible. He said that will affect the company economically. Palco has been logging an average of about 150 million board feet per year in recent years over its 220,000 acre ownership. Center also read the decision as having broad ramifications for all timberland owners, requiring an extensive review of waste discharge permits for any timber plan in an impaired watershed. The vast majority of watersheds on the North Coast are considered impaired. "I think the California Department of Forestry needs to take a look at this as well," he said. But Kuhlman didn't interpret the order the same way, saying general permits could still be used in impaired watersheds -- just not watersheds with extensive records of disturbance. "These are very special watersheds," Kuhlman said. Kuhlman said it was reasonable for her board to allow a portion of the logging -- the first time a regional board has taken action to crimp logging significantly. Watershedwide permits are expected to be released in draft form next week, and hearings are tentatively scheduled for September. "Those permits would have been done long ago if PL
would have been forthcoming in providing data," said Mark Lovelace
of the Humboldt Watershed Council, who placed the onus for any reduction
of logging at Palco's feet. "PL is done in these watersheds this
year." HoustonChronicle.com -- <http://www.HoustonChronicle.com>http://www.HoustonChronicle.com | Section: Business
PACIFIC LUMBER RULING California board limits Palco harvest Maxxam-owned unit cannot cut some trees Pacific Lumber Co. suffered a major setback Thursday after a California state board ruled to limit the company's timber harvesting. ADVERTISEMENT
Pacific Lumber officials met Thursday after the decision to consider their options, including an appeal. They have said that the company, commonly known as Palco, needs to continue harvesting those lands in order to remain financially stable. "We anticipate Palco will be forced to take extraordinary actions, which may include: reducing expenditures by laying off employees and shutting down various operations; seeking other sources of liquidity, such as from asset sales; and seeking bankruptcy," said Palco President Robert Manne and its vice president of finance, Gary Clark, in an economic white paper they issued in March. The five-member California water board confirmed its previous order blocking cutting on Palco's Elk River and Freshwater Creek watersheds in northern California. It found that the North Coast Regional Water Quality Control Board — the primary regulator of Palco's timber activity — had improperly issued a permit earlier this year allowing Palco to log there. Residents downstream from Palco's mills complained the company's aggressive timber cutting was causing flooding and adding silt that fouled the river water. Environmental groups had appealed the regional board's decision. Palco can appeal the state board's decision in court. Palco executives said the logging ban has led to $20 million a year in losses. "We're very disappointed with the decision," said Chuck Center, spokesperson for Palco. "We're up there hand-in-hand with the North Coast Regional Water Quality Control Board. They complied with the letter of the law. We believe, along with the regional water quality control board, that the state recommendation and order were way off base." The company has been a lightning rod for criticism in California since it was purchased in 1986 by Maxxam, controlled by Houstonian Charles Hurwitz. Palco's opponents question the validity of the company's economic analysis, saying Palco does not have enough timber to pull it out of debt, which has averaged over $800 million since Maxxam bought the company nearly 19 years ago. "Over the 20 years since Maxxam took over the company, they've been in a sort of liquidation mode," said Paul Mason, forestry representative for the Sierra Club of California. " They're cutting a lot more volume than they used to." About 30 percent of their lands remain to be harvested, according to Mason. "They've just driven the company so close to the edge that they feel compelled to fight over the scraps," he said. Lumber dispute coming to a head
Palco, as it's called up here, is betting its future on a new $30 million sawmill and planer designed to cut the young, small-diameter redwoods that it now harvests. But that new mill is barely running at two-thirds capacity, company officials say, because regional water regulators won't let them cut enough trees on company lands. "This time of year, we should have three to four weeks of logs on hand,'' said Palco operations manager Dennis Wood. "Right now, we've got about two days." About 30 miles north of the sawmill, Kristi Wrigley stood alongside the Elk River, which borders the farm her family has owned since 1903. About 5 feet of silt fills the hollow where Wrigley, 59, used to fish with her three children. She has no doubt -- and there is evidence at the water board and some acknowledgment from the company -- that the silt is a consequence of logging by Palco, which owns and has cut much of the watershed. "All my life, this was a rocky river bottom,'' said Wrigley, a member of the Humboldt Watershed Council. This activist group has spent several years pressuring the North Coast Regional Water Control Board -- a local body with purview over everything from sewer hookups to timber harvests -- into creating the tree-cutting rules that Palco blames for starving its sawmill. On Thursday, Palco and its critics are expected to face off before the state Water Resources Control Board in Sacramento. The five-member body, which sits above the various regional water boards, must decide whether to lift a stay that has, so far, prevented Palco from harvesting timber in two watersheds -- one above Wrigley's Elk River apple farm and the other in the upper reaches of Freshwater Creek, between Eureka and Arcata. That hearing is a pivotal point in the nearly 20 years of disputes that have pitted loggers against environmentalists, profit against wildlife protection -- even neighbor against neighbor. Officials of the embattled timber company recently heated up the debate when they warned in a financial statement that if it isn't allowed to cut the disputed trees, "Palco could be forced to take extraordinary actions, which may include reducing expenditures by laying off employees ... and seeking protection by filing under the bankruptcy code." Opponents consider this a ploy. "If they can't make money, who's fault is it?'' asked the Humboldt Watershed Council's Mark Lovelace. He cited an analysis for the water board showing that Palco made money under its prior ownership but has lost money ever since its corporate reincarnation. The specifics of silt aside, the controversy goes back to 1986, when Pacific Lumber was acquired by Maxxam Corp., the Houston firm controlled by Charles Hurwitz. He turned the company into a magnet for protest by cutting the big redwoods at a faster rate to service the $750 million debt he had incurred to help finance his leveraged buyout. In an April rebuttal of Palco's warnings, a state water board staffer said that if the company is in trouble now, it's mainly because it has carried too much debt for too long. Despite refinancings in 1993 and 1998, its debt stood at $692 million as of May, not much below where it stood 19 years ago. "Palco has over-leveraged the value of their timberlands, and even if they cut every tree they own, it may not be enough to pay back its current debt,'' water board staffer Michael Gjerde wrote in an 18-page report. 'The geologist's analysis' During a recent interview at Palco headquarters in Scotia, chief executive Robert Manne and Chief Financial Officer Gary Clark dismissed what they called "the geologist's analysis." (The water board notes that Gjerde has a master's degree in economics in addition to his primary expertise in Earth sciences). The timber executive painted a different picture of how Palco got into a jam. Manne traced the troubles back to the 1999 Headwaters deal brokered by Sen. Dianne Feinstein, D-Calif. Under its terms, the state and federal governments paid Palco $480 million for 10,000 acres of old growth groves. In addition, Palco and several state and federal agencies agreed on a new habitat conservation plan. It was meant to govern how the company logged its remaining 220,000 acres of private land and subjected it to rules and scrutiny over and above regular logging regulations, Manne said. In return, Palco thought it had won the right to cut enough timber -- 178 million board feet a year -- to cover its debts, pay employees and turn a profit, he said. But right around this same time, the North Coast Regional Water Board, which was not a party to the Headwaters deal, began hearing from people who lived downstream of Palco logging operations in Elk River and Freshwater. They complained of flooding during rainstorms that closed country roads or damaged drinking systems that tap directly into the waterways. Years of meetings Thus began several years of meetings, hearings and studies. As a result, regional and, more recently, state water board officials have reduced or, as is now the case, stopped Palco from cutting timber in the two watersheds. Manne said these water board restrictions have meant that since 1999, Palco has been allowed to cut about only 85 percent of the logs it had expected to harvest under the Headwaters deal. "They have not enabled us to operate at our sustainable level,'' he said. Palco estimates this has cost its timber operation about $13.5 million a year for each of the last several years. It blames that string of revenue shortfalls for the bankruptcy warning. But that warning -- and Palco's corporate structure -- bear some explaining. Using a blackboard, Manne showed how the company most people would think of as "Pacific Lumber" is actually two separate legal entities that are inextricably intertwined. The first is Palco, which owns the sawmills and other lumber-making facilities -- the big green buildings visible in Scotia along Highway 101. Complex ownership The second entity is Scotia Pacific, which owns the forest lands, including the disputed areas in Freshwater Creek and Elk River. Scotia Pacific sells logs to Palco, and both are ultimately owned by Maxxam. CFO Clark said the creation of Scotia Pacific put all the company's timberlands into a bond offering at lower interest rates -- and thus lower payments -- by securing the debt to ownership of the trees. He likened it to refinancing a home at a better rate. Clark said Scotia Pacific sells logs to Palco to earn the revenues it needs to pay the interest on those bonds. But with water board restrictions reducing harvests for several years running, Scotia Pacific has used up its financial reserves and may not be able to pay the entire $27.9 million in interest due July 20. That, says the company, is why it needs the green light Thursday to start cutting trees. Financial issues With financial issues becoming central to the silt debate, Palco's critics argue that its woes result more from its own decisions to maintain a high level of debt than from regulatory interference. And here they can point to "the geologist's analysis" by Gjerde, the state water board staffer. "Maxxam has put Palco at risk by borrowing large sums of money, not paying down its long-term debt, and thereby keeping Palco a highly leveraged company,'' Gjerde concluded. In his analysis, Gjerde noted that in the four years before the Maxxam takeover, the old Pacific Lumber averaged pre-tax profits of $20 million a year. Using figures provided by Palco, he calculated that in 19 years under Hurwitz, "it has averaged over $22 million in losses each year." Lovelace, the Watershed Council activist, said the water board should focus on the silt build-up and its relationship to logging. "The only thing that's really going to allow it (the affected streams) to recover are time and rest,'' he said. River may be getting better Back at Palco headquarters in Scotia, forester Stephen Horner acknowledges that the company bears some responsibility for what it calls "legacy impacts" of its logging practices. But he says its current practices are so carefully planned, executed and regulated that cutting in the two watersheds will not worsen the silt problem, which the company thinks is getting better. "The river is cleaning itself up even as we cut under these new practices, '' said Kate Sullivan, senior scientist for Scotia Pacific's watershed sciences program. The whole morass goes before the five-member state Water Board on Thursday. Spokeswoman Liz Kanter said the board could let Palco cut in the two watersheds or could continue the stay that prevents additional logging. Either way, she expects a decision that day. Palco has the support of at least one long-time Elk River resident. Retired rancher Gene Senestraro, 76, served on the regional water board before the Maxxam takeover and still sides with Palco. "What's happened in the past has happened,'' he said. "With today's logging rules, I can't imagine doing a better job than Palco has to do.'' But further upriver, closer to the logging, Wrigley said the silty conditions that regularly flood her 7-acre apple orchard -- cutting its yield from 3,000 boxes a decade ago to 400 boxes today -- is more than a financial loss. She has a job in town anyway. It's a sign, she said, that the river is dying. |
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