May 5, 2005
Responding to Pacific Lumber Company’s claims of financial crisis, the State Water Resources Control Board has released what is quite likely the most thorough and authoritative analysis of the PL’s finances ever made public, finding that the company’s dire predicatment â€œis the result of the risky business model that (parent company)MAXXAM has chosen to follow.
This study was commissioned by the State Water Board to determine whether increased regulation by the North Coast Regional Water Quality Control Board (NCRWQCB) may be responsible for PL’s proclaimed economic crisis. The study specifically responds to various claims made by Pacific Lumber in a March 15, 2005 Economic White Paper, and analyzes Securities and Exchange Commission (SEC) filings by Pacific Lumber, Scotia Pacific, and MAXXAM going back to 1993.
The report concludes that â€œMAXXAM has taken money out of PALCO in subtle and complex ways and has directed PALCO to harvest trees at rates that greatly exceeds sustainable forest practices. 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.
Perhaps the most startling finding is that â€œ..even if they cut every tree they own, it may not be enough to pay back its current debts. PALCO’s financial difficulties are the result of deliberate business decisions, and not the result of any regulatory decisions.
PL’s financial crisis exists despite a massive increase in the company’s harvest rates. The study notes â€œMAXXAM PALCO has tripled the old harvest rates to unsustainable levels, nearly doubled the operating income, and still lost an average of $20 million a year since the takeoverâ€¦ None of the profit from accelerated harvesting has been used to pay off this company debt. Instead, MAXXAM has removed at least $724 million in PALCO funds for its own use.â€
In analyzing that rate of harvest, the report finds that in the 10 years from 1987 to 1997, PALCO harvested over half of their entire timber inventory. This rate of harvest is equivalent to a 20-year harvest cycle.â€ The study also notes that the 178 million bf/yr harvest rate allowed by the 1998 Headwaters deal â€œwould deplete the 3.2 billion bf inventory in less than 18 years.
The report finds that the company is so highly leveraged that â€œâ€¦a Debt to Equity ratio cannot even be calculated for the new PALCO.â€ â€œMAXXAM has refinanced and taken so much money out that PALCO has a negative equity position (nearly twice as much debt as assets). This is highly unusual for any company operating as an ongoing concern.
In analyzing the possibility of bankruptcy, the report sees two likely scenarios: â€œThe companies could be put into bankruptcy with MAXXAM continuing to operate the companies,â€ or â€œa second possibility is that the Timber Note holders might successfully gain control of Scotia in the bankruptcy process and come to own the property.â€ â€œIn either case, timber harvest and milling should continue and workers would keep working. The local economy would experience some slowdown during this period of uncertainly, but most of the economic harm would be borne by the Timber Note holders and possibly MAXXAM.â€
The report responds strongly to Pacific Lumber Company's repeated assertions that the company sold the Headwaters Forest for less than market value. The study concludes â€œPALCO got an equivalent of $95,000 PER ACRE for its Headwaters transfer.â€ It goes on to note that in the 1998 Scotia Timber Note sale, â€œ205,000 acres were mortgaged to the bond holders at a rate of only $4300 an acre. MAXXAM was able to get over twenty times this amount per acre from the government for its prime old growth Headwaters.
The report also notes â€œCharles Hurwitz received $9 million from MAXXAM for his role in securing the Headwaters Agreement.
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