PALCO’s problems reminiscent of Kaiser’s

California officials are close to a decision that could force Pacific Lumber Co. or a subsidiary into bankruptcy.

An analysis done for the State Water Resources Control Board says a filing, if one comes, will be the fault of the company and its corporate parent, Maxxam Inc. Pacific Lumber officials say their backs are pressed against the redwoods that potential harvest restrictions will not let them cut, despite past agreements.

In two weeks, the board will meet to consider which of two clashing white papers best explains the dire outlook for Pacific Lumber, or PALCO, which remains the corporate brother of Kaiser Aluminum Corp. Kaiser, like PALCO, struggled for years with high debt, finally succumbing to bankruptcy three years ago. Debt when Kaiser filed in February 2002 exceeded $3 billion. A long-delayed reorganization plan may eliminate whatever equity Maxxam once had in the aluminum maker, which it purchased in 1987.

Kaiser continues to operate a rolling mill at Trentwood. The smelter at Mead is scrap.

Kaiser, of course, was one of Spokane’s biggest employers for decades after World War II. But the bankruptcy cost hundreds their jobs, and thousands more the health care benefits called for in their union contracts. The government assumed responsibility for their pensions.

PALCO President Robert Manne and Vice President for Finance Gary Clark say many of their workers might also lose their jobs if the state does not back off harvest restrictions imposed because of water quality concerns. In a white paper submitted to the Control Board in March, they say the company has been a mainstay in Northern California, where it employs 875, carries a $40 million payroll, and contributes to many local charities.

“If PALCO is put into bankruptcy, Humboldt County will suffer severe economic harm,” they say.

PALCO wants the state board to overrule the decisions of its North Coast regional office.

PALCO, purchased by Maxxam in 1986, is caught in a squeeze. A subsidiary, Scotia Pacific Lumber, in 1998 refinanced more than $780 million in debt by selling $843 million in Timber Notes. Rated investment-grade at the time, the debt was supposed to be serviced with revenues from an annual cut of about 180 million board feet of redwood and fir trees. Except in 2002, the cut has never reached that level.

And, as harvest levels continued to lag, costs increased. Only asset sales and modernization of its mills have kept the company going despite $389 million in negative cash flow since 1998, say Manne and Clark. The debt-rating agencies have downgraded the notes, with a “watch” that implies ongoing concerns about Scotia Pacific’s ability to continue making payments.

They reject long-standing claims that PALCO’s woes are the result of cash grabbed by Maxxam during a series of debt refinancings, a charge also made by critics of Maxxam’s oversight of Kaiser.

“Maxxam did not enrich themselves with the ongoing operations of PALCO,” they conclude.

The Control Board’s Michael Gjerde does not see it that way. In a point-by-point response to the company white paper, he describes a pattern of financial dealings among Maxxam, PALCO and other entities that consistently ended with money flowing to Maxxam’s Houston headquarters.

“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,” he says.

PALCO had just $30 million in long-term before Maxxam purchased the company. The burden today exceeds $700 million.

Gjerde, who examined public filings going back to 1993, estimates Maxxam has extracted at least $724 million from PALCO. Debt service has turned a company that averaged $20 million in profits based on $75 million in sales prior to 1986 into one with $207 million in sales but losses of $22 million a year. The problem? $55 million in debt service on the Timber Notes.

The next payment, $27 million, is due in July 20.

If bankruptcy comes, Gjerde foresees a period of uncertainty while Maxxam and the noteholders either renegotiate terms of the debt, or fight over possession of Scotia Pacific’s timberlands. In either case, he says, operations will continue at near current levels, workers would keep working, the local economy would experience a bump, not a collapse.

What happens next month, or in July, will be episodes in one of the most notorious corporate takeovers in U.S. history, with deep environmental and political themes in addition to the economic. Expect more conflict. When a tree falls in a PALCO forest, it makes a detonation, not just a sound.