Timber Firm Has Growth Problem Environmentalists stymie Pacific Lumber bid to 
harvest old-growth

SERIES: THE TIMBER INDUSTRY

By Jeff Pelline, Chronicle Staff Writer

 (Second of two parts)

 Few industries have undergone more changes or have been more in the public eye 
than the multibillion-dollar lumber industry in the Pacific Northwest. And no 
company has been more in the spotlight than Pacific Lumber.

 As the biggest private owner of old- growth redwoods, it has been a key target 
of environmentalists. And since it was taken over by an out-of-state conglomerate 
controlled by a multimillionaire Texas investor, the Scotia-based company has 
come to symbolize the more-controversial leveraged buyouts of the 1980s.

 In fewer than seven years, Charles Hurwitz, chief executive of Houston- based 
Maxxam Inc., has built an empire generating more than $2.2 billion in annual 
revenues. Its principal assets include not only Pacific Lumber, but also 
Oakland-based Kaiser Aluminum. And last week, a Hurwitz-led group agreed to 
invest $ 350 million to buy a majority stake in Continental Airlines.

 When he bought Pacific Lumber Co. in 1985, Hurwitz saw the company as 
undervalued, with gratifyingly little debt and a dominant position in its market.


 But Hurwitz, 52, celebrated by some as an ingenious investor, didn't envision 
the controversy that would erupt from his plan to harvest the company's most 
valuable commodity over a 20- year period -- the largest remaining private stand 
of old-growth redwoods, some of which may be more than 2,000 years old. ''I 
clearly underestimated what would happen,'' Hurwitz said.

 Hurwitz wanted to double the company's timber cut to pare the acquisition debt. 
What he underestimated was the strength of the opposition from environmentalists. 
Lawsuits by environmental groups have blocked nine of the Hurwitz regime's plans 
to cut old- growth timber on 2,500 acres.

 In addition, Pacific Lumber has temporarily agreed not to harvest a 3,000-acre 
plot 10 miles southeast of Eureka known as the Headwaters forest, because of 
opposition from environmentalists. The company owns 195,000 acres of timberland 
all told, but the old- growth acreage is the most valuable, according to Pacific 
Lumber President John Campbell.

 Industry consultants estimate that the timberland locked up in litigation is 
worth about $ 300 million, and the Headwaters forest is valued at $ 500 million 
to $ 700 million. Between them, these properties account for perhaps a third of 
the company's assets.

 ''We already have manipulated 96 percent of the forested area in California, so 
the ancient forests are critical to maintain those threads of diversity that 
existed beforehand,'' said Charles Powell, a director of EPIC, the environmental 
group that has filed numerous suits against Pacific Lumber. ''People also are 
touched by these forests -- many of them feel they are the embodiment of God's 
wonder.''

 Pacific Lumber is facing a new challenger to its harvesting plans: a coastal 
seabird called the marbled murrelet. In March, the California Department of Fish 
and Game decided to list the murrelet as an endangered species. Last month, Fish 
and Game inspectors reported that the company may have inadequately surveyed the 
bird's habitat before starting to cut a 240-acre stand of old-growth redwoods.

 Pacific Lumber says that it was in full compliance with harvesting regulations, 
but has agreed to stop cutting in the stand for at least a month, while it 
conducts further surveys. In the meantime, Pacific Lumber is suing the Fish and 
Game department, charging that the murrelet was listed on inconclusive evidence.

 Some wildlife biologists say that the black-brown-and-white- speckled bird poses 
a greater threat to timber harvesting than the spotted owl, because it seems to 
be more dependent on old- growth forests.

 The challenges to the company's timber-harvesting ''create some uncertainty, no 
doubt,'' said Pacific Lumber Chairman John Seidl, Hurwitz's hand-picked manager. 
''But we think we're managing very well with that uncertainty.''

 Last month, the California Supreme Court agreed to review a case that 
environmental groups often cite in legally challenging timber-harvesting plans. 
In the case, which involved Pacific Lumber, the state appellate court ruled that 
regulators have the authority to require extensive wildlife surveys beyond those 
specified in timber- harvesting regulations.

 Many legal experts, mindful of recent property-rights rulings in other states, 
predict that the high court will scale back or overturn the lower-court decision, 
making it easier for the companies to harvest their timber. A decision is 
expected early next year.

 Pacific Lumber is looking to increase profits by cutting whatever trees it can. 
These include second- and third-growth redwoods and Douglas firs, and so-called 
residuals -- old-growth trees left standing from cuts made years ago.

 Last year, for the first time since Hurwitz bought Pacific Lumber, the company 
posted a decline in profits and revenues. Its operating income fell to $ 51.1 
million from $ 61.8 million, while its revenues fell to $ 192.2 million from $ 
193.2 million. The company said that the declines stemmed largely from the 
recession, but also from increased regulatory costs.

 This year, earnings are rebounding. The company earned $ 11.9 million on sales 
of $ 47.2 million for the quarter ended March 31 -- up from $ 8.5 million on 
revenues of $ 39.1 million for the year- earlier period.

 ''The tremendous cutback in federal land sales has made a huge difference in 
terms of prices and volumes for redwoods, so the first quarter has been 
unbelievably strong,'' Seidl said. ''We think this is going to be a strong year 
for us, and 1993 will be better.''

 An earthquake that struck the region in April -- and shut down one of the 
company's sawmills for about a month -- dampened second-quarter results. But 
higher prices are helping to offset the lower production, which fell about 4 
million board feet below projections.

 Pacific Lumber has been expanding its operations. In February the company bought 
300 acres of timberland -- property seized by the government after its previous 
owner was found guilty of growing marijuana.

 Two years ago, the company bought Arcata-based Britt Lumber, a major 
manufacturer of redwood fence-and-deck lumber. And last year it built a new, 
so-called edge-and-glue plant at Scotia, enabling it to make wood products from 
short and narrow boards that formerly were tossed out.

 The company's capital investments have totaled more than $ 100 million since 
Hurwitz took control, including a $ 50 million, 30-megawatt cogeneration power 
plant. The number of workers involved in lumber operations has increased by 
one-third -- to 1,250.

 On the other hand, the company's cutting and welding business, which had 
employed nearly 2,000 people in Southern California, Texas, Kansas and 
Massachusetts, was sold for $ 325 million in 1987 to cut debt. Its former 
headquarters building in San Francisco was sold for more than $ 30 million.

 Pacific Lumber is seeking to strengthen its balance sheet. The company is 
negotiating with lenders this week to refinance its high debt load, which grew 
nearly 14- fold when Hurwitz took over.

 The debt has been cut by about $ 90 million -- to $ 545 million. Cash flow has 
been averaging more than $ 90 million annually -- enough to cover the company's 
interest payments of about $ 70 million per year. A total of $ 377 million in 
debt becomes payable in 1995 and 1996, and the company plans to refinance that 
debt at a lower interest rate and extend the maturity dates.

 Pacific Lumber also is working to rebuild the company-owned town of Scotia. The 
town and the company's operations suffered an estimated $ 16 million in 
earthquake damage three months ago. The shopping center and 45 of 272 employee 
houses were damaged.

 The company expects to begin rebuilding the shopping center, which included a 
grocery store, hardware store, pharmacy and coffee shop, by the fall, and will 
complete the work in a year. All the homes should be repaired by the end of 
summer.

 Before the arrival of Hurwitz, it was Pacific Lumber's policy to never harvest 
more timber than it grew in any given year. The company also practiced selective 
harvesting, where the largest trees in a stand are periodically removed, leaving 
the younger ones to grow further. The practice is repeated indefinitely, 
producing what lumbermen call an ''uneven-aged'' forest.

 ''We always took a very conservative look at our forests and the harvesting and 
managing of them,'' said Stan Murphy, whose family controlled the company before 
it was listed on the New York Stock Exchange. When Maxxam took control, it 
abruptly doubled the cut to pay off debt, and stepped up the controversial 
practice of clear-cutting, where an entire stand of trees is removed down to the 
stump. Pacific Lumber was met by protests from environmental groups, who once had 
regarded the company as highly sensitive to their concerns. A group of former 
employees and local politicians support a new plan, called the PL take-back 
proposal, to slow down the cutting of old-growth trees and wrest the company from 
Hurwitz's control.

 Campbell defends the company's harvesting practices. Clear- cutting, he notes, 
is practiced on less than 10 percent of the company's timberland -- mainly where 
the land has been damaged by wind, fire or insects. It is widely practiced 
elsewhere in the industry, he adds.

 Campbell said that Pacific Lumber's harvesting, though increased, remains within 
the industry norm when considered as a percentage of total timber holdings. And 
in 20 years, Pacific Lumber plans to reduce its harvesting to pre-Hurwitz levels, 
he said.

 Most of the old-growth trees, he adds, are dying and should be cut down. He also 
makes the point that the best of the redwoods -- some 157,000 acres worth of 
virgin growth -- have been preserved in parks.

 Critics contend that Pacific Lumber's plan to eliminate its old- growth timber 
will lead to job cuts. Old-growth trees, generally defined as those more than 200 
years old, are larger and harder to handle than others, and therefore more 
labor-intensive.

 Campbell concedes that jobs -- perhaps hundreds of them -- will be lost over a 
decade as the transition occurs. But he thinks most of the cuts will be achieved 
through attrition. He said that the company plans to expand its timberlands, 
which could mean added jobs.

 The issue of pension security has bedeviled the company and its employees. Last 
year, the trustee of Pacific Lumber's annuity plan, First Executive Life 
Insurance, went into bankruptcy protection. Payments to more than 500 of the 
company's retirees were temporarily halted. The U.S. Department of Labor filed 
suit against Maxxam, demanding that it cover any shortfall, and the company 
agreed.

 Hurwitz also has been criticized for using excess money in the company's old 
pension plan to partly finance his buyout of Pacific Lumber.

 Hurwitz has had rocky times elsewhere as well. He formerly served as chairman of 
United Financial Group, whose United Savings Association of Texas unit collapsed 
four years ago.

 Federal Deposit Insurance Corp., which oversees the savings- and-loan industry, 
has said that it is considering filing a $ 500 million- plus lawsuit against 
United Financial and its former officers, alleging that they are liable for 
breach of fiduciary duty.

The San Francisco Chronicle
JULY 14, 1992, TUESDAY, FINAL EDITION
SECTION: BUSINESS; Pg. B1