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PALCO

Key Palco hearing set for Thursday

By John Driscoll
The Times-Standard
February 26, 2008

Attorneys for the parties are expected to argue over the summary of three different plans submitted to the U.S. Bankruptcy Court in Corpus Christi, Texas. The disclosure statement, as it’s called, is key to the case.

“It’s supposed to have a bunch of information to help creditors make intelligent decisions on how to vote on a plan,” said San Francisco Bay Area bankruptcy expert Peter Clapp, who has been following the case.

The unsecured creditors committee has been ordered by the judge to come up with a single disclosure statement that outlines the three plans before Thursday’s hearing.

Either at the hearing or shortly afterward, Judge Richard Schmidt will determine whether the disclosure statement is adequate, and then creditors will get to vote up or down on each plan.

In April, Schmidt is scheduled to hold a confirmation hearing, in which he’ll consider the votes each plan received and whether there are enough votes to reach a certain threshold. If more than one plan gets enough votes, the judge may then decide which plan is best for creditors.

Palco filed for Chapter 11 protection in January 2007. A year later, three plans were submitted to the court — Palco’s, one by the holders of debt secured by the company’s 210,000 acres of timberland, and another by Palco creditor Marathon Structured Finance Fund and the Mendocino Redwood Co.

Palco’s plan looks to raise money by selling off 22,000 acres for an exclusive development, selling 6,600 acres currently off limits to logging for $300 million, and would turn over the town of Scotia and other assets to Marathon.

But Palco has also submitted two alternative plans. One would transfer timberlands other than the 22,000 acres proposed for development to the timber noteholders, and the other would turn over Scotia and the Scotia mill to Marathon.

Clapp said it’s unprecedented, in his experience, for a company to file more than one plan.

“To me, they’re sort of holding their options open,” Clapp said.

Marathon and Mendocino Redwood would provide new cash, turn some debt into equity and put in place new management for a company with merged timber and lumber operations.

The timber noteholders would sell timberland and other assets, allow Marathon to sell Palco’s mills, and ensure that bidders would keep Scotia Pacific’s employees — except top management — for a year or more. That plan could open the door for community and environmental groups to start a timber and lumber operation and preserve some of the land.

Leading up to that hearing, agencies and public officials like California Sen. Dianne Feinstein and St. Helena Rep. Mike Thompson have been weighing in on the upcoming process.

The latest is from the U.S. Interior and Commerce departments, and the U.S. Fish and Wildlife Service and National Marine Fisheries Service. The agencies signed Palco’s habitat conservation plan, which governs timber operations with respect to endangered species.

Attorneys for the United States wrote that the conservation plan’s implementation agreement means any transfer of the covered lands would require the agencies’ approval. They also wrote that residential housing was not contemplated as part of the agreement, and warned that it could lead to a number of problems. Among them, they wrote, are withdrawing water from streams, increases in road densities, increases in landslides, increases in nutrients and pesticides to streams and increased human activity like light, noise and domesticated animals.

“Whether the wildlife agencies would approve particular land transfers for residential housing cannot be determined at this time,” they wrote.

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

Box: The Times-Standard is hosting a connection to the U.S. Bankruptcy Court in Corpus Christi by teleconference on Thursday. If you would like to attend, please RSVP by e-mail to jdriscoll@times-standard.com. The hearing begins at 8 a.m. in the Times-Standard newsroom on the second floor at 930 Sixth St., Eureka.

Boxes: 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

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