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The pulp web

Eureka Times-Standard

The pulp web

By John Driscoll The Times-Standard

Monday, November 29, 2004 –

The Samoa pulp mill’s key investors and management have been recycled and replaced since it was bought from Louisiana-Pacific Corp. in 2001.

Reorganized several times, each time unshouldering massive debt, the companies that have owned the mill have changed names, but many of the faces remained the same.

The mill’s management is now largely different than it was a year ago, but with the Stockton Pacific Enterprises mill expected to close or be sold by year’s end, minority investors who hail from the original purchase from L-P, a board member nominated by the newest company’s bank and a former CEO and investor are hatching plans to buy the mill.

On top of that, a major Chinese container board producer called Lee & Man Paper Manufacturing is also expressing interest. The mill’s present management is in the unusual position of forging its own buyout while courting other suitors, like representatives from Lee & Man, who spent much of last week at the mill.

Point to point

In the 1990s, the Surfrider Foundation sued Louisiana-Pacific and the Simpson Paper Co. over toxic discharges from two chlorine-based pulp mills on the Samoa Peninsula. In the wake of the settlement, Simpson shut down its mill.

Louisiana-Pacific took a different route. It poured tens of millions into transforming its mill to a totally chlorine-free facility with vastly fewer environmental effects. Operating costs skyrocketed, however, and L-P soon wanted out of the volatile pulp business.

Enter LaPointe Partners, a Wisconsin-based investment vehicle, which industry sources say has a revolving door for pulp and paper investors. LaPointe’s chairman, William New, was a former paper executive that by 2001 had bought several mills and made an apparent effort to turn them around. Most have failed.

New was chairman of Plainwell Inc., which owned mills in Portland, Ore., Wisconsin, Pennsylvania and Plainwell, Mich. It also owned the Shasta Paper Co. mill in Anderson, which closed in 2001 after workers turned down a 20 percent pay cut and energy costs bled the company. Plainwell had filed for Chapter 11 bankruptcy protection in 2000 and in 2001 asked an international banking firm for options to recover.

In 2001, LaPointe bought the L-P mill in Samoa for $46 million in cash plus preferred stock worth $33 million. New became the chair of the newly formed Samoa Pacific Cellulose.

Ernest Harvey, Samoa Pacific’s president, had previously held a senior management position at Plainwell, as had investor Randy Rhodes. Rhodes became vice president of Samoa Pacific when Harvey retired, moving Brent Hawkins, the former mill manager at Shasta Paper, to president.

Samoa Pacific slashed a third of the workforce and boosted efficiency immediately. But major operating losses, a lack of focus on relationships with suppliers and a massive run up in debt was stifling the mill, according to the mill’s current leaders.

Last August, the company’s primary lender, PPM Finance in Chicago, foreclosed on the mill’s assets. A new company created by the mill’s management bought the mill for $30 million, casting off $45 million in debt, much of which was owed to L-P.

But Stockton Pacific Enterprises was really only cosmetically different, which roiled chip suppliers and vendors who felt Samoa Pacific had run up debt on the eve of the foreclosure and left many businesses unpaid or partially compensated. Hawkins, New and other investors remained.

Stockton Pacific now owed some $30 million — financed at a whopping 17.5 percent interest. Steve Fleischer, nominated by PPM to be an outside director, joined the board of Stockton Pacific in December 2003.

Pulp prices were bleak and pulp production low, while overhead remained high. PPM decided to reorganize the company again. Fleischer jumped on as CEO, and most of the management team left, including Hawkins. LaPointe’s ownership was cut to 35 percent and PPM loaned Stockton Pacific $2 million.

Still, the mill remained indebted at an extraordinary interest rate. In August, Fleischer asked the mill’s 162 employees to take a 15 percent pay cut, approved narrowly by the Association of Western Pulp and Paper Workers Union Local 49. Fleischer also beseeched chip suppliers, truckers and other vendors for concessions, and got them.

It appears today that the mill will close by the new year, or be sold to one of several prospective buyers at a discount, dropping the huge debt that drags the mill toward insolvency during downturns in the roller coaster pulp market.

Getting back in

Go north across the border into British Columbia, to a little town on the Vancouver Island coast called Port Alice. Home to a pulp mill and not much more, Port Alice’s pulp mill this spring was in its own death throes.

Its owner at the time, Doman Industries Ltd., was allowed by the British Columbia Supreme Court to sell the company for $1 to LaPointe Partners’ affiliate Port Alice Specialty Cellulose.

The mill ran for months, then shut its doors during a pulp slump. Allegations that LaPointe used employee benefit money to operate the company have drawn the ire of its workers and the town — and has sparked an investigation by the Royal Canadian Mounted Police.

Among the investors now trying to buy the Stockton Pacific mill is New’s LaPointe Partners, though whether the group has made a bona fide offer isn’t known.

Fleischer, and Alan Lindgren, a manager with Samoa Pacific and current vice president of logistics, are two key investors who have hatched the management-led buyout effort called Phoenix Holdings. Fleischer has said PPM Finance wants to cast off the pulp mill, and may be willing to walk away from its $30 million debt.

Behind the scenes until recently is also another plan, being developed by Brent Hawkins, who still lives in Eureka. Hawkins said he’s no longer affiliated with New or anyone else making an offer, and that his offer aims to run the mill to keep jobs, not to reap huge profits.

“The pulp mill is never going to be a gold mine,” Hawkins said.

Hawkins said he’s approached the region’s timber companies, who could have a serious problem if they can’t sell their chips to the pulp mill. The mill takes in more than 100 truckloads of chips each day, and pays more for them than a power plant would pay to burn them.

Hawkins wouldn’t say which companies are involved.

Since the mill is up for bid, every suitor is trying to guess what it’s worth. The mill and its real estate were purchased at the discount rate of $24 million when PPM Finance foreclosed on it in August 2003. Speculation is that it could be bought for under $10 million today.

Lee & Man is a major Chinese corporation that has grown significantly by building mills over the past four years. The country’s limited forest resources can’t keep up with its growth, and it imports much of its pulp from North America, Chile and Russia. Lee & Man buys 10 percent to 15 percent of the mill’s 17,000 ton monthly pulp production.

With more than 60 mothballed pulp mills in North America, it’s hard to see why Lee & Man would buy the Samoa mill. It produces only about 550 to 600 tons a day, less than a quarter of what some of the big modern mills turn out, and its costs per unit are high.

Bryan Smith, news editor for the industry publication Pulp and Paper Weekly, said a purchase of the Samoa mill by a Chinese company would be an unusual reversal. Most often, North American companies buy Chinese assets to enter the Chinese market.

Current machinations

On Tuesday, Lindgren said he does not expect to hear from PPM Finance on the management’s proposed purchase of the mill until this week. Still in limbo is how the Humboldt Bay Municipal Water District — which provides some 15 million gallons of water per day to the mill — will handle Phoenix Holding’s request for extended payments on $600,000 in debt, and for capped costs into the future. Last week, the district appeared staunchly opposed to a fixed price agreement.

Also, Louisiana-Pacific is obligated to build a secondary wastewater treatment plant for the mill, according to Stockton Pacific management. Lindgren said discussions with L-P are ongoing. The plant would cost an estimated $4 million, he said.

Earlier this year, the pulp mill enjoyed a strong pulp market, but its profits were eaten up by its high interest debt. Management said they were forced to ask for pay cuts — which it agreed to itself, as well — and concessions from its vendors and its broker as the pulp market dipped in the fall.

But that dip could be just a bump in the road compared to a downturn anticipated toward the end of next year. Smith said 2005 pulp prices may start higher than this year’s, but by year’s end, that pendulum may swing the other way.

New, modern mills in Latin America could displace some North American producers, scoffing up market shares in China and the United States, he said.

How the company is positioned to handle that possible downturn may determine if it survives long into the future.

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