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    RELATIONSHIP WITH
RAYONIER
     
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Kavilco’s contract with Rayonier concluded on December 31, 2001. To commemorate that association we have collected information from Kavilco’s records and Rayonier’s website to create the story of the 23-year relationship. Like many long-term relationships, there have been ups and downs, but everyone would agree, it was profitable.

Rayonier started out in 1926, as Rainier Pulp and Paper Company, opening their first mill in Shelton, Washington. Rayonier was the first to recognize an opportunity to use the area’s plentiful Western hemlock tree species for the production of a superior grade of bleached paper pulp. Later their scientists teamed up with DuPont, the leading producer of rayon, and perfected the world’s first pulp made from hemlock and rayon, designed especially for the growing rayon industry. The name was derived from combining the word “rayon” and Mt. Rainier.

After becoming publicly traded on the New York Stock Exchange in 1937, Rayonier began to expand its interests to the Southeastern part of the United States, completing their first pulp mill in Florida in 1939, and in Georgia in 1954. The mill in Georgia quickly doubled in size to meet the growing demand and offices were opened in Europe. Markets were developed in the Far East and offices were opened in Asia. In 1968, Rayonier became a wholly owned subsidiary of ITT Corporation and became known as ITT Rayonier.

Kavilco is Born
In 1971, ANCSA created Native village corporations, granting each village corporation entitlement to acreage of their choosing. An integral part of the ANCSA agreement was that the Native village corporations would have the rights to all of the assets on the surface of those lands, including timber rights. ANCSA land entitlement was based on the number of shareholders. Kavilco was the smallest village corporation in Southeast Alaska, having only 120 shareholders.

The First Sale
In October of 1979, Kavilco accepted a bid from ITT Rayonier to buy approximately 100 million board feet of timber for $25 million, mainly in the Skowl Arm area of Kavilco’s timber holdings. Board members Roberta Campbell, Helen Dailey, Ramona Hamar, John McAllister, Fred Olsen, Sr., David Peele, Rosemarie Young Trambitas, Estelle Thompson, and Louis A. Thompson had entertained offers from several other timber corporations before settling on Rayonier. Rayonier gave Kavilco $1.1 million as a bid deposit, the first payment of $7.17 million dollars (less bid deposit) to be received as soon as the property was legally conveyed to Kavilco from the Bureau of Land Management.

This first sale produced considerable interest in industry circles because of its size and price. Including interest, the sale to ITT Rayonier of timber in the Skowl Arm area could bring as much as $280 per thousand board feet, which was remarkably higher than most other Southeast Alaska Native Corporation timber sales.

Kavilco finally received the land patent from the United States on December 5, 1979, making it the first village corporation in Southeastern Alaska to receive all of its land entitlement under ANCSA. The land patent entitled the corporation to the surface estate, meaning everything above ground. The ANCSA law gave the regional corporation (Sealaska) a patent to the rights to the subsurface estate. As promised, Rayonier made the first payment and Kavilco paid each of its shareholders $25,000 in January 1980, for a total initial shareholder distribution of $3,000,000. The distribution was the largest single payment made to individual shareholders of a Native corporation (at that time) since ANCSA was passed in 1971.

Benefits for ShareholdersKavilco Board 1982.
In addition to the initial distribution, the Board of Directors and General Manager of Kavilco planned a distribution of $100 per share to each shareholder every year for the next 10 years. Each shareholder having 100 shares would receive $10,000 annually for 10 years, or $100,000 by 1990. Adding the initial $25,000 payment to this totaled $125,000!

Imagine, in 1979, the Village of Kasaan did not have a road connecting it to the rest of Prince of Wales Island. They had only one telephone in the village, located in the community building. A person would have to use a boat or floatplane to travel around the island to get fuel, supplies, or medical care. Part of Kavilco’s commitment to its shareholders was to improve conditions in Kasaan. Kavilco donated 20 cedar poles from their land for a new Kasaan Community Building foundation, land and gravel for a fuel storage facility, and installed a second telephone in Kasaan. In 1981, KavilcoKasaan Forest Products sawmill. opened Kasaan Forest Products, its very own timber company. The plan was to hire village residents to cut select timber and mill it into lumber at its own sawmill, then to be shipped to specialty buyers. Kavilco built and equipped the sawmill and the first customer was the Village of Kasaan.

Rayonier formed a Foundation in 1952, to contribute charitable donations to causes in the communities in which it operated. In 1980, Rayonier made available to the Board of Directors information about its education grants. Beginning in 1980, Rayonier annually contributed $2,500 to be used by Kavilco shareholders for education. The Board of Directors selected a committee to pick the winners of the grant. These grants continued until 1988, for a total of $17,500 given to Kavilco shareholders. We have attempted to list all of the recipients here: Karla Olsen-Smith, Fred Olsen, Jr., Patrick Olsen, Thomas Hanbury, III, Jeane Breinig, Jessie Cook, and Brian Coburn.

In 1980, Rayonier established a customer base in China, only one year after the restoration of U.S./China diplomatic relations. Trade overseas was essential because the U.S. economy was in a recession. Interest rates were at all-time highs, housing starts were way down, and the timber market was dropping off. Housing starts in China, however, were way up, and companies within the Peoples Republic were experimenting with capitalism by competing against each other for international trade.

T I M B E R!
The U.S. timber market was in a terrible downward spiral that did not level off until 1987. The original timber “cruise” or inventory that was done for all of the Southeast Alaska Native corporations had overstated the quantity and quality of Kavilco’s timber holdings. Kavilco hired Forest and Land Management, Inc., an independent firm, to conduct a more accurate inventory and discovered the errors were substantial. Rayonier conducted their own inventory and confirmed the lower numbers.

One year after the sales contract had been signed the timber market was down, the inventory was down, and the quality of the inventory was not what anyone had anticipated it would be. This created a loss on paper of millions of board feet of timber and a “write-down” in the value of the timber from $61,234,318 in 1982 to $46,655,168 in 1983. Things were so grim that at one point Rayonier’s CEO wrote a letter to Kavilco asking to be let out of the 1979 contract. In 1984, Kavilco again had to write-down the value of its marketable timber to $14,548,00, this time due to the plummeting timber market.

In 1984 and 1985, Rayonier suspended their harvest of the Skowl Arm sale area. Quoting from a letter dated July 16, 1985, I. G. Paterson, Alaska manager for ITT Rayonier wrote:
"One reason for the continued shutdown is the very depressed prices and market for medium to low grade cedar that comprises more than 50% of the remaining timber on the sale area.”

Rayonier asked for an extension on the sales contract, which would have ended December 31, 1986, to December 31, 1988, with a four-year extension option to 1992 without penalty. Kavilco’s Board of Directors voted to deny the extension, preferring to adhere to the original contract, which states that Rayonier could extend the contract up to two years at $100,000 per year.

Kasaan Forest Products struggled to make a profit. Problems over the years with equipment and a lack of regular paying customers were having a negative effect on Kavilco’s bottom line. Kavilco ceased the solicitation of timber and at the end of 1984, the sawmill was closed.

During the Board meetings of 1985, the Directors were hammered with information about the continued decline in the timber industry. The only place, it seemed, where Rayonier could sell the timber it harvested was in China. In fact, Rayonier was one of only two timber companies that employed a full-time representative in the Peoples Republic.

China Comes to TownCIETCC delegation.
Kavilco explored the possibility of selling another portion of their timber holdings directly to China. Sales negotiations were conducted with Chongqing International Economic and Technical Cooperative Company (CIETCC) of China and they sent a delegation to Kasaan via their sister city, Seattle. A draft of an agreement on the framework to establish a joint venture corporation between Kavilco and CIETCC was drawn up. The only sticking point was the fact that the CIETCC wanted to bring in Chinese laborers to fell and load the logs. The Chinese felt so strongly about this issue that the whole deal hinged on that point. Kavilco wrote letters to the Commissioner of the Department of Commerce and Economic Development in Alaska and received this response from Greg Baker, Deputy Commissioner:
"Although the State encourages joint ventures and foreign investment in Alaska, you should be aware that the use of foreign labor would be unacceptable to many people of the State. The Governor is strongly in favor of Alaska hire, which he included as an important part of his platform when running for Governor. Alaskan First, an organization dedicated to working for preferential hiring of qualified Alaska workers, would not support the use of foreign workers as there are numerous qualified Alaska loggers looking for work. We understand your point of using Chinese labor as a cost savings, but the federal minimum wage requirements would still apply.”

Rayonier and the NOL
In August 1986, Rayonier wrote to Kavilco indicating that they would be extending the contract for one year until December 31, 1987, and would pay the extension fee.

In October 1986, Kavilco entered into a partnership with Drexel Burnham Lambert, wherein Kavilco agreed to sell their remaining timber creating a net operating loss (NOL); they would then sell the NOL to Drexel.

In January 1987, it became clear that there was no hope of Kavilco making a direct sale to China so Kavilco struck a deal with Rayonier to sell the rest of the standing timber for $1,500,000 in February. This deal helped Rayonier offset their losses on the original sale and allowed Kavilco to establish the net operating loss required in their contract with Drexel. Rayonier signed a note to make payments over the course of the contract period until December 31, 2001. Kavilco, in turn, sold a portion of their NOL to Drexel for $15,819,583, over $1,000,000 more than the timber was valued at in 1984. The terms of the payment were $321,667 in cash and a promissory note for $15,715,983 bearing interest at 12 percent, payable annually.

Carrying On
With the timber market finally showing signs of moderate recovery, Rayonier began harvesting again. They completed their harvest from Smith Cove and Kasaan Island, and began work on the Peninsula.

An integral part of harvesting logs is the creation of a road system to transport cut trees to transfer and sorting yards. Rayonier created three miles of road on Kasaan Island: 8.4 miles in the Paul’s Bight area, 49.9 miles in the Smith Cove area, 25.6 miles of road in the Lyman Anchorage area, and some in the Jacob Mountain area for that purpose. Once the timber was sorted it was trucked to Lyman for rafting or barge loading.

Many different logging companies, or sub-contractors, worked on harvesting or road construction. Depending on the area being cut, different methods were used such as high lead towers, shovel logging in smaller, level harvest units, and helicopter logging for more difficult terrain.

In 1992, Rayonier gained control over extensive timberlands in New Zealand, and in 1994, once again became an independent public corporation in a spin-off from ITT. In 1995, they moved their main operations from the Northwest to the Southeastern part of the United States with completion of a state-of-the-art research facility in Georgia. Rayonier still maintains two core interests, Timber and Land, and Performance fibers. They are now headquartered in Florida.

Closure
The contract between Kavilco and Rayonier required the closing of all the logging roads, the removal of all bridge crossings and culverts, and that exposed soil on steep slopes be seeded with grass to prevent erosion. This was completed by the summer of 2002. The State of Alaska, Department of Natural Resources conducted an inspection afterwards to confirm that environmental laws have been met.

Kavilco owes a great deal to its relationship with Rayonier. We wish Rayonier all the best in the future and "Háw'aa!"

  TIMBER!Rayonier logger, 1981.A Rayonier logger fells a tree in 1981.