knock on wood - Atlantic Business Magazine

NOVA SCOTIA
SPECIAL REPORT
KNOCK ON WOOD
Nova Scotia’s decomposing paper mills feed new industrial development
By Stephen Kimber
It had been a very bad week for
Nova Scotia Premier Darrell Dexter.
Two days earlier, on August 22, 2011,
he had arrived at his downtown Halifax
office at 9 a.m. to word federal NDP
leader Jack Layton, a close friend of
many years, had succumbed to cancer.
Before he’d even digested that, Dexter
was blindsided by news Ohio-based
NewPage Corporation had decided to
shut down its Port Hawkesbury paper
mill indefinitely, putting close to 1,000
rural Nova Scotians out of work.
That had been a long day. On
Wednesday, he’d spent the day in Port
Hawkesbury, meeting with the workers.
And now—just two days later,
on Friday August 26—Dexter’s 10
o’clock appointment was waiting
in his boardroom. The meeting, a
cou r tesy- ca ll/st ate - of-t he -business
update was with Richard Garneau,
the new president of Montreal-based
multinational Resolute Forest Products.
Resolute operated the venerable Bowater
pulp and paper mill on Nova Scotia’s
south shore. By the time the meeting
was over, Dexter’s day—and week, and
month, and year—would become much,
much worse.
Dexter and his director of policy, Paul
Black, sat in the premier’s darkened
seventh-f loor boardroom while Garneau
walked them through the economics in
a PowerPoint presentation, detailing the
dismal state of the North American pulp
and paper industry and the even sorrier
state of Resolute’s Nova Scotia operation.
According to one of Garneau’s slides,
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Bowater ranked in the “fourth quartile”
among company mills in costs per tonne
of paper produced. Garneau compared the
Nova Scotia mill’s $650-700 per tonne
cost to plants in the southern U.S., which
were in the first quartile and turning
out paper at a cost of just $470-500. The
Bowater operation had lost more than
$25 million in each of 2009 and 2010.
To make matters worse, Bowater’s Asian
and Latin American markets, which
represented 90 per cent of the mill’s sales,
were shrinking fast as cheaper local mills
came on stream.
None of this came as new news to Dexter
or Black. Soon after the NDP had come to
power in 2009, the government set up a
“mills committee” of senior civil servants
to begin plotting how to transition the
province’s aging paper mills—and the
forestry industry with which their fate
was inextricably intertwined—to a more
economically sustainable model. They
assumed they’d have a few years to develop
alternatives. They were wrong.
On this morning, in fact, Black
acknowledges today, they were expecting to
hear Garneau complain about Nova Scotia
power rates, which were higher than those
90 | Atlantic Business Magazine | March/April 2013
in Quebec, and perhaps request financial
assistance so the mill could acquire new,
more efficient technology to improve its
productivity.
But that wasn’t Garneau’s message at
all. A new slide popped up on the screen.
“Permanent Closure,” it read.
Suddenly, it became clear that Garneau—
an executive so notorious for his frugality
he’d renounced his own annual incentive
compensation of $1.7 million a year as part
of his drive to cut costs and restructure the
company—hadn’t come to ask the province
what it could do to help the mill survive but
to inform the premier he was walking away
from it.
The slide, Dexter remembers ruefully,
“reduced the situation from the abstract to
the real pretty quickly.”
For Dexter, Garneau’s message was
as personal as political. He’d grown
up in Queen’s County where the mill
was located, had worked there during
university. “I knew those guys,” he says of
the mill’s workers. “I went to school with
them, I played hockey and baseball with
them. My brother and sister still live there.
I still spend time there…”
Dexter turned to Garneau.
Instead of a “drop-dead” public
announcement the plant is closing, he
asked, “will you at least give us some
time to evaluate what you need and to see
if we can help get you there?”
Although Garneau confided he didn’t
believe Bowater could ever lower its price
per tonne to competitive levels, he agreed
to give Dexter a few months to prove him
wrong.
And that’s how it began.
Nova Scotia is a small province—
just 5.5 million hectares—but more than
three-quarters of it is covered by forest.
Forestry in all its forms—sawmills to
silviculture to Christmas tree farming—
has been a provincial economic mainstay
for 400 years. But the development of
new and more efficient ways of making
pulp from wood, and paper from
pulp—coupled with cheap power and a
seemingly insatiable American demand
for newsprint—had goosed an industry
into existence at the beginning of the
20th century that, at its height, supported
thousands of well-paying jobs in rural
Nova Scotia.
Catch 22: on September 23, 2012, the Halifax Herald criticised Premier Darrell Dexter for giving too many concessions
to keep the Port Hawkesbury paper mill open. The day before, the same paper had similarly censured him for not doing
enough to keep the plant open. Closure of the mill would have put 1,000 Nova Scotians out of work.
In 1929, astute Nova Scotia industrialist
Izaak Walton Killam had set up the
Mersey Paper Company Ltd. in Liverpool
to take advantage of the region’s abundant
forests and easy access to U.S. markets.
In 1956, the year after Killam died,
American paper giant Bowater eagerly
gobbled up his company. Seven years
later, the Washington Post Company
acquired 49 per cent of Bowater Mersey
just to keep the presses rolling at its thenexponentially expanding newspaper and
magazine empire. (Although the Post is
still a “legacy” Bowater minority owner,
Paul Black admits “it hasn’t bought paper
from the mill for at least 10 years.”)
During the sixties, the then-provincial
government—eager for rural industrial
development—lured other multinationals
like Sweden’s Stora Kopparberg and
America’s Scott Paper Limited to invest
in a pulp mill in Port Hawkesbury that
would become—close to 50 years of
myriad mergers and acquisitions later—
the NewPage Port Hawkesbury mill that
was also now about to close.
What might the permanent closure of
the province’s two largest pulp and paper
mills mean to rural Nova Scotia? To the
long-term future of Darrell Dexter’s NDP
government?
Dexter wasn’t ready to contemplate the
answer to either question yet.
The civil servants’
mills
committee, which had been going
about its careful contemplation of
how the future of the pulp and paper
industry might unfold, was immediately
transformed into a task force and handed
some urgent tasks. It had to figure out not
only whether to save the mills—and, if so,
how—but also, and just as importantly,
how to manage the transformation of the
entire forest industry, of which the pulp
and paper sector was an integral part, to
make it viable on an ongoing basis.
“The premier made it clear from
the beginning he wanted the best
information available,” remembers Duff
Montgomerie, a veteran civil servant
who’d recently become deputy minister
of natural resources and who now took on
the job of co-chairing the committee with
Black, the premier’s most trusted aide.
What would eventually become an
ever fluctuating group of 12-14 senior
public servants—often including deputy
ministers—set up semi-permanent shop
in surplus government office space. For
more than a year, its members would
meet at 9 a.m. each day to plot strategy
and dole out tasks. Most days, Black and
Montgomerie would reconvene late in the
afternoon to hear updates.
“It could get emotional,” Montgomerie
allows. “You sometimes had middle
What might the
permanent closure
of the province’s two
largest pulp and paper
mills mean to rural
Nova Scotia? To the
long-term future of
Darrell Dexter’s NDP
government?
managers, who’d had to become forestry
experts in a hurry, calling out their senior
bosses. ‘That’s bullshit…’” He chuckles.
“It was a great growth experience for
everyone.”
The issues they had to tackle were
multi-pronged and mega-complicated.
What would it take to bring down
costs at Bowater? Would the union make
concessions? Would the municipalities
grant tax relief? What about power rates?
And, even if the mill could magically be
made competitive, for how long? How
many taxpayers’ dollars would it take to
squeeze just five to 10 more years of life
from the mill—and at what point did
pouring more money in stop making
economic sense?
The situation at Port Hawkesbury
was different. While Bowater was rich
in forest resources but burdened by an
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The former Bowater Mersey paper plant is getting a new lease on life. Its biomass power plant has been absorbed by
Emera, the mill site is being developed as an incubator for forestry and bioenergy R&D and ownership of Nova Scotia’s
largest privately-owned woodland stays in the province.
aging mill turning out low-quality paper
the market increasingly wasn’t buying,
NewPage’s Port Hawkesbury operation
boasted a world-class, super-calendar
paper-making facility turning out highquality magazine papers buyers still
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92 | Atlantic Business Magazine | March/April 2013
coveted. NewPage’s problem was debt.
Less than a month after announcing
its indefinite shutdown, NewPage filed
for bankruptcy protection, claiming “dire
financial straits” after losing $50 million
on the mill in the previous year.
With the mill up for sale, the courts
would ultimately rule on who got its assets
for how much, and the winner would then
determine what to do with them.
While the civil servants waited for those
legal and business dominoes to fall, they
focused on Bowater.
By December, they’d carved out a
complex $50-million deal under which the
province agreed to provide a $25-million
five-year forgivable loan to help upgrade
the Bowater mill, buy 10,000 hectares
of company forest land for $23.75 million
and provide another $1.5 million for
worker training. Meanwhile, union
members agreed to cut 80 jobs and
freeze wages, while the municipalities
anted up a 10-year property tax freeze.
There were electricity rate reductions and
transportation sweeteners too.
Black and Montgomerie believed they’d
bought five to eight years, long enough to
plan for a more orderly transition.
“The plant reopened and everything
was working,” Paul Black remembers. “By
April they were meeting their [cost per
tonne] targets.”
Which meant it was time to begin
tackling longer-term issues at Bowater.
Two days before Black and Montogomerie
were to f ly to Montreal to meet with
Resolute officials to discuss those next
steps, however, a company official called
“out of respect.”
Even though the local community had
pitched in to reduce costs to competitive
levels, the mill’s future prospects had
now been sandbagged by something out
of anyone’s control. The euro had tanked,
which meant European papermakers
were suddenly able to undercut Bowater’s
prices. Within a few months, Bowater had
lost 25 per cent more of its international
market.
When Black and Montgomerie met
with company officials in Montreal that
Friday, it was not to discuss how to best
invest the province’s $25-million loan;
it was to hear company officials explain
they were recommending to the Resolute
board it shutter its Bowater operations
and put them up for sale in order to allow
the company to concentrate on more
promising investments elsewhere.
To complicate matters, Resolute said it
already had an offer for its Bowater assets
from outside North America. Was the
province interested in making a counteroffer?
Should it be?
September 21, 2012.
It had been yet another rollercoaster
day. With his biological clock still ticking
in a far-off time zone after a 10-day trade
mission to China, Darrell Dexter had
landed back in Nova Scotia and smack in
the middle of final, final negotiations on
the other paper mill file. Vancouver-based
Pacific West Commercial Group had been
the successful bidder for NewPage’s Port
Hawkesbury assets, and was looking for
provincial help to get the mill back in
operation.
“I was still wide awake in the middle of
the night,” Dexter jokes, “so the timing
for negotiations was great for me.”
But the negotiations weren’t going well.
The month before, Dexter’s government
had offered Pacific West what seemed like
a sweet package: a $124.5-million grab
bag of loans, grants, incentives, provincial
agreements to purchase company lands.
The company was keen. But it also wanted
a favourable ruling on a complex tax break
deal from the Canada Revenue Agency in
order to make all its carefully constructed
profit pieces fit.
The week before, the CRA had said no.
And now Pacific West was telling
Nova Scotia Premier Darrell Dexter thought he’d lost
the negotiations for the Port Hawkesbury plant when
Pacific West publicly announced its closure. Then the
company blinked.
provincial negotiators it was walking
away.
The Port Hawkesbury mill was dead.
Dexter wasn’t so sure. “Put it this
way,” he says today, then pauses for a
long moment. “I’ve been involved in
negotiations for a lot of years. Negotiations
work when the two sides have a common
objective. I believed we had a common
objective. We’d made the fairest offer
we could, and I believed the company
could work with it. Were they testing our
resolve?”
Early that Friday evening, Pacific West
issued a press release announcing it was
walking away from the mill.
With the breakdown public, Dexter
had to defend his government from what
he knew would be inevitable criticism
over his government’s failure to strike
a deal. He was on the telephone, in
fact, explaining his version of what had
happened to the Halifax Herald’s editorial
board when Paul Black slid a cell phone in
front of him. There was a message on it
from one of Pacific West’s key negotiators.
“Is the patient dead?” it asked simply.
Pacific West had blinked.
Within the hour, the two sides were
back at the table. Within 12 hours they
had a deal. It was complicated—using the
taxes Pacific would have had to pay the
Dexter’s government
had offered Pacific
West what seemed
like a sweet package:
a $124.5-million grab
bag of loans, grants,
incentives, provincial
agreements to purchase
company lands. The
company was keen.
province after the CRA ruling to honey
the company pot—but it was, Dexter
insisted to reporters, “a win-win for the
province and Pacific West… By as early
as Year 12,” he bragged, “Nova Scotia’s
full investment should be repaid and
the province will have earned about $150
million in tax revenue.”
Not that Dexter would get much
political credit for any of it. A friend,
Dexter tells me, later framed the front
pages of the Herald from Saturday,
September 22 and Sunday, September
23, and gave it to him as a joke-gift. “On
Saturday,” Dexter says, “the paper’s front
page was full of recriminations for failing
to get a deal. On Sunday, the paper was
replete with recriminations for us having
given the company too much.”
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Regardless, the government had a deal.
The mill and its jobs—not to mention
the rural communities that depended on
them—would survive into the foreseeable
future.
One down. One to go.
“This is the new reality,”
Ron Smith told the eager-to-get-downto-business crowd of 200 Liverpool area
residents who’d gathered in the local
Best Western Hotel for the first public
meeting of the province’s new Bowater
Transition Advisory Team.
It was September 23, 2012, just one day
after Pacific West and the province had
announced they’d struck a deal to reopen
the Port Hawkesbury mill, and Smith—
the former chief financial officer of
Aliant, past vice-president and CFO of
Emera, chairman of the Nova Scotia Jobs
Fund board and member of the board of
Nova Scotia Business Inc.—was trying to
set the tone as head of Dexter’s transition
team for Bowater. “There’s been a
permanent change in the economic
landscape of this area and we need to
deal with it head on,” he said. “Tonight,
our purpose is to look forward.”
When Resolute officially announced
in June it was closing Bowater, Dexter
had coupled that worst-case blow by
appointing a transition team and
promising the community he would
“meet immediate needs and plan for
long-term opportunities.”
His amoeba-like public servant mills
committee quickly subdivided again into
new sub-committees.
Smith’s transition advisory committee
of local community leaders, bolstered
by civil servants, would stage a series
of public input sessions like the one in
Liverpool. Audience members, who
sat at 14 round tables, spent half an
hour debating key questions about the
community’s future among themselves
before rejoining the full group to discuss
the larger question of how to create “a
more diverse and sustainable business
climate.” (The Bowater transition
advisory committee approach worked
so well in engaging the community,
Dexter says today, he wishes he’d tried
something similar in his first year in
office after his government cut subsidies
for the Yarmouth-Portland, Maine,
ferry service. That decision is still
controversial.)
Meanwhile, the mills committee’s
community adjustment team—with
more seconded members from the labour
94 | Atlantic Business Magazine | March/April 2013
and advanced education departments—
focused on career transition training
and developing alternate employment
opportunities.
And the deal transition team—with
senior officials from natural resources,
treasury, Nova Scotia lands and energy—
kept its eyes on the prize: the Bowater
assets.
While it was clear the mill, as it had
operated, could never be profitable,
Bowater also owned 220,000 hectares
of prime provincial forest land. If those
were to be sold to a foreign buyer—as
Resolute had hinted—chances were the
new company would come in and strip
the forests bare, shipping wood overseas
where it could be processed more cheaply,
thus eliminating Nova Scotia jobs and
any value-added benefits.
Liberal Opposition leader
Stephen McNeil argued the
NDP should have stood
up to the company as
Newfoundland had done
with Bowater Abitibi and
“expropriated these valuable
lands,” while Conservative
leader Jamie Baillie claimed
“the NDP have let Resolute
Forest Products off the hook
by acquiring all of their debts
themselves instead of looking
at other options that would
have saved taxpayers money”.
“We heard presentations from
experts,” Montgomerie recalls, “and
their advice was, ‘hold on to your [wood]
fibre. It’s a valuable asset.’”
It turned out there were many new and
exciting potential uses for those woody
assets—from controversial biofuels to
new-frontier biochemicals. Wood fibre, it
turns out, can be used in the manufacture
of everything from car parts to makeup.
By December, the deal transition
group had cobbled together a new and
even more complicated deal, not to save
Bowater this time but to reinvent it.
The province bought Bowater’s
remaining 220,000 hectares of forest
(independently valued at a $117.7 million),
its mill site ($5 million) and its Brooklyn
Power biomass generating facility ($25
million)… for one dollar.
Well, not quite. The province also agreed
to pay off $18 million Bowater owed to its
parent company and assume $100 million
in liabilities to cover employee pension
and related costs.
But then it quickly flipped the power
plant to Emera, owners of Nova Scotia
Power, for what it had paid.
When the accountants were done
adding and subtracting, the province
claimed a net gain of $14 million on the
deal itself.
But that, in the end, could turn out to be far
less important than what the purchase could
mean to the future of the province’s forestry
industry, whose export value has fallen from
over one billion dollars a year in 2004 to just
$710 million in 2011.
The government got control of what had
been the largest block of privately-owned
woodland in the province, enabling it to try
everything from innovative, communitymanaged forests to a collaborative forestry
initiative with first nations groups.
At the same time, the province
began to transform the former paper
mill site—with its ready access to lowcost, renewable electricity, an excellent
wharf, salvaged mill equipment, in-place
treatment systems and proper zoning for
industry—into an incubator for research
and development in forestry innovation
and bioenergy. By the time the deal was
formally announced, the centre already
had its first tenants: Emera, which has
committed to invest up to $1 million
over the next five years; and CelluFuel,
a Nova Scotia company attempting to
commercialize technology to turn “woody
biomass into renewable diesel fuel.”
While there were quibbles—Liberal
Opposition leader Stephen McNeil argued
the NDP should have stood up to the
company as Newfoundland had done with
Bowater Abitibi and “expropriated these
valuable lands,” while Conservative leader
Jamie Baillie claimed “the NDP have let
Resolute Forest Products off the hook by
acquiring all of their debts themselves
instead of looking at other options that
would have saved taxpayers money”—
most experts agreed that, on balance, the
deal made sense.
Although it might not ultimately—in
Dexter’s own boastful words—“secure
the future for southwest Nova Scotia
for generations to come,” there is no
question Nova Scotia’s forestry future
now seems better and brighter than it
did in Darrell Dexter’s board room on
that August day in 2011 when the words
“Permanent Closure” f lashed up on the
screen. | ABM