Catalyst Paper & Electricity Rates in BC. Ministry of Energy, Mines & Natural Gas presentation

Transcription

1 Catalyst Paper & Electricity Rates in BC Ministry of Energy, Mines & Natural Gas presentation March 2013

2 Catalyst Paper in BC 2 Submission to the Rate Review Panel March

3 Catalyst Overview Largest producer of specialty mechanical printing papers and newsprint in Western North America Three world scale mill sites in BC Head Office in Richmond; support office in Nanaimo 420,000 sq. ft. Distribution Center in Surrey Recent closures in Snowflake AZ, Elk Falls & Coquitlam Recycling Division Employ 1,600 people in BC and support 5,400 indirect jobs Catalyst spending has $2 billion impact on BC economy 3 Submission to the Rate Review Panel March

4 WHY US AND WHY NOW? Focused Manufacturing Base * * No. 1 paper machine at Crofton remains indefinitely curtailed. If it were to be restarted we do not expect it would produce newsprint. 4 Submission to the Rate Review Panel March

5 CATALYST PRODUCT RANGE» Major supplier for Western North American Customers» Expertise in light basis weight production» Broad product portfolio to shift with customers» Only coated paper producer» Have environmental producer offering - Sage 5 Submission to the Rate Review Panel March

6 SIGNIFICANT ACHIEVEMENTS Financial Reorganization 6 Submission to the Rate Review Panel March

7 Catalyst is Economic Engine for community Catayst is: The largest single customer for BC Hydro Steady sales on existing transmission assets to Vancouver Island and the Sunshine Coast of 2,700 GWh The largest shipper on Fortis BC s gas line to Vancouver Island The largest consumer of sawmill and logging residuals on Vancouver Island and the Lower Mainland The largest non-government Marine service user on the BC Coast. One of the largest shippers of finished products from the Lower Mainland to USA and Pacific Rim The primary user of trucks returning from the Cache Creek landfill These shipments reduce the cost of waste disposal for Metro Vancouver 7 Submission to the Rate Review Panel March

8 Catalyst Progress and Industry Challenges Progress Fixed our balance sheet, lowered costs and sold non-performing assets Hired and trained more than 120 employees since January 1, 2012 Entered new market segments, improved market share, developed new and environmental products Advanced joint infrastructure projects in Powell River, Port Alberni with local communities Generate green electricity with completion of GTP-funded upgrades Hosted pilot-scale MicroSludge plant at Crofton to produce biogas from waste Leveraged distribution capabilities to expand third-party requirements Challenges Migration to internet-based media channels Excess Paper and Pulp capacity into N.A. and Asian markets Competitive landscape challenges: Re-introduction of PST Transportation/Fuel Costs Carbon tax Electricity rate increases Aggressive job and industry retention policies elsewhere (Port Hawkesbury restart) Consolidation of major customers and vendors Foreign exchange impacts Competition for skilled trades across sectors 8 Submission to the Rate Review Panel March

9 Catalyst is a major customer of BC Hydro Energy Catalyst is ~20% of the domestic industrial load Note Based on BC Hydro s sales data in its 2012 Annual Report and Catalyst Paper s BC Hydro purchases in FY2012 (year ending March 31, 2012) 9 Submission to the Rate Review Panel March

10 Energy Costs & Competitiveness 10 Submission to the Rate Review Panel March

11 Electricity Costs and Catalyst Catalyst is largest paper producer in BC and exports more than 90% of production outside BC Major use of electricity in Catalyst operations is for mechanical pulping process Electricity is 2 nd highest cost component after fiber, comprising 15-20% of production cost 1 North American paper markets are highly competitive; 70% of mechanical paper industry has had to financially restructure to compete BC Hydro rate increases and re-introduction of PST will increase electricity cost to Catalyst by 27% in 3 years 2,3 Catalyst emerged from CCAA protection in September 2012 with support and concessions from all involved parties: PST on electricity alone represents ~40% of concessions made by Catalyst employees or over 100% of concessions made by defined benefit pension plan members Competing jurisdictions providing electricity and tax subsidies to their paper industry(e.g., Nova Scotia & Port Hawkesbury) Notes 1. Source: Catalyst Paper Corp cost statements for Canadian Operations 2012 Total Paper. (top 3 of manufacturing cash cost items: 36% total furnish, 19% electricity, 17% labour & salaries) 2. This represents a calculated increase from FY2011 ($100.5M) to FY2014 (April 1, 2013 to March 31, 2014) assuming the same volume of energy is purchased in both years. 3. The PST impact is based on the energy rate in FY2014 (when the PST comes into effect) 11 Submission to the Rate Review Panel March

12 Key constraints Why do the Paper and CTMP companies use so much electricity? About 70% of power used by Catalyst is for Thermal Mechanical Pulping (TMP) TMP uses power to drive mechanical refiners to liberate fibres TMP is energy intensive but wood efficient 95% yield vs. Kraft at 45-50% yield on wood Why not use less? More energy efficient TMP requires major capital spend in new technology and payback period is not attractive for investment Access to Power Smart incentives limited by financial security requirements of BCH for companies like Catalyst Why not generate more? Cogeneration presently maximized, additional generation at simple cycle is inefficient Incremental generation is capital intensive and with high cost incremental hog fuel, would require bioenergy power prices e.g., the Bioenergy Phase 1 Call price (2008) = $ /MWh 1 1. Source: 12 Submission to the Rate Review Panel March

13 Catalyst Energy Overview Black Liquor 34% 2012 Fuel Energy 20.8 Million GJ Tire Derived Fuel 0.21% Biomass 47% Powell River Energy Inc. 13% Self Generation - Thermal 14% 2012 Electricity 3,650 GWh Fuel Oil 1% Natural Gas 18% 13 Purchased Power 73% Submission to the Rate Review Panel March

14 Power costs are outpacing our market prices 14 Submission to the Rate Review Panel March

15 BC Hydro s Projections indicate that rates will be going up BC Hydro recently submitted their Service Plan for the next 3 years (FY14 - FY16), in it they project: Domestic Revenues will increase 30% ($1.7 billion) Domestic Energy sales only increase 6% (4,000 GWh) This can only happen with higher rates since the revenue is increasing as a rate 5 times the volume F2011 F2012 F2013 F2014 F2015 F2016 Domestic Revenue $ Million $ 3,438 $ 3,692 $ 3,971 $ 4,214 $ 4,729 $ 5,147 Domestic Sales GWh 50,607 GWh 51,487 GWh 51,515 GWh 52,701 GWh 53,024 GWh 54,643 GWh revenue/sales ratio $/MWh $ 68 $ 72 $ 77 $ 80 $ 89 $ 94 index BCH is not prepared to confirm the rate assumptions used in their service plan Source material 15 Submission to the Rate Review Panel March

16 BCH projects a surplus from F2017 to F2024 Balance returns Base: F2017 DSM: F2024 LNG: Catalyst s Load Notes 1. DSM: (Demand Side Management) reflects the base case with the impact of Power Smart conservation 2. LNG: (Liquefied Natural Gas) the DSM case including the impact of additional load with the development of LNG in the province. this surplus in supply is inconsistent with a drive for higher rates Source material: BC Hydro response to Association of Major Power Customers of BC (AMPC) dated January 28, Submission to the Rate Review Panel March

17 Costs are being transferred from the residential to the industrial rate class Notes The Revenue to Cost ratio is calculated by BC Hydro to track how much revenue is generated by a customer class relative to the cost of providing supply. Source material Fully Allocated Cost of Service Study filed with the BCUC January 8, 2013 by BC Hydro (Order No. G Compliance Filing) 17 Submission to the Rate Review Panel March

18 Escalation in rates has been compounded by increases in non energy components 18 Submission to the Rate Review Panel March

19 Catalyst - Rate Impacts BC Hydro Fiscal Year BC Hydro % Increase 8.00% 3.90% 1.44% 6.50% 6.50% BC Hydro Rate Rider 2.50% 5.00% 5.00% 5.00% 5.00% effective blended rate impact 8.00% 4.00% 1.44% 6.50% 6.50% tax 0.28% 0.28% 7.00% 7.00% 7.00% Catalyst BC Hydro Cost Index Costs = PST Impact, $million $ 8.0 $ 8.6 $ 9.3 overall effective rate, $/MWh $ 38 $ 42 $ 45 $ 49 $ 53 $ 57 relative to $ - $ 10 $ 18 $ 28 $ 37 $ 48 Mid C Energy Price, $/MWh $ 28 $ 24 $ 21 $ 29 $ 34 $ 36 BC Hydro premium to Mid C, $/MWh $ 10 $ 18 $ 24 $ 20 $ 19 $ 21 A 50% increase in electricity rates is not sustainable for Industry Note This is the BC Hydro bill for demand and energy based on a period corresponding with BC Hydro s fiscal year, inclusive of non-refundable taxes. This amount assumes the same volume of energy is purchased in that year as in FY2011 to isolate the impact of rate and tax increases. There is no Tier 2 energy purchases included in these numbers. 19 Submission to the Rate Review Panel March

20 BC rates are up 24% over 3 years relative to 6% for the rest of Canada (note 3) change City region $/MWh $/MWh $/MWh $/MWh $/MWh $/MWh $/MWh % Montréal, QC Montréal,QC $ $ $ $ $ $ $ $ % Calgary, AB Calgary,AB $ $ $ $ % Charlottetown, PE Charlottetown,PE $ $ $ $ $ $ $ $ % Edmonton, AB Edmonton,AB $ $ $ $ $ $ $ $ % Halifax, NS Halifax,NS $ $ $ $ $ $ $ $ % Moncton, NB Moncton,NB $ $ $ $ $ $ $ $ % Ottawa, ON Ottawa,ON $ $ $ $ $ $ $ $ % Regina, SK Regina,SK $ $ $ $ $ $ $ $ % St. John's, NL St. John's, NL $ $ $ $ $ $ $ $ % Toronto, ON Toronto,ON $ $ $ $ $ $ $ $ % Vancouver, BC Vancouver,BC $ $ $ $ $ $ $ $ % Winnipeg, MB Winnipeg,MB $ $ $ $ $ $ $ $ % Canadian average excluding BC $ $ $ $ $ $ $ $ % Boston, MA Boston,MA $ $ $ $ $ $ $ $ % Chicago, ILL Chicago,ILL $ $ $ $ $ $ $ $ % Detroit, MI Detroit,MI $ $ $ $ $ $ $ $ % Houston, TX Houston,TX $ $ $ $ $ $ $ $ % Miami, FLA Miami,FLA $ $ $ $ $ $ $ $ % Nashville, TN Nashville,TN $ $ $ $ $ $ $ $ % New York, NY New York, NY $ $ $ $ $ $ $ $ % Portland, OR Portland,OR $ $ $ $ $ $ $ $ % San Francisco, CA San Francisco, CA $ $ $ $ $ $ $ $ % Seattle, WA Seattle,WA $ $ $ $ $ $ $ $ % US Average $ $ $ $ $ $ $ $ % BC's ranking Notes 1. source: 2. the rates reflect those in effect on May 1 of the year stated 3. data from BCH 2004/5 and 2005/65 RRA 4. calculations based on 50 MW demand, 30.6 GWh/month, service at 138 kv and a load factor of 85% 20 Submission to the Rate Review Panel March

21 Other jurisdictions are providing assistance to paper companies Nova Scotia Port Hawkesbury Paper negotiated a Load Retention Rate in Washington State Port Townsend Paper Corporation signed an amendment to the existing power sales contract through September 2022 with the Bonneville Power Administration (BPA) North Pacific Paper Corp(NORPAC) received $21M from the BPA and $4M from the Cowlitz County Public Utility District for a $60M TMP energy reduction and brightness improvement project Ontario Northern Industrial Electricity Rate Program $20/MWh rebate up to $20 million/year per customer Northern Ontario, defined as being within the collective territorial Districts of Kenora, Rainy River, Thunder Bay, Cochrane, Algoma, Sudbury, Timiskaming, Nipissing, Manitoulin, and Parry Sound 21 Submission to the Rate Review Panel March

22 BC taxation policy compounds the challenge BC is one of only 2 jurisdictions in North America that tax electricity for industrial processing Manitoba taxes industrial electricity at 1.4% (BC at 7%) PST compounds any future rate increases PST on electricity does not contribute to BCH revenues Exempt electricity used in industrial processing from PST Electricity used for other purposes would be taxed (Manitoba model) This creates a tax policy that is: Consistent with commitment to re-introduce PST in 2013 Consistent and equitable for industrial processors in BC Keeps BC industries competitive with other North American jurisdictions Easy to track and implement by companies Proposed modification to PST implementation would obtain support from industrial companies in BC Logic of proposed solution and public messages would be straightforward 22 Submission to the Rate Review Panel March

23 Policy considerations 23 Submission to the Rate Review Panel March

24 Retail Access Catalyst competes with producers in Washington state who have market access to electricity Market access to some market power provides a competitive hedge for some of our production Market prices at Mid C have been significantly lower than BCH Tier 1 rates and market projections appear flat. Market access also provides customers with an alternative to BCH pricing and commercial terms We recognize that there needs to be a clear framework to address the issues with customers moving demand out of, and re-entering, the BCH system These issues have been addressed in other jurisdictions so this should not be insurmountable The suspended Retail Access program provides a good starting point 24 Submission to the Rate Review Panel March

25 There is a material gap in market prices and industrial rates Notes Mid C: (Mid Columbia) this is the local trading hub for market electricity in the Pacific Northwest. 25 Submission to the Rate Review Panel March

26 Rate Design Discussion Stepped Rates are fine Tier 1 is not a DSM barrier most of the issues have been addressed in the TS74 amendments in front of the BCUC Tier 2 is a barrier for restart for previously idled equipment Intensity Based Rates would be difficult to manage MWh/EBITDA vs. MWh/MT vs. MWh/m 2 vs? It would introduce complexity and uncertainty for both the utility and the customer End Use Rates are great for us but unrealistic from an equity perspective Other Rates may provide opportunities for high intensity, high load factor industries while benefitting the rest of the system, like: Time of Use rates (e.g., 3 x 12 table used by BCH acquisitions) Real Time pricing Interruptible rates 26 Submission to the Rate Review Panel March

27 Customer issues and conclusions 27 Submission to the Rate Review Panel March

28 Key Issues for Catalyst as a BCH Customer 1. Rate increases for Catalyst and industry Rapidly becoming uncompetitive in our end paper products 2. Credit terms - Catalyst Current BCH credit terms are constraining liquidity for Catalyst 3. PST exemption for industrial processing All electricity used in the manufacturing of products should be PST exempt 4. Power Smart incentives financial requirement BCH has required Catalyst to provide letter of credit for conservation projects which many other BCH customers are not required to do 5. Ability to buy some of our energy at a market rate A hedge against our competition in Washington State that have market access to power at the Mid Columbia trading hub (e.g., Nippon Port Angeles, NORPAC Longview) Provides healthy competition for BCH, a real price comparison 6. Mandatory Reliability Standards Catalyst has diverted limited resources to support regulatory requirements that is handled by the utility in other jurisdictions 7. Deferal account balance (regulatory accounts) Size of the regulatory balances is approaching $ 5 billion, greater than the total revenues from BCH in 2013 Resolution of the Deferral Account balance is unclear and poses a risk for all ratepayers and the share holder in the longer term. 28 Submission to the Rate Review Panel March

29 Ideally Rate stability Small increases, if required Provide adequate notice and minimize use of interim rates Return Catalyst to normal trade credit PST exemption for industrial processing Access to Power Smart incentives for conservation projects without Letter of Credit requirement Ability to access the market for some power Industrial Rate structures to maximize the value of installed (& future) capital Stable, cost effective electricity in the near term is necessary to give industry a chance to transform to thrive in the long term. 29 Submission to the Rate Review Panel March

30 Additional Slides 30 Submission to the Rate Review Panel March

31 Service plan analysis detail F2011 F2014 F2015 F2016 Domestic Revenue $ Million $ 3,438 $ 4,214 $ 4,729 $ 5,147 $ % $ 1,709 50% Domestic Sales GWh 50,607 GWh 52,701 GWh 53,024 GWh 54,643 GWh 2,094 GWh 4% 4,036 GWh 8% Average Mid C price $/MWh $ $ $ $ $ % $ 8 28% Net Long-Term Debt $ Million $ 11,520 $ 15,701 $ 17,509 $ 18,709 $ 4,181 36% $ 7,189 62% Capital Spending $ Million $ 1,519 $ 2,031 $ 2,445 $ 2,457 $ % $ % Surplus Energy GWh 53 GWh 3,837 GWh 3,210 GWh 3,326 GWh 3,784 GWh 7140% 3,273 GWh 6175% Total Expense $ Million $ 3,427 $ 4,380 $ 4,887 $ 5,238 $ % 1,811 GWh 53% Rate increase % 0.00% 1.44% 6.50% 6.50% Tier 1 Rate $/MWh $ $ $ $ $ % $ % index Deferral Account Balance $ Million $ 2,160 $ 4,211 $ 4,211 $ 4,211 $ 2,051 95% 2,051 revenue/sales ratio $/MWh $ $ $ $ $ 12 18% 26 index Impact F11-F14 Impact, F11-F16 $ 95% $ 39% 31 Submission to the Rate Review Panel March

32 Rate Impact detail Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 BC Hydro Fiscal Year BC Hydro % Increase 8.00% 3.90% 1.44% 6.50% 6.50% BC Hydro Rate Rider 2.50% 5.00% 5.00% 5.00% 5.00% year over year rate rider change 0.00% 2.50% 0.00% 0.00% 0.00% effective blended rate impact 8.00% 4.00% 1.44% 6.50% 6.50% tax 0.28% 0.28% 7.00% 7.00% 7.00% overall rate increase 9.75% 7.01% 8.53% 7.72% 7.86% cumulative 9.7% 17.4% 27.5% 37.3% 48.1% Blended 8.0% 12.3% 13.9% 21.3% 29.2% Tier % 15.8% 17.8% 27.4% 37.6% Tier 1 Rates, $/MWh $ $ $ $ $ $ loaded $ $ $ $ $ $ Tier 2 Rates $ $ $ $ $ $ loaded $ $ $ $ $ $ Demand $ 5.58 $ 6.03 $ 6.26 $ 6.35 $ 6.77 $ 7.21 loaded $ 5.80 $ 6.20 $ 6.59 $ 7.14 $ 7.60 $ 8.10 conservation incentive $ $ $ $ $ $ Catalyst Energy Bill, $million $ $ $ $ $ $ Year over Year increase, $million $ 9.8 $ 7.7 $ 10.1 $ 9.9 $ 10.8 Catalyst BC Hydro Cost Index Costs = PST Impact, $million $ 8.0 $ 8.6 $ 9.3 GWh from Hydro 2,618,017 2,618,017 2,618,017 2,618,017 2,618,017 2,618,017 overall effective rate, $/MWh $ 38 $ 42 $ 45 $ 49 $ 53 $ 57 relative to $ - $ 10 $ 18 $ 28 $ 37 $ 48 Mid C Energy Price, $/MWh $ 28 $ 24 $ 21 $ 29 $ 34 $ 36 BC Hydro premium to Mid C, $/MWh $ 10 $ 18 $ 24 $ 20 $ 19 $ Submission to the Rate Review Panel March