Catalyst Paper & Electricity Rates in BC · Electricity Costs and Catalyst Catalyst is largest paper producer in BC and exports more than 90% of production outside BC Major use of

Catalyst Paper & Electricity Rates in BC

Ministry of Energy, Mines & Natural Gas presentation

March 2013

Catalyst Paper in BC

2 Submission to the Rate Review Panel – March 27 2013

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

WHY US AND WHY NOW?

Focused Manufacturing Base

4

* No. 1 paper machine at Crofton remains indefinitely curtailed. If it were

to be restarted we do not expect it would produce newsprint.

*

Submission to the Rate Review Panel – March 27 2013

» 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

CATALYST PRODUCT RANGE


SIGNIFICANT ACHIEVEMENTS

Financial Reorganization


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


Catalyst Progress and Industry Challenges


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

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

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)

Energy Costs & Competitiveness


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 2nd 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)

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) = $107-114/MWh1


1. Source: http://www.bcuc.com/Documents/Proceedings/2009/DOC_21037_B-1_BCH_Bioenerg_Call.pdf

Catalyst Energy Overview - 2012

Purchased Power

73%

Self Generation -

Thermal 14%

Powell River Energy Inc.

13%

2012 Electricity 3,650 GWh

Biomass

47%

Natural Gas

18%

Fuel Oil

1%

Tire Derived

Fuel

0.21%

Black Liquor

34%

2012 Fuel Energy 20.8 Million GJ

Submission to the Rate Review Panel – March 27 2013 13

Power costs are outpacing our market prices


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

BCH is not prepared to confirm the rate assumptions used in their service plan


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

$/MWh 68$ 72$ 77$ 80$ 89$ 94$

index 100 106 113 118 131 139 revenue/sales ratio

Source material http://www.bchydro.com/etc/medialib/internet/documents/about/company_information/reports/bch_service_plan_2013.Par.0001.File.BCH-

service-plan_web.pdf

BCH projects a surplus from F2017 to F2024


Balance returns

Base: F2017

DSM: F2024

LNG: 2019-22

Catalyst’s Load

this surplus in supply is inconsistent with a drive for higher rates

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.

Source material: BC Hydro response to Association of Major Power Customers of BC (AMPC) dated January 28, 2013

Costs are being transferred from the residential to the industrial rate class


Source material Fully Allocated Cost of Service Study filed with the BCUC January 8, 2013 by BC Hydro (Order No. G-110-10 Compliance Filing)

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.

Escalation in rates has been compounded by increases in “non energy” components


Catalyst - Rate Impacts


A 50% increase in electricity rates is not sustainable for Industry

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

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

2010-11 Costs = 100100 110 117 127 137 148

PST Impact, $million 8.0$ 8.6$ 9.3$

overall effective rate, $/MWh 38$ 42$ 45$ 49$ 53$ 57$

relative to 2010-2011 -$ 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$

BC Hydro Fiscal Year

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.

BC rates are up 24% over 3 years relative to 6% for the rest of Canada http://www.hydroquebec.com/publications/en/comparison_prices/index.html


2003 (note 3) 2006 2007 2008 2009 2010 2011 2012 change 2009-2012

City region $/MWh $/MWh $/MWh $/MWh $/MWh $/MWh $/MWh %

Montréal, QC Montréal,QC 44.00$ 42.60$ 43.50$ 44.70$ 45.30$ 45.50$ 45.30$ 45.10$ -0.4%

Calgary, AB Calgary,AB 93.80$ 50.30$ 68.00$ 82.80$ -11.7%

Charlottetown, PE Charlottetown,PE 70.50$ 63.80$ 74.20$ 87.50$ 107.20$ 95.80$ 83.60$ 83.60$ -22.0%

Edmonton, AB Edmonton,AB 76.50$ 63.10$ 68.80$ 96.90$ 56.90$ 69.80$ 84.90$ 69.70$ 22.5%

Halifax, NS Halifax,NS 65.80$ 67.50$ 70.40$ 70.40$ 77.00$ 76.10$ 80.70$ 90.00$ 16.9%

Moncton, NB Moncton,NB 58.30$ 54.50$ 58.80$ 64.70$ 66.60$ 66.60$ 68.60$ 68.60$ 3.0%

Ottawa, ON Ottawa,ON 72.60$ 77.40$ 81.30$ 86.60$ 81.50$ 86.40$ 95.10$ 105.80$ 29.8%

Regina, SK Regina,SK 53.80$ 49.00$ 51.10$ 51.10$ 51.10$ 60.90$ 62.40$ 56.70$ 11.0%

St. John's, NL St. John's, NL 43.60$ 52.30$ 39.80$ 39.80$ 39.80$ 39.80$ 39.80$ 39.80$ 0.0%

Toronto, ON Toronto,ON 94.20$ 79.30$ 77.40$ 84.60$ 82.90$ 94.00$ 96.40$ 104.60$ 26.2%

Vancouver, BC Vancouver,BC 38.40$ 35.30$ 36.50$ 38.40$ 40.30$ 44.00$ 43.40$ 49.90$ 23.8%Winnipeg, MB Winnipeg,MB 33.60$ 31.20$ 31.90$ 31.90$ 34.50$ 35.50$ 36.20$ 36.90$ 7.0%

Canadian average excluding BC 61.29$ 58.07$ 59.72$ 65.82$ 66.96$ 65.52$ 69.18$ 71.24$ 6.4%Boston, MA Boston,MA 142.50$ 133.00$ 155.10$ 147.60$ 184.80$ 119.80$ 111.40$ 101.30$ -45.2%

Chicago, ILL Chicago,ILL 75.30$ 55.70$ 70.00$ 89.40$ 63.00$ 51.50$ 61.60$ 53.30$ -15.4%

Detroit, MI Detroit,MI 75.40$ 72.30$ 71.00$ 66.50$ 78.70$ 67.60$ 64.40$ 76.90$ -2.3%

Houston, TX Houston,TX 62.90$ 65.50$ 70.20$ 74.50$ 43.80$ 39.00$ 66.20$ 55.50$ 26.7%

Miami, FLA Miami,FLA 85.30$ 91.80$ 85.70$ 75.10$ 99.50$ 63.00$ 62.20$ 60.90$ -38.8%

Nashville, TN Nashville,TN 62.30$ 65.70$ 63.10$ 64.60$ 84.20$ 62.80$ 68.40$ 69.60$ -17.3%

New York, NY New York, NY 234.60$ 136.70$ 177.60$ 151.60$ 152.60$ 122.90$ 126.30$ 115.50$ -24.3%

Portland, OR Portland,OR 54.90$ 43.60$ 46.20$ 43.10$ 58.60$ 50.70$ 57.40$ 59.40$ 1.4%

San Francisco, CA San Francisco, CA 231.20$ 96.60$ 90.20$ 83.30$ 120.10$ 97.80$ 89.90$ 88.40$ -26.4%

Seattle, WA Seattle,WA 82.40$ 61.60$ 51.60$ 45.80$ 56.40$ 52.30$ 52.50$ 56.00$ -0.7%

US Average 110.68$ 82.25$ 88.07$ 84.15$ 94.17$ 72.74$ 76.03$ 73.68$ -21.8%

BC's ranking 2 2 2 2 3 4 3 4 4

Notes 1. source: http://www.hydroquebec.com/publications/en/comparison_prices/index.html

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%

http://www.hydroquebec.com/publications/en/comparison_prices/index.html

Other jurisdictions are providing assistance to paper companies

Nova Scotia

– Port Hawkesbury Paper negotiated a Load Retention Rate in 2012 http://0-fs01.cito.gov.ns.ca.legcat.gov.ns.ca/deposit/b10651895.pdf

Washington State

– Port Townsend Paper Corporation signed an amendment to the existing power sales contract through September 2022 with the Bonneville Power Administration (BPA) http://jeffcountychamber.org/bpa-and-port-townsend-paper-sign-long-term-contract-amendment-2/ http://www.bpa.gov/power/pl/regionaldialogue/implementation/Documents/2012/PTPC_EXTENSION_ROD.pdf

– 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 http://www.bpa.gov/news/newsroom/Pages/Going-big-BPA-Cowlitz-PUD-and-NORPAC-partner-on-largest-ever-energy-efficiency-project.aspx

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 http://www.mndm.gov.on.ca/en/northern-development/business-support/northern-industrial-electricity-rate-program


http://0-fs01.cito.gov.ns.ca.legcat.gov.ns.ca/deposit/b10651895.pdf




http://jeffcountychamber.org/bpa-and-port-townsend-paper-sign-long-term-contract-amendment-2/























http://www.bpa.gov/power/pl/regionaldialogue/implementation/Documents/2012/PTPC_EXTENSION_ROD.pdf



http://www.bpa.gov/news/newsroom/Pages/Going-big-BPA-Cowlitz-PUD-and-NORPAC-partner-on-largest-ever-energy-efficiency-project.aspx




























http://www.mndm.gov.on.ca/en/northern-development/business-support/northern-industrial-electricity-rate-program















BC taxation policy compounds the challenge

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


Exempt electricity used in industrial processing from PST

Electricity used for other purposes would be taxed

(Manitoba model)

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

Policy considerations


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


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.

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/m2 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


Customer issues and conclusions


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.


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.

Additional Slides


Service plan analysis detail


F2011 F2014 F2015 F2016

Domestic Revenue $ Million 3,438$ 4,214$ 4,729$ 5,147$ 776$ 23% 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 $/MWh 28.02$ 29.23$ 33.52$ 35.80$ 1.21$ 4% 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$ 512$ 34% 938$ 62%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$ 953$ 28% 1,811 GWh 53%Rate increase % 0.00% 1.44% 6.50% 6.50%

$/MWh 28.17$ 33.19$ 35.88$ 38.74$ 5.03$ 18% 10.58$ 38%

index 100 118 127 138

Deferral Account Balance $ Million 2,160$ 4,211$ 4,211$ 4,211$ 2,051$ 95% 2,051$ 95%

$/MWh 67.94$ 79.96$ 89.19$ 94.19$ 12$ 18% 26$ 39%index 100 118 131 139

Impact, F11-F16Impact F11-F14

revenue/sales ratio

Tier 1 Rate

Rate Impact detail


Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

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 1 10.3% 15.8% 17.8% 27.4% 37.6%

Tier 1 Rates, $/MWh 28.17$ 31.07$ 32.60$ 33.19$ 35.88$ 38.74$

loaded 29.29$ 31.94$ 34.33$ 37.29$ 40.31$ 43.53$

Tier 2 Rates 73.60$ 73.60$ 73.60$ 73.60$ 73.60$ 73.60$

loaded 76.54$ 75.65$ 77.50$ 82.69$ 82.69$ 82.69$

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 45.44$ 42.53$ 41.00$ 40.41$ 37.72$ 34.86$

Catalyst Energy Bill, $million 100.5$ 110.3$ 118.0$ 128.1$ 138.0$ 148.8$

Year over Year increase, $million 9.8$ 7.7$ 10.1$ 9.9$ 10.8$

Catalyst BC Hydro Cost Index

2010-11 Costs = 100100 110 117 127 137 148

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 2010-2011 -$ 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$

BC Hydro Fiscal Year