KNOCK ON WOOD - Atlantic Business Magazine · KNOCK ON WOOD NOVA SCOTIA SPECIAL REPORT It had been...

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KNOCK ON WOOD

NOVA SCOTIASPECIAL REPORT

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 cour tesy-cal l/state-of-the-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,

Nova Scotia’s decomposing paper mills feed new industrial developmentBy Stephen Kimber

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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

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.


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 then-exponentially 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 f luctuating 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

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

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. 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?


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 high-quality magazine papers buyers still

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.

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.

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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 counter-offer?

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

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

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.”

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.

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.


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-down-to-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

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.

“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 f lipped 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, community-managed 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 low-cost, 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

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”.

KNOCK ON WOOD - Atlantic Business Magazine · KNOCK ON WOOD NOVA SCOTIA SPECIAL REPORT It had been...

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