In the same week that Canfor Pulp Products announced 2Q financial results, the BC Ministry of Energy and Mines announced a new Power Smart program that will reduce electricity costs for pulp and paper producers.
Canfor Pulp’s net income, reported on Wednesday, was $18.8 million, or $0.27 per share, for 2Q 2014, compared to $25.7 million, or $0.36 per share, for 1Q and $7.6 million, or $0.11 per share, for 2Q 2013. For the six months ended June 30, 2014, the Company’s net income was $44.5 million, or $0.63 per share, compared to $18.5 million, or $0.26 per share, for the six months ended June 30, 2013.
Canfor Pulp had an operating income of $29.6 million for 2Q 2014, a decrease of $6.8 million from operating income of $36.4 million for 1Q, as the impact of pulp and paper maintenance outages and higher fibre costs more than offset increased pulp and paper shipments.
The new BC government/BC Hydro program will help pulp producers remain globally competitive, supporting thousands of jobs throughout the province and reducing overall electricity demand to keep rates low for all customers over the long-term, according to a Ministry of Energy and Mines release Thursday.
Energy Costs
The new program builds on existing initiatives for industrial customers where BC Hydro provides a financial incentive of up to 75 per cent of the project cost to support investments in more energy efficient equipment.
Under the new program, thermo-mechanical pulp and paper producers, which have electricity costs that account for as much as 30 per cent of their operating budgets and represent 10 per cent of BC Hydro’s annual power sales, will be eligible for increased incentives ranging from $5 million to $25 million for projects that can reduce their power consumption.
The program is expected to reduce electricity consumption by 300 gigawatt hours per year which will save pulp and paper producers $17.5 million in annual power costs. In addition, by reducing overall electricity demand by this amount, BC Hydro will avoid the need to acquire new sources of power generation, saving ratepayers up to $265 million and keeping rates low for all customers, says the Ministry.
There are seven thermo-mechanical pulp and paper operations in BC operated by four companies: Canfor (Taylor), Catalyst Paper (Crofton, Port Alberni, and Powell River), Paper Excellence (Chetwynd and Port Mellon), and West Fraser (Quesnel).
The companies must submit project applications to BC Hydro by autumn 2015 for approval.
BC’s industrial sector accounts for approximately 32 per cent of BC Hydro power usage, mostly from sawmills, pulp and paper mills, mines, and chemical plants, said the government release.
Catalyst, which was recovering from bankruptcy protection, warned it had already absorbed a 27 per cent rate hike over the last three years and the new increases would raise its $124 million annual Hydro bill to $150 million within the first two years. The company has 1,550 workers. The new government program would see Catalyst eligible for up to $19 million in funding at its Powell River plant, $10 million at Port Alberni, and $16 million at Crofton, all on Vancouver Island.
The company’s former boss said at the time the looming electricity hikes would have wiped out all the cost savings accomplished in the restructuring. Catalyst briefed politicians during the 2013 election campaign about the implications of the rate hike.
The program has been in the works since last November, according to the Times Colonist Thursday, when a long-range electricity plan was unveiled that included significant rate hikes for the next several years. The five-year plan includes a staged 28 per cent rate hike for most users.
The calculation at that time was that the overall hike would amount to an average $139,000-a-month increase for industrial customers by the end of the five-year plan.
The new program adds to the $1.6 billion that BC Hydro will spend on Power Smart initiatives as part of the 10 Year Plan, according to the Ministry announcement. Earlier this month, government, BC Hydro and FortisBC announced an expansion of energy-efficiency programs to help customers, particularly those on low-incomes, reduce their electricity and gas bills.
Pulp is produced using refiners to mechanically break down material. The refiners are run using very-large horsepower motors, hence the high electricity consumption. Thermo-mechanical pulp is different than craft pulp and a much higher amount of electricity is used to produce this pulp. BC’s thermo-mechanical pulp sector is the largest single industry segment and consumes approximately 10 per cent of BC Hydro’s supply. This sector has many opportunities for large energy efficiency projects with proven technologies.
The Ministry details that thermo-mechanical pulp (TMP) industry in BC can be split into two sectors: market-oriented and internally-oriented.
The Interior mills, Quesnel River Pulp, Canfor – Taylor, and Paper Excellence – Chetwynd all produce TMP for the global market. The TMP is sold to paper producers who convert it into uncoated paper products such as newsprint, coated paper products such as magazines, and paperboard for packaging materials. A smaller, but growing, market is tissue products, primarily paper towels and napkins. The TMP is sold to North American and Pacific Rim customers. Competition comes from global producers of hardwood and softwood Kraft pulp, with hardwood being the prime competitor.
The Coastal mills are internally-oriented. The TMP produced is used within the mill and converted into paper products. These mills cannot sell TMP directly into the market because they do not have a pulp dryer section. Catalyst produces newsprint, directory-grade paper, coated paper for magazines, and specialty paper. Howe Sound Pulp and Paper produces newsprint. In North America, the competition comes from Resolute Paper, Norpac Paper, and Verso. In the Pacific Rim, European producers such as Stora Enso, UPM Kymene, and Norske Skog have entered the market along with regional producers in South Korea, Japan, and China.