Terrace Bay Pulp is now in a period of creditor protection through the Companies’ Creditors Arrangement Act (CCAA).

Ernst & Young Inc. has been appointed as Monitor by the Ontario Superior Court of Justice.

The initial court order has provided a stay of proceedings until February 24, 2012. During the stay period, the company is unable to make payments on the supply of goods or services prior to January 25, 2012, unless specifically mentioned in the court order. All parties are prohibited from commencing or continuing legal action against Terrace Bay Pulp during the stay period.

What Happened?

Terrace Bay Pulp completed its annual major shutdown just prior to the explosion of a blow tank on October 31, 2011 that resulted in the death of an employee. The unexpected shutdown that occurred as a result of the explosion happened at a time when the mill was vulnerable to additional expenses and a lack of production due to the annual shutdown. This resulted in a major liquidity crisis at a time when pulp prices were declining.

Terrace Bay Pulp told the court the declining market conditions, the liquidity crisis, and the upward impact on costs of production due to the loss of equipment damaged in the explosion resulted in their decision to idle the mill.

The mill was restarted briefly after the explosion only to convert the remaining raw material to finished goods.

Due to their liquidity crisis, Terrace Bay Pulp was unable, financially, to replenish the raw materials necessary to resume operations at the mill.

Financial Status

As of December 31, 2011 the company had just over $4 million in cash. Combined with net receivables, inventories, cpaital, and other assets, Terrace Bay Pulp has assets worth $46,290,607.

There are approximately 375 employees of the mill (50 non-union, 325 union). There are two unions representing workers at the mill – the United Steelworkers (Local 665) and the International Brotherhood of Electrical Workers (Local 1861). Most of the mill’s employees have been laid off.

As of December 31, 2011 the company is up to date with its contributions to its employees’ defined contribution pension plan.

The mill’s 4 executives (Wolfgang Gericke, Taras Sawula, Russell York, and Aaron Blazina) are employed by Buchanan Sales Inc. and will continue to perform various executive functions at the mill central to the sales process. The court has approved Gericke’s request that Terrace Bay Pulp reimburse Buchanan Sales Inc. for their services at rates of $75 to $100 per hour.

Terrace Bay Pulp has received financing from Callidus Capital Corporation and the province of Ontario for its operations. All amounts owing to Callidus have been repaid.

The province of Ontario is currently owed over $24 million and is the primary secured lender for Terrace Bay Pulp.

The Computershare Trust Company of Canada is the trustee for a promissory note of $30 million owed to unsecured creditors’ claims from the company’s last restructuring.

The Township of Terrace Bay is owed $571,000 in deferred municipal realty taxes.

Thunderpine (a party related to the Buchanan Group) has four liens registered against a piece of equipment (a Komatsu Wheel Loader) owed by Terrace Bay Pulp and repaired by Thunderpine.

There are $9.2 million of construction lien claims registered on the mill’s property. The company plans to pay for many of these claimants from funds they will be receiving from Natural Resources Canada through the Pulp and Paper Green Transformation Program in connection with two capital investments underway at the mill to reduce emissions and improve biomass power generation. (The court has granted the company permission to complete these projects by their March 31, 2012 deadline).

$432,000 is owed to other members of the Buchanan Group for the supply of goods and services.

If a going concern sale is not completed, the mill will owe its employees severance and termination payments.

Certain members of the mill’s management team have been charged with Occupational Health and Safety Act offences in connection with an accident that occurred in January 2011. Because these employees are key to restarting the mill, their defence will be funded by Terrace Bay Pulp. The company has asked that $200,000 is put towards the legal counsel of these employees. The explosion on October 31 is still under investigation.

Insurance of the mill expires on January 31, 2012. The company is currently working towards an insurance claim to replace and repair equipment damaged by the October 31, 2011 explosion.

The company plans to sell its existing pulp inventory for cash flow during this period of creditor protection.

Sales Process

The court has permitted Terrace Bay Pulp to lay off or terminate the employment of any of its employees, as well as downsizing or permanently close the mill. Terrace Bay Pulp has been authorized by the court to sell its assets or shares before April 16, 2012. At this time, Terrace Bay Pulp projects it will run out of cash by the end of April.

The company is now soliciting non-binding letter of intent from interested bidders by February 15, 2012. The letters of intent will be considered by the company, the monitor, and the province of Ontario, who will limit the bidders to a list of qualified bidders.

All qualified bidders will be notified by February 17, and will be invited to tour the facility and meet with management, labour unions, and representatives from the province.

All final offers will be due on March 16. One qualified bidder will be selected as the potential purchaser by March 19. The sale should be concluded by April 16.

Terrace Bay Pulp would like to sell the mill as a going concern, and is prepared to maintain heat and basic operations at the mill to keep the mill from deteriorating, but will consider purchase offers from liquidators.

If a sale is not concluded by April 16, the company will be required to use whatever cash it has left to completely shut down and decommission the mill.

Golf Course and Lake Front Property

The company’s assets that are not used in connection with the operation of the mill, including a golf course and certain lake front real estate, will be marketed. Their sale will be subject to court approval.

Previous Financial Problems

This isn’t Terrace Bay Pulp’s first period of creditor protection.

Terrace Bay Pulp previously filed for creditor protection on March 11, 2009, and emerged from those proceedings on September 15, 2010.

The mill was idle from February 23, 2009 until October 4, 2010.

About the Mill

The Terrace Bay Pulp mill was constructed in 1948 by the Kimberly-Clark Corporation.

Neenah Paper acquired the mill from Kimberly-Clark in 2004.

Currently Terrace Bay Pulp is a wholly-owned subsidiary of Lucky Star Holdings Inc. and is one of several companies in what is sometimes referred to as the Buchanan Group. In 2006, the Buchanan Group acquired the mill from Neenah Paper.

The mill is capable of producing various blends of northern bleached softwood kraft pulp and northern bleached hardwood kraft pulp, together with certain other byproducts.

The mill has two full integrated pulp lines, and three integrated pulp machines, with a rated capacity of approximately 550,000 air-dried metric tonnes of pulp per year (hardwood and softwood combined).

Source:
Ernst & Young