The government of Newfoundland and Labrador has reached a deal with Corner Brook Pulp and Paper Ltd. that aims to secure the future of the company’s two defined benefit pension plans.
Provincial officials met with the company Sunday to set out the deal, which will guarantee a letter of credit for Corner Brook Pulp and Paper from a financial institution. In return, the government will take security interests in the company’s power assets at Deer Lake and Watson’s Brook. A trust will hold the letter of credit for the benefit of pension plan members, with the government and the company’s representatives as co-trustees.
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The deal is the latest arrangement with the province to keep operations going at the mill. In 2014, Corner Brook Pulp and Paper borrowed $110 million from the province. The conditions of that loan also stipulated that the government had to purchase the power assets associated with the mill if the company were to shut down, says Julian McCarthy, assistant deputy minister of regulatory affairs at Service NL.
He notes that, up until 2017, the purchase price for the assets was basically the value of the outstanding loan made in 2014. The agreement identifies a methodology for determining the purchase price, so that in February 2017, it increased to $150 million; in February 2018, it will increase to $175 million and in February 2019, it will rise to $200 million.
“Right now, we have a situation where the purchase price is $150 million and the loan is $110 million, so we’ve basically got $40 million in equity. If the mill closed today and government had to purchase those assets, it would write off the loan and the remainder would go back to Corner Brook Pulp and Paper,” says McCarthy, noting the new loan help pay some of the solvency deficit in the defined benefit pension plans should the government have to purchase the company.
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The arrangement is for solvency funding purposes only, so the deal doesn’t really exist from a going-concern perspective, McCarthy adds. “They would have to do a valuation without considering the letter of credit, and if there’s any deficits on a going-concern basis, they will have to fund them as per the legislative requirements. That will ensure, from a going-concern perspective, that there’s always money there and is funded to the extent possible to cover benefits as they’re being paid.”
The deficits in Corner Brook Pulp and Paper’s two pension plans are currently about $65 million, says McCarthy, noting it’s continually changing as the company completes its valuations. “Right now, based on the deficits in the pension plan, $38 million is not going to cover all of it.”
Corner Brook Pulp and Paper hasn’t been meeting the full amount due in its schedule of payments, he adds. “As of the end of 2016, they were about $25 million in overdue payments that should have gone into the plan. So this letter of credit we’re setting up can be counted towards those overdue contributions.
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“Basically what Corner Brook Pulp and Paper is saying is, ‘If we do close down and you have to purchase, pay off the pension plan before you pay off anything.’ And for the government, there’s no cost to them,” he says, noting that since the purchase price will be $200 million by 2019, the government knows there will be close to $90 million in equity to give back to the company once the 2014 loan is paid back.
“That’s the amount that’s going to be directed into the pension plan if that needs to happen . . . if there’s a closure of the company and a windup of the pension plan. But from a solvency funding basis, they will have to fund as per the normal rules.”
Corner Brook Pulp and Paper didn’t respond to Benefits Canada‘s request for comment.
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