Canfor Announces Proposed Pulp Income Trust
By 250 News
Wednesday, February 15, 2006 03:11 PM
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For the workers at three pulp mills in Prince George, they used to work for a company that claimed "Our Roots are in this Community".
Now they work for The PIT.
That's the "Pulp Income Trust".
Canfor has announced it intends to "separate its pulp business from its wood products business". The company is planning to transfer to an "indirectly owned limited partnership, the Northwood, Intercon and PG Pulp and Paper Mills, their managers and employees to "The Pulp Income Trust". That trust will see Canfor holding 80% interest, and the shareholders holding 20%.
Canfor boss Jim Shepherd says the move will allow Canfor to focus on its wood products industry. In a news release issued late this afternoon, Shepherd says "We see significant opportunities to improve, diversify and grow in wood products both within our existing mills and through new markets."
Last year, the three mills listed now as the "Pulp Income Trust," earned about $60 million dollars. Canfor says the "Trust" is expected to have an annual maintenance/captital bill of $30 million, a total debt of $125 - 150 million and will be left with about $95 million cash for distribution. The release from the company says it will distribute between 85 - 90% of that cash to investors.
Canfor says it is committed to a long term agreement to provide the mills with chips and hog fuel at market price.
Canfor employees are in a meeting right now, getting the full picture of this announcement, but it would appear, Canfor, in separating this part of operations, is clearing the way for the future sale of the controlling share of the mills to some other entity.
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Posted by: Chadermando on February 16 2006 1:02 AM
My understanding of an income trust is that all income under the trust is not taxed at a corporate level or as a dividend. This in effect adds about 20% to the market value of the underlying assets.
Conversions to income trusts in Canada since year 2000 are said to have cost both provincial and federal governments $300 million a year each in tax revenue.
The idea of an income trust is that the business will not be expanding, thus limited growth in the economy the higher the percentage of income trusts. This is a result of all the income going out to its unit holders and not back into future capital investments.
An income trust thus in effect is a way for a company to pay liquidating dividends from operations without paying taxes on those dividends as it winds down its investment in those assets. Eventually once all capital is liquidated from its investment it can then walk away from the investment having liquidated its capital through its guaranteed liquidating dividends.
The current employees of Canfors pulp mills are of an average age of 63.5 years of age and thus on the cusp of retirement. For them a liquidating dividend or 20% appreciation in market value is great news. For the future economic growth of Prince George it is not.
The question is whether Canfor uses its 20% growth in market value to sell to the Chinese, or do they use the tax advantage to finance their growth in the wood products division.
The winner is Canfor and its current invested employees.
The loser is growth in the Prince George economic region, the tax payer, and the potential sovereignty of our natural resources.
Time Will Tell