SCI may be a giant tax shelter in eyes of buyers Hundreds of millions in losses valuable as tax write-offs to a profitable buyer By JEFF NAGEL FORGET about sawmills, forest licences or the pulp mill, _. The part of Skeena Cellulose _ that may be worth the most to a potential buyer is not any of its physical assets, but rather its ‘losses. -. A buyer could use Skeena as a tax shelter, buying the company and then using its losses as tax ‘deductions against profits from ‘operations elsewhere. .... That would reduce the amount . Of tax the buyer would pay on its regular operations. SIF a company has been losing money it gets a free ticket from the government not to pay taxes,” explains UNBC finance professor Charles Schell. “With somebody like Skeena Cellulose, you've been losing money year after year and accu- mulating all these options not to pay tax,” he said. A buyer making profits and paying tax could buy the company and harness those tax losses, “If they're making a profit they can apply Skeena Cellulose’s losses against their own profits,” Schell said, “Even though the business might not have much value, the business as a tax write-off might.” Exactly how much SCI might be worth as a tax shelter is tough to calculate. , Corporate taxation experts say ax losses can be carried forward seven years before they must be either used or lost. Although Skeena Cellulose made a small profit of $18.5 mil- lion in 2000, it has rung up net losses of more than $330 million fram 1994 to 2000. Mest of that is concentrated in 1996 and 1997 when SCI lost a From front Loggers. Further pressure might! begin’ with more protests outside TD bank branches in other cities, Houlden said. “There’s talk of having a heavy metal party at the branch in Prince George,” he said. An even more expensive option would be to drive logging trucks to Vancouver for Friday's meeting with Thorpe. “We're discussing maybe going down there with some equipment and iron and see how the City of Vancouver feels about having a bunch of equipment parked around the TD building © there,” Houlden said He estimates the bank has made at least $120 million in in- terest from Skeena Cellulose over the years, He said SCI had been incurring $3 million per month in interest payments. “[ ran the numbers and got mad all over again,” he said, ‘ “There have been times when SCI has shut down logging be- cause it was trying to build up money to make interest payments.” Houlden says SCI is paying a high interest rate at three percent- age points over the prime rate. He said when he started his bu- siness he was paying 1.7 per cent over prime. Meanwhile Thorpe said pro- spects for a sale of SCI have dim- med somewhat. “It’s not as positive right now oT may.targ | Skeena Cellulose net income | | Profitiioss 1994-2000 combined $250 million. Corporate tax rates range from 17 to 45 per cent, says KPMG tax accountant Peter Ranson. Based on that range, SCI’s $330 million losses could trans- late into tax write-offs worth $56 million to $150 million for a buyer that succeeds in using the full value of the tax losses, It’s not that simple, however, First of all a buyer would have to be making a profit on other operations in Canada and paying Ranson. If it’s not a. slam dunk, he said, the value of the losses should be. discounted to reflect that risk. A halt in the company’s opera- tions can also affect whether the losses are preserved for future use.. “It's very, very complex,” Ranson said, What is clear is that the pro-. vincial government — which owns SCI - knows the losses are valu- able and has carefully protected them. “Even though the business might not have much value, the business as a tax write-off might.” taxes because of those profits. Profits are in short supply with the multitude of troubles presently facing the industry. That raises doubt as to when a buyer could realistically make use of tax deductions from SCI losses, Also, the use of such losses is subject to a decision by federal tax officials. “Ts it.a slam dunk that I can claim the losses or is there some risk that I won’t be able to?” asks a dey eer og Preserving the tax losses was a key reason the government moved Sept. 5 to place SCL back under protection from its creditors, court documents show. Had Skeena Cellulose fatlen into bankruptcy as a result of the TD bank calling its loans, SCI as- sets would have been liquidated and those tax losses erased. “Skeena would lose the benefit of a significant amount of its. tax losses,” ‘stated the government's wy de filing to the court. Enterprise minister Rick Thorpe also confirmed keeping the tax losses is a major factor helping attract potential buyers. - "The goal is to preserve them through restructuring, thereby al- -lowing-a buyer to buy ‘shares of Skeena and get tax loss benefits,” he said. , , “While in negotiations with potential purchasers, to be in pro- tection is a way better situation than to be in bankruptcy.” For the government, the tax losses are a major carrot to en- courage a buyer lo pay a signif- icant amount of money for Skeena Cellulose. Victoria could then return that money to the taxpayers to in part offset the massive government bailout of the company. From a buyer's perspective, the lax savings could have the effect of greatly. reducing the price tag on SCI, And if the tax savings it expec- ted to enjoy matched or exceeded the purchase price, the buyer would get the forest company ef- fectively for free, or even turn an instant profit — regardiess of the future value of Skeena Ceilulose’s assets or potential profits. Schell notes tax deductions for Skeena Cellulose losses mean the taxpayers — through the federal government — may continue to pay more for SCI's hard times for several years to come. If the eventual buyer of SCI ends up being foreign-owned, those tax dollars could even exit Canada, “If we get a foreign buyer get- ting something like this for free, the laxpayer will continue to be paying because we'll be giving then a tax credit based on tax- payer-supported fosses,” Schell said. : ches. as I would have liked,” Thorpe said. Two companies are actively examining the possibility of buy- ing SCI, Thorpe said. One of them is Swiss-based Mercer International, which vi- sited the Terrace sawmill last week, “We're trying to get an offer on the table,” Thorpe said. Skeena MLA Roger Harris ap- plauded the decision of contrac- lors to end the blockade here, “The actions the guys teok today in terms of taking that dawn will send a very clear message to potential buyers that these are contractors who are very interes- ted in the survival of the facili- ties,” he said. The direct action campaign of ore bank bra SKEENA CELLULOSE was expected to be able to resume SKEENA MLA Roger Harris meets with logging contractors blockade of Skeena Gel- lulose’s Ter- race sawmill. JEFF NAGEL shipments of lumber from Terrace early this week, contractors spread to Smithers, where contractors continued to blockade the SC] sawmill there as of late last week. Victoria pauses stumpage demands Loggers hit with double whammy By JEFF NAGEL VICTORIA agreed Thursday to suspend demands that indepen- dent loggers pay stumpage owed to the province by Skeena Cellu- lose. The announcement came after loggers surrounded the forests ministry regional headquarters in Smithers for several hours Sept. 20, ; _ Independent loggers like Ter- race's Mario Da Costa and many in the Smithers-Hazelions. area found themselves on the hook for stumpage royalties SCE was sup- posed to cover after the forest company was placed under credi- tor protection Sept. 5. For many it was a doubie whammy, The loggers, who got forest li- cences under the small business program and agreed to sell the wood to Skeena Cellulose, had not been paid for the timber they delivered to SCI. ‘Then the province demanded they pay the stumpage owed by the government’s forest company. Da Costa said it was like add- ing insult to injury. “Not only have we not got paid but we also have to pay stumpage,” Da Costa said. “This is supposed to be the government for the srnall business man.” Acting regional forest manager ‘Norm Parry said the decision does _ not absalve independent’ loggers of responsibility, ‘and said the sus- pension of stumpage demands is “until further notice.” “The ministry of provincial re- venue agreed to hold in abeyance any collection of that stumpage revenue if it was in connection with SCI,” Parry said Friday, Provincial revenue ministry of- “This is supposed to be the government for the small business man.” ficials were unavailable to com- ment further on the situation. Parry said it is normal. for the government to hold the loggers who cut the timber-responsible.for stumpage, when. the mill or forest company that received the logs _ and pledged to pay the stumpage fails to do so, ; Parry said the situation resulted in the province freezing deposits independent loggers made on other timber sales over SCI’s un- paid stumpage. “Tt was a flag coming up so they couldn’t bid on other timber sale licences,” he said, He estimated $1 million to $2 million worth of stumpage is owed by SCI that falls on the shoulders of independent loggers, Northwest Loggers Association vice-president Ken Houlden was not optimistic the reprieve will last long or be permanent. “It’s in abeyance," Houlden said. “Once there’s no more ‘media and nobody paying alten- tion they'll come back and try to collect their money again.” The Terrace Standard, Wednesday, September 26, 2001 - AS CORRESPONDENCE FOR THE TERRACE STANDARD The Mail Bag — The gift of life Dear Sir: In recent months there have been several articles in the paper with regards to the “hoped for” hemodialysis unit al Mills Memorial Hospital. This is another letter to highlight the need for this unit. My daughter is in renal failure and has been on peritoneal dialysis at home for over a year now. Just last week she took a turn for the worse and had to be medevaced to Prince George Regional Hospital to be put on hemodialysis. Just when a patient needs family and their . Support more than ever they are whisked away to a hemodialysis centre where they have no family or friends and are too far away for visits. This ought not tO be so. The renal outpatient clinic in Prince George is absolutely wonderful. They have a team working together for you and with you. Without their support I’m not sure where we'd be having to walk through this difficult and frightening time. However, as wonderful as they are, we need this support in our own local area. There have been times when my daughter's condition took a bad turn and we could have easily lost her. Had we had dialysis support here, these conditions would never have gotten as bad as they did, The symptoms of trouble could have been recognized and dealt with immediately, not after conferring with the Prince George clinic and driving there to see her doctor. - There are several persons in the northwest in renal failure and the desperately needed facilities and support should be here for each and-every one, What is going to take, a death? Several, if not ali, of these patients are waiting and hoping fora kidney transplant. A transplant is still only a treatment and not a cure, but the quality of life is very much improved. I ask everyone toa consider being a donor. Kidneys can be a living donation (usually to family or friends) or donated after death (cadaver donors). Please talk ‘ta your families and be sure your wishes are known in this regard. Give the gift of life. Linda R. Compton, Terrace, B.C. Why the logging? Dear Sir: I really find it difficult to understand the mentality of the forest service in allowing the logging of Ritchie Flats to go ahead. This area has been a picking site for pine mushrooms since this industry started over 25 years ago. Obviously Minisiry of Forest personnel could care less about the people that live in the Terrace- Kitwanga areas. Many of these people are, and have been, in desperate need of the mushroom money that they make each year. The company is said to have advertised its intentions a number of times in the past. see if there is opposition to logging in this area. They didn’t do that. They instead insert a small! ad (which a person needs to take out a magnifying glass to read) in the local paper. If you happened to miss these ads in the classified section, that's it, I’ve tried in the past to keep an eye on what’s happening in the West Nass area, another prime mushroom picking spot. It has been a major _ undertaking so see which cut blocks are up for future consideration and how these correspond to known picking areas. Forestry personnel know which areas they should cleave alone to protect this renewable and valuable resource, but they do not choose to do so. Instead, they hide behind the fact that they have done their job by a couple of newspaper advertisements. Obviously, the forest service methods of informing the public are not very effective. We hear opposition to the logging of Ritchie Flats - and other areas after the flagging has been put up in the bush. Why? Because we did not know of Skeena Cellulose’s intentions ahead of time. If we had, you _can be sure that there would have been significant " opposition expressed. » J hope that pickers will not just sit back and say that this is a done deal, Ignorant people must be stopped from carrying oul actions that are against the will of the people. This has to be one of the most unbelievably stupid and inconsiderate actions taken towards the people of the northwest by the forest service to date, and to say that they had no opposition expressed shows haw much they really (ried to survey the general public. Good mushroom ground likely comprises less than five per cent of the total forested area in B.C. Why should this not be Jeft alone for the present and future generations of this province? Ed Ansems, Terrace B.C. We need each other Dear Sir: 1 must voice my concern regarding the publication: “Youth, Unions and You", Such a book should be available in a bookstore for those who want to buy it and certainly not be paid for wilh taxpayers money. There is absolutely no question of my concern. Let me make it quite clear. What would a mather and father do if they had a child who is an hourly worker and another child who ison management side. It is very obvious thal this would not be good for anyone and we must take whatever steps are necessary to get rid of the labour against business mentality, In plain and simple wards, We all need each other to exist, J, Andre Nabess, Terrace, B.C. About the Mail Bag The Terrace Standard welcomes letters. Our address is 3210 Clinton St., Terrace, B.C, V8G 5A2. You can fax us at 250-638-8432 or e-mail us at standard@kermode.net, No attachments, please. We need your name, address and phone number for verification. Our deadline Is noon Friday or noon Thursday If it's a long weekend. | ~