State won’t help offset $48M proposed tax break for Katahdin mill suitors

Posted March 02, 2011, at 9:05 p.m.
Last modified March 02, 2011, at 10:10 p.m.

State government will offer “plenty of help” to revitalize two Katahdin region paper mills but won’t intercede directly to help East Millinocket and Millinocket grant Meriturn Partners $48 million in  property tax breaks the potential mill buyer seeks, Gov. Paul LePage’s spokesman said.

“We support the deal and want to help where we can, but the state has a budget crisis of its own to deal with and that’s the focus for us,” spokesman Dan Demeritt said Wednesday. “Nobody wins if the mills are not working. People need to stay focused on that.”

Meriturn signed a letter of intent on Feb. 11 to purchase the mills from Brookfield Asset Management of Toronto by April 29 if several conditions are met. East Millinocket and Millinocket town leaders disclosed Tuesday that Meriturn seeks the $48 million break over 10 years from both towns and would buy the mills, which Meriturn partner Lee C. Hansen said have lost money for years, for $1. If the deal falls apart, Brookfield said it would shut the East Millinocket plant on April 22.

Mark Scally, chairman of East Millinocket’s Board of Selectmen, called the initial Meriturn offer “a joke,” but he and Millinocket Town Manager Eugene Conlogue said their towns’ leaders are considering it. Negotiations will continue next week.

Hansen declined to comment on Wednesday. Town officials have said they plan to meet with LePage in a few days to see what help his administration can provide.

The state  likely will pitch in about $10 million in aid to help clean up the Dolby landfill in East Millinocket and help the mills with state permitting, Demeritt said. Used by the mills for decades, the landfill provokes fears about pollutants and the ultimate responsibility for the site that caused several previous potential investors to withdraw.

“Our focus is going to be to work on issues that fall within the jurisdiction of state government,” Demeritt said. “The local tax issue is not something the state would get involved in. A local tax issue is a local tax issue.”

And a $48 million tax break over 10 years might not be unreasonable. That’s according to Jeff Dutton, president and chief executive officer of Twin Rivers Paper Co., which manages the Katahdin mills and a mill in Madawaska; Keith Van Scotter, co-owner of Lincoln Paper and Tissue LLC.; John Williams, president of the Maine Pulp and Paper Association, an advocacy group in Augusta; and Patrick Woodcock, U.S. Sen. Olympia Snowe’s energy and environmental adviser.

“I wouldn’t characterize them as greedy,” Van Scotter said of Meriturn. “I would say that they are just trying to put together a scenario that justifies the risk of assuming ownership of these mills and trying to make a going business out of them.”“

“You can buy something for a dollar, but if it’s going to lose $1 million in a year, or $5 million, that’s still no deal,” Van Scotter added.

To help put the tax break in perspective, Williams said, Katahdin Paper Co. LLC, a Brookfield subsidiary that owns the East Millinocket mill, spent $47 million on its East Millinocket operations in 2009, when it employed 464 workers.

“That’s a fair amount of money spent statewide, and it is in a part of the state doesn’t have a lot of good-paying jobs,” Williams said.

The paper industry experts say that with paper markets generally in decline, several factors make the two mills a risky investment in the best of circumstances. The factors include:

  1. The Millinocket and East Millinocket mills are encumbered with “legacy values,” Dutton said, that do not match their present-day value. The Millinocket mill has been closed for almost 2½ years, and both mills have lost money for years, he noted.

“That is why we are seeking the transaction,” Dutton said, “because of the ongoing losses. This isn’t a new topic to the two towns. I think the question the towns are faced with is: What alternative is there? The business values of the mills aren’t close to the real estate values, so the tax burden becomes unsustainable.”

East Millinocket officials disagree. They have been in court battling Brookfield over the mill’s valuation for more than a year.

  1. Both mills require substantial reinvestment and revitalization merely to get them pointed in the right direction. Namely, they need to upgrade their equipment, acquire enough customers to achieve profitability, and diversify their product lines with new products that would acquire those customers.
  2. After years of decline, the supercalender paper market, which Millinocket’s mill would serve, is rebounding, but the telephone directory and newsprint markets East Millinocket serves are in free fall, Williams said.

“Of all these markets we are in, there’s not a publishing market that has grown. They are all in decline,” Dutton said, “all driven by electronic substitution” — computerized devices that replace paper.

  1. The mills are a significant distance from their customers and this adds to transportation costs at a time when gasoline prices are edging higher and Maine is burdened with “a transportation infrastructure that is extremely disadvantageous to its customers,” Dutton said.

Maine’s lack of seagoing shipping capacity, with most paper products sailing from Boston Harbor, is among several examples. The East Millinocket and Millinocket mills get especially hurt, Williams said, by federal regulations that effectively force logging and paper trucks off Interstate 95 north of Augusta.

  1. With the average Maine paper millworker earning, Williams said, $61,130 in 2009, the most recent year available, Maine mills pay wages higher than most other manufacturers. The costs are attributable to state mandates, such as workers’ compensation costs, higher medical benefit costs associated with state regulations and unions.

Thanks to several years of concessions, the East Millinocket unions, however, rank at or near the bottom in wages when compared to other mills statewide, union officials say.

  1. The sparse population surrounding the two mills leaves them with fewer stockpiles of recycled newsprint, which they use to cut costs, than most suburban and urban mills get.
  2. The mills have suffered from a lack of reinvestment over the years. Van Scotter said that with the national paper markets’ severe contraction over the last decade, even the most modern mills are suffering.

“The reality is the whole industry has changed, and even if they spent a whole lot of money, given the markets and inherent cost structures in Maine, I’m not sure it would have made any difference,” Van Scotter said. “A lot of mills and machines have shut down in the U.S. and Canada – good ones.”

Meriturn deserves credit, the experts said, for wanting to make both mills go, when several other suitors dropped out. They said the mills themselves benefit from several positive factors: The work force is excellent; the products made at both mills are good to excellent; and the mills have ready access to electricity and good stocks of wood with which to make their products.

Meriturn revitalized Dunn Paper, a Michigan specialty packaging and labelmaking mill that competes with Twin Rivers’ Madawaska operations, Dutton said.

“They were formidable competitors,” Dutton said. “We figured their business would not have made it, but they came in and did something and that business is still there. They are still a very viable competitor today.”

“From my perspective, they have a track record in doing what they say are going to do,” Dutton said of Meriturn.

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