The board’s action marked a $9 million reduction in the state-backed bond board members approved for a similar project proposed by the same developer in October 2013. Representatives of Thermogen Industries, the company proposing the mill, said they were “disappointed” in the reduction and could not say whether it would affect the project’s realization.
“This makes a challenging venture even more challenging,” said Alexandra Ritchie, spokeswoman for Cate Street Capital, the New Hampshire-based investment firm backing the project. “Developing a project [of this nature] is challenging enough. That being said, we will regroup” and see whether and when the project can be realized.
Board members who voted in favor of the $16 million followed a staff recommendation to lower the bond from $25 million despite the project having acquired new technology that FAME experts said was better than what the board approved with an 8-5 vote in October.
FAME staff analysts recommended against the larger bond because an independent appraisal showed that the pellet mill has only enough assets to back the lower figure should it fail.
Cate Street representatives said that with the $25 million bond, they expected to close on financing within 30 days and finish construction of the facility by April 2015. The plant is projected to create 55 jobs directly, 281 indirectly and produce 300,000 tons of pellets annually with $63 million more in equity than the earlier proposal.
The earlier proposal promised 36 direct jobs, 184 indirect jobs and 100,000 tons of pellets.
The pellets would be sold to overseas electricity producers seeking millions of tons of pellets, which are touted as an eco-friendly alternative to coal, according to the developers.
Cate Street is bankrolling the Thermogen venture and a Great Northern Paper Co. LLC mill in East Millinocket that has been offline since late January. Great Northern officials announced the layoff of 212 of 256 workers on Feb. 6 due to rising energy costs and chronic unprofitability.
The FAME bond is crucial to plans to restart the mill — although a restart date remains undetermined — and begin construction of the pellet mill this summer, officials have said. Created by the Legislature, FAME is an independent state agency that develops and administers programs to finance higher education and business in Maine.
Board member George Gervais, who voted against the $16 million bond in support of the higher bond, said he was disappointed in the board’s vote.
“It think it is an important project and there was less risk to the state in this project than in the previous,” said Gervais, commissioner of Maine’s Department of Economic and Community Development.
Board member Rosaire Pelletier, forest products industry liaison at DECD and supporter of the $25 million bond, said the technology changeout didn’t rate another review.
“I don’t know why this is here today. This should have been taken care of [already]. That’s my personal opinion,” he said.
After the meeting, Gervais said he believed board members had overemphasized recent Bangor Daily News coverage highlighting Great Northern having accumulated at least $6.8 million in liens and attachments due to nonpayment of taxes and vendors — particularly Brookfield Asset Management’s dispute with GNP over ongoing negotiations of an agreement to share revenues from Brookfield hydroelectric dams built originally to serve the paper mill.
Board members opted to revisit the approval of the $25 million on Feb. 20. That’s when FAME’s staff reported that Thermogen had informed them that they would be changing the project’s technology from a microwave pellet-roasting process devised in Scotland to a Masonite-based process offered by a company in Houston.
Acting Board Chairman Patrick Murphy and board member Neria Douglass, the state’s treasurer, supported the $16 million bond. They said they believed that the majority voted for that bond because Cate Street lacked the “strong prospect of repayment” of the $25 million that FAME’s rules require.
Douglass said she wasn’t comfortable with Cate Street arguments that Thermogen and Great Northern were separate companies and that GNP’s debts shouldn’t affect the Thermogen proposal. Cate Street, she said, argued that the two were intricately linked except when the debts became an issue.
“When we voted in October, Great Northern was running. Their application is that it [the Thermogen project] was a major business expansion and while they are separate corporations, there are interlocking investors and shareholders and directors,” Douglass said. “They are related companies.”
“There were a number of legal questions to be answered in my mind about the company and proposal in October,” Douglass added. “Then conditions changed when GNP laid off workers, and some of the aspects of it being a major expansion changed.”
Without GNP operational, the Thermogen project is more like a new business proposal than an expansion, Douglass said.
Great Northern, Cate Street officials said, has synergy with Thermogen in that both would use different parts of the trees harvested to make paper and pellets. Cate Street had always maintained that Thermogen’s project was critical to the long-term success of the paper mill, said Cate Street attorney Christopher Howard.
Ritchie said Cate Street showed its commitment to the paper mill and its integrity by operating the paper mill for 30 months without ever profiting and investing $21 million in paper mill operations.
During the hearing, Douglass said she was “astonished at the failure to pay taxes” by Great Northern. GNP West, the corporation that owns the Millinocket business park Thermogen plans to build its mill on, owes Millinocket about $2.3 million. GNP East, which represents the paper mill, owes East Millinocket $657,900.
“Brookfield’s involvement with regard to whatever’s been in the paper doesn’t weigh on me. But the nonpayment of a municipality does,” Douglass said.
Ritchie said GNP would pay its overdue taxes as part of and within 30 days of the closing on the bond, as the agreement requires. Any other liens against collateral for the bond must also be satisfied, FAME officials said. The bond money can’t be used to pay off existing debt.
The finalization of the bond would bring forth other investments, Cate Street officials said.
FAME attorney Christopher Roney said that FAME was pledging “the moral obligation of the state” to back the bond. Under state law, FAME would have to seek funding from the governor’s office or the Legislature if the governor’s budget cannot cover the $16 million.
Murphy said he also had concerns about the project’s lacking signed contracts guaranteeing its wood supply and customers to buy the finished pellets. Howard told the board that Cate Street is in talks with three equity investors and four potential customers and could have contracts signed within a few months of the bond closing.
The project has huge potential for Maine’s economy, Cate Street and FAME officials said. If Cate Street builds as many machines as they eventually hope to, 1,000 jobs will be created with a major new and growing industry supplying pellets to Europe, Great Britain and eventually North America.
Cate Street’s recent partnership with Zilkha Renewable Energy to supply the technology to the Millinocket venture guarantees Thermogen is part of the production of 600,000 tons of pellets annually. Located in Houston, Zilkha is building a similar-sized plant in Selma, Ala. That’s an amount large enough to draw substantial European interest, and the redundancy of two energy suppliers in different parts of the U.S. comforts European contractors leery of relying upon a single mill for all of their biocoal needs, officials said.
“Every one of us board members want to see this project succeed. We want to see Millinocket get jobs back,” Murphy said. “It is very, very important that this project succeed and that there is a decent amount of collateral to back this project.”
No timeline for the finalization of the bond has been set.
Correction: A previous version of this story incorrectly referred to the bond as a bond or loan guarantee.