Achieving Maine’s goal of extending natural gas lines to unserved areas — and cutting energy costs for major employers — may partly hinge on state government’s willingness to offer loan guarantees for private-sector projects.

Without those assurances, lenders may balk at financing new pipelines to serve Maine’s paper industry, amid questions about the economic condition of some mills and their ability to pay off debt.

Paper mills are essential because of their constant, heavy demand for steam energy. Reaching them, as well as other large “anchor” customers, such as hospitals and state-owned complexes, is the first critical step in offering gas to more homes and small businesses, and easing the state’s high dependence on oil.

These points are emerging from discussions by a special working group set up by Gov. Paul LePage to see what the state can do to help expand gas service. Gas enjoys a big price advantage today. It’s roughly 40 percent less costly than heating oil and projected to stay lower for many years.

Working group members include pipeline companies, local distribution utilities and project developers. Talks remain under way, but the group is likely to issue a report before year’s end.

LePage and the group’s members know loan guarantees can be a powerful tool. Last spring, the Finance Authority of Maine agreed to backstop a $5.2 million bank loan to help new owners of the pulp mill in Baileyville convert from oil to gas. A 4.5-mile pipeline is now being built, an investment that’s expected to pay for itself in a year and eliminate the need for 10.3 million gallons of industrial oil.

Moreover, gas will help make the mill more competitive, securing 310 papermaking jobs and an estimated 1,800 related jobs from logging to shipping.

The loan guarantee for Woodland Pulp LLC is relatively small, around $5 million. But building an 80-mile pipeline anchored by three paper companies along the Kennebec River valley — one proposal looking for financing — could cost $80 million. Bringing gas to a shuttered, recently purchased paper mill in Millinocket also would be expensive.

These and other potential projects will force the LePage administration, and lawmakers when they return to Augusta in January, to decide how deeply the state should get involved in helping finance natural gas lines.

“We don’t want to put any more public funds at risk than we have to,” said Kenneth Fletcher, the state’s energy director.

Fletcher, who organized the working group, said the state would have to study each proposal and see how risk could be reduced. For instance: The Kennebec Valley proposal targets paper companies in Waterville, Madison and Skowhegan.

But the pipeline route also would pass through Augusta, where the state spends millions of dollars a year to heat government buildings and where a new regional hospital is being built. Hooking up these and other big users could increase the volume of gas sold and reduce the risk to investors.

Maine has two interstate gas pipelines that fuel half the state’s electricity generators. But more than a decade after the lines were built, only 5 percent of the state’s homes and even fewer businesses burn gas.

Distribution lines were built to paper mills in Jay and Rumford; a third line later connected the mill in Bucksport. Since then, the paper industry in Maine has consolidated and mills are struggling in a down economy.

The Rumford mill, for instance, is operating under bankruptcy protection. The Woodland mill had closed temporarily before new owners took over a year ago.

The mill in East Millinocket is set to reopen this month. The new owner eventually plans to restart the sister facility in Millinocket, but the venture depends on market conditions and the ability to convert from oil to gas.

This atmosphere makes it more challenging to finance natural gas lines to Maine’s paper mills, according to Mark Robinson, a managing member of Kennebec Valley Gas Co. LLC. Robinson won’t discuss details, but says not all the mills that are vital to his company’s project have investment-grade credit ratings.

State loan guarantees may be needed to attract investors, he said. It will cost roughly $1 million a mile to run the 8-inch steel line from Richmond to Skowhegan and Madison.

The state has a clear economic interest in supporting the project, Robinson said. Gas could cut energy costs to customers along the route up to 40 percent, he said, and bolster employers that originally located in the river valley during the 19th century because of water power.

“These mills now operate at a distinct economic disadvantage due to the lack of access to natural gas,” he said.

Loan guarantees aren’t the only option being considered, however. The town of Madison, which has a municipal electric utility, is asking voters next month to approve a $72 million bond request for a competing pipeline proposal.

While paper mills could be anchors for new pipelines, it’s not clear how many home customers would be able to take advantage of gas right away.

Maine Natural Gas has been serving Windham since 1999, when the interstate pipelines were built. Many businesses along local highways have converted to gas, but distant subdivisions are too costly to reach, according to Darrel Quimby, the company’s vice president.

At the same time, homeowners near the gas lines often balk at converting to gas, especially if they have newer oil equipment. The company offers small rebates, but Quimby thinks that some form of cash incentive probably will be needed to convince most people to buy a new boiler, which can cost more than $5,000.

“We find that people have a hard time coming up with that money,” Quimby said.

Staff Writer Tux Turkel can be contacted at 791-6462 or at:

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