AUGUSTA — The Finance Authority of Maine’s board voted Thursday to reduce the amount of a bond for Thermogen Industries, an energy startup hoping to begin operations in Millinocket. Thermogen will receive a $16 million bond, instead of the $25 million it requested.
The 8-5 vote represents a reversal for Thermogen, which in October received approval from FAME’s board for a $25 million bond. Since then, the company, which is managed by New Hampshire private equity firm Cate Street Capital, decided to pursue a more expensive, but better established, technology to manufacture renewable wood-based biofuel. FAME officials determined the change was significant enough to require a new vote.
Alexandra Ritchie, Cate Street’s managing director for government and community relations, said she was grateful for FAME’s staff and board evaluation of the project, but was “disappointed” that the company’s request for a $25 million bond failed. Ritchie was not prepared to say what this means for the project’s viability going forward.
“I need to go back and regroup with our organization and take a look at what impact it will have,” she said, while acknowledging the vote makes the project more challenging.
Christopher Howard, the Pierce Atwood attorney representing Cate Street, said the vote puts the equity firm in the awkward position of having to tell investors it lost state support.
“It’s a very difficult endeavor to go out to existing partners that you’ve been talking to about a state-supported $25 million piece of financing and try to back them down to the $16 million level and still have them believe we still have the kind of support we need in order to have that debt slice in the capital structure,” he said.
The bond is being provided under FAME’s Major Business Expansion Bond Program. Interest rates are determined at the time of the bond sale, and loan terms are based on the project’s assets. If Thermogen fails and can’t pay back the $16 million, the state would have to repay it.
Thermogen has proposed building a facility in Millinocket, at the site of the former paper mill, and use technology to create wood pellets targeted primarily for power plants in Europe looking to replace coal with a cleaner-burning alternative. Thermogen’s original plan used an untested technology to create biocoal. The new plan doubles the original project’s cost to $140 million, but increases the number of direct jobs created from 36 to 55 and triples the annual output of the facility to 300,000 tons. Cate Street officials said it would raise the extra capital necessary for the revised project.
As it did in October, FAME’s staff recommended a $16 million bond on Thursday rather than the $25 million.
Cate Street officials stressed to the FAME board that the new project is an improvement over its previous plan. But some board members expressed concerns over other issues that have surfaced since last fall. Specifically, the financial challenges of Great Northern Paper, another company managed by Cate Street, were cited by two board members who reversed their votes from October.
GNP, which closed its paper mill in East Millinocket in January and laid off 200 workers, has failed to pay $3 million in overdue property taxes to Millinocket and East Millinocket. In addition, on March 31 the IRS filed a lien with the Penobscot County Registry of Deeds on GNP West Inc., one of Great Northern’s subsidiaries, for $1.4 million in unpaid corporate income tax from 2012. Several other creditors are also seeking payment of unpaid bills.
“Their handling of their credit issues changed my mind,” Larry Mitchell, a board member and retired U.S. Marine Corps colonel, said after the meeting.
Mitchell said Cate Street held a certain amount of goodwill when it approached FAME last fall.
“That goodwill kind of disappeared because of the recent revelations,” he said. “I think it’s an important project and I think … well, I hope they succeed, and I think they probably will.”
Neria Douglass, Maine’s state treasurer and a FAME board member, also voted for the lower bond amount. She was unable to attend October’s meeting, but had her deputy attend to vote for the $25 million.
She changed her mind because of the “nonpayment of taxes” and because Great Northern closed the paper mill. She said there were anticipated synergies between the paper mill and Thermogen when the mill was operating, and the promise of those synergies no longer exists.
“I do accept the closing of the mill is a business decision that may have been required, but it means I’m a little less willing to take on the extra risk that they were asking for in terms of bonding at $25 million, while the $16 million bond seems to be covered by collateral,” she said. “So it’s really a question of, for me, increased risk.”
George Gervais, commissioner of the Maine Department of Economic and Community Development and a FAME board member, was disappointed with Thursday’s vote. He blamed stories in the media for influencing the FAME board to back away from a $25 million bond.
“(Cate Street) very clearly brought to us a project with less risk for the state of Maine than the one we approved in October. I feel they addressed the concerns raised in October with the change in scope of this project,” Gervais said. “I understand a lot of the doubt came from the stories that have been playing in the press related to Great Northern Paper. I personally believe that’s what drove the outcome today.”
Vice Chairman Patrick Murphy, president of Portland-based marketing and consulting firm Pan Atlantic SMS Group, was one of the five board members who opposed the $25 million bond in October. He voted for the $16 million bond Thursday. Murphy credits Thursday’s outcome to board members having more time to do due diligence and think about their fiduciary duty to the state’s residents.
“I think the board today was being a bit more conservative and saying, ‘We want to ensure the citizens of Maine are not going to be left carrying the can here,’ ” he said.
Before the bond can be released to Thermogen, FAME is requiring that Great Northern pay the $3 million in overdue property taxes to Millinocket and East Millinocket. Christopher Roney, FAME’s general counsel, said during the meeting that the same condition applies to the $1.4 million in unpaid corporate income tax to GNP West, because it owns the land on which the Thermogen project would be built.
Howard, the attorney, said the company’s intention is to pay all of its outstanding taxes at the time of the closing on the FAME bond.
One question raised by multiple board members centered on interpreting the legislation that created the bond program. A requirement for bond approval is “a strong likelihood” that an applicant would be able to repay the money.
Roney said the lawyer in him interprets that language to imply there is “clear and convincing evidence that it will be repaid.” He noted that this standard is much higher than for FAME’s more well-known commercial loan insurance program, which only requires a “reasonable prospect of repayment” and only places FAME in a position to be liable for a maximum of $4.2 million.
The FAME board members who voted for the $16 million bond were Murphy; Douglass; Cheri Walker, principal at Albin, Randall & Bennett; Susan Snowden, director of consumer banking at Bangor Savings Bank; Christopher Pierce, a retired executive from Cumberland; Gregory Miller of Eastern Maine Community College; Jay Violette, a senior loan officer at TD Bank in Waterville; and Mitchell. Voting against the $16 million in anticipation of approving a $25 million bond were Gervais; Rosaire Pelletier, a senior forest products industry adviser for Gov. Paul LePage; Patrick Keliher, commissioner of the Maine Department of Marine Resources; Reis Hagerman, vice president of enrollment management at Saint Joseph’s College; and James Howard, CEO of Priority Real Estate Group in Topsham.
Whit Richardson can be contacted at 791-6463 or at: