PUD poised to sell turbine to paper mill investors


In 2006, Grays Harbor Paper was looking for new ways to keep itself economically solvent, and talk about green energy was a hot topic. About a decade before, the company had purchased an old biomass turbine from Weyerhaeuser and had it sitting in storage without the funding to install it.

Grays Harbor Paper executives, including then-President Bill Quigg, approached local legislators with an idea: Provide the funding and the company will install the turbine system, which uses woody debris, burns it and creates steam that powers the turbine that creates electricity. The thought was the company could lower its costs and make it more viable by lowering its energy bill.

Legislators agreed and wanted to help, but the state can’t just give cash to a private company outright. The Grays Harbor PUD stepped in as an intermediary. The 2006 state budget allocated $7.5 million to help install the turbine. The allocation included a $6 million grant and loans that added up to $1.5 million, with agreements by the paper company to pay off the loans.

Fast forward to today and Grays Harbor Paper is out of business. The PUD still owns the turbine and is on the hook for hundreds of thousands of dollars still owed to the state.

New documents filed with Grays Harbor Superior Court show that the PUD is willing to sell the turbine to a new company seeking to take over the paper mill. The sale price would be $540,000.

On Monday, the PUD commissioners will meet and consider a resolution to sell the turbine as surplus, and all three commissioners have said they fully support the sale.

When the paper mill went under in May of last year, it left more than $25 million in secured and unsecured debts, including $9 million owed to U.S. Bank. The Grays Harbor PUD is a secured creditor, specifically because of its role in the biomass turbine installation. Grays Harbor paper owes the PUD $1 million for the turbine and the PUD, in turn, is supposed to pay that to the state.

And that doesn’t count the roughly $1 million Grays Harbor Paper owes the PUD in back power costs. That debt is unsecured.

The state Community Economic and Revitalization Board oversees the loans given to the PUD. A $500,000 loan has been paid off, leaving the original $1 million loan. At the request of the PUD, the board already approved a deferment of the loan. The next payment is due in July, according to Karen Larkin, with the state Department of Commerce. Larkin said the issue will come up during the board’s next meeting in July.

State Sen. Brian Hatfield, D-Raymond, sits on the Community Economic and Revitalization Board and said he expects the PUD to ask for permission to pay a lump sum covering part of what it owes and then ask the board to write off the rest.

“We have discussed a lot of potential solutions since our briefing with Senator Hatfield and Commerce,” PUD spokeswoman Liz Anderson wrote in an e-mail. “We will need to present a formal request in writing for their consideration prior to the meeting and likely will request a lump sum payment with conversion of the remainder to a grant.”

SPECIAL MEETING

During a special meeting June 21, the PUD commissioners met in a closed-door executive session to “Discuss the Sale of Real Estate.” The PUD says no action was taken, but the very next day PUD General Manager Rick Lovely signed an asset sale agreement for the sale of the biomass turbine for $540,000 to Harbor Paper, the company that wants to buy the mothballed paper mill.

The sale is contingent on the mill actually being sold. A Superior Court judge has to approve that deal and a hearing is set for July 12.

Anderson said a resolution will be brought before the PUD Board of Commissioners on Monday, for surplussing the property and agreeing to sell it contingent on the court approving the sale by a receiver.

Anderson said the PUD would like to sell the turbines for more than $1 million to repay the loan, but “market conditions, the economic decline and the fact that the mill is in receivership substantially impacts our ability to generate a better purchase price.”

“Our other option would be to remove and try to sell the generators or scrap them which would mean any additional benefit from the state initiative would be negated, plus there wouldn’t be 175 jobs and we would anticipate a lower purchase price than what is currently on the table,” she added.

Anderson said the general manager has the authority to enter into purchase and sale agreements without direct approval by the PUD commissioners.

“… Briefings took place in executive session to share with the Board progress in the negotiations and the development of an agreement as part of the District’s strategy in the ongoing receivership court case,” Anderson wrote. “Board members are able to express concerns, seek additional information, discuss potential risks and benefits and state opinions which help guide staff through the process. Negotiations are very fluid and can change by the hour so often the General Manager is making decisions based on his understanding of the Board’s objectives. At the end of the process we had an agreement signed by the General Manager.”

Besides the sales agreement, in a June 22 letter found in court records, Lovely also committed to the court-appointed receiver to use $185,658 in PUD resources to pay the receiver for rent on the land the turbine sets on. Rayonier owns much of the land at the mill site. Before 2006, Grays Harbor Paper leased the land directly from Rayonier. But because the PUD owns the turbine, the lease agreement had to change so the PUD would have access to the turbine. The PUD then sub-leased the property back to Grays Harbor Paper.

But when the mill went under, the back rent on the property became a question.

The $185,658 paid to the receiver is being used to compensate Rayonier for the back rent, as well as unpaid property taxes, according to filings made by the receiver.

The receiver notes that if the sale is approved by the judge, he’s also asking permission to make the lease and sub-lease agreements null to help the PUD. The receiver also notes that the asset sale agreement to sell the biomass turbine to Harbor Paper is “critical to the operation” of the mill.

PUD Commissioner Tom Casey noted the commissioners have talked about the legal interests of the district as they apply to the court receivership process in executive session, but he said there was never any direct action taken on the turbine deal, which he said is pending.

Casey and fellow PUD Commissioners Russ Skolrood and Dave Timmons all said they approve of the pending deal.

“As far as the deal itself, I don’t think everybody is going to be happy, but my stance would be that we want the mill to open up and that’s the best scenario for us and the community and the ratepayers,” Skolrood said. “If we scrapped it, the value is pretty much a wash. The best thing for us is that the mill actually reopens.”

“Everything that led up this was all about keeping that mill open and keeping that mill working,” Casey added.

Timmons doubted there was much of a market for the turbine, saying, “There really aren’t people out there clamoring to buy bio-turbines.”

If this works out, and it looks like it’s going to, it’s going to be a real good thing for the community,” Timmons said.

Asked if the PUD was getting a fair deal, Casey said he saw the PUD as being in a position to assist “the general economic well-being of an entire community. Not to mention, that if the mill runs they buy electricity and that generates revenue and that helps us pay off the fixed costs that we would otherwise have.”

“There is certainly a business element benefit to the PUD if the mill is open,” Casey said.

HELP FROM THE STATE

Grays Harbor Paper has received special attention from local legislators and state leaders.

Laws were changed mandating several state agencies to convert their paper usage to a 100 percent recycled variety that Grays Harbor Paper produced. The state Department of Ecology provided a consultant to Grays Harbor Paper to help its “industrial footprint.” The paper company qualified for a B&O tax break supported by local legislators in 2006.

Grays Harbor Paper had 5 megawatt and 2 megawatt turbines before the state provided funding for the new one. The $7.5 million provided the funding to install a 7.5 megawatt turbine that the paper company had purchased in 1996 from Weyerhaeuser when it shut down a pulp mill in Everett.

Besides the $7.5 million, the PUD was also given a $1.5 million state grant for a new substation and transmission lines, specifically to service the new biomass project, although it had the added effect of improving electrical service in the Hoquiam area.

According to a Daily World story at the time, Grays Harbor Paper needed 12.5 megawatts of energy to operate and if everything was running at capacity, the paper company would be a “power island” dependent on biomass and still have extra megawatts it could sell back to the PUD as “green energy.”

But the paper company always had issues running at full capacity because of a lack of biomass to run all of the turbines. Following the December 2007 storm, the mill was urging the public to bring their tree branches to the mill as a way to increase supply. And, even then, company officials said at the time, they didn’t have enough to run at full capacity.

The high cost of the biomass raw material sometimes made it more cost effective to just buy power from Grays Harbor PUD, company executives have said.

And yet when the paper company went out of business, it owed the PUD more than $1 million from unpaid power bills.

State Sen. Jim Hargrove, D-Hoquiam, said that he has no regrets about helping Grays Harbor Paper. He points out that back in 2006, the community was reeling from mill shutdowns in Cosmopolis and Aberdeen.

“Another gut punch to the Harbor would have been devastating,” Hargrove said. “We were looking at losing another 250 jobs with Grays Harbor Paper and had an opportunity to create green power to help subsidize the paper mill. I constantly hear the number one issue is jobs and if we’re not doing everything we can to keep jobs in the Harbor, I think we would be at a bigger risk to be politically stupid or policy stupid than taking a shot at them creating green power. It didn’t work out. And it was a little risky, but I’d do it again.”

Hargrove points out that the state Legislature passed “all sorts of tax breaks for Boeing and they moved their headquarters out of the state anyway.”

Hargrove said he feels the state’s investment “recycled throughout the community these past years and certainly paid the taxpayers back in multiple ways.”

Daily World reporter Angelo Bruscas contributed to this story