GNP Magic to misfortune

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Once upon a time, Millinocket was “the magic city,” a company town where money grew in trees and the paper industry seemed unstoppable.

At the dawning of the 20th century, Great Northern Paper Inc.’s new Millinocket mill was the largest in the world. At its peak, the company owned 10 percent of the state’s land area and the nation’s largest private hydroelectric system. More than 4,000 loyal employees toiled at the company’s two mills, then went home to mill-built houses to raise the next generation of workers – children who would graduate from high school one day and report to the mill the next.

By the time GNP filed for Chapter 11

bankruptcy protection just after Christmas last year, however, Millinocket had lost its magic, and local people had lost a century of faith. Mainers are asking how a company could fall so far.

But this is a case where even hindsight isn’t quite 20-20.

“Everyone is looking for something or someone to blame, but like a lot of things in history, it’s a much fuzzier, murkier picture,” said Lloyd Irland, a former state economist who now runs a forestry consulting business from his Winthrop home.

Paper barons

Mainers have never wanted to believe that GNP, the last of Maine’s independent mills, could fall. But for decades, the company has been on shifting ground.

“There was a whole series of superlatives at Great Northern, even through the ’50s. Now, the superlatives are in the past and other regions are leading,” Irland said.

GNP was a 20th century giant, cast in the mold of Standard Oil by captains of industry. GNP grew the trees, hired the loggers, made the electricity and trucked the logs on company-owned roads, lowering its cost to make and market paper. For decades, the strategy led to immense power and wealth for the company. In 1969, around the time of peak employment, net sales topped $175 million – two-thirds as much as the state budget.

“For some 50 years, through peace and war, boom and depression, it grew, independent and proud and self-sufficient, minding its own business and keeping its affairs to itself,” late GNP historian John McLeod wrote in a 1982 book titled “The Northern: The Way I Remember.”

But paper production, like all natural-resource-based industries, is cyclical. Instead of diversifying its products to weather the storms, GNP again and again lost opportunities to invest in new ideas and technologies.

Through the years, much of the equipment at GNP has been outdated. Historians cite only four major overhauls in the company’s 103-year history. Of the four machines that have been used in recent years, one was rebuilt in 2001 and two others modernized in 1985, but the core machinery is 30 or more years old.

Another GNP historian, the late Paul McCann, predicted the company’s demise in 1994, when he wrote a book aptly titled “Timber: The Fall of Maine’s Paper Giant.”

McCann, a former company spokesman, links many of the company’s problems to the 1970 decision to merge with Nekoosa Edwards Corp., a Wisconsin-based operation, to form Great Northern Nekoosa. The merger gave the new company a place on the national stage and funds to expand in the South, where trees grow faster and wages are lower than in Maine.

Irland called the merger “defensive.” Throughout the industry, paper production was shifting to the development-friendly South. The mood of the day was “merge or be swallowed up.”

“There was a prodigious resource at a very low cost. You had timber sitting right on top of oil and gas fields. The fiber was there and it was growing like gangbusters,” he said.

But as the formerly Maine-based company grew, Mainers lost influence in company decisions. The company even had a ban on purchasing land in Maine.

By the mid-1980s, Great Northern Nekoosa’s board of directors had little knowledge of the GNP mills, according to McCann. Instead, the board of directors invested in new technology for its Southern mills, and made acquisitions scattered throughout the eastern United States.

Changing times

As the decades passed, the mills struggled to cope with changing times. A seemingly endless string of unanticipated challenges during the 1970s and ’80s kept GNP managers in reaction mode, and only made the Maine mills less influential in the Great Northern Nekoosa boardroom in Norwalk, Conn.

“Maine, in their corporate headquarters, became a dirty word,” said James Tierney, who served as Maine’s attorney general from 1980 to 1990.

The company’s difficulties mounted during that time:

? With the passage of new environmental protection laws in the early 1970s, GNP spent more than $36 million adjusting its old equipment to meet new standards.

? Beginning in 1975, GNP was among the landowners who led a battle with Maine Indian tribes over land ownership. Through the 1980 Maine Indian Claims Settlement Act, the company sold more than 99,000 acres to the tribes.

? In 1976, Wayne Hockmeyer and a group of friends made the first-ever white-water rafting trip down the West Branch of the Penobscot, and recreational use of paper company holdings by hikers, campers and rafters became another diversion for the company’s energies.

? In 1978, a majority of the workers at GNP participated in the mill’s first large strike, causing rifts that some say have never healed. The strike cost GNP an estimated $10 million.

? In the mid-1970s a decade-long plague of spruce budworm larvae began eating Maine’s spruce and fir forests – the raw materials for paper pulp. Then, the massive rolling clear-cuts that were prescribed to counteract the ravenous insects raised the concerns of a nascent environmentalist movement. In 1989, after years of battles with timber industry leaders like GNP, the Forest Practices Act was passed, ushering in a new era of regulated forestry.

Years of squabbling came to a head in the mid-1980s, when for the first time GNP’s plans to take advantage of hydropower was denied. Mainers and industry analysts alike point to the “Big A” debacle as a turning point for the company.

The Arab oil embargo of the 1970s and an emerging Canadian paper industry subsidized by the government also created problems for GNP.

In 1981, the company was producing 50 percent of its power from company-owned hydropower dams throughout the Penobscot River watershed. A $100 million dam and generating station proposed for Big Ambejackmockamus Falls on the West Branch would solve the company’s energy problem, supporters said.

But the dam would also have flooded the West Branch’s rapids, leaving in their place a massive, placid lake. New environmental and recreation lobbies fought the dam in unprecedented joint hearings of the state’s Land Use Regulation Commission and Board of Environmental Protection. The dam was finally defeated in 1985.

GNP spent millions protecting its “corporate ego” and didn’t know when to accept defeat, Tierney said.

“They were off the ball for five or six years, fixated on the dam. They got mad when they should have been focusing on making paper,” he said.

Uncertain future

Over the past 15 years, GNP has been tossed from owner to owner, each unable to revive the troubled giant. Many Mainers trace this last age of GNP’s life to a single point of no return – the hostile takeover of Great Northern Nekoosa by Georgia-Pacific in 1988.

Tierney led a court battle to block the sale, which created – for a short time – the world’s largest paper company. He was one of the few outsiders to ever pore over Great Northern Nekoosa’s company documents, and see plans for the Maine mills. He still believes the company cared about GNP.

“These guys really knew the company. They knew every machine,” Tierney said of the Great Northern Nekoosa management.

Georgia-Pacific, on the other hand, is based in Atlanta and had no loyalties to two outdated mills in northern Maine, he said.

“It was like looking down Main Street in Millinocket when I looked at those documents. I could see what was going to happen – I thought, ‘Oh boy, here we go. We’re just going to keep being bought and sold,'” Tierney said.

Wall Street analysts predicted at the time that Georgia-Pacific would sell off “unimportant or excess assets,” and that Maine’s outdated and debt-laden mills could be at risk.

Georgia-Pacific promised to hold GNP for at least a year. The deal was completed in 1990, and the old GNP holdings were sold to Bowater, a South Carolina company, one year later, for $300 million.

Local residents hoped for salvation.

But Bowater made no major capital investments and instead dismantled the old GNP and within eight years, sold the assets to out-of-state companies for a total of more than $600 million.

Bowater was part of an industrywide trend toward “galloping gigantism,” which encouraged paper companies to enlarge, then contract, keeping only the most profitable holdings, Irland said.

A majority of the GNP land went to J.D. Irving of Canada and to McDonald Investment Co. based in Birmingham, Ala.

And in 1999, the two paper mills, the hydropower system and the remaining 380,000 acres were sold to the current owner, Inexcon, a Canadian consulting firm, for $250 million.

Locals spoke of a “white knight.”

At first, Inexcon and its new Canadian president, Lambert Bedard, seemed to be the realization of Millinocket’s hopes. The company secured more than $150 million in loans to rebuild the 30-year-old No. 11 paper machine in Millinocket, and claims to have distributed more than $1 million in bonuses to its management team.

But debts continued to build, and in 2002, Inexcon sold the hydropower assets, 11 dams and six power generating stations, to Brascan Corp.’s Great Lakes Group, a Toronto-based conglomerate, for $156.5 million.

New world order

The short answer to Maine’s million-dollar question is that GNP is in bankruptcy court because it went into industry hard times in a weakened state.

The combination of a reduction in paper use in response to a struggling post-Sept. 11 economy, and the rise of new competitors overseas has taken American paper companies to the low point on the pendulum swing, explained industry experts.

“When the pricing and profitability is at the low end of the cycle, the high-cost mills like GNP are more vulnerable,” said John Maine, vice president of Resource Information Systems Inc., an industry economics consultant based in Massachusetts.

All Maine mills have had increased costs because energy and labor are comparatively high. A 1999 report compiled by University of Maine economists indicated that inflation-adjusted wages in the Maine pulp and paper industry had increased 20 percent over the past 20 years – by far the biggest jump among 11 papermaking states.

Mill managers struggled to remain profitable while maintaining larger, higher-paid staffs than many of their competitors. GNP had had a paternalistic relationship to the town, and leaders through the years have felt a greater responsibility to its employees than economics alone would dictate.

“They just can’t support the kind of wages and fringes that they could in 1984, or 1954,” Irland said.

And the general business climate in Maine runs to high taxes and strict environmental regulations. The constant risk of clear-cutting bans or tough new pollution restrictions make Maine appear risky to paper companies, he said.

“People say, ‘Why do we want to do business in a place like that? It’s a bloody circus up there,'” he said.

And GNP has been in a particularly tight spot in recent years because the price of softwoods like spruce and fir has been high due to a shortage that is the legacy of the spruce budworm outbreak.

“These mills were built on a single type of fiber that’s shrinking in supply,” Irland said.

No domino effect

With all its baggage, GNP just couldn’t compete in the new international paper marketplace. In the past 20 years the market has expanded, and paper production overseas has created a large supply while demand was low, driving prices lower than they’ve been in recent memory, said John Williams, president of the Maine Pulp and Paper Association, an industry lobby group based in Augusta.

International paper corporations often shut down less profitable mills during such times.

“For many of the mills that have deeper pockets, they can just wait out these periods,” Maine said.

This shrinking paper market is increasingly being served by new mills in Asia, Australia and Latin America, many of which have lower timber, energy and labor costs and fewer environmental regulations.

And a strong U.S. dollar makes foreign products all the more attractive to a world marketplace than expensive American imports.

“It’s a significant cause of the pain that we’re seeing right now in the paper industry,” Irland said.

But despite all the bad news, GNP’s bankruptcy does not herald the end of Maine’s diverse pulp and paper industry. The company faced unique challenges.

“I don’t think there’s a question that some machines are at risk and some mills may be at risk … [but] it’s not a domino sort of thing where GNP is going to knock down another and another and another,” Irland said.