Success — and struggles Six mills see fortunes change

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Six paper mills along the Penobscot River may be the victims of their own success. For most of a century, the mills were proud to the point of arrogance about their dominance in the global marketplace. They were just as strong and just as powerful as the mighty river that flowed alongside their facilities.

But it was their inability – or even lack of desire – to change the way they conducted business that may have put them in a downward spiral in recent years.

According to industry analysts, it was the natural resources – the vast expanses of timber, and the energy and transportation possibilities of the Penobscot River – that brought the paper companies to the region in the late 1880s and early 1900s.

But even the continued abundance of these resources was not enough to overcome years of bickering, infighting and poor decision-making by management teams, corporate boards of directors, labor groups, politicians and environmentalists.

In the last two years, nearly 2,000 paper jobs have been lost – the majority just in the last three months – at the six mills along the Penobscot.

“In the minds of many, Maine’s forest products industry has entered the beginning of the end, much like textiles and steel,” said James McNutt, executive director of the Center for Paper Business and Industry Studies, based in Atlanta. “It’s lost its competitive positioning, it has a poor image as a competitive place for business, and there has been a historical inability to secure the cooperative attention of politicians, labor and industry for a common path forward.”

While it remains one of the five strongest enterprises in Maine, according to economists, the industry is in peril unless all players across the board – from workers and managers to politicians and environmentalists – make the right choices about where to go from here, according to McNutt during a recent interview.

“This will not be easy,” he said. “That time is now … or maybe never. All involved must choose wisely and with a dedicated sense of urgency.”

Of the six mills along the Penobscot River, four currently are under Chapter 11 bankruptcy protection. Great Northern Paper Inc.’s two mills in Millinocket and East Millinocket will be sold in the next few days to Brascan Corp. of Toronto in a $103 million deal approved by U.S. Bankruptcy Judge Louis H. Kornreich last month.

Eastern Fine Paper Co. in Brewer and Lincoln Pulp and Paper Co. in Lincoln, both owned by Eastern Pulp and Paper Co. of Amherst, Mass., received additional financing this week to get the mills through the end of June. At that time, the parent company either will be in U.S. Bankruptcy Court in Bangor to present a plan to emerge from bankruptcy or it will present another financing plan to get through an unspecified amount of time.

More than two weeks ago, Georgia-Pacific Corp. in Old Town retired its two tissue machines, putting 300 people out of work. What remains is its pulping operation, but some analysts wonder for how much longer. At least 300 people still have jobs.

And in Bucksport, at International Paper, 10-day or two-week shutdowns continue sporadically because of poor market conditions. During the most recent shutdown, in late December, about 150 people accepted severance and early retirement packages, and the work force was reduced to 900.

“We’re past the peak,” said Lloyd Irland, a former state economist who owns The Irland Group Forestry Consultants in Winthrop. “It’s really tragic.”

The industry may never return to the glory years, but analysts, company managers and state officials remain hopeful the paper mills will continue to be a viable and integral – though somewhat leaner – part of Maine’s economy.

Eastern Fine Paper Co., Brewer

A glut of paper products along with rock-bottom prices for the goods could keep Eastern Fine Paper’s parent company, Eastern Pulp and Paper Co., in bankruptcy for a while longer. Unlike Great Northern Paper Inc., which entered bankruptcy in early January and was sold within four months, Eastern Fine is following what’s called a typical bankruptcy path – reorganizing its debt and operations while it writes a financial plan on how it will survive after reorganization.

Eastern Fine’s confidence level teeters between uneasiness about depressed market conditions and exuberance about a new product that could make it a major player in the digital imaging industry.

The Brewer mill is trying to accomplish what other smaller paper companies throughout the country are trying to do – find a little corner of the paper-producing world that no one is touching and develop a product that will make it stand out.

Doug Walsh, executive vice president of Maine operations, said the Brewer mill is completing the development of untreated, uncoated roll-stock digital paper for Hewlett-Packard Indigo commercial and specialty web presses, otherwise known as high-speed digital color laser printing applications. The paper will be available for print trials next month by selected press owners and operators in the United States.

“Eventually our ability to compete and be viable will depend on our ability to be somewhat immune from the problems in the pulp and paper industry,” Walsh said. “That is why we need to develop more of these products.”

Under the protection of bankruptcy, Eastern Fine is trying to streamline its operations so it can be profitable even during the downtimes of the market, Walsh said. The writing and printing products manufactured in Brewer continually are susceptible to pricing and inventory variations in the marketplace, he said.

When the parent company filed for bankruptcy almost three years ago, the third shift in Brewer was cut temporarily while other employees were offered early retirement packages or were laid off. Within a year, the third shift was put back on the schedule.

“The paper industry is tough, whether you’re in Maine or any other place,” Walsh said. “We still feel confident we can be competitive in these days of globalization.”

Great Northern Paper Inc., East Millinocket

When bankrupt Great Northern was shopped around to at least six prospective buyers beginning last September, the East Millinocket mill was not presented as the saving grace of the company. Instead, it was the No. 11 supercalender paper machine in Millinocket, which recently underwent a $156 million refurbishment, that was offered up as the jewel of the properties for sale.

But when Brascan Corp. completes its $103 million purchase of Great Northern in the coming days, the East Millinocket mill will be the first to start up after being idle since late December.

During the four-month downtime, Brascan subsidiary Nexfor Fraser Papers Inc. picked up some of the orders that would have gone to Great Northern, according to a Nexfor Fraser official, and now Brascan is trying to woo back the Great Northern customers who chose suppliers other than Nexfor Fraser.

The East Millinocket mill produces directory paper, and “is a very good mill from the perspective of competing in its respective market,” said Richard Legault, executive vice president for Brascan, in a recent interview.

Legault sat in the back of U.S. Bankruptcy Court in Bangor on March 24 when Judge Kornreich approved Brascan as the buyer of Great Northern’s mills. He saw more than 20 people, mostly millworkers, stand up and applaud the successful completion of the deal.

Yet even though most of Great Northern’s 1,116 workers supported Brascan as the most reliable of two final suitors to keep the mills open for decades to come, more than half of the furloughed employees won’t be rehired.

During the mills’ heyday, more than 4,400 people were employed at Great Northern’s facilities in Millinocket and East Millinocket, and when the East Millinocket site is reopened next month, its ranks will total only 375.

Legault said poor market conditions are forcing his company to seriously evaluate what can be done to upgrade the mills and return them to profitability. In East Millinocket, Brascan intends to spend several million dollars to improve energy efficiencies, which would help reduce operating costs.

As is the case with Eastern Fine, Brascan has to operate Great Northern with a lean budget, Legault said, so that when bad times hit, massive layoffs or mill shutdowns will not be the result.

Great Northern Paper Inc., Millinocket

Brascan also wants to reconfigure how the Great Northern mill in Millinocket is operated.

In an interview after Brascan was named Great Northern’s buyer, Legault stood outside the courtroom and called the Millinocket facility “the more challenging” mill of the two he just bought.

The refurbished No. 11 machine – the so-called jewel in Great Northern’s treasure chest – and the pulping operations that support it would need some more work, Legault said.

“There’s a lot of inefficiencies that will need to be fixed,” he said.

But market conditions for supercalendered paper have to be just right, he said. Brascan intends to spend upward of $60 million to build a new bleach chemi-thermo-mechanical-pulp plant in Millinocket. And if all goes well, about 175 people will be hired to operate the mill and the pulp plant in about a year.

Besides the fact that Brascan was willing to pay cash to cover most of the purchase price, the Toronto-based conglomerate’s willingness to invest millions of dollars to upgrade the mills gave it stronger value to the community over the other Canadian company that wanted to buy Great Northern, according to those involved with the company’s bankruptcy proceedings.

According to analyst McNutt, most of the six mills along the Penobscot River are hindered competitively by outdated equipment and other infrastructure that bring production costs above those at mills in other states.

Brascan, which already has sawmill, hydroelectric and papermaking operations in Maine, could support financially over time the substantial investment it is willing to make at Great Northern because the conglomerate has deep pockets, according to some observers. The investments likely will be recovered by lowering the operating costs at the mills.

Brascan, a publicly traded Canadian company that has sizeable real estate, forestry and investment holdings, will operate Great Northern the same way Georgia-Pacific Corp. handles its operations – by managing capacity so every penny is spent wisely, McNutt said. Investments will be made in machinery so that it costs less in labor and energy to operate the equipment, he said.

That’s a far cry from how other companies operated their mills over the years, McNutt said. More often than not, Maine is viewed as a place with an older work force that’s qualified but aging and expensive to employ. It’s considered to have a business environment that’s heavy with workers’ compensation costs and such high taxes that even if a company invested in equipment, it would be penalized with taxes on the machinery.

“Maine is not viewed as a premium place for basic industry operations or investment,” McNutt said. “[Businesses] don’t make investments here when they want to. They make investments here if they have to.”

Georgia-Pacific Corp.,Old Town

Though Georgia-Pacific is viewed as one of the best paper companies for managing capacity and investing in machinery upgrades, that didn’t stop the publicly traded firm from retiring its two consumer tissue machines two weeks ago in Old Town. More than 300 people were laid off.

In recent years, the company spent millions of dollars on capital improvements in its tissue and pulping operations, renegotiated contracts with its labor unions, and converted to natural gas from electricity and propane in hopes of reducing energy costs.

To former G-P employee Jean LaBelle of Old Town, the company and its employees were doing everything right, or so she thought. It’s obvious now, she said, that the company had no intention of staying.

“We broke records here – safety records, productivity records,” said LaBelle after attending a meeting on unemployment benefits almost two weeks ago. “They wanted more productivity, we gave them more. I’ve been working on a machine that they spent millions on to upgrade. Why would they do something like this?”

The two Old Town tissue machines made about 9.2 million cases of Brawny, Vanity Fair and Quilted Northern bath and napkin products a year. Now the company is moving the machines to New York and will add jobs there to replace those it is cutting in Maine.

On April 8, four days after the company notified workers arriving on the job that their positions were being cut, Georgia-Pacific informed the federal Securities and Exchange Commission that it “has made no determination of the effect that this announcement might have on its operating results in any given quarter.”

According to documents filed with the SEC on Thursday, Georgia-Pacific is taking a one-time “asset impairment charge” of $74 million related to the closure of tissue and converting operations in Old Town.

In Old Town, however, city officials are evaluating the impact that the loss of 300 jobs and two functional paper machines will have on the municipal budget. After already making $456,000 in cuts to its 2004 budget, the city expects it will have to make another $600,000 in reductions from municipal and school accounts. Georgia-Pacific represents 35 percent of Old Town’s tax base, paying $3.3 million of the city’s $9 million in collected tax revenues annually.

International Paper Co., Bucksport

In Bucksport, International Paper remains a staple in the community’s economy even though every December in recent years the town has been faced with the same situation – a 10-day or two-week shutdown of the mill’s operations because of a drop-off in orders. Last December’s shutdown lasted 10 days because the mill received a few last-minute orders for lightweight coated paper.

However, the end of 2002 also brought with it the end of careers for 150 employees. Months before the shutdown, the mill announced that it needed to cut the jobs, including 70 hourly positions, by year’s end.

With about 900 people still employed, it’s not certain whether any layoffs are planned for this year. International Paper is a publicly traded company, and no information pertaining to operations is released until the actual day changes are made so the company’s stock prices aren’t adversely affected.

“It’s difficult to predict what will happen tomorrow or what will happen the next day,” said Kelly McFarlane, the mill’s spokeswoman, during a recent interview.

She said the company is focusing on controlling costs during the depressed market conditions.

“We’re trying to keep focused on the things we can control in a difficult environment,” McFarlane said. “We’re trying to control costs because we can’t control the economy.”

McFarlane’s boss, IP chairman and chief executive officer John Dillon, recently has taken to the national stage to voice big business’ concerns about the economy. Dillon, chairman of the Business Roundtable, an advocacy group composed of 150 businesses throughout the country, stated last week that 45 percent of the group’s member companies expect to lay off workers this year. He did not state specifically what his own company would do.

“This economy continues to operate well below its potential and continues to be of serious concern to us,” Dillon said in the group’s report. “We’re teetering someplace right on the brink of negative numbers. The most troubling finding is the employment figures reflecting lower employment expectations.”

Also in recent weeks, Dillon has visited with President Bush to show support for the president’s $726 billion tax cut plan, and especially for the elimination of taxes on corporate dividends. He also lobbied U.S. Sen. Olympia J. Snowe of Maine to change her mind about opposing the size of the tax cut plan. Snowe wanted the amount of the tax cuts reduced by half, and was given assurances by a colleague that the amount would be no larger than $350 billion when a compromise bill is worked out between the U.S. House of Representatives and the U.S. Senate.

Lincoln Pulp and Paper Co., Lincoln

Like its sister mill in Brewer, Lincoln Pulp and Paper remains operating despite its nearly three years in bankruptcy and a reduction in market demand for tissue products.

The Lincoln mill dominates the market for deep-dye tissue products, napkins and other tissue products that are dyed with very dark, rich colors that don’t run when wet. In recent years, the company developed a process that allows napkins to be printed from edge to edge, instead of print designs framed by a plain border.

Not many paper companies are interested in producing specialty deep-dyed napkins, said vice president Walsh, and that gives the mill an incentive to keep manufacturing them. It also insulates the mill from the more volatile pricing swings experienced by the conglomerates that manufacture supercalendered paper, newsprint or directory paper.

Higher-end products such as specialty napkins are not immune from a recession either, Walsh said, but they’re not as susceptible to major financial losses as other paper mill products.

Lincoln Pulp and Paper has laid off only about 50 employees in the last few years even though it has been in bankruptcy and even though the company has been trying to survive in a state where the cost of doing business has been high.

Walsh said he credits the company’s position as a dominant specialty tissue paper producer in the country as the reason no more people are out of work.

He said the company wants to keep its position as the go-to producer of niche papers.

“That is our goal,” Walsh said. “Our goal is to continue to try to produce and manufacture innovative products in order to try to secure a stable place in the market.”