MILLINOCKET – The town will owe about $167,000 the state paid to Allagash Valve & Controls Inc. because the company will probably fail to create at least 30 jobs by July 1 as part of its Community Development Block Grant agreement with Millinocket.

That three-year agreement lapses June 30, Town Manager Eugene Conlogue told the Town Council on Thursday.

Although Allagash is doing well and has regularly made loan payments, it shall relocate to Yarmouth and the state Department of Economic and Community Development has written to the town indicating that it will recall the loan balance, Conlogue said.

“Here is the first [CDBG loan] that has not met the [state’s] benefit requirement,” Conlogue said Thursday.

Allagash President Terry J. Ingram informed Conlogue and state officials Wednesday of the move, which will occur in about 30 days. He promised to repay the town what is owed and to make payment arrangements within 30 days.

“We have been making payments to this loan for nearly a year and will continue to do so,” he wrote.

Despite his company’s double-digit growth compared to 2006, Allagash is moving to be closer to customers in southern Maine and the rest of New England, and to combat high fuel costs. The firm reportedly paid more than $15,000 in fuel costs alone last year. The move also will connect Allagash with Portland’s vast pool of skilled workers, Ingram wrote.

“I realize that this may be a disappointment to you and the city council but I have worked very hard to keep this together in your area,” Ingram wrote.

Another CDBG loan through the state and town that the town might have to reimburse the state totals about $250,000. That loan to water filtration manufacturer Brims Ness came due on July 1, 2006, but state officials have delayed collecting because they are working with a potential company buyer, Conlogue said.

The CDBG loan program is one of several tools municipalities typically use to encourage new businesses and existing business growth. But the program carries risks. Municipalities must guarantee loans if businesses fail to perform within specified hiring and wage guidelines.

Councilor’s expressed regret that Allagash Valve and Controls never developed as it promised to the council in 2004.

“The state will be recalling this loan. That’s troubling,” Councilor Jimmy Busque said. He approved the loan at the time, but since questioned Allagash’s progress and regretted the council vote, he said.

“We totally expect to pay the state the money they so willingly gave us,” Councilor Scott Gonya said. “We have a personal guarantee from Terry but also collateral involved in all of this.”

“It’s unfortunate news,” Councilor Matthew Polstein said. “Terry is caught in the same downturn in the paper industry that affects us generally.

“It’s important that we deal aggressively with this, that we make demand for payment and not be too flexible,” Polstein added.

Councilor Bruce McLean said the agreement with Allagash was a learning experience for the council and he invited councilors to have Ingram meet with them in executive session.

“I think we are going to get paid back 100 percent,” McLean said. “We can find out what went right and what went wrong.”

McLean is the executive director of the Millinocket Area Growth and Investment Council, which helped Allagash secure the loan agreement. MAGIC is a quasi-public agency aimed at helping develop the economy of the Katahdin region.

Two Katahdin residents will continue as home-based full-time workers for Allagash, Ingram said.

The meeting was Wallace Paul’s first as council chairman, replacing the departed David Nelson. About 15 people attended.