Parks Falls mill is about more than paper

In July and August, Ainsworth Engineered permanently closed about half of the oriented strand board (OSB) capacity at its operation in Bemidji and closed its mills in Grand Rapids and Cook pending a market recovery.

In Northwest Wisconsin, Smart Papers closed its uncoated paper mill in Park Falls last February, and then filed for Chapter 11 bankruptcy reorganization. It was the second shutdown at the 110-year-old mill in two years and virtually all signs pointed to a permanent closure. It was a devastating blow for Park Falls (pop. 3,100) and the mill’s 300 workers, and nearly as painful for hard pressed loggers within a 300-mile radius, supplying the mill with birch and hard maple pulpwood from Northeastern Minnesota, Michigan’s Upper Peninsula and northern Wisconsin.

But what a difference a year can make.

New owner Flambeau River Papers, LLC, acquired the asset in bankruptcy court last July, rehired the unionized workforce at the same pay and benefit levels and reopened the mill on Aug. 9. Six months later, the excitement in the Park Falls community is palpable over bold initiatives the new owner has proposed with a price tag topping $200 million to transform the aging operation into an industry leader.

“A year ago, there were ‘for sale’ signs everywhere and it was pretty bleak,” said Sam Pritzl, a loan officer at the First National Bank of Park Falls, and president of the Park Falls Area Development Corp., which formed in response to the shutdown. “We were very excited to just have (the mill) reopen,” he said.

“There is a vision of hope for new employment, growth for all businesses, and the dynamics of population growth for the community,” said Charles J. Pouba, president of the Park Falls Area Industrial Development Corp.

William “Butch” Johnson, chief executive of Johnson Timber Co. in Hayward, led the bankruptcy salvage effort and the principal architect of the transformation plan. In 2002, Johnson’s company built an onsite chipping plant adjacent to the mill to become its sole source of wood procurement for previous owner Fraser Papers. He went into the Smart Papers bankruptcy as a major creditor.

Just how much Johnson was owed isn’t clear. His claim was merged with Fraser Papers’. “It was enough that I had to buy the mill,” he said. He lined up a group of silent investors and emerged from the bankruptcy with 75 percent of the equity in the new company.

Johnson, a longtime Republican figure in Wisconsin politics, hasn’t identified those minority investors with the remaining 25 percent ownership in Flambeau River Papers, LLC. But its chairman is an old political friend and former Wisconsin governor. Tommy Thompson left Madison to serve as secretary of Health and Human Services in the first term of the Bush presidency. In January, he threw his hat in the ring as a 2008 Republican candidate for president.

Johnson said Thompson is neither an investor nor a paid lobbyist as Flambeau River Papers embarks upon the two major projects ahead. Asked whether Thompson will be a future investor, Johnson said that hinges partly upon the outcome of the politician’s presidential quest. “He’s a friend who supports this operation, and believes it’s good for northern Wisconsin,” Johnson said.

Energy independence

Johnson already has tentative financial commitments for the first of the two projects, to make Flambeau River Papers energy independent.

The mill’s No. 6 boiler is fired by wood waste, coal and natural gas. It produces about half the mill’s steam requirement and 5 megawatts of electricity. But that’s a far cry from the mill’s overall energy needs for papermaking. Annual costs of purchased natural gas and electricity have risen to about $17 million, making it the mill’s No. 2 expense, along with labor, trailing only wood procurement costs, Johnson said.

The mill’s owners have secured tentative pledges of $30 million in public financing to become fossil fuel independent, in the process producing an additional 1 trillion in BTUs (British thermal units) of energy from wood waste. The company is proposing to do that either by installing a combined cycle biomass boiler, or a combined cycle biomass gasifier that would produce steam and 13 megawatts of electricity. The result would be an estimated $6 million in reduced annual energy costs, and a payback within five years, according to the company. The benefits also include an estimated 100 additional jobs, most in Northwest Wisconsin, for wood waste procurement and transportation.

Flambeau River Papers is pledging to provide 20 percent of the $30 million in private capital. It’s asked for a commitment from the city of Park Falls to issue the remaining 80 percent in state industrial development revenue bonds, and has applied for a federal loan guarantee from the U.S. Department of Energy, to reduce risk for bondholders and the interest rate necessary to sell the bonds.

“We’re going to be the first U.S. pulp and paper mill that’s energy independent,” Johnson said.

Controlling those energy costs is critical to the mill’s survival, said Pritzl, the banker, “We know that without getting its energy costs down, the mill will be in the same situation again. We’re also happy to see the owners looking at the refinery.”

Flambeau River Bio-refinery, LLC

The mill’s owners also hope to become the first pulp and paper operation to become a biorefinery, producing “cellulosic” ethanol from wood fiber. Ethanol is the largest-scale petroleum fuel substitute, producing five billion gallons a year from cornstarch fermentation. But about half the U.S. corn crop has been diverted into producing ethanol, doubling corn prices over the past year. On a tonnage basis, the U.S. wood supply far exceeds corn and other crop residues, and Johnson and his cohorts believe they can produce ethanol from wood cellulose for 50 cents a gallon, about half the cost from corn fermentation.

The mill’s three paper machines produce 400 tons per day of book, printing and copy paper grades. Its pulp mill produces about 150 tons of hardwood sulphite pulp and another 80 to 100 tons of post-consumer waste, or recycled pulp. It buys the remainder of the pulp needed to produce those paper grades.

The bio-refinery they are proposing would build a second, 500-ton-per-day softwood pulp line next to that hardwood pulp mill.

Concurrently, it would produce two other products, softwood pulp used in papermaking, and lignin in the publishing industry.

The level of investment would be huge, estimated at about $215 million. Johnson said the company has secured letters of intent to invest from private investors for $115 million in bio-refinery costs. With technical support from the University of Wisconsin-Stevens Point, Flambeau River Papers was one of 30 applicants last fall for a U.S. Department of Energy grant of up to $80 million to help finance the bio-refinery. In November, the agency winnowed those applications to 15 with Johnson’s group among the survivors. The agency is expected to choose three winners after Congress finalizes the fiscal 2006 federal budget.

CellMark’s role

Johnson stepped into a papermaking world from the periphery as a wood chips supplier. During the Smart Papers bankruptcy, he met Joseph McNaney, executive vice president of CellMark, a $2 billion paper products supplier, also a creditor. Johnson developed his plan for buying the mill, and McNaney and CellMark signed on to supply the new owners with softwood pulp, and to market 100 percent of Flambeau’s production. “We sell all the papers produced in this mill to more than 100 companies and we pay in 10 days,” McNaney said. “That provides cash flow, that’s how we support them,” he said. “We have no ownership.”

In turn, CellMark is Flambeau River Papers’ sole outside supplier of pulp.

McNaney, a hard-bitten New Yorker familiar with the aging mill and its union workforce, saw transforming it was going to be a monumental challenge, particularly for someone from the outside. But in Johnson, he recognized someone who might beat those long odds. “My first impression was, ‘what does this guy know about paper.’ But Butch sold me long before anything else.

“This wouldn’t work if it was the same culture under the previous owners. But that’s changing. The workers here have been empowered and are expected to make decisions,” McNaney said.

An unsupervised stroll through the mill pretty much confirms that change. Lingering resentment is apparent about an early decision to outsource the finishing department to a nonunion minority-owned firm, Innovative Paper Solutions, based in Cornwall, Ontario. The company’s 21 employees work virtually side-by-side with union mill workers.

The change to improve efficiency was permitted in the “management’s rights” clause of the labor agreement the new owners assumed with the Steelworkers union.

Ron Schoch, a dry end operator on the mill’s No. 1 machine, a 22-year employee and union activist, said the new management operates very differently. It’s not necessarily what you want to hear, but Butch always gets back to you.”

Fifteen-year employee John Gerlach, a color technician and beater engineer, said far better communication on the mill floor has boosted morale. “What (Johnson) has done for this community, loggers and Northwest Wisconsin is unreal,” he said.

That appreciation surfaced in a most dramatic way on Dec. 25 when the morning shift was greeted with a Christmas tree atop the No. 6 boiler with lights twinkling with the message, “Thanks, Butch.”