$200 million wood pellet mill in Pine Bluff on schedule for year-end start despite production, financing hitches

Despite recent setbacks for a project first announced in August 2014, the CEO at Boston-based Highland Pellet Inc. said Arkansas’ first full-scale wood pellet mill is still on schedule to be commissioned and begin production by the end of 2017.

“We are still on target for our commissioning by the end of the year and expect most if not all the upgrades will be done by then and so we are still on schedule,” Highland CEO and Chairman Tom Reilley told Talk Business & Politics on Monday.

In late 2016, Reilley and other Highland executives, along with Gov. Asa Hutchinson, Pine Bluff city leaders, and state and local economic development representatives, dedicated the $200 million facility that will create 68 local jobs and support another 450 jobs that will deliver and supply the timber products for the South Arkansas manufacturing plant.

Reilley expressed his confidence in the project Monday after Astec Industries Inc. of Chattanooga, Tenn., announced Monday (Oct. 2) it had initiated “significant design upgrades” to Highland’s Pine Bluff wood pellet plant and another facility in Georgia to meet full production rates. Astec, a publicly traded company, said the “additional investment” is expected to cut the Tennessee industrial giant’s third quarter earnings by four cents a share.

Astec first announced over a year ago it had been hired by Highland to deliver and construct the modular, multi-line wood pellet manufacturing plant that will include four separate 150,000 metric-ton production lines at the facility. Highland made an initial down payment of $30 million in August 2015 and a final $122.5 million in March 2016 to Astec to design, install, test and then get the Pine Bluff biomass facility running at full capacity by year’s end.

“In the last 45-days, we identified significant design issues at our customers’ Georgia and Arkansas wood pellet plants driven by the need for both facilities to achieve full production rates. Upon learning of these design flaws, which were different at each plant, we identified a clear path to success,” Astec CEO Benjamin Brock said in a statement. “In addition, this past Friday (Sept. 29), we completed an updated analysis of the necessary all-inclusive investment needed to deliver on our commitments to our customers with regard to production rates.”

Brock added: “We remain very confident in the near-term and long-term outlook for the wood pellet business and believe it has been a good investment for our company. In total, we will have invested approximately $31 million over seven years to open up an opportunity for a $100 million per year business.”

Reilley downplayed any potential issues with Astec’s contract work, offering that the company’s announcement was referring to “some horse power upgrades” on Highland’s fiber processing and conveyance system at the pellet mill, located in the Pine Bluff Industrial Park.

Astec’s announcement Monday is related to a special meeting in early September called by the Arkansas Teacher Retirement System’s board of trustees to commit up to $26 million in debt equity to Highland as construction of the Pine Bluff wood pellet mill is nearing completion. After a “due diligence” recommendation by Pine Bluff banking giant Simmons Bank and analysis by the ATRS staff, led by Executive Director George Hopkins, the retirement system’s board on Sept. 8 unanimously approved the $26 million debt investment.

The state’s largest public pension fund, which has market value of $14.7 billion, first approved a 31% equity stake in the East Coast investment group for $25 million at a July 19, 2016, board meeting. The additional $26 million investment approved at the September meeting has a beginning interest rate of 9% for a term of approximately three years. According to ATRS, refinancing of the Highland long-term debt to a 6% interest rate or lower would be a significant decrease in the current interest rate and would improve Highland’s cash flow and access to available funds.

“The lower interest rate applied to the ATRS debt investment would be appropriate at that time based on the strength of Highland’s projected production along with increased cash flow and available funds due to the lower interest rate of the long-term debt,” ATRS officials noted in board minutes.

Once fully operational, 100% of Highland’s wood pellet production will be shipped to Europe. According to the U.S. Energy Information Administration (EIA), global production of wood pellets has increased significantly over the past five years, and demand in the European Union (EU) has led to international trade in this renewable energy source.

According to industry analysts, the greatest risk for the emerging biomass industry is securing long-term supply agreements and commitments from overseas buyers to purchase wood pellets that will be shipped down river to Louisiana, and then transported to the United Kingdom and other European markets.

Reilley said his Boston-based energy investment group already has agreements with large land owners in south Arkansas to supply the wood products necessary to sustain the company for years to come. Highland has also executed contracts with Astec, Weyerhaeuser and Drax, England’s largest biomass energy generation company, to mitigate risks associated with supply, product demand, pricing, shipping and manufacturing equipment guarantees, he said.

On the other hand, plans for Houston-based Zilkha Biomass Energy’s $90 million renewable energy project in Monticello stalled after the company said last summer it failed to obtain long-term contracts for the sale of the company’s patented “black pellets” used for green power energy generation. Company officials have not responded to repeated inquiries concerning that project.