Tru Shrimp Co., a pioneer in indoor shrimp farming, will build its first production facility in South Dakota rather than Luverne, surprising local and state officials as it cited hurdles in Minnesota regulations.

The decision, announced Friday, came after South Dakota appeared to offer more financial help to Tru Shrimp and just as state leadership in both Minnesota and South Dakota was changing.

With groundbreaking expected this summer at the Luverne site, Tru Shrimp executives said they recently discovered a state environmental rule about water discharge that could delay construction of the facility, which it calls a harbor, by one to three years.

"Our timeline is to build a harbor in 2019," Michael Ziebell, chief executive of Tru Shrimp, said in an interview Tuesday. With investors' money on the line, the company couldn't afford to wait for the discharge issue to be resolved, he said.

The board of the Balaton, Minn.-based firm in November gave final approval for the $45 million facility on 67 acres just outside Luverne. The state of Minnesota had invested nearly $2 million to build roads and utilities to the site and Luverne, a city of about 5,000 residents, invested $600,000 in the effort.

"I'm not going to kid you, it was like a gut shot and we were blindsided by it," Luverne Mayor Pat Baustian said. "I understand it was a business decision and they've got to do what they've got to do, but we had no previous interaction with Tru Shrimp that suggested the regulatory issue was going to be a real problem."

Tru Shrimp now plans to break ground in Madison, S.D., about 74 miles northwest of Luverne, in June. Both towns are on the Lewis & Clark Regional Water System, a 337-mile system that mitigates floods and droughts in 20 towns and utilities in southeast South Dakota, northwest Iowa and southwest Minnesota.

After Tru Shrimp executives told Luverne officials about the company's plans to change cities last Wednesday, city leaders asked the company for 30 to 60 days to work with the Minnesota Pollution Control Agency on a fix to the issue. But the company had already arranged for a news conference with South Dakota Gov. Dennis Daugaard on Friday, his last day in office, the Rock County Star Herald reported.

By abandoning Luverne, Tru Shrimp leaves on the table between $3 million and $5 million in production credit from the state of Minnesota. But it gains tax incentives from South Dakota — an amount not yet made public. The Sioux Falls Argus Leader reported Tru Shrimp recently received a $6.5 million low-interest loan from two South Dakota agencies. The Madison site is also in a federal opportunity zone, giving tax benefits to its investors.

Ziebell said Tru Shrimp has $800,000 invested in the Luverne site and will consider the town for one of the two other production sites it aims to build in the next five years. Last Thursday, he spoke to Gov. Mark Dayton, who completed his term Monday.

"I made a commitment to Luverne and I made a commitment to Gov. Dayton to resolve this," he said. "I understand how disappointed they were — and possibly angry. We are not trying to abandon Luverne. We've been at this four years … and another year delay would be untenable. I'm hoping we can build the bridges and work together in the near future."

The administrative rule Tru Shrimp said was a problem was designed in the 1960s, before its indoor aquaculture technology existed. Because the facility plans to use reverse osmosis to filter the water, Ziebell said the mineral level in discharged water would be more concentrated and exceed MPCA's standards.

"Our business model is built on sustainability and the irony is this problem has nothing to do with the saltwater," Ziebell said, which is typically the environmental concern for indoor shrimp operations.

In a statement, new MPCA Commissioner Laura Bishop said the agency was surprised and disappointed by the Tru Shrimp decision.

"Our staff communicated clearly with Tru Shrimp for an extended period of time, to help facilitate their development plans," Bishop said. "We recognize the value of economic development across Minnesota and we are committed to economic growth while protecting clean water. We look forward to working with future Tru Shrimp projects."