Papermakers Dig Deep in Highway Bill To Hit Gold
Saturday, March 28, 2009
Big paper companies could each get hundreds of millions of dollars in cash payments from the Treasury this year by taking advantage of an alternative fuels tax credit in the 2005 highway bill, according to company filings and Wall Street analysts.
The alternative fuels clause, which appears on page 804 of the massive 2005 highway bill, was intended primarily to increase the use of ethanol and other biofuels in cars and trucks, said congressional sources and lobbyists who helped shape the measure.
But paper companies are now being richly rewarded for the long-standing practice of using a byproduct of the wood pulping process as a fuel to run their mills. The paper companies, which had not applied for these benefits before the end of last year, have not needed to alter or improve their existing business practices to qualify for the tax breaks, analysts said. Burning the fuel known as "black liquor" dates to the 1930s, and paper companies have consumed nearly all of the byproduct since the 1990s.
A J.P. Morgan analyst report said the companies were "burning black liquor into gold."
Verso Paper, 62 percent owned by the private-equity firm Apollo Management, said in a Securities and Exchange Commission filing that in February it received a tax credit worth $29.7 million in the fourth quarter of 2008 for using "black liquor" at one of its four mills. The Treasury's payment to Verso was only $7 million less than the company's current market capitalization. Verso is expected to receive another similar payment soon, according to J.P. Morgan.
International Paper announced Tuesday that it received a $71.6 million cash payment from the Treasury to cover a one-month period of operation late last year, from mid-November to mid-December. A Goldman Sachs report issued Wednesday estimated that International Paper alone could receive as much as $1.06 billion in tax benefits this year. J.P. Morgan said International Paper could reap as much as $3.7 billion in benefits.
Other big beneficiaries in the paper industry include Montreal-based Domtar as well as U.S. companies Weyerhaeuser, Mead Westvaco and Temple-Inland, the Goldman Sachs and J.P. Morgan reports said.
The payments come at a critical time for the paper industry, which has been losing money during the economic slump. Because the tax credit is refundable, money-losing companies such as Verso and International Paper qualify for direct payments from the Treasury, instead of offsets on taxes owed. International Paper lost $452 million in the fourth quarter of 2008. Unlike money lent by the Treasury to banks or ailing automobile companies, these sums will not be repaid.
"Even though we expect only a temporary cash infusion, the amounts are material and fairly well-timed given where we are in the cycle," said a report by a team of J.P. Morgan paper and forest industry analysts.
A public relations representative for Apollo said the private-equity firm would have no comment. Verso and International Paper could not be reached for comment.
But the International Paper news release on Tuesday said that the tax code "allows an excise tax credit for alternative fuel mixtures produced by a taxpayer for sale, or for use as a fuel in a taxpayer's trade or business" and that in January the company was notified that its registration as "an alternative fuel mixer" was approved. It received its first check March 20 for fuel used at 15 of its plants.
"The company will continue to submit refund claims based on actual mill production and use of an alternative fuel mixture," the company's statement said.
The use of black liquor does have benefits. By burning the byproduct, mills avoid discharging toxic chemicals and can become largely self-sufficient in energy.
But some financial analysts worry that there will be a backlash from Congress as the payments mount.
"We would not be aggressively buying the stocks based on the potential benefit from the tax credit. We are concerned that lawmakers will see the application of the credit by the industry as an unintended application of the credit and may close off the benefit," said the Goldman Sachs report.
Spokesmen for key members of Congress on the Transportation and Ways and Means committees said members were not available to comment on the issue.
Black liquor contains lignin (the "glue" that holds cells together) and various chemicals among other carbon-based material; it contains much of the energy content of the wood fed into a mill. An average size U.S. pulp mill can burn more than 175 million gallons of black liquor a year in its recovery boilers, which implies an annual tax credit of $90 million, according to the J.P. Morgan report.
(The Washington Post Co., publisher of this newspaper, owns 49 percent of a paper company, Bowater Mersey. But the Post's chief financial officer, Hal Jones, said the venture's only mill was in Nova Scotia and would therefore not qualify for a U.S. tax credit.)