Alternative fuel tax credit may be ripe with cash from kraft pulp mill black liquor

By Greg Rudder, Editor, PPI Pulp & Paper Week, RISI

SAN FRANCISCO, March 20, 2009 (PPI Pulp & Paper Week) - From an alternative fuel tax credit regulation, the US Internal Revenue Service (IRS) last month paid $29.7 million to Verso Paper because the company's 405,000 tons/yr kraft pulp operation at the Androscoggin mill in Jay, ME, burns spent black liquor in a recovery boiler for producing energy at the mill. The payment in the first quarter was for the mill's fourth quarter use of black liquor.

The $29.7 million greatly helped the financial bottom line of Verso, the second largest coated printing and writing paper producer in North America. In the fourth quarter, Verso reported an almost $33.6 million net loss. For all of 2008, its net loss was nearly $63 million. The $29.7 million represented almost 8% of the firm's fourth quarter revenue.

This month, the company said it also expects another IRS payment for alternative fuel use from black liquor in the fourth quarter at its Quinnesec, MI, mill.

The tax credit for Verso could total $60 million per quarter.

Other kraft pulp mills are applying for the credit as well.

Softwood and hardwood kraft pulp mills (as well as a small amount of dissolving pulp made from the sulfate process) may qualify for the funding at a time when a global recession has steeply pinched down demand for paper and board. US paper and board output in the first two months of this year was off 15-20%. Total US sulfate paper grade capacity this year is 54.7 million tons, according to the American Forest & Paper Assn's capacity report last year.

Contacts said Canadian mills are surprised by the funding and are expected to protest to Canadian authorities about it as an unfair subsidy, one contact said.

"Pulp and paper mills have been using black liquor as an alternative to fossil fuel for years and years," said one analyst in Canada. "Why all of sudden should they benefit from it now?

Shredding the tax credit? "Once the politicians get their hands on this, they're going to rip this to shreds."

US chemical market pulp mills or paper mills with an integrated kraft pulping line may quality for the credit, JP Morgan analyst Claudia Shank Hueston said recently in a report.

International Paper said it gained approval from the IRS and is registered as a user of alternative fuel mixers, and anticipates refunds.

KapStone Paper and Packaging applied at the end of January because of its Roanoke Rapids, NC, and North Charleston, SC, mills, and expects the revenue could reach $50-60 million/yr.

"At current operating rates, it's worth about $15 million a quarter. Let me run full (and) that would be about $22 million a quarter," KapStone chmn Roger Stone said.

The alternative fuel tax credit, set to end at the end of 2009, is for business operations that use renewable energy, cutting back on fossil fuel use, contacts said.

Hueston recently estimated that pulp mills could gain tax credit revenue of as much as $300/ton of production.

"Upon approval, a facility is eligible to receive a $0.50 per gallon tax credit for burning a combination of black liquor and traditional fossil fuel," Hueston said.

"The credit is based on the amount of alternative fuel contained in the mixture, " KapStone CFO Andrea Tarbox told analysts.