By Greg Rudder, Editor, PPI Pulp & Paper Week, RISI
SAN FRANCISCO,
March 27, 2009
(PPI Pulp & Paper Week) -
From a federal tax provision that could pay out more than $1 billion this year to International Paper (IP), IP on Monday said it gained a first payment of $71.6 million for one month from the Internal Revenue Service (IRS) for using alternative fuels at 15 of its kraft pulp mills.
IP said the payment was made on Mar. 20 for its pulp mills burning spent black liquor to create recovery boiler energy from Nov. 14-Dec. 14.
Annually, that amounts to $859 million for IP, the largest paper and board producer in the world.
However, IP uses black liquor at 20 kraft pulp mills and those mills if they ran at 85% of capacity on average this year could generate $1.065 billion from the provision or 4-5% of IP's 2008 revenue, said a report Wednesday by Goldman Sachs analyst Rick Skidmore who said he spoke with IP.
Skidmore also estimated that based on a 35% tax rate, Domtar could generate $354 million this year from the provision, MeadWestvaco $254 million, Temple Inland $160 million, and Packaging Corp of America $135 million.
Further, contacts said major companies AbitibiBowater (with about one million tonnes/yr of kraft pulp capacity), Boise (about 1.6 million tonnes/yr of kraft pulp capacity), and NewPage (about one million tonnes/yr) could benefit from the provision as well.
The potential funding opportunity available for US kraft pulp mills could total more than $6 billion this year based off the 85% operating rate average, some say. This week's 2009 American Forest & Paper Assn Capacity Survey report identified 53.8 million tons of kraft sulfate paper grade pulp capacity this year, down 1.7% from last year's capacity, that could gain revenue from the tax provision.
Some analysts, however, aren't so certain the payouts will last all this year.
"...if this black liquor bonanza continues for more than a couple of quarters, we will be very surprised," said Kevin Mason in Equity Research Associates' latest monthly report. "Companies should use the monies to pay down debt; still, given recent actions by Congress, no one can be sure the payments won't be cancelled retroactively. Caution remains the watchword."
Various US paper and board companies seek the government funding because their spent black liquor qualifies as an alternative renewable fuel, contacts said. The alternative fuel provision ends at the end of this year.
Under the program, Verso Paper, the second largest coated printing and writing paper producer in North America based on capacity, gained a $29.7 million payment for its use of spent black liquor in the fourth quarter at its mill in Jay, ME, the company said. The company expects a similar payment this month for its Quinnesec, MI, mill.
The IRS 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," according to IP on Tuesday.
"(IP) will continue to submit refund claims based on actual mill production and use of an alternative fuel mixture," IP said.
Skidmore said in his report that the alternative fuel provision is "to provide an incentive for taxpayers to burn or use more non fossil fuels in their vehicles."
"We find it interesting that the industry is adding diesel to its recovery boilers and black liquor to qualify for the tax credit, which is opposite of what lawmakers likely had in mind when the tax credit was established," Skidmore said.
Leveling the biomass field. Also on renewable energy, some US paper industry representatives Tuesday called on the US Congress for the same credits for making renewable energy that it is considering giving utilities as part of a new mandate that utilities make more electricity from renewable sources, the Associated Press reported.
Gaining a federal renewable energy source credit provision, which can be traded, "will level the playing field between forest products manufacturers that use wood fiber as a raw material and energy source, and generators of new renewable energy," American Forest & Paper Assn pres Donna Harman said at Paper Week in New York City.
"You can't take for granted the forest products industry if a public policy is put in place that disadvantages existing renewable energy producers on behalf of creating new renewable energy capacity," Harman said.
The greater demand for biomass will increase prices for the material, P.H. Glatfelter chmn and CEO George Glatfelter II said.
"If regulations that are promulgated don't recognize what the industry is already doing from a biomass perspective and only encourages new biomass or renewable power generation capacity, then that will drive up the cost of biomass, which would hit us hard," Glatfelter said. "Don't penalize companies that have built their infrastructures around biomass."
• By Greg Rudder, Editor, PPI Pulp & Paper Week, grudder@risiinfo.com.