International Paper Drowns Its Sorrows in Black Liquor

With a name like "International Paper", you would think the company made its money from selling paper.

Nope. Once again in the 3rd Quarter, IP got far more money from Uncle Sam in the form of black-liquor credits than it made from selling actual products. The company booked $525 million in such credits during the quarter, versus $233 million in pre-tax earnings before special items, the company announced today.

The giant paper and packaging company has received $1.547 billion in black-liquor credits this year for producing and using more than 3 billion gallons of the energy-rich pulp byproduct. Again, that is far more than it earned from normal operations, which have been hampered by the recession. IP is on pace to surpass the $2 billion mark in black-liquor credits before the controversial program expires at the end of this year.

The credits grew out of highway legislation intended to encourage production of  motor fuels that contain a mix of petroleum and plant-derived substances. IP learned late last year that, if it added a bit of diesel (at least 0.1% by volume) to the black liquor typically used to power kraft-pulp mills, the mixture could qualify for "alternative fuel mixture credits".

As word got out of the loophole IP was exploiting, at least 19 other publicly traded pulp and paper companies began jumping on the bandwagon. Public companies qualified for about $2.8 billion in black-liquor credits during the first half of this year, and hundreds of millions more no doubt went to private companies. (See Black Liquor Credits Top $3 Billion So Far .) IP is one of the first pulp producers to reveal details of its 3rd Quarter credits.

Having nearly three times more kraft-pulp capacity than any other company in the U.S., IP is the biggest beneficiary of the tax loophole. It is averaging an estimated $187 in black-liquor credits per ton of kraft-pulp capacity. Kraft pulp sells on the open market in the range of $650 to $800 ton, depending upon the grade.

IP executives put the kibbosh today on speculation about huge "Son of Black Liquor" credits, formally known as cellulosic ethanol tax credits, going to the company.

"We believe that pulp & paper producers do not qualify," a company presentation said. The IRS recently ruled that black liquor meets the definition of biofuel necessary to receive the credits, but the substance would also have to pass muster with the Environmental Protection Agency for the latter program. (See Will the EPA Stop 'Son of Black Liquor'?)

A good news/bad news joke is making the rounds of papermakers: The good news is that, at the next paper-industry convention, liquor will be half-priced because the bar is taking advantage of special government incentives. The bad news is that, to qualfiy for the program, bartenders will have to add a dash of diesel to the drinks.