Tuesday, November 2, 2010

Son of Black Liquor Money Starts Rolling In For U.S. Pulp Makers

Much to their amazement, U.S. pulp manufacturers are discovering that the Son of Black Liquor tax loophole is starting to pay off or will soon do so.

International Paper reversed its previous statements on the subject a few days ago, acknowledging that its gains could be "substantial" from the Cellulosic Biofuel Producer Credits program (commonly called Son of Black Liquor in conjunction with the pulp and paper industry). The country's largest pulp manufacturer scoffed early this year at the possibility of receiving any money from CBPC and said in July it did not foresee much benefit.

IP's most recent assessment was underscored by some of the first reports of 3rd Quarter earnings by smaller pulp makers. Temple-Inland, with less than one-fourth of IP’s pulp-making capacity, reported net gains of $83 million from Son of Black Liquor. Buckeye Technologies, with less than one-tenth of IP’s capacity, booked $51.3 million in after-tax profit from the program.

Those companies recorded Son of Black Liquor earnings and others are estimating 4th Quarter earnings because recent Internal Revenue Service guidance clarified how pulp makers can pay back Alternative Fuel Mixture (AFM) subsidies, the original black liquor tax credits, to cash in on the more lucrative Son of Black Liquor tax credits.

Both programs were established to encourage production of environmentally friendly fuels. But in the case of pulp mills, neither has what environmentalists call "additionality" -- that is, they had no favorable impact on the environment.

The federal government doled out, and is still doling out, billions of dollars to pulp and paper companies for doing in 2009 what they would have done anyway -- following the standard industry practice of burning black liquor, a pulp byproduct, to power their mills.

When CBPC started last year, pulp manufacturers did not bother to register for the program because the regulations indicated it was only for motor fuels and motor fuel additives. Even after the IRS issued a controversial ruling that made black liquor eligible for the program, industry analysts predicted that Congress would soon close the loophole.

But Congress went on its pre-election recess without taking up the issue or receiving a requested study of the loophole's impact. Meanwhile, pulp mills seem to be having no trouble getting IRS approval to participate in CBPC.

IP plans to carry forward at least some of Son of Black Liquor credits into future years, according to the company's CFO, Timothy Nicholls.

“If we see that there's a benefit there that we can realize, we'll try to time it, such that anything that we're giving back is timed close to when we would file an amended return and get the benefit from the cellulosic biofuel credit,” he said during the company’s recently quarterly earnings conference call.

“We're currently assessing where we are,” Nicholls said. "We can't quantify the potential benefit of the cellulosic tax credits at this time, but we think that, potentially, it could be significant.”

Temple-Inland didn’t have to repay any of its AFM credits to get the $83 million tax gain. It claimed Son of Black Liquor credits only on production from the 1st Quarter of 2009 when it was not participating in the AFM program. It has not indicated whether it would pay back any AFM money to receive additional Son of Black Liquor credits.

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