Hurts So Good: Is International Paper Hoping To Be Punished?

Now we know why International Paper isn't joining with other North American paper companies in their recently filed anti-dumping complaint: It is supposedly one of the perpetrators.

Four paper makers and the industry's main union announced last week they were seeking tariffs against uncoated freesheet paper imported into the U.S. from five countries. The announcement listed the countries, but not the manufacturers, from which the "unfairly priced imports" were allegedly coming from.

But the complaint itself lists the alleged perpetrators, which include International Paper's Brazilian operation. IP would probably welcome the tariffs -- and not because it's been afflicted with a case of corporate masochism.

By discouraging imports, such tariffs would be likely to drive up U.S. prices for copy paper and other uncoated freesheets. With roughly one-fourth of the country's UFS market, IP would gain far more from the higher prices than its Brazilian mill would lose from reduced sales into the U.S.

Editor's note: According to a comment about this article in a LinkedIn group, IP's Brazilian operation brings some paper through the port of Miami for subsequent shipment to other countries but does not actually sell paper into the U.S. market. 

Related articles:

• Boo-hoo!: North American Paper Companies That Enjoyed Black Liquor Subsidies File Complaint Against Foreign Competitors' Subsidies
• IRS Inaction Leads to Another Black-Liquor Windfall for U.S. Paper Companies
• Farewell to the 'Commie' Conquistadors: Tables Turned on Finnish Papermakers

IRS Inaction Leads to Another Black-Liquor Windfall for U.S. Paper Companies

First there were the black liquor tax credits. Then there was Son of Black Liquor. And now there's The Creature From the Black Liquor Lagoon, another IRS handout to the U.S. paper industry

IRS inaction has led to an approximately $2 billion windfall for U.S. paper companies that burn black liquor, according to the reporter who originally broke the story about black liquor tax credits in 2009.

Steven Mufson of the Washington Post recently chronicled how paper companies originally thought the Alternative Fuel Mixture tax credits they received in 2009 would be taxable income. But when some companies changed to treating the credits as non-taxable, "IRS examination agents were told to stand down and not challenge the position that the refundable credits were not taxable income," one IRS employee said.

"If the IRS says nothing, the returns will go unchallenged, and the companies will keep the money," Mufson wrote. "The agency still has not issued a ruling — even as the clock runs on the statute of limitations for challenging the companies’ interpretation. For some companies, time could expire this fall."

International Paper originally set aside money to pay for income taxes on the $2.1 billion the IRS handed it for burning black liquor, a pulp byproduct. But it booked $700 million in additional income when it switched to treating the credits as non-taxable. All for doing something that had been standard operating procedure around the world for decades -- burning black liquor, a hazardous pulp byproduct, to provide energy for its pulp mills.

Mufson's tale of black-liquor boondoggles, lobbying by paper companies, and a politicized IRS is well worth the read. But the picture is actually worse than he presents in several ways:

•  Mufson puts the tab for the original black liquor credits as $8 billion, but that appears to be on the low side. Publicly traded companies reported $6.6 billion in credits. But we don't know what was handed out to privately held companies, which owned more than one-fourth of the country's kraft pulp capacity when the Alternative Fuel Mixture tax credits were being handed out.
• After the original tax credits program was ended, paper companies received additional money via what's come to be known as the Son of Black Liquor tax credits, officially known as the Cellulosic Biofuel Producer Credits. Paper companies have not been able to use all their credits yet, but when all is said and done the tab will probably be several billion dollars.
• IRS inaction hasn't been its only sin. Questionable rulings from the IRS (See IRS Ruling Helps Pulp Makers Keep Black Liquor Billions and Pulp Manufacturers Scratching Their Heads Over Son of Black Liquor Ruling, for example) made Son of Black Liquor possible and boosted the payouts for the original credits.

 Background: Since 2009, Dead Tree Edition has published more than 50 articles about the twisted tale of black liquor bailouts. How Democrats Helped Finance the Tea Party With Black Liquor provides a taste of the tale's many ironies.

17 Years Later, Using SCA in Magazines Can Still Stir Controversy

Early one fall morning in 1996, the magazine production director heard the phone ringing as soon as he walked into his office.

“Who are these assholes?” the publisher on the other end of the phone growled. “And are we buying any paper from them?”

“Huh?”

“You’d better take a look at today’s Wall Street Journal, then tell me who Champion Paper Company is and why they’re calling us liars.”

The production director soon learned that his counterparts at other publishing companies were getting the same grilling from their publishers that morning. The controversial Champion ad warned advertisers to watch out for sleazy magazine-advertising sales reps, who promised their ads would be on glossy paper when in fact they would be printed on supercalendered (SCA) paper.

(Editor’s note: If you have a digital copy or scan of that ad, please email it to dead.tree.edition@gmail.com so that I can publish it. I would be happy to give you credit – or not, if you prefer.)

The campaign backfired, with some publishers dropping Champion as a supplier, and defiant Champion executives eventually hitting the road for an apology tour. International Paper bought the company in 2000.

Seventeen years later, the makers of coated-groundwood (CGW) paper are still seeking advertisers’ help to prevent magazines from switching to less expensive SCA. But their tactics have become less clumsy and far more subtle.

Based on information from unnamed “paper industry sources,” the New York Post reported today that Time Inc. is saving “at least $10 million a year” by switching from CGW to “razor-thin” SCA in its weekly magazines, “unbeknownst to advertisers.” You don’t suppose any of those sources were from companies that make coated paper, do you?

Color reproduction isn’t as good on SCA, and “bleed through” is worse because the paper is thinner, the tabloid quoted the sources as saying.

My fellow paper geeks will recognize the over-generalizations here: For example, color reproduction isn’t always inferior on SCA, and a thin paper doesn’t necessarily have more bleedthrough (or showthrough or strikethrough) than thicker paper.

Traditional coated paper is like a sandwich: The central “meat” layer consists mostly of pulp, which is covered on both sides by a clay-based coating and then run through giant calender rolls to make it smooth and glossy.

With SCA, the meat and bread are all mixed together, but heat and extra pressure in the calender rolls yield a surface similar to that of coated paper. Because the process is less expensive than making coated paper, SCA sells for a roughly 15% discount off of CGW.

SCA does tend to be limper, thinner, and less opaque than CGW of the same weight and to have lower print quality. But the quality gap between CGW and SCA has narrowed greatly to the point that a good SCA can look better than a bad CGW (and I’ve certainly seen plenty of bad CGW in Time Inc.’s flagship TIME magazine in recent years).

Although CGW is the dominant substrate for North American magazines, extensive use of SCA isn’t new to weekly magazines. In fact, by using SCA mostly in the heartland and coated paper on the East and West coasts, Time is following an approach that Newsweek reportedly employed for several years without a peep from the popular press.

Related articles about SCA and coated papers:

• There's Little Clarity About Some SCA Papers  
• Heavier Paper Can Save Money  
• Newsweek Spending Millions in Paper Money

Environmental Impact of Paper Goes Way Beyond Cutting Trees

Almost any discussion of paper manufacturing's environmental impact focuses on cutting trees and protecting forests. But five news reports in the past week provide a reminder of other environmental issues surrounding paper making:

• An Environmental Protection Agency study of a former paper Montana paper mill found “potentially dangerous levels of dioxins, heavy metals and other hazardous chemicals,” according to the Missoulian. The results could lead to the former Smurfit Stone property becoming a Superfund site, as well as concerns about what would happen if a levee on the property failed.
• The site of an abandoned paper mill in Tennessee has been proposed as a Superfund site because of PCB and dioxin contamination. 
• A trial began this week on charges that a lawyer duped buyers of a New York paper mill by not disclosing it had been declared a Superfund site. (Are you noticing a pattern here?) 
• International Paper received regulatory approval for an extensive upgrade of the wastewater treatment plant at its Bogalusa, LA mill. A failure of the plant under previous ownership last year caused a discharge of black liquor, an especially nasty and infamous pulp byproduct, killing hundreds of thousands of fish and fouling the Pearl River. 
• A power outage last week at a Glatfelter mill in Pennsylvania caused the release of 6,000 gallons of pulp and contaminated water into a nearby stream. 

Regardless of how it sources its fiber, can a paper company be considered green if it fouls waterways, spews high levels of toxins and greenhouse gases into the air, uses carcinogenic additives, or reveals as little as possible about its environmental impact? No, not when there are competitors using best practices to minimize emissions, operating mills that are nearly carbon neutral, switching to safer materials, and going way beyond what the law requires in reporting their environmental practices and measurements.

Related articles:

• What Exactly Is Environmentally Preferable Paper?
• What Nasty Chemicals Are Lurking in Your Paper?  
• Three, or Maybe Four, Green Magazine Pioneers  
• Ecologomania and Printed Products

Green Groups Turn the Heat Down on National Geographic But Up on KFC

Please see also the May 30, 2012 follow up to this article, The Recycled Debate: Can We 'Get Beyond the Stereotypical Industry-Environmental Relationship'?, where Locantore and industry pundit BoSacks debate the green-ness of recycled paper.

The environmental group that aimed a "Practice What You Print" campaign against National Geographic for not using recycled paper says it is now engaged in "productive discussions" with the magazine.

Frank Locantore, director of the Better Paper Project, revealed the discussions in a comment today on Dead Tree Edition's article, What Exactly Is Environmentally Preferable Paper? Acknowledging that there is more to "green" paper than recycled content, he called for "a broad cross-section of stakeholders" to establish measurements that will lead to making paper more environmentally friendly.

Here is Frank's comment in its entirety:

I've wanted to post a comment to this blog for a long time now. But, there is so much here to comment on that it has been hard to figure out where to begin. First, I want to thank DTE for repeatedly trying to get a conversation going about this. My hope is that the conversation finds a different venue than on-line commenting. It is really difficult to substantially and meaningfully discuss this issue without the benefit of being in the same room with one another.

My three comments are these:

U.S. Paper Companies May Lose Son of Black Liquor Loophole

Senate Finance Committee Chairman Max Baucus is trying to close the Son of Black Liquor tax loophole that has already provided U.S. paper makers with a windfall of more than $1 billion.

The committee's staff estimates the move would save $2.786 billion over the next four years, which Baucus would use to help pay for highway construction and other infrastructure projects. The staff has not revealed the basis for its calculation, a tricky matter because it requires assumptions about the future taxable income of more than a dozen paper companies.

"Black liquor qualified for the alternative fuel mixture [AFM] tax credit and the cellulosic biofuels tax credit," a news release from the committee noted Friday. "Congress never intended for black liquor to qualify for these credits and, in 2010, prohibited the credit for black liquor sold or used on or after January 1, 2010. This provision would prohibit taxpayers from claiming the alternative mixture credit or the cellulosic biofuels credit on any new or amended returns made on or after February 3, 2012."

The committee is scheduled to discuss the Highway Investment, Job Creation and Economic Growth Act of 2012 tomorrow.

Lobbying the Postal Service Is a Multimillion-Dollar Business

Note: Additional information is provided in the June 15 follow-up article, An Explanation of Postal Service Lobbying.

Corporations and associations spent more than $20 million last year to lobby the U.S. Postal Service, according to a government database.

During the past decade, organizations shelled out $283 million to influence the USPS.

But even the lobbying business has hit hard times. The amount spent on lobbying the Postal Service has declined every year since 2005, when the combined tab surpassed $40 million, the Senate's Lobbying Database shows.

Three organizations accounted for more than half the $20.3 million spent on influencing the Postal Service last year. The top spenders were:

1)  American Bankers Association: $5.5 million
2)  American Express Company: $2.89 million
3)  Pitney Bowes: $1.99 million
4)  Lorillard Tobacco Company: $1.86 million
5)  Retail Industry Leaders Association: $1.23 million
6)  (tie) Direct Marketing Association and Newspaper Association of America: $1 million each
8)  Disabled American Veterans: $810,000
9)  Medco Health Solutions: $470,000
10) National Newspaper Association: $460,000

Other major spenders of note included Printing Industries of America ($394,745), Appleton Inc. ($190,000), American Business Media ($150,000), Greeting Card Association ($120,000), and the National League of Postmasters ($100,000).

Nearly $5.6 million was spent lobbying the Postal Service during the 1st Quarter of this year. Leading the way were Medco Health Solutions ($1.08 million), International Paper ($1 million), and the Air Transport Association of America ($960,000).

Cost of New Black Liquor Boondoggle Reaches $1.1 Billion

The cost of the "Son of Black Liquor" giveaway to U.S. pulp and paper companies officially passed $1 billion last week and could eventually grow much larger.

A dozen publicly traded pulp manufacturers recently reported actual or expected federal Cellulosic Biofuel Producer Credits (CBPC) totaling $1.1 billion in their annual and quarterly reports.

That number includes only $65 million, so far, for #1 pulp manufacturer International Paper and nothing from #2 Georgia Pacific, which is privately held. Both giants seem likely to join or surpass Packaging Corp. of America, Weyerhaeuser, and Domtar, each of which recorded or expects to record more than $200 million (pretax) in CBPCs.

CBPC is supposed to subsidize the production of environmentally friendly biofuels, but in the case of pulp manufacturers it’s a pure giveaway of taxpayer money. The credits are being shelled out to the manufacturers for burning black liquor as a power source, a standard industry practice, in 2009, but the manufacturers didn’t even know they would qualify for the credits until 2010.

IP recorded 2010 tax credits on less than 2% of the black liquor it burned in 2009. That was the portion that it did not mix with diesel fuel to take advantage of the original black liquor tax credits, which exploited a loophole in the federal Alternative Fuel Mixture (AFM) program.

IP has not decided whether to repay any of its $2.1 billion in AFM credits to get the more lucrative, but taxable, CBPC funds. But its 2010 annual report says it might end up switching some or all of its AFM credits for CBPC. That would be worth up to another $2.1 billion pretax and probably at least $400 million after taxes.

PCA leads in Son of Black Liquor credits so far, partly from paying back AFM credits to get $146 million ($33 million net gain) in CBPC, plus another $107 million for the “proprietary biofuel process” at its Filer City, Michigan mill. It estimates it has another $200 million in CBPC available to offset future income taxes until the credits expire in 2015.

Rock-Tenn plans to trade its AFM credits for CBPC over the course of several years, resulting in an estimated pre-tax gain of $112 million. Pulp makers that have claimed or estimated less than $100 million from Son of Black Liquor are Temple-Inland, Clearwater Paper, Wausau, Rayonier, Buckeye Technologies, Kapstone Paper and Packaging, and Mead Westvaco.

Nine companies that benefited from the original (AFM) black liquor credits have not claimed or estimated Son of Black Liquor handouts – AbitibiBowater, Appleton, Boise, Graphic Packaging, Glatfelter, NewPage, SAPPI, Smurfit-Stone Container, and Verso. Several of these companies are unlikely to benefit because of their history of unprofitability; CBPC can only be used to offset income taxes.

For further background:

• U.S. Taxpayers' Black Liquor Tab Surpasses $30 Billion: Not a cent of the taxpayer money tied up in eco-fuel subsidies involving black liquor has helped the environment. Most of the money didn’t even benefit the companies that produce and burn black liquor.
• How Democrats Helped Finance the Tea Party With Black Liquor: Georgia Pacific, which is owned by the Koch Brothers, has benefitted from Democrats’ failure to close the black liquor tax loopholes.
• Blame It On the (Black) Liquor, And Other Tales From A Strange Family of Tax Credits: A quick rundown of the original black liquor tax credits, Son of Black Liquor, and Grandson of Black Liquor.

Black Liquor Tax Credits: The Gift That Keeps on Giving To Paper Mills -- and Taking From Taxpayers

Six months after questioning whether it would benefit from "Son of Black Liquor", International Paper announced Thursday it got $40 million of the bogus eco-fuel tax credits.

The giant papermaker received the Cellulosic Biofuel Producer Credits in the 4th Quarter of 2010 for burning black liquor, a pulp byproduct, to power its pulp mills in 2009. As with the original black liquor credits -- the Alternative Fuel Mixture Credits program that gave more than $2 billion in taxpayers' money to IP during 2009 -- CBPC (Son of Black Liquor) was intended to spur development of new bio-fuels but mostly rewarded pulp mills for doing what they would have done anyway.

The Son of Black Liquor credits IP claimed were "just the benefit on black liquor gallons that we ran in 2009 but did not mix" with diesel fuel, Timothy Nicholls, the company's CFO, said Thursday during a conference call with stock analysts. Black liquor had to be mixed with diesel to qualify for the original black liquor credits but not for Son of Black Liquor.

"IP cannot quantify the value of additional CBPC because it depends on future taxable earnings, but it could be significant," a company presentation said.

Less than a year ago, IP was apparently not bothering to seek CBPC money because it believed -- as did Dead Tree Edition -- that black liquor would not qualify. And even after an odd IRS ruling that opened the door, Nicholls told analysts this past summer "We don't see a huge benefit for the company."

Even now, Nicholls is unsure about the future benefits from Son of Black Liquor. IP would have to return some of the AFMC money to receive the more lucrative CBPC credits. Though it's been more than a year since pulp mills could earn credits under either program, the tax status of the AFM money is still unclear.

"There's some reason to believe that the proper conclusion maybe non-taxable," Nichols said. "If we come to that conclusion, then economically it just doesn't make sense to refund or payback the credit that we've already received and apply for the CB credit."

Rock-Tenn sees things differently. The packaging manufacturer's most recent annual report says AFMC "is not taxable for federal or state income tax purposes." But it estimates it will eventually net $112 million by paying back the original black liquor credits to get the more lucrative Son of Black Liquor money.

Packaging Corporation of America, which has about one-eighth of IP's pulp capacity, recorded $135.5 million in Son of Black Liquor credits last year. Domtar, which is also the #1 beneficiary of Canada's black-liquor program, reported $127 million in Son of Black Liquor credits last quarter.

Those earnings reports are news to Congress' Joint Committee on Taxation, which in December estimated that the government's cost for all "credits for alcohol fuels", including CBPC, for fiscal years 2010-2014 would only be $100 million.

For more information on the black liquor boondoggles, please see:

• Son of Black Liquor Money Starts Rolling In For U.S. Pulp Makers 
• How Democrats Helped Finance the Tea Party With Black Liquor
• U.S. Taxpayers' Black Liquor Tab Surpasses $30 Billion
• All 45 (and counting) Dead Tree Edition articles on black liquor

Paper Companies Are Greener Than Average, Study Indicates

Contrary to their popular image as despoilers of the forest, major paper companies get high marks for being green in a recent ranking of large U.S. companies.

All six forest-products companies in Newsweek's "Green Rankings 2010" scored in the top 35%. The magazine ranked the nation's 500 largest publicly traded companies on their environmental impact, "green policies", and reputation.

Leading the way was Kleenex maker Kimberly-Clark, ranked #76 based on a score of 80.65 out of a possible 100 despite a poor showing in the environmental impact category.

Greenpeace ended its Klearcut campaign against the company last year when it agreed to increase its usage of certified and recycled pulp. Kimberly Clark calls itself a consumer-products company, but with its purchase and processing of more than 3 million tons of pulp annually, it certainly fits into the forest-products industry.

Other forest-products companies ranked by Newsweek, along with their scores, were Domtar (#95, 79.00), Sonoco Products (#125, 76.92), International Paper (#155, 75.27), MeadWestvaco (#161, 74.89), and Weyerhaeuser (#172, 74.12).

IP made the biggest upward move from last year's inaugural ranking, jumping from #344, while Kimberly-Clark improved from #120. Domtar wasn't in last year's survey (probably because it was then classified as Canadian), while the other three slipped slightly in the rankings.

Other articles that challenge common conceptions about forestry and the forest-products industry include:

• An Environmentalist's Defense of Clearcut Logging 
• Why Planting Trees Is Not Necessarily Green 
• Condoms to the Rescue, and 5 Other Novel Ideas for Saving the Forests 
• Cutting some trees but saving the forest 

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.

Related articles:

• How Democrats Helped Finance the Tea Party With Black Liquor: Congress' failure to stop the original black liquor tax credits or to shut off Son of Black Liquor has probably enriched a company whose owners are major financial backers of the Tea Party and of climate-change denial campaigns.
• U.S. Taxpayers' Black Liquor Tab Surpasses $30 Billion: Rather than closing off loopholes for black liquor, Congress has manipulated the loopholes as an excuse for spending even more taxpayer dollars.
• Congress and Paper Companies Covet 'Son of Black Liquor' Funds

Pulp Manufacturers Scratching Their Heads Over Son of Black Liquor Ruling

U.S. pulp makers are still trying to figure out exactly what the IRS’ recent “Son of Black Liquor” ruling means, but the largest one said yesterday it sees little if any gain.

“We don’t see a huge benefit for the company,” said Timothy Nicholls, CFO of International Paper, during the company’s quarterly earnings call. “When you layer in the consideration that we would have to return the credits that we filed for last year under the alternative fuel mixture tax credits [the original black liquor tax credits] and then accrue those benefits over some period of time, we don't see the rationale for making any kind of change from what we've previously done at this point.”

Others were a bit more optimistic but still uncertain about exactly how to interpret the ruling that became public earlier this month. (For details, see IRS Brings Son of Black Liquor Back From the Dead; Ruling May Be Worth Billions to U.S. Pulp Makers and Why Tax Credits for Black Liquor Don’t Add Up | IMHO.)

Here’s the explanation presented this week by Temple-Inland’s CFO, Randy Levy, during that company’s earnings call:

“We expect to be registered as a cellulosic biofuel producer during the third quarter. We have received $228 million in cash from alternative fuel mixture tax credits for the period from late March 2009 to year-end 2009.

“We may have the potential to ultimately receive up to an additional $130 million to $140 million of after-tax credits by selecting the cellulosic biofuel producer [Son of Black Liquor] credit, about $80 million to $85 million of which is attributable to the January 1 through late March period when we were not yet mixing and about $50 million to $55 million for the incremental credit between the alternative fuel mixture credit and the cellulosic biofuel credit for the balance of the year.

“However, in order to convert from the alternative fuel mixture tax credit to the cellulosic biofuel credits the cash we previously received would have to be returned plus interest. A key piece of information for us that is currently not available is whether both credits may be claimed in the same year on different volumes. Our objective is to maximize the present value of these credits. There is still a lot of uncertainty surrounding this issue.”

The biggest uncertainty is the process for obtaining the Son of Black Liquor credits, writes Robert Tita of Dow Jones Newswires. “The IRS says companies that received 50-cent credits can't collect a second, higher credit on the same black liquor. Companies, however, could return the money from the 50-cent credit and apply for the $1.01 credit instead.” However, he notes, “the $1.01 credit would be applied as a noncash offset to companies' cash expenses for federal income taxes. The 50-cent credits were distributed as cash subsidies.”

“Given the complexities of acquiring the larger credit, companies could conclude that the reward isn't worth the effort," Tita adds. "Pursuing the higher credit also could expose paper companies to further outrage from members of Congress who remain angry over the paper industry's use of a regulatory loophole to obtain the 50-cent credit.”

Congressional outrage didn’t carry much weight or have much impact on the paper industry last year. Various members of Congress expressed outrage in the spring of 2009 when they learned that U.S. paper companies makers were receiving tax credits for doing what manufacturers of kraft pulp around the world had been doing for decades – burning black liquor to power their mills. But Congress did nothing to close the loophole before the law expired on Dec. 31, enabling pulp and paper companies to rack up more than $8 billion in direct federal subsidies.

In fact, the IRS’ logic-defying June 28 ruling looks like a gift to Congress. The relevant law requires that a qualifying cellulosic biofuel “meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency”. Normal people, and many pulp manufacturers, interpreted that to mean that a biofuel must be registered by the EPA to receive the credits and that black liquor is therefore excluded because it can’t be used as a motor fuel.

But the IRS ruling exempts black liquor from the EPA requirement specifically because it is not a motor fuel or fuel additive. (That makes me wonder what would happen if someone, perhaps a Canadian pulp manufacturer, tried to register black liquor as a motor fuel. Would the EPA’s rejection close the Son of Black Liquor loophole?)

Congress’ “pay-for” rules (that is, new programs must be paid for with offsetting cost savings or revenue gains) have led to some odd accounting methods – “odd” as in “If you, private citizen, used this kind of accounting, you’d end up in the slammer.” The ObamaCare health law includes $23 billion in “savings” from declaring black liquor ineligible for cellulosic biofuel credits starting on Jan. 1, 2010, even though no money had ever been budgeted for that alleged expense in the first place.

So how long will it take some enterprising Congressman to propose "paying for" a new multibillion-dollar program by changing that date to Jan. 1, 2009?

International Paper Puts $2 Billion on Its Black Liquor Tab

Studying the fine print of tax legislation helped International Paper earn more than $2 billion last year in black liquor credits from the federal government.

The giant paper and packaging company announced today that it is getting $516 million in “alternative fuel mixture” credits for the 4th Quarter of 2009 and yet lost $101 million during the quarter. For the full year, IP got $2.06 billion from the government for mixing a bit of diesel fuel into its black liquor, a pulp byproduct, and using the mixture to power its pulp mills. Without the credits, it would have had a net loss of $1.4 billion last year.

IP kicked off the black-liquor craze in the U.S. pulp and paper industry a year ago when it revealed that it was exploiting a loophole in a federal highway bill. The law, which expired on Dec. 31, was intended to subsidize the use of bio-fuels in motor vehicles, but IP realized the subsidies could also apply to the decades-old practice of using energy-rich black liquor as a fuel source for kraft pulp mills.

Within a few months, all publicly traded companies with U.S. kraft mills were earning the credits. Most have not reported Fourth Quarter numbers yet, but they are on pace to receive more than $6 billion for 2009. With about one-fourth of the country’s kraft capacity owned by privately held companies, the total black-liquor tab for 2009 is likely to surpass $8 billion.

As we’ve noted before, we suspect Democrats in Congress left the black-liquor loophole open as part of a deal to help healthcare legislation. If so, they spent billions of taxpayer money and didn’t even get “two aspirins and a Band-Aid.”

Related Articles:

• Black Liquor Scorecard: $4.7 Billion Through September: An analysis of black-liquor credits earned through the 3rd Quarter of 2009 by the 21 publicly traded owners of U.S. kraft mills.
• Did Black Liquor Credits Pave the Way for Healthcare Legislation? 
• Environmentalists Try To Put a Cork Into Black-Liquor Loopholes: A coalition of 27 environmental groups wants to make sure that “Son of Black Liquor” is never born.

For U.S. Papermakers, the (Black) Liquor's Gone, But the Party Goes On

The huge black-liquor subsidy of pulp mills expired last week, but that isn’t stopping the U.S. forest-products industry from tapping taxpayers' money in other ways.

Three-fourths of the pulp and paper companies that received U.S. black-liquor tax credits are signed up to benefit from another biofuel subsidy, the new Biomass Crop Assistance Program (BCAP). But also among the more than 100 mills that have been approved as BCAP "biomass conversion facilities" are at least several that were put at a competitive disadvantage by the black-liquor program, which expired on Dec. 31.

Various paper companies are also getting government help to reduce reliance on fossil fuels, using state grants funded by federal economic-stimulus programs. Just this week, Maine awarded $2 million to Verso Paper’s Bucksport mill and smaller amounts to five other paper companies for investments in such projects as heat recovery and biomass boilers. Last month, Wisconsin made similar energy-efficiency grants totaling about $5 million to four paper companies.

Say hello to Uncle Sam
U.S. paper companies have historically avoided government entanglement. But after some left millions of dollars on the table last year by being late to the black-liquor party, they are definitely keeping an eye on Uncle Sam's wallet now.

BCAP is nowhere near as generous as the black-liquor credits, and the benefits to paper mills and other buyers of biomass will be indirect and uncertain. Boosted by a $517 million appropriation for the first quarter of 2010, the program provides subsidies to suppliers rather than users of biomass.

By being BCAP-approved sites, biomass users – such as paper mills that burn bark, limbs and sawdust to fire their boilers – will presumably be able to buy at less-than-market prices. As with the black-liquor credits, critics are already complaining that BCAP will distort markets in a way that unfairly hurts some businesses without doing much for the environment.

Among the companies and mills on the list of BCAP-approved facilities are:

• All of the top 12 producers of kraft pulp in the U.S. and 24 of the 32 known producers. Those companies earned an estimated $8 billion-plus last year from a federal alternative-fuel program simply by following the standard industry practice of using black liquor, a pulp byproduct, as an energy source for their mills.
• Eighteen mills owned by International Paper, the #1 recipient of the black-liquor credits.
  
• The Woodland pulp mill in Baileyville, ME, which Domtar reopened last year (while simultaneously closing a Canadian kraft pulp mill) specifically because of the black-liquor credits. An improving global pulp market has enabled the mill to continue running even without the credits.
• An East Millinocket, Maine directory mill affiliated with Fraser Papers. Fraser said the black-liquor credits helped push it into bankruptcy reorganization last year; it couldn't get the credits because its kraft pulp comes from Canada. The Maine program also made grants to three other Fraser mills.
• The Boise Inc. mill in DeRidder, LA that used the black-liquor credits to grab share – and hurt competitors -- in the newsprint market. Last spring, Boise publicly announced a decrease of more than 20% on newsprint prices, made possible by its unusual use of (subsidized) kraft pulp in its newsprint.
• Catalyst Paper’s 100%-recycled newsprint mill in Snowflake, AZ, which lost significant business because it wasn’t able to match Boise’s pricing. It became a poster child for opposition to the black-liquor credits, a supposed environmental subsidy that in this case encouraged a switch from recycled to virgin pulp.
• AbitibiBowater newsprint mills in August, GA and Grenada, MS, which also suffered from Boise’s move.

For further reference:

• The U.S. Department of Agriculture's BCAP Web site.
• Black Liquor Scorecard: $4.7 Billion Through September, which lists black-liquor credits earned through Third Quarter 2009 by each of the publicly traded kraft-pulp producers.
  
• International Paper Drowns Its Sorrows in Black Liquor: The giant company earned more in black-liquor subsidies last year than it made from selling actual products.
• Did Black Liquor Credits Pave the Way for Healthcare Legislation?: How the reopening of Domtar's Woodland mill played a role in a key Congressional vote.
  

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.

Son of Black Liquor: A $50 Billion Loophole for the U.S. Pulp and Paper Industry

Please see Will the EPA Stop 'Son of Black Liquor'? for an update on the Son of Black Liquor issue.

For the second time in a year, the U.S. pulp and paper industry has hijacked a multi-billion dollar federal program that was supposed to promote new biofuels.

What's being called Son of Black Liquor dwarfs the original black-liquor loophole that created such a stir in Congress and among Canadian officials earlier this year.

Son of Black Liquor, officially known as cellulosic biofuel producer credits, could generate $50 billion in tax credits for U.S. kraft pulp mills before it expires at the end of 2012, Dead Tree Edition estimates. Tax expert Martin A. Sullivan, writing at Tax.com, more conservatively forecasts that "this credit will provide the paper industry with $25 billion of additional tax benefits that Congress never intended."

The program, part of the 2008 farm bill, was supposed to benefit "companies that use expensive, cutting-edge technologies to distill ethanol from plant materials instead of corn," Sullivan writes. "But these new technologies developed by fledgling companies will get peanuts compared to the windfall pulp manufacturers will get from the new credit."

IRS Ruling
Despite Congress' intent, the Internal Revenue Service released a memorandum in the past few days ruling that black liquor qualifies for cellulosic biofuel producer credits because the fuel is produced and used in the U.S. and is "derived from lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis." Black liquor is an energy-rich byproduct of the kraft pulping process and the main power source for pulp mills worldwide.

The memorandum says black liquor cannot be used for both the original black-liquor loophole -- the 50-cent-per-gallon alternative fuel mixture credit -- and the $1.01-per-gallon Son of Black Liquor credits. Though it is twice as generous, Son of Black Liquor is also harder to use because it is not refundable, notes Sullivan.

As an example of how easy it is to collect the original black-liquor credits from the IRS, International Paper is on track to earn nearly $2 billion in alternative fuel mixture credits this year from its kraft pulp mills. The company paid less than $200 million in U.S. income taxes last year and had less than $400 million in earnings during the first half of this year.

U.S. pulp producers, therefore, may continue milking the original black-liquor program until it expires at the end of this year and then switch to Son of Black Liquor next year.

Doing the Math: $25 Billion or $50 Billion
Here is Sullivan's math: A Congressional committee reported that the pulp industry received more than $2.5 billion in alternative fuel mixture credits during the first half of this year. With Son of Black Liquor being twice as generous and essentially lasting three years, that indicates it has a potential for $30 billion. But because the credits are not refundable, Sullivan figures companies will only be able to claim $25 billion in benefits.

Here is Dead Tree Edition's math: As explained in Black Liquor Credits Top $3 Billion So Far, U.S. companies probably earned more than $3 billion in black-liquor credits during the first half of this year (though some were not received until later). Because some companies were late to the black-liquor party, the credits in the second half seem likely to approach $4 billion.

As companies learn to take advantage of these credits, they are no doubt tweaking their operations to maximize their output of black liquor. A paper-industry insider tells me, for example, that a mill can create more black liquor and less (though brighter) pulp by "cooking" the wood fibers longer. So it seems likely that, with a payout double that of the original black-liquor loophole, Son of Black Liquor will be worth more than $8 billion in a six-month period, which equates to $50 billion over three years.

Although $50 billion may be greater than the taxable income of U.S. pulp-mill owners during the next three years, I have enough faith in the American accounting profession and consulting industry to believe that somehow the available credits will not be wasted.

For more information on black-liquor credits, please see:

• "Black Liquor" Credits Are Helping Paper Buyers 
• Pulp Fiction: Eco-Credits for Black Liquor, which discusses how the supposedly "green" alternative fuel mixture program is discouraging the use of recycled pulp.
• 'Son of Black Liquor' subsidy poses new threat to Canadian forest sector, an excellent Vancouver Sun article about Canada's reaction to the new U.S. program.

Black Liquor Credits Top $3 Billion So Far

Pulp and paper mills in the United States earned more than $3 billion in controversial "black liquor" credits during the first half of this year, a Dead Tree Edition analysis shows.

The companies are on pace to earn even more in "alternative fuels tax credits" during the second half of the year if the federal program is not terminated prematurely. The program expires at the end of the year, but the Obama Administration and some members of Congress want to end it early. A few Congress members have advocated some sort of extension.

Twenty-one companies that operate kraft-pulp mills reported to the U.S. Securities and Exchange Commission that they earned or received$2.86 billion from the federal "alternative fuels tax credit" in the first and second quarters.

That doesn't include at least 11 other privately held pulp makers that do not file reports with the SEC. One of those private companies, Georgia-Pacific, manufactures enough pulp to earn well over $200 million per quarter in black liquor credits, according to Equity Research Associates.

The alternative-energy program was originally intended to subsidize the use of bio-fuels to replace petroleum fuels. But International Paper set off a feeding frenzy among pulp makers early this year when it revealed that, by mixing some diesel fuel with the black liquor used to power its kraft mills, it had qualified for the program. Black liquor is a byproduct of the kraft process that pulp mills around the world have been using as an energy source for decades.

For more background on the tax credits, please see "Black Liquor" Credits Are Helping Paper Buyers and Boozing It Up on Black Liquor: One Company's High Is Another's Hangover.

IP, the largest kraft producer in the U.S., has already earned just over $1 billion from the program, it reported to the SEC.

Most other publicly traded pulp makers were late to the liquor party. Many started blending diesel with black liquor in mid- to late January, but Weyerhaeuser and SAPPI apparently didn't start until the 2nd Quarter. Now that all of the eligible public companies have qualified for the program, they seem to be on pace to earn at least $1.6 billion in both the 3rd and 4th quarters.

Accounting for the credits varies among the public companies. Some recognized only the payments they had received from the Internal Revenue Service, while most seem also to have booked credits that were earned but not yet in hand. Some reported the amount of credits they had earned, while others first backed out related expenses.

Here are the credits earned from January to June, as best as I can interpret from the SEC reports:

• International Paper: $1.022 billion
• Smurfit-Stone Container: $294 million
• Domtar; $183 million
• MeadWestvaco: $180 million
• Verso Paper: $144 million
• NewPage: $120 million
• AbitibiBowater: $118 million
• Weyerhaeuser: $107 million
• Rayonier $92 million
• Packaging Corporation of America: $81 million
• Boise: $79 million
• Temple-Inland: $79 million
• Clearwater Paper: $76 million
• Kapstone Paper & Packaging: $70 million
• Graphic Packaging; $62 million
• P.H. Glatfelter: $43 million
• SAPPI: $37 million
• Rock-Tenn: $34 million
• Buckeye Technologies: $25 million
• Appleton Papers: $8 million
• Wausau $6 million
  

Smackdown: Printed Editions vs. Digital Editions

Finally, a paper company is fighting back against the ridiculous notion that electronic books are greener than printed books.

International Paper recently released “Are Pixels Greener Than Paper”, which compares the environmental profile of ink-on-paper publications (dead tree editions) to digital publications (what I call “dead dinosaur editions” because of the fossil fuels and petrochemicals they consume). It has good points backed by in-depth research, but we need to translate and reformat the PR-speak into something more understandable to the general public.

With The Wall Street Journal's bogus claim yesterday that "e-textbooks are environmentally friendly", it's more important than ever to take a realistic look at e-books. Therefore, Dead Tree Edition offers this color-coded "tale of the tape" (as they say in boxing circles) comparing Dead Dinosaur Editions with Dead Tree Editions on key attributes, with quotations from the IP brochure:

• Raw Materials:Paper is a renewable resource. The North American “paper and forest products industry replenishes more than it takes and ensures the sustainability of our forests by planting 1.7 million trees every single day, more than three times what is harvested.” But as for dead dinosaur editions, “making a computer typically requires the mining and refining of dozens of minerals and metals, including gold, silver and palladium, as well as the extensive use of plastics and hydrocarbon solvents.” No one is planting dead dinosaurs into the ground to make more oil for the petrochemicals that digital devices consume.
  
  
• Energy/Carbon Footprint: “Sixty percent of the energy used to make paper in the U.S. comes from carbon-neutral renewable resources and is produced on site at mills.” “The electronics industry uses more than 90 percent fossil fuels purchased off the grid."
  
  
• Recycling:“In the U.S., nearly 60 percent of all paper is recycled, recovered and reused to make new paper products.” Electronic devices have a recycling rate of only 18%.
  
  
• User Editing: The Journal article says most students prefer dead-tree textbooks to dead-dinosaur textbooks, partly because they can't highlight important passages or write notes in e-textbooks.
  
  
• Reliability: Digital editions are often read on machines running Windows or Vista. 'Nuf said. Dead-tree editions never crash, get infected with viruses, receive spam, or serve pop-up ads.
  
  
• Durability: Ever dropped a laptop? Not pretty.
  
  
• Lifespan: I read a 150-year-old book the other day and have 75-year-old copies of National Geographic, but my 15-year-old WordPerfect for DOS files are either unreadable or FUBAR. How many of today’s laptops, e-book readers, and iPhones will still be in use five years from now?
  
  
• Waste: “The lifespan of a computer is short, and electronics have become the fastest growing waste stream in the world.” Much of that waste is toxic. Paper is reusable, recyclable, and biodegradable.
  
  
• Personal Hygiene: Speaking of waste, which would you rather read while sitting on the toilet, a magazine or a Kindle? And remember that, before they had toilet paper, our ancestors had the Sears, Roebuck catalog. Ever tried to wipe your bottom with a Blackberry?
  

Phone-Sex Service Gets Boost from Lands' End, International Paper

Here's one for the No Good Deed Goes Unpunished Department: Lands' End and International Paper are among the companies whose names have recently been connected to a telephone-sex outfit offering hundreds of "hot, horny girls . . . who love nasty talk."

The accompanying scan shows an example of the inadvertent promotion of the "Intimate Encounters" operation: It's from a panel of a box that was manufactured by International Paper and used to deliver Lithonia Lighting products to a construction site several months ago. The box includes the message "Corrugated Recycles", with a toll-free phone number to call for more information.

The American corrugated industry, however, phased out (800) 879-9777 at the end of 2007. Callers now are greeted with a recorded come-on that begins, "Hey there, sexy guy", as explained in "Hey, big boy, can I recycled your cardboard?"

It's taken awhile for the word to get out about the phase-out; some recycling information Web sites still list the number. And even companies that stopped ordering boxes with the phone number didn't throw away their existing boxes or pull the boxes off of dealers' shelves.

One Dead Tree Edition correspondent got a box displaying the 800 number from Lands' End last Christmas. He says the Sears subsidiary responded quickly to his email about the situation. Lands End apologized, said it was "shocked" to learn that the phone number had been changed, and offered a coupon, he reports.

One advantage of corrugated boxes is their durability. No doubt there are thousands of "porno cardboard" boxes in homes across the U.S. containing everything from Christmas ornaments to tax records to children's toys.

And one of the strengths of print is its durability. It doesn't disappear when a server goes down or a hard drive crashes.

Moral of the story: Printing a message on a corrugated box is great if you want the message to be around for a decade -- and not so great if you want to change the message after a year.

Disclosures: Although I've written several articles about "cardboard porn", I don't really get it. I'm not a pedophile, so the idea of talking nasty with "girls" seems creepy; I prefer women. Come to think of it, "telephone sex" sounds like an unnatural act. Then again, I don't know much about pornography. I don't even own a pornograph.

Boozing It Up on Black Liquor: One Company's High Is Another's Hangover

If you need proof that the power to tax is the power to destroy, or to enrich, look no further than announcements from two paper companies yesterday.

International Paper revealed that it expects to receive $413 million in "black liquor" credits from the U.S. government for the first quarter of 2009. The estimated credits for its printing-papers segment will total $170 per ton, which was 89% of the segment's EBITDA. In other words, without the credits the segment would have barely covered its cash costs but with the credits it had a rather profitable quarter.

Fraser Papers blamed those same credits, which are being lavished on kraft pulp mills in the U.S., Friday for its decision to shut indefinitely a coated-paper machine at its Madawaska, Maine mill. That mill on the Canadian border is itself a vestige of tax policy -- the former practice of placing tariffs on imported paper but not on imported pulp.

But what worked in the pre-NAFTA era is now backfiring on Fraser. Its pulp mills that supply Madawaska are not eligible for the black liquor credits because they are in Canada. The ideal set-up today would be just the opposite of Fraser's: kraft pulping in the U.S. to get the tax credits, paper making in Canada because its weak currency makes costs there so low.

"We are calling on the U.S. Government to close this outrageous tax loophole that unfairly benefits a select group of paper companies in the country,” Jeff Dutton, president and COO of Fraser, said in a statement yesterday. He said the credits "are providing an enormous incentive to certain of our competitors to produce at full capacity when they may not otherwise do so."

Even with tax credits distorting the paper market, the future of Madawaska's PM6 would have been shaky because of the economies of scale and newer technology on competitors' larger machines. Fraser also blamed the weak market for coated paper. The tax credits were merely the final straw.

The credits are a mixed blessing for one closely watched paper company -- giant AbitibiBowater, which filed for bankruptcy organization last month. It should qualify for millions in black-liquor credits for its U.S. pulp operations, but its Canadian pulp mills will struggle to compete against what are essentially heavily subsidized U.S. competitors.

And one of the company's strengths -- making groundwood papers that are a low-cost substitute for kraft-containing freesheet papers -- will be undermined if the tax credits enable competitors to make freesheet papers less expensively than the groundwood substitutes.

There isn't much confidence in AbitibiBowater these days. Half the voters in a recent Dead Tree Edition on-line poll predicted the company would be broken up. Only 16% thought it would emerge from Chapter 11 stronger than ever; 19% said it would emerge from Chapter 11 but still be weak. And 12% voted for "Put some butter on it; it's toast."

The credits will also cut both ways for NewPage, the largest maker of coated paper in North America. The tax credits will enrich it but will also undermine its argument that punitive tariffs should be placed on allegedly subsidized coated papers from China.