Dead Tree Edition

Thursday, September 16, 2010

Blame It On the (Black) Liquor, And Other Tales From A Strange Family of Tax Credits

In this week's saga of the Black Liquor Tax Credits, Dad got blamed for luring away a big customer, Son looks as if he'll really start paying off for some paper mills, and Congress decided to cash in on Grandson. Let's start with the oldest first:

Dad (AKA, the original black liquor tax credit): In advance of a hearing regarding whether his company illegally sold paper in the U.S. at below cost, an official of Asia Pulp & Paper noted today that his company's adversaries had been heavily subsidized by the U.S. government.

"Domestic producers gained market share between 2007 and 2009 and during that time we lost our largest U.S. customer, Unisource, to NewPage. NewPage lured them away with lower prices made possible by the enormous federal ‘black liquor’ subsidies they received," said Terry Hunley, acting president of APP Americas. "What we’re seeing here are hedge fund managers, who have taken over the American paper industry, looking for another government bailout."

Son of Black Liquor: A second pulp maker, Rock-Tenn, revealed this week that the IRS approved it as a Cellulosic Biofuel Producer last month, which means it can claim a lucrative tax credit for the black liquor (a pulp byproduct) it burned last year to produce power. The company estimates the after-tax value of these "Son of Black Liquor" credits to be $113 million, but it expects to net only $29 million because it will first have to return the original black liquor credits it earned last year. Kapstone, the first paper company to qualify for Son of Black Liquor, has similarly estimated it will net $22 million.

Grandson of Black Liquor: After many months of wrangling and revisions, the U.S. Senate gave a crucial thumbs up today to the Small Business Jobs Act of 2010, which includes a provision banning crude tall oil, another pulp byproduct, from receiving cellulosic biofuel credits. Most pulp makers had never dreamed of the acidic, corrosive liquid qualifying for a program intended for motor fuels, but that hasn't stopped Congress from claiming that closing this Grandson of Black Liquor loophole will save nearly $1.9 billion. (A friend of Dead Tree Edition has questioned my moniker for this bogus loophole, noting that movie monsters have sons but not grandsons. He suggested "Creature From the Black Liquor Lagoon" instead.)

For help in understanding the saga of the dysfunctional Black Liquor Tax Credits family, see:

Paper Makers Bring Out the Big Guns for Dumping Case

Nine senators, 10 House members, and one governor are slated to appear at today's U.S. International Trade Commission hearing on the anti-dumping case against Asian paper companies.

The agenda doesn't state whether the politicians will be speaking or which side they are on, but it's clear they will be there in support of the anti-dumping case. Almost all are from states like Minnesota, Wisconsin, and Maine where the three petitioning companies (NewPage, SAPPI, and Appleton Coated) have a presence.

Update: The United Steelworkers issued a news release today saying that the 20 politicians will be testifying on behalf of the U.S. paper makers.

The hearing is part of the final phase of the ITC's investigation into whether Chinese and Indonesian makers of coated paper for sheet-fed presses should have to pay penalties and tariffs. They are accused of selling such paper, both coated freesheet and coated groundwood, at below cost in the U.S.

Those opposing the penalties have no politicians appearing on their behalf -- mostly just officials of the Asian companies.

Related articles:

Tuesday, September 14, 2010

How Does the Postal Service Discourage Early Retirement? Let Me Count the Ways

At a time when the U.S. Postal Service should be trying to downsize by getting employees to retire early, it instead continues finding ways to discourage early retirements.

In recent pension estimates for employees considering early retirement, USPS has been leaving out information about a significant benefit, writes Don Cheney in a PostalReporter editorial called Does the Postal Service Really Want Early Retirements?

“The Postal Service issued FERS [Federal Employees Retirement System] annuity estimates that omitted the employee’s FERS annuity supplement” even though the supplement “is often nearly equal the basic annuity amount,” he says. Cheney is an APWU leader in Auburn, WA who has worked extensively on and written about early-retirement problems at the Postal Service for seven years.

“Most postal employees in FERS are eligible for the annuity supplement after age 55 with 30 years of service, but in a VERA [voluntary early retirement], RIF [reduction in force], or involuntary transfer over 50 miles that requirement is reduced to 20 years – a significant bonus.” Calculating the supplement isn’t rocket science; there’s a Web site that does it for free.

Poor communication and actual miscommunication from the Postal Service were major reasons that employee response was so low to some special early-retirement offers last year. The National Association of Letter Carriers filed a grievance (which is still active) last year because USPS failed to provide mandatory retirement counseling prior to the deadline for accepting one of the offers.

A commenter wrote on this site last month that long delays between retirement date and receipt of full retirement pay are also causing postal employees to delay retirement. "I can calculate my retirement in 30 minutes on my calculator, so why does it take 7 months for the USPS to do it?"

Cheney wonders whether the Postal Service is purposely discouraging early retirements “so they can justify weakening the no-layoff clause in upcoming contract negotiations.”

For an organization that admits to having too many employees and whose strategic plan says it will shrink the workforce through attrition, the Postal Service’s actions – and inactions – on early retirement do look fishy. Is it trying to exacerbate its financial problems in the short term so that it can win some kind of longer-term relief, such as reform of retiree healthcare payments or an end to Saturday delivery?

Or is it just plain old incompetence and bureaucratic indifference? In any case, how can postal executives claim they need exigent rate increases when they clearly have not done everything they can to reduce the Postal Service’s cost structure via early retirements?

For other articles on early-retirement issues at the Postal Service, please see:

Monday, September 13, 2010

Is Bankruptcy Inevitable for NewPage?

Despite growing market share and rising prices for its products, NewPage is having to fend off a leading analyst’s assessment that it is destined for bankruptcy court.

“Bankruptcy/restructuring is inevitable for the company, as it will never generate enough cash to meet its obligations,” Kevin Mason of Equity Research Associates wrote recently. “Many of NewPage’s existing debt holders have no hope of ever being repaid” because of the big paper maker’s “impossible debt load.”

North America’s top producer of coated paper responded by issuing earnings projections that forecast about $250 million in EBITDA (operating cash flow) for the second half of the year, versus only $25 million in the first half. NewPage’s EBITDA excludes nearly $175 million in quarterly expenses, mostly interest payments, so even the company’s projection calls for no profitable quarters this year.

“We currently expect that our levels of sales volume and pricing for the fourth quarter of 2010 will be indicative of the quarterly sales volume and pricing levels in 2011 after consideration of seasonal factors,” NewPage said in the SEC filing. After all, its machines are full, if not overbooked, and prices are still rising for its main products, coated and supercalendered papers.

By contrast, Mason projects 2010 EBITDA of less than $70 million and then about $260 million in 2011. He doesn’t foresee EBITDA surpassing $400 million in any year through 2014, which would mean actual earnings remain well under water for years to come.

He questions whether holders of NewPage’s senior secured debt, with a face value of $1.7 billion, will ever get all of their money back. Owners of other NewPage debt have even bleaker prospects.

And what about the owners? NewPage’s equity “is the financial equivalent of a dead man walking,” Mason wrote.

Mason, managing director of ERA, is not just any stock analyst. ERA specializes in the North American forest products industry, and Mason's company-by-company projections early last year about the value of black liquor credits turned out to be quite accurate. ERA’s research reports are generally available only to customers (See equityresearchassociates.com.), but it has granted permission for Dead Tree Edition to quote from the NewPage report.

A few years ago, Mason noted, Wall Street was eagerly pushing the benefits of consolidation in pulp and paper markets. As a result, the Cerberus hedge fund had no trouble obtaining backing for a mountain of debt when it decided in 2007 to “double-down” on the coated paper business by having NewPage buy StoraEnso’s North American assets.

But the move occurred just after coated paper demand started experiencing “ongoing secular decline.”

“With NewPage being the largest producer, it took it upon itself to 'control' the market. However, the cost to NewPage of closures and market-related downtime has been substantial, and price control escaped NewPage anyway.”

NewPage also exacerbated the usual buyers’ wariness of price leaders by creating “a lot of negative customer sentiment over the years,” Mason said. “It will take years to heal this damaged reputation.” (Indeed, one paper buyer tells me he was congratulated by a colleague in the magazine industry for being “NewPage-free.”)

Noting that AbitibiBowater, which is in bankruptcy reorganization, is also the product of consolidation frenzy, Mason said, “The jury is still out on the benefits of consolidation for the industry, but there is no doubt it is a great win for the bankers and other advisors.”

There has been at least one other winner in the NewPage saga: Since 2005, NewPage has paid more than $3.7 million to a company owned by the son of recently departed chairman Mark Suwyn for “a training program and a process to improve communication skills, consensus building and problem solving abilities,” according to NewPage’s annual reports.

If Mason is on target, NewPage will get plenty of practice for those multimillion-dollar problem-solving skills.

For other recent articles about NewPage, please see: