International Paper receives $71.6 million from the IRS

[Samuel]

Has anyone heard about this scam where pulp companies are sucking millions of dollars out of the US government by introducing diesel fuel to the black liquor process and taking advantage of a green tax credit.  This introduction of diesel does nothing to enhance the process, rather a scam to secure tax credits.  News from the marketing guys is that IP could landfill the pulp produced and still turn a profit.  : Tell me how this is helpful for the forest industry to try and survive?


International PaperInternational Paper is receiving a huge tax credit by burning its alternative fuel mixture at 15 of its mills.

International Paper is burning a mixture of black liquor and diesel fuel.

Black liquor is a byproduct of the pulping process. It contains wood lignins and pulping chemicals. Mills are burning the black liquor and are using the steam to generate power for the mills. The pulping chemicals (sodium hydroxide and sodium sulfide) are recovered from the process as white liquor that is used by the pulp mills in the digesters to cook the wood chips.

International Paper is mixing diesel fuel in with the black liquor at a rate of .5gpm. While this does not add much BTU value to the black liquor, it does classify it as another green fuel because it generating power and not emitting anything to the environment. By classifying it as another green fuel, International Paper gets a tax credit for every .5gpm burned for every one gallon of black liquor burned.

International Paper said that they were approved in January 2009 as an alternative fuel mixer. On March 20, 2009, the company received its first check from the Internal Revenue Service in the amount of $71.6 million for the period of November 14 to December 14, 2008.

International Paper will continue to submit refund claims based on actual mill production and use of an alternative fuel mixture and will provide investors with information relating to future credits during its regular quarterly earnings calls.

This tax credit is calculated at a rate of $0.50/gallon of black liquor and will certainly encourage U.S. pulp mills to operate at full capacity.

Current research aims to use black liquor and biomass gasification to completely eliminate the need for fossil fuel energy in paper manufacturing.

[Ironman]

I'm not a big fan of the IRS in general and believe they ought be shut down and we go with a flat tax system with no such thing as a 'credit'.  The way congress has completely bast***-ized the tax code and made it into a constituent welfare system is completely egregious and unconscionable.  DOn't get me started on the 'earned income tax credit', given to those who do not work at all.

Having said that, its sort of like playing poker with someone whom you know is a cheat.  If you know that going into the game you certainly make your plans accordingly.

I think IP is just playing the hand they have been dealt.  The whole tax system is one giant disastrous scam designed to reward those who 'pay to play'.  Congress has been using it to buy votes ever since it was first established.  I can find no fault with a company that uses it to their advantage.  I am sure IP could tell us plenty of stories about the years in which they were very profitable and the IRS was sticking it to them for billions of dollars.

Go IP!!!!! 8)


www.ironmart.com

[Samuel]

I think the point I was trying to make was it was not too long ago our neighbours to the south were crying foul when they suspected various provincial governments subsidizing lumber manufacturers through unfair stumpage calculations.  The Canadian response to this was to make the US government happy, create more red tape and unnecessary paperwork to prove what they were already doing made sense.  With that said, now that the Pulp & Paper Market is crashing, mills are closing from coast to coast, the US government is pumping unjustified subsidies into these corporations which enables them to substantially undercut the market ($250- $300/tonne) for spec pulp, which is causing havoc north of the border.

Hopefully I am not striking a nerve with our neighbours to the south (as the majority of the membership lies there), but I am trying to find some help in someone justifying this for me.  I apologize if my rant has offended anyone.

[Dan_Shade]

tax breaks are very different from subsidies.

[Samuel]

OK I agree, but don't you agree that injecting diesel fuel into a pulping process simply to collect tax breaks have an ethical question attached? 

[stonebroke]

No

Stonebroke

[Dan_Shade]

There is nothing unethical about using legal means to create a profit.

[Jeff]

You are taking and adding a product, diesel, which is totally unneeded in the process. A product that is a fossil fuel, something that environmentally, we need to ween ourselves off of, and inject it unnecessarily for the soul purpose of taking a tax credit meant to help create a future independence from fossil fuel?   Come on, give me a break. That's as unethical as it gets. If not unethical, its certainly immoral.

[Gary_C]

I can't say that I understand what this is all about. Is that normal to burn the "black liquor" because it is some type of fuel or is that just a means of disposal?

Please explain the process more. Also I don't understand what the detrimental effects are on the pulp markets.

[isawlogs]

 Is adding the fuel to the liquor neccesary to help it burn ???   If not then it is as unethical as it comes  ....

[SwampDonkey]

I don't believe black liquor is even a waste, it's a bi-product of the Kraft pulping process. More than half of the energy content of the wood fed into the digester is in this liquor. With a recovery boiler designed in the 30's, much of the black liquor is burned to generate steam and to recover the "cooking chemicals" from the liquor used to separate lignin from the cellulose fibres during the pulping process. So basically, it increases efficiency to recover this liquor in making Kraft pulp. Adding diesel is no net benefit or it would have been done many years ago. In fact it's wasteful. Many mills in fact sell excess liquor for profit.

[Samuel]

Is adding the fuel to the liquor necessary to help it burn ???   If not then it is as unethical as it comes  ....

Exactly.  Its a loophole in the tax credit to creating "green fuel".  They are burning black liquor anyhow and the addition of .5 L of diesel adds nothing to the process given the 1000's of litres of black liquor in the process.  I guess its your tax dollars at work.

[Dan_Shade]

wouldn't the black liqour part be the "green" part?  burning deisel fuel is not "green".

I don't think we have enough info here. 

However, any way you look at it, I can't see how a company utilizing a legal tax break can be considered unethical.

[Samuel]

The Issue

Some U.S. forest products companies with kraft pulp mills are misusing a U.S. tax credit designed to reduce the use of fossil fuels and promote the use of alternative, clean bio-fuels in the transportation sector.

These companies have discovered that by adding at least 0.1% of diesel to black liquor, a by-product of the chemical pulp making process, they may qualify for the $0.50/gallon tax credit because the resultant mixture qualifies as a bio-fuel.

Black liquor goes into a recovery boiler, where combustion results in chemicals that are recovered and re-used in the pulping process. Diesel was never part of the mixture until companies discovered this loophole in recent months. In effect, they are actually burning additional fossil fuels just to qualify for the tax credit, which is completely contrary to tax credit's intent to reduce the use of fossil fuels.

Though several mills stand to gain financially from this practice, many more throughout the diverse and interconnected pulp and paper industry will suffer as a consequence and it is quite possible that many will be rendered non-competitive.

The Impact

There are a number of extremely negative impacts to the industry as a whole as a result of this practice. 

·         Only certain types of paper mills are eligible: market pulp mills, kraft linerboard mills and bleached paper & paperboard mills, as they use the chemical or "kraft" method of pulping wood fibre and generate black liquor as a by-product.

·          Only U.S.-based mills qualify, putting operations in Canada and other countries at a severe competitive disadvantage.

·         The subsidy is estimated at about $200/tonne of pulp. With manufacturing costs at approximately $500/tonne of hardwood pulp and the spot market price sitting at about $400/tonne, U.S. kraft mills that might otherwise have shut down temporarily until the market corrected itself, are still operating, flooding the market and keeping market prices artificially lower.

·         According to an analysis of the issue released March 25 by Goldman Sachs, "the tax credit would provide benefits of $130 and $160/short ton of linerboard and uncoated freesheet, respectively. With producers generating less than that on an EBITDA per ton basis, producers may start operating their facilities to generate more black liquor as it is more profitable than producing linerboard or uncoated freesheet. This could lead to increased production and pressure on pricing or it could lead to producers to discount their prices as they factor the credit as a cost reduction. Historically, the industry has not been able to maintain prices amidst a decline in costs."

To put it into further context, International Paper, one of the companies taking advantage of this loophole, announced that it received a $71 million cash payment from the U.S. Internal Revenue Service, reflecting the benefit of the tax credit for the consumption of black liquor at 15 of its mills for a one-month period in the fourth quarter of 2009. At this monthly rate, the company would receive $852 million in 2009. However, Goldman Sachs estimated that International Paper could receive as much as $1.06 billion in 2009.

It is believed that every eligible U.S. pulp and paper mill is in the process of applying for the tax credit, which is scheduled to expire December 31, 2009.

Background

In 2005, U.S. Congress enacted the Internal Revenue Code Section 6426 (e), which provides an excise tax credit for the use of a range of alternative fuels, including liquefied petroleum gas, P Series Fuels, compressed or liquefied natural gas, liquefied hydrogen, any liquid fuel derived from coal (including peat) through the Fischer-Tropsch process, and liquid hydrocarbons derived from biomass.

An alternative fuel tax credit is available to taxpayers who blend at least 0.1 percent of taxable fuel (diesel, gasoline or kerosene) with a qualified alternative fuel. To date, the Internal Revenue Service has allowed black liquor to be classified as a liquid hydrocarbon derived from biomass, given that black liquor is the by-product of the wood fibre kraft pulping process and consists of wood lignin and hemicellulose from wood.

Only certain types of paper mills are eligible. Market pulp mills, kraft linerboard mills, and bleached paper and paperboard mills are eligible, as they use the chemical or "kraft" method of pulping wood fibre and generate residue-filled, energy-rich black liquor as a by-product.

Non-integrated paper mills, recycled paper/paperboard mills and groundwood paper mills all lack recovery boilers and don't produce internally-generated energy. Meanwhile, semi-chemical corrugating medium mills produce much less black liquor per ton of production. The credit is calculated based on the amount of alternative fuel used.

To claim the credit, companies must register with the Internal Revenue Service as an alternative fuel producer. According to the tax code, the tax credit expires at the end of 2009.

[Jeff]

wouldn't the black liqour part be the "green" part?  burning deisel fuel is not "green".

I don't think we have enough info here. 

However, any way you look at it, I can't see how a company utilizing a legal tax break can be considered unethical.

My understanding is that the green fuel standing alone, is not a tax credit, but a green fuel that is supplementing a fossil fuel is. The loop hole is that by adding the diesel, the green product is now supplementing the fossil fuel, and if that's the case, its bogus.

[SwampDonkey]

They probably wouldn't even have thought of it if some senator or congressman had kept quiet.  :D :D

[Ron Wenrich]

So, if management didn't take advantage of the loophole, how would that set with the Board of Directors?  IP didn't write the law, they merely took advantage of it.  I can't really fault them for that.  The politicians are the ones at fault for writing a bonehead law.

Paper makers are also seeking renewable energy credit for their biomass so they can be competitive with the renewable energy standards that were just passed.  It seems that 20% of the electricity is going to have to be made from renewables, which biomass is one of them.  They expect high competition for biomass, and in order to remain competitive, they want the tax credit.

[isawlogs]

  After reading this if one does not find it questionable at the very least that a compagnie could do this .... I am not saying it aint legal , what I see here is your tax dollars going out the window , and many mill workers on this side being robed of jobs because of this . It just aint right. I guess it is another way of digging a bigger hole for your tax dollars to go too.  :-\

[Dan_Shade]

many US citizens, including me, think that we are WAY overtaxed.  If a company can use a tax break to improve their bottom line, that's good.

If it is impacting jobs in Canada, those effected should petition their government for tax breaks to make them more competitive.

[Samuel]

 :D  I think there is something called the SW lumber agreement that disallows this.

[Riles]

Something doesn't pass the sniff test here. I think the intent of the tax provision is to encourage "green fuels."

If that means a tax break for people adding black liquor to diesel, then great, mission accomplished, everything makes sense (economics otherwise, notwithstanding).

If IP is already burning black liquor, and has to add diesel just to get the tax break, then the law is written incorrectly. IP should get the break for using a green fuel.

Is the law written incorrectly or are we interpreting it incorrectly? Somebody get IP on the phone.

[Gary_C]

Somebody get IP on the phone.

Just where are they?  And do they still have kraft plants?

This is from Wikipedia.

In 2005 and 2006, International Paper undertook significant restructuring, selling over 6,000,000 acres (24,000 km2) of forestland in the U.S., along with its coated paper, kraft paper, wood products, and beverage packaging businesses, as well as subsidiaries Arizona Chemical and New Zealand-based Carter Holt Harvey. The coated paper business (4 mills in Maine, Michigan and Minnesota) were sold to Apollo Management and now operate as Verso Paper. The kraft paper business (composed of a kraft paper mill in Roanoke Rapids, NC and a dunnage bag plant in Fordyce, AR) was sold to Kapstone Paper and Packaging and operates as Kapstone Kraft Paper.

I was going to sell that formerly IP plant in Minnesota that is now Versa Paper some balsam pulp this past winter but they were not running their large machine and could not take any more wood this winter. They were supposed to get back running this spring, but they called too late for me to cut that sale. Far as I know IP is completely divested of that plant.

[SwampDonkey]

Look at your special papers for Hewlett Packard. IP makes their paper or kraft. To get the volume of black liquor to make the profits you guys are posting here, it would have to be a kraft mill. The process generates 7 tonnes of black liquor per tonne of kraft pulp. I recently read that Sweden is developing technology to produce methane from it and have a 3 MW test plant set up.

[Ironman]

Totally agree with Gary_C.  If the intent is to encourage the use of non-traditional fossil fuels and promote green alternatives, mission accomplished.

I understand the point to the effect that IP was already burning the black liquor but the fact that Congress did not disqualify capacity that was per-existing, tells me they intended to reward companies that were already doing this.

If they have to add a little diesel to the black liquor to technically 'qualify' for the credit, it makes no difference to me.

Back to my original thought on the matter.  The Government has their hand out every time you turn around, draw a breath or scratch your hind end.  If IP found a loophole or tax credit they qualify for by simply adding some diesel to their black liquor, I say give that guy a raise.

8)

[Gary_C]

Totally agree with Gary_C. 

:D :D :D

Thanks for the vote of agreement, but I am not sure what this is about and I certainly know nothing about black liquor, although I think I have smelled it before.  :D :D

I can't figure out if there is any truth to this whole thing as everything I know and read says that IP is out of the kraft mill business  and has been for some years. So where are they milking this tax credit thing?