Paper companies eye another serving of black liquor tax benefits

Pulp mills may be getting back on the black liquor gravy train.

Paper and pulp makers, including a number of mills in southwest Alabama, collected $8 billion or more last year in federal cash and tax credits by doing what they've done for decades -- burning the carbon-rich leftovers from the pulp-making process to fuel their mills.

The liquid, known as black liquor, was declared eligible for alternative fuel tax credits if mill operators mixed in a little diesel fuel.

At 50 cents per gallon of black liquor, publicly held paper companies collected $6.5 billion in federal money in 2009, either as cash or credits against taxes. Private companies such as Georgia-Pacific LLC also collected large amounts.

The alternative fuel credit expired at the end of 2009, apparently ending the lucrative federal subsidy.

But in July, the IRS released a six-page memo ruling that black liquor burned before Dec. 31 was eligible for the separate cellulosic biofuel tax credit, which paper companies had previously believed out of reach. That subsidy is worth $1.01 a gallon, twice as much as the alternative fuel tax credit, and companies can amend their tax returns to claim it.

Now, paper companies are trying to figure out whether the new credit will bring another windfall. Those that think they're eligible say they could collectively reap another $500 million or more.

Environmentalists and some members of Congress say pulp makers are abusing tax credits intended for makers of fuels such as biodiesel, meant to replace petroleum fuels.

"The original intent of both of these tax credits is to reduce dependence on fossil fuels and incentivize the production and use of domestic alternatives," a group of environmental concerns wrote in a December letter to the U.S. Environmental Protection Agency urging that it bar black liquor from cellulosic biofuel credits. "Instead, paper companies brazenly crafted a creative yet crude way to dip into the pockets of U.S. taxpayers, and are being paid billions for what they have been doing for over 75 years, and would continue to do without the credit."

Opponents also complain that the credit doesn't help firms that make pulp from recycled paper and don't produce black liquor. The Newark Group, which owns a paperboard mill in Mobile and is currently trying to exit a short stint in bankruptcy, is among that group.

It's unclear if environmentalists and other opponents, who were unable to stop the first subsidy, will be able to block a second round. But paper industry insiders are aware there could be another uproar.

"In our view, the political risks surrounding this issue remain difficult to ignore," wrote Mark Wilde, a Deutsche Bank analyst who covers the industry.

Patty Bedient, chief financial officer for Weyerhaeuser Co., told analysts on a call last month that "there's a great deal of uncertainty" surrounding the IRS ruling, and her Federal Way, Wash., firm was still trying to figure out how to maximize the money. Weyerhaeuser makes pulp in Columbus, Miss., and other locations, and said it could get $240 million from the new credit.

The IRS ruled that black liquor producers can't get both credits for burning the same gallon of black liquor. And while the alternative fuel credit could be taken in cash, the cellulosic credit can only be used to offset federal taxes. That makes it less attractive for firms that are losing money or making small profits, and thus face little or no tax liability.

"We don't have a lot of taxes to offset," said Virginia Aulin, a spokeswoman for Boise Inc. "We just don't think it would be as valuable to us."

But other pulp makers are registering and may be able to claim the credit for part of 2009. That's key because many paper companies didn't get registered for the alternative fuel credit until part-way through 2009.

Steve Voorhees, the chief financial officer of Rock-Tenn Co., which operates a paper mill in Demopolis, told investors that his firm applied for the cellulosic credit in April and plans to claim $37 million in benefits on its 2008 and 2009 tax returns.

At least six other publicly held paper companies said they intended to seek the credits. The seven firms, which as a group collected $1.23 billion from the first round of credits, said the cellulosic credit could net another $570 million.

It may even be possible to give back the alternative fuel credits, with interest, and claim the more lucrative cellulosic credits for the entire year, although some companies said they were reluctant to return cash.

That's part of the reason that International Paper Co., the United States' largest papermaker, isn't interested, said spokeswoman Patty Neuhoff.

"We're not going to pursue it at this time," she said. "We're going to continue to monitor it. Our decision was to keep what we have."